<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended December 31,
1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from
____________ to _____________
Commission file number 0-22716
BOLLINGER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2502577
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
602 FOUNTAIN PARKWAY, GRAND PRAIRIE, TEXAS 75050
(Address of principal executive offices)
(Zip Code)
(972) 343-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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
---------- --------
As of February 10, 1999, 4,400,210 shares of the registrant's common
stock, $0.01 par value per share, were outstanding.
<PAGE> 2
BOLLINGER INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
December 31, 1998 (unaudited), and March 31, 1998 3
Consolidated Statements of Earnings -
Three Months and Nine Months Ended December 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 321,448 $ 136,369
Accounts receivable - trade net of allowance for doubtful accounts of
$499,546 and $450,000 and allowance for returns and allowances of
$1,512,027 and $910,025 8,218,672 6,351,691
Escrow receivable -- 1,012,296
Other 5,127 424,335
Inventories 9,118,493 5,820,013
Prepaid expenses 558,990 793,511
------------ ------------
Total current assets 18,222,730 14,538,215
PROPERTY PLANT AND EQUIPMENT - NET 1,955,289 1,864,993
OTHER ASSETS
Goodwill net of accumulated amortization of $59,217 and $0 3,493,783 --
License rights net of accumulated amortization of $11,917 and $0 703,083 --
Notes receivable and other 121,840 209,554
Deferred financing fees - net of accumulated amortization of $525,559
and $372,390 235,395 388,564
------------ ------------
TOTAL ASSETS $ 24,732,120 $ 17,001,326
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt and other debt $ 1,550,350 $ 142,681
Current portion of capital lease obligations 234,592 212,101
Accounts payable - trade 6,682,188 2,595,565
Income tax payable 47,200 224,700
Other current liabilities 1,044,922 1,016,513
Accrued product liability 226,817 381,957
Other payables-customer overpayment -- 1,125,627
------------ ------------
Total current liabilities 9,786,069 5,699,144
LONG-TERM LIABILITIES
Long-term debt, net of current portion 6,610,836 36,505
Long-term capital lease obligations 592,200 778,319
------------ ------------
Total long-term liabilities 7,203,036 814,824
------------ ------------
Total liabilities 16,989,105 6,513,968
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $0.01 par value; 1,000,000 shares authorized;
none issued -- --
Common stock -- $0.01 par value; 8,000,000 shares authorized; issued
and outstanding 4,400,210 at December 31,1998, and 4,000,210 at
March 31, 1998 44,002 40,002
Capital in excess of par 15,519,058 15,323,058
Accumulated deficit (7,820,045) (4,875,702)
------------ ------------
Total stockholders' equity 7,743,015 10,487,358
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,732,120 $ 17,001,326
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 10,844,056 $ 15,888,556 $ 25,339,295 $ 51,512,517
Cost of Goods Sold 7,583,354 13,068,363 18,017,298 41,926,520
-------------- -------------- -------------- --------------
Gross Profits 3,260,702 2,820,193 7,321,997 9,585,997
Selling Expenses 993,070 1,399,606 2,636,482 3,928,424
Distribution, general and
administrative expenses 2,554,459 2,894,770 7,069,718 7,963,245
-------------- -------------- -------------- --------------
3,547,529 4,294,376 9,706,200 11,891,669
-------------- -------------- -------------- --------------
Operating profit (loss) (286,827) (1,474,183) (2,384,203) (2,305,672)
Other expense (income)
Interest expense 232,119 420,022 488,312 1,576,225
Gain on sale of assets -- (10,377,593) (7,147) (11,246,838)
Other 61,899 (325) 78,975 (7,607)
-------------- -------------- -------------- --------------
294,018 (9,957,896) 560,140 (9,678,220)
-------------- -------------- -------------- --------------
Earnings (loss) before
income tax expense
(benefit)
(580,845) 8,483,713 (2,944,343) 7,372,548
Income tax expense
(benefit)
-- (837,700) -- (838,760)
-------------- -------------- -------------- --------------
Net earnings (loss) $ (580,845) $ 7,646,013 $ (2,944,343) $ 6,533,788
============== ============== ============== ==============
Per share data (basic and
diluted):
Basic Earnings (loss per
share) $ (0.13) $ 1.91 $ (0.72) $ 1.63
============== ============== ============== ==============
Diluted earnings (loss) per
share $ (0.13) $ 1.90 $ (0.72) $ 1.63
============== ============== ============== ==============
Weighted average shares used
in the calculation of per
share amounts:
Basic common shares 4,318,688 4,000,210 4,106,755 4,000,210
Dilutive impact of stock
options -- 22,000 -- 17,692
-------------- -------------- -------------- --------------
Diluted common shares 4,318,688 4,022,210 4,106,755 4,017,902
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (2,944,343) $ 6,533,788
Adjustments to reconcile net earnings (loss) to net cash
Provided by (used in) operating activities
(Gain) loss on disposal of assets (7,147) (11,246,838)
Depreciation and amortization 760,301 1,036,416
Provision for returns and allowances 2,190,161 2,571,197
Provision for doubtful accounts 180,000 208,335
Provision for obsolete inventory 268,167 1,355,783
Changes in operating assets and liabilities (net of acquisition
of assets)
Accounts receivable-trade (3,748,142) 853,688
Other receivables 419,208 123,820
Inventories (3,048,647) 5,222,264
Prepaid expenses 234,521 (515,612)
Notes receivable and other assets (34,507) 18,082
Accounts payable-trade 4,086,623 (7,513,173)
Income tax payable (177,500) 837,700
Other current liabilities (1,302,358) 413,807
Provision for restructuring operations -- (1,820,146)
-------------- --------------
Net cash provided by (used in) operating activities (3,123,663) (1,920,889)
Cash flows from investing activities
Purchases of property and equipment (588,569) (271,050)
Cash portion of acquisition of license rights and businesses (3,575,000) --
Payments (advances made) on note receivable 121,523 199,315
Proceeds from sale of assets 20,120 14,753,949
Escrow receivable 1,012,296 --
-------------- --------------
Net cash provided by (used in) investing activities (3,009,630) 14,682,214
Cash flows from financing activities
Net proceeds from (payments on) long term debt 6,482,000 (12,342,485)
Payments on capital lease obligations (163,628) --
Payments to officers -- (280,000)
Financing fees -- (125,000)
-------------- --------------
Net cash provided by (used in) financing activities 6,318,372 (12,747,485)
Net increase (decrease)in cash 185,079 13,840
Cash at beginning of period 136,369 3,481
-------------- --------------
Cash at end of period $ 321,448 $ 17,321
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - GENERAL
The consolidated interim financial statements include the accounts of Bollinger
Industries, Inc., its wholly-owned subsidiaries, and Bollinger Industries, L.P.,
a partnership wholly-owned by Bollinger's subsidiaries (collectively the
"Company").
The consolidated interim financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosure normally included in
financial statements prepared in accordance with Generally Accepted Accounting
Principals ("GAAP") have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the consolidated financial statements and notes for
the fiscal year ended March 31, 1998 contained in the Company's Annual Report on
Form 10-K.
In the opinion of management, the unaudited interim consolidated financial
statements of the Company contain all adjustments, consisting only of those of a
normal recurring nature, necessary to present fairly the Company's financial
position and the results of its operations and cash flows for the periods
presented. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities, as well as the disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expense during the reporting period.
Actual results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Revenue Recognition and Provisions for Returns and Chargebacks
The Company recognizes sales revenue at the time products are shipped to its
customers. Provision is made currently for estimated product returns and
chargebacks, which may occur. Returns are generally for products that are
salable with minor reworking of packaging or replacement of missing components.
The term "chargebacks" refers to the action taken by customers of withholding
payments or applying for credit amounts for items such as volume discounts or
rebates under marketing programs or pricing discrepancies, penalties, vendor
compliance issues, shipping shortages and any other similar item under vendor
compliance guidelines established by customers. The provision for returns is
estimated based on current trends and historical experience of returns. The
provision for chargebacks is estimated based on the marketing programs designed
for customers and recent historical experience based on volume.
6
<PAGE> 7
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Goodwill and Other Intangibles
Goodwill resulting from the purchase of customer lists and patents and
intangible resulting from license rights are amortized utilizing the
straight-line method over a period of 10 years. The Company periodically
evaluates the carrying value and the periods of amortization of goodwill based
on the current and expected future income from operations of the entities
giving rise to the intangible to determine whether revisions to the carrying
value or useful lives is warranted.
Adoption of New Accounting Standards
In June 1998, the Financial Accounting Standard Board issued Standard No. 133
"Accounting for Derivative Instruments and Hedging Activities". The Standard
establishes accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The new
Standard is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company does not expect the adoption of the new
Standard to have a material impact on its financial position or results of
operations.
NOTE B - CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Interest paid $ 268,688 $ 1,684,338
Non-cash financing transactions:
Purchase of assets-financed by notes from
buyer $ 1,400,000 $ --
Purchases of assets and agreements
financed by stock $ 200,000 $ --
Purchases of assets financed by debt $ 111,107 $ --
Sale of assets-paid in escrow by buyer $ -- $ 1,000,000
Liabilities assumed by buyer in connection
with the sale of the trampoline product
line $ -- $ 179,954
</TABLE>
7
<PAGE> 8
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Shortly before the fiscal year-end on March 31, 1998, the Company received
$1,125,000 in cash from a major customer that should have been properly payable
to the purchaser of the trampoline product line. The Company advised the
customer of this payment, but the customer did not request an immediate
repayment. Accordingly, this is included in other payables on the Company's
balance sheet at March 31, 1998. By December 31, 1998 the overpayment was
eliminated by the customer's continued purchases of products from the Company.
NOTE C - INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
-------------- --------------
<S> <C> <C>
Raw materials $ 461,677 $ 336,285
Work-in-process -- --
Finished goods 10,482,195 7,686,607
Reserve for obsolescence (1,825,379) (2,202,879)
-------------- --------------
$ 9,118,493 $ 5,820,013
============== ==============
</TABLE>
NOTE D - NOTES PAYABLE
The Company obtained a credit facility with a financial institution on August
16, 1996 with a maximum line of $25 million and a three-year term. The loan
agreement had an expiration date of August 16, 2000. During the first quarter of
fiscal 1999, at the request of the Company, the loan agreement was favorably
renegotiated with the financial institution to more closely reflect the
Company's financial condition and financing needs. The maximum line of credit
was reduced to $15 million subject to certain borrowing base requirements. The
facility was also extended to August 20, 2002 and several of the performance
covenants were revised or removed. Availability under the credit line is based
on the level of specific current assets, namely accounts receivable and
inventory. The outstanding obligation at December 31, 1998 was $6,326,000, and
the Company had borrowing availability of $1,710,000 pursuant to the asset-based
formula. In October 1998, the Company increased borrowings by $3,575,000 to
finance certain acquisitions (see Note G).
The Company issued a Convertible Subordinated Note to The Step Company for the
principal sum of $1,400,000 and a five year term pursuant to the asset purchase
agreement. The note bears interest at the rate of prime plus one percent
adjusted quarterly. The Holder has the right to convert the outstanding
principal balance into fully paid and non-assessable shares of the Company's
unregistered common stock subject to predefined ratios.
NOTE E - INCOME TAXES
The Company's effective income tax rate for the three and nine months ended
December 31, 1997 was 2% and is comprised of state and alternative minimum
federal income taxes. The Company's effective income tax rate for the three and
nine months ended December 31, 1998 was 0% based on
8
<PAGE> 9
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
utilization of a tax loss carry-forward (and lack of income). At December 31,
1998 the Company had net operating losses available to offset future taxable
income of approximately $7.2 million which begin expiring in 2011.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company, certain of its officers and directors, former officers, former
independent auditors, and the underwriters of the Company's initial public
offering are defendants in certain shareholder lawsuits. The Company has entered
into settlement discussions which are ongoing at the date of this report. See
"Part II, Item 1. Legal Proceedings."
The Company was contacted by the Department of Labor ("DOL") in fiscal 1996
regarding certain questions about its former Employee Stock Ownership Plan (the
"ESOP"). Assets of the ESOP are now held in the Company's 401(k) plan, which is
the successor to the ESOP. The Company has responded to and cooperated with the
DOL. The DOL has not initiated any proceedings with respect to the ESOP or any
of the Company's other employee benefit plans. The Company plans to meet with
the DOL to address outstanding issues. The DOL has requested and received
tolling agreements extending the running of the statute of limitations through
and including March 31, 1999.
The Internal Revenue Service ("IRS") has examined the Bollinger Employees
Retirement Plan and Trust ("Plan"). In order to maintain its tax-exempt status,
the Plan must comply with certain tests and limitations of the Internal Revenue
Code of 1986, as amended (the "Code"). In a preliminary finding, the IRS has
recommended disqualification of the Plan. The Company has retained counsel for
representation in this matter and has provided additional information for
consideration by the IRS. At this time, the effect of such an IRS preliminary
finding on the Company or the Plan cannot be determined.
During October 1997 the Company entered into a marketing agreement with First
Fidelity Acceptance Corporation ("FFAC"). Richard J. Tucker, a former director
of the Company, served as Chairman and Chief Executive Officer of FFAC at the
time the Company executed the agreement. The original investment of $200,000 was
to be returned threefold on the first anniversary date. In October 1998 neither
the original investment nor the threefold return on the investment were
received. The Company is pursuing recovery of this investment but believes full
recovery is unlikely. Accordingly, $150,000 of the original investment has been
reserved.
In the normal course of business, the Company is involved in various other
lawsuits. Management believes that the aggregate effect of any liability arising
from such items would not be material to the consolidated statements of
operations or financial position at December 31, 1998.
9
<PAGE> 10
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
NOTE G - ACQUISITIONS AND DISPOSITIONS
Acquisitions
Effective October 1, 1998 the Company acquired certain inventory, accounts
receivable, and trade-marks from Self Image Sports and Fitness Co., Inc. (d.b.a.
Multi-Grip), a Tennessee corporation. This acquisition was made by the Company's
controlled operating entity, Bollinger Industries, L.P., a Texas limited
partnership (the "Partnership"). The purchase price for these assets was
approximately $1,400,000 paid in cash at closing, a deferred cash payment of
$100,000 (subject to adjustment for uncollected accounts receivable), and the
assumption of approximately $60,000 in trade payables. As a part of this
transaction, Multi-Grip's principal shareholder entered into a non-competition
agreement with the Company in exchange for 100,000 shares of the Company's
restricted common stock. The transaction also involved a Registration Rights and
Option Agreement pursuant to which the owner of the shares may participate in
any qualified public offering made by the Company. The owner of the shares may
also require the Company to repurchase the shares at anytime after April 8,
2001. The per share price under this option is ninety percent of the then thirty
day average closing price for the Company's common stock.
Effective October 1, 1998 the Company and the Partnership entered into various
agreements with The Step Company, a Georgia corporation. These agreements
provide for the license or sublicense of various fitness related products and
concepts from The Step Company, the Partnership's sale of the licensed products
to the sporting goods, mass merchandising, and catalog retail markets, and for
the Partnership's purchase of customer lists, price lists, and cost information
related to the licensed products. The consideration for these rights and assets
was a cash payment of $2,175,000 at closing, a $1,400,000 convertible
subordinated note, and 300,000 shares of the Company's restricted common stock
valued at $150,000 for purposes of the transaction.
The convertible subordinated note received by The Step Company provides for
quarterly installments of approximately $88,000 (subject to future adjustments
for interest rate changes) beginning January 4, 1999, with the last installment
scheduled for October 1, 2003. The holder of the note may convert part or all of
the note balance at anytime into the Company's common stock at $4.00 per share.
The stock issued on a conversion of the note, the 300,000 shares of stock issued
at closing, and the shares covered by the option described below are subject to
a registration rights agreement with the Company. This agreement permits the
owner of the shares to participate in any qualified public offering made by the
Company.
The Step Company transaction also involved a consulting and non-competition
agreement relating to the licensed and sublicensed products. This agreement
provides for a first year payment of $200,000. Subsequent annual payments, if
any, during the agreement's initial five year term will range from $200,000 to
$300,000 based on the sales volume of the products sold under The Step Company
license agreement. The Step Company's sublicense of certain exercise routines to
the Partnership involved the Company's grant of an option to purchase 200,000
shares of the Company's common stock at $5.00 per share. The exercise of this
option is subject to the Company reaching certain sales levels of products under
the sublicense before January 1, 2002.
10
<PAGE> 11
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED-CONTINUED)
Disposal of Trampoline Product Line
On November 21, 1997 the Company disposed of its trampoline product line.
The unaudited pro forma results of operations for the three month and nine month
periods ended December 31, 1998 and 1997, stated as though the disposition
occurred on April 1, 1997, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales $ 10,844,056 $ 8,790,439 $ 25,339,295 $ 26,135,588
================== ================== ================== ==================
Net earnings (loss) $ (580,845) $ (2,365,879) $ (2,944,343) $ (5,118,534)
================== ================== ================== ==================
Net earnings (loss) per
commons share $ (0.13) $ (0.59) $ (0.72) $ (1.28)
================== ================== ================== ==================
</TABLE>
The pro forma results are not necessarily indicative of what would have occurred
if the disposition occurred during the periods presented. In addition, they are
not intended to be a projection of future results of operations.
NOTE H - SUBSEQUENT EVENTS
Subsequent to December 31, 1998, a judgment in the amount of $218,000 plus
interest was entered against Bollinger Industries, L.P. in favor of Breathe
Better, Inc. The Company has reserved adequately for this eventuality. See "Part
II, Item 1. Legal Proceedings."
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's Annual
Report on Form 10-K and consolidated financial statements for the fiscal years
ended March 31, 1998 and March 31, 1997; the Company's Quarterly Reports on Form
10-Q for the fiscal quarters ended June 30, 1997, September 30, 1997, December
31, 1997, June 30, 1998, and September 30, 1998; and the consolidated financial
statements and related notes for the fiscal quarter ended December 31, 1998
found elsewhere in this report.
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THREE MONTHS
AND NINE MONTHS ENDED DECEMBER 31, 1997
During the quarter ended December 31, 1998, the Company purchased the assets of
Self Image Sports and Fitness Co., Inc. (d.b.a. Multi-Grip) and licensed "The
Step" for retail distribution. Each of these purchase agreements were signed in
mid-October. The results of operations for these two acquisitions are
incorporated in these financial statements from the respective dates of
acquisition.
Fitness accessory sales increased for the quarter by $2,054,000 on a comparative
basis with the same quarter of the prior year, an increase of 23.4%.
Consolidated net sales for the quarter ended December 31, 1998 decreased by $5.0
million as compared to the quarter ended December 31, 1997, a decrease of 31.7%.
In the third quarter of the prior year, the Company sold approximately $7.1
million of trampoline products. The trampoline product line was sold in November
1997. Fitness accessory sales decreased for the nine months by $796,000 on a
comparative basis with the same period of the prior year, a decrease of 3.0%.
Consolidated net sales for the nine months ended December 31, 1998 decreased by
$26.2 million as compared to the nine months ended December 31, 1997, a decrease
of 50.8%. In the nine months ended December 31, 1997, the Company sold
approximately $25.4 million of trampoline products accounting for a significant
portion of the decline in consolidated net sales.
Gross profit as a percentage of net sales increased dramatically for fitness
accessory products from 15.7% in the quarter ended December 31, 1997 to 30.1% in
the quarter ended December 31, 1998 (eliminating the effect of the trampoline
product line). The improvement was primarily due to improved pricing from
overseas vendors, better controls over related expenses and higher margins from
the new product lines of Multi-Grip and The Step. In addition, the prior year
gross profit percentage was suppressed by low margins on targeted inventory
sales that were entered into as a part of the Company's plan to reduce overall
inventory levels. Consolidated gross profit for the quarter ended December 31,
1998 increased $441,000 as compared to the quarter ended December 31, 1997, and
increased as a percentage of net sales from 17.7% in 1997 to 30.1% in 1998 for
the same period. The increase in gross profit is directly related to cost
improvements on the fitness accessory line, better internal cost controls and
higher margins from the Multi-Grip and Step product lines acquired in October
1998.
Gross profit as a percentage of net sales of fitness accessories increased from
17.6% during the nine months ended December 31, 1997 to 28.9% in the nine months
ended December 31, 1998 (eliminating the effect of the trampoline product line).
Consolidated gross profit for the nine months ended December 31, 1998 decreased
$2,264,000 as compared to the nine months ended December 31, 1997 and increased
as a percentage of net sales from 18.6% in 1997 to 28.9% in
12
<PAGE> 13
1998. The decrease in dollars of $2.3 million is directly related to the sale of
the trampoline product line in November 1997.
Selling expenses for the quarter ended December 31, 1998 decreased by $407,000
as compared to the quarter ended December 31, 1997, and increased as a
percentage of net sales from 8.8% to 9.2%. Selling expenses for the nine months
ended December 31, 1998 decreased by $1,292,000 as compared to the nine months
ended December 31, 1997, and increased as a percentage of net sales from 7.6% to
10.4%. The nine months ended December 31, 1997 benefited from a $508,000
decrease in royalty commissions as well as other selling expenses compared to
December 31, 1998. Without the benefit of the reduced royalty commissions in
1997 the comparable dollar improvement in overall selling expenses would have
been $1,800,000.
Distribution, general and administrative expenses for the quarter ended December
31, 1998 decreased by $340,000 as compared to the quarter ended December 31,
1997, and increased as a percentage of net sales from 18.2% in 1997 to 23.6% in
1998. The decrease in distribution, general and administrative expenses resulted
from the reduction of labor costs, bad debt expense, computer costs and
warehouse rent partially offset by the increase in legal fees and depreciation
expense. The percentage increase was directly related to decreased sales after
the sale of the trampoline product line, which accounted for approximately
$7,098,000 in sales for the quarter ended December 31, 1997. Distribution,
general and administrative expenses for the nine months ended December, 1998
decreased by $894,000 as compared to the same period of 1997, and increased as a
percentage of net sales from 15.5% to 27.9% based on lower net sales. The
decrease in distribution, general and administrative expenses resulted from the
reduction of labor costs, computer costs and warehouse rent partially offset by
the increase in legal fees and depreciation expense. The percentage increase was
directly related to decreased sales after the sale of the trampoline product
line, which accounted for approximately $25,377,000 in sales for the nine months
ended December 31, 1997.
The Company sustained an operating loss of $287,000 for the quarter ended
December 31, 1998, as compared to an operating loss of $1,474,000 in the same
quarter last year. Improvements in cost controls across the cost categories were
responsible for this $1,187,000 improvement.
The Company sustained an operating loss of $2,384,000 for the nine months ended
December 31, 1998 as compared to an operating loss of $2,306,000 in the same
period of 1997. The gross profit decline of $2,264,000 for the nine months ended
December 31, 1998 as compared to the same period of 1997 was substantially
offset by lower selling and distribution, general and administrative expenses of
$2,185,000.
Interest expense for the quarter ended December 31, 1998 was $232,000 compared
to $420,000 for the same quarter of 1997. Interest expense for the nine months
ended December 31, 1998 was $488,000 compared to $1,576,000 for the same period
of 1997. The significant reduction in interest expense was due to the reduction
of debt made possible by the sale of the assets associated with the trampoline
product line in November 1997 and the sale of the Irving facility in September
1997.
Net loss for the quarter ended December 31, 1998 was $581,000 compared to net
earnings of $7,646,000 for the same quarter of 1997. In the quarter ending
December 31, 1997, the Company recorded $10,378,000 as a gain on the sale of
fixed assets primarily from the sale of the trampoline division. Net loss for
the nine month period ended December 31, 1998 was $2,944,000 compared to net
earnings of $6,534,000 for the same period of 1997. During the nine months ended
December 31, 1997 the Company recorded a gain on the sale of fixed assets of
$11,247,000, primarily from the sale of the trampoline product line and a
building in Irving, Texas.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of outside financing have been borrowings from
various financial institutions and its initial public offering. In addition, the
Company received $14,682,000 in cash in connection with the sale of the
trampoline product line in November 1997 and an Irving facility in 1997. For the
nine months ended December 31, 1998 cash used in operating activities was
$3,124,000 and cash used in investing activities was $3,010,000. The acquisition
of The Step and Multi-Grip, as well as the increase in receivables, inventory
and operating losses were offset by increases in accounts payable, receipt of
funds held in escrow from the sale of the trampoline product line and additional
borrowings from a financial institution.
For the nine months ended December 31, 1997 cash used in operating activities
was $1,921,000 and cash provided by investing activities was $14,682,000. The
disposition of the trampoline division provided cash used to reduce trade
payables and long term debt with a financial institution.
Shortly before the fiscal year ended March 31, 1998, the Company received
$1,125,000 in cash from a major customer that should have been properly payable
to the purchaser of the trampoline product line. The Company advised the
customer of this payment, but the customer did not request an immediate
repayment. Accordingly, this is included in other payables on the Company's
balance sheet at March 31, 1998. During the quarter ended December 31, 1998 the
overpayment has been eliminated based on the customer's continued purchases of
products from the Company.
The Company obtained a credit facility with a financial institution on August
16, 1996 with a maximum line of $25 million and a three-year term. The loan
agreement had an expiration date of August 16, 2000. During the first quarter of
fiscal 1999, at the request of the Company, the loan agreement was renegotiated
with the financial institution to more closely reflect the Company's financial
condition and financing needs. The maximum line of credit was reduced to $15
million subject to certain borrowing base requirements. The facility was also
extended to August 20, 2002 and several of the performance covenants were
revised or removed. The Company received waivers for noncompliance of certain
negative financial covenants of the loan agreement involving tangible net worth
following the two acquisitions in October 1998. Availability under the credit
line is based on the level of specific current assets, namely accounts
receivable and inventory. The outstanding obligation at December 31, 1998 was
$6,326,000 and the Company had borrowing availability of $1,710,000 pursuant to
the asset-based formula. Outstanding balances in the quarter ended December 31,
1998 bore interest at an approximate rate of 9.4% compared to a rate of 10.25%
for the quarter ended December 31, 1997.
The Company, from time to time, reviews the possible acquisition of businesses
or products that complement its current business. In October 1998 the Company
acquired certain assets of Self Image Sports and Fitness Co., Inc. (d.b.a.
Multi-Grip) for $1,500,000. The Company paid $1,400,000 in cash and deferred
payment of the remaining $100,000 for six months contingent on the collection of
certain receivables. The Company also acquired certain patents for an additional
$40,000 and issued 100,000 shares of the Company's restricted stock (valued at
$50,000) for a non-compete agreement. In October 1998 the Company acquired the
license rights to various products of The Step Company in an asset purchase for
$3,575,000 and 300,000 shares of the Company's restricted stock. The Company
paid $2,175,000 in cash and issued a convertible subordinated note for
$1,400,000. The 300,000 shares of stock were valued at $150,000 for purposes of
the acquisition.
14
<PAGE> 15
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize data sensitive
information when the Year 2000 arrives. Software that does not properly
recognize such information could generate erroneous data or cause a system to
fail.
Although the Company believes its previous accounting system was Year 2000
compliant, in 1998 the Company began installing a new accounting system that was
confirmed by the vendor to address the Year 2000 issues. The upgrade to the new
system was completed during the second quarter of fiscal 1999 and is ready for
the internal Year 2000 issues. The Company has conducted random testing on its
computer accessory equipment, phone system, fax machines, copy equipment, etc.,
and believes it will not have Year 2000 problems. The Company has not analyzed
any external factors, such as the impact on those vendors and customers
adversely affected by the Year 2000 issue, and has not assessed the related
potential effect on the Company's business, financial condition or results of
operations. There can be no assurance that computer systems and applications of
other companies on which the Company's operations rely will be converted in a
timely fashion, or that such failure to correct by another company would not
have a material adverse effect on the Company.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements about the business and
financial condition of the Company, including various statements contained in
"Management's Discussions and Analysis of Financial Condition and Results of
Operations." When used in this report, words such as "believes," "anticipates,"
"intends," "expects," "should," and words of similar import identify a
forward-looking statement. Such forward-looking statements may involve numerous
assumptions about known and unknown trends, uncertainties, risks, economic
conditions and other factors, which may ultimately prove to be inaccurate.
Investors are cautioned that forward-looking statements involve certain risks
and uncertainties that could cause actual results of the Company to differ
materially from those contained in the forward-looking statements. Important
factors include, but are not limited to: seasonality, advertising and
promotional efforts, availability and terms of capital, future acquisitions,
economic conditions, consumer preferences, lack of success of new products, loss
of customer loyalty, heightened competition, failure of the Company or its
significant vendors and customers to become Year 2000 compliant and other
factors discussed in this report. The Company disclaims any obligation to update
or to publicly revise any of the forward-looking statements contained herein to
reflect future events or developments.
The Company continues to suffer operating losses. Nothing contained in these
financial statements or in Management's Discussion and Analysis of Financial
Condition and Results of Operations should be interpreted as a guarantee of
future earnings or a change in financial condition. The actual future results of
the Company could differ materially from the statements found in this section
and elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Cause No. 96-02952; Suntrust Bank Atlanta, as Trustee for Suntrust Retirement
Sunbelt Equity Fund v. Bollinger Industries, Inc., Glenn D. Bollinger, Bobby D.
Bollinger, Curtis D. Logan, Michael J. Beck, John L. Maguire, William Blair &
Company, Rauscher Pierce Refsnes, Inc. and Grant Thornton, L.L.P.; in the 68th
Judicial District Court of Dallas County, Texas (the "Suntrust Lawsuit"):
The Company, Glenn D. Bollinger (Chairman and CEO), Bobby D. Bollinger
(President), Curtis D. Logan (former CFO), Michael J. Beck (former CAO), John L.
Maguire (Director), William Blair & Company (underwriters of initial public
offering), Rauscher Pierce Refsnes, Inc. (underwriters of initial public
offering), and Grant Thornton, L.L.P. (independent accountants) are defendants
in a lawsuit filed on March 22, 1996 by shareholder Suntrust Bank Atlanta, as
Trustee for Suntrust Retirement Sunbelt Equity Fund, on behalf of themselves,
and all persons similarly situated. This lawsuit was filed as a class action
suit on behalf of those who purchased securities through a public offering that
were issued by the Company, and alleges that the Company's stock prices were
artificially inflated and maintained in violation of the anti-fraud provisions
of the securities law as well as common law. Prior to the class certification
hearing the judge excused himself; accordingly, there is currently no trial date
established or venue to hear motions. At a hearing the court indicated that it
was approving the settlement stipulation entered between the underwriters and
the plaintiffs. It is anticipated that the court order approving the settlement
stipulation will be signed by the court shortly. Notices have been sent to the
settlement class. Further, Grant Thornton has cross-claimed against the
underwriters, and against the Company, Glenn D. Bollinger and Bobby D.
Bollinger, generally seeking contribution. The plaintiffs' lawsuit seeks
recovery of actual damages in the amount of $10,636,648, treble damages, and
exemplary damages, attorneys' fees and expert fees, as well as rescission,
pre-judgment interest and extraordinary equitable and/or injunctive relief. A
mediator has been engaged and several mediation sessions have taken place, but
it is uncertain whether the case will settle through mediation. The STI lawsuit
described in the following paragraph involves similar issues.
Civil Action No. 3:96C-V-0823-R; STI Classic Fund and STI Classic Sunbelt v.
Bollinger Industries, Inc., Glenn D. Bollinger, Bobby D. Bollinger, and Michael
J. Beck; in the United States District Court for the Northern District of Texas,
Dallas Division (the "STI Lawsuit"):
The Company, Glenn D. Bollinger, Bobby D. Bollinger, and Michael J. Beck are
defendants in this lawsuit filed on March 22, 1996 in the United States District
Court for the Northern District of Texas, Dallas Division by shareholders STI
Classic Fund and STI Classic Sunbelt, on behalf of themselves and all persons
similarly situated. Like the Suntrust Lawsuit, this lawsuit was also filed as a
class action on behalf of a class of persons who purchased securities issued by
the Company at prices which allegedly were artificially inflated and maintained
in violation of the anti-fraud provisions under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5
thereunder. The plaintiffs have filed a Motion for Partial Summary Judgment
against the Company, which is being briefed and is currently pending. The Court
has granted leave for the plaintiffs to file a Fourth Amended Complaint, which
adds claims for common law fraud, negligent misrepresentation, and a claim for
$100,000,000 in punitive damages ("New Claims") against Glenn D. Bollinger,
Bobby D. Bollinger and the Company. Limited discovery is proceeding on the New
Claims pursuant to court order. The plaintiffs seek damages, exemplary damages,
costs and expenses. The Court has granted the plaintiffs' Motion to Certify the
Class. The case is currently set for trial May 1999. A mediator has been engaged
and
16
<PAGE> 17
the parties have held several mediation sessions, but it is uncertain whether
the case will settle through mediation.
Civil Action No. 3-98CV0039X; Breathe Better, Inc. v. Bollinger Industries, L.P.
in the United States District Court for the Northern District of Texas:
Subsequent to the date of this report, a judgment in the amount of $218,000 plus
interest was entered against Bollinger Industries, L.P. in favor of Breathe
Better, Inc.
The Company was contacted by the Department of Labor ("DOL") in fiscal 1996
regarding certain questions about its former Employee Stock Ownership Plan (the
"ESOP"). Assets of the ESOP are now held in the Company's 401(k) plan, which is
the successor to the ESOP. The Company has responded to and cooperated with the
DOL. The DOL has not initiated any proceedings with respect to the ESOP or any
of the Company's other employee benefit plans. The Company plans to meet with
the DOL to address outstanding issues. The DOL has requested and received
tolling agreements extending the running of the statute of limitations through
and including March 31, 1999.
The Internal Revenue Service ("IRS") has examined the Bollinger Employees
Retirement Plan and Trust ("Plan"). In order to maintain its tax-exempt status,
the Plan must comply with certain tests and limitations of the Internal Revenue
Code of 1986, as amended (the "Code"). In a preliminary finding, the IRS has
recommended disqualification of the Plan. The Company has retained counsel for
representation in this matter and has provided additional information for
consideration by the IRS. At this time, the effect of such an IRS preliminary
finding on the Company or the Plan cannot be determined.
On September 30, 1996 in connection with an investigation by the Securities and
Exchange Commission, the Company consented to the entry of an order of permanent
injunction which enjoins the Company from violating the antifraud, periodic
reporting, record keeping and internal accounting controls provisions of the
Exchange Act and regulations promulgated thereunder in the future in the conduct
of its business. Glenn Bollinger also consented to the entry of an order of
permanent injunction enjoining him from violations of the antifraud, record
keeping, periodic reporting and internal accounting controls provisions of the
Exchange Act and regulations promulgated thereunder in the future, and agreed to
the payment of a monetary penalty in the amount of $40,000. Ronald Bollinger
also consented to the entry of an order of permanent injunction enjoining him
from violations of the antifraud, record keeping, periodic reporting and
internal accounting controls provisions of the Exchange Act and regulation
promulgated thereunder in the future, and agreed not to act as a director or
officer of a registered or reporting entity.
From time to time, the Company is a party to various other legal proceedings
arising in the ordinary course of business. The Company is not currently a party
to any other material litigation and is not aware of any litigation threatened
against the Company, arising in the ordinary course of business, that could have
a material adverse effect on the Company.
17
<PAGE> 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Subsequent Events
Subsequent to December 31, 1998, a judgment in the amount of $218,000 plus
interest was entered against Bollinger Industries, L.P. in favor of Breathe
Better, Inc. The Company currently has adequate reserves for this judgment. See
"Part II, Item 1. Legal Proceedings."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.68 Convertible Subordinated Note Agreement dated October
15, 1998 between Bollinger Industries, L.P., a Texas
limited partnership, Bollinger Industries, Inc. a
Delaware corporation and The Step Company, a Georgia
corporation.*
11 Computation of Earnings Per Share*
27.1 Financial Data Schedule*
- ------------------------
* Filed herewith
(b) Reports on Form 8-K
On November 5, 1998 the Company filed a Current Report on Form 8-K to
report that on October 22, 1998 the Company and its subsidiary, Bollinger
Industries, L.P., consummated the purchase of the license rights to
various products of The Step Company.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOLLINGER INDUSTRIES, INC.
Date: February 10, 1999 /s/ Glenn D. Bollinger
-------------------------------------
Glenn D. Bollinger
Chairman of the Board and
Chief Executive Officer
Date: February 10, 1999 /s/ Rose Turner
-------------------------------------
Rose Turner
Chief Operating Officer
Executive Vice President -
Finance, Chief Financial Officer,
Treasurer and Secretary
Date: February 10, 1999 /s/ Floyd DePauw
-------------------------------------
Floyd DePauw
Controller and Chief Accounting
Officer
19
<PAGE> 20
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
10.68 Convertible Subordinated Note Agreement dated October
15, 1998 between Bollinger Industries, L.P., a Texas
limited partnership, Bollinger Industries, Inc. a
Delaware corporation and The Step Company, a Georgia
corporation.
11 Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.68
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED, TRANSFERRED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER
APPLICABLE SECURITIES LAWS.
THIS CONVERTIBLE NOTE, AND PAYMENT AND ENFORCEMENT HEREOF, IS FURTHER
SUBJECT TO THE TERMS AND PROVISIONS OF THAT CERTAIN SUBORDINATION
AGREEMENT DATED OCTOBER 15, 1998, BETWEEN FOOTHILL CAPITAL CORPORATION
AND THE STEP COMPANY AND ACKNOWLEDGED BY BOLLINGER INDUSTRIES L.P. AS
SUCH SUBORDINATION AGREEMENT MAY BE AMENDED FROM TIME TO TIME (THE
"SUBORDINATION AGREEMENT").
BOLLINGER INDUSTRIES, L.P.
CONVERTIBLE SUBORDINATED NOTE
$1,400,000 October 15, 1998
FOR VALUE RECEIVED, the undersigned, Bollinger Industries, L.P., a
Texas limited partnership with its principal office located at 602 Fountain
Parkway, Grand Prairie, Texas 75050 (the "Company"), hereby promises to pay to
the order of The Step Company, a Georgia corporation or its registered assigns
(the "Holder"), at 2250 Newmarket Parkway, Suite 130, Marietta, Georgia 30067,
or at such other place as Holder may from time to time designate, the principal
sum of ONE MILLION FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($1,400,000),
together with interest (computed on the basis of a 360-day year of twelve 30-day
months) on the unpaid principal balance of this Convertible Note at the Base
Rate (as defined below). All past due principal and interest will bear interest
at the Base Rate plus four percent per annum (the "Default Rate"); provided,
however, in no event shall the interest charged exceed the Highest Lawful Rate.
This Convertible Note is issued pursuant to the Asset Purchase
Agreement dated October 15, 1998 (the "Asset Purchase Agreement") among Company,
Bollinger Industries, Inc. ("Bollinger"), and Holder and is subject to the terms
and provisions thereof. All capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the Asset Purchase
Agreement.
1. PAYMENT OF PRINCIPAL AND INTEREST.
1.1 PAYMENT AMOUNTS. Quarterly amortization payments shall equal the
amount necessary to amortize the remaining principal balance in equal principal
and interest payments over the remaining term at the Base Rate for such calendar
quarter. The first payment under this Convertible Note shall be due on January
4, 1999 and the amount of such payment shall be $87,979.37. The succeeding
payments shall be made on or before the first banking business day
<PAGE> 2
of each calendar quarter thereafter. These payments shall be calculated on the
basis of the Base Rate in effect for the preceding calendar quarter, the
principal balance outstanding on the first day of the preceding calendar quarter
(adjusted for any prepayments or conversions during such quarter), and the
remaining term.
1.2 MATURITY DATE. The principal amount of this Convertible Note
together with all accrued and unpaid interest shall be due and payable in full
on October 1, 2003 (the "Maturity Date") unless this Convertible Note is
converted or prepaid in full prior to such date. Company will pay all sums
becoming due to Holder under this Convertible Note in lawful money of the United
States of America at the address specified for such purpose herein.
1.3 APPLICATION OF PAYMENTS. All payments made by Company on this
Convertible Note shall be applied first to the accrued but unpaid interest
hereon, and then to the principal balance.
1.4 PREPAYMENT. Unless Holder delivers to Company a Conversion Notice
pursuant to SECTION 5, Company may, at its option and without premium or
penalty, prepay at any time all, or any portion, of the principal amount of this
Convertible Note, plus all accrued and unpaid interest on such principal amount.
This Convertible Note when paid or prepaid in full shall be surrendered to
Company.
1.5 BASE RATE. Base Rate means nine and one-quarter percent (9.25%) per
annum on the date of this Convertible Note. Beginning with the month of January,
1999, this Base Rate shall be changed each calendar quarter to the prime rate as
quoted on the first publication date in such calendar quarter in the money rates
section of the Wall Street Journal, plus an additional one percent (1.0%).
2. DEFAULT AND REMEDIES.
2.1 EVENTS OF DEFAULT. An "Event of Default" shall exist if any of the
following conditions or events shall occur:
(a) Company defaults in the payment of any principal, interest
or other amount due under this Convertible Note when the same becomes due and
payable, whether at maturity, by declaration or otherwise, and such default is
not cured within five (5) days after Holder has given Company written notice of
such default; or
(b) Company or Bollinger defaults or breaches in the
observance or performance of any of the other terms or conditions of this
Convertible Note, and such default is not cured within thirty (30) days after
Holder has given Company written notice of such default; or
(c) Company or Bollinger shall (1) apply for, or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
assets or revenues; (2) admit in writing its inability to pay its liabilities as
they become due; (3) make an assignment for the benefit of creditors; (4)
commence a voluntary case under Title 11 of the United States Code or any other
Federal, state or foreign
<PAGE> 3
bankruptcy, insolvency, reorganization or similar law (as now or hereafter in
effect); (5) file a petition seeking to take advantage of any other law relating
to bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of indebtedness; (6) fail to controvert in a timely or appropriate
manner, or acquiesce in, any petition filed against Company or Bollinger, as the
case may be, in an involuntary case under Title 11 of the United States Code or
any other Federal, state or foreign bankruptcy, insolvency, reorganization or
similar law (as now or hereafter in effect); (7) have an order for relief
against Company or Bollinger entered under Title 11 of the United States Code or
other Federal, state or foreign bankruptcy, insolvency, reorganization or
similar law (as now or hereafter in effect); or (8) take any action for purposes
of effecting any of the foregoing; or
(d) a proceeding or case shall be commenced in any court of
competent jurisdiction, seeking (1) the liquidation, reorganization,
dissolution, winding-up, or readjustment of debts of Company or Bollinger; or
(2) the appointment of a trustee, receiver, custodian, liquidator or similar
official of Company or Bollinger or of all or a substantial part of its
respective properties, assets or revenues; or (3) the entry of similar relief in
respect of Company or Bollinger under any law (domestic or foreign) relating to
bankruptcy, insolvency, reorganization, winding-up, or readjustment of
indebtedness (as now or hereafter in effect) without the consent of Company or
Bollinger, as the case may be, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect for sixty (60)
days; or
(e) a termination of the Step License (as defined in the
Purchase Agreement) pursuant to Section 9.2 or 9.3 thereof.
2.2 ACCELERATION. Subject to the Subordination Agreement, upon the
occurrence of an Event of Default and during the Event of Default [excluding
Events of Default under SECTIONS 2.1(c) and 2.1(d), the occurrence of which will
automatically trigger acceleration of all amounts payable under this Convertible
Note], Holder may, at its election and without demand, declare the entire unpaid
principal balance of this Convertible Note and all interest accrued with respect
thereto and other amounts payable hereunder due and payable without any further
notice, action or demand on the part of Company or Holder or any other person or
entity, and Holder shall be entitled to all such other remedies as may be
available to it hereunder, under applicable law, at equity or otherwise, all
such remedies being cumulative, not exclusive, and enforceable alternatively,
successively and/or concurrently.
2.3 NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of
dealing and no delay on the part of Holder in exercising any right, power or
remedy shall operate as a waiver thereof or otherwise prejudice such Holder's
rights, powers or remedies. No right, power or remedy conferred by this
Convertible Note upon Holder shall be exclusive of any other right, power or
remedy referred to herein or now or hereafter available at law, in equity, by
statute or otherwise. Company will pay to Holder on demand such further amount
as shall be sufficient to cover all reasonable costs and expenses of such Holder
incurred in any enforcement or collection of this Convertible Note, including,
without limitation, reasonable attorneys' fees, expenses and disbursements,
together with interest on such amounts at the Default Rate accruing from the
date of demand.
<PAGE> 4
3. WARRANTIES AND REPRESENTATIONS OF HOLDER. Holder represents and
warrants to Company and Bollinger as follows:
3.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Convertible Note is
delivered to Holder in reliance upon Holder's representation to Company and
Bollinger, which by Holder's execution of this Convertible Note Holder hereby
confirms, that this Convertible Note and the Common Shares issuable upon
conversion thereof (collectively the "Securities") will be acquired for
investment for Holder's own account, not as a nominee or agent, and not with a
view to the resale or distribution of any part thereof, and Holder has no
present intention of selling, granting any participation in, or otherwise
distributing the same, except in compliance with applicable federal and state
securities laws. Holder does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person with respect to any of the Securities.
3.2 RELIANCE UPON HOLDER'S REPRESENTATIONS. Holder understands that
this Convertible Note has not been, and the Common Shares issuable upon
conversion thereof at the time of conversion may not be, registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on
appropriate exemptions therefrom, and that Company's and Bollinger's reliance on
such exemption is predicated on Holder's representations set forth herein.
3.3 RECEIPT OF INFORMATION. Holder believes that it has received all
the information Holder considers necessary or appropriate for deciding whether
to purchase this Convertible Note. Holder has had an opportunity to ask
questions and receive answers from Company and Bollinger regarding the terms and
conditions of this Convertible Note and the Common Shares issuable upon
conversion thereof and the business, properties, prospects and financial
condition of Company and Bollinger, and to obtain additional information (to the
extent Company or Bollinger possessed such information or could acquire it
without unreasonable effort or expense) necessary to verify the accuracy of any
information furnished to Holder or to which Holder had access.
3.4 INVESTMENT EXPERIENCE AND COUNSEL. Holder is experienced in
evaluating and investing in securities of companies such as Bollinger, is
represented by legal and/or investment advisory counsel with regard to this
Convertible Note or has voluntarily elected to forego such counsel, can bear the
economic risk of its investment in this Convertible Note and the Common Shares
issuable upon conversion thereof, and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment in this Convertible Note.
3.5 ACCREDITED INVESTOR. Holder is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D under the Securities Act.
3.6 RESTRICTED SECURITIES. Holder understands that this Convertible
Note, and the Common Shares issuable upon the conversion thereof, may not be
sold, transferred, or otherwise disposed of without registration under the
Securities Act or an exemption therefrom, and, in the absence of an effective
registration statement covering this Convertible Note (or the Common Shares
issuable upon the conversion thereof) or an available exemption from
registration under the Securities Act, this Convertible Note (and the Common
Shares issuable upon conversion thereof) must be held indefinitely.
<PAGE> 5
3.7 LEGENDS. Holder understands that each certificate evidencing the
Common Shares issuable pursuant to the conversion of this Convertible Note will
be endorsed with the legend set forth below:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE
TO COMPANY, REGISTRATION UNDER SUCH ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER."
4. TRANSFER AND EXCHANGE; SUBSTITUTION OF CONVERTIBLE NOTE.
4.1 TRANSFER AND EXCHANGE OF CONVERTIBLE NOTE. With respect to any
offer, sale or other disposition of this Convertible Note or the Common Shares
issuable upon conversion thereof, Holder will give prior written notice to
Company and Bollinger, describing briefly the manner thereof, together with a
written opinion of the counsel identified as Holder's counsel in SECTION 7.2 or
other counsel for Holder who shall be reasonably acceptable to Bollinger, to the
effect that such offer, sale or other distribution may be effected without
registration or qualification (under any applicable federal or state securities
laws then in effect). Subject to the foregoing and upon surrender of this
Convertible Note at the principal executive office of Company for registration
of transfer or exchange (and in the case of a surrender for registration of
transfer, duly endorsed or accompanied by a written instrument of transfer duly
executed by Holder, accompanied by a written acknowledgement and acceptance of
the representations and warranties of Holder under SECTION 3 and a consent to
governing law under SECTION 7.5, and further accompanied by the address for
notices of each transferee of such Convertible Note or part thereof), Company
shall execute and deliver, at Company's expense (subject to the obligation of
Holder requesting any transfer to pay any taxes due in respect of such
transfer), one or more new Convertible Notes (as requested by Holder) in
exchange therefor, in an aggregate principal amount equal to the unpaid
principal amount of the surrendered Convertible Note. Each such new Convertible
Note shall be payable to such Person as Holder may request and shall be
substantially in the form specified herein. Each such new Convertible Note shall
be dated and bear interest from the date of surrender of the Convertible Note,
and accrued but unpaid interest on the surrendered Convertible Note shall be
paid as directed by Holder on the next scheduled interest payment date.
4.2 REPLACEMENT OF CONVERTIBLE NOTE. Upon receipt by Company of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Convertible Note, and (a) in the case of loss,
theft or destruction, of indemnity reasonably satisfactory to it, or (b) in the
case of mutilation, upon surrender and cancellation thereof, Company at its own
expense shall execute and deliver, in lieu thereof, a new Convertible Note,
dated and bearing interest from the most recent prior principal and interest
installment payment date of such lost, stolen, destroyed or mutilated
Convertible Note.
<PAGE> 6
5. CONVERSION RIGHTS.
5.1 CONVERSION. At anytime during the term of this Convertible Note and
prior to the payment in full of its outstanding principal balance, Holder shall
have the right, at its option exercisable at the times and in the manner
specified in SECTION 5.2, to convert the outstanding principal balance of this
Convertible Note or any portion thereof, plus accrued and unpaid interest due
thereon to the effective date of the conversion, into fully paid and
non-assessable shares of common stock, par value $0.01 per share, of Bollinger
("Common Shares"). If Holder makes such an election, the conversion ratio shall
be one (1) Common Share, subject to adjustments as described in SECTION 5.3, for
each Four and no/100 Dollars ($4.00) of outstanding principal and accrued but
unpaid interest on this Convertible Note.
5.2 CONVERSION PROCEDURE.
(a) If Holder desires to convert this Convertible Note or any
portion thereof into Common Shares pursuant to SECTION 5.1, Holder shall
surrender this Convertible Note at the principal executive office of Company,
duly endorsed to Company or in blank, or accompanied by proper instruments of
transfer to Company or in blank, and accompanied by an irrevocable written
notice (the "Conversion Notice") to Company. The Conversion Notice shall state
that Holder elects to convert this Convertible Note, or a portion thereof, in
accordance with its terms, and specify the name or names (with address) in which
a certificate or certificates for Common Shares are to be issued. If Holder
desires to convert only a portion of this Convertible Note, then Holder shall
specify in such written notice the percentage amount of the outstanding
principal and accrued interest of this Convertible Note which it desires to
convert. The effective date for such conversion shall be the date of the
Conversion Notice, provided such Conversion Notice is received by Company within
ten days of the date of such notice.
(b) If Holder has surrendered this Convertible Note
accompanied by the Conversion Notice and complied with any other conditions
herein, Bollinger shall, as soon as practicable thereafter, deliver or cause to
be delivered, to the Person for whose account such Convertible Note was so
surrendered, certificates for the number of full Common Shares to which such
Person shall be entitled under the Conversion Notice and a cash adjustment for
any fraction of a Common Share as hereinafter provided. Such conversion shall be
deemed to have been made as of the effective date of the Conversion Notice and
the Person entitled to receive the Common Shares deliverable upon conversion
shall be treated for all purposes as the record Holder of such Common Shares on
such date.
(c) In the event that Holder has elected to convert only a
portion of this Convertible Note, Company shall deliver or cause to be delivered
to Holder a new Convertible Note substantially in the form of the surrendered
Convertible Note with appropriate adjustment to the principal and accrued
interest.
5.3 ADJUSTMENTS. The number of Common Shares, or amount of any other
securities and property as hereinafter provided, into which this Convertible
Note is convertible (the "Conversion Rate") shall be subject to adjustment from
time to time effective upon each occurrence of any of the following events. In
case by reason of the operation of this SECTION 5.3 this Convertible Note shall
be convertible into any other shares of stock or other securities or
<PAGE> 7
property of Company, Bollinger or of any other corporation, any reference herein
to the conversion of this Convertible Note shall be deemed to refer to and
include the conversion of this Convertible Note into such other shares of stock
or other securities or property.
(a) If Bollinger shall declare or pay any dividend with
respect to its Common Stock payable in shares of Common Stock, subdivide the
outstanding Common Stock into a greater number of shares of Common Stock, or
reduce the number of shares of Common Stock outstanding (by stock split, reverse
stock split, reclassification or otherwise than by repurchase of its Common
Stock) (any of such events being hereinafter called a "Stock Split"), the number
of Common Shares issuable upon conversion of this Convertible Note shall be
appropriately adjusted so as to entitle Holder hereof to receive upon conversion
of this Convertible Note, for the same aggregate consideration provided herein,
the same number of Common Shares, plus cash in lieu of any fractional Common
Share, as Holder would have received as a result of such Stock Split had Holder
hereof converted this Convertible Note in full immediately prior to such Stock
Split.
(b) If Bollinger shall merge or consolidate with or into one
or more corporations or other entities and Bollinger is the sole surviving
corporation, or Bollinger shall adopt a plan of recapitalization or
reorganization in which Common Stock is exchanged for or changed into another
class of stock or other security of Bollinger, Holder shall, for the same
aggregate consideration provided herein, be entitled upon conversion of this
Convertible Note to receive in lieu of the number of Common Shares (plus cash in
lieu of any fractional Common Share) into which this Convertible Note would
otherwise be convertible, the number of Common Shares or other securities, plus
cash in lieu of any fractional Common Share, to which such Holder would have
been entitled pursuant to the terms of the agreement or plan of merger,
consolidation, recapitalization or reorganization had such Holder converted this
Convertible Note in full immediately prior to such merger, consolidation,
recapitalization or reorganization.
(c) If Bollinger is merged or consolidated with or into one or
more corporations or other entities under circumstances in which Bollinger is
not the sole surviving corporation, or if Bollinger sells or otherwise disposes
of substantially all its assets, and in connection with any such merger,
consolidation or sale holders of Common Stock receive stock or other securities
convertible into equity of the surviving or acquiring corporations or entities,
after the effective date of such merger, consolidation or sale, as the case may
be, Holder shall, for the same aggregate consideration provided herein, be
entitled upon conversion of this Convertible Note to receive, in lieu of Common
Shares (plus cash in lieu of any fractional Common Share) into which this
Convertible Note would otherwise be convertible, shares of such stock or other
securities (plus cash in lieu of any fractional share of such stock or other
securities) as Holder would have received pursuant to the terms of the merger,
consolidation or sale had such Holder converted this Convertible Note in full
immediately prior to such merger, consolidation or sale. In the event of any
consolidation, merger or sale as described in this SECTION 5.3(C), provision
shall be made in connection therewith for the surviving or acquiring
corporations or partnerships to assume all obligations and duties of Company and
Bollinger hereunder or to issue substitute convertible notes in lieu of this
Convertible Note, with all such changes and adjustments in the number or kind of
Common Shares or other securities or property thereafter subject to this
Convertible Note or in the Conversion Rate as shall be required in connection
with this SECTION 5.3.
<PAGE> 8
(d) If Bollinger shall declare or pay any dividend, or make
any distribution, with respect to its Common Stock that is payable in preferred
stock or other securities, assets (other than cash) or rights to subscribe for
or purchase any security of Bollinger, or that is payable in debt securities of
Bollinger convertible into Common Stock, preferred stock or other equity
securities of Bollinger, Holder hereof shall, for the same aggregate
consideration provided herein, be entitled to receive upon conversion of this
Convertible Note in addition to the Common Shares (plus cash in lieu of any
fractional Common Share) into which this Convertible Note would otherwise be
convertible, the same amount of preferred stock and other securities, assets
(other than cash) or rights to subscribe for or purchase any security (plus cash
in lieu of any fractional Common Share) as Holder would have received had Holder
converted this Convertible Note in full immediately prior to any such dividend
or distribution.
5.4 CASH IN LIEU OF FRACTIONAL SHARES. No fractional, or scrip
representing fractional, Common Shares shall be issued upon the conversion of
this Convertible Note. Instead of any fractional Common Share that would
otherwise be issuable upon conversion of this Convertible Note, Company will pay
a cash adjustment in respect of such fractional interest in an amount equal to
$4.00 per Common Share then in effect.
5.5 PROCEDURE.
(a) Bollinger shall at all times to reserve and keep
available, out of its authorized and unissued stock, solely for the purpose of
effecting the conversion of this Convertible Note, such number of Common Shares
free of preemptive rights as shall be sufficient to effect the conversion of
this Convertible Note in full.
(b) Company or Bollinger will pay any and all issue or other
taxes that may be payable in respect of any issue or delivery of Common Shares
on conversion of this Convertible Note. Company and Bollinger shall not,
however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue or delivery of Common Shares (or other securities
or assets) in any name or names other than that in which this Convertible Note
was initially issued, and no such issue or delivery shall be made unless and
until the Person requesting such issue has paid to Company or its designee the
amount of such tax or has represented, to the reasonable satisfaction of
Company, that such tax has been paid.
(c) Before taking any action that would cause an adjustment
increasing the Conversion Rate such that the effective consideration for the
Common Shares would be below the then par or stated value of the Common Stock,
Company and Bollinger will use its best efforts to take such corporate action as
may, in the opinion of counsel to Company and Bollinger, be necessary in order
that Bollinger may validly and legally issue fully paid and non-assessable
Common Shares in the amount as so adjusted.
(d) In case Company or Bollinger, as appropriate, proposes:
(1) to pay any dividend upon the Common Stock or make any
distribution or offer any subscription or other rights to holders of Common
Stock, or
<PAGE> 9
(2) to effect any capital reorganization or
reclassification of capital stock of Bollinger, or
(3) to effect the consolidation, merger, sale of all or
substantially all of the assets, liquidation, dissolution or winding up of
Bollinger, or
(4) to liquidate and dissolve,
(5) to prepay this Convertible Note, or
(6) to otherwise take any of the actions described in
SECTION 5.3,
then Company and Bollinger, as appropriate, shall cause
notice of any such intended action to be given to each then Holder not less than
ten (10) nor more than sixty (60) days prior to the date on which the transfer
books of Bollinger shall close or a record be taken for such dividend or
distribution, or the date when such capital reorganization, reclassification,
consolidation, merger, sale, liquidation, dissolution or winding up shall be
effected, or the date of such prepayment or the occurrence of any such other
event, as the case may be.
6. DEFINED TERMS. Capitalized terms used herein have meanings set forth
below:
6.1 "AFFILIATE" means, at any time and with respect to any Person, (a)
any other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, and (b) any Person beneficially owning or holding, directly
or indirectly, 10% or more of any class of voting or equity interests of Company
or any subsidiary or any corporation of which Company and its subsidiaries
beneficially own or hold, in the aggregate, directly or indirectly, 10% or more
of any class of voting or equity interests. As used in this definition,
"Control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise. Unless the
context otherwise clearly requires, any reference to an "Affiliate" is a
reference to an Affiliate of Company.
6.2 "COMMON STOCK" means the shares of common stock, $0.01 par value,
of Bollinger.
6.3 "HIGHEST LAWFUL RATE" means with respect to any indebtedness owed
to any Holder under this Convertible Note and any document relating thereto, the
maximum nonusurious interest rate, if any, that at any time or from time to time
may be contracted for, taken, reserved, charged or received by such Holder with
respect to such indebtedness under law applicable to such Holder.
6.4 "HOLDERS" shall mean The Step Company for so long as it holds this
Convertible Note and its successors and assigns who acquire or are otherwise the
transferee of this Convertible Note, directly or indirectly, from The Step
Company (or any subsequent Holder), for so long as such successors and assigns
hold this Convertible Note.
<PAGE> 10
6.5 "PERSON" means an individual, partnership, corporation, limited
liability company, association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.
6.6 "REQUIRED HOLDERS" means, at any time, Holder or Holders of at
least 66 2/3% in principal amount of this Convertible Note at the time
outstanding (exclusive of any portion of this Convertible Note then owned by
Company or any of its Affiliates).
7. MISCELLANEOUS.
7.1 AMENDMENT AND WAIVER. This Convertible Note may be amended,
modified or terminated only by an agreement in writing signed by Company,
Bollinger and the Required Holders. Any amendment or waiver consented to as
provided in this SECTION 7.1 applies equally to all Holders of Convertible Notes
and is binding upon them and upon each future Holder of any Convertible Note and
upon Company without regard to whether such Convertible Note has been marked to
indicate such amendment or waiver. No such amendment or waiver will extend to or
affect any obligation, covenant, agreement, Default or Event of Default not
expressly amended or waived or impair any right consequent thereon. No course of
dealing between Company, Bollinger, and Holder of any Convertible Note nor any
delay in exercising any rights hereunder or under any Convertible Note shall
operate as a waiver of any rights of any Holder of such Convertible Note.
7.2 NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, telecopier, any
courier guaranteeing overnight delivery, or first class certified mail, return
receipt requested, postage prepaid, addressed to the applicable party at the
address provided herein or such other address as may hereafter be designated in
writing by such party to the other party in accordance with the provisions of
this SECTION 7.2:
If to Company or Bollinger, to:
Bollinger Industries, L.P.
602 Fountain Parkway
Grand Prairie, Texas 75050
Attn: Glenn Bollinger
Telecopy: (972) 343-1199
Telephone: (972) 343-1000
With a copy to:
Tracy & Holland, L.L.P.
306 W. Seventh Street, Suite 500
Fort Worth, Texas 76102-4982
Attn: George T. Johns
Telecopy: (817) 332-3140
Telephone: (817) 335-1050
<PAGE> 11
If to Holder to:
The Step Company
Attn: Mr. Richard P. Boggs
2250 Newmarket Parkway, Suite 130
Marietta, Georgia 30067
Telephone: 770-859-9292
Telecopy: 770-956-0578
With a copy to:
Troutman Sanders L.L.P.
Attn: Joel S. Goldman
600 Peachtree Street N.E., Suite 5200
Atlanta, Georgia 30308-2216
Telephone: 404-885-3144
Telecopy: 404-885-3995
If to any subsequent Holder, to the address of such Person set forth in
the records of Company.
All such notices and other communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; when receipt
is acknowledged, if telecopied; when actually delivered, if delivered by a
courier; and upon receipt, if sent by mail.
7.3 LIMITATION ON INTEREST. Each provision in this Convertible Note is
expressly limited so that in no event whatsoever shall the amount paid, or
otherwise agreed to be paid, by Company for the use, forbearance or detention of
the money to be loaned under this Convertible Note or otherwise (including any
sums paid as required by any covenant or obligation contained herein or in any
of the documents relating hereto which is for the use, forbearance or detention
of such money), exceed that amount of money which would cause the effective rate
of interest thereon to exceed the Highest Lawful Rate, and all amounts owed
under this Convertible Note and any of the documents relating hereto shall be
held to be subject to reduction to the effect that such amounts so paid or
agreed to be paid which are for the use, forbearance or detention of money under
this Convertible Note or in any of the documents relating hereto shall in no
event exceed that amount of money which would cause the effective rate of
interest thereon to exceed the Highest Lawful Rate. Notwithstanding any
provision in this Convertible Note to the contrary, if the maturity of this
Convertible Note is accelerated for any reason, or in the event of prepayment of
all or any portion of this Convertible Note by Company or in any other event,
earned interest on this Convertible Note may never exceed the maximum amount
permitted by applicable law, and any unearned interest otherwise payable under
this Convertible Note that is in excess of the maximum amount permitted by
applicable law shall be canceled automatically as of the date of such
acceleration or prepayment or other such event and if theretofore paid, shall be
credited to the principal of this Convertible Note or, if the principal of this
Convertible Note has been paid in full, refunded to Company. In determining
whether or not the interest paid or payable, under any specific contingency,
exceeds the Highest Lawful Rate, Company and Holder shall, to the maximum extent
permitted by applicable law, amortize, prorate, allocate and spread, in equal
parts during the period of the actual term of Convertible Note, all interest at
any time contracted for, charged, received or reserved in connection with this
Convertible Note.
<PAGE> 12
7.4 SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
described in SECTION 4, all covenants and other agreements contained in this
Convertible Note shall be binding upon the successors, assigns, heirs,
administrators and executors of Company and Bollinger, and inure to the benefit
of Holder, its successors, endorsees, assigns, heirs, administrators and
executors (including without limitation, any subsequent Holder of a Convertible
Note) whether so expressed or not.
7.5 GOVERNING LAW. This Convertible Note shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the law of the State of Texas excluding choice-of-law principles, except to the
extent the Delaware Business Corporation Act governs the affairs of Bollinger.
7.6 TREATMENT OF CONVERTIBLE NOTE. To the extent permitted by generally
accepted accounting principles and applicable laws, Company and Bollinger will
treat, account and report this Convertible Note as debt and not as equity for
accounting purposes and with respect to any returns filed with federal, state or
local tax authorities.
7.7 NO SHAREHOLDER RIGHTS. Nothing contained in this Convertible Note
shall be construed as conferring upon Holder or any other person the right to
vote or to consent or to receive notice as a shareholder in respect of meetings
of shareholders for the election of directors of Bollinger; and no dividends or
interest shall be payable or accrued in respect of this Convertible Note or the
interest represented hereby or the Common Shares obtainable hereunder until, and
only to the extent that, this Convertible Note shall have been converted.
7.8 SUBORDINATION. This Convertible Note is subject to certain rights
and restrictions concerning recoupment or set-off as more particularly set forth
in the Asset Purchase Agreement.
7.9 WAIVER OF NOTICE, DEMAND, ETC. Except as expressly provided in this
Convertible Note, Company waives demand, protest, notice of protest, notice of
default or dishonor, notice of intention to accelerate, notice of acceleration,
notice of payment and nonpayment, notice of any default, and notice of
nonpayment at maturity.
BOLLINGER INDUSTRIES L.P.
By: /s/ GLENN BOLLINGER
----------------------------------------------
Glenn Bollinger, CEO of Bollinger Operating Corp.,
its general partner
Executed effective even date herewith for purposes of agreement and acceptance
of the provisions of Sections 5.2(b), 5.3, 5.5, 7.2, 7.4, 7.5, and 7.6.
BOLLINGER INDUSTRIES INC.
By: /s/ GLENN BOLLINGER
------------------------
Glenn Bollinger, CEO
<PAGE> 13
Executed effective even date herewith for purposes of agreement and acceptance
of the provisions of Sections 3, 7.1, 7.2, 7.5 and 7.8.
THE STEP COMPANY
By: /s/ RICHARD P. BOGGS
--------------------------
Richard P. Boggs, President
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
A reconciliation of basic to diluted earnings per share for the nine months
ended December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
BASIC DILUTED BASIC DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (2,944,343) $ (2,944,343) $ 6,533,788 $ 6,533,788
============ ============ ============ ============
Weighted average number of common
shares outstanding during the
period 4,106,755 4,106,755 4,000,210 4,000,210
Net effect of dilutive stock options
based on the treasury stock
method at market prices
-- -- -- 17,692
------------ ------------ ------------ ------------
Shares used for computation 4,106,755 4,106,755 4,000,210 4,017,902
============ ============ ============ ============
Net earnings (loss) per share $ (0.72) $ (0.72) $ 1.63 $ 1.63
============ ============ ============ ============
</TABLE>
As the Company incurred a net loss for the nine months ended December 31, 1998,
there were no adjustments for potentially dilutive securities as the adjustments
would have been antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 321,448
<SECURITIES> 0
<RECEIVABLES> 8,218,672
<ALLOWANCES> 499,546
<INVENTORY> 9,118,493
<CURRENT-ASSETS> 18,222,730
<PP&E> 3,390,540
<DEPRECIATION> 1,435,251
<TOTAL-ASSETS> 24,732,120
<CURRENT-LIABILITIES> 9,786,069
<BONDS> 0
0
0
<COMMON> 44,002
<OTHER-SE> 7,699,013
<TOTAL-LIABILITY-AND-EQUITY> 24,732,120
<SALES> 25,339,295
<TOTAL-REVENUES> 25,339,295
<CGS> 18,017,298
<TOTAL-COSTS> 2,636,482
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 180,000
<INTEREST-EXPENSE> 488,312
<INCOME-PRETAX> (2,944,343)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,944,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,944,343)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
