<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
BOYDS WHEELS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3714 93-1000272
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CODE NUMBER) IDENTIFICATION NO.)
8380 CERRITOS AVENUE, STANTON, CALIFORNIA 90680
(714) 952-4038
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
8380 CERRITOS AVENUE, STANTON, CALIFORNIA 90680
(714) 952-4038
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS)
BOYD CODDINGTON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8380 CERRITOS AVENUE, STANTON, CALIFORNIA 90680
(714) 952-4038
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
</TABLE>
------------------------
COPIES TO:
<TABLE>
<S> <C>
EVRIDIKI (VICKI) DALLAS, ESQ. NICK E. YOCCA, ESQ.
THOMAS G. BROCKINGTON, ESQ. MICHAEL E. FLYNN, ESQ.
RUTAN & TUCKER MATTHEW P. THULLEN, ESQ.
611 ANTON BOULEVARD, SUITE 1400 STRADLING, YOCCA, CARLSON & RAUTH
COSTA MESA, CALIFORNIA 92626 660 NEWPORT CENTER DRIVE, SUITE 1600
(714) 641-5100 NEWPORT BEACH, CALIFORNIA 92660
(714) 725-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement under the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLES OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock, no par value(2)...... 1,150,000 $11.00 $12,650,000 $4,362
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Representative's Warrants(3)....... 52,500 $ .001 $ 52.50 (3)
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Common Stock, no par value(4)...... 52,500 $13.20 $ 693,000 $ 239
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TOTAL.............................. $4,601
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</TABLE>
(1) Estimated pursuant to Rule 457(a) solely for calculating the registration
fee.
(2) Includes 150,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(3) To be issued to the Representative of the several Underwriters. No fee
pursuant to Rule 457(g).
(4) Issuable upon exercise of the Representative's Warrants. Pursuant to Rule
416, there are also being registered such additional shares as may be
issuable pursuant to anti-dilution provisions of the Representative's
Warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 17, 1996
PROSPECTUS
1,000,000 SHARES
BOYDS WHEELS, INC.
COMMON STOCK
Of the 1,000,000 shares of Common Stock offered, 750,000 shares are being
offered by Boyds Wheels, Inc. (the "Company") and 250,000 shares are being
offered by certain shareholders of the Company (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the shares sold by the Selling Shareholders. The Common Stock of
the Company is quoted on the Nasdaq National Market under the symbol "BYDS". On
May 16, 1996, the last sale price per share of the Common Stock as reported by
the Nasdaq National Market was $11.00. See "Price Range for Common Stock and
Dividends."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" AT PAGE 5 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
<S> <C> <C> <C> <C>
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Per Share.................. $ $ $ $
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Total(3)................... $ $ $ $
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</TABLE>
(1) Does not include (i) a non-accountable expense allowance payable by the
Company to the Representative and (ii) the sale by the Company to the
Representative of the Underwriters of five-year warrants to purchase up to
52,500 shares of Common Stock at an exercise price of $ per share
(120% of the per share price to the public). The Company and the Selling
Shareholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $375,000,
including the Representative's nonaccountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
150,000 additional shares on the same terms and conditions as set forth
above solely to cover over-allotments, if any. If all such shares are
purchased, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered severally by the Underwriters
named herein, subject to receipt and acceptance by them, and subject to other
conditions. The Underwriters reserve the right to reject any order in whole or
in part and to withdraw, cancel or modify the offer without notice. It is
expected that delivery of the certificates representing the shares of Common
Stock will be made against payment therefor at the offices of Cruttenden Roth
Incorporated, Irvine, California, on or about , 1996.
CRUTTENDEN ROTH
I N C O R P O R A T E D
THE DATE OF THIS PROSPECTUS IS , 1996
LOGO
<PAGE> 3
[PHOTOS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE
WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise indicated, the information in this
Prospectus assumes no exercise of: (i) the Underwriters' over-allotment option,
(ii) outstanding options and warrants to purchase up to 193,375 shares of Common
Stock and (iii) options which have been granted under the Company's 1995 Stock
Option Plan; and assumes no conversion of outstanding notes which are
convertible into 7,143 shares of Common Stock. See "Risk Factors" for a
discussion of important factors that should be considered by prospective
investors related to forward-looking statements included in this Summary.
THE COMPANY
Boyds Wheels, Inc. (the "Company") designs, manufactures and markets high
quality aluminum wheels for the specialty automotive aftermarket. In addition to
its premium aluminum wheels, the Company designs, manufactures and markets
motorcycle wheels, steering wheels for automobiles, automotive and motorcycle
billet aluminum accessories and also sells car care products under its own
label. The Company's products utilize machined aluminum materials and unique
designs which the Company believes enhance individuality of vehicle styling. The
Company sells its products domestically through a national distribution network
of tire and performance retailers, warehouse distributors and mail order
outlets, and internationally through foreign distribution channels.
The Company was founded in 1988 by Boyd Coddington in response to consumer
demand for billet aluminum wheels similar to those featured on custom hot rod
vehicles designed and manufactured by Hot Rods by Boyd, a company which has been
recognized as a leading designer, manufacturer and marketer of custom vehicles
and hot rods. Since 1978, Mr. Coddington has owned and operated Hot Rods by
Boyd, which has built vehicles that have been featured in many automotive and
general interest publications, including Car and Driver, Autoweek, Hot Rod,
Smithsonian and Forbes. The Company believes that its relationship with Hot Rods
by Boyd is a key factor in maintaining and enhancing the image and brand name
recognition of the Company's products. The Company has entered into a
marketing/promotion agreement with Hot Rods by Boyd pursuant to which Hot Rods
by Boyd is required to endorse, promote and market the Company's products as the
"official wheel" of Hot Rods by Boyd, use the Company's wheels on vehicles
produced by Hot Rods by Boyd and permit the Company to use these vehicles for
promotional displays and photographs. In addition, the Company has an option to
purchase Hot Rods by Boyd.
The custom wheel market is the second largest segment of the specialty
automotive aftermarket. The custom wheel market is generally divided into five
product categories: aluminum wheels, composite wheels, modular wheels, steel
wheels and custom wheel accessories. According to Specialty Equipment Market
Association ("SEMA"), aluminum wheels are the largest segment of this market,
accounting for more than 75% of total sales. SEMA reports that the custom wheel
industry has grown from sales of approximately $525 million in 1992 to $650
million in 1994. The Company believes that this industry grew at approximately
10% in 1995 and will continue to grow at that rate for 1996. The Company further
believes that consumer desire for individuality in vehicle appearance will
contribute to the Company's growth since custom wheels represent one of the
easiest, least expensive and quickest ways to dramatically alter the appearance
of a vehicle.
The Company's strategy is to expand its position as a leading marketer of
premium automotive/ motorcycle aftermarket products by capitalizing on consumer
recognition of the "Boyds" brand name and the Company's growing distribution
network. The Company intends to implement this strategy by (i) leveraging and
strengthening its premium brand name recognition, (ii) creating selected new
product lines in order to build its customer loyalty into a broader based
business, (iii) differentiating its products from its competition by continually
identifying and introducing trend setting designs, (iv) diversifying domestic
product distribution by penetrating new geographic areas and targeting key
distributors to service its customer and consumer markets and (v) expanding the
Company's penetration into international markets by establishing relationships
with selected distributors in Europe and the Pacific Rim.
The Company was incorporated in California in April 1988. The principal
executive offices of the Company are located at 8380 Cerritos Avenue, Stanton,
California 90680. The Company's telephone number is (714) 952-4038.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company....................... 750,000 shares.
Common Stock offered by Selling Shareholders.............. 250,000 shares.
Common Stock to be outstanding after the offering......... 3,287,414 shares.
Use of proceeds........................................... To acquire capital equipment,
repay outstanding indebtedness,
for general corporate purposes
and working capital requirements.
See "Use of Proceeds."
Nasdaq National Market symbol............................. BYDS
</TABLE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------------- ---------------
STATEMENTS OF INCOME DATA: 1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $10,188 $12,127 $17,796 $3,660 $5,334
Cost of goods sold............................... 8,524 9,336 13,263 2,782 3,976
------ ------ ------ ----- -----
Gross margin..................................... 1,664 2,791 4,533 878 1,358
Selling, general and administrative expenses..... 1,230 1,648 2,741 465 714
------ ------ ------ ----- -----
Income from operations........................... 434 1,143 1,792 413 644
Interest and other expenses, net................. 423 695 383 142 48
------ ------ ------ ----- -----
Income before income taxes....................... 11 448 1,409 271 596
Provision (benefit) for income taxes............. 1 (227) 462 111 236
------ ------ ------ ----- -----
Net income....................................... $ 10 $ 675 $ 947 $ 160 $ 360
====== ====== ====== ===== =====
Net income per common share and common equivalent
share(1)...................................... $ -- $ .40 $ .48 $ .09 $ .14
====== ====== ====== ===== =====
Weighted average shares outstanding.............. 1,671 1,701 1,960 1,697 2,655
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
----------------- -------------------------
BALANCE SHEET DATA: 1994 1995 ACTUAL AS ADJUSTED(2)
------ ------- ------- ---------------
<S> <C> <C> <C> <C>
Working capital (deficit)........................ $ (175) $ 2,113 $ 2,646 $ 8,880
Total assets..................................... 6,326 11,782 12,862 17,714
Long-term debt................................... 1,328 903 1,326 --
Shareholders' equity............................. 1,880 5,856 6,266 13,564
</TABLE>
- ---------------
(1) Does not reflect adjustment for accretion of the Company's Series A
Redeemable Preferred Stock which was redeemed with the proceeds of the
initial public offering of the Company's Common Stock in September 1995. See
"Financial Statements."
(2) Adjusted to give effect to the sale by the Company of 750,000 shares of
Common Stock offered hereby at an assumed offering price of $11.00 per share
and the estimated net proceeds therefrom. See "Use of Proceeds."
------------------------
BOYDS(R), BOYDS WHEELS(TM), BOYDS ULTRA VIOLET(TM) and THE BOYD LOOK(TM
)are trademarks of the Company. This Prospectus also contains trademarks of
companies other than those of the Company.
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby.
DEPENDENCE ON KEY CUSTOMERS
Typically a limited number of customers have accounted for a substantial
portion of the Company's revenues. In 1995, the Company's ten largest customers
accounted for approximately 82.4% of net sales, with four accounting for greater
than 10% each: Wheel City at 24.1%, Ousyu Hambi Co. Ltd. ("American Motoring
Accessories") at 16.7%, Moon of Japan, Ltd. ("Mooneyes") at 15.6% and American
Racing Equipment, Inc. ("American Racing") at 12.0%. In 1994, the Company's ten
largest customers accounted for approximately 84.6% of net sales, with three
accounting for greater than 10% each: American Racing at 25.2%, Mooneyes at
15.5% and Wheel City at 12.3%. The Company does not have any long-term
contractual relationships with its major customers. The loss of or any material
reduction in orders by any of such customers, including reductions due to
market, economic or competitive pressures in the automotive aftermarket
industry, could adversely affect the Company's business, financial condition and
results of operations. The Company's ability to maintain or increase its sales
levels in the future will depend in part upon its ability to obtain orders from
new customers as well as the financial condition and success of its current
customers and the general economy. There can be no assurance that the Company
will be able to maintain or continue to increase the level of its sales in the
future or that the Company will be able to retain existing customers or attract
new customers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business -- Distribution, Sales and Marketing."
COMPETITION
The market for the Company's products is highly competitive and is based
primarily on price, product selection, product availability and service. Many of
the Company's competitors have substantially greater financial and other
resources than the Company and may offer lower prices on competing products. The
Company also competes with dealers and distributors who may offer their own
branded products at prices below those offered by the Company. A key competitive
factor among suppliers of automotive aftermarket products is the ability to
promptly deliver products to dealers and distributors and, accordingly, even
smaller regional companies may be able to compete effectively against the
Company. Increased competition could result in product price reductions, reduced
margins and loss of market share, all of which could have a material adverse
effect on the Company's results of operations and financial condition. While the
Company believes its prices are competitive for the quality level of its
products, the Company relies primarily on its reputation for selling quality
products supported by strong customer service. There can be no assurance that
the Company will be able to compete successfully in the future with its
competitors. Furthermore, the custom aluminum wheel business has been
characterized by widespread imitation of popular designs. The Company must,
therefore, continually strive to develop new designs to differentiate its
products from those of its competitors. There can be no assurance that the
Company will continue to develop sufficient new designs and any failure to do so
could have a material adverse effect on its results of operations and financial
condition. See "Business -- Competition."
CHANGING CONSUMER TRENDS
The Company's success depends substantially on its ability to correctly and
consistently anticipate, gauge and respond in a timely manner to rapidly
changing consumer preferences. The Company attempts to minimize the risks
relating to changing consumer trends by offering a wide variety of product
styles, analyzing consumer purchases, maintaining an active product development
effort and monitoring sales of its products. However, any misjudgment by the
Company of the market for a particular product, or its failure to correctly
anticipate consumer preferences, could have a material adverse impact on its
results of operations and financial condition. See "Business -- Product
Development."
5
<PAGE> 7
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, in large part, on the efforts and abilities
of Boyd Coddington, its founder, Chairman and Chief Executive Officer. Under the
terms of his employment agreement with the Company, Mr. Coddington is not
required to and does not expend his full time and attention on the Company's
activities and Mr. Coddington has other business interests, including Hot Rods
by Boyd, which require his time and attention. The Company does not maintain key
man life insurance on Mr. Coddington. The loss of the services of Mr. Coddington
would have a material adverse effect on the business of the Company. The success
of the Company will depend on, among other factors, the successful recruitment
and retention of quality management and personnel. See "Management."
COST OF ALUMINUM AND DEPENDENCE ON THIRD PARTY SUPPLIERS
The Company purchases several types of aluminum, including billet discs,
billet bar stock, prime ingot and prefabricated outer rims from third party
suppliers for use in the manufacture of its products. Consequently, an
interruption in the supply or a significant increase in the price of aluminum
could have a material adverse effect on the Company's results of operations and
financial condition. There can be no assurance that such materials will be
delivered on a timely basis or on terms favorable to the Company. Should the
Company lose its present sources of supply for these materials, not be able to
obtain such materials on favorable terms or experience delays in receiving them,
a material adverse impact on the Company's results of operations and financial
condition may result. The Company believes, however, that alternative sources of
supply exist or can be developed. The Company experienced significant rises in
aluminum prices in 1994 and early 1995. Although such prices have subsequently
stabilized, there can be no assurance that the Company will not experience
significant rises in aluminum prices in the future. See
"Business -- Manufacturing."
DEPENDENCE ON INTERNATIONAL SALES
A significant element of the Company's business strategy is to expand into
selected international markets, such as the recent introduction of its products
in Japan. In 1994 and 1995 and the first quarter of 1996, the Company derived
approximately 26.3%, 39.3% and 26.4%, respectively, of total sales from
international markets, substantially all of which was in Japan. The Company's
international sales efforts are subject to the customary risks of doing business
abroad, including exposure to regulatory requirements, political and economic
instability, barriers to trade, trade restrictions (including import quotas),
tariff regulations, foreign taxes, restrictions on transfer of funds, difficulty
in obtaining distribution and support and export licensing requirements, any of
which could have a material adverse effect on the Company's operations. In
addition, a weakening in the value of foreign currencies relative to the U.S.
dollar and potential fluctuations in foreign currency exchange rates could have
an adverse impact on the effective price of the Company's products in its
international markets. See "Business -- Distribution, Sales and Marketing."
ADVERSE EFFECT OF REDUCED DISCRETIONARY CONSUMER SPENDING
Purchases of specialty automotive aftermarket products are discretionary
for consumers. The success of the Company is influenced by a number of economic
factors affecting disposable income such as employment levels, business
conditions, interest rates and tax rates. Adverse changes in these economic
factors, among others, may cause consumers to reduce discretionary spending for
the Company's products, thereby adversely affecting the Company's results of
operations and growth.
VARIABILITY IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors including, among other things, the
size and timing of customer orders, delays in new product enhancements and new
product introductions, quality control difficulties, market acceptance of new
products, product returns, seasonality in product purchases by distributors and
end users and pricing trends in the automotive aftermarket industry in general
and in the specific markets in which the Company is active. Any of these factors
could cause quarterly operating results to vary significantly from prior
periods. Furthermore, the
6
<PAGE> 8
Company's business is seasonal in most sections of the country, as the Company
believes that it is affected by weather conditions. Historically, the Company's
net sales have been highest in the second and third quarters of each year.
However, the Company believes that unusually adverse or otherwise poor weather
conditions in the spring and summer seasons may have a negative effect on the
Company's sales in such quarters. Significant variability in orders during any
period may have an adverse impact on the Company's cash flow or work flow, and
any significant decrease in orders could have a material adverse impact on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCT CONCENTRATION
Substantially all of the Company's revenues are derived from sales of
aluminum automobile and motorcycle wheels. The Company anticipates that these
products will continue to account for a substantial portion of its sales in the
foreseeable future. A decline in the demand for these products, whether as a
result of competition or other factors, could have a material adverse effect on
the Company's results of operations and financial condition.
RISK OF DECLINING AVERAGE SELLING PRICES
The Company may face increasing pricing pressures from current and future
competitors and, accordingly, there can be no assurance that competitive
pressures will not require the Company to reduce its prices. In particular, over
time, the average selling prices for the Company's wheel products (which
currently represent a significant portion of the Company's revenues) may decline
as the market for these products becomes more competitive. Any material
reduction in the price of the Company's products would negatively affect the
Company's gross margin and would require the Company to increase unit sales in
order to maintain net sales. See "Business -- Distribution, Sales and Marketing"
and "-- Competition."
MANAGEMENT OF COMPANY GROWTH; FUTURE CAPITAL REQUIREMENTS
The Company has experienced significant growth in recent years. This growth
will continue to make significant demands on the Company's management, resources
and operations. To manage its growth effectively, the Company intends to
continue to improve its operational, financial, sales and marketing systems and
to hire and train new employees and better manage its current employees. The
Company's failure to manage its growth effectively could have a material adverse
effect on the Company's results of operations and financial condition.
To the extent that the proceeds from this offering and cash flow from
operations are insufficient to fund the Company's activities, the Company will
be required to raise additional funds through equity or debt financings. No
assurance can be given that such financings will be available on terms
acceptable to the Company, if at all and, if available, such financings may
result in further dilution to the Company's shareholders and in higher interest
expense. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
RISK OF PRODUCT LIABILITY
The nature of the Company's business exposes it to risk from product
liability claims. The Company currently maintains product liability insurance
for its products worldwide, with limits of $5,000,000 per occurrence and
$5,000,000 in the aggregate, per annum. However, such coverage is becoming
increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be successful in maintaining adequate product liability insurance
at commercially reasonable rates. Any losses that the Company may suffer from
future liability claims, including the successful assertion against the Company
of one or a series of large uninsured claims in excess of the Company's
coverage, may have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any product
liability litigation may have a material adverse effect on the reputation and
marketability of the Company's products. See "Business -- Product Warranties."
7
<PAGE> 9
ENVIRONMENTAL COMPLIANCE
In the ordinary course of its manufacturing process, the Company uses
metals, oils and similar materials which are stored on-site. The waste created
by use of these materials is transported off-site on a regular basis by a state
registered waste hauler. Although the Company is not aware of any claim
involving violation of environmental or occupational safety and health laws and
regulations, there can be no assurance that such a claim may not arise in the
future, which may have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Mr. and Mrs. Coddington have agreed pursuant to lock-up agreements
that they will not, without the prior written consent of the Representative,
sell or otherwise dispose of approximately 656,431 shares of Common Stock
beneficially owned by them for a period of twelve months from the date of this
Prospectus, but may sell or otherwise dispose of up to 15,000 shares of Common
Stock per quarter commencing after this offering. Upon the completion of this
offering, the Company will have 3,287,414 shares of Common Stock outstanding. Of
this amount, the 1,000,000 shares sold in this offering (plus any additional
shares sold upon the Underwriter's exercise of the over-allotment option) and
approximately 1,545,407 other shares (subject in certain cases to the volume and
other limitations of Rule 144 ("Rule 144") as promulgated under the Securities
Act of 1933, as amended (the "Securities Act")), will be available for immediate
sale in the public market as of the date of this Prospectus. An additional
31,509 shares will be available for sale in the public market (subject to the
volume and other restrictions of Rule 144) following the expiration of 180-day
lock-up agreements with the Representative of the Underwriters. The
Representative may, in its sole discretion, and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. As
of December 1, 1996, approximately 18,353 shares will become available for
immediate sale in the public market, subject to Rule 144. See "Principal and
Selling Shareholders," "Shares Eligible for Future Sale" and "Underwriting."
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of this offering, the principal shareholders, directors and
officers of the Company will beneficially own approximately 20.0% of the
Company's outstanding voting securities, or 19.1% in the event the
over-allotment option is exercised. Because of their stock ownership and
positions with the Company, these persons will be in a position to continue to
control the affairs and management of the Company. Such concentration of
ownership and control may have the effect of delaying, deferring or preventing a
change in control of the Company. See "Principal and Selling Shareholders" and
"Description of Capital Stock -- Common and Preferred Stock."
EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK
The Board of Directors of the Company is authorized to issue, from time to
time, without any action on the part of the Company's shareholders, up to
5,000,000 shares of Preferred Stock in one or more series, with such relative
rights, powers, preferences, limitations and restrictions as are determined by
the Board of Directors at the time of issuance. Accordingly, the Board of
Directors is empowered to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of Common Stock. In the event of such issuance,
the preferred stock could be utilized, under either circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company. See
"Description of Capital Stock -- Preferred Stock."
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The trading price of the Common Stock has been and is likely to continue to
be subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by the
Company or its competitors, legislative or regulatory changes, general trends in
the industry and other events or factors. In
8
<PAGE> 10
addition, the stock market has experienced extreme price and volume fluctuations
which have affected the market price for many companies for reasons frequently
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. The Company currently intends to retain any future earnings for use in
its business and does not anticipate any cash dividends in the future. See
"Price Range for Common Stock and Dividend Policy."
DILUTION
Purchasers of the Common Stock offered hereby will incur immediate
substantial dilution in net tangible book value of the Common Stock. The
conversion of existing convertible notes or the exercise of warrants and options
may also have an additional dilutive effect on the interest of the investors in
this offering. See "Dilution."
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the products and
future economic performance of the Company. The forward-looking statements and
associated risks set forth in this Prospectus may include or relate to (i)
development of brand name recognition and loyalty to the Company's trade names
and trademarks, (ii) increasing sales through the introduction and development
of new products and product lines, (iii) success of marketing initiatives to be
undertaken by the Company, (iv) increasing international sales through
distribution arrangements in Japan and through the pursuit of additional
distribution arrangements in other countries, (v) increasing distribution
through expansion of the Company's network of distributors and its customer
base, (vi) success of the Company in forecasting demand for particular designs
and product styles and its success in establishing production and delivery
schedules and forecasts which accurately anticipate and respond to market
demand, (vii) success in expanding the Company's market through increasing sales
to large regional and national distributor accounts, (viii) success of the
Company in achieving increases in net sales such that cost of goods sold and
selling, general and administrative expenses may decrease as a percentage of net
sales and (ix) the size and growth rate of the custom wheel market.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that the Company will
continue to design, manufacture, market and ship new products on a timely basis,
that competitive conditions within the automotive aftermarket industry will not
change materially or adversely, that the custom wheel market will continue to
experience steady growth, that demand for the Company's products will remain
strong, that the Company will retain existing distributors and key management
personnel, that inventory risks due to shifts in market demand will be
minimized, that the Company's forecast will accurately anticipate market demand
and that there will be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect,
among other things, to future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
information will be realized. In addition, as disclosed above, the business and
operations of the Company are subject to substantial risks which increase the
uncertainty inherent in such forward-looking statements. Any of the other
factors disclosed above could cause the Company's net sales or net income, or
growth in net sales or net income, to differ materially from prior results.
Growth in absolute amounts of costs of goods sold and selling, general and
administrative expenses or the occurrence of extraordinary events could cause
actual results to vary materially from the results contemplated in the
forward-looking statements. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience in business
9
<PAGE> 11
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 750,000 shares of Common
Stock offered hereby by the Company, at an assumed offering price of $11.00 per
share and after deducting the underwriting discount and estimated offering
expenses, are estimated to be approximately $7.3 million ($8.8 million if the
Underwriters' overallotment option is fully exercised). The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholders.
The Company intends to use approximately $3.5 million of the net proceeds
to purchase capital equipment in order to develop additional manufacturing
capacity. In addition, approximately $1.8 million of the net proceeds will be
used to retire long-term debt and approximately $0.7 million will be used to
repay the Company's indebtedness under its revolving line of credit. The
interest rates on the long-term debt vary from 4.8% to 15.0% per annum with
various maturity dates. The interest rate on the revolving line of credit is
1.0% over the Wall Street Journal's published prime rate. The Company intends to
use the balance of the net proceeds for general corporate purposes, including
the financing of product sales growth, development of new products and working
capital requirements. A portion of the net proceeds may also be used by the
Company to acquire or invest in businesses, assets, technologies or product
lines that complement the Company's existing businesses. While from time to time
the Company evaluates potential acquisitions of such businesses, assets,
technologies or product lines, there is no present understanding or agreement
with respect to any such acquisitions.
The foregoing represents the Company's best estimate of the use of the net
proceeds to be received in this offering based on current planning and business
conditions. The Company reserves the right to change such use when and if market
conditions or unexpected changes in operating conditions or results occur. The
amounts actually expended for each use may vary significantly depending upon a
number of factors, including future sales growth and the amount of cash
generated by the Company's operations. Net proceeds not immediately required for
the purposes described above will be invested principally in U.S. government
securities, short-term certificates of deposit, money market funds or other
short-term, interest-bearing securities.
10
<PAGE> 12
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "BYDS." The following table sets forth for the quarters indicated the
reported high and low closing sale prices as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1995:
Third Quarter (commencing September 15, 1995).............. 7 5/8 6 7/8
Fourth Quarter............................................. 9 3/4 6 3/4
Fiscal 1996:
First Quarter.............................................. 10 3/4 8
Second Quarter (through May 16, 1996)...................... 11 3/4 8 1/2
</TABLE>
At May 16, 1996, there were approximately 1,200 holders of the Company's
outstanding shares of Common Stock and the closing sale price of the Common
Stock on the Nasdaq National Market was $11.00 per share.
The Company anticipates that all future earnings, if any, will be retained
for use in the Company's business and it does not anticipate paying any cash
dividends. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion. The Company's ability to pay
cash dividends is restricted under its revolving line of credit facility and
future borrowings may contain similar restrictions.
DILUTION
As of March 31, 1996, the Company had a net tangible book value of
approximately $6,094,000 or $2.45 per share. "Net tangible book value" per share
represents the amount of total tangible assets less total liabilities divided by
the number of shares of Common Stock issued and outstanding. After giving effect
to the sale of the Common Stock offered by the Company hereby at an assumed
offering price of $11.00 per share, and assuming no other changes in the net
tangible book value after March 31, 1996, the Company's net tangible book value
(after deduction of underwriting discounts and commissions and estimated
offering expenses) at March 31, 1996 would have been approximately $13,392,000
or $4.13 per share. This represents an immediate increase in net tangible book
value of $1.68 per share to existing shareholders and an immediate dilution to
new investors of $6.87 per share. Dilution is determined by subtracting net
tangible book value per share after the offering from the amount of cash paid by
a new investor for a share of Common Stock. The following table illustrates the
per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share................................... $ 11.00
Net tangible book value per share before the offering............ $ 2.45
Increase per share attributable to new investors................. 1.68
------
Net tangible book value per share after the offering............... 4.13
------
Dilution per share to new investors................................ $ 6.87
======
</TABLE>
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the Common Stock offered
hereby at an assumed offering price of $11.00 per share and the application of
the net proceeds thereof to repay certain indebtedness.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt(1)....................................................... $1,326 $ --
------ -------
Shareholders' equity:
Preferred Stock, no par value:
5,000,000 shares authorized, none issued or outstanding............... -- --
Common Stock, no par value:
25,000,000 shares authorized; 2,489,856 shares issued and outstanding,
3,239,856 shares as adjusted(2)....................................... 6,007 13,305
Contributed capital..................................................... 827 827
Accumulated deficit..................................................... (568) (568)
------ -------
Total shareholders' equity............................................ 6,266 13,564
------ -------
Total capitalization............................................... $7,592 $13,564
====== =======
</TABLE>
- ---------------
(1) See Note 13 of Notes to Financial Statements for a description of the
Company's lease commitments.
(2) Excludes (i) 158,613 of Common Stock issuable upon exercise of currently
outstanding warrants, (ii) 69,762 shares of Common Stock issuable upon
exercise of currently outstanding options, (iii) 7,143 shares of Common
Stock issuable upon conversion of the convertible notes and (iv) 247,500
shares of Common Stock issuable pursuant to options under the 1995 Stock
Option Plan.
12
<PAGE> 14
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of income data for the years ended December 31, 1994 and 1995 and
balance sheet data at December 31, 1995 are derived from the audited financial
statements of the Company included elsewhere in this Prospectus that have been
audited by Coopers & Lybrand L.L.P., independent accountants. The statement of
income data for the year ended December 31, 1993 and balance sheet data at
December 31, 1994 also are derived from financial statements audited by Coopers
& Lybrand L.L.P. which are not included in this Prospectus. The selected
financial data as of March 31, 1996, and for the three month periods ended March
31, 1995 and 1996 have been derived from the Company's unaudited financial
statements, which reflect all adjustments of a normal recurring nature which the
Company considers necessary for a fair presentation of the results for such
periods. The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results of operations to be expected for any
future quarter or the fiscal year ending December 31, 1996. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes related thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- ----------------
STATEMENTS OF INCOME DATA: 1993 1994 1995 1995 1996
------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales.................................... $10,188 $12,127 $17,796 $3,660 $5,334
Cost of goods sold........................... 8,524 9,336 13,263 2,782 3,976
------ ------ ------ ----- -----
Gross margin................................. 1,664 2,791 4,533 878 1,358
Selling, general and administrative
expenses.................................. 1,230 1,648 2,741 465 714
------ ------ ------ ----- -----
Income from operations....................... 434 1,143 1,792 413 644
Interest and other expenses, net............. 423 695 383 142 48
------ ------ ------ ----- -----
Income before income taxes................... 11 448 1,409 271 596
Provision (benefit) for income taxes......... 1 (227) 462 111 236
------ ------ ------ ----- -----
Net income................................... $ 10 $ 675 $ 947 $ 160 $ 360
====== ====== ====== ===== =====
Net income per common share and common
equivalent share(1)....................... $ -- $ .40 $ .48 $ .09 $ .14
====== ====== ====== ===== =====
Weighted average shares outstanding.......... 1,671 1,701 1,960 1,697 2,655
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
------------------ -------------------------
BALANCE SHEET DATA: 1994 1995 ACTUAL AS ADJUSTED(2)
------ ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital (deficit)....................... $ (175) $ 2,113 $ 2,646 $ 8,880
Total assets.................................... 6,326 11,782 12,862 17,714
Long-term debt.................................. 1,328 903 1,326 --
Shareholders' equity............................ 1,880 5,856 6,266 13,564
</TABLE>
- ---------------
(1) Does not reflect adjustment for accretion of the Company's Series A
Redeemable Preferred Stock which was redeemed with the proceeds of the
initial public offering of the Company's Common Stock in September 1995. See
"Financial Statements."
(2) Adjusted to give effect to the sale by the Company of 750,000 shares of
Common Stock offered hereby at an assumed offering price of $11.00 per share
and the estimated net proceeds therefrom. See "Use of Proceeds."
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
under "Risk Factors -- Important Factors Related to Forward-Looking Statements
and Associated Risks."
OVERVIEW
The Company designs, manufactures and markets high quality aluminum wheels
for the specialty automotive aftermarket. In addition to its premium aluminum
wheels, the Company designs, manufactures and markets motorcycle wheels,
steering wheels for automobiles, automotive and motorcycle billet aluminum
accessories, and also sells car care products under its own label. The Company
sells its products domestically through a national distribution network of tire
and performance retailers, warehouse distributors and mail order outlets and
internationally through foreign distribution channels. The Company derived
approximately 26.3%, 39.3% and 26.4% of its sales in fiscal 1994 and 1995, and
the first quarter of fiscal 1996, respectively, from international sales,
primarily in Japan.
Net sales consist of gross sales less the amount of discounts, returns and
allowances. The Company generally provides its customers a standard term of
2%/10 net 30 days upon payment of the gross invoice price. Discounts, returns
and allowances vary from year to year but were approximately 3% for 1994 and 5%
for 1995, with most of the increase attributable to discounts taken by customers
for early payment of invoices. Net sales for any of the Company's product lines
can be influenced by a number of factors, including changes in customer
preferences and pricing policies of the Company's competitors. In late 1994, the
Company adopted a long term strategy to shift its domestic sales distribution to
large, national and regional warehouse distributors from local and smaller
regional chains and independent dealers. As a result of implementing this
strategy, domestic sales increased 20.9% in fiscal 1995 over fiscal 1994 and
68.0% in the three months ended March 31, 1996 over the same period in 1995.
Cost of goods sold consists primarily of the costs of labor, aluminum, raw
materials and overhead used in the production of the Company's products. The
gross margins of late 1994 and early 1995 were adversely impacted by significant
rises in aluminum costs. During 1995 and the first quarter of 1996 aluminum
prices stabilized. The Company currently does not purchase forward contracts for
aluminum and, therefore, any increase in future prices of aluminum could
adversely affect the Company's gross margin. The Company's gross margin was
25.5% for 1995 and remained at 25.5% for the first quarter of 1996. The Company
anticipates that its gross margin will remain relatively constant or will
slightly increase in the near future.
Selling, general and administrative expenses consist primarily of
commissions, marketing expenses, sales and administrative salaries, product
development expenses, office expenses and general overhead. The Company expects
that selling, general and administrative expenses will increase in absolute
amounts in fiscal 1996 due, in part, to increased advertising and promotion
activities, increased product development expenditures, the hiring of additional
personnel and periodic reporting and compliance requirements associated with
being a public company. However, the Company believes that such expenses should
decrease as a percentage of net sales from the 1995 level.
Traditionally, the Company's ten largest customers have accounted for a
substantial portion of the Company's net sales. During the three months ended
March 31, 1996, the Company's ten largest customers accounted for approximately
87.8% of the Company's net sales. During 1995 and for the three months ended
March 31, 1996, the Company's significant customers were Wheel City (24.1% of
net sales in 1995 and 27.5% of net sales for the three months ended March 31,
1996), American Motoring Accessories (16.7% and 13.0%), Mooneyes (15.6% and
10.2%) and American Racing (12.0% and 16.6%).
14
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Income.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................. 83.7 77.0 74.5 76.0 74.5
----- ----- ----- ----- -----
Gross margin....................................... 16.3 23.0 25.5 24.0 25.5
Selling, general and administrative expenses....... 12.1 13.6 15.4 12.7 13.4
----- ----- ----- ----- -----
Income from operations............................. 4.2 9.4 10.1 11.3 12.1
Interest and other expenses, net................... 4.1 5.7 2.2 3.9 0.9
----- ----- ----- ----- -----
Income before provision for income taxes........... 0.1 3.7 7.9 7.4 11.2
Provision (benefit) for income taxes............... -- (1.9) 2.6 3.0 4.4
----- ----- ----- ----- -----
Net income......................................... 0.1% 5.6% 5.3% 4.4% 6.8%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND THREE MONTHS ENDED MARCH 31,
1995
Net sales for the three months ended March 31, 1996, were $5,334,000
compared to $3,660,000 for the same period in 1995, an increase of $1,674,000 or
45.7%. The increase was primarily attributable to the continued demand for the
Company's main product lines, two-piece cast wheels and billet wheels, sales of
which increased approximately $600,000. The new motorcycle wheels and
accessories, introduced in mid-1995, accounted for approximately $500,000 of the
increase. The new one-piece cast wheels, introduced in the fourth quarter of
1995, contributed approximately $200,000 to the increase in net sales and
private label sales contributed approximately $300,000 to the increase in net
sales.
Gross margin for the three months ended March 31, 1996 was $1,358,000
compared to $878,000 for the same period in 1995, an increase of $480,000 or
54.7%. As a percentage of net sales, gross margin increased to 25.5% in 1996
from 24.0% in 1995. The increase in gross margin was primarily attributable to
volume discounts associated with larger quantity purchases of raw materials, an
increase in average sales price and a change in sales mix which included new
products at higher gross margins. The increase in gross margin was slightly
offset by an increase in general factory overhead.
Selling, general and administrative expenses for the three months ended
March 31, 1996 were $714,000 compared to $465,000 for the same period in 1995,
an increase of $249,000 or 53.5%. As a percentage of net sales, selling, general
and administrative expenses increased to 13.4% in 1996 from 12.7% in 1995. This
increase was primarily attributable to an increase in expenditures related to
new product development, advertising and promotional costs associated with new
product introductions and legal, accounting and other costs related to being a
public company.
Interest and other expenses, net, for the three months ended March 31, 1996
were $48,000 compared to $142,000 for the same period in 1995, a decrease of
$94,000 or 66.2%. This decrease was attributable to the application of the
proceeds from the Company's initial public offering which were used to reduce
debt and were invested in short-term interest-bearing securities.
Income taxes for the three months ended March 31, 1996 were $236,000
compared to $111,000 for the same period in 1995, an increase of $125,000 or
112.6%. The provision for income taxes in the first quarter of 1996 and 1995
represents the Company's expected annual effective tax rate and was 39.6% and
41.0% for 1996 and 1995, respectively.
15
<PAGE> 17
As a result of the above, net income for the three months ended March 31,
1996 was $360,000 compared to $160,000 for the same period in 1995, an increase
of $200,000 or 125.0%.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31,
1994
Net sales for the year ended December 31, 1995, were $17,796,000 compared
to $12,127,000 for the same period in 1994, an increase of $5,669,000 or 46.7%.
This increase was attributable to increased sales as a result of additional
product offerings, continued growth internationally and a general price increase
in May 1995.
Gross margin for the year ended December 31, 1995 was $4,533,000 compared
to $2,791,000 for the same period in 1994, an increase of $1,742,000 or 62.4%.
As a percent of sales gross margin increased to 25.5% in 1995 from 23.0% in
1994. The increase in gross margin was primarily attributable to a
reconfiguration of the Company's plant layout which resulted in greater
production efficiencies. These efficiencies were offset in part by an increase
in the price of aluminum stock. In addition, the allocation of overhead charges
over a greater sales base helped to improve gross margin.
Selling, general and administrative expenses for the twelve months ended
December 31, 1995, were $2,741,000 compared to $1,648,000 for the same period in
1994, an increase of $1,093,000 or 66.3%. As of a percent of sales the costs
increased in 1995 to 15.4%, from 13.6% in 1994. This increase was attributable
to additional administrative and facility costs incurred to support the
Company's growth and the addition of management, including a one-time payment to
a former executive officer.
Interest and other expenses, net for the year ended December 31, 1995, were
$383,000 compared to $695,000 for the same period in 1994, a decrease of
$312,000 or 44.9%. This decrease was attributable to favorable lease refinancing
and a decrease in factoring costs, which were eliminated by year-end. During the
fourth quarter, the Company earned interest income of $19,000 from the cash
proceeds from the initial public offering.
The benefit for income taxes in 1994 resulted from the elimination of the
valuation allowance against deferred tax assets resulting from current taxable
income and the expected utilization of the Company's net operating loss carry
forwards. The provision for income taxes in 1995 of $462,000, reflects the
continued application of the net operating loss carry forwards and the benefit
of state tax credits. The effective tax rate for 1995 was 32.8%.
As a result of the above, net income for the year ended December 31, 1995,
was $947,000 compared to $675,000 for the same period in 1994, an increase of
$272,000 or 40.3%.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31,
1993
Net sales for 1994 were $12,127,000 compared to $10,188,000 for 1993, an
increase of $1,939,000 or 19.0%. This increase was attributable to additional
sales volume in the Japanese market as a result of additional product offerings
and an increased number of distributors to such market.
Gross margin for 1994 was $2,791,000 compared to $1,664,000 for 1993, an
increase of $1,127,000 or 67.7%. As a percentage of sales, gross margin
increased to 23.0% in 1994 from 16.3% in 1993. The improved margins were
attributable to the allocation of overhead charges to a greater sales base,
substituting costly outside processing with in-house services and the
efficiencies obtained by the reconfiguration of the Company's plant layout.
Selling, general and administrative expenses for 1994 were $1,648,000
compared to $1,230,000 for 1993, an increase of $418,000 or 34.0%. As a
percentage of sales, these expenses increased from 12.1% to 13.6%. This increase
was attributable to the expansion of sales and administrative personnel to
support the Company's growth, larger administrative facilities and increased
participation at industry trade shows throughout the United States.
Interest and other expenses, net, for 1994 were $695,000 compared to
$423,000 for 1993, an increase of $272,000 or 64.3%. The increase in interest
expense was attributable to higher debt levels needed to finance the Company's
growth and to higher factoring costs.
16
<PAGE> 18
The benefit for income taxes in 1994 was attributable to the elimination of
the valuation allowance on deferred tax assets resulting from current taxable
income and the expected utilization of net operating loss carryforwards. See
Note 12 to the Financial Statements.
As a result of the above, net income for 1994 was $675,000 compared to
$10,000 for 1993, an increase of $665,000.
QUARTERLY RESULTS
The following table sets forth unaudited selected quarterly financial
information. This information has been derived from unaudited financial
statements which, in the opinion of management, include all adjustments
(consisting of normal recurring entries) necessary for a fair presentation of
such information. Results of operations for any one or more quarters are not
necessarily indicative of results for an entire year or of results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MAR.
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales............ $2,728 $3,214 $ 3,141 $3,044 $3,660 $4,680 $ 4,594 $4,862 $5,334
Cost of goods sold... 2,100 2,474 2,418 2,344 2,782 3,516 3,455 3,510 3,976
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin......... 628 740 723 700 878 1,164 1,139 1,352 1,358
Selling, general and
administrative
expenses........... 346 407 420 475 465 607 623 1,046 714
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
operations......... 282 333 303 225 413 557 516 306 644
Interest and other
expenses, net...... 238 164 160 134 142 117 97 27 48
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before
provision for
income taxes....... 44 169 143 91 271 440 419 279 596
Provision (benefit)
for income taxes... (22) (86) (73) (47) 111 173 166 12 236
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income........... $ 66 $ 255 $ 216 $ 138 $ 160 $ 267 $ 253 $ 267 $ 360
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors including, among others things, the
size and timing of customer orders, delays in new product enhancements and new
product introductions, quality control difficulties, market acceptance of new
products, product returns, seasonality in product purchases by distributors and
end users and pricing trends in the automotive aftermarket industry in general
and in the specific markets in which the Company is active. While the effect of
these factors on the Company's operating results has been obscured to date by
the Company's growth, any of these factors could cause quarterly operating
results to vary from prior periods.
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SEASONALITY
The following table sets forth net sales information for each of the
Company's last 17 quarters. This unaudited net sales information, in the opinion
of management, reflects all adjustments (consisting of normal recurring entries)
necessary for a fair presentation of the information presented. Net sales for
any quarter are not necessarily indicative of sales for any future period.
<TABLE>
<CAPTION>
NET SALES
---------------------------------------
FIRST SECOND THIRD FOURTH
YEAR QUARTER QUARTER QUARTER QUARTER
---------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1992.................................... $1,411 $2,115 $1,762 $1,440
1993.................................... 2,261 2,726 2,654 2,547
1994.................................... 2,728 3,214 3,141 3,044
1995.................................... 3,660 4,680 4,594 4,862
1996.................................... 5,334 -- -- --
</TABLE>
In general, the Company's business is seasonal in most sections of the
country, as the Company believes that it is affected by weather conditions.
Historically, the Company's net sales have been the highest in the second and
third quarters of each year. The Company believes that unusually adverse or
otherwise poor weather conditions in the spring and summer seasons may have a
negative effect on the Company's sales in such quarters. Significant variability
in orders during any period may have an adverse impact on the Company's cash
flow or work flow, and any significant decrease in orders could have a material
adverse impact on the Company's results of operations and financial condition.
The Company's strategy of expanding motorcycle sales and sales into
international markets has mitigated the impact of seasonality on the Company's
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant growth since 1992, with its net
sales growing from $6,728,000 in 1992 to $17,796,000 in 1995 which represents a
38% compound annual growth rate. During this period, the Company has financed
its cash requirements primarily through cash generated from operations,
borrowings on bank credit lines, capitalized lease financing of fixed asset
purchases, a factoring arrangement from September 1993 to March 1995, private
placements of securities and an initial public offering of Common Stock in
September 1995. At March 31, 1996, the Company's cash and cash equivalents
balance was $555,000 and its current ratio was 1.53 to 1.00.
In August 1995 and as amended in November 1995 and April 1996, the Company
entered into a revolving line of credit agreement and an equipment line of
credit agreement with a bank with maximum loan amounts of $2,500,000 and
$1,000,000, respectively. The interest rate on the revolving line of credit
agreement is 1.0% over the Wall Street Journal's published prime rate and the
interest rate on the equipment line of credit agreement is 1.5% over the Wall
Street Journal's published prime rate. The bank has a lien on the Company's
assets as collateral for both agreements. At May 16, 1996, the outstanding
balance of the revolving line of credit was $650,000, with $583,000 available on
that date. The equipment line of credit of $1,000,000 had an available balance
of $1,000,000 as of May 16, 1996. On April 19, 1996, the Company also refinanced
the then outstanding balance on the equipment line of $599,874 into a 60-month
term loan, payable in equal monthly installments and bears interest at 1.75%
over the Wall Street Journal's published prime rate (an effective rate of 10% at
April 19, 1996).
Net cash used by operating activities totalled approximately $862,000 for
the three months ended March 31, 1996. This increase was directly attributable
to working capital used for an increase in inventories from approximately
$3,600,000 at December 31, 1995 to $4,700,000 at March 31, 1996. The increase in
inventories reflects the general growth of the Company's business and the
seasonal growth in anticipation of customer orders to be shipped in the second
and third quarters of 1996. Net cash used by investing activities totalled
approximately $419,000 for the three months ended March 31, 1996. The primary
use of cash was for the purchase of property and equipment of approximately
$442,000 to expand the Company's plant capacity.
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<PAGE> 20
Working capital was approximately $2,646,000 at March 31, 1996 compared to
$2,113,000 at December 31, 1995. Working capital requirements are expected to
grow as the Company expands its inventories, property and equipment and seeks to
increase sales through additional marketing activities and extension of its new
products and product lines.
The Company intends to use the proceeds of this offering, its revolving
line of credit, equipment line of credit and cash generated from operations, if
any, to support the growth of the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The accounting or disclosure requirements of this statement are
effective at the Company's fiscal year-end 1996. It is currently anticipated
that the Company will continue to account for stock-based compensation using
Accounting Principles Board Opinion No. 25. and the impact of SFAS 123 has not
yet been determined.
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<PAGE> 21
BUSINESS
The following discussion contains certain forward-looking statements.
Actual results could differ materially. See "Risk Factors -- Important Factors
Related to Forward-Looking Statements and Associated Risks."
INTRODUCTION
Boyds Wheels, Inc. (the "Company") designs, manufactures and markets high
quality aluminum wheels for the specialty automotive aftermarket. In addition to
its premium aluminum wheels, the Company designs, manufactures and markets
motorcycle wheels, steering wheels for automobiles and automotive and motorcycle
billet aluminum accessories, and also sells car care products under its own
label. The Company's products utilize machined aluminum materials and unique
designs which the Company believes enhance individuality of vehicle styling. The
Company sells its products domestically through a national distribution network
of tire and performance retailers, warehouse distributors and mail order outlets
and internationally through foreign distribution channels.
The Company was founded in 1988 by Boyd Coddington in response to consumer
demand for billet aluminum wheels similar to those featured on custom hot rod
vehicles designed and manufactured by Hot Rods by Boyd, a company which has been
recognized as a leading designer, manufacturer and marketer of custom vehicles
and hot rods. Since 1978, Mr. Coddington has owned and operated Hot Rods by
Boyd, which has built vehicles that have been featured in many automotive and
general interest publications, including Car and Driver, Autoweek, Hot Rod,
Smithsonian and Forbes. The Company believes that its relationship with Hot Rods
by Boyd is a key factor in maintaining and enhancing the image and brand name
recognition of the Company's products. The Company has entered into a
marketing/promotion agreement with Hot Rods by Boyd pursuant to which Hot Rods
by Boyd is required to endorse, promote and market the Company's wheels as the
"official wheel" of Hot Rods by Boyd, use the Company's wheels on vehicles
produced by Hot Rods by Boyd and permit the Company to use these vehicles for
promotional displays and photographs. In addition, the Company has an option to
purchase Hot Rods by Boyd.
INDUSTRY BACKGROUND
The custom wheel market is the second largest segment of the specialty
automotive aftermarket. The custom wheel market is generally divided into five
product categories: aluminum wheels, composite wheels, modular wheels, steel
wheels and custom wheel accessories. According to Specialty Equipment Market
Association ("SEMA"), aluminum wheels are the largest segment of this market,
accounting for more than 75% of total sales. SEMA reports that the custom wheel
industry has grown from sales of approximately $525 million in 1992 to $650
million in 1994. The Company believes that this industry grew at approximately
10% in 1995 and will continue to grow at that rate for 1996.
The Company believes that several factors which have contributed to the
growth in its segment of the market include: (i) increases in sales of domestic
cars and light trucks which have resulted in increasing the aggregate number of
vehicles in use and therefore potential consumers of automotive aftermarket
products, (ii) increases in average vehicle life, which the Company believes
contributes to demand for automotive aftermarket parts as vehicle owners seek to
enhance the appearance of older vehicles, (iii) increases in sales through tire
dealers and performance retailers and (iv) the continuing enthusiasm of
Americans for vehicle styling. The Company further believes that consumer desire
for individuality in vehicle appearance will contribute to the Company's growth
and custom wheels represent one of the easiest, least expensive, and quickest
ways to dramatically alter the appearance of a vehicle. Additionally, increased
government regulation of specialty performance automotive aftermarket parts has
made it more difficult to modify engine and drive-train components, which the
Company believes will also contribute to its growth.
To address the growing Harley-Davidson motorcycle accessory market, the
Company has developed a line of machined billet aluminum wheels, belt drives,
stainless steel rotors and accessories marketed under the brand name "Boyds
Motorcycle Accessories." According to Harley-Davidson's 1995 annual report,
Harley-Davidson dominates the heavy-weight portion of the market (751cc and
above) with 55% of the North American market and 22% and 11% of the
Asian/Pacific and European markets, respectively. Harley-Davidson reports that
annual shipments of its motorcycles have increased at a compound annual growth
rate
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<PAGE> 22
of 12.4% since 1986, with approximately 680,000 of its motorcycles shipped
worldwide in that period. This large installed base combined with projected
annual shipments represents a significant potential market for the Company's
motorcycle aftermarket wheels and accessories. The Company believes that by
leveraging its brand awareness in this cross-over market, the Company can
capitalize on established consumer recognition and diversify the product line
through this growing industry. Currently the Company's motorcycle product line
addresses the entire Harley-Davidson line. Also, the Company is currently
seeking distribution in Europe, the largest market in the world for heavy-weight
motorcycles. The Company is also in the process of developing a one-piece cast
aluminum motorcycle wheel, which it expects to introduce during the second half
of 1996.
BUSINESS STRATEGY
The Company's strategy is to expand its position as a leading marketer of
premium automotive and motorcycle aftermarket products by capitalizing on
consumer recognition of the "Boyds" brand name and the Company's growing
distribution network. Key elements of the Company's business strategy include:
Leverage and Strengthen Premium Brand Name Recognition. The Company has
developed the reputation for delivering premium products to the marketplace. The
Company intends to leverage its premium brand name recognition in order to
introduce new products and product lines to the markets it serves. Furthermore,
the Company intends to strengthen its premium brand name recognition through the
use of dynamic advertising and marketing programs, public relations efforts,
licensing agreements and celebrity associations.
Create New Product Lines. The Company continually assesses industry
trends, the marketplace and product positioning. The Company is committed to
adding selected new product lines in order to build its customer loyalty into a
broader based business. For example, the Company has introduced Boyds Ultra
Violet car care products and billet motorcycle wheels marketed under the name
"Boyds Motorcycle Accessories" and in late 1995 introduced one-piece cast
aluminum wheels. The Company also plans to introduce a one-piece cast aluminum
motorcycle wheel during the second half of 1996.
Continue Innovative Product Design and Development. The Company's strategy
is to differentiate its products from its competition by continually identifying
and introducing trend setting designs. Innovative designs for new products in
existing product lines that appeal to the consumer's desire for individuality
and superior product quality are critical to the Company's sales growth. The
goal of the Company's product development team is to be a leader in design
trends, develop fashions for the aftermarket and develop cost effective and
creative manufacturing techniques for the production of its products.
Diversify Domestic Product Distribution. The Company has successfully
established distribution of its products in key regions of the United States.
The Company believes that future growth of its distribution channels will come
from penetration of new geographic areas. In addition, through the use of
demographic and psychographic information, the Company intends to target key
distributors to service its customer and consumer markets. Creative distribution
methods and new distribution channels are key elements of continued sales
expansion for the Company.
Expand Penetration of International Markets. The Company's products are
recognized in many international markets. In order to meet what the Company
anticipates to be a growing international market, the Company intends to expand
its foreign presence by establishing relationships with selected distributors in
Europe and the Pacific Rim. The Company believes that its premium brand name
recognition, promotion of its "Made in the USA" products and unique styling will
facilitate penetration into these markets.
PRODUCTS
The Company currently offers three distinct lines of custom aluminum
automotive wheels: two-piece machined billet wheels, two-piece machined cast
wheels and one-piece machined cast wheels. The Company offers a line of custom
aluminum steering wheels, machined billet motorcycle wheels and related billet
aluminum accessories in addition to car-care products. Innovative designs and
premium quality are key elements of each product line manufactured by the
Company.
TWO-PIECE BILLET WHEELS. The Company currently markets 54 styles of
two-piece machined billet aluminum wheels, with a suggested retail price range
of $1,300 to $6,500 for a set of four wheels. The
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<PAGE> 23
Company believes that the machined billet wheel is the most elite and
high-quality custom aluminum wheel available. Billet wheel centers are
manufactured from a solid piece of aluminum known as a billet, through the use
of computerized numerically controlled ("CNC") machines which "carve" out the
specialized custom designs from the billet aluminum. After polishing, the
finished center is welded into an aluminum outer rim. Through the precision and
flexibility of this billet manufacturing process, the Company is able to offer
billet wheels with greater detail in design, higher quality finish and larger
variety of styles, applications and vehicle fitments than other standard
manufacturing processes. Billet wheels accounted for approximately 33.6%, 28.1%
and 17.8% of the Company's sales for the years ended December 31, 1994 and 1995,
and for the three months ended March 31, 1996, respectively.
TWO-PIECE MACHINED CAST WHEELS. The Company currently markets 28 styles of
custom two-piece machined cast wheels. Nine additional styles are sold to
Japanese distributors for sale exclusively in Japan. The suggested retail price
range for a set of four wheels is $700 to $1,000. The two-piece cast wheels are
produced with integrated machine processes, whereby the wheel centers are molded
from aluminum ingot in a low pressure foundry, machined to achieve a more
distinctive look (similar to that of the billet wheel), polished and welded into
an aluminum outer rim. This two-piece assembly process allows the Company to
weld the center into a variety of positions creating a larger selection of
appearances and fitments and, in some cases, to produce a variety of designs
from a single mold. Included within this product line are cast aluminum wheel
centers which are sold to American Racing which then assembles the centers with
its own outer rims for resale as private label wheels. See "-- Product
Distribution -- Warehouse Distributors." Two-piece cast wheels accounted for
approximately 61.3%, 64.1% and 64.0% of the Company's sales for the years ended
December 31, 1994 and 1995, and for the three months ended March 31, 1996,
respectively.
STEERING WHEELS. The Company currently markets ten styles of steering
wheels, made with the same machining process as its billet wheels. The suggested
retail price range for one steering wheel is $400 to $1,000. Each steering wheel
begins as a 1/8 inch thick piece of billet aluminum which is stamped into a
basic pattern and machined on a CNC machine. The steering wheel is then
polished, a foam grip is injected around its perimeter and a hand-stitched
leather wrap is sewn to the steering wheel. The Company also builds limited
quantities of an extremely high end steering wheel which is hand machined and
available in special finishes. Steering wheels accounted for approximately 4.7%,
3.6% and 2.3% of the Company's sales for the years ended December 31, 1994 and
1995, and for the three months ended March 31, 1996, respectively.
MOTORCYCLE WHEELS AND ACCESSORIES. The Company currently markets 15 styles
of motorcycle wheels as well as accessories under the trade name Boyds
Motorcycle Accessories for application on Harley-Davidson motorcycles. The
Company's motorcycle wheels were first manufactured in 1994 and are currently
distributed by Sullivan Brothers, Drag Specialties and Nempco pursuant to
distribution agreements with the Company. Currently the motorcycle accessories
include stainless steel brake rotors, billet aluminum belt drives, aluminum
chain drive sprockets, billet aluminum rocker boxes, billet aluminum swing arms
and billet aluminum cam covers. These accessory products are designed to
complement the styling of wheels and further enhance the look of the motorcycle.
The Company introduced five new accessory items in 1995. The Company's suggested
retail price for one motorcycle wheel ranges from $650 to $980. Motorcycle
wheels and accessories accounted for approximately 3.0% of the Company's sales
for the year ended December 31, 1995 and 9.0% for the three months ended March
31, 1996. The Company also plans to introduce a one-piece cast aluminum
motorcycle wheel during the second half of 1996.
ONE-PIECE CAST WHEELS. The Company introduced five styles of one-piece
cast aluminum wheels in late 1995 for the sport utility vehicle and European
vehicle markets. One-piece cast wheels are produced with integrated machine
processes whereby the entire wheel is molded from aluminum ingot in a low
pressure foundry. The wheel is then machined to achieve a more distinctive look.
One-piece cast wheels have a greater load capacity than the Company's other
wheel lines thereby making them suitable for applications on heavier vehicles.
One-piece cast wheels are manufactured using a simpler, faster production
process since the rim and the center is molded as one integral unit thereby
eliminating the costs associated with an outside supplier of outer rims and
reduced assembly and handling costs. The lower material costs and reduced
machining time should enable the Company to reach a market for which the Company
could not otherwise effectively
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<PAGE> 24
compete. The Company's suggested retail price range for a set of four wheels is
$600 to $1,200. One-piece cast wheels accounted for approximately 4.0% of the
Company's first quarter 1996 net sales.
WHEEL ACCESSORIES AND CAR-CARE PRODUCTS. The Company currently sells Boyds
Ultra Violet car care products and also sells a variety of billet aluminum
accessory items under its "The Boyd Look" trademark,
such as pedal kits, horn buttons, air cleaners and license plate frames. These
products enhance the product line and provide ancillary sales at the dealer
level. The Company is currently in negotiations with a national auto parts
retail chain pursuant to which Boyds Ultra Violet car care products will be
manufactured and sold by such retail chain.
PRODUCT DEVELOPMENT
The Company seeks to design innovative and trend-setting styles for
existing and new product lines. The Company's design influence is derived
primarily from Boyd Coddington and is often referred to in the industry as "The
Boyd Look," which is based on simplicity in style, look and design. The
Company's products are designed by a five-person product development team which
includes Boyd Coddington. Boyd Coddington and one other member of the team
design wheels as well as vehicles for Hot Rods by Boyd. The product development
team uses CAD/CAM technology for the development of many new products. The
CAD/CAM system enables the Company to transition new products rapidly from
design, to prototype development, and then to full-scale production. The Company
currently has several products within several product lines under development.
DISTRIBUTION, SALES AND MARKETING
PRODUCT DISTRIBUTION
The Company's products are currently sold through a national and
international distribution network consisting primarily of the categories
described below. The following are brief descriptions of the Company's
distribution channels:
TIRE DEALERS AND PERFORMANCE RETAILERS. The Company sells its custom
wheels and other products to tire dealers throughout the United States,
including Discount Tire, Les Schwab and Super Shops, Inc. The Company's
performance retailer customers currently include Tradertim, Inc., Hunter's
and Super Shops, Inc. Tire dealers and performance retailers, two
traditionally separate channels which are beginning to overlap in their
product coverages, are currently the largest distribution channel for the
Company's custom wheels and related accessories. The Company believes that
tire dealers have experienced success with "combination" sales of tires
with custom wheels and that performance retailers serve as an important
link to automotive enthusiasts.
WAREHOUSE DISTRIBUTORS. The Company sells its products to warehouse
distributors, such as Wheel City and American Racing, who sell to tire
dealers, performance retailers, service stations and specialty boutiques.
Since 1993, the Company has sold both its billet wheels and private label
cast wheel centers to American Racing which the Company believes is the
nation's largest warehouse distributor of specialty automotive wheels with
approximately 65 warehouses. In 1995, the Company agreed to sell wheels
directly to Tredit Tire, one of the largest direct distributors of custom
wheels and tires to the van/truck conversion industry. Automotive
aftermarket warehouse distributors generally seek rapid inventory turnover
by heavily stocking a limited selection of high quality merchandise offered
at good values. The Company believes that warehouse distributors are, and
will continue to be, an important factor in the Company's penetration of
new geographic areas and that the van conversion industry will be a new
market for distribution of its wheel lines.
MAIL ORDER OUTLETS. The Company sells its products to mail order
catalog houses which resell them to the public. The Company believes that
inclusion of its products in large mail-order catalogs, including ASAP,
Tradertim Inc. and Hunter's, has been, and will continue to be, a
significant factor in promoting the brand name recognition of the Company's
products and increasing direct sales to consumers.
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<PAGE> 25
INTERNATIONAL SALES. The Company seeks to expand its international
sales by addressing selected foreign markets and securing foreign
distribution channels for its products. In 1992, the Company began selling
to the Japanese market through a domestic distributor and currently sells
to eight distributors that market the Company's products in Japan. In 1994
and 1995, and for the three months ended March 31, 1996 international sales
accounted for approximately 26.3%, 39.3% and 26.4%, respectively, of the
Company's net sales, substantially all of which were in Japan. The Company
believes that continued success and growth in this market will be largely
due to (i) significant demand that exists for wheels made and designed in
the United States with distinctive styling and (ii) the offering of
exclusive designs to individual distributors.
SALES
The Company's strategy is to increase sales by (i) identifying additional
niche markets such as sport utility vehicles, sports cars and European vehicles,
(ii) reaching new domestic distribution channels in new geographic areas of the
United States, (iii) using direct marketing to specialty groups through mail
order outlet channels and (iv) developing new products and product lines,
including those to be aimed at new market segments, such as the one-piece cast
wheels introduced in late 1995 for use on other types of vehicles and
applications.
As of May 16, 1996, the Company employed ten individuals in its sales and
marketing department. The Company's sales and marketing employees are
responsible for implementing marketing plans and sales programs, providing
technical advice and customer service, handling customer inquiries, coordinating
the Company's trade shows and staffing exhibits. Returns in excess of $5,000 are
subject to preapproval and a 15% restocking fee.
Typically a limited number of customers have accounted for a substantial
portion of the Company's net sales. In 1995, the Company's ten largest customers
accounted for approximately 82.4% of net sales, with four accounting for greater
than 10% each: Wheel City at 24.1%, American Motoring Accessories at 16.7%,
Mooneyes at 15.6% and American Racing at 12.0%. In 1994, the Company's ten
largest customers accounted for approximately 84.6% of net sales, with three
accounting for greater than 10% each: American Racing at 25.2%, Mooneyes at
15.5% and Wheel City at 12.3%. The Company does not have any long-term
contractual relationships with its major customers. The loss of or any reduction
in orders by any such customers could adversely affect the Company's business,
financial condition and results of operations.
MARKETING
The Company's collaboration with Hot Rods by Boyd is one of its principal
marketing tools. See "-- Collaboration with Hot Rods by Boyd." The Company uses
a variety of other methods to promote its products, including participation in
automotive events and international trade shows. In order to ensure that the
Company stays in close touch with the constantly changing needs of its
customers, including both consumers and distributors, the Company maintains a
consumer data base derived from warranty card information and other sources.
Sales personnel also attend distributor open houses and retail store openings,
enabling direct one-on-one interaction with consumers and customers. Key
management personnel attend many of these events in order to develop ideas for
new products and programs. The Company believes that its trademarks, Boyds,
Boyds Wheels, Boyds Ultra Violet, and The Boyd Look have become recognized brand
names in the automotive/motorcycle markets and represent its commitment to
well-designed, high-quality innovative wheels and accessories.
To date, the Company has utilized limited print advertising. The Company
has, instead, concentrated on high-profile public relations opportunities such
as featuring its wheels on the award-winning vehicles of Hot Rods by Boyd and
gaining coverage of its wheels in leading specialty automotive publications such
as Hot Rod Magazine, Truckin', Street Rodder, Sport Truck and AutoWeek and
targeted enthusiast television and radio programs. The Company recently received
the 1995 "Wheel of the Year" award presented by Eagle One. The Petersen
Automotive Museum in Los Angeles also recently devoted a wing of the museum to a
retrospective
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<PAGE> 26
of the works of Boyd Coddington, including his hot rods and the Company's
wheels. The Company also engages in cooperative advertising efforts with its
major retailers and distributors.
The Company currently publishes a periodic newsletter which is mailed
directly to various newspapers and periodicals, retailers, distributors and
customers and features new products, special events, technical innovations,
employee profiles and interesting facts about the Company. The Company believes
that its direct mail programs are effective in maintaining its reputation as a
leading manufacturer of premium custom wheels and related accessories. The
Company also believes that dealer support programs are key factors for marketing
success and provides its wheel dealers with marketing kits that include ad
slicks, product photos, logo sheets, press releases and other advertising
information and a videotape presentation featuring the Company's latest products
and information. The Company also supports its dealers and brand name image with
special events and onsite presentations, featuring two 70 foot
semi-tractor/trailer rigs. These act as mobile displays of the Company's
products and award winning vehicles by Hot Rods by Boyd. The rolling displays
travel the country attending shows and dealer events allowing for dealer
hospitality in the on-board lounge. These vehicle costs have been partially
underwritten by the corporate sponsorship of B.F. Goodrich and revenues derived
from direct retail sales from the trucks.
The Company also promotes its brand name through exclusive styling
agreements and product licensing. In 1994 the Company began a new program to
license its various brand names to selected licensees. The Company has granted
licenses to Franklin Mint and through Hot Rods by Boyds to Testers Corporation
and Mattel Corporation allowing reproduction of the Boyds Wheels styles on scale
models. The Company charges royalty fees for such licenses and exercises care in
selecting the licensees to protect the association of its brand names with
premium products. This program was recently initiated and to date has not
yielded any significant revenues to the Company. The Company believes exclusive
styling arrangements and private licensing will broaden the Company's visibility
and brand name recognition.
COLLABORATION WITH HOT RODS BY BOYD
The Company has had a long-standing collaboration with Hot Rods by Boyd, a
company wholly-owned by Mr. Coddington and his wife. In 1977, Mr. Coddington
began building custom vehicles and hot rods in his garage which were quickly
recognized by automotive publications as design leaders. Today, Hot Rods by Boyd
designs and builds custom vehicles which range in price from $75,000 to $500,000
and are custom produced typically for wealthy individuals, including
celebrities, as promotional vehicles for corporations and as prototypes or show
cars for major automobile manufacturers. These cars, displaying the Company's
custom wheels, are regularly featured at hot rod and automotive shows and have
been featured in national automotive and general interest publications such as
Car and Driver, Autoweek, Hot Rod, Smithsonian and Forbes and have also been
displayed in the Petersen Museum in Los Angeles. In June 1995, the Company
entered into a marketing/promotion agreement with Hot Rods by Boyd pursuant to
which Hot Rods by Boyd is required to (i) endorse, promote and market the
Company's wheels as the "official wheel" of Hot Rods by Boyd, (ii) use the
Company's wheels on vehicles produced by Hot Rods by Boyd and (iii) allow the
Company to use vehicles produced by Hot Rods by Boyd for promotional displays
and photographs, including the likeness of Boyd Coddington and the vehicles for
printed and electronic media in connection with the design, manufacture and sale
of automotive wheels, motorcycle wheels, steering wheels, car care products and
related accessories. Unless terminated in accordance with the provisions
thereof, this agreement expires upon the exercise of the Company's option to
purchase Hot Rods by Boyd. The Company has entered into an option agreement with
Mr. and Mrs. Coddington and Hot Rods by Boyd pursuant to which the Company
currently has an option to purchase all of the outstanding Common Stock of Hot
Rods by Boyd for up to $750,000, payable in shares of the Company's Common
Stock, valued at its then fair market value. This option is exercisable by the
Company commencing after delivery to it of the audited financial statements of
Hot Rods by Boyd for the years ending December 31, 1995 and December 31, 1996,
but in no event after September 30, 1997, unless extended pursuant to the terms
thereof. If, at the time the option agreement becomes exercisable the Company
believes that the acquisition of Hot Rods by Boyd is in the Company's best
interests, the Company intends to exercise the option.
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<PAGE> 27
MANUFACTURING
The Company's aluminum products are manufactured, finished and packaged at
its Stanton, California facilities. The Company's corporate offices and
manufacturing and distributing facilities occupy seven buildings covering
approximately 75,900 square feet. The Company is committed to maintaining
control over the entire design and manufacturing process which it believes
enables it to (i) reduce design and production time, (ii) refine manufacturing
techniques and existing products, (iii) design future products and (iv) maintain
the Company's high quality standards.
The machined billet aluminum wheel manufacturing process for commercial
applications was developed by Mr. Coddington and continues to be refined by the
Company. The Company believes that the machined billet manufacturing process
results in a superior quality of product and that other types of billet
manufacturing processes, such as stamped, are inferior due to structural and
design limitations. The billet wheel centers for the two-piece machined billet
aluminum wheels are manufactured from a solid piece of aluminum known as a
billet, through the use of CNC machines which "carve" out the specialized custom
designs from the billet aluminum. After polishing, the finished center is welded
into an aluminum outer rim. Through the precision and flexibility of this billet
manufacturing process, the Company is able to offer billet wheels with greater
detail in design, higher quality finish and larger variety of styles,
applications and vehicle fitments than other types of manufacturing processes
such as cast or forged. An additional advantage of the billet manufacturing
process is reduced development time, whereby a new wheel design can be typically
produced in one to two weeks, compared to ten to twelve weeks required for the
development and tooling of a new cast wheel design. The Company believes that
the shorter design cycle enables the Company to maintain a competitive
advantage. During 1995 the Company produced approximately 12,000 billet aluminum
wheel centers.
The two-piece cast wheels are also produced with integrated machine
processes. The wheel centers are molded from aluminum ingot in a low pressure
foundry, machined to achieve a more distinctive look (similar to that of the
billet wheel) and, after polishing, welded into an aluminum outer rim. This
two-piece assembly process allows the Company to store work-in-process in a
smaller area, to weld the center into a variety of positions creating a larger
selection of appearances and fitments and, in some cases, to produce a variety
of designs from a single mold. The Company's cast wheel manufacturing facility
is equipped with seven state-of-the-art low pressure casting machine. During
1995 the Company produced approximately 175,000 cast aluminum wheels.
Steering wheels begin as a 1/8 inch thick piece of billet aluminum, which
is stamped into a basic pattern and machined on a CNC machine. The wheel is then
polished, a foam grip is injected around its perimeter and a hand-stitched
leather wrap is sewn to the wheel. All of the machining processes (except
stamping), and all of the polishing, leather wrapping, foam injection and
packaging efforts for the manufacture of the Company's steering wheels, are
completed on-site at the Company's facilities. During 1995 the Company produced
approximately 4,800 steering wheels. The Company's various accessory products
are manufactured in-house, while its line of Boyds Ultra Violet car care
products are mixed and packaged by an outside contractor.
Billet motorcycle wheels are produced in a similar process as the billet
automotive wheels. The product begins as a solid piece of billet aluminum which
is machined on the same type of CNC equipment as the automotive wheels. The
wheels undergo a trueing process to ensure proper fit and are then polished and
welded. Final assembly involves stringent controls that maintain proper fit of
the hub assemblies. The exclusive "Invisible Weld(C)" technology employed by the
Company in manufacturing its motorcycle wheels was developed by Boyd Coddington
and the Company believes it provides a better looking and more structurally
sound product.
The Company uses a modern design and manufacturing system for the
manufacture of its wheels and billet accessories, which through the use of
CAD/CAM technologies, provides the Company with two dimensional CAD drawings.
All of the CNC equipment in the Company's manufacturing facility is linked to a
Macintosh based CAD/CAM manufacturing system in order to obtain efficiencies and
maintain exacting tolerances in manufacture. The Company's design control
department monitors the compliance of production processes in order to ensure
that the designs have been correctly processed by the manufacturing computers
26
<PAGE> 28
and that finished products are accurately produced. The CAD/CAM system allows
the Company to transition new products rapidly from development to full-scale
production. The Company's CNC machinery maintains precise controls over
manufacturing processes. The CNC machinery greatly reduces the chance of error,
scrap and injury commonly found in manually operated machines. CNC technology
also allows for reduced machine times. The Company continually seeks to increase
efficiency at its production facilities through further automation and increased
use of technology.
The Company relies on outside suppliers for its billet aluminum and ingot
aluminum requirements. The Company currently purchases billet aluminum from
Metalcenter, Inc. and Earle M. Jorgensen Co. The Company currently does not have
any contractual relationships with any billet or ingot aluminum suppliers and
purchases materials on an as-needed basis. In 1994 and 1995, the Company
purchased 100% of its ingot requirements for its cast aluminum wheels from two
suppliers, Noranda Aluminum, Inc. and Vista Sales Co. The Company believes that
there are other suppliers of billet and ingot from which the Company could
obtain such materials in the future should the need arise. Any significant
interruption in the supply of these required raw materials could have a material
adverse effect on the Company's business and results of operations. The rims for
the Company's wheels are purchased from five different suppliers and the Company
believes alternative sources of supply of rims are readily available.
In the ordinary course of its manufacturing process, the Company uses
metals, oils and similar materials which are stored on-site. The waste created
by use of these materials is transported off-site on a regular basis by a state
registered waste hauler. To date, the Company has not experienced any
significant environmental compliance problems, although there can be no
assurances such problems will not arise in the future.
COMPETITION
The custom aluminum wheel business is highly competitive and is based
primarily on price, product selection, product availability and service and is
characterized by widespread imitation of popular wheel designs. The preferences
of custom aluminum wheel purchasers may also be subject to rapid and
unanticipated changes. Competition in the billet segment of the custom wheel
market is intense, but concentrated among a limited number of manufacturers,
such as Budnik Wheels, Colorado Custom, Weld Racing, Inc. and Billet
Specialties, Inc. In addition, the Company believes several wheel manufacturers
such as Ultra Custom Wheel and American Racing who do not currently manufacture
premium quality billet aluminum wheels could, because of their substantial
resources, pose significant competition if they were to enter this market.
Cast aluminum wheels comprise a much larger portion of the custom wheel
market than billet wheels, due to their lower retail prices. There are numerous
competitors in the cast wheel market, including American Racing, Ultra Custom
Wheel and Prime Wheel, and competition is fierce and based primarily on cost,
with most manufacturers seeking high volume to compensate for low margins. The
one-piece cast wheels which the Company introduced in 1995 will be aimed at a
broader range of customers than the Company's other wheel lines because of their
moderate price range and more varied vehicle applications. Accordingly, the
Company expects that these wheels may face more competition, including branded
wheels and "look-alike" designs produced by low-cost offshore manufacturing
sources.
There are several competing manufacturers of steering wheel products and
motorcycle wheels, including Grant Products and Weld Racing, Inc., some with
substantially more resources than the Company. Increased competition could
result in product price reductions, reduced margins and loss of market share,
all of which could have a material adverse effect on the Company's results of
operations and financial condition. The Company intends to meet its competition
with innovative designs, quality workmanship and the strength of its brand
names. The Company believes its relationship with its customers is strengthened
by its exclusive styling of products for certain of its competitors who are also
customers, such as American Racing.
FACILITIES
The Company's executive offices, product development, manufacturing and
distribution facilities are currently housed in a cluster of leased industrial
buildings. Building No. 1 contains the foundry and machining facilities and is
approximately 20,700 square feet. Building No. 2 contains the warehouse and
administrative
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<PAGE> 29
facilities and is approximately 20,400 square feet. Building No. 3 contains the
assembly area and is approximately 9,800 square feet. Building No. 4 contains a
motorcycle wheel design studio and custom motorcycle assembly area and is
approximately 17,000 square feet, of which Hot Rods by Boyds currently subleases
approximately 12,500 square feet. Building No. 5 contains the polishing
department and is approximately 5,100 square feet. Building No. 6 contains the
manufacturing facilities for motorcycle wheels and accessories and is
approximately 8,550 square feet. Building No. 7 contains machining facilities
and is approximately 6,850 square feet. The Company believes that its facilities
are adequate for its immediate needs, however, it is currently in negotiations
to lease additional property containing buildings with approximately 28,000
square feet. The Company has expanded its facilities in the last year in order
to accommodate its growing motorcycle product operations and to take advantage
of adjacent properties which became available for lease within the past nine
months.
INTELLECTUAL PROPERTY
The Company markets its custom wheels and products under a variety of brand
names designed to capitalize on the reputations of Boyd Coddington and Hot Rods
by Boyd among automotive enthusiasts. The Company believes that its trademarks,
Boyds, Boyds Wheels, Boyds Ultra Violet, and The Boyd Look, are critical to its
marketing strategy. There are no infringing uses currently known to the Company.
The Company does not believe its business is otherwise dependent upon any
patent, license, trademark, service mark or copyright.
PRODUCT WARRANTIES
Historically, the Company's wheels have been sold with a limited one-year
warranty from the date of purchase. Commencing in April 1995, the Company began
honoring a limited three-year warranty from the date of purchase. The Company's
warranties generally provide that, in the case of defects in material or
workmanship, the Company will, at its option, replace or repair the defective
product without charge. The Company currently maintains product liability
insurance for its products worldwide with limits of $5,000,000 per occurrence
and $5,000,000 in the aggregate, per annum. Such coverage is becoming
increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be able to maintain adequate product liability insurance at
commercially reasonable rates.
EMPLOYEES
As of May 16, 1996, the Company had approximately 313 employees, a majority
of which were full-time employees, including ten employed in sales and
marketing, three employed in development and 246 employed in production. The
remaining full-time employees are administrative and support staff. The Company
considers its employee relations to be good. None of the Company's employees are
represented by unions.
LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of
its business. There are currently no material pending legal proceedings to which
the Company is a party or to which any of its property is subject.
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<PAGE> 30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and nominees for the office of director
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
Boyd Coddington(1)....................... 52 Chairman of the Board and Chief Executive
Officer
Stanley Clark............................ 44 Chief Operating Officer and Nominee
(Director)
Rex A. Ours.............................. 35 Chief Financial Officer and Secretary
Marcus Sorenson(1)(2).................... 48 Director
Curt Barwick(1)(2)....................... 41 Director
Melanie McCaffery........................ 42 Nominee (Director)
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Boyd Coddington founded the Company in 1988, and has served as a director
and executive officer of the Company since its inception. Mr. Coddington also
founded Hot Rods by Boyd in 1978 and has been featured in many automotive and
general interest publications, including Car and Driver, Autoweek, Smithsonian
and Forbes.
Stanley Clark joined the Company in April 1996 as the Chief Operating
Officer of the Company and is a nominee for the Board of Directors. From 1992 to
March 1996, Mr. Clark was vice president and general manager for the automotive
wheels division of Titan Wheel International, where he was in charge of
production of wheels for original equipment manufacturers and the automotive
aftermarket. Prior to 1992, Mr. Clark worked for fourteen years in the aerospace
industry with American Welding and Manufacturing Inc., a division of Freedom
Forge Corporation, a manufacturer of jet engine components for the aerospace
industry.
Rex A. Ours joined the Company in June 1994 as the Chief Financial Officer.
From 1993 to June 1994, Mr. Ours was an accountant in private practice
specializing in tax and general business matters. From 1991 to 1993, Mr. Ours
was Chief Financial Officer of Russell Performance, Inc., a manufacturer of
specialty aftermarket automotive products and high performance hoses for racing
engines and from 1990 to 1991, he was Vice President of Finance of Simpson Race
Products, Inc., a manufacturer of racing safety equipment. Mr. Ours was
previously employed by B.D.O. Seidman and Ernst & Whinney.
Marcus Sorenson joined the Board of Directors in June 1995. From 1976 to
the present, Mr. Sorenson has been the President of Calwest Marketing, a
manufacturer's representative specializing in consumer electronics and
automotive electronics. Mr. Sorenson is a co-founder of Mackie Designs, a
publicly traded company and since 1990 has served as its Vice President and
director. Mackie Designs manufactures recording consoles used in professional
and home recording studios.
Curt Barwick joined the Board of Directors in April 1996. From May 1994 to
the present, Mr. Barwick has been an attorney with the law firm of Day Campbell
& McGill. From February 1992 to September 1993, Mr. Barwick was Vice President
and General Counsel of DVI, Inc., a New York stock exchange listed company and a
healthcare finance and service provider. From February 1985 until January 1992,
Mr. Barwick was an attorney with the law firm of Buchalter, Nemer, Fields &
Younger. Mr. Barwick is a member of the California and District of Columbia
Bars.
Melanie McCaffery is a nominee for the Board of Directors. Ms. McCaffery, a
Certified Public Accountant, is the President of McCaffery & Associates, a
financial and accounting firm which she founded in October 1995. From October
1988 through September 1995, Ms. McCaffery was a Partner with the international
accounting firm of Coopers & Lybrand L.L.P.
29
<PAGE> 31
The Company's Bylaws provide that the authorized number of directors of the
Company must be no less than three nor more than five. The exact number of
directors, which is currently three, may be set from time to time within this
range by either approval of the Board of Directors or the affirmative vote of
the holders of a majority of the Company's capital stock. Directors are elected
annually to serve until the next annual meeting of shareholders and until their
successors are elected and qualified. Executive officers are elected annually
by, and serve at the discretion of, the Board of Directors.
BOARD COMMITTEES
The Compensation Committee consists of Messrs. Barwick and Sorenson. The
Compensation Committee establishes salaries, incentives and other forms of
compensation for officers and other employees, administers incentive
compensation and benefit plans, including the Company's 1995 Stock Option Plan
and recommends policies relating to such plans.
The Audit Committee consists of Messrs. Coddington, Sorenson and Barwick.
The Audit Committee, which meets periodically with management and the Company's
independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and the need for
internal auditing procedures and the adequacy of internal controls.
DIRECTORS' COMPENSATION
Standard Compensation
Directors who are not employees of the Company or its subsidiaries
("Non-Employee Directors") receive $1,000 for attendance at the Company's Annual
Meeting of Shareholders plus $500 for each meeting of the Board or committee
meeting that they attend, plus reimbursement of any expenses they may incur with
respect to such meeting. Directors who are employees of the Company serve as
directors without compensation.
Stock Options
Non-Employee Directors receive additional compensation in the form of stock
options granted automatically under the Company's 1995 Stock Option Plan. Upon
their initial election to the Board of Directors, Non-Employee Directors
automatically receive options to purchase 3,000 shares of Common Stock. Such
options vest on the Non-Employee Directors' first anniversary with the Company.
In addition, such Non-Employee Directors will automatically be granted options
to purchase 1,000 shares of Common Stock each year they serve as a Director.
Such additional options will be fully vested and exercisable after each
additional full year of service. All options granted to Non-Employee Directors
have an exercise price equal to the fair market value of the shares on the date
of grant of such option.
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<PAGE> 32
EXECUTIVE COMPENSATION
The following table shows certain information concerning the compensation
of the Chief Executive Officer and each other executive officer of the Company
where aggregate compensation for services in all capacities rendered during the
year ended December 31, 1995 exceeded $100,000 (collectively the "Named
Executive Officers.")
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------- LONG-TERM
OTHER ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (OPTIONS/SARS)
- ---------------------------------- ---- -------- ----- ------------ --------------
<S> <C> <C> <C> <C> <C>
Boyd Coddington(1)
Chairman and Chief Executive
Officer....................... 1995 $173,675 $ -0- $ 15,200 60,000
1994 79,075 -0- 14,000 --
Brad Fanshaw
President (former)(2)........... 1995 124,146 -0- 13,200 30,000
1994 69,160 -0- 12,000 --
Stanley Clark(3)
Chief Operating Officer......... 1995 -- -- -- --
1994 -- -- -- --
</TABLE>
- ---------------
(1) Pursuant to a five-year employment agreement between the Company and Boyd
Coddington, Mr. Coddington currently receives an annual salary of $160,000
and will receive an annual bonus in an amount to be determined by the
Compensation Committee of the Board of Directors. Mr. Coddington is required
to devote his entire productive time, with certain limited exceptions
described in his employment agreement, to the business of the Company. In
addition to salary and bonus, under the terms of his employment agreement
the Company is required to provide Mr. Coddington with a nonaccountable
automobile expense allowance of at least $1,100 per month, pay all health
insurance premiums for him and his spouse and pay the premiums of a term
life insurance policy. In the event of termination of the executive without
cause, the Company is liable for the remaining unpaid annual salary under
the full term of the agreement plus a severance payment equal to 10% of the
annual salary each year. Other annual compensation for 1995 included in the
above-described annual automobile allowance of $13,200 for a vehicle used by
Mr. Coddington and approximately $2,000 in repair and maintenance expenses
for this automobile. Other annual compensation for 1994 included a separate
annual automobile allowance of $12,000 for a vehicle used by Mr. Coddington
and approximately $2,000 in repair and maintenance expenses for this
automobile.
(2) Mr. Fanshaw's employment with the Company terminated in February 1996.
During fiscal 1995, Mr. Fanshaw received, in addition to salary and bonus, a
nonaccountable automobile expense allowance of $1,100 per month and payment
of health insurance premiums for him and his spouse. Other annual
compensation for 1995 included an annual automobile allowance of $13,200 for
a vehicle used by Mr. Fanshaw. Other annual compensation for 1994 included
an annual automobile allowance of approximately $12,000 for a vehicle used
by Mr. Fanshaw. In May 1993, Mr. Fanshaw was granted a stock option
exercisable until December 31, 1999 to purchase 71,429 shares of Common
Stock for a price of $1.00 per share. Mr. Fanshaw exercised 2,000 of these
options in September 1995.
(3) Mr. Clark's employment with the Company commenced in April 1996. Mr. Clark
currently receives an annual salary of $110,000.
OPTION GRANTS TABLE
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in fiscal 1995 to the
Named Executive Officers.
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<PAGE> 33
STOCK OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR (PER SHARE) DATE
- ----------------------------- -------------------- -------------------- -------------- ----------
<S> <C> <C> <C> <C>
Boyd Coddington.............. 60,000 24% $ 6.25 9/15/05
Brad Fanshaw................. 30,000 12% 6.25 9/15/05
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information regarding option
exercises during the year ended December 31, 1995 by the Named Executive
Officers. The number of shares covered by both exercisable and unexercisable
options as of December 31, 1995 and the value of unexercised in-the-money
options held by the Named Executive Officers as of December 31, 1995. None of
the Named Executive Officers held any stock appreciation rights at the end of
that fiscal year.
<TABLE>
<CAPTION>
NUMBER OF UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED SECURITIES IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Boyd Coddington.......... -0- $ -0- 60,000 -0- $ 210,000 $ -0-
Brad Fanshaw............. 2,000 10,500 99,429 -0- 712,504 -0-
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1995, the Company's Board of Directors
established the levels of compensation for certain of the Company's executive
officers prior to the formation of the Compensation Committee ("Compensation
Committee"). The current members of the Company's Compensation Committee are
Messrs. Barwick and Sorenson. None of these individuals were at any time during
1995 an officer or employee of the Company.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "Plan") was adopted by the Board
of Directors in June 1995 and was approved by the shareholders at the Company's
annual meeting of shareholders in July 1995. The Plan is administered by the
Compensation Committee (the "Committee") of the Board of Directors, except that
grants to the Non-Employee Directors are automatically made pursuant to a
predetermined formula. The Committee consists solely of Non-Employee Directors.
The Committee has broad authority in administering and interpreting the Plan.
The purpose of the Plan is to enable the Company to attract, retain and
motivate employees by providing for or increasing their proprietary interests in
the Company and, in the case of Non-Employee Directors, to attract such
directors and further align their interests with those of the Company's
shareholders by providing for or increasing their proprietary interests in the
Company. Under the Plan, officers, directors, employees and independent
consultants of the Company are eligible to receive options to purchase Common
Stock. As of May 16, 1996, approximately 300 persons were eligible.
The aggregate number of shares which may be issued pursuant to the grant of
awards under the Plan is 250,000, subject to adjustment for certain
circumstances such as a stock exchange, reorganization, recapitalization, stock
split, reverse stock split, stock dividend or other capital change or
adjustment. At the Company's next annual meeting scheduled for June 12, 1996,
the shareholders of the Company will be requested to consider and approve a
proposed amendment to the Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 200,000 shares, bringing the total number of
shares issuable under the Plan to 450,000 shares. The Board of Directors
approved such amendment in May 1996.
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<PAGE> 34
Awards to Employees
Options granted under the Plan may be options intended to qualify as
incentive stock options (the "Incentive Stock Options") under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or options not intended
to so qualify (the "Non-Qualified Stock Options").
An award to an employee may permit the employee to pay all or part of the
purchase price of the shares issuable pursuant thereto, and/or to pay all or
part of such employee's tax withholding obligation with respect to such
issuance, by (i) delivering previously owned shares of capital stock of Company
or (ii) reducing the amount of shares otherwise issuable pursuant to the award.
If an option granted to an employee permitted the employee to pay for the shares
issuable pursuant thereto with previously owned shares, the employee would be
able to exercise the option in successive transactions, known as pyramiding, to
acquire a large number of shares with no more investment than the original share
or shares delivered upon exercise of the option.
Upon the grant of an option under the Plan, the person receiving the grant
(the "Option Holder") must enter into a written option agreement with the
Company that contains terms, provisions and conditions that are consistent with
the Plan and have been determined from time to time by the Committee. Incentive
Stock Options granted under the Plan may not expire later than ten years after
the date of grant except that an Incentive Stock Option granted to an individual
owning (after the application of the family and other attribution rules of
Section 424(d) of the Code), at the time the option was granted, more than 10%
of the total combined voting power of all classes of stock of the Company (a
"10% Shareholder"), may not expire later than five years from the date the
option is granted. The exercise price for any Incentive Stock Option may not be
less than 100% of the fair market value of Common Stock of the Company at the
date the Option is granted and the exercise price of an Incentive Stock Option
granted to a 10% Shareholder may not be less than 110% of the fair market value
of the Common Stock of the Company on the date such option is granted. The Plan
provides that the maximum number of shares of Common Stock that may be issued
pursuant to Incentive Stock Options, in the aggregate, is 250,000 shares.
An award granted under the Plan to an employee may include a provision
terminating the award upon termination of employment under certain circumstances
or accelerating the receipt of benefits upon the occurrence of specified events,
such as a change of control of the Company or a dissolution, liquidation,
merger, reclassification, sale of substantially all of the property and assets
of the Company or other significant corporate transaction. Options granted to
Non-Employee directors must be exercised by the first anniversary of the date of
grant if the grantee ceases to be a director of the Company as a result of death
or disability, and the three months after such grantee ceases to be a director
for any other reason other than cause, in which case the option terminates
immediately.
Awards to Non-Employee Directors
Non-Qualified Stock Options to purchase 3,000 shares of Common Stock are
automatically granted to Non-Employee Directors upon their initial election to
the Board. Such options will vest on the first anniversary of the date of
appointment or election of grant. Non-Qualified Stock Options to purchase an
additional 1,000 shares will be granted to each Non-Employee Director each year
provided such individual continues to serve as a director. Such additional
options will vest after each additional year of service.
33
<PAGE> 35
CERTAIN TRANSACTIONS
Boyd and Diane Coddington, the Company's principal shareholders, have
personally guaranteed the Company's equipment leases and the leases on the real
properties located at 8400, 8402 and 8380 Cerritos Avenue and 10541 Ashdale
Street.
In September 1994, Boyd and Diane Coddington assigned to the Company all of
their rights and interests under the lease of the real properties located at
8380 Cerritos Avenue and 10541 Ashdale Street in consideration of the Company's
assumption of all of the obligations of the Coddingtons' under such leases. The
Company has been subleasing a portion of the premises located at 10541 Ashdale
Street to Hot Rods by Boyd (a company which is wholly owned by Boyd Coddington)
since the commencement of the lease term, and has been paying Hot Rods by Boyd's
share of all rental and other payments due thereunder. The total current monthly
rent under these leases is $14,991, with the Company's share being $10,000. The
rent is subject to annual adjustment based on increases in the Consumer Price
Index.
From time to time the Company has loaned amounts to Hot Rods by Boyd on an
interest free basis, for use as working capital and to cover certain expenses,
including the build-out of the premises occupied by Hot Rods by Boyd. In 1993
and 1994, the Company also paid on behalf of Hot Rods by Boyd the entire salary
for several employees that work for both Hot Rods by Boyd and the Company. As of
March 31, 1996, the amount owed to the Company from Hot Rods by Boyd was
approximately $158,000, representing amounts previously advanced by the Company
and the portion of the salary payments made to such employees by the Company
which are allocable to Hot Rods by Boyd.
The Company has entered into an option agreement with Mr. and Mrs.
Coddington pursuant to which the Company currently has the option to purchase
all of the outstanding Common Stock of Hot Rods by Boyd for up to $750,000,
payable in shares of the Company's Common Stock, valued at its then fair market
value. This option is exercisable by the Company commencing after delivery to it
of audited financial statements of Hot Rods by Boyd for the years ending
December 31, 1995 and December 31, 1996, but in no event after September 30,
1997, unless extended pursuant to the terms of the option agreement. Until the
option is exercised, any transactions between the Company and Hot Rods by Boyd
will be reviewed and approved by the outside board members of the Company. In
June 1995, the Company entered into a marketing/promotion agreement with Hot
Rods by Boyd pursuant to which Hot Rods by Boyd is required to (i) endorse,
promote and market the Company's products, (ii) use the Company's wheels on
vehicles produced by Hot Rods by Boyd and (iii) allow the Company to use
vehicles produced by Hot Rods by Boyd for promotional displays and photographs,
including the likeness of Boyd Coddington and the vehicles for printed and
electronic media. Unless terminated in accordance with the provisions thereof,
this agreement expires upon the exercise of the Company's option to purchase Hot
Rods by Boyd.
In November 1994, the Board of Directors of the Company authorized the
issuance of 1,000,000 shares of Series A Redeemable Preferred Stock, 706,668
shares of which were issued to Karl Kantarjian, a former director of the
Company, in exchange for 706,668 shares of Common Stock held by Mr. Kantarjian.
The Series A Redeemable Preferred Stock was redeemed by the Company in September
1995. In consideration for exchanging his shares of Common Stock for shares of
Series A Redeemable Preferred Stock, Mr. Kantarjian received a warrant to
purchase 10,000 shares of Common Stock (the "Kantarjian Warrant") at a price of
$6.25 per share. The Kantarjian Warrant expires on November 3, 1996.
Codde, Inc., a company in which Mr. Coddington is an officer, director and
principal shareholder, leases two 70 foot semi-tractor/trailer rigs to the
Company for special event and onsite presentations for a monthly fee of
approximately $10,000. The Company believes that its agreement with Codde, Inc.
is on terms no less favorable than could be obtained from a nonaffiliated party.
Boyd Coddington, Jr., the son of Boyd Coddington, is employed by the
Company in the position of National Sales Manager at an annual salary of $78,000
plus bonus. In fiscal 1995, he received aggregate compensation of $61,035 from
the Company.
In February 1996, the Company entered into an agreement under which an
employee of the Company was released from his duties under an employment
contract. Under the agreement, the Company paid to this
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<PAGE> 36
employee total consideration of $275,000, consisting of $150,000 in
consideration for a five-year covenant not to compete and $125,000 for other
compensation. Of such consideration, $225,000 was paid in cash and the remaining
$50,000 was paid in shares of the Company's Common Stock (the "Settlement
Stock"). All other amounts due to/from the Company and the employee pursuant to
the employment contract were cancelled.
In February 1996 the Company purchased substantially all of the assets of
Velocity Distribution, Inc. (the "Velocity"), a company owned by Boyd Coddington
and a former employee of the Company. Velocity was in 1995 a party to an
agreement with the Company pursuant to which Velocity was granted a license to
use certain trademarks owned by the Company in connection with the distribution
of apparel and other accessories. As consideration for these assets, the Company
assumed certain liabilities of Velocity totalling approximately $81,000 and also
entered into a five-year covenant not to compete with an employee of Velocity
for total consideration of approximately $25,000.
35
<PAGE> 37
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 16, 1996 and as adjusted to
reflect the sale of the Common Stock being offered hereby (assuming no exercise
of the Underwriter's over-allotment option) by (i) each person (or group of
affiliated persons) who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) the executive
officers named in the Summary Compensation Table, (iv) all Selling Shareholders,
and (v) all directors and executive officers of the Company as a group. Except
as otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable:
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1) OFFERING
------------------ SHARES BEING ------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Boyd Coddington(2)(3)........................ 413,334 15.9% 25,237 388,097 11.6%
Diane Coddington(2).......................... 353,334 13.9% 25,000 328,334 10.0%
Jon D. Gruber
c/o Gruber & McBaine Capital
Management, Inc.
50 Osgood Place
San Francisco, CA 94133(4)............... 156,600 6.2% 0 156,600 4.8%
Brad Fanshaw(5).............................. 87,250 3.4% 52,821 34,429 1.0%
Frank W. Cutler++............................ 27,879 1.1% 12,879 15,000 *
The Richard F. Foster Family Trust UAD
5/24/93++.................................. 19,362 * 19,362 0 *
The Silagy Living Trust DTD 1/15/93(6)++..... 19,362 * 19,362 0 *
George Nicholas++............................ 16,842 * 16,842 0 *
Kendall W. Everson, Jr. Family Trust DTD
9/21/89(7)++............................... 12,102 * 12,102 0 *
Larry E. Baumgardner, Jr++................... 10,839 * 7,000 3,839 *
CJ & WM Reed Trust DTD 1986(8)++............. 10,839 * 5,839 5,000 *
The Davis Living Trust(9)++.................. 9,681 * 9,681 0
John E. Thompson and Linda Thompson++........ 6,619 * 6,619 0 *
Gregory A. Brown and Susan R. Brown++........ 5,519 * 5,519 0 *
Silverberg Trust DTD 12/21/88(10)++.......... 5,434 * 5,434 0 *
Peter G. Jones++............................. 5,419 * 3,419 2,000 *
Dale Mitchum++............................... 5,419 * 2,419 3,000 *
Ajit Singh M.D. Profit Sharing Plan and
Trust++.................................... 5,419 * 5,419 0 *
Lawrence J. Larsen and Janice L. Larsen++.... 4,842 * 4,842 0 *
Michael Murphy++............................. 4,119 * 4,119 0 *
Newport Potomac Partners(11)................. 3,872 * 3,872 0 *
Joe Firmage++................................ 2,717 * 1,717 1,000 *
Kurt Mason++................................. 2,418 * 2,418 0 *
Yie Fong Chiang and Kuang Chi Chiang++....... 2,170 * 500 1,670 *
Gary Rorden and Sheryl S. Rorden++........... 1,450 * 1,450 0 *
Rex A. Ours.................................. 500 * -- -- *
Stanley Clark................................ -- * -- -- *
Marcus Sorenson.............................. -- * -- -- *
Curt Barwick................................. -- -- -- --
All Executive Officers and Directors as a
Group
(5 persons)(12)............................ 413,834 15.9% 25,239 388,597 11.6%
</TABLE>
36
<PAGE> 38
- ---------------
* Indicates ownership of less than one percent.
++ Indicates that the shareholder purchased common stock and warrants in a
November 1994 private placement and converted the warrants into Common
Stock in September 1995. (See "Description of Capital Stock").
(1) Includes Common Stock issued pursuant to a conversion of warrants into
shares of Common Stock, in September 1995. See "Description of Capital
Stock -- Warrants from Private Placement," and "Description of Capital
Stock -- Other Warrants." Any correspondence to the shareholders should be
addressed to such shareholder c/o the Company at the Company's address. The
percent beneficially owned by each shareholder has been calculated pursuant
to Rule 13d-3(d) promulgated by the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
(2) Boyd Coddington and Diane Coddington are married, and therefore, each has a
beneficial interest in the other's shares of Common Stock.
(3) Includes 60,000 shares purchasable within 60 days of the date hereof upon
exercise of an option to purchase Common Stock.
(4) Based upon information contained in a statement on Schedule 13D, dated
February 21, 1996, filed with the Securities and Exchange Commission by
Gruber & McBaine Capital Management, Inc. ("Gruber"). The Schedule 13D
states that Jon D. Gruber is deemed to have beneficial ownership of 156,600
shares of Common Stock as of February 21, 1996.
(5) Includes 34,429 shares purchasable within 60 days of the date hereof upon
exercise of an option to purchase Common Stock.
(6) John W. Silagy and Deana K. Silagy are deemed to be beneficial owners of
all shares of Common Stock owned by the Silagy Living Trust dated January
15, 1993.
(7) Includes shares owned by Newport Potomac Partners, of which Kendall W.
Everson, Jr. is also a general partner and in such capacity has shared
voting and investment power with respect to shares of Common Stock owned
thereby. As a result, Mr. Everson is deemed to be a beneficial owner of
such Common Stock.
(8) Charles J. Reed and Winifred M. Reed are deemed to be beneficial owners of
all shares of Common Stock owned by the CS & WM Reed Trust dated 1986.
(9) James P. Davis and Virginia D. Davis are deemed to be beneficial owners of
all shares of Common Stock owned by the Davis Living Trust.
(10) Joseph G. Silverberg and Audrey G. Silverberg are deemed to be beneficial
owners of all the shares of Common Stock owned by the Silverberg Trust
dated December 21, 1988.
(11) Kendall W. Everson, Jr. is a general partner of Newport Potomac Partners
and in such capacity has shared voting and investment power with respect to
shares of Common Stock owned by Newport Potomac Partners and is deemed to
be a beneficial owner of such Common Stock. Steven Wilcox is also a general
partner of Newport Potomac Partners and in such capacity has shared voting
and investment power with respect to shares of Common Stock owned by
Newport Potomac Partners and is deemed to be a beneficial owner of such
Common Stock.
(12) Includes 60,000 shares of Common Stock purchasable within 60 days of the
date hereof upon exercise of an option to purchase Common Stock. See Note
(3).
37
<PAGE> 39
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value. The following description of the Company's capital stock is qualified in
all respects by reference to the Company's Amended and Restated Articles of
Incorporation ("Articles of Incorporation"), which have been filed as an exhibit
to the Registration Statement incorporating this Prospectus.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of Preferred Stock. Holders
of Common Stock are entitled to one vote per share on all matters on which the
holders of Common Stock are entitled to vote and the holders of Common Stock may
cumulate their votes in the election of directors upon giving notice as required
by law. Cumulative voting means that in any election of directors, each
shareholder may give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of shares held by such
shareholder, or such shareholder may distribute such number of votes among as
many candidates as the shareholder sees fit. The Common Stock is not entitled to
preemptive rights and is not subject to redemption or conversion. Upon
liquidation, dissolution or winding-up of the Company, the assets (if any)
legally available for distribution to shareholders are distributable ratably
among the holders of the Common Stock after payment of all debt and liabilities
of the Company and the liquidation preference of any outstanding class or series
of Preferred Stock. All outstanding shares of Common Stock are, and the shares
of Common Stock to be issued pursuant to this offering will be, when issued and
delivered, validly issued, fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to any series of Preferred
Stock that the Company may issue in the future.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series, and
the Board of Directors, without action by the holders of the Common Stock, may
fix or alter the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of Preferred Stock. The Board of Directors,
without shareholder approval, can issue shares of Preferred Stock with rights
that could adversely affect the rights of the holders of Common Stock. No shares
of Preferred Stock presently are outstanding, and the Company has no present
plans to issue any such other shares. The issuance of shares of Preferred Stock
could adversely affect the voting power of holders of Common Stock and could
have the effect of delaying, deferring or preventing a change in control of the
Company or other corporate action.
WARRANTS FROM PRIVATE PLACEMENT
In connection with an offering of securities in a private placement in
November 1994 (the "Private Placement"), the Company issued 609,998 warrants
(the "Warrants"). Holders of 595,713 Warrants exercised their Warrants by
electing to convert their Warrants into 248,213 shares of Common Stock of the
Company, effective upon the closing of the Company's initial public offering in
September 1995. Warrants to purchase 14,285 shares of Common Stock remain
outstanding and each outstanding Warrant entitles the holder to purchase one
share of Common Stock at a price equal to $3.50 per share until November 30,
1997. On May 10, 1996, the Warrants were called by the Company for a price of
$.01 per Warrant. A holder must either exercise his or her Warrant within 30
days of the notice of redemption or accept the redemption price. The shares of
Common Stock underlying the Warrants, when issued upon exercise of the Warrants,
will be fully paid and nonassessable, and the Company will pay any transfer tax
incurred as a result of the issuance of shares of Common Stock to the holder
upon exercise. The Warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price and the number of shares of Common
Stock subject to the Warrants in certain events, such as stock dividends and
distributions, stock splits, recapitalization, mergers or consolidations and
certain issuances below the fair market value of the Common Stock. The
38
<PAGE> 40
Company is not required to issue fractional shares upon the exercise of a
Warrant. The holder of a Warrant will not possess any rights as a shareholder of
the Company until such holder exercises the Warrant.
OPTIONS
In May 1993, the Company granted to Mr. Fanshaw options to purchase 71,429
shares of Common Stock at an exercise price of $1.00 per share (the "Fanshaw
Options"). Mr. Fanshaw exercised 2,000 of the Fanshaw Options in September 1995
and 35,000 in May 1996. Mr. Fanshaw was also granted certain registration rights
with respect to the shares of Common Stock issuable upon exercise of the Fanshaw
Options. See "Description of Capital Stock -- Registration Rights."
9% CONVERTIBLE PROMISSORY NOTES
In September 1993, the Company privately sold $660,000 principal amount of
9% Convertible Promissory Notes due June 30, 1996 (the "Notes"). In November
1994, in connection with an offering of securities in the Private Placement, the
Company converted $622,500 in principal amount ($572,648, net of original debt
issue costs) of Notes into 177,857 shares of the Company's Common Stock and
redeemed $12,500 in principal amount of Notes. As of the date of this offering,
$25,000 in principal amount of Notes is outstanding. The Company does not have
the right to prepay all or any part of the principal of the Notes. The Notes are
convertible, in whole or in part, into shares of Common Stock at the rate of
$3.50 per share. However, no fractional shares will be issued, as all fractional
shares will be rounded down to the nearest whole number of shares with
fractional shares, if any, to be paid a cash adjustment based upon the
conversion price. The Company granted to the holders of Notes, subject to
certain limitations, certain registration rights covering the Common Stock
issuable upon conversion of the Notes. See "Description of Capital
Stock -- Registration Rights."
OTHER WARRANTS
In connection with the September 1993 private placement of Notes, the
Company issued to officers of the placement agent warrants to purchase (the
"Note Placement Agent Warrants") an aggregate of 9,328 shares of Common Stock at
a price of $4.25 per share. The Note Placement Agent Warrants are currently
exercisable and expire in September 1999. The holders of the Note Placement
Agent Warrants may elect to exercise the Note Placement Agent Warrants by having
withheld from the number of shares issuable upon exercise of the Note Placement
Agent Warrants that number of shares of Common Stock with an aggregate fair
market value at the time of exercise equal to the aggregate exercise price. The
exercise price and the number of shares of Common Stock issuable upon the
exercise of the Note Placement Agent Warrants is subject to adjustment in the
event of any stock dividend, stock split, recapitalization or similar
transaction and upon the issuance of shares of Common Stock, or rights to
acquire shares of Common Stock, at a price which is less than the exercise price
then in effect, with certain exceptions. Holders of the Note Placement Agent
Warrants also have been granted certain registration rights with respect to the
shares of Common Stock issuable upon exercise. See "Description of Capital
Stock -- Registration Rights."
In November 1994, the Board of Directors of the Company authorized the
issuance of 1,000,000 shares of Series A Redeemable Preferred Stock, 706,668
shares of which were issued to Karl Kantarjian in exchange for 706,668 shares of
Common Stock held by Mr. Kantarjian. These shares were redeemed in September
1995. In consideration for exchanging his shares of Common Stock for Series A
Redeemable Preferred Stock, Mr. Kantarjian received a warrant to purchase 10,000
shares of Common Stock at $6.25 per share.
In connection with the 1994 Private Placement, the Company issued to
officers of the placement agent warrants to purchase (the "Unit Placement Agent
Warrants") an aggregate of 85,714 shares of Common Stock, which effective as of
the closing of the initial public offering were converted into 35,714 shares of
Common Stock as a result of having withheld from the number of shares issuable
upon exercise of the Unit Placement Agent Warrants that number of shares of
Common Stock (at an agreed price of $6.00 per share) equal to the aggregate
exercise price of $3.50 per share. Holders of the Unit Placement Agent Warrants
have
39
<PAGE> 41
been granted certain registration rights with respect to the shares of Common
Stock issuable upon exercise. See "Description of Capital Stock -- Registration
Rights."
IPO WARRANTS
In connection with the Company's initial public offering, the Company
agreed to sell to the Representative and its co-manager warrants to purchase up
to 125,000 shares of Common Stock at an exercise price per share equal to $7.50
(the "IPO Warrants"). The IPO Warrants, which are not transferable (other than
to officers or partners of the Representative or its co-manager), are
exercisable beginning September 20, 1996 until September 20, 2000. See
"Underwriting."
REPRESENTATIVE'S WARRANTS
The Company has agreed to sell to the Representative warrants to purchase
up to 52,500 shares of Common Stock at an exercise price per share equal to 120%
of the public offering price (the "Representative's Warrants"). The
Representative's Warrants which are not transferable (other than to officers or
partners of the Representative), are exercisable for a period of four years
beginning one year from the date of this Prospectus. See "Underwriting."
REGISTRATION RIGHTS
The holder of the Notes can require the Company, subject to certain
limitations, to include all or any portion of the Note Shares in any
registration statement (other than registration statements on Form S-8 or Form
S-4) filed by the Company under the Securities Act.
The Company has granted to the holders of the Common Stock underlying the
Warrants, subject to certain limitations, the right to require the Company to
file a registration statement covering such Common Stock, commencing March 15,
1996. In addition, the Company has agreed to use its best efforts to register
such shares of Common Stock on Form S-3 under the Securities Act, and in
addition to register the shares if the Company proposes to register stock or
securities in connection with certain underwritten public offerings of its
securities, subject to certain limitations.
In connection with the Private Placement, the Company granted to the
holders of Common Stock certain rights to register the shares if the Company
proposes to register stock or securities in connection with certain underwritten
public offerings of its securities, subject to certain limitations. Any such
shares of Common Stock not sold in this offering will continue to have
registration rights, subject to certain limitations. See "Shares Eligible For
Future Sale."
The Company has agreed to use its best efforts to register the shares of
Common Stock issuable to Mr. Fanshaw upon exercise of the Fanshaw Options.
The Company has granted to the holders of the Note Placement Agent Warrants
certain rights with respect to the registration under the Securities Act of the
9,328 shares of Common Stock issuable upon exercise of the Note Placement Agent
Warrants (the "Note Placement Agent Shares"). The holders of the Note Placement
Agent Warrants can require the Company, subject to certain limitations, to file
one registration statement covering the Note Placement Agent Shares at any time
commencing March 15, 1996 and can request, on up to three occasions, that the
Note Placement Agent Shares be sold by means of an underwritten public offering.
In addition, the Company has agreed to use its best efforts to register such
shares on Form S-3 under the Securities Act and the holders of the Note
Placement Agent Warrants can require the Company, subject to certain
limitations, to include all or any portion of the 9,328 Note Placement Agent
Shares in any registration statement.
The Unit Placement Agent Warrants provide certain rights with respect to
the registration under the Securities Act of the shares of Common Stock issuable
upon exercise thereof. If the Company registers any of its Common Stock either
for its own account or for the account of other security holders, the holders of
such shares are entitled to include their shares of Common Stock in the
registration. Effective as of the closing of
40
<PAGE> 42
the Company's initial public offering, the Unit Placement Agent Warrants were
converted into 35,714 shares of Common Stock.
The Company has agreed to register the Settlement Stock in the event that
the Company undertakes a public offering of its Common Stock.
The IPO Warrants provide certain rights with respect to the registration
under the Securities Act of up to 125,000 shares of Common Stock issuable upon
exercise thereof. The holders of the shares issuable upon exercise of the IPO
Warrants may require the Company to file a registration statement under the
Securities Act with respect to such shares. In addition, if the Company
registers any of its Common Stock either for its own account or for the account
of other security holders, the holders of the shares issuable upon exercise of
the IPO Warrants are entitled to include their shares of Common Stock in the
registration.
The Representative's Warrants provide certain rights with respect to the
registration under the Securities Act of up to 52,500 shares of Common Stock
issuable upon exercise thereof at 120% of the per share price to the public. The
holders of the shares issuable upon exercise of the Representative's Warrants
may require the Company to file a registration statement under the Securities
Act with respect to such shares. In addition, if the Company registers any of
its Common Stock either for its own account or for the account of other security
holders, the holders of the shares issuable upon exercise of the
Representative's Warrants are entitled to include their shares of stock in the
registration.
The Company generally is required to bear all costs incurred in connection
with any such registrations, other then underwriting discounts and commissions.
The foregoing registration rights could result in substantial future expense to
the Company and could adversely affect any future equity or debt offerings of
the Company.
CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation provides that, to the fullest
extent permitted by California law, the Company's directors will not be liable
for monetary damages for breach of the directors' fiduciary duty of care to the
Company or its shareholders. This provision in the Articles of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as an injunction or other forms of nonmonetary relief would remain
available under California law. Each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company, for acts
or omissions involving intentional misconduct or knowing and culpable violations
of law, for acts or omissions that a director believes to be contrary to the
best interests of the Company or its shareholders or that involve the absence of
good faith on the part of the director, for any transaction from which the
director derived an improper personal benefit, for acts or omissions involving a
reckless disregard for the director's duty to the Company or its shareholders
when the director was aware or should have been aware of a risk of serious
injury to the Company or its shareholders, for acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Company or its shareholders, for improper transactions
between the director and the Company, for improper distributions to shareholders
and loans to directors and officers or for acts or omissions by the director
acting in his or her capacity as an officer of the Company. This provision also
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The stock transfer agent, registrar and warrant agent for the Common Stock
and Warrants is U.S. Stock Transfer Corporation, Glendale, California.
41
<PAGE> 43
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated is
acting as representative (the "Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement (the form of which has
been filed as an exhibit to the Registration Statement), to purchase from the
Company the respective number of Common Stock set forth opposite their names in
the table below. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters shall be obligated to purchase all of the Common Stock offered
hereby (other than the Common Stock covered by the over-allotment option
described below) if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Cruttenden Roth Incorporated......................................
Total...........................................................
========
</TABLE>
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to certain other dealers. After the public offering, the
public offering price and such concessions may be changed. The Representative
has informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
The offering of the shares of Common Stock is made for delivery when, as if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares.
The Company has granted an option to the Underwriters, exercisable during
the 45-day period after the date of this Prospectus, to purchase up to an
aggregate of 150,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option only for
the purpose of covering over-allotments made in connection with the sale of the
Common Stock offered hereby. To the extent that the Underwriters exercise such
option, each Underwriter may be committed, subject to certain conditions, to
purchase a number of additional Common Stock proportionate to such Underwriter's
initial commitment pursuant to the Underwriting Agreement.
The Company has agreed to indemnify the Underwriters against certain
liabilities in connection with the Registration Statement, including liabilities
under the Securities Act.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 1.5% of the aggregate offering price of the Common Stock offered
hereby (including any Common Stock purchased pursuant to the Underwriters'
over-allotment option), of which $10,000 has been paid to date. The
Representative's expenses in excess of the nonaccountable expense allowance,
including their legal expenses, will be borne by the Representative.
The Company has also agreed to sell to the Representative for nominal
consideration the Representative's Warrants pursuant to which the Representative
may purchase up to 52,500 shares of Common Stock at a price of 120% of the
public offering price. The Representative's Warrants will be exercisable
commencing one year after the date hereof for a period of four years thereafter.
The Representative's Warrants cannot be transferred, assigned or hypothecated
for one year from the date of their issuance, except that they may be assigned,
in whole or in part, to any successor, officer or partner of the Representative
or their partners or members of the underwriting group. The Representative's
Warrants will contain certain registration rights and antidilution provisions
providing for appropriate adjustment of the exercise price and number of shares
which may be purchased upon exercise upon the occurrence of certain events.
Pursuant to the Underwriting Agreement, Boyd and Diane Coddington, who own
the aggregate 707,000 shares of the Company's Common Stock, are subject to
lock-up arrangements for a period of twelve
42
<PAGE> 44
months from the date of this Prospectus (but collectively may sell or otherwise
dispose of up to 15,000 shares of Common Stock per quarter after the date of
this Prospectus) and shareholders owning in the aggregate 31,509 shares of the
Company's Common Stock are subject to lock-up arrangements for a period of six
months from the date of this Prospectus.
In November 1994, the Company raised $1,512,500 and converted $622,500 in
Notes in a private placement of units consisting of one share of Common Stock
and a Warrant to purchase one share of Common Stock at a price of $3.50 per
share. The Representative acted as placement agent for such private placement
and was paid an aggregate commission of $185,800. In addition, in connection
with such private placement, the Representative received Unit Placement Agent
Warrants to purchase an aggregate of 85,714 shares of Common Stock at $3.50 per
share which were converted into 35,714 shares of Common Stock effective upon the
closing of the Company's initial public offering. The Company has also granted
certain registration rights with respect to the shares of Common Stock.
In September 1995, the Company agreed to sell to the Representative and its
co-manager the IPO Warrants, pursuant to which the Representative and its
co-manager may purchase up to 125,000 shares of Common Stock at an exercise
price of $7.50 per share. The IPO Warrants, which are not transferrable (other
than to officers or partners of the Representative or its co-manager) are
exercisable commencing September 20, 1996 and for a period of four years
thereafter.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Company's Common Stock
during the "cooling off" period immediately preceding the commencement of sales
in the offering. The Commission has, however, adopted an exemption from these
rules that permits passive market making under certain conditions. These rules
permit an Underwriter or other member of the selling group to continue to make a
market in the Company's Common Stock subject to the conditions, among others,
that its bid not exceed the highest bid by a market maker not connected with the
offering and that its net purchases on any one trading day not exceed prescribed
limits. Pursuant to those exemptions, certain Underwriters and other members of
the selling group intend to engage in passive market making in the Company's
Common Stock during the cooling off period.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representative, the Company and the United States Securities and Exchange
Commission, Washington, D.C. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Rutan & Tucker LLP, Costa Mesa, California.
Certain legal matters will be passed upon for the Underwriters by Stradling,
Yocca, Carlson & Rauth, a Professional Corporation, Newport Beach, California.
EXPERTS
The balance sheet as of December 31, 1995 and the statements of income,
shareholders' equity and cash flows for the years ended December 31, 1994 and
1995 included in this Prospectus have been so included in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") under the Securities Act
with respect to the securities being offered pursuant to this Prospectus. This
Prospectus does not contain all information set forth in the Registration
Statement and exhibits and schedules thereto, certain parts of which are omitted
in accordance with the rules and regulations of the
43
<PAGE> 45
Commission. The Registration Statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 25049 and at the regional office of the Commission located at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. Copies
of such material can be obtained at prescribed rates from the Public Reference
Room of the Commission at 450 Fifth Street N.W., Washington, D.C. 20549.
Statements contained in this Prospectus concerning the provisions of any
documents are not necessarily complete and in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company is subject to the reporting and other informational
requirements of the Exchange Act and, in accordance therewith, files reports and
other information with the Commission. Such reports, proxy statements and other
information filed by the Company, including the Registration Statement and
exhibits thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at the offices of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies
of such materials can also be obtained by written request to the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is
quoted on the Nasdaq National Market (symbol: BYDS). Reports and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
44
<PAGE> 46
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants...................................................... F-2
Balance Sheets at December 31, 1995 and at March 31, 1996 (unaudited).................. F-3
Statements of Income For the Years Ended December 31, 1994 and 1995 and for the Three F-4
Months Ended March 31, 1995(unaudited) and for the Three Months Ended March 31, 1996
(unaudited)..........................................................................
Statements of Shareholders' Equity for the Years Ended December 31, 1994 and 1995 and F-5
for the Three Months Ended March 31, 1996 (unaudited)................................
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995, and for the F-6
Three Months Ended March 31, 1995 (unaudited) and for the Three Months Ended March
31, 1996 (unaudited).................................................................
Notes to Financial Statements.......................................................... F-8
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Boyds Wheels, Inc.
We have audited the accompanying balance sheet of Boyds Wheels, Inc. as of
December 31, 1995, and the related statements of income, shareholders' equity
and cash flows for the years ended December 31, 1994 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boyds Wheels, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
years ended December 31, 1994 and 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 14, 1996
F-2
<PAGE> 48
BOYDS WHEELS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,039,552 $ 554,606
Accounts receivable, net of allowance for doubtful accounts of
$3,630 and $23,630, respectively............................. 1,287,275 1,375,453
Inventories, net................................................ 3,643,512 4,667,007
Due from affiliate.............................................. 100,000 100,000
Prepaids and other current assets............................... 593,642 753,566
Deferred income taxes........................................... 156,946 156,946
------------ -----------
Total current assets......................................... 6,820,927 7,607,578
Due from affiliate................................................ 72,684 58,142
Property and equipment, net....................................... 4,689,372 4,977,752
Covenants not to compete, net..................................... 150,000 172,085
Other assets...................................................... 49,034 46,627
------------ -----------
Total assets............................................ $ 11,782,017 $12,862,184
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 2,449,674 $ 2,695,326
Accrued liabilities............................................. 1,458,980 988,749
Revolving credit agreements..................................... 289,554 550,000
Current maturities of long-term debt............................ 343,413 494,932
Due to affiliate................................................ 35,769 29,170
Income taxes payable............................................ 130,689 203,521
------------ -----------
Total current liabilities.................................... 4,708,079 4,961,698
Long-term debt.................................................... 902,754 1,326,072
Other long-term liabilities....................................... 79,757 72,979
Deferred income taxes............................................. 235,179 235,179
------------ -----------
Total liabilities....................................... 5,925,769 6,595,928
------------ -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued and outstanding................................ -- --
Common stock, no par value; 25,000,000 shares authorized,
2,484,593 and 2,489,856 shares issued and outstanding,
respectively................................................. 5,957,207 6,007,207
Contributed capital............................................... 826,511 826,511
Accumulated deficit............................................... (927,470) (567,462)
------------ -----------
Total shareholders' equity................................... 5,856,248 6,266,256
------------ -----------
Total liabilities and shareholders' equity.............. $ 11,782,017 $12,862,184
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 49
BOYDS WHEELS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................... $12,127,208 $17,796,110 $3,659,669 $5,334,074
Cost of goods sold...................... 9,336,026 13,262,522 2,781,721 3,976,019
----------- ----------- ---------- ----------
Gross margin....................... 2,791,182 4,533,588 877,948 1,358,055
Selling, general and administrative
expenses.............................. 1,647,793 2,741,332 464,932 714,142
----------- ----------- ---------- ----------
Income from operations............. 1,143,389 1,792,256 413,016 643,913
Interest and other expenses, net........ 694,931 382,859 142,392 47,873
----------- ----------- ---------- ----------
Income before provision (benefit)
for income taxes................. 448,458 1,409,397 270,624 596,040
Provision (benefit) for income taxes.... (226,783) 461,769 111,074 236,032
----------- ----------- ---------- ----------
Net income.................... $ 675,241 $ 947,628 $ 159,550 $ 360,008
=========== =========== ========== ==========
Net income per common share and common
equivalent share before accretion of
Series A redeemable preferred stock... $ 0.40 $ 0.48 $ 0.09 $ 0.14
=========== =========== ========== ==========
Accretion of Series A redeemable
preferred stock:
Net income, as above.................. $ 675,241 $ 947,628 $ 159,550 $ 360,008
Adjustment for accretion of Series A
redeemable preferred stock......... (180,371) (1,068,629) (313,840) --
----------- ----------- ---------- ----------
Net income (loss) applicable
to common shareholders...... $ 494,870 $ (121,001) $ (154,290) $ 360,008
=========== =========== ========== ==========
Net income per share, as above.......... $ 0.40 $ 0.48 $ 0.09 $ 0.14
=========== =========== ========== ==========
Adjustment for accretion of Series A
redeemable preferred stock............ (0.11) (0.55) (0.18) --
----------- ----------- ---------- ----------
Net income (loss) per common share and
common equivalent share............... $ 0.29 $ (0.07) $ (0.09) $ 0.14
=========== =========== ========== ==========
Weighted average common shares and
common equivalent shares
outstanding........................... 1,701,000 1,960,000 1,697,000 2,655,000
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 50
BOYDS WHEELS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993.... 1,413,336 $ 2,000 $ 826,511 $(1,301,339) $ (472,828)
Conversion of common stock to
Series A redeemable
preferred stock............. (706,668) (1,000) -- -- (1,000)
Issuance of common stock for
cash (net of costs of
$225,695)................... 432,141 1,286,809 -- -- 1,286,809
Conversion of notes payable
into common stock (net of
debt issuance costs of
$49,852).................... 177,857 572,648 -- -- 572,648
Accretion of Series A
redeemable preferred
stock....................... -- -- -- (180,371) (180,371)
Net income..................... -- -- -- 675,241 675,241
--------- ---------- -------- ---------- ---------
Balances at December 31, 1994.... 1,316,666 1,860,457 826,511 (806,469) 1,880,499
Accretion of Series A
redeemable preferred
stock....................... -- -- -- (1,068,629) (1,068,629)
Issuance of common stock for
cash (net of costs of
$1,417,875)................. 850,000 3,894,625 -- -- 3,894,625
Issuance of common stock upon
conversion of warrants...... 315,927 200,000 -- -- 200,000
Issuance of common stock
warrants for cash........... -- 125 -- -- 125
Common stock options
exercised................... 2,000 2,000 -- -- 2,000
Net income..................... -- -- -- 947,628 947,628
--------- ---------- -------- ---------- ---------
Balances at December 31, 1995.... 2,484,593 5,957,207 826,511 (927,470) 5,856,248
Issuance of common stock in
connection with employment
contract settlement
(unaudited)................. 5,263 50,000 -- -- 50,000
Net income (unaudited)......... -- -- -- 360,008 360,008
--------- ---------- -------- ---------- ---------
Balances at March 31, 1996
(unaudited).................... 2,489,856 $6,007,207 $ 826,511 $ (567,462) $ 6,266,256
========= ========== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 51
BOYDS WHEELS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 675,241 $ 947,628 $ 159,550 $ 360,008
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization................ 533,798 581,527 125,665 185,392
Loss (gain) on disposal of property and
equipment.................................. 2,413 (5,171) -- 8,160
Bad debt expense............................. 75,577 2,540 -- 20,000
Reserve for inventory obsolescence........... -- -- -- 20,000
Deferred income taxes........................ (230,083) 308,316 111,073 --
Increase in accounts receivable.............. (94,807) (852,199) (578,522) (100,302)
Increase in inventories...................... (801,984) (2,051,561) (841,157) (1,011,907)
Increase in prepaids and other assets........ (128,022) (147,468) (77,440) (157,217)
Increase in accounts payable................. 385,095 726,637 906,224 242,935
Increase (decrease) in accrued liabilities... 67,082 568,383 (277,296) (494,671)
Increase in income taxes payable............. -- 130,689 -- 72,832
Increase (decrease) in other long-term
liabilities................................ 29,324 56,223 32,965 (6,778)
----------- ----------- ----------- -----------
Net cash provided (used) by operating
activities............................ 513,634 265,544 (438,938) (861,548)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.............. (493,758) (1,275,564) (178,773) (442,049)
Proceeds from the sale of property and
equipment.................................... 2,000 700 -- 2,400
Deposits on leased equipment.................... (10,000) (20,000) -- --
Decrease (increase) in due to (from)
affiliates................................... 24,584 (41,024) 24,114 7,943
Payments on covenants not to compete............ -- -- -- (24,585)
Cash acquired in acquisition.................... -- -- -- 37,693
----------- ----------- ----------- -----------
Net cash used by investing activities........ (477,174) (1,335,888) (154,659) (418,598)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Decrease in book overdraft...................... (125,398) -- -- --
Decrease in revolving purchasing agreement...... (5,024) -- -- --
Increase (decrease) in due to majority
shareholder.................................. 37,168 (25,545) (20,641) --
Borrowings on revolving line of credit.......... -- 862,105 550,000 550,000
Payments on revolving line of credit............ -- (862,105) -- --
Proceeds from issuance of long-term debt........ -- 1,192,686 1,111,782 332,407
Principal repayments of long-term debt.......... (1,085,420) (2,183,609) (1,187,347) (87,207)
Proceeds from sale of common stock.............. 1,512,504 5,312,500 -- --
Cost of equity issuances........................ (225,695) (1,083,156) -- --
Proceeds from issuance of common stock
warrants..................................... -- 125 -- --
Proceeds from exercise of common stock
options...................................... -- 2,000 -- --
Redemption of Series A preferred stock.......... -- (1,250,000) -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities.... 108,135 1,965,301 453,794 795,200
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 144,595 894,957 (139,803) (484,946)
Cash and cash equivalents at beginning of
period.......................................... -- 144,595 144,595 1,039,552
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period........ $ 144,595 $ 1,039,552 $ 4,792 $ 554,606
=========== =========== =========== ===========
</TABLE>
F-6
<PAGE> 52
BOYDS WHEELS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid during the year for:
Income taxes.................................... $ 800 $ 1,600 $ 800 $ 163,200
========== ========== ========== ==========
Interest........................................ $ 686,432 $ 372,492 $ 47,998 $ 142,956
========== ========== ========== ==========
Supplemental schedule of noncash investing and
financing activities:
Equipment leases capitalized.................... $ 169,471 $ 77,578 $ 53,875 $ 40,084
Equipment financed with a contract payable...... 88,463 372,900 -- --
Equipment financed with long-term debt.......... 13,521 -- -- --
Equipment financed with equipment line of
credit....................................... -- 289,554 -- --
Interest capitalized to construction in
progress..................................... -- 15,000 -- --
Accounts payable paid by the majority
shareholder on behalf of the Company......... 74,298 -- -- --
Revolving purchasing agreement converted to
long-term debt............................... 979,641 -- -- --
Cash proceeds from sale of fixed assets retained
by the majority shareholder.................. 40,000 -- -- --
Noncash reductions of due from affiliate........ 99,219 145,198 30,605 14,542
Exchange of common stock for Series A redeemable
preferred stock.............................. 1,000 -- -- --
Accretion of Series A redeemable preferred
stock........................................ 180,371 1,068,629 313,840 --
Conversion of notes payable into common stock... 622,500 -- -- --
Costs of 1995 equity issuances not paid in
1995......................................... -- 128,939 -- --
Debt issuance costs of notes payable converted
into common stock............................ 49,852 -- -- --
Costs of 1995 equity issuances deferred in
1994......................................... -- 205,780 -- --
Deposits on leased equipment made by majority
shareholder on behalf of the Company......... 71,929 -- -- --
Common stock warrants converted to common
stock........................................ -- 200,000 -- --
Prior year deposits transferred to fixed
assets....................................... -- 70,690 -- --
Covenant not to compete liability included in
accounts payable (Note 17)................... -- 150,000 -- --
Cancellation of note payable to the former
President (Note 17).......................... -- 29,375 -- --
Common stock issued in settlement of employment
contract (Note 17)........................... -- -- -- 50,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 53
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Boyds Wheels, Inc. (the "Company") was incorporated in California in May
1988. The Company designs, manufactures and markets high quality aluminum wheels
for the specialty automotive aftermarket. In addition to its premium aluminum
wheels, the Company designs, manufactures and markets motorcycle wheels,
steering wheels for automobiles, automotive and motorcycle billet aluminum
accessories and also sells car care products under its own label. The Company's
products utilize machined aluminum materials and unique designs which the
Company believes enhance individuality of vehicle styling. The Company sells its
products domestically through a national distribution network of tire and
performance retailers, warehouse distributors and mail order outlets, and
internationally through foreign distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash And Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
acquired maturities of three months or less. Cash and cash equivalents are
carried at cost, which approximates market.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
Property And Equipment
Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets,
ranging generally from 5 to 10 years. Capital leases are recorded at the lower
of the fair market value of the leased assets or the present value of the future
minimum lease payments. The leased assets are depreciated on a straight-line
basis over their economic useful lives.
Upon sale or disposition of assets, any gain or loss is included in the
statement of income.
Normal repairs and maintenance are expensed as incurred whereas significant
improvements which materially increase values or extend useful lives are
capitalized and depreciated over the estimated useful lives of the related
assets.
Covenants Not To Compete
The covenants not to compete are stated at cost and will be amortized using
the straight-line basis over the five-year lives of the agreements (Note 17).
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax bases of assets and
liabilities using enacted rates in effect for the years in which the differences
are expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
F-8
<PAGE> 54
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair
value based method of accounting for an employee stock option. Fair value of the
stock option is determined considering factors such as the exercise price, the
expected life of the option, the current price of the underlying stock and its
volatility, expected dividends on the stock, and the risk-free interest rate for
the expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period.
A company may elect to adopt SFAS No. 123 or elect to continue accounting
for its stock option or similar equity awards using the intrinsic method, where
compensation cost is measured at the date of grant based on the excess of the
market value of the underlying stock over the exercise price. If a company
elects not to adopt SFAS No. 123, then it must provide pro forma disclosure of
net income and earnings per share, as if the fair value based method had been
applied.
SFAS No. 123 is effective for transactions entered into for fiscal years
that begin after December 15, 1995. Pro forma disclosures for entities that
elect to continue to measure compensation cost under the old method must include
the effects of all awards granted in fiscal years that begin after December 15,
1994. It is currently anticipated that the Company will continue to account for
stock-based compensation plans under the intrinsic method and the impact of SFAS
No. 123 has not yet been determined.
Revenue Recognition
Sales and related costs of goods sold are recognized when goods are shipped
to customers. Provisions are recorded for estimated sales returns and
allowances.
Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Data
The interim financial data as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results for the
interim periods.
3. INITIAL PUBLIC OFFERING
In September 1995, the Company completed an initial public offering (the
"Offering") of 850,000 shares of its common stock at $6.25 per share (the
"Offering Price") for proceeds, net of offering expenses of $1,417,875, of
$3,894,625. Of such amount, $1,250,000 was used to redeem all of the outstanding
shares of the Company's Series A Redeemable Preferred Stock (Note 10), $580,000
was used to repay outstanding indebtedness (Note 6) and approximately $862,000
was used to repay amounts outstanding under the revolving line of credit (Note
7). In addition, the following events occurred concurrent with the closing of
the Offering: (a) 681,427 warrants were converted into 283,927 shares of the
Company's common stock (Note 9); (b) $200,000 of warrants were converted to
32,000 shares of the Company's common stock (Note 6); and (c) stock options were
exercised for 2,000 shares of the Company's common stock (Note 9).
In September 1995, the underwriters of the Offering exercised their option
to purchase warrants to acquire 125,000 shares of common stock for cash proceeds
of $125 (Note 9).
F-9
<PAGE> 55
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following at December 31, 1995:
<TABLE>
<S> <C>
Raw materials............................................................ $ 921,819
Work in process.......................................................... 1,805,882
Finished goods........................................................... 915,811
---------
$3,643,512
=========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Machinery and equipment.................................................. $5,573,267
Office equipment......................................................... 262,893
Leasehold improvements................................................... 550,432
Vehicles................................................................. 133,198
Construction in progress................................................. 313,872
----------
6,833,662
Less, accumulated depreciation and amortization........................ (2,144,290)
----------
$4,689,372
==========
</TABLE>
Machinery and equipment under capital leases at December 31, 1995 is
$3,227,235 with accumulated amortization of $1,544,661. Construction in progress
at December 31, 1995 includes approximately $15,000 in capitalized interest.
6. REVOLVING PURCHASE AGREEMENT
In prior years, the Company had a revolving purchase agreement with a major
vendor. Under this agreement, the Company could purchase up to $1,000,000 of
rims at the prevailing market price. Interest accrued on outstanding balances
greater than 60 days at the rate of one percent per month and was payable
monthly.
On December 30, 1994, the Company restructured the then outstanding balance
under this agreement into a note payable of $979,641 and made an immediate
payment of $200,000. Interest accrued on the outstanding balance at a rate of
one percent per month and was paid monthly. In August 1995, a principal payment
of $200,000 was made. With the proceeds from the Offering, all remaining amounts
outstanding under this agreement, approximately $580,000, were paid in full.
In May 1992 and as amended in March 1993, the Company issued to the vendor
a warrant to purchase, at a price of $.01 per share, shares of the Company's
common stock with an aggregate fair market value of $200,000 to be determined at
the time of exercise. Concurrent with the Offering, the warrant was converted
into 32,000 shares of the Company's common stock.
F-10
<PAGE> 56
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REVOLVING CREDIT AGREEMENTS
Revolving Line Of Credit
At December 31, 1995, the Company had no outstanding balance due under a
revolving line of credit agreement with a bank. During the year ended December
31, 1995, the Company drew advances of, and repaid amounts owed on,
approximately $862,000 on the revolving line of credit.
The revolving line of credit agreement provides for maximum borrowings of
up to $2,000,000, or 80% of eligible accounts receivable plus 40% of eligible
inventory, as defined, and bears interest at 1% over the Wall Street Journal's
published prime rate (an effective rate of 9.75% at December 31, 1995), and
expires on May 1, 1996, unless renewed.
Unaudited: On April 19, 1996, the Company renewed its revolving line of
credit and the maximum borrowings were increased to $2,500,000.
Equipment Line Of Credit
At December 31, 1995, the Company had $289,554 outstanding under an
equipment line of credit agreement with a bank.
The equipment line of credit agreement provides for maximum borrowings of
up to $750,000 and bears interest at 1.75% over the Wall Street Journal's
published prime rate (an effective rate of 10.5% at December 31, 1995). The
equipment line of credit expires on May 1, 1996 and it contains a provision to
refinance all then outstanding amounts over a 60-month period, under certain
conditions.
The above credit agreements are collateralized by substantially all the
assets of the Company and require the Company to maintain certain financial
ratios.
Unaudited: On April 19, 1996, the Company refinanced the then outstanding
balance on the equipment line of credit of $599,874 into a 60-month term loan,
payable in equal monthly installments and bears interest at 1.75% over the Wall
Street Journal's published prime rate (an effective rate of 10% at April 19,
1996). Such terms have been reflected in the accompanying March 31, 1996 balance
sheet. Also on April 19, 1996, the Company renewed its equipment line of credit,
and increased the maximum borrowings to $1,000,000. This renewed line of credit
bears interest at 1.5% over the Wall Street Journal's published prime rate (an
effective rate of 9.75% at April 19, 1996).
F-11
<PAGE> 57
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Convertible notes payable, unsecured, remaining balance due June 30,
1996, and otherwise convertible into the Company's common stock at the
rate of one share per $3.50 of unpaid principal, interest payable
semiannually at 9.0%................................................... $ 25,000
Note payable to the City of Stanton, unsecured, balance due April 25,
2000, interest at 9.5% per annum....................................... 43,539
Notes payable with a finance company with various maturity dates ranging
from December 1997 to February 1999, collateralized by automobiles,
principal and interest due in monthly installments ranging from $221 to
$483 at interest rates ranging from 4.8% to 8.9% per annum............. 31,385
Capital lease obligations for equipment, due in monthly installments
ranging from $191 to $29,854 through January 1999 at interest rates
ranging from 10.5% to 15.0% per annum.................................. 1,146,243
----------
1,246,167
Less, current maturities................................................. (343,413)
----------
$ 902,754
==========
</TABLE>
The future principal payments on long-term debt are scheduled as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-----------------------------------------------------------------------
<S> <C>
1996................................................................. $ 343,413
1997................................................................. 309,411
1998................................................................. 530,242
1999................................................................. 18,556
2000................................................................. 44,545
----------
$1,246,167
==========
</TABLE>
9. COMMON STOCK AND COMMON STOCK WARRANTS
In October 1994, the Company's Board of Directors declared a 1-for-1.4151
reverse stock split on the then outstanding common stock and preferred stock.
All share and per share amounts have been adjusted to give retroactive effect to
the common and preferred shares outstanding resulting from the reverse stock
split.
In November 1994, the Company issued 432,141 units for cash of $3.50 per
unit in a private offering. Net proceeds from this private offering were
$1,286,809. The Company also converted $622,500 ($572,648, net of original debt
issue costs) of its convertible notes payable into 177,857 units.
Each of the 609,998 units issued above included one share of common stock
and one warrant to purchase one share of the Company's common stock at the
lesser of $3.50 or 58 1/3% of the share price in the event of an initial public
offering. Concurrent with the Offering, 595,713 of the above-mentioned warrants
were converted into 248,213 shares of the Company's common stock. The remaining
14,285 warrants are exercisable at their original terms through November 1997.
In November 1994, the Company issued warrants to the underwriter of the
private stock offering to purchase up to 85,714 shares of the Company's common
stock at the lesser of $3.50 or 58 1/3% of the share
F-12
<PAGE> 58
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
price in the event of an initial public offering. Concurrent with the Offering,
all 85,714 warrants were converted into 35,714 shares of the Company's common
stock.
In May 1993, the Company issued its then President an option to purchase up
to 71,429 shares of the Company's common stock at an exercise price of $1.00 per
share. The option expires in December 1999. Concurrent with the Offering,
options to acquire 2,000 shares of common stock were exercised for cash proceeds
of $2,000.
In 1993, the Company issued warrants to an unrelated party to purchase up
to 9,328 shares of the Company's common stock at an exercise price of $4.25 per
share. The warrants expire in September 1999. No warrants have been exercised
through December 31, 1995.
In September 1995, concurrent with the Offering, the Company granted
warrants to the underwriters of the Offering to purchase up to 125,000 shares of
the Company's common stock for $.001 per warrant. These warrants are exercisable
at 120% of the Company's Offering Price for a period of four years beginning one
year from the Offering. In September 1995, the underwriters purchased these
warrants for cash proceeds of $125.
10. REDEEMABLE PREFERRED STOCK
In October 1994, the Company authorized 1,000,000 shares of Series A
Redeemable Preferred Stock (the "Redeemable Preferred Stock") from its initial
authorization of 5,000,000 shares of preferred stock. Holders of the Redeemable
Preferred Stock were entitled to receive noncumulative dividends at the
Company's discretion. No dividends were declared or paid through December 31,
1995. The holders of the Redeemable Preferred Stock had the right to cast one
vote per share.
In October 1994, the Company issued 706,668 shares of Redeemable Preferred
Stock to a related party in exchange for 706,668 shares of common stock. The
difference between the consideration paid and the redemption price was accreted
by a charge to the accumulated deficit. With the proceeds from the Offering, the
Company redeemed all of the Redeemable Preferred Stock for cash of $1,250,000.
The Company also issued a warrant to purchase up to 10,000 shares of the
Company's common stock at the Offering Price to the holder of the Redeemable
Preferred Stock. This warrant expires on November 3, 1996 and has not been
exercised through December 31, 1995.
11. STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan (the "Plan"), the Company may
grant nonqualified and incentive stock options to officers, directors,
employees, and consultants up to a maximum of 250,000 shares of the Company's
common stock. The exercise price of incentive stock options must equal at least
the fair market value of the common stock on the date of grant. The term of any
option may not exceed ten years from the date of grant. A summary of the shares
under option is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
NONQUALIFIED PER SHARE
------------ ---------------
<S> <C> <C>
Year ended December 31, 1995:
Granted................................................ 247,500 $6.25 to $7.25
Exercised.............................................. --
Canceled............................................... --
------------
Balance at December 31, 1995............................. 247,500 $6.25 to $7.25
=========
Exercisable at December 31, 1995......................... 188,500 $6.25 to $7.25
=========
</TABLE>
In addition to the above, the Company issued 1,000 options outside the Plan
of which 333 options have vested and are exercisable at a price of $7.00 per
share and 667 options have been canceled as of December 31, 1995.
F-13
<PAGE> 59
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
The provision (benefit) for federal and state income taxes consists of the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1994 1995
--------- --------
<S> <C> <C>
Current:
Federal..................................................... $ 2,500 $125,115
State....................................................... 800 28,338
--------- --------
3,300 153,453
--------- --------
Deferred:
Federal..................................................... (236,623) 351,345
State....................................................... 6,540 (43,029)
--------- --------
(230,083) 308,316
--------- --------
Total............................................... $(226,783) $461,769
========= ========
</TABLE>
The tax effects of the temporary differences that give rise to the deferred
tax provision (benefit) consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1994 1995
--------- --------
<S> <C> <C>
Accrued liabilities........................................... $ (4,648) $(11,728)
Bad debts..................................................... (26,892) 30,424
Net operating loss carryforward............................... (43,095) 374,051
Property and equipment........................................ 126,555 96,032
State income taxes............................................ 272 3,041
Income tax credits............................................ 8,851 (164,938)
Change in valuation allowance................................. (291,126) --
Other......................................................... -- (18,566)
-------- --------
$(230,083) $308,316
======== ========
</TABLE>
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1994 1995
----- ----
<S> <C> <C>
Statutory regular federal income tax rate....................... 34.0% 34.0%
State income taxes, net of federal benefit...................... 1.6 6.0
State manufacturer's investment tax credit, net of federal
benefit....................................................... -- (6.7)
Change in valuation allowance................................... (90.1) --
Other........................................................... 3.9 (.5)
------
-
----
---
(50.6)% 32.8%
======= =======
</TABLE>
F-14
<PAGE> 60
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The components of the deferred tax asset and (liability) as of December 31,
1995 are as follows:
<TABLE>
<S> <C>
Accrued liabilities...................................................... $ 28,764
Bad debts................................................................ 1,572
Net operating loss carryforward.......................................... 101,979
Property and equipment................................................... (391,283)
State income taxes....................................................... (2,769)
Income tax credits....................................................... 164,938
Other.................................................................... 18,566
---------
$ (78,233)
=========
</TABLE>
The Company did not record a valuation allowance against the deferred
income tax assets at December 31, 1994 or 1995. At December 31, 1995, the
Company had net operating loss carryforwards for federal income tax reporting
purposes of approximately $300,000 which begin expiring in 2007. The utilization
of net operating loss carryforwards may be limited under the provisions of
Internal Revenue Code Section 382.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company has many noncancellable capital leases with lease terms ranging
from two to five years. The majority of the equipment leases have bargain
purchase options at the end of the lease term.
The Company leases its facilities under noncancellable operating leases.
Under these lease agreements, the Company is required to pay for insurance,
taxes, utilities and building maintenance and is subject to certain consumer
price index adjustments. The facilities leases are personally guaranteed by the
majority shareholder.
Future minimum lease payments under capital leases and noncancellable
operating leases with remaining lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------------------------------------------------------ ---------- ----------
<S> <C> <C>
1996...................................................... $ 447,166 $ 709,483
1997...................................................... 398,913 591,307
1998...................................................... 574,113 501,030
1999...................................................... 19,219 436,129
2000...................................................... 1,655 392,715
Thereafter................................................ -- 313,105
---------- ----------
1,441,066 $2,943,769
=========
Less, amount representing interest........................ (294,823)
----------
$1,146,243
=========
</TABLE>
Rent expense for the years ended December 31, 1994 and 1995 was $511,326
and $437,909, respectively.
Employment Agreement
The Company has entered into an employment agreement with its Chairman and
Chief Executive Officer which provides for a minimum annual salary of $160,000
and benefits and expires on December 31, 1999. In the event of disability, as
defined, the executive is entitled to twelve months base salary in addition to
earned base salary and benefits through the date of disability.
F-15
<PAGE> 61
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In the event of termination of the executive without cause, the Company is
liable for the remaining unpaid annual salary under the full terms of the
agreement plus a severance payment equal to 10% of the annual salary each year.
Litigation
The Company is involved in various legal matters resulting from the normal
course of business. Such legal matters, when ultimately determined, will not, in
the opinion of the management, have a material effect on the financial position
or the results of operations of the Company.
14. RELATED PARTIES
The majority shareholder of the Company is also the majority shareholder of
two other entities. The balance due to affiliate included as a current liability
in the December 31, 1995 balance sheet represents equipment lease payments due
to the affiliate.
On March 20, 1995, the Company entered into an agreement with one of the
affiliates whereby the affiliate is required to make minimum net reductions of
$25,000 each quarter until the outstanding balance has been paid in full. The
outstanding balance due from this affiliate as of December 31, 1995 was $172,684
and the affiliate has complied with the quarterly reduction requirement.
Accordingly, the outstanding amounts due from this affiliate have been
classified as an asset on the accompanying balance sheet.
The Company has entered into an option agreement with the majority
shareholder pursuant to which the Company currently has the option to purchase
all of the outstanding common stock of Hot Rods by Boyd, an affiliate of the
Company, for up to $750,000, payable in shares of the Company's common stock,
valued at its then fair market value. This option is exercisable by the Company
commencing after delivery to it of audited financial statements of Hot Rods by
Boyd for the years ending December 31, 1995 and 1996, but in no event after
September 30, 1997, unless extended pursuant to the terms of the option
agreement. Until the option is exercised, any transactions between the Company
and Hot Rods by Boyd will be reviewed and approved by the outside board members
of the Company.
15. NET INCOME PER COMMON SHARE
Net income per share is based on the reported net income, with such
reported net income reduced for the accretion of the Redeemable Preferred Stock.
The resulting amount is presented below as income applicable to common
shareholders.
Such income applicable to common shareholders in each period is divided by
the weighted average number of outstanding common shares and common equivalent
shares in accordance with Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 83. The SAB requires that common stock issued by the
Company in the twelve months immediately preceding an initial public offering
plus the number of common equivalent shares which became issuable during the
same period pursuant to the issuance of common stock options and warrants (using
the modified treasury stock method) at prices substantially less than the
Offering Price be included in the calculation of common stock and common stock
equivalents as if they were outstanding for all periods presented.
F-16
<PAGE> 62
BOYDS WHEELS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------- ---------------------------------
1994 1995 1995 1996
--------------- ---------------- --------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income and net income per share, before
accretion of Redeemable Preferred Stock........ $ 675 $ 0.40 $ 948 $ 0.48 $ 160 $ 0.09 $ 360 $0.14
Adjustment for accretion of Redeemable Preferred
Stock.......................................... (180) (0.11) (1,069) (0.55) (314) (0.18) -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) applicable to common
shareholders and net income per share.......... $ 495 $ 0.29 $ (121) $(0.07) $ (154) $(0.09) $ 360 $0.14
====== ====== ====== ====== ====== ====== ====== ======
Weighted average number of:
Common shares.................................... 1,317 1,886 1,634 2,490
Common equivalent shares......................... 384 74 63 165
------ ------ ------ ------
Weighted average common shares and common
equivalent shares.............................. 1,701 1,960 1,697 2,655
====== ====== ====== ======
</TABLE>
Primary and fully diluted per share amounts do not differ.
16. CONCENTRATION OF CREDIT RISK
The Company has cash and cash equivalent deposits of $1,013,187 at an
investment firm at December 31, 1995 which are exposed to credit loss in the
event of nonperformance; however, the Company does not anticipate
nonperformance.
The Company's customers are concentrated in the automotive industry
primarily in the western United States. Five of the Company's customers
comprised 60% and 73% of gross sales during 1994 and 1995, respectively. These
customers also comprised 55% of gross accounts receivable at December 31, 1995.
In 1994 and 1995, the Company derived approximately 26.3% and 39.3%,
respectively, of total sales from international sales, substantially all of
which was in Japan. The Company reviews a customer's credit history before
extending unsecured credit. The Company establishes allowances for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends, and other information. To reduce credit risk, the Company
generally requires a down payment on large orders. The accounting loss, should a
customer be unable to meet its obligation to the Company, would be equal to the
recorded account receivable.
17. SUBSEQUENT EVENT (UNAUDITED)
In February 1996, the Company entered into an agreement under which an
employee of the Company was released from his duties under an employment
contract. Under the agreement, the Company paid to this employee total
consideration of $275,000 consisting of $150,000 in consideration for a
five-year covenant not to compete and $125,000 for other compensation. Of such
consideration, $225,000 was paid in cash and the remaining $50,000 was paid in
shares of the Company's common stock. All other amounts due to/from the Company
and the employee pursuant to the employment contract were canceled. The above
transactions have been recognized in the December 31, 1995 financial statements.
In February 1996, the Company also finalized an Agreement for the Purchase
and Sale of Assets of Velocity Distribution Inc. (the "Velocity Agreement").
Under the Velocity Agreement, the Company assumed the assets and liabilities of
Velocity Distribution Inc. and entered into a five-year covenant not to compete
with a former employee of Velocity Distribution Inc. for a total amount of
approximately $25,000.
F-17
<PAGE> 63
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 10
Price Range for Common Stock and
Dividend Policy..................... 11
Dilution.............................. 11
Capitalization........................ 12
Selected Financial Data............... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 20
Management............................ 29
Certain Transactions.................. 34
Principal and Selling Shareholders.... 36
Description of Capital Stock.......... 38
Underwriting.......................... 42
Legal Matters......................... 43
Experts............................... 43
Additional Information................ 43
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
BOYDS WHEELS, INC.
1,000,000 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
, 1996
CRUTTENDEN ROTH
I N C O R P O R A T E D
------------------------------------------------------
------------------------------------------------------
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Underwriting Agreement (Exhibit 1 hereto) provides for indemnification
by the Underwriters of the Registrant and its officers and directors and by the
Registrant of the Underwriters for certain liabilities arising under the
Securities Act or otherwise.
The Registrant's Amended and Restated Articles of Incorporation ("Articles
of Incorporation") provides that, to the fullest extent permitted by California
law, the Registrant's directors will not be liable for monetary damages for
breach of the directors' fiduciary duty of care to the Registrant or its
shareholders. This provision in the Articles of Incorporation does not eliminate
the duty of care and in appropriate circumstances equitable remedies such as an
injunction or other forms of nonmonetary relief would remain available under
California law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Registrant, for acts or
omissions involving intentional misconduct or knowing and culpable violations of
law, for acts or omissions that a director believes to be contrary to the best
interests of the Registrant or its shareholders or that involve the absence of
good faith on the part of the director, for any transaction from which the
director derived an improper personal benefit, for acts or omissions involving a
reckless disregard for the director's duty to the Registrant or its shareholders
when the director was aware or should have been aware of a risk of serious
injury to the Registrant or its shareholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its shareholders, for improper
transactions between the director and the Registrant, for improper distributions
to shareholders and loans to directors and officers or for acts or omissions by
the director in his or her capacity as an officer of the Registrant.
The inclusion of the above provision in the Articles of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefitted the Registrant and its
shareholders. At present, there is no litigation or proceeding pending involving
a director of the Registrant as to which indemnification is being sought, nor is
the Registrant aware of any threatened litigation that may result in claims for
indemnification by any director.
The Registrant's Articles of Incorporation authorizes the Registrant to
indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary under California law. The Registrant entered into indemnification
agreements with certain of its directors and officers that require the
Registrant to indemnify such directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable.
II-1
<PAGE> 65
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 4,601
NASD Filing Fee........................................................... 1,300
Nasdaq Filing Fee......................................................... 17,500
Underwriter's Nonaccountable Expense Allowance............................ 160,000
Printing Expenses......................................................... 60,000
Legal Fees and Expenses................................................... 50,000
Accounting Fees and Expenses.............................................. 30,000
Blue Sky Filing Fees and Expenses......................................... 10,000
Warrant Agent, Transfer Agent and Registrar Fees.......................... 10,000
Miscellaneous............................................................. 31,599
--------
TOTAL........................................................... $375,000
========
</TABLE>
- ---------------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since May 17, 1993, the Registrant has sold and issued the following
unregistered securities:
1. In May 1993, the Company granted to Brad Fanshaw, the former President
and former director of the Company, options to purchase 71,429 shares of Common
Stock at an exercise price of $1.00 per share, the fair market value of the
Company's Common Stock as of the date of grant, as determined by the Board of
Directors of the Company. The issuance of these options was deemed to be exempt
from registration under the Securities Act by virtue of Section 4(2) of the
Securities Act.
2. In September 1993, the Registrant privately sold for cash $660,000
principal amount of 9% Convertible Promissory Notes due June 30, 1996 (the
"Notes") to certain accredited or sophisticated investors. The sale of the Notes
was deemed to be exempt from registration under the Securities Act by virtue of
Rule 504 promulgated under Section 3(b) of the Securities Act.
3. In connection with the September 1993 private placement of Notes, the
Registrant issued to officers of the placement agent, in consideration for their
efforts in the private placement, warrants to purchase (the "Note Placement
Agent Warrants") an aggregate of 9,328 shares of Common Stock, at a price of
$4.25 per share. The Note Placement Agent Warrants are currently exercisable and
expire in September 1999. The issuance of the Note Placement Agent Warrants was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act.
4. In November 1994, the Board of Directors of the Registrant issued
706,668 shares of Series A Redeemable Preferred Stock to Karl Kantarjian in
exchange for 706,668 shares of Common Stock issued to Mr. Kantarjian in 1988. In
consideration for exchanging his shares of Common Stock for Series A Redeemable
Preferred Stock, Mr. Kantarjian received a warrant (the "Kantarjian Warrant") to
purchase 10,000 shares of Common Stock at $6.25 per share. The Kantarjian
Warrant is currently exercisable and expires on November 3, 1996. The issuance
of Series A Redeemable Preferred Stock and the Kantarjian Warrant were deemed to
be exempt from registration under the Securities Act by virtue of Section 4(2)
of the Securities Act.
5. In November 1994, the Registrant sold to certain accredited or
sophisticated investors 609,998 "Units," each Unit consisting of one share of
the Registrant's Common Stock and one warrant to purchase one share of the
Registrant's Common Stock. Of the total Units issued, 177,857 were issued upon
conversion of $622,500 in principal amount of Notes. The Registrant received
cash for the remainder of the Units issued. The issuance of the Units was deemed
to be exempt from registration under the Securities Act by virtue of Rule 506
promulgated thereunder.
II-2
<PAGE> 66
6. In connection with the 1994 Private Placement, the Registrant issued to
officers of the placement agent warrants to purchase an aggregate of 85,714
shares of Common Stock, which effective as of the closing of the Registrant's
initial public offering, were converted into 35,714 shares of Common Stock at a
price equal to $3.50 per share. The issuance of the Unit Placement Agent
Warrants was deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) of the Securities Act.
7. On September 1995, the Registrant granted options to purchase 207,500
shares of Common Stock at an exercise price of $6.25 per share and on November,
1995, the Registrant granted options to purchase 40,000 shares of Common Stock
at an exercise price of $7.25 per share to certain key officers and employees.
In addition, options to purchase 3,000 shares of the Registrant's Common Stock
were granted to each of the Registrant's Non-Employee Directors under the
provisions of the Registrant's 1995 Stock Option Plan. The grant of all such
options was deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) of the Securities Act.
8. In connection with the departure of the Registrant's president, in
February 1996, the Registrant issued 5,263 shares of the Registrant's Common
Stock to the former president. The issuance of this common stock was deemed to
be exempt from registration under the Securities Act by virtue of Section 4(2)
of the Securities Act.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement by and among the Registrant, certain Selling
Shareholders of the Registrant and Cruttenden Roth Incorporated.
3.1** -- Articles of Incorporation as filed with the California Secretary of State on
April 27, 1988.
3.2** -- Amended and Restated Articles of Incorporation filed with the California
Secretary of State on December 12, 1991.
3.3** -- Amended and Restated Articles of Incorporation filed with the California
Secretary of State on October 13, 1994.
3.4** -- Certificate of Determination of Preferences of Series A Redeemable Preferred
Stock of Registrant filed with the California Secretary of State on November
2, 1994.
3.5** -- Agreement of Merger by and between Registrant and Boyds Ultra Violet, Inc.
filed with the California Secretary of State on November 2, 1994.
3.6** -- Bylaws of the Registrant, as amended and restated.
4.1** -- Form of Warrant held by Robert E. Fitzgerald to purchase 10,560 shares of
Common Stock and Ty Rogers to purchase 2,640 shares of Common Stock.
4.2** -- Warrant held by Karl Kantarjian to purchase 10,000 shares of Common Stock
dated as of November 3, 1994.
4.3** -- Form of 9% Convertible Promissory Note due June 30, 1996.
4.4** -- Form of Warrant issued in 1994 Private Placement held as of the date hereof by
Messrs. Gills and Fitzgerald.
4.5** -- Option to Purchase Common Stock by and between the Registrant and Brad Fanshaw
dated as of May 19, 1993.
4.6** -- 1995 Stock Option Plan.
4.7** -- Representatives' Warrant Agreement by and between the Registrant, Cruttenden
Roth Incorporated and Black & Company, Inc.
4.8* -- Form of Representative's Warrant Agreement by and between the Registrant and
Cruttenden Roth Incorporated.
5.1* -- Opinion of Rutan & Tucker, LLP.
</TABLE>
II-3
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C> <C>
10.1* -- Loan Agreement, Security Agreement and Promissory Notes each dated April 19,
1996 between the Registrant and Eldorado Bank.
10.2* -- Close End Vehicle Lease Agreement between the Registrant and Eldorado Bank
Leasing dated March 18, 1996.
10.3* -- Close End Vehicle Lease Agreement between the Registrant and Eldorado Bank
Leasing dated March 18, 1996.
10.4* -- Equipment Lease Agreement between the Registrant and Stunson Equipment Inc.
dated January 30, 1996.
10.5** -- Letter dated March 20, 1995 memorializing agreement between Registrant and Hot
Rods by Boyd concerning inter-company account balance.
10.6** -- Standard Industrial Lease between Registrant and A & P Leasing Registrant
dated April 9, 1992 (8350 Cerritos Avenue).
10.7** -- Standard Industrial Lease between Registrant and Currie Family Trust dated
July 17, 1994 (8402 Cerritos Avenue).
10.8** -- Standard Industrial Lease between Registrant and Currie Family Trust dated
October 1, 1994 (8400 Cerritos Avenue).
10.9** -- Standard Industrial/Commercial Single-Tenant Lease between Boyd and Diane
Coddington and Duane and Carole Logsdon dated June 15, 1992 (8380 Cerritos
Avenue and 10541 Ashdale Street).
10.10** -- Assignment of Real Property Lease Rights of Boyd and Diane Coddington to
Registrant dated September 29, 1994 (8380 Cerritos Avenue and 10541 Ashdale
Street), and Assignment of Equipment Lease Rights.
10.11** -- Standard Industrial/Commercial Single-Tenant Lease between Registrant and
Hopper Shop Equipment Sales dated January 11, 1995. (8250 Cerritos Avenue).
10.12** -- Letter Agreements between Registrant and Codde, Inc. to lease a tractor and
trailer, dated January 1, 1995 and May 1, 1995.
10.13** -- Equipment Lease between Registrant and Financial Federal Credit, dated March
10, 1995.
10.14** -- Equipment Lease between Registrant and Financial Federal Credit, dated March
22, 1995.
10.15** -- Textron Financial Corp. Master Lease Schedule, Master Lease Agreement and
Guaranty, dated August 14, 1992.
10.16** -- Master Lease Schedule by and between Citicorp Leasing Inc. and Registrant
dated January 23, 1995.
10.17** -- Automobile purchase agreement between Boyd Coddington and Richard Hibbard
Chevrolet, Inc., dated May 23, 1994.
10.18** -- Guaranty of Boyd and Diane Coddington and Hot Rods by Boyd to Financial
Federal Credit, dated March 10, 1995.
10.19** -- Marketing/Promotion Agreement by and among the Registrant, Boyd Coddington and
Hot Rods by Boyd, Inc.
10.20** -- Option Agreement by and among the Registrant, Boyd and Diane Coddington and
Hot Rods by Boyd, Inc.
10.21* -- Employment Agreement by and between the Registrant and Boyd Coddington.
10.22*** -- Agreement for the Purchase and Sale of Assets among the Registrant, Velocity
Distribution, Inc., Brad Fanshaw, Charlotte Fanshaw, Boyd Coddington and Diane
Coddington (Portions omitted pursuant to an application for confidential
treatment pursuant to Rule 406).
</TABLE>
II-4
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C> <C>
10.23*** -- Settlement Agreement and General Release dated February 15, 1996 (Portions
omitted pursuant to an application for confidential treatment pursuant to Rule
406).
10.24** -- Equipment Lease between Registrant and Financial Federal Credit dated July 21,
1995.
10.25* -- Standard Industrial/Commercial Single-Tenant Lease between the Registrant and
Flam Properties, Ltd. dated July 26, 1995.
10.26* -- Guaranty of Boyd Coddington to Flam Properties, Ltd. dated July 26, 1996.
10.27* -- Commercial Lease between the Registrant and Custom Pipe & Coupling Inc. dated
.
10.28* -- Standard Industrial/Commercial Multi-Tenant Lease among the Registrant, Gary
Hollander, Susan Henson, Kevin Henson Trust and Hollander Glass dated August
15, 1995.
11.1 -- Computation of Earnings Per Share (included in Note 15 to the Registrant's
Financial Statements at page F-16).
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Rutan & Tucker, LLP (included in the opinion to be filed as Exhibit
5).
24.1 -- Power of Attorney (included on page II-7).
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Incorporated by reference from the Registration Statement on Form SB-2 of
Boyds Wheels, Inc. (Registration No. 33-94064-LA).
*** Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (Commission File No. 0-26738)
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the Underwriter at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-5
<PAGE> 69
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events arising after the effective date
of this Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement; (iii) include any
material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
II-6
<PAGE> 70
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe it meets all of
the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stanton, State of California, on the 16th day of May,
1996.
BOYDS WHEELS, INC.
By: /s/ Boyd Coddington
------------------------------------
Boyd Coddington
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors
of Boyds Wheels, Inc., a California corporation, which is filing a Registration
Statement on Form SB-2 with the Securities and Exchange Commission, Washington
D.C., under the provisions of the Securities Act of 1933, as amended, hereby
constitute and appoint Boyd Coddington and Rex Ours, and each of them, their
true and lawful attorneys-in-fact and agents; with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign such Registration Statement and any or all amendments to the
Registration Statement, including a Prospectus or an amended Prospectus therein,
and all other documents in connection therewith to be filed with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all interests and purposes as they might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- --------------
<S> <C> <C>
/s/ BOYD CODDINGTON Chairman of the Board of May 16, 1996
- --------------------------------------------- Directors, and Chief Executive
Boyd Coddington Officer (Principal Executive
Officer)
/s/ REX A. OURS Secretary, Chief Financial May 16, 1996
- --------------------------------------------- Officer Principal Financial and
Rex A. Ours Accounting Officer)
/s/ CURT BARWICK Director May 16, 1996
- ---------------------------------------------
Curt Barwick
/s/ MARCUS SORENSON Director May 16, 1996
- ---------------------------------------------
Marcus Sorenson
</TABLE>
II-7
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement by and among the Registrant, certain Selling
Shareholders of the Registrant and Cruttenden Roth Incorporated.
3.1** -- Articles of Incorporation as filed with the California Secretary of State on
April 27, 1988.
3.2** -- Amended and Restated Articles of Incorporation filed with the California
Secretary of State on December 12, 1991.
3.3** -- Amended and Restated Articles of Incorporation filed with the California
Secretary of State on October 13, 1994.
3.4** -- Certificate of Determination of Preferences of Series A Redeemable Preferred
Stock of Registrant filed with the California Secretary of State on November
2, 1994.
3.5** -- Agreement of Merger by and between Registrant and Boyds Ultra Violet, Inc.
filed with the California Secretary of State on November 2, 1994.
3.6** -- Bylaws of the Registrant, as amended and restated.
4.1** -- Form of Warrant held by Robert E. Fitzgerald to purchase 10,560 shares of
Common Stock and Ty Rogers to purchase 2,640 shares of Common Stock.
4.2** -- Warrant held by Karl Kantarjian to purchase 10,000 shares of Common Stock
dated as of November 3, 1994.
4.3** -- Form of 9% Convertible Promissory Note due June 30, 1996.
4.4** -- Form of Warrant issued in 1994 Private Placement held as of the date hereof by
Messrs. Gills and Fitzgerald.
4.5** -- Option to Purchase Common Stock by and between the Registrant and Brad Fanshaw
dated as of May 19, 1993.
4.6** -- 1995 Stock Option Plan.
4.7** -- Representatives' Warrant Agreement by and between the Registrant, Cruttenden
Roth Incorporated and Black & Company, Inc.
4.8* -- Form of Representative's Warrant Agreement by and between the Registrant and
Cruttenden Roth Incorporated.
5.1* -- Opinion of Rutan & Tucker, LLP.
10.1* -- Loan Agreement, Security Agreement and Promissory Notes each dated April 19,
1996 between the Registrant and Eldorado Bank.
10.2* -- Close End Vehicle Lease Agreement between the Registrant and Eldorado Bank
Leasing dated March 18, 1996.
10.3* -- Close End Vehicle Lease Agreement between the Registrant and Eldorado Bank
Leasing dated March 18, 1996.
10.4* -- Equipment Lease Agreement between the Registrant and Stunson Equipment Inc.
dated January 30, 1996.
10.5** -- Letter dated March 20, 1995 memorializing agreement between Registrant and Hot
Rods by Boyd concerning inter-company account balance.
10.6** -- Standard Industrial Lease between Registrant and A & P Leasing Registrant
dated April 9, 1992 (8350 Cerritos Avenue).
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C> <C>
10.7** -- Standard Industrial Lease between Registrant and Currie Family Trust dated
July 17, 1994 (8402 Cerritos Avenue).
10.8** -- Standard Industrial Lease between Registrant and Currie Family Trust dated
October 1, 1994 (8400 Cerritos Avenue).
10.9** -- Standard Industrial/Commercial Single-Tenant Lease between Boyd and Diane
Coddington and Duane and Carole Logsdon dated June 15, 1992 (8380 Cerritos
Avenue and 10541 Ashdale Street).
10.10** -- Assignment of Real Property Lease Rights of Boyd and Diane Coddington to
Registrant dated September 29, 1994 (8380 Cerritos Avenue and 10541 Ashdale
Street), and Assignment of Equipment Lease Rights.
10.11** -- Standard Industrial/Commercial Single-Tenant Lease between Registrant and
Hopper Shop Equipment Sales dated January 11, 1995. (8250 Cerritos Avenue).
10.12** -- Letter Agreements between Registrant and Codde, Inc. to lease a tractor and
trailer, dated January 1, 1995 and May 1, 1995.
10.13** -- Equipment Lease between Registrant and Financial Federal Credit, dated March
10, 1995.
10.14** -- Equipment Lease between Registrant and Financial Federal Credit, dated March
22, 1995.
10.15** -- Textron Financial Corp. Master Lease Schedule, Master Lease Agreement and
Guaranty, dated August 14, 1992.
10.16** -- Master Lease Schedule by and between Citicorp Leasing Inc. and Registrant
dated January 23, 1995.
10.17** -- Automobile purchase agreement between Boyd Coddington and Richard Hibbard
Chevrolet, Inc., dated May 23, 1994.
10.18** -- Guaranty of Boyd and Diane Coddington and Hot Rods by Boyd to Financial
Federal Credit, dated March 10, 1995.
10.19** -- Marketing/Promotion Agreement by and among the Registrant, Boyd Coddington and
Hot Rods by Boyd, Inc.
10.20** -- Option Agreement by and among the Registrant, Boyd and Diane Coddington and
Hot Rods by Boyd, Inc.
10.21* -- Employment Agreement by and between the Registrant and Boyd Coddington.
10.22*** -- Agreement for the Purchase and Sale of Assets among the Registrant, Velocity
Distribution, Inc., Brad Fanshaw, Charlotte Fanshaw, Boyd Coddington and Diane
Coddington (Portions omitted pursuant to an application for confidential
treatment pursuant to Rule 406).
10.23*** -- Settlement Agreement and General Release dated February 15, 1996 (Portions
omitted pursuant to an application for confidential treatment pursuant to Rule
406).
10.24** -- Equipment Lease between Registrant and Financial Federal Credit dated July 21,
1995.
10.25* -- Standard Industrial/Commercial Single-Tenant Lease between the Registrant and
Flam Properties, Ltd. dated July 26, 1995.
10.26* -- Guaranty of Boyd Coddington to Flam Properties, Ltd. dated July 26, 1996.
10.27* -- Commercial Lease between the Registrant and Custom Pipe & Coupling Inc. dated
.
10.28* -- Standard Industrial/Commercial Multi-Tenant Lease among the Registrant, Gary
Hollander, Susan Henson, Kevin Henson Trust and Hollander Glass dated August
15, 1995.
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C> <C>
11.1 -- Computation of Earnings Per Share (included in Note 15 to the Registrant's
Financial Statements at page F-16).
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Rutan & Tucker, LLP (included in the opinion to be filed as Exhibit
5).
24.1 -- Power of Attorney (included on page II-7).
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Incorporated by reference from the Registration Statement on Form SB-2 of
Boyds Wheels, Inc. (Registration No. 33-94064-LA).
*** Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (Commission File No. 0-26738)
<PAGE> 1
EXHIBIT 1.1
UNDERWRITING AGREEMENT
PUBLIC OFFERING OF
___________ SHARES OF COMMON STOCK*
BOYDS WHEELS, INC.
June __, 1996
CRUTTENDEN ROTH INCORPORATED
As Representative of the
several Underwriters
named in Schedule I hereto
18301 Von Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
Boyds Wheels, Inc., a corporation organized under the laws of the
State of California (the "Company"), and the selling shareholders identified in
Schedule II hereto (the "Selling Shareholders") propose to issue and sell to
the several Underwriters named in Schedule I hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 7) an aggregate of __________ shares (the "Firm
Shares") of Common Stock, no par value (the "Common Stock"), of the Company, of
which 750,000 shares are to be issued and sold by the Company (the "Firm
Company Shares") and _________ shares are to be sold by the Selling
Shareholders (the "Shareholder Shares"), each Selling Shareholder selling the
amount set forth opposite such Selling Shareholder's name on Schedule II
hereto, and, in addition to the Firm Shares, for the sole purpose of covering
over-allotments in connection with the sale of the Firm Shares, the Company
proposes to grant to the Underwriters an option to purchase up to an additional
________ shares (the "Option Shares" and, together with the Firm Company
Shares, the "Company Shares") of such Common Stock. The Company also proposes
to sell to you (the "Representative"), individually and not in your capacity as
Representative of the several underwriters, five-year warrants (the
"Representative's Warrants") to purchase up to _________ shares of Common Stock
of the Company (the "Representative's Warrant Stock"), which sale will be
consummated in accordance with the terms and conditions of the Representative's
Warrant Agreement (the "Representative's Warrant Agreement") filed as an
exhibit to the Registration Statement described below. The Firm Shares and any
Option Shares purchased pursuant to this Agreement are hereinafter called the
"Shares."
This is to confirm the agreement concerning the sale and the purchase
of the Shares from the Company and the Selling Shareholders by the
Underwriters. The Company and the Selling
- ----------------
* Plus an option to purchase up to an aggregate of ________ Option Shares from
the Company to cover overallotments, if any.
<PAGE> 2
Shareholders understand that the Underwriters propose to make a public
offering of the Shares as soon as you deem advisable after the Registration
Statement (as defined below) becomes effective.
1. Representations, Warranties and Agreements of the Company.
The Company represents and warrants to, and agrees with, each Underwriter that:
(a) A registration statement on Form SB-2 (File No.
__________-LA) relating to the Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Rules and Regulations (as defined below) of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. Copies of such registration statement and any
amendments, and all forms of the related prospectuses contained therein,
previously filed by the Company with the Commission have been delivered to you
and the Company has consented to the Underwriter's use of such copies for the
purposes permitted by the Securities Act. Such registration statement,
including the prospectus, Part II and all exhibits thereto, as amended at the
time when it shall become effective, is herein referred to as the "Registration
Statement," and the prospectus included as part of the Registration Statement
on file with the Commission that discloses all the information that was omitted
from the prospectus on the effective date pursuant to Rule 430A of the Rules
and Regulations with any changes contained in any prospectus filed with the
Commission by the Company with your consent after the effective date of the
Registration Statement, is herein referred to as the "Final Prospectus." Such
amendments to such Registration Statement as may have been required prior to
the date hereof have been filed with the Commission; and the Company will file
such additional amendments to such Registration Statement and such amended
prospectuses as may hereafter be required. If the Registration Statement has
been declared effective under the Securities Act by the Commission, the Company
has prepared and will promptly file with the Commission the information omitted
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations as part of an amendment or supplement to the prospectus pursuant to
subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to the Registration Statement (including an
amended prospectus); otherwise the Company has prepared and will promptly file
an amendment to the Registration Statement (including an amended prospectus).
The prospectus included as part of the Registration Statement on the date when
the Registration Statement became effective is referred to herein as the
"Effective Prospectus"; any prospectus included in the Registration Statement
of the Company and in any amendments thereto prior to the effective date of the
Registration Statement is referred to herein as a "Pre-Effective Prospectus."
For purposes of this Agreement, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
applicable, and "affiliate" shall have the definition specified in Rule 405 of
the Rules and Regulations.
(b) No stop order or other order preventing or suspending
the use of any Pre-Effective Prospectus has been issued by the Commission nor
any "Blue Sky" or securities authority of any jurisdiction and each
Pre-Effective Prospectus, at the time of filing thereof, did not contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under
2
<PAGE> 3
which they were made, not misleading; except that the foregoing shall not apply
to statements in or omissions from any Pre-Effective Prospectus in reliance
upon, and in conformity with, written information furnished to the Company by
you, or by any Underwriter through you, or by any Selling Shareholder
specifically for use in the preparation thereof.
(c) As of the Closing Date (as defined herein), the
Registration Statement will have been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement will have
been filed as of the Closing Date or Option Closing Date (as defined herein),
as the case may be, without the Representative's approval as provided in
Section 4(a) hereof. When the Registration Statement becomes effective and at
all times subsequent thereto, the Registration Statement, any post-effective
amendment thereto and the Effective Prospectus and the Final Prospectus as
amended or supplemented shall comply in all material respects with the
requirements of the Securities Act and the Rules and Regulations. No such
document shall contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that the foregoing shall not apply to statements in, or
omissions from, any such document, in reliance upon, and in conformity with,
written information furnished to the Company by you, or by any Underwriter
through you, or by any Selling Shareholder specifically for use in the
preparation thereof. There is no contract or document required to be described
in the Registration Statement or Effective Prospectus or Final Prospectus or to
be filed as an exhibit to the Registration Statement which is not in all
material respects accurately described in the Effective Prospectus or Final
Prospectus and filed as an exhibit to the Registration Statement or Final
Prospectus, or both, as the case may be. As of the Closing Date or Option
Closing Date, as the case may be, no stop order or other order suspending the
effectiveness of the Registration Statement or preventing or suspending the use
of the Effective Prospectus or the Final Prospectus or any amendment or
supplement thereto, has been issued by the Commission nor any "Blue Sky" or
securities authority of any jurisdiction.
(d) Coopers & Lybrand L.L.P., whose report appears in the
Registration Statement, the Pre-Effective Prospectus, the Effective Prospectus
and the Final Prospectus, are independent auditors as required by the
Securities Act and the Rules and Regulations. The financial statements
(including the related schedules and notes) included in the Registration
Statement, any Pre-Effective Prospectus, the Effective Prospectus and/or the
Final Prospectus, together with the unaudited financial information of the
Company forming part of the Registration Statement, each Pre-Effective
Prospectus, the Effective Prospectus and/or the Final Prospectus present fairly
the financial condition, the results of the operations and changes in cash
flows and equity of the entities purported to be shown thereby at the dates and
for the periods indicated and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated. The selected and summary financial data included in the
Registration Statement, the Effective Prospectus, and the Final Prospectus
present fairly the information shown therein and have been compiled on a basis
substantially consistent with the financial statements presented in the
Registration Statement, the Effective Prospectus, and the Final Prospectus.
3
<PAGE> 4
(e) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Registration Statement, each Pre-Effective Prospectus, the Effective Prospectus
and Final Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the character
of the business conducted by it or the location of the properties owned or
leased by it makes such qualification necessary except where the failure to so
qualify would not have a material adverse effect on the financial condition,
results of operations, business or prospects of the Company; and the Company
holds all licenses, certificates, permits, consents, orders, approvals and
other authorizations from governmental authorities necessary for the conduct of
its business and to own or lease, as the case may be, and to operate its
properties as described in the Registration Statement, each Pre- Effective
Prospectus, the Effective Prospectus and Final Prospectus. The expiration or
revocation of any such licenses, certificates, permits, consents, orders,
approvals or other governmental authorizations would not materially affect the
operations of the Company. None of the activities or businesses of the Company
is in violation of, any law, rule, regulation or order of the United States,
any state, county, city or locality, or of any agency or body of the United
States or of any state, county, city or locality of any foreign jurisdiction
which violation might have a material adverse effect on the financial
condition, results of operations, business or prospects of the Company.
(f) The Actual and As Adjusted capitalization of the
Company as of _______, 1996, is as set forth under the caption "Capitalization"
in the Registration Statement, each Pre-Effective Prospectus, the Effective
Prospectus and Final Prospectus, and the Common Stock conforms to the
description thereof contained under the caption "Description of Capital Stock"
in the Registration Statement, each Pre- Effective Prospectus, the Effective
Prospectus and Final Prospectus; the outstanding shares of Common Stock
(including the Shareholder Shares) have been and are, and the Shares to be sold
by the Company, upon issuance and delivery and payment therefor in the manner
herein described, will be, duly authorized, validly issued, fully paid and
nonassessable and are not subject to any preemptive or similar rights. Except
as described in the Registration Statement, each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus, there are no preemptive rights or
other rights to subscribe for or to purchase, or any restriction upon the
voting or transfer of, any shares of Common Stock pursuant to the Company's
Articles of Incorporation, by-laws or other governing documents or any
agreement, contract or other instrument to which the Company is a party or by
which it may be bound. Neither the filing of the Registration Statement nor
the offering or sale of the Shares or Representative's Warrant Stock as
contemplated by this Agreement and the Representative's Warrant Agreement,
respectively, gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares of Common
Stock; and any such waivers, to the best of the Company's knowledge, were duly
and validly given. The Company has no "subsidiary" as defined in Rule 405 of
the Rules and Regulations.
(g) Except as described in or contemplated by the
Registration Statement, each Pre-Effective Prospectus, the Effective Prospectus
and Final Prospectus, (i) there has not been any material adverse change in, or
any adverse development which materially affects, the business, properties,
financial condition, results of operations or prospects of the Company,
4
<PAGE> 5
whether or not arising in the ordinary course of business, from the date as of
which information is given; (ii) the Company has not, directly or indirectly,
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or which is material in amount whether or not in
the ordinary course of business, or entered into any transactions not in the
ordinary course of business, or which is material to the business of the
Company whether or not in the ordinary course of business; (iii) to the
Company's knowledge, the agreements to which the Company is a party described
in the Registration Statement, each Pre-Effective Prospectus, the Effective
Prospectus and Final Prospectus, are valid and enforceable by the Company and
the other party or parties thereto are not in material breach or default under
any such agreement; (iv) there has not been any change in the capital stock of,
or any incurrence of long-term debt by, the Company, or any issuance or grant
of options, warrants or rights to purchase the capital stock of the Company, or
any security convertible into, exercisable for, or exchangeable for capital
stock of the Company, or any declaration or payment of any dividend or other
distribution on any class of the capital stock of the Company from the date as
of which information is given in the Registration Statement, each Pre-Effective
Prospectus, the Effective Prospectus and Final Prospectus; (v) there is
outstanding no security or other instrument which by its terms is convertible
into or exchangeable for capital stock of the Company; and (vi) there is no
commitment, plan or arrangement to change or alter the rights, preferences or
privileges of any outstanding class or series of the capital stock of the
Company.
(h) The Company is not, nor with the giving of notice or
lapse of time or both would be, in violation of or in default under, nor will
the execution or delivery of this Agreement or the Representative's Warrant
Agreement or consummation of the transactions contemplated hereby or thereby
result in a violation of, or constitute a default under, the Articles of
Incorporation, by-laws or other governing documents of the Company, or any
contract, indenture, mortgage, deed of trust, loan or credit agreement, bond,
debenture, note, lease or other agreement or instrument, to which the Company
is a party or by which it is bound, or to which any of its properties is
subject and which violation or default would have a material adverse effect on
the business of the Company as described in the Prospectus, nor will the
performance by the Company of its obligations hereunder or under the
Representative's Warrant Agreement violate any law, rule, administrative
regulation, judgment, order, writ or decree of any court, or any governmental
agency or body having jurisdiction over the Company or any of its properties,
or result in the creation or imposition of any lien, charge, claim or
encumbrance upon any property or asset of the Company and which would have a
material adverse effect on the business of the Company as described in the
Prospectus. Except for permits and similar authorizations required under the
Securities Act and the securities or "Blue Sky" laws of certain jurisdictions
and for such permits and authorizations which have been obtained, no consent,
approval, authorization or order of any court, governmental agency or body,
financial institution or other person or entity is required in connection with
the consummation of the transactions contemplated by this Agreement, including,
without limitation, the valid sale and delivery of the Shares, or the
Representative's Warrant Agreement.
(i) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and the Representative's Warrant Agreement, and this Agreement and the
Representative's Warrant Agreement have been duly authorized, executed and
delivered by the Company and constitute legal, valid and binding
5
<PAGE> 6
agreements of the Company and are enforceable against the Company in accordance
with their respective terms except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally, and except insofar as the enforceability of the
indemnification and contribution terms may be limited by applicable law or
public policy.
(j) The Company has good and marketable title in fee
simple to all items of real property and good and marketable title to all
personal property owned by it, in each case free and clear of all liens,
charges, claims, encumbrances and defects except such as are described or
referred to in the Registration Statement, each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus, security interests on certain leased
equipment and capital equipment owned by the Company, or such as do not
materially affect the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company and any real
property and buildings held under lease by the Company are held by it under
valid, existing and enforceable leases with such exceptions as are not material
and do not interfere with the use made or proposed to be made of such property
and buildings by the Company and except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally.
(k) There is no litigation or governmental proceeding to
which the Company is a party or to which any of its property is subject or
which is pending or, to the Company's knowledge, threatened against or
affecting the Company which might result in any material adverse change in the
financial condition, results of operations, business or prospects of the
Company, which is required to be disclosed in the Registration Statement, each
Pre-Effective Prospectus, the Effective Prospectus and Final Prospectus or
which could materially and adversely affect the consummation of the
transactions contemplated by this Agreement, nor are there any actions, suits
or proceedings related to environmental matters or related to discrimination on
the basis of age, sex, religion, race, or physical or mental disability, and no
labor disturbance by the employees of the Company exists or to the Company's
knowledge is imminent which might be expected to affect adversely the financial
condition, results of operations, business or prospects of the Company or which
is required to be disclosed in the Registration Statement, each Pre-Effective
Prospectus, the Effective Prospectus and Final Prospectus.
(l) The Company is not in violation of any law,
ordinance, governmental rule or regulation or court decree to which it may be
subject which violation might have a material adverse effect on the financial
condition, results of operations, business or prospects of the Company.
(m) The Company complies in all material respects with
all Environmental Laws (as defined below), except to the extent that failure to
comply with such Environmental Laws would not have a material adverse effect on
the financial condition, results of operation, business or prospects of the
Company. The Company (i) is not the subject of any pending or, to the
knowledge of the Company, threatened federal, state or local investigation
evaluating whether any remedial action by the Company is needed to respond to a
release of any Hazardous Materials (as defined below) into the environment,
resulting from the Company's business
6
<PAGE> 7
operations or ownership or possession of any of their properties or assets, or
(ii) is not in contravention of any Environmental Law that could reasonably be
expected to have a material adverse effect on the financial condition, results
of operation, business or prospects of the Company. The Company has not
received any notice or claim, nor are there pending or, to the knowledge of the
Company, threatened lawsuits against them, with respect to violations of an
Environmental Law or in connection with any release of Hazardous Materials into
the environment that, in the aggregate, if the subject of any unfavorable
decision, ruling or finding, could reasonably be expected to have a material
adverse effect on the financial condition, results of operation, business or
prospects of the Company. As used herein, "Environmental Laws" means any
federal, state, city or local law or regulation applicable to the Company's
business operations or ownership or possession of any of their properties or
assets relating to environmental matters, and "Hazardous Materials" means those
substances that are regulated by or form the basis of liability under any
Environmental Laws.
(n) The Company has not taken and shall not take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(o) The Company has timely (giving effect to permitted
extensions) filed and properly prepared all necessary federal, state, local and
foreign income, franchise and any other required tax returns and has paid all
taxes shown as due thereon, and the Company has no knowledge of any tax
deficiency which has been or might be asserted against the Company which might
materially and adversely affect the financial condition, results of operations,
business or prospects of the Company.
(p) Neither the Company nor any officers, directors,
employees or agents, nor any shareholder acting on the Company's behalf, has at
any time (i) made any contributions to any candidate for political office in
violation of law, or failed to disclose fully any contributions to any
candidate for political office in accordance with any applicable statute, rule,
regulation or ordinance requiring such disclosure, (ii) made any payment to any
local, state, federal or foreign governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or allowed by applicable law, (iii) violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended (iv) made any payment outside
the ordinary course of business to any purchasing or selling agent or person
charged with similar duties of any entity to which the Company sells or from
which the Company buys products for the purpose of influencing such agent or
person to buy products from or sell products to the Company, (v) made any other
bribe, rebate, payoff, influence payment, kickback or other unlawful payment or
(vi) engaged in any transaction, maintained any bank account or used any
corporate funds except for transactions, bank accounts and funds which have
been and are reflected in the normally maintained books and records of the
Company.
(q) Except for the several Underwriters and the
Representative there are no claims for services in the nature of, and no person
has any right to receive, a finder's fee, brokerage fee or similar fee with
respect to this offering for which the Company or any of the several
Underwriters may be responsible.
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<PAGE> 8
(r) The Company has its properties adequately insured
against loss or damage by fire and maintains such other insurance as is prudent
or customarily maintained by companies in the same or similar business and in
the same or similar locality.
(s) The Company owns or possesses adequate rights to use
all material patents, patent rights, inventions, proprietary software (whether
represented by source code, object code or in any other manner), trademarks,
service marks, trade names and copyrights (collectively, the "Intangibles")
necessary for the conduct of its business as described in the Registration
Statement, each Pre-Effective Prospectus, the Effective Prospectus and Final
Prospectus and has taken all reasonable security measures to protect the
secrecy, confidentiality and value of its trade secrets and know-how which are
valid and protectible and are not part of the public knowledge or literature.
All of the Intangibles that the Company owns or has pending, or under which it
is licensed, are in good standing and uncontested. Any of the Company's
employees and any other person who, either alone or in concert with others,
developed, invented, discovered, derived, programmed or designed these secrets,
or who have knowledge of or access to information relating to them, have been
put on notice and have entered into agreements that these secrets are
proprietary to the Company and are not to be divulged or misused. The Company
has not received any notice of infringement of or conflict with, and to the
best of its knowledge, the Company is not infringing or in conflict with,
asserted rights of others with respect to any Intangibles which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
could materially and adversely affect the financial condition, results of
operations, business or prospects of the Company. To the knowledge of the
Company, there is no infringement by others of Intangibles of the Company.
(t) The Representative's Warrants have been duly and
validly authorized by the Company and upon delivery to you in accordance with
this Agreement and the Representative's Warrant Agreement will be duly issued
and legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms except as enforceability may be limited
by bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally.
(u) The Representative's Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the Representative's
Warrants and when issued upon payment of the exercise price therefor will be
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.
(v) There are no outstanding loans or advances or
guarantees of indebtedness by the Company to or for the benefit of any
affiliate of the Company, any of the officers or directors of the Company, or
any of the members of the families of any of them, or any other business
relationships or related-party transaction of the nature described in Item 404
of Regulation S-B involving the Company and any other persons referred to in
said Item 404, which are required by the Rules and Regulations to be described
in the Registration Statement, each Pre- Effective Prospectus, the Effective
Prospectus and Final Prospectus except such that are so described.
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<PAGE> 9
(w) The Company is eligible to use Form SB-2 for the
registration of the Shares.
(x) Application for listing of the Shares on the National
Association of Securities Dealers Automated Quotations (herein called Nasdaq)
National Market has been approved, subject to notice of issuance.
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary in order to permit preparation of
financial statements in accordance with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) The Company is not an "investment company" or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
(aa) Neither (i) Boyd Coddington, the Chairman of the
Board and Chief Executive Officer of the Company, (ii) Stanley Clark, the Chief
Operating Officer of the Company, nor (iii) Rex Ours, the Chief Financial
Officer of the Company, has any actual knowledge (for purposes of this Section
1(aa), "actual knowledge" shall be defined so as to exclude any duty of
inquiry) that any of the representations, warranties or agreements of any of
the Selling Shareholders set forth in Section 2 herein is incorrect as of the
date hereof.
2. Representations, Warranties and Agreements of the Selling
Shareholders. Each Selling Shareholder, severally and not jointly, represents
and warrants to, and agrees with, each Underwriter that:
(a) Such Selling Shareholder is the sole record owner of
the Shareholder Shares to be sold by such Selling Shareholder, and at the
Closing Date such Selling Shareholder will be able to convey good and
marketable title to the Shareholder Shares free and clear of any pledge, lien,
security interest, charge, encumbrance, equity and claim of any kind
whatsoever, and, upon delivery of the Shareholder Shares and payment of the
purchase price therefor as contemplated in this Agreement, each of the
Underwriters will receive good and marketable title to the Shareholder Shares,
purchased by it from such Selling Shareholder, free and clear of any pledge,
lien, security interest, charge, encumbrance, equity and claim of any kind
whatsoever.
(b) Such Selling Shareholder, without having made any
independent investigation, (i) has no reason to believe that the
representations and warranties of the Company contained in Section 1 are not
true and correct, (ii) is familiar with the Registration Statement and (iii)
has no knowledge of any material fact, condition or information not disclosed
in the Prospectus or any supplement thereto which has adversely affected or may
adversely affect the business of the Company; and the sale of Shareholder
Shares by such Selling Shareholder
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<PAGE> 10
pursuant hereto is not prompted by any information concerning the Company which
is not set forth in the Prospectus or any supplement thereto.
(c) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to stabilize or manipulate or
which has constituted, or which might reasonably be expected to cause or result
in, stabilization or manipulation of, under the Exchange Act, the Rules or
Regulations or otherwise, the price of any security of the Company to
facilitate the sale or resale of the Shares.
(d) Such Selling Shareholder has full right, power and
authority to enter into this Agreement, the Custody Agreement (as defined
below) and power-of-attorney (the "Power-of-Attorney") and to sell, transfer
and deliver the Shareholder Shares pursuant to this Agreement, and this
Agreement and the Power-of-Attorney have been duly authorized, executed and
delivered by such Selling Shareholder.
(e) Certificates in negotiable form for the Shareholder
Shares to be sold by such Selling Shareholder pursuant to the terms of this
Agreement have been placed in custody under a Custody Agreement duly
authorized, executed and delivered by such Selling Shareholder, in the form
heretofore furnished to you (the "Custody Agreement"), with U.S. Stock Transfer
as Custodian (the "Custodian"); the Common Stock represented by the
certificates so held in custody for each Selling Shareholder are subject to the
interests hereunder of the Underwriters, the Company and the other Selling
Shareholders, the arrangements for custody and delivery of such certificates
made by such Selling Shareholder hereunder and under the Custody Agreement, are
not subject to termination by any acts of such Selling Shareholder, or by
operation of law, whether by the death or incapacity of such Selling
Shareholder or the occurrence of any other event; and if any such death,
incapacity or any other such event shall occur before the delivery of such
Common Stock hereunder, certificates for the Common Stock will be delivered by
the Custodian in accordance with the terms and conditions of this Agreement and
the Custody Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have received notice
of such death, incapacity or other event.
(f) There is no action, suit, investigation or proceeding
before or by any government, governmental instrumentality or court, domestic or
foreign, or otherwise now pending or, to the knowledge of such Selling
Shareholder, threatened to which such Selling Shareholder is or would be a
party or of which the property of such Selling Shareholder is or may be
subject, that (i) seeks to restrain, enjoin, prevent the consummation of or
otherwise challenge the sale of Shares by such Selling Shareholder or any of
the other transactions contemplated hereby, or (ii) questions the legality or
validity of any such transactions or seeks to recover damages or obtain other
relief in connection with any such transactions.
(g) No consent, approval, authorization or order of any
court or governmental agency or body is required for the execution and delivery
by such Selling Shareholder of the Custody Agreement or the Power-of-Attorney,
the execution and delivery by or on behalf of such Selling Shareholder of this
Agreement and the consummation by such Selling Shareholder of the transactions
contemplated herein, including the valid sale and delivery of the Shareholder
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<PAGE> 11
Shares, except such as may have been obtained under the Securities Act and such
as may be required under the "Blue Sky" laws of any jurisdiction in connection
with the purchase and distribution of the Common Stock by the Underwriters and
such other approvals as have been obtained.
(h) Neither the sale of the Shareholder Shares being sold
by such Selling Shareholder nor the consummation of any other of the
transactions herein contemplated by such Selling Shareholder or the fulfillment
of the terms hereof by such Selling Shareholder will conflict with, result in a
breach of, or constitute a default under the terms of any contract, indenture,
mortgage, deed of trust, loan or credit agreement, bond, debenture, note, lease
or other agreement or instrument to which such Selling Shareholder is a party
or bound, or any decree, judgment, order or regulation applicable to such
Selling Shareholder or its properties of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction over
such Selling Shareholder or its properties.
(i) In respect of any statements in or omissions from the
Registration Statement or the Prospectus or any supplement thereto made in
reliance upon and in conformity with information furnished in writing to the
Company by any Selling Shareholder specifically for use in connection with the
preparation thereof, such Selling Shareholder hereby makes the same
representations and warranties to each Underwriter as the Company makes to such
Underwriter under Subsection 1(c).
(j) No such Selling Shareholder nor any of his or her
affiliates directly or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section (q) of the Bylaws of
the National Association of Securities Dealers, Inc. (the "NASD")), any member
firm of the NASD.
(k) Such Selling Shareholder has not relied upon any
representation by the Underwriters with respect to any tax consequences
(federal, state or local) of the transactions contemplated hereby, or
otherwise. Such Selling Shareholder acknowledges that any tax liability that
might arise with respect to the Shareholder Shares to be sold by such Selling
Shareholder shall be solely the responsibility of such Selling Shareholder.
3. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell the Company Firm Shares to the several
Underwriters and each Selling Shareholder, severally and not jointly, agrees to
sell to the several Underwriters the number of Shareholder Shares set forth
opposite such Selling Shareholder's name in Schedule II hereto, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
each of the Selling Shareholders, at a purchase price of $________ per share,
the respective number of Firm Shares set forth opposite their names on Schedule
I hereto (subject to adjustment as provided in Section 7 hereof).
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<PAGE> 12
(b) Subject to the terms and conditions and in reliance
upon the representations and warranties and agreements set forth herein, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to ________ Option Shares, at the same purchase
price per share as the Underwriters shall pay for the Firm Shares. Said option
may be exercised only to cover over- allotments in the sale of the Firm Shares
by the Underwriters. Said option may be exercised in whole or in part at any
time (but not more than once) on or before the 45th day after the date of the
Effective Prospectus upon written or telegraphic notice by the Underwriters to
the Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option and the settlement date, which shall not
be earlier than the Closing Date (as defined below). Delivery of certificates
for the Option Shares by the Company and payment therefor shall be made as
provided in Section 3(c) hereof. The number of Option Shares to be purchased by
each Underwriter shall be the same percentage of the total number of Option
Shares to be purchased by the several Underwriters as such Underwriter is
purchasing of the Firm Shares, subject in each case to such adjustments as the
Underwriters in their absolute discretion shall make to eliminate any
fractional shares.
(c) Delivery of definitive certificates for the Firm
Shares and the Option Shares (if the option provided for in Section 3(b) hereof
shall have been exercised on or before the second business day prior to the
Closing Date) shall be made against payment of the purchase price therefor by
the several Underwriters by checks drawn in next-day funds, payable to the
order of each of the Company and the Custodian for the Selling Shareholders
(and each of the Company and the Selling Shareholders agrees not to deposit or
permit the deposit of any such check in the bank on which drawn until the day
following the date of the delivery of any such check to the Company and the
Custodian for the Selling Shareholders) at the offices of Rutan & Tucker, 611
Anton Boulevard, Suite 1400 Costa Mesa, California 92626 (or at such other
place as may be agreed upon between you and the Company) at 7:00 a.m.
California time, on the third full business day following the date of this
Agreement or at such other time and date not later than seven full business
days thereafter as you and the Company may determine, such time and date of
payment and delivery being herein called the "Closing Date." The certificates
for the Shares so to be delivered will be made available to you at such office
or at such other location as you may reasonably request for checking at least
two full business days prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least three full
business days prior to the Closing Date.
It is understood that each Underwriter has authorized you,
individually and not as Representative of the several Underwriters, to accept
delivery and receipt of, for its account, the Shares that it has agreed to
purchase, and each Underwriter has further authorized you (but not obligated
you) to make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the Closing Date or Option Closing Date, as the case may be, for the Shares to
be purchased by such Underwriter or Underwriters. Any such payment by you shall
not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder or under any other underwriting arrangement relating to
the Shares, including, without limitation, the Agreement Among Underwriters.
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<PAGE> 13
If the option provided for in Section 3(b) hereof is exercised
after the second business day prior to the Closing Date, the Company will
deliver to the Underwriters, at Irvine, California, on the date specified by
the Underwriters (which shall be no earlier than the second business day and no
later than the third business day after the exercise of said option),
certificates for the Option Shares in such names and denominations as the
Underwriters shall have requested against payment of the purchase price thereof
by certified or official bank check or checks drawn in next-day funds, payable
to the Company. If settlement for the Option Shares occurs after the Closing
Date, the Company will deliver to the Underwriters on the settlement date for
the Option Shares (such date and time of delivery and payment for the Option
Shares being herein called the "Option Closing Date" and, together with the
Closing Date, the "Closing Dates"), and the obligation of the Underwriters to
purchase the Option Shares shall be conditioned on receipt of, supplemental
opinions, certificates and letters confirming as of such date the opinions,
certificates and letters delivered on the Closing Date pursuant to Section 5
hereof.
Each Selling Shareholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
the Common Stock to be purchased by them from such Selling Shareholder and the
respective Underwriters will pay any additional stock transfer taxes involved
in further transfers.
4. Covenants. The Company covenants and agrees with each
Underwriter that:
(a) The Company shall use its best efforts to cause the
Registration Statement to become effective and, if the procedure in Rule 430A
of the Rules and Regulations is utilized, to comply with the provisions of, and
make all requisite filings with the Commission pursuant to, Rule 430A of the
Rules and Regulations and to notify you promptly (in writing, if requested) of
all such filings. The Company shall notify you promptly of the receipt of any
comments from the Commission and any request by the Commission for any
amendment of or supplement to the Registration Statement or the Effective
Prospectus or the Final Prospectus or for additional information; the Company
shall prepare and file with the Commission, promptly upon your request, any
amendments of or supplements to the Registration Statement or the Effective
Prospectus or the Final Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Shares; and the Company
shall not file any amendment of or supplement to the Registration Statement or
the Effective Prospectus or the Final Prospectus (including any post-effective
amendment), which is not approved by you after reasonable notice thereof, such
approval not to be unreasonably withheld or delayed. The Company shall advise
you promptly of the issuance by the Commission or any State or other regulatory
body of any stop order or other order suspending the effectiveness of the
Registration Statement, suspending or preventing the use of any Pre-Effective
Prospectus, Effective Prospectus or Final Prospectus or suspending the
qualification of the Shares for offering or sale in any jurisdiction, or of the
institution of any proceedings for any such purpose; and the Company shall use
its best efforts to prevent the issuance of any stop order or other such order
and, should a stop order or other such order be issued, to obtain as soon as
possible the lifting thereof.
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<PAGE> 14
(b) If the Company has elected to rely upon Rule 430A, it
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus.
(c) The Company shall furnish to the Underwriters, from
time to time and without charge, a reasonable number of copies of the
Registration Statement and of each amendment and supplement thereto, of which
one of each such Registration Statement and each amendment and supplement
thereto for the Representative and one for counsel to the Underwriters shall be
originally signed and shall include exhibits. During the period in which a
prospectus is required to be delivered under the Securities Act and the Rules
and Regulations, the Company shall furnish to each Underwriter, from time to
time and without charge, such number of copies of the Pre-Effective Prospectus,
Effective Prospectus and Final Prospectus as such Underwriter may reasonably
request and the Company hereby consents to the use of such copies for purposes
permitted by the Securities Act.
(d) Within the time during which a Final Prospectus
relating to the Shares is required to be delivered under the Securities Act,
the Company shall comply with all requirements imposed upon it by the
Securities Act, as now and hereafter amended, and by the Rules and Regulations,
as from time to time in force, so far as is necessary to permit the continuance
of sales of or dealings in the Shares as contemplated by the provisions hereof
and the Final Prospectus. If during such period any event occurs or condition
exists as a result of which in the opinion of counsel for the Underwriters or
counsel for the Company, the Final Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances then existing, not misleading, or if during such period it is
necessary in the opinion of counsel for the Underwriters or counsel for the
Company, to amend the Registration Statement or supplement the Final Prospectus
to comply with the Securities Act, the Company shall promptly notify you and
shall amend the Registration Statement or supplement the Final Prospectus (at
the expense of the Company), subject to Section 4(a), so as to correct such
statement or omission or effect such compliance, provided that the Company
shall determine the final terms of any such amendment or supplement only after
considering such changes in any such documents as the Underwriters may
reasonably request.
(e) The Company shall take or cause to be taken all
necessary actions and furnish to whomever you may direct such information as
may be required in qualifying the Shares for sale under the laws of such
jurisdictions which you shall designate and to continue such qualifications in
effect for as long as may be necessary for the distribution of the Shares;
except that in no event shall the Company be obligated in connection therewith
to qualify as a foreign corporation. The Company will file such statements and
reports as may be required by the laws of each jurisdiction in which the Shares
have been qualified as above provided.
(f) The Company shall make generally available to its
security holders, in the manner contemplated by Rule 158(b) under the
Securities Act, as soon as practicable but in any event not later than 45 days
after the end of its fiscal quarter in which the first anniversary date of the
effective date of the Registration Statement occurs, an earnings statement
satisfying the
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<PAGE> 15
requirements of Section 11(a) of the Securities Act covering a period of at
least twelve (12) consecutive months beginning after the effective date of the
Registration Statement.
(g) For a period of twelve (12) months following the
Closing Date, the Company will not, without your prior written consent, (i)
purchase any shares of Common Stock or equity securities of the Company or (ii)
offer, issue, sell, transfer or otherwise dispose of, for value or otherwise,
directly or indirectly, any shares of Common Stock or other equity securities
of the Company except (A) the Shares and the Representative's Warrants, (B)
pursuant to the exercise of options or warrants of the Company outstanding
immediately prior to the Closing Date, as described in the Effective Prospectus
and Final Prospectus, (C) up to a total of 250,000 shares of Common Stock upon
the exercise or grant of options currently outstanding or authorized pursuant
to the Company's existing employee benefit plans, as described in the Effective
Prospectus and Final Prospectus, or (D) in connection with a merger of another
corporation into, or an acquisition of all or substantially all of the assets
or stock of another entity by, the Company where the Company or a subsidiary is
the surviving entity. In addition to the foregoing, for a period of 180 days
following the Closing Date, the Company will not, without your prior written
consent, file any registration statement under the Securities Act on Form S-8
with respect to any shares of the Company's Common Stock.
(h) The Company shall apply the net proceeds of the sale
of the Shares as set forth under the caption "Use of Proceeds" in the Final
Prospectus.
(i) The Company shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the
Securities Act.
(j) The Company will furnish to you as early as
practicable prior to the Closing Date and Option Closing Date, as the case may
be, but not less than two full business days prior thereto, a copy of its
latest available unaudited interim financial statements that have been read by
the Company's independent certified public accountants, as stated in their
letters to be furnished pursuant to Section 5(h).
(k) The Company will comply with all provisions of all
undertakings contained in the Registration Statement;
(l) The Company shall pay or cause to be paid (A) all
expenses (including any capital duties, stamp duties and stock transfer taxes)
incurred in connection with the delivery to the several Underwriters of the
Shares, (B) all fees and expenses (including, without limitation, fees and
expenses of the Company's accountants and counsel) in connection with the
preparation, printing, filing, delivery and shipping of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), each Pre-Effective Prospectus, the Effective Prospectus and
the Final Prospectus as amended or supplemented, and the printing, delivery and
shipping of this Agreement and other underwriting documents, including
Underwriters' Questionnaires, Underwriters' Powers of Attorney, Blue Sky
Memoranda, Agreements Among Underwriters and Selected Dealer Agreements and any
letters transmitting the offering material to Underwriters or selling group
members (including costs of mailing and
15
<PAGE> 16
shipment) and the cost of furnishing copies thereof to the Underwriters, (C)
all legal fees (not to exceed $25,000), filing fees and fees and disbursements
of counsel to the Underwriters incurred in connection with the qualification of
the Shares under state securities laws as provided hereof and in the review of
the offering by the NASD, (D) the filing fee of the NASD, (E) any applicable
listing fees, including the fee for listing the Shares for quotation on the
Nasdaq National Market, (F) the cost of printing certificates representing the
Shares, (G) the cost and charges of any transfer agent or registrar, (H) the
costs of preparing, printing and distributing bound volumes for the
Representative and their counsel, and (I) all other costs and expenses not
specifically set forth above which are incident to the performance of its
obligations hereunder which are not otherwise provided for in this section. In
addition, the Company will also pay to Cruttenden Roth Incorporated,
individually and not in your capacity as Representative, a non-accountable
expense allowance equal to two percent (2%) of the initial public offering
price of the Shares (including Shares purchased pursuant to the option granted
pursuant to Section 3(b)). If the sale of the Shares provided for herein is not
consummated by reason of acts of the Company pursuant to Section 8(a) hereof
which prevent this Agreement from becoming effective, or by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder is not fulfilled, the Company shall pay for
all reasonable accountable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with the
investigation, preparing to market and marketing the Shares or in contemplation
of performing their obligations hereunder up to a maximum of $75,000, all "Blue
Sky" filing fees and expenses, and legal fees up to a maximum of $25,000,
incurred in qualifying the Shares under State Securities or "Blue Sky" laws,
and in the review of the offering by the NASD, and all expenses incurred by the
Company including printing expenses and its accounting and legal fees. If this
agreement is terminated for any of the events specified in clauses (ii) through
(v), inclusive, of Section 8(b) or if the sale of the Shares provided for
herein is not consummated for any reason other than by reason of any failure,
refusal or inability on the part of the Company to perform any agreement on its
part to be performed or because any other condition of the Underwriters'
obligations hereunder is not fulfilled, the Company shall (i) pay the several
Underwriters for all reasonable accountable out-of-pocket expenses (including
fees and disbursements of counsel) incurred by the Underwriters in connection
with the investigation, preparing to market and marketing the Shares or in
contemplation of performing their obligations hereunder up to a maximum of
$25,000, (ii) pay all "Blue Sky" filing fees and expenses, including legal fees
(not to exceed $25,000) incurred in qualifying the Shares under State
Securities or "Blue Sky" laws and in the review of the offering by the NASD,
and (iii) pay all expenses incurred by the Company including printing expenses
and its accounting and legal fees. You acknowledge that $25,000 has already
been paid to you by the Company to be applied against such non-accountable
expense allowance or such reasonable out-of-pocket expenses if the sale of
Shares is not consummated as provided in the preceding sentences, as the case
may be. You agree that any portion of such $25,000 that is not necessary to pay
the Underwriters for their reasonable out-of-pocket expenses actually incurred
if the sale of Shares is not consummated for any reason shall be returned to
the Company. The Company shall not in any event be liable to any of the
Underwriters for loss of anticipated profits from the transactions covered by
this Agreement.
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<PAGE> 17
(m) The Company, at its expense, will furnish to its
shareholders an annual report (including financial statements prepared in
accordance with generally accepted accounting principles audited by independent
certified public accountants), and, as soon as practicable after the end of
each of the first three quarters of each fiscal year, a statement of operations
of the Company for such quarter (which may be in summary form), all in
reasonable detail, and during the five year period after the date hereof, at
its expense, will furnish you, with copies for each of the several
Underwriters, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any subsidiaries as at the end of such fiscal
year, together with statements of income or operations, shareholders' equity
and changes in cash flows of the Company and any consolidated subsidiaries, and
of any non-consolidated significant subsidiary, for such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report
thereon of independent certified public accountants; (ii) as soon as they are
available, a copy of all reports (financial or other) mailed to security
holders; (iii) as soon as they are available, a copy of all reports and
financial statements furnished to or filed with the Commission; and (iv) such
other information as you may from time to time reasonably request. In addition,
during such five-year period the Company will furnish you, with copies for each
of the several Underwriters, every material press release and every material
news item or article in respect of the Company or its affairs that is released
or prepared by the Company.
(n) If the Company has an active subsidiary or
subsidiaries, the financial statements provided for in Section 4.(m) will be on
a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
shareholders generally. Separate financial statements shall be furnished for
all subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
[(o) At or before the Closing Date, you shall receive from
each of the Company's officers, directors, and Selling Shareholders
("Insiders") a written agreement (i) not to offer, sell, transfer or otherwise
dispose of, directly or indirectly, any shares of Common Stock or other equity
securities of the Company now owned or hereafter acquired by such person, for a
period of six months (except for Boyd and Diane Coddington, for whom such
period shall be twelve months) from the date on which the Registration
Statement becomes effective (the "Lock-up Period"), without your prior written
consent (which consent shall not be unreasonably withheld); provided, however,
that they may make private dispositions or gifts of such securities if such
securities constitute "restricted securities," within the meaning of Rule 144
of the Rules and Regulations, in the hands of the acquiring persons, and if the
acquiring persons agree in writing to be bound by the foregoing restrictions on
transfer and that Boyd Coddington shall be permitted to sell no more than
15,000 shares of Common Stock per quarter beginning six months after the
Effective Date and through the end of the Lock-up Period; and (ii) giving you
the right of first opportunity during the Lock-up Period to be the sole broker
dealer to effect any sales made under Rule 144 of the Rules and Regulations by
such Insiders, provided your commissions are competitive with other major
brokerage firms. For a period of four years following the Lock-up Period, the
Company will use its best efforts to notify you of any sales made by such
Insiders under Rule 144 of the Rules and Regulations or any similar provision
of or under the Securities Act enacted after the date hereof.]
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<PAGE> 18
(p) The Company shall continue to maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(q) The Company shall comply with all registration,
filing and reporting requirements of the Exchange Act which may from time to
time be applicable to the Company.
(r) The Company shall make all filings required,
including registration under the Exchange Act, to maintain the inclusion of the
Common Stock on the Nasdaq National Market. The Company shall not delist its
Common Stock from Nasdaq without the prior approval of the Representative,
unless required by Nasdaq to do so.
(s) The Company will file timely with the Commission and
the NASD, if required, a report on Form 10-C in accordance with the Rules and
Regulations of the Commission under the Exchange Act.
(t) The Company shall use its best efforts to be included
in Standard & Poor's Corporations Designation Manual and/or Moody's Investors
Services, Inc. Over-the-Counter Industrial Manual for at least five years
following the Closing Date.
(u) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(v) If any time during the 25-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Final Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the substance of,
and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication or
event.
(w) The Company shall retain for a period of one (1) year
following the Closing Date, a financial public relations firm acceptable to the
Representative.
(x) Prior to the Closing Date and during the period for
which a prospectus is required to be delivered pursuant to the Rules and
Regulations under the Securities Act, the Company shall not issue any press
release or other publicity about the Company without the prior approval of the
Representative and counsel to the Underwriters.
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<PAGE> 19
(y) If the principal shareholders, officers, or directors
of the Company are required by the "Blue Sky" or securities authority of any
jurisdiction selected by you pursuant to Section 4(e) to escrow or agree to
restrict the sale of any security of the Company owned by them for the Company
to qualify or register the Firm Shares or the Option Shares for sale under the
"Blue Sky" or securities laws of any such jurisdiction, the Company shall use
its best efforts to cause each such person to escrow or restrict the sale of
such security on the terms and conditions and in the form specified by the
securities administrator of such jurisdiction.
5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy, as of the date
hereof and on each Closing Date and Option Closing Date, as if made on the
dates thereof, of the representations and warranties of the Company and the
Selling Shareholders contained herein, to the performance by the Company and
the Selling Shareholders of their respective obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made; at each
Closing Date, no stop order or other order suspending the effectiveness of the
Registration Statement or any amendment or supplement thereto shall have been
issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Final
Prospectus or otherwise) shall have been disclosed to you and complied with to
the reasonable satisfaction of you and your counsel.
(b) No Underwriter shall have advised the Company that
the Registration Statement or Effective Prospectus or Final Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact which, in
your opinion, is material, or omits to state a fact which, in your opinion, is
material and is required to be stated therein or is necessary to make the
statements therein not misleading.
(c) On or prior to each Closing Date, you shall have
received from Stradling, Yocca, Carlson & Rauth, counsel for the Underwriters,
such opinion or opinions with respect to the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you reasonably may require and such counsel
shall have received such papers and information as they request to enable them
to pass upon such matters. In rendering such opinion, such counsel may rely
upon the opinion to be delivered to the Underwriter by the counsel for the
Company pursuant to Section 5(d) herein.
(d) On each Closing Date and each Option Closing Date
there shall have been furnished to you the opinion (addressed to the
Underwriters) of Rutan & Tucker, counsel for the Company, dated as of such
Closing Date or Option Closing Date and in form and substance satisfactory to
counsel for the Underwriters and stating that it may be relied upon by counsel
for the Underwriters in giving their opinion, to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its organization, with full
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<PAGE> 20
corporate power and authority to own, lease, license or use its properties and
conduct its business as described in the Registration Statement and Final
Prospectus, and is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which the ownership or leasing of
its properties makes such qualification necessary.
(ii) The authorized, issued and outstanding
capital stock of the Company as of _______, 1996 is as set forth under the
caption "Capitalization" in the Final Prospectus and there have been no changes
in the authorized and outstanding capital stock of the Company since such date.
The Common Stock of the Company conforms to the description thereof contained
in the Final Prospectus. The outstanding shares of Common Stock (including the
Shareholder Shares) have been and are, and the Shares to be issued and sold by
the Company, upon issuance and delivery and payment therefor in the manner
herein described will be, duly authorized, validly issued, fully paid and
nonassessable. Except as described in the Final Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, or any restriction
upon the voting or transfer of, any shares of Common Stock pursuant to the
Company's Articles of Incorporation, by-laws, or any material agreement,
contract or other instrument to which the Company is a party or by which it is
bound reviewed by such counsel and known to be material to the Company; neither
the filing of the Registration Statement nor the offering or sale of the Shares
or Representative's Warrant Stock as contemplated by this Agreement and the
Representative's Warrant Agreement, respectively, gives rise to any rights
under any material agreement, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock;
and such waivers, to such counsel's knowledge, were duly and validly given. To
such counsel's knowledge, the Company has no subsidiaries and does not
otherwise have any ownership interest in any corporation, partnership or other
entity.
(iii) The execution or delivery of this Agreement
or the Representative's Warrant Agreement or consummation of the transactions
contemplated hereby or thereby will not result in a violation of, or constitute
a default under, the Articles of Incorporation or by-laws of the Company or any
material agreement, nor will the performance by the Company of its obligations
hereunder or under the Representative's Warrant Agreement violate any existing
California or federal law, rule, or administrative regulation, or to such
firm's knowledge under any judgment, order, writ or decree of any court or any
governmental agency or body having jurisdiction over the Company or its
properties, or result in the creation or imposition of any lien, charge, claim
or encumbrance upon any property or asset of the Company under any material
agreement, where such violation, default or lien would have a material adverse
effect on the financial condition, results of operations, business or prospects
of the Company. Except for permits and similar authorizations required under
the Securities Act, the securities or "Blue Sky" laws of certain jurisdictions
and from the NASD and for such permits and authorizations which have been
obtained, no consent, approval, authorization or order of any governmental
agency or body is required under federal or California law in connection with
the consummation of the transactions contemplated by this Agreement, including,
without limitation, the valid sale and delivery of the Shares, or the
Representative's Warrant Agreement.
(iv) The descriptions in the Registration
Statement, the Effective Prospectus and the Final Prospectus of the statutes,
regulations, legal or governmental
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<PAGE> 21
proceedings, contracts and other documents therein described, to the extent
that such descriptions constitute summaries of matters of law, documents or
proceedings, or legal conclusions, have been reviewed by such counsel and
fairly present the information disclosed therein in all material respects.
(v) The Registration Statement and all
post-effective amendments thereto have become effective under the Securities
Act and, to such counsel's knowledge, no stop order or other order suspending
the effectiveness of the Registration Statement or preventing or suspending the
use of any Pre-Effective Prospectus, the Effective Prospectus, the Final
Prospectus or any amendment or supplement thereto has been issued and to such
counsel's knowledge no proceedings for that purpose have been instituted or are
pending before or contemplated by the Commission or any "Blue Sky" or
securities authority of any jurisdiction and all filings required by Rule 424
and Rule 430A of the Rules and Regulations have been made within the required
time period; the Registration Statement, each Pre-Effective Prospectus, the
Effective Prospectus and the Final Prospectus and any amendment or supplement
thereto, as of their respective effective dates, comply as to form in all
material respects with the requirements of the Securities Act and the Rules and
Regulations (except that counsel need express no opinion on the financial
statements or other financial or statistical data or supporting schedules
data); in addition, we advise you that we have participated in conferences with
officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and your representative, at
which the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although we are not passing upon, and do not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus and have
not made any independent check or verification thereof, during the course of
such participation, no facts came to our attention that caused us to believe
that the Registration Statement, at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, as of its date, contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; it being understood that we express no belief or
opinion with respect to the financial statements, schedules and other
financial, accounting and statistical data included in the Registration
Statement or the Prospectus or in any supporting schedules.
(vi) To such counsel's knowledge, all descriptions
in each Pre-Effective Prospectus, the Effective Prospectus and the Final
Prospectus of contracts and other documents and trademarks, and the statements
under the captions "Dividend Policy," "Management," "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale," to the
extent that they constitute matters of law or legal conclusions, are accurate
in all material respects and fairly present the information set forth therein;
and such counsel does not know of any contracts or documents of a character
required to be summarized or described in each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus or required to be filed as exhibits
to the Registration Statement which are not so summarized, described or filed,
nor does such counsel know of any pending or threatened litigation or any
governmental action, suit or proceeding, statute or regulation required to be
described in the Final Prospectus which is not so described.
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<PAGE> 22
(vii) The Company has the corporate power to enter
into and perform its obligations under this Agreement and the Representative's
Warrant Agreement and each of this Agreement and the Representative's Warrant
Agreement has been duly authorized, executed and delivered by the Company and
constitutes the valid and binding agreement of the Company and is enforceable
against the Company in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by Federal or state
securities laws or equitable principles, and except as enforceability may be
limited by bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally.
(viii) The Representative's Warrant Stock has been
duly authorized and reserved for issuance and, when issued and delivered in
accordance with the terms of the Representative's Warrant Agreement, will be
duly and validly issued, fully paid and nonassessable.
(ix) The Company is not an "investment company" or
a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
In rendering such opinion, such counsel may
rely upon certificates of any officer of the Company or of government officials
as to matters of fact of which the maker of such certificate has knowledge
provided that counsel rendering such opinion shall furnish the Representative
with copies of any such statements or certificates and state in their opinion
that they have no reason not to rely upon any such statements or certificates.
In addition, we advise you that we have
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants for the Company,
and your representative, at which the contents of the Registration Statement
and the Prospectus and related matters were discussed and, although we are not
passing upon, and do not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus and have not made any independent check or
verification thereof, during the course of such participation, no facts came to
our attention that caused us to believe that the Registration Statement, at the
time it became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, as of its
date, contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; it being understood
that we express no belief or opinion with respect to the financial statements,
schedules and other financial, accounting and statistical data included in the
Registration Statement or the Prospectus or in any supporting schedules.
(e) On the Closing Date with respect to the Selling
Shareholders, there shall have been furnished to you the opinion (addressed to
the Underwriters) of Rutan & Tucker, as counsel to the Selling Shareholders,
dated as of such Closing Date and in form and substance satisfactory to counsel
for the Underwriters and stating that it may be relied upon by counsel for the
Underwriters in giving their opinion, to the effect that:
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<PAGE> 23
(i) Each of this Agreement, the Custody Agreement
and the Powers-of-Attorney has been duly authorized (as to Selling
Shareholders that are not natural persons) and delivered by or on
behalf of each of the Selling Shareholders and each is valid and
binding on each of the Selling Shareholders, enforceable against each
Selling Shareholder in accordance with its terms except insofar as
indemnification and contribution provisions may be limited by Federal
or state securities laws or equitable principles, and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights
generally.
(ii) To the best of such counsel's knowledge, upon
completion and registration with the transfer agent of the sale of
such Shareholder Shares pursuant to this Agreement, each of the
Underwriters will be the registered owner of the Shareholder Shares
purchased by it from such Selling Shareholder, and, assuming the
several Underwriters purchased the Shareholder Shares in good faith
and without prior notice of any adverse claim, the Underwriters will
have acquired the Shareholder Shares free and clear of all adverse
claims; and the Selling Shareholder has the full right and power (A)
to enter into this Agreement, the Custody Agreement and the
Powers-of-Attorney, and (B) to sell, transfer and deliver the
Shareholder Shares to be sold by the Selling Shareholder under this
Agreement.
(iii) No consent, approval, authorization or order
of any court or governmental agency or body is required under
California or federal law for the valid sale and delivery of such
Shareholder Shares or for the consummation by any Selling Shareholder
of the transactions contemplated herein, except such as may have been
obtained under the Securities Act and such as may be required under
the "Blue Sky" laws of any jurisdiction in connection with the
purchase and distribution of the Common Stock by the Underwriters and
such other approvals (specified in such opinion) as have been
obtained.
(iv) To the best of such counsel's knowledge,
neither the execution or delivery of this Agreement by any Selling
Shareholder nor the sale of the Shareholder Shares being sold by any
Selling Shareholder or the consummation of any other of the
transactions herein contemplated by any Selling Shareholder or the
fulfillment of the terms hereof by any Selling Shareholder will
conflict with, result in a breach of, or constitute a default under
the terms of any contract, indenture, mortgage, deed of trust, loan or
credit agreement, bond, debenture, note, lease or other agreement or
instrument set forth as an exhibit to the Registration Statement or
pursuant to which any Selling Shareholder acquired the Shareholder
Shares to be sold by such Selling Shareholder and to which any Selling
Shareholder is a party or bound.
In rendering such opinion, such counsel may
rely upon certificates of any officer of the Company, government officials or
other persons as to matters of fact of which the maker of such certificate has
knowledge provided that counsel rendering such opinion shall furnish the
Representative with copies of any such statements or certificates and state in
their opinion that they have no reason not to rely upon any such statements or
certificates.
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<PAGE> 24
(f) There shall have been furnished to you on the Closing
Date and on the Option Closing Date, if any, a certificate, dated such Closing
Date and addressed to you, signed by the President and by the Chief Financial
Officer of the Company to the effect that: (i) the representations and
warranties of the Company in this Agreement are true and correct, as if made at
and as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date; (ii) no stop order or other order
suspending the effectiveness of the Registration Statement or preventing or
suspending the use of any Pre-Effective Prospectus, the Effective Prospectus or
Final Prospectus or any amendment or supplement thereto has been issued by the
Commission or any "Blue Sky" or securities authority of any jurisdiction, and
no proceedings for that purpose has been initiated or threatened; (iii) all
filings required by Rule 424 and Rule 430A of the Rules and Regulations have
been made; (iv) the signers of said certificate have carefully examined the
Registration Statement and the Effective Prospectus and the Final Prospectus,
and any amendments or supplements thereto, and such documents contain all
statements and information required to be included therein, and do not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; (v) there has been no material adverse change in the general
affairs, business key personnel, earnings, capitalization, financial position
or net worth of the Company since the effective date of the Registration
Statement; and (vi) since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amendment or
supplement to the Registration Statement or the Effective Prospectus and the
Final Prospectus which has not been so set forth.
(g) Since the effective date of the Registration
Statement, the Company shall not have sustained any loss by fire, flood,
accident or other calamity, nor shall have become a party to or the subject of
any litigation, nor shall there have been a change in the general affairs,
business, key personnel, earnings, capitalization, financial position or net
worth of the Company, whether or not arising in the ordinary course of
business, which loss, litigation or change is so material and adverse to the
Company that, in your judgment, shall render it inadvisable to proceed with the
delivery of the Shares.
(h) On the date of this Agreement and on each Closing
Date you shall have received a letter of Coopers & Lybrand L.L.P., dated such
date and each Closing Date, respectively, addressed to you as Representative,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Effective Prospectus and Final Prospectus.
In addition, you shall have received from Coopers &
Lybrand L.L.P., a letter addressed to the Company and made available to you for
the use of the Underwriters stating that their review of the Company's system
of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of December 31, 1994, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
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<PAGE> 25
(i) You shall be satisfied that, and you shall have
received a certificate, dated the Closing Date, from the attorney for each
Selling Shareholder to the effect that, as of the Closing Date they have not
been informed that:
(i) The representations and warranties made by
such Selling Shareholder herein are not true or correct in any material respect
on the Closing Date; or
(ii) Such Selling Shareholder has not complied
with any obligation or satisfied any condition which is required to be
performed or satisfied on his or its part at or prior to the Closing Date.
(j) At or prior to the Closing Date, the Representative's
Warrant Agreement shall have been entered into by the Company and you, and the
Representative's Warrants shall have been issued and sold to you pursuant
thereto.
(k) At or prior to the Closing Date, you shall have
received the written agreements described in Section 4(n) hereof.
(l) All proceedings taken in connection with the
issuance, sale, transfer and delivery of the Shares shall be satisfactory in
form and substance to you and to counsel to the Underwriters, and you shall
have been furnished such additional documents and certificates as you may
reasonably request.
(m) You shall have been furnished evidence in usual
written or telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in subsection 4(e) above.
(n) Prior to the Closing Date, the Shares shall have been
duly authorized for trading on the Nasdaq National Market upon official notice
of issuance.
(o) The NASD, upon review of the terms of the public
offering of the Shares, shall not have objected to your participation in such
offering.
All such opinions, certificates, letters and
documents shall be in compliance with the provisions hereof only if they are
reasonably satisfactory in form and substance to you and to counsel for the
Underwriters. Any certificate or document signed by any officer of the Company
and delivered to you or counsel for the Underwriters shall be deemed a
representation and warranty by the Company hereunder to the Underwriters as to
the statements made therein. Each of the Company and the Selling Shareholders
shall furnish you with such number of conformed copies of such opinions,
certificates, letters and other documents as you shall reasonably request. If
any of the conditions specified in this Section 5 shall not have been fulfilled
when and as required by this Agreement, this Agreement and all obligations of
the Underwriters hereunder may be cancelled at, or at any time prior to, each
Closing Date, by you. Any such cancellation shall be without liability of the
Underwriters to the Company. Notice of such cancellation shall be given to the
Company in writing, or by telegraph or telephone and confirmed in writing.
25
<PAGE> 26
6. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless the Underwriters, any member of
the selling group, and each of such entities' officers, directors, partners,
employees, agents, and counsel, and each person, if any, who controls any one
of the Underwriters or selling group members within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act (each an
"Indemnified Underwriter") against any and all loss, claim, damage, expense or
liability, joint or several, to which such Indemnified Underwriter may become
subject, under the Securities Act or otherwise, insofar as such loss, claim,
damage, expense or liability (or action in respect thereof) arises out of or is
based upon: (i) the inaccuracy of any of the representations or warranties made
by the Company in Section 1 hereof or otherwise; (ii) any untrue statement or
alleged untrue statement of a material fact contained (A) in the Registration
Statement, any Pre-Effective Prospectus, the Effective Prospectus or the Final
Prospectus or any amendment or supplement thereto, or (B) in any application or
other document or communication (in this Section 6, collectively called an
"Application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company in any jurisdiction in
order to qualify the Shares under the "Blue Sky" or securities laws thereof or
filed with the Commission or any securities exchange or national market system,
such as the Nasdaq National Market; (iii) the omission or alleged omission to
state, in the Registration Statement, any Pre-Effective Prospectus, the
Effective Prospectus or Final Prospectus or any amendment or supplement thereto
or in any Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (iv) any breach of
any representation, warranty, covenant or agreement of the Company contained in
this Agreement; and shall pay each Indemnified Underwriter for any and all
costs and expenses, including reasonable attorneys' fees, as and when incurred
by such Indemnified Underwriter in connection with investigating or defending
against or appearing as a third-party witness in connection with any
litigation, commenced or threatened, and any and all amounts paid in settlement
of any claim or litigation of any such loss, claim, damage, liability or action
whatsoever, notwithstanding the possibility that payments for such expenses
might later be held to be improper; except that the Company shall not be liable
in any such case to the extent, but only to the extent, that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with written information furnished to the Company
through you by or on behalf of any Underwriter specifically for use in the
preparation of the Registration Statement, any Pre-Effective Prospectus, the
Effective Prospectus or Final Prospectus or any amendment or supplement
thereto, or any Application, nor shall the Company be liable to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission in
any Pre-Effective Prospectus which is corrected in the Final Prospectus if a
sufficient number of copies of such Final Prospectus were provided to the party
seeking indemnification and such party failed to send or deliver a copy and
such Final Prospectus to the person asserting any such loss, claim, damage or
liability at or prior to the written confirmation of the sale of such shares to
such person, if such delivery was required by law. In addition to its other
obligations under this Section 6(a), the Company agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, or any
26
<PAGE> 27
inaccuracy in the representations and warranties of the Company herein or the
failure to perform its obligations hereunder, it will pay each Indemnified
Underwriter on a monthly basis for all costs and expenses, including reasonable
attorneys' fees, incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to indemnify hereunder or to pay each Indemnified
Underwriter for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim payment is so held to have been improper, each
Indemnified Underwriter shall promptly return it to the Company, together with
interest compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America NT&SA, San Francisco, California (the
"Prime Rate"). Any such interim payment which is not made to an Indemnified
Underwriter within 30 days of a request for payment, shall bear interest at the
Prime Rate from the date of such request. The foregoing agreement to indemnify
shall be in addition to any liability which the Company may otherwise have,
including liabilities arising under this Agreement.
(b) Each Selling Shareholder severally and not jointly
agrees to indemnify and hold harmless the Company, each of its directors, each
of its officers who signs the Registration Statement, each Indemnified
Underwriter and each person who controls the Company within the meaning of the
Securities Act or otherwise and each other Selling Shareholder to the same
extent as the foregoing indemnity from the Company to each Indemnified
Underwriter, but only with reference to Applications executed by or on behalf
of such Selling Shareholder or written information furnished to the Company by
or on behalf of such Selling Shareholder specifically for use in preparation of
the documents referred to in the foregoing indemnity or for any breach of any
representation, warranty, covenant or agreement of such Selling Shareholder
contained in this Agreement. This indemnity agreement shall be in addition to
any liability which any Selling Shareholder may otherwise have, including
liabilities arising under this Agreement.
(c) Each Underwriter severally, but not jointly, shall
indemnify and hold harmless the Company, each director of the Company, each
officer of the Company who has signed the Registration Statement and any person
who controls the Company within the meaning of Section 15 of the Securities Act
against any loss, claim, damage or liability to which the Company may become
subject, under the Securities Act or otherwise, insofar as such loss, claim,
damage or liability (or action in respect thereof) arises out of or is based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained (A) in the Registration Statement, any Pre-Effective Prospectus, the
Effective Prospectus or Final Prospectus or any amendment or supplement
thereto, or (B) in any Application, or (ii) the omission or alleged omission to
state in the Registration Statement, any Pre-Effective Prospectus, the
Effective Prospectus or Final Prospectus or any amendment or supplement thereto
or in any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading; except that such
indemnification shall be available in each such case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company through you by or on behalf of such
Underwriter specifically for use in the preparation thereof; and shall pay the
Company for any and all costs and expenses,
27
<PAGE> 28
including reasonable attorney's fees, as and when incurred by it in connection
with investigating or defending against or appearing as a third-party witness
in connection with any such loss, claim, damage, liability or action. Each
Underwriter severally, but not jointly, shall indemnify and hold harmless each
Selling Shareholder to the same extent and subject to the same limitations as
the foregoing indemnity from each Underwriter to the Company. This indemnity
agreement shall be in addition to any liability which any Underwriter may
otherwise have. The Company and each Selling Shareholder acknowledge that the
statements set forth in the last paragraph of the cover page (insofar as such
information relates to the Underwriters) the paragraph on page 2 with respect
to stabilization and under the heading "Underwriting" in any Pre- Effective
Prospectus, Effective Prospectus and/or the Final Prospectus constitute the
only information furnished in writing by or on behalf of the several
Underwriters, for inclusion in any such Prospectus, and you, as the
Underwriters, confirm that such statements are correct.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b), or (c) above of notice of any claim or the commencement of
any action, the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the claim or the commencement of that action;
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under such subsection for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; except that you shall
have the right to employ counsel to represent you and those other Indemnified
Underwriters who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Indemnified Underwriters
against the Company under such subsection if, in your reasonable judgment, you
conclude that you are entitled to defenses other than those to which the
indemnifying party is entitled and that representation of both you and the
indemnifying party by one firm would be inappropriate due to actual or
potential differing interests and in that event the fees and expenses of such
separate counsel shall be paid by the Company, provided that in such case the
indemnifying party shall not be liable for the expenses of more than one
separate counsel. The Company and the Selling Shareholders each agree promptly
to notify the Underwriters and the Representative of the commencement of any
litigation or proceedings against the Company or any Selling Shareholder,
respectively, or against any of their officers or directors in connection with
the sale of the Shares, the Registration Statement, any Pre-Effective
Prospectus, the Effective Prospectus or the Final Prospectus, or any amendment
or supplement thereto, or any Application. To the extent any provision of this
Section 6 entitles the indemnified party to reimbursement of fees and expenses,
such obligations may be billed by the indemnified party monthly and shall be
due and payable within ten (10) days of the date thereof.
(e) If the indemnification provided for in this Section 6
is unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then
28
<PAGE> 29
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in subsection (a), (b) or (c) above (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company or the
Selling Shareholders, as the case may be, on the one hand, and the Underwriters
on the other, from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company or the
Selling Shareholders, as the case may be, on the one hand, and the Underwriters
on the other, in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company or the
Selling Shareholders, as the case may be, on the one hand, and the Underwriters
on the other, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Shares (before deducting expenses) received
by the Company and the Selling Shareholders, taken together, bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Final Prospectus.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company, the Selling Shareholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company, the Selling
Shareholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (e) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
subsection (e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities referred to in the first sentence
of this subsection (e) shall be deemed to include any and all costs and
expenses, including reasonable attorneys' fees, incurred by such indemnified
party in connection with investigating or defending against any action or claim
which is the subject of this subsection (e). Notwithstanding the provisions of
this subsection (e), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint. Each party entitled to contribution agrees that
upon the service of a summons or other initial legal process upon it in any
action instituted against it in respect of which contribution may be sought, it
shall promptly give written notice of such service to the party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom contribution
may be sought from any obligation it may have hereunder or otherwise. For
purposes of this Section 6(e), each person, if any, who controls an Underwriter
within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as such Underwriter, and each director of the Company,
each officer of the Company who signed the
29
<PAGE> 30
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act, shall have the same
rights to contribution as the Company. This Section 6(e) is intended to
supersede any right to contribution under the Securities Act, the Exchange Act,
or otherwise.
(f) The maximum aggregate liability to all persons, other
than the Custodian and Attorneys-in-Fact, of each Selling Shareholder under
this Agreement and the Custody Agreement shall be equal to the net proceeds
(before deducting expenses) to such Selling Shareholder from the sale of Common
Stock in the transactions contemplated by the Registration Statement.
(g) It is agreed that any controversy arising out of the
operation of the interim payment arrangements set forth in Sections 6(a) or
6(b) hereof, including the amounts of any requested payments and method of
determining such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of the New
York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of
the National Association of Securities Dealers, Inc. Any such arbitration shall
be commenced by service of a written demand for arbitration or written notice
of intention to arbitrate, therein electing the arbitration tribunal. In the
event the party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party responding to
said demand or notice is authorized to do so. Such an arbitration shall be
limited to the operation of the interim payment provisions contained in
Sections 6(a) or 6(b) hereof and shall not resolve the ultimate propriety or
enforceability of the obligation to indemnify or pay expenses which is created
by the provisions of such Sections 6(a) or 6(b) hereof.
7. Substitution of Underwriters. If any Underwriter defaults in
its obligation to purchase the number of Shares which it has agreed to purchase
under this Agreement, the non-defaulting Underwriters shall be obligated to
purchase (in the respective proportions which the number of Shares set forth
opposite the name of each non-defaulting Underwriter in Schedule I hereto bears
to the total number of Shares set forth opposite the names of all the
non-defaulting Underwriters in Schedule I hereto) the Shares which the
defaulting Underwriter agreed but failed to purchase; except that the
non-defaulting Underwriters shall not be obligated to purchase any of the
Shares if the total number of Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase exceeds 9.09% of the total number of
Shares, and any non-defaulting Underwriter shall not be obligated to purchase
more than 110% of the number of Shares set forth opposite its name in Schedule
I hereto plus the total number of Option Shares, purchasable by it pursuant to
the terms of Section 3(b) provided, further, that the non- defaulting
Underwriters shall not be obligated to purchase any Shares if such additional
purchase would cause the Underwriter to be in violation of the net capital rule
of the Commission or other applicable law. If the foregoing maximums are
exceeded, (i) the non-defaulting Underwriters, and any other underwriters
satisfactory to you who so agree, shall have the right, but shall not be
obligated, to purchase (in such proportions as may be agreed upon among them)
all the Shares which the defaulting Underwriter agreed but failed to purchase.
If the non-defaulting Underwriters or the other underwriters satisfactory to
you do not elect to purchase the Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter or the Company
30
<PAGE> 31
except for the payment of expenses to be borne by the Company and the
Underwriters as provided in Section 4(k) and the indemnity and contribution
agreements of the Company and the Underwriters contained in Section 6 hereof.
Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have for damages caused by its default. If
the other Underwriters satisfactory to you are obligated or agree to purchase
the Shares of a defaulting Underwriter, either you or the Company may postpone
the Closing Date for up to seven full Business Days in order to effect any
changes that may be necessary in the Registration Statement, the Effective
Prospectus or the Final Prospectus or in any other document or agreement, and
to file promptly any amendments or any supplements to the Registration
Statement or the Effective Prospectus or the Final Prospectus which in your
opinion may thereby be made necessary. As used herein, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 7.
8. Effective Date and Termination.
(a) This Agreement shall become effective at whichever of
the following times shall first occur: (i) at 8:00 A.M., Los Angeles time, on
the first full Business Day following the date upon which the Registration
Statement becomes effective, or (ii) the time after the Registration Statement
becomes effective as you, in your discretion, shall first release the Shares
for sale to the public. For purposes of this Section 8, the Shares shall be
deemed to have been released for sale to the public upon release by you for
publication of a newspaper advertisement relating to the Shares or upon release
by you of communications offering the Shares for sale to securities dealers,
whichever shall first occur. Until this Agreement is effective, it may be
terminated by the Company by giving notice as hereinafter provided to you or by
you by giving notice as hereinafter provided to the Company, except that the
provisions of Section 4(k) and Section 6 shall at all times be effective.
(b) Until the Closing Date, this Agreement may be
terminated by you by giving notice as hereinafter provided to the Company, if
(i) the Company shall have failed, refused or been unable, at or prior to the
Closing Date, to perform any agreement on its part to be performed hereunder;
(ii) any other condition of the obligations of the Underwriters hereunder is
not fulfilled; (iii) if there has been, since the date as of which the
information is given in the Final Prospectus, any material adverse change, or
any development involving a prospective material adverse change, in the
financial condition, results of operation, business or prospects of the
Company; (iv) trading in the Shares has been suspended by the Commission or
trading in securities generally on either the New York Stock Exchange, American
Stock Exchange or Nasdaq shall have been suspended or minimum or maximum prices
shall have been established on or maximum ranges for prices for securities have
been required by such exchange or Nasdaq by the Commission or by such exchange
or other regulatory body or governmental authority having jurisdiction; or (v)
a general banking moratorium shall have been declared by Federal or California
authorities; or (vi) if there has occurred any material adverse change in the
financial markets in the United States or internationally or any outbreak of
hostilities or escalation of existing hostilities or other calamity or crisis
that, in your reasonable judgment, is material and adverse. Any termination of
this Agreement pursuant to this Section 8 shall be
31
<PAGE> 32
without liability on the part of the Company or any Underwriter, except as
otherwise provided in Sections 4(k) and 6 hereof.
Any notice referred to above may be given at the address
specified in Section 10 hereof in writing or by telegraph or telephone, and if
by telegraph or telephone, shall be immediately confirmed in writing.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The indemnity and contribution agreements contained in
Section 6 and the representations, warranties and agreements of the Company and
the Selling Shareholders in Sections 1, 2 and 4 shall survive the delivery of
the Shares to the Underwriters hereunder and shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of any indemnified party.
10. Notices. Except as otherwise provided in this Agreement, (a)
whenever notice is required by the provisions of this Agreement to be given to
the Company or the Selling Shareholders, such notice shall be in writing (and
may be telecopied if confirmed by letter) addressed to the Company at 8380
Cerritos Avenue, Stanton, California 90680, telecopier number (714) 220-6458,
Attention: President; and (b) whenever notice is required by the provisions of
this Agreement to be given to the several Underwriters, such notice shall be in
writing addressed to the Underwriters in care of Cruttenden Roth Incorporated,
18301 Von Karman, Suite 100, Irvine, California 92715, telecopier number (714)
852-9603, Attention: President.
11. Information Furnished by Underwriters. The statements set
forth the in the last paragraph on the cover page, the paragraph on page 2 with
respect to stabilization, and under the caption "Underwriting" in any
Pre-Effective Prospectus and in the Effective Prospectus and the Final
Prospectus, constitute the written information furnished by or on behalf of any
Underwriter referred to in paragraph (b) and (c) of Section 1 hereof and in
paragraph (c) of Section 6 hereof.
12. Parties. This Agreement is made solely for the benefit of the
several Underwriters, the Company, any officer, director or controlling person
referred to in Section 6 hereof, the Selling Shareholders and their respective
successors and assigns, and no other person shall acquire or have any right by
virtue of this Agreement. The term "successors and assigns," as used in this
Agreement, shall not include any purchaser of any of the Shares from any of the
Underwriters merely by reason of such purchase.
13. Definition of "Business Day." The purposes of this Agreement,
"Business Day" means any day other than Saturday, Sunday, a federal holiday or
a day on which the New York Stock Exchange is closed.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
giving effect to the choice of law or conflict of laws principles thereof.
32
<PAGE> 33
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement. Please confirm, by
signing and returning to us counterparts of this Agreement, that you are acting
on behalf of yourselves and the several Underwriters and that the foregoing
correctly sets forth the Agreement among the Company and the several
Underwriters.
Very truly yours,
BOYDS WHEELS, INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
THE SELLING SHAREHOLDERS AND THE
OVER-ALLOTMENT SELLING SHAREHOLDERS
By:
-----------------------------------
Attorney-in-Fact
Confirmed and accepted as of
the date first above mentioned:
CRUTTENDEN ROTH INCORPORATED
as Representative of the
several Underwriters named
in Schedule I hereto
By:
---------------------------
Name:
----------------------
Title:
---------------------
33
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter to be Purchased
- ----------- ---------------
<S> <C>
Cruttenden Roth Incorporated
- ----------------------------------------------
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
34
<PAGE> 35
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Firm Shares
Selling Shareholders to be Sold
-------------------- -----------
<S> <C>
Total 400,000
=======
</TABLE>
35
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2
(File No. 33- ) of our report, dated March 14, 1996 on our audits of the
financial statements of Boyds Wheels, Inc. We also consent to the references to
our firm under the captions "Selected Financial Data" and "Experts."
COOPERS & LYBRAND L.L.P.
Newport Beach, California
May 17, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 554,606
<SECURITIES> 0
<RECEIVABLES> 1,399,083
<ALLOWANCES> 23,630
<INVENTORY> 4,667,007
<CURRENT-ASSETS> 7,607,578
<PP&E> 6,833,662
<DEPRECIATION> 2,144,290
<TOTAL-ASSETS> 12,862,184
<CURRENT-LIABILITIES> 4,961,698
<BONDS> 1,634,230
0
0
<COMMON> 6,007,207
<OTHER-SE> 259,049
<TOTAL-LIABILITY-AND-EQUITY> 12,862,184
<SALES> 5,334,074
<TOTAL-REVENUES> 5,337,074
<CGS> 3,976,019
<TOTAL-COSTS> 3,976,019
<OTHER-EXPENSES> 694,142
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> 47,873
<INCOME-PRETAX> 596,040
<INCOME-TAX> 236,032
<INCOME-CONTINUING> 596,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 360,008
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
