Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2/A Pre-Effective Amendment to Registration of 84 518K
Securities by a Small-Business Issuer
2: EX-1.1 Exhibit 1.1 Representative's Warrant 12 47K
3: EX-1.2 Exhibit 1.2 Underwriting Agreement 38 179K
4: EX-10.28 Exhibit 10.28 Endorsement Agrmt With Glen Day 12 50K
5: EX-10.33 Exhibit 10.33 Form of Incentive Stock Option Agrmt 8 33K
6: EX-10.34 Exhibit 10.34 Form of Non-Qual. Stock Option Agrmt 8 32K
7: EX-10.37 Exhibit 10.37 Consulting Agreement 4 22K
8: EX-10.38 Exhibit 10.38 Form for Outside Directors 7 31K
9: EX-10.39 Exhibit 10.39 Termination Agrmt With Daniel Snider 1 9K
10: EX-10.40 Exhibit 10.40 Wrnt Agrmt, Co. & Amer Stock Tfr 19 79K
11: EX-23.1 Exhibit 23.1 Consent of Pricewaterhouse 1 7K
12: EX-99.1 Exhibit 99.1 - Consent of Daniel Snider 1 7K
13: EX-99.2 Exhibit 99.2 - Consent of Kim Haskell 1 8K
SB-2/A — Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1998
REGISTRATION NO. 333-58631
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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OUTLOOK SPORTS TECHNOLOGY, INC.
(Name of Small Business Issuer in its Charter)
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DELAWARE 3949 65-0648808
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification Number)
Code Number)
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4400 NORTH FEDERAL HIGHWAY, SUITE 410
BOCA RATON, FLORIDA 33431
(561) 750-7528
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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JIM DODRILL
PRESIDENT
4400 NORTH FEDERAL HIGHWAY, SUITE 410
BOCA RATON, FLORIDA 33431
(561) 750-7528
(Address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES OF ALL COMMUNICATIONS TO:
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PETER ROSENBLUM, ESQ. ROBERT E. ALTENBACH, ESQ.
DAVE BROADWIN, ESQ. Kutak Rock
Foley, Hoag & Eliot LLP 225 Peachtree Street, N.E.
One Post Office Square Atlanta, Georgia 30303-1731
Boston, Massachusetts 02109 (404) 222-4600
(617) 832-1000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this 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: /X/
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE (1) REGISTRATION FEE
Class A Common Stock, $.01 par value (2)......... 2,875,000 $7.00 $20,125,000 --
Redeemable Class A Common Stock Purchase Warrants
(3)............................................ 2,952,500 $0.125 $369,063 --
Class A Common Stock issuable upon exercise of
Redeemable Class A Common Stock Purchase
Warrants....................................... 2,952,500 $8.05 $23,767,625 --
Representative's Warrant......................... 250,000 $0.01 $2,500 --
Class A Common Stock issuable upon exercise of
Representative's Warrant....................... 250,000 $8.40 $2,100,000 --
Total............................................ 9,280,000 $46,364,188 $13,677 (4)
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(2) Includes 375,000 shares of Class A Common Stock subject to the Underwriters'
over-allotment option.
(3) Includes 150,000 Warrants subject to the Underwriters' over-allotment
option, 50,000 Warrants issuable upon exercise of the Representative's
Warrant and 1,752,500 warrants registered in the concurrent registration.
(4) Includes a filing fee of $10,546 paid in connection with the initial filing
of this Registration Statement on July 7, 1998.
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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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 , 1998
PROSPECTUS
OUTLOOK SPORTS TECHNOLOGY, INC.
2,500,000 SHARES OF CLASS A COMMON STOCK AND
1,000,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
Outlook Sports Technology, Inc., a Delaware corporation (the "Company"),
hereby offers 2,500,000 shares of Class A Common Stock, par value $0.01 per
share (the "Class A Common Stock"), and 1,000,000 Redeemable Class A Common
Stock Purchase Warrants (the "Warrants"). The shares of Class A Common Stock and
the Warrants offered hereby (sometimes hereinafter collectively referred to as
the "Securities") may be purchased separately. It is currently estimated that
the initial offering price per share of the Class A Common Stock will be between
$6.00 and $8.00 and that the initial offering price per Warrant will be $.125.
Each Warrant is transferable and exercisable immediately upon issuance and
entitles the holder thereof to purchase one share of Class A Common Stock at a
price per share of 115% of the initial public offering price of the Class A
Common Stock, for a period of three years. The Warrants are redeemable by the
Company at a redemption price of $.125 per Warrant, at any time, upon 30 days
prior written notice to the holders thereof, if the average closing price of the
Class A Common Stock equals or exceeds 120% of the initial public offering price
per share of Class A Common Stock for 10 consecutive trading days ending on the
date prior to the date of the notice of redemption. Concurrently herewith the
Company is registering for resale (i) 275,000 shares of Class A Common Stock
(the "Selling Stockholder Shares") held by six existing Stockholders (the
"Selling Stockholders") and (ii) 1,752,500 Warrants (the "Selling Warrantholder
Warrants") held by 44 existing Warrantholders (the "Selling Warrantholders" and
collectively with the Selling Stockholders the "Selling Security-holders"). The
Selling Warrantholders have agreed, subject to certain conditions, not to sell
any Selling Warrantholder Warrants for a period of one year following the
effective date of this Offering. Thereafter the Selling Warrantholder Warrants
may be sold without any lock-up restrictions. The Selling Stockholders have
granted the Underwriters an option, exercisable within 45 days of the date
hereof, to purchase up to 275,000 shares of Class A Common Stock solely to cover
over-allotments, if any. The Company will not receive any of the proceeds of the
sales of the Selling Warrantholder Warrants or the Selling Stockholders Shares.
See "Description of Securities."
Prior to this offering (the "Offering") there has been no public market for
the Class A Common Stock or Warrants and there can be no assurance that any such
market will develop. The initial public offering price of the shares of Class A
Common Stock, the Warrants and the exercise price and other terms of the
Warrants have been determined by negotiations between the Company and Argent
Securities, Inc., as representative of the Underwriters (the "Representative").
See Underwriting. The Company has applied to include the Class A Common Stock
and the Warrants for listing on the NASDAQ Stock Market's SmallCap Market under
the symbols TGRA and TGRAW, respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED UNDER THE
CAPTION "RISK FACTORS" WHICH APPEAR BEGINNING ON PAGE 10 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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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY(2) SECURITY-HOLDERS(3)
Per Share of Class A Common Stock... $ $
Per Warrant......................... $ $
Total (3)..................... $ $
(1) Does not reflect additional compensation to be received by Argent
Securities, Inc. (the "Representative") in the form of: (i) a non-
accountable expense allowance equal to 3% of the gross proceeds of this
Offering or $ ($ if the Underwriter's over allotment option
described in footnote 3 is exercised in full), and (ii) an option to
purchase up to 250,000 shares of Class A Common Stock and 50,000 Warrants at
120% of the initial public offering price (the "Representative's Warrants"),
exercisable for a period of four years, commencing one year after the
effective date of the Registration Statement of which this Prospectus is a
part. The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at approximately $ , including the Representative's non-accountable
expense allowance (assuming no exercise of the Underwriters' over-allotment
option).
(3) The Company has granted the Underwriters an option, exercisable within 45
days of the date hereof, to purchase up to an additional 100,000 shares of
Class A Common Stock and 150,000 Warrants, solely to cover over-allotments,
if any. The Selling Stockholders have granted the Underwriters an option,
exercisable within 45 days of the date hereof, to purchase up to 275,000
shares of Class A Common Stock solely to cover over-allotments, if any. The
Underwriters have agreed to exercise in full the over-allotment option
granted to them by the Company before exercising any of the over-allotment
options granted to them by the Selling Stockholders. If the Underwriters'
over-allotment option is exercisable in full, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ , and $ , respectively.
See "Underwriting."
The Securities offered by this Prospectus are being offered by the
Underwriters on a "firm commitment" basis subject to prior sale, when, as and if
accepted by the Underwriters, approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer without notice and reject any
order in whole or part. It is expected that delivery of the certificates
representing the Securities will be made in Atlanta, Georgia on or about
, 1998.
ARGENT SECURITIES, INC.
The Date of this Prospectus is , 1998
"OUTSIDE" OF GATE FOLD
On this page appears a photograph of the Tegra driver featuring its
Invisible Inset Hosel.
INSIDE OF GATE FOLD LEFT
On this page appear several photographs including one of the Company's Tegra
Retail Environment displaying the Company's golf equipment, apparel and
accessories, one of Ian Woosnam with Tegra golf clubs and golf bag and one of
Glen Day using the Tegra driver.
INSIDE GATE FOLD RIGHT
On this page appear two photographs including one of the Tegra iron
featuring its Invisible Inset Hosel and one showing four golfers using and/or
wearing Tegra products.
INSIDE BACK COVER
Red background with Tegra logo.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
The Company intends to furnish to its security holders annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
NOTICE TO CALIFORNIA INVESTORS
Each purchaser of Securities in California must meet one of the following
suitability standards: (i) a liquid net worth (excluding home, furnishings and
automobiles) of $250,000 or more and gross annual income during 1997, and
estimated during 1998, of $65,000 or more from all sources; or (ii) a liquid net
worth (excluding home, furnishings and automobiles) of $500,000 or more. Each
California resident purchasing Securities offered hereby will be required to
execute a representation that it comes within one of the aforementioned
categories.
The Company uses and has applied to register in the United States the
following marks: TEGRA-TM-, TEGRA T (and design)-TM-, T (and design)-TM-, GOLF
FIRST-TM-, INVISIBLE INSET HOSEL-TM-, and NEMESIS-TM-. Other trademarks referred
to in this Prospectus are not owned by the Company and the Company makes no
claim of association with respect to those marks or their owners.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION, AND THE FINANCIAL STATEMENTS AND
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE
RETROACTIVE EFFECT TO A NUMBER OF STOCK SPLITS AND REVERSE STOCK SPLITS AS
DESCRIBED IN NOTE 6 TO THE COMPANY'S FINANCIAL STATEMENTS INCLUDED ELSEWHERE
HEREIN AND ASSUMES (I) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION HAS NOT BEEN
EXERCISED, AND (II) THAT THE REPRESENTATIVE'S WARRANTS HAVE NOT BEEN EXERCISED.
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
ON OCTOBER 7, 1998, THE COMPANY AMENDED ITS CERTIFICATE OF INCORPORATION TO
CREATE TWO CLASSES OF COMMON STOCK (15,000,000 SHARES OF CLASS A COMMON STOCK
AND 5,000,000 SHARES OF CLASS B COMMON STOCK) (THE "AMENDMENT"). ALL SHARES OF
THE COMPANY'S COMMON EQUITY OUTSTANDING PRIOR TO THE AMENDMENT WERE CONVERTED
INTO SHARES OF CLASS A COMMON STOCK EXCEPT FOR 1,464,953 SHARES OF COMMON EQUITY
OWNED BY MESSRS. BERGER AND DODRILL WHICH WERE CONVERTED INTO AN EQUAL NUMBER OF
SHARES OF CLASS B COMMON STOCK. THE CLASS A AND CLASS B COMMON STOCK HAVE
IDENTICAL RIGHTS, INCLUDING VOTING RIGHTS. EACH SHARE OF CLASS B COMMON STOCK
WILL BE AUTOMATICALLY CONVERTED INTO A SHARE OF CLASS A COMMON STOCK ON THE
EARLIER TO OCCUR OF (I) OCTOBER 31, 2000 OR (II) SUCH TIME AS THE CLOSING PRICE
OF THE CLASS A COMMON STOCK SHALL EQUAL OR EXCEED $8.00 FOR 10 CONSECUTIVE
TRADING DAYS. REFERENCES IN THIS PROSPECTUS TO "COMMON STOCK" ARE TO THE CLASS A
COMMON STOCK AND THE CLASS B COMMON STOCK COLLECTIVELY. SEE "DESCRIPTION OF
SECURITIES -- COMMON STOCK."
THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), THAT INVOLVE RISKS AND UNCERTAINTIES. THE SAFE
HARBOR FROM PRIVATE ACTIONS BASED ON UNTRUE STATEMENTS OR OMISSIONS OF MATERIAL
FACT THAT IS PROVIDED BY THESE TWO STATUTORY PROVISIONS DOES NOT APPLY TO
STATEMENTS MADE IN CONNECTION WITH AN INITIAL PUBLIC OFFERING. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION" AND "BUSINESS."
THE COMPANY
The Company is a designer, marketer and manufacturer of premium quality golf
equipment, apparel and accessories under the Tegra brand name. Tegra products
represent a wide range of technologically innovative, premium-priced men's golf
clubs, apparel and accessories that are sold in off-course golf specialty and
on-course pro shops. Tegra golf clubs incorporate the Company's patent-pending
Invisible Inset Hosel (the cylindrical chamber in which the shaft is attached to
the club head), a feature designed to reduce slice, and increase the accuracy
and distance of golf shots, and were introduced into the US market in October
1997. In the spring of 1998, the Company began installing dedicated Tegra Retail
Environments ("TREs") in select golf stores across the country and shipping a
Tegra men's apparel line. TREs are defined spaces in golf shops which house the
Company's equipment, apparel and accessories in an integrated, branded selling
environment. The Company has installed 58 TREs in golf stores in 55 cities. The
Company is in the process of opening additional TREs and expects to install up
to 100 new TREs for the Spring, 1999 selling season. Tegra products are now
available in over 170 golf shops nationwide and the Company expects they will be
available in 300 golf shops by year end.
The Company's business strategy is to establish itself as a leading
designer, marketer and manufacturer of premium golf equipment, apparel and
accessories by providing a complete range of products at the premium-priced
segment of the golf market. The Company is implementing this strategy by: (1)
creating products with proprietary, visibly distinct technology and design such
as the Company's patent-pending Invisible Inset Hosel to differentiate the
Company from its competitors while pricing such products
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competitively and (2) raising consumer demand for and awareness of the Company's
products through innovative marketing programs such as TREs as well as
traditional advertising, endorsements from professional golfers and use of
infomercials.
The Company was founded as Hippo, Inc. in 1996 and contemporaneously
acquired a license from Hippo Holdings, Ltd. to sell value-priced HiPPO-TM-
brand golf equipment, apparel and accessories in the United States. The
Company's initial strategy was to sell value-priced golf clubs that were
presently available under the HiPPO-TM- brand and to simultaneously develop a
premium-priced golf club brand because that segment of the golf market comprises
approximately 70% of golf equipment sales and offers higher margins to
manufacturers. This development effort resulted in the Tegra line of
premium-priced golf equipment. The Company has since discontinued the
distribution of value-priced golf equipment to pursue opportunities offered by
its Tegra products. On May 4, 1998, the Company sold its license to sell
HiPPO-TM- products in the U.S. back to Hippo Holdings, Ltd. along with all
existing HiPPO-TM- inventory, marketing materials and related liabilities. In
return, the Company received a cash payment from Hippo Holdings, Ltd. of
approximately $413,000. In addition Hippo Holdings, Ltd. returned to the Company
50,000 shares of the Company's Common Stock and assumed outstanding liabilities
and commitments of the Company in excess of $1,000,000.
INDUSTRY OVERVIEW. According to the National Golf Foundation ("NGF"), in
1997, wholesale sales of golf equipment in the U.S. were approximately $3.9
billion. In addition, wholesale sales of golf clubs are estimated to have
increased at an annual compound growth rate of approximately 10.9% over the
5-year period from 1992 to 1997. The Company believes that a number of trends
are likely to further increase the demand for golf products generally. These
trends include: (i) the large numbers of golfers entering their 40s and 50s, the
age when most golfers begin to play more often and increase their spending on
the sport; (ii) growth in the number of golf courses; (iii) increasing interest
in golf from women, junior and minority golfers; (iv) the large population who
are beginning to enter their 20s, the age when golfers generally take up the
sport; and (v) the rapid evolution of golf club designs and materials.
PRODUCTS. Tegra golf clubs which incorporate the Company's patent-pending
Invisible Inset Hosel are an evolution from current golf club technology. The
Company's design moves or insets the shaft as close to the center of the club
head as is permitted under USGA rules. As a result, the club head will rotate to
the target faster than conventional designs, making it easier to square the club
at impact and enabling the golfer to hit longer and straighter shots. The
Company believes that the Company's Invisible Inset Hosel technology could be as
significant to the golf industry as perimeter weighting, graphite shafts or
oversize metal woods.
The Company has conducted player testing on its woods and irons and the
Company believes such testing shows its Tegra technology promotes straighter and
longer golf shots than other leading premium-priced golf clubs. "Iron Byron"
testing (robotic testing designed to repeat identical swings so different clubs
can be compared under controlled conditions) of Tegra woods has shown that the
Tegra driver provides greater carry, roll and overall distance than certain
leading premium-priced clubs while simultaneously increasing accuracy.
Additional mechanical testing which has been recorded using high speed video
shows that the Invisible Inset Hosel design produces a squarer club face at
impact than other leading premium-priced clubs.
The Company has also developed a line of Tegra men's apparel. The Company's
apparel collection emphasizes quality, comfort and style and is intended to
enhance a golfer's on-course performance. The Company plans to introduce to the
U.S. market its new apparel line and a full range of golf accessories by Spring
1999. The Company has already begun selling headwear featuring ergonomic
closures and intends to introduce items such as golf bags, umbrellas and towels.
One of the Company's strategies is to deliver products which can achieve
superior retail margin in order to incentivize retailers to sell more Tegra
product. The Company estimates that retailers on average achieve 20% gross
margin on sales from premium golf equipment. By pricing appropriately, the
Company
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believes it is able to offer retailers products that can achieve superior
margin. The Company expects that, on average, Tegra golf clubs will allow
retailers to achieve 40% gross margin, while Tegra apparel will allow retailers
to achieve in excess of 50% gross margin.
MARKETING. By creating TREs, the Company has adapted a marketing model used
by marketers of many leading brands of consumer products, who use in-store shops
to increase sales and brand awareness. TREs are defined spaces in golf shops,
which occupy from 50 to 150 square feet and consist of flooring, fixtures,
graphics and point-of-purchase materials. Within a TRE, the Company markets its
Tegra golf clubs, apparel and accessories in an integrated, branded environment
designed to convey the image of the Company as innovative in golf club
technology and distinctive in design.
The Company's advertising focuses on the Company's visibly distinct
technology and its performance benefits. In addition, the Company is presently
developing a long-format (30 minute) infomercial which is anticipated to air in
December. This broadcast advertising is expected to be supplemented with a print
campaign.
Tegra products are currently endorsed by four touring professionals
including Ian Woosnam and Glen Day. Mr. Woosnam began endorsing Tegra products
on January 1, 1998, although Mr. Woosnam does not yet have an endorsement
contract. Mr. Woosnam competes using Tegra golf clubs, carrying a Tegra bag and
wearing Tegra headwear and apparel. The Company is currently negotiating with
Mr. Woosnam for him to endorse Tegra products through December 31, 2006. Mr.
Woosnam has won more than 40 tournaments worldwide, including the 1991 Master's
Tournament. Mr. Day is currently endorsing Tegra golf equipment, apparel and
accessories under a contract terminating on December 31, 1998. Since beginning
his association with Tegra, Mr. Day has had five top three finishes on the
United States PGA Tour.
The Company's executive offices are located at 4400 North Federal Highway,
Suite 410, Boca Raton, Florida 33431. The Company's telephone number is (561)
750-7528.
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THE OFFERING
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Securities Offered (1).......... 2,500,000 shares of Class A Common Stock and 1,000,000
Warrants. See "Description of Securities."
Warrants........................ Each Warrant is immediately exercisable and entitles the
holder thereof to purchase one share of Class A Common
Stock at a price per share of 115% of the initial public
offering price for a period of three years. The Warrants
are redeemable by the Company at a redemption price of
$0.125 per Warrant, at any time, upon 30 days prior
written notice to the holders thereof, if the closing
price of the Class A Common Stock equals or exceeds 120%
of the initial public offering price of the Class A Common
Stock, for 10 consecutive trading days ending on the day
prior to the date of the Notice of redemption. See
"Description of Securities."
Securities Outstanding Prior to
the Offering (2).............. 1,051,818 shares of Class A Common Stock and 1,464,953
shares of Class B Common Stock.
Securities Outstanding
Subsequent to the Offering
(3)........................... 3,551,818 shares of Class A Common Stock and 1,464,953
shares of Class B Common Stock and 1,000,000 Warrants.
Use of Proceeds by the Company.. The net proceeds of this Offering will be used for
repayment of indebtedness, the purchase of inventory, the
payment of marketing and advertising expenses and working
capital and other corporate purposes. See "Use of
Proceeds."
NASDAQ Symbols.................. Class A Common Stock -- TGRA; Warrants -- TGRAW
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(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) The Class A Common Stock and the Class B Common Stock have identical rights,
including voting rights. Each share of Class B Common Stock will
automatically convert into one share of Class A Common Stock on the earlier
to occur of (i) October 31, 2000 and (ii) such time as the closing price of
the Class A Common Stock shall equal or exceed $8.00 for 10 consecutive
trading days. Also excludes 1,752,500 Warrants issuable upon the exercise by
certain bridge investors of the right to elect payment in Warrants of
amounts due them in connection with the Company's bridge financing (the
"Bridge Warrants").
(3) Does not include (i) the 1,000,000 shares of Class A Common Stock issuable
upon the exercise of the Warrants offered hereby, (ii) the 100,000 shares of
Class A Common Stock and 150,000 Warrants issuable by the Company upon the
exercise of the Underwriters' over-allotment option, (iii) the 150,000
shares of Class A Common Stock issuable upon exercise of the Warrants
included in the Underwriters' over-allotment option, (iv) the 250,000 shares
of Class A Common Stock and 50,000 Warrants issuable upon exercise of the
Representative's Warrants (or the 50,000 shares of Class A Common Stock
issuable upon exercise of the Warrants included therein), (v) 2,036,170
shares of Class A Common Stock issuable upon the exercise of stock options
and warrants outstanding on the date hereof or (vi) up to 1,752,500 Bridge
Warrants or 1,752,500 shares of Class A Common Stock issuable upon exercise
of such Bridge Warrants. See "Management -- Stock Option Plans,"
"Description of Securities" and "Underwriting."
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RISK FACTORS
The Company does not presently have adequate cash from operations or
financing activities to meet either its short-term or long-term needs. In
addition, the Company's obligation to repay $1,975,000 of bridge debt matured on
September 30, 1998 and an additional $3,505,000 of bridge debt will become due
on October 15, 1998. The Company does not have sufficient cash to repay these
obligations and is currently negotiating with the holders of this debt to extend
the maturity date. The Company expects to repay this debt from the proceeds of
this offering. See "Use of Proceeds." If this offering is not successful, the
Company expects that it will seek alternative private financing or seek to sell
the Company if an interested buyer can be found. If no alternative private
financing can be secured and no buyer can be found, the Company expects that it
will seek protection from its creditors under the applicable bankruptcy laws.
See "Risk Factors -- Lack of Cash." There can be no assurance that the Company
will be able to achieve its business goals or ever achieve profitability. See
"Risk Factors -- Precarious Financial Condition", "-- Ability to Continue as a
Going Concern," and "-- History of Losses; Anticipation of Future Losses." The
Company is substantially dependent on the efforts of its founders and principal
officers who have no proven record of success in designing, marketing or
manufacturing retail products. See "Risk Factors -- Lack of Experience of
Management."
RECENT TRANSACTIONS
Since, July, 1988, the Company has consumed all cash on hand and has funded
its operations with cash flow and loans from its officers aggregating $67,500
which are to be repaid with the proceeds of this offering. The Company is in the
process of negotiating to obtain a loan of $250,000 from an individual. This may
be personally guaranteed by Jim Dodrill and Paul Berger. The lender may also
provide consulting services to the Company the terms of which are currently
being negotiated. See "Use of Proceeds" and "Certain Transactions -- Recent Loan
and Consulting Agreement."
8
SUMMARY FINANCIAL DATA
The following summary financial data, insofar as it relates to the period
February 8, 1996 (inception) to January 31, 1997 and the year ended January 31,
1998, has been derived from the Company's audited financial statements,
including the balance sheets at January 31, 1997 and 1998 and the related
statements of operations, of changes in shareholders' deficit and of cash flows
for the periods then ended, and notes thereto appearing elsewhere herein. The
data for the six months ended July 31, 1997 and 1998 has been derived from
unaudited financial statements also appearing herein and which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The summary financial data should be read in conjunction with
the "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and notes thereto appearing elsewhere herein.
[Enlarge/Download Table]
FOR THE PERIOD
FEBRUARY 8,
1996 FOR THE FOR THE SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED JULY 31,
JANUARY 31, JANUARY 31, ----------------------------
1997 1998 1997 1998
--------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ -- $ 741,120 $ 267,547 $ 440,474
Total costs and expenses........................... $ 2,375,708 $ 5,190,123 $ 1,913,404 $ 3,378,022
Loss from operations............................... $ (2,375,708) $ (4,449,003) $ (1,645,857) $ (2,937,549)
Interest expense................................... $ (2,844) $ (244,648) $ (76,555) $ (325,636)
Gain on sale of license............................ $ -- $ -- $ -- $ 413,997
Net loss........................................... $ (2,378,552) $ (4,693,651) $ (1,722,412) $ (2,849,188)
Basic and diluted net loss per share (1)........... $ (3.24) $ (2.21) $ (1.48) $ (1.17)
Weighted average number of shares outstanding...... 734,330 2,120,460 1,162,539 2,425,197
[Enlarge/Download Table]
JULY 31, 1998
-----------------------------
AS ADJUSTED
ACTUAL (2)
------------- --------------
BALANCE SHEET DATA:
Current assets...................................... $ 26,850 $ 650,792 $ 1,135,979 $ 10,435,979
Working (deficit) capital........................... $ (1,306,705) $ (5,056,682) $ (7,679,293) $ 7,683,207
Total assets........................................ $ 227,347 $ 1,005,055 $ 1,658,578 $ 10,958,578
Total liabilities................................... $ 1,373,555 $ 5,747,474 $ 8,855,272 $ 2,792,772
Total shareholders' (deficit) equity................ $ (1,146,208) $ (4,742,419) $ (7,196,694) $ 8,165,806
------------------------
(1) Due to the Company's losses from continuing operations, the Company's
diluted loss per share is the same as that of basic loss per share.
(2) Adjusted to give effect to the sale of 2,500,000 shares of Class A Common
Stock and 1,000,000 Warrants offered hereby at assumed initial public
offering prices of $7.00 per Share and $0.125 per Warrant, respectively, and
the application of the net proceeds therefrom. See "Use of Proceeds." No
effect has been given to the exercise of (i) the Warrants, (ii) the
Underwriter's over-allotment option (iii) the Representative's Warrants (or
the Warrants included therein) or (iv) the Bridge Warrants. See
"Underwriting."
9
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION, AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION IN THIS
PROSPECTUS, INCLUDING THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS
HEREIN, PRIOR TO PURCHASING THE SECURITIES.
LACK OF CASH
The Company does not presently have adequate cash from operations or
financing activities to meet either its short-term or long-term needs. In
addition, the Company's obligation to repay $1,975,000 of bridge debt matured on
September 30, 1998 and an additional $3,505,000 of bridge debt will become due
on October 15, 1998. The Company does not have sufficient cash to repay these
obligations and is currently negotiating with the holders of this debt to extend
the maturity date. The Company expects to repay this debt from the proceeds of
this offering. See "Use of Proceeds." If this offering is not successful, the
Company expects that it will seek alternative private financing or seek to sell
the Company if an interested buyer can be found. If no alternative private
financing can be secured and no buyer can be found, the Company expects that it
will seek protection from its creditors under the applicable bankruptcy laws.
PRECARIOUS FINANCIAL CONDITION
For the year ended January 31, 1998, the Company incurred net losses of
$4,693,651, and for the six months ended July 31, 1998, the Company incurred net
losses of $2,849,188. As of July 31, 1998, the Company had $1,621 in cash and an
accumulated deficit of $9,921,391. The Company's current liabilities, as of such
date, aggregated $8,815,272 and exceeded the Company's current assets by
$7,679,293. The Company expects its cash needs subsequent to repayment of bridge
loan debt for the next twelve months to be approximately $4,400,000. The Company
does not presently have adequate cash from operations to meet these needs. In
order to meet its needs for cash to fund its operations, the Company must obtain
additional financing. The Company is currently in default under a number of its
arrangements, agreements and instruments with creditors. If this Offering is not
successful or if the Company is unable to obtain significant additional
financing, it may be obligated to seek protection from its creditors under the
bankruptcy laws and the existing stockholders may lose their investment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources"; and the financial statements and
notes thereto included elsewhere in this Prospectus.
ABILITY TO CONTINUE AS A GOING CONCERN
The Company's independent certified public accountants have issued their
report dated June 9, 1998 on the financial statements of the Company as of
January 31, 1998 and for the year then ended, which includes an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern. Among the reasons cited by the independent certified public
accountants as raising substantial doubt as to the Company's ability to continue
as a going concern are the following: the Company has suffered recurring losses
and negative cash flows from operations through January 31, 1998, has a
shareholders' deficit and working capital deficiency as of January 31, 1998, and
is dependent on raising additional financing in order to fund its existing level
of operations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. If this Offering is not successful or if the
Company is unable to secure significant additional financing, it may be obliged
to seek protection under the bankruptcy laws and the stockholders may lose their
investment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources"; and the financial
statements and notes thereto included elsewhere in this Prospectus.
10
HISTORY OF LOSSES; ANTICIPATION OF FUTURE LOSSES
The Company has incurred operating losses since its inception and had an
accumulated deficit of $9,921,391 as of July 31, 1998. The Company incurred a
net loss of $4,693,651 for the twelve months ended January 31, 1998, as compared
with a net loss of $2,378,552 for the period ended January 31, 1997. The Company
incurred a net loss of $2,849,188 for the six months ended July 31, 1998, as
compared with a net loss of $1,722,412 for the six months ended July 31, 1997.
Such losses have resulted principally from expenses incurred from general and
administrative costs, research and development and marketing costs incurred
during the Company's development efforts. The continued development of the
Company's business will require the commitment of substantial resources to
establish sales and marketing capabilities. The amount of net losses and the
time required by the Company to reach sustained profitability are highly
uncertain, and to achieve profitability the Company must, among other things,
successfully establish sales and marketing capabilities by itself or with third
parties. There is no assurance that the Company will ever generate substantial
revenues from its products or achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
LACK OF EXPERIENCE OF MANAGEMENT
The Company is substantially dependent on the efforts of its founders and
principal officers. The Company was founded in 1996 and only entered the market
for premium-priced golf products in the Fall of 1997. Management has no proven
record of success in designing, marketing or manufacturing retail products. In
addition, the Company has only recently hired the majority of its sales force.
No assurance can be given that the Company will be successful in retaining such
personnel and recruiting additional personnel. The golf market is a highly
competitive market for personnel and new personnel could be costly in terms of
cash compensation or equity necessary to attract them to the Company or may not
be available to the Company on any terms. The Company currently has no
employment contracts or non-competition agreements with, nor does it carry key
man life insurance for, any of its founders or principal officers.
DEPENDENCE ON OFFERING PROCEEDS
The Company's capital requirements have been and will continue to be
significant. The Company is dependent on and intends to use a substantial
portion of the proceeds of this Offering to fund purchases of inventory and
implement its marketing strategies. The Company also plans to use approximately
$6,062,500 of the proceeds of this Offering to repay indebtedness. See "Use of
Proceeds." The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that the proceeds of this Offering,
together with cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for the next 18 months. In the event that the
Company's plans change, its assumptions change or prove to be inaccurate or if
the proceeds of this Offering or cash flows otherwise prove to be insufficient
to fund operations (due to unanticipated expenses, delays, problems,
difficulties or otherwise), the Company will be required to minimize cash
expenditures and/or obtain additional financing in order to support its plan of
operations. The Company has no current arrangements with respect to, or sources
of, additional financing and there can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
LIMITED HISTORY
The Company has a limited operating and financial history for potential
investors to consider in assessing the advisability of an investment in the
Company. The Company must, therefore, be considered to be subject to all of the
risks inherent in the establishment of a new business enterprise, including the
absence of any significant operating history, any significant revenues, losses
from continuing operations and the presence of outstanding payables and
significant commitments, along with the uncertainties of the
11
development and marketing of new products. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by new businesses in a highly competitive industry. To date the
Company has achieved limited sales and during the year ended January 31, 1998
the Company incurred losses of $4,693,651 on revenues of $741,120. To address
these risks, the Company must, among other things, successfully increase the
scope of its operations, respond to competitive and technological developments,
continue to attract, retain and motivate qualified personnel and continue to
develop and obtain market acceptance of its products. There can be no assurance
that the Company will be successful in addressing these risks and challenges.
See "-- Lack of Experience of Management."
LITIGATION
The Company has received a letter from Tatsuya Saito requesting that the
Company review its TEGRA line of clubs in view of a patent issued to him on July
12, 1994 (the "Saito Patent"). The Saito Patent covers certain aspects of a club
head and hosel, including the positioning of the hosel inset relative to the
club head. The Company has referred this request to independent outside patent
counsel. The Company does not believe that the TEGRA line of clubs infringes any
of the claims of the Saito Patent; however, there can be no assurance that a
court will not conclude that one or more of the Company's products does not
infringe the Saito Patent, or any other patent. If Mr. Saito is successful in
asserting his patent, it could require the Company to alter or withdraw existing
products, delay or prevent the introduction of new products, or force the
Company to pay damages if the products have been introduced. See "--
Intellectual Property" and "Business -- Legal Proceedings."
The Company has received a letter from Vardon Golf Company, Inc. ("Vardon")
asserting that the Company's TEGRA woods and irons infringe one of the claims of
its patent issued on April 12, 1994 (the "Vardon Patent"). The Vardon Patent
includes claims directed to a number of aspects of a golf club head and hosel,
including claims directed to an extended radius of gyration, which includes an
aspect of the club head extending behind the hosel. Vardon filed a complaint in
the Northern District of Illinois, Eastern Division, on May 13, 1998, in which
Vardon alleges that six companies have manufactured, sold, offered to sell and
distributed in the United States, specifically in the Northern District of
Illinois, wood-type and iron golf club products that are covered by at least one
claim of the Vardon Patent and a related design patent. The Company does not
believe that the TEGRA line of clubs infringes any of the claims of these
patents and the Company is in the process of preparing a response to the
complaint; however, there can be no assurance that a court will not conclude
that the Company does not infringe one or the other of these patents, or both.
If Vardon is successful in asserting its patent, it could require the Company to
alter or withdraw existing products, delay or prevent the introduction of new
products, or force the Company to pay damages if the products have been
introduced. See "-- Intellectual Property" and "Business -- Legal Proceedings."
The Company is the defendant in a lawsuit filed by TBWA Chiat/Day Inc.
("Chiat") in the Supreme Court of the State of New York on July 6, 1998 alleging
breach of contract for advertising services and that certain fees and expenses
in an amount of approximately $200,000 incurred by Chiat have not been paid by
the Company. The Company has prepared and filed a response to this complaint,
and the Company intends to assert its defenses vigorously; however, there can be
no assurance that the Company will prevail. See "Business -- Legal Proceedings."
DEPENDENCE ON PRODUCT INTRODUCTION
The Company believes that the introduction of new, innovative golf clubs
will be crucial to its future success. The Company has just begun to sell
products to retailers but there can be no assurance that the Company's newly
developed products will be accepted by consumers or preferred by consumers over
other companies' products. There can also be no assurance that the Company will
successfully develop new products. New models and basic design changes are
frequently introduced into the golf club market but often meet with consumer
rejection. Failure by the Company to identify and develop products that achieve
12
widespread market acceptance would adversely affect the Company's future growth
and profitability. Additionally, successful technologies, designs and product
concepts are likely to be copied by competitors. Accordingly, the Company's
operating results could fluctuate as a result of the amount, timing and market
acceptance of new product introductions by the Company or its competitors.
In addition the Company plans to introduce new apparel and accessories. The
Company has only recently begun to sell some of these products to retailers.
There can be no assurance that the Company's apparel and accessories will be
accepted by consumers. There can also be no assurance that the Company will be
able to design or sell new apparel and accessories in the future. Failure of the
Company's current and planned apparel and accessories would adversely affect the
Company's future growth and profitability.
POTENTIAL CHANGES IN USGA REGULATIONS
The design of new golf clubs is also greatly influenced by rules and
interpretations of the United States Golf Association ("USGA"). Although the
golf equipment standards established by the USGA generally apply only to
competitive events sanctioned by that organization, it has become critical for
designers of new clubs to assure compliance with USGA Rules. The Company has
received an authorization letter from the USGA stating that the Tegra irons and
titanium metal woods conform with USGA Rules. Although the Company believes that
all future clubs designed by the Company will conform with USGA Rules, no
assurance can be given that any new products will receive confirmation of such.
In the past, the USGA has made changes in the rules and regulations governing
golf equipment. No assurance can be given that it will not do so in the future,
any such action by the USGA which changes the rules regarding golf equipment
could have a material adverse effect on the Company.
INTELLECTUAL PROPERTY
TRADEMARKS. The Company has applied in the United States for registration
of the following marks: TEGRA, TEGRA T (and design), T (and design), GOLF FIRST,
INVISIBLE INSET HOSEL, and NEMESIS. The Company has only applied to register the
mark TEGRA outside the U.S., and has only sought to register that mark in
Canada, the United Kingdom, Japan and Taiwan. The Company has received notices
of allowance from the U.S. Patent and Trademark Office ("PTO") for the marks
TEGRA, TEGRA T (and design), T (and design), and NEMESIS. While the Company has
undertaken U.S. trademark searches through standard trademark search channels
for some of the marks for which the Company seeks registration and the search
results reveal that these marks appear to be available for use and registration
in the U.S. in connection with golf clubs and some golf accessories and golf
related apparel, no assurance can be given that such searches uncovered all
existing or potentially conflicting marks. Outside the U.S., the Company has not
undertaken any trademark searches to determine whether any of these marks is
available for use or registration in connection with golf clubs, golf
accessories or golf related apparel.
No assurances can be given that any or all of the Company's applications for
these trademark registrations will be granted. Additionally, no assurances can
be given that any issued trademark registrations will give the Company exclusive
rights to use the marks with respect to all of the goods or services the Company
may propose to sell. The Company does not plan to introduce any product which is
covered by any third party U.S. or foreign trademark, registration or trademark
rights known to the Company. To date, there have been no interruptions in the
Company's business as the result of any claim of infringement. However, no
assurance can be given that the Company will not be adversely affected by the
assertion of intellectual property rights belonging to others. The effects of
such assertions could include requiring the Company to alter or withdraw
existing trademarks or products delaying or preventing the introduction of
products, or forcing the Company to pay damages if the products have been
introduced.
PATENTS. The Company has filed an application for a United States patent
claiming certain elements of the Company's Tegra line of inset woods and irons,
and the Company has filed a Patent Cooperation
13
Treaty patent application, designating all countries, that is based on such
United States patent application. Based on the results of a patent search
conducted by outside patent counsel, the Company is of the view that various
aspects of the Tegra line of woods and irons may be patentable, but no assurance
can be given that any of the foregoing patent applications or any future
application for a utility or design patent will be granted by the U.S. PTO or
any other PTO or, if a patent issues, as to the scope of any patent that might
issue, or that any such patent will prevent misappropriation or duplication of
the Company's products or similar products by competitors, or that the Company
will have the rights or resources to commercialize products on the basis of any
new patents. There can be no assurance that any issued patents will provide the
Company with significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patents owned by the
Company or, if instituted, that such challenges will not be successful. The cost
of litigation to uphold the validity of a patent and prevent infringement can be
very substantial and could be beyond the Company's financial means, even if the
Company could otherwise prevail in such litigation. Furthermore, there can be no
assurance that others will not independently develop similar designs or
technologies, duplicate the Company's designs and technologies or design around
the patented aspects of the Company's technology.
There are numerous patents granted with respect to golf technology, and the
Company cannot provide any assurances that any particular product of the Company
will not infringe any issued patent or any patent that issues in the future from
an application that is currently pending with any of the PTOs, or will not
infringe any other right of any third party. To date, there have been no
interruptions in the Company's business as the result of any claim of patent
infringement. However, no assurance can be given that the Company will not be
adversely affected by the assertion of intellectual property rights belonging to
others. The Company has not obtained an opinion from its patent counsel that the
Company's products do not infringe on the rights of others. The effects of
assertion of patent rights of third parties could include requiring the Company
to alter or withdraw existing products, delaying or preventing the introduction
of products, or forcing the Company to pay damages if the products have been
introduced. See "-- Litigation" and "Business -- Legal Proceedings."
GLOBAL ESTABLISHMENT OF TEGRA-TM- BRAND
The Company's business strategy includes the global use of the TEGRA brand
name. Successfully implementing this strategy requires that the Company create
recognition of the TEGRA brand, which is new to the golf industry and establish
trademark rights in the TEGRA and TEGRA T (and design) marks. Implementing this
strategy requires the commitment of substantial financial resources. There can
be no assurance that the proceeds of this Offering will be sufficient to
implement this strategy or that the Company will be able to obtain any
additional financing on acceptable terms or at all.
RISK OF RETAILERS' REFUSAL TO PLACE OR MAINTAIN TEGRA RETAIL ENVIRONMENTS
A significant component of the Company's corporate strategy is the
installation of TREs within stores of the Company's targeted Tegra retailers.
There can be no assurance, however, that such retailers will be willing to place
the TREs in their stores, or that, if such TREs are installed, their performance
will meet the Company's expectations. Moreover, there can be no assurance that,
if such TREs are installed, the retailers will agree to keep such TREs in place.
This risk is particularly high when, as is currently the case, the Company may
not have the resources to provide advertising and other marketing support to the
retailers in maintaining the TREs. The Company's failure to persuade such
retailers to place or keep TREs in their stores, or the failure of such TREs to
perform up to their expectations, would have a material adverse effect on the
Company's business.
COMPETITION
The Company will face intense competition for customers because the golf
equipment and apparel industry is highly competitive and is characterized by the
frequent introduction of new products. The
14
Company's competitors consist of several well established domestic and foreign
companies, the substantial majority of which have significantly greater
financial resources than the Company, longer operating histories in the golf
industry, well established reputations, and marketing, distribution and service
networks, larger product lines than the Company, and greater management and
technical resources. Accordingly, many of these competitors will have greater
financial resources to devote to areas such as advertising, marketing and club
development, and consequently the cost of entry into the golf market is higher
than in many markets. A manufacturer's ability to compete is in part dependent
upon its ability to satisfy various subjective requirements of golfers,
including the golf club's "look" and "feel" and the level of acceptance that the
golf club has among professional and other golfers. Additionally, the apparel
industry is driven by, among other factors, fashion considerations and no
assurance can be given that the Company's designs will be accepted by consumers
or preferred by consumers over other companies' products.
SOURCES OF SUPPLY
As is the case with most golf club manufacturers, the Company will import
club heads and other components from companies in Asia, including companies
located in mainland China. In the event that the Company should fail to
establish adequate sources of supply, lose its sources of supply for these
materials and components, or experience delays in receiving delivery from such
sources, the Company would sustain shortages of materials and components and
incur delays in meeting delivery deadlines. The Company would also experience
such difficulties in the event that any supplier was unable or unwilling to meet
the Company's requirements. Any of these occurrences could have a material
adverse effect on the Company's operating results. Additionally, the Company
faces certain risks associated with importing goods from other countries such as
the risk of currency fluctuations, government imposed quotas, work stoppages,
political instability and the difficulty in enforcing contracts.
The Company relies on a limited number of suppliers for a significant
portion of the component parts used in the manufacture of its golf clubs. The
Company could in the future experience shortages of components or periods of
increased price pressures, which could have a material adverse effect on the
Company's business, operating results or financial condition. In addition,
failure to obtain adequate supplies or fulfill customer orders on a timely basis
could have a material adverse effect on the Company's business, operating
results or financial condition.
SEASONALITY; DISCRETIONARY CONSUMER SPENDING
Golf is generally regarded as a warm weather sport and accordingly, sales of
golf equipment reflect a seasonality of market demand and have historically been
strongest in the first and second quarters of each year with the weakest sales
occurring during the fourth quarter. Due to the seasonality of the industry,
results from any one or more quarters are not necessarily indicative of annual
results or continuing trends. Additionally, quarterly results may vary from year
to year due to the timing of new product introductions by both the Company and
its competitors, advertising expenditures, promotional periods; competitive
pressures resulting in lower than expected average selling prices; and the
volume of orders that are received and that can be fulfilled in a quarter.
Additionally, due to the outdoor nature of the sport, golf sales are influenced
by the weather and inclement or unseasonable weather conditions can adversely
affect the Company's operating results. In addition, sales of golf clubs are
dependent on discretionary consumer spending, which may be affected by general
economic conditions. A decrease in consumer spending generally could result in
decreased spending on golf equipment, which could have a material adverse effect
on the Company's business, operating results and financial condition. Any one or
more of the above factors could result in the Company failing to achieve its
expectations as to future sales or net income.
Because in the short term most operating expenses are relatively fixed, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate in the event of any unexpected sales shortfall. Any such failure by
the Company could materially adversely affect quarterly results of operations.
If technological advances by competitors or other competitive factors require
the Company to invest
15
significantly greater resources than anticipated in research and development or
sales and marketing efforts, the Company's business, operating results or
financial condition could be materially adversely affected. Accordingly, the
Company believes that comparisons of its results of operations on a period to
period basis should not be relied upon as an indication of future performance.
Additionally, the results on any quarter are not indicative of results to be
expected for a full fiscal year. Fluctuations in operating results or any of the
numerous other factors discussed above or below may result in certain future
quarters in the Company's results of operations may be below the expectations of
public market analysts or investors. In these events, the market price of the
Common Stock and Warrants would be materially adversely affected.
RESPONSIBILITY FOR MARKDOWNS
In the apparel industry, the prices of products that are not sold by
retailers in a timely manner are often marked down. It is customary in the
industry for the seller of such products to share markdown costs with the
retailers and the Company anticipates that it will share such costs with, to the
extent they are incurred by, its major customers in order to maintain its
relationships with such customers.
POTENTIAL ACQUISITIONS
The Company may in the future utilize a portion of the net proceeds of the
Offering to pursue acquisitions of complementary services or businesses. Future
acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt, the write-off of costs, and the amortization
of expenses related to goodwill and other intangible assets, all of which could
have a material adverse effect on the Company's business, operating results and
financial condition. Future acquisitions would involve numerous additional
risks, including difficulties in the assimilation of the operations, services
and personnel of the acquired company, the diversion of management's attention
from other business concerns, entering markets in which the Company has little
or no direct prior experience and the potential loss of key employees of the
acquired company. The Company has not consummated any acquisitions and currently
has no agreements or understandings with regard to any acquisitions.
Shareholders will not vote on any potential acquisitions (unless required by
NASDAQ regulations or applicable law) nor have the opportunity to review any
potential acquisition candidate. See "-- Representative's Influence Over
Potential Future Capital Financing."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering for working
capital and general corporate purposes, including potential acquisitions.
Accordingly, the Company will have broad discretion with respect to the use of
the net proceeds of the Offering. Purchasers of Common Stock in the Offering
will not have the opportunity to evaluate the economic, financial or other
information that the Company will use to determine the application of such
proceeds. See "Use of Proceeds."
LISTING AND MAINTENANCE CRITERIA FOR NASDAQ SYSTEM; "PENNY STOCK" REGULATIONS.
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers Nasdaq, requires, among other things, for a company's securities to
be listed on the Nasdaq SmallCap Market, that the Company have at least
$4,000,000 in total assets and a $5,000,000 market value of the public float.
Further, initial listing requires three market makers and a minimum bid price of
$4.00 per share. Continued inclusion in the Nasdaq SmallCap Market currently
requires two market makers and a minimum bid price of $1.00 per share and a
market value of the public float of at least $1,000,000 among other
requirements. If the Company fails to maintain the Nasdaq minimum threshold
requirements, it would lose Nasdaq listing and trading, if any, in the
securities would be conducted in the over-the-counter market known as the NASD
OTC Electronic Bulletin Board, or more commonly referred to as "pink
16
sheets." As a result, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the market value of, the Company's Common
Stock.
The Commission has adopted regulations which generally define "penny stock"
to be any equity security that has a market price (as defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. If the Class A Common Stock and Warrants are accepted for
quotation on Nasdaq, they will initially be exempt from the definition of "penny
stock." If the Class A Common Stock and Warrants are later removed from listing
by Nasdaq and are traded at a price below $5.00, the Class A Common Stock and
Warrants may become subject to rules that impose additional sales practice
requirements on broker-dealers who sell such Class A Common Stock and Warrants
to persons other than established customers and institutional accredited
investors. For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Class A Common Stock and
Warrants and may affect the ability of purchasers in this Offering to sell the
Class A Common Stock and Warrants in the secondary market.
REPRESENTATIVE'S INFLUENCE OVER POTENTIAL FUTURE CAPITAL FINANCING
The Company has agreed that for a period of 24 months from the date of this
Prospectus, it will not sell or otherwise dispose of any of its securities (with
the exception of the shares of Common Stock issued upon exercise of currently
outstanding options or warrants, and options granted under the Company's 1996
Incentive and Non-qualified Stock Option Plan or the Company's 1998 Incentive
and Non-qualified Stock Option Plan) without the Representative's prior written
consent. The Company has also agreed that, for a period of 24 months from the
date of this Prospectus, it will not sell or issue any of its securities
pursuant to Regulation S under the Securities Act nor any preferred stock
without the Representative's prior written consent. These agreements represent
significant potential restrictions on the Company's ability to raise capital or
consummate any merger or acquisition through the sale or issuance of the
Company's securities. Should the Company need to raise capital or complete a
merger or acquisition transaction through the sale or issuance of its securities
within the applicable time frame of these agreements, the refusal of the
Representative to grant its consent would have a material adverse effect on the
Company. The Representative has informed the Company that these agreements are
for the purpose of encouraging the Company not to issue additional securities on
terms that would be dilutive to investors who participate in this Offering,
although there can be no assurance that additional sales of securities that may
have dilutive effects will not occur. The Representative has further advised the
Company that in determining whether consent will be granted the Representative
will consider on a case-by-case basis, in addition to the potential dilution to
existing shareholders, a number of factors, including the Company's current need
for additional financing, the purposes for which the financing is sought, the
cost and availability of alternative sources of non-equity financing and, in the
case of a proposed acquisition, the type of business to be acquired, its
relation to the Company's current business and the existence of alternative
methods of financing the transaction. See "Underwriting."
17
REPRESENTATIVE'S INFLUENCE THROUGH ABILITY TO SELECT A DIRECTOR
The Company has agreed with the Representative that, promptly after the
completion of this Offering, the Company will increase to five the number of
individuals serving on the Company's Board of Directors. In addition, the
Company has agreed with the Representative that, for a period of five years
following the completion of the Offering, it will use its best efforts to cause
the election to its Board of Directors, one designee of the Representative. This
agreement will, as a practical matter, allow the Representative to continue to
influence the management of the Company for a period of five years.
PAYMENTS TO AFFILIATES
The Company plans to use approximately $782,500 from the proceeds of the
Offering to repay outstanding loans to certain stockholders. These stockholders
currently hold Class A and Class B Common Stock of the Company as well as
options and/or warrants to purchase additional shares in the following amounts
and exercise prices. Paul H. Berger, the co-founder, Chairman of the Board of
Directors, and Chief Executive Officer of the Company, will receive
approximately $170,000. He currently owns 1,305,120 shares of the Class B Common
Stock of the Company, 125,000 shares of the Class A Common Stock of the Company
and has options to purchase 19,577 shares of Class A Common Stock at the
exercise price of $0.225 per share. Jim G. Dodrill II, the co-founder,
President, General Counsel, and a Director of the Company, will receive
$102,500. He currently owns 159,833 shares of the Class B Common Stock of the
Company, 25,000 shares of Class A Common Stock of the Company and has options to
purchase 336,510 shares of Class A Common Stock at an average exercise price of
$1.76 per share. Stanley Berger, father of Paul Berger and a member of the
Company's Advisory Board, will receive $510,000. He currently owns none of the
Class A or Class B Common Stock of the Company, but has warrants to purchase
108,002 shares of Class A Common Stock at an average exercise price of $1.73 and
an option to purchase 4,444 of Class A Common Stock shares at the exercise price
of $2.75 per shares. See "Use of Proceeds" and "Certain Transactions."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Upon completion of this Offering, Messrs. Berger and Dodrill will own 100%
of the outstanding Class B Common Stock which together with their shares of
Class A Common Stock and presently exercisable options represents approximately
36.7% of the outstanding Class A and Class B Common Stock of the Company,
assuming no exercise of options, warrants or the over-allotment option. Although
no voting arrangement exists among them, the Company's principal stockholders
and current management will, as a practical matter, be able to control the
outcome of most matters submitted for shareholder approval including the
election of directors and amendments to the Company's Certificate of
Incorporation and otherwise direct the affairs of the Company. See "Principal
and Selling Shareholders."
FUTURE SALES OF CLASS A COMMON STOCK PURSUANT TO RULE 144
The 2,566,771 shares of Class A and Class B Common Stock issued prior to
this Offering are "restricted securities" as that term is defined by Rule 144
under the Securities Act, and in the future, may be sold in compliance with Rule
144 or pursuant to an effective registration statement. The 1,305,120 shares of
Class B Common Stock owned by Mr. Berger and the 159,833 shares of Class B
Common Stock owned by Mr. Dodrill are subject to the provisions of an agreement
between the Company, the Representative and Messrs. Berger and Dodrill pursuant
to which the Company has agreed not to register the Class B Common Stock for
sale by either Mr. Berger or Mr. Dodrill. Ordinarily, under Rule 144, a person
who has beneficially owned restricted securities for a period of one year may,
every three months, sell in brokerage transactions an amount that does not
exceed the greater of (i) 1% of the outstanding number of shares of a particular
class of such securities or (ii) the average weekly trading volume in such
securities on all national exchanges and/or reported through the automated
quotation system of a registered securities association during the four weeks
prior to the filing of a notice of sale by a securities holder. In the future,
18
sales of restricted stock pursuant to Rule 144 may have an adverse effect on the
market price of the Company's Class A Common Stock should a public trading
market develop for such shares.
Prior to this Offering, there has been no market for the Class A Common
Stock. The Company can make no prediction as to the effect, if any, that sales
of shares of Class A Common Stock, or the availability of such shares for sale,
will have on the market price of Class A Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Class A Common Stock in the
public market could adversely affect prevailing market prices.
SUBSTANTIAL SHARES OF CLASS A COMMON STOCK RESERVED FOR ISSUANCE PURSUANT TO
STOCK OPTION PLAN
The Company has reserved 1,150,000 and 800,000 shares of Class A Common
Stock for issuance to employees, officers, directors, and consultants pursuant
to option exercises under the Company's 1996 Incentive and Non-qualified Stock
Option Plan and the Company's 1998 Incentive and Non-qualified Stock Option
Plan, respectively. To date, the Company has granted options to purchase a total
of 823,688 shares of Class A Common Stock, at prices ranging from $0.225 to
$9.20 per share. The existence of these options may be perceived as an overhang
on the market and therefor may prove to be a hindrance to the Company's future
equity financing. Sales in the public market of substantial amounts of Class A
Common Stock, or the perception that such sales could occur, could depress
prevailing market prices for the Class A Common Stock. See "Management -- Stock
Option Plans," "Certain Transactions" and "Underwriting."
POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of up to
5,000,000 shares of preferred stock, $0.01 par value per share ("Preferred
Stock"), with designations, rights, and preferences determined from time to time
by its Board of Directors. Accordingly, the Company's Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with
dividends, liquidation, conversion, voting, or other rights that could adversely
affect the voting power or other rights of the holders of Class A Common Stock.
In the event of issuance, the Preferred Stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. See "-- Representative's Influence Over Potential Future
Capital Financing" and "Description of Securities."
SUBSTANTIAL DILUTION; DISPROPORTIONATE CONSIDERATION PAID BY NEW SHAREHOLDERS
Based upon the net tangible book value of the Company at July 31, 1998,
investors in this Offering will suffer an immediate and substantial dilution of
their investment of approximately $5.39 or 77% in net tangible book value per
share. The cash consideration paid by new investors in this Offering is 87.51%
of the total consideration paid for the securities of the Company that will be
outstanding after this Offering. To the extent outstanding options or warrants
to purchase the Company's Class A Common Stock are exercised, there will be
further dilution. See "Dilution."
LACK OF PRIOR MARKET FOR THE CLASS A COMMON STOCK OR WARRANTS
Prior to this Offering, there has been no public trading market for the
Class A Common Stock or Warrants and there can be no assurances that a public
trading market for the Class A Common Stock or Warrants will develop or, if
developed, will be sustained. Although the Company has applied to list the Class
A Common Stock and Warrants on the NASDAQ SmallCap Market, there can be no
assurance that a regular trading market will develop for the Class A Common
Stock or Warrants offered hereby, or, if developed, that it will be maintained.
If for any reason the Company fails to maintain sufficient qualifications for
continued listing on the NASDAQ SmallCap Market or a public trading market does
not develop, purchasers of the Class A Common Stock or Warrants may have
difficulty selling their Class A Common Stock or Warrants should they desire to
do so.
19
ARBITRARY DETERMINATION OF OFFERING PRICE AND WARRANT EXERCISE PRICE
The initial public offering price of the Class A Common Stock and the
Warrants and the Warrant exercise price have been determined by negotiations
between the Company and the Representative and do not necessarily bear any
relationship to the Company's assets, net worth or results of operations, or any
other established criteria of value. The offering price set forth on the cover
page of this Prospectus should not be considered an indication of the actual
value of the Class A Common Stock and Warrants offered hereby. After completion
of this offering, such price may vary as a result of market conditions and other
factors. See "Description of Securities" and "Underwriting."
IMPACT ON MARKET OF WARRANT EXERCISE
In the event of the exercise of a substantial number of Warrants at the
Warrant exercise price within a reasonably short period of time after the right
to exercise commences, the resulting increase in the amount of Class A Common
Stock of the Company in the trading market could materially adversely affect the
market price of the Class A Common Stock. Futhermore, in the event of a
redemption of the Warrants, Selling Warrantholder Warrants will cease to be
subject to any lock-up restrictions and will be fully tradeable and the shares
of Class A Common Stock underlying such Warrants will also be freely tradeable
upon exercise of such Warrants. This increase in the number of Warrants and/or
Shares of Class A Common Stock could materially adversely affect the market
price of the Class A Common Stock and/or the Warrants. See "Description of
Securities -- Warrants."
RISK OF WARRANT CALL TO WARRANTHOLDERS
The one million Warrants for sale in this Offering will be immediately
exercisable. Furthermore, in the event of a redemption of the Selling
Warrantholders' Warrants by the Company, an additional 1.75 million Warrants
will be immediately exercisable. The resulting increase in the number of
exercisable Warrants could materially adversely affect the market price of the
Warrants sold in this Offering. The Warrants will be exercisable immediately
upon issuance at a price per share of 115% of the initial public offering price
of the Class A Common Stock for a period of three years and will be redeemable
by the Company at a redemption price of $0.125 per Warrant at such time as the
price per share of the Class A Common Stock reaches 120% of the initial public
offering price of the Class A Common Stock for ten consecutive trading days. If
the Company redeems the Warrants before the Warrantholders exercise their right
of purchase, then the Warrantholders will be entitled to receive only the
redemption price, $0.125 per Warrant. Because the difference in exercise price
and redemption price of the Warrants is narrow, there is a substantial risk that
the Warrantholders will have limited opportunity to exercise their Warrants.
ADJUSTMENTS TO WARRANT EXERCISE PRICE AND EXERCISE DATE
The Company, in it sole discretion, may reduce the exercise price of the
Warrants and/or extend the time within which the Warrants may first be
exercised. Further, in the event the Company issues certain securities or makes
certain distributions to shareholders, the exercise price of the Warrants may be
reduced. Any such price reductions (assuming exercise of the Warrants) will
provide less money for the Company and possibly materially adversely affect the
market price of the Class A Common Stock and Warrants.
REDEMPTION OF REDEEMABLE WARRANTS
The Warrants are subject to redemption by the Company, at any time, at a
price of $0.125 per Warrant upon 30 days prior written notice to the holders
thereof, if the average closing bid price for the Class A Common Stock equals or
exceeds 120% of the initial public offering price for the Class A Common Stock
for ten consecutive trading days. In the event that the Warrants are called for
redemption by the Company, holders thereof will have 30 days during which they
may exercise their rights to purchase shares of Class A
20
Common Stock. In the event a current prospectus is not available, the Warrants
may not be exercised and the Company will be precluded from redeeming the
Warrants. If holders of the Warrants elect not to exercise them upon notice of
redemption thereof, and the Warrants are subsequently redeemed prior to
exercise, the holders thereof would lose the benefit of the difference, if any,
between the market price of the underlying Class A Common Stock as of such date
and the exercise price of such Warrants, as well as any possible future price
appreciation in the Class A Common Stock. As a result of an exercise of the
Warrants, existing shareholders would be diluted and the market price of the
Class A Common Stock may be adversely affected. If holders of the Warrants fail
to exercise their rights under the Warrants prior to the date set for
redemption, then they will be entitled to receive only the redemption price,
$0.125 per Warrant. See "Description of Securities -- Warrants."
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE CLASS A COMMON STOCK
AND WARRANTS
Although they have no legal obligation to do so, the Underwriters from time
to time may act as market makers and otherwise effect transactions in the Class
A Common Stock and Warrants. Unless granted an exemption by the Securities and
Exchange Commission (the "Commission") from Rule 103 of Regulation M under the
Exchange Act, the Underwriters will be prohibited from engaging in any market
making activities or solicited brokerage activities with respect to the Class A
Common Stock and Warrants for the period from five business days prior to any
solicitation of the exercise of any Warrant or five business days prior to the
exercise of any Warrant based on a prior solicitation until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right the Underwriters may have to receive such a fee for the
exercise of the Warrants following such solicitation. As a result, the
Underwriters may be unable to continue to provide a market for the Class A
Common Stock and Warrants during certain periods while the Warrants are
exercisable. The prices and liquidity of the Class A Common Stock and Warrants
may be materially and adversely affected by the cessation of the Underwriters
market making activities. In addition, there is no assurance that the
Underwriters will continue to be market makers in the Class A Common Stock and
Warrants. The prices and liquidity of the Class A Common Stock and Warrants may
be affected significantly by the degree, if any, of the Underwriters'
participation in the market. The Underwriters may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the Class
A Common Stock and Warrants may be adversely affected by the fact that a
significant amount of the Class A Common Stock and Warrants may be sold to
customers of the Underwriters. See "Underwriting."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH THE
EXERCISE OF THE WARRANTS
The Company will be able to issue shares of its Class A Common Stock upon
the exercise of the Warrants only if (i) there is a current prospectus relating
to the Class A Common Stock issuable upon exercise of the Warrants under an
effective registration statement filed with the Commission and (ii) such Class A
Common Stock is then qualified for sale or exempt therefrom under applicable
state securities laws of the jurisdictions in which the various holders of
Warrants reside. Although the Company will undertake to use its best efforts to
maintain the effectiveness of a current prospectus covering the Class A Common
Stock subject to the Warrants offered hereby, there can be no assurance that the
Company will be successful in doing so. After a registration statement becomes
effective, it may require continuous updating by the filing of post-effective
amendments. A post-effective amendment is required (i) when, for a prospectus
that is used more than nine months after the effective date of the registration
statement, the information contained therein (including the audited financial
statements) is as of a date more than 16 months prior to the use of the
prospectus, (ii) when facts or events have occurred which represent a
fundamental change in the information contained in the registration statement,
or (iii) when any material change occurs in the information relating to the plan
of distribution of the securities registered by such registration statement. The
Company anticipates that this Registration Statement will remain effective for
at least nine months following the date of this Prospectus, assuming a
post-effective amendment is not filed by the Company. The Company intends to
qualify the sale of the Class A Common Stock and Warrants in a
21
limited number of states, although certain exemptions under certain state
securities laws may permit the Warrants to be transferred to purchasers in
states other than those in which the Warrants were initially qualified. The
Company will be prevented, however, from issuing Class A Common Stock upon
exercise of the Warrants in those states where exemptions are unavailable and
the Company has failed to qualify the Class A Common Stock upon exercise of the
Warrants. The Company may decide not to seek, or may not be able to obtain,
qualification of the issuance of such Class A Common Stock in all of the states
in which the ultimate purchasers of the Warrants reside. In such a case, the
Warrants of those purchasers will expire and have no value if such Warrants
cannot be exercised or sold. Accordingly, the market for the Warrants may be
limited because of the foregoing requirements. See "Description of Securities."
REPRESENTATIVE'S WARRANTS
In connection with the Offering, the Company will sell to the
Representative, for nominal consideration, warrants to purchase an aggregate of
250,000 shares of Class A Common Stock and 50,000 Warrants. The Representative's
Warrants will be exercisable for a period of four years, commencing one year
after the effective date of the Registration Statement of which this Prospectus
is a part, at an exercise price of 120% of the initial public offering price of
the Class A Common Stock and Warrants. The holder of the Representative's
Warrants will have the opportunity to profit from a rise in the market price of
the Securities, if any, without assuming the risk of ownership. The Company may
find it more difficult to raise additional equity capital if it should be needed
for the business of the Company while the Representative's Warrants are
outstanding. At any time when the holder thereof might be expected to exercise
them, the Company would probably be able to obtain additional capital on terms
more favorable than those provided by the Representative's Warrants.
The Representative has demand and "piggyback" registration rights with
respect to the Class A Common Stock owned by the Representative, the
Representative's Warrants and the Class A Common Stock and Warrants issuable
upon exercise of the Representative's Warrants. Any future exercise of these
registration rights may cause the Company to incur substantial expense and could
impair the Company's ability to raise capital through the public sale of its
securities. See "Dilution," "Shares Available for Future Sale" and
"Underwriting."
NO DIVIDENDS ANTICIPATED
The Company has never paid any dividends. It expects that it will retain its
earnings, if any, for the foreseeable future to finance its operations and will
not pay dividends to investors.
LIMITED LIABILITY OF DIRECTORS
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminated personal liability of a director to the
Company and its stockholders for monetary damages for breach of fiduciary duty
as a director, except in certain circumstances. Accordingly, stockholders may
have limited rights to recover money damages against the Company's directors for
breach of fiduciary duty.
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Class A Common Stock and Warrants offered by the Company hereby are estimated
at approximately $15,362,500, based on an assumed initial public offering prices
of $7.00 per shares of Class A Common Stock and $0.125 per Warrant
(approximately $16,009,375 if the Underwriters' over-allotment option is
exercised in full). The Company expects such net proceeds (assuming no exercise
of the Underwriters' over-allotment option) to be utilized in approximately the
manner set forth in the following table:
[Enlarge/Download Table]
APPROXIMATE APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
------------------------------------------------------------------------ -------------- -------------------------
Repayment of existing bridge debt (1)................................... $ 6,062,500 39.46%
Purchase of Inventory................................................... 1,950,000 12.69
Advertising and Marketing............................................... 1,750,000 11.39
Purchase of Fixed Assets................................................ 200,000 1.30
Working capital and general corporate purposes (2)...................... 5,400,000 35.16
-------------- ------
Total............................................................... $ 15,362,500 100.00%
-------------- ------
-------------- ------
--------------------------
(1) Of the $6,062,500, $1,360,000 was loaned at an interest rate of 12.5% and
$525,000 was loaned at an interest rate of 15%. The remainder was loaned
without a term interest rate, but with an option to receive a $3,125
lump-sum payment per $50,000 of indebtedness. The maturity date for
$1,975,000 of the bridge debt is September 30, 1998, and for $3,505,000 of
the bridge debt the maturity date is October 15, 1998. See "Risk Factors --
Lack of Cash." Of the $6,062,500, $4,630,000 was received within the past
year and the proceeds were used for payroll and benefits, rent, utilities,
acquisition of inventory, distribution costs, manufacturing costs,
advertising costs and other overhead expenses. In addition, $272,500
consisted of advances from officers. Of the $6,062,500, approximately
$782,500 will be used to repay affiliates of the Company. See "Certain
Transactions."
(2) Includes payroll and benefits, rent, utilities, acquisition of inventory,
distribution costs, manufacturing costs, advertising costs and other
overhead expenses.
A portion of the net proceeds may be used for acquisitions. Although the
Company is engaged from time to time in discussions relating to possible
acquisitions, the Company presently has no agreements, understandings or
commitments with respect to any acquisitions. The foregoing represents the
Company's current estimate of its allocation of the net proceeds of this
Offering based upon the current status of its business operations, its current
plans, and current economic and industry conditions. Future events, as well as
changes in economic or competitive conditions or the Company's business and the
results of the Company's sales and marketing activities, may make different uses
of funds necessary or desirable. The Company will require the consent of the
Representative to engage in any such transations. See "Risk Factors --
Representative's Influence Over Potential Future Capital Financing."
If the Underwriters exercise the over-allotment option in full, the Company
will realize additional net proceeds of approximately $646,875, which will be
added to the Company's working capital.
The Company believes that the proceeds of this Offering, together with cash
flow from operations, will be sufficient to satisfy its contemplated cash
requirements for the next 18 months. The Company's financial requirements will
depend upon, among other things, the growth rate of the Company's business, the
amount of cash flow generated by operations and the company's ability to borrow
funds to produce inventory or for working capital purposes. Should the Company
require additional debt or equity financing to support its operations, there can
be no assurance that such additional financing will be available to the Company
on commercially reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short term
certificates of deposit, money market funds or other short-term interest bearing
investments.
The Company anticipates that the proceeds, if any, received from any
exercise of the Warrants or the Underwriters' Warrants (or the Warrants included
therein) will be utilized for working capital and other corporate purposes.
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DILUTION
The difference between the initial public offering price per share of Class
A Common Stock and the pro forma net tangible book value per share of Class A
Common Stock after this Offering constitutes the dilution to investors in this
Offering. Net tangible book value per share is determined by dividing the net
tangible book value of the Company (total assets less intangible assets and
liabilities) by the total number of shares of Class A and Class B Common Stock
outstanding.
At July 31, 1998 the net tangible deficit of the Company was ($7,196,694),
or approximately ($2.80) per share. After giving effect to the sale by the
Company of the 2,500,000 shares of Class A Common Stock in this Offering (at an
assumed offering price of $7.00 per share) and the 1,000,000 Warrants in this
Offering (at an assumed offering price of $.125 per Warrant) and the Company's
use of the estimated net proceeds therefrom as set forth under "Use of
Proceeds," the pro forma net tangible book value of the Class A Common Stock at
July 31, 1998 would have been $8,165,806 or approximately $1.61 per share. This
represents an immediate pro forma increase in net tangible book value of $4.41
per share to the Company's present shareholders and an immediate pro forma
dilution of $5.39 per share to the purchasers of shares of Class A Common Stock
in this Offering. The following table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price (per share of Class
A Common Stock) (1)..................................... $ 7.00
Net tangible deficit per share at July 31, 1998........... $ (2.80)
Increase per share attributable to shares offered
hereby.................................................. $ 4.41
---------
Pro forma net tangible book value per share after the
Offering................................................ $ 1.61
---------
Dilution of net tangible book value per share to
purchasers in this Offering (2)......................... $ 5.39
---------
---------
------------------------
(1) Represents the assumed initial public offering price per share of Class A
Common Stock before deduction of the underwriting discount and estimated
expenses of the Offering.
(2) Assuming no exercise of Warrants or the Underwriters' over-allotment option.
See "Description of Securities" and "Underwriting."
The following table sets forth on a pro forma basis as of July 31, 1998, the
number and percentage of shares of Class A and Class B Common Stock issued, and
the amount and percentage of consideration and average price per share paid by
existing shareholders of the Company, and to be paid by purchasers pursuant to
this Offering (based upon an assumed initial public offering price of $7.00 per
share of Class A Common Stock and before deducting the underwriting discount and
estimated expenses of this Offering):
[Enlarge/Download Table]
OWNERSHIP
---------------------- CONSIDERATION
NUMBER ------------------------- AVERAGE PRICE
OF SHARES PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ------------- ---------- ---------------
Existing Shareholders.......................... 2,566,771 50.66% $ 2,497,246 12.49% $ 0.97
New Shareholders............................... 2,500,000 49.34% 17,500,000 87.51% $ 7.00
---------- ---------- ------------- ----------
Total.................................... 5,066,771 100.00% $ 19,997,246 100.00% $ 3.95
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
The foregoing table gives effect to the sale of the shares of Class A Common
Stock offered hereby and does not give effect to the exercise of the
Underwriters' over-allotment option, any Warrants or the Underwriters' Warrants.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
31, 1998 and as adjusted giving effect to the sale by the Company of the
2,500,000 shares of Class A Common Stock and 1,000,000 Warrants offered hereby.
The table has not been adjusted to give effect to the exercise of the
Underwriter's over-allotment option, the exercise of the Warrants, or the
exercise of the Underwriters' Warrants. This table should be read in conjunction
with the Financial Statements, including the notes thereto, appearing elsewhere
in this Prospectus.
[Enlarge/Download Table]
JULY 31, 1998
-----------------------------
PRO FORMA AS
ACTUAL ADJUSTED(1)
------------- --------------
Cash............................................................................... $ 1,621 $ 9,301,621
------------- --------------
Advances from officers............................................................. 272,500 --
------------- --------------
Notes payable...................................................................... 5,865,000 75,000
------------- --------------
Shareholders' deficit:
Common Stock, par value $0.01 per share, (8,100,000 shares authorized, 2,566,771
shares issued and 2,516,771 outstanding; as adjusted, 5,066,771 shares issued
and 5,016,771 outstanding) (2)................................................. 25,668 50,668
Treasury Stock -- 50,000 shares.................................................... (19,300) (19,300)
Additional paid-in capital....................................................... 2,718,329 17,893,329
Warrants......................................................................... -- 162,500
Accumulated deficit.............................................................. (9,921,391) (9,921,391)
------------- --------------
Total shareholders (deficit) equity.......................................... (7,196,694) 8,165,806
------------- --------------
Total capitalization......................................................... $ (1,057,573) $ 17,542,427
------------- --------------
------------- --------------
------------------------
(1) Assumes (i) an initial public offering price of $7.00 per share and $0.125
per Warrant, (ii) deduction of underwriting commissions assumed to be 10%,
estimated offering expenses payable by the Company of $500,000 and repayment
of $5,790,000 of indebtedness and $272,500 of advances from officers, and
(iii) an estimated value of the Representative's Warrant of $37,500.
(2) Does not include (i) the 1,000,000 shares of Class A Common Stock issuable
upon the exercise of the Warrants offered hereby, (ii) the 100,000 shares of
Class A Common Stock and 150,000 Warrants issuable upon exercise of the
Underwriters' over-allotment option, (iii) the 150,000 shares of Class A
Common Stock issuable upon exercise of the Warrants included in the
Underwriters' over-allotment option, (iv) the 250,000 shares of Class A
Common Stock and the 50,000 Warrants issuable upon exercise of the
Representative's Warrants (or the 50,000 shares of Class A Common Stock
issuable upon exercise of the Warrants included therein), (v) 2,036,170
shares of Class A Common Stock issuable upon the exercise of stock options
and warrants outstanding on the date hereof.
DIVIDEND POLICY
The Company intends to retain any future earnings for the operation and
expansion of its business and does not anticipate paying any cash dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon a number of factors, including the Company's
earnings, capital requirements, financial condition and other factors considered
relevant by the Company's Board of Directors.
25
SELECTED FINANCIAL DATA
The following selected financial data, insofar as it relates to the period
February 8, 1996 (inception) to January 31, 1998 and the year ended January 31,
1998, has been derived from the Company's financial statements, including the
balance sheets at January 31, 1997 and 1998 and the related statements of
operations, of changes in shareholders' deficit and of cash flows for the
periods then ended, and notes thereto appearing elsewhere herein. The data for
the six months ended July 31, 1997 and 1998 has been derived from unaudited
financial statements also appearing herein and which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The selected financial data should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto appearing
elsewhere herein. The results of operations for the six months ended July 31,
1998 are not necessarily indicative of future results.
[Enlarge/Download Table]
FOR THE PERIOD
FEBRUARY 8,
1996 FOR THE YEAR FOR THE SIX MONTHS ENDED
(INCEPTION) TO ENDED JULY 31,
JANUARY 31, JANUARY 31, ----------------------------
1997 1998 1997 1998
--------------- ------------- ------------- -------------
STATEMENTS OF OPERATIONS DATA:
Revenue............................................ $ -- $ 741,120 $ 267,547 $ 440,474
Costs of sales..................................... -- 859,317 300,028 520,179
Research and development........................... 650,805 451,019 185,078 102,235
Stock-based compensation........................... 473,894 210,130 133,583 --
Selling, general and administrative expenses....... 1,251,009 3,669,657 1,294,715 2,755,609
Total costs and expenses........................... 2,375,708 5,190,123 1,913,404 3,378,023
Loss from operations............................... (2,375,708) (4,449,003) (1,645,857) (2,937,549)
Interest expense................................... (2,844) (244,648) (76,555) (325,636)
Gain on sale of license............................ -- -- -- 413,997
Net loss........................................... $ (2,378,552) $ (4,693,651) $ (1,722,412) $ (2,849,188)
Basic and diluted loss per share of Common Stock... $ (3.24) $ (2.21) $ (1.48) $ (1.17)
Weighted average number of common shares
outstanding (1).................................. 734,330 2,120,460 1,162,539 2,425,197
[Enlarge/Download Table]
AS OF JULY 31, 1998
----------------------------
AS
ACTUAL ADJUSTED(2)
------------- -------------
BALANCE SHEET DATA:
Current assets...................................................................... $ 1,135,979 $ 10,435,979
Working (deficit) capital........................................................... $ (7,679,293) $ 7,683,207
Total assets........................................................................ $ 1,658,578 $ 10,958,579
Total liabilities................................................................... $ 8,855,272 $ 2,792,772
Stockholders' (deficit) equity...................................................... $ (7,196,694) $ 8,165,806
------------------------
(1) Adjusted to give retroactive effect to a number of stock splits and reverse
stock splits as described in Note 6 to the Company's Financial Statements
included elsewhere in this Prospectus.
(2) Adjusted to reflect the sale of the 2,500,000 shares of Class A Common Stock
and 1,000,000 Warrants offered by the Company hereby at an assumed public
offering price of $7.00 per share and $.125 per Warrant and the initial
application of the estimated net proceeds to the Company as described under
"Use of Proceeds."
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the Company's financial condition as of and for
the fiscal year ended January 31, 1998 and for the period from February 8, 1996
(inception) through January 31, 1997 and for the Company's results of operations
for the six month periods ended July 31, 1998 and 1997 should be read in
conjunction with the Company's financial statements and notes thereto included
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Sales during the year ended January 31, 1998 totaled $741,120. There were no
sales during the period February 8, 1996 (inception) to January 31, 1997. Of the
sales during the year ended January 31, 1998, $588,514 were generated by sales
of HiPPO products and $152,606 by sales of Tegra products.
Sales during the six months ended July 31, 1998 totaled $440,474 compared to
sales of $267,547 during the same period in 1997. Of the sales during the six
months ended July 31, 1998, $22,395 were generated by sales of HiPPO products
and $418,079 by sales of Tegra products. The sales recognized during the six
months ended July 31, 1997 represent HiPPO club and apparel sales.
The Company introduced the HiPPO line in July of 1997 and the Tegra line in
October of 1997. Sales during both the year ended January 31, 1998 and the six
months ended July 31, 1998 were negatively impacted because the Company was not
able to purchase inventory to fill customer orders as a result of the Company's
inadequate working capital and lack of open terms with its vendors. The Company
believes that the absence of sufficient working capital has historically
prevented the Company from taking full advantage of demand for its products.
Likewise, the Company believes that the lack of open terms with its vendors
contributed to preventing the Company from meeting this demand.
In May of 1998 the Company sold its license to sell HiPPO products in the
U.S. back to Hippo Holdings, Ltd. along with all existing HiPPO inventory,
marketing materials and related liabilities. In return, the Company received a
cash payment from Hippo Holdings, Ltd. of approximately $413,000. In addition
Hippo Holdings, Ltd. returned to the Company 50,000 shares of the Company's
common stock and assumed commitments of the Company in excess of $1,000,000.
Accordingly, the Company has ceased selling HiPPO products and does not expect
to receive revenue on a going forward basis from such brand.
Costs of sales during the year ended January 31, 1998 totaled $859,317. Of
this amount, approximately $89,343 reflects costs associated with air freighting
goods from manufacturing facilities, which are in Asia, to the Company's
warehouse in Miami, Florida. Cost of sales during the six months ended July 31,
1998 totaled $520,179. Of this amount, $28,895 reflects costs associated with
air freighting goods to the Company's warehouse in Miami, Florida. The cost of
air freight was necessitated by the Company's marginal working capital position
which limited the Company's ability to place orders as far in advance as would
otherwise be desirable or to maintain inventory to support demand. The Company's
shortage of working capital required the Company to attempt to shorten lead
times involved in production and shipping of goods in order to deliver product
as quickly as possible to its customers. Other incremental delivery costs of
$47,787 also adversely impacted cost of sales for the year ending January 31,
1998. Additional production cost variances of $52,218 in material and assembly
charges attributed to smaller production runs and manufacturing carrying charges
than the Company expects would have been the case if it were in a better working
capital position also adversely impacted cost of sales for the year ending
January 31, 1998. Costs of sales in comparison to sales for the year ended
January 31, 1998 was negatively impacted by the liquidation of apparel for
$85,356 with a cost of $151,089. Cost of sales for the six months ended July 31,
1998 were also negatively impacted by a $142,157 provision for liquidation of
apparel.
27
Research and development costs totaled $451,019 for the year ended January
31, 1998 as compared to $650,805 for the period ended January 31, 1997. This 31%
decrease resulted from reduced spending associated with final development of
Tegra golf equipment.
Research and development costs totaled $102,235 for the six months ended
July 31, 1998 as compared to $185,078 for the six months ended July 31, 1997.
This 45% decrease is attributed primarily to timing in recognition of research
and development costs. The Company expects that its research and development
costs will continue to decline for the rest of fiscal year 1998, but may
increase thereafter as the Company undertakes new projects.
During the year ended January 31, 1998 the Company incurred a royalty
expense of $16,681 to Hippo Holdings, Ltd. in connection with sales of HiPPO
products. Because all such sales have been terminated, the Company will no
longer have any royalty expenses to Hippo Holdings, Ltd.
Selling, general and administrative expenses totaled $3,669,657 for the year
ended January 31, 1998 as compared to $1,251,009 for the period ended January
31, 1997. This increase resulted primarily from increased advertising and
promotion spending and development costs and growth in employment and related
costs.
Selling, general and administrative expenses totaled $2,755,609 for the six
months ended July 31, 1998 as compared to $1,294,715 for the six months ended
July 31, 1997. This 213% increase resulted primarily from increased payroll and
related expenses, advertising and promotion, travel, professional fees and
facilities, supplies and services.
FORECAST
The Company has installed 58 TREs in 55 cities. The Company is in the
process of opening additional accounts and installing additional TREs. The
Company expects to have products available in 300 stores by year end and to open
up to 100 new TREs for Spring, 1999. The Company expects sales of Tegra products
to increase as existing and potential retailers and consumers gain familiarity
with the Tegra brand and the benefits offered by the Company's product lines and
as additional accounts are opened and TREs are installed. The Company plans to
use $1,750,000 of the proceeds from the Offering for marketing and advertising
efforts. See "Use of Proceeds."
The Company anticipates that its cost of goods sold will decrease with
increased volume of purchasing and lower costs associated with shipping product
as the Company's working capital position improves.
The Company anticipates that within the 12 months subsequent to the closing
of the Offering it will hire an additional 20 people. Of these 20 people, 5 are
expected to be hired for sales positions. These individuals will primarily be
territory managers responsible for sales to specific accounts within a defined
geographic region. The Company also anticipates that 5 of these 20 people will
work in customer service and the remaining 10 in support, administrative and
distribution positions.
YEAR 2000 COMPLIANCE
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, as year 2000
approaches, computer systems and applications used by many companies may need to
be upgraded to comply with "Year 2000" requirements. The Company relies on its
systems in operating and monitoring many significant aspects of its business,
including financial systems (such as general ledger, accounts payable, accounts
receivable, inventory and order management), customer services, infrastructure
and network and telecommunications equipment. The Company also relies directly
and indirectly on the systems of external business enterprises such as
customers, suppliers, creditors, financial organizations and domestic and
international governments. The Company currently estimates that its costs
associated with Year 2000 compliance, including any costs associated with the
consequences of incomplete or untimely
28
resolution of Year 2000 compliance issues, will not have a material adverse
effect on the Company's business, financial condition or results of operations.
However, the Company has not exhaustively investigated and does not believe it
has fully identified the impact of Year 2000 compliance and has not concluded
that it can resolve any issues that may arise in complying with Year 2000
without disruption of its business or without incurring significant expense. In
addition, even if the Company's internal systems are not materially affected by
Year 2000 compliance issues, the Company could be affected through disruption in
the operation of the enterprises with which the Company interacts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has historically consisted of
sales of equity securities and high yield debt borrowings. During the year ended
January 31, 1998 the Company borrowed $1,870,500 from unaffiliated individuals
at interest rates ranging from 9.4% to 24% and with a weighted average rate of
13.4%. Additionally, the Company borrowed $782,500 from individuals who either
are officers of the Company or are affiliated with or related to officers of the
Company. These borrowings will be repaid from the proceeds of this Offering. See
"Use of Proceeds" and "Certain Transactions."
At January 31, 1998, the Company was in default of the terms of certain
12.5% and 15% unsecured notes payable to private investors which were due during
September 1997. During February 1998, the Company obtained a specific waiver to
extend the maturity of the then outstanding unsecured notes payable through the
earlier of September 30, 1998 or within 5 days after an initial public offering
of the Company's common stock generating in excess of $7.5 million of gross
proceeds.
The Company has developed and implemented strategies to meet ongoing and
future liquidity needs. These strategies include (i) obtaining funds from a
private placement of securities of the Company which was completed in June,
1998; (ii) an initial public offering of the Company's Class A Common Stock and
(iii) arranging for working capital financing on inventory and receivables to
assist in cash flow. The management of the Company believes that these actions
along with a tighter control on overall costs will allow the Company to meet its
liquidity needs for the next 18 months.
Pursuant to the terms of a factoring agreement, the Company assigns
substantially all of its accounts receivable to a factor with recourse. The
Company is able to borrow up to 50% of eligible accounts receivable, as defined,
up to a maximum amount of $1 million. Advances from the factor incur interest at
24% per annum. Receivables assigned to the factor are subject to a charge of
3.0% of the face amount of the receivable. The advances from the factor are
secured by all the Company's assets. During the year ended January 31, 1998, the
Company incurred interest and factoring charges of $10,059 and $7,739,
respectively. The factoring agreement was for an initial term of six months and
renews for successive twelve month periods thereafter, unless cancelled by the
Company or the factor. At January 31, 1998, the Company had received advances of
approximately $115,000 in excess of those permitted under the factoring
agreement, resulting in the Company being in default of such agreement. As a
result of the default, the factor had the right to terminate the agreement and
demand payment of the funds advanced. Subsequent to year end, the Company has
reduced the amounts outstanding under the factoring agreement and is currently
within the borrowing base of such agreement.
The Company has held discussions with a purchase order financing institution
regarding opening a purchase order financing arrangement. The Company has
received a commitment from this institution to enter such an arrangement
conditioned on the Company reducing its accounts payable to within current
reasonable terms. The closing of this Offering will allow the Company to reduce
accounts payable to a point where the Company expects to be able to enter into
such purchase order financing arrangement. See "Use of Proceeds."
One of the Company's most significant commitments is to Ian Woosnam as a
worldwide spokesperson for the Tegra brand. As of July 31, 1998, the Company
owed Mr. Woosnam approximately $550,000 for services rendered since January 1,
1998. If the Company is able to successfully negotiate an endorsement
29
contract with Mr. Woosnam, the Company expects to pay Mr. Woosnam approximately
$1,150,000 annually during the term of the agreement. The Company currently
expects the term of the agreement to be nine years. See "Business -- Marketing
-- Endorsements."
SEASONALITY
The business of the Company is subject to seasonal fluctuations.
Historically, companies in the golf industry have seen their greatest sales in
the first half of the calendar year, and the business of the Company is
particularly dependent on sales during these months. Nevertheless, the Company
believes that, in the near term, its sales may not reflect this seasonality
because the opening of new accounts during the second half of 1998 will outweigh
seasonal effects, which the Company expects may increase its sales during this
period.
30
BUSINESS
GENERAL
The Company is a designer, marketer and manufacturer of premium quality golf
equipment, apparel and accessories under the Tegra brand name. Tegra products
represent a wide range of technologically innovative, premium-priced men's golf
clubs, apparel and accessories that are sold in off-course golf specialty and
on-course pro shops. Tegra golf clubs incorporate the Company's patent-pending
Invisible Inset Hosel (the cylindrical chamber in which the shaft is attached to
the club head), a feature designed to increase the accuracy and distance of golf
shots, and were introduced into the US market in October 1997. In the spring of
1998, the Company began installing dedicated Tegra Retail Environments ("TREs")
in select golf stores across the country and shipping a Tegra men's apparel
line. TREs are defined spaces in golf shops which house the Company's equipment,
apparel and accessories in an integrated, branded selling environment. The
Company has installed 58 TREs in golf stores in 55 cities. The Company is in the
process of opening additional TREs and expects to install up to 100 new TREs for
the Spring, 1999 selling season. Tegra products are now available in over 170
golf shops nationwide and the Company expects they will be available in 300 golf
shops by year end. In addition, the Company expects to have products available
in 1,000 stores by Spring, 1999. Professional golfers Ian Woosnam and Glen Day
began endorsing Tegra products in January, 1998. The Company is currently
negotiating an agreement with Mr. Woosnam for him to continue his endorsement
through December 31, 2006.
GOLF INDUSTRY OVERVIEW
According to the National Golf Foundation ("NGF"), there are approximately
48 million golfers worldwide, including approximately 25 million in the U.S. In
1997, golfers in the U.S. played an estimated 547 million rounds of golf and,
according to the National Sporting Goods Association, are estimated to have
spent $5.8 billion on golf equipment, apparel and accessories. Of the 25 million
U.S. golfers, about 5.2 million, characterized by the NGF as "avid golfers,"
play over 25 rounds of golf per year. The Company believes that avid golfers are
the first to seek out performance-oriented golf equipment and generally drive
golf club product trends.
According to the NFG in 1997, wholesale sales of golf equipment in the U.S.
were approximately $3.9 billion. In addition, wholesale sales of golf clubs
increased at an annual compound growth rate of approximately 10.9% over the
5-year period from 1992 to 1997. The Company believes that sales of golf clubs
will continue to grow in the future due to a number of factors including:
FAVORABLE POPULATION TRENDS. The Company believes that the aging of Baby
Boomers (those born between 1946 and 1964) and the emergence of the Baby
Boomers' children (those born between 1977 and 1995) are likely to increase the
demand for golf products generally. As golfers age, they tend to play golf more
often and spend more money on the sport, particularly in the over-50 age group.
Accordingly, because a majority of Baby Boomers are entering their 40s and 50s,
the Company expects interest in and spending on golf to increase. Further,
because Baby Boomers' children are beginning to enter their 20s, the age most
golfers begin to play the sport, the Company believes they will further increase
their participation in and spending on golf.
INCREASING AVAILABILITY OF GOLF FACILITIES. According to the NGF,
approximately 350 new golf courses will open in the U.S. annually between 1998
and the year 2000. The Company believes that these additional facilities will
make golf more accessible and convenient, leading to a further increase in golf
participation rates.
INCREASING INTEREST FROM NON-TRADITIONAL GOLFERS. The Company believes that
golf has become increasingly attractive to segments of the population that have
not historically been well-represented among golfers. Most notably, Tiger Woods
has made golf more appealing to junior and minority golfers. According to the
NGF, the total number of beginning and junior golfers increased by over 40% in
1997
31
compared to the previous year. In addition, the success of the Ladies
Professional Golf Association (the "LPGA") Tour and such female golfers as
Annika Sorenstam have increased the appeal of the sport to women.
NEW PRODUCT INNOVATIONS. In recent years, the golf equipment industry has
made significant advances in product designs and technologies to enhance
golfers' performance and overall enjoyment of the game. The Company believes
that this rapid evolution of golf clubs accelerates the rate at which golfers
purchase new or additional clubs.
COMPANY HISTORY
The Company was founded as Hippo, Inc. in February 1996, with the goal of
becoming a leading U.S. golf equipment and apparel manufacturer. To that end the
Company entered into a licensing agreement with Hippo Holdings, Ltd, a leading
manufacturer of value-priced golf equipment in Europe, to manufacture, market
and distribute the HiPPO brand of golf equipment in the United States and
Canada. The Company began shipments of HiPPO products in July of 1997 and for
the ten month period ending April 30, 1998 sold approximately $500,000 in HiPPO
clubs. The Company has since discontinued the distribution of value-priced golf
equipment to pursue opportunities in the premium-priced end of the market
offered by Tegra products.
In June of 1996, the Company initiated a significant research and
development project to develop new, visibly distinct technology for its golf
clubs with which to enter the premium-priced segment of the U.S. golf market.
The premium-priced segment of the golf market captures the largest portion of
consumer spending with approximately 70% of consumer dollars being spent on
premium clubs. In addition, manufacturers margins on premium clubs are typically
significantly higher than on value-priced equipment. This research led to the
Company's development of its patent-pending Invisible Inset Hosel and bullet
shaped driver technology. These new technologies have become the key
technological elements of the Tegra brand of golf equipment. To improve its
margins and profits, the Company added the Tegra brand of premium golf equipment
and accessories at the premium-priced segment of the market.
In January, 1998 the Company changed its name to Outlook Sports Technology,
Inc. Management believes that this name better reflects the attitude and spirit
of the Company, as a forward thinking and technologically advanced sporting
goods manufacturer, than its prior name.
In April, 1998 the Company was approached by Hippo Holdings, Ltd. to
reacquire the rights to the HiPPO brand in the United States and Canada. On May
4, 1998 the Company sold its license to sell HiPPO-TM- products in the U.S. back
to Hippo Holdings, Ltd. along with all existing HiPPO-TM- inventory, marketing
materials and related liabilities. In return, the Company received a cash
payment from Hippo Holdings, Ltd. of approximately $413,000. In addition Hippo
Holdings, Ltd. returned to the Company 50,000 shares of the Company's common
stock and assumed outstanding liabilities and commitments of the Company in
excess of $1,000,000.
COMPANY PRODUCTS
TEGRA GOLF CLUBS. Tegra woods and irons with the Company's patent-pending
Invisible Inset Hosel are an evolution from current club technology. The Company
has worked with Chou Golf Design Labs, Inc. to develop the Tegra line of golf
clubs. The Company's design moves or insets the shaft as close to the center of
the club head as permitted under current USGA rules. As a result, the club head
will rotate to the target faster than conventional designs, making it easier to
square the club at impact and enabling the golfer to hit straighter and longer
shots. This technology has been designed to be visibly distinct to the consumer
at all times except while the club is being used. The Company's purpose in
making the technology "invisible" to golfers while hitting the shot is to
enhance the golfers ability to aim the club when addressing the ball. The
Company believes that the Company's Invisible Inset Hosel technology could be as
significant to the golf industry as perimeter weighting, graphite shafts or
oversize metal woods.
32
In addition, the Company designed the Tegra woods with a "bullet" shape in
which the widest part of the club is the club's face or hitting area. This
"bullet" shape contrasts with conventional club designs, in which the club head
widens out from the face of the club resulting in the widest part of the club
head being half an inch or more behind the face. The club's bullet shape
provides a larger hitting area and sweet spot than would be achieved in a club
having the same volume but a conventional design. An additional result of the
bullet shape is that more weight in the club is distributed directly behind the
hitting area than with conventional designs.
Tegra irons incorporate the same patent-pending Invisible Inset Hosel
technology as Tegra woods. The inset is as beneficial in Tegra irons as it is in
Tegra woods. The Company believes that squaring the club to the target at impact
makes Tegra iron shots more accurate than conventional designs. Tegra irons
feature an oversize head design, with weighting around the perimeter and behind
the sweet spot designed to maximize forgiveness on mis-hits and to provide a
better feel on center hits, and the Invisible Inset Hosel which has been
elevated to reduce club head twisting in longer grass.
The Company presently manufactures Tegra men's right handed titanium woods
and 17-4 stainless steel irons. The Company produces a full range of titanium
drivers (6 DEG., 8 DEG., 9 DEG., 10 DEG. and 11 DEG.) and titanium fairway woods
(#3, #5, #7 and #9) with graphite shafts and irons with options of steel or
graphite shafts. Each shaft is available in various flexes to accommodate
golfers of all ages and ability levels. The Company plans to introduce
left-handed, ladies and seniors woods in the Spring of 1999.
The Company has conducted player testing on its woods and irons and the
Company believes such testing shows its Tegra technology promotes straighter and
longer golf shots than other leading premium-priced golf clubs. "Iron Byron"
testing (robotic testing designed to repeat identical swings so different clubs
can be compared under controlled conditions) of Tegra woods has confirmed that
the Tegra driver provides greater carry, roll and overall distance than certain
leading premium-priced clubs while simultaneously increasing accuracy.
Additional mechanical testing which has recently been recorded using high speed
video shows that the Invisible Inset Hosel design produces a squarer club face
at impact than other leading premium-priced clubs, resulting in straighter and
longer shots.
The Company's Invisible Inset Hosel technology is visibly distinct to the
consumer except while the club is being used. In the golf industry, where many
products look alike, some technological features are difficult to distinguish.
Since many manufacturers make similar performance claims, consumers can become
confused and have difficulty distinguishing products. The visibility of the
technology is extremely important to identifying the product and communicating
its benefits in a believable way and therefore adds to the Company's marketing
effort. The Company believes that past performance of golf club sales shows that
golf clubs which have had visibly distinct technology have seen far greater
sales growth than equipment with new but non-visibly distinct technology. In
1967, Ping became a leader in the irons category when it introduced the first
cavity backed (perimeter weighted) irons, a technology that was visibly distinct
from other irons available at the time. In 1979, Taylor Made became a leader in
the driver category when it introduced the first "metal wood" with an investment
cast steel club head replacing the traditional persimmon wood head. In 1991,
Callaway Golf became a leader in the driver category when it introduced the
first oversized metal wood. Each of these products was not only an evolution of
existing technology but its technology was visibly distinct to the consumer. As
a more recent example, in 1994, Taylor Made introduced the Burner Bubble Shaft.
This shaft incorporates a geometrical "bubble" highlighted with copper paint to
emphasize its visible difference from conventional shafts. In the second quarter
of 1995, Taylor Made's sales nearly tripled from 1994, achieving a 30% share of
the premium driver market. The Company believes that a key factor to the success
of these products is that the technology was visibly distinct to the consumer.
The Company is currently sourcing all of its golf club components from
contract manufacturing facilities. The Company's golf club heads are currently
made in Asia by Fu Sheng Industrial Co., Ltd. and Zhong Shan Wei Sheng Sporting
Goods Co., Ltd. True Temper Sports ("True Temper"), the world's largest
33
shaft manufacturer, is currently producing the Company's steel and graphite
shafts domestically. Golf Pride, a division of the Eaton Corporation, the
world's largest grip manufacturer, produces the grips domestically. Joe Powell
Golf, Inc. ("Powell"), one of the golf industry's leading golf equipment
assembly companies, assembles the Tegra clubs domestically. The Company obtains
these supplies by using individual purchase orders, rather than detailed open
supply agreements. The Company spent approximately $451,019 in 1997 and $650,905
in 1996 in connection with research and development.
APPAREL. In addition to golf clubs, the Company presently designs and
manufacturers a line of men's apparel. The Tegra apparel range consists of men's
shirts and outerwear which emphasize performance, comfort and style and are
suitable for wear on or off the course. The Company expects that Tegra men's
shirts will retail from $38-$54, while outerwear will retail from $80-$125 for a
jacket and $225 for a rain-suit. The Company's apparel designs are intended to
enhance the Tegra image of a technologically advanced and fashionable line of
apparel.
The Company's men's collection is divided into three groupings: solid color
shirts, fashion shirts, and technical pieces (shirts, rainwear and other
outerwear incorporating innovative fabrics, zippers, and other features). The
foundation of the apparel collection is the Company's line of core solids. The
Company's solids are produced from 97% cotton-3% spandex which fabric has the
benefits of moveability and durability. Tegra's fashion collection incorporates
Tegra's colors (red, black and white) to reinforce the Company's brand image.
Technical pieces are constructed from innovative fabric combinations which
include cotton and polyester microfiber materials to keep golfers cool and dry
in the heat. These shirts are designed to accentuate the athleticism of the
golfer and may include such details as zippered plackets, Johnny (i.e. V-neck)
collars and reinforced sleeve and shoulder seams.
Tegra outerwear is designed to perform in a variety of climatic conditions.
A collection of technical fabrics such as Air-Tech-TM-, a waterproof-breathable
nylon, and Micro Fleece, a brushed Polyester fabric which provides breathable
insulation have been incorporated to help keep the golfer comfortable when
playing in inclement weather.
ACCESSORIES. The Company currently offers a variety of golf caps and full
size staff bags. The Company plans to offer a full line of accessories,
including bags, umbrellas, towels and caps. The Company anticipates offering a
range of golf bags, including stand, light-weight carry and full size staff
bags. The Company expects its golf bags, umbrellas, and towels to be available
in March, 1999. See "Risk Factors -- Dependence on Product Introduction."
MARKETING
GENERAL. The Company's target consumer is the avid amateur golfer. To reach
this consumer the Company is developing and installing TREs in golf shops
throughout the country, creating a distinctive advertising campaign for the
Tegra brand, attempting to obtain endorsements from touring professionals, such
as Ian Woosnam, and pursuing other traditional forms of marketing. See "Risk
Factors -- Dependence on Product Introduction."
TEGRA RETAIL ENVIRONMENTS. The Company has adapted a marketing model used
by marketers of many leading brands of consumer products who use in-store shops
to increase sales and brand awareness. TREs are advanced retail selling systems
designed to increase sales and brand awareness by selling Tegra golf clubs,
apparel and accessories in a dedicated in-store area. Within the TRE the Company
markets its Tegra golf clubs, apparel and accessories in an integrated, branded
environment designed to convey the image of the Company as innovative in golf
club technology and distinctive in design. The Company expects that TREs will
promote Tegra products as visually distinctive and technologically advanced and
will encourage customers to purchase the Company's accessories and apparel as
well as its golf clubs. These types of in-store environments have been
successfully used to promote many other products such as designer clothing and
personal computers.
34
TREs occupy from 50 to 150 square feet in specialty golf shops, and consist
of flooring, fixtures, graphics and point-of-purchase materials. The TREs
display Tegra clubs, clothing and apparel in a unified environment. The Company
has developed proprietary fixtures which it uses to define the Tegra area within
a store. These fixtures vary from a free standing display which can hold a
complete set of irons and individual clubs, to a display which houses 18 woods,
and a variety of apparel fixtures which display anywhere from 24 to 148 apparel
pieces. A typical TRE is comprised of a wood and iron display as well as a
clothing presentation. The Company's aim is to establish TREs in 1,000
off-course golf shops within three years. The Company has installed 58 TREs to
date and expects to install up to 100 additional TREs by spring of 1999. The
Company believes that a major point of differentiation from its competitors will
be its emphasis on retail environments and in-store presentations. To the
Company's knowledge, no other golf company is presently manufacturing clubs,
bags, apparel and accessories and providing the retailer with fixturing to
accommodate these items. See "Risk Factors -- Risk of Retailers' Refusal to
Place or Maintain Tegra Retail Environments."
ADVERTISING. The Company has completed a distinctive advertising campaign
for the Tegra brand in an effort to create consumer awareness of and demand for
Tegra products. The initial Tegra advertising campaign, entitled "Golf First,"
focused on the Company's visibly distinct technology, and was designed to build
brand awareness and name recognition for Tegra and position the Tegra brand as
the golf equipment choice for avid golfers. The Company intends to continue to
use advertising to build an image for the Tegra brand and to separate itself
from other golf companies. The Company believes the breadth of its product line,
in particular its apparel line, should greatly enhance the Company's ability to
create this image.
The Company is presently developing a long format (30-minute) infomercial
for Tegra drivers, which is expected to air in December. This broadcast
advertising will be supplemented with a print campaign. The Company believes
that several golf equipment companies have found long format infomercials to be
extremely successful and profitable. The Company believes that the unique
technological features incorporated in the Tegra driver and the visibility of
these features give it the potential to be a successful direct marketed product.
The Company plans to test market the infomercial on the Golf Channel and other
cable sports channels. In addition, Peter Kessler, host of GOLF ACADEMY LIVE,
wears Tegra clothing on the show. GOLF ACADEMY LIVE, which airs in prime time
two nights per week, is one of the highest rated shows on the Golf Channel.
ENDORSEMENTS
Ian Woosnam. Mr. Woosnam began competing using Tegra clubs in October, 1997
and began endorsing Tegra products on January 1, 1998, although he does not yet
have an endorsement contract. The Company is currently negotiating with Ian
Woosnam to enter into an endorsement agreement for the Tegra brand. The Company
expects to enter into a contract with Ian Woosnam pursuant to which he will
continue to endorse Tegra products through December 31, 2006. Under the terms of
the proposed agreement, Mr. Woosnam will endorse Tegra worldwide, wear Tegra
clothing and headgear, play Tegra clubs and carry a Tegra bag and accessories.
The Company also believes that Mr. Woosnam will agree to play a minimum of eight
of his approximately 25 annual tournaments per year in the United States. Mr.
Woosnam held a top ten Sony Ranking from the end of 1987 through the summer of
1994, and has over forty career victories world-wide, including the Master's
Tournament in 1991 and is one of the top ranked golfers in Europe. Mr. Woosnam
is a global personality as he annually plays in approximately 25 tournaments
worldwide. Mr. Woosnam customarily plays in the four majors, including the three
U.S. majors (the Masters, the U.S. Open and the PGA Championship) which
traditionally receive the highest television viewership for golf tournaments.
Mr. Woosnam's European Tour events can be seen in the U.S. on the Golf Channel.
Additionally, the Company expects to secure publicity appearances and photo
shoot days from Mr. Woosnam. The Company believes that Mr. Woosnam's visibility
and extensive knowledge of golf will enhance the Company's brand identity and
capabilities.
35
Glen Day. Mr. Day, a U.S. PGA Tour member, has endorsed Tegra golf
equipment, apparel and accessories worldwide since January 1998. Mr. Day
currently endorses such products under a contract that will expire on December
31, 1998. As of September 14, 1998, Mr. Day was ranked in the top ten on the
U.S. PGA Tour. Mr. Day has had six top ten finishes, including five top three
finishes since beginning his association with Tegra. Mr. Day's endorsement
contract with the Company expires on December 31, 1998.
Other Professional Endorsers. The Company's products are currently being
endorsed by PGA and Nike Tour professionals John Maginnes and Gene Sauers. Mr.
Maginnes has been a professional golfer on the PGA and Nike Tours since 1994 and
won the Nike Dakota Dunes Open in August, 1998. The Company and Mr. Maginnes
have entered into a two-year contract for him to wear Tegra apparel on tour. Mr.
Sauers has been a professional golfer for fourteen years and had two PGA Tour
victories including the 1986 Bank of Boston Classic and the 1989 Hawaiian Open.
Mr. Sauers won the Nike South Carolina Classic in May of this year. The Company
anticipates that Mr. Sauers will enter into a two-year contract to wear Tegra
apparel on tour.
PERFORMANCE ACCOUNT PROGRAM. The Company intends to institute a Performance
Account Program ("PAP") as part of its distribution strategy. The Company plans
to grant each participant in the PAP program priority status for off-course
retail distribution of Tegra products in a specific territory. The Company
expects to require these selected retailers to purchase at least $250,000 of
merchandise per year in each territory for which they are granted priority
status. The Company also plans to require such retailers to install TREs in each
of their retail locations. See "Risk Factors -- Risk of Retailers' Refusal to
Place or Maintain Tegra Retail Environments."
RETAIL PRICING. One of the Company's sales strategies is to deliver
products which can achieve superior retail margin in order to incentivize
retailers to sell more Tegra product. The Company estimates that retailers on
average achieve 20% gross margin on sales from premium golf equipment. By
pricing appropriately, the Company believes it will be able to offer retailers
products that can achieve superior margin. The Company expects that, on average,
Tegra golf clubs will allow retailers to achieve 40% gross margin, while Tegra
apparel allow retailers to achieve in excess of 50% gross margin.
CATALOGUE SALES. Tegra products are available in the Edwin Watts golf
catalog, one of the country's leading golf catalogues.
PATENTS
Where appropriate, the Company seeks patent protection. The Company has
filed patent applications covering various aspects of its TEGRA line of inset
woods and irons. The Company filed a United States provisional patent
application on December 31, 1996, entitled INSET HOSEL GOLF CLUB. The Company
subsequently filed a full United States patent application and a Patent
Cooperation Treaty patent application based on the United States provisional
patent application, claiming priority as of the December 31, 1996 date. The
Patent Cooperation Treaty Application designated all states. Based on the
results of a patent search obtained by outside patent counsel, the Company is of
the view that various aspects of the TEGRA line of woods and irons may be
patentable. The patent applications include sixty-eight claims of varying scope
and construction, including claims directed to golf clubs having an inset hosel
wherein the fact that the hosel is inset and is hidden from the golfer, as well
as claims directed to methods of making such a golf club. Other claims are
directed to other features or combinations of features of the Tegra golf clubs.
The Company has not received a substantive office action on the merits from the
United States Patent and Trademark Office.
The Company intends to seek further patents on its technology, if
appropriate. However, there can be no assurance that patents will issue from any
of the Company's pending or any future applications or that any claimed allowed
from such applications will be of sufficient scope of strength, or be issued in
all
36
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. See "Risk
Factors--Intellectual Property."
COMPETITION
The Company competes with a number of established golf club manufacturers,
many of which have greater financial and other resources than the Company. The
Company's competitors include Callaway Golf Company, Adidas-Salomon AG (Taylor
Made) and Fortune Brands, Inc. (Titleist and Cobra). The Company competes
primarily on the basis of performance, brand name recognition, quality and
price. The Company believes that its ability to establish its brand and market
its products through its distributors is important to its ability to compete.
See "Risk Factors -- Competition."
The golf club industry is generally characterized by rapid and widespread
imitation of popular technologies, designs and product concepts. The Company
expects that one or more competitors may introduce products similar to its Tegra
clubs. The buying decisions of many purchasers of golf clubs are often the
result of highly subjective preferences which can be influenced by many factors,
including, among others, advertising media, promotions and product endorsements.
The Company may face competition from manufacturers introducing other new or
innovative products or successfully promoting golf clubs that achieve market
acceptance. The failure to compete successfully in the future could result in a
material deterioration of customer loyalty and could have a material adverse
effect on the Company's business, operating results or financial condition. See
"Risk Factors -- Competition."
In addition, the Company competes with a number of more well-established
designers of golf apparel, including Nike, Reebok, Greg Norman, and Tommy
Hilfiger. Because the Company competes primarily on the basis of brand name
recognition, quality, comfort, and fashion considerations, the Company believes
that its ability to establish its brand and market its apparel is important to
its ability to compete. The subjective nature of apparel-buying decisions could
result in a lack of acceptance in the market of the Company's apparel and
accessories. Failure of the Company's current and planned apparel and
accessories would adversely affect the Company's future growth and
profitability. See "Risk Factors -- Competition."
PROPERTIES
The Company's corporate headquarters are located in a 2,650 square foot
facility in Boca Raton, Florida. This facility accommodates the Company's
corporate, administrative, marketing and sales personnel. The lease expires
November 30, 1998.
Additionally, the Company's apparel division is headquartered in a 2,250
square foot facility in New York, New York. The facility accommodates the
Company's apparel design sourcing and quality assurance personnel. The Company
is currently leasing this facility on a month-to-month basis.
EMPLOYEES
At September 21, 1998, the Company had 25 full-time employees, of whom 24
were involved in executive, managerial, supervisory and sales capacities, and
one served in a clerical capacity. None of the Company's employees is covered by
a collective bargaining agreement or is a member of a union. The Company
considers its relationship with its employees to be good.
LEGAL PROCEEDINGS
The Company has received a letter from Tatsuya Saito requesting that the
Company review its Tegra line of clubs in view of a patent issued to him on July
12, 1994 (the "Saito Patent"). The Saito Patent covers certain aspects of a club
head and hosel, including the positioning of the hosel inset relative to the
club head. The Company has referred this request to independent outside patent
counsel. The Company does not believe that the Tegra line of clubs infringes any
of the claims of the Saito Patent; however, there can
37
be no assurance that a court will find that one or more of the Company's
products does not infringe the Saito Patent, or any other patent. If Tatsuya
Saito is successful in asserting its patent, it could require the Company to
alter or withdraw existing products, delay or prevent the introduction of new
products, or force the Company to pay damages if the products have been
introduced. See "Risk Factors -- Litigation."
The Company has received a letter from Vardon Golf Company, Inc. ("Vardon")
asserting that the Company's Tegra woods and irons infringe one of the claims of
its patent issued on April 12, 1994 (the "Vardon Patent"). The Vardon Patent
includes claims directed to a number of aspects of a golf club head and hosel,
including claims directed to an extended radius of gyration, which includes an
aspect of the club head extending behind the hosel. Vardon filed a complaint in
the Northern District of Illinois, Eastern Division, on May 13, 1998, in which
Vardon alleges that six golf club manufacturers, including the Company, have
manufactured, sold, offered to sell and distributed in the United States,
specifically in the Northern District of Illinois, wood-type and iron golf clubs
that are covered by at least one claim of the Vardon Patent and a related design
patent. The Company does not believe that the Tegra line of clubs infringes any
of the claims of these patents and the Company is in the process of preparing a
response to the complaint; however, there can be no assurance that a court will
find that the Company does not infringe one or the other of these patents, or
both. If Vardon is successful in asserting its patent, it could require the
Company to alter or withdraw existing products, delay or prevent the
introduction of new products, or force the Company to pay damages if the
products have been introduced. See "Risk Factors -- Litigation."
The Company is the defendant in a lawsuit filed by TBWA Chiat/Day Inc.
("Chiat") in the Supreme Court of the State of New York on July 6, 1998 alleging
breach of contract for advertising services and that certain fees and expenses
in an amount of approximately $200,000 incurred by Chiat have not been paid by
the Company. The Company has prepared and filed a response to this complaint,
and the Company intends to assert its defences vigorously, however, there can be
no assurance that the Company will prevail. See "Risk Factors -- Litigation."
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions with the
Company as of the date of this Prospectus of all of the officers and directors
of the Company. Also set forth below is information as to the principal
occupation and background for each person in the table.
[Enlarge/Download Table]
NAME AGE POSITION AND OFFICE
----------------------------------------------------- --- -----------------------------------------------------
Paul H. Berger....................................... 30 Chairman of the Board and Chief Executive Officer
Jim G. Dodrill II.................................... 32 President, General Counsel and Director
Gary M. Treater...................................... 42 Executive Vice President
Everette C. Hinson................................... 49 Vice President Finance
Neal J. Cohen........................................ 41 Vice President Apparel Operations
David K. Stern....................................... 34 Vice President Marketing
James J. Henley...................................... 30 Apparel Design Director
MR. BERGER co-founded the Company with Mr. Dodrill and has served as the
Chairman of the Board and Chief Executive Officer of the Company since the
Company's inception. From 1994 to 1995, Mr. Berger was the Special Projects
Manager for Designs, Inc. ("Designs"), of which his father is the Chairman of
the Board. Mr. Berger assisted in repositioning Designs from a single brand
apparel chain to a multi-brand operation and in the acquisition by Designs of
Boston Trading Ltd., a high quality men's and women's apparel manufacturer. From
1993 to 1994, Mr. Berger served as an attorney with Designs. Mr. Berger is a
graduate of the George Washington University and the University of Miami School
of Law. Mr. Berger is licensed to practice law in the Commonwealth of
Massachusetts and the State of Florida.
MR. DODRILL co-founded the Company with Mr. Berger and has served as
President, General Counsel and a director of the Company since the Company's
inception. From 1993 to 1996, Mr. Dodrill was an associate at the law firm of
Latham & Watkins, practicing in the corporate area with an emphasis on
securities offerings, acquisitions, finance and general corporate
representation. From 1988 to 1990, Mr. Dodrill worked for Davis Polk & Wardwell
conducting research and coordinating administrative efforts regarding corporate
reorganization and recapitalization transactions and mergers and acquisitions.
Mr. Dodrill graduated from Brown University and the University of Miami School
of Law, MAGNA CUM LAUDE. Mr. Dodrill is licensed to practice law in the State of
New York.
MR. TREATER has served as the Company's Executive Vice President since
January, 1997, after having served as Vice President of Golf Operations for the
Company from June 1996 through December 1996. From 1994 to 1996, Mr. Treater
served as President of Gary Player Golf Equipment Inc., where he was responsible
for relocating the company from South Africa to the U.S. and for development of
the Player product line. From 1989 to 1994, Mr. Treater served as the General
Manager of the Golf Club & Golf Products Divisions at the Ben Hogan Company. For
the four years prior to that, Mr. Treater was the Senior Vice President at the
National Golf Foundation.
MR. HINSON has served as the Company's Vice President of Finance since May,
1997. From 1987 to 1997, Mr. Hinson served as Controller and Vice President of
Finance, responsible for the accounting, treasury, credit, MIS and human
resources departments, at Dunlop Maxfli Sports Corporation, a multi-division
sporting goods manufacturer with annual sales in excess of $125 million. From
1980 to 1987, Mr. Hinson served as Corporate Controller and in various
controllership and operations positions at Elscint, Inc., a manufacturer and
distributor of medical diagnostic equipment with annual sales in excess of $100
million.
MR. COHEN has served as the Company's Vice President of Apparel Operations
since June 1996. From 1989 to 1996, Mr. Cohen was Vice President of Operations
for Benetton Sportsystem Active, where he was
39
responsible for managing the global sourcing of all brands, implementing final
quality assurance auditing procedures and managing customer service, and
traffic, warehousing and distribution of product. From 1980 to 1985 Mr. Cohen
served as the Quality/Production Manager for Adidas U.S.A.
MR. STERN has served as the Company's Vice President of Marketing since
March, 1998. From 1997 to February, 1998, Mr. Stern served on the Company's
Advisory Board. From 1997 to 1998, Mr. Stern served as Director of Marketing for
Thermolase, a publicly traded company which owns and runs spa facilities across
the U.S. From 1987 to 1997, Mr. Stern was Vice President of Marketing at
Maddocks and Company.
MR. HENLEY has served as the Company's Apparel Design Director since June
1996. From 1995 to June, 1996, Mr. Henley served as Apparel Designer for the
Tommy Golf line at Tommy Hilfiger, Inc. From 1992 to 1994, Mr. Henley served as
the designer for all product categories for Duck Head Apparel Co.
The Company currently has two directors, Mr. Paul Berger and Mr. Jim
Dodrill. The Company's Board of Directors is divided into three classes, with
one class of directors elected each year at the annual meeting of stockholders
for a three-year term of office. All directors of one class hold their positions
until the annual meeting of stockholders at which the terms of directors in such
class expire and until their respective successors are elected and qualified.
Mr. Jim Dodrill serves in the class whose term expires in 1999; Mr. Paul Berger
serves in the class whose term expires in 2000. The Company intends to appoint
one of the individuals named below under the caption "New Directors" to serve in
the class whose term expires in the year 2000 and the Company intends to appoint
one of the individuals under the caption "New Directors" to serve in the class
whose term expires in the year 2001. Executive officers of the Company are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors or until their successors are duly elected and qualified.
None of the Company's executive officers has entered into an employment
agreement with the Company. See "Risk Factors -- Lack of Experience of
Management."
NEW DIRECTORS
The Company has agreed with the Representative that, promptly after the
completion of this Offering, the Company will increase to five the number of
individuals serving on the Company's Board of Directors, at least two of whom
will be independent directors. The Company has also agreed that, for a period of
five years following the completion of the Offering, it will use its best
efforts to cause the election to its Board of Directors, one designee of the
Representative.
Set forth below are the names, ages and certain background information of
the two individuals the Company intends to appoint to its Board of Directors,
each of whom has agreed to serve. The Company anticipates that the new directors
will also serve on the Audit Committee and the Compensation Committee.
MR. HASKELL has agreed to serve on the Company's Board of Directors. Mr. Kim
C. Haskell has over twenty-one years of media and marketing experience,
including currently serving as Executive Vice President of Colby, Effler &
Partners.
MR. SNIDER has agreed to serve on the Company's Board of Directors. Mr.
Michael Daniel Snider has been a professional golfer for twenty-five years and
is currently the Head Golf Professional at Chenal Country Club. Mr. Snider's
students include PGA, LPGA and Nike Tour players as well as amateur golfers of
all skill levels.
The third new director, to be nominated by the Representative, has not yet
been appointed.
COMPENSATION OF DIRECTORS
The Company's directors will be reimbursed for any out-of-pocket expenses
incurred by them for attendance at meetings of the Board of Directors or
committees thereof. The Board of Directors intends
40
to establish and form a Compensation Committee and Audit Committee upon
completion of this Offering. The Board of Directors also intends to compensate
Directors who are not employees of the Company $1,000 per month and to grant
each Director who is not an employee of the Company options to purchase 12,000
shares of Common Stock each year, with a per share exercise price equal to the
then fair market value of the Common Stock.
ADVISORY BOARD
Since the Company's formation, it has operated under the guidance of a
Senior Advisory Board. The Senior Advisory Board serves as a resource for
management and has no power or authority to direct the affairs of the Company.
The following are members of that Board:
STANLEY BERGER. Mr. Berger is Chairman of the Board of Directors of
Designs, Inc., based in Needham, Massachusetts. Mr. Berger co-founded Designs in
1977. Under his leadership, the company has grown to be one of the largest
global retailers of Levi Strauss & Co. products. Mr. Berger is the father of
Paul Berger.
STEVEN FIREMAN. Mr. Fireman served in the senior management of Reebok, Inc.
for five years, including his last two years serving as President of Reebok's
Casual Division (which included Reebok's Golf Division). At Reebok, Mr. Fireman
launched the Greg Norman apparel line and Reebok's line of golf footwear.
RIC JARRETT. Mr. Jarrett has twenty years of experience in the golf
industry. As the former owner, President and Chief Executive Officer of Tiger
Shark Golf, Inc., a multi-national golf equipment manufacturer, Mr. Jarrett has
extensive experience in areas ranging from product design to creation of
marketing and sales strategies. Mr. Jarrett is currently the President and Chief
Executive Officer of Absolute Sports, Inc.
DOUG RUDISCH. Mr. Rudisch is with Brookside Capital, a limited partnership
formed by Bain Capital, Inc. to make strategic equity investments in public
companies. Prior to joining Brookside, Mr. Rudisch was an associate at Bain
Capital, where he was responsible for structuring, analyzing and executing
private equity transactions and management buy outs. Prior to joining Bain
Capital, Mr. Rudisch worked with the Boston Consulting Group, a strategic
consulting firm. Mr. Rudisch graduated MAGNA CUM LAUDE from the Wharton School
of Business.
WILLIAM TAYLOR. Mr. Taylor was Vice President of Customer Relations at Levi
Strauss & Co. Mr. Taylor was an executive at Levi Strauss for more than 20
years. Before joining Levi Strauss, Mr. Taylor was an Assistant Coach of the
Dallas Cowboys.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation received by the Company's
Chief Executive Officer and each other executive officer whose total annual
salary and bonus exceeded $100,000 during the fiscal year ended January 31, 1998
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
(FISCAL YEAR 1998)
[Enlarge/Download Table]
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
SECURITIES
----------------------- OTHER ANNUAL UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) (2)
---------------------------------------------------- ---------- ----------- ----------------- ---------------------
Paul H. Berger...................................... $ 125,000 -- $ 7,800 --
Chairman of the Board and Chief
Executive Officer
James G. Dodrill II................................. 32,721 -- 7,800 (3)
President, General Counsel and Director
Gary M. Treater..................................... 153,912 -- 6,039 13,000
Executive Vice President
Neal J. Cohen....................................... 135,600 -- 6,444 10,000
Vice President Apparel Operations
Everette C. Hinson.................................. 77,263 -- -- 18,333
Vice President Finance
James J. Henley..................................... 120,000 -- 5,400 7,000
Apparel Design Director
--------------------------
(1) Other Annual Compensation consists of life insurance premiums paid by the
Company on behalf of the Named Executive Officer. See "-- Benefit Plans --
MONY Plan."
(2) See "Option Grants in Last Fiscal Year," below.
(3) In March, 1998, Mr. Dodrill received options to purchase 166,666 shares of
Class A Common Stock at $3.00 per share in lieu of approximately $95,000 of
salary for 1997.
BENEFIT PLANS
STOCK OPTION PLANS. The 1996 Incentive and Non-Qualified Stock Option Plan
(the "1996 Plan") was adopted by the Board of Directors and the shareholders.
Under the 1996 Plan, 1,150,000 shares of Class A Common Stock have been reserved
for issuance upon exercise of options designated as either (i) incentive stock
options ("ISOs") under the Internal Revenue Code (the "Code"), or (ii)
non-qualified options. ISOs may be granted under the 1996 Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors and other persons who render services to the Company or any subsidiary
corporation of the Company (whether or not they are employees).
The 1998 Incentive and Non-Qualified Stock Option Plan (the "1998 Plan" and
collectively with the 1996 Plan, the "Plans") was adopted by the Board of
Directors and the shareholders of the Company in June, 1998. Under the 1998
Plan, 800,000 shares of Class A Common Stock have been reserved for issuance
upon exercise of options designated as either (i) incentive stock options
("ISOs") under the Internal Revenue Code (the "Code"), or (ii) non-qualified
options. ISOs may be granted under the 1998 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants and other
persons who render services to the Company or any subsidiary corporation of the
Company (whether or not they are employees), and to all directors of the
Company.
The purpose of the Plans is to provide additional incentive to officers and
other employees of the Company as well as other persons providing services to
the Company by affording them an opportunity to acquire or increase their
proprietary interest in the Company through the acquisition of shares of its
Common Stock. The Board of Directors is responsible for administering the Plans.
The 1998 Plan may also be administered by a committee consisting of at least two
disinterested directors. The Board, within the
42
limitations of the Plans, may determine the persons to whom options will be
granted, the number of shares to be covered by each option, whether the options
granted are intended to be ISOs, the duration and rate of exercise of each
option, the option purchase price per share and the manner of exercise, the
time, manner and form of payment upon exercise of an option, and whether
restrictions such as repurchase rights by the Company are to be imposed on
shares subject to options. ISOs granted under the Plans may not be granted at a
price less than the fair market value of the Class A Common Stock on the date of
grant (or 110% of fair market value in the case of persons holding 10% or more
of the voting power of all classes of stock of the Company). The aggregate fair
market value at the time of grant of shares for which ISOs granted to any person
are exercisable for the first time by any person during any calendar year may
not exceed $100,000. Options under the Plans may not be granted more than 10
years after its effective date. Options granted to date have seven (7) year
terms. The term of each ISO granted under the Plans will expire not more than
ten years from the date of grant (or five (5) years in the case of persons
holding 10% or more of the voting power of all classes of stock of the Company).
Options granted under the Plans are not transferable during an optionee's
lifetime but are transferable at death by will or under the laws of descent and
distribution. In addition to the options summarized below, a total of ISOs and
non-qualified options to purchase 326,819 shares of Class A Common Stock have
been granted to other employees and advisors of the Company.
The following table sets forth as to each Named Executive Officer (a) the
total number of shares subject to options granted during the fiscal year ended
January 31, 1998, (b) exercise price of such options, (c) the percentage such
grants represent of the total option grants to employees in the fiscal year
ended January 31, 1998, and (d) the expiration date of such option grants.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
NUMBER OF PERCENTAGE OF
SHARES SUBJECT TOTAL OPTIONS
TO EXERCISE GRANTED TO
NAME OPTION GRANTS PRICE EMPLOYEES EXPIRATION DATE
----------------------------------------- ---------------- ------------- --------------- ----------------------
Gary Treater............................. 4,000 $ 6.00 .8% December 31, 2004
9,000 $ 6.00 1.8 January 30, 2005
Everette Hinson.......................... 8,333 $ 0.75 1.7 May 5, 2004
3,000 $ 6.00 .6 December 31, 2004
7,000 $ 6.00 1.4 January 30, 2005
Neal Cohen............................... 3,000 $ 6.00 .6 December 31, 2004
7,000 $ 6.00 1.4 January 30, 2005
James Henley............................. 5,000 $ 6.00 1.0 December 31, 2004
2,000 $ 6.00 .4 January 30, 2005
The following table sets forth certain information concerning the value of
unexercised stock options held by the Named Executive officers.
FISCAL YEAR-END OPTION VALUES
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT JANUARY 31, OPTIONS AT JANUARY 31,
1998 1998
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------------------------- ----------- ------------- ----------- -------------
Gary Treater........................................... 11,554 28,334 $ 44,578 $ 116,579
Everette Hinson........................................ 3,000 15,333 $ 3,000 $ 59,081
Neal Cohen............................................. 6,193 14,917 $ 20,804 $ 53,343
James Henley........................................... 6,526 4,917 $ 12,336 $ 16,943
MONY PLAN. The MONY Plan is a flexible premium variable life insurance
policy that the Company has provided as a benefit since August 15, 1996 to the
following employees: Paul Berger, Jim Dodrill, Gary Treater, Neal Cohen and
James Henley. In addition, the Company has provided this benefit to Everette
Hinson since July 1, 1998. Pursuant to the MONY Plan, an individual (or his
successors) may, subject to certain conditions, receive up to $500,000 at his
death. In the alternative, the individual may choose to receive a lesser payment
after a certain number of years in service, the amount of such payment to vary
with length of service, among other factors. The Company pays monthly premiums
ranging from $450 to $650 for the MONY Plan. The Company has the discretion to
increase the benefit amounts provided to MONY Plan beneficiaries and to
terminate the MONY Plan at will.
43
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock immediately prior to this
Offering, and as adjusted to reflect the sale of the shares of Class A Common
Stock offered by the Company by (i) each person known by the Company to
beneficially own more than five percent of the Common Stock, (ii) each director
and the Company's Chief Executive Officer, (iii) all directors and executive
officers of the Company as a group and (iv) each Selling Stockholder. Except as
otherwise indicated, the address of each beneficial owner of five percent of
such Common Stock is the same as the Company. See "Management."
[Enlarge/Download Table]
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP IMMEDIATELY AFTER
NAME AND ADDRESS OF PRIOR TO OFFERING SHARES OFFERING (1)
BENEFICIAL OWNER 5% STOCKHOLDER OR SELLING ---------------------- BEING ----------------------
STOCKHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Paul Berger (2)..................................... 1,449,697 38.29% 125,000 1,449,697 28.89%
Jim Dodrill (3)..................................... 521,343 13.77% 25,000 521,343 10.39%
Synergy Group International, Inc. (4)............... 200,000 7.9% -- 200,000 3.98%
4725 East Sunrise Drive, Suite 228
Tucson, AZ 85718
All directors and executive officers of the Company
as a group (7 persons) (5)........................ 2,011,563 53.11% -- 2,011,563 40.09%
------------------------
(1) Assumes that all Securities offered in this Offering are purchased but that
the Underwriters' over-allotment option is not exercised. The first 100,000
shares of Class A Common Stock and 150,000 Warrants purchased pursuant to
the exercise of such option, if any, would be acquired from the Company. The
next 150,000 shares of Class A Common Stock purchased pursuant to the
exercise of such option, if any, would be acquired from Messrs. Berger and
Dodrill and the remaining shares of Class A Common Stock would be acquired
from the other Selling Stockholders.
(2) Includes 19,577 shares of Class A Common Stock issuable upon the exercise of
options exercisable within 60 days of the date of this Prospectus.
(3) Includes 336,510 shares of Class A Common Stock issuable upon the exercise
of options exercisable within 60 days of the date of this Prospectus.
(4) The principal beneficial owner of Synergy Group International, Inc. is
Vincent J. Marold.
(5) Includes 388,833 shares of Class A Common Stock issuable upon the exercise
of options exercisable within 60 days of the date of this Prospectus.
CONCURRENT REGISTRATION
The following table sets forth certain information with respect to persons
for whom the Company is registering Bridge Warrants for resale to the public.
The Company will not receive any proceeds from the sale of such Bridge Warrants.
The Bridge Warrants are not being underwritten by the Underwriters.
[Enlarge/Download Table]
WARRANTS PERCENTAGE
WARRANTS OWNED OF WARRANTS
OWNED BEFORE WARRANTS OFFERED AFTER OWNED
NAME OFFERING HEREBY OFFERING AFTER OFFERING
-------------------------------------------------- ------------- ---------------- ------------- --------------
John G. Costino................................... 212,500 212,500 0 0%
Afzal Ahmad....................................... 150,000 150,000 0 0
Gary E. Markman................................... 125,000 125,000 0 0
James S. Mulholland, Jr........................... 125,000 125,000 0 0
David Hungerford.................................. 87,500 87,500 0 0
44
[Enlarge/Download Table]
WARRANTS PERCENTAGE
WARRANTS OWNED OF WARRANTS
OWNED BEFORE WARRANTS OFFERED AFTER OWNED
NAME OFFERING HEREBY OFFERING AFTER OFFERING
-------------------------------------------------- ------------- ---------------- ------------- --------------
Kal Zeff.......................................... 75,000 75,000 0 0%
Martin C. Watz.................................... 75,000 75,000 0 0
Eugene D. Crittenden, Jr.......................... 50,000 50,000 0 0
Kelly Joseph Flynn................................ 50,000 50,000 0 0
Ronald Gagnon..................................... 50,000 50,000 0 0
Douglas H. Symons................................. 50,000 50,000 0 0
Robert Hurley..................................... 50,000 50,000 0 0
Dr. Riyaz Jinnah.................................. 37,500 37,500 0 0
Ronald J. Berk.................................... 25,000 25,000 0 0
Communication Enterprises, Inc.................... 25,000 25,000 0 0
Gilbert X. Dementis............................... 25,000 25,000 0 0
Richard Grant..................................... 25,000 25,000 0 0
Andrew A. Holder.................................. 25,000 25,000 0 0
Edward M. Kalinowski, Sr.......................... 25,000 25,000 0 0
L G Trust......................................... 25,000 25,000 0 0
Martin R. Lesh.................................... 25,000 25,000 0 0
Meca, Inc......................................... 25,000 25,000 0 0
Pafco General Insurance Co........................ 25,000 25,000 0 0
Joe Y. Pitts, Jr.................................. 25,000 25,000 0 0
Roy Roberts....................................... 25,000 25,000 0 0
Benjamin Russell.................................. 25,000 25,000 0 0
Kenneth J. Santiamo............................... 25,000 25,000 0 0
Superior Insurance Company........................ 25,000 25,000 0 0
Alex Theriot, Jr.................................. 25,000 25,000 0 0
Jane P. Trudeau................................... 25,000 25,000 0 0
Mark Wiener....................................... 25,000 25,000 0 0
Mike and Dana Eberts.............................. 15,000 15,000 0 0
Tyrone and Evelyn Adams........................... 12,500 12,500 0 0
Joel Benowitz..................................... 12,500 12,500 0 0
Milton Chwasky Retirement Trust................... 12,500 12,500 0 0
Jay L. Kobrin..................................... 12,500 12,500 0 0
Lee Harrison Corbin............................... 12,500 12,500 0 0
M. Jenkins Cromwell, Jr........................... 12,500 12,500 0 0
Nelson Garjian.................................... 12,500 12,500 0 0
Esther Golub...................................... 12,500 12,500 0 0
Integrated Capital Corp........................... 12,500 12,500 0 0
Paul J. Kuehn..................................... 12,500 12,500 0 0
H. Barry Robins................................... 12,500 12,500 0 0
Milan Tyburec..................................... 12,500 12,500 0 0
Total......................................... 1,752,500 1,752,500
------------- ----------------
------------- ----------------
There are no material relationships between any of the selling
warrantholders and the Company. Each selling warrantholder has agreed to lock-up
provisions pursuant to which the warrantholders have agreed not to sell any
Bridge Warrants for a period of one year following the effective date of this
Offering which lock up agreements cannot be terminated without the prior written
consent of the Representative. Commencing one year from the effective date of
this Offering, each selling warrantholder may sell without any lock-up
restrictions.
45
CERTAIN TRANSACTIONS
AMENDMENT OF CERTIFICATE OF INCORPORATION
On October 7, 1998, the Company amended its certificate of incorporation to
create two classes of Common Stock (15,000,000 shares of Class A Common Stock
and 5,000,000 shares of Class B Common Stock) (the "Amendment"). All shares of
the Company's common equity outstanding prior to the Amendment were converted
into shares of Class A Common Stock except for 1,464,953 shares of common equity
owned by Messrs. Berger and Dodrill which were converted into Class B Common
Stock. The Class A and Class B Common Stock have identical rights, including
voting rights. Each share of Class B Common Stock will be automatically
converted into a share of Class A Common Stock on the earlier to occur of (i)
October 31, 2000 and (ii) such time as the closing price of the Class A Common
Stock shall equal or exceed $8.00 for 10 consecutive trading days. See
"Description of Securities -- Common Stock."
RECENT LOAN AND CONSULTING AGREEMENT
Since, July, 1998, the Company has consumed all cash on hand and has funded
its operations with cash flow and loans from its officers aggregating $67,500
which are to be repaid with the proceeds of this offering. The Company is in the
process of negotiating to obtain a loan of $250,000 from an individual. This may
be personally guaranteed by Jim Dodrill and Paul Berger. The lender may also
provide consulting services to the Company the terms of which are currently
being negotiated. See "Use of Proceeds."
TRANSACTIONS INVOLVING PAUL BERGER
Between August 21, 1996 and January 23, 1998, Paul Berger, Chairman of the
Board of Directors and Chief Executive Officer of the Company, made a number of
advances to the Company. On August 21, 1996, Mr. Berger advanced $10,000 to the
Company and received a note with a term of six years, earning 7.5% interest
annually and an option to purchase 19,577 shares of the common stock of the
Company at a price of $0.225 per share. In addition, Mr. Berger made four
advances to the Company using proceeds from sales of his own stock to other
individuals (some of whom were affiliates of the Company) at lower prices than
contemporaneous sales of stock by the Company to third-party investors. On
October 17, 1997, Mr. Berger advanced $50,000 to the Company after selling
100,000 shares of his stock to Synergy Group International, Inc. at the price of
$0.50 per share. On October 28, 1997, Mr. Berger advanced $50,000 to the Company
after selling 100,000 shares of his stock to Carol Dodrill, Jim Dodrill's
mother, and Bill Powell at the price of $0.50 per share. On November 11, 1997,
Mr. Berger advanced $2,500 to the Company after selling 3,333 shares of his
stock to Rodger Berman at the price of $0.75 per share. On January 23, 1998, Mr.
Berger advanced $50,000 to the Company after selling 50,000 shares of his stock
to Andrew Holder and Marc Roberts at the price of $1.00 per share. These four
transactions were contemporaneous with the Company's sale of its common stock at
$2.10 per share. On July 31, 1998, Mr. Berger advanced $17,500 to the Company.
Mr. Berger received notes from the Company for all five advances with an annual
interest rate of 12.5%. All five notes, aggregating $170,000 plus interest, are
to be repaid out of the proceeds of this Offering. See "Underwriting."
TRANSACTIONS INVOLVING JIM DODRILL
Between September 5, 1996 and January 23, 1998, Jim Dodrill, President and
General Counsel of the Company, made a number of advances to the Company. On
September 5, 1996, Mr. Dodrill advanced $30,000 to the Company and received a
note with a term of six years, earning 7.5% interest annually and an option to
purchase 58,731 shares of the common stock of the Company at a price of $0.225
per share. In addition, Mr. Dodrill made three advances to the Company using
proceeds from sales of his own stock to other individuals at lower prices than
contemporaneous sales of stock by the Company to third-party investors. On
October 17, 1997, Mr. Dodrill advanced $50,000 to the Company after selling
100,000 shares of his stock to Synergy Group International, Inc. at the price of
$0.50 per share. On November 11, 1997,
46
Mr. Dodrill advanced $2,500 to the Company after selling 3,333 shares of his
stock to Rodger Berman at the price of $0.75 per share. On January 23, 1998, Mr.
Dodrill advanced $50,000 to the Company after selling 50,000 shares of his stock
to Andrew Holder and Marc Roberts at the price of $1.00 per share. These three
transactions were contemporaneous with the Company's sale of its Common Stock at
$2.10 per share. Mr. Dodrill received notes from the Company for all three
advances with an annual interest rate of 12.5%. All three notes, aggregating
$102,500 plus interest, are to be repaid out of the proceeds of this Offering.
See "Underwriting."
TRANSACTIONS INVOLVING STANLEY BERGER
Between August 13, 1996 and January 16, 1998, Stanley Berger, Paul Berger's
father, made a number of advances to the Company. The following table summarizes
the loans made. For each loan, Mr. Berger received a note with the loan amount
and interest rate set forth in the table. In addition, for all but the two
repaid loans and one loan on October 1, 1997, Mr. Berger also received a warrant
to purchase the number of shares set forth in the table and at the exercise
price set forth in the table. All of these notes, aggregating $510,000 plus
interest, are to be repaid out of the proceeds of the Offering. See
"Underwriting."
[Enlarge/Download Table]
NUMBER OF
SHARES
PURCHASABLE
INTEREST UPON EXERCISE WARRANT
DATE AMOUNT OF LOAN RATE OF WARRANT EXERCISE PRICE
-------------------------------------------------------- --------------- ----------- ------------- ---------------
August 13, 1996(1)...................................... $ 35,000 -- -- --
September 26, 1996...................................... $ 40,000 12.5% 4,400 $ 1.13
October 8, 1996......................................... $ 25,000 12.5% 2,750 $ 1.13
April 30, 1997.......................................... $ 25,000 12.5% 3,437 $ 0.75
May 27, 1997............................................ $ 50,000 15% 27,708 $ 0.75
June 19, 1997........................................... $ 50,000 15% 27,708 $ 0.75
July 3, 1997............................................ $ 30,000 12.5% 6,000 $ 2.10
July 10, 1997........................................... $ 15,000 12.5% 3,000 $ 2.10
August 27, 1997(1)...................................... $ 50,000 -- -- --
September 12, 1997...................................... $ 50,000 12.5% 8,333 $ 2.10
October 1, 1997(2)...................................... $ 25,000 12.5% -- --
October 14, 1997........................................ $ 50,000 12.5% 8,333 $ 2.10
November 14, 1997....................................... $ 50,000 12.5% 8,333 $ 2.10
November 28, 1997....................................... $ 30,000 12.5% 2,400 $ 2.10
December 3, 1997........................................ $ 20,000 12.5% 1,600 $ 2.10
January 16, 1998........................................ $ 50,000 12.5% 4,000 $ 4.00
Total............................................... $ 595,000 108,002
------------------------
(1) This Note was repaid.
(2) For this loan, Mr. Berger received a security interest in all of the
Company's accounts receivable.
47
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 15,000,000 shares of
Class A Common Stock, par value $0.01 per share, 5,000,000 shares of Class B
Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share. As of the date of this Prospectus, 1,051,818
shares of Class A Common Stock and 1,464,953 shares of Class B Common Stock were
issued and outstanding.
COMMON STOCK
The holders of Class A and Class B Common Stock ("Common Stock") are
entitled to one vote per share. The holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of legally available funds. Upon liquidation, dissolution or
winding up of the Company, the holders of the Common Stock are entitled to share
ratably in all assets of the Company which are legally available for
distribution, after payment of or provisions for all debts and liabilities.
Holders of Common Stock have no preemptive, subscription, or redemption rights.
The shares of Common Stock offered hereby will be, when and if issued, fully
paid and non-assessable. The Company has agreed that for a period of 24 months
from the date of this Offering it will not sell or issue any securities (with
certain limited exceptions) without the Representative's prior written consent.
See "Risk Factors -- Representative's Influence Over Potential Future Capital
Financing."
The Company has agreed not to register the Class B Common Stock under the
Securities Exchange Act of 1934, as amended, for a period of two (2) years. The
shares of Class B Common Stock will be automatically exchanged into shares of
Class A Common Stock on a share for share basis (subject to adjustment upon the
occurrence of certain events including a dividend distribution to the holders of
Class A Common Stock, or a subdivision, combination or reclassification of the
Class A Common Stock) after the earlier to occur of (i) October 31, 2000 and
(ii) such time as the closing price for the Class A Common Stock shall equal or
exceed $8.00 for a period of 10 consecutive trading days.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 5,000,000 shares of Preferred Stock in one or more series. Each
such series of Preferred Stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences and conversion
rights, as shall be determined by the Board of Directors in a resolution or
resolutions providing for the issuance of such series. Any such series of
Preferred Stock, if so determined by the Board of Directors, may have full
voting rights with the Common Stock or superior or limited voting rights, and
may be convertible into Common Stock or another security of the Company.
The Company has granted to the Board of Directors the authority to issue
Preferred Stock and to determine its rights and preferences in order to
eliminate delays associated with a stockholder vote on specific issuances. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock. See "Description of Securities--Certain Effects of Authorized but
Unissued Stock." The Company has agreed that for a period of 24 months from the
date of this Offering it will not sell or issue any securities (with certain
limited exceptions) without the Representative's prior written consent. See
"Risk Factors -- Representative's Influence Over Potential Future Capital
Financing."
48
WARRANTS
Each Warrant entitles the holder thereof to purchase one share of Class A
Common Stock at a price per share of 115% of the initial public offering price
per share of Class A Common Stock for a period of three years commencing on the
effective date of this Offering. Each Warrant is redeemable by the Company at a
redemption price of $0.125 per Warrant at any time, upon 30 days prior written
notice to holders thereof, if the average closing bid price of the Class A
Common Stock, as reported on the principal exchange on which the Class A Common
Stock is traded, equals or exceeds 120% of the initial public offering price per
share for 10 consecutive trading days ending on the day prior to the date of the
notice of redemption.
Pursuant to applicable federal and state securities laws, in the event a
current prospectus is not available, the Warrants may not be exercised by the
holders thereof and the Company will be precluded from redeeming the Warrants.
There can be no assurance that the Company will not be prevented by financial or
other considerations from maintaining a current prospectus. Any Warrant holder
who does not exercise prior to the redemption date, as set forth in the
Company's notice of redemption, will forfeit the right to purchase the Class A
Common Stock underlying the Warrants, and after the redemption date or upon
conclusion of the exercise period, any outstanding Warrants will become void and
be of no further force or effect, unless extended by the Board of Directors of
the Company. See "Underwriting" for the terms of the Warrants issuable pursuant
to the Underwriters' Warrants.
The number of shares of Class A Common Stock that may be purchased is
subject to adjustment upon the occurrence of certain events, including a
dividend distribution to the Company's shareholders or a subdivision,
combination or reclassification of the outstanding shares of Class A Common
Stock. Further, the Warrant exercise price is subject to adjustment in the event
the Company issues additional stock or rights to acquire stock at a price per
share that is less that the current market price per share of Class A Common
Stock on the record date established for the issuance of additional stock or
rights to acquire stock. The term "current market price" is defined as the
average of the daily closing prices for the 20 consecutive trading days ending
three days prior to the record date. However, the Warrant exercise price will
not be adjusted in the case of the Underwriter's Warrants (or the Warrants
included therein) or any other options or warrants outstanding as of the date of
this Offering. The Warrant exercise price is also subject to adjustment in the
event of a consolidation or merger where a distribution by the Company is made
to its shareholders of the Company's assets or evidences of indebtedness (other
cash or stock dividends) or pursuant to certain subscription rights or other
rights to acquire Class A Common Stock.
The Company may at any time, and from time to time, extend the exercise
period of the Warrants, provided that written notice of such extension is given
to the Warrant holders prior to the expiration date then in effect. Also, the
Company may reduce the exercise price of the Warrants for limited periods or
through the end of the exercise period if deemed appropriate by the Board of
Directors. Any extension of the term and/or reduction of the exercise price of
the Warrants will be subject to compliance with Rule 13e-4 under the Exchange
Act including the filing of a Schedule 13E-4. Notice of any extension of the
exercise period and/or reduction of the exercise price will be given to the
Warrant holders. The Company does not presently contemplate any extension of the
exercise period nor does it contemplate any reduction in the exercise price of
the Warrants. The Warrants are also subject to price adjustment upon the
occurrence of certain events including subdivisions or combinations of the Class
A Common Stock.
The Warrants will be issued pursuant to the terms and conditions of a
Warrant Agreement between the Company and American Stock Transfer and Trust
Company.
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person
49
became an interested stockholder is approved in a prescribed manner. Generally,
a "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
As a result of the foregoing provisions, the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors could be made more difficult. These provisions
are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to negotiate with the Company first. The Company believes that the
benefits of increased protection of the Company's potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure the Company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management. The Company has agreed that for a period of 60 months from the date
of this Offering it will not sell or issue any securities (with certain limited
exceptions) without the Representative's prior written consent. See "Risk
Factors -- Representative's Influence Over Potential Future Capital Financing."
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrants is
American Stock Transfer and Trust Company.
50
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 3,551,818
shares of Class A Common Stock (3,651,818 shares of Class A Common Stock if the
Underwriters' over-allotment option is exercised in full) and 1,464,953 shares
of Class B Common Stock. All of the shares of Class A Common Stock offered
hereby will be freely tradeable by persons other than "affiliates" of the
Company without restriction or further registration under the Securities Act.
Of the 3,551,818 shares of Class A Common Stock, 1,051,818 shares and
1,464,953 shares of Class B Common Stock (the "Restricted Shares") held by
officers, directors, employees, consultants and other stockholders of the
Company were sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted securities" within the
meaning of Rule 144 promulgated under the Securities Act. Of the Restricted
Shares of Class A Common Stock 463,903 will be eligible for resale in the public
market as of the date of this Prospectus (the "Effective Date") in reliance on
Rule 144 under the Securities Act.
The one million Warrants for sale in this Offering will be immediately
exercisable. Furthermore, in the event of a redemption of the Selling
Warrantholders' Warrants by the Company, an additional 1.75 million Warrants
will be immediately exercisable. The Warrants will be exercisable at a price per
share of 115% of the initial public offering price of the Class A Common Stock
and will be redeemable by the Company at a price per Warrant of $0.125 upon 30
days prior written notice to the holders thereof if the average closing price of
the Class A Common Stock equals or exceeds 120% of the initial public offering
price per share of the Class A Common Stock for ten consecutive trading days. If
the Company redeems the Warrants before the Warrantholders exercise their right
of purchase, then the Warrantholders will be entitled to receive only the
redemption price, $0.125 per Warrant.
Persons who are deemed affiliates of the Company are generally entitled
under Rule 144 as currently in effect to sell within any three-month period a
number of shares that does not exceed 1% of the number of shares of the Common
Stock then outstanding or the average weekly trading volume of Common Stock
during the four calendar weeks preceding the making of a filing with the
Securities and Exchange Commission (the "Commission") with respect to such sale.
Such sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. The Company is unable to estimate accurately the number of
shares of Common Stock that ultimately may be sold under Rule 144 because the
number of shares will depend in part on the market price for the Common Stock,
the personal circumstances of the sellers and other factors. In addition to the
restrictions under Rule 144, the Company, the Representative and Messrs. Berger
and Dodrill have entered into an agreement pursuant to which the Company has
agreed not to register the Class B Common Stock for sale by either Mr. Berger or
Mr. Dodrill. See "Underwriting." The shares of Class B Stock will be
automatically exchanged into shares of Class A Common Stock on a share for share
basis (subject to adjustment upon the occurrence of certain events including a
dividend or distribution to the holders of Class A Common Stock, or a
subdivision, combination or reclassification of the Class A Common Stock) after
the earlier to occur of (i) October 31, 2000 and (ii) such time as the closing
price for the Class A Common Stock shall equal or exceed $8.00 for a period of
ten (10) consecutive trading days. See "Underwriting."
51
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Company has agreed to sell to the Underwriters, and
the Underwriters, severally and not jointly, have agreed to purchase from the
Company, on a "firm commitment" basis, if any are purchased, the number of
shares of Class A Common Stock and Warrants (exclusive of shares of Class A
Common Stock and Warrants issuable upon exercise of the Underwriters'
over-allotment option) set forth opposite their respective names below:
[Enlarge/Download Table]
SHARES OF
CLASS A
UNDERWRITERS COMMON STOCK WARRANTS
------------------------------------------------------------------------------------- -------------- ----------
Argent Securities, Inc. 2,500,000 1,000,000
Total 2,500,000 1,000,000
The Company has agreed to sell the shares of Class A Common Stock and
Warrants to the Underwriters at a discount of percent ( %) of the initial
public offering price thereof. The Underwriters will offer the shares of Class A
Common Stock and Warrants to the public at $ . per share of Class A
Common Stock and $0.125 per Warrant as set forth on the cover page of this
Prospectus and may allow to certain dealers who are National Association off
Securities Dealers, Inc. ("NASD") members concessions not to exceed $ .
per share of Class A Common Stock and $
. per Warrant, of which not in excess of $ . per share of Class A
Common Stock and $
. per Warrant may be re-allowed to other dealers who are members of the NASD.
After the initial public offering, the public offering price, concession and
re-allowances may be changed by the Underwriters.
Prior to this offering, there has not been any public market for the Class A
Common Stock or the Warrants. The initial public offering prices of the shares
of Class A Common Stock and the Warrants and the exercise price and other terms
of the Warrants were determined by negotiations between the Company and the
Representative and do not necessarily relate to the assets, book value or
results of operations of the Company and the Representative and do not
necessarily relate to the assets, book value or results of operations of the
Company or any other established criteria of value.
The Company has granted an option to the Underwriters, exercisable during
the 45-day period from the date of this Prospectus, to purchase in the aggregate
up to a maximum of 100,000 additional shares of Class A Common Stock and 150,000
Warrants and the Selling Stockholders have granted an option to the Underwriters
to purchase 275,000 shares of Class A Common Stock, in each case at the prices
set forth on the cover page of this Prospectus, minus the underwriting discount.
The Underwriters have agreed to exercise in full the over-allotment option
granted to them by the Company before exercising any of the over-allotment
options granted to them by the Selling Stockholders and to exercise in full the
over-allotment options granted to them by Messrs. Berger and Dodrill before
exercising any of the over-allotment options granted to them by the other
Selling Stockholders. The Underwriters' over-allotment option is exercisable
upon the same terms and conditions as are applicable to the sale of the shares
of Class A Common Stock and Warrants offered hereby.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be provided to officers, directors or persons controlling the Company, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy and is therefore unenforceable.
52
The Company has agreed to pay certain blue sky legal fees of the
Underwriters and to pay to the Underwriters at the closing of the Offering a
non-accountable expense allowance of % of the aggregate offering price of the
shares of Class A Common Stock and Warrants offered hereby (including any shares
of Class A Common Stock and Warrants purchased purchasing pursuant to the
Underwriters' over-allotment option).
The Company has agreed to sell to the Representative or its respective
designees, for an aggregate purchase price of $ , an option (the
"Representative's Warrant") to purchase up to an aggregate of 250,000 shares of
Class A Common Stock and 50,000 Warrants exercisable at 120% (providing for a
purchase price per share at 120% of the initial public offering price of the
Class A Common Stock underlying the Warrants) of the initial public offering
price of the Securities. The Underwriters' Warrant shall be exercisable during a
four-year period commencing one year after the effective date of the
Registration Statement of which this Prospectus is a part. The Underwriters'
Warrant may not be assigned, transferred, sold or hypothecated by the
Underwriters until 12 months from the date of this Prospectus, except to
officers or partners of the Underwriters, to a successor to the Underwriters, to
a purchaser of substantially all of the assets of the Underwriters, or by
operation of law. Any profits realized by the Underwriters upon the sale of the
Class A Common Stock and Warrants (or the underlying Securities) issuable upon
exercise of the Underwriters' Warrants may be deemed to be additional
underwriting compensation. The exercise price of the Warrants issuable upon
exercise of the Underwriters' Warrants during the period of exercisability shall
be 115% of the initial public offering price of the Class A Common Stock per
Warrant. The exercise of the Warrants subject to the Underwriters' Warrants and
the number of shares of Class A Common Stock covered thereby are subject to
adjustment in certain events to prevent dilution. For the life of the
Underwriters' Warrant, the holders thereof are given, at a normal cost, the
opportunity to profit from a rise in the market price of the Securities with a
resulting dilution in the interest off other shareholders. The Company may find
it more difficult to raise capital for its business if the need should arise
while the Underwriters' Warrant is outstanding. At any time when the holders of
the Underwriters' Warrant might be expected to exercise it, the Company would
probably be able to obtain additional capital on more favorable terms.
The Company has agreed with the Underwriters that the Company will pay to
the Underwriters a warrant solicitation fee (the "Warrant Solicitation Fee")
equal to 5% of the exercise price of the Warrants exercised beginning one year
from the date of this Prospectus and to the extent not inconsistent with the
guidelines of the NASD and the rules and regulations of the Commission
(including NASD Notice to Members 81-38). Such Warrant Solicitation Fee will be
paid to the Underwriters if (a) the market price of the Class A Common Stock on
the date that any Warrant is exercised is greater than the exercise price of the
Warrant; (b) the exercise of such warrant was solicited by the Underwriters; (c
) prior specific written approval for exercise is received from the customer if
the Warrant is held in a discretionary account; (d) disclosure of this
compensation agreement is made prior to or upon the exercise of such Warrant;
(e) solicitation of the exercise is not in violation of Rule 103 of Regulation M
of the Exchange Act; (f) the Underwriter provided bona fide services in exchange
for the Warrant Solicitation Fee; and (g) the Underwriter has been specifically
designated in writing by the holders of the Warrants as the broker. In addition,
unless granted and exemption by the Commission from Rule 103 of Regulation M
under the Exchange Act, the Underwriters will be prohibited from engaging in any
market making activities or solicited brokerage activities with respect to the
Securities for a specified period (generally five business days) prior to any
solicitation of the exercise of any Warrant or prior to the exercise of any
Warrant based on a prior solicitation until the later of the termination by
waiver or otherwise) of any right the Underwriters may have to receive such a
fee for the exercise of the Warrants following such solicitation. As a result,
the Underwriters may be unable to continue to provide a market for the
Securities during certain periods while the Warrants are exercisable.
53
The Representative has informed the Company that the Underwriters do not
intend to confirm sales of shares of Class A Common Stock or Warrants offered
hereby to any accounts over which they exercise discretionary authority.
The Underwriters have been given certain "piggyback" and demand registration
right with respect to the Class A Common Stock underlying the Underwriters'
Warrants for a period of four years commencing one year from the date of this
Prospectus. The exercise of any such registration rights by the Underwriters may
result in dilution to the interest of the Company's shareholders, hinder efforts
by the Company to arrange future financing of the Company and/or have an adverse
effect on the market price of the Securities.
The Company has agreed that for a period of 24 months commencing from the
date of this Prospectus, it will not issue or sell, directly or indirectly, any
shares of its capital stock, or sell or grant options, warrants or rights to
purchase any shares of its capital stock, without the written consent of the
Representative, except for issuances pursuant to (i) the public offering of the
Company's securities as described herein, (ii) the exercise of the Warrants and
the Underwriters' Warrants, and the Class A Common Stock issuable thereunder,
(iii) outstanding convertible securities or contractual obligations disclosed in
this Prospectus, (iv) the grant of options and the issuance of shares issued
upon exercise of options granted or to be granted under the Plan, and (v) an
acquisition, merger or similar transaction provided that the acquirer of such
capital stock does not receive, and will not be entitled to demand, registered
securities during such 24-month period. See "Shares Available for Future Sale."
The Company has agreed that, for a period of five years following the
completion of this Offering, it will use its best efforts to cause the election
too its Board of Directors one designee of the Representative, provided that
such designee is reasonably acceptable to and approved by the Company.
Alternatively, the Representative may appoint an observer to attend all meetings
of the Board of Directors during such period. As of this date, no person has
been identified by the Representative for election as a director or for
appointment as a observer.
LEGAL MATTERS
The validity of the Class A Common Stock and Warrants being offered hereby
will be passed upon for the Company by Foley, Hoag & Eliot LLP, Boston,
Massachusetts. Certain matters are being passed upon for the Underwriters by
Kutak Rock, Atlanta, Georgia.
EXPERTS
The financial statements as of January 31, 1998 and 1997 and for the year
ended January 31, 1998 and the period February 8, 1996 (inception) to January
31, 1997 included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
given on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Commission through the Electronic Data
Gathering and Retrieval ("EDGAR") system a registration statement on Form SB-2
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act with respect to the Securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in such Registration Statement, certain parts of which have been omitted
in accordance with the rules and regulation of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. For further
information, reference is made to such registration statement, including the
exhibits thereto, which may be inspected without charge at the Commission's
principal office
54
at 450 Fifth Street, N. W., Room 1024, Washington D. C. 20549; and at the
following Regional Offices of the Commission, except that copies of the exhibits
may not be available at certain of the Regional Offices: Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office 7 World Trade Center, Suite 1300, New York, NY 10048.
Copies of all or any part of such material may be obtained from the Commission
at 450 Fifth Street, N. W. Room 1024, Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy,
information statements, and registration statements and other information filed
with the Commission through the EDGAR system.
The Company is not presently a reporting company and does not file reports
or other information with the Commission. However, on the effective date of the
Registration Statement, the Company will become a reporting company. Further,
the Company will register its Common Stock and Warrants under the Exchange Act.
Accordingly, the Company will become subject to the additional reporting
requirements of the Exchange Act and in accordance therewith will file reports,
proxy statements and other information with the Commission. In addition, after
the completion of this Offering, the Company intends to furnish its shareholders
with annual reports containing audited financial statements and such interim
reports, in each case as it may determine to furnish or as may be required by
law.
55
OUTLOOK SPORTS TECHNOLOGY, INC.
INDEX TO FINANCIAL STATEMENTS
[Enlarge/Download Table]
Report of Independent Certified Public Accountants.................................... F-2
Balance Sheets at January 31, 1997, January 31, 1998 and July 31, 1998 (unaudited).... F-3
Statements of Operations for the period February 8, 1996 (inception) to January 31,
1997, for the year ended January 31, 1998 and for the six months ended July 31, 1997
and 1998 (unaudited)................................................................. F-4
Statement of Changes in Shareholders' Deficit......................................... F-5
Statements of Cash Flows for the period February 8, 1996 (inception) to January 31,
1997, for the year ended January 31, 1998 and for the six months ended July 31, 1997
and 1998 (unaudited)................................................................. F-6
Notes to Financial Statements, January 31, 1998....................................... F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Outlook Sports Technology, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Outlook Sports
Technology, Inc. (formerly Hippo, Inc.) at January 31, 1998 and 1997, and the
results of its operations and its cash flows for the year ended January 31, 1998
and for the period February 8, 1996 (inception) to January 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations through January 31, 1998, has a shareholders' deficit
and working capital deficiency as of January 31, 1998, and is dependent on
raising additional financing in order to fund its existing level of operations.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Price Waterhouse LLP
Miami, Florida
June 9, 1998
F-2
OUTLOOK SPORTS TECHNOLOGY, INC.
BALANCE SHEETS
[Enlarge/Download Table]
ASSETS
JANUARY 31,
---------------------- JULY 31,
1997 1998 1998
---------- ---------- ----------
(UNAUDITED)
Cash................................................... $ 19,041 $ 1,367 $ 1,621
Accounts receivable, net of allowance for doubtful
accounts of $35,000.................................. -- 167,700 279,108
Inventory.............................................. -- 417,058 527,296
Prepaid expenses....................................... -- 12,854 96,760
Debt issuance costs.................................... -- -- 194,688
Deposits and other current assets...................... 7,809 51,813 36,506
---------- ---------- ----------
Total current assets............................... 26,850 650,792 1,135,979
---------- ---------- ----------
Deferred expenses -- -- 93,750
Prepaid royalties...................................... 150,000 133,319 --
Property and equipment, net............................ 31,197 201,644 428,849
License................................................ 19,300 19,300 --
---------- ---------- ----------
$ 227,347 $1,005,055 $1,658,578
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 495,413 $1,962,657 $1,798,024
Accrued expenses..................................... 134,482 824,179 919,748
Advances from officers............................... 588,660 255,000 272,500
Notes payable, current portion....................... 115,000 2,665,638 5,825,000
---------- ---------- ----------
Total current liabilities.......................... 1,333,555 5,707,474 8,815,272
Notes payable, long term............................... 40,000 40,000 40,000
---------- ---------- ----------
1,373,555 5,747,474 8,855,272
---------- ---------- ----------
Commitments and contingencies.......................... -- -- --
---------- ---------- ----------
Shareholders' deficit:
Common stock; $.01 par value, 8,100,000 shares
authorized; 1,118,488 and 2,324,071 shares issued
and outstanding in 1997 and 1998, respectively, and
2,566,771 issued and 2,516,771 outstanding at July
31, 1998 (unaudited)............................... 11,185 23,241 25,668
Treasury stock; 50,000 shares (unaudited)............ -- -- (19,300)
Additional paid in capital........................... 1,221,159 2,306,543 2,718,329
Accumulated deficit.................................. (2,378,552) (7,072,203) (9,921,391)
---------- ---------- ----------
Total shareholders' deficit........................ (1,146,208) (4,742,419) (7,196,694)
---------- ---------- ----------
$ 227,347 $1,005,055 $1,658,578
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-3
OUTLOOK SPORTS TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
FOR THE
PERIOD
FEBRUARY 8,
1996
(INCEPTION) FOR THE SIX MONTHS ENDED
TO YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ----------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
(UNAUDITED)
Revenue.............................................. $ -- $ 741,120 $ 267,547 $ 440,474
------------- ------------- ------------- -------------
Operating expenses:
Costs of sales..................................... -- 859,317 300,028 520,179
Research and development........................... 650,805 451,019 185,078 102,235
Stock-based compensation........................... 473,894 210,130 133,583 --
Selling, general and administrative expenses....... 1,251,009 3,669,657 1,294,715 2,755,609
------------- ------------- ------------- -------------
Total costs and expenses......................... 2,375,708 5,190,123 1,913,404 3,378,023
------------- ------------- ------------- -------------
Loss from operations................................. (2,375,708) (4,449,003) (1,645,857) (2,937,549)
Interest expense..................................... (2,844) (244,648) (76,555) (325,636)
Gain on sale of license.............................. -- -- -- 413,997
------------- ------------- ------------- -------------
Net loss............................................. $(2,378,552) $ (4,693,651) $ (1,722,412) $ (2,849,188)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic and diluted loss per share..................... $ (3.24) $ (2.21) $ (1.48) $ (1.17)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares outstanding........... 734,330 2,120,460 1,162,539 2,425,197
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-4
OUTLOOK SPORTS TECHNOLOGY, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
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COMMON STOCK
--------------------- ADDITIONAL TOTAL
PAR TREASURY PAID IN ACCUMULATED SHAREHOLDERS'
SHARES VALUE STOCK CAPITAL DEFICIT DEFICIT
---------- --------- ---------- ------------ ------------- -------------
Balance, February 8, 1996........ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock......... 1,068,488 10,685 -- 1,128,074 -- 1,138,759
Stock option compensation........ -- -- -- 73,785 -- 73,785
Acquisition of license........... 50,000 500 -- 19,300 -- 19,800
Net loss......................... -- -- -- -- (2,378,552) (2,378,552)
---------- --------- ---------- ------------ ------------- -------------
Balance, January 31, 1997........ 1,118,488 11,185 -- 1,221,159 (2,378,552) (1,146,208)
Issuance of common stock......... 1,205,583 12,056 -- 932,218 -- 944,274
Stock option compensation........ -- -- -- 153,166 -- 153,166
Net loss......................... -- -- -- -- (4,693,651) (4,693,651)
---------- --------- ---------- ------------ ------------- -------------
Balance, January 31, 1998........ 2,324,071 23,241 -- 2,306,543 (7,072,203) (4,742,419)
Issuance of common stock for
payment of services
(unaudited).................... 242,700 2,427 -- 411,786 -- 414,213
Treasury stock (unaudited)....... -- -- (19,300) -- -- (19,300)
Net loss (unaudited)............. -- -- -- -- (2,849,188) (2,849,188)
---------- --------- ---------- ------------ ------------- -------------
Balance, July 31, 1998
(unaudited).................... 2,566,771 $ 25,668 $ (19,300) $ 2,718,329 $ (9,921,391) $(7,196,694)
---------- --------- ---------- ------------ ------------- -------------
---------- --------- ---------- ------------ ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-5
OUTLOOK SPORTS TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
FOR THE
PERIOD
FEBRUARY 8,
1996
(INCEPTION) FOR THE SIX MONTHS ENDED
TO YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ----------------------
1997 1998 1997 1998
------------- ----------- ---------- ----------
(UNAUDITED)
Operating activities:
Net loss........................................................ $(2,378,552) ($4,693,651) $(1,722,412) $(2,849,188)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation................................................ 3,355 8,100 4,409 74,700
Stock-based compensation.................................... 473,894 210,130 133,583 --
Changes in operating assets and liabilities:
Increase in accounts receivable........................... -- (167,700) (212,892) (111,408)
Increase in inventory..................................... -- (417,058) (220,539) (110,238)
Increase in prepaid expenses.............................. -- (12,854) (36,946) 14,731
Increase in deposits and other current assets............. (7,809) (44,004) (102,494) 34,607
(Increase) decrease in prepaid royalties.................. (150,000) 16,681 -- 133,319
Increase (decrease) in accounts payable and accrued
expenses................................................ 629,895 2,156,941 221,585 152,762
------------- ----------- ---------- ----------
Net cash used in operating activities............................. (1,429,217) (2,943,415) (1,935,706) (2,660,715)
------------- ----------- ---------- ----------
Investing activities:
Capital expenditures............................................ (34,552) (178,547) (13,951) (301,905)
------------- ----------- ---------- ----------
Net cash used in investing activities............................. (34,552) (178,547) (13,951) (301,905)
------------- ----------- ---------- ----------
Financing activities:
Proceeds from line of credit.................................... -- 35,000 35,000 --
Advances from officers.......................................... 588,660 255,000 3,000 17,500
Proceeds from issuance of unsecured notes payable............... 190,000 2,265,500 1,870,000 3,555,000
Debt issuance costs............................................. -- -- -- (194,688)
Proceeds (payments) from (to) factor............................ -- 280,138 -- (280,138)
Repayment of unsecured notes payable............................ (35,000) (30,000) -- (115,500)
Proceeds from exercise of stock options and sale of common
stock......................................................... 739,150 298,650 59,150 --
Acquisition of treasury stock................................... -- -- -- (19,300)
------------- ----------- ---------- ----------
Net cash provided by financing activities......................... 1,482,810 3,104,288 1,967,150 2,962,874
------------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.............. 19,041 (17,674) 18,493 254
------------- ----------- ---------- ----------
Cash and cash equivalents, beginning of period.................... -- 19,041 19,041 1,367
------------- ----------- ---------- ----------
Cash and cash equivalents, end of period.......................... $ 19,041 $ 1,367 $ 36,534 $ 1,621
------------- ----------- ---------- ----------
------------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.......................... $ -- $ 1,868 $ -- $ 47,924
------------- ----------- ---------- ----------
------------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In June 1998, the Company issued 125,000 shares of its common stock to obtain
financial and investment services through January 2000. Additionally, the
Company issued in June 1998, 1,666 shares of its common stock to a vendor. These
shares were valued by the Company's Board of Directors at $1.00 per share based
on the fair market value of other common stock transactions during the
particular time frame. (unaudited)
In March 1998, the Company issued 104,784 shares of its common stock to a
professional golfer as consideration for $220,047 owed to such golfer.
Additionally, the Company issued in March, 1998 11,250 shares of its common
stock valued at $67,500 in connection with endorsement contracts expiring in
December 1998 (unaudited).
During February 1997, the Company issued 1,024,800 shares of its common stock in
exchange for the forgiveness of $588,660 of advances due to the Company's Chief
Executive Officer.
During 1996, the Company issued 50,000 shares of its common stock valued at
approximately $19,800 in exchange for certain marketing rights.
The accompanying notes are an integral part of these financial statements.
F-6
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
Outlook Sports Technology, Inc. (the Company) was incorporated on February
8, 1996 in the State of Delaware. The Company is a designer and marketer and,
through the use of contracted parties, a manufacturer of golf equipment, apparel
and accessories under the TEGRA-TM- brand name. TEGRA-TM- golf clubs incorporate
the Company's patent-pending Invisible Inset Hosel-TM-.
The Company initially entered the U.S. golf market under a license agreement
with Hippo Holdings, Ltd. ("Hippo Holdings"), a British golf equipment
manufacturer and distributor. Under the terms of the licensing agreement, the
Company acquired the rights, in perpetuity, to market and sell HiPPO-TM- brand
products in the U.S. and Canada for 50,000 shares of the Company's common stock,
and prepaid $150,000 of royalties. In May 1998, the Company sold this license
back to Hippo Holdings. (See Note 9.)
Since its inception in 1996 to January 31, 1998, the Company has incurred
recurring losses, has not generated cash from its operating activities and is
dependent on raising additional financing in order to fund its existing level of
operations. Additionally, at January 31, 1998, the Company's current liabilities
exceeded its current assets by approximately $5,057,000, and the Company had an
accumulated deficit of approximately $4,742,000. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not reflect any adjustments that might
result from the outcome of this uncertainty.
In connection with the above, the Company's management intends to execute an
initial public offering under which the Company expects to sell shares of its
common stock as well as warrants to acquire shares of common stock. Proceeds
from the offering are expected to be used to repay the Company's outstanding
notes payable (see Note 5) and fund inventory purchases and ongoing operations.
There can be no assurance that such offering will be successful. If the offering
is not successful, management will seek alternative financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company in the
preparation of the accompanying financial statements is presented below.
ACCOUNTING ESTIMATES
The preparation of financial statements 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 these estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data of the Company is unaudited. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted. In the opinion of management, the interim financial statements
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the Company's operations for
the interim periods presented. The results of operations for the six month
period ended July 31, 1998 are not necessarily indicative of the results for the
full year.
F-7
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH
The Company considers those short term, highly liquid investments with
original maturities of three months or less as cash.
INVENTORY
Inventory, which is primarily comprised of clubs and component parts, is
stated at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method. Component parts consist primarily of golf club heads,
shafts and grips.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight line method over the estimated useful lives of the assets. Significant
additions and improvements are capitalized and costs for maintenance and repairs
are expensed as incurred.
LICENSE
The license to market HIPPO-TM- brand golf products in the U.S. and Canada
is recorded at the estimated fair value of 50,000 shares issued in May 1996 as
consideration for such license (see Note 9).
LONG LIVED ASSETS
The Company reviews long lived assets and identifiable intangibles for
recoverability and reserves for impairment whenever events or changes in
circumstances indicate, based on estimated future cash flows, the carrying
amount of the assets will not be fully recoverable.
REVENUE RECOGNITION
Revenue from the sale of non consignment products is recognized at the time
title to such products passes to the customer. Revenue from the sale of products
delivered on consignment is recognized at the time such products are sold by the
customer.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which relate primarily to the design of the
TEGRA-TM- brand name products, are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense consists of
media advertising as well as brochure, production and direct mail costs.
Advertising expense approximated $1,033,000 for the year ended January 31, 1998.
F-8
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company records deferred income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and income tax bases of the Company's assets and liabilities. An
allowance is recorded, based upon currently available information, when it is
more likely than not that any or all of a deferred tax asset will not be
realized. The provision for income taxes includes taxes currently payable, if
any, plus the net change during the year in deferred tax assets and liabilities
recorded by the Company.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation to its employees using the
intrinsic value method, which requires the recognition of compensation expense
over the vesting period of the options when the exercise price of the stock
option granted is less than the fair value of the underlying common stock.
Additionally, the Company provides pro forma disclosure of net loss and loss per
share as if the fair value method had been applied in measuring compensation
expense for stock options granted. Stock-based compensation related to options
granted to non-employees is recognized using the fair value method.
LOSS PER SHARE
The computation of loss per share of common stock is computed by dividing
net loss for the period by the weighted average number of shares outstanding
during that period. The weighted average number of shares outstanding for the
period February 8, 1996 (inception) to January 31, 1997 and the year ended
January 31, 1998 excludes approximately 274,000 and 1,179,000 respectively, of
antidilutive stock options and warrants.
Because the Company is incurring losses, the effect of stock options and
warrants is antidilutive. Accordingly, the Company's presentation of diluted
earnings per share is the same as that of basic earnings per share.
Assuming the Company's contemplated public offering and the related payment
of the unsecured notes payable to private investors had taken place on February
1, 1997, the Company would have net loss per share of $1.68 for the year ended
January 31, 1998 and $0.78 for the unaudited period February 1, 1998, to July
31, 1998. Such supplemental net loss per share is based on the number of shares
of common stock used in the calculation of net loss per share plus the number of
shares required to be sold by the Company to fund the repayment of the unsecured
notes payable after giving effect to the interest savings of approximately
$237,000 and $300,000 for the periods ended January 31, 1998, and July 31, 1998,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and notes payable approximated fair value because of the short maturity of these
instruments. The Company routinely assesses the financial strength of its
customers and records an allowance for doubtful accounts when it determines that
collection of a particular amount is unlikely.
F-9
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
3. INVENTORY
Inventory at January 31, 1998 consists of the following:
[Download Table]
Components parts.................................................. $ 126,340
Clubs............................................................. 278,715
Apparel, golf accessories and other............................... 12,003
---------
$ 417,058
---------
---------
At January 31, 1998, the Company had inventory of approximately $134,000 on
consignment at various customer locations. The consigned inventory did not
include any HIPPO-TM- brand products.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
[Enlarge/Download Table]
JANUARY 31, ESTIMATED
--------------------- USEFUL LIVES
1997 1998 (IN YEARS)
--------- ---------- ---------------
Furniture and fixtures................................... $ -- $ 169,215 3
Equipment................................................ 34,552 43,884 3
--------- ----------
34,552 213,099
Accumulated depreciation................................. (3,355) (11,455)
--------- ----------
$ 31,197 $ 201,644
--------- ----------
--------- ----------
The Company recorded depreciation expense related to its property and
equipment of $3,355 and $8,100 for the period ended January 31, 1997 and the
year ended January 31, 1998, respectively.
F-10
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
5. NOTES PAYABLE
The Company's notes payable are as follows:
[Enlarge/Download Table]
JANUARY 31,
--------------------------
1997 1998 JULY 31, 1998
----------- ------------- -------------
(UNAUDITED)
Unsecured notes payable to private investors, due September 1998 (see
below)............................................................... $ -- $ 50,000 $ 3,905,000
Unsecured notes payable to private investors, due September 1998,
interest at 12.5%.................................................... 115,000 1,705,000 1,360,000
Unsecured notes payable to private investors, due September 1998,
interest at 15%...................................................... -- 525,000 525,000
Unsecured notes payable to private investors, due September 1998,
interest at 24%...................................................... -- 70,500 --
Unsecured line of credit, interest at the bank's prime rate plus 2%
(10.5% at January 31, 1998), guaranteed by the Company's President
and Chief Executive Officer, due on demand........................... -- 35,000 35,000
Long term unsecured notes payable to the Company's President and Chief
Executive Officer, interest at 7.5%, due by September 2002........... 40,000 40,000 40,000
Advances from factor, interest at 24%, due on demand................... -- 280,138 --
----------- ------------- -------------
155,000 2,705,638 5,865,000
Current portion........................................................ (115,000) (2,665,638) (5,825,000)
----------- ------------- -------------
$ 40,000 $ 40,000 $ 40,000
----------- ------------- -------------
----------- ------------- -------------
In January 1998, as part of a proposed $3,500,000 debt offering, the Company
issued a $50,000 note payable maturing at the earlier of September 1998 or
within 5 days after an initial public offering of the Company's common stock
generating in excess of $7 million of gross proceeds. Under the terms of the
debt financing, the holder of the $50,000 note payable has the option to receive
interest in the amount of $3,125 or warrants to purchase 25,000 shares of the
Company's common stock at a price per share equal that to be offered in
connection with the offering of warrants under the Company's planned initial
public offering, which management expects to be 115% of the per share initial
public offering price.
Under the terms of the original issuance of 12.5% unsecured notes payable to
private investors, the notes were due at the earlier of September 30, 1997, or
an initial public offering of the Company's common stock. Additionally, the
Company issued $275,000 of such notes during or subsequent to September 1997
which had a maturity of September 1998 or within 5 days of an initial public
offering, if earlier. The 12.5% debt included 231,400 warrants to purchase the
Company's common stock at prices ranging from $0.75 to $3.99 per share.
Under the original terms of the 15% unsecured notes payable to private
investors, the notes were due at the earlier of September 30, 1997, or an
initial public offering of the Company's common stock. The terms of the debt
included 232,750 warrants to purchase the Company's common stock at $0.75 per
share.
F-11
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
5. NOTES PAYABLE (CONTINUED)
At January 31, 1998, the Company was in default of the terms of the 12.5%
and 15% unsecured notes payable to private investors which were due during
September 1997. During February 1998, the Company obtained a specific waiver to
extend the maturity of the then outstanding unsecured notes payable through the
earlier of September 1998 or within 5 days after an initial public offering of
the Company's common stock generating in excess of $7.5 million of gross
proceeds.
As a result of the extension of the maturity of the 15% and certain of the
Company's 12.5% unsecured notes payable to September 1998, the Company issued to
the holders of such unsecured notes, warrants to purchase 85,000 shares of the
Company's common stock at $0.75 per share, warrants to purchase 98,333 shares of
the Company's common stock at $3.00 per share and warrants to purchase 31,666
shares of the Company's common stock at $2.10 per share. The warrants were
exercisable in full at the time of their issuance and expire on the dates of
expiration of the warrants issued under the terms of the original debt.
The Company's management believes that at the time of their issuance, the
warrants issued in connection with the Company's unsecured notes payable had no
value due to the financial condition of the Company as explained in Note 1.
Accordingly, no portion of the proceeds from the issuance of the notes was
allocated to the warrants nor was any value assigned to warrants issued in
connection with the extension of the maturity of certain unsecured notes as
described above.
In February and May 1998 the Company repaid an aggregate of $68,500 and
$47,000, respectively, of unsecured notes payable to private investors
representing notes bearing interest at 12.5% and 24%.
Pursuant to the terms of a factoring agreement, the Company assigns
substantially all of its accounts receivable to a factor with recourse. The
Company is able to borrow up to 50% of eligible accounts receivable, as defined,
up to a maximum amount of $1 million. Advances from the factor bear interest at
24% per annum. Receivables assigned to the factor are subject to a charge of 3%
of the face amount of the receivable. The advances from the factor are secured
by all of the Company's assets. During the year ended January 31, 1998, the
Company incurred interest and factoring charges of $10,059 and $7,739,
respectively. The factoring agreement was for an initial term of six months and
renews for successive twelve month periods thereafter, unless cancelled by the
Company or the factor.
At January 31, 1998, the Company had received advances of approximately
$115,000 in excess of those permitted under the factoring agreement, resulting
in the Company being in default of such agreement. As a result of the default,
the factor had the right to terminate the agreement and demand payment of the
funds advanced. Subsequent to year end, the Company has reduced the amounts
outstanding under the factoring agreement and currently is within the borrowing
base of such agreement.
At January 31 and July 31, 1998, the Company had accrued interest under its
unsecured notes payable in the aggregate amount of approximately $237,000 and
493,000, respectively.
At January 31, 1998, $410,000 and $100,000 of the 12.5% and 15% unsecured
notes payable, respectively, were held by a related party. Accrued interest and
interest expense of approximately $34,000 and $31,000, respectively, was
recorded in regards to these unsecured notes payable as of and for the year
ended January 31, 1998.
During the period February to June 1998, the Company obtained debt financing
amounting to approximately $3.4 million (amounts outstanding at January 31, 1998
and July 31, 1998 were $50,000 and $3,905,000, respectively). This debt matures
at the earlier of September 1998, or within 5 days of an initial
F-12
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
5. NOTES PAYABLE (CONTINUED)
public offering of the Company's common stock generating in excess of $7 million
of gross proceeds. Under the terms of the debt financing, each holder of a
$50,000 note payable has the option to receive interest in the amount of $3,125
or warrants to purchase 25,000 shares of the Company's common stock at a price
per share equal to that to be offered in connection with the offering of
warrants under the Company's intended initial public offering, which management
expects to be 115% of the per share initial public offering price.
6. SHAREHOLDERS' DEFICIT
STOCK SPLITS AND NUMBER OF AUTHORIZED SHARES
In August 1996, the Company increased the number of authorized shares of
common stock from 250,000 to 6,500,000 and simultaneously effected a 15-for-1
stock split. In February 1997, the Company increased the number of authorized
shares of common stock from 6,500,000 to 10,881,000 and simultaneously effected
a 3-for-2 reverse stock split. In July 1997, the Company increased the number of
authorized shares of common stock from 10,881,000 to 24,300,000. On January 31,
1998, the Company decreased the authorized shares of Common Stock to 8,100,000
and simultaneously effected a 3-for-1 reverse stock split.
All references to the number of common shares and per share amounts
elsewhere in the financial statements and related footnotes have been restated
to reflect the effect of all stock splits for all periods presented.
See Note 10.
COMMON STOCK
During February 1997, the Company's Chief Executive Officer was issued
approximately 1,025,000 shares of the Company's common stock in return for the
forgiveness of $588,660 in advances to the Company at various dates during 1996
and 1997. The Company recorded approximately $57,000 of compensation expense in
connection with the issuance of such shares based on the fair market value of
the shares as determined by an independent valuation. Also, during the year
ended January 31, 1998, the Company sold approximately 181,000 shares of its
common stock for $299,000, of which 4,833 shares were sold to a related party.
In May 1996, the Company issued 50,000 shares of its common stock to Hippo
Holdings in exchange for the perpetual rights to market and sell HiPPO-TM- brand
products in the U.S. and Canada. These shares were valued by the Company's Board
of Directors at $19,800, the estimated fair value, and their issuance recorded
as an intangible asset in the accompanying balance sheets at January 31, 1997
and 1998 (see Note 9).
At various dates during the period ended January 31, 1997, the Company's
President and Chief Executive Officer purchased approximately 992,000 shares of
the Company's common stock for $529,000. In connection with the sale of such
shares to the Company's Chief Executive Officer, the Company recorded
compensation expense of approximately $400,000 for the period ended January 31,
1997 based on fair market value of shares issued to other investors during the
particular time frame.
Additionally, during the period ended January 31, 1997, the Company issued,
to third parties, approximately 77,000 shares of its common stock for $210,000.
F-13
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
6. SHAREHOLDERS' DEFICIT (CONTINUED)
COMMON STOCK WARRANTS
In connection with the issuance of its unsecured notes payable to private
investors, the Company issued warrants to purchase shares of its common stock as
follows:
[Enlarge/Download Table]
WEIGHTED
AVERAGE
EXERCISE
WARRANTS PRICE
--------- -----------
Warrants issued in connection with $65,000 of notes payable at 12.5%........................ 7,150 $ 1.13
--------- -----
BALANCE AT JANUARY 31, 1997................................................................. 7,150 1.13
Warrants issued in connection with $975,000 of notes payable at 12.5%....................... 107,250 0.75
Warrants issued in connection with $525,000 of notes payable at 15%......................... 232,750 0.75
Warrants issued in connection with $420,000 of notes payable at 12.5%....................... 84,000 2.10
Warrants issued in connection with other notes payable...................................... 33,000 2.33
--------- -----
BALANCE AT JANUARY 31, 1998................................................................. 464,150 $ 1.75
--------- -----
--------- -----
The Company believes, based on an independent valuation, that the above
warrants had an insignificant fair market value at the time of their issuance.
The above warrants do not include 25,000 warrants issuable at the election of a
debt holder in connection with a $50,000 note payable issued by the Company in
January 1998 (see Note 5).
COMMON STOCK OPTIONS
On September 4, 1996, the Company adopted an Incentive Stock Plan (the
"Plan") allowing the Company to issue 500,000 incentive stock options to
employees and non-qualified options to either employees or consultants. The
total number of shares with respect to which options may be granted was
increased to 1.1 million on January 24, 1997.
F-14
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
6. SHAREHOLDERS' DEFICIT (CONTINUED)
The Company has issued various stock options to employees and consultants.
The options' vesting period varies from full vesting upon issuance of options to
vesting over a three year period. A summary of the Company's stock options
activity is as follows:
[Enlarge/Download Table]
OPTIONS
----------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- -----------
Balance, February 8, 1996................................................................... -- $ --
Granted..................................................................................... 267,531 0.82
--------- -----
Balance, January 31, 1997................................................................... 267,531 0.82
Granted..................................................................................... 448,880 3.04
--------- -----
Balance, January 31, 1998................................................................... 716,411 $ 2.21
--------- -----
--------- -----
[Enlarge/Download Table]
WEIGHTED
OUTSTANDING EXERCISABLE AVERAGE
----------- ----------- EXERCISE
EXERCISE PRICE RANGE SHARES SHARES PRICE
----------------------------------------------------------------------------- ----------- ----------- -----------
$0.225....................................................................... 85,476 85,476 $ 0.225
0.72-0.75................................................................... 169,161 125,204 $ 0.729
2.10-3.00................................................................... 384,068 286,624 $ 2.550
6.00........................................................................ 77,166 24,000 $ 6.000
----------- -----------
716,411 520,749 $ 2.210
----------- -----------
----------- -----------
The Company generally grants options at exercise prices equal to the
estimated market value of the Company's common stock at the date of the grant.
The Company recognized approximately $74,000 and $153,000 of stock-based
compensation expense during the periods ended January 31, 1997 and 1998,
respectively, relating to options granted at exercise prices below the estimated
fair market value of the Company's common stock at the date of grant. Had
compensation costs for the Company's stock option grants to employees been
determined using the fair value method, the Company's loss and loss per share
for the year ended January 31, 1998 would not have been significantly different
from the amounts recorded.
Fair market value information for the Company's stock warrants and options
for the period February 8, 1996 (inception) to January 31, 1997 and the year
ended January 31, 1998 was estimated using the Black-Scholes option pricing
model assuming risk free rates of 5.6% to 6.5%, no dividend yield, expected
terms of 3 years, and no significant volatility.
7. INCOME TAXES
The Company is subject to federal and state income taxes but has not
incurred a liability for such taxes due to losses incurred. The Company had
deferred tax assets of approximately $812,000 and $2,414,000 at January 31, 1997
and 1998, respectively, resulting primarily from net operating loss
carryforwards. The deferred tax assets have been fully offset by a valuation
allowance resulting from the uncertainty surrounding the future realization of
the net operating loss carryforwards. These carryforwards are
F-15
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
7. INCOME TAXES (CONTINUED)
available to offset future taxable income, if any, through 2013. Limitations on
the utilization of the Company's net operating tax loss carryforwards could
result in the event of certain changes in the Company's ownership.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease arrangements. Rent expense for the period February 8, 1996 (inception) to
January 31, 1997 and for the year ended January 31, 1998 was approximately
$46,000 and $101,000, respectively.
Minimum future rental payments on non-cancelable operating leases with
remaining lease terms of one or more years are as follows at January 31, 1998:
[Download Table]
JANUARY 31,
1999.............................................................. $ 93,883
2000.............................................................. 36,951
2001.............................................................. 3,953
2002.............................................................. 549
---------
Total minimum future rental payments.............................. $ 135,336
---------
---------
The Company has entered into an endorsement contract with a professional
golfer for endorsement of the TEGRA-TM- brand. Under the terms of the contract,
the professional golfer will wear TEGRA-TM- headwear and apparel, play TEGRA-TM-
clubs and carry a TEGRA-TM- bag and accessories in professional competitions and
in any golf related activities worldwide.
Total minimum annual payments under the endorsement contract are as follows:
[Download Table]
JANUARY 31,
1999........................................................... $ 147,500
2000........................................................... 152,500
2001........................................................... 120,000
----------
Total minimum future endorsement contract commitments.......... $ 420,000
----------
----------
The Company has commitments under employment and design consulting contracts
expiring through November 1999. The terms of the present design consulting
contract entered into in October 1996, as amended in April 1997, include a
monthly retainer and royalty payments based on a percentage of cost of sales of
the designed products. The designer also received 6,666 options at $0.75 per
share which vest 3,333 each at December 31, 1997 and at December 31, 1998, upon
final performance of the contract. In connection with these options, no amount
was recorded as compensation expense as the Company's management believes these
options had an insignificant fair market value at the time of issuance based on
F-16
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
an independent appraisal. The Company is currently negotiating an extension of
the design consulting contract. Total minimum annual payments under these
contracts are as follows:
[Download Table]
JANUARY 31,
1999.............................................................. $ 192,500
2000.............................................................. 46,667
---------
Total minimum future employment and design consulting contract
commitments..................................................... $ 239,167
---------
---------
The Company entered into an agreement with Hippo Holdings under which the
Company was to pay a percentage of the endorsement fee paid by Hippo Holdings to
a professional golfer. In connection therewith, the Company accrued
approximately $220,000 during the year ended January 31, 1998. This agreement
was terminated upon the sale back to Hippo Holdings of its license (see Note 9).
As of January 31, 1998, the Company had entered into purchase agreements
with various suppliers for components and finished goods for both TEGRA-TM- and
HiPPO-TM- brand products, approximating $1.3 million (see Note 9).
The Company is a defendant in a lawsuit alleging patent infringement and,
additionally, has received a request that the Company review its TEGRA-TM- line
of clubs in view of a patent issued to a third party relating to golf club
design. The Company believes that its TEGRA-TM- brand golf clubs do not infringe
the patents which are the subject of the lawsuit or the review request. However,
no assurance can be given that the Company's product does not infringe such
patents, or any other golf club related patent. Further, the Company cannot
currently estimate the effect of an adverse decision in connection with these
matters on the Company's financial condition or results of operations.
See Note 10.
9. SUBSEQUENT EVENTS
In March 1998, the Company issued 104,784 shares to a professional golfer as
consideration for $220,047 owed to such golfer under the Company's endorsement
arrangement with Hippo Holdings. The Company is currently negotiating an
endorsement contract with this professional golfer for the Company's TEGRA-TM-
brand products.
In May 1998, the Company sold its license to sell HiPPO-TM- products in the
U.S. back to Hippo Holdings along with all existing HiPPO-TM- brand inventory of
approximately $62,000, prepaid royalties of approximately $133,000, and the
assumption of liabilities in the amount of approximately $225,000. The Company
received a cash payment of approximately $359,000. A gain of approximately
$389,000 will be recorded in connection with this transaction. In addition,
Hippo Holdings returned to the Company the 50,000 shares of common stock it had
received upon entering the license agreement; no gain or loss will be recorded
in connection with the return of the stock. Furthermore, Hippo Holdings assumed
the Company's then outstanding purchase commitments in the amount of
approximately $1,172,000 related to the HiPPO-TM- brand of products. Sales of
HiPPO-TM- brand products for the year ended January 31, 1998, and the three
months ended April 30, 1998, were approximately $589,000 and $24,000,
respectively.
On April 29, 1998, the Company entered into an agreement with a financial
advisor to obtain financial investment services through January 22, 2000. The
consideration provided for in the agreement was
F-17
OUTLOOK SPORTS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
9. SUBSEQUENT EVENTS (CONTINUED)
125,000 shares of the Company's Common Stock. The Company recorded $125,000 as a
deferred charge to be amortized over the period of the agreement.
See Note 10.
10. UNAUDITED SUBSEQUENT EVENTS
In October 1998, the Company increased the authorized shares of common stock
from 8,100,000 to 20,000,000. Within the authorized shares of common stock, the
Company created a Class A and a Class B stock, consisting of 15,000,000 and
5,000,000 shares of stock, respectively. Additionally, the Company authorized
5,000,000 shares of preferred stock, par value $0.01 per share.
The Company is a defendant in a lawsuit alleging breach of contract for
advertising services in an amount of approximately $200,000. The Company's
management believes its defense to be meritorious; however, there can be no
assurance that the Company will prevail.
The Company received an additional payment of approximately $54,000 from
Hippo Holdings in connection with the sale of the Company's license to produce
HiPPO-TM- products. Accordingly, the gain on the sale was increased by
approximately $25,000.
F-18
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------------
TABLE OF CONTENTS
[Download Table]
PAGE
---------
Prospectus Summary.............................. 4
Risk Factors.................................... 10
Use of Proceeds................................. 23
Dilution........................................ 24
Capitalization.................................. 25
Dividend Policy................................. 25
Selected Financial Data......................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 27
Business........................................ 31
Management...................................... 39
Principal and Selling Shareholders.............. 44
Concurrent Registration......................... 44
Certain Transactions............................ 46
Description of Securities....................... 48
Shares Available for Future Sale................ 51
Underwriting.................................... 52
Legal Matters................................... 54
Experts......................................... 54
Available Information........................... 54
Index to Financial Statements................... F-1
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,500,000 SHARES OF
CLASS A COMMON STOCK
AND
1,000,000 REDEEMABLE
CLASS A COMMON STOCK PURCHASE
WARRANTS
OUTLOOK SPORTS TECHNOLOGY, INC.
---------------------
PROSPECTUS
---------------------
[LOGO]
[LOGO]
SECURITIES, INC.
Atlanta, Georgia
(404) 965-5353
(800) 840-8467
, 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to the Delaware General Corporation Law ("Delaware Law")
whereby officers and directors of the Company are to be indemnified against
certain liabilities. The Certificate of Incorporation also limits to the fullest
extent permitted by Delaware Law a director's liability to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
including gross negligence, except liability for (i) breach of the director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) the unlawful
payment of a dividend or unlawful stock purchase or redemption, and (iv) any
transaction from which the director derives an improper personal benefit.
Delaware Law does not permit a corporation to eliminate a director's duty of
care and this provision of the Company's Certificate of Incorporation has no
effect on the availability of equitable remedies, such as injunction or
rescission, based upon a director's beach of the duty of care.
Article SEVENTH of the Company's Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), provides that no director of the Company
shall be personally liable for any monetary damages for any breach of fiduciary
duty as a director, except to the extent that the Delaware General Corporation
Law prohibits the elimination or limitation of liability of directors for breach
of fiduciary duty.
Article EIGHTH of the Certificate of Incorporation provides that a director
or officer of the Company shall be indemnified by the Company against (a) all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Company) brought against him or
her by virtue of his or her position as a director or officer of the Company if
he or she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful and (b) all expenses (including attorneys' fees) and
amounts paid in settlement incurred in connection with any action by or in the
right of the Company brought against him or her by virtue of his or her position
as a director or officer of the Company if he or she acted in good faith and in
a manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, except that no indemnification shall be made with
respect to any matter as to which such person shall have been adjudged to be
liable to the Company, unless a court determines that, despite such adjudication
but in view of all of the circumstances, he or she is entitled to
indemnification of such expenses. Notwithstanding the foregoing, to the extent
that a director or officer has been successful, on the merits or otherwise,
including the dismissal of an action without prejudice, he or she is required to
be indemnified by the Company against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his or her request, provided that he or she undertakes to repay the
amount advanced if it is ultimately determined that he or she is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Company determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Company that the director or officer
did not meet the applicable standard of conduct required for indemnification, or
if the Company fails to make an indemnification payment within sixty days after
such payment is claimed by such person, such person is permitted to petition the
court to make an independent determination as to whether such person is entitled
to indemnification. As a condition precedent to the right of indemnification,
the director or officer must give the Company notice of the action for which
indemnity is sought and the Company has the right to participate in such action
or assume the defense thereof.
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Article EIGHTH of the Certificate of Incorporation further provides that the
indemnification provided therein is not exclusive, and provides that in the
event that the Delaware General Corporation Law is amended to expand the
indemnification permitted to directors or officers the Company must indemnify
those persons to the fullest extent permitted by such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he or she is or is threatened
to be made a party by reason of such position, if such person shall have acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, and, in any criminal
proceeding, if such person had no reasonable cause to believe his or her conduct
was unlawful; provided that, in the case of actions brought by or in the right
of the corporation, no indemnification shall be made with respect to any matter
as to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
The Company maintains a directors' and officers' insurance policy that
covers certain liabilities of directors and officers of the Company. The Company
maintains a general liability insurance policy that covers certain liabilities
of directors and officers of the Company arising out of claims based on acts or
omissions in their capacities as directors or officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
An itemized statement of expenses in connection with the issuance and
distribution of the securities to be registered, other than underwriting
discounts and commissions, appears below. All amounts are estimates, except for
the SEC registration fee, the NASD filing fee and the NASDAQ SmallCap Market
listing fee.
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SEC Registration Fee.............................................................. $ 13,677
NASD Filing Fee................................................................... 4,040
NASDAQ SmallCap Market Listing Fee................................................ 7,566
Blue Sky Qualification Fees and Expenses.......................................... 30,000
Accounting Fees and Expenses...................................................... 100,000
Legal Fees and Expenses........................................................... 250,000
Transfer Agent Fees............................................................... 6,000
Printing and Engraving Expenses................................................... 75,000
Miscellaneous Expenses............................................................ 13,717
---------
TOTAL............................................................................. $ 500,000
---------
---------
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES.
On October 7, 1998, the Company amended its certificate of incorporation to
create two classes of Common Stock. References to Common Stock below are to the
Common Stock of the Company prior to this Amendment.
The following information is furnished with regard to all securities sold by
the Company within the past three years which were not registered under the
Securities Act. The share numbers set forth below have been adjusted to reflect
a number of stock splits. In August 1996, the Company increased the number of
authorized shares of Common Stock from 250,000 to 6,500,000 and simultaneously
effected a 15-for-1 stock split. In February 1997, the Company increased the
number of authorized shares of Common Stock from 6,500,000 to 10,881,000 and
simultaneously effected a 3-for-2 reverse stock split. In July 1997, the Company
increased the number of authorized shares of Common Stock from 10,881,000 to
24,300,000. On
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January 31, 1998, the Company decreased the number of authorized shares to
8,100,000 and simultaneously effected a 3-for-1 reverse stock split.
The issuances described in this Item 26 were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act
relating to sales by an issuer not involving any public offering. None of the
foregoing transactions involved a distribution or public offering.
ISSUANCES OF COMMON STOCK
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NAME NUMBER OF SHARES PURCHASE PRICE DATE SOLD
------------------------------------------------------- ----------------- -------------- ----------------------
Paul Berger............................................ 333,333 $ 132,000 May 13, 1996
117,630 95,000 June 21, 1996
207,690 170,000 August 19, 1996
1,024,800 588,660 February 27, 1997
Jim Dodrill............................................ 333,333 132,000 May 31, 1996
4,833 10,150 April 22, 1997
Greg Cohen............................................. 76,502 210,000 September 4, 1996
David Staudinger....................................... 6,666 14,000 July 25, 1997
Walter Maupay.......................................... 16,666 35,000 July 31, 1997
Walter & Gina McDonough................................ 3,333 7,000 August 1, 1997
DDJ Hackworthy Ltd Pp.................................. 47,619 100,000 August 11, 1997
David Stern............................................ 8,333 17,500 August 18, 1997
Ian Woosnam(1)......................................... 104,784 220,047 October 1, 1997
Synergy Group International(2)......................... 200,000 100,000 October 17, 1997
Carol Dodrill/Bill Powell(3)........................... 100,000 50,000 October 28, 1997
Paul Fairchild......................................... 33,333 70,000 October 30, 1997
Rodger Berman(2)....................................... 6,666 5,000 November 10, 1997
Frank Maddocks......................................... 60,000 45,000 November 11, 1997
Glen Day............................................... 10,000 (4) January 1, 1998
Dan Snider............................................. 1,250 (4) January 1, 1998
Arthur Chou............................................ 1,666 (4) January 1, 1998
Andrew Holder/Marc Roberts(2).......................... 100,000 100,000 January 23, 1998
Argent Securities, Inc................................. 125,000 (4) January 23, 1998
Total............................................
------------------------
(1) Purchase price was paid by the individual forgoing payments due under a
contract with Company in amounts equal to the purchase price.
(2) These individuals purchased stock from Paul Berger and Jim Dodrill.
(3) These individuals purchased stock from Paul Berger.
(4) Issued in connection with a services contract.
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DEBT SECURITIES AND WARRANTS
From February, 1997 through July 1, 1998, the Company issued unregistered
debt securities and warrants to a number of individuals pursuant to five private
placements and to Stanley Berger in connection with certain advances to the
Company. The issuances made in connection with these transactions were made in
reliance on Section 4(2) of the Securities Act. In each case, each purchaser was
an accredited investor. The following summary of these transactions reflects the
effect of all stock splits of the Company's Common Stock. The summary also
reflects a 25% increase in the number of shares of Common Stock that may be
purchased by each investor in the offerings described under (a) and (b) below,
which increase was granted by the Company in return for an extension of the
payment date for each Note.
(a) In February through April, 1997, the Company sold through a private
placement a total of 9.75 Units (or portions of a Unit) to fourteen individuals,
each Unit consisting of a non-transferable promissory note in the amount of
$100,000, earning 12.5% interest annually, and a warrant to purchase 13,570
shares of the Common Stock of the Company. The warrants are convertible into
shares of Common Stock at $0.75 per share and terminate after five years.
(b) In May through June, 1997, the Company sold through a private placement
a total of 10.5 Units (or portions of a Unit) to ten individuals (all of whom
had participated in the first private placement), each Unit consisting of a
non-transferable promissory note in the amount of $50,000, earning 15% interest
annually, and a warrant to purchase 27,708 shares of the Common Stock of the
Company. The warrants are convertible into shares of Common Stock at $0.75 per
share and terminate after five years.
(c) In July, 1997, the Company sold through a private placement a total of
six Units (or portions of a Unit) to three individuals, each Unit consisting of
a non-transferable promissory note in the amount of $75,000, earning 12.5%
interest annually, and a warrant to purchase 15,000 shares of the Common Stock
of the Company. The warrants are convertible into shares of Common Stock at
$2.10 per share and terminate after five years. One investor in this offering
received warrants to purchase an additional 98,333 shares of common stock at
$3.00 per share, and one investor received warrants to purchase an additional
31,666 shares of common stock at $2.10 per share.
(d) In January through June, 1998, the Company sold through a private
placement a total of 70.1 Units (or portions of a Unit) to 43 individuals (four
of whom had participated in the first private placement), each Unit consisting
of a non-transferable promissory note in the amount of $50,000 and an option to
receive an additional $3,125 in cash or a warrant to purchase 25,000 shares of
the Common Stock of the Company. The warrants are convertible into shares of
Common Stock at $6.90 per share and terminate after three years. The Company
will register the warrants contemporaneously with registration of this Offering.
Argent Securities, Inc. acted as placement agent in the private placement and
received compensation of $499,150 consisting of a 10% commission and certain
other fees.
(e) On July 1, 1998, the Company sold through a private placement a total of
one Unit to a single individual, which Unit consisted of a non-transferable
promissory note in the amount of $400,000 and a warrant to purchase 533,333
shares of the Common Stock of the Company. The warrant is convertible into
shares of Common Stock at $7.50 per share and terminates after three years. H.J.
Meyers acted as placement agent in the private placement and received
compensation of $40,000 consisting of a 10% commission.
(f) In September, 1996 through January, 1998, the Company issued a total of
ten non-transferable promissory notes, totaling $340,000 and warrants to
purchase a total of 67,857 shares of the Common Stock of the Company. The
warrants are convertible into shares of Common Stock at exercise prices ranging
from $0.75 per share to $4.00 per share and terminate after five years.
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ITEM 27: EXHIBITS
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1.1 Form of Representative's Warrant
1.2 Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-Laws of the Company
4.1* Specimen certificate for the Common Stock of the Company
4.2* Specimen certificate for the Warrants of the Company
5.1** Opinion of Foley, Hoag & Eliot LLP
10.1* Employment Agreement with William Barthold, dated January 16, 1996
10.2* Employment Agreement with Daniel Snider, dated January 16, 1998
10.3* Business Note and Security Agreement, dated June 19, 1997, with Barnett Bank, N.A.
10.4* Revolving Accounts Receivable Funding Agreement between the Company and Gibraltar
Financial Corporation, dated November 25, 1997
10.5* Amendment to Revolving Accounts Receivable Funding Agreement, dated November 25,
1997
10.6* Gibraltar Financial Corporation Demand Note, dated November 25, 1997
10.7* Form of Promissory Note signed by the Company in favor of Paul Berger, Jim Dodrill
and Stanley Berger for all advances made by them to the Company
10.8* Security Agreement with Stanley Berger, dated October 1, 1997
10.9* Subordination Agreement with Stanley Berger, dated December 3, 1997
10.10* Option, dated January 24, 1997, received by Paul Berger as consideration for an
advance made by him to the Company
10.11* Option, dated September 5, 1996, received by Jim Dodrill as consideration for an
advance made by him to the Company
10.12* Form of Warrant for the purchase of the Common Stock of the Company received by
Stanley Berger as consideration for advances made by him to the Company
10.13* Form of Promissory Note signed by the Company in favor of all participants in a
private financing between February 4, 1997 and April 30, 1997
10.14* Form of Warrant for the purchase of the Common Stock of the Company received by
all participants in a private financing between February 4, 1997 and April 30,
1997
10.15* Form of Promissory Note signed by the Company in favor of all participants in a
private financing between May 12, 1997 and June 30, 1997
10.16* Form of Warrant for the purchase of the Common Stock of the Company received by
all participants in a private financing between May 12, 1997 and June 30, 1997
10.17* Form of Promissory Note signed by the Company in favor of all participants in a
private financing in July, 1997
10.18* Form of Warrant for the purchase of the Common Stock of the Company received by
all participants in a private financing in July, 1997
10.19* Form of Consent to extension of payment date for all Notes executed by the Company
in all private financings
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10.20* Form of Subscription Agreement signed by all investors in the Company
10.21* Lease Agreement, dated March 13, 1997, between the Company and Sanctuary of Boca,
Inc. (for office space in Boca Raton)
10.22* Amendment to Lease #1, dated August 1, 1997, between the Company and Sanctuary of
Boca, Inc.
10.23* Amendment to Lease #2, dated February 2, 1998, between the Company and Sanctuary
of Boca, Inc.
10.24* Sublease Agreement and Rider, dated December 1, 1996, between the Company and Tom
Rochon Associates (for office space in New York City) and Over-Lease Agreement
incorporated therein
10.25* Sublease Agreement and Rider, dated July 12, 1996, between the Company and Tom
Rochon Associates (for office space in New York City) and Over-Lease Agreement
incorporated therein
10.26* Research, Development and Consulting Contract, dated October 8, 1996, with Chou
Golf Design Labs, Inc.
10.27* Contract Amendment, dated May 4, 1997, to Research, Development and Consulting
Contract with Chou Golf Design Labs, Inc.
10.28 Agreement, dated September 1, 1998, with G. Day Associates, Inc.
10.29* 1996 Incentive and Non-qualified Stock Option Plan
10.30* Form of Incentive Stock Option Agreement under 1996 Incentive and Non-qualified
Stock Option Plan
10.31* Form of Non-qualified Stock Option Agreement under 1996 Incentive and
Non-Qualified Stock Option Plan
10.32* 1998 Incentive and Non-qualified Stock Option Plan
10.33 Form of Incentive Stock Option Agreement under 1998 Incentive and Non-Qualified
Stock Option Plan
10.34 Form of Non-Qualified Stock Option Agreement under 1998 Incentive and
Non-Qualified Stock Option Plan
10.35* MONY Deferred Compensation Plan for managers of the Company
10.36* Settlement Agreement and Release, dated May 4, 1998, between the Company and Hippo
Holdings Ltd
10.37 Consulting Agreement, dated April 29, 1998, between the Company and Argent
Securities, Inc.
10.38 Form of Non-Qualified Stock Option Agreement for Outside Directors under 1998
Incentive and Non-Qualified Stock Option Plan
10.39 Termination Agreement, dated September 1, 1998, between the Company and Daniel
Snider
10.40 Form of Warrant Agreement, dated , 1998, between the Company and
American Stock Transfer & Trust Company
21.1* Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2** Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
24.1* Power of Attorney (contained on the signature page of this Registration Statement)
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27.1* Financial Data Schedule
99.1 Consent of Daniel Snider to being named in the Registration Statement as a new
director, dated June 19, 1998
99.2 Consent of Kim Haskell to being named in the Registration Statement as a new
director, dated June 23, 1998
------------------------
* Previously filed.
** To be filed by amendment.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer 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 Act and will be governed by the final adjudication of such
issue.
(a) The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells, a post-effective
amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) of
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Boca Raton, The State of Florida, on October 7, 1998.
OUTLOOK SPORTS TECHNOLOGY, INC.
By: /s/ PAUL H. BERGER
-----------------------------------------
Paul H. Berger
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
OF THE BOARD OF DIRECTORS
By: /s/ JIM G. DODRILL II
-----------------------------------------
Jim G. Dodrill II
PRESIDENT
By: /s/ EVERETTE C. HINSON
-----------------------------------------
Everette C. Hinson
VICE PRESIDENT FINANCE
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Dates Referenced Herein and Documents Incorporated by Reference
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