-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CizRkTQ+XiW7ju2UU5MQru4xr7sxyZNyFr07OWxzWxHnk9OacL2w74XPCFGrFbii IoFqIGR5humdatauxw1vGA== 0001047469-98-000532.txt : 19980112 0001047469-98-000532.hdr.sgml : 19980112 ACCESSION NUMBER: 0001047469-98-000532 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980109 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT VALLEY SPORTS INC CENTRAL INDEX KEY: 0001047475 STANDARD INDUSTRIAL CLASSIFICATION: ORDNANCE & ACCESSORIES, (NO VEHICLES/GUIDED MISSILES) [3480] IRS NUMBER: 133890380 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-37507 FILM NUMBER: 98503276 BUSINESS ADDRESS: STREET 1: 4004 HWY 95 NORTH CITY: STEVENSVILLE STATE: MT ZIP: 59870 BUSINESS PHONE: 4067775534 MAIL ADDRESS: STREET 1: 4004 HWY 95 NORTH CITY: STEVENSVILLE STATE: MT ZIP: 59870 SB-2/A 1 FORM SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998 REGISTRATION STATEMENT NO. 333-37507 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CONNECTICUT VALLEY SPORTS, INC. (Name of Small Business Issuer) ------------------------------ DELAWARE 3484 13-3890380 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
------------------------ 4004 HIGHWAY 93 NORTH STEVENSVILLE, MONTANA 59870 (406) 777-5534 (Address and Telephone Number of Principal Executive Offices and Place Of Business) ------------------------------ JOHN TILLELI CHIEF EXECUTIVE OFFICER CONNECTICUT VALLEY SPORTS, INC. 4004 HIGHWAY 93 NORTH STEVENSVILLE, MONTANA 59870 (406) 777-5534 (Name, Address and Telephone Number of Agent for Service) ------------------------------ COPIES TO: GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS LLP ZIMET, HAINES, FRIEDMAN & KAPLAN JAY M. KAPLOWITZ, ESQ. JAMES MARTIN KAPLAN, ESQ. 101 EAST 52ND STREET 460 PARK AVENUE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022 TELEPHONE: (212) 752-9700 TELEPHONE: (212) 486-1700 TELECOPIER: (212) 752-9713 TELECOPIER: (212) 223-1151
------------------------ APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ------------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ------------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / 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/ 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 AN 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. THE EXHIBIT INDEX REQUIRED BY ITEM 601 OF REGULATION S-B IS LOCATED AT PAGE OF THE SEQUENTIAL NUMBERING SYSTEM APPEARING IN THE MANUALLY SIGNED COPY OF THIS REGISTRATION STATEMENT, TOTALING PAGES, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION REGISTERED REGISTERED SECURITY (1) PRICE FEE Units............................... 1,725,000(2) $5.10 $8,797,500 $2,665.91 Common Stock $.001 par value ("Common Stock").................. 1,725,000(3) -0- -0- -0- Redeemable Common Stock Purchase Warrant ("Warrant")............... 1,725,000(4) -0- -0- -0- Common Stock........................ 1,725,000(5) $6.00 $10,350,000 $3,136.56 Underwriter Warrant................. 1(6) $.0001 $10.00 $-- Units............................... 150,000(7) $5.61 $841,500 $255.00 Common Stock........................ 150,000(8) -0- -0- -0- Warrants............................ 150,000(9) -0- -0- -0- Common Stock........................ 150,000(10) $6.00 $900,000 $272.73 Total Registration Fee.............. $6,330.20 Previously Paid..................... $5,830.46 Amount Due Herewith................. $499.74
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 promulgated under the Securities Act of 1933, as amended. (2) Includes 225,000 Units subject to an over-allotment option granted to the Underwriter ("Over-Allotment Option"). (3) Consists of Common Stock included as part of the Units, including Units which the Underwriter has the option purchase from the Registrant to cover the over-allotments, if any. (4) Consists of Warrants included as part of the Units, including Units which the Underwriter has an option to purchase from the Registrant to cover over-allotments, if any. (5) Represents shares of Common Stock issuable upon exercise of the Warrants contained in the Units. Pursuant to Rule 416, this Registration Statement also covers an indeterminable number of additional shares of Common Stock issuable as a result of any future anti-dilution adjustments in accordance with the terms of the Warrants contained in the Units. (6) Issuable to the Underwriter. Exercisable to purchase up to 150,000 Units. (7) Represents the Units issuable upon exercise of the Underwriter's Warrant. Pursuant to Rule 416, this Registration Statement also covers an indeterminable number of additional Units issuable as a result of a future anti-dilution adjustments in accordance with the terms of the Underwriter's Warrants. (8) Consists of Common Stock included as part of the Units underlying the Underwriter's Warrants. Pursuant to Rule 416, this Registration Statement also covers an indeterminable number of additional of shares of Common Stock issuable as a result of a future anti-dilution adjustments in accordance with the terms of the Underwriter's Warrants. (9) Consists of Warrants included as part of the Units underlying the Underwriter's Warrants. Pursuant to Rule 416, this Registration Statement also covers an indeterminable number of additional of Warrants issuable as a result of a future anti-dilution adjustments in accordance with the terms of the Underwriter's Warrants. (10) Represents the Common Stock issuable upon exercise of the Warrants contained in the Underwriter's Warrant. Pursuant to Rule 416, this Registration Statement also covers an indeterminable number of additional of shares of Common Stock issuable as a result of a future anti-dilution adjustments in accordance with the terms of the Underwriter's Warrants and the Warrants contained in the Units. 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 CONNECTICUT VALLEY SPORTS, INC. 1,500,000 UNITS EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT Connecticut Valley Sports, a Delaware corporation (the "Company"), is offering hereby (the "Offering") 1,500,000 Units ("Units"), each Unit consisting of one share of the Company's common stock, $.0001 par value ("Common Stock"), and one Redeemable Common Stock Purchase Warrant ("Warrant"), through Briarwood Investment Counsel (the "Underwriter"). The Units, Common Stock and the Warrants are sometimes collectively referred to as the "Securities." The Common Stock and Warrants are immediately separable and separately tradable. Each Warrant entitles the holder thereof to purchase one share of the Company's Common Stock ("Share") at an exercise price of $6.00 per Share, subject to adjustment in certain circumstances, commencing 2000 [two years from the effective date of the registration statement of which this Prospectus is a part ("Effective Date")] and ending on 2003 [five years from the Effective Date]. The Warrants are subject to redemption by the Company upon not less than 30 days written notice at $.10 per Warrant at any time commencing 1999 [one year from the Effective Date] with the prior approval of the Underwriter, provided the closing bid quotation in the market where the Common Stock trades at the time of the call for redemption has equaled or exceeded $7.50 for 20 consecutive trading days ending on the third business day prior to the date of the redemption notice. Prior to this Offering there has been no market for the Securities and there can be no assurance that a market will develop or if developed will be sustained. See "Description of Securities" and "Risk Factors." Application has been made to have the Units, Common Stock and Warrants included for quotation on The Nadsaq SmallCap Market under the symbols "CVSPU", "CVSP" and "CVSPW" respectively and for listing on the Boston Stock Exchange under the symbols "CVSC", "CVS" and "CVSW", respectively. The offering price of the Units and the exercise price and other terms of the Warrants have been determined by negotiation between the Company and the Underwriter and do not necessarily bear any relation to the Company's earnings, assets, book value, net worth or any other recognized criteria of value. For a discussion of the factors considered in determining the offering price and exercise price, see "Underwriting." These are Speculative Securities. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTEMENT SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION" ON PAGE 18 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURANCY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNT AND PROCEEDS TO THE PRICE TO PUBLIC COMMISSION (1) COMPANY(2) Per Unit............................ $5.10 $.51 $4.59 Total (3)........................... $7,650,000 $765,000 $6,885,000
(1) In addition, the Company has agreed to pay the Underwriter a non-accountable expense allowance equal to 3% of the gross proceeds of this Offering, to sell to the Underwriter a warrant to purchase 150,000 shares of Common Stock at a purchase price of $5.50 per share and 150,000 Warrants at a purchase price of $.11 per Warrant ("Underwriter's Warrant") and to retain the Underwriter as a financial consultant. The Company has also agreed to pay the Underwriter a warrant solicitation fee of 5% under certain circumstances and to indemnify the Underwriter against certain liabilities arising under the Securities Act of 1933, as amended ("Securities Act"). See "Underwriting." (2) Does not include expenses of the Offering, (estimated to be $655,000) including the Underwriter's non-accountable expense allowance in the amount of $229,500 ($263,925 if the Underwriters' Over-allotment Option is exercised in full). (3) The Company has granted the Underwriter an option exercisable within 45 days from the Effective Date to purchase up to 225,000 additional Units ("Over-Allotment Option"), on the same terms as set forth above for the purpose of covering over-allotments, if any. If the Over-Allotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $8,797,500, $879,750 and $7,917,750, respectively. See "Underwriting." The Securities are offered by the Underwriter, as agent for the Company when, as and if delivered to and accepted by the Underwriter and subject to its right to reject orders in whole part, the approval of certain legal matters by counsel and certain other conditions. It is expected that delivery of the certificates representing the Common Stock and Warrants comprising the Units will be made against payment therefor at the offices of Briarwood Investment Counsel, 1851 East First Street, Suite 950 Santa Ana, California 92705 on or about 1998. BRIARWOOD INVESTMENT COUNSEL THE DATE OF THIS PROSPECTUS IS 1998 CERTAIN PERSON'S PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING PURCHASES OF THE UNITS, SHARES AND WARRANTS TO STABILIZE THEIR MARKET PRICE, PURCHASES OF THE UNITS, SHARES AND WARRANTS TO COVER SOME OR ALL OF A SHORT POSITION IN THE UNITS, SHARES AND WARRANTS MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSIONS IN THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" BEGINNING ON PAGE 8. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. IN SEPTEMBER 1997, CONNECTICUT VALLEY SPORTS, INC. (THE "COMPANY"), THROUGH AN EXCHANGE OFFER ACQUIRED APPROXIMATELY 97% OF THE OUTSTANDING CAPITAL STOCK OF CONNECTICUT VALLEY CLASSICS, INC. ("CVC"). CVC OWNS ALL OF THE OUTSTANDING CAPITAL STOCK OF THE STOCK SHOP, INC. ("STOCK SHOP") WHICH IN TURN, OWNS APPROXIMATELY 99% OF THE OUTSTANDING CAPITAL STOCK OF COOPER FIREARMS, INC. ("COOPER ARMS"). ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY INCLUDE CVC, STOCK SHOP AND COOPER ARMS AND THE OPERATIONS OF CVC EXCLUSIVE OF ITS SUBSIDIARIES ARE REFERRED TO HEREIN AS "CVC CLASSICS." SEE "BUSINESS -- HISTORY." THE COMPANY The Company through CVC and CVC's subsidiaries, Stock Shop and Cooper Arms, designs, engineers, manufactures, assembles, markets and sells custom quality, mass produced rifles and shotguns used for both hunting and competition (target) shooting. The Company's firearms are produced to the quality level associated with rifles produced largely by hand to a customers specifications (custom quality), but multiple units of the Company's firearms are manufactured in a production line process to the Company's standard specifications (mass produced.) CVC Classics designs, engineers, manufactures, assembles and markets a premium line of ten shotguns for clay target shooting and hunting. This line is an improved version of the famed Winchester Model 101 and features lengthened forcing cones, overboring, mechanical triggers, diamond honed barrels, and select American walnut with hand checkering. The most popular model, the CVC Classic Sporter, is intended for sporting clays competition shooting. CVC Classics' shotguns generally retail from $3,000 without options to in excess of $10,000 with options and are sold to licensed firearms dealers who are approved by the Company (the "Approved Dealers"). See "Business - Products -- CVC Classics." The Stock Shop manufactures rifle and shotgun stocks used by the Company in the manufacture of its other firearms and custom manufactures stocks for others. The Stock Shop also purchases barreled actions manufactured by the world-renowned firm of J.G. Anschutz GmbH ("Anschutz") under an agreement between them. These barreled actions are then assembled by the Company, with stocks and hardware manufactured by it into rifles, designed by the Company which are sold under the trade name "Anschutz USA Sporting Rifles." The Anschutz USA Sporting Rifles are sold to the Approved Dealers. The rifles retail for approximately $1,550 to $1,895 without options, and can generally retail for in excess of $10,000 with options. See "Business - Products -- The Stock Shop." Cooper Arms designs, engineers, manufactures, markets and sells a line of custom quality, mass produced bolt action rifles for hunting and competition. The Cooper Arms product line consists of five basic models of rifles ranging in caliber from .17 up to .45-70. The Cooper Arms rifles are produced in AAA select walnut in a classic design. The rifles are sold to the Approved Dealers and generally retail from $1,695 to in excess of $6,000 with options. The Company has designed prototypes of, and intends to market ultra accurate high performance ammunition for use primarily by military and law enforcement units. This line of highly accurate ammunition previewed at the Brussels Military Procurement Exposition in November of 1997. See "Business - Products -- Cooper Arms." The Company intends to commence marketing of specialty labeled sports apparel and shooting accessories. Products are expected to include caps, shooting vests, gun cases 3 and cleaning supplies. The products will be targeted at the high grade, high margin upscale market. See "Business - Products -- Apparel and Accessories." The Company's goal is to become a leading manufacturer of custom quality, mass produced firearms and high grade accessories by focusing on the high growth areas of the firearms market which the Company believes includes various types of target shooting, such as clay, trap and skeet shooting. The Company's primary strategies for achieving its goal are to broaden its product line and increase the scope and efficiency of its manufacturing operations. In order to broaden its product lines, the Company intends to seek to acquire companies which sell products which are competitive or complimentary to its current products or to acquire such product lines. Alternatively, as the Company is doing with ammunition and apparel and accessories, the Company may develop such product lines itself. The purchase of additional production equipment at its existing, or proposed facilities, is expected by management to reduce reliance on third party suppliers, as well as to increase capacity and manufacturing efficiency. The Company's address is 4004 Highway 93 North, Stevensville, Montana 59870 and its telephone number is (406) 777-5534. The Company was incorporated in Delaware in May 1996. CVC was incorporated in Connecticut in March 1991 and reincorporated in Delaware in May 1995. 4 THE OFFERING Units Offered................... 1,500,000 Units, each Unit consisting of one share of Common Stock and one Warrant. Offering-Price.................. $5.10 per Unit Common Stock Outstanding Prior to the Offering (1)..... 2,797,476 After the Offering (1)........ 4,297,476 Warrants Outstanding: Prior to the Offering......... 50,000 After the Offering(2)......... 1,550,000 Terms of Warrants: Exercise Price................ The exercise price is $6.00 per share of Common Stock, subject to adjustment in certain circumstances. Exercise Period............... The Warrants are exercisable for a period of three years commencing, unless adjusted pursuant to the redemption provisions, on , 2000 (two years after the Effective Date) and expiring on , 2003 (five years after the Effective Date). Redemption.................... The Warrants are redeemable by the Company, commencing 1999, one year from the Effective Date with the prior approval of the Underwriter, at a redemption price of $0.10 per Warrant on not less than 30 days written notice, provided that the closing bid price per share of Common Stock, for 20 consecutive trading days ending on the third business day prior to the date of the redemption notice, is at least $7.50, subject to adjustment for certain events. Upon giving notice of redemption, the Warrants will become exercisable if they were not otherwise exercisable. See "Description of Securities -- Redeemable Common Stock Purchase Warrants." Risk Factors.................. The securities offered hereby involve a high degree of risk and immediate substantial dilution to public investors. See "Risk Factors" and "Dilution." Use of Proceeds............... The net proceeds of the Offering will be used primarily for acquisitions, construction of a new manufacturing facility, for research and development, for sales and marketing, to purchase raw materials, repayment of indebtedness and for working capital and general corporate purposes. See "Use of Proceeds." Proposed NASDAQ Symbols(3).... Units: CVSPU Common Stock: CVSP Warrants: CVSPW Proposed Boston Stock Exchange Symbols(3).................. Units: CYSU Common Stock: CVS Warrants: CVSW
- ------------------------ (1) Assumes no exercise of (i) options to acquire 600,000 shares of Common Stock pursuant to the Company's 1997 Stock Option Plan, of which options to acquire 275,000 shares have been granted, (ii) 5 other currently outstanding options and warrants to acquire 250,000 shares of Common Stock, (iii) the Warrants, (iv) the Underwriter's Warrants, or (v) the Over-allotment Option. See "Principal Stockholders," "Management" and "Description of Securities." (2) Assumes no exercise of (i) the Underwriter's Warrants or (ii) the Over-allotment Option. See "Description of Securities." (3) The proposed trading symbols do not imply that a liquid and active market will be developed or sustained for the Units, Shares and or Warrants upon completion of the Offering. 6 SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information set forth below is derived from and should be read in conjunction with the financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------ -------------------------- 1994 1995 1996 1996 1997 ----------- ---------- ----------- ---------- -------------- STATEMENT OF OPERATIONS DATA Net sales.................................... $ 247,950 $ 74,744 $ 244,725 $ 193,796 $ 365,378 Gross profit (loss).......................... (157,491) (264,502) (331,428) (161,331) (272,933) Operating loss............................... (402,468) (746,708) (1,090,615) (817,062) (729,953) Net loss..................................... (449,480) (782,463) (1,102,664) (846,762) (753,523) Earnings per share........................... (0.84) (0.75) (0.44) (0.35) (0.27) Weighted average number of shares outstanding(1)............................. 535,728 1,040,893 2,488,466 2,410,972 2,803,558
AT DECEMBER 31, AT SEPTEMBER 30, ------------------------------------ -------------------------- 1994 1995 1996 1997 AS ADJUSTED(2) ----------- ---------- ----------- ---------- -------------- BALANCE SHEET DATA Working capital (deficit).................... $ (598,480) $ (49,286) $ 200,083 $ (76,943) $ 6,238,880 Total assets................................. 500,286 736,095 1,126,112 1,107,900 7,114,400 Long-term debt............................... -- 262,500 300,000 384,203 470,026 Total liabilities............................ 901,291 759,059 999,357 1,143,342 1,059,842 Stockholders' equity (deficit)............... (401,005) (22,964) 126,755 (35,442) 6,054,558
- ------------------------ (1) Adjusted for merger with Stock-Shop and recapitalization in 1995. See Notes 1 and 2 to the financial statements. (2) Gives effect to the sale of securities offered hereby and application of estimated net proceeds of $6,230,000 and the reclassification in December 1997 of $123,323 in short term debt owed to a company which the Company's Chairman is a principal to long term debt. See "Use of Proceeds." 7 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH INVESTMENTS IN THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. HISTORY OF LOSSES; GOING CONCERN UNCERTAINTY INCLUDED AS PART OF AUDITOR'S REPORT; NO ASSURANCE OF PROFITABILITY For the years ended December 31, 1995, December 31, 1996 and the nine months ended September 30, 1997, the Company had net losses of $782,463, $1,102,664, and $753,523 respectively. At September 30, 1997, the Company had an accumulated deficit of $3,412,069. There can be no assurance that the Company will be able to integrate successfully the operations of CVC, the Stock Shop and Cooper Arms, that the Company will be able to successfully implement its business strategy, that the Company's products wll gain market acceptance, or that the Company will operate profitably in the future. Due to the Company's continued operating losses, the independent accountants' opinion on the Company's 1996 and 1995 financial statements indicates that there is a substantial doubt about the Company's ability to continue as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." POSSIBLE NEED FOR ADDITIONAL FINANCING Although the Company anticipates, based on currently proposed plans, that the net proceeds of the Offering will be sufficient to satisfy the Company's anticipated cash requirements for at least 12 months following the date that the Securities and Exchange Commission declares the Registration Statement of which this Prospectus is a part effective (the "Effective Date"), there can be no assurance that the Company will not require additional financing at an earlier date. If the Company is required to obtain financing in the future, there can be no assurance that such financing will be available on terms acceptable to the Company, or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LIMITED OPERATIONS OF OPERATING SUBSIDIARIES, NEW PRODUCT LINES On a limited basis in 1993 and 1994, CVC Classics produced various prototypes and limited production for two shotguns within the CVC Classic Sporter family--the CVC Classic Sporter and the Waterfowler. In September 1994, the Company curtailed such limited production due to a lack of adequate capital and in order to develop its business plan for long-term, full-scale production of its products. Subsequent to financing activities that occurred in mid-1995, CVC Classics recommenced operations in October 1995. In-house manufacturing and assembly of CVC Classic's premium line of shotguns recommenced after the acquisition by CVC Classics of the capital stock of the Stock Shop and its subsidiary Cooper Arms in November 1996. There can be no assurance that the Company's operations relating to CVC Classic's line of shotguns will produce significant, or any, revenues or that such operations will be profitable. See the Financial Statements and Notes thereto included herein and "Business." The Company has not sold, produced or purchased any Cooper Arms ammunition or any of the Company's apparel and accessory products or any significant quantity of firearms stocks. The Company has never engaged in the business of selling, designing or producing products other than firearms. An evaluation of ammunition, apparel and accessory, and firearms stocks business lines must be considered in light of the risks, expenses and difficulties frequently encountered in connection with establishing new businesses in a competitive industry. There can be no assurance that these products will gain market 8 acceptance or that the Company will be able to establish recognizable brand names. Furthermore, there can be no assurance that these business lines will produce significant or any revenue, or that such operations will be profitable. See "Business." INSUFFICIENT FACILITIES While the Company believes that its current property and equipment are adequate for its business as currently conducted, the current facilities are not automated, operate in a comparatively inefficient manner and have insufficient production capacity to achieve significant growth in production volume. Therefore the Company believes it is necessary to purchase new manufacturing equipment and ideally, consolidate and expand its current manufacturing premises. Failure to do so could cause the Company to have inventory shortages or force the Company to rely on high cost third party suppliers. Additionally, the Company manufactures its products at two separate facilities, leading to inefficiencies. The Company has allocated a portion of the proceeds of this Offering to improve its manufacturing facilities and intends to raise additional capital for improvements by issuing industrial development bonds. However, there can be no assurance that the industrial development bond offering will be completed, that improvements can be made to the Company's manufacturing facilities, or that such improvements will enable the Company to operate profitably. Furthermore, construction of the new facility will take at least 12 months, and could take significatly longer. Although the Company intends to upgrade its existing facilities during this time period, delays in opening the new facility could have a material adverse effect on the Company. See "Use of Proceeds" and "Business -- Property" and "Business -- Manufacturing." BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS A substantial portion of the proceeds of this Offering have been allocated to acquisitions. As of the date of this Prospectus, the Company has not identified any particular acquisition targets and no discussions or negotiations regarding any acquisitions are pending. Stockholders of the Company, therefore, may have no opportunity to approve specific acquisitions or to review the financial condition of any potential target. Additionally, there can be no assurance that the Company will be able to successfully integrate such acquisitions into the Company, or that such acquisitions will enable the Company to operate profitably. In addition, a portion of the proceeds are to be used for working capital and general corporate purposes. Accordingly, management of the Company will have broad discretion in the application of the proceeds of this Offering. See "Use of Proceeds." ABSENCE OF PATENT PROTECTION; POTENTIAL INFRINGEMENT CLAIMS; PROPRIETARY RIGHTS The Company does not currently have patent protection on its products or production processes. Its ability to compete effectively with other companies will depend, in part, on its ability to maintain the proprietary nature of its products and production processes. The Company may apply for patent protection. However, there can be no assurance that it will be successful in obtaining such patents or if obtained, that such patents will afford the Company sufficient protection. The Company intends to rely substantially on unpatented products and production processes, and there can be no assurance that others will not copy any of its designs or processes. See "Business -- Products." It is not certain that the Company's products or production processes will not infringe patents or other rights owned by others. Specifically, with respect to CVC Classics, the basic design and engineering of the CVC Classic Sporter is largely based on that of the Classic Doubles, previously manufactured by Sports Japan, Inc. ("Sports Japan"), which Classic Doubles was itself based upon the shotgun known as the Winchester Model 101 produced by the Winchester Division of the Olin Corporation ("Winchester"). The Company has no license or other relationship with Winchester, Olin, or any other party who has patent or trademark rights in the Winchester Model 101. Management does not believe that either Sports Japan or Winchester has any viable claims against the Company based upon unfair competition or protected proprietary rights to such designs and engineering. Management believes that neither the Winchester 9 Model 101 nor any of its parts are protected by patents and the shotgun itself is no longer manufactured. Management also believes that Winchester sold the manufacturing rights to Sports Japan, whose Classic Doubles was an improved version of the Winchester Model 101 and which company itself ceased operations and forfeited its firearms manufacturing license in Japan in 1988. Further, management believes that the CVC Classic Sporter is differentiated from the Winchester Model 101 and the Classic Doubles by virtue of the different manufacturing process and the Company's design enhancement. The Company has not obtained any opinion from patent counsel and there can be no assurance that any such claims will not be brought against the Company by Winchester, Sports Japan or persons connected or previously connected with such entities. In the event that such claims are brought against the Company, even if the Company was ultimately found not to be liable, the cost to the Company of defending any such lawsuit could have a materially adverse effect on the Company's operations. Moreover, if the Company's products infringe patents or proprietary rights of others, the Company, under certain circumstances could become liable for damages or be forced to alter its products or production processes, either of which could have a material adverse effect on the Company. Cooper Arms holds a registered trademark, No. 74-511,590, granted March 28, 1995 for the mark "17CCM" which is used in connection with a cartridge developed by Cooper Arms. The Company has applied for the registration of additional marks, however, there can be no assurance that it will be successful in obtaining such registrations. The Company's application of the mark "Classic Sporter" was rejected as being "merely descriptive" and thus not eligible for trademark protection. The Company is currently appealing the rejection. If the Company fails to obtain the mark "Classic Sporter," the Company would not be able to prevent other companies from marketing firearms under the name Classic Sporter, which could have a material adverse effect on the Company. Additionally, the Company's trademark counsel has indicated that the name "Connecticut Valley" may be deemed "confusingly similar" to another company's name and the Company may be required to change its name or seek another name under which to market certain products. If the Company were required to cease using "Connecticut Valley", it could have a material adverse effect on the Company. Although registration affords the Company the protection of federal trademark laws against the unauthorized use of the protected mark or a use deemed "confusingly similar" under federal trademark law, there can be no assurance that third parties will not infringe on the Company's current or future trademark registrations or that the Company will have sufficient resources to defend against any such infringement successfully or at all. See "Business -- Proprietary Rights." POSSIBLE INSUFFICIENCY OF INSURANCE The Company maintains, and intends to continue to maintain, pending product liability insurance in the amount of $1,000,000 per claim and $1,000,000 in the aggregate, which management believes will be sufficient to cover liabilities to the Company arising from injury to people or their property from use of the Company's products. There can be no assurance that the Company's current insurance will be adequate to cover unanticipated liabilities. See "Business -- Legal Proceedings." DEPENDENCE UPON SUPPLIERS Although the Company assembles its own firearms products, it purchases certain materials and component parts from third-party suppliers and intends to use third party suppliers to manufacture all of the products in the Company's ammunition and apparel and accessories lines. No assurance can be given that the Company's third-party suppliers will be able to provide the Company with a timely, uninterrupted and adequate supply of materials. In the event that any of the Company's third-party suppliers are unable to provide the Company with a timely, uninterrupted and adequate supply of materials, the Company's ability to meet its production schedule may be adversely affected. In addition, the Company does not presently have any long-term contracts with these suppliers and, as a consequence, any of these relationships may be terminated by the Company or the supplier at any time. Although the Company believes that 10 other suppliers are available, there can be no assurance that such materials would be available to the Company on an immediate basis, if needed, or at prices similar to those now paid by the Company. See "Business -- Suppliers." DEPENDENCE ON CERTAIN CUSTOMERS The Company's three largest customers accounted for 42% of net sales for the nine months ended September 30, 1997. During the nine months ended September 30, 1997, Sporting Clays Market, The Outdoorsman and PJ Vollmer & Co., Inc accounted for 12%, 17% and 13% of sales, respectively. The Company believes that it has good relationships with its customers and that they will continue to do business with the Company. However, the Company has no long term contracts with any of its customers, all of whom purchase products from the Company pursuant to purchase orders. Therefore, there can be no assurance that any of its customers, including its largest customers, will continue to purchase products from the Company. The loss of customers, particularly the Company's largest customers, could have a materially adverse effect on the Company's business and results of operations. See "Business -- Major Customers." RISK OF NON-PAYMENT BY CUSTOMERS In recent years, the Company's uncollectible accounts receivable has been high in relation to total sales. The Company believes that this was partially due to the changes in management at certain subsidiaries. The Company now employs procedures to limit the sales on credit terms to customers who pose a high risk of non-payment. However, there can be no assurance that customers, particularly those who own one retail store, who are a majority of the Company's customers, will not fail to pay for the Company's products. See "Managements Discussion and Analysis of Financial Condition and Results of Operations." CONCENTRATION OF CREDIT RISK From time to time the Company maintains cash balances with a Montana commercial bank in amounts in excess of federal insurance limits. There can be no assurance that the Company will not suffer losses due to its concentration of credit risk. See the Financial Statements and Notes thereto included herein. COMPETITION The Company competes in a highly specialized competitive environment directly with many other national and international sporting firearms manufacturers. Many of these companies are larger, better known and have significantly greater financial, manufacturing and marketing resources than the Company. In addition, unlike the Company, many firearms manufacturers are subsidiaries of larger, more diverse companies on whom they can rely for capital and other resources. No assurance can be given that the Company will be capable of competing successfully in the future, or that the Company will be successful in maintaining or expanding its share of the market for its products. See "Business -- Competition." OUTSTANDING FEDERAL EXCISE TAX LIABILITY As of September 30, 1997 the Company owed approximately $46,000 for federal excise taxes that were not paid when due during 1997, together with penalties that have accrued. Although no collection or enforcement actions or proceedings have been commenced or been threatened against the Company to date, no assurance can be given that an action or proceeding will not be commenced against the Company. If commenced, such an action or proceeding could result in fines or a suspension of the Company's firearms manufacturing license which could materially and adversely affect the Company's business or operations. The Company intends to pay the balance of its federal excise tax liability from the net proceeds of the Offering. See "Use of Proceeds" and "Business -- Licensing and Government Regulations." 11 LICENSING AND GOVERNMENT REGULATION The firearms manufacturing industry is subject to extensive regulation by various federal and State regulatory agencies, including the Bureau of Alcohol, Tobacco and Firearms ("BATF"). The Company maintains a license issued by BATF permitting the manufacturing and distribution of firearms and ammunition to a network of BATF licensed dealers throughout the United States. The license is renewable every three years and requires the Company to maintain certain records relating to firearms shipments. In October 1997 the Company's BATF license was renewed until October 2000. The loss or suspension of any of the Company's license could have a material adverse effect on the Company. The Company may export products. Each shipment of firearms shipped outside the United States must be licensed by the State Department. The State Department regulates the type of firearms that may be exported to various countries. The Company must comply with these regulations to be able to export products. The manufacturing, sale and purchase of firearms is extensively regulated by federal, state and local governments. While many of the current laws and regulations do not affect the Company, from time to time, legislation and regulations that could potentially affect the Company, either beneficially or adversely, have been proposed by federal and state legislators and regulators. Management is not aware of any currently pending or proposed legislation or regulations which, if adopted, would have a materially adverse impact on the Company's operations. There can be no assurance that BATF or various federal and state regulators will not adopt regulations or take other actions that would materially adversely affect the business of the Company. See "Business -- Licensing and Government Regulation." CONTINUED CONTROL BY MANAGEMENT AND/OR EXISTING STOCKHOLDERS Following completion of the Offering, the Company's officers, directors and principal stockholders will own or control an aggregate of approximately 49% of the Company's issued and outstanding Common Stock. There are no cumulative voting rights under the Company's certificate of incorporation and therefore, such stockholders will effectively possess the ability to elect all of the directors of the Company, to increase its authorized capital, to dissolve or merge the Company, or to sell its assets, and generally to exert substantial control over the business and operations of the Company. See "Principal Stockholders" and "Certain Transactions." ENVIRONMENTAL REGULATION The Company's facilities in Montana use and store various hazardous materials and generate small amounts of hazardous waste. Under various federal, state and locals laws, ordinances and regulations, an owner or operator of real property is generally liable for the costs of removal or remediation of hazardous wastes that are released on its property, regardless of whether the owner or operator know of, or was responsible for, the release of such hazardous materials. The Company has not been advised of any non-compliance or violation of any environmental laws, ordinances and regulations and the Company believes that it is in substantial compliance with all such laws, ordinances or regulations applicable to its Montana facilities. The Company, however, has not performed any environmental studies on its Montana facilities, and as a result, there may be potential liabilities or conditions which could arise with respect to the Montana facilities and have a material adverse effect on the Company. DEPENDENCE ON KEY PERSONNEL The Company's business is dependent upon the efforts and abilities of its management and engineering/assembly production personnel, who are familiar with the specific manufacturing details of the Company's products and the production processes therefor. The success of the Company is largely dependent upon the experience and expertise of Daniel Cooper, its President and only full time executive officer. The Company, through its Stock Shop subsidiary, has entered into an employment agreement with 12 Mr. Cooper. The employment agreement is for a three-year term expiring in March 1999, and provides that Mr. Cooper will receive an annual salary of $48,000, in addition to stock options and bonuses in certain circumstances and reimbursement of certain expenses. The Company also intends to enter into employment agreements with each of Messrs. Tilleli, McCabe, Landis and Wang, each of whom are currently officers and directors of the Company. Although the specific terms of these employment agreements have not been negotiated, it is expected that the annual salary for each individual will not exceed $100,000. The loss of the services of any of the Company's management or key personnel would likely have a material adverse effect on the business of the Company. The Company intends to purchase key man life insurance on Mr. Cooper's life in the amount of $1,000,000. See "Business -- Personnel," "Management" and "Certain Transactions." OFFERING TO BENEFIT INSIDERS, PROCEEDS TO REPAY INDEBTEDNESS The Company will use a portion of net proceeds to make an aggregate installment payment of $37,500 on four notes aggregating $300,000 principal amount that CVC issued to four former officers and directors of CVC, including an $10,961 payment to Gary Landis who is a director and officer of the Company, and a $15,120 payment to O. Milton Gosset who is a principal shareholder of the Company and a former director of CVC. The balance of this aggregate first installment will be made to two former officers and directors of CVC. The Company intends to make the remaining installments from operating cash flows, but if such cash flows are insufficient, a portion of the net proceeds of the Offering that were allocated to working capital may be used to make the remaining installment payments. Additionally, the Company owes $123,323 to a Company controlled by its Chairman, Victor Wang, evidenced by a promissory note due, with interest accruing at 6% per annum, on the earlier of (i) thirteen months following the closing of the Offering, or (ii) November 30, 2000. The Company intends to repay the note from operating cash flows, but if such cash flows are insufficient, a portion of the net proceeds of the Offering that were allocated to working capital may be used to repay the note. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." SUBSTANTIAL DILUTION; CONSIDERATION PAID BY EXISTING STOCKHOLDERS Purchasers of Units in the Offering will suffer immediate dilution of $3.61 per share of Common Stock (or 72%) in the net tangible book value of their investment, assuming $.10 of the offering price per Unit is attributable to the Warrants. See "Dilution." Officers, directors and other existing stockholders acquired their shares of Common Stock at an average per Share price of $1.23 per share, substantially less than the initial public offering price of $5.00 per share. Accordingly, investors in the Offering will bear a disproportionate share of the risk of an investment in the Company. See "Dilution." LIMITATION ON DIRECTOR LIABILITY, INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's certificate of incorporation provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions under Delaware law. This may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of the Company against a director. In addition, the Company's by-laws provide for mandatory indemnification of directors and officers. See "Management -- Indemnification of Officers and Directors and Limitation on Directors' Liability." ABSENCE OF DIVIDENDS ON COMMON STOCK Since inception, the Company has not paid any cash dividends on its Common Stock and it does not anticipate paying such dividends in the foreseeable future. The payment of dividends by the Company is 13 within the discretion of its Board of Directors and depends upon the Company's earnings, capital requirements, financial condition and other factors deemed relevant by the Board. The Company intends to retain earnings, if any, to finance its operations. In addition, the payment of cash dividends may be limited or prohibited by the terms of any future loan agreements or any preferred stock that may be issued by the Company. See "Dividend Policy." AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK The Company's certificate of incorporation, authorizes the issuance of 1,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could decrease the amount of earnings and assets available for distribution to holders of Common Stock and adversely affect the relative voting power or other rights of the holders of the Company's 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. The Company has no present intention to issue any shares of its preferred stock. However, there can be no assurance that the Company will not issue shares of preferred stock in the future. The Company has agreed with the Underwriter that, except for issuance's disclosed in or contemplated by this Prospectus, it will not issue any securities, including but not limited to any shares of preferred stock, prior to , 2001 without the prior written consent of the Underwriter. See "Description of Securities -- Preferred Stock." NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE VOLATILITY OF MARKET PRICE FOR THE UNITS, COMMON STOCK AND WARRANTS Prior to this Offering, there has been no public trading market for the Units, Common Stock and the Warrants (collectively, the "Securities"). The initial public offering price of the Units and the exercise price and other terms of the Warrants were determined through negotiations between the Company and the Underwriter and bear no relationship whatsoever to the Company's earnings, assets, book value per share, net worth, results of operations or other generally accepted criteria of value. The offering price of the Units, as well as the exercise price of the Warrants, should not be construed as indicative of their value. There can be no assurance that an active trading market for the Units will develop after the Offering or that, if developed, it will be sustained. As a result, investors will be exposed to a risk of a decline in the market prices of the Securities after the Offering. The market prices of the Securities following the Offering may be highly volatile as has been the case with the securities of many emerging companies. The Company's operating results and various factors affecting the industry in which the Company competes may impact the market price of the Company's Securities to a significant degree. In addition, in recent years the stock market has experienced a high level of price and volume volatility, and market prices for the securities of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies. There can be no assurance that the market price of the Securities will not experience significant fluctuations or decline below the initial public offering price. LIMITED UNDERWRITING EXPERIENCE OF UNDERWRITER Although certain officers of the Underwriter have had experience working on public offerings, and other corporate finance matters, the Underwriter has not previously served as the sole or managing underwriter of a firm commitment public offering. Since the Underwriter's experience in underwriting firm commitment public offerings is limited, there can be no assurance that the lack of experience will not adversely affect the public offering of the Company's Units and the subsequent development, if any, of a trading market for the Units. See "Risk Factors -- Underwriter's Influence on the Market; Possible Limitations on Market Making Activities." 14 UNDERWRITER'S INFLUENCE ON THE MARKET; POSSIBLE LIMITATIONS ON MARKET MAKING ACTIVITIES A significant number of Units may be sold to customers of the Underwriter. Such customers subsequently may engage in transactions for the sale or purchase of Securities through or with the Underwriter. The Underwriter has indicated that it intends to act as market-maker and otherwise effect transactions in the Securities. To the extent the Underwriter acts as market-maker in the Securities, it may exert a dominating influence in the markets for those Securities. The price and liquidity of the Securities may be significantly affected to the extent, if any, that the Underwriter participates in such markets. Furthermore, the Underwriter may discontinue such activities at any time and from time to time. The Underwriter also has the right to act as the Company's exclusive agent in connection with any future solicitation of holders of Warrants to exercise their Warrants. Applicable rules of the Securities and Exchange Commission prohibit the Underwriter and any other soliciting broker-dealers from engaging in any market making activities or solicited brokerage activities with regard to the Units, Common Stock and Warrants for a period of up to five business days prior to the solicitation of the exercise of any Warrants until the later of the termination of such solicitation activity or the termination of any right the Underwriter may have to receive a fee for the solicitation of the Warrants. As a result, the Underwriter and such soliciting broker-dealers may be unable to continue to make a market for the Units, Common Stock and the Warrants during certain periods while the Warrants are exercisable. Such a limitation, while in effect, could impair the liquidity and market price of the Common Stock and the Warrants. See "Underwriting." RISK OF LOW-PRICED SECURITIES; PENNY STOCK REGULATION The regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934 as amended ("Exchange Act") require additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. Commission regulations generally define a penny stock to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Unless an exception is available, those regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). In addition, the broker-dealer must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. Moreover, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. If the Company's securities become subject to the regulations applicable to penny stocks, the market liquidity for the Company's securities could be severely affected. In such an event, the regulations on penny stocks could limit the ability of broker-dealers to sell the Company's securities and thus the ability of purchasers of the Company's securities to sell their securities in the secondary market. NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ SMALLCAP MARKET OR THE BOSTON STOCK EXCHANGE Prior to this Offering, there has been no established public trading market for the Company's Units, Common Stock or Warrants and there is no assurance that a public trading market for the Company's Securities will develop after the completion of this Offering. If a trading market does in fact develop for the Securities offered hereby, there can be no assurance that it will be sustained. The Company has applied for listing of the Units, Common Stock and Warrants on Nasdaq SmallCap Market and the Boston Stock Exchange ("BSE"). If the listings are approved, the continued trading of the Common Stock and the Warrants on Nasdaq SmallCap and the BSE is conditioned upon the Company 15 meeting certain criteria. If the Company fails to meet any of these criteria, the Units, Common Stock and/ or the Warrants could be delisted from trading on Nasdaq SmallCap Market or the BSE, which delisting could materially adversely affect the trading market for the Units, Common Stock and/or the Warrants. There can be no assurance that the Securities will not be delisted. SHARES ELIGIBLE FOR FUTURE SALE No assurance can be given as to the effect, if any, that future sales of Common Stock, or the availability of shares of Common Stock for future sales, will have on the market price of the Common Stock from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of Warrants or stock options), or the possibility of such sales, could adversely affect the market price of the Units, Common Stock and Warrants and also impair the Company's ability to raise capital through an offering of its equity securities in the future. Upon completion of the Offering, the Company will have 4,297,476 shares of Common Stock outstanding, of which only the 1,500,000 shares of Common Stock included in the Units offered hereby will be transferable without restriction under the Securities Act. The remaining 2,797,476 shares, issued in private transactions, will be "Restricted Securities" (as defined in Rule 144 promulgated under the Securities Act) which may be publicly sold only if registered under the Securities Act or if sold in accordance with an applicable exemption from registration, such as Rule 144. In general, under Rule 144, as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted securities for at least one year, is entitled to sell (together with any person with whom such individual is required to aggregate sales), within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class or, if the Common Stock is quoted on The Nasdaq Stock Market or a national securities exchange, the average weekly trading volume during the four calendar weeks preceding the sale. A person who has not been an affiliate of the Company for at least three months and who has beneficially owned restricted securities for at least two years is entitled to sell such restricted shares under Rule 144 without regard to any of the limitations described above. Holders of 2,757,475 shares of Common Stock have certain registration rights. Officers, directors and other security holders of the Company including those with registration rights, owning and/or having rights to acquire in the aggregate 2,797,476 shares of Common Stock, have entered into agreements not to sell or otherwise dispose of any securities of the Company, including Common Stock, prior to , 2000 (two years from the Effective Date) (the "Lock-Up Agreements") without the prior written consent of the Underwriter, which may be granted or withheld in the sole and absolute discretion of the Underwriter. Following expiration of the term of the Lock-Up Agreements, or the earlier release of the restrictions contained therein, shares will become eligible for resale pursuant to Rule 144, subject to the volume limitations and compliance with the other provisions of Rule 144. Furthermore, the holder(s) of the Underwriter's Warrants (including the securities issuable upon exercise thereof) have demand and piggyback registration rights with respect to the units issuable upon exercise of the Underwriter's Warrants. See "Description of Securities," "Description of Securities -- Shares Eligible for Future Sale," and "Underwriting." ADVERSE EFFECT OF REDEMPTION OF WARRANTS Under certain conditions, the Warrants may be redeemed by the Company after , 1999 with the prior written consent of the Underwriter, at a redemption price of $.10 per Warrant upon not less than 30 days prior written notice to the holders of such Warrants, provided the closing bid price of the Common Stock has been at least $7.50 for 20 consecutive trading days ending on the third day prior to the date the notice of redemption is given. The Warrants will be exercisable until the close of business on the day immediately preceding the date fixed for redemption. The redemption of the Warrants could force the holders (i) to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, (ii) to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants or (iii) to 16 accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities -- Redeemable Common Stock Purchase Warrants." NEED FOR FUTURE REGISTRATION OF WARRANTS; STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS The Warrants and Common Stock will trade separately upon the completion of the Offering. Purchasers may buy Warrants in the after-market or may move to jurisdictions in which the Warrants and the shares of Common Stock underlying the Warrants are not so registered or qualified. In this event, the Company would be unable to issue shares of Common Stock to those persons desiring to exercise their Warrants unless and until the Warrants and the underlying shares of Common Stock are qualified for sale in jurisdictions in which such purchasers reside, or an exemption from such qualification exists in such jurisdictions. There can be no assurance that the Company will be able to effect any required qualification. The Warrants will not be exercisable unless the Company maintains a current registration statement on file with the Commission through post-effective amendments to the registration statement containing the Prospectus. Although the Company has agreed to file appropriate post-effective amendments to the registration statement containing the Prospectus and to maintain a current Prospectus with respect to the Warrants, there can be no assurance that the Company will file post-effective amendments necessary to maintain a current Prospectus or that the Warrants will continue to be so registered. See "Description of Securities -- Redeemable Common Stock Purchase Warrants." RELATIONSHIP OF UNDERWRITER TO TRADING The Underwriter may act as a broker or dealer with respect to the purchase or sale of the Common Stock and the Warrants in the over-the-counter market where each is expected to trade. The Underwriter also has the right to act as the Company's exclusive agent in connection with any future solicitation of Warrantholders to exercise their Warrants. Regulation M, which was recently adopted to replace Rule 10b-6, under the Exchange Act may prohibit the Underwriter from engaging in any market-making activities with regard to the Company's securities for a period of up to five business days (or such other applicable period as Regulation M may provide) prior to any solicitation by the Underwriter of the exercise of Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriter may have to receive a fee for the exercise of Warrants following such solicitation. As a result, the Underwriter and any solicitating broker/dealer may be unable to provide a market for the Company's securities during certain periods while the Warrants are exercisable. Any temporary cessation of such market-making activities could have an adverse effect on the market price of the Company's securities. UNDERWRITER'S WARRANTS AND REGISTRATION RIGHTS In connection with this Offering, the Company has agreed to sell to the Underwriter, for nominal consideration, the Underwriter's Warrants which entitle the Underwriter to purchase up to 150,000 shares of Common Stock at a purchase price of $5.50 per share and 150,000 Warrants at a purchase price of $.11 per Warrant. The securities issuable upon exercise of the Underwriter's Warrants are identical to those offered pursuant to this Prospectus. The Underwriter's Warrants are exercisable for a period of four years commencing one year from the date of this Prospectus. The exercise of the Underwriter's Warrants and the Warrants contained in the Underwriter's Warrants may (i) dilute the value of the shares of Common Stock to be acquired by holders of the Warrants, (ii) adversely affect the Company's ability to obtain equity capital and (iii) adversely affect the market price of the Common Stock if the Common Stock issuable upon the exercise of the Underwriter's Warrants and the Warrants contained in the Underwriter's Warrants are sold in the public market. The Underwriter has been granted certain "piggyback" and demand registration rights for a period of seven years from the Effective Date with respect to the registration under the Securities Act of the securities directly or indirectly issuable upon exercise of the Underwriter's Warrants. The exercise of such rights could result in substantial expense to the Company. See "Underwriting." 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the Units offered hereby, after underwriting discounts and commissions and other expenses of the Offering are estimated to be $6,230,000 ($7,228,325 if the Over-allotment Option is exercised in full). The Company intends to use the net proceeds as follows:
AMOUNT PERCENT ------------ ----------- ACQUISITIONS(1)............................................................................ $ 1,500,000 24% CONSTRUCTION OF NEW MANUFACTURING FACILITY (2)............................................. 1,250,000 20% RESEARCH AND DEVELOPMENT (3)............................................................... 975,000 16% SALES AND MARKETING (4).................................................................... 750,000 12% RAW MATERIALS (5).......................................................................... 300,000 5% REPAYMENT OF INDEBTEDNESS (6).............................................................. 83,500 1% WORKING CAPITAL AND GENERAL CORPORATE PURPOSES............................................. 1,371,500 22% ------------ --- TOTAL...................................................................................... $ 6,230,000 100% ------------ --- ------------ ---
(1) The Company, as the opportunity arises, intends to acquire other companies, products or product lines complementary to its existing businesses and may use a portion of the proceeds of this Offering to pay all, or a portion of, the purchase price for such acquisitions. Additionally, the portion of the proceeds of this Offering allocated to acquisitions may be used to purchase equipment, or as working capital, for such acquisitions. Any decision to make such an acquisition will be based on a variety of factors, including the purchase price, and other financial terms of the transaction, and the business prospects and competitive position of, and technology or products provided by, the acquisition candidate. As of the Effective Date, the Company has no agreements, understandings or arrangements with respect to any such acquisition nor is the Company engaged in any discussions or negotiations regarding any such acquisition. There can be no assurance that the Company will successfully consummate any acquisition or successfully integrate any acquired company or products into its operations. Investors in this Offering may not have an opportunity to evaluate the specific merits and risks of any acquisition. Net proceeds which are allocated for acquisitions but not used for that purpose may be used for working capital. (2) The Company intends to construct and equip a new manufacturing facility on property being purchased in Missoula County, Montana that is expected to be financed in part through the issuance of industrial revenue bonds. The facility is expected to consist of a 20,000 square foot manufacturing and warehousing building on approximately 6.3 acres of land. The existing manufacturing plants and equipment will be relocated in the new consolidated facility when it is completed. The Company's proposed equipment purchases include 2 CNC machining centers, a CNC tooling center and other equipment designed to expand manufacturing capacity and improve efficiency. This equipment can be used at either the new or existing facilities. There can be no assurance that the industrial revenue bond financing will be completed. If the financing is delayed or terminated, the Company intends to utilize proceeds from the offering designated for construction to make additional equipment purchases and make other improvements to operations at its existing facilities. (3) Research and development costs include the development of certain new products, as well as attempts to determine more efficient ways to manufacture existing products. (4) Sales and marketing expenses include the production of a catalogue of the Company's products and the costs of print advertising trade shows, sales literature and sales samples. (5) The Company intends to purchase metal, wood, supplies and component assemblies such as barrels and frames. (6) Repayment of indebtedness consists of approximately $46,000 due for outstanding federal excise taxes and a payment of $37,500 due on a series of promissory notes in the aggregate principal amount of $300,000. Of the $300,000, $87,690 principal amount is due to Gary Landis, an officer and director of the Company, $120,960 principal amount is due to O. Milton Gossett, a principal shareholder of the 18 Company and a former officer and director of CVC, and the remainder is due to two former officers and directors of CVC. The notes bear interest at 9% per annum and are payable in eight (8) quarterly installments commencing on the earlier of (i) the closing of the Offering or (ii) November 1, 1998. The Company intends to make the remaining payments from operating cash flows, but if such cash flows are insufficient, proceeds of the Offering that were allocated to working capital may be used to make the remaining installment payments. See "Certain Transactions." Repayment of indebtedness does not include trade accounts payable which may be repaid from funds allocated to working capital. The foregoing represents the Company's current estimate of the allocation of the net proceeds of the Offering based upon certain assumptions relating to the costs associated with the implementation of the Company's present business plans. Future events, including problems, delays and complications encountered in implementation of its present plans, as well as changes in economic conditions, regulatory or competitive conditions and the success of the Company's marketing activities may make shifts in the allocation of funds necessary or desirable. Any material reallocation will be made by the Board of Directors. There can be no assurance that the Company's estimates will prove accurate or that unforeseen expenses will not be incurred with a resulting reallocation of the use of the proceeds of this Offering. The Company believes, based on currently proposed plans, that the net proceeds of this Offering will satisfy the Company's cash requirements for at least 12 months followings the Effective Date. Pending the utilization, the net proceeds will be invested primarily in high grade short term interest bearing investments. Additional proceeds received as a result of the exercise of the Over-allotment Option will be added to working capital. 19 DILUTION At September 30, 1997, the net tangible book value of the Company was ($187,481) or $(0.07) per share of common stock based on 2,747,476 shares of common stock outstanding. The net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities and minority interests, divided by the number of shares of common stock outstanding. After giving effect to the receipt of the net proceeds (estimated to be approximately $6,230,000) from the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $5.10 per share, the proforma net tangible book value of the Company attributable to common stock at September 30, 1997 would be $5,892,519 or $1.39 per share of common stock. This would result in dilution to the public investors (i.e. the difference between the estimated initial public offering price per share of common stock and the tangible book value thereof after giving effect to this Offering) of approximately $3.61 per share or (72%). The following table illustrates the per share dilution assuming $10 of the Offering price per Unit is attributable to the Warrant included therein. Assumed initial public offering price......................... $ 5.00 Net tangible book value at September 30, 1997................. (0.07) Increase in proforma net tangible book value attributable to new investors............................................... 1.46 --------- Proforma net tangible book value after this Offering.......... 1.39 --------- Proforma dilution of net tangible book value to the new investors................................................... $ 3.61 --------- ---------
The following tables set forth as of September 30, 1997, with respect to the Company's existing stockholders and investors in this Offering, the number of shares of Common Stock acquired from the Company, the percentage of ownership of such shares of Common Stock, the total consideration paid, the percentage of total consideration paid, and the average price per share paid by the existing stockholders and by the investors in the Offering:
AVERAGE SHARES PURCHASED TOTAL CONSIDERATION PRICE --------------------- ------------------------ PER NUMBER PERCENT NUMBER PERCENT SHARE ---------- --------- ------------- --------- ----------- Existing stockholders.................... 2,747,476 64.68% $ 3,376,627 31.04% $ 1.23 New investors............................ 1,500,000 35.32 7,500,000 68.96 $ 5.00 ---------- --------- ------------- --------- ----- Total.................................... 4,247,476 100.00% $ 10,876,627 100.00% $ 2.56 ---------- --------- ------------- --------- ----- ---------- --------- ------------- --------- -----
The above table assumes no exercise of the Overallotment Option. The above table also assumes no exercise of currently outstanding options to purchase 475,000 shares of Common Stock and currently outstanding Warrants to purchase 50,000 shares of Common Stock. The options have exercise prices below the Offering price, and thus, to the extent they are exercised, will cause further dilution to new investors. See "Options/SAR Grants in Last Fiscal Year" and "Certain Transactions." 20 CAPITALIZATION The following table sets forth the actual capitalization of the company at September 30, 1997, and as adjusted to give effect to the sale of 1,500,000 units offered hereby and to the application of the net proceeds therefrom, at the assumed public offering price of $5.10 per unit and the reclassification in December 1997 of $123,323 in short term debt owed to a company in which the Company's Chairman is a principal to long term debt.
AS OF SEPTEMBER 30, 1997 ---------------------------- ACTUAL AS ADJUSTED ------------- ------------- Long-term debt..................................................................... $ 384,203 $ 470,026 ------------- ------------- ------------- ------------- Stockholders' Equity Common Stock, $.0001 par value, 30,000,000 shares authorized on an actual and adjusted basis, 2,747,476 issued and outstanding on an actual basis and 4,247,476 shares issued and outstanding on an adjusted basis (1) 275 425 Additional paid-in capital......................................................... 3,376,352 9,466,202 Retained earnings (accumulated deficit)............................................ (3,412,069) (3,412,069) ------------- ------------- Stockholders equity (deficit)...................................................... $ (35,442) $ 6,054,558 ------------- ------------- Total capitalization............................................................... $ 2,058 $ 6,524,584 ------------- ------------- ------------- -------------
- ------------------------ (1) Does not give effect to the issuance of 50,000 shares of Common Stock and 50,000 warrants after September 30, 1997. DIVIDEND POLICY The Company does not anticipate paying any dividends on its Common Stock in the foreseeable future. Any earnings, which the Company may realize in the foreseeable future, will be retained to finance the growth of the Company. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Company's Board of directors. In addition, the payment of cash dividends may be limited or prohibited by the terms of any future loan agreements or any preferred stock that may be issued by the Company. See "Description of Securities -- Common Stock." 21 SELECTED FINANCIAL DATA
NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30, ------------------------------------------- ---------------------------- 1994 1995 1996 1996 1997 ------------ ------------- -------------- ------------- ------------- STATEMENT OF OPERATIONS DATA Net sales................................. $ 247,950 $ 74,744 $ 244,725 $ 193,796 $ 365,378 Cost of good sold......................... 405,441 339,246 576,153 355,127 638,311 Gross profit (loss)....................... (157,491) (264,502) (331,428) (161,331) (272,933) Operating expenses........................ 244,977 482,206 759,187 655,731 457,020 Operating loss............................ (402,468) (746,708) (1,090,615) (817,062) (729,953) Other income (expense).................... (47,012) (35,755) (12,049) (29,700) (23,570) Net loss.................................. (449,480) (782,463) (1,102,664) (846,762) (753,523) Earnings per share........................ (0.84) (0.75) (0.44) (0.35) (0.27) Weighted average number of shares outstanding (1)......................... 535,728 1,040,893 2,488,466 2,410,972 2,803,558 AT DECEMBER 31, AT SEPTEMBER ------------------------------------------- 30, 1994 1995 1996 1997 ------------ ------------- -------------- ------------- BALANCE SHEET DATA Working capital (deficit)................. (598,480) $ (49,286) $ 200,083 $ (76,943) Total assets.............................. 500,286 736,095 1,126,112 1,107,900 Long-term debt............................ -- 262,500 300,000 384,203 Total liabilities......................... 901,291 759,059 999,357 1,143,342 Stockholder's equity (deficit)............ (401,005) (22,964) 126,755 (35,442)
- ------------------------ (1) Adjusted for merger with Stock Shop and recapitalization in 1995. See notes 1 and 2 to the financial statements. COOPER FIREARMS, INC. SELECTED FINANCIAL DATA
JANUARY 1, YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED ---------------------------- TO AUGUST 13, JUNE 30, 1994 1995 1996 1996 ------------- ------------- -------------- ---------------- STATEMENT OF OPERATIONS DATA Net sales..................................................... $ 959,206 $ 954,002 $ 589,070 $ 534,420 Cost of goods sold............................................ 1,046,630 1,027,871 516,687 461,005 Gross profit (loss)........................................... (87,424) (73,869) 72,383 73,415 Operating expenses............................................ 182,410 396,278 237,190 209,621 Operating loss................................................ (269,834) (470,147) (164,807) (136,206) Other income (expense)........................................ (17,230) (38,809) (20,267) (15,241) Net loss...................................................... (287,064) (508,956) (185,074) (151,447) Earnings per common share..................................... (3.17) (4.19) (1.36) (1.13) Weighted average number of common shares outstanding.......... 90,565 121,436 135,677 133,465 AT DECEMBER 31, ---------------------------- 1994 1995 ------------- ------------- BALANCE SHEET DATA Working capital (deficit)..................................... $ (2,401) $ (117,865) Total assets.................................................. 781,774 675,636 Long-term debt................................................ 118,621 175,643 Total liabilities............................................. 603,957 669,775 Stockholders' equity.......................................... 177,817 5,861
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's financial statements and the notes thereto appearing elsewhere in this Prospectus. This discussion contains forward looking statements that involve risks and uncertainties. The Company's actual results in the future may differ materially from the results discussed in such forward looking statements. Factors that might cause such a difference include, but are not limited to those discussed in "Risk Factors." CERTAIN FACTORS AFFECTING COMPARABILITY On August 13, 1996, the Company acquired all of the preferred stock and 92% of the common stock of Cooper Arms (in subsequent stock purchases, the Company increased its ownership in Cooper Arms to approximately 99%) in a transaction accounted for under the purchase method. This acquisition distorts comparability between periods. Therefore, pro forma results of operations assuming Cooper Arms was acquired on January 1, 1995 have been used in this analysis to provide more meaningful information in the evaluation of the ongoing performance of the business. The following pro forma condensed statements of operations do not purport to be indicative of the consolidated results of operations of the Company that might have occurred had the acquisition actually taken place on January 1, 1995, nor are they indicative of future results. Furthermore, these pro forma condensed consolidated statements of operations do not reflect changes which may occur as a result of post-merger activities or other matters.
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ---------------------------- ------------------- 1995 1996 1996 ------------- ------------- ------------------- Net sales..................................................... $ 1,028,746 $ 833,795 $ 782,866 Cost of goods sold............................................ 1,367,117 1,092,840 871,814 ------------- ------------- ------------------- Gross profit (loss)........................................... (338,371) (259,045) (88,948) Operating expenses............................................ 878,484 996,377 892,921 ------------- ------------- ------------------- Operating loss................................................ (1,216,855) (1,255,422) (981,869) Other expenses................................................ 74,564 38,960 52,404 ------------- ------------- ------------------- Loss before minority interests................................ (1,291,419) (1,294,382) (1,034,273) Minority interests in net loss of subsidiary.................. 6,644 -- -- ------------- ------------- ------------------- Net loss...................................................... $ (1,284,775) $ (1,294,382) $ (1,034,273) ------------- ------------- ------------------- ------------- ------------- -------------------
RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA AMOUNTS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996. Net sales revenue declined $417,488 or 53% from $782,866 in 1996 to $365,378 in 1997, primarily due to lower sales volume. The Company has concentrated its efforts in 1997 on expanding production capacity, improving efficiency and securing capital required for both. The Company has temporarily reduced its current production and marketing efforts to accomplish these objectives. Furthermore, financial constraints and limitations on production capacity have forced the Company to temporarily suspend rifle production for portions of 1997. Consequently, sales volume has suffered. Management believes that it is necessary for the Company to expand production capacity for it to be able to produce significant improvement in sales. 23 Gross profit (loss) declined from (11.4%) of net sales in 1996 to (74.7%) in 1997, in part due to inefficiencies in the integration of CVC Classics, Cooper Arms and Stock Shop production operations. A major inefficiency was the failure to consolidate production at a single location. In addition, the Company temporarily suspended rifle production for portions of 1997 as described above. The lower production volume resulted in a significant increase in fixed overhead costs allocated to each unit produced. Operating expenses declined $435,728 or 49% from $892,921 in 1996 to $457,020 in 1997, primarily due to elimination of duplicated costs after the merger of CVC and Cooper Arms. Executive compensation was reduced by $127,290 from $175,290 in 1995 to $48,000 in 1996. In addition, management has significantly reduced bad debt expense from $85,574 in 1996 to $193 in 1997. This is due to tighter credit policies and improved collection procedures. As a percentage of net sales, operating expenses increased from 114.1% to 125.1% primarily due to the decline in net sales. Loss from operations decreased by $251,916 or 26% from $(981,869) in 1996 to $(729,953) in 1997, primarily due to the elimination of duplicated costs after the merger of CVC and Cooper Arms which was partially offset by the decrease in net sales and inefficiencies in the integration of production operations of CVC Classics and Cooper Arms. Interest expense decreased by $36,406 or 58% from $62,570 in 1996 to $26,164 in 1997 reflecting repayment of debt and new low or non-interest-bearing borrowings from related parties. There was no income tax expense in either period as a result of the Company incurring a loss. As a result, the Company's net loss decreased by $280,750 or 27% from $(1,034,273) in 1996 to $(753,523) in 1997. As a percentage of net sales, net loss was (132.1%) in 1996 and (206.2%) in 1997. PRO FORMA AMOUNTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO PRO FORMA AMOUNTS FOR YEAR ENDED DECEMBER 31, 1995. Net sales declined $194,951 or 19% from $1,028,746 in 1995 to $833,795 in 1996, primarily due to lower sales volumes. Due to financial difficulties, Cooper Arms temporarily suspended operations for approximately three months in 1996. Cooper Arms resumed its production after it was acquired by CVC funded primarily by the proceeds of $402,383 from CVC's sale of Common Stock in a private offering and a capital contribution of $1,000,000 from an entity controlled by the Company's Chairman. See "Certain Transactions." Gross profit (loss) improved from (32.8%) of net sales in 1995 to (31.1%) in 1996. Operating expenses increased $117,893 or 13% from $878,484 in 1995 to $996,377 in 1996, primarily due to an increase of approximately $119,000 in bad debt expense. This increase was partially attributable to the write off of past due receivables that existed at the time the Company acquired Cooper Arms and during the reorganization of CVC, which resulted in the operations being relocated to Montana. As a percentage of net sales, operating expenses increased from 85.4% in 1995 to 119.5% in 1996, primarily due to the decline in net sales and the increase in bad debt expense. Loss from operations increased by $38,567 or 3% from $(1,216,855) in 1995 to $(1,255,422) in 1996, primarily due to the decrease in net sales and increase in bad debt expense which were partially offset by the improvement in gross profit (loss) percentage. As a percentage of net sales, loss from operations was (118.2%) in 1995 and (150.6%) in 1996, reflecting the decline in sales volume. Interest expense decreased by $24,374 or 33% from $74,564 in 1995 to $50,190 in 1996, reflecting repayments of debt and new low or non-interest-bearing borrowings from related parties. There was no income tax expense in either period as a result of the Company incurring a loss. As a result, the Company's net loss increased by $9,607 or 1% from $(1,284,775) in 1995 to $(1,294,382) in 1996. As a percentage of net sales, the net loss was (124.9%) in 1995 and (155.2%) in 1996. 24 LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its operating cash flow deficit through loans from stockholders, capital contributions and sales of common stock. In 1996, the Company had negative cash flows of $(1,123,583) from operations. The principal uses of cash were the net loss of $1,102,664, an increase in inventory of $87,873, a decrease in accounts payable and accrued expenses of $69,053 and a decrease in federal excise tax payable. The principal source of cash from operations was a decrease in accounts receivable of $47,915. A temporary suspension of production for parts of 1996 resulted in an increase in raw materials inventory, since these items did not enter the production cycle when expected. In addition, the Company purchased raw materials at favorable prices, taking advantage of discounts in anticipation of the planned increase in production capacity. Accounts payable and accrued expenses and federal excise taxes payable decreased as such balances were paid out of the proceeds of the sale of the Company's Common Stock in a private placement. Cash flows from investments activities was reduced by $105,728. The principal uses of cash from investments were the purchase of Cooper Arms for $30,000 and purchase of equipment for $126,205. The principal source for cash from investments was the $37,477 in cash obtained in connection with the Cooper Arms acquisition. The Company raised $402,383 from the sale of Common Stock; and a Company controlled by its principal shareholder made a capital contribution of $1,000,000. When reflecting all transactions, the Company had a net increase in cash of $167,330 from $64,204 in 1995 to $231,534 in 1996 and a net increase in working capital (deficit) of $249,369 from $(49,286) in 1995 to $200,083 in 1996. The Company had lease commitments at December 31, 1996 for its facilities totaling $114,325 of which $55,075 and $43,250 is committed for 1997 and 1998, respectively. The lease commitments end on September 1, 1999. The Company was also obligated under an employment agreement with its President at December 31, 1996 at a total of $108,000 in salary, of which $48,000 is to be paid in 1997. The employment agreement expires on March 31, 1999. In the first nine months of 1997, the Company used $(599,599) in operating activities. The principal uses of cash were the net loss of $(753,523) and a decrease in federal excise taxes payable of $14,249. Cash was provided principally by increases in accounts payable and accrued expenses (including accrued interest) of $46,713 and customer deposits of $14,774. Cash flows from investing activities were decreased by $297,611 as a result of the purchase of property and equipment and costs incurred related to this Offering. Cash flows from financing activities increased by $690,466 primarily as a result of $591,326 from the sale of Common Stock, $98,900 of bank borrowings and a $15,091 advance from an affiliate. When reflecting all these transactions, the Company had a net decrease in cash of $206,744 from $231,534 in 1996 to $24,790 in 1997 and a net decrease in working capital (deficit) of $277,026 and $200,083 in 1996 to $(76,943) in 1997. After payment of applicable underwriting discounts and commissions and certain other expenses of the Offering, the Company expects to receive net proceeds of approximately $6,230,000 (or approximately 81% of the estimated gross proceeds of $7,650,000). The Company believes, based on currently proposed plans, that the proceeds of the Offering will fulfill the Company's working capital needs for at least 12 months following the Offering. If the Company continues to grow, bank borrowings, other debt placements and equity offerings may be considered, in part or in combination as the situation warrants. There can be no assurance that financing will be available from these sources on terms acceptable to the Company, if at all. The Company has incurred substantial recurring operating losses. This raises substantial doubt about the Company's ability to continue as a going concern. The auditors have expressed such doubt in their opinion on the Company's financial statements. If the Company is not able to complete the Offering, generate additional revenues or reduce its expenses, it is possible that operations will be discontinued. 25 BUSINESS HISTORY CVC was formed to re-engineer, produce and market a high-quality, American-manufactured version of a sporting shotgun produced first in Japan by the Olin Corporation as the "Winchester Model 101" and, until 1988, by its successor company as the "Classic Doubles" Sporter. In 1993 and 1994, CVC commenced limited production of its American-made model, the "CVC Classic Sporter" and by 1995 completed the design and engineering of a line of ten shotguns within the CVC Classic Sporter family. In 1995 and early 1996, CVC sought to increase production of the CVC Classic Sporter by reaching an understanding with a manufacturer pursuant to which the manufacturer would supply and assemble the metal components of the CVC Classic Sporter and CVC would finish and market the completed product. In mid-1996, management determined that this arrangement was not performing as expected and it was discontinued. The Company was formed in May 1996 for the purpose of acquiring the outstanding securities of CVC. In September 1997, the Company completed an exchange offer as a result of which CVC became a majority owned (approximately 97%) subsidiary of the Company. In November 1996, CVC acquired all of the issued and outstanding capital stock of the Stock Shop, and indirectly, the Stock Shop's majority-owned (approximately 99%) subsidiary Cooper Arms. The Company's senior management and Board of Directors believes this acquisition was necessary in order to expand the Company's business activities to include in-house manufacturing of CVC shotguns and create economies of scale in the marketing of the Company's products. At this time CVC Classics' operations were relocated to a facility in Montana. Although the Company still experiences inefficiencies related to operating two separate facilities, it has been able to eliminate some expenses by conducting all of its operation in Montana. In August and September 1996, Stock Shop acquired 92% of the outstanding capital stock of Cooper Arms and all of the assets of the Stock Shop of Montana LLC, a company under common control, respectively. In August 1997, the Company acquired an additional 7% of Cooper Arms' outstanding capital stock. INDUSTRY BACKGROUND The 1995 Annual Firearms Manufacturing, and Exportation Report ("Report") compiled by the Bureau of Alcohol, Tobacco and Firearms ("BATF") revealed that in 1995, 1,331,780 rifles and 1,173,645 shotguns were manufactured in the United States. According to the Report, of these firearms, 88,899 rifles and 100,877 shotguns were exported. The National Shooting Sports Foundation's Profile of Participation in the Hunting and Shooting Sports (1995) ("Profile") reveals that hunting is a stable, if not growing, recreational activity. Annual hunting license sales have remained around the 16 million mark since 1983. The Profile indicates that hunters/shooters between the ages of 35-54 report owning the most shotguns, while those over 55 own the most centerfire rifles. With respect to target shooters, the Profile reports that the target shooting segment of the shooting sports market is growing and cites a survey by American Sports Analysis which reveals that trap and skeet shooting, with over 4.5 million participants, is on the rise. Additionally, sporting clay shooting is among the fastest growing sports, which over the course of a few years attracted approximately 3.1 million participants. GROWTH STRATEGY The Company's goal is to become a leading manufacturer of custom quality, mass produced firearms and high grade accessories by focusing on the high growth areas of the firearms market which the Company believes includes various types of target shooting, such as clay, trap and skeet shooting. The Company's primary strategies for achieving its goal are to broaden its product line and increase the scope 26 and efficiency of its manufacturing operations. In order to broaden its product lines, the Company intends to seek to acquire companies which sell products which are competitive or complimentary to its current products or to acquire such product lines. Alternatively, as the Company is doing with ammunition and clothing and accessories, the Company may develop such product lines itself. The purchase of additional production equipment at its existing, or proposed facilities, is expected by management to reduce reliance on third party suppliers, as well as increase capacity and manufacturing efficiency. PRODUCTS The Company manufactures manually operated rifles and shotguns primarily designed for hunting, target shooting and other shooting sports. The primary components of each of these firearms are a barrel action and stock. The barrel is the metallic cylindrical tube through which the projectile passes before it leaves the firearm. The moving parts that allow one to load, fire and unload a firearm make up the action. When the barrel is attached to the action, these metal parts (which contain all the parts necessary for the firearm to function) may be called a barreled action. The stock is the wood handle of the firearm to which the barrel and the action are attached. The stock provides proper grip and balance. Firearms may be decorated by engravings or inlays on the metal parts or engravings, inlays or checkering on the stock. A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the projectile a stabilizing spin after it leaves the barrel. A rifle fires a single projectile each time the cartridge is ignited by the pulling of the trigger. Most of the Company's rifles are bolt action rifles. Bolt action rifles require manual turning, retraction and closing of a bolt device in order to load ammunition. Lugs are used to lock the bolt into the action when the rifle is to be fired. Bolt action rifles may be repeating rifles, which allow more than one (usually three to five) cartridges to be stored in a magazine and manually fed into the action with the bolt. A shotgun is also a long gun. In contrast to a rifle, a shotgun fires a cartridge with a number of projectiles at one time which spread over an area after being discharged from the barrel. This makes a shotgun the firearm of choice for shooting moving targets. The concentration of the projectiles from a given distance is known as the shot pattern. Many shotguns have two barrels, which are arranged vertically (over-and-under) or horizontally (side by side). Many shotguns use a rib (a long flat metal piece running the length of the barrel) to provide a proper sighting plane. Most shooting sportsmen prefer a high level of accuracy in their firearms. The accuracy and distance of a rifle or shotgun depends upon the length and width of the barrel, the precision with which it is manufactured, as well as other variations. Other features of importance to shotgun users are internal refinements to the barrel such as diamond honing, to ensure internal smoothness, a minimal recoil (recoil is the force with which the gun moves backwards against the shoulder when fired) and overboring for a consistent shot pattern. Rifle users prefer rifles that are manufactured with high grade barrels (known as match-grade) and are designed so that glass bedding is used to create a precise fit between the action and stock and also to prevent the wood in the stock from touching the barrel which could adversely affect the rifle's accuracy (this design is known as free floating). A shooting sportsmen may own a wide variety of rifles or shotguns, creating a market for repeat buyers of the Company's products. The Company does not intend to manufacture or market handguns or assault weapons. CVC CLASSICS CVC Classics designs, engineers, manufactures and markets a premium line of ten shotguns for clay target shooting and hunting which retail from $3,000 to $4,200 without options and can retail for in excess $10,000 with options. The CVC Classics shotguns are a 12 gauge, over and under third generation rendition of the renowned Winchester Model 101. The best selling model in the line is the CVC Classic Sporter offered in three barrel lengths. The CVC Classic Sporter are ready for sporting clays competition 27 (which Management believes is the largest and fastest growing segment of the shotgun industry) as delivered. Third generation improvements to the CVC Classic Sporter include lengthened forcing cones, mechanical triggers, and overboring. Improvements to manufacturing techniques include a one piece frame machined from ordinance 416 stainless steel a machined 4140 steel monobloc, and diamond honed barrels. All of these improvements provide superior balance, lighter weight, reduced recoil and better shot patterning. Additionally the shotguns feature select American walnut with hand checkering. CVC is currently perfecting its rib to barrel laser beam welding process known as "CVC Fusion(TM)" which fuses the barrels and ribs into an inseparable structure for improved strength and durability. Management believes that this technology will provide the strongest barrel assembly available because the ribs and barrel metal are fused into an inseparable structure for the life of the shotgun. Moreover, in addition to achieving greater barrel strength, lighter weight and a unique gun balance, CVC Fusion(TM) is expected to lower production costs per unit due to the accelerated pace at which assembly can occur (as compared to soldering) and reduced labor needed in the assembly process. The Company does not hold a patent on its laser-beam welding technology and may seek to secure a patent in order to license the technology to the industry. There can be no assurance, however that even if the Company applies for patent protection, a patent will be issued. THE STOCK SHOP The Stock Shop designs and manufactures high quality firearms stocks. Currently, the Company only produces stocks for use on the Company's other products and on a custom basis for retail customers. If the Company is able to increase capacity in its manufacturing facilities, it may attempt to solicit contract orders from other firearms manufacturers for large quantities of firearms stocks on an OEM basis. There can be no assurance that the Company will be able to increase capacity to a sufficient level for this or that there exists a market for production of the Company's stocks on an OEM basis. The Stock Shop also designs, engineers, assembles and markets the "Anschutz USA Sporting Rifle," based on the Anschutz Model 1700 series barreled action. The Stock Shop has an agreement with the world renowned firm of J.G. Anschutz GmbH and its distributor, AcuSport Corporation, whereby AcuSport has agreed to sell the Stock Shop the Anschutz Model 1700 series barreled action, the Stock Shop manufactures stocks for and assembles the rifle using the barreled action. The Stock Shop also acquired the American rights to the use of the name "Anschutz USA Sporting Rifle." The Company's arrangement with Anschutz is terminable by either party without notice. The Stock Shop's Anschutz rifle is available in four calibers and with two stock designs. The rifles retail from $1,550 to $1,895 without options, and can retail for in excess of $10,000 with options. COOPER ARMS Cooper Arms designs, engineers, manufactures and markets a line of high quality bolt action rifles for sport hunting and competition. The line consists of five basic models of rifles, each in various styles, featuring classic American design, two of which are repeating rifles and three of which are single shot bolt action varmint rifles. The standard features of the repeating rifles include three mid-locking lug bolts, box magazine, twin extractors, glass bedding, single stage fully adjustable match trigger, 24 inch length chrome moly match barrel (free floated) with .960-.650 straight taper, competition step crown and 13 inch length of pull. All metal component parts of the repeating rifles are machined from solid bar stock steel. The standard features of the single shot varmint rifles include three front-locking lug bolts, Sako-style extraction system, glass bedding, matte finish, single stage fully adjustable match trigger, 24 inch stainless steel match grade barrel (free floated) and 13 inch length of pull. Cooper Arms rifles retail from $1,695 without options and can retail for in excess of $6,000 with options. 28 The Cooper Arms rifles are sold with certain guarantees as to the accuracy of the rifles and a one year warranty requiring the Company to remedy defects in the rifle's metal parts. The warranty does not cover damage caused by misuse or inadequate care. The Cooper Model 36 is the holder of the 1994, 1995, 1996 and 1997 National Rifle Association sanctioned Hunter Class Silhouette US National Championships. Cooper Arms also designs and intends to market Cooper Arms ammunition. The Company has designed prototypes of the ammunition including ammunition which is especially designed for use with Cooper Arms rifles. The ammunition and the manufacturing process by which it will be produced were designed to provide superior accuracy. This design includes using precise processes for placing the bullet in the brass cartridge and measuring the amount of gun powder used. This ammunition is primarily intended for use by military and law enforcement units in the United States and abroad. Manufacturing of the ammunition is being contracted out to a manufacturer specializing in the production of high grade ammunition. The Company intends to ensure that the manufacturers maintain high quality control levels so that the ammunition is produced with the precision called for in the Company's design. Cooper Arms plans to utilize third party manufacturers for the production of the ammunition as customer purchase orders are received and thus avoid keeping ammunition in inventory. This ammunition previewed at the Brussels Military Procurement Exposition in November of 1997 and the Company expects sales to commence in the second quarter of 1998. APPAREL AND ACCESSORIES In the second quarter of 1998, the Company intends to commence marketing of specialty labeled sports apparel and shooting accessories. The Company is hoping to capitalize on the consumer's perception and familiarity with its firearms in order to establish an identifiable brand name. These products are expected to include caps, shooting vests, hunting coats, shirts, shotgun and rifle cases and cleaning supplies. The products will be targeted at the high grade, high margin upscale market. Design and selection of the products will be performed by the Company and the manufacturing of the products will be contracted out to third parties. The products will be sold primarily to the approved dealers. The Company intends to establish a brand name which will be recognized and associated with high quality firearms and accessories. MANUFACTURING In manufacturing shotguns, the Company mills (that is, cuts and forms raw metal into the required shape and size) approximately 60% of the internal metal components of the shotguns and produces the stocks. The barrel, as well as other parts not manufactured by the Company, are purchased from suppliers. As required, the metal parts purchased from suppliers are heat-treated by the Company, which also fits or trims and adjusts the parts and finishes the metal. Finishing is the process by which a metal part is either polished or blued, which is a chemical process which protects the part against rusting and creates a dark blue or black finish. The Company then assembles the various components into finished shotguns which undergo quality control review before being readied for shipment. All of the metal components of the Company's rifles are purchased from suppliers, but the Company produces the stocks itself. The metal parts are fit and finished by the Company which also assembles them into finished rifles. The Company produces the stocks for its firearms from raw wood. The process of profiling (also called milling) the wood, that is, shaping the raw wood block into the required shape is done by hand with the use of semi-automatic machinery. The remainder of the production process, which consists of fitting the profiled wood to the metal parts of the firearm, final shaping, sanding, placing the design on the wood (known as checkering) and finishing, are currently done by hand. The Company's proposed new manufacturing facility is expected to allow the Company to produce substantially all of the metal parts for the firearms itself: barrels will continue to be purchased from suppliers at least initially. Additionally, the equipment which the Company expects to purchase is intended to automate substantial portions of the manufacturing process which are now performed by hand. For 29 example, currently producing the stocks is done almost entirely by hand. The new equipment is intended to automate virtually the entire production process for the stocks except for certain finishing processes that will be done by hand. See "Business--Property." In the event the financing for the new manufacturing facility cannot be obtained, the Company will install the new equipment in its existing facilities. This equipment will allow for substantially all of the changes in the Company's manufacturing operations which the new facility would allow, except rather than producing all of the component metal parts for rifle production only a majority of such parts would be produced by the Company. The remainder of the parts would continue to be purchased from suppliers. However, the new facility would result in greater manufacturing efficiencies and capacity than would updating the existing facilities and would also provide for on-site warehousing of finished goods which is not possible at the existing facilities. Management believes that the equipment purchased for existing facilities will be transferable to the new facility. This will enable the Company to make equipment purchases while waiting to obtain financing and complete construction of the new facility. SALES AND MARKETING The Company sells its products primarily to retail stores which specialize in the sale of firearms and related products. The Company's Approved Dealer list currently consists of approximately 500 retail stores of which approximately 125 have purchased products during 1997. Before approving a dealer, the Company reviews each prospect to determine that it holds an appropriate BATF license and is a "storefront" firearms dealer. The Company may sell to distributors in the future although it has no current plans to do so. Sales to the Approved Dealers are solicited by independent sales representatives retained by the Company who have exclusive territories. Presently, the Company retains independent sales representatives covering approximately 35 states and intends to engage representatives to cover the remaining states. The sales representatives also sell firearms manufactured by others and are not prohibited from selling directly competitive firearms. The Company promotes its products at trade shows and shooting competitions or outings. The Company advertises in shooting and hunting periodicals and provides dealers with sales literature about its products. The Company intends to use a portion of the proceeds of the Offering to produce a direct mail catalogue. The catalogue will include all of the Company's products and solicit sales of products other than firearms which cannot be sold by direct mail. The catalogue will enable the Company to market directly to the higher margin consumer market. Additionally, the Company believes its catalogue will increase consumer awareness of its products, which could serve to promote sales in dealer outlets. COMPETITION The Company competes in a highly specialized, competitive environment directly with many other national and international sporting firearms manufacturers. Many of these companies are larger, better known and have significantly greater financial, manufacturing and marketing resources than the Company. In addition, unlike the Company, many firearms manufacturers are subsidiaries of larger, more diverse companies on whom they can rely for capital and other resources. No assurance can be given that the Company will be capable of competing successfully in the future, or that the Company will be successful in maintaining or expanding its share of the market for its products. The Company's competition includes the Dakota Arms, Beretta Perazzi, Krieghoff Ultralight, Kimber and Browning lines of firearms. MAJOR CUSTOMERS The Company's three largest customers accounted for 42% of net sales for the nine months ended September 30, 1997, respectively. During the nine months ended September 30, 1997, Sporting Clays Market, The Outdoorsman and PJ Vollmer & Co., Inc. accounted for 12%, 17% and 13% of sales, 30 respectively. The Company believes that it has good relationships with its customers and that they will continue to do business with the Company. However, the Company has no long term contracts with any of its customers, all of whom purchase products from the Company pursuant to individually placed purchase orders. Therefore, there can be no assurance that any of its customers, including its largest customers, will continue to purchase products from the Company. SUPPLIERS Although the Company manufactures certain components of its firearms and assembles them, it purchases certain materials and other component parts from third party suppliers. The Company has no long-term contracts with suppliers, and any of these relationships can be terminated by either party at any time. Failure to obtain necessary materials from suppliers could interrupt the Company's production schedule and adversely affect the Company. The Company intends to use a portion of the proceeds of the offering to increase in-house manufacturing in order to reduce dependence on metal component part suppliers. However, the Company will remain dependent on suppliers for raw material and certain component parts. The Company intends to use one or more independent manufacturers for the manufacture of the Cooper Arms ammunition and the apparel and accessories. The Company will remain dependent on these suppliers for the production of the ammunition and the apparel and accessories, although the Company believes that there are a number of manufacturers who are capable of producing the ammunition and the apparel and accessories. LICENSING AND GOVERNMENT REGULATION The firearms manufacturing industry is subject to extensive regulation by various Federal and State regulatory agencies, including BATF. The Company maintains licenses issued by the BATF permitting the distribution of firearms and ammunition to a network of BATF licensed dealers throughout the United States. The licenses are renewable every three years and require the Company to maintain certain records relating to Firearms shipments. The Company's BATF license was originally issued to Cooper Arms in February 1991 and has been renewed until October 2000. The loss or suspension of any of the Company's licenses could have a material adverse effect on the Company. The Company's licenses could be suspended if it fails to pay the 11% federal excise tax due on all sales of firearms. Currently, the Company owes approximately $46,000 in such taxes together with interest or penalties. The Company is not aware of any pending action against the Company with respect to such taxes and intends to pay all amounts due from the proceeds of this Offering. The manufacture, sale and purchase of firearms is subject to extensive governmental regulation, including The Gun Control Act of 1968, The National Firearms Act, The Arms Export Control Act and The Federal Firearms Act. Since the Company is not presently selling revolvers, pistols or assault weapons, many of the provisions of presently effective laws and regulations are not applicable to the Company's present business. The Company may export products. Each shipment of firearms shipped outside the United States must be licensed by the State Department. The State Department regulates the type of firearms that may be exported to various countries. The Company must comply with these regulations to be able to export products. There can be no assurance that as the Company expands its product line or as new laws or regulations are adopted, or current laws and regulations expanded, that existing or future laws and regulations would not have a materially adverse effect on the business of the Company. Moreover, from time to time, legislation and regulations that could potentially affect the Company, either beneficially or adversely, have been proposed by federal and state legislators and regulators. Management is not aware of any currently pending or proposed legislation or regulations which, if adopted, would have a materially adverse impact on the Company's operations. 31 PROPRIETARY RIGHTS The Company does not currently have patent protection on its products or production processes. Its ability to compete effectively with other companies will depend, in part, on its ability to maintain the proprietary nature of its products and production processes. The Company may apply for patent protection. However, there can be no assurance that it will be successful in obtaining such patents or if obtained that such patents will afford the Company sufficient protection. The Company intends to rely substantially on unpatented products and production processes, and there can be no assurance that others will not copy any of its designs or processes. The basic design and engineering of the CVC Classic Sporter is largely based on that of the Classic Doubles, previously manufactured by Sports Japan, Inc. ("Sports Japan"), which, in turn, was based upon the shotgun known as the Winchester Model 101 produced by the Winchester Division of the Olin Corporation ("Winchester"). The Company has no license or other relationship with Winchester, Olin Corporation or any other party who owns a patent or trademark on the Winchester Model 101. Management does not believe that either Sports Japan or Winchester has any viable claims against the Company based upon unfair competition or protected proprietary rights to such designs and engineering. Management believes that neither the Winchester Model 101 nor any of its parts are protected by patents, and the shotgun itself is no longer manufactured. Management also believes that Winchester sold the manufacturing rights to Sports Japan, whose Classic Doubles was an improved version of the Winchester Model 101 and which company itself ceased operations and forfeited its firearms manufacturing license in Japan in 1988. Further, management believes that the CVC Classic Sporter is differentiated from the Winchester Model 101 and the Classic Doubles by virtue of the different manufacturing process and the Company's design enhancement. The Company has not obtained any opinion from patent counsel and there can be no assurance that any such claims will not be brought against the Company by Winchester, Sports Japan or persons connected or previously connected with such entities. In the event that such claims are brought against the Company, even if the Company was ultimately found not to be liable, the cost to the Company of defending any such lawsuit could have a materially adverse effect on the Company's operations. Moreover, if the Company's products infringe patents or proprietary rights of others, the Company, under certain circumstances, could become liable for damages or be forced to alter its products, or production processes, either of which could have a material adverse effect on the Company. Cooper Arms holds a registered trademark, No. 75-511,590, granted March 28, 1995 for the mark "17CCM" which is used in connection with a cartridge developed by Cooper Arms. The Company has applied for the registration of additional markets, however, there can be no assurance that it will be successful in obtaining such registrations. The Company's application of the mark "Classic Sporter" was rejected as being "merely descriptive" and thus not eligible for trademark protection. The Company is currently appealing the rejection. If the Company fails to obtain the mark "Classic Sporter", the Company would not be able to prevent other companies from marketing firearms under the name Classic Sporter, which could have a material adverse effect on the Company. Additionally, the Company's trademark counsel has indicated that the name "Connecticut Valley" may be deemed "confusingly similar" to another company's name and the Company may be required to change its name or seek another name under which to market certain products. If the Company were required to cease using "Connecticut Valley", it could have a material adverse effect on the Company. Although registration affords the Company the protection of federal trademark laws against the unauthorized use of the protected mark or a use deemed "confusingly similar" under federal trademark law, there can be no assurance that third parties will not infringe on the Company's current or future trademark registrations or that the Company will have sufficient resources to defend against any such infringement successfully or at all. PERSONNEL The Company has approximately 18 full time employees, including 15 in manufacturing and 3 in corporate and general administration, some of whom also have production responsibilities. Of the 15 32 employees in manufacturing, 12 are located at the Stevensville, Montana facility, three are at the Victor Montana facility. None of the Company's employees are represented by labor organizations and the Company is not aware of any activities seeking such organization. The Company considers its relationships with its employees to be satisfactory. See "Management." PROPERTY The Company operates two manufacturing facilities. The primary manufacturing operations are conducted at a 5,200 square foot facility in Stevensville, Montana, and the manufacturing activities relating to machining and metal work are conducted at Victor, Montana. The Company's executive offices are located at the Stevensville facility. The Stevensville facility is leased by the Company for $2,475 per month for the first 12 months and for $2,750 per month for the remaining 12 months. The lease is due to expire in July 1998, but is renewable by the Company for a period of 12 months upon 30 days written notice at a rate of $3,000 per month. The Company also leases the Victor facility for approximately $2,000 per month, which lease expires in September 1999. The Company believes that its current property and equipment are adequate for its business as currently conducted, however, the current facilities are not automated, operate in a comparatively inefficient manner and have insufficient production capacity to achieve significant growth in production volume. The Company believes that consolidation of its two facilities is desirable and the acquisition of automated production equipment, such as computer aided design and manufacturing equipment is necessary for it to increase capacity and operate more efficiently. The estimated cost of the acquisition of the necessary property is $2,200,000 and the estimated cost of the capital equipment and machinery is $2,300,000. Approximately 75% of the cost of the new facility is to be financed by the issuance of industrial revenue bonds by Missoula County, Montana. The Company is presently finalizing the agreements to acquire the real property and to finance the project. There can be no assurance that the Company will be successful in obtaining industrial revenue bond financing for the new manufacturing facility. If it is unsuccessful in obtaining such financing it would consider conventional financing for the new manufacturing facility, or a smaller new facility, or if financing is not available for these alternatives, the Company will purchase new equipment for its existing facilities. LEGAL PROCEEDINGS The Company has a dispute with a former officer and director of CVC which may give rise to a claim by the Company against such individual for damages. The Company is currently investigating the matter. Management does not believe that the matter will have a material affect on the Company. The Company has been contacted by an individual who injured himself while firing a firearm manufactured by the Company. This matter was referred to the Company's insurance carrier. Independent tests have indicated that the injury was not caused by any defect in the Company's product and the individual has not pursued any claim against the Company. Management believes that any exposure relating to this matter in excess of its $25,000 deductible would be covered by the insurance currently maintained, however, there can be no assurance that existing insurance coverage is adequate for this or any other claim. In December 1997, McLemore Sporting Arms, Inc., an operator of a retail store which was a customer of Cooper Arms commenced a lawsuit in the Fifth District Court, Franklin Parish, Louisiana against it and CVC seeking approximately $35,000 representing plaintiff's loss from the purchase of allegedly defective rifles plus unspecified additional monetary damages for other costs incurred by the customer and damage to the customer's commercial reputation. The Company believes it has meritorious defenses to the action and intends to vigorously defend this lawsuit. The Company is not currently a party to any litigation, or aware of any potential litigation that it believes could have a material adverse effect on the Company or its business. See "Risk Factors--Possible Insufficiency of Insurance." 33 MANAGEMENT The directors and executive officers of the Company, together with their ages and a brief Description of their employment histories, are as follows:
NAME AGE POSITION AND OFFICE - ------------------------------------ --- --------------------------------------------------------------------- Daniel Cooper....................... 43 President and Director Victor Wang......................... 32 Chairman of the Board and Director of Marketing John Tilleli........................ 26 Chief Executive Officer and Director Gary D. Landis...................... 55 Vice President-Marketing, Secretary and Director Edward McCabe....................... 40 Treasurer (Chief Financial Officer) and Director
None of the Company's executive officers intends to devote his full business time to the affairs of the Company except for Mr Cooper. The Company's by-laws contain a provision dividing the Board of Directors into three classes. Initially, Class I, Class II and Class III directors shall serve terms of one, two and three years, respectively. As the initial term of each class concludes, directors of that class shall be elected to serve a term of three years or until their respective successors have been duly elected. Directors of the Company are not compensated for acting in such capacities. John Tilleli has been elected to Class I, Edward McCabe and Gary D. Landis have been elected to Class II, Victor Wang and Dan Cooper have been elected to Class III. At the Effective Date, the Company intends to add at least two independent directors, who shall be added to the classes so that the number of directors in each class is as evenly distributed as possible. Daniel Cooper has served as a Director and officer, since September 1996, and has been President of the Company and its subsidiaries since August 1997. He founded The Stock Shop of Montana, LLC, the predecessor of the Stock Shop, and has served as its President since its inception. Mr. Cooper founded Cooper Arms and served as its President and a Director from October 1990 to February 1995 and from August 1996 to date. Mr. Cooper organized the North American Divide Expedition in 1980 and led the Expedition on a 6 year hike of the North American Continental Divide from Mexico to the Bering Strait of Alaska. This accomplishment was recognized by the Guinness Book of World Records. Mr. Cooper holds a BS in Environmental Studies and International Affairs from Lewis and Clark College (1979). Victor Wang has served as Chairman of the Board and Director of Marketing of the Company since its inception. Mr. Wang is a principal shareholder of Duke & Co., Inc., a registered broker/dealer, and has served as an officer and director of Duke & Co., Inc. since 1993. From 1991 to 1993, Mr. Wang served as Chairman of the Board and Chief Executive Officer of Questron Technologies Incorporated, a publicly traded alternate dispute resolution company. Mr. Wang has a BS from Johns Hopkins University (1989) and is licensed as a General Securities Principal and Corporate Securities Limited Representative. John Tilleli has served as a Director and Chief Executive Officer of the Company since its inception. He has served as Secretary of The Stock Shop of Montana, LLC, the predecessor of Stock Shop, Inc., since March 1996. Mr. Tilleli is presently employed as Vice President of Corporate Finance of Duke & Co., Inc., a registered broker/dealer, where he works on mergers, acquisitions, and other corporate finance matters. He has held that position since February, 1994. From 1993 to 1994, Mr. Tilleli was employed as a registered representative for Russo Securities, Inc. Mr. Tilleli has a BBA in Finance from the University of Miami (1993) and is licensed as a General Securities Representative, General Securities Options Principal and Uniform Securities Agent. Gary D. Landis is one of CVC's founders and has served as a Director of the Company and CVC since CVC's inception. He also served as CVC's Chief Executive Officer from 1991 until September 1996, when he was appointed Vice President of Marketing. Mr. Landis operates a consulting business, Gary Landis Consulting. Mr. Landis was the managing director of all healthcare businesses at Compton 34 Partners, a division of Saatchi & Saatchi Advertising. Mr. Landis has been in the advertising business for 33 years, having spent 29 years with Saatchi & Saatchi both in the United States and abroad. During that period, Mr. Landis managed subsidiary companies for 19 years. Mr. Landis has a BA from the University of Illinois. Edward McCabe has served as a Director, Treasurer and Chief Financial Officer of the Company since its inception. Mr. McCabe has been employed as Chief Financial Officer of Duke & Co., Inc., a registered broker/dealer, since December 1995. From January 1993 to November 1995, Mr. McCabe served as the Controller for Concord Holding Corporation, a publicly traded company engaged in the financial services business. Prior thereto, he served as the Controller for Adler Coleman & Co. from December 1984 to July 1992. Mr. McCabe holds a BS from St. Peter's College (1982). EMPLOYMENT AGREEMENTS None of the Company's executive officers are subject to employment agreements with the Company, except for Mr. Cooper whose employment agreement with The Stock Shop of Montana, LLC, Stock Shop's predecessor, was assigned to Stock Shop in connection with the September 1996 acquisition of The Stock Shop of Montana, LLC. See "Certain Transactions." Mr. Cooper receives an annual salary of $48,000 and may receive a performance related bonus or stock options. Mr. Cooper's three year employment contract expires on March 31, 1999 and continues on the same terms and conditions until that time. The Company intends to enter into employment agreements with each of Messrs. Wang, Tilleli, McCabe and Landis. Although no terms have yet been agreed upon, the Company expects that none of these employment agreements will provide for an annual salary in excess of $100,000. EXECUTIVE COMPENSATION The following table sets forth cash compensation paid by the Company to, as well as any other compensation paid to or earned by, the Chief Executive Officer of the Company and those executive officers, if any, compensated at greater than $100,000 for services rendered to the Company in all capacities during the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------- ANNUAL COMPENSATION AWARDS ----------------------------------------------- ----------------- OTHER ANNUAL RESTRICTED COMPENSATION STOCK NAME AND YEAR SALARY BONUS AWARD(S) PRINCIPAL POSITION ($) ($) ($) ($) (#) (A) (B) (C) (D) (E) (F) - ---------------------------------------------- --------- --------- ------ --------------------- ----------------- John Tilleli, CEO............................. 1996 0 0 Joe Bishoff(2)................................ 82,131 1996 1995 48,577 SECURITIES UNDERLYING NAME AND OPTIONS/SARS PRINCIPAL POSITION (A) (G) - ---------------------------------------------- ------------- John Tilleli, CEO............................. 50,000(1) Joe Bishoff(2)................................
- ------------------------ (1) Represents shares of Common Stock underlying currently exercisable options. (2) Mr. Bishof served as the Chief Executive Officer of Cooper Arms until shortly prior to the Company's acquisition of Cooper Arms in 1996. 35 EMPLOYEE STOCK OPTION PLAN In September 1997, the Board of Directors adopted and approved the Company's 1997 Stock Option Plan (the "Plan" or the "1997 Stock Option Plan"). The Plan is to be administered by the Board of Directors or by the committee appointed by the Board (the "Plan Administrator"). Pursuant to the Plan, options to acquire an aggregate of 600,000 shares of Common Stock may be granted, 275,000 of which have been granted. Each of the Company's subsidiaries had adopted a stock option plan. In December 1997, the Company cancelled each subsidiary's plan so that no shares or options will be issued pursuant to those plans. The following table set forth options issued by the Stock Shop in 1996. These options were exchanged for options to purchase the Company's Common Stock on identical terms pursuant to the Company's September 1997 private offering in which it acquired 97% of CVC. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS) ------------------------------------------------------------------- NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE (A) (B) (C) (D) (E) - ----------------------------------------------- ------------- ----------------- ---------------- --------------- John Tilleli, CEO.............................. 50,000 18% $ .0001 9/1/2001 Daniel Cooper, President....................... 25,000 9% $ 3.45 9/1/2001 Victor Wang, Chairman.......................... 150,000 55% $ .0001 9/1/2001 Edward McCabe, CFO............................. 50,000 18% $ .0001 9/1/2001
INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's certificate of incorporation and by-laws provide that the Company shall indemnify all officers and directors of the Company to the full extent permitted by the Delaware General Corporation Law. Under such provision, any director or officer who is in his capacity as such is made or threatened to be made a party to any suit or proceeding, may be indemnified if the Board of Directors determines such director or officer acted in good faith and in manner he or she reasonably believed to be in or not opposed to the best interest of the Company. The certificate of incorporation, by-laws and Delaware law further provide that such indemnification is not exclusive of any other rights to which such individual may be entitled under the certificate of incorporation, the by-laws, any agreement, vote of shareholders or disinterested directors or otherwise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted or directors of officers pursuant to the foregoing provision otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy and therefore is unenforceable. 36 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning stock ownership of all persons known by the Company to own beneficially five percent or more of the outstanding Common Stock, each Director and certain executive officers and all officers and directors as a group, and as adjusted to reflect the sale of the Units offered hereby.
AMOUNT AND NATURE PERCENTAGE OF OUTSTANDING NAME AND ADDRESS OF OF BENEFICIAL COMMON STOCK OWNED BENEFICIAL OWNER OR OWNERSHIP ---------------------------------- IDENTITY OF GROUP NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING - -------------------------------------------------------------- ------------------ ----------------- --------------- Victor Wang(2)................................................ 1,730,000 55.0% 37.2% The C.I.T. Trust(2)........................................... 1,380,000 49.3% 32.1% O. Milton Gossett............................................. 171,884 6.1% 4.0% 156 Ridgefield Ave. South Salem, NY 10590 John Tilleli (4).............................................. 50,000 1.8% 1.2% Gary D. Landis................................................ 132,446 4.7% 3.1% 12 Taylor Lane Westport, CT 06880 Edward McCabe (4)............................................. 50,000 1.8% 1.2% Daniel Cooper (5)............................................. 370,595 13.2% 8.6% All officers and directors as a group (5 persons)............. 2,333,041 71.7% 49.0%
- ------------------------ (1) Except as set forth herein the business address of each individual is c/o Connecticut Valley Classics, 4004 Highway 93 North, Stevensville, MT 59870. (2) Includes 350,000 shares underlying currently exercisable options and 1,380,000 shares owned by the C.I.T. Trust, of which Mr. Wang disclaims beneficial ownership. (3) The beneficiaries of the C.I.T. Trust are the children of the Company's Chairman, Victor Wang. (4) Includes 50,000 shares underlying currently exercisable options. (5) Includes 6,250 shares underlying currently exercisable options. Does not include 18,750 shares issuable upon exercise of options which are not currently exercisable and will not become exercisable within sixty days from the date of this Prospectus. CERTAIN TRANSACTIONS CVC is currently indebted to Messrs. Landis, Gossett, Dean Jendsen and George Carey, all of whom are or were officers, directors or stockholders of CVC, in the aggregate amount of $300,000, plus interest, accruing at the rate of 9% per annum, of approximately $37,500 since June 1995. The loans are to be repaid in eight quarterly installments. The first installment will be due on the earlier of November 1, 1998 or the closing of this Offering. In December 1995, Victor Wang, a principal stockholder and director received 200,000 options to purchase shares of CVC's Common Stock as additional consideration for a $75,000 loan made by Mr. Wang to the Company. The options are exercisable at $2.76 per share for a three year period terminating in December 1998. The Company repaid the $75,000 loan in March 1996. These 200,000 options were exchanged for 200,000 options to purchase shares of the Company's Common Stock pursuant to the Company's September 1997 Private Offering. Between May 1992 and December 1, 1997, a company in which Victor Wang is a principal advanced CVC approximately $123,323, none of which has been repaid. On December 1, 1997, the Company executed a promissory note to evidence these advances. Pursuant to the note, the Company is to repay the 37 principal, together with interest accruing at 6% per annum from December 1, 1997, on the earlier of (i) thirteen months following the closing of the Offering, or (ii) November 30, 2000. Additionally, Mr. Wang loaned $50,000 to CVC in 1996 pursuant to a promissory note bearing interest at a rate of 9% per annum. This loan was repaid in September 1996. Between September 1995 and May 1997, the Company sold a total of 553,954 shares of stock in three separate private placements at purchase prices ranging from $3.45 to $3.85 per share. Duke & Co., Inc., a company in which the Company's Chairman is a principal, acted as placement agent in these offerings and received a commission of 10% of the gross proceeds and a non-accountable expense allowance of 3% of the gross proceeds. In March 1996, Mr. Wang acquired a 70% membership interest in The Stock Shop of Montana, LLC for $86,500. In connection with such transaction, Mr. Wang agreed to use his best efforts to assist The Stock Shop of Montana, LLC to (i) obtain a $200,000 line of credit, and (ii) restructure its secured debt. In order to aid the Company in obtaining this line of credit, Mr. Wang hypothecated a $30,000 certificate of deposit as collateral for this line of credit with Rocky Mountain Bank, Rocky Mountain Bank continues to hold this certificate of deposit in Mr. Wang's name as collateral for the Company's loan in the amount of $15,000. In September 1996, the Stock Shop acquired The Stock Shop of Montana, LLC and Messrs. Wang, Tilleli and McCabe were appointed as officers and/or directors of the Stock Shop. In November 1996, CVC acquired all of the issued and outstanding common stock of the Stock Shop from its stockholders, which included Mr. Wang and Mr. Daniel Cooper, officers, directors and stockholders of CVC, by an exchange of 1,300,000 shares of the CVC's Common Stock for 1,300,000 shares of the Stock Shop's common stock. In addition, CVC replaced options previously issued to employees of the Stock Shop with options to purchase the same number of shares of CVC's Common stock on the same terms, which included options to purchase 150,000 shares of the Stock Shop's common stock to Mr. Wang, options to purchase 50,000 shares to each of Messrs. Tilleli and McCabe and options to purchase 25,000 shares to Mr. Cooper. Each of these options to acquire CVC Common Stock were exchanged in September 1997 for options to acquire the Company's Common Stock. See "Management" and "Principal Stockholders." In September 1996, a company in which Victor Wang is a principal paid $1,000,000 to CVC. No additional stock was issued to Mr. Wang or his company as part of this transaction. For financial reporting purposes, the Company has accounted for this as a contribution to additional paid in capital and no portion of this $1,000,000 will be repaid. In September 1997, the Company completed an exchange offer as a result of which CVC became a majority owned (approximately 97%) subsidiary of the Company. Pursuant to the exchange, the Company issued an aggregate of 2,747,476 shares of its Common Stock and granted options to acquire up to 475,000 shares of its Common Stock. There exists the potential that an additional 230,000 options to acquire stock of CVC will be granted to certain of CVC's current and former principals, thereby decreasing the percentage of ownership the Company has in CVC. However, even if all 230,000 CVC options are granted and exercised, CVC will continue to be a majority owned subsidiary of the Company. In the future, the Company will present all proposed transactions between the Company and its officers, directors or 5% stockholders, and their affiliates to the Board of Directors for its consideration and approval. Any such transaction will require approval by a majority of the disinterested directors and such transactions will be on terms no less favorable than those available to disinterested third parties. 38 DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, $.0001 par value per share, and 1,000,000 shares of "blank check" preferred stock, $.0001 par value per share. As of the date of the Prospectus, 2,797,476 shares of Common Stock and no shares of Preferred Stock are issued and outstanding. The following are brief descriptions of the securities offered hereby and other securities of the Company. The rights of the holders of shares of the Company's capital stock are established by the Company's certificate of incorporation, the Company's by-laws and Delaware law. The following statements do not purport to be complete or give full effect to statutory or common law, and are subject in all respects to the applicable provisions of the certificate of incorporation, by-laws and state law. UNITS Each Unit consists of one share of Common Stock and one Warrant to purchase one share of Common Stock. The securities comprising the Units will be separately tradable or transferable immediately upon issuance. COMMON STOCK Holders of the Common Stock are entitled to one vote per share, and subject to the rights of holders of the of preferred stock, if any, to receive dividends when, as and if declared by the Board of Directors and to share ratably in the assets of the Company legally available for distribution to holders of Common Stock in the event of the liquidation, dissolution or winding up of the Company. Holders of the Common Stock do not have subscription, redemption, conversion or preemptive rights. Each share of Common Stock is entitled to one vote on any matter submitted to the holders, including the election of directors. Holders of Common Stock do not have cumulative voting rights. Therefore, holders of a majority of the outstanding shares of Common Stock entitled to vote for the election of directors may elect all of the directors to be elected, if they so choose, and in such event, the holders of the remaining shares will not be able to elect any of the Company's directors. Except as otherwise required by the Delaware General Corporation Law, all stockholder action (other than the election of directors, who are elected by plurality vote), is subject to approval by a majority of the shares of Common Stock present at a stockholders' meeting at which a quorum (a majority of the issued and outstanding shares of Common Stock) is present in person or by proxy, or by written consent pursuant to Delaware law. All shares of Common Stock outstanding are fully paid and non-assessable, and the shares of Common Stock offered hereby and the shares of Common Stock issuable upon exercise of the Warrants, when issued upon payment of the purchase price set forth on the cover page of the Prospectus or payment of the exercise price specified in the Warrants, as the case may be, will be fully paid and non-assessable. The Board of Directors is authorized to issue additional shares of Common Stock within the limits authorized by the Company's Certificate of Incorporation without further stockholder action. The Company has agreed with the Underwriter that it will not issue any securities, including but not limited to shares of Common Stock, prior to , [three years from the Effective Date] except as disclosed in or contemplated by this Prospectus, without the prior written consent of the Underwriter. REDEEMABLE COMMON STOCK PURCHASE WARRANTS The Warrants offered hereby will be issued in registered form under a Warrant Agreement (the "Warrant Agreement") between the Company and Continental Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). 39 Each Warrant will be separately transferable and will entitle the registered holder thereof to purchase one share of Common Stock at $6.00 per share (subject to adjustment as described below) commencing 2000 (two years from the Effective Date) and ending, , 2003 (five years from the Effective Date) (the "Exercise Period"). The exercise price and the number of shares of Common Stock issuable upon the exercise of each Warrant are subject to adjustment in the event of a stock split, stock dividend, recapitalization, merger, consolidation or certain other events. A holder of Warrants may exercise such Warrants by surrendering the certificate evidencing such Warrants to the Warrant Agent, together with the form of election to purchase on the reverse side of such certificate attached thereto properly completed and executed and the payment of the exercise price and any transfer tax. If less than all of the Warrants evidenced by a Warrant certificate are exercised, a new certificate will be issued for the remaining number of Warrants. The Company has authorized and reserved for issuance a number of shares of Common Stock sufficient to provide for the exercise of the Warrants. When issued, upon payment of the exercise price specified in the Warrants, each share of Common Stock will be fully paid and nonassessable. Holders of Warrants will not have any voting or other rights as stockholders of the Company unless and until Warrants are exercised and shares issued pursuant thereto. Under certain conditions, the Warrants may be redeemed by the Company after , 1999 with the prior written consent of the Underwriter at a redemption price of $.10 per Warrant upon not less than 30 days prior written notice to the holders of such Warrants, provided the closing bid price of the Common Stock has been at least $7.50 for 20 consecutive trading days ending on the third day prior to the date the notice of redemption is given. The Warrants will be exercisable until the close of business on the day immediately preceding the date fixed for the redemption of the Warrants in the notice of redemption. The Company will pay the Underwriter a fee of 5% of the exercise price of each Warrant exercised, provided (i) the market price of the Common Stock on the date the Warrant was exercised was equal to or greater than the Warrant exercise price on that date, (ii) the funds constituting the exercise price of the Warrant was solicited by the Underwriter, (iii) the Warrant was not held in a discretionary account, (iv) the disclosure of compensation arrangements was made in documents provided to the holders of the Warrants, (v) the solicitation of the exercise of the Warrant was not a violation of Rule 101 of Regulation M under the Exchange Act and (vi) the Underwriter is designated in writing as the soliciting NASD member. The Underwriter and any other soliciting broker/dealers will be prohibited from engaging in any market making activities or solicited brokerage activities with regard to the Company's securities during the periods prescribed by Rule 101 of Regulation M before the solicitation of any Warrant until the later of the termination of such solicitation activity or the termination of any right the Underwriter and any other soliciting broker/dealer may have to receive a fee for the solicitation of the exercise of the Warrants. For a holder of a Warrant to exercise the Warrant, there must be a current registration statement on file with the Securities and Exchange Commission and various state securities commissions. The Company will be required to file post-effective amendments to the registration statement when events require such amendments and to take appropriate action under the state securities laws. While it is the Company's intention to file post-effective amendments when necessary and to take appropriate action under state securities laws, there can be no assurance that the Company will file all post-effective amendments required to maintain the effectiveness of the registration statement or that the Company will take all appropriate action under state securities laws. If the registration statement is not kept current for any reason, the Warrants will not be exercisable, and holders thereof may be deprived of value. PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without further stockholder approval, to issue 40 preferred stock with dividend, liquidation, conversion, voting or other rights that could decrease the amount of earnings and assets available for distribution to holders of Common Stock or adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. As of the date of the Prospectus, no shares of preferred stock are outstanding. The Company has no present intention to issue any shares of preferred stock. The Company has agreed with the Underwriter that, except for issuances disclosed in or contemplated by this Prospectus, it will not issue any securities, including but not limited to any shares of preferred stock, prior to , 2001 without the prior written consent of the Underwriter. STATUTORY PROVISIONS AFFECTING STOCKHOLDERS Following the consummation of the Offering, the Company will be subject to Section 203 of the Delaware General Corporation Law, the State of Delaware's "business combination" statute. In general, such statute prohibits a publicly held Delaware corporation from engaging in various business combination" transactions with any "interested stockholder" for a period of three years after the date of the transaction in which the person became an "interested stockholder," unless (i) the transaction is approved by the Board of Directors prior to the date the interested stockholder obtained such status; (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date the "business combination" is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" includes mergers, asset sales and other transactions. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. REPORTS TO STOCKHOLDERS The Company intends to furnish its stockholders with annual reports containing financial statements audited and reported upon by its independent certified public accountants after the end of each fiscal year, and will make available such other periodic reports as the Company may deem to be appropriate or as may be required by law. The Company's fiscal year end December 31. The Company has filed a Registration Statement on Form 8-A with the Commission to register under, and be subject to the reporting requirements of, the Exchange Act. TRANSFER AGENT AND WARRANT AGENT The Company has engaged Continental Stock Transfer & Trust Co. to act as Transfer Agent for the Company's Units and Common Stock and Warrant Agent for the Warrants. 41 SHARES ELIGIBLE FOR FUTURE SALE All of the 2,797,476 shares of Common Stock of the Company outstanding as of the date of this Prospectus, are "restricted securities." Of this amount 2,048,675 are owned by "affiliates" of the Company, as those terms are defined in Rule 144 promulgated under the Securities Act. Absent registration under the Securities Act, the sale of such shares is subject to Rule 144, as promulgated under the Securities Act. In general, under Rule 144, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted shares of Common Stock for at least one year is entitled to sell in brokerage transactions, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or if the Common Stock is quoted on NASDAQ or a stock exchange, the average weekly trading volume during the four calendar weeks preceding the sale. Rule 144 also permits a person who presently is not and who has not been an affiliate of the Company for at least three months immediately preceding the sale and who has beneficially owned the shares of Common Stock for at least two years to sell such shares without regard to any of the volume limitations as described above. Holders of 2,757,475 shares of Common Stock have certain registration rights. All of the Company's existing securityholders, including those with registration rights, have agreed not to sell or otherwise dispose of any of their shares of Common stock now owned or issuable upon the exercise of currently exercisable warrants for a period of two years from the date of this Prospectus, without the prior written consent of the Underwriter. No prediction can be made as to the effect, if any, that sales of shares of Common Stock or the availability of such shares for sale will have on the market prices of the Company's securities prevailing form time to time. The possibility that substantial amounts of Common Stock may be sold under Rule 144 into the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital in the future through the sale of equity securities. 42 UNDERWRITING Briarwood Investment Counsel Inc. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company 1,500,000 Units, each consisting of one share of Common Stock and one Warrant. The Underwriter is committed to purchase and pay for all of the Units offered hereby if any of such securities are purchased. The Units are being offered by the Underwriter subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Units to the public at the public offering price set forth on the cover page of this Prospectus. The Underwriter may allow to certain dealers who are members of the National Association of Securities Dealers, Inc. the ("NASD") concessions, not in excess of $ per Unit. The Company has granted to the Underwriter an option, exercisable for 45 days from the date of this Prospectus, to purchase up to 225,000 additional Units at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriter may exercise this option from time to time, in whole or in part, solely for the purpose of covering overallotments, if any, made in connection with the sale of the Units offered hereby. The Company has agreed to pay to the Underwriter a nonaccountable expense allowance of 3% of the gross proceeds of this offering ($229,500). The Company has also agreed to pay all expenses in connection with qualifying the shares of Common Stock and Warrants included in the Units offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to sell to the Underwriter and its designees, for an aggregate of $10.00 warrants (the "Underwriter's Warrants") to purchase up to 150,000 shares of Common Stock at an exercise price of $5.50 per share and 150,000 Warrants at an exercise price of $.11 per Warrant (110% of the public offering price per Security). The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year from the date of this Prospectus, except to the officers and partners of the Underwriter or members of the selling group, and are exercisable during the four-year period commencing one year from the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at nominal cost, the opportunity to profit form a rise in the market price of the Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's shareholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the Sale of the Underwriter's Warrants, the underlying shares of Common Stock or the underlying Warrants, or the shares of Common Stock issuable upon any exercise of such underlying Warrants, may be deemed additional underwriting compensation. Subject to certain limitations and exclusions, the Company has agreed, at the request of the holders of a majority of the Underwriter's Warrants, at the Company's expense, to register the Underwriter's Warrants, the shares of Common Stock and Warrants underlying the Underwriter's Warrants, and the shares of Common Stock issuable upon exercise of the underlying Warrants, under the Securities Act on one occasion during the three-year period commencing one year from the date of this Prospectus and to include such Underwriter's Warrants and such underlying securities in any appropriate registration statement which is filed by the Company during the Warrant Exercise Term. The Units issuable upon exercise of the Underwriter's Warrant and the Securities of which the Units are comprised of are being registered by this Prospectus. Additionally, the Company has granted the Underwriter piggyback registration rights with respect to these Securities for a period of seven years. 43 The Company has agreed, in connection with the exercise of the Warrants pursuant to solicitation (commencing one year from the date of this Prospectus), to pay to the Underwriter a fee of 5% of the exercise price for each Warrant exercised, provided, however, that the Underwriter will not be entitled to receive such compensation in Warrant exercise transactions in which (i) the market price of Common Stock at the time of exercise is lower than the exercise price of the Warrants; (ii) the Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made, in addition to the disclosure provided in this Prospectus, in documents provided to holders of the Warrants at the time of exercise; (iv) the exercise of Warrants is unsolicited by the Underwriter; or (v) the solicitation of exercise of the Warrants was in violation of Regulation M promulgated under the Exchange Act. The Company has agreed, for a period of three years from the date of this Prospectus, to engage a designee of the Underwriter as a non-voting advisor to the Company's Board of Directors or, at the Underwriter's request, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company. The Underwriter has not yet, and has no current intention to exercise its right to designate such person. In addition, the Company has agreed to enter into a consulting agreement to retain the Underwriter as a financial consultant for a period of two years following the consummation of this offering at a monthly fee of $2,083.34 (or an aggregate of $50,000), $25,000 of which aggregate fee is payable upon the closing of this Offering and the balance on the first anniversary thereof. The consulting agreement will not require the consultant to devote a specific amount of time to the performance of its duties thereunder. It is anticipated that these consulting services will be provided by principals of the Underwriter and/or members of the Underwriter's corporate finance department who, however, have not been designated as of the date hereof. In the event that the Underwriter originates a financing or a merger, acquisition, joint venture or other transaction to which the Company is a party, the Underwriter will be entitled to receive a finder's fee in consideration for origination of such transaction. The Company has agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act. The Company's officers, directors and shareholders have agreed not to sell or otherwise dispose of any of their shares of Common Stock for a period of two years from the date of this Prospectus, without the prior written consent of the Underwriter other than in connection with private transfers pursuant to which the transferees agree to be bound by the same provisions. Prior to this offering, there has been no public trading market for the Units or the Common Stock or Warrants. Consequently, the initial public offering price of the Units and the exercise price of the Warrants have been determined by negotiations between the Company and the Underwriter. Among the factors consider in determining the initial public offering price and the exercise price were the Company's financial condition and prospects, management, market prices of similar securities of comparable publicly-traded companies, certain financial and operating information of companies engaged in activities similar to those of the Company and the general condition of the securities markets. Although it has no obligation to do so, the Underwriter intends to engage in market-making actives or solicited brokerage activities with respect to the purchase or sale of Common Stock or Warrants in the over-the-counter market where such securities will trade. However, no assurance can be given that the Underwriter will continue to participate as a market maker in the securities of the Company or that another broker/dealer will make a marker in such securities. The Underwriter has the right to act as the Company's exclusive agent in connection with any future solicitation of holders of the Warrants to exercise their Warrants. Unless granted an exemption by the Securities and Exchange Commission from Regulation M under the Exchange Act, the Underwriter will be prohibited from engaging in any market-making activities or solicited brokerage activities with regard to the Company's securities during the period prescribed by Regulation M before the solicitation of the exercise of any Warrant based upon a prior solicitation until the later of the termination of such solicitation activity or the termination by waiver or 44 otherwise of any right the Underwriter many have to receive a fee for the exercise of the Warrants following such solicitation. As a result, the Underwriter and soliciting broker/dealers may be unable to continue to make a market for the Company's securities during certain periods while the Warrants are exercisable. Such a limitation, while in effect, could impair the liquidity and market price of the Company's securities. While certain officers of the Underwriter have significant experience in corporate financing and the underwriting of securities, the Underwriter has not previously underwritten any public offering. Accordingly, there can be no assurance that the Underwriter's limited public offering experience will not affect the Company's offering of the Units and subsequent development of a trading market, if any. LEGAL MATTERS Certain legal matters in connection with the securities being offered hereby will be passed upon the Company by Gersten, Savage, Kaplowitz & Fredericks, LLP ("GSKF"), New York, New York. GSKF owns 110,000 shares of Common Stock and 50,000 Warrants which are identical to the Warrants offered hereby. Certain legal matters will be passed upon for the Underwriter by Zimet, Haines, Friedman & Kaplan, New York, New York. EXPERTS The financial statements of the Company included in this Prospectus have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods (which contain an explanatory paragraph regarding uncertainties relating to the Company being a going concern) set forth in their report appearing elsewhere herein, and is included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The financial statements of Cooper Firearms, Inc. included in this Prospectus have been audited by David Tarlow & Co., P.C., independent certified public accountants, to the extent and for the periods set forth in their report appearing elsewhere herein, and is included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form SB-2 under the Securities Act with respect to the Securities offered hereby (the "Registration Statement"). This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits thereto as permitted by the Rules and Regulation of the Commission. For further information with respect to the Company and such securities, reference is made to the Registration Statement and to the exhibits filed therewith. Statements contained in this Prospectus as to the contents of any contracts or other document referred to herein are not necessarily complete and where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all aspects by the provision of such exhibit to which reference is made for a full statement of the provisions thereof. The Registration Statement including exhibits filed therewith, may be inspected, without charge, at the principal office of the Commission located at 450 Fifth Street N.W., Room 1024, Washington, D.C. 20549. Copies of all or any part of the Registration Statement (including the exhibits thereto) also may be obtained from the Public Reference Section of the Commission at its principal office in Washington, D.C., at the Commission's prescribed rates. Electronic registration statements filed through the Electronic Data Gathering Analysis and Retrieval system are publicly available through the Commission's web site at http: //www.sec.gov. On the date of the Prospectus, the Company will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will file reports, proxy and information statements and other information with the Securities and Exchange 45 Commission. Such reports, proxy and information statements and other information can be inspected and copies at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material also may be obtained from the Public Reference Section of the Commission at prescribed rates. The Commission maintains a web site at http: //www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically. The Company intends to furnish its stockholders with annual reports containing audited financial statements and such other reports containing audited financial statements and such other reports as the Company deems appropriate or as may be required by law. 46 INDEX TO FINANCIAL STATEMENTS
PAGE NO. ----------- CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES Report of Independent Certified Public Accountants...................................................... F-1 Financial Statements: Consolidated Balance Sheets........................................................................... F-2 Consolidated Statements of Operations................................................................. F-3 Consolidated Statements of Stockholders' Equity....................................................... F-4 Consolidated Statements of Cash Flows................................................................. F-5 Notes to Consolidated Financial Statements............................................................ F-7 COOPER FIREARMS, INC. Report of Independent Certified Public Accountants...................................................... F-20 Financial Statements: Statements of Operations.............................................................................. F-21 Statements of Stockholders' Equity.................................................................... F-22 Statements of Cash Flows.............................................................................. F-23 Notes to Financial Statements......................................................................... F-24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Officers and Directors Connecticut Valley Sports, Inc. Stevensville, Montana We have audited the accompanying consolidated balance sheet of Connecticut Valley Sports, Inc. (formerly Connecticut Valley Classics, Inc.) and Subsidiaries as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Connecticut Valley Sports, Inc. and Subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 3 to the financial statements, the company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO SEIDMAN, LLP --------------------------------------- BDO Seidman, LLP
New York, New York February 15, 1997, except for Note 1 which is September 17, 1997 F-1 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- UNAUDITED ASSETS CURRENT ASSETS Cash................................................................................ $ 231,534 $ 24,790 Accounts receivable, net of allowance for doubtful accounts of $47,860 in 1996 and $20,643 in 1997............................................................... 46,653 48,034 Inventories......................................................................... 475,827 477,329 Other current assets................................................................ 18,862 7,872 ------------ ------------- Total current assets................................................................ 772,876 558,025 ------------ ------------- PROPERTY AND EQUIPMENT Property and equipment, at cost, less accumulated depreciation of $182,884 in 1996 and $265,486 in 1997.............................................................. 278,454 353,566 ------------ ------------- DEFERRED COSTS Deferred costs, less accumulated amortization of $101,590 in 1996 and $119,064 in 1997.............................................................................. 29,513 152,039 ------------ ------------- OTHER ASSETS Due from stockholders............................................................... 30,000 30,000 Due from affiliated companies....................................................... 14,269 14,270 Other assets........................................................................ 1,000 -- ------------ ------------- Total other assets.............................................................. 45,269 44,270 ------------ ------------- Total assets.................................................................... $1,126,112 $ 1,107,900 ------------ ------------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable and accrued expenses............................................... $ 280,022 $ 306,485 Customer deposits................................................................... 16,425 31,199 Federal excise tax payable.......................................................... 60,454 46,205 Notes payable....................................................................... 41,740 42,906 Notes payable to stockholders....................................................... 23,770 22,450 Accrued interest.................................................................... 42,150 62,400 Due to affiliated companies......................................................... 108,232 123,323 ------------ ------------- Total current liabilities....................................................... 572,793 634,968 Notes payable--less current maturities.............................................. -- 84,203 Notes payable to stockholders....................................................... 300,000 300,000 Deferred credit on acquisition...................................................... 126,564 124,171 ------------ ------------- Total liabilities............................................................... 999,357 1,143,342 ------------ ------------- Commitments and Contingencies STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock $.0001 par value, 1,000,000 shares authorized and -0- shares issued and outstanding in 1997........................................................... -- -- Common stock $.01 par value, 3,000,000 shares authorized and 2,655,471 shares issued and outstanding in 1996 and $.0001 par value, 30,000,000 shares authorized and 2,747,476 shares issued and outstanding in 1997................................... 26,555 275 Additional paid-in-capital.......................................................... 2,872,769 3,376,352 Accumulated deficit................................................................. (2,772,569) (3,412,069) ------------ ------------- Total stockholders' equity (deficit)............................................ 126,755 (35,442) ------------ ------------- Total liabilities and stockholders' equity...................................... $1,126,112 $ 1,107,900 ------------ ------------- ------------ -------------
The accompanying notes are an integral part of these financial statements. F-2 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- -------------------------- 1995 1996 1996 1997 ------------ ------------- ------------ ------------ UNAUDITED Net sales................................................ $ 74,744 $ 244,725 $ 193,796 $ 365,378 Cost of goods sold....................................... 339,246 576,153 355,127 638,311 ------------ ------------- ------------ ------------ Gross profit (loss)...................................... (264,502) (331,428) (161,331) (272,933) ------------ ------------- ------------ ------------ OPERATING EXPENSES Selling, general and administrative expenses........... 332,206 685,800 570,157 456,827 Writedown of inventory to lower of cost or market........ 150,000 -- -- -- Bad debts................................................ -- 73,387 85,574 193 ------------ ------------- ------------ ------------ Total operating expenses............................... 482,206 759,187 655,731 457,020 ------------ ------------- ------------ ------------ Operating loss......................................... (746,708) (1,090,615) (817,062) (729,953) ------------ ------------- ------------ ------------ OTHER INCOME (EXPENSE) Other income............................................. -- 11,230 10,166 2,594 Interest expense......................................... (35,755) (29,923) (42,303) (26,164) ------------ ------------- ------------ ------------ Total other income (expense)........................... (35,755) (18,693) (32,137) (23,570) ------------ ------------- ------------ ------------ Loss before minority interests........................... (782,463) (1,109,308) (849,199) (753,523) Minority interests in net loss of subsidiary............. -- 6,644 2,437 -- ------------ ------------- ------------ ------------ Net loss............................................... $ (782,463) $ (1,102,664) $ (846,762) $ (753,523) ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Loss per share........................................... $ (0.75) $ (0.44) $ (0.35) $ (0.27) ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Weighted average number of shares outstanding............ 1,040,893 2,488,466 2,410,972 2,803,558 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------
The accompanying notes are an integral part of these financial statements. F-3 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' ----------------------- PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT (DEFICIT) ---------- ----------- ------------ ------------- -------------- YEAR ENDED DECEMBER 31, 1995 Balance--January 1, 1995.................. 470,000 $ 210,000 $ 238,442 $ (887,442) $ (439,000) Issuance of stock......................... 860,000 8,600 39,123 47,723 Reorganization............................ -- (205,300) 205,300 -- Proceeds from private placement........... 237,269 2,373 816,204 818,577 Expenses related to private placement..... (182,981) (182,981) Stockholder loans contributed to capital................................. 365,180 365,180 Net loss--year ended December 31, 1995.... (782,463) (782,463) ---------- ----------- ------------ ------------- -------------- Balance--December 31, 1995................ 1,567,269 $ 15,673 $ 1,481,268 $ (1,669,905) $ (172,964) ---------- ----------- ------------ ------------- -------------- ---------- ----------- ------------ ------------- -------------- YEAR ENDED DECEMBER 31, 1996 Balance--January 1, 1996.................. 1,567,269 $ 15,673 $ 1,481,268 $ (1,669,905) $ (172,964) Issuance of stock......................... 910,000 9,100 58,699 67,799 Contribution of capital................... 1,000,000 1,000,000 Proceeds from private placement........... 178,202 1,782 406,606 408,388 Expenses related to private placement..... (73,804) (73,804) Net loss--year ended December 31, 1996.... (1,102,664) (1,102,664) ---------- ----------- ------------ ------------- -------------- Balance--December 31, 1996................ 2,655,471 $ 26,555 $ 2,872,769 $ (2,772,569) $ 126,755 ---------- ----------- ------------ ------------- -------------- ---------- ----------- ------------ ------------- -------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 UNAUDITED Balance--January 1, 1997.................. 2,655,471 $ 26,555 $ 2,872,769 $ (2,772,569) $ 126,755 Proceeds from private placement........... 183,993 1,840 706,533 708,373 Expenses related to private placement..... (117,047) (117,047) Acquisition of minority interest in Cooper Firearms, Inc........................... 790 8 (8) -- -- Acquisition of and reorganization as Connecticut Valley Sports, Inc.......... (92,778) (28,128) (85,895) 114,023 -- Net loss--nine months ended September 30, 1997.................................... (753,523) (753,523) ---------- ----------- ------------ ------------- -------------- Balance--September 30, 1997............... 2,747,476 $ 275 $ 3,376,352 $ (3,412,069) $ (35,442) ---------- ----------- ------------ ------------- -------------- ---------- ----------- ------------ ------------- --------------
The accompanying notes are an integral part of these financial statements. F-4 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------------------- 1995 1996 1996 1997 ----------- ------------- ------------ ----------- UNAUDITED CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................................ $ (782,463) $ (1,102,664) $ (846,762) $ (753,523) Adjustments to reconcile net loss to net cash used by operating activities: Minority interest in net loss of subsidiary................. -- (6,644) (2,437) -- Depreciation and amortization............................... 73,874 104,996 68,465 97,579 Changes in operating assets, net of effect of acquisition of Cooper Firearms, Inc.: (Increase) decrease: Accounts receivable................................... (22,188) 47,915 (10,312) (1,381) Inventories........................................... 34,846 (87,873) 76,734 (1,502) Other current assets.................................. (14,544) 4,773 13,035 10,990 Other assets.......................................... (1,000) -- -- 1,000 Increase (decrease) in: Accounts payable and accrued expenses................. 125,339 (69,053) (129,086) 26,463 Customer deposits..................................... (12,756) 9,891 34,377 14,774 Federal excise tax payable............................ -- (51,924) (8,222) (14,249) Accrued interest payable.............................. 15,150 27,000 38,203 20,250 ----------- ------------- ------------ ----------- Net cash used by operating activities........................... (583,742) (1,123,583) (766,005) (599,599) ----------- ------------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Repayment of loan receivable.................................... -- 13,000 13,000 -- Acquisition of subsidiary....................................... -- (30,000) (30,000) -- Cash of acquired subsidiary..................................... -- 37,477 37,477 -- Purchases of property and equipment............................. (171,401) (126,205) (77,412) (157,611) Advance of loan receivable...................................... (13,000) -- -- -- Deferred costs.................................................. (4,232) -- -- -- ----------- ------------- ------------ ----------- Net cash used by investing activities........................... (188,633) (105,728) (56,935) (157,611) ----------- ------------- ------------ -----------
F-5 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------------------- 1995 1996 1996 1997 ----------- ------------- ------------ ----------- UNAUDITED CASH FLOWS FROM FINANCING ACTIVITIES Proceeds of loans payable....................................... 47,115 1,225 1,225 98,900 Advances from stockholders...................................... 507,151 92,170 92,170 -- Advances to stockholders........................................ -- (94,269) (80,000) -- Repayment of loan receivable from stockholder................... -- 50,000 -- -- Repayments to stockholders...................................... -- (163,100) (52,122) (1,320) Advances from affiliates........................................ -- 108,232 16,330 15,091 Proceeds from private placement................................. 818,577 408,388 408,388 708,373 Expenses related to private placement........................... (182,981) (73,804) (73,804) (117,047) Capital contributed............................................. -- 1,000,000 1,000,000 -- Issuance of stock............................................... 47,723 67,799 67,799 -- Deferred costs.................................................. -- -- -- (140,000) Repayment of notes payable...................................... (405,000) -- -- (13,531) ----------- ------------- ------------ ----------- Net cash provided by financing activities....................... 832,585 1,396,641 1,379,986 550,466 ----------- ------------- ------------ ----------- Net increase (decrease) in cash............................... 60,210 167,330 557,046 (206,744) Cash at beginning of period..................................... 3,994 64,204 64,204 231,534 ----------- ------------- ------------ ----------- Cash at end of period........................................... $ 64,204 $ 231,534 $ 621,250 $ 24,790 ----------- ------------- ------------ ----------- ----------- ------------- ------------ ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Notes payable to stockholders transferred to additional paid-in capital....................................................... $ 365,180 $ -- $ -- The company purchased all of the preferred stock and 91.65% of the common stock of Cooper Firearms, Inc. for $30,000. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired............................... $ -- $ 310,479 $ 310,479 $ -- Cash paid for the capital stock............................. -- (30,000) (30,000) -- ----------- ------------- ------------ ----------- Liabilities assumed....................................... $ -- $ 280,479 $ 280,479 $ -- ----------- ------------- ------------ ----------- ----------- ------------- ------------ ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest.......................................... $ 20,605 $ 23,190 $ 4,100 $ 10,094 Cash paid for income taxes...................................... $ 317 $ 1,291 $ 1,243 $ 1,464
The accompanying notes are an integral part of these financial statements. F-6 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 1--ORGANIZATION AND NATURE OF BUSINESS Connecticut Valley Sports, Inc. ("CVS") was incorporated on March 28, 1996 under the laws of the State of Delaware. On September 17, 1997, CVS, an inactive shell corporation acquired 2,747,476 shares of common stock representing 96.73% of the outstanding stock of Connecticut Valley Classics, Inc. ("CVC"). The surviving entity changed its name from CVC to Connecticut Valley Sports, Inc. Pursuant to the terms of the acquisition, CVC shareholders exchanged their stock for shares in CVS on a one for one basis. CVC is the continuing entity for financial reporting purposes, and the financial statements prior to September 17, 1997 represent its financial position and results of operations. The assets, liabilities and results of operations of CVS (which were minimal) are included as of September 17, 1997. CVS and its subsidiaries manufacture and sell custom quality production bolt action rifles and high quality shot guns used for both sport hunting and competition. The company also manufactures and sells firearm stocks used in the production of rifles. Customers are located throughout the United States and parts of Canada. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Connecticut Valley Sports, Inc. and its majority-owned subsidiaries Connecticut Valley Classics, Inc., The Stock Shop, Inc., and Cooper Firearms, Inc. All material intercompany transactions and balances have been eliminated. The consolidated statement of operations reflects amounts for Cooper Firearms, Inc. as of August 13, 1996, the date it was acquired. B) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C) INVENTORIES Inventories are valued at the lower of cost or market on a first-in, first-out basis. D) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided using accelerated methods over estimated useful lives of five to seven years for furniture and fixtures, molds and tools, and machinery and equipment and over the remaining term of the lease to which leasehold improvements relate. F-7 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E) ORGANIZATION AND START-UP COSTS Organization and start-up costs are stated at cost. Amortization is provided using the straight line method over a period of 36-60 months. F) REVENUE RECOGNITION Revenue from the sale of firearms is recognized when the product is shipped. G) INCOME TAXES The company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities, if any, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. H) STOCK-BASED COMPENSATION The company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25). Stock-based compensation includes all transactions under which employees receive shares of stock or other equity instruments (such as options) in the company or events where the company incurs liabilities to employees in amounts that are based on the price of its stock. Under APB 25, the company recognizes compensation expense for employee options in the amount of the excess of the fair value of stock underlying options over the exercise price of such options. The expense is recorded on the date the company issues stock or grants options as compensation. I) LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which requires that certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This standard is effective for fiscal years that begin after December 15, 1995. The company's adoption of this pronouncement on January 1, 1996 did not have a material impact on the company's consolidated financial statements. J) DEFERRED CREDIT Deferred credit on acquisition (negative goodwill arising from the acquisition of Cooper Firearms, Inc. described in Note 13) is amortized on a straight-line basis over its estimated useful life of 40 years. F-8 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K) INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of September 30, 1997, and for the nine months ended September 30, 1996 and 1997 reflect all adjustments (consisting of recurring accruals) management considers necessary for a fair presentation of financial position, results of operations and cash flows. Results of operations for the nine months ended September 30, 1997 are not indicative of results to be expected for the year. L) LOSS PER SHARE DATA Net loss per common and common equivalent share using the weighted average number of common and common equivalent shares outstanding was computed by applying Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83). Pursuant to SAB 83, common and common equivalent shares issued by the company during the twelve months immediately preceding its initial public offering at a price below the initial public offering price together with common share equivalents which result from the grant of common stock options and warrants having exercise prices below the initial public offering price during the same period have been included in the calculation of the shares used in computing net loss per share as if they were outstanding for all periods prior to the initial public offering. Net loss per share for these periods has been computed using the treasury stock method, under which the number of shares outstanding reflects an assumed use of the proceeds from the issuance of such shares and from the assumed exercise of such options and warrants to repurchase shares of the company's common stock at the initial public offering price. M) RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective for financial statements issued for periods ending after December 15, 1997. Statement 128 simplifies the computation of earnings per share by replacing the presentation of primary earnings per share with a presentation of basic earnings per share, as defined. The statement requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. Statement 128 is not expected to have a significant impact on the company's financial statements. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement 130") and Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("Statement 131") were issued. Statement 130 addresses standards for reporting and display of comprehensive income and its components, and Statement 131 requires disclosure of reportable operating segments. Both statements are effective for the Company's 1998 fiscal year. These pronouncements are not expected to materially affect the company's financial statements. F-9 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 3--GOING CONCERN As shown in the accompanying financial statements, the company has incurred substantial recurring operating losses. This raises substantial doubt about the company's ability to continue as a going concern. Management believes the company will generate new business and improve operating efficiency in future years. In addition, the company intends to raise funds through a public offering of its common stock. Management believes that the proceeds from the offering will be sufficient to provide working capital until the company is able to increase revenues and improve operating efficiency. If the company is not able to complete the public offering, generate significant new business or reduce its expenses, it is possible operations will be discontinued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 4--INVENTORIES Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Finished goods.................................................. $ 101,791 $ 47,763 Work in process................................................. 42,235 62,493 Raw materials................................................... 331,801 367,073 ------------ ------------- $ 475,827 $ 477,329 ------------ ------------- ------------ -------------
NOTE 5--PROPERTY AND EQUIPMENT Major classifications of property and equipment and their respective depreciable lives are as follows:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Furniture and fixtures.......................................... $ 11,159 $ 10,898 Molds and tools................................................. 304,625 323,982 Machinery and equipment......................................... 132,840 264,568 Leasehold improvements.......................................... 12,714 19,604 ------------ ------------- 461,338 619,052 Accumulated depreciation........................................ (182,884) (265,486) ------------ ------------- Property and equipment, net................................... $ 278,454 $ 353,566 ------------ ------------- ------------ -------------
Depreciation expense amounted to $46,019 and $77,879 for the years ended December 31, 1995 and 1996, and $46,934 and $82,501 for the nine months ended September 30, 1996 and 1997, respectively. F-10 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 6--DEFERRED COSTS Major classifications of deferred costs and their respective amortization periods are as follows:
AMORTIZATION DECEMBER 31, SEPTEMBER 30, PERIOD 1996 1997 ------------ ------------ ------------- Display models.................................... 36 months $ 15,425 $ 15,425 Organization costs................................ 60 months 36,406 36,406 Start-up costs.................................... 60 months 79,272 79,272 Stock issuance costs.............................. -- 140,000 ------------ ------------- 131,103 271,103 Accumulated amortization.......................... (101,590) (119,064) ------------ ------------- Deferred costs, net............................... $ 29,513 $ 152,039 ------------ ------------- ------------ -------------
The stock issuance costs are related to a proposed public offering of the company's common stock. If the offering does not take place, these costs will be expensed. NOTE 7--NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- First Security Bank, due July, 1996, interest at 8.75% per annum, secured by all of the former assets of SSLLC with a book value of approximately $87,000. This note was refinanced with Rocky Mountain Bank (see below) in 1997.................. $ 41,740 $ -- Rocky Mountain Bank, due January, 2000, interest at 9.25% per annum, collateral-ized by a $20,000 Certificate of Deposit (included in cash), monthly payments inclusive of interest of $1,339.86..................................................... -- 35,060 Equipment lease, due January, 2002, interest at 8.85% per annum, monthly payments inclusive of interest of $1,735.30, collateralized by equipment with a book value of $98,705 at June 30, 1997................................................. -- 77,049 Rocky Mountain Bank, due September, 1998, interest at 8.1% per annum......................................................... -- 15,000 ------------ ------------- 41,740 127,109 Less: Current portion........................................... 41,740 42,906 ------------ ------------- Long-term debt.................................................. $ -- $ 84,203 ------------ ------------- ------------ -------------
F-11 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 7--NOTES PAYABLE (CONTINUED) Maturities of long-term debt are as follows:
YEARS ENDED SEPTEMBER 30, - -------------------------------------------------------------- 1998.......................................................... $ 42,906 1999.......................................................... 30,537 2000.......................................................... 24,539 2001.......................................................... 19,004 2002.......................................................... 10,123 ---------- $ 127,109 ---------- ----------
NOTE 8--NOTES PAYABLE TO STOCKHOLDERS The company has notes payable to its stockholders as follows:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Notes payable to four (4) stockholders payable in eight (8) equal quarterly installments commencing November 1, 1998 inclusive of interest at 9%................................... $ 300,000 $ 300,000 Demand notes, non-interest bearing.............................. 23,770 22,450 ------------ ------------- 323,770 322,450 Less: Current portion........................................... (23,770) (22,450) ------------ ------------- Long-term debt.................................................. $ 300,000 $ 300,000 ------------ ------------- ------------ -------------
Maturities of long-term debt are as follows:
YEARS ENDED DECEMBER 31, - -------------------------------------------------------------- 1997.......................................................... $ 23,770 1998.......................................................... 37,500 1999.......................................................... 150,000 2000.......................................................... 112,500 ---------- $ 323,770 ---------- ----------
F-12 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 9--RELATED PARTY TRANSACTIONS The company and other entities controlled by its chairman have advanced funds to each other for operating purposes. Other than as described in Note 8, related party loans are non-interest bearing and have no scheduled repayment dates. In accordance with the intentions of the parties involved, the balances payable to affiliates have all been classified as current, and the balances due from shareholders and affiliates have been classified as non-current. The company has also issued options to certain executives. See Note 17. NOTE 10--INCOME TAXES The company had available net operating loss carryforwards for tax purposes at December 31, 1996. Due to a change in ownership, the availability of these losses to offset future taxable income is severely restricted. The company must continue to operate as a firearms manufacturer until 1998, and an annual limit on the use of prior losses based on the value of the company at the time of the ownership change multiplied by the long-term tax exempt rate will apply. This results in a limitation on utilization of the losses of approximately $2,000 per year and affects approximately $2,000,000 of the total available carryforward. The amounts and expiration dates of these losses are as follows:
EXPIRATION DATE DECEMBER 31, AMOUNT - ------------------------------------------------------------ ------------ 2006........................................................ $ 559,199 2007........................................................ 94,026 2008........................................................ 375,989 2009........................................................ 275,605 2010........................................................ 795,863 2011........................................................ 454,277 ------------ $ 2,554,959 ------------ ------------
As of December 31, 1996, the company has a net operating loss carryforward (after applying change of ownership limitations described above) of approximately $580,000 which results in a deferred tax asset of approximately $232,000 which has been offset by a valuation allowance. The consolidated statements of operations include losses of $129,766 and $40,939 for the years ended December 31, 1996 and 1995, respectively, incurred by The Stock Shop of Montana, LLC prior to its merger with The Stock Shop, Inc. Since SSLLC was taxed as a partnership under the provisions of Subchapter K of the Internal Revenue Code, this loss may only be deducted by SSLLC's members. NOTE 11--COMMITMENTS a) The company conducts its primary operations from a facility that is leased under an agreement which expires July 29, 1998. There is an option to renew the lease for an additional 12 months at $3,000 per month. The company has an option to purchase the property at fair market value which expires on July 10, F-13 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 11--COMMITMENTS (CONTINUED) 1998. The company is responsible for all costs of utilities, repairs, maintenance, upkeep, insurance, and real estate taxes in addition to the basic rent. The company leases a second facility under an agreement which expires on September 1, 1999. Future minimum rental payments under these leases are as follows:
YEARS ENDING YEARS ENDING DECEMBER 31, AMOUNT SEPTEMBER 30, AMOUNT - ------------------------------ ---------- ------------------------------ --------- 1997.......................... $ 55,075 1998.......................... $ 51,500 1998.......................... 43,250 1999.......................... 22,000 1999.......................... 16,000 ---------- --------- $ 114,325 $ 73,500 ---------- --------- ---------- ---------
Rent expenses for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 were $15,188, $29,465, $14,022 and $44,387, respectively. b) The company has employment agreements with its President of Manufacturing and its Production Manager that expire on March 31, 1999. Future minimum payments under the contracts are as follows:
YEARS ENDING DECEMBER 31, AMOUNT - -------------------------------------------------------------- ---------- 1997.......................................................... $ 78,000 1998.......................................................... 78,000 1999.......................................................... 19,500 ---------- $ 175,500 ---------- ----------
NOTE 12--SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The company has concentrated its credit risk for cash by maintaining accounts at Rocky Mountain Bank in excess of federal insurance limits. The maximum loss that would have resulted from that risk totalled $127,419 at December 31, 1996, for the excess of deposits over amounts that would have been covered by federal insurance. NOTE 13--MERGERS AND ACQUISITIONS In September 1996, The Stock Shop, Inc. ("SSI") acquired all of the assets of The Stock Shop of Montana, LLC ("SSLLC"), a company under common control, in exchange for the assumption of all of SSLLC's liabilities. The transaction has been accounted for in a manner similar to that in pooling-of-interests accounting and the operations of SSLLC have been recorded by SSI as of the beginning of the F-14 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED) year. SSI did not issue any new shares of stock as part of the transaction. The book value of SSLLC's net assets (liabilities) at the date of combination consisted of the following: Accounts receivable.............................................. $ 2,625 Prepaid expenses................................................. 452 Property and equipment, net of accumulated depreciation of $5,595......................................................... 8,383 Start-up costs, net of accumulated amortization of $1,058........ 3,174 Due from member.................................................. 80,000 Accounts payable and accrued expenses............................ (42,000) Notes payable (current).......................................... (47,215) Due to affiliated companies...................................... (140,602) --------- $(135,183) --------- ---------
On November 15, 1996, CVC acquired all of the outstanding stock of SSI in exchange for 1,300,000 shares of its own common stock. The transaction has been accounted for as a pooling-of-interests, and the operations of SSI are reflected for all periods presented. SSI's consolidated balance sheet (including the assets, liabilities and equity of SSLLC acquired in the pooling described above) as of December 31, 1995 was as follows: ASSETS CURRENT ASSETS Cash...................................................... $ 5,565 Accounts receivable....................................... 17,366 Inventory................................................. 7,319 Other current assets...................................... 900 --------- Total current assets.................................. $ 31,150 PROPERTY AND EQUIPMENT Property and equipment, at cost, less accumulated depreciation of $2,516.................................. 11,462 START-UP COSTS Start-up costs, net of accumulated amortization of $423... 3,809 --------- Total assets.......................................... $ 46,421 --------- ---------
F-15 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED) LIABILITIES AND MEMBERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable and accrued expenses..................... $ 29,422 Notes payable to LLC members.............................. 13,100 Notes payable--bank....................................... 47,115 --------- Total liabilities..................................... $ 89,637 Members' equity (deficit)................................. (43,216) --------- Total liabilities and members' equity (deficit)........... $ 46,421 --------- ---------
The company's consolidated statement of operations included the following amounts attributable to SSI:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- Revenues.................................... $ 87,038 $ 51,600 Net income (loss)........................... (40,939) (129,766)
The consolidated net loss for the year ended December 31, 1995 is comprised of the following: Net loss of CVC before effect of merger with SSI............................................ $(741,524) Net loss of SSLLC................................ (40,939) --------- Consolidated net loss............................ $(782,463) --------- ---------
Consolidated revenue for the year ended December 31, 1995 is the same amount as originally reported by CVC prior to the merger with SSI. On August 13, 1996, the company acquired all of the preferred stock and 91.65% of the common stock of Cooper Firearms, Inc. for $30,000. The transaction has been accounted for under the purchase method for financial reporting purposes. The deferred credit which arose from the purchase of this stock at a discount is being amortized over a period of 40 years. Pro forma information assuming the acquisition had occurred on January 1, 1995 is as follows:
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ---------------------------- SEPTEMBER 30, 1995 1996 1996 ------------- ------------- ------------- Revenues..................... $ 1,028,746 $ 833,795 $ 782,866 Net loss..................... $ (1,284,775) $ (1,294,382) $(1,034,273)
F-16 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED) On August 15, 1997, the company issued 790 shares of its common stock in exchange for an additional 5.79% interest in Cooper Firearms, Inc. The company issued one share of CVC stock for every ten shares of Cooper Firearms, Inc. stock exchanged. NOTE 14--REGULATION OF FIREARMS BY U.S. GOVERNMENT As a manufacturer of firearms, the company must comply with the regulations of the Bureau of Alcohol, Tobacco and Firearms. Requirements include an accountability of each serial numbered gun and the payment of an 11% federal excise tax as the guns are shipped and invoiced. Failure to comply with these regulations can lead to fines and suspension of manufacturing and sales operations. NOTE 15--CONTINGENCIES The company has been notified that an individual injured himself while firing a weapon produced by the company. This individual has retained counsel. Management intends to vigorously defend this matter and has referred it to its insurance company. The insurer has not yet determined whether this is a covered claim under the policy. The amount or range of potential loss cannot be reasonably estimated at this time, but management does not expect it to be material. No accrual has been made for this loss contingency in the financial statements. NOTE 16--FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash, accounts receivable and accounts payable and accrued expenses approximated fair value as of December 31, 1996 because of the relatively short-term maturity of these instruments. The carrying values of long-term receivables and long-term debt, including the current portion, approximated fair value as of December 31, 1996, based upon quoted market prices. NOTE 17--STOCK OPTIONS CVC adopted a stock option plan on August 29, 1995 authorizing it to issue four members of management options to purchase 230,000 shares of CVC common stock. These options may not be issued unless CVC attains certain levels of profitability. CVC will issue 125,000 of these options if it achieves one year of after-tax profitability. Another 60,000 options will be issued if CVC's after tax profitability is $250,000. If CVC's net income reaches $500,000, it will issue an additional 45,000 options. The exercise prices of these options will be determined by CVC's Board of Directors when they are issued. To date, CVC has not yet met such criteria. Upon issuance, these options will vest immediately and have no expiration date. These options are not exercisable with respect to CVS stock. To date, no options have been issued pursuant to this plan. CVC adopted a second stock option plan on August 29, 1995 authorizing it to issue its employees options to purchase an aggregate of up to 125,000 shares of CVC common stock. These options are issuable at the discretion of CVC's board of directors based upon employee performance with terms as the F-17 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 17--STOCK OPTIONS (CONTINUED) board deems appropriate. These options will not be exercisable with respect to CVS stock. To date, no options have been issued pursuant to this plan. In December 1995, the company issued its chairman an option to purchase 200,000 shares of the company's common stock at an exercise price of $2.76 per share. The options were issued as additional consideration for the company to obtain a $75,000 loan from the chairman. The right to exercise this option vested immediately and expires in December 1998. The exercise price of this option exceeds management's estimate of the market value of the stock on the grant date, and, accordingly, the option has an immaterial value. The chairman has not yet exercised any portion of this option. In September 1996, SSI awarded one of its directors (now a director of CVS) an option to purchase 25,000 shares of SSI's common stock at an exercise price of $3.45 per share. Pursuant to the mergers of SSI and CVC and CVC and CVS, this option is now available to the individual with respect to CVS common stock. The right to exercise this option vests in increments of 6,250 shares per year for four years beginning September 1, 1997. The option expires on September 1, 2001. The exercise price of this option exceeds management's estimate of the market value of SSI's common stock on the grant date, and are considered to have an immaterial value. The director has not yet exercised any portion of this option. In September 1996, SSI awarded three of its directors (now directors of CVS) options to purchase 250,000 shares of SSI's common stock at an exercise price of $0.0001 per share. Pursuant to the mergers of SSI and CVC and CVC and CVS, these options are now available to the individuals with respect to CVS common stock. The right to exercise these options vested immediately and expires on September 1, 2001. Management's estimate of the market value of SSI's common stock on the grant date exceeds the exercise price of these options by an amount which results in an immaterial expense. Accordingly, the options had an immaterial value at the time of their issuance, and no expense has been recorded in connection therewith. The directors have not yet exercised any portion of these options. Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("Statement 123"), requires the company to provide pro forma information regarding net loss and loss per share as if compensation cost for the company's stock option plans had been determined in accordance with the fair value-based method prescribed in Statement 123. The company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: no dividends paid for all years; expected volatility of 40.7% and 38.9%; risk free interest rates of 5.51% and 6.60%; and expected lives of 5.0 and 4.0 years. Under the accounting provisions of Statement 123, there would be no material difference between the company's net loss and loss per share from that reported in the financial statements in accordance with Accounting Principles Board Opinion No. 25. NOTE 18--CAPITAL CONTRIBUTION In September 1996, a company in which the Chairman is a principal paid the company $1,000,000. No additional stock was issued to the Chairman or his company as a result of this transaction. The company has accounted for this as a contribution to additional paid-in capital. F-18 CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997) NOTE 19--REORGANIZATION In 1995, the company reincorporated in Delaware. As part of this transaction, the company changed the par value of its stock from $1 per share to $0.01 per share. In 1997, the company was reorganized as Connecticut Valley Sports, Inc. as described in Note 1. As part of this transaction, the company changed the par value of its stock from $0.01 per share to $0.0001 per share. NOTE 20--PREFERRED STOCK The company has authorized the issuance of 1,000,000 shares of "blank check" preferred stock. This stock may be issued with any rights, preferences or designations as determined by the Board of Directors at the time of its issuance without stockholder approval. Management has no present intention to issue any shares of this preferred stock. NOTE 21--MAJOR CUSTOMERS During the nine months ended September 30, 1997, the company generated approximately 42% of its sales from three customers. NOTE 22--SUBSEQUENT EVENTS The company has filed a registration statement with the Securities Exchange Commission for an initial public offering of 1,500,000 units. Each unit will consist of one share of the company's common stock and one warrant entitling the holder thereof to purchase one additional share of the company's common stock at an exercise price of $6. The offering price is expected to be $5.10 per unit. F-19 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Officers and Directors Cooper Firearms, Inc. Stevensville, Montana We have audited the accompanying statements of operations, stockholders' equity and cash flows of Cooper Firearms, Inc. for the year ended December 31, 1995 and for the period from January 1, 1996 to August 13, 1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 3, on August 13, 1996, The Stock Shop, Inc. acquired all of the company's preferred stock and 91.65% of its common stock. In our opinion, the statements of operations, stockholders' equity and cash flows referred to above present fairly, in all material respects, the results of operations and cash flows of Cooper Firearms, Inc. for the year ended December 31, 1995 and for the period from January 1, 1996 to August 13, 1996, in conformity with generally accepted accounting principles. /s/ DAVID TARLOW & CO., P.C. --------------------------------------- David Tarlow & Co., P.C.
New York, New York May 8, 1997 F-20 COOPER FIREARMS, INC. STATEMENTS OF OPERATIONS
SIX MONTHS JANUARY 1, ENDED JUNE 30, 1996 1996 YEAR ENDED TO -------------- DECEMBER 31, AUGUST 13, 1995 1996 UNAUDITED ------------ -------------- Net sales......................................................... $ 954,002 $ 589,070 $ 534,420 Cost of goods sold................................................ 1,027,871 516,687 461,005 ------------ -------------- -------------- Gross profit (loss)............................................... (73,869) 72,383 73,415 ------------ -------------- -------------- OPERATING EXPENSES Selling, general and administrative expenses...................... 316,278 209,828 191,621 Writedown of inventory to lower of cost or market................. 80,000 -- -- Bad debts......................................................... -- 27,362 18,000 ------------ -------------- -------------- Total operating expenses...................................... 396,278 237,190 209,621 ------------ -------------- -------------- Operating loss................................................ (470,147) (164,807) (136,206) Interest expense.................................................. 38,809 20,267 15,241 ------------ -------------- -------------- Net loss...................................................... $ (508,956) $ (185,074) $ (151,447) ------------ -------------- -------------- ------------ -------------- --------------
The accompanying notes are an integral part of these financial statements. F-21 COOPER FIREARMS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
TREASURY STOCK-- PREFERRED PREFERRED STOCK STOCK CLASS B CLASS C COMMON STOCK COMMON ---------------------- ---------------------- --------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- --------- ----------- --------- --------- ---------- ----------- --------- YEAR ENDED DECEMBER 31, 1995 Balance--January 1, 1995..... 28,661 $ 716,525 10,000 $ 125,000 117,085 $ 690,221 2,324 $ (23,240) Shares issued................ 23,000 287,500 6,300 Shares issued in lieu of interest................... 1,100 11,000 Warrants exercised........... 6,500 44,000 Common stock repurchased..... 550 (5,500) Net loss--year ended December 31, 1995................... ----------- --------- ----------- --------- --------- ---------- ----- --------- Balance--December 31, 1995... 28,661 $ 716,525 33,000 $ 412,500 130,985 $ 745,221 2,874 $ (28,740) ----------- --------- ----------- --------- --------- ---------- ----- --------- ----------- --------- ----------- --------- --------- ---------- ----- --------- JANUARY 1, 1996 TO AUGUST 13, 1996 Balance--January 1, 1996..... 28,661 $ 716,525 33,000 $ 412,500 130,985 $ 745,221 2,874 $ (28,740) Warrants exercised........... 5,000 30,000 Shares issued in lieu of interest................... 1,120 14,000 Debt converted to common stock...................... 2,424 300,000 Net loss--period from January 1, 1996 to August 13, 1996....................... ----------- --------- ----------- --------- --------- ---------- ----- --------- Balance--August 13, 1996..... 28,661 $ 716,525 33,000 $ 412,500 139,529 $1,089,221 2,874 $ (28,740) ----------- --------- ----------- --------- --------- ---------- ----- --------- ----------- --------- ----------- --------- --------- ---------- ----- --------- TOTAL ACCUMULATED STOCKHOLDERS' DEFICIT EQUITY ------------- ------------- YEAR ENDED DECEMBER 31, 1995 Balance--January 1, 1995..... $(1,330,689) $ 177,817 Shares issued................ 287,500 Shares issued in lieu of interest................... 11,000 Warrants exercised........... 44,000 Common stock repurchased..... (5,500) Net loss--year ended December 31, 1995................... (508,956) (508,956) ------------- ------------- Balance--December 31, 1995... $(1,839,645) $ 5,861 ------------- ------------- ------------- ------------- JANUARY 1, 1996 TO AUGUST 13, 1996 Balance--January 1, 1996..... $(1,839,645) $ 5,861 Warrants exercised........... 30,000 Shares issued in lieu of interest................... 14,000 Debt converted to common stock...................... 300,000 Net loss--period from January 1, 1996 to August 13, 1996....................... (185,074) (185,074) ------------- ------------- Balance--August 13, 1996..... $(2,024,719) $ 164,787 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-22 COOPER FIREARMS, INC. STATEMENTS OF CASH FLOWS
JANUARY 1, 1996 YEAR ENDED TO SIX MONTHS DECEMBER 31, AUGUST 13, ENDED JUNE 30, 1995 1996 1996 ------------ -------------- -------------- UNAUDITED CASH FLOWS FROM OPERATING ACTIVITIES Net loss.......................................................... $ (508,956) $ (185,074) $ (151,447) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization................................. 25,141 12,738 13,252 Loss on sale of property and equipment........................ -- 3,702 3,702 (Increase) decrease in: Accounts receivable......................................... 107,610 29,809 (38,400) Inventory................................................... 39,902 (3,555) (39,469) Other current assets........................................ 9,306 13,328 7,590 Other assets................................................ 1,957 16,605 16,605 Increase (decrease) in: Accounts payable and accrued expenses....................... (55,934) (14,218) 64,853 Customer deposits........................................... 12,930 (7,987) (6,191) Federal excise tax payable.................................. 50,290 (16,959) 27,206 ------------ -------------- -------------- Net cash used by operating activities............................. (317,754) (151,611) (102,299) ------------ -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment............................... (24,303) (10,307) (10,307) Proceeds from sales of property and equipment..................... -- 170,035 170,035 ------------ -------------- -------------- Net cash provided (used) by financing activities................ (24,303) 159,728 159,728 ------------ -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds of loans payable......................................... 95,000 -- -- Repayments of loans payable....................................... (21,026) (188,934) (188,934) Net advances of bank line-of-credit............................... 24,475 23,700 23,700 Capital stock issued.............................................. 342,500 44,000 44,000 Purchase of treasury stock........................................ (5,500) -- -- Advance from stockholder.......................................... -- 100,000 100,000 Financing costs incurred.......................................... (3,325) -- -- ------------ -------------- -------------- Net cash provided (used) by financing activities................ 432,124 (21,234) (21,234) ------------ -------------- -------------- Net increase (decrease) in cash................................. 90,067 (13,117) 36,195 Cash at beginning of period....................................... (39,473) 50,594 50,594 ------------ -------------- -------------- Cash at end of period............................................. $ 50,594 $ 37,477 $ 86,789 ------------ -------------- -------------- ------------ -------------- -------------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES Notes payable assumed by purchaser of property and equipment...... $ -- $ 106,082 $ 106,082 Notes payable to stockholder converted to stock................... $ -- $ 300,000 $ -- Supplemental Disclosure of Cash Flow Information Cash paid for interest............................................ $ 24,744 $ 20,909 $ 15,241 Cash paid for income taxes........................................ $ 51 $ -- $ --
The accompanying notes are an integral part of these financial statements. F-23 COOPER FIREARMS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996) NOTE 1--ORGANIZATION AND NATURE OF BUSINESS Cooper Firearms, Inc., was incorporated in 1990 under the laws of the State of Montana. The company manufactures and sells custom quality production bolt action rifles used for both sport hunting and competition. Customers are located throughout the United States and parts of Canada. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B) INVENTORIES Inventories are valued at the lower of cost or market on a first-in, first-out basis. C) DEPRECIATION Depreciation is provided using accelerated methods over the estimated useful lives of the assets. D) AMORTIZATION Amortization of loan fees and start-up costs is provided using the straight line method over a period of 36-60 months. E) INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements for the six months ended June 30, 1996 reflect all adjustments (consisting of recurring accruals) management considers necessary for a fair presentation of results of operations and cash flows. F) LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which requires that certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This standard is effective for fiscal years that begin after December 15, 1995. The company's adoption of this pronouncement on January 1, 1996 did not have a material impact on the company's financial statements. NOTE 3--SUBSEQUENT EVENTS On August 13, 1996, The Stock Shop, Inc. acquired all of the preferred stock and 91.65% of the common stock of the company. F-24 COOPER FIREARMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996) NOTE 4--DEPRECIATION The company recorded depreciation expense of $23,440 for the year ended December 31, 1995 and $9,967 for both the six months ended June 30, 1996 and the period from January 1, 1996 to August 13, 1996. NOTE 5--REGULATION OF FIREARMS BY U.S. GOVERNMENT As a manufacturer of firearms, the company must comply with the regulations of the Bureau of Alcohol, Tobacco and Firearms. Requirements include an accountability of each serial numbered gun and the payment of an 11% federal excise tax as the guns are shipped and invoiced. Failure to comply with these regulations can lead to fines and suspension of manufacturing and sales operations. NOTE 6--CONTINGENCIES The company has been notified that an individual injured himself while firing a weapon produced by the company. This individual has retained counsel. Management intends to vigorously defend this matter and has referred it to its insurance company. The insurer has not yet determined whether this is a covered claim under the policy. The amount or range of potential loss cannot be reasonably estimated at this time, but management does not expect it to be material. No accrual has been made for the loss contingency in the financial statements. F-25 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE AND REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED FOR THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................. 3 Risk Factors................................... 8 Use of Proceeds................................ 18 Dilution....................................... 20 Capitalization................................. 21 Dividend Policy................................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 23 Business....................................... 26 Management..................................... 34 Principal Stockholders......................... 37 Certain Transactions........................... 37 Description of Securities...................... 39 Shares Eligible for Future Sale................ 42 Underwriting................................... 43 Legal Matters.................................. 45 Experts........................................ 45 Financial Statements........................... 47
------------------------ 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 SUBSCRIPTION. CONNECTICUT VALLEY SPORTS, INC. 1,500,000 Units Each Unit Consisting of One Shares of Common Stock and One Redeemable Common Stock Purchase Warrants BRIARWOOD INVESTMENT COUNSEL, INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law, among other things, and subject to certain conditions, authorizes the Company to indemnify its officers and directors against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such an officer or director. The restated Certificate of Incorporation and By-laws of the Company provide for indemnification of its officers and directors to the full extent authorized by law. Reference is made to the Underwriting Agreement, the proposed form of which is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to indemnify the directors and certain officers of the Registrant and certain other persons against certain civil liabilities. ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is a statement of the estimated expenses to be paid by the Company in connection with the issuance and distribution of the securities being registered: SEC Registration Fee.......................................................... $ 6,330.20 NASD Filing Fee............................................................... $ 2,414.75 NASDAQ Filing Fee............................................................. * $25,000.00 Printing Engraving Expenses................................................... * $75,000.00 Legal Fees and Expenses....................................................... * $125,000.00 Accounting Fees and Expenses.................................................. * $120,000.00 Blue Sky Fees and Expenses.................................................... * $40,000.00 Transfer Agent and Registrar Fees and Expenses................................ * $ 3,500.00 Underwriter's Non-accountable Expense Allowance............................... $229,500.00 Miscellaneous................................................................. * $28,236.41 ---------- Total..................................................................... $655,000.00
- ------------------------ * Estimate ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Company has sold securities to the individuals listed below. The issuances of these securities were considered to be exempt from registration under Rule 505 and 506 of Regulation D of the Act, as amended, and the regulations promulgated thereunder or Section 4(2) of the Act. Each purchaser of the securities in such transaction represented his intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the certificates for the securities issued in such transaction. Each purchaser of the securities in such transaction had adequate access to information about the Registrant. Except as set forth below, there were no underwriters or placement agents involved in the transactions and there were no underwriting discounts or commissions paid in connection therewith. In September 1997, the Company issued an aggregate of 2,747,476 shares of its Common Stock to 56 investors in exchange for 2,747,476 shares of Common Stock of Connecticut Valley Classics, Inc. ("CVC"). As a result of the exchange, CVC became a 97% owned subsidiary of the Company. In October 1997, the Company issued 50,000 shares of common stock to Gersten, Savage, Kaplowitz & Fredricks, LLP in exchange for legal services rendered. This transaction was exempt from registration pursuant to Section 4(2) of the Act. II-1 CVC, the Company's predecessor and majority owned subsidiary has sold securities to the individuals listed below in the past three years: In May 1995, Victor Wang acquired 470,000 shares of CVC common stock for $50,000 and undertaking obligations to provide additional financing for CVC in the future. This transaction was exempt from registration pursuant to Section 4(2) of the Act. In September 1995, CVC closed a private placement in which it issued 237,269 shares of common stock at an offering price of $3.45 per share. Sales were made to 26 accredited investors. Duke & Co., Inc. acted as placement agent and received a placement agent fee of 10% of the gross proceeds as well as a 3% non-accountable expense allowance. In March 1996, an additional 132,692 shares of common stock were sold to 11 other accredited investors on the same terms and conditions in another private placement. These transactions were exempt from registration pursuant to Rule 506 of Regulation D. In connection with these private placements, 60,000 shares of common stock were issued to Gersten, Savage, Kaplowitz & Fredericks, LLP as compensation for legal services rendered. This transaction was exempt pursuant to Section 4(2) of the Act. In November 1996, the CVC issued 910,000, 364,000 and 26,000 shares to Victor Wang, Daniel Cooper and Jason Stacey, respectively, in connection with the acquisition of the Stock Shop, Inc. Mssrs. Wang, Cooper and Stacey had acquired their shares in the Stock Shop, Inc. in connection with the acquisition by the Stock Shop, Inc. of all of the assets of the Stock Shop LLC. These transactions were exempt from registration pursuant to Section 4(2) of the Act. From March through May 1997, CVC has a series of closings on a private placement in which it issued 183,993 shares of common stock at an offering price of $3.85 per share. Sales were made to 13 accredited investors. Duke & Co., Inc. acted as placement agent and received a placement agent fee of 10% of the gross proceeds as well as a 3% non-accountable expense allowance. This transaction was exempt from registration pursuant to Rule 506 of Regulation D. In August 1997, CVC issued 790 shares of stock to eight individuals in exchange for their shares in the Company's majority owned Cooper Arms subsidiary. This transaction was exempt from registration pursuant to Section 4(2). ITEM 16. EXHIBITS 1.1 Form of Underwriting Agreement between the Company and Briarwood Investment Counsel 1.2 Form of Underwriter's Warrant 1.3 Form of Investment Banking Agreement between the Company and Briarwood Investment Counsel, Inc. 3.1* Certificate of Incorporation of the Company and Amendments thereto 3.2* By-laws of the Company 4.1** Specimen Common Stock Certificate 4.2** Specimen Warrant Certificate 4.3 Form of Warrant Agreement 4.4** Form of public warrant agreement 5.1** Form of opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP 10.1 Form of employment agreement with Dan Cooper, President of the Company 10.2 The Company's 1997 Stock Option Plan
II-2 10.3 Lease Agreement between the Company and Curtis L. Merriman 10.4 Lease Agreement between the Company and Bitteroot Investments, L.L.C. 10.5 Agreement between the Company and J.G. Anschutz GmbH 10.6 Agreement between the Company and AcuSport Corporation 21.1* List of Subsidiaries 23.1 Consent of BDO Seidman, LLP 23.2 Consent of David A. Tarlow & Co., P.C. 23.3 Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP, counsel for the Company (included in Exhibit 5.1 to this Registration Statement) 24.1* Power of Attorney 27** Financial Data Schedule
- ------------------------ * Filed with the initial filing on October 9, 1997 ** To be filed by Amendment ITEM 17 UNDERTAKINGS Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to any charter provision, by-law contract arrangements statute, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 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. The undersigned small business issuer hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any Prospectus required by section 10(a)(3) of the Act; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to suit information in the registration statement. (2) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. (4) For determining any liability under the 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) or 497(h), under the Act as part of this registration statement as of the time the Commission declared it effective. II-3 (5) For determining any liability under the Act, treat each post-effective amendment that contains a form of Prospectus as a new registration statement at that time as the initial bona fide Offering of those securities. (6) 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 Underwriter to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on January 8, 1998. CONNECTICUT VALLEY SPORTS, INC. By: /s/ JOHN TILLELI ----------------------------------------- John Tilleli Pursuant to the requirements of the Act, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ JOHN TILLELI Chief Executive Officer - ------------------------------ January 8, 1998 John Tilleli * President and Director - ------------------------------ January 8, 1998 Dan Cooper * Chairman and Director - ------------------------------ January 8, 1998 Victor Wang * Treasurer (Principal - ------------------------------ Accounting Officer) and January 8, 1998 Edward McCabe Director * Vice President-Marketing, - ------------------------------ Secretary and Director January 8, 1998 Gary Landis /s/ JOHN TILLELI - ------------------------------ *by John Tilleli as attorney in fact II-5 EXHIBIT INDEX
ITEM 16. EXHIBITS - --------- -------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement between the Company and Briarwood Investment Counsel, Inc. 1.2 Form of Underwriter's Warrant 1.3 Form of Investment Banking Agreement between the Company and Briarwood Investment Counsel, Inc. 3.1* Certificate of Incorporation of the Company and Amendments thereto 3.2* By-laws of the Company 4.1** Specimen Common Stock Certificate 4.2** Specimen Warrant Certificate 4.3 Form of Warrant Agreement 4.4** Form of public warrant agreement 5.1** Form of opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP 10.1 Form of employment agreement with Dan Cooper, President of the Company 10.2 The Company's 1997 Stock Option Plan 10.3 Lease Agreement between the Company and Curtis L. Merriman 10.4 Lease Agreement between the Company and Bitteroot Investments, L.L.C. 10.5 Agreement between the Company and S.G. Anschutz GmbH 10.6 Agreement between the Company and AcuSport Corporation 21.1* List of Subsidiaries 23.1 Consent of BDO Seidman, LLP 23.2 Consent of David A. Tarlow & Co., P.C. 23.3 Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP, counsel for the Company (included in Exhibit 5.1 to this Registration Statement) 24.1 Power of Attorney (included on the signature page of this Registration Statement) 27** Financial Data Schedule
- ------------------------ * Filed with the initial filing on October 9, 1997 ** to be filed by Amendment EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 Draft 12/31/97 CONNECTICUT VALLEY SPORTS, INC. UNDERWRITING AGREEMENT New York, New York ___________, 1998 Briarwood Investment Counsel 1851 East First Street Suite 950 Santa Ana, California 92705 Dear Sirs: The undersigned, Connecticut Valley Sports, Inc., a Delaware corporation (the "Company"), hereby confirms its agreement with Briarwood Investment Counsel (the "Underwriter" or "You"), as follows: 1. Introduction. The Company proposes to issue and sell to the Underwriter an aggregate of 1,500,000 units (the "Offered Units") at a price of $5.10 per Offered Unit, consisting of an aggregate of 1,500,000 shares of Common Stock, $.0001 par value (the "Common Stock"), of the Company and 1,500,000 redeemable Common Stock purchase warrants (the "Redeemable Warrants"), each Redeemable Warrant exercisable to purchase one share of Common Stock. Each Redeemable Warrant shall be exercisable for a period of three (3) years, commencing two years after the Effective Date, and shall entitle the holder to purchase one share of Common Stock at a price equal to $6.00 per share, which price is subject to adjustment in certain circumstances to prevent dilution; provided, however, that in the event the Company calls the Redeemable Warrants for redemption prior to the second anniversary of the Effective Date, the Redeemable Warrants shall be exercisable from the date on which the Redeemable Warrants are called for redemption until the redemption date. The Company shall have the right, upon the written consent of the Underwriter, to call each of the Redeemable Warrants for redemption upon not less than thirty (30) days' prior written notice at any time commencing one year from the Effective Date at a redemption price of $.10 per Redeemable Warrant, subject to adjustment, provided that the closing bid quotation of the Common Stock as reported on The Nasdaq Stock Market or the last sales price if quoted on a national securities exchange for a period of 20 consecutive trading days, which period ends on the third trading day prior to the date on which the Company gives notice of redemption, equals or exceeds $7.50 per share, subject to adjustment in certain circumstances to prevent dilution. The Redeemable Warrants will be issued pursuant to a warrant agreement dated the date hereof between the Company and Continental Stock Transfer and Trust Company (the "Public Warrant Agreement"), a form of which has been filed as Exhibit 4.4 to the Registration Statement. It is contemplated that the shares of Common Stock and the Redeemable Warrants comprising the Offered Units will become detachable and trade separately and be purchasable separately immediately upon issuance. The 1,500,000 Offered Units, and the 1,500,000 shares of Common Stock and 1,500,000 Redeemable Warrants included therein, are hereinafter referred to as the "Firm Securities." Upon your request, as provided in Section 3 of this Agreement, the Company shall also issue and sell to you up to an additional 225,000 Units, for the purpose of covering over-allotments in the sale of the Firm Securities. Such additional securities are hereinafter referred as the "Option Securities." The Firm Securities and the Option Securities are hereinafter sometimes referred to as the "Offered Securities." The 1,725,000 shares of Common Stock included as part of the Offered Securities are hereinafter referred to as the "Shares"; the 1,725,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants included as part of the Offered Securities are hereinafter referred to as the "Public Warrant Shares"; and the Offered Securities and Public Warrant Shares are sometimes hereinafter referred to collectively as the "Public Securities." The Company also proposes to issue and sell to you, pursuant to the terms of a warrant agreement, dated as of the First Closing Date (as hereinafter defined), between you and the Company (the "Underwriter's Warrant Agreement"), warrants (the "Underwriter's Warrants) to purchase up to 150,000 shares of Common Stock and 150,000 Redeemable Warrants. The Underwriter's Warrants shall be exercisable during the four-year period commencing 12 months from the Effective Date, at $5.50 per share of Common Stock and $.11 per Redeemable Warrant, subject to adjustment in certain events to protect against dilution. The 150,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants are hereinafter referred to as the "Underwriter's Shares"; the 150,000 Redeemable Warrants issuable upon exercise of the Underwriter's Warrants are hereinafter referred to as the "Underwriter's Redeemable Warrants"; the 150,000 shares of Common Stock issuable upon exercise of the Underwriter's Redeemable Warrants are hereinafter referred to as the "Underwriter's Warrant Shares"; and the Underwriter's Warrants, the Underwriter's Shares, the Underwriter's Redeemable Warrants and the Underwriter's -2- Warrant Shares are sometimes hereinafter referred to collectively as the "Underwriter's Securities." The Public Securities and the Underwriter's Securities are sometimes hereinafter referred to collectively as the "Registered Securities." The Registered Securities are more fully described in the Registration Statement and the Prospectus referred to below. 2. Representations and Warranties. The Company represents and warrants to, and agrees with, the Underwriter: (a) A registration statement on Form SB-2 (File No. 333-37507) including a preliminary form of prospectus, relating to the registration of the Registered Securities has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") promulgated pursuant to the Act, and said registration statement has been filed with the Commission under the Act. One or more amendments to said registration statement has or have, as the case may be, been similarly prepared and filed with the Commission and the Company may file on or prior to the Effective Date of said registration statement an additional amendment thereto which will include the final prospectus. The Company will not, so long as any Redeemable Warrants or Underwriter's Warrants remain outstanding and exercisable, file any amendment thereto or any amendment or supplement to the Preliminary Prospectus or the Prospectus (as those terms are defined below) unless the Company has given reasonable and prior notice thereof to the Underwriter and counsel for the Underwriter and neither shall have reasonably objected within a reasonable period of time prior to the filing thereof. As used in this Agreement and unless the context indicates otherwise, the term "Registration Statement" refers to and means said registration statement, including any exhibit, financial statement and prospectus included therein, as finally amended and revised on or prior to the effective date (the "Effective Date") of said registration statement. The term "Preliminary Prospectus" refers to and means any prospectus filed with the Commission and included in said registration statement before it becomes effective, and the term "Prospectus" refers to and means the prospectus included in the Registration Statement, except that if the prospectus first filed by the Company pursuant to Rule 424(b) of the Rules and Regulations shall differ from the Prospectus, the term "Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b). If the Registration Statement or the Prospectus is amended or supplemented after the Effective Date and prior to or on the Closing Dates (as hereinafter defined), then the terms -3- "Registration Statement" and "Prospectus" shall refer to such documents as so amended or supplemented. The terms used herein shall have the same meaning as in the Prospectus unless the context hereof otherwise requires. (b) Neither the Commission nor any state regulatory authority has issued an order preventing or suspending the use of the Preliminary Prospectus nor has the Commission or any such authority instituted or, to the best knowledge of the Company, threatened to institute any proceedings with respect to such an order; the Preliminary Prospectus, at the time of filing with the Commission, conformed in all material respects to the requirements of the Act and the Rules and Regulations, contained all statements which were required to be stated therein by the Act and the Rules and Regulations and did not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Registration Statement at the time when it becomes effective, and the Prospectus (and any amendments or supplements thereto) at all subsequent times up to the date set forth in the Prospectus as required by Item 502(e) of Regulation S-B of the Rules and Regulations, will contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations and will conform in all material respects to the requirements of the Act and the Rules and Regulations, and at such times neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, except that the representations and warranties in this Section 2(b) do not apply to statements or omissions made in the Registration Statement or Prospectus by or on behalf of the Underwriter made in reliance upon and in conformity with information furnished in writing to the Company in connection with the Registration Statement or Prospectus or any amendment or supplement thereto by the Underwriter, expressly for use therein. (c) Each of the Company and the Subsidiaries (as defined in paragraph (d) of this Section 1 below) has been duly organized and is now, and at the Closing Dates will be, validly existing and in good standing as a corporation or partnership, as the case may be, under the laws of the jurisdiction of its organization, and has (i) with respect to the Company, an authorized and outstanding capitalization and indebtedness as set forth in the Registration Statement at the respective dates referred to therein and (ii) full power and authority to own its -4- properties and conduct its business as presently conducted and as described in, or contemplated by, the Registration Statement. Each of the Company and the Subsidiaries is duly qualified and in good standing as a foreign corporation in all jurisdictions in which the nature of the business transacted by it or the character or location of its properties makes such qualification necessary. Except where the failure to be so qualities would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. Each of the Company and the Subsidiaries holds all material authorizations, approvals, licenses, certificates, franchises and permits from state, federal or other regulatory authorities necessary for the conduct of its business as presently conducted and as described in or contemplated by the Registration Statement and is in material compliance with all laws and regulations and all orders and decrees applicable to it or to such business or assets, and there are no proceedings pending or, to the best knowledge of the Company, threatened, seeking to cancel, terminate or limit such authorizations, approvals, licenses, certificates, franchises or permits. (d) The Company does not own, directly or indirectly, any capital stock or other equity interest in or of any corporation, partnership or other legal entity whatsoever, except that the Company owns approximately 97% of the outstanding securities of Connecticut Valley Classics, Inc., a ________ corporation ("CVC"). CVC owns all of the outstanding securities of Stock Shop, Inc., a ________ corporation ("Stock Shop"), and Cooper Firearms, Inc., a ________ corporation ("Cooper Firearms" and collectively with CVC, the "Subsidiaries"). All of the securities owned by the Company, directly or indirectly, in the Subsidiaries are free and clear of all liens, charges, encumbrances and restrictions. There are no options or warrants for the purchase of, or other rights to purchase, or outstanding securities convertible into or exchangeable for, any capital stock or other securities of the Subsidiaries. [Add other representations/covenants re: Subsidiaries.] (e) The financial statements of the Company, including the related notes included as part of the Registration Statement, present fairly the financial condition of the Company and Subsidiaries as of the dates thereof and the results of operations for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as otherwise stated therein, and all adjustments necessary for a fair presentation of results for such periods have been made. -5- (f) BDO Seidman, LLP, who have audited the financial statements included as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. [Add language re: David Tarlow & Co., P.C. re: Cooper Firearms' financial statements] (g) Subsequent to the dates as of which information is given in the Registration Statement and Prospectus, except as disclosed in or contemplated by the Registration Statement and Prospectus, (i) the Company has not incurred any liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business; (ii) there has not been any change in the capital stock, funded debt (other than regular repayments of principal and interest on existing indebtedness) or other securities of the Company; (iii) there has not been any adverse change in the condition (financial or otherwise), business, operations, income, net worth or properties, including any loss or damage to the properties, of the Company (whether or not such loss is insured against); and (iv) the Company has not paid or declared any dividend or other distribution on its Common Stock or its other securities or redeemed or repurchased any of its Common Stock or other securities. (h) This Agreement, the Public Warrant Agreement, the Underwriter's Warrant Agreement and the Consulting Agreement (as defined in Section 5(u) hereof), have been duly and validly authorized by the Company, and this Agreement constitutes, and the Public Warrant Agreement, the Underwriter's Warrant Agreement and the Consulting Agreement, when executed and delivered pursuant to this Agreement (assuming due execution by the Underwriter and/or the appropriate parties to such agreements), will each constitute, a valid and binding agreement of the Company, enforceable against the Company in accordance with its respective terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification, contribution or exculpation provision may be limited under applicable Federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought ((i), (ii) and (iii) are hereinafter referred to as the "Enforceability Exceptions"). (i) The Units and the Shares have been duly authorized and, when issued and delivered pursuant to this Agreement, the Shares will be duly authorized, validly issued, -6- fully paid and non-assessable. The Redeemable Warrants have been duly authorized and, when issued and delivered pursuant to this Agreement, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits provided by the Public Warrant Agreement. The Public Warrant Shares have been reserved for issuance upon exercise of the Redeemable Warrants and, when issued in accordance with the terms of the Redeemable Warrants and Public Warrant Agreement, will be duly authorized, validly issued, fully paid and non-assessable. The Underwriter's Warrants have been duly authorized and, when issued and delivered pursuant to this Agreement and the Underwriter's Warrant Agreement, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits provided by the Underwriter's Warrant Agreement. The Underwriter's Shares have been reserved for issuance upon exercise of the Underwriter's Warrants and, when issued in accordance with the terms of the Underwriter's Warrants and Underwriter's Warrant Agreement, will be duly authorized, validly issued, fully paid and non-assessable. The Underwriter's Redeemable Warrants, when issued in accordance with the terms of the Underwriter's Warrants and Underwriter's Warrant Agreement, will be duly authorized and will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits provided by the Public Warrant Agreement. The Underwriter's Warrant Shares have been reserved for issuance upon exercise of the Underwriter's Redeemable Warrants and, when issued in accordance with the terms of the Underwriter's Redeemable Warrants and the Public Warrant Agreement, will be duly authorized, validly issued, fully paid and non-assessable. Neither the issuance of any of the Public Securities nor any of the Underwriter's Securities will violate or otherwise be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company, and none of the holders of any of the Public Securities or any of the Underwriter's Securities will be subject to personal liability by reason of being such holders. (j) All issued and outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and non-assessable; the issuances and sales of all such capital stock complied in all respects with applicable Federal and state securities laws; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any -7- holders of any security of the Company or similar contractual rights granted by the Company. (k) No default exists in the due performance and observance of any term, covenant or condition of any license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary may be bound or to which any of the property or assets of the Company or any Subsidiary are subject. (l) The Company and the Subsidiaries are not in violation of any term or provision of their respective Certificate of Incorporation or By-Laws. Neither the execution and delivery of this Agreement, nor the issuance and/or sale of any of the Public Securities or the Underwriter's Securities, nor the consummation of any of the transactions contemplated herein, nor the compliance by the Company with the terms and provisions hereof, has conflicted with or will conflict with, or has resulted in or will result in a breach of, any of the terms and provisions, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon the property or assets of the Company or any Subsidiary pursuant to the terms of, any indenture, mortgage, deed of trust, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or any Subsidiary is a party, or by which the Company or any Subsidiary is or may be bound, or to which any of the property or assets of the Company or any Subsidiary is subject; nor will such actions result in any violation of the provisions of the Certificate of Incorporation or the By-Laws of the Company or any Subsidiary or of any contract or agreement, or of any statute or any order, rule or regulation applicable to the Company or any of the Subsidiaries or of any other regulatory authority or other governmental body having jurisdiction over the Company or any of the Subsidiaries. (m) Except as set forth in the Registration statement, there is neither pending nor, to the best knowledge of the Company, threatened, any action, suit, or proceeding at law or in equity or any arbitration (or circumstances that may give rise to the same) to which the Company or any Subsidiary or any of the respective officers, directors or securityholders thereof is a party before or by any court, arbitration tribunal or governmental instrumentality, agency, or body, which might result in any materially adverse change in the condition (financial or otherwise), business, operations, income, net worth or properties of the Company or any Subsidiary, or which might materially -8- adversely affect the properties or assets thereof, or prevent consummation of the transactions contemplated hereby; nor except as set forth in the Registration Statement, are there any such actions, suits or proceedings against the Company related to environmental matters or matters related to discrimination on the basis of age, sex, religion or race; and no labor disturbance by the employees of the Company or any Subsidiary exists or to the best knowledge of the Company is imminent which might be expected to materially adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company or any Subsidiary. (n) There is no contract or other document which is required by the Act or by the Rules and Regulations to be filed as an exhibit to the Registration Statement which has not been so filed, and each contract which is filed as an exhibit to the Registration Statement is and shall be in full force and effect at each of the Closing Dates or shall have been terminated in accordance with its terms or as set forth in the Registration Statement and Prospectus, and no party to any such contract has given notice to the Company of the cancellation of or, to the knowledge of the Company, shall have threatened to cancel, any such contract, and, except as set forth in the Prospectus, the Company and the Subsidiaries are not or shall not be in default thereunder. (o) Except as set forth in the Registration Statement, neither the Company nor any Subsidiary owns any real property. Except as set forth in the Registration Statement, each of the Company and the Subsidiaries has good and marketable title to all of its property and assets, including any licenses, trademarks and copyrights, described in the Registration Statement as owned by it, free and clear of all liens, charges, encumbrances and restrictions other than such as do not materially affect the value or transferability of such property and assets and do not interfere with the use of such property or assets made or proposed to be made by the Company or any Subsidiary, and other than as described in the Registration Statement (including the financial statements and notes included therein), all of the leases, subleases and licenses under which it holds or uses any real or personal property, including those described or referred to in the Prospectus, are in full force and effect, and the Company and the Subsidiaries are not in default in respect of any of the terms or provisions of any such leases, subleases and licenses, and, to the best of the Company's knowledge, no claim of any sort has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any such leases, subleases or licenses affecting or questioning the rights of the Company or such Subsidiary to the continued use or enjoyment of the rights and property covered -9- thereby. Each of the Company and the Subsidiaries owns or leases all such properties as are necessary to its operations as now conducted and as proposed to be conducted as set forth in the Prospectus. (p) Each of the Company and the Subsidiaries has timely (giving effect to permitted extensions) and properly prepared and filed all necessary Federal, state, local and foreign income and franchise tax returns and has paid all taxes shown on such returns and all assessments received by it to the extent the same have become due, other than those due without interest or penalty, and except to the extent the Company is in good faith contesting any such tax or assessment in appropriate proceedings and has established reserves in accordance with normal accounting practices. Except as set forth in the Registration Statement, the Company has no knowledge of any tax deficiency which might be asserted against the Company or any Subsidiary which could adversely affect the business or properties thereof, and has established adequate reserves for such taxes which are not yet due and payable. (q) Each of the Company and the Subsidiaries maintains insurance, which is in full force and effect, of the types and in the amounts currently adequate for its business, including but not limited to personal injury and product liability insurance, insurance covering all personal property owned or leased by the Company or any Subsidiary against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. The Company and the Subsidiaries have not (i) failed to give notice or present any insurance claim with respect to any matter, including but not limited to the Company's business, property or employees, under the insurance policy or surety bond in a due and timely manner, (ii) had any disputes or claims against any underwriter of such insurance policies or surety bonds or has failed to pay any premiums due and payable thereunder, or (iii) failed to comply with all conditions contained in such insurance policies and surety bonds. To the best knowledge of the Company, there are no facts or circumstances under any such insurance policy or surety bond which would relieve any insurer of its obligation to satisfy in full any valid claim of the Company or any Subsidiary. (r) Except as set forth in the Registration Statement, the Company and the Subsidiaries own or possess adequate rights to use all patents, patent rights, inventions, trademarks, service marks, trade names and copyrights necessary for the conduct of their business as described in the Prospectus and the Company and the Subsidiaries have not received any notice of infringement of or conflict with, and the Company and the Subsidiaries, to the -10- best of the Company's knowledge, are not infringing or in conflict with asserted rights of others with respect to, any patents, patent rights, inventions, trademarks, service marks, trade names or copyrights. (s) Except as set forth in the Prospectus, neither the Company nor any Subsidiary is obligated or under any liability whatsoever to make any payment by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. In addition, the Company and the Subsidiaries own and have the unrestricted right to use all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") that are material to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company and any Subsidiary, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees. The Company is not aware of any development by any other person or entity of trade secrets or items of technical information similar to those of the Company. The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of all of its intellectual property in all material aspects. (t) Except as set forth in the Registration Statement, the Company is not obligated to pay and has not paid within the past twelve months, and has not obligated, and will not obligate, the Underwriter to pay, any finder's fee in connection with the underwriting contemplated hereby or any other fee (cash, securities or otherwise) in consideration of financial, consulting or investment banking services. (u) No officer or director of the Company or any affiliate (as such term is defined in Rule 405 promulgated under the Rules and Regulations) of any such officer or director has taken, and each officer or director has agreed that he will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security issued by the Company. (v) No officer, director or greater than 5% stockholder of the Company or any Subsidiary, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated -11- under the Rules and Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest (other than ownership of an immaterial number of shares of capital stock of an entity whose securities are publicly traded) in any person or entity which (A) furnishes or sells products or services which are furnished or sold or are proposed to be furnished or sold by the Company or any Subsidiary, or (B) purchases from or sells or furnishes to the Company or any Subsidiary any goods or services, or (ii) a beneficial interest in any contract or agreement to which the Company or any Subsidiary is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions," there are no existing agreements, arrangements, or transactions, between or among the Company or any of its Subsidiaries and any officer or director of the Company or any Subsidiary, or any partner, affiliate or associate of any of the foregoing persons or entities. (w) The minute books of each of the Company and the Subsidiaries have been made available to the Underwriter and contain a complete summary of all meetings and actions of the directors and stockholders or partners, as the case may be, of each of the Company and the Subsidiaries since the time of their respective dates of organization, and reflect all transactions referred to in such minutes accurately in all respects. (x) The Company is not aware of any bankruptcy, labor disturbance or other event affecting any of its principal suppliers or customers which is reasonably likely to result in a material adverse change in the condition, financial or otherwise, prospects, business or results of operation of the Company and the Subsidiaries, taken as a whole. (y) The Registered Securities and all the other securities of the Company conform to all statements in relation thereto in the Registration Statement. (z) On the Effective Date, (i) the authorized capital stock of the Company will be as set forth in the Registration Statement, and (ii) not more than an aggregate of 2,797,476 shares of Common Stock shall be issued and outstanding, not including: (A) an aggregate of 600,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (the "Stock Option Plan") and (B) up to an aggregate of 475,000 shares of Common Stock upon exercise of options and warrants which are anticipated to be outstanding on the First Closing Date (collectively the "Non-Plan Options"). Other than the shares of Common Stock already issued (or reserved for issuance as described in the immediately preceding sentence), the 1,725,000 Public -12- Warrant Shares reserved for issuance upon the Redeemable Warrants, the 150,000 Underwriter's Shares reserved for issuance upon exercise of the Underwriter's Warrants, the 150,000 Underwriter's Warrant Shares reserved for issuance upon exercise of the Underwriter's Redeemable Warrants, and the Public Securities and Underwriter's Securities to be offered in or in connection with the proposed public offering ("Public Offering"), no other shares of capital stock or securities convertible into capital stock shall be outstanding or reserved for issuance at the completion of the Public Offering, without the consent of the Underwriter. (aa) Except for the registration rights granted (i) under the Underwriter's Warrant Agreement, (as described in the Registration Statement), no holder of any securities of the Company has the right to require that the Company include such securities in the Registration Statement or any registration statement to be filed by the Company. (bb) The Units, Common Stock and the Redeemable Warrants are eligible for quotation on The Nasdaq SmallCap Market ("NASDAQ") and have been approved for listing on the Boston Stock Exchange, subject to official notice of issuance. The Company has filed a registration statement with the Commission pursuant to Sections 12(g) and 12(b) of the 1934 Act, and has used its best efforts to have same declared effective by the Commission on an accelerated basis on the Effective Date. (cc) Neither the Company or any Subsidiary nor any officer, director or other agent thereof has, acting on behalf of the Company or any Subsidiary, at any time (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any such contributions in violation of law, (ii) made any payment to any state, Federal or foreign governmental officer or official, or any other person charged with similar public or quasi-public duties, other than payments required or not prohibited by law or (iii) made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation and under circumstances requiring the disclosure of such payment, receipt or retention of funds in the Prospectus. (dd) Since December 31, 1996, neither the Company nor any Subsidiary has sustained any material casualty loss or interference with its business from fire, storm, explosion, flood or other like or unlike casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree which is not disclosed or reflected in the Prospectus. -13- (ee) The Company is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (ff) No unregistered securities of the Company have been sold by the Company within the three years prior to the date hereof, except as disclosed in Part II of the Registration Statement. (gg) The employment agreements between the Company and its respective officers, as disclosed in the Registration Statement, are or will be on or before the First Closing Date binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, subject to the Enforceability Exceptions. (hh) Except as set forth in the Prospectus, the Company has no employee benefit plans (including, without limitation, profit sharing and welfare benefit plans) or deferred compensation arrangements that are subject to the provisions of the Employee Retirement Income Security Act of 1974. (ii) There are no voting or other shareholder agreements between the Company and any shareholders of the Company or between or by and among any shareholders of the Company. (jj) Each of the Company and the Subsidiaries has generally enjoyed a satisfactory employer-employee relationship with its employees and is in material compliance with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. There are no pending investigations involving the Company or any of the Subsidiaries by the U.S. Department of Labor or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company or any of the Subsidiaries pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or, to the Company's best knowledge, threatened against or involving the Company or the Subsidiaries or any predecessor entity, and none has ever occurred. No representation question exists respecting the employees of the Company or any of the Subsidiaries, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company or any of the Subsidiaries. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements to which the Company or any of the Subsidiaries is or was a party. No -14- labor dispute with the employees of the Company or any of the Subsidiaries exists, or is imminent. (kk) The statements in the Prospectus under "RISK FACTORS," "BUSINESS," "CERTAIN TRANSACTIONS," "MANAGEMENT" and "DESCRIPTION OF SECURITIES," insofar as they refer to statements of law, descriptions of statutes, licenses, regulations or legal conclusions are correct in all material respects. (ll) The Company warrants that consummation of the transactions contemplated herein will not, as of the Effective Date or the First Closing Date, result in a material breach of any of the terms, provisions or conditions of any agreement to which it or any Subsidiary is a party. (mm) [The Company has delivered to the Underwriter a business plan covering a three year period setting forth its best estimates of sales, earnings, cash flow and other significant items.] Any certificate signed by an officer of the Company in his capacity as such and delivered to the Underwriter or counsel for the Underwriter shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. 3. Purchase, Delivery and Sale of the Offered Securities and the Underwriter's Warrants. (a) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriter the Firm Securities, consisting of 1,500,000 Units, and the Underwriter agrees to purchase such Firm Securities from the Company, on a firm commitment basis, at a purchase price of $4.59 per Unit, of which $4.50 shall be ascribed to each Share and $.09 shall be ascribed to each Redeemable Warrant therein, to be sold by the Underwriter at an initial public offering price of $5.10 per Unit, of which $5.00 shall be ascribed to each Share and $.10 shall be ascribed to each Redeemable Warrant therein. (b) In addition, the Company hereby grants the Underwriter the option (the "Over-allotment Option) to purchase from the Company, at any time or from time to time during a period of forty-five (45) days from the date of the Prospectus, all or any part of the Option Securities at a purchase price of $4.50 per share of Common Stock and/or $.09 per Redeemable Warrant, to be sold by the Underwriter at an initial public offering price of $5.00 per share and $.10 per Redeemable Warrant. Notice of -15- exercise of the Over-allotment Option, in whole or in part, shall be delivered by the Underwriter to the Company at least two (2) days in advance of the date on which the Option Securities are to be delivered to the Underwriter, provided that delivery of the Option Securities shall be made concurrently with tender of payment therefor. Option Securities may be purchased by the Underwriter only for the purpose of covering over-allotments in the sale of the Firm Securities, and the Underwriter shall have no obligation to make any over-allotments. No Option Securities shall be delivered and paid for unless the Firm Securities shall be simultaneously delivered or shall theretofore have been delivered and paid for as herein provided. (c) On the First Closing Date, the Company shall issue and sell to the Underwriter the Underwriter's Warrants. The total purchase price of the Underwriter's Warrants shall be $10. The Underwriter's Warrants shall be exercisable for a period of four years commencing 12 months from the Effective Date, at prices of $5.50 per Underwriter's Share and $.11 per Underwriter's Redeemable Warrant, respectively. The Underwriter's Warrant Agreement, including the forms of Underwriter's Warrant Certificates, shall be substantially in the form filed as Exhibit 4.3 to the Registration Statement. Payment for the Underwriter's Warrants shall be made on the First Closing Date. (d) Payment for the Firm Securities and the Option Securities shall be made on each of the First Closing Date and Option Closing Date (as hereinafter defined), respectively, by certified or bank cashier's check in New York Clearing House funds, payable to the order of the Company, or by Federal Funds wire transfer, at the offices of counsel to the Underwriter, or at such other place as agreed upon by the Underwriter and the Company, upon delivery of certificates (in form and substance reasonably satisfactory to the Underwriter) representing the Firm Securities and Option Securities to be sold at such closing or by confirmation of electronic transfer of the Firm Securities or Option Securities, as the case may be, to the Underwriter for the accounts of the Underwriter. Delivery and payment for the Firm Securities shall be made at 10:00 A.M. New York time, on or before the [third] business day following the Public Offering or at such earlier time as the Underwriter shall determine or as required by law, or at such other time as shall be agreed upon by the Underwriter and the Company. The hour and date of delivery and payment for the Firm Securities are called the "First Closing Date." The Firm Securities shall be registered in such name or names and in such authorized denominations as the Underwriter may request in writing at least two (2) full business days prior to Closing Date. The Company will permit the Underwriter to examine and package any certificates -16- representing the Firm Securities for delivery, at least one (1) full business day prior to the First Closing Date. Delivery for each of the Option Securities as provided above shall be made within two (2) business days after notice of exercise to the Company, and against payment therefor, as provided above. The hour and date of such delivery and payment made subsequent to the First Closing Date for Option Securities is referred to as the "Option Closing Date." The Option Securities shall be registered in such name or names and in such denominations as the Underwriter may request in writing at the time of exercise of the Over-allotment Option. The First Closing Date and Option Closing Date are collectively referred to herein as the "Closing Dates." (e) The Company shall not be obligated to sell or deliver any Firm Securities except upon tender of payment by the Underwriter for all the Firm Securities. 4. Public Offering by the Underwriter. The Underwriter agrees to cause the Firm Securities to be offered to the public initially at the prices and under the terms set forth in the Prospectus as soon, on or after the effective date of this Agreement, as the Underwriter deems advisable, but no more than five (5) full business days after such effective date. The Underwriter may allow such concessions and discounts upon sales to other dealers as set forth in the Prospectus. The Underwriter agrees to notify the Company in writing when the Public Offering is first made and when it is completed. After the completion of the initial public offering, the public offering prices, the concessions and the reallowance may be changed by the Underwriter. 5. Agreements of the Company. The Company covenants and agrees with the Underwriter that: (a) The Company will use its best efforts to cause the Registration Statement to become effective as promptly as possible, and will not at any time, whether before or after the Effective Date, file any amendment or supplement to the Registration Statement, (i) which shall not have been previously submitted to, and approved by, the Underwriter or counsel for the Underwriter a reasonable time prior to the filing thereof, (ii) to which the Underwriter or counsel for the Underwriter shall have reasonably objected in writing as not being in compliance with the Act or the Rules and Regulations or (iii) which is not in compliance with the Act or the Rules and Regulations. (b) The Company will notify the Underwriter, promptly after it shall have received notice of the effectiveness of the Registration Statement or any amendment or supplement -17- thereto, of the receipt of any comments of the Commission with respect thereto, of the time when the Registration Statement or any post-effective amendment thereto has become effective or any supplement to the Prospectus has been filed. (c) The Company will advise the Underwriter promptly of any request of the Commission for an amendment or supplement to the Registration Statement or the Prospectus, or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, or of any judgment, order, injunction or decree preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the institution of any proceedings for any of such purposes, of which it has knowledge, and will use its best efforts to prevent the issuance of any stop order, and, if issued, to obtain as promptly as possible the lifting thereof. (d) If at any time when a prospectus relating to the Public Securities and/or the Underwriter Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or counsel for the Underwriter, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Underwriter promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be satisfactory to counsel for the Underwriter, and the Company will furnish to the Underwriter copies of such amendment or supplement as soon as available and in such quantities as the Underwriter may request. (e) Within the time during which the Prospectus is required to be delivered under the Act, or pursuant to the undertakings of the Company in the Registration Statement, the Company will comply, at its own expense, with all requirements imposed upon it by the Act, the Rules and Regulations, the 1934 Act or the rules and regulations of the Commission promulgated under the 1934 Act, each as now or hereafter amended or supplemented, and by any order of the Commission so far as necessary to permit the continuance of sales of, or dealings in, the Registered Securities. (f) The Company will furnish to the Underwriter, without charge, two (2) signed copies of the Registration Statement and of any amendment of supplement thereto which has been filed -18- prior to the date of this Agreement, together with two (2) copies of each exhibit filed therewith, and of five (5) conformed copies of such Registration Statement and amendments thereto (unsigned and exclusive of exhibits). The signed copies of the Registration Statement so furnished to the Underwriter will include signed copies of any and all consents and reports of the independent public auditors as to the financial statements included in the Registration Statement and Prospectus, and signed copies of any and all consents and certificates of any other person whose profession gives authority to statements made by them and who are named in the Registration Statement or Prospectus as having prepared, certified or reviewed any parts thereof. (g) The Company will deliver to the Underwriter, without charge, (i) prior to the Effective Date, copies of each Preliminary Prospectus distributed to the public and filed with the Commission bearing in red ink the statement required by Item 501 of Regulation S-B of the Rules and Regulations; (ii) on and from time to time after the Effective Date, copies of the Prospectus; and (iii) as soon as they are available, and from time to time thereafter, copies of each amended or supplemented Prospectus, and the number of copies to be delivered in each such case will be such as the Underwriter may reasonably request. The Company has consented and hereby consents to the use of each Preliminary Prospectus for the purposes permitted by the Act and the Rules and Regulations. The Company authorizes the Underwriter and dealers to use the Prospectus in connection with the sale of the Offered Securities and the Public Warrant Shares, for such period as, in the opinion of counsel for the Underwriter, delivery of the Prospectus is required to comply with the applicable provisions of the Act and the Rules and Regulations. (h) For so long as any Redeemable Warrant is outstanding, the Company shall, at its own expense, use its reasonable best efforts to cause post-effective amendments to the Registration Statement, or a new registration statement relating to the Public Warrant Shares, to become effective in compliance with the Act and without any lapse of time between the effectiveness of the Registration Statement and of any such post-effective amendment or new registration statement. The Company also agrees to take such action as may be necessary to qualify the Registered Securities for offer and sale under the Blue Sky or securities laws of such states or other jurisdictions as is required and as the Underwriter or counsel for the Underwriter may designate (provided that such states or jurisdictions do not require the Company to qualify as a foreign corporation or to file a general consent to service of process) and to continue such qualifications in effect so long as may be required for the purposes of the distribution of -19- the Registered Securities. In each state or jurisdiction where the Company shall qualify the Registered Securities as above provided, the Company will prepare and file such statements or reports as may be required by the laws of such state or jurisdiction, and the Underwriter shall, upon the written request of the Company, supply the Company with all information known to the Underwriter and required to be included in such statements or reports. (i) Except as otherwise provided in (iii) below, during the period of three years from the First Closing Date, the Company, at its expense, shall furnish the Underwriter with (i) copies of each annual report of the Company; (ii) as soon as practicable and in any event upon filing such report with the Commission, a financial report of the Company, which will include a balance sheet as of the end of the preceding fiscal year, a statement of operations, a statement of stockholders' equity (deficit) and a statement of cash flows covering such fiscal year, such report being in reasonable detail and audited by independent public auditors; (iii) during the period of two years from the First Closing Date, for each fiscal quarter of the Company other than the last fiscal quarter in any fiscal year, as soon as practicable and in any event upon filing such report with the Commission, a financial report of the Company, which will include a balance sheet as of the end of the fiscal quarter, a statement of operations, a statement of stockholders' equity (deficit) and a statement of cash flows covering such fiscal quarter, together with notes thereto, for such fiscal quarter and, with respect to the statement of operations, for the fiscal year to date, setting forth in each case in comparative form the corresponding figures for the preceding year, such report being in reasonable detail and certified by the Chief Financial Officer of the Company to be correct and complete, to fairly present the financial condition of the Company at the date thereof and the results of operations for the period then ending and to have been prepared in accordance with generally accepted accounting principles consistently applied, except for normal year end adjustments; and (iv) a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4 received or filed by the Company from time to time; (v) a copy of any report filed by the Company pursuant to the 1934 Act; (vi) copies of all statements, documents or other information which the Company shall mail or otherwise make available to any class of its security holders, or shall file with the Commission or with any exchange upon which the securities issued by the Company shall then be listed or registered; and (vii) such other publicly available information as the Underwriter may from time to time request. If, and so long as, the Company has an active subsidiary or subsidiaries, the Company's financial statements will be on a consolidated basis to the extent the accounts of the Company and its subsidiary or subsidiaries are -20- consolidated in reports furnished to its stockholders generally. Separate financial statements shall be furnished for all subsidiaries whose accounts are not consolidated but which at the time are significant subsidiaries as defined by the Rules and Regulations. With respect to each consolidated and unconsolidated significant subsidiary and affiliate, if any, the financial reports shall be in sufficient detail to show the basis of any consolidated reports required hereunder. Notwithstanding the foregoing, the Company's financial statements shall be deemed to comply with the requirements of this paragraph if they comply with the Rules and Regulations. (j) For a period of five years from the First Closing Date, the Company shall not change its independent public accountants without the Underwriter's prior consent. For a period of five years from the First Closing Date, the Company shall promptly submit to the Underwriter copies of all accountants' management reports and similar correspondence between the Company and its independent public accountants. (k) The Company on the First Closing Date will sell to the Underwriter the Underwriter's Warrants according to the terms specified in Section 3 hereof. The Company has reserved and shall continue to reserve a sufficient number of shares of Common Stock for issuance upon exercise of the Underwriter's Warrants and the Underwriter's Redeemable Warrants. (l) For the five year period following the First Closing Date, the Company agrees that the Underwriter shall have the right to nominate, and the Company shall use its best efforts to cause the election of, one member of the Company's Board of Directors, who shall be reasonably acceptable to the Company. The Underwriter may also appoint a designee to be engaged as an advisor at all meetings of the Company's Board of Directors, which advisor would be entitled to the same cash compensation and the same reimbursement of expenses as the Company affords its directors who are not also officers or employees of the Company (and would, in any event, be reimbursed for all reasonable costs incurred in attending Board meetings, including but not limited to, food, lodging and transportation) and to receive all copies of all notices and other documents distributed to the members of the Company's Board of Directors (including, but not limited to, any unanimous consents prepared and advance notices of all proposed Board actions or consents), as if such advisor were a member of the Company's Board of Directors; provided, however, that during any period a person designated by the Underwriter is engaged by the Board as an advisor, the Underwriter shall not be entitled to designate a director. To the extent permitted by law, the Company -21- agrees to indemnify and hold the designee (as a director or advisor) and the Underwriter harmless against any and all claims, actions, awards and judgments arising out of his service. The Company shall immediately after the First Closing Date use its best efforts to obtain directors' and officers' liability insurance in amounts reasonable and customary for similarly situated companies, at a premium that the Company can reasonably afford. In the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, it will, if possible, include the Underwriter and its designee (as a director or advisor) as insureds under such policy. The rights and benefits of such indemnification and the benefits of such insurance shall, to the extent possible, extend to the Underwriter insofar as it may be, or be alleged to be, responsible for such advisor. The Company will deliver, on or before the date hereof, the agreements of each of its officers, directors and holders of 5% or more of its Common Stock, to vote, during the five (5) year period commencing on the First Closing Date, for the election of the Underwriter's designee for director, if any. (m) The Company will maintain insurance in full force and effect of the types and in the amounts adequate for its business and in line with insurance maintained by similar companies and businesses, including but not limited to, personal injury and product liability insurance and insurance covering all personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. (n) During the course of the distribution of the Offered Securities, the Company will not take, directly or indirectly, any action designed to or which might, in the future, reasonably be expected to cause or result in stabilization or manipulation of the prices of the Common Stock and/or Redeemable Warrants. During the so-called "quiet period" in which delivery of a prospectus is required, if applicable, the Company will not issue press releases or engage in any other publicity regarding the Company, its business or any terms of the Public Offering, without the Underwriter's prior written consent which shall not be unreasonably withheld or unduly delayed. During such period, copies of all documents which the Company or its public relations advisors intend to distribute will be provided to the Underwriter for review prior to such distribution. (o) The Company will use its best efforts at its cost and expense, to take all necessary and appropriate action to maintain the listing of the Common Stock and the Redeemable Warrants on NASDAQ and the Boston Stock Exchange for a period of -22- five years from the First Closing Date and will, as promptly as practicable following determination by the Company that the Common Stock and Redeemable Warrants will qualify therefor, use its best efforts to list such securities on The Nasdaq National Market and maintain such listing for as long as such securities remain qualified. (p) On or prior to the Effective Date, the Company shall register with (i) the Corporation Records Service (including annual report information) published by Standard & Poor's Corporation or (ii) Moody's Industrial Manual (Moody's OTC Industrial Manual not being sufficient for these purposes). (q) The Company has filed a registration statement with the Commission pursuant to Sections 12(b) and 12(g) of the 1934 Act with respect to the Common Stock and Redeemable Warrants and will use its best efforts to have same declared effective by the Commission on or before the Effective Date. The Company will use its best efforts to maintain such registration in effect for a period of not less than 5 years from the First Closing Date. (r) The Company will at all times from the First Closing Date until at least five (5) years from such date, maintain in full force, or cause to be maintained in full force, from an insurer rated "A" or better (General Policyholders Rating) in the most recent edition of "Best Life Reports", term life insurance in the amount of at least $1,000,000 on the life of Dan Cooper. Such policy shall be owned by the Company and all benefits thereunder shall be payable to the Company. (s) On the Closing Dates, all transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Offered Securities and the Underwriter's Warrants will have been fully paid by the Company and all laws imposing such taxes will have been fully complied with. (t) On the First Closing Date, the Company and the Underwriter shall enter into a consulting agreement, substantially in the form filed as Exhibit 1.3 to the Registration Statement, pursuant to which the Underwriter will offer to provide financial consulting services to the Company for a two-year period (the "Consulting Agreement"). (u) Except for (i) the Public Securities, (ii) the Underwriter's Securities, (iii) the issuance of Common Stock pursuant to the exercise of any Non-Plan Options and (iv) the issuance, subject to the terms hereof, to employees, officers and -23- directors of stock options to purchase a number of shares of Common Stock not to exceed 600,000 shares pursuant to the Stock Option Plan, the Company will not, from and after the date hereof until thirty-six (36) months after the First Closing Date, sell or issue any shares of Common Stock, preferred stock or other equity securities of the Company or sell or grant options, warrants or rights to purchase any shares of equity securities of the Company, without the Underwriter's prior written consent. Notwithstanding the foregoing, during the 36-month period following the First Closing Date, the Company may issue securities in connection with an acquisition, merger or similar transaction without the Underwriter's prior consent, provided that such securities are not publicly registered and the acquirer of the securities is not granted registration rights with respect thereto which may be exercised prior to thirty-six (36) months after the First Closing Date. (v) The Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8, during the thirty-six (36) months following the First Closing Date without the Underwriter's prior written consent. Furthermore, for a period of five years after the First Closing Date, the Company shall notify the Underwriter in writing at least fifteen (15) days before the proposed filing of any registration statement for any public offering of any equity or debt securities of the Company or its Subsidiaries (other than securities issued pursuant to an employee benefit plan or a transaction subject to Rule 145 promulgated under the Act), or at least fifteen (15) days before the private offering of any debt or equity securities by the Company or its Subsidiaries through a private financing, in order that the Underwriter or, at its option, a group of associated investment bankers of which the Underwriter shall be a co-manager, shall have a right of first refusal to effect such offering on terms at least as favorable as otherwise offered in writing to the Company. A private offering of securities shall not include shares given as compensation to employees of the Company. The Underwriter agrees to notify the Company if the Underwriter intends to exercise its right of first refusal within 15 days of receipt by the Underwriter of such notice from the Company. A refusal by the Underwriter in respect of any offering made by the Company shall not prejudice any further rights of first refusal during the five year period, including without limitation the right of first refusal of the Underwriter with respect to any revised terms otherwise offered to the Company. -24- (w) The Company shall retain Continental Stock transfer & Trust Company ("Continental Stock") as transfer agent for the Common Stock and as warrant agent for the Redeemable Warrants. For the five (5) year period following the First Closing Date, the Company will not change its transfer agent or warrant agent without the prior written consent of the Underwriter. (x) Subsequent to the dates as of which information is given in the Registration Statement and Prospectus and prior to the Closing Dates, except as disclosed in or contemplated by the Registration Statement and Prospectus, (i) the Company will not have incurred any liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business; (ii) there shall not have been any change in the capital stock, funded debt (other than regular repayments of principal and interest on existing indebtedness) or other securities of the Company, any adverse change in the condition (financial or otherwise), business, operations, income, net worth or properties, including any loss or damage to the properties of the Company (whether or not such loss is insured against), which could adversely affect the condition (financial or otherwise), business, operations, income, net worth or properties of the Company; and (iii) the Company shall not have paid or declared any dividend or other distribution on its Common Stock or its other securities or redeemed or repurchased any of its Common Stock or other securities. The Company shall furnish to the Underwriter as early as practicable prior to each of the date hereof, the First Closing Date and each Option Closing Date, if any, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in no event shall be as of a date more than sixty (60) days prior to the date of the Registration Statement) which have been read by the Company's independent public accountants, as stated in their letters to be furnished pursuant to Section 9(d) hereof. (z) [Address employment agreements] The Company will not, for a period of three (3) years from the First Closing Date increase or authorize an increase in the compensation of its five (5) most highly paid employees in any year without the prior written consent of the Underwriter or unless permitted by the terms of employment contracts satisfactory to the Underwriter. (aa) The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit -25- preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (bb) For a period of three years from the Effective Date, the Company will retain a financial public relations firm reasonably acceptable to Underwriter. (cc) The Company agrees that for so long as the Common Stock is registered under the 1934 Act, the Company will hold an annual meeting of shareholders for the election of directors within 180 days after the end of each of the Company's fiscal years and, within 150 days after the end of each of the Company's fiscal years, will provide the Company's shareholders with the audited financial statements of the Company as of the end of the fiscal year just completed prior thereto. Such financial statements shall be those required by applicable rules under the 1934 Act and shall be included in an annual report pursuant to the requirements thereof. (dd) For a period equal to the lesser of (i) seven (7) years from the date hereof and (ii) the sale to the public of the Underwriter's Securities, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form S-1 or Form SB-2 (or other appropriate form) for the registration under the Act of the Underwriter's Redeemable Warrants, the Underwriter's Shares or the Underwriter's Warrant Shares. (ee) Subject to the provisions of applicable law, the Underwriter shall be entitled to receive a warrant solicitation fee of five percent (5%) of the aggregate exercise price of the Redeemable Warrants for each Redeemable Warrant exercised during the period commencing one year after the Effective Date; provided, however, that the Underwriter will not be entitled to receive such compensation in Redeemable Warrant exercise transactions in which (i) the market price of the Common Stock at the time of exercise is lower than the exercise price of the Redeemable Warrants; (ii) the Redeemable Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made in the Registration Statement and in documents provided to holders of Redeemable Warrants at the time of exercise; (iv) the holder thereof has not confirmed in writing that the Underwriter solicited the exercise of the Redeemable Warrants; or (v) the solicitation -26- or exercise of the Redeemable Warrants was in violation of Regulation M promulgated under the 1934 Act. (ff) Promptly following the First Closing Date the Board of Directors shall designate an Audit Committee, at least one of whose members shall be the director, if any, who is designated by the Underwriter. A majority of the members of the Audit Committee shall be independent directors. (gg) The Company shall cause each director, officer and shareholder of the Company, to enter into an agreement with the Underwriter pursuant to which he, she or it will agree not to sell or otherwise transfer any shares of Common Stock and or options or warrants to acquire Common Stock of the Company for a period of 24 months following the First Closing Date without the prior consent of the Underwriter. (hh) The Company shall engage the Underwriter's counsel, at such counsel's regular hourly rates, to provide the Underwriter, on the First Closing Date and annually thereafter, until the earlier of (i) such time as the Common Stock is listed on the New York Stock Exchange or American Stock Exchange or quoted on NASDAQ/NMS or (ii) the second anniversary of the First Closing Date, with an opinion, setting forth those states in which the Common Stock and Redeemable Warrants may be traded in non-issuer transactions under the Blue Sky laws of the 50 states. The cost of the same shall not exceed $10,000. (ii) There shall be no agreements between the Company and any securityholder except those which are disclosed in the Registration Statement. (jj) The Company will arrange to have its securityholders agree to be bound by such "lock-up" or similar transfer restrictions as may be required by the NASD or any exchange or similar entity. (kk) For a period of three (3) years from the Effective Date, the Company will not offer or sell any of its securities pursuant to Regulation S promulgated under the Act without the prior written consent of the Underwriter. 6. Indemnification. (a) The Company agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act against any losses, claims, damages, expenses or liabilities, joint or several -27- (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all reasonable attorney's fees), to which the Underwriter or any such controlling person may become subject, under the Act or otherwise, but only as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damages or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, in reliance upon, and in conformity with, written information furnished to the Company by the Underwriter specifically for use in the preparation thereof. The information set forth on the cover page concerning the Underwriter and under the caption "Underwriting" or otherwise specifically relating to the Underwriter in the Registration Statement shall be deemed to have been furnished to the Company by the Underwriter for purposes hereof. This indemnity will be in addition to any liability which the Company may otherwise have. (b) The Underwriter agrees that it will indemnify and hold harmless the Company, each of its directors, each nominee (if any) for director named in the Prospectus, each of its officers who has signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act, against any losses, claims, damages, expenses or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorney's fees), joint or several, to which the Company or any such director, nominee, officer or controlling person may become subject under the Act or otherwise, but only as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration -28- Statement, any Preliminary Prospectus or the Prospectus or such amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by the Underwriter specifically for use in the preparation thereof, provided, however, that the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall (i) only relate to any untrue statement or alleged untrue statement or any omission or alleged omission which applies to such Underwriter and (ii) be limited in amount to the net proceeds received by the Company from the Underwriter. This indemnity will be in addition to any liability which the Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than solely pursuant to this Section 6. In case any such action is brought against any indemnified party, which notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may choose, jointly with any other indemnifying party similarly notified, reasonably assume the defense thereof. Subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall have a default judgment entered against it or shall settle such action without the consent of the indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, (ii) the named parties to such action (including any impleaded parties) include both the indemnified and the indemnifying party and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different -29- from or in conflict with any legal defenses which may be available to the indemnified party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the indemnified party, which firm shall be designated in writing by the indemnified party), or (iii) the professional competence of the counsel to be employed by the indemnifying party is not reasonably acceptable to the indemnified party. No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. The indemnifying party shall not be liable to indemnify the indemnified party for any settlement of any action effected without the indemnifying party's prior written consent to any such settlement, which consent shall not be unreasonably withheld. 7. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Underwriter makes a claim for indemnification pursuant to Section 6 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 6 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of the Underwriter, then the Company and the Underwriter shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) in such proportions such that the Underwriter shall be responsible in the aggregate for that portion of such losses, claims, damages or liabilities determined by multiplying the total amount of such losses, claims, damages or liabilities by the difference between the aggregate public offering price of the Units (or underlying Shares and Redeemable Warrants) and the aggregate purchase price of the Units (or underlying Shares and Redeemable Warrants) to such Underwriter and dividing the product by the aggregate public offering price of the Units (or underlying Shares and Redeemable Warrants), and the Company shall be responsible for that portion of such losses, claims, damages or liabilities determined by multiplying the total amount of such losses, claims, damages or liabilities by the aggregate purchase price of the Units -30- (or underlying Shares and Redeemable Warrants) to the Underwriter and dividing the product thereof by the aggregate public offering price of the Units (or underlying Shares and Redeemable Warrants). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company and the Underwriter. As used in this Section 7, the term "Underwriter" includes any person who controls the Underwriter within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this Section 7 is not permitted by law, then the Underwriter shall be entitled to contribution from the Company, its officers, directors and controlling persons to the fullest extent permitted by law. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this Section 7, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this Section 7, or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. Survival of Agreements, etc. All statements contained in any schedule, exhibit or other instrument delivered by or on behalf of the parties hereto, or in connection with the transactions contemplated by this Agreement, shall be deemed to be representations and warranties hereunder. Notwithstanding any investigations made by or on behalf of the parties to this Agreement, all representations, warranties, indemnities, and agreements made by the parties to this Agreement or pursuant hereto shall remain in full force and effect and will survive delivery of and the payment for the Offered Securities, for a period of five years from the date hereof, except that, if a party hereto has actual knowledge at the time of the Closing Dates of facts which would constitute a breach of the representations and warranties contained herein, such breaches shall be waived by such party if such party consummates the transactions contemplated by this Agreement. -31- 9. Conditions of Underwriter's Obligations. The obligations of the Underwriter hereunder will be subject to the accuracy of and compliance with (as of the date of this Agreement and as of the Closing Dates) the representations, warranties and agreements contained in Sections 2 and 5 hereof and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:30 p.m., New York City time, on the date of this Agreement, or such later date as shall be consented to in writing by the Underwriter; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been initiated or be pending or, to the best knowledge of the Company or the Underwriter, contemplated or threatened by the Commission; any request by the Commission for additional information to be included in the Registration Statement or the Prospectus or otherwise shall have been complied with to the satisfaction of counsel for the Underwriter; qualification under the securities laws of such states as the Underwriter may designate of the issue and sale of the Offered Securities upon the terms and conditions herein set forth or contemplated and containing no provision unacceptable to the Underwriter shall have been secured; and no stop order shall be in effect denying or suspending effectiveness of such qualifications, nor shall any stop order proceedings with respect thereto be instituted or pending or, to the best knowledge of the Company and the Underwriter, threatened under such laws. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Units (or underlying Shares and Redeemable Warrants) and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the First Closing Date the Company shall have provided evidence satisfactory to the Underwriter of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) No amendments to the Registration Statement, any Preliminary Prospectus or the Prospectus to which the Underwriter or counsel for the Underwriter shall have objected, after having received reasonable notice of a proposal to file the same, shall have been filed. (c) The Underwriter shall not have discovered and disclosed to the Company prior to the respective Closing Dates that the Registration Statement or the Prospectus, or any amendment or -32- supplement thereto, contains an untrue statement of fact which, in the reasonable opinion of counsel for the Underwriter, is material, or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (d) The Underwriter shall have received from BDO Seidman, LLP, two certificates or letters, one dated and delivered on the Effective Date and one dated and delivered on the First Closing Date, in form and substance satisfactory to the Underwriter, stating that: (i) they are independent certified public accountants with respect to the Company within the meaning of the Act and the Rules and Regulations, and no disclosure under Item 13 of a registration statement on Form SB-2 is required insofar as it relates to them; (ii) the financial statements included in the Registration Statement and the Prospectus were examined by them and, in their opinion, comply as to form in all material respects with the applicable requirements of the Act, the Rules and Regulations and instructions of the Commission with respect to registration statements on Form SB-2 and that the Underwriter may rely upon the opinion of such firm with respect to the financial statements included in the Registration Statement; (iii) on the basis of inquiries and procedures conducted by them (not constituting an examination in accordance with generally accepted auditing standards), including a reading of the latest available unaudited interim financial statements or other financial information of the Company (with an indication of the date of the latest available unaudited interim financial statements), inquiries of officers of the Company who have responsibility for financial and accounting matters, reviews of minutes of all meetings of the shareholders and the Board of Directors of the Company and its subsidiaries since December 31, 1996, and other specified inquiries and procedures, nothing has come to their attention as a result of the foregoing inquiries and procedures that causes them to believe that: (A) during the period from (and including) December 31, 1996 to a specified date not more than five days prior to the date of such letter, there has been any change in the Common Stock or other securities of the Company (except as specifically disclosed in such certificates or letters), any decreases in shareholders' equity or working capital or any increases in net current liabilities, net liabilities or long-term debt (except, -33- regarding the foregoing, for decreases resulting from operating losses continuing at rates commensurate with those incurred in prior periods) or in any other item appearing in the Company's financial statements as to which the Underwriter may request advice, in each case as compared with amounts shown in the audited balance sheet as of December 31, 1996, as included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or will or may occur; and (B) during the period from (and including) December 31, 1996 to such specified date there was any decrease in revenues or in the total or per share amounts of income before extraordinary items or net income or loss, or any other material change in such other items appearing in the Company's financial statements as to which the Underwriter may request advice, in each case as compared with the corresponding period in the fiscal period ended December 31, 1996, except in each case for increases, changes or decreases which the Prospectus discloses have occurred or will or may occur. (iv) On the basis of certain procedures specified by the Underwriter and described in their letter, they have compared specific dollar amounts, numbers of shares, percentages of revenue and earnings and other information (to the extent they are contained in or derived from the accounting records of the Company, and excluding any questions of legal interpretations) included in the Registration Statement and Prospectus with the accounting records and other appropriate data of the Company and have found them to be in agreement. Any changes, increases or decreases in the items set forth in such letter which, in the sole judgment of the Underwriter, are materially adverse with respect to the financial position or results of operations of the Company shall be deemed to constitute a failure of the Company to comply with the conditions of the obligations to the Underwriter hereunder. (e) The Underwriter shall have received from Gersten, Savage, Kaplowitz & Fredericks LLP ("GSK&F") counsel for the Company, two opinions, one dated and delivered on the Effective Date and one dated and delivered on the First Closing Date, in form and substance satisfactory to Zimet, Haines, Friedman & Kaplan, counsel for the Underwriter. (f) All corporate proceedings relating to this Agreement, the Registered Securities, the Registration Statement, each Preliminary Prospectus, the Prospectus and other related -34- matters shall be satisfactory to, or approved by, counsel for the Underwriter, and the Underwriter shall have received from such counsel a signed opinion, in form and substance reasonably satisfactory to the Underwriter, dated the First Closing Date, with respect to such corporate proceedings and other legal matters in connection with this Agreement, the Registered Securities, the Registration Statement, the Prospectus (other than the financial statements and other financial data contained therein) and related matters as the Underwriter may reasonably require, and the Company shall have furnished to such counsel such documents, certificates and opinions as they may have requested for the purpose of enabling them to pass upon such matters. (g) The Underwriter shall have received a certificate, dated and delivered as of the date of the First Closing Date, of the Chief Executive Officer and Secretary of the Company stating that: (i) The Company and such officers have complied with all the agreements and satisfied all the conditions on their respective part to be performed or satisfied hereunder at or prior to such date, including but not limited to the agreements and covenants of the Company set forth in Section 5 hereof. (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending, contemplated or threatened under the Act. (iii) Such officers have carefully examined the Registration Statement and the Prospectus and any supplement or amendment thereto, each of which contains all statements required to be stated therein or necessary to make the statements therein not misleading and does not contain any untrue statement of a material fact, and since the Effective Date there has occurred no event required to be set forth in the amended or supplemented prospectus which has not been set forth. (iv) As of the date of such certificate, the representations and warranties contained in Section 2 hereof are true and correct as if such representations and warranties were made in their entirety on the date of such certificate, and the Company has complied with all its agreements herein contained as of the date hereof and further certifying as to the matters referred to in Sections 9(h) and (i). (v) Subsequent to the respective dates as of which information is given in the Registration Statement and -35- Prospectus, and except as contemplated in the Prospectus, the Company has not incurred any liabilities or obligations, direct or contingent, or entered into any material transactions and there has not been any change in the Common Stock or funded debt of the Company or any adverse change in the condition (financial or otherwise), business, operations, income, net worth, properties or prospects of the Company. (vi) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company shall have not sustained any material loss of or damage to its properties, whether or not insured, and since such respective dates, no dividends or distributions whatever shall have been declared or paid, or both, on or with respect to any security (except interest in respect of loans) of the Company. (vii) Neither the Company nor, to the knowledge of the officers executing such certificate, any of its officers or affiliates shall have taken, and the Company, its officers and affiliates will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in the stabilization or manipulation of the price of the Company's securities to facilitate the sale or resale of the Offered Securities. (viii) No action, suit or proceeding, at law or in equity, shall be pending or, to the knowledge of such officers, threatened against the Company, or affecting any of its properties, before or by any commission, board or other administrative agency, except as otherwise set forth in the Registration Statement. (h) On the First Closing Date, the Company shall not be a party to, or be involved in, any arbitration, litigation (except as set forth in the Registration Statement) or governmental proceeding, which is then pending, or, to the knowledge of the Company, threatened, of a character which might materially and adversely affect the Company or be required to be disclosed in the Registration Statement. (i) The Company shall not have sustained, at any time since December 31, 1996, any loss on account of fire, flood, accident, or other calamity, whether or not covered by insurance, which, in the sole judgment of the Underwriter, adversely affects the business of the Company. (j) All of the Units, Shares and Redeemable Warrants shall have been tendered for delivery in accordance with the terms and provisions of this Agreement. -36- (k) The Underwriter shall have received the agreements referred to in Sections________and________hereof. (l) At each of the Closing Dates, (i) the representations and warranties of the Company contained in this Agreement shall be true and correct with the same effect as if made on and as of the Closing Dates and the Company shall have performed all its obligations due to be performed prior thereto; (ii) the Registration Statement and the Prospectus and any amendment or supplement thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations and conform in all material respects to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) there shall have been, since the date as of which information is given, no material adverse change in the condition, business, operations, properties, business prospects, securities, long-term or short-term debt or general affairs of the Company from that set forth in the Registration Statement or the Prospectus, except changes which the Registration Statement and the Prospectus indicate will occur after the Effective Date and prior to such Closing Date, and the Company shall not have incurred any material liabilities or obligations, direct or contingent, or entered into any material transaction, contract or agreement not in the ordinary course of business other than as referred to in the Registration Statement and the Prospectus; and (iv) except as set forth in the Prospectus, no action, suit or proceeding, at law or in equity, shall be pending or threatened against the Company which might be required to be set forth in the Registration Statement, and no proceedings shall be pending or threatened against the Company before or by any commission, board or administrative agency in the United States or elsewhere, wherein an unfavorable decision, ruling or finding might adversely affect the condition, business, operations, properties, prospects or general affairs of the Company. (m) Upon exercise of the Over-allotment Option provided for in Section 3(b) hereof, the obligations of the Underwriter to purchase and pay for the Option Shares and/or the Redeemable Warrants will be subject to the following additional conditions: (i) The Registration Statement shall remain effective at the Option Closing Date, and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending, -37- or, to the knowledge of the Underwriter or the Company, shall be contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the satisfaction of counsel for the Underwriter. (ii) At the Option Closing Date there shall have been delivered to the Underwriter the signed opinion of GSK&F, counsel for the Company, in form and substance reasonably satisfactory to Zimet, Haines, Friedman & Kaplan, counsel for the Underwriter, which opinion shall be substantially the same in scope and substance as the opinions furnished to the Underwriter by such counsel at the First Closing Date pursuant to Section 9(e). (iii) At the Option Closing Date there shall have been delivered to the Underwriter a certificate of the Chief Executive Officer and the Secretary of the Company dated the Option Closing Date, in form and substance satisfactory to counsel for the Underwriter, substantially the same in scope and substance as the certificates furnished to the Underwriter at the First Closing Date pursuant to Section 9(g). (iv) At the Option Closing Date there shall have been delivered to the Underwriter a certificate or letter, in form and substance satisfactory to the Underwriter, from BDO Seidman, LLP, dated the Option Closing Date and addressed to the Underwriter, confirming the information in its certificate or letter referred to in Section 9(d) hereof and stating that nothing has come to their attention during the period from the ending date of their review referred to in said certificate or letter to a date not more than five business days prior to the Option Closing Date which would require any change in said certificate or letter if it were required to be dated the Option Closing Date. (v) All proceedings taken at or prior to the Option Closing Date in connection with the sale and transfer of the Option Securities shall be satisfactory in form and substance to the Underwriter, and the Underwriter and counsel for the Underwriter, shall have been furnished with all such documents, certificates, affidavits and opinions as the Underwriter and counsel for the Underwriter may reasonably request in connection with this transaction in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or its compliance with any of the covenants or conditions contained herein. (n) The Company shall have executed and delivered the Public Warrant Agreement, the Underwriter's Warrant Agreement -38- and the Consulting Agreement, and shall have issued the Underwriter's Warrants. (o) The Company shall have furnished to the Underwriter such other certificates, documents, and opinions as the Underwriter may have reasonably requested (including certificates of officers of the Company) as to the accuracy, at the Closing Dates, of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder and as to other conditions concurrent and precedent to the obligations of the Underwriter hereunder. The opinions and certificates mentioned above or elsewhere in this Agreement will be deemed to be in compliance with the provisions hereof only if they are reasonably satisfactory to the Underwriter and to counsel for the Underwriter. Any certificate signed by an officer of the Company delivered to the Underwriters or to counsel for the Underwriters, will be deemed a representation and warranty by the Company to the Underwriters as to the statements made therein. 10. Effective Date. This Agreement will become effective at 9:30 a.m. on the first business day following the date on which the Registration Statement becomes effective; provided, however, this Agreement will become effective at such later time after the Registration Statement becomes effective as the Underwriter may determine on and by notice to the Company or by release of any of the Offered Securities for sale to the public or by any other action constituting a commencement of the Public Offering. For the purposes of this Section 10, the Offered Securities will be deemed to be so released upon the release for publication of any newspaper advertisement relating to the Offered Securities or upon the release by the Underwriter of telegrams offering the Offered Securities for sale to securities dealers, whichever may occur first. The term "business day" shall mean a calendar day other than a Saturday, Sunday or holiday. Notwithstanding anything herein to the contrary, the provisions of this Section and of Sections 6, 7, 11 and 12 hereof will, however, be effective upon the execution of this Agreement. 11. Termination. This Agreement may be terminated by the Underwriter by notice to the Company (i) at any time before this Agreement becomes effective in accordance with Section 9 hereof; (ii) if, prior to the First Closing Date, the Company shall have failed or refused to fully comply with any of the provisions of this Agreement on its part to be performed prior thereto, or if any of the agreements, conditions, covenants, representations or -39- warranties of the Company herein contained shall not have been performed or fulfilled within the times specified; (iii) trading in securities generally on the New York Stock Exchange or the American Stock Exchange will have been suspended; (iv) limited or minimum prices will have been established on either such Exchange or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD; (v) a banking moratorium will have been declared either by federal or New York State authorities; (vi) any other restrictions on transactions in securities materially affecting the free market for securities or the payment for such securities, will be established by either of such Exchanges, by the Commission by any other federal or state agency, by action of the Congress or by Executive Order; (vii) the Company will have sustained a material loss, whether or not insured, by reason of fire, flood, accident or other calamity; (viii) any action has been taken by the Government of the United States or any department or agency thereof which, in the sole judgment of the Underwriter, has had a material adverse effect upon the general market for securities; (ix) if, prior to the First Closing Date, there shall have occurred the outbreak of any war or any other event or calamity which, in the sole judgment of the Underwriter, materially disrupts the financial markets of the United States; (x) if, prior to the First Closing Date, the general market for securities or political, legal or financial conditions should deteriorate so materially from that in effect on the date of this Agreement that, in the sole judgment of the Underwriter, it becomes impracticable for the Underwriter to commence or proceed with the Public Offering of the Offered Securities and with the payment for or acceptance thereof; (xi) if trading of any securities of the Company shall have been delisted on any exchange or in any over-the-counter market; or (xii) if, prior to the First Closing Date, the Underwriter determines, in its sole discretion, that any materially adverse change shall have occurred, since the date as of which information is given in the Registration Statement and the Prospectus, in the financial condition, business, prospects, operations, properties or obligations of the Company. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 7, 8 and 12 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 12. Expenses; Blue Sky Filings and Expenses. (a) Whether or not the Public Offering is consummated, the Company will pay all costs and expenses incident to the performance of the obligations of the Company hereunder, -40- including without limiting the generality of the foregoing, (i) the preparation, printing, filing, and copying of the Registration Statement, Prospectus, this Agreement, the Selected Dealer Agreement, and other underwriting documents, if any, and any drafts, amendments or supplements thereto, including the cost of all copies thereof supplied to the Underwriter in such quantities as reasonably requested by the Underwriter and the costs of mailing Prospectuses to offerees and purchasers of the Offered Securities; (ii) the out-of-pocket travel expenses of the Underwriter and counsel to the Underwriter or other professionals designated by the Underwriter to visit the Company's facilities for purposes of discharging due diligence responsibilities (and if conferences and discussions are held outside New York, New York, the Company shall pay such reasonable amount of pre-approved traveling and lodging out-of-pocket expenses as may be incurred by the Underwriter and its counsel, payable when incurred and billed); (iii) the printing, engraving, issuance and delivery of certificates representing the Offered Securities, including any transfer or other taxes payable thereon; (iv) the registration or qualification of the Offered Securities under state securities or "blue sky" laws (including attorneys fees of $35,000 (payable on the First Closing Date) and disbursements of counsel to the Underwriter (to be paid monthly as incurred, except that the amount of blue sky filing fees shall be paid by the Company to the Underwriter's counsel at the time application for qualification of the offering under blue sky laws is made); (v) all reasonable fees and expenses of the Company's counsel and accountants; [(vi) all costs, expenses and filing fees in connection with review of the terms of the offering by the NASD (it being agreed that all reasonable fees and expenses of the Underwriter and Underwriter's counsel in securing NASD approval, shall be paid by the Company)]; (vii) all costs and expenses of any listing of the Offered Securities on NASDAQ and Boston Stock Exchange; (viii) all costs and expenses of three (3) bound volumes provided to the Underwriter of all documents, paper exhibits, correspondence and records forming the materials included in the offering; (ix) the cost of "tombstone" advertisements to be placed in one or more daily or weekly periodicals as the Underwriter may request; (x) all expenses incurred in connection with presentation of two "due diligence" meetings and (xi) all other costs and expenses incurred or to be incurred by the Company in connection with the transactions contemplated by this Agreement. The aforementioned $35,000 payment shall not include fees of special counsel if the same is required to be incurred in a "merit review" state which may require local counsel; the Underwriter will not retain special counsel in any state without the prior consent of the Company. The obligations of the Company under this subsection (a) shall survive any termination or cancellation of this Agreement, except as provided in paragraph of this Section 12. -41- (b) In addition to the Company's responsibility for payment of the foregoing expenses, the Company shall pay to the Underwriter a non-accountable expense allowance equal to three percent (3%) of the gross proceeds of the offering, including in such amount the proceeds from the exercise of the Underwriter's over-allotment option. The non-accountable expense allowance due shall be paid at the First Closing Date and any Option Closing Date, as applicable. (c) If the Company decides not to proceed with the Public Offering for any reason, and subsequently engages in any public offering, private placement, merger, acquisition, joint venture or corporate reorganization with any other business entity within 12 months after the Company notifies the Underwriter of its decision not to proceed with the Public Offering, the Underwriter shall be entitled to receive from the Company a cash fee equal to 5% of the consideration paid or received in any such transaction, less any payments previously made to the Underwriter pursuant to paragraph (b). The Company and the Underwriter mutually agree that since the amount of monetary damages suffered by the Underwriter would be difficult to calculate in the event of abandonment of the Public Offering, the amount of such fee is a fair measure of compensation due to the Underwriter in such event. The Company and the Underwriter shall negotiate in good faith the terms of an investment banking finders' fee, if any, if the Underwriter is instrumental in arranging such transaction. (d) The Underwriter shall determine in which states or jurisdictions the Offered Securities shall be registered or qualified for sale, provided that such states or jurisdictions do not require the Company to qualify as a foreign business corporation or to file a general consent to service of process. Immediately prior to the Effective Date, counsel for the Underwriter shall advise counsel for the Company in writing of all states in which the offering has been registered or qualified for sale or has been cancelled, withdrawn or denied and the number of Offered Securities registered or qualified for sale in each such state. The Company shall be responsible for the cost of state registration or qualification, including the filing fees (which filing fees are payable to Underwriter's counsel in advance of such filings) and the legal fees and disbursements of Underwriter's counsel in connection with obtaining such registration or qualification; provided, however, that the legal fees of Underwriter's counsel payable by the Company with respect to blue sky filings shall be $35,000, subject to paragraph (a) above. The disbursements of Underwriter's counsel shall be paid by the Company monthly as incurred by such legal counsel. The Underwriter hereby acknowledge that the Company has previously paid $10,000 to -42- Underwriter's counsel to be applied towards the legal fees payable pursuant to this paragraph (d) and the Company hereby acknowledges that any remaining balance with respect to legal fees or blue sky filing fees, and any unpaid disbursements, shall be due and payable on the First Closing Date. 13. Notices. Any notice hereunder shall be in writing, unless otherwise expressly provided herein, and if to the respective persons indicated, will be sufficient if mailed by certified mail, return receipt requested, postage prepaid, or hand delivered, and confirmed in writing or by telegraph, addressed as respectively indicated or to such other address as will be indicated by a written notice similarly given, to the following persons: (a) If to the Underwriter -- addressed to Briarwood Investment Counsel, 1851 East First Street, Suite 950, Santa Ana, California 92705, Attention: Dean Petkanas, President, with a copy to Zimet, Haines, Friedman & Kaplan, 460 Park Avenue, New York, New York 10022, Attention: James Martin Kaplan, Esq. (b) If to the Company -- addressed to Connecticut Valley Sports, Inc., 4004 Highway 93 North, Stevensville, Montana 59870, Attention: Chief Executive Officer, with a copy to: Gersten, Savage, Kaplowitz & Fredericks LLP, 101 East 52nd Street, New York, New York 10022, Attention: Jay M. Kaplowitz, Esq. Notice shall be deemed delivered upon receipt. 14. Successors. This Agreement will inure to the benefit of and be binding upon the Underwriter and the Company and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended, or will be construed, to give any person, corporation or other entity other than the persons, corporations and other entities mentioned in the preceding sentence any legal or equitable right, remedy, or claim under or in respect to this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other persons; except that the representations, warranties and indemnities of the Company contained in this Agreement will also be for the benefit of the directors and officers of the Underwriter and any person or persons who control any of the Underwriter within the meaning of Section 15 of the Act, and except that the indemnities of the Underwriter will also be for the benefit of the directors and officers of the Company and any person or persons who control the Company within the meaning of Section 15 of the Act. No purchaser of any of the -43- Offered Securities from the Underwriter will be deemed a successor or assign solely because of such purchase. 15. Finders and Holders of First Refusal Rights. (a) The Company hereby represents and warrants to the Underwriter that no person is entitled, directly or indirectly, to compensation for services as a finder in connection with the proposed transactions or holds a right of first refusal or similar right in connection with the proposed offering, and the Company hereby agrees to indemnify and hold harmless the Underwriter, its officers, directors, agents and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, from and against any loss, liability, claim, damage or expense whatsoever arising out of a claim by an alleged finder or alleged holder of a right of first refusal or similar right in connection with the proposed offering, insofar as such loss, liability, claim, damage or expense arises out of any action or alleged action of the Company. (b) The Underwriter hereby represents and warrants to the Company that no person is entitled, directly or indirectly, to compensation for services as a finder in connection with the proposed transactions; and the Underwriter hereby agrees to indemnify and hold harmless the Company, its officers, directors and agents, from and against any loss, liability, claim, damage or expense whatsoever arising out of a claim by an alleged finder in connection with the proposed offering, insofar as such loss, liability, claim, damage or expense arises out of any action or alleged action of the Underwriter. 16. Applicable Law. This Agreement shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said state applicable to contracts made and to be performed entirely within such State. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York and the United States District Court for the Southern District of New York in any such suit, action or procedure. Each of the Company and the Underwriter further agrees to accept and acknowledge service of any and all process which may be served in any suit, action or proceeding in the New York State Supreme Court, -44- County of New York and the United States District Court for the Southern District of New York, and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding. In the event of litigation between the parties arising hereunder, the prevailing party shall be entitled to costs and reasonable attorney's fees. 17. Headings. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. 18. Counterparts. This Agreement may be executed in any number of counterparts which, taken together, shall constitute one and the same instrument. 19. Entire Agreement. This Agreement sets forth the entire agreement and understanding between the Underwriter and the Company with respect to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between them. 20. Representation of the Underwriter. The Underwriter hereby represents that it is registered as a broker-dealer with the Commission and is registered as a broker-dealer in all states in which it of conducts business and it is a member in good standing of the NASD. 21. Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders and the singular shall include the plural, and vice versa. -45- If the foregoing correctly sets forth our understanding, please indicate the Underwriter's acceptance thereof, as of the day and year first above written, in the space provided below for that purpose, whereupon this letter with the Underwriter's acceptance shall constitute a binding agreement between us. Very truly yours, CONNECTICUT VALLEY SPORTS, INC. By ----------------------------------- Name: John Tilleli Title: Chief Executive Officer Confirmed and accepted on the day and year first above written. BRIARWOOD INVESTMENT COUNSEL By:--------------------------------- Name: Dean Petkanas Title: President -46- CONNECTICUT VALLEY SPORTS, INC. [SELECTED DEALER AGREEMENT] -47- EX-1.2 3 EXHIBIT 1.2 Exhibit 1.2 Draft 12/31/97 UNDERWRITER'S WARRANT AGREEMENT dated as of _______, 1997 between Connecticut Valley Sports, Inc., a Delaware corporation (the "Company"), and Briarwood Investment Counsel (the "Underwriter"). W I T N E S S E T H: WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement (the "Underwriting Agreement") dated _______, 1997 between the Underwriter and the Company, to act as the underwriter in connection with the Company's proposed public offering (the "Public Offering") of 1,500,000 units (the "Units") consisting of 1,500,000 shares of common stock, par value $0.01 per share ("Common Stock"), and 1,500,000 redeemable Common Stock purchase warrants ("Redeemable Warrants"), plus up to an additional 225,000 shares of Common Stock and 225,000 Redeemable Warrants pursuant to the Underwriter's over-allotment option, which securities are included in a registration statement on Form SB-2 (File No. 333-37507) (hereinafter, the "Public Offering Registration Statement"); and WHEREAS, the Company proposes to issue to the Underwriter warrants, one for the purchase of up to 150,000 shares of Common Stock and the other for the purchase of up to 150,000 Redeemable Warrants; and WHEREAS, the warrants issued pursuant to this Agreement are being issued by the Company to the Underwriter or officers and partners of the Underwriter and members of the selling group (the Selling Group") and/or their officers or partners, in consideration for, and as part of the Underwriter's compensation in connection with, the Underwriter acting as the underwriter pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the foregoing premises, the payment by the Underwriter to the Company of an aggregate of $10, the receipt of which is hereby acknowledged by the Company, the agreements herein set forth and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. Subject to the terms and conditions of this Agreement, the Underwriter, and/or its designees who are officers or partners of the Underwriter or members of the Selling Group in connection with the Public Offering, are hereby granted the right to purchase, at any time from ______ , 1999 until 5:00 P.M., New York City time, on _______, 2003 (the "Warrant Exercise Term"), up to (i) 150,000 shares of Common Stock (the "Shares") at an initial exercise price (subject to adjustment as provided in Article 8 hereof) of $5.50 per Share and (ii) 150,000 Redeemable Warrants at an initial exercise price of $.11 per Redeemable Warrant. The right to purchase Shares as described in (i) above is hereinafter referred to as "Warrant No. 1" and the right to purchase Redeemable Warrants as described in (ii) above is hereinafter referred to as "Warrant No. 2". Warrant No. 1 and Warrant No. 2 are hereinafter referred to collectively as the "Warrants". Except as specifically otherwise provided herein, the Shares and the Redeemable Warrants issued pursuant to Warrant No. 1 and Warrant No. 2, respectively, shall bear the same terms and conditions as described under the caption "Description of Securities" in the Public Offering Registration Statement. In addition, the Redeemable Warrants shall be governed by the terms of the Warrant Agreement dated as of _______, 1998, executed in connection with the Public Offering (the "Public Warrant Agreement"), and except that the holder shall have registration rights under the Securities Act of 1933, as amended (the "Act"), with respect to the Warrants, the Shares and the Redeemable Warrants subject thereto and the shares of Common Stock underlying the Redeemable Warrants issuable upon exercise of Warrant No. 2, which registration rights are more fully described in paragraph 7 of this Warrant Agreement. In the event of any adjustments to the exercise price of and the number of shares of Common Stock purchasable under the Redeemable Warrants pursuant to the Public Warrant Agreement, the same changes to the Redeemable Warrants subject to Warrant No. 2 shall be simultaneously effected. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") for Warrant No. 1 and Warrant No. 2 to be delivered pursuant to this Agreement shall be in the forms set forth as Exhibit A and Exhibit B attached hereto, respectively, and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrants. 3.1 Cash Exercise. The exercise price of the respective Warrants shall be payable in cash or by certified or official bank check to the order of the Company, or any combination of cash or check. Upon surrender of the applicable Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the applicable exercise price for the Shares and/or Redeemable Warrants purchased, at the Company's principal offices, currently located at 4004 Highway 93 North, Stevensville, Montana 59870, the registered holder of a Warrant Certificate ("Holder" or 2 "Holders") shall be entitled to receive a certificate or certificates for the Shares and/or Redeemable Warrants so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional Shares or fractional Redeemable Warrants). In the case of the purchase of less than all the Shares or Redeemable Warrants, as the case may be, purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares or Redeemable Warrants, as the case may be, purchasable thereunder. 3.2 Cashless Exercise for Warrant No. 1. At any time during the Warrant Exercise Term, the Holder may, at its option, exchange Warrant No. 1, in whole or in part (a "Warrant Exchange"), into the number of Shares determined in accordance with this Section 3.2, by surrendering the Warrant Certificate representing Warrant No. 1 at the principal office of the Company, accompanied by a notice stating (i) such Holder's intent to effect such exchange, (ii) the number of Shares subject to Warrant No. 1 as to which the exchange is to be effected and (iii) the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or if the date the Notice of Exchange is received by the Company is later than the date specified in the Notice of Exchange, such later date (the "Exchange Date"). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the Shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within three (3) business days following the Exchange Date. In connection with any Warrant Exchange, Warrant No. 1 shall represent the right to subscribe for and acquire the number of Shares (rounded to the next highest integer) equal to (i) the number of Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing exercise price of Warrant No. 1 by (B) the market price of a share of Common Stock on the Exchange Date; and, in the case of any Warrant Exchange for less than all of the Shares purchasable under Warrant No. 1, the Company shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares purchasable thereunder. By way of example, if the holder of Warrant No. 1 submits a Notice of Exchange relating to _____ of the _____ Shares subject to Warrant No. 1 and the current market price of a share of Common Stock on the Exchange Date is 3 $_____, the holder will be entitled to receive _____ shares of Common Stock, along with a new Warrant Certificate entitling the holder to purchase _____ Shares. 4. Issuance of Certificates. 4.1. Issuance. Upon exercise of the Warrants, the issuance of certificates for the Shares and/or Redeemable Warrants, as applicable shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 4.2. Forms of Certificates. The Warrant Certificates and certificates representing the Shares and/or Redeemable Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. The Warrant Certificates and, upon exercise of the Warrants, in part or in whole, certificates representing the Shares and/or Redeemable Warrants shall bear a legend substantially similar to the following: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably 4 satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available." 5. Restriction on Transfer of Warrants. The Holder of a Warrant Certificate, by acceptance thereof, covenants and agrees that the Warrant is being acquired as an investment and not with a view to the distribution thereof, and that the Warrant may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to officers or partners of the Underwriter or to any member of the Selling Group participating in the distribution to the public of the Common Stock and Redeemable Warrants, and/or their respective officers or partners. 6. Price. 6.1 Initial and Adjusted Exercise Prices. The initial exercise price of Warrant No. 1 shall be $5.50 per Share and the initial exercise price of Warrant No. 2 shall be $.11 per Redeemable Warrant. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 8 hereof. 6.2 Exercise Price. The term "exercise price" herein shall mean the initial exercise price of Warrant No. 1 or Warrant No. 2, as the case may be, or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1 Registration Under the Securities Act of 1933. None of the Warrants, the Shares, the Redeemable Warrants and the Common Stock issuable upon exercise of the Redeemable Warrants (the "Underlying Shares") have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"). 7.2 Registrable Securities. As used herein the term "Registrable Securities" means the Warrants, the Shares issuable upon exercise of Warrant No. 1, the Redeemable Warrants issuable upon exercise of Warrant No. 2, the Underlying Shares and any securities issued upon any stock split or stock dividend in respect of any of the foregoing; provided, however, any of such securities shall cease to be Registrable Securities when, as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the subsequent public distribution of 5 such securities or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Securities" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7. 7.3 Piggyback Registration. (a) If, at any time during the seven years following the date of this Agreement, the Company proposes to prepare and file one or more post-effective amendments to the Public Offering Registration Statement filed in connection with the Public Offering or any new registration statement or post-effective amendments thereto covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (other than pursuant to a Form S-4 relating to a merger or acquisition or pursuant to a Form S-8 or successor form) (for purposes of this Article 7, collectively, a "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least thirty (30) days prior to the filing of each such Registration Statement, to all holders of the Registrable Securities. Upon the written request of such a holder (a "Requesting Holder"), made within twenty (20) business days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders (other than underwriting discounts and commissions applicable to the sale of such Registrable Securities and the fees and disbursements, if any, of counsel to the Requesting Holders); provided, however, that the Company shall in any event be entitled to withdraw such Registration Statement prior to its effectiveness if such Registration Statement is withdrawn as to all securities proposed to be registered thereunder; and provided, further, that the rights granted under this Section 7.3 shall be subject to the right of the managing underwriter, in any such offering that is underwritten, to limit the number of Registrable Securities that may be included hereunder in such offering on a pro rata basis with any other selling securityholder on whose behalf securities of the Company are being registered. (b) If the registration of which the Company gives notice is for a registered public offering involving an 6 underwriting, the Company shall so advise the holders as a part of the written notice given pursuant to paragraph (a) above. If the managing underwriter determines that a limitation of the number of shares to be underwritten is required, the underwriter may exclude some or all Registrable Securities from such registration (the "Excluded Registrable Securities"); provided, however, that any other securityholder may only include the same pro-rata portion of any such securities in such Registration Statement. 7.4 Demand Registration. (a) At any time during the Warrant Exercise Term, any "Demand Holder" (as such term is defined in Section 7.4(d) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, at the sole expense of the Company (except as provided in Section 7.5(b) hereof), a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Demand Holder), in order to comply with the provisions of the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. The Company shall use its best efforts to cause the Registration Statement to become effective under the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold or (ii) the date which is nine months after the effective date of such Registration Statement. A request for registration under this Section 7.4(a) shall coincide with the availability of the Company's audited financial statements, unless such Demand Holder(s) agree to pay the costs to the Company of any special audit which may be required. (b) The Company covenants and agrees to give written notice of any Demand Registration Request to all holders of the Registrable Securities within ten (10) business days from the date of the Company's receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to have such securities 7 included within ten (10) days of their receipt of the Company's notice. (c) In addition to the registration rights provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, at any time during the Warrant Exercise Term, any Demand Holder (as defined below in Section 7.4(d)) of Registrable Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file with the Commission, on one occasion in respect of all holders of Registrable Securities, a Registration Statement so as to permit a public offering and sale of such Registrable Securities until the earlier of (i) the date that all of the Registrable Securities have been sold or (ii) the date which is nine months after the effective date of such Registration Statement; provided, however, that all costs incident thereto shall be at the expense of the holders of the Registrable Securities included in such Registration Statement (including the costs of any special audit which may be required). If a Demand Holder shall give notice to the Company at any time of its or their desire to exercise the registration right granted pursuant to this Section 7.4(c), then within ten (10) days after the Company's receipt of such notice, the Company shall give notice to the other holders of Registrable Securities advising them that the Company is proceeding with such registration and offering to include therein the Registrable Securities of such holders, provided they furnish the Company with such appropriate information in connection therewith as the Company shall reasonably request in writing. (d) The term "Demand Holder" as used in this Section 7.4 shall mean any holder or any combination of holders of Registrable Securities, if included in such holders' Registrable Securities are that aggregate number of shares of Common Stock (including Shares already issued and not disposed of in a public offering and/or Shares issuable pursuant to the exercise of Warrant No. 1 and Underlying Shares already issued and not disposed of in a public offering and/or Underlying Shares issuable pursuant to the exercise of Redeemable Warrants issued and not disposed of in a public offering or issuable pursuant to exercise of Warrant No. 2 (the "Total Common Shares")) as would constitute 50% or more of the aggregate number of such Total Common Shares. 7.5 Covenants of the Company With Respect to Registration. The Company covenants and agrees as follows: (a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in no event later than twenty (20) days following receipt of any demand therefor (unless delayed by 8 the failure of a holder of Registrable Securities to promptly furnish such information necessary to complete such registration statement), shall use its best efforts to have any such Registration Statement declared effective at the earliest possible time, and shall furnish each holder of Registrable Securities such number of prospectuses as shall reasonably be requested. (b) Except as otherwise expressly set forth in this Agreement, the Company shall pay all costs, fees and expenses in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof (excluding any underwriting discounts and commissions which may be incurred in connection with the sale of any Registrable Securities and excluding any fees and expenses of counsel for any Requesting Holder or Demand Holder), including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. The holders of Registrable Securities included in any Registration Statement filed pursuant to Section 7.4(c) hereof will pay all costs, fees and expenses in connection with such Registration Statement, including their own legal fees and expenses, if any. (c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in a Registration Statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the holders of such securities; provided that the Company shall not be obligated to qualify or register the Registrable Securities in any jurisdiction, in which it would have to qualify as a foreign corporation or give a general consent to service of process in order to so qualify or register. (d) The Company shall indemnify any holder of the Registrable Securities to be sold pursuant to any Registration Statement and each person, if any, who controls such holder within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 6 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 7 of the Underwriting Agreement. 9 (e) Each holder of Registrable Securities to be sold pursuant to a Registration Statement will furnish to the Company such information as may be reasonably be requested by the Company for inclusion in the Registration Statement. Any holder of Registrable Securities to be sold pursuant to a Registration Statement, and its successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished in writing by or on behalf of such holder, or its successors or assigns, for specific inclusion in such Registration Statement to the same extent and with the same effect as the provisions contained in Section 6 of the Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify the Company and to provide for just and equitable contribution as set forth in Section 7 of the Underwriting Agreement. (f) Nothing contained in this Agreement shall be construed as requiring any Holder to exercise his Warrants prior to the initial filing of any Registration Statement or the effectiveness thereof. (g) If the Company shall fail to comply with the provisions of this Article 7, the Company shall, in addition to any other equitable or other relief available to the holders of Registrable Securities, be liable for any or all actual damages (but not punitive or consequential damages) sustained by the holders of Registrable Securities, requesting registration of their Registrable Securities. (h) The Company shall not permit the inclusion of any securities other than the Registrable Securities to be included in any Registration Statement filed pursuant to Section 7.4 hereof, without the prior written consent of the Demand Holders, which consent shall not be unreasonably withheld. (i) The Company shall deliver promptly to each holder of Registrable Securities whose securities are included in a Registration Statement copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the Registration Statement and permit each holder of Registrable Securities and underwriters to do such investigation, upon reasonable advance notice, with respect to 10 information contained in or omitted from the Registration Statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such holder of Registrable Securities or underwriter shall reasonably request. (j) If, in connection with a registration which includes Registrable Securities pursuant to this Article 7, the Company shall enter into an underwriting agreement with one or more underwriters selected for such underwriting, such agreement shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the underwriters. The holders of Registrable Securities shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations and warranties of the Company to or for the benefit of such underwriters shall, to the extent that they may be applicable, also be made to and for the benefit of such holders of Registrable Securities. Such holders of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such holders of Registrable Securities and their intended methods of distribution. 8. Adjustments of Exercise Price and Number of Shares. 8.1 Stock Dividend, Split, etc.. In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the exercise price under Warrant No. 1 in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the exercise price by a fraction, the denominator of which shall be the number of shares or Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. 11 8.2 Rights or Warrants. In the case the Company shall fix a record date for the issuance of rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less than the current market price of the Common Stock (as defined in Section 8.5 below) on such record date, the exercise price of Warrant No. 1 shall be adjusted so that it shall thereafter equal the price determined by multiplying (i) the exercise price in effect immediately prior to the date of such issuance and (ii) a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the exercise price shall be readjusted to the exercise price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. 8.3 Evidences of Indebtedness or Assets. In case the Company shall hereafter distribute to the holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions of securities of the type referred to in Section 8.1 above) or subscription rights or warrants (excluding those referred to in Section 8.2 above), then in each such case the exercise price of Warrant No. 1 in effect thereafter shall be determined by multiplying (i) the exercise price in effect immediately prior thereto and (ii) a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined in Section 8.5 below), less the fair market value (as determined by the Company's Board of Directors) of said assets or evidences of indebtedness so distributed or of such 12 rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effectively immediately after the record date for the determination of shareholders entitled to receive such distribution. 8.4 Adjustment of Number of Shares. Whenever the Exercise Price payable upon exercise of Warrant No. 1 is adjusted pursuant to Sections 8.1, 8.2 or 8.3 above, the number of Shares purchasable upon exercise of Warrant No. 1 shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon exercise of Warrant No. 1 by the exercise price in effect on the date hereof and dividing the product so obtained by the exercise price, as adjusted. 8.5 Determination of Current Market Price. For the purpose of any computation under Sections 8.2 and 8.3 above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for twenty (20) consecutive business days before such date. The closing price for each day shall be the last sale price regular way or, in case no such reported sale takes place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or as reported by National Association of Securities Dealers, Inc. Automatic Quotation System ("NASDAQ") or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors. 8.6 No Adjustment for De Minimus Adjustment. No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least ten cents ($0.10) in such price; provided, however, that any adjustments which by reason of this Section 8.6 are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Article 8 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Article 8 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the exercise price, in addition to those required by this Article 8, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or 13 combination of Common Stock, hereafter made by the Company shall not result in any Federal income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Redeemable Warrants issuable upon exercise of Warrant No. 2). 8.7 Notice. Whenever an exercise price is adjusted, as herein provided, the Company shall promptly, but no later than 10 days after any request for such an adjustment by the Holder, cause a notice setting forth the adjusted exercise price and adjusted number of Shares and/or Warrants issuable upon exercise of the Warrants and, if requested, information describing the transactions giving rise to such adjustments, to be mailed to the Holder, at the address set forth herein, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. 8.8 Other Securities. In the event that at any time, as a result of any adjustment made pursuant to this Article 8, the Holder thereafter shall become entitled to receive any securities of the Company other than Common Stock and Redeemable Warrants, thereafter the number of such other securities receivable upon exercise of the Warrants shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock and Redeemable Warrants contained in Sections 8.1 to 8.6, inclusive above. 9. Exchange and Replacement of Warrant Certificates. 9.1 Exchange. Each Warrant Certificate is exchangeable without expense, upon the surrender hereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of Shares or Redeemable Warrants, as the case may be, in such denominations as shall be designated by the Holder thereof at the time of such surrender. 9.2 Replacement. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of any Warrants, if mutilated, the Company will make 14 and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock or Redeemable Warrants and shall not be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or Redeemable Warrants, as the case may be. 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of Warrant No. 1 and the exercise of the Redeemable Warrants subject to Warrant No. 2, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of Warrant No. 1 and payment of the exercise price therefor, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder, and that, upon exercise of Warrant No. 2 and payment of the exercise price therefor, the Redeemable Warrants will be valid and binding obligations of the Company, enforceable against the Company in accordance with their terms. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock and all Redeemable Warrants issuable upon the exercise of the Warrants, as well as the Underlying Shares, to be listed on or quoted by NASDAQ or listed on such national securities exchanges as the Company's Common Stock is then listed. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock and/or Redeemable Warrants for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current 15 or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock and/or Redeemable Warrants any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing of the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to Connecticut Valley Sports, Inc., 4004 Highway 93 North, Stevensville, Montana 59870 or to such other address as the Company may designate by notice to the Holders. 14. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this 16 Agreement without the approval of any Holders of Warrant Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to adversely affect the interests of the Holders of Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. 16. Termination. This Agreement shall terminate at the close of business on _______, 2006. Notwithstanding the foregoing, this Agreement will terminate on any earlier date when all Warrants have been exercised and all the Shares issuable upon exercise of Warrant No. 1 and all the Redeemable Warrants issuable upon exercise of Warrant No. 2 (or the Underlying Shares) have been resold to the public; provided, however, that the provisions of Section 7.5 shall survive such termination until the close of business on _______, 2009. 17. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. 18. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered holder or holders of the Warrant Certificates, Warrants or the underlying securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other holder or holders of the Warrant Certificates, Warrants or the underlying securities. 19. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. 17 CONNECTICUT VALLEY SPORTS, INC. By:-------------------------------------- Name: Title: Attest: By: -------------------------- Name: Title BRIARWOOD INVESTMENT COUNSEL By:------------------------------------ Name: Title: Attest: By: --------------------------- Name: Title 18 EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, ________, 2003. No. WW-1 150,000 Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that __________ or registered assigns is the registered holder of 150,000 Warrants to purchase, at any time from _______, 1999 until 5:00 P.M. New York City time on _______, 2003 ("Expiration Date"), up to 150,000 shares ("Shares") of fully-paid and nonassessable common stock, par value $.01 per share ("Common Stock"), of Connecticut Valley Sports, Inc. , a Delaware corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $5.50 per Share upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Warrant Agreement dated as of _______, 1998 between the Company and Briarwood Investment Counsel (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination of cash or check. 19 No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. 20 All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 21 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of the date below. Dated: _______, 1998 CONNECTICUT VALLEY SPORTS, INC. By:-------------------------------- Name: Title: Attest: By: ----------------------------------------- Name: Title 22 FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase Shares and herewith tenders in payment for such Shares cash or a certified or official bank check payable in New York Clearing House Funds to the order of in the amount of $ , all in accordance with the terms hereof. The undersigned requests that a certificate for such Shares be registered in the name of , whose address is and that such Certificate be delivered to whose address is. Dated:__________ Signature:_______________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ------------------------------------------------ (Insert Social Security or Other Identifying Number of Holder) 23 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated:__________ Signature:________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) _______________________________________________ (Insert Social Security or Other Identifying Number of Assignee) 24 EXHIBIT B THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, _______, 2003 No. WW-2 150,000 Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that _________ or registered assigns is the registered holder of 150,000 Warrants to purchase, at any time from _______, 1999 until 5:00 P.M. New York City time on , 2003 ("Expiration Date"), up to 150,000 Redeemable Common Stock Purchase Warrants ("Redeemable Warrants"), of Connecticut Valley Sports, Inc., a Delaware corporation (the "Company"), at the exercise price (the "Exercise Price"), of $.11 per Redeemable Warrant upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Warrant Agreement dated as of ________, 1998 between the Company and Briarwood Investment Counsel (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination of cash or check. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. 25 The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: ___________ CONNECTICUT VALLEY SPORTS, INC. By: ---------------------------------- Name: Title: 26 Attest: Name: Title 27 FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase Redeemable Warrants and herewith tenders in payment for such Redeemable Warrants cash or a certified or official bank check payable in New York Clearing House Funds to the order of _______________ in the amount of $_______, all in accordance with the terms hereof. The undersigned requests that a certificate for such Redeemable Warrants be registered in the name of___________, whose address is ________ __________________________ and that such Certificate be delivered to whose address is _____________________________________. Dated: ____________ Signature: ___________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) __________________________________________ (Insert Social Security or Other Identifying Number of Holder) 28 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED hereby sells, assigns and transfers unto _____________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: ________, 1997 Signature: __________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) ___________________________________________ (Insert Social Security or Other Identifying Number of Assignee) 29 EX-1.3 4 EXHIBIT 1.3 Exhibit 1.3 Draft 12/31/97 CONSULTING AND INVESTMENT BANKING AGREEMENT This Agreement is made and entered into as of the ___ day of ___________, 1998 by and between Briarwood Investment Counsel, a corporation ("Briarwood" or "Consultant"), and Connecticut Valley Sports, Inc., a Delaware corporation (the "Company"). In consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Duties of Consultant. The Company shall retain Briarwood as its consultant and investment banker, on a non-exclusive basis, pursuant to the terms and conditions hereof. The Consultant shall, at the request of the Company, upon reasonable notice, render the following services to the Company from time to time. (a) Consulting Services. The Consultant will provide such financial consulting services and advice pertaining to the Company's business affairs as the Company may from time to time reasonably request. Without limiting the generality of the foregoing, the Consultant will assist the Company in developing, studying and evaluating financing, merger and acquisition proposals and assist in negotiations and discussions pertaining thereto. (b) Financing. The Consultant will assist and represent the Company in obtaining both short and long-term financing if, as and when requested by the Company. The Consultant will be entitled to additional compensation under certain circumstances in accordance with the terms set forth in Section 3 hereof. The services described in this Section 1 shall be rendered by the Consultant without any direct supervision by the Company and at such time and place and in such manner (whether by conference, telephone, letter or otherwise) as the Consultant may determine. 2. Term. Except as otherwise specified in Paragraph 4 hereof, this Agreement shall be effective for a two (2) year period commencing on the date hereof and ending __________, 2000. 3. Compensation. (a) As compensation for the Consultant's services hereunder, the Company shall pay to the Consultant a fee of Twenty-Five Thousand Dollars ($25,000) per year for the term of this Agreement, payable annually in advance with the first payment due upon the First Closing date (as defined in the Underwriting Agreement dated ___________, 1998 by and between Briarwood and the Company (the "Underwriting Agreement")) and the remaining $25,000 due on the first anniversary of the First Closing Date. (b) In addition to the financial consulting services described in Section 1 above, the Consultant may, at the request of the Company, bring the Company in contact with persons, whether individuals or entities, that may be suitable candidates for providing the Company with, or may lead the Company to other individuals or entities that may provide the Company with, debt or equity financing or that may be suitable candidates, or may lead the Company to such suitable candidates, to purchase substantially all of the stock or assets of the Company, merge with the Company, or enter into a joint venture or other transaction with the Company. If, at any time during the term of this Agreement, the Company enters into an agreement with any such persons or their affiliates, or with any persons introduced to the Company by any such persons or their affiliates, pursuant to which the Company obtains debt or equity financing or pursuant to which substantially all of the Company's stock or assets is purchased or the Company is merged with or into another entity, or pursuant to which the Company enters into a joint venture or other transaction, the Company will pay to the Consultant, in accordance with the formula set forth below, additional compensation based on the aggregate Transaction Value (as defined below) of such transaction (the "Transaction") [; provided, that if a fee is payable by Company to a person introduced to the Company by Consultant, the amount of such fee shall be deducted from the fee payable to Consultant hereunder.] Nothing herein shall be deemed or construed to obligate or require the Company to complete or consummate any Transaction for which the Consultant would be compensated hereunder or to pay the Consultant any fee or compensation for any Transaction which is not consummated. (c) The additional compensation to be paid will be paid upon the closing of the Transaction, by certified check, in the following amounts: 5% of the first $5,000,000 of Transaction Value in the Transaction; - 2 - 4% of the Transaction Value in excess of $5,000,000 and up to $6,000,000; 3% of the Transaction Value in excess of $6,000,000 and up to $7,000,000; 2% of the Transaction Value in excess of $7,000,000 and up to $8,000,000; and 1% of any Transaction Value in excess of $8,000,000. (d) "Transaction Value" shall mean the aggregate value of all cash, securities and other property (i) paid to the Company, its affiliates, or their securityholders in connection with any Transaction involving an investment in or acquisition of the Company or any affiliate (or the assets of either), (ii) paid by the Company or any affiliate in any such Transaction involving an investment in or acquisition of another party or its equity holdings by the Company or any affiliate, or (iii) paid or contributed by the Company or any affiliate and by the other party or parties in the event of any such Transaction involving a joint venture or similar joint enterprise or undertaking. The value of any such securities (whether debt or equity) or other property shall be the fair market value thereof as determined by agreement of the Consultant and the Company or by an independent appraiser jointly selected by the Consultant and the Company. "Transaction Value" shall also include the principal amount of any indebtedness assumed or forgiven as part of a Transaction. (e) All fees to be paid pursuant to this Agreement, except as otherwise specified, are due and payable to Briarwood in cash or company check at the closing or closings of any Transaction specified herein. In the event that the consideration in respect of a Transaction is paid out over a period of time, Briarwood shall be paid its pro-rata portion of such consideration as the Company is paid. In the event that this Agreement shall not be renewed or if terminated for any reason, notwithstanding any such non-renewal or termination, Briarwood shall be entitled to a full fee as provided under Paragraphs 3 and 4 hereof, for any Transaction for which the discussions were initiated with a third party at the request of the Company during the term of this Agreement and which is consummated within a period of twelve months after non-renewal or termination of this Agreement. 4. Expenses of Briarwood. In addition to the fees payable hereunder and regardless of whether any Transaction set - 3 - forth in Paragraph 3 hereof is proposed or consummated, the Company shall reimburse Briarwood for Briarwood's reasonable travel and out-of-pocket expenses incurred in connection with the services performed by Briarwood pursuant to this Agreement and at the request of the Company, including without limitation, hotels, food and associated expenses and long-distance telephone calls [; provided, that expenses in excess of $_______ in the aggregate or any single expense in excess of $1,000 shall be approved by Company in advance]. 5. Available Time. The Consultant shall make available such time as it, in its sole discretion, shall deem appropriate for the performance of its obligations under this Agreement. 6. Liability of Briarwood. (a) The Company acknowledges that all opinions and advice (written or oral) given by Briarwood to the Company in connection with Briarwood's engagement are intended solely for the benefit and use of the Company in considering the Transaction to which they relate, and the Company agrees that no person or entity other than the Company shall be entitled to make use of or rely upon the advice of Briarwood to be given hereunder, and no such opinion or advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose, nor may the Company make any public references to Briarwood, or use Briarwood's name in any annual reports or any other reports or releases of the Company without Briarwood's prior written consent or as required by law. (b) The Company acknowledges that Briarwood makes no commitment whatsoever as to making a market in the Company's securities or to recommending or advising its clients to purchase the Company's securities. Research reports or corporate finance reports that may be prepared by Briarwood will, when and if prepared, be done solely on the merits or judgement of analysis of Briarwood or any senior corporate finance personnel of Briarwood. 7. Briarwood's Services to Others. The Company acknowledges that Briarwood or its affiliates are in the business of providing financial services and consulting advice to others. Nothing herein contained shall be construed to limit or restrict Briarwood in conducting such business with respect to others, or in rendering such advice to others, except that Briarwood will not provide services to others when such services may materially and adversely affect the Company. - 4 - 8. Company Information. (a) The Company recognizes and confirms that, in advising the Company and in fulfilling its engagement hereunder, Briarwood will use and rely on data, material and other information furnished to Briarwood by the Company. The Company acknowledges and agrees that in performing its services under this engagement, Briarwood may rely upon the data, material and other information supplied by the Company without independently verifying the accuracy, completeness or veracity of same. (b) Except as required by applicable law, Briarwood shall keep confidential all non-public information provided to it by the Company, and shall not disclose such information to any third party without the Company's prior written consent, other than such of its employees and advisors as Briarwood reasonably determines to have a need to know, provided that Briarwood shall instruct such employees and advisors to keep such information confidential and Briarwood shall be liable for any breach of such confidentiality. In the event that Briarwood is required by subpoena to disclose such information, the Company shall be afforded an opportunity to seek an order preserving the confidentiality of such information. 9. Indemnification. (a) The Company shall indemnify and hold Briarwood harmless against any and all liabilities, claims, lawsuits, including any and all awards and/or judgments to which it may become subject under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act") or any other federal or state statute, at common law or otherwise, insofar as said liabilities, claims and lawsuits (including costs, expenses, awards and/or judgments) arise out of or are in connection with the services rendered by Briarwood or any transactions in connection with this Agreement, except for any liabilities, claims and lawsuits (including awards and/or judgments), arising out of acts or omissions of Briarwood. In addition, the Company shall also indemnify and hold Briarwood harmless against any and all costs and expenses, including reasonable counsel fees, incurred relating to the foregoing. Briarwood shall give the Company prompt notice of any such liability, claim or lawsuit which Briarwood contends is the subject matter of the Company's indemnification and the Company thereupon shall be granted the right to take any and all necessary and proper action, at its sole cost and expense, with respect to - 5 - such liability, claim and lawsuit, including the right to settle, compromise and dispose of such liability, claim or lawsuit, excepting therefrom any and all proceedings or hearings before any regulatory bodies and/or authorities and provided that no such settlement shall be made without the prior consent of Briarwood. Briarwood shall indemnify and hold the Company harmless against any and all liabilities, claims and lawsuits, including any and all awards and/or judgments to which it may become subject under the 1933 Act, the 1934 Act or any other federal or state statute, at common law or otherwise, insofar as said liabilities, claims and lawsuits (including costs, expenses, awards and/or judgments) arise out of or are in connection with the services rendered by Briarwood or any transactions in connection with this Agreement. In addition, Briarwood shall also indemnify and hold the Company harmless against any and all costs and expenses, including reasonable counsel fees, incurred relating to the foregoing. The Company shall give Briarwood prompt notice of any such liability, claim or lawsuit which the Company contends is the subject matter of Briarwood's indemnification and Briarwood thereupon shall be granted the right to take any and all necessary and proper action, at its sole cost and expense, with respect to such liability, claim or lawsuit, including the right to settle, compromise or dispose of such liability, claim or lawsuit, excepting therefrom any and all proceedings or hearings before any regulatory bodies and/or authorities and provided that no such settlement shall be made without the prior consent of the Company. (b) In order to provide for just and equitable contribution in any case in which (i) any person entitled to indemnification under this Paragraph 9 makes claim for indemnification pursuant hereto but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Paragraph 9 provides for indemnification in such case, or (ii) contribution may be required on the part of any such person in circumstances for which indemnification is provided under this Paragraph 9, then, and in each such case, the Company and Briarwood shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after any contribution from others) in such proportion taking into consideration the relative benefits received by each party from the transactions undertaken in connection with this Agreement (taking into account the portion of the proceeds realized by each), the parties' relative knowledge and access to - 6 - information concerning the matter with respect to which the claim was assessed, the opportunity to correct and prevent any statement or omission and other equitable considerations appropriate under the circumstances; and provided, that, in any such case, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof, but the omission so to notify the Contributing Party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a Contributing Party or his or its representative of the commencement thereof within the aforesaid fifteen (15) days, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. Any such Contributing Party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution without the written consent of the Contributing Party. The indemnification provisions contained in this Paragraph 9 are in addition to any other rights or remedies which either party hereto may have with respect to the other or hereunder. 10. Briarwood an Independent Contractor. Briarwood shall perform its services hereunder as an independent contractor and not as an employee of the Company or an affiliate thereof. The parties hereto expressly understand and agree that Briarwood shall have no authority to act for, represent or bind the Company or any affiliate thereof in any manner, except as may be agreed to expressly by the Company in writing from time to time. 11. Miscellaneous. (a) This Agreement between the Company and Briarwood constitutes the entire agreement and understanding of the parties hereto, and supersedes any and all previous agreements and understandings, whether oral or written, between the parties with respect to the matters set forth herein. - 7 - (b) All communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to Briarwood, shall be mailed, delivered or telegraphed and confirmed to Briarwood Investment Counsel, 1851 East First Street, Suite 950, Santa Ana, California 92705, Attention: President, with a copy to Zimet, Haines, Friedman & Kaplan, 460 Park Avenue, New York, New York 10022, Attention: James Martin Kaplan, Esq., and if to the Company, shall be mailed, delivered or telegraphed and confirmed to Connecticut Valley Sports, Inc., 4004 Highway 93 North, Stevensville, Montana 59870, with a copy to Gersten, Savage, Kaplowitz & Fredericks LLP, 101 East 52nd Street, New York, New York 10022, Attention: Jay M. Kaplowitz, Esq. (c) This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors, legal representatives and permitted assigns. This Agreement shall not be assignable by any party without the prior written consent of the other party. (d) This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same original document. (e) No provision of this Agreement may be amended, modified or waived, except in a writing signed by all of the parties hereto. (f) This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without giving effect to its conflict of law principles. The parties hereby agree that any dispute which may arise between them arising out of or in connection with this Agreement shall be adjudicated before a court located in New York City, and they hereby submit to the exclusive jurisdiction of the courts of the State of New York located in New York, New York and of the federal courts in the Southern District of New York with respect to any action or legal proceeding commenced by any party, and irrevocably waive any objection they now or hereafter may have respecting the venue of any such action or proceeding brought in such a court or respecting the fact that such court is an inconvenient forum, relating to or arising out of this Agreement, and consent to the service of process in any such action or legal proceeding by means of registered or certified mail, return receipt requested, in care of the address set forth in Paragraph 11(b) hereof. - 8 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. BRIARWOOD INVESTMENT COUNSEL By:_________________________ Name: Title: CONNECTICUT VALLEY SPORTS, INC. By:_________________________ Name: Title: - 9 - EX-4.3 5 EXHIBIT 4.3 Exhibit 4.3 Draft: 12/31/97 WARRANT AGREEMENT AGREEMENT, dated as of ________, 1998, by and among CONNECTICUT VALLEY SPORTS, INC., a Delaware corporation (the "Company"), CONTINENTAL STOCK TRANSFER & TRUST COMPANY, a New York corporation, as Warrant Agent (the "Warrant Agent"), and BRIARWOOD INVESTMENT COUNSEL, a ___________ corporation (the "Underwriter"). W I T N E S S E T H: WHEREAS, pursuant to an underwriting agreement (the "Underwriting Agreement") dated ________, 1997 between the Company and the Underwriter, in connection with (i) a public offering pursuant to a Registration Statement on Form SB-2 (Registration No. 333-_____) (the "Registration Statement") filed pursuant to the Securities Act of 1933, as amended (the "Act"), and declared effective by the Securities and Exchange Commission on ________, 1997 of up to 1,725,000 units (the "Units"), each Unit consisting of one share of common stock of the Company, par value $0.01 per share (the "Common Stock"), and one redeemable Common Stock purchase warrant (the "Warrant") and (ii) the issuance to the Underwriter or its designees of warrants to purchase up to an aggregate of 150,000 shares of Common Stock and/or 150,000 Warrants (the "Underwriter's Warrants"), the Company will issue up to an aggregate of 1,875,000 Warrants; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof; NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean the authorized stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distribution of earnings and assets of the Company without limit as to amount or percentage, which at the date hereof consists of Common Stock of the Company, $.01 par value. (b) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located on the date hereof at 2 Broadway, 19th Floor, New York, New York 10004. (c) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (ii) payment in cash, or by official bank or certified check made payable to the Warrant Agent, of an amount in lawful money of the United States of America equal to the applicable Purchase Price. (d) "Initial Warrant Exercise Date" shall mean, as to each Warrant, _______, 2000, [24 months from Effective Date]; provided, however, that in the event the Company calls the Warrants for redemption prior to _________, 2000, the Warrants shall be exercisable from the date on which the Warrants are called for redemption until the redemption date. (e) "Purchase Price" shall mean the price to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be $6.00 per share, subject to adjustment from time to time pursuant to the provisions of Section 9 hereof, and subject to the Company's right to reduce the Purchase Price upon notice to all Warrant Holders. (f) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants in accordance with the terms hereof, which price shall be $.10 per Warrant, subject to adjustment from time to time consistent with the provisions of Section 9 hereof. (g) "Registered Holder" shall mean the person in whose name any certificate representing Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6. 2 (h) "Transfer Agent" shall mean Continental Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. (i) "Warrant Expiration Date" shall mean, with respect to each Warrant, 5:00 p.m. (Eastern time) on _________, 2003 [5 years after Effective Date], or on the business day immediately preceding the date fixed for redemption (as set forth in Section 8), whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (Eastern time) on the next following day which in the State of New York is not a holiday nor a day on which banks are authorized to close. Upon notice to all Warrant Holders, the Company shall have the right to extend the Warrant Expiration Date. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) Each Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one (1) share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants sold pursuant to the Underwriting Agreement shall be executed by the Company and delivered to the Warrant Agent. Upon written order of the Company signed by its President or Chairman or a Vice President and by its Secretary or an Assistant Secretary, the Warrant Certificates shall be countersigned, issued and delivered by the Warrant Agent. (c) From time to time up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing up to an aggregate of 1,875,000 of Common Stock, subject to adjustment as described herein, upon the exercise of Warrants in accordance with this Agreement. (d) From time to time up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Initial Warrant Exercise Date upon the exercise of fewer than all Warrants 3 represented by any Warrant certificate to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; (v) those issued pursuant to the Underwriter's Warrants; and (vi) those issued at the option of the Company, in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrants or the Redemption Price therefor made pursuant to Section 9. (e) Pursuant to the terms of the Underwriter's Warrants, the Underwriter and its designees may purchase up to an aggregate of 150,000 Warrants. SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A, and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates) and issued in registered form. Warrants shall be numbered serially with the letter W on the Warrants. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Secretary or an Assistant Secretary, by mutual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder 4 without further action by the Company, except as otherwise provided by Section 4(a). (c) It is contemplated that the securities comprising the Units will become detachable and trade separately immediately upon issuance. SECTION 4. Exercise. (a) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder upon exercise thereof as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deposit the cash or check received from the exercise of a Warrant in an account for the benefit of the Company and shall notify the Company in writing of the exercise of the Warrants. Promptly following, and in any event within five (5) days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent to the person or persons entitled to receive the same a certificate or certificates for the securities deliverable upon such exercise (plus a Warrant Certificate for any remaining unexercised Warrants of the Registered Holder), provided that the Warrant Agent shall refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant to the Company or as the Company may direct in writing. Notwithstanding anything in the foregoing to the contrary, no Warrant will be exercisable unless at the time of exercise the Company has filed with the Securities and Exchange Commission a registration statement under the Act covering the shares of Common Stock issuable upon exercise of such Warrant and such shares have been so registered or qualified or deemed to be exempt under the securities laws of the state of residence of the Registered Holder of such Warrant. The Company shall use its best efforts to have all shares so registered or qualified on or before the date on which the Warrants become exercisable. (b) If, on the Exercise Date in respect of the exercise of any Warrant at any time on or after the first anniversary of the 5 date hereof, (i) the market price of the Common Stock is equal to or greater than the then Purchase Price of the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriter at such time as the Underwriter is a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary account, (iv) disclosure of the compensation arrangement is made in documents provided to the holders of the Warrants and (v) the solicitation of the exercise of the Warrant is not in violation of Regulation M (as such regulation or any successor regulation or rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, as amended, then the Underwriter shall be entitled to receive from the Company, upon exercise of the each of Warrant(s), a fee of five percent (5%) of the aggregate Purchase Price of the Warrants so exercised (the "Exercise Fee"). Within five (5) days of the last day of each month commencing with ________, 1999, [first anniversary of date hereof], the Warrant Agent will notify the Underwriter of each Warrant Certificate which has been properly completed for exercise by holders of Warrants during the last month. The Company and Warrant Agent shall determine, in their sole and absolute discretion, whether a Warrant Certificate has been properly completed. The Warrant Agent will provide the Underwriter with such information, in connection with the exercise of each Warrant, as the Underwriter shall reasonably request. The Company hereby authorizes and instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after receipt by the Warrant Agent from the Company of a check payable to the order of the Underwriter in the amount of the Exercise Fee. In the event that an Exercise Fee is paid to the Underwriter with respect to a Warrant which the Company or the Warrant Agent determines is not properly completed for exercise or in respect of which the Underwriter is not entitled to an Exercise Fee, the Underwriter will promptly return such Exercise Fee to the Warrant Agent which shall forthwith return such fee to the Company. The Underwriter and the Company may at any time, after ________, 1999, [first anniversary of date hereof] and during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant certificates returned to the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the contrary, the provisions of this paragraph may not be modified, amended or deleted without the prior written consent of the Underwriter. SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc. (a) The Company has reserved, and covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon exercise of 6 Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issuance thereof (other than those which the Company shall promptly pay or discharge) and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of outstanding Common Stock of the Company are then listed or, if applicable, The Nasdaq Stock Market. (b) The Company hereby agrees that, so long as any unexpired Warrants remain outstanding, the Company will file such post-effective amendments to the Registration Statement as may be necessary to permit it to deliver to each person exercising a Warrant a prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise complying therewith, and will deliver such a prospectus to each such person. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants or the issuance or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same had paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants, unless the Warrant Agent and the Transfer Agent are the same entity. SECTION 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to 7 the Warrant Agent at its Corporate Office, and upon satisfaction of all the terms and provisions hereof, the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing the aggregate number of Warrants so transferred. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the "Election to Purchase" or "Assignment" form, as appropriate, on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact authorized in writing. (d) A service charge may be imposed by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates requested by a Registered Holder. In addition, the Company may require payment by such Registered Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or, with the prior written consent of the Underwriter, disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Warrants, which are being publicly 8 offered with shares of Common Stock pursuant to the Underwriting Agreement, may be purchased separately from the shares and will be immediately transferable separately from the Common Stock. SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe pursuant to Section 6(d) or otherwise. SECTION 8. Redemption. (a) Commencing _______, 1999, [one year after Effective Date], on prior written notice as required pursuant to the provisions of paragraph (b) of this Section 8 below, the Warrants may, with the prior written consent of the Underwriter, be redeemed by the Company at the Redemption Price, provided the closing bid quotation of the Common Stock on The Nasdaq Stock Market or the last sales price if quoted on a national securities exchange equals or exceeds $7.50 per share, subject to adjustment consistent with the provisions of Section 9 hereof, for 20 consecutive trading days ending on the third trading day prior to the date on which the Company gives notice of redemption. All Warrants must be redeemed if any of the Warrants are redeemed. (b) In case the Company shall desire to exercise its right to so redeem the Warrants, it shall request the Warrant Agent, or the Underwriter, to mail a notice of redemption to each of the Registered Holders of the Warrants to be redeemed, first class, postage prepaid, not earlier than the forty-fifth (45th) day before the date fixed for redemption and not later than the thirtieth (30th) day before the date fixed for redemption, at such Registered Holder's last address as it shall appear on the records of the Warrant Agent. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. 9 (c) The notice of redemption shall specify (i) the Redemption Price, (ii) the date fixed for redemption, (iii) the place where the Warrant Certificates shall be delivered and the Redemption Price paid, (iv) that the Underwriter will assist each Registered Holder of a Warrant in connection with the exercise thereof (if the Underwriter has conducted, or caused to be conducted, the mailing) and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (Eastern time) on the business day immediately preceding the date fixed for redemption. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Underwriter or the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant that has been called for redemption shall terminate at 5:00 p.m. (Eastern time) on the business day immediately preceding the date fixed for redemption. After such termination, Holders of the redeemed Warrants shall have no further rights except to receive, upon surrender of the redeemed Warrant, the Redemption Price. (e) From and after the date fixed for redemption, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the Redemption Price of each such Warrant. From and after the date fixed for redemption and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the Redemption Price, shall cease. SECTION 9. Adjustment of Exercise Price and Number of Shares of Common Stock or Warrants. (a) (i) In the event the Company shall, at any time or from time to time after the date hereof, issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, 10 the applicable Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (calculated to the nearest cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such Change of Shares and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such Change of Shares. (ii) Subject to the exceptions referred to in Section 9(h), in the event that the Company shall at any time or from time to time issue or sell any shares of its Common Stock for a consideration per share of Common Stock less than the then applicable Purchase Price, the Purchase Price shall thereupon be reduced to a price (calculated to the nearest cent) determined by dividing (x) an amount equal to the sum of (i) the number of shares of Common Stock of the Company outstanding immediately prior to such issue or sale multiplied by the then applicable Purchase Price plus (ii) the consideration, if any, received by the Company upon such issuance or sale by (y) the total number of shares of Common Stock of the Company outstanding immediately after such issuance or sale. (iii) If the Company shall at any time after the date hereof issue or sell any shares of any other securities convertible into Common Stock or any options or warrants to purchase Common Stock (except as provided in Section 9(h)), including in connection with retirement of outstanding debt, for a consideration per share less than the Purchase Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the Purchase Price shall be reduced to the price (calculated to the nearest cent) determined by dividing (x)an amount equal to the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Purchase Price at the time plus (ii) the consideration, if any, received by the Company upon such issue or sale by (y) the total number of shares of Common Stock outstanding immediately after such issue or sale. (iv) For purposes of this Section 9(a) the consideration in connection with any such issue or sale shall be the amount of cash received by the Company (or, in the case of securities sold to underwriters or dealers for public offering or to the public through underwriters, the public offering price) for the sale of such shares or other securities, options or warrants, before deducting therefrom any commissions or other expenses paid or incurred by the Company in connection with the issue or sale of such securities, options or warrants plus any additional cash 11 receivable by the Company on conversion or exercise of such other securities, options or warrants except that, if any portion of such consideration is a consideration other than cash, the amount of such consideration other than cash shall be (i) the principal amount thereof, plus any accrued but unpaid interest thereon and all other amounts payable in connection with such debt including for expenses and yield maintenance premiums, in the case of debt forgiven, exchanged or converted, and (ii) the value of such consideration as determined in good faith by the Board of Directors of the Company (whose determination shall be conclusive and shall be evidenced by a resolution of the Company's Board of Directors filed with the Warrant Agent), in the case of any other non-cash consideration. (v) If the conversion or exercise price of any securities convertible into Common Stock or options or warrants to purchase Common Stock is not specified at the time of the issue or sale of such securities, option or warrants, the amount thereof, for purposes only of this Section 9(a), shall be as determined in accordance with Section 9(i). (vi) In the event of the issuance or sale by the Company of any securities convertible into Common Stock or any options or warrants to purchase Common Stock (except as provided in Section 9(h)), the Company shall be deemed to have issued the maximum number of shares of Common Stock into which such convertible securities may be converted or the maximum number of shares of Common Stock deliverable upon the exercise of such options or warrants, as the case may be, for the minimum consideration payable in respect thereof. On the expiration of such options or warrants or the termination of the right to convert such convertible securities, the Purchase Price shall be readjusted based upon the number of shares of Common Stock actually delivered upon the exercise of such options or warrants or upon the conversion of such convertible securities. Except as provided in the next preceding sentence no further adjustment of the Purchase Price shall be made as a result of the actual issuance of shares of Common Stock upon the exercise of such options or warrants or the conversion of such convertible securities. (b) Upon each adjustment of the applicable Purchase Price pursuant to Section 9(a), the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Section 9(c)) be such number of shares (calculated to the nearest tenth) purchasable at the applicable Purchase Price immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the applicable Purchase Price in effect immediately prior to such 12 adjustment and denominator of which shall be the applicable Purchase Price in effect immediately after such adjustment. (c) The Company may elect, upon any adjustment of the applicable Purchase Price, to adjust the number of Warrants outstanding, in lieu of adjusting the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the applicable Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the applicable Purchase Price in effect immediately after such adjustment. Upon each such adjustment of the number of Warrants, the Redemption Price in effect immediately prior to such adjustment also shall be adjusted by multiplying such Redemption Price by a fraction, the numerator of which shall be the Purchase Price in effect immediately after such adjustment and the denominator of which shall be the Purchase Price in effect immediately prior to such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10, the number of additional Warrants, if any, to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by such Holder prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (d) In the case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such consolidation, 13 merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant, immediately prior to such consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The foregoing provisions shall similarly apply to successive consolidations, mergers, sales or conveyances. (e) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates, continue to express the applicable Purchase Price per share, the number of shares purchasable thereunder and the Redemption Price therefor as were expressed in the Warrant Certificates when the same were originally issued. (f) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly after the fiscal quarter in which such adjustment was triggered prepare a certificate signed by the Chairman or President, and by the Secretary or an Assistant Secretary, of the Company setting forth: (i) the applicable Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the Registered Holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to the Underwriter and to each Registered Holder of Warrants at his or her last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (g) For purposes of Section 9(a), 9(b) and 9(c) hereof, the following provisions (i) and (ii) shall also be applicable. 14 (i) The number of shares of Common Stock outstanding at any given time shall include shares of Common Stock owned or held by or for the account of the Company and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. (ii) No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $0.05 in such price; provided that any adjustments which by reason of this clause (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $0.05 in the Purchase Price then in effect hereunder. (h) No adjustment to the Purchase Price or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made, however, with respect to the following: (1) upon the issuance or exercise of any of the Warrants; (2) upon (i) the issuance or sale of shares of Common Stock pursuant to options, warrants or convertible or exchangeable securities outstanding as of the date of this Agreement or (ii) issuance of shares of Common Stock pursuant to the Company's 1997 Stock Option Plan as such plan exists on the date hereof; or (3) upon the issuance of any shares of Common Stock in connection with a consolidation or merger in which the Company or a wholly owned subsidiary of the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of the outstanding Common Stock, or (ii) pursuant to and in connection with the acquisition by the Company or any wholly owned subsidiary of the Company of all or substantially all of the assets or stock (or other equity interests, as the case may be) of another entity. (i) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. 15 (j) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company shall concurrently therewith grant to each of the then Registered Holders of the Warrants all of such rights, warrants or options to which each such holder would have been entitled if, on the date of determination of stockholders entitled to the rights, warrants or options being granted by the Company, such holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise (assuming, for purposes of this Section 9(j), that the exercise of Warrants is permissible during periods prior to the Initial Warrant Exercise Date) of his Warrants. Such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 9. (k) In case the Company shall, at any time prior to the exercise of a Warrant, make any distribution of its assets to holders of the Common Stock, then the Registered Holder of such Warrant who exercises his Warrant after the record date for determination of those Registered Holders of Common Stock entitled to such distribution of assets shall be entitled to receive, upon exercise of the Warrant, in addition to Common Stock, the amount of such distribution which would have been payable to such Registered Holder had he been the holder of record of the Common Stock receivable upon exercise of such Warrant on the record date for the determination of those entitled to such distribution. SECTION 10. Fractional Warrants and Fractional Shares. (a) If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company shall nevertheless not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (i) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on The Nasdaq Stock Market, the current value shall be the last reported sale price of the Common Stock on The Nasdaq Stock Market or such exchange on the last business day prior to the date of exercise of the Warrant, or if no 16 such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of the Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. SECTION 12. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificates and this Agreement. SECTION 13. Agreement of Warrant Holders. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in 17 person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 hereof. SECTION 14. Cancellation of Warrant Certificates. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions of this Agreement. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. The Warrant Agent shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) 18 be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company or for the Underwriter) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, its Secretary, or Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence or willful misconduct. In the event of a dispute under this Agreement between the Company and the Underwriter regarding proceeds received by the Warrant Agent from the exercise of the Warrants, the Warrant Agent shall have the right, but not the obligation, to bring an interpleader action to resolve such dispute. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then 19 the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court shall be a bank or trust company having a capital and surplus as shown by its last published report to its stockholders, of not less than Ten Million Dollars ($10,000,000.00), or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. SECTION 16. Modification of Agreement. Subject to the provisions of Section 4(b), the Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained or (ii) that they may 20 deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than a majority of the outstanding Warrants, and provided, further, that no change in the number of or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed. SECTION 17. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made three days after such is mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 4004 Highway 93 North, Stevensville, Montana 59870, Attention: Chief Executive Officer, or at such other address as may have been furnished to the Warrant Agent in writing by the Company, with a copy to Gersten, Savage, Kaplowitz & Fredericks LLP, 101 East 52nd Street, New York, New York 10022, Attention: Jay M. Kaplowitz, Esq.; if to the Warrant Agent, at Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004; if to Briarwood Investment Counsel, at 1851 East First Street, Suite 950, Santa Ana, California 92705, Attention: President, with a copy sent to Zimet, Haines, Friedman & Kaplan, 460 Park Avenue, New York, New York 10022, Attention: James Martin Kaplan, Esq. SECTION 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. SECTION 19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and the Underwriter, and their respective successors and assigns, and the holders from time to time of the Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. SECTION 20. Termination. This Agreement shall terminate at the close of business on the Warrant Expiration Date of all the 21 Warrants or such earlier date upon which all Warrants have been exercised and/or redeemed, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 hereof shall survive such termination. SECTION 21. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this warrant Agreement to be duly executed as of the date first above written. CONNECTICUT VALLEY SPORTS, INC. By:__________________________________ Name: Title: CONTINENTAL STOCK TRANSFER & TRUST COMPANY By:__________________________________ Name: Title: Authorized Officer BRIARWOOD INVESTMENT COUNSEL By:__________________________________ Name: Title: 22 EXHIBIT A (FORM OF FACE OF WARRANT CERTIFICATE) No. Warrants VOID AFTER _______, 2003 WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK CONNECTICUT VALLEY SPORTS, INC. THIS CERTIFIES THAT, FOR VALUE RECEIVED, __________ or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one (1) fully paid and nonassessable share of common stock, $0.0001 par value (the "Common Stock"), of CONNECTICUT VALLEY SPORTS, INC., a Delaware corporation (the "Company"), at any time from _________, 2000 to the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Election to Purchase Form on the reverse hereof duly executed, at the corporate office of CONTINENTAL STOCK TRANSFER & TRUST COMPANY as warrant agent, or its successor (the "Warrant Agent"), accompanied by payment of $6.00, subject to adjustment (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check made payable to the Warrant Agent; provided, however, that in the event the Company calls the Warrants for redemption prior to _________, 2000, the Warrants shall be exercisable from the date on which the Warrants are called for redemption until the redemption date. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement") dated as of _________, 1998, by and among the Company, the Warrant Agent and Briarwood Investment Counsel (the "Underwriter"). Reference is hereby made to said Warrant Agreement for a more complete statement of the rights and limitations of rights of the Registered Holder hereof, the rights and duties of the Warrant Agent and the rights and obligations of the Company thereunder. Copies of said Warrant Agreement are on file at the office of the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modifications or adjustments. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 p.m. (Eastern time) on ________, 2003, or on the business day immediately preceding the date fixed for redemption, whichever is earlier. If such date shall in the State of New York be a holiday or a day on which the banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (Eastern time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. This Warrant shall not be exercisable by a Registered Holder in any state in which it would be unlawful for the Company to deliver the shares of Common Stock upon exercise of the Warrants represented hereby. The Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment of this Warrant Certificate at such office for registration of transfer, together with any transfer fee and any tax or other governmental charge imposed in connection with such transfer, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as may be provided in the Warrant Agreement. Commencing ________, 1999, this Warrant may, with the prior written consent of the Underwriter, be redeemed at the option of the Company, at the Redemption Price (as defined in the Warrant Agreement), provided the closing bid quotation of the Common Stock on The Nasdaq Stock Market or the last sales price if quoted on a national securities exchange equals or exceeds $7.50 per share (subject to adjustment as set forth in the Warrant Agreement) for 20 consecutive trading days ending on the third trading day prior to the date on which the Company gives notice of redemption. Notice of redemption shall be given not later than the thirtieth day, and not earlier than the forty fifth day, before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the Redemption Price per Warrant upon surrender of this Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Company has agreed to pay a fee of 5% of the Purchase Price to the Underwriter upon certain conditions as specified in the Warrant Agreement upon the exercise of this Warrant. This Warrant Certificate and each Warrant represented hereby shall be governed by and construed in accordance with the laws of the State of New York. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized, and a facsimile of its corporate seal to be imprinted hereon. CONNECTICUT VALLEY SPORTS, INC. By__________________________________ Its By__________________________________ Its Date: _______________ Seal COUNTERSIGNED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By_______________________ Its Authorized Officer (FORM OF REVERSE OF WARRANT CERTIFICATE) ELECTION TO PURCHASE FORM To Be Executed by the Registered Holder in Order to Exercise Warrants The undersigned Registered Holder hereby irrevocably elects to exercise (___) Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _________________________ _________________________ _________________________ _________________________ please print or type name and address and be delivered to _________________________ _________________________ _________________________ _________________________ please print or type name and address and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. ("NASD"). If not solicited by an NASD member, please write "unsolicited" in the space below. Unless otherwise indicated by listing the name of another NASD member firm, it will be assumed that the exercise was solicited by Briarwood Investment Counsel. Please indicate the name of the NASD member firm which solicited the exercise of the Warrant. __________________________________ Name of soliciting NASD Member Dated: __________________ __________________________________ Name (Please Print or Typewrite) __________________________________ Signature __________________________________ Street Address __________________________________ City, State and Zip Code __________________________________ Social Security or Other Taxpayer ID Number Signature Guaranteed: __________________________________ ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _________________________ _________________________ _________________________ _________________________ please print or type name and address (___) of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints _______________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated:______________ _______________________________________________________ Signature Guaranteed: ___________________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE ELECTION TO PURCHASE FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEDALLION BANK. EX-10.1 6 EXHIBIT 10.1 Exhibit 10.1 EMPLOYMENT AGREEMENT AGREEMENT made as of this 1st day of April 1996 by and between THE STOCK SHOP, LLC, a Montana Limited Liability Company, having an office at 3911 Red Ranch Road, Unit D, Stevensville, Montana 59870 (the "Employer") and Daniel Cooper, an individual residing at 3652 Eastside Highway, P.O. Box 377, Stevensville, Montana 59870 (the "Employee"). W I T N E S S E T H: WHEREAS, the Employer desires to employ the Employee as Co-Chairman and President; and WHEREAS, the Employee is willing to be employed as Co-Chairman and President in the manner provided for herein, and to perform the duties of such employment upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein set forth it is agreed as follows: 1. Employment of Employee. The Employer hereby employs the Employee as Co-Chairman and President of the Employer and the Employee hereby accepts such employment. During the term hereof, the Employee shall devote all of his business time and efforts to the Employer. 2. Duties. The Employee shall serve Employer and shall perform such services and duties and have such powers as may be prescribed by the Board of Directors (the "Board") , or the board's designee. The Employee shall report to and be subject to the direction and control of the Board or its designee. 3. Consideration. a. The Employee shall be paid a salary at the rate of $48,000 per year, less applicable withholding taxes and other payroll deductions required by law, payable in accordance 1 with Employer's customary payroll practices. b. The Employer shall include the Employee in any health insurance and other benefit programs available to all its employees. c. Employee shall receive an annual bonus of $7,500 which shall be payable only if the Company's revenues exceed $600,000 per year, which bonus, at Employee's option, shall be convertible to shares of stock in Employer or any successor thereto under terms to be determined by the Board. 4. Term. This Agreement shall expire on the third Anniversary hereof. It shall automatically renew for successive one year terms unless one of the parties hereto notifies the other party in writing of its intention not to renew at least sixty (60) days prior to the then next termination date. 5. Termination. a. Expiration. This Agreement shall terminate upon its expiration pursuant to its terms, as set forth in paragraph 4 above. b. For Cause. The Employer may terminate this Agreement and the Employee's employment hereunder upon written notice for cause. For purposes hereof, "Cause" shall mean (i) failing to carry out in a competent, workmanlike and diligent manner the business of the Employer as determined by the Board, (ii) engaging in conduct which is not in the best interests of the Employer, financially or otherwise (including but not limited to conduct that constitutes competitive activity), (iii) breach of this Agreement in any material manner, (iv) conviction of a crime (other than routine traffic offenses), (v) habitual abuse of alcohol or prescription drugs or (vi) abuse of controlled substances. c. Other. This Agreement automatically shall terminate upon the death of the Employee, except that the Employees's estate shall be entitled to receive any amount accrued under paragraph 3(a) above for the period prior to the 2 Employees's death and any other amount to which the Employee was entitled to the time of his death. 6. Expenses. The Employee shall be reimbursed for all reasonable, actual out-of-pocket expenses incurred in the performance of the Employee's duties hereunder, provided such expenses are acceptable to the Employer, and that the Employee shall submit to the Employer detailed expense reports and receipts with respect thereto in order to receive such reimbursement. 7. Vacation. The Employee shall be entitled to receive three weeks paid vacation time during each year of employment on dates to be agreed upon between the Employer and the Employee. 8. Confidentiality. At no time shall the Employee disclose to anyone any confidential or secret information (not already constituting information available to the public) of the Employer and/or its affiliates concerning (a) internal affairs or proprietary business operations of the Employer and/or its affiliates or (b) any trade secrets, new product developments, patents, or unique processes or methods. 9. Covenant Not to Compete. The Employee will not, at any time, anywhere in the world, during the term of this Agreement, and for one (1) year thereafter, either directly or indirectly, engage in, with or for any enterprise, institution, business, or company, whether or not for profit, which is competitive with the business of the Employer and/or its affiliates as such business may be conducted on the date thereof, as a creditor, guarantor, or financial backer, stockholder, director, officer, consultant, advisor, employee, member, inventor, producer, director, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity. However the ownership of, by the Employee, his spouse or his children, of not more than four percent (4%) of the total debt or equity capital of any such competitive enterprise or business, where the stock is listed on a national securities 3 exchange or on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), shall not be deemed in violation of the covenants contained in this paragraph. 10. Proprietary Rights - Ownership of Inventions. The Employee acknowledges that in the event the Employee creates or invents any products or technology or improves any existing products or technology of the Employer and/or its affiliates during the term of this Agreement, all patents or other proprietary rights shall be the exclusive property of the Employer and/or its affiliates. Employee agrees to execute any documents required to confirm the Employer's and/or its affiliates' ownership of all rights in and to any inventions of the Employee made during the term of this Agreement. The Employee agrees not to challenge the Employer's and/or its affiliates' ownership of any such invention or the validity of any of the Employer's and/or its affiliates' patents or other rights relating to such inventions. 11. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the employment contemplated herein and supersedes any prior agreement or understanding between the Employer and the Employee with respect to the Employee's employment by the Employer. The unenforceability of any provision of this Agreement shall not effect the enforceability of any other provision. This Agreement may not be amended, modified or changed in any way except by an agreement in writing signed by the Employee and the Employer. Waiver of or failure to exercise any rights provided by this Agreement and in any respect shall not be deemed a waiver of any further or future rights. 12. Assignment. This Agreement shall not be assigned to any other person or entity, except that this Agreement shall be assigned to any successor or re-organized entity into which the Employer may be re-organized pursuant to paragraph l.d.2. (ii) of a certain Purchase Agreement by and among Employer, Employee, Jason Stacy and Victor Wang dated as of March 15, 1996. 13. Governing Law. This Agreement and any amendments 4 hereto, and waivers and consents with respect thereto shall be governed by the internal laws of the state of New York, without regard to the conflict of laws principles thereof. 14. Notices. All notices, responses, demands or other communications under this Agreement shall be in writing and shall be deemed to have been given when a. delivered by hand; b. sent by telecopier, (with receipt confirmed), provided that a copy is mailed by registered or certified mail, return receipt requested; or c. received by the addressee as sent by express delivery service (receipt requested) in each case to the appropriate addresses or telecopier numbers as each party may designate by notice to the other party: (i) if to the Employer: The Stock Shop, LLC 3911 Red Ranch Road, Unit D Stevensville, Montana 59870 Attn: Daniel Cooper Telecopier: 406-777-7075 Telephone: 406-777-1111 With a copy to: Gersten, Savage, Kaplowitz & Curtin, LLP 575 Lexington Avenue 27th Floor New York, New York 10022 Attn: Wesley C. Fredericks, Jr., Esq. Telecopier: (212) 980-5192 Telephone: (212) 752-9700 5 (ii) if to the Employee: Dan Cooper 3652 Eastside Highway P.O. Box 377 Stevensville, Montana 59870 IN WITNESS WHEREOF, THE UNDERSIGNED HAVE EXECUTED THIS AGREEMENT THE DAY AND YEAR FIRST ABOVE WRITTEN. THE STOCK SHOP, LLC By: /s/ Victor Wang ---------------------------------- VICTOR WANG, Chairman and Member /s/ Daniel Cooper ---------------------------------- DANIEL COOPER, Employee 6 EX-10.2 7 EXHIBIT 10.2 CONNECTICUT VALLEY SPORTS, INC. 1997 STOCK OPTION PLAN As adopted August 14, 1997 1 1. PURPOSE OF PLAN; ADMINISTRATION 1.1 Purpose. Connecticut Valley Sports, Inc. 1997 Stock Option Plan I (hereinafter, the "Plan") is hereby established to grant to officers and other employees of Connecticut Valley Sports, Inc. (the "Company") or of its parents or subsidiaries (as defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code")), if any (individually and collectively, the Company"), and to non-employee directors, consultants and advisors and other persons who may perform significant services for or on behalf of the Company, a favorable opportunity to acquire common stock, $.0001 par value ("Common Stock"), of the Company and, thereby, to create an incentive for such persons to remain in the employ of or provide services to the Company and to contribute to its success. The Company may grant under the Plan both incentive stock options within the meaning of Section 422 of the Code ("Incentive Stock Options") and stock options that do not qualify for treatment as Incentive Stock Options ("Nonstatutory Options"). Unless expressly provided to the contrary herein, all references herein to "options,' shall include both incentive Stock Options and Nonstatutory Options. 1.2 Administration. The Plan shall be administered by the Board of Directors of the Company (the "Board"), if each member is a "Non-Employee Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b3"), or a committee (the "Committee") of two or more directors, each of whom is a Non-Employee Director. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. A majority of the members of the Committee shall constitute a quorum for the purposes of the Plan. Provided a quorum is present, the Committee may take action by affirmative vote or consent of a majority of its members present at a meeting. Meetings may be held telephonically as long as all members are able to hear one another, and a member of the Committee shall be deemed to be present for this purpose if he or she is in simultaneous communication by telephone with the other members who are able to hear one another. In lieu of action at a meeting, the Committee may act by written consent of a majority of its members. Subject to the express provisions of the Plan, the Committee shall have the authority to construe and interpret the Plan and all Stock Option Agreements (as defined in Section 3.4) entered into pursuant hereto and to define the terms used therein, to prescribe, adopt, amend and rescind rules and regulations relating to the administration of the Plan and to make all other 2 determinations necessary or advisable for the administration of the Plan; provided, however, that the Committee may delegate nondiscretionary administrative duties to such employees of the Company as it deems proper; and, provided, further, in its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan. Subject to the express limitations of the Plan, the Committee shall designate the individuals from among the class of persons eligible to participate as provided in Section 1.3 who shall receive options, whether an optionee will receive Incentive Stock Options or Nonstatutory Options, or both, and the amount, price, restrictions and all other terms and provisions of such options (which need not be identical). Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and the Company's officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, and all members of the Committee shall be fully protected by the Company in respect of any such action, determination or interpretation. 1.3 Participation. Officers and other employees of the Company, non-employee directors, consultants and advisors and other persons who may perform significant services on behalf of the Company shall be eligible for selection to participate in the Plan upon approval by the Committee; provided, however, that only "employees" (within the meaning of Section 3401(c) of the Code) of the Company shall be eligible for the grant of Incentive Stock Options. An individual who has been granted an option may, if otherwise eligible, be granted additional options if the Committee shall so determine. No person is eligible to participate in the Plan by matter of right; only those eligible persons who are selected by the Committee in its discretion shall participate in the Plan. 1.4 Stock Subject to the Plan. Subject to adjustment as provided in Section 3.5, the stock to be offered under the Plan shall be shares of authorized but unissued Common Stock, including any shares repurchased under the terms of the Plan or any Stock Option Agreement entered into pursuant hereto. The cumulative aggregate number of shares of Common Stock to be issued under the Plan shall not exceed 600,000, subject to adjustment as set forth in Section 3.5. If any option granted hereunder shall expire or terminate for any reason without having been fully exercised, the unpurchased shares subject thereto shall again be available for the purposes of the Plan. For purposes of this Section 1.4, where the exercise price of options is paid 3 by means of the grantee's surrender of previously owned shares of Common Stock, only the net number of additional shares issued and which remain outstanding in connection with such exercise shall be deemed "issued" for purposes of the Plan. 2. STOCK OPTIONS 2.1 Exercise Price; Payment. (a) The exercise price of each Incentive Stock Option granted under the Plan shall be determined by the Committee, but shall not be less than 100% of the "Fair Market Value" (as defined below) of Common Stock on the date of grant. If an Incentive Stock Option is granted to an employee who at the time such option is granted owns (within the meaning of section 424(d) of the Code) more than 10% of the total combined voting power of all classes of capital stock of the Company, the option exercise price shall be at least 110% of the Fair Market Value of . Common Stock on the date of grant. The exercise price of each Non-statuatory Option shall be determined by the Committee, but shall not be less than 85% of the Fair Market Value. The status of each option granted under the Plan as either an Incentive Stock Option or a Nonstatutory Option shall be determined by the Committee at the time the Committee acts to grant the option, and shall be clearly identified as such in the Stock Option Agreement relating thereto. "Fair Market Value" for purposes of the Plan shall mean: (i) the closing price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any, on the day immediately preceding the date of grant, or, if shares were not traded on the day preceding such date of grant, then on the next preceding trading day during which a sale occurred; or (ii) if Common Stock is not traded on an exchange but is quoted on Nasdaq or a successor quotation system, (1) the last sales price (if Common Stock is then listed on the Nasdaq Stock Market) or (2) the mean between the closing representative bid and asked price (in all other cases) for Common Stock on the day prior to the date of grant as reported by Nasdaq or such successor quotation system; or (iii) if there is no listing or trading of Common Stock either on a national exchange or over-the-counter, that price determined in good faith by the Committee to be the fair value per share of Common Stock, based upon such evidence as it deems necessary or advisable. (b) In the discretion of the Committee at the time the option is exercised, the exercise price of any option granted under the Plan shall be paid in full in cash, by check or by the optionee's interest-bearing promissory note (subject to any limitations of applicable state corporations law) delivered at the time of exercise; provided, however, that subject to the timing requirements of Section 2.7, in the discretion of the Committee and upon receipt of all regulatory approvals, the person exercising the option may deliver as payment in whole or in part of such exercise price certificates for Common Stock of the Company (duly endorsed or with duly executed stock powers attached), which shall be valued at its Fair Market Value on the day of exercise of the option, or other property deemed appropriate by the Committee; and, provided further, that, subject to Section 422 of the Code, so-called cashless exercises as permitted under applicable rules and regulations of the Securities and Exchange Commission and the Federal 4 Reserve Board shall be permitted in the discretion of the Committee. Without limiting the Committee's discretion in this regard, consecutive book entry stock-for-stock exercises of options (or "pyramiding") also are permitted in the Committee's discretion. Irrespective of the form of payment, the delivery of shares issuable upon the exercise of an option shall be conditioned upon payment by the optionee to the Company of amounts sufficient to enable the Company to pay all federal, state, and local withholding taxes resulting, in the Company's judgment, from the exercise. In the discretion of the Committee, such payment to the Company may be effected through (i) the Company's withholding from the number of shares of Common Stock that would otherwise be delivered to the optionee by the Company on exercise of the option a number of shares of Common Stock equal in value (as determined by the Fair Market Value of Common Stock on the date of exercise) to the aggregate withholding taxes, (ii) payment by the optionee to the Company of the aggregate withholding taxes in cash, (iii) withholding by the Company from other amounts contemporaneously owed by the Company to the optionee, or (iv) any combination of these three methods, as determined by the Committee in its discretion. 2.2 Option Period. (a) The Committee shall provide, in the terms of each Stock Option Agreement, when the option subject to such agreement expires and becomes unexercisable, but in no event will an Incentive Stock Option granted under the Plan be exercisable after the expiration of ten years from the date it is granted. Without limiting the generality of the foregoing, the Committee may provide in the Stock Option Agreement that the option subject thereto expires 30 days following a Termination of Employment (as defined in Section 3.2 hereof) for any reason other than death or disability, or six months following a Termination of Employment for disability or following an optionee's death. (b) Outside Date for Exercise. Notwithstanding any provision of this Section 2.2, in no event shall any option granted under the Plan be exercised after the expiration date of such option set forth in the applicable Stock Option Agreement. 2.3 Exercise of Options. Each option granted under the Plan shall become exercisable and the total number of shares subject thereto shall be purchasable, in a lump sum or in such installments, which need not be equal, as the Committee shall determine; provided, however, that each option shall become exercisable in full no later than ten years after such option is granted, and each option shall become exercisable as to at least 10% of the shares of Common Stock covered thereby on each anniversary of the date such option is granted; and provided, further, that if the holder of an option shall not in any given installment period purchase all of the shares which such holder is entitled to purchase in such installment period, such holder's right to purchase any shares not purchased in such installment period shall continue until the expiration or sooner termination of such holder's option. The Committee may, at any time after grant of the option and from time to time, increase 5 the number of shares purchasable in any installment, subject to the total number of shares subject to the option and the limitations set forth in Section 2.5. At any time and from time to time prior to the time when any exercisable option or exercisable portion thereof becomes unexercisable under the Plan or the applicable Stock Option Agreement, such option or portion thereof may be exercised in whole or in part; provided, however, that the Committee may, by the terms of the option, require any partial exercise to be with respect to a specified minimum number of shares. No option or installment thereof shall be exercisable except with respect to whole shares. Fractional share interests shall be disregarded, except that they may be accumulated as provided above and except that if such a fractional share interest constitutes the total shares of Common Stock remaining available for purchase under an option at the time of exercise, the optionee shall be entitled to receive on exercise a certified or bank cashier's check in an amount equal to the Fair Market Value of such fractional share of stock. 2.4 Transferability of Options. Except as the Committee may determine as aforesaid, an option granted under the Plan shall, by its terms, be nontransferable by the optionee other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order (as defined by the Code), and shall be exercisable during the optionee's lifetime only by the optionee or by his or her guardian or legal representative. More particularly, but without limiting the generality of the immediately preceding sentence, an option may not be assigned, transferred (except as provided in the preceding sentence), pledged or hypothecated (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of any option contrary to the provisions of the Plan and the applicable Stock Option Agreement, and any levy of any attachment or similar process upon an option, shall be null and void, and otherwise without effect, and the Committee may, in its sole discretion, upon the happening of any such event, terminate such option forthwith. 2.5 Limitation on Exercise of Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined on the date of grant as provided in Section 2.1 above) of the Common Stock with respect to which Incentive Stock Options granted hereunder (together with all other Incentive Stock Option plans of the Company) are exercisable for the first time by an optionee in any calendar year under the Plan exceeds $100,000, such options granted hereunder shall be treated as Nonstatutory Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking options into account in the order in which they were granted. 2.6 Disqualifying Dispositions of Incentive Stock Options. If Common Stock acquired upon exercise of any Incentive Stock Option is disposed of in a disposition that, under Section 422 of the Code, disqualifies the option holder from the application of Section 421(a) of the Code, the holder of the Common Stock immediately before 6 the disposition shall comply with any requirements imposed by the Company in order to enable the Company to secure the related income tax deduction to which it is entitled in such event. 2.7 Certain Timing Requirements. At the discretion of the Committee, shares of Common Stock issuable to the optionee upon exercise of an option may be used to satisfy the option exercise price or the tax withholding consequences of such exercise, in the case of persons subject to Section 16 of the Securities Exchange Act of 1934, as amended, only (i) during the period beginning on the third business day following the date of release of the quarterly or annual summary statement of sales and earnings of the Company and ending on the twelfth business day following such date or (ii) pursuant to an irrevocable written election by the optionee to use shares of Common Stock issuable to the optionee upon exercise of the option to pay all or part of the option price or the withholding taxes made at least six months prior to the payment of such option price or withholding taxes. 2.8 No Effect on Employment. Nothing in the Plan or in any Stock Option Agreement hereunder shall confer upon any optionee any right to continue in the employ of the Company, any Parent Corporation or any subsidiary or shall interfere with or restrict in any way the rights of the Company, its Parent Corporation and its Subsidiaries, which are hereby expressly reserved, to discharge any optionee at any time for any reason whatsoever, with or without cause. For purposes of the Plan, "Parent Corporation" shall mean any corporation in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For purposes of the Plan, "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. OTHER PROVISIONS 3.1 Sick Leave and Leaves of Absence. Unless otherwise provided in the Stock Option Agreement, and to the extent permitted by Section 422 of the Code, an optionee's employment shall not be deemed to terminate by reason of sick leave, military leave or other leave of absence approved by the Company if the period of any such leave does not exceed a period approved by the Company, or, if longer, if the optionee's right to reemployment by the Company is guaranteed either contractually or by statute. A Stock Option Agreement may contain such additional or different provisions with respect to leave of absence as the Committee may approve, either at the time of grant of an option or at a later time. 7 3.2 Termination of Employment. For purposes of the Plan "Termination of Employment," shall mean the time when the employee-employer relationship between the optionee and the Company, any Subsidiary or any Parent Corporation is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement; but excluding (i) terminations where there is a simultaneous reemployment or continuing employment of an optionee by the Company, any Subsidiary or any Parent Corporation, (ii) at the discretion of the Committee, terminations which result in a temporary severance of the employee-employer relationship, and (iii) at the discretion of the Committee, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company, a Subsidiary or any Parent Corporation with the former employee. Subject to Section 3.1, the Committee, in its absolute discretion, shall determine the affect of all matters and questions relating to Termination of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that such leave of absence or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then-applicable regulations and revenue rulings under said Section. 3.3 Issuance of Stock Certificates. Upon exercise of an option, the Company shall deliver to the person exercising such option a stock certificate evidencing the shares of Common Stock acquired upon exercise. Notwithstanding the foregoing, the Committee in its discretion may require the Company to retain possession of any certificate evidencing stock acquired upon exercise of an option which remains subject to repurchase under the provisions of the Stock Option Agreement or any other agreement signed by the optionee in order to facilitate such repurchase provisions. 3.4 Terms and Conditions of Options. Each option granted under the Plan shall be evidenced by a written Stock Option Agreement ("Stock Option Agreement") between the option holder and the Company providing that the option is subject to the terms and conditions of the Plan and to such other terms and conditions not inconsistent therewith as the Committee may deem appropriate in each case. 3.5 Adjustments Upon Changes in Capitalization; Merger and Consolidation. If the outstanding shares of Common Stock are changed into, or exchanged for cash or a different number or kind of shares or securities of the Company or of another corporation through reorganization, merger, recapitalization, reclassification, stock split-up, reverse stock split, stock dividend, stock consolidation, stock combination, stock reclassification or similar transaction, an appropriate adjustment shall be made by the Committee in the number and kind of shares as to 8 which options may be granted. In the event of such a change or exchange, other than for shares or securities of another corporation or by reason of reorganization, the Committee shall also make a corresponding adjustment changing the number or kind of shares and the exercise price per share allocated to unexercised options or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment, however, shall be made without change in the total price applicable to the unexercised portion of the option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices). In the event of a "spin-off" or other substantial distribution of assets of the Company which has a material diminutive effect upon the Fair Market Value of the Common Stock, the Committee in its discretion shall make an appropriate and equitable adjustment to the exercise prices of options then outstanding under the Plan. Where an adjustment under this Section 3.5 of the type described above is made to an Incentive Stock Option, the adjustment will be made in a manner which will not be considered a "modification" under the provisions of subsection 424(b)(3) of the Code. In connection with the dissolution or liquidation of the Company or a partial liquidation involving 50% or more of the assets of the Company, a reorganization of the Company in which another entity is the survivor, a merger or reorganization of the Company under which more than 50% of the Common Stock outstanding prior to the merger or reorganization is converted into cash or into a security of another entity, a sale of more than 50% of the Company's assets, or a similar event that the Committee determines, in its discretion, would materially alter the structure of the Company or its ownership, the Committee, upon 30 days prior written notice to the option holders, may, in its discretion, do one or more of the following: (i) shorten the period during which options are exercisable (provided they remain exercisable for at least 30 days after the date the notice is given); (ii) accelerate any vesting schedule to which an option is subject; (iii) arrange to have the surviving or successor entity grant replacement options with appropriate adjustments in the number and kind of securities and option prices, or (iv) cancel options upon payment to the option holders in cash, with respect to each option to the extent then exercisable (including any options as to which the exercise has been accelerated as contemplated in clause (ii) above), of any amount that is the equivalent of the Fair Market Value of the Common Stock (at the effective time of the dissolution, liquidation, merger, reorganization, sale or other event) or the fair market value of the option. In the case of a change in corporate control, the Committee may, in considering the advisability or the terms and conditions of any acceleration of the exercisability of any option pursuant to this Section 3.5, take into account the penalties that may result directly or indirectly from such acceleration to either the Company or the option holder, or both, under Section 280G of the Code, and may decide to limit such acceleration to the extent necessary to avoid or mitigate such penalties or their effects. No fractional share of Common Stock shall be issued under the Plan on account of any adjustment under this Section 3.5. 9 3.6 Rights of Participants and Beneficiaries. The Company shall pay all amounts payable hereunder only to the option holder or beneficiaries entitled thereto pursuant to the Plan. The Company shall not be liable for the debts, contracts or engagements of any optionee or his or her beneficiaries, and rights to cash payments under the Plan may not be taken in execution by attachment or garnishment, or by any other legal or equitable proceeding while in the hands of the Company. 3.7 Government Regulations. The Plan, and the grant and exercise of options and the issuance and delivery of shares of Common Stock under options granted hereunder, shall be subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law) and federal margin requirements and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan and options granted hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 3.8 Amendment and Termination. The Board or the Committee may at any time suspend, amend or terminate the Plan and may, with the consent of the option holder, make such modifications of the terms and conditions of such option holder's option as it shall deem advisable, provided, however, that, without approval of the Company's stockholders given within twelve months before or after the action by the Board or the Committee, no action of the Board or the Committee may, (A) materially increase the benefits accruing to participants under the Plan; (B) materially increase the number of securities which may be issued under the Plan; or (C) materially modify the requirements as to eligibility for participation in the Plan. No option may be granted during any suspension of the Plan or after such termination. The amendment, suspension or termination of the Plan shall not, without the consent of the option holder affected thereby, alter or impair any rights or obligations under any option theretofore granted under the Plan. No option way be granted during any period of suspension nor after termination of the Plan, and in no event may any option be granted under the Plan after the expiration of ten years from the date the Plan is adopted by the Board. 3.9 Time of Grant And Exercise of Option. An option shall be deemed to be exercised when the Secretary of the Company receives written notice from an option holder of such exercise, payment of the exercise price determined pursuant to Section 2.1 of the Plan and set forth in the Stock Option Agreement, and all 10 representations, indemnifications and documents reasonably requested by the Committee. 3.10 Privileges of Stock Ownership; Non-Distributive Intent; Reports to Option Holders. A participant in the Plan shall not be entitled to the privilege of stock ownership as to any shares of Common Stock not actually issued to the optionee. Upon exercise of an option at a time when there is not in effect under the Securities Act of 1933, as amended, a Registration Statement relating to the Common Stock issuable upon exercise or payment therefor and available for delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act, the optionee shall represent and warrant in writing to the Company that the shares purchased are being acquired for investment and not with a view to the distribution thereof. The Company shall furnish to each optionee under the Plan the Company's annual report and such other periodic reports, if any, as are disseminated by the Company in the ordinary course to its stockholders. 3.11 Legending Share Certificates. In order to enforce any restrictions imposed upon Common Stock issued upon exercise of an option granted under the Plan or to which such Common Stock may be subject, the Committee may cause a legend or legends to be placed on any share certificates representing such Common Stock, which legend or legends shall make appropriate reference to such restrictions, including, but not limited to, a restriction against sale of such Common Stock for any period of time as may be required by applicable laws or regulations. If any restriction with respect to which a legend was placed on any certificate ceases to apply to Common Stock represented by such certificate, the owner of the Common Stock represented by such certificate may require the Company to cause the issuance of a new certificate not bearing the legend. Additionally, and not by way of limitation, the Committee may impose such restrictions on any Common Stock issued pursuant to the Plan as it may deem advisable, including, without limitation, restrictions under the requirements of any stock exchange upon which Common Stock is then traded. 3.12 Use of Proceeds. Proceeds realized pursuant to the exercise of options under the Plan shall constitute general funds of the Company. 3.13 Changes in Capital Structure; No Impediment to Corporate Transactions. The existence of outstanding options under the Plan shall not affect the Company's right to effect adjustments, recapitalizations, reorganizations or other changes in its or any other corporation's capital structure or business, any merger or consolidation, any issuance of bonds, 11 debentures, preferred or prior preference stock ahead of or affecting Common Stock, the dissolution or liquidation of the Company's or any other corporation's assets or business, or any other corporate act, whether similar to the events described above or otherwise. 3.14 Effective Date of the Plan. The Plan shall be effective as of the date of its approval by the stockholders of the Company within twelve months after the date of the Board's initial adoption of the Plan. Options may be granted but not exercised prior to stockholder approval of the Plan. If any options are so granted and stockholder approval shall not have been obtained within twelve months of the date of adoption of this Plan by the Board of Directors, such options shall terminate retroactively as of the date they were granted. 3.15 Termination. The Plan shall terminate automatically as of the close of business on the day preceding the tenth anniversary date of its adoption by the Board or earlier as provided in Section 3.8. Unless otherwise provided herein, the termination of the Plan shall not affect the validity of any option agreement outstanding at the date of such termination. 3.16 No Effect on Other Plans. The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company, any Subsidiary or any Parent Corporation. Nothing in the Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for employees of the Company, any Subsidiary or any Parent Corporation or (ii) to grant or assume options or other rights otherwise than under the Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, firm or association. * * * 12 EX-10.3 8 EXHIBIT 10.3 LEASE AGREEMENT THIS AGREEMENT is made and entered into this 20th day of August, 1996, by and between CURTIS L. MERRIMAN of 599 Popham Lane, Corvallis, Montana 59828, hereinafter referred to as LESSOR; and DAN COOPER, of Cooper Arms, Inc., hereinafter referred to as LESSEE. W I T N E S S E T H WHEREAS, LESSOR is the owner of certain real property located in Ravalli County, described as 1131 Highway 93 with improvements thereon; WHEREAS, LESSEE is desirous of leasing a portion of said property; NOW, THEREFORE, in exchange for good and valuable consideration paid by LESSEE to LESSOR, the legal sufficiency and receipt of which is hereby acknowledged, and covenants to be performed, all as more particularly hereinafter set forth, the parties agree as follows: 1. DESCRIPTION OF LEASED PROPERTY: LESSOR by these presents does hereby lease unto LESSEE the following real property located in Ravalli County, Montana: 5200 sq. metal building at 1131 Highway 93 and land 20' north and south of said building with 40' near yard and frontage to Highway 93 to the east. TO HAVE AND TO HOLD the said premises unto LESSEE, its successors and assigns, for the term of this lease as hereinafter set forth. 2. TERM AND PAYMENTS: The primary term of this lease shall be for a period of three years commencing September 1, 1996 and shall terminate on September 1, 1999. It is expressly understood and agreed by the parties that the length of this lease is a material term and that LESSOR would not have entered into this lease agreement without the term of the lease agreed to herein. LESSEE shall pay, prior to taking possession of the leased premises, the nonrefundable sum of $4,000, which shall represent payment for the first month of the lease agreement and prepayment of the last one month(s) of the lease agreement. Thereafter, LESSEE shall pay as rental payment for the leased premises the sum of $2,000 per month, said payment to be made by LESSEE to LESSOR on the ______ day of each month. Said monthly rent payment to 1 be made by LESSEE to LESSOR at its address set forth above, unless LESSOR subsequently designates a different address in writing. The parties expressly understand and agree that timely rent payments are required herein and that there shall accrue a late fee penalty of Fifteen Dollars ($15.00) per day after the __________ of each month until payment in full is made hereunder. Additionally, prior to taking possession of the leased premises, the LESSEE shall pay to LESSOR the sum of -0- as a cleaning and security deposit. 3. ASSIGNMENT OF LEASE: It is expressly understood, agreed and part of the consideration given hereunder that LESSEE may not assign or transfer any part of this Lease or LESSEE's interest hereunder and nor may LESSEE sublet or sublease any part or all of the leased premises without the express written consent of the LESSOR. 4. POSSESSION, MAINTENANCE AND USE OF PROPERTY: LESSEE shall be entitled to possession on the first day of the term of this Lease provided the payments required hereunder have been made to LESSOR, and shall yield possession to LESSOR on the last day of the term of the Lease, unless otherwise agreed to by both parties in writing. LESSEE shall maintain the premises in a clean, safe and sanitary condition. LESSEE shall not permit any use of the premises, or any part thereof, which is in violation of any national, state, country or municipal law, ordinance or regulation. LESSEE shall be responsible for cleaning the leased premises and will be responsible for damage caused to the leased premises by LESSEE. LESSEE expressly agrees and understands that LESSEE is responsible for maintaining the real property surrounding the improvements and that there shall be no old cars, junk, garbage, etc. on the real property and further that there shall be no outside storage without the express written consent of the LESSOR. LESSEE understands and agrees that LESSEE shall be responsible for all utilities, waste disposal, garbage disposal etc. LESSEE understands and agrees that neither the use of nor storage of any toxic materials is allowed on the leased premises without EPA approval. 5. DEVELOPMENT AND IMPROVEMENT OF PROPERTY: LESSEE shall be responsible to provide all necessary improvements to leased premises in connection with the activities LESSEE will conduct on the leased premises. LESSEE shall obtain LESSOR's advance permission in writing prior to altering or improving the leased premises. 6. TAXES: 2 LESSOR agrees to pay all taxes, assessments, and other charges levied upon the real property during the term of the lease. 7. INSURANCE: LESSOR shall maintain fire and extended coverage insurance upon the premises herein demised. LESSEE and LESSOR shall each be responsible to maintain appropriate insurance for their respective interests and activities in the leased premises. 8. DEFAULT: In the event the LESSEE shall be in default in the performance or observance of any covenant or agreement or condition of this lease and in the event of such default or condition, then LESSOR may give LESSEE written notice of such default or condition. Said notice shall be deemed delivered when deposited in the United States mail, registered or certified with return receipt request, properly sealed, stamped and addressed to LESSEE at the address set forth for LESSEE at the beginning of this lease. In the event the default or defaults are not cured in their entirety within thirty (30) days after the delivery of said notice, the LESSOR may reenter the demised property and take and hold full and complete possession thereof. Thereafter, LESSOR may recover from LESSEE such damages as LESSOR may have suffered by reason of such default, together with attorneys' fees and other costs. In the event that LESSEE vacates, abandons or terminates this lease agreement prior to the end of the term of this lease agreement, then said damages shall include, but are not limited to, all of the monthly rental/lease payments due hereunder up to the end of the term of this lease agreement. LESSOR agrees, however, to take all reasonable steps to minimize the damages. In the event the above default or defaults are not cured within the thirty (3) day period, LESSOR may, at its option and sole discretion and without any further notice, reenter the demised property and cancel and terminate this lease or may seek any other rights or remedies allowed by law. LESSOR may, in the alternative, elect to cure any default and the cost of such action shall be added to LESSEE's financial obligations under this Lease. The provisions of this paragraph shall similarly govern should LESSOR be in default. Any default by the LESSOR, not cured within the applicable thirty (30) day time period, shall entitle LESSEE to recover all damages suffered by reason of such default, together with attorney's fees and other costs and LESSEE may cancel and terminate this lease. 9. TIME OF ESSENCE: Time shall be of the essence of this lease and all the terms, covenants and conditions hereof shall be performed at or before the times herein set forth. Any forbearance on the 3 part of LESSOR or LESSEE in the enforcement of the terms and conditions of this lease shall in no way be construed as a waiver of default thereof or waiver of the obligatory effect of such provision. 10. CONSTRUCTION AND VENUE: This lease shall be construed under the laws of the State of Montana and the parties agree that venue for any legal proceedings hereunder shall be in the Twenty-First Judicial District in and for Revalli County. 11. ENTIRE AGREEMENT AND MODIFICATION: The parties hereto expressly declare that this Agreement contains the entire agreement and understanding of the parties and supersedes any prior oral agreements and understandings. This Agreement may be modified only in writing, signed by both of the parties. 12. BINDING EFFECT: This Agreement shall be binding upon the parties' assigns and successors. 13. NOTICES: Notices under this Lease shall not be deemed valid unless given or served in writing. Said notices shall be deemed delivered when deposited in the United States mail, registered or certified with return receipt request, properly sealed, stamped and addressed to LESSEE or LESSOR at the addresses set forth above, unless notice of another address is subsequently provided. 14. SAVE HARMLESS: LESSEE shall save LESSOR harmless from any and all liability, damages, or claims of damages of any nature or description for injuries arising out of or in connection with the operation of LESSEE'S business on the leased premises. 15. SEVERABILITY: If any portion of this Lease shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a Court finds that any provision of this Lease is invalid or unenforceable, but that by limiting such provision, it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited. 4 16. WAIVER: The failure of either party to enforce any provisions of this Lease shall not be constructed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Lease. 17. OTHER: All three phase electric needs to be supplied by LESSEE. No smoking in the office area. LESSEE has right of first refusal at time of sale. IN WITNESS WHEREOF, LESSOR and LESSEE have caused this agreement to be executed on this 20th day of August, 1996. LESSOR: By: /s/ Curtis Merriman ---------------------- Curtis L. Merriman LESSEE: By: /s/ Daniel Cooper ---------------------- Daniel Cooper President 5 EX-10.4 9 EXHIBIT 10.4 L E A S E THIS LEASE, made and entered into and effective the 29th day of July, 1996, by and between BITTERROOT INVESTMENTS, L.L.C., a Montana Limited Liability Company of P.O. Box 8929, Missoula, Montana 59807-8929, hereinafter called the "LESSOR", AND Cooper Firearms Inc., a Montana corporation, of 4004 Hwy. 93 North, Stevensville, Montana 59870, hereinafter called the "LESSEE", WITNESSETH: 1. DESCRIPTION: In consideration of the terms and conditions herein contained, the LESSOR hereby leases unto the LESSEE, and the LESSEE hereby leases from the LESSOR, that certain property situated in Ravalli County, Montana, and more particularly described as follows: See Exhibit "A" attached hereto and by this reference made a part hereof. 2. TERM and RENTAL: To have and to hold the property for a term of 24 months, beginning July 29, 1996 for a rental to be paid without demand or offset at $2,475.00 per month for the first 12 months. The rent shall be payable at Bitterroot Investments, L.L.C., P.O. Box 8929, Missoula, Montana 59807-8929 on or before the 10th day of each month. This lease may be renewed at the option of LESSEE for an additional period of 12 months by LESSEE providing written notice to LESSOR at the above address no less than 30 nor more than 60 days from the end of the lease term. The amount of rent shall be $3,000.00 3. USE AND INDEMNIFICATION: The property subject hereto shall be used only for LESSEE'S manufacture and sale of firearms. LESSEE indemnifies and holds LESSOR harmless of any liability due to LESSEE'S or other's use or occupancy of the premises. 4. ENJOYMENT: The LESSOR agrees that the LESSEE on payment of the rents and observing and keeping the terms and conditions of this Lease on its part to be kept, shall lawfully, peaceably and quietly hold, occupy and enjoy said premises during the demised terms without hindrance, objection or molestation. 5. UTILITIES and MAINTENANCE: The LESSEE shall pay all expenses of maintenance and upkeep and utilities prior to delinquency. 6. ACCEPTANCE OF PROPERTY: The LESSEE has personally inspected and accepts the property in its present condition without representation of any nature. The LESSOR shall not be liable for any injury to person or property caused by or resulting from any defects in the property or form any damage or injury resulting or arising from any other cause or happening whatsoever, unless said damage or injury be caused by or be due directly to the act or failure to act of the LESSOR. 7. ALTERATIONS, REPAIRS and SURRENDER: The LESSEE shall not make any alterations, additions, or improvements to said property without the written consent of the LESSOR; however, such consent shall not be unreasonably withheld. LESSEE agrees that it will commit no waste on said premises nor suffer waste to be committed thereon, and that any improvements now on, or which may be hereinafter placed on said premises, shall not be removed or destroyed while it is in possession of said premises; LESSEE shall not make permanent improvements upon the property without the prior written consent of LESSOR. LESSEE agrees that such improvements shall be and become the property of LESSOR on termination of this LEASE, and LESSEE agrees to keep the improvements on said premises in repair, outside and inside, so as to prevent unreasonable determination of the 2 property while it is in possession thereof, ordinary wear and tear excepted. LESSEE shall be responsible for all repairs and maintenance of the premises, except for losses covered by causality insurance maintained by LESSOR. 8. INSURANCE: LESSOR to keep premises insured for casualty losses against loss or damage by fire or other cause in the amount of $300,000.00 and maintain boiler and other casualty loss with extended coverage in like amounts, from the effective date of this Lease, payable for benefit of the LESSOR. LESSEE shall maintain liability insurance coverage of least $1 Million, naming Lessor as additional insureds. LESSEE agrees that LESSOR is not responsible for LESSEE'S equipment, inventory, lost profits or any other loss as a result of calamity or damage to the premises. Nothing in this Lease will prevent LESSEE from carrying insurance to cover such losses. In the event of loss to the premises due to fire or other calamity rendering the premises uninhabitable, either party shall have the right to terminate this lease on 30 days notice, in which case the termination date will be effective the date the premises became uninhabitable. 9. REAL PROPERTY TAXES: The LESSOR agrees that it shall pay all real property taxes incurred during the term of this lease. 10. INSPECTION-PRESERVATION: The LESSEE agrees that the LESSOR and agents, and other representatives, shall have the right to enter into and upon said property, or any part thereof, at all reasonable hours for the purpose of examining the same, or making such repairs or alterations therein as may be necessary for the safety and preservation thereof, however, the LESSOR shall be under no obligation to do the same. LESSEE shall comply with all Federal, State and Local laws and regulations. Lessee 3 shall obtain or maintain all necessary permits for its operations, including without limitation, permits necessary for the generation, storage, and disposal of hazardous waste. LESSEE shall not store any hazardous waste or other by-products of its operations on the premises for a period of more than 30 days. LESSEE shall lawfully dispose of all hazardous waste if it does not, then LESSOR may (but is not required to do so) at LESSEE'S cost. LESSEE indemnifies and holds LESSOR harmless from all claims, liability, rights or causes of action, expenses, damages, fines, attorneys fees and costs arising from the production, use, storage, release, disposal or presence of any hazardous waste, pollution or contamination of the site or other lands, water or air by LESSEE or its employees, officers and directors (whether authorized or not), or those acting at its request or under its direction or control. 11. VIOLATION: It is agreed that time is of the essence of all terms and conditions of this Lease agreement, and in the event the LESSEE shall fail to fully pay any rental payment due hereunder when due or the LESSEE shall breach any other terms or conditions of this Lease, and the LESSEE shall fail to remedy such default or to discontinue such violation within fifteen (15) days after a written notice is mailed by LESSOR to LESSEE at the address above, then LESSEE shall pay to LESSOR in addition to the rental due a penalty in the amount of One Hundred and no/100 Dollars ($100.00) on the next following day. If the rent and penalty are not paid on the 30th day after mailing of written notice of default, then this Lease given herewith shall thenceforth become null, void and terminated, and the LESSOR, its agents or assigns, may immediately re-enter the property without further notice or demand and remove all persons therefrom and repossess itself of said property. 12. ASSIGNMENT AND SUBLEASE: LESSEE may assign this lease or sublease 4 the premises or any part thereof only with the prior written consent of Lessor which shall not be unreasonably withheld. 13. OPTION TO PURCHASE: The LESSOR in consideration of the amount of One Hundred and no/100 Dollars ($100.00) paid by LESSEE to LESSOR and receipt of which is hereby acknowledged, does hereby give and grant unto the LESSEE the right, privilege and option of purchasing the property as follows: a. The Purchase price to LESSEE shall be determined within sixty (60) days after the exercise of the option and notice thereof by LESSEE as set forth below by an appraisal hereto and which appraisal shall be conducted by an appraiser mutually agreed to by LESSOR and LESSEE, with the cost of such appraisal to be paid one-half by LESSOR and one-half by LESSEE. The One Hundred and no/100 Dollars ($100.00) option money shall be considered as down payment to LESSOR and shall be credited against amounts to be paid by LESSOR to LESSEE. Whether LESSEE exercises the option or not, LESSOR shall be entitled to retain the full amount of One Hundred and no/100 Dollars ($100.00) option money paid herewith, or, in the alternative, the parties shall enter into a contract for deed upon terms mutually agreeable to them. b. LESSEE shall exercise this option not later than the 10th day of July, 1998 by providing written notice to LESSOR of the exercise of the option. Such notice of exercise of the option shall be deemed given when a notice is placed in the United States Mail, either registered or certified postage prepaid, and addressed to the LESSOR at the address set forth on the first page of this Lease and option and postage prepaid. c. Should the LESSEE fail to timely exercise this option, or if the LESSEE should default upon any other term of this lease and option agreement, this option shall, without notice of any kind, be terminated and void. d. LESSOR may sell in a bona fide arms-length transaction the above property subject to this lease and option. LESSOR shall provide written notice to LESSEE at least 45 days prior to closing such a sale of the property. LESSEE may then exercise its option to purchase by meeting the same terms and at the same time as the proposed sale and giving notice of its intention to do so at least 30 days before closing of the sale. If LESSEE does not exercise this right of first refusal its option to purchase shall terminate. 14. ATTORNEY FEES AND COSTS: Should it become necessary to institute an 5 action at law because either party shall be in default in the performance of this agreement, the successful party to such action shall be entitled to reasonable attorney fees and costs as may be determined by the Court. 15. NOTICE AND SERVICE: Any written notice required to be given herein shall be considered adequately and sufficiently delivered and served after it has been properly addressed, to the last known address of either party or any other person to whom notice is required to be given herein, duly posted and mailed certified in any United States Post Office. 6 IN WITNESS WHEREOF, the parties hereto have signed this instrument the day and year first above written. LESSOR: BITTERROOT INVESTMENT, L.L.C. By: /s/ Douglas S. Spencer _____________________________ Douglas S. Spencer, Member LESSEE: COOPER FIREARMS, INC. By: /s/ John Tilleli This instrument was acknowledged before me on _________________, 1996 by ___________________. _________________________________________ Notary Public for the State of __________ Residing at: ____________________________ My Commission Expires:___________________ 7 EXHIBIT "A" Description of Property A tract of land located in and being a portion of the NE Section 21, Township 9 North, Range 20 West, PMM, Ravalli County, Montana, and being more particularly described as follows: Commencing at the northeast corner of Section 21; thence S89 DEG. 52'00" West, 73.49 feet along the north boundary of Section 21 to the true point of beginning; thence S. 16 DEG. 34'07" West 280.37 feet, N86 DEG. 52'00" West, 430.12 feet to a point on the easterly right of way of U.S. Highway 93; thence the following 3 courses along the easterly right of way of U.S. Highway 93: N16 DEG. 34'19" East 252.23 feet, N89 DEG. 38'56" East 31.37 feet N15 DEG. 33'06" East 2.46 feet to a point on the north boundary of Section 21; thence N. 89 DEG. 52'22" East 405.46 feet along the north boundary of Section 21 to the true point of beginning, and all according to Certificate of Survey No. 1453. 8 EX-10.5 10 EXHIBIT 10.5 Exhibit 10.5 The Stock Shop Mr. Dan Cooper P.O. Box 66 3911 Red Ranch Rd. Stevensville, MT 59870 USA 28, March 1996 DA/kk Your fax of March 26, 1996. Dear Mr. Cooper, It is understood that Anschutz is a trademark of J.G. Anschutz GmbH and no one shall use the trademark without authorization of Anschutz. We hereby confirm that The Stock Shop may use our trademark when using Anschutz barrelled actions in a stock of The Stock Shop for advertising and promotion purposes only. In this case The Stock Shop is also authorized to call the product described above "Anschutz USA Sporting Rifles". The Stock Shop will also submit any proposed advertising and promotional materials using the Anschutz name and logo for the approval of Anschutz prior to publications. It is further understood that The Stock Shop may not sell Anschutz products without authorization of Acu Sport as long as Acu Sport has the exclusive rights for our sporters. Sincerely, J.G. Anschutz BrmbH /s/ Dieter Anschutz - -------------------------------- Dieter Anschutz President cc: Rick Robison c/o Acu Sport EX-10.6 11 EXHIBIT 10.6 Exhibit 10.6 AcuSport Letterhead Dan Cooper The Stock Shop P.O. Box 66 3911 Red Ranch Rd. Stevensville, MT 59870 Dear Dan, Please be aware AcuSport is the sole importer of Anschutz product and will be provide Dan Cooper with Anschutz barreled actions for his custom rifle business. This is with the provision that credit and federal firearms license is in good standing. Prices will be as quoted on 2/22/96 (copy attached) and subject to change if there are any large swings in the value of the German Mark. Sincerely, /s/ Rick L. Robison - ---------------------------------- Rick L. Robison Vice President - Merchandising RLR/pe enclosure cc: John Tilleli EX-23.1 12 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Connecticut Valley Sports, Inc. and Subsidiaries Stevensville, Montana We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated February 15, 1997, except for Note 1 which is September 17, 1997 relating to the financial statements of Connecticut Valley Sports, Inc. and Subsidiaries, which is contained in that Prospectus. Our report contains an explanatory paragraph regarding uncertainties as to the ability of the Company to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO SEIDMAN, LLP -------------------------------------- BDO Seidman, LLP New York, New York January 2, 1998 EX-23.2 13 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Cooper Firearms, Inc. Stevensville, Montana We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 8, 1997 relating to the financial statements of Cooper Firearms, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ DAVID TARLOW & CO., P.C. -------------------------------------- David Tarlow & Co., P.C. New York, New York January 2, 1998 -----END PRIVACY-ENHANCED MESSAGE-----