As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Antigua Enterprises Inc.
(Exact name of registrant as specified in its charter)
British Columbia 2329 75-2290165
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
9319 North 94th Way
Scottsdale, Arizona 85258
(602) 860-1444
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)
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L. Steven Haynes
Chief Executive Officer
Antigua Enterprises Inc.
9319 North 94th Way
Scottsdale, Arizona 85258
(602) 860-1444
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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Copies to:
P. Robert Moya, Esq. John Anderson Paul Hurdlow, Esq.
Quarles & Brady Stikeman, Elliott Gray Cary Ware & Freidenrich
One East Camelback Suite 1700, Park Place 4365 Executive Drive
Suite 400 666 Burrard Street Suite 1600
Phoenix, Arizona 85012 Vancouver, British Columbia V6C 2X8 San Diego, California 92121
(602) 230-5500 (604) 631-1300 (619) 677-1400
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement 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. [ ]
Calculation of Registration Fee
=========================================================================================================================
Proposed
Title of each class Amount Proposed maximum maximum
of securities to be offering price aggregate Amount of
to be registered registered(1) per share(2) offering price(2) registration fee
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Common Shares, no par value...... 3,450,000 $3.56 $12,282,000 $3,721.82
=========================================================================================================================
(1) Includes 450,000 Common Shares subject to the Underwriters'
over-allotment option.
(2) Estimated solely for purposes of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, as amended.
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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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 NOVEMBER 12, 1997
PROSPECTUS
3,000,000 Shares
ANTIGUA ENTERPRISES INC.
[LOGO]
Common Shares
---------------
All of the Common Shares offered hereby are being sold by Antigua
Enterprises Inc. ("Antigua" or the "Company"), other than those shares subject
to the Underwriters' over-allotment option which, if exercised, will be sold by
a shareholder of the Company (the "Selling Shareholder"). See "Principal and
Selling Shareholders." The Company will not receive any proceeds from the sale
of shares pursuant to an exercise of the over-allotment option.
The Company's Common Shares are listed on The Vancouver Stock Exchange
under the symbol "ANE." The Company has applied for quotation of its Common
Shares on the Nasdaq National Market under the symbol "ANTGF." On October 31,
1997, the reported closing price of the Common Shares on The Vancouver Stock
Exchange was C$5.35 , or approximately $3.79 based on the Noon Buying Rate (as
herein defined) on such date. See "Price Range of Common Shares." See
"Underwriting" for a discussion of the factors to be considered in determining
the public offering price.
----------------
See "Risk Factors" beginning on page 8 for information
prospective investors should consider.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
====================================================================================================================================
Underwriting Discounts Proceeds to
Price to Public and Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Per share ................................... $ $ $
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Total(3) .................................... $ $ $
====================================================================================================================================
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). See "Underwriting."
The Company has also agreed to sell to the Representatives of the
Underwriters warrants to purchase up to 300,000 Common Shares
exercisable at 120% of the public offering price per share (the
"Representatives' Warrants"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at
$____________, including the Representatives' non- accountable expense
allowance.
(3) The Selling Shareholder has granted to the Underwriters a 45-day option
to purchase up to 450,000 additional Common Shares solely to cover
over-allotments, if any. If this option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholder will be $__________ ,
$_________, $__________ and $_________, respectively. See
"Underwriting."
The Common Shares are offered by the several Underwriters, when, as and
if delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject any orders in whole or in part. It
is expected that delivery of share certificates will be made against payment
therefor at the offices of Cruttenden Roth Incorporated in Irvine, California,
or through the facilities of the Depository Trust Company, on or about
_______________, 1997.
CRUTTENDEN ROTH FERRIS, BAKER WATTS
INCORPORATED INCORPORATED
The date of this prospectus is_____________, 1997
ENFORCEABILITY OF CIVIL LIABILITIES: The Company is a corporation incorporated
under the laws of the province of British Columbia, Canada. A majority of the
directors and controlling persons of the Company, certain of its officers, and
certain of the experts named herein, are residents of Canada, and all or a
substantial portion of their assets and a smaller portion of the Company's
assets are located outside the United States. As a result, it may be difficult
for investors to effect service of process within the United States upon certain
directors, controlling persons, officers and experts who are not residents of
the United States or to realize in the United States upon judgments of courts of
the United States predicated upon the civil liability provisions of the federal
securities laws of the United States. There is doubt as to the enforceability in
Canada against the Company or against any of its respective directors,
controlling persons, officers or experts, who are not residents of the United
States, in original actions or in actions for enforcement of judgments of United
States courts, of liabilities predicated solely upon the civil liability
provisions of the federal securities laws of the United States.
THIS PROSPECTUS DOES NOT QUALIFY THE COMMON SHARES OF THE COMPANY OFFERED HEREBY
FOR SALE UNDER THE SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF
CANADA AND DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THESE SECURITIES IN CANADA.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
Antigua(R), Antigua Sport(R), Antech(R), AII Apparel(R), and the Kachina and
Antigua Sport logos are registered trademarks of Antigua Enterprises Inc. This
prospectus also contains trademarks of other companies.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Unless otherwise indicated, the information contained in this
prospectus reflects (i) a one-for-five reverse split of the Company's Common
Shares effected on June 13, 1997 and (ii) assumes no exercise of the
Underwriters' over-allotment option, options granted or reserved for by the
Company prior to the date hereof or warrants or other securities exercisable for
or convertible into Common Shares. See "Certain Relationships and Related
Transactions", "Description of Securities" and "Underwriting."
Unless otherwise indicated, all dollar amounts are stated in United
States dollars with Canadian dollars designated as "C$." The Company conducts
its business in United States dollars. The noon buying rate in New York City for
cable transfers in Canadian dollars, as certified for customs purposes by the
Federal Reserve Bank of New York, is referred to herein as the "Noon Buying
Rate."
See "Risk Factors" for a discussion of important factors that should be
considered by prospective investors related to forward-looking statements
included in this prospectus.
The Company
Antigua designs, sources, embroiders, and markets men's and women's
lifestyle apparel and casual sportswear under the distinctive Antigua label. The
Company has more than 18 years of experience developing innovative seasonal and
year round collections of apparel for the premium 18-80 year old men's and
women's markets. The Company has developed a strong reputation by offering high
quality, fashion apparel with custom embroidery, screen printing and generous
fit. In addition, the Company believes it holds a competitive advantage by
having the capacity and reputation necessary for quick response to "hot markets"
(such as event-related garments) and corporate impulse orders, so called "at
once" business.
The Company sells its products through three distribution channels:
golf; licensed products; and corporate identity apparel. Antigua designs all of
its apparel to appeal to each of these channels. By selecting styles and color
stories which can be marketed to golf, licensed product and corporate
purchasers, the Company believes that it increases its sales potential and
reduces the risk of obsolescence of any particular stockkeeping unit. The
Company also believes that servicing three distribution channels from one
inventory provides the Company with the additional competitive advantage of
responding quickly to shifting demand in its three distribution channels with
fewer stockkeeping units.
Antigua offers its golf apparel in premium and mid-price market golf
professional shops, country clubs and resorts through a network of independent
sales representatives throughout the United States. Antigua supplies apparel to
more than 40 PGA, LPGA and Senior Tour tournaments, including the Ryder Cup, PGA
Championship, Buick Invitational, Motorola Western Open, Greater Hartford Open,
GTE Suncoast Classic, Bob Hope Chrysler Classic, the Shell Houston Open, Walt
Disney Oldsmobile Classic and Standard Register PING. Antigua golf shirts are
worn by sportscasters during televised NBC Sports golf programs and by a number
of top Tour players.
The Company also offers licensed sportswear and accessories of the
National Football League ("NFL"), the National Basketball Association (the
"NBA") and Major League Baseball ("MLB"). The Company also offers official
apparel under licenses granted by the National Hockey League (the "NHL"), the
National Collegiate Athletic Association (the "NCAA"), Notre Dame and more than
150 colleges and universities. The Company also produces Ryder Cup merchandise
and PGA Championship merchandise through licensing agreements with the
Professional Golfers Association of America ("PGA").
Antigua markets embroidered and screen printed apparel to corporations
for promotional material and has entered into licensing agreements with several
companies, such as the Cadillac Motor Division of General Motors, to sell
apparel bearing the names and logos of these companies and preferred supplier
agreements with other companies, such as Mercedes Benz, that the Company
believes enjoy high consumer awareness.
3
Business Strategy
The Company's strategic goals focus on growth in brand identity and
sales in all three of its distribution channels. The Antigua corporate strategic
goals are as follows:
* Three Channel Products: All of Antigua's products must be viable in
the three channels of distribution: golf, licensed product and
corporate identity. The Company believes that this strategy affords it
a competitive advantage because the products are moved from one channel
to another as demand shifts. Antigua can be responsive to fluctuating
demand because it has one inventory for three distribution channels,
rather than one separate inventory for each of the three channels.
* Product Mix: Antigua strives to maintain a product mix of 60%
Essentials (i.e., solid color shirts, sweaters, jackets, windshirts,
fleece, slacks and shorts) and 40% All Seasons Collections and the
Spring and Fall Collections (i.e., seasonal designs which reflect a
trending or fashion forward appearance). The Company believes that this
product mix gives Antigua a competitive advantage by positioning the
Company to serve "at once" business and "hot markets" as well as
prebooked fashion collection business. This strategy also allows the
Company a safer inventory risk position in that Essentials generally
have longer life spans in the three distribution channels into which
the Company sells.
* Small and Large Customer Mix: Antigua serves an even balance of large
and small customers and has over 15,000 open accounts (open accounts
include all customers whose credit has been approved by the Company and
who have purchased products from the Company on at least one occasion).
The Company's strategy is to maintain this mix of small and large
accounts to reduce the risk from concentration of accounts.
* All Seasons Products and Competitive Pricing Model: The All Seasons
Collection allows Antigua to offer apparel that is designed to have
greater longevity than the products of its competitors. Because of this
longevity, Antigua can buy large quantities and reduce its per item
cost. With this price advantage Antigua brings its All Seasons
Collection products to market below many competitors' prices. The
longevity (one year availability) of the All Season Collection appeals
to all three channels of distribution the Company serves and allows the
Company essentially to "prebook" business which is ordered later by
customers as "at once" goods. The Company believes that the All Seasons
Collection provides customers the ability to reorder familiar, proven
product without requiring repeat cuts by manufacturers (which may not
be economic) and to include fashion items in their own catalogs with a
reduced risk of offering product which is sold out prior to their
catalogs reaching their end users.
* Sales Expansion in Three Channels: The Company intends to pursue a
strategy of simultaneously increasing sales in all three distribution
channels.
Golf: Antigua will look to grow its golf business by renewing
business relationships with inactive accounts, refining and
providing additional training for its sales force,
capitalizing on its strategic alliances with golf facility
management companies and offering additional product
categories (outerwear, women's and special event products).
Licensed Products: Antigua plans to increase its licensed
products sales by increasing the range of licensed products
offered through key national and regional retailers. The
Company believes that it currently holds a competitive
advantage in this channel because of its product design mix,
the depth of its portfolio of licensed logos and its position
as one of the higher end providers of licensed apparel.
Corporate Identity: The Company believes that corporate
identity products provide an important growth opportunity for
the Company. Antigua seeks to add to its corporate identity
business by substantially increasing its sales force and
expanding its direct mail activities. The increasing trend of
casual dress in the workplace will increase opportunities for
the Company as consumers wear more lifestyle apparel,
embroidered and screen printed identity apparel.
4
Company History
Antigua Enterprises Inc. ("AEI") was incorporated under the laws of the
province of British Columbia on December 9, 1986 as Fair Harbour Mining
Corporation and changed its name to Fair Resources Group Inc. on December 17,
1991. On August 12, 1992, Fair Resources Group Inc. acquired Southhampton
Enterprises, Inc., a Texas corporation ("SEI") in a transaction which left the
former shareholders of SEI with approximately 75% of the issued and outstanding
share capital of the Company. To reflect the change of ownership and the shift
in the business of the Company (see "Business"), the Company changed its name to
Southhampton Enterprises Corp. ("Southhampton") on December 2, 1992, and the
Common Shares began trading on the Vancouver Stock Exchange (the "VSE") under
the symbol "SOH." Southhampton, through SEI, has operated a screen printing
business in Dallas, Texas since 1993. On June 13, 1997, Southhampton effected a
consolidation, or reverse split, of its Common Shares (pursuant to which
shareholders received one share for every five shares) and changed its name to
Antigua Enterprises Inc. On June 16, 1997, Southhampton, through SEI, acquired
(the "Acquisition") The Antigua Group, Inc. ("AGI"). In connection with the
Acquisition, the Company changed its VSE trading symbol to "ANE," and the VSE
redesignated the Company as an advanced company (a category of reporting company
previously referred to as a senior board or senior listed company). See "The
Acquisition and Related Financing."
The "Company" or "Antigua" refers to Antigua Enterprises Inc. and its
consolidated subsidiaries. The Company's principal executive offices are located
at 9319 North 94th Way, Scottsdale, Arizona 85258, and its telephone number is
(602) 860-1444.
5
The Offering
Common Shares offered by the Company ......... 3,000,000 shares
Common Shares to be outstanding
after this offering .......................... 7,338,365 shares (1)
Use of Proceeds .............................. The net proceeds from this offering will be used to repay or secure
approximately $14.5 million of indebtedness incurred in connection with
the Acquisition and for working capital and other general corporate
purposes. See "The Acquisition and Related Financing" and "Use of
Proceeds."
Proposed Nasdaq National
Market symbol ................................ ANTGF
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(1) Includes 3,692,209 Common Shares issued and outstanding, 646,156 Common
Shares for which the Company has received consideration and is
committed to issue but has not yet issued and 3,000,000 Common Shares
offered hereby. Excludes 4,336,770 Common Shares underlying warrants,
300,000 Common Shares underlying the Representatives' Warrants and
517,000 Common Shares underlying options to employees and Directors.
Also excludes 1,146,000 Common Shares into which Convertible Preferred
Shares Series A (the "Series A Preferred") may be converted upon
payment of a premium increasing over time and 1,858,954 Common Shares
into which two convertible debentures may be converted upon payment at
specified exercise prices. See "The Acquisition and Related Financing,"
"Use of Proceeds," "Management -- Executive Compensation," "Certain
Relationships and Related Transactions," "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
Summary Financial Data
(in thousands, except per share data)
Three Months
Year Ended December 31, Ended March 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
Statement of Operations Data - The Antigua
Group, Inc. (1):
Net sales ................................ $ 31,279 $ 32,019 $ 31,794 $ 31,403 $ 33,510 $ 6,455 $ 9,219
Gross profit ............................. 10,207 10,454 6,290 10,577 11,019 1,873 3,268
Income (loss) from operations ............ 2,166 1,655 (3,639) 1,751 1,577 (196) 803
Net income (loss)(1) ..................... 1,782 1,192 (4,328) 740 620 (470) 196(2)
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
Statement of Operations Data - Antigua
Enterprises Inc:
Net sales ................................ $ 131 $ 404 $ 1,793 $ 1,843 $ 2,858 $ 1,257 $ 2,722
Gross profit ............................. (22) 73 124 144 595 201 898
Income (loss) from operations ............ (389) (616) (828) (1,068) (652) (421) (851)
Net income (loss) ........................ (383) (645) (912) (1,094) (722) (420) (1,988)
6
Year Ended Six Months Ended
December 31, June 30,
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1996 1997
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Statement of Operations Data - Company Pro Forma:
Net sales ............................................ $ 36,368 $ 20,903
Gross profit ......................................... 11,615 7,342
Income (loss) from operations ........................ 520 1,207
Net income (loss) .................................... (316) 479
Adjusted pro forma net income (loss) per share ....... (.04) .06
Adjusted pro forma weighted average shares outstanding 8,427,938 8,599,832
June 30, 1997
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Actual Pro Forma(3)
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Balance Sheet Data:
Working capital (deficit) ............................ $(3,293) $1,898
Total assets ......................................... 38,375 37,055
Short term debt ...................................... 14,107 9,503
Long term debt ....................................... 8,045 2,051
Total liabilities, excluding preferred stock ......... 28,656 16,150
Preferred stock ...................................... 3,581 2,070
Shareholders' equity ................................. 6,138 18,835
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(1) Net income (loss) of The Antigua Group, Inc. ("AGI") does not include
any provision for income tax because AGI operated as an S Corporation
prior to the Acquisition.
(2) Includes an extraordinary charge of $354,000 from early extinguishment
of debt.
(3) On a pro forma basis, as adjusted to give effect to the application of
the net proceeds of this offering in the manner described in "Use of
Proceeds." See "Unaudited Pro Forma Consolidated Financial Statements."
7
RISK FACTORS
In addition to the other information in this prospectus, prospective
investors should carefully consider the following risk factors prior to making
an investment in the Common Shares offered hereby.
Limited Capital Resources; Leverage
AEI is principally a holding company whose material assets are its
investments in its subsidiaries. AEI does conduct limited business through a
division but is chiefly dependent on distributions from its subsidiaries to
service its obligations. AEI incurred approximately $12.3 million in debt (net
of discounts) in connection with the Acquisition. The debt is carried on the
financial statements of AGI because the lenders require payment primarily from
AGI. After giving pro forma effect to this offering and the application of the
net proceeds therefrom, approximately $10.0 million of that debt will be repaid,
and the Company has the right to cause conversion of the remaining debt into
Common Shares. AGI will still have approximately $8.4 million of indebtedness
(including the line of credit and assuming conversion of the convertible debt),
and AEI, on a consolidated basis and after giving pro forma effect to this
offering and the application of the net proceeds therefrom, will have
approximately $9.9 million of indebtedness (assuming conversion of the
convertible debt and including $6.2 million on a revolving line of credit),
representing 49.5% of total capitalization (or 18.4% of total capitalization
excluding the revolving line of credit). The Company believes that, after the
application of the net proceeds from this offering, cash generated from the
operations of AGI will be sufficient to meet AGI's remaining obligations and to
fund its operations for the next twelve months. However, AGI's borrowing
agreements prohibit AGI from making payments to AEI except as needed for
scheduled principal and interest payments on AEI's debt obligations to AGI's
former shareholders, and the operations of SEI provide AEI with limited other
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." As part of the terms of the Acquisition the Company
agreed to pay Mr. Dooley additional cash consideration in an amount currently
estimated at $700,000 (less an advance of $75,000), to be paid in four quarterly
installments. The terms of AGI's borrowing agreements do not permit AGI to make
payments to AEI to satisfy this obligation to Mr. Dooley. See "The Acquisition
and Related Financing." The first installment was due on September 16, 1997. AEI
was unable to make the entire payment at that time but such obligation has since
been paid in full. AEI will be required to pay Mr. Dooley approximately $150,000
on December 16, 1997, as the second of the four quarterly payments, and would
currently be unable to make that payment with cash generated from operations of
SEI. The terms of the Acquisition accelerate payment of any amount remaining on
the approximate $700,000 obligation to Mr. Dooley upon certain securities
offerings of the Company, and the Company anticipates satisfying such obligation
from the net proceeds of this offering. See "Use of Proceeds." AEI has also
defaulted on payment of an approximately $100,000 obligation to Sea/Q of
America, Inc. ("Sea/Q"). Sea/Q commenced suit to recover this amount but has
agreed not pursue this claim until after January 15, 1998, in consideration for
the Company having caused the transfer of warrants to Sea/Q. The Company
anticipates satisfying the obligation to Sea/Q from proceeds of this offering.
See "Use of Proceeds" and "Business - Legal Proceedings." If the Company were
unable to meet the obligations to Mr. Dooley and to Sea/Q with net proceeds of
this offering, the Company would need additional financing to satisfy the
obligations, and there can be no assurance that such financing would be
available, or, if available, that such financing would be on terms favorable to
the Company.
Absence of Combined Operating History
The Company was incorporated on December 9, 1986 in the province of
British Columbia as Fair Harbour Mining Corporation and changed its name to Fair
Resources Group Inc. on December 17, 1991. On August 12, 1992, Fair Resources
Group Inc. acquired Southhampton Enterprises, Inc., a Texas corporation ("SEI").
On December 2, 1992 the Company changed its name to Southhampton Enterprises
Corp. ("Southhampton") and the Common Shares began trading on the Vancouver
Stock Exchange (the "VSE") under the symbol "SOH." Through SEI, the Company
operates a screen printing business in Dallas, Texas. The Company incurred
operating losses of $.9, $1.1, $.7 and $.9 million in 1994, 1995, 1996 and the
six months ended June 30, 1997, respectively. On June 13, 1997, Southhampton
effected a consolidation, or reverse split, of its Common Shares (pursuant to
which shareholders received one share for every five shares) and changed its
name to Antigua Enterprises Inc. and its VSE trading symbol to "ANE." On June
16, 1997, Southhampton, through SEI, acquired (the "Acquisition") The Antigua
Group, Inc. ("AGI"). On a pro forma basis, revenues of AGI comprised 95.0%,
94.5%, 92.1% and 94.8%, respectively, of the Company's total revenues for the
years ended December 31, 1994, 1995 and 1996 and for the six months ended June
30, 1997. Prior to the Acquisition, management of AGI was under the direction of
Thomas E. Dooley, Jr., the founder of AGI. In connection with the Acquisition,
Mr. Dooley ceased having day to day responsibility for AGI's operations and has
agreed to serve as a consultant to the Company for a period of two years ending
in May 1999 and has been appointed a Director and Chairman of the Board of AGI.
While a management team of seven individuals with as much as 18 years of tenure
with AGI will continue to manage daily combined operations in conjunction with
executive management of the Company, there can be no assurance that the Company
will be able to manage effectively the combined operations of SEI and AGI or
achieve the Company's operating and growth strategies. The integration of the
management, operations and facilities of AGI could involve unforeseen
difficulties, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "The Acquisition and
Related Financing." Accordingly, neither the historical results of the Company
prior to its acquisition of AGI nor the historical results of AGI are
necessarily indicative of the results that would have been achieved if
Southhampton and AGI had been operated on an integrated basis or the results of
the Company in the future.
Competition
The Company encounters intense competition in all three of its
distribution channels, much of which is from significantly larger competitors.
The Company considers its main competitors in its golf distribution channel to
be Ashworth, Inc., Izod Club, Polo Ralph Lauren Corporation, Tommy Hilfiger,
Cutter & Buck Inc. and Sport-Haley, Inc. The Company considers its main
competitors in the licensed goods channel to be Nike, Reebok, Starter, Champion
Products Inc. and Vanity Fair. The Company considers its main competitors in the
corporate channel to be Polo Ralph Lauren Corporation, Tommy Hilfiger, the
Dockers brand of Levi Strauss & Co. and the Gear brand of L.A. Gear, Inc.
Competition in these distribution channels is intense and is based primarily on
brand recognition, as well as loyalty, quality, price, style, decoration
(embroidery) capacity, design, service and availability of shelf space in the
golf apparel and licensed apparel distribution channels. The Company also
competes, particularly in its golf distribution channel, with manufacturers of
high quality men's and women's sportswear and general leisure wear, including
Nike, Tommy Hilfiger and Nautica Enterprises, Inc. Many of these competitors, as
with competitors within particular distribution channels, have substantially
greater experience, financial and marketing resources, manufacturing capacity,
distribution and design capabilities than the Company. Increased competition in
the fashion golf apparel market, such as Nautica's recent entry into golf
apparel, from these manufacturers or others could result in price reductions,
reduced margins or loss of market share, all of which could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will compete successfully
with its present or potential competition. Further, recent entries in these
distribution channels by competitors offering apparel comparable to that of the
Company will likely intensify competitive pressures. There can be no assurance
that the Company will be able to maintain market share, to increase its market
share at the expense of its existing competition or that the Company will not
experience pricing pressures as a result of intensifying competition within
these markets. See "Business -- Competition."
8
Changes in Apparel Design; Forecasting and Scheduling
Fashion trends in the golf apparel, licensed apparel and corporate
identity markets are subject to rapid innovation and change. Because the Company
typically designs and arranges for the manufacture of its apparel substantially
in advance of sales to customers, there can be no assurance the Company will
accurately anticipate shifts in design trends. Should the Company be
unsuccessful in responding to fashion trends or changes in market demand, the
Company may experience insufficient or excess inventory levels, missed market
opportunities or higher markdowns, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company develops forecasts for each of its apparel products and establishes
production schedules based upon these forecasts in order to build sufficient
inventory to meet expected customer demand. If the Company misjudges market
demand for a particular product, or if shipment delays are incurred from
suppliers, the Company's delivery schedules may be disrupted. The Company has
been required to mark down inventory in the past in order to reduce inventory of
specific styles. In particular, the Company's gross margins were adversely
affected during fiscal 1994 and 1996 as a result of close-out sales of
discontinued garments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." There can be no assurance that the
Company's forecasts and production schedules will accurately anticipate market
demand or that the Company's results of operations will not be adversely
affected by design trends, changes in the market or other factors. See "Business
- -- Products and Product Design."
Dependence on Licensing Arrangements
Licensed products sales accounted for approximately 42% of AGI's sales
in 1996 and 38% of sales for the six months ended June 30, 1997. The Company's
licensed apparel lines are based on its use of insignia, logos, names, color
schemes and other identifying marks and images borne by its products under
licenses from professional sports leagues, golf organizations, colleges and
universities. The Company relies on these licensors for their right to grant and
maintain licenses and for their ability to preserve the value of the licenses by
promoting and protecting the licensed properties. The Company's licensing
arrangements are non-exclusive and expire at various times between December 31,
1997 and July 31, 1999 and, generally, allow the licensor to terminate the
license on short notice. Historically, the Company's licenses have been renewed,
and none have been terminated. Non-renewal, termination or modification of a
material license, in particular the Company's license from the NFL, would have a
material adverse effect on the Company's financial condition and results of
operations. There can be no assurance that the Company will continue to be able
to maintain or renew its licenses or that the licensors will not grant more
favorable licenses to competitors. See "Business -- Overview -- Licensed
Apparel."
The Company's licenses limit the types of product, which limits may be
modified from time to time, that may be sold under the license. Accordingly, the
Company may be limited in its ability to respond to changing market demands.
Royalty rates under the licenses have generally been rising over the past
several years, and the Company expects them to continue to rise. Although the
Company believes that it has been able to offset the impact of increasing
royalty rates, there can be no assurance that the Company will continue to be
able to do so. Any inability to offset royalty rates would reduce current
margins, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Foreign Suppliers and Outside Contractors
The Company obtains its raw materials from third party independent
suppliers, nearly all of which are foreign. The Company does not have formal
contracts with any of its suppliers or contractors and does not anticipate
entering into such contracts in the future. Because the Company does not have
formal contracts for mill production or for cutting and sewing of products, the
Company competes with other companies for production capacity. The Company
believes that it has good relationships with its principal vendors. However, in
the event any of the Company's suppliers or contractors are unable or unwilling
to ship the Company's products in a timely manner or to continue to manufacture
the Company's products, the Company would have to rely on other current sources
or identify and qualify new vendors. In such event, there can be no assurance
that the Company would be able to qualify such vendors for existing or new
products in a timely manner or that such vendors would allocate sufficient
capacity to the Company in order to meet its requirements. Delays in shipments
to the Company or inconsistent or inferior apparel quality may adversely affect
the Company's relationships with its customers and independent sales
representatives. Although the loss of major suppliers or contractors, and
resulting delays, could have a significant adverse effect on the Company's
immediate operating results, the Company believes alternate sources of fabric
and cutting and sewing capability for most product categories are available at
comparable prices and that it could replace these vendors without any long-term
adverse effect on the Company. Should the Company experience significant
unanticipated demand, the Company will be required to significantly expand its
access to manufacturing, both from current and new manufacturing sources. There
can be no assurance that such additional manufacturing capacity will be
available on terms as favorable as those obtained from current sources. See
"Business -- Product Development and Sourcing." Reliance on foreign suppliers
subjects
9
the Company to risks including changes in economic policies and political or
labor conditions and could result in the imposition of new or additional
currency or exchange controls. Although the Company contracts to purchase
products in United States dollars, changes in exchange rates could increase the
effective prices the Company pays for its products.
Import Restrictions
The Company's import operations are subject to constraints imposed by
the bilateral textile agreements between the United States and certain foreign
countries. These agreements impose quotas on the amount and type of goods that
can be imported into the United States from these countries. Such agreements
also allow the United States to impose restraints on the import of merchandise
that are not subject to specified limits. The Company's imported products are
also subject to United States customs inspections, which could result in delays
in delivery of the Company's products. While the Company has experienced no
material disruption of its business due to quota or customs restrictions, there
can be no assurance that it will not face such disruptions in the future. A
substantial increase in customs duties, decrease in quotas or inability of the
Company to import its supplies before quotas have been filled could have an
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, the United States and the countries in which the
Company's products are manufactured may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adversely adjust presently prevailing
quota, duty or tariff levels.
Operations of Foreign Manufacturers
The Company obtains most of its fabric from suppliers in Asia. Certain
foreign fabric manufacturers have been found to operate under conditions which
are commonly referred to "sweat shops," in some cases employing children in
violation of local law. Recently, some United States distributors have been
adversely affected by their association with such operations. The Company
requires its suppliers to sign a policy statement confirming that they do not
operate in such conditions. The Company's Sourcing Manager or Vice President of
Product Development visits all factories a minimum of once annually to confirm
compliance with Antigua's labor policies. Nevertheless, the Company does not
control such suppliers or their labor practices. The violation of labor or other
laws by any manufacturer used by the Company, or the divergence of an
independent manufacturer's labor practices from those generally accepted as
ethical in the United States, could result in adverse publicity for the Company
and retailers carrying the Company's products, which, in turn, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Future Status of Hong Kong and China
On July 1, 1997, China resumed sovereignty over Hong Kong in accordance
with the 1984 Sino-British Joint Declaration, and Hong Kong became a Special
Administrative Region of China. There can be no assurance that Hong Kong will
not experience political, economic or social disruption following resumption of
Chinese sovereignty. In addition, there have been a number of recent trade
disputes between China and the United States during which the United States
threatened to impose tariffs and duties on some products imported from China and
to withdraw China's "most favored nation" trade status. A large portion of the
Company's production is arranged through direct company contacts or contacts
with representatives in Hong Kong. In addition, approximately 25% of the fabric
for apparel is sourced from China and the Company has arranged in the past, and
could arrange in the future, for manufacture of product in China. Therefore, a
significant disruption in the operations of the Company's agents or fabric
manufacturers located in Hong Kong or China or the loss of most favored nation
trade status for China could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Independent Sales Representatives
The Company sells its apparel and accessory products predominantly
through a network of independent sales representatives. The Company's
independent sales representative agreements are generally terminable for any
reason by either party on 30 days notice. A number of the Company's independent
sales representatives carry apparel or other products lines which may compete
directly or indirectly with the Company's existing and anticipated apparel
lines. The Company's continued growth is dependent in part on existing
representatives increasing their sales per account, increasing their account
base, or upon the Company increasing the number of sales representatives
offering its products. There can be no assurance that existing representatives
will be successful in increasing their sales or will not highlight product lines
of other companies to the detriment of the Company's products, or that the
Company will retain existing representatives or be successful in expanding the
number of sales representatives. The Company has experienced a loss of sales
representatives in the past. The loss of existing
10
representatives, for any reason, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Distribution and Sales."
Risks Associated with Product Line Expansion
One element of the Company's business strategy is to increase sales by
leveraging the Company's brand name identification to offer an expanded product
line within established distribution channels. Products in development include
an expanded line of outerwear and fleece tops. In part, the Company's future
growth and profitability will be dependent on achieving market acceptance of,
and expanding the market share for, these and other new products. The Company
could encounter manufacturing and marketing obstacles which could adversely
impact sales of these product lines and the Company's results of operations.
There can be no assurance that efforts to expand the Company's product line will
be successful or that the allocation of resources to the expansion of product
offerings will prove to be more beneficial than allocation of the same resources
to design and marketing of existing products.
Fluctuations in Quarterly Results; Seasonality
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors including, among other things,
changes in the Company's product and customer mix, the difficulty of accurately
forecasting apparel demand, market acceptance of apparel designs introduced by
the Company or its competitors, seasonality in apparel purchases by customers,
poor weather conditions in the spring and summer seasons, loss of independent
sales representatives, changes in material and manufacturing costs, failure to
deliver products timely, pricing trends in the golf apparel industry, the level
and pricing of international sales, foreign currency exchange rates, general
economic conditions and other factors. The Company's business is seasonal, with
sales in the second and third fiscal quarters typically exceeding the other two
quarters of each fiscal year. Although the effect of seasonality and other
factors on the Company's operating results has been obscured to date by the
Company's growth, any of these factors could cause quarterly operating results
to vary significantly from prior periods. Certain of the Company's expenses are
fixed in the short term and are based on forecasts of product orders.
Significant variations between the Company's forecasts and actual orders may
adversely affect operating results if the Company is unable to proportionately
reduce its expenses in a timely manner. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business
- --Product Development and Sourcing."
Dependence on Key Personnel
The Company's success depends to a significant extent on several key
individuals, including L. Steven Haynes, Chief Executive Officer, Ronald A.
McPherson, President of AGI, Gerald K. Whitley, Vice President of Finance of
AGI, Brett Moore, Vice President of Product Development of AGI, and Joseph M.
Blanchette, Vice President of Information Technology of AGI. The Company has
employment and non-competition agreements with each of these executives but does
not maintain "key person" life insurance on the lives of any of its executive
officers. The success of the Company will depend, among other factors, on the
successful recruitment and retention of quality management and other personnel.
See "Management."
Limited High-End Market for Golf Apparel
AGI's sales into the golf distribution channel accounted for 46.5%,
44.0%, 37.3% and 36.8% of its sales in the years ended December 31, 1994, 1995
and 1996 and for the six months ended June 30, 1997, respectively. The Company
targets distribution of its fashion golf apparel toward high quality golf
professional shops, country clubs and resorts. According to Golf Shop Operations
magazine, there are approximately 17,500 golf retailers in the United States,
including golf professional shops (green grass shops) and off course shops. Of
these retailers, the Company targets 75%, or approximately 13,000, as its golf
distribution channel customer base (discounting the total number because of
possible credit problems or non-viability as an apparel retailer). Because the
Company currently has open accounts with approximately 7,900 golf professional
shops and off course shops (approximately 55% of which are active in any given
year), the domestic market for distribution of golf apparel lines may be
limited. High quality sportswear and general leisure wear, being similar to
fashion golf apparel, can be purchased from a variety of sources including
department stores, sporting goods stores, catalog retailers and other
11
retail outlets. Customers seeking to purchase high quality sportswear may elect
to purchase apparel from any of these sources, thus creating competition for
discretionary consumer spending. See "Business."
Management of Growth
AGI's sales increased from approximately $31.4 million for the fiscal
year ended December 31, 1995 to approximately $33.5 million for the fiscal year
ended December 31, 1996 and from approximately $15.7 million for the six months
ended June 30, 1996 to approximately $19.8 million for the six months ended June
30, 1997. During the six months ended June 30, 1997 this growth has required AGI
to transport some product by air rather than by less expensive shipping in order
to fill a limited number of customer orders in a timely manner. While the
Company believes that the use of air freight has not had a material effect on
its results of operations, a significant and sudden increase in orders could
require the Company to increase its use of air freight in the future, which
could adversely affect operating results during periods of such use. This growth
has placed and, if sustained, will continue to place, a substantial strain on
the operational, administrative and financial resources of the Company and has
resulted in an increase in the level of responsibility of the Company's
management personnel. The increase in sales activity and the addition of new
product lines, although complementary to the Company's existing product lines,
will require the Company to improve its operating and financial systems and to
continue to expand, train and manage its employee base and network of
independent sales representatives. The Company's future operating results will
depend in part on management's ability to manage future growth, the success of
which cannot be assured. See " -- Absence of Combined Operating History" and
"Business -- Management of Growth."
Absence of Prior United States Market; Possible Volatility of Share Price
The Company's Common Shares have been listed on the VSE since May 1989
(trading under the "SOH" symbol between December 2, 1992 and June 13, 1997 and
under the symbol "ANE" after June 13, 1997), but there has been no United States
public market for the Common Shares prior to this offering. There can be no
assurance that an active trading market for the Common Shares will develop in
the United States or be sustained after this offering or that the market price
of the Common Shares will not decline below the public offering price. The
public offering price was determined by negotiations among the Company, the
Selling Shareholder and the Representatives and may not be indicative of the
market price for the Common Shares in the future. See "Underwriting" for a
discussion of the factors considered in determining the public offering price.
The trading price of the Common Shares in the future could be subject to wide
fluctuations in response to quarterly variations in operating results of the
Company or its competitors, actual or anticipated announcements of product
developments by the Company or its competitors, changes in analysts' estimates
of the Company's financial performance, acquisition or loss of licenses, general
industry conditions and other events and factors, including broad-based market
fluctuations.
Shares Eligible for Future Sales; Rights to Acquire Shares
Upon completion of this offering, the Company will have 7,338,365
Common Shares outstanding. Sales of substantial amounts of Common Shares in the
public market, or the perception that such sales could occur, could adversely
affect prevailing market prices and could impair the Company's future ability to
raise capital through the sale of its equity securities. With respect to sales
in the Province of British Columbia, the securities laws of the Province of
British Columbia generally impose a hold period of one year from the date of
issuance of securities sold in a private placement transaction without the
benefit of a prospectus. During the hold period, common shares are unable to be
traded in British Columbia, or through the facilities of the VSE, without the
filing of a prospectus in respect thereof, but such hold period may not apply to
sales outside of British Columbia. Between the fourth quarter of 1997 and the
end of the fourth quarter of 1998, the hold period will expire with respect to
approximately 11,442,385 Common Shares and Common Shares underlying convertible
securities (not at all of which will necessarily be converted) which have been
privately placed by the Company within the last year. With respect to sales in
the United States, the common shares sold in this offering will be freely
tradeable in the Unites States public market without restriction or further
registration under the Act unless held by an "affiliate" of the Company, as that
term is defined in Rule 144 under the Act. The remaining 4,338,365 Common
Shares, and the Common Shares underlying warrants, options and other convertible
securities are, or will be when issued, "restricted securities" as that term is
defined in Rule 144 and may be sold only in compliance with Rule 144, pursuant
to registration under the Act or pursuant to an exemption therefrom. See "Shares
Eligible For Future Sale."
As of the date of this prospectus, the Company has reserved 517,000
Common Shares for issuance on exercise of options. Warrants to purchase
4,536,770 Common Shares, excluding the Representatives' Warrants for 300,000
Common Shares at a per share exercise price equal to 120% of the public offering
price in this offering, were also outstanding, with a weighted average exercise
price per share of $5.38. See "Description of Securities - Common Share Purchase
Warrants." The Company has additionally reserved 3,004,954 Common Shares into
which shares of the Series A Preferred (as defined) and other convertible
debentures may be converted upon payment of premiums which increase over time.
12
Holders of certain outstanding warrants and other convertible securities have
certain demand and incidental registration rights which could require the
Company to register the Common Shares underlying such warrants for a period of
five years from the dates of such warrants. Sales of Common Shares underlying
options or warrants may adversely affect the price of the Common Shares. See
"Management -- Compensation Plans" and "Description of Securities."
Anti-Takeover Effect of Charter
The Company's Memorandum, as amended, authorizes the issuance of up to
30,000,000 Preferred Shares, of which, 10,000,000 shares were designated as and
5,730,000 shares were issued as Convertible Preferred Shares Series A (the
"Series A Preferred") in connection with financings related to the Acquisition.
The Series A Preferred is non-voting, has a fixed cumulative preferential cash
dividend at a rate of 12% per annum, is convertible for five years into Common
Shares (five Series A Preferred shares being convertible into one Common Share)
upon payment of a premium which escalates over the five-year period, may be
redeemed by the Company upon certain circumstances, is retractable at the option
of the holder (i.e., the holder holds a put option with respect to these shares)
upon completion of a public offering with proceeds to the Company in excess of
$8,000,000, restricts the payment of dividends on or redemption of other classes
of shares and restricts the creation of classes or series of shares which would
rank senior to or pari passu with the Series A Preferred. See "The Acquisition
and Related Financing." The Company intends to retire a portion of the Series A
Preferred with proceeds of this offering. Other Preferred Shares may be issued
in series with the material terms of any series determined by the Board of
Directors. Such material provisions would likely include dividend rights, which
may be cumulative, conversion features, voting rights, redemption rights,
retraction rights and liquidation preferences. The Company does not currently
anticipate any new issuances of Preferred Shares. However, if the Company does
issue any series of Preferred Shares in the future, it is likely that such
shares will have dividend privileges and liquidation preferences superior to
those of the Common Shares. Further, the Preferred Shares may be issued with
voting, conversion or other terms determined by the Board of Directors which
could be used to delay, discourage or prevent a change in control of the
Company. Such terms could include, among other things, dividend payment
requirements, redemption provisions, preferences as to dividends and
distributions and preferential voting rights. See "Description of Securities"
and "Canadian Governmental Regulation."
Control by Executive Officers and Directors
Upon the closing of this offering, the executive officers and Directors
of the Company will beneficially own approximately 32% of the outstanding Common
Shares (approximately 30% if the Underwriters' over-allotment option is
exercised in full). Because of such share ownership, these shareholders will
continue to be able substantially to influence or control the election of
members of the Company's Board of Directors and to determine corporate actions
requiring shareholder approval, including mergers or other business
combinations. See "Principal and Selling Shareholders."
Benefits to Management, Creditors and Underwriters; Potential Conflict of
Interests
The successful completion of this offering will benefit certain
Directors and officers of the Company by enabling the Company to repay
indebtedness to Mr. Dooley and others which has been guaranteed by Mr. Haynes
and Mr. Lloyd, Directors of the Company, and to satisfy various other
obligations of the Company. See "Certain Relationships and Related
Transactions." Additionally, the Company will repay certain financing extended
by lenders in connection with the Acquisition, including a bridge loan from an
affiliate of Cruttenden Roth Incorporated. See "The Acquisition and Related
Financing" and "Use of Proceeds."
Dilution
Purchasers of Common Shares offered hereby will suffer an immediate and
substantial dilution in the net tangible book value per share from the public
offering price. To the extent outstanding options to purchase Common Shares are
exercised, there will be further dilution. See "Dilution."
13
Enforceability of Judgments
The enforceability by investors of civil liabilities under the federal
securities laws of the United States may be affected adversely by the fact that
the Company is organized under the laws of a foreign country, that some of its
officers and Directors may be residents of a foreign country, that some of the
experts named in the registration statement of which this prospectus forms a
part may be residents of a foreign country and that some portion of the assets
of the Company are located outside the United States.
Important Factors Related to Forward-Looking Statements and Associated Risks
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Act and Section 21E of the Exchange Act and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to the products and future economic performance of the Company. The
forward-looking statements and associated risks set forth in this prospectus
include or relate to (i) development of brand name recognition and loyalty to
Antigua apparel, (ii) increasing sales through the introduction to its existing
network of independent sales representatives of the additional outerwear and
fleece products, as well as other apparel products and designs, (iii) success of
additional marketing initiatives to be undertaken by the Company, (iv) increases
in international sales as a result of the pursuit of distribution agreements in
the European community, the Pacific Rim and other countries, (v) increased
distribution through expansion of its network of independent sales
representatives and its customer base, (vi) expansion of sales to corporate and
tournament customers through brand name recognition and capitalizing on
embroidery capacity, (vii) achievement of increases in per-account sales by
broadening the Company's product line, (viii) success of the Company in
forecasting demand for particular apparel styles and its success in establishing
production and delivery schedules and forecasts which accurately anticipate and
respond to market demand, (ix) success in increasing sales in the corporate
identity channel of distribution, (x) achievement of high gross profit margins
by targeting the premium and mid-priced lifestyle apparel market, controlling
production costs and expanding the Company's apparel lines to include other high
margin products and (xi) success of the Company in achieving increases in net
sales such that costs of goods sold and selling, general and administrative
expenses decrease as a percentage of net sales.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Company will
continue to design, market, have manufactured, embroidered and ship new apparel
products on a timely basis, that competitive conditions within the lifestyle
apparel industry will not change materially or adversely, that demand for the
Company's lifestyle apparel will remain strong, that the market will accept the
Company's new lifestyle apparel lines, that the Company will retain existing
independent sales representatives and key management personnel and be able to
add independent sales representatives, that inventory risks due to shifts in
market demand will be minimized, that the Company's forecasts will accurately
anticipate market demand and that there will be no material adverse change in
the Company's operations or business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements, many of which are beyond the control
of the Company, are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the results contemplated in
forward-looking information will be realized. In addition, as disclosed
elsewhere under "Risk Factors," the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in such
forward-looking statements. Any of the other factors disclosed under "Risk
Factors" could cause the Company's net sales or net income, or growth in net
sales or net income, to differ materially from prior results. Growth in absolute
amounts of cost of goods sold and selling, general and administrative expenses
or the occurrence of extraordinary events could cause actual results to vary
materially from the results contemplated by the forward-looking statements.
Budgeting and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revisions based on actual
experience and business developments, the impact of which may cause the Company
to alter its marketing, capital expenditure or other budgets, which may in turn
affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
14
THE ACQUISITION AND RELATED FINANCING
On May 7, 1997, the Company entered into an agreement (the
"Agreement"), through SEI, to purchase all of the outstanding shares of The
Antigua Group, Inc. ("AGI") from Thomas E. Dooley, Jr., direct and indirect
holder of approximately 82% of the shares of AGI, and from Mr. Dooley as agent
for the other shareholders of AGI, such that AGI became a wholly owned
subsidiary of the Company. At the closing of the transaction on June 16, 1997
(the "Acquisition Closing Date"), the Company paid Mr. Dooley, personally and as
agent, cash in the amount of $12,636,482, convertible long-term promissory notes
in the total amount of $6,378,000, which notes the Company intends to repay with
proceeds of this offering, and distributed assets, consisting primarily of
forgiveness of a note payable to the Company, to Mr. Dooley in the amount of
$134,706. The Company also contributed $2,112,000 in cash to AGI to allow AGI to
pay certain promissory notes due and payable to Mr. Dooley and his wife. As
additional consideration, the Company issued to Mr. Dooley, personally and as
agent, 250,000 shares of Series A Preferred, which are convertible into 50,000
Common Shares and a five-year warrant to purchase 50,000 Common Shares at an
escalating per share exercise price, commencing at C$7.20 per share if exercised
within twelve months of May 1997 and rising in steps to C$12.10 per share if
exercised within the final twelve months of its term. Additionally, Mr. Dooley,
as agent, was issued an option to purchase 50,000 Common Shares at $5.00 per
Common Share and, in connection with a consulting agreement between himself and
the Company, received an option to acquire 10,000 Common Shares at $5.00 per
Common Share and will receive additional cash consideration in the Acquisition
in an amount currently estimated at $700,000 to be paid in four equal quarterly
installments beginning September 16, 1997, subject to prepayment upon the
completion of a securities offering by the Company with gross proceeds to the
Company in excess of $12,000,000. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
AGI has an existing $12,000,000 line of credit (the "Credit Facility")
from LaSalle Business Credit, Inc., against which, as of June 30, 1997, AGI had
drawn approximately $6.2 million and had outstanding letters of credit of
approximately $2.7 million in the aggregate. The Company also borrowed funds
from the following lenders to finance the acquisition of AGI: (i) LaSalle
Business Credit, $3,500,000 (the "LaSalle Acquisition Loan"); (ii) Imperial
Bank, $2,500,000 (the "Imperial Acquisition Loan"); and (iii) Cruttenden Roth
Bridge Fund, L.L.C., $1,020,000 (the "Cruttenden Bridge Acquisition Loan") with
proceeds of this offering. The Company intends to repay $2,000,000 of the
LaSalle Acquisition Loan and the Cruttenden Bridge Acquisition Loan and
anticipates that it will receive a demand from Imperial Bank to either prepay
the Imperial Acquisition Loan or pledge $2,500,000 as cash collateral for such
loan. See "Use of Proceeds." To obtain these loans, the Company issued warrants
to these lenders to purchase an aggregate of 2,479,598 Common Shares, subject to
adjustment, at an aggregate exercise price of approximately $12.4 million ($5.00
per Common Share).
In addition to bank and bridge financing for the Acquisition, cash
consideration paid to Mr. Dooley, personally and as agent for AGI's
shareholders, consisted in part of cash raised from a series of private
placements of equity and debt securities of the Company. See "Description of
Securities."
The Company issued 5,730,000 shares of Series A Preferred for aggregate
consideration received of C$7,385,500 in two transactions, one of which was not
funded and completed until after the Acquisition. The proceeds of the second
placement were used in part to pay costs incurred in the Acquisition. The Series
A Preferred is non-voting, has a fixed cumulative preferential cash dividend at
a rate of 12% per annum, is convertible for five years into Common Shares (five
Series A Preferred shares being convertible into one Common Share) upon payment
of a premium which escalates over the five-year period, may be redeemed by the
Company upon certain circumstances, is retractable at the option of the holder
(i.e., the holder holds a put option with respect to these shares at a purchase
price equal to the subscription price plus any accrued dividends) upon
completion of a public offering with proceeds to the Company in excess of
$8,000,000, restricts the payment of dividends on or redemption of other classes
of shares and restricts the creation of classes or series of shares which would
rank senior to or pari passu with the Series A Preferred. The Company intends to
retire a portion of the Series A Preferred with proceeds of this offering. The
Series A Preferred is coupled with detachable five-year warrants to purchase
Common Shares, which warrants entitle the Series A Preferred holders to purchase
1,146,000 Common Shares in connection with the placement of the Series A
Preferred. The warrants may be exercised at an escalating per share exercise
price, commencing at C$7.20 per share if exercised within twelve months after
issuance and rising in steps to C$12.10 per share if exercised within the final
twelve months of their respective terms.
15
The Company also issued units consisting of Common Shares and warrants
to purchase additional Common Shares in five private transactions. In the first
of such transactions, the Company issued 162,200 Common Shares and two-year
warrants to purchase a like number of Common Shares (of which 42,800 have been
exercised) at a price of C$6.25 per Common Share in the first year and C$7.50 in
the second year. In a second transaction, the Company issued 210,000 Common
Shares and two-year warrants to purchase a like number of Common Shares at a
price of C$5.80 per Common Share in the first year and C$6.65 in the second
year. In a third transaction, the Company issued 180,144 Common Shares and
two-year warrants to purchase 90,072 shares at a price of C$6.75 per Common
Share in the first year and C$8.00 in the second year. In the fourth of such
transactions, the Company issued 151,778 Common Shares and two-year warrants to
purchase 75,889 shares at a price of C$4.50 per Common Share in the first year
and C$5.20 in the second year. In connection with the fourth private placement
the Company paid a finder's fee of 12,142 Common Shares to Eron Mortgage Corp.,
an entity of which Brian W. Slobogian, a former Director of the Company, is the
President. The fifth private placement consisted of an issuance by the Company
of 60,000 Common Shares and two-year warrants to purchase a like number of
shares at a price of C$5.35 per Common Share in the first year and C$6.15 in the
second year. The Company raised C$4,451,722 from these five private placements.
Additionally, the Company issued two convertible debentures, one in the
amount of $1,791,048.45 (the "KOZ Debenture") to KOZ Capital Corp., a Cayman
Islands corporation ("KOZ Capital"), and one in the amount of C$4,200,000 (the
"Westcoast Debenture") to Westcoast Golf Promotions Ltd., a Canadian corporation
("Westcoast"), of which Mr. Slobogian is an officer and director. The KOZ
Debenture bears interest at 12% per annum and is due in June 1998. The KOZ
Debenture (including interest) is convertible into 714,454 Common Shares and
two-year warrants to purchase an additional 714,454 Common Shares at a price of
C$4.00 per Common Share in the first year and C$4.60 in the second year. As
additional inducement to invest in the Company, the Company agreed to issue to
KOZ Capital 124,378 Common Shares as bonus shares. See "Certain Relationships
and Related Transactions." The Westcoast Debenture bears interest at 15% per
annum and matures in June 1998. The Westcoast Debenture (including accrued but
unpaid interest) is convertible into 1,144,500 Common Shares and two-year
warrants to purchase an additional 1,144,500 Common Shares at a price of C$4.00
per Common Share in the first year and C$4.60 in the second year. In connection
with the Westcoast Debenture, the Company granted each of Mr. Lloyd and Mr.
Haynes, Directors of the Company, 88,500 Common Shares as a bonus for their
having guaranteed the Westcoast Debenture (see "Certain Relationships and
Related Transactions"), issued 177,000 Common Shares to Westcoast as an
inducement to invest in the Company and paid a finder's fee of C$315,000 to Eron
Mortgage Corp.
In connection with the Acquisition and related financings the Company
has issued Common Shares and warrants to purchase Common Shares as finders'
fees, in addition to the finders' fees described above. In connection with
identifying AGI as a potential acquisition candidate the Company issued 131,758
Common Shares to Sportswear Investors, LLC, a member of which, Gary McCauley, is
a director of AGI. In connection with the three bridge financings, the Company
issued 97,054 Common Shares as a finders' fee to an unaffiliated third party. In
connection with placing 4,730,000 shares of Series A Preferred, the Company paid
finders fees by issuing to an unaffiliated third party (i) two-year warrants to
purchase an aggregate of 118,627 Common Shares at an exercise price of C$4.00 in
the first year and C$4.60 in the second year and (ii) 37,680 Common Shares and
two-year warrants to purchase 160,000 Common Shares at an exercise price of
C$5.00 in the first year and C$5.75 in the second year. TradeCo Global
Securities, Inc. ("TradeCo"), of which Mr. Lewis, a Director of the Company, is
Chairman, has acquired the right to obtain from an unaffiliated third party the
37,680 Common Shares and warrants to acquire 160,000 Common Shares upon the
expiration of relevant hold periods under VSE policies. See "Certain
Relationships and Related Transactions." In connection with placing the second
tranche (1,000,000 shares) of Series A Preferred the Company issued 16,000
Common Shares and two-year warrants to purchase an aggregate of 16,000 Common
Shares at an exercise price of C$5.91 in the first year and C$6.95 in the second
year to an unaffiliated third party. In connection with placing 85,089 Common
Shares as part of the third common equity private placement described above the
Company issued 6,537 Common Shares to an unaffiliated third party. In connection
with the fifth common equity private placement described above the Company
issued 3,653 Common Shares to an unaffiliated third party. For finding KOZ
Capital as an investor, the Company issued two-year warrants to purchase 115,344
Common Shares at an exercise price of C$4.00 in the first year and C$4.60 in the
second year to an unaffiliated third party.
16
S CORPORATION DISTRIBUTIONS
Prior to the Acquisition Closing Date, AGI had elected (beginning July
1, 1988) to be treated as an S Corporation under Subchapter S of the Internal
Revenue Code and comparable state tax laws. As a result, until the Acquisition
Closing Date the earnings of AGI were attributable for federal and certain state
income tax purposes to their existing shareholders rather than to AGI.
Distributions of approximately $300,000 and $725,000 were paid to AGI
shareholders in 1994 and 1997, respectively. These distributions were made to
provide funds to AGI shareholders with which to pay income taxes on the earnings
of AGI attributable to them. No such distributions were paid in 1995 and 1996,
and tax related distributions paid to AGI shareholders were discontinued as of
the Acquisition Closing Date. See "Certain Relationships and Related
Transactions."
USE OF PROCEEDS
The net proceeds (after deducting the estimated offering expenses,
including the underwriting discounts and commissions) to the Company from the
sale of 3,000,000 Common Shares offered by the Company are estimated to be
approximately $15,500,000. The Company will not receive any proceeds from the
sale of Common Shares by the Selling Shareholder.
Upon completion of this offering, the Company is required to repay
approximately $3.02 million in bridge loans incurred in connection with the
Acquisition, as follows: (i) $2,000,000 of the LaSalle Acquisition Loan,
currently bearing interest at 3% over the banks' prime rate with a final
maturity, in the absence of a public offering, of January 23, 2000; and (ii) the
$1,020,000 Cruttenden Bridge Acquisition Loan, currently bearing interest at 13%
with a final maturity, in the absence of a public offering, of May 7, 1998. The
Company also anticipates that it will receive a demand from Imperial Bank to
either prepay the Imperial Acquisition Loan or pledge $2.5 million as cash
collateral for such loan. The Imperial Acquisition Loan currently bears interest
of 13%, but such rate is reduced to 11% upon a pledge of cash collateral. The
Imperial Acquisition Loan matures on May 7, 1998, subject to Imperial Bank's
option to extend the term for an additional two-year period. The Company intends
to use up to $6.4 million of the net proceeds to retire notes outstanding to Mr.
Dooley as agent for the former shareholders of AGI incurred in the Acquisition,
subject to the creditor's right to convert this debt to equity. These notes
currently bear interest at 8.25% and mature, in the absence of a public
offering, on May 7, 1999, with respect to $1.18 million, and on May 7, 2000,
with respect to the balance. The Company intends to use approximately $500,000
to pay the balance of the approximately $700,000 which remains owed to Mr.
Dooley and which must be paid upon the completion of a securities offering by
the Company with gross proceeds to the Company in excess of $12,000,000. The
Company intends to use up to $2.0 million of the net proceeds to retire a
portion of the Series A Preferred, which was issued to finance the Acquisition.
The Company intends to use remaining net proceeds for working capital and for
other general corporate purposes.
The foregoing represents the Company's best estimate of the use of the
net proceeds to be received in this offering based on current planning and
business conditions. To the extent the Company is not contractually committed to
making payments upon the closing of this offering, the Company reserves the
right to change such uses when and if market conditions or unexpected changes in
operating conditions or results occur. The amounts actually expended for each
use may vary significantly depending upon a number of factors, including future
sales growth and the amount of cash generated by the Company's operations. Net
proceeds not immediately required for the purposes described above will be
invested principally in U.S. Government securities, short-term certificates of
deposit, money market funds or other short-term, interest-bearing securities.
17
PRICE RANGE OF COMMON SHARES
The Company's Common Shares are traded on the Vancouver Stock Exchange
under the symbol "ANE" (previously, "SOH"), and the Company has applied to have
its Common Shares listed on the Nasdaq National Market under the proposed symbol
"ANTGF." The Company's Common Shares began trading on the VSE under the SOH
symbol on December 2, 1992 and under the symbol ANE after June 16, 1997. The
symbol was changed to ANE in connection with the Acquisition. The following
table sets forth the range of the high and low sale prices for the Company's
Common Shares for the periods indicated as reported by the VSE. The Company
acquired all of the issued and outstanding shares of AGI on June 16, 1997.
Therefore, prices for the Company's Common Shares prior to that time reflect the
business of Southhampton only. All prices have been adjusted to give effect to
the one-for-five reverse stock split effected on June 16, 1997 and have been
converted into United States dollars equivalents based on the Noon Buying Rate
then in effect. In connection with the closing of the Acquisition, trading of
the Common Shares on the VSE was halted after the close of that market on June
13, 1997 and reopened for trading on the VSE on September 3, 1997.
High Low
---- ---
1995:
First Quarter ........................................ 3.4592 1.7649
Second Quarter ....................................... 3.6229 1.5631
Third Quarter ........................................ 2.7889 0.9186
Fourth Quarter ....................................... 3.3388 1.1593
1996:
First Quarter ........................................ 6.9674 1.6123
Second Quarter ....................................... 9.1102 4.5861
Third Quarter ........................................ 7.1293 4.1916
Fourth Quarter ....................................... 6.7481 4.5055
1997:
First Quarter ........................................ 5.7763 3.6502
Second Quarter ....................................... 5.4210 3.3869
Third Quarter ........................................ 5.9261 3.9560
Fourth Quarter (through October 31, 1997) ............ 4.5578 3.4197
The last reported sale price of the Common Shares on the VSE on October
31, 1997 was C$5.35 per share, or approximately $3.79 based on the Noon Buying
Rate on such date. As of September 26, 1997, the Company had 89 shareholders of
record. For a description of securities convertible into Common Shares and which
may be sold pursuant to Rule 144 under the Act, see "The Acquisition and Related
Financing," "Description of Securities" and "Shares Eligible for Future Sale."
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Shares. The
Company anticipates that for the foreseeable future all earnings will be
retained for use in the Company's business and that no cash dividends will be
paid to shareholders. The Company is restricted by the terms of the Series A
Preferred from paying a dividend on the Common Shares, or on any other class of
shares which might be designated in the future, unless dividends on the Series A
Preferred are current. The terms of the Credit Facility prevent AGI from paying
dividends without the prior written consent of the lender. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Antigua Group, Inc.--Liquidity and Capital Resources." Prior to the Acquisition,
AGI had elected to be treated as an S Corporation and had paid distributions of
approximately $300,000 and $725,000 to AGI stockholders in 1994 and 1997,
respectively, to provide funds to such stockholders with which to pay income
taxes on the earnings of AGI attributable to them. See "The Acquisition and
Related Financing," "Description of Securities," "Certain Income Tax
Considerations" and "Canadian Governmental Regulation."
18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997, as adjusted for financings subsequent to June 30, 1997 and as
adjusted to give effect to the sale of Common Shares offered by the Company at
the offering price of $6.00 per share (and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company). The following additionally gives effect to the one-for-five reverse
stock split effected on June 13, 1997.
June 30, 1997
(in thousands)
----------------------------------------------
As adjusted As
for adjusted
subsequent for this
Actual financings offering
-------- ----------- --------
Short term debt:
Current portion of long-term debt ....................... $ 1,088 $ 1,088 $ 1,088
Revolving line of credit ................................ 6,220 6,220 6,220
Notes payable to bridge lenders ......................... 3,661 3,661 --
Current portion of due to directors and officers ........ 535 535 535
Current portion of notes payable to sellers ............. 384 384 --
Convertible debentures, net of discounts ................ 2,219 2,219 2,219
-------- -------- --------
$ 14,107 $ 14,107 $ 10,062
======== ======== ========
Due to directors and officers ............................. $ 336 $ 336 $ 336
-------- -------- --------
Long-term debt ............................................ 1,715 1,715 1,715
-------- -------- --------
Notes payable to sellers................................... 5,994 5,994 --
-------- -------- --------
Redeemable preferred stock, 30,000,000
shares authorized, 10,000,000
designated as Convertible Preferred
Shares Series A, and 4,730,000 shares
issued and outstanding, 5,730,000
shares issued and outstanding, as
adjusted for subsequent financings,
and 3,730,000 issued and outstanding,
as adjusted for this offering(1) .................. 3,581 4,501 2,990
-------- -------- --------
Shareholders' equity:
Common Shares, without par value;
300,000,000 shares authorized,
4,260,565 shares issued and
outstanding, 4,338,365 shares issued
and outstanding, as adjusted for
subsequent financings, and 7,338,365
issued and outstanding, as adjusted
for this offering(1)(2) ............................... 7,421 7,733 23,231
Additional paid-in capital .............................. 5,810 5,810 5,810
Retained earnings ....................................... (7,093) (7,093) (11,786)
-------- -------- --------
Total shareholders' equity .............................. 6,138 6,450 17,255
-------- -------- --------
Total capitalization ............................. $ 17,764 $ 18,996 $ 22,296
======== ======== ========
- ------------------
(1) Financings subsequent to June 30, 1997, include the issuance on
September 5, 1997, of 1,000,000 shares of Series A Preferred together
with 16,000 Common Shares as a finders' fee, and the issuance of 61,800
Common Shares as a result of exercises of warrants and options.
(2) The figure of 4,260,565 Common Shares issued and outstanding includes
630,156 Common Shares for which the Company has received consideration
and is committed to issue but had not yet issued. The figures of
4,338,365 and 7,338,365 Common Shares includes 646,156 Common Shares
for which the Company has received consideration and is committed to
issue but has not yet issued. Excludes 4,377,690 Common Shares
underlying warrants, 300,000 Common Shares underlying Representatives'
Warrants and 557,000 Common Shares underlying options to employees and
Directors. Also excludes 946,000 Common Shares into which Series A
Preferred ("Series A Preferred") may be converted upon payment of a
premium increasing over time, 200,000 Common Shares into which the
Series A Preferred Shares issued September 5, 1997, may be converted
and 1,858,954 Common Shares and warrants for an additional 1,858,954
Common Shares into which the convertible debentures may be converted
upon payment at specified exercise prices. See "The Acquisition and
Related Financing," "Use of Proceeds," "Management -- Executive
Compensation," "Certain Relationships and Related Transactions,"
"Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
19
DILUTION
The net tangible book value of the Company at June 30, 1997 was
$(14,906,326), or $(3.49) per share. Without taking into account any changes in
net tangible book value subsequent to June 30, 1997, other than to give effect
to the sale of the 3,000,000 Common Shares offered by the Company at $6.00 per
share and after deduction of the estimated underwriting discount and estimated
offering expenses payable by the Company, the pro forma net tangible book value
of the Company's Common Shares at June 30, 1997 would have been $598,674, or
$.08 per share. This represents an immediate increase in net tangible book value
of $3.57 per share to existing shareholders and an immediate dilution in net
tangible book value of $5.92 per share to investors purchasing shares in this
offering. The following table illustrates the per share dilution at June 30,
1997:
Public offering price per Common Share ........................ $6.00
-----
Pro forma net tangible book value per
Common Share as of June 30, 1997 ..................... $(3.49)
------
Increase in net tangible book value per share
attributable to this offering ........................ 3.57
------
Adjusted pro forma net tangible book value
per Common Share after this offering .......................... .08
-----
Dilution per Common Share to new investors .................... $5.92
=====
The following table sets forth, on a pro forma basis at June 30, 1997,
the number of Common Shares purchased from the Company, the total consideration
paid and the average price per share paid by the existing shareholders and to be
paid by new investors based upon the initial public offering price of $6.00 per
share:
Shares Purchased Total Consideration Average
--------------------- ------------------------ Price Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- ------------------
Existing shareholders ..... 4,260,565 58.7% $ 9,962,106 35.6% $2.33
New investors ............. 3,000,000 41.3% 18,000,000 64.4% $6.00
--------- ----- ----------- -----
Total ............ 7,260,565 100.0% $27,962,106 100.0%
========= ===== =========== =====
20
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
(the "Pro Forma Financial Statements") are based on the financial statements of
the Company and The Antigua Group, Inc., which are included elsewhere in the
prospectus, adjusted to give pro forma effect to the Acquisition and this
offering (collectively, the "Transactions").
The Unaudited Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1996 is derived from the audited statements of
operations of the Company and The Antigua Group, Inc. for the year ended
December 31, 1996 and assumes the Transactions were consummated on January 1,
1996. The Unaudited Pro Forma Consolidated Statement of Operations for the six
months ended June 30, 1997 is derived from the unaudited financial statements of
the Company for the six months ended June 30, 1997 and the unaudited financial
statements of The Antigua Group, Inc. for the period from January 1, 1997 to
June 16, 1997 and assume the Transactions were consummated on January 1, 1997.
The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997 is
derived from the unaudited balance sheet of the Company as of June 30, 1997 and
assumes the consummation of this offering on that date. The Unaudited Pro Forma
Consolidated Financial Statements should be read in conjunction with the
historical financial statements of the Company and The Antigua Group, Inc. and
the Notes thereto included elsewhere in this prospectus.
The Unaudited Pro Forma Consolidated Financial Statements do not
purport to represent what the Company's results of operations or financial
condition would actually have been if the Transactions had occurred on the dates
indicated or to project the Company's results or financial condition for or at
any future period or date. The Unaudited Pro Forma Consolidated Financial
Statements are presented for comparative purposes only. The pro forma
adjustments, as described in the accompanying data, are based on available
information and certain assumptions that management believes are reasonable.
Unaudited Pro Forma Consolidated Statements of Operations
For the Six Months Ended June 30, 1997
Antigua
Antigua Enterprises
Group, Inc. Inc.
------------ -------------
January 1, January 1,
1997 through 1997 through Pro Forma Pro Forma
June 16, 1997 June 30, 1997 Adjustments Consolidated
------------- ------------- ------------ ------------
Sales, net of returns ................ $ 18,181,083 $ 2,722,077 $ -- $ 20,903,160
Cost of sales ........................ 11,736,650 1,824,058 -- 13,560,708
------------ ------------ ------------ ------------
Gross profit ................ 6,444,433 898,019 -- 7,342,452
------------ ------------ ------------ ------------
Selling expenses ..................... 2,898,244 353,755 3,251,999
General and administrative expenses .. 1,979,999 695,143 (192,790) (b) 2,528,185
45,833 (b)
Amortization of licenses ............. -- 27,522 327,218 (c) 354,740
Expenses related to acquisition ...... -- 672,455 (672,455) (n) --
------------ ------------ ------------ ------------
4,878,243 1,748,875 180,261 6,134,924
------------ ------------ ------------ ------------
Income (loss) from operations 1,566,190 (850,856) (180,261) 1,207,528
------------ ------------ ------------ ------------
Other income (expenses)
Interest .................... (571,956) (1,176,587) (1,126,884) (d) (642,110)
(1,858,601) (e)
(1,480,822) (f)
146,334 (h)
88,000 (i)
5,338,406 (n)
Other ....................... 192,988 39,762 -- 232,750
------------ ------------ ------------ ------------
(378,968) (1,136,825) 1,106,433 (409,360)
------------ ------------ ------------ ------------
Income (loss) before income taxes .... 1,187,222 (1,987,681) 926,172 798,168
Provision for income taxes ........... -- -- 319,267 (k) 319,267
------------ ------------ ------------ ------------
Net income (loss) ................. $ 1,187,222 $ (1,987,681) $ 606,905 $ 478,901
============ ============ ============ ============
Earnings per share ......................... (o) $ 0.06
============
Weighted average common
shares outstanding ....................... 8,599,832
============
21
For the Year Ended December 31, 1996
Antigua
Antigua Enterprises Pro Forma Pro Forma
Group, Inc. Inc. Adjustments Consolidated
------------ ------------ ------------ ------------
Sales, net of returns ................ $ 33,510,364 $ 2,857,962 $ -- $ 36,368,326
Cost of sales ........................ 22,490,634 2,263,000 -- 24,753,634
------------ ------------ ------------ ------------
Gross profit ................ 11,019,730 594,962 -- 11,614,692
------------ ------------ ------------ ------------
Selling expenses ..................... 5,843,314 259,109 -- 6,102,423
General and administrative expenses .. 3,598,886 987,548 (407,593) (b) 4,278,841
100,000 (b)
Amortization of licenses ............. -- -- 713,930 (c) 713,930
Expenses related to acquisition ...... 315,000 (j)
-- -- (315,000) (n) --
------------ ------------ ------------ ------------
9,442,200 1,246,657 406,337 11,095,194
------------ ------------ ------------ ------------
Income (loss) from operations 1,577,530 (651,695) (406,337) 519,498
------------ ------------ ------------ ------------
Other income (expenses)
Interest .................... (1,342,859) (160,864) (1,165,790) (d) (1,311,723)
(1,942,000) (e)
(1,500,000) (f)
192,000 (i)
4,607,790 (n)
Other ....................... 385,730 90,485 -- 476,215
------------ ------------ ------------ ------------
(957,129) (70,379) 192,000 (835,508)
------------ ------------ ------------ ------------
Income (loss) before income taxes .... 620,401 (722,074) (214,337) (316,010)
Provision for income taxes ........... -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) ........... $ 620,401 $ (722,074) $ (214,337) $ (316,010)
============ ============ ============ ============
Earnings (loss) per share .................. (o) $ (0.04)
============
Weighted average common
shares outstanding ....................... 8,427,938
============
Unaudited Pro Forma Consolidated Balance Sheet
As of June 30, 1997
Assets
Antigua
Enterprises Pro Forma Pro Forma
Inc. Adjustments Consolidated
------------ ------------ ------------
Current assets
Cash ................................. $ 4,923 $ 1,000,250 (l) $ 1,005,173
Accounts receivable-net .............. 5,970,048 -- 5,970,048
Inventory ............................ 8,576,981 -- 8,576,981
Prepaid assets ....................... 220,183 -- 220,183
Deferred loan fees ................... 2,545,890 (75,186) (m) 125,483
(864,399) (d)
(1,480,822) (f)
------------ ------------ ------------
Total current assets ................ 17,318,025 (1,420,157) 15,897,868
Property and equipment-net .................... 2,544,399 -- 2,544,399
Licenses-net of amortization .................. 18,446,411 -- 18,446,411
Other assets .................................. 65,853 -- 65,853
------------ ------------ ------------
$ 38,374,688 $ (1,420,157) $ 36,954,531
============ ============ ============
See Notes to Unaudited Pro Forma Combined Financial Statements
22
Liabilities and Shareholders' Equity
Antigua
Enterprises Pro Forma Pro Forma
Inc. Adjustments Consolidated
------------ ------------ ------------
Current liabilities
Current portion of long term debt .............. $ 1,088,492 $ -- $ 1,088,492
Revolving credit line .......................... 6,220,203 -- 6,220,203
Notes payable to bridge lenders, net of discount 3,661,400 (5,520,000) (l) --
1,858,600 (e)
Current portion of due to directors and officers 534,619 -- 534,619
Current portion of notes payable to sellers .... 383,733 (383,733) (l) --
Convertible debentures, net of discount ........ 2,218,949 (2,218,949) (m) --
Accounts payable ............................... 1,659,341 -- 1,659,341
Accrued liabilities ............................ 2,712,718 (10,305) (m) 2,364,898
(600,000) (l)
262,485 (d)
Accrued loan fees due to directors and officers 2,131,826 -- 2,131,826
------------ ------------ ------------
Total current liabilities ...................... 20,611,281 (6,611,902) 13,999,379
Due to directors and officers ........................... 336,106 -- 336,106
Long term debt .......................................... 1,714,589 -- 1,714,589
Notes payable to seller ................................. 5,994,267 (5,994,267) (l) --
Preferred stock, net of discount ........................ 3,580,743 (2,000,000) (l) 2,069,789
489,046 (g)
Shareholders' equity
Common stock ................................... 7,421,446 15,498,250 (l) 25,073,764
2,154,068 (m)
Additional paid in capital ..................... 5,809,556 -- 5,809,556
Retained earnings .............................. (7,093,300) (1,126,884) (d) (12,048,652)
(1,858,600) (e)
(1,480,822) (f)
(489,046) (g)
------------ ------------ ------------
Total shareholders' equity ..................... 6,137,702 12,696,966 18,834,668
------------ ------------ ------------
$ 38,374,688 $ (1,420,157) $ 36,954,531
============ ============ ============
See Notes to Unaudited Pro Forma Combined Financial Statements
23
Notes to Unaudited Pro Forma Consolidated Financial Statements
(a) The pro forma consolidated financial statements reflect the
Acquisition, which was accounted for as a purchase. See "The
Acquisition and Related Financing." The purchase price and the
estimated allocation of such costs is as follows:
Purchase price components:
Cash paid to sellers $12,636,482
Notes payable to sellers 6,378,000
Series A Preferred with attached warrants issued to sellers 250,000
Assets of AGI distributed to the sellers 134,706
Amounts to be paid to the sellers 759,656
Transaction costs 2,920,360
-----------
Total purchase price 23,079,204
Book value 4,677,674
-----------
Excess of purchase price over net book value
of assets acquired $18,401,530
===========
Allocated to:
Licenses $18,473,933
Inventory (488,956)
Eliminate LIFO reserve 186,221
Accrued interest 230,333
-----------
$18,401,530
===========
(i) The excess purchase price has been allocated to the
identified intangible assets consisting of the
license agreements with the major league professional
sports team organizations.
(ii) As part of the allocation process, inventory carrying
value has been reduced to net realizable value for
those items the new management has decided to
liquidate rather than sell through normal close out
channels.
(iii) To eliminate the LIFO reserve as FIFO will be
adopted.
(iv) To eliminate accrued interest that is no longer
payable as the principal on the debt has been paid in
connection with the Acquisition. The note agreement
provides for forgiveness of interest if the principal
is paid before December 31, 1997.
(b) Reflects the elimination of salaries, benefits and consulting fees of
specific shareholders not continuing as employees with the combined
Company. Also reflects the addition of consulting fees to be paid to
the former owner and CEO of AGI.
(c) Reflects the amortization expense resulting from the allocation of the
purchase of AGI to licenses. The amortization period assigned to the
licenses is 25 years.
(d) Reflects the write off of debt issuance and termination costs incurred
in connection with the bridge financing. This is necessary since the
bridge financing is being paid off with the proceeds of this offering.
(e) Reflects the write off of discounts on bridge loans. These discounts
represent the valuation assigned to the warrants issued to the bridge
lenders.
(f) Reflects the write off of loan fees on sellers notes as the seller
notes are to be paid off with the proceeds of this offering. The loan
fees are the amounts paid to related parties for their guarantee of the
payment of the principal and interest of the seller notes.
(g) Reflects the write off of discounts on preferred stock. These discounts
represent the valuation assigned to warrants issued to holders of
preferred stock and the valuation assigned to warrants issued for
finders' fees.
24
(h) Elimination of interest on convertible debentures since these are
assumed to be converted as of the offering date. These are convertible
at the option of the Company.
(i) Reflects elimination of interest expense incurred on the notes to the
majority stockholder as these notes were paid off in connection with
the Acquisition.
(j) To write off fees paid for debt financing that was not consummated.
(k) To provide income tax provisions on pro forma income at a rate of 40%.
No provision is made in the historical income of AGI since it
previously operated as an S corporation.
(l) This adjustment reflects the estimate of the net proceeds and use of
proceeds of this offering. See "Use of Proceeds."
Proceeds of this offering $18,000,000
Expenses of this offering (2,501,750) $15,498,250
-----------
Use of proceeds
To pay off bridge loans 5,520,000
To pay off seller notes 6,378,000
To redeem preferred stock 2,000,000
To pay off profits bonus to seller 500,000
To pay off note due to Sea/Q of America, Inc. 100,000 14,498,000
--------- ----------
Net cash received $ 1,000,250
===========
(m) To reflect conversion of the convertible debentures. These are
convertible at the option of the Company.
(n) To eliminate nonrecurring expenses which relate directly to the
Acquisition. These include expenses related to the Acquisition, the
write off of debt issuance and termination costs and discounts on the
bridge financing, the write off of loan fees on the seller notes and
the interest on the convertible debentures.
(o) Weighted average shares outstanding reflects the 3,000,000 Common
Shares to be issued in this offering. It does not reflect common stock
equivalents related to stock options and stock purchase warrants as
these are not dilutive.
25
SELECTED FINANCIAL DATA
The selected financial data of AGI as of and for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the Financial
Statements of AGI, which have been audited by Arthur Andersen LLP, independent
public accountants. The selected financial data of AEI as of and for the years
ended December 31, 1993, 1994 and 1995 are derived from the Financial Statements
of AEI, which have been audited by BDO Dunwoody, chartered accountants. The
selected financial data of AEI as of and for the year ended December 31, 1992
are derived from the Financial Statements of AEI, which have been audited by
Loewen Stronach & Co., Chartered Accountants. The selected financial data of AEI
as of and for the year ended December 31, 1996 are derived from the Financial
Statements of AEI, which have been audited by Arthur Andersen LLP, independent
public accountants. The financial data should be read in conjunction with the
Financial Statements and the Notes thereto appearing elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected financial data as of and for the three
months ended March 31 and six months ended June 30, 1996 and 1997 have been
derived from the unaudited financial statements of AGI and AEI, which, in the
opinion of management, have been prepared on a basis consistent with the audited
information and include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the information set forth therein.
Results of operations for the three months ended March 31 and six months ended
June 30, 1996 and 1997 may not necessarily be indicative of the results to be
expected for the entire year or any other period. The Financial Statements are
denominated in United States dollars.
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(unaudited)
Statement of Operations Data - AGI: (in thousands)
Net sales .............................. $ 31,279 $ 32,019 $ 31,794 $ 31,402 $ 33,510 $ 6,455 $ 9,219
Cost of sales .......................... 21,072 21,565 25,504 20,825 22,491 4,582 5,951
-------- -------- -------- -------- -------- -------- --------
Gross profit .................. 10,207 10,454 6,290 10,577 11,019 1,873 3,268
Selling expenses ....................... 5,741 6,071 6,424 5,688 5,843 1,114 1,433
General and administrative expenses .... 2,300 2,728 3,505 3,138 3,599 955 1,032
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations . 2,166 1,655 (3,639) 1,751 1,577 (196) 803
Interest expense ....................... (587) (824) (1,037) (1,445) (1,343) (332) (297)
Other income ........................... 203 361 348 434 386 58 44
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item ............ 1,782 1,192 (4,328) 740 620 (470) 550
Extraordinary item - debt extinguishment -- -- -- -- -- -- (354)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(1) ................... $ 1,782 $ 1,192 $ (4,328) $ 740 $ 620 $ (470) $ 196
======== ======== ======== ======== ======== ======== ========
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(unaudited)
Statement of Operations Data - AEI: (in thousands)
Net sales .............................. $ 131 $ 404 $ 1,793 $ 1,843 $ 2,858 $ 1,257 $ 2,722
Cost of sales .......................... 153 331 1,669 1,699 2,263 1,056 1,824
------- ------- ------- ------- ------- ------- -------
Gross profit .................. (22) 73 124 144 595 201 898
Selling expenses ....................... 50 67 163 250 259 68 354
General and administrative expenses .... 317 622 789 962 988 554 695
Amortization of licenses ............... -- -- -- -- -- -- 28
Expenses related to acquisition ........ -- -- -- -- -- -- 672
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations . (389) (616) (828) (1,068) (652) (421) (851)
Interest expense ....................... -- (26) (41) (86) (161) (39) (1,177)
Other income (expense) ................. 6 (3) (43) 60 91 40 40
------- ------- ------- ------- ------- ------- -------
Net income (loss) ............. $ (383) $ (645) $ (912) $(1,094) $ (722) $ (420) $(1,988)
======= ======= ======= ======= ======= ======= =======
26
Six Months
Year Ended Ended
December 31, June 30,
------------ ----------
1996 1997
------------ ----------
(unaudited)
Statement of Operations Data - Company Pro Forma (2): (in thousands)
Net sales ......................................... $ 36,368 $ 20,903
Cost of sales ..................................... 24,753 13,561
-------- --------
Gross profit ............................. 11,615 7,342
Selling expenses .................................. 6,102 3,252
General and administrative expenses ............... 4,279 2,528
Amortization of licenses .......................... 714 355
Expenses related to acquisition ................... -- --
-------- --------
Income from operations ................... 520 1,207
Interest expense .................................. (1,312) (642)
Other income (expense) ............................ 476 233
-------- --------
Income (loss) before income taxes (316) 798
Provision for income taxes ........................ -- 319
-------- --------
Net income (loss) ........................ $ (316) $ 479
======== ========
December 31, March 31,
--------------------------------------------------------------- ---------
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ---------
(unaudited)
Balance Sheet Data: AGI (in thousands)
Cash and cash equivalents $ 318 $ 120 $ 120 $ 17 $ 94 $ 131
Working capital ......................... 5,236 10,955 786 4,732 4,797 5,450
Total assets ............................ 19,070 21,599 17,992 18,258 15,753 16,469
Short term debt ......................... 7,987 4,856 10,658 7,756 5,946 6,358
Long term debt .......................... 1,130 7,681 1,645 3,374 2,465 2,940
Shareholders' equity .................... 7,056 7,024 2,395 4,135 4,756 4,952
December 31, June 30,
---------------------------------------------------------------- --------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
(unaudited)
Balance Sheet Data: AEI (in thousands)
Cash and cash equivalents ............... $ -- $ 144 $ 90 $ 2 $ 666 $ 5
Working capital (deficit) ............... (234) (52) (131) (608) (918) (3,293)
Total assets ............................ 608 621 909 465 2,908 38,375
Short term debt ......................... 81 50 128 200 1,431 14,107
Long term debt, excluding preferred stock -- 314 432 136 49 8,045
Preferred stock ......................... -- -- -- -- -- 3,581
Shareholders' equity .................... 51 (138) (637) (1,439) (1,069) 6,138
27
June 30,
--------------
1997
--------------
(unaudited)
(in thousands)
Balance Sheet Data - Company Pro Forma (2):
Cash and cash equivalents ............................................. $ 1,105
Working capital ....................................................... 1,898
Total assets .......................................................... 37,055
Short term debt ....................................................... 9,503
Long term debt, excluding preferred stock.............................. 2,051
Preferred stock........................................................ 2,070
Shareholders' equity .................................................. 18,835
- -----------------
(1) Net income (loss) of The Antigua Group, Inc. ("AGI") does not include
any provision for income tax because AGI operated as an S Corporation
prior to the Acquisition.
(2) On a pro forma basis, as adjusted to give effect to the application of
the net proceeds of this offering in the manner described in "Use of
Proceeds." See "Unaudited Pro Forma Consolidated Financial Statements."
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
under "Risk Factors -- Important Factors Related to Forward-Looking Statements
and Associated Risks."
Through a series of strategic acquisitions and divestitures, the
Company has shifted from its origins of manufacturing molded and printed plastic
products to designing, screen printing or embroidering, and marketing a full
line of men's and women's sportswear and lifestyle apparel and accessories. The
Company entered the apparel business in 1993 with the acquisition of a screen
printing company. The Company began selling both (i) screen printing services on
apparel provided by customers and (ii) apparel purchased and printed by the
Company. Beginning in 1994, the Company expanded its apparel operations by
providing personalized, printed fleece products for a national retailer's
catalog business. When the retailer discontinued this catalog category in 1995,
the Company leveraged its experience to sell screen printing services and
apparel to other corporate customers. The Company also acquired an embroidering
machine in 1995 to sell embroidery-embellished apparel without subcontracting.
The Company further expanded its customer base with the January 1996 acquisition
of the assets of CHL Services, a broker of customized sportswear and lifestyle
apparel and plastic sports accessories for Canadian Junior Hockey and corporate
customers. In June 1997, the Company dramatically expanded its embroidered
apparel business with the acquisition of AGI, which is the subsidiary through
which the Company currently conducts its primary operations.
The following discussion and analysis of financial condition and
results of operations of AGI and AEI should be read in conjunction with their
respective Financial Statements, including the related notes thereto, appearing
elsewhere herein.
THE ANTIGUA GROUP, INC. ("AGI")
AGI sells quality embroidered lifestyle apparel through golf, licensed
product and corporate marketing channels. The Company also generates sales from
one outlet store and one company store in Arizona, which together account for
less than two percent of revenues. AGI's revenue is primarily derived from the
design of apparel and the value added to non-embroidered apparel by embroidering
logos. AGI sells its products through a network of independent sales
representatives. Beginning in 1995, AGI also developed an internal telemarketing
force targeting the corporate market.
AGI maintains a broad inventory of blank apparel to meet short
turn-around demands of its customers. AGI's production cycle is typically from
five to eight days. The Company also receives advance orders for delivery over
60 days from the sale. Orders are cancelable until the apparel is embroidered.
Revenue is recognized at the time product is shipped to the customer. AGI's net
sales consist of gross sales less discounts and credit memos for customer
returns. Cost of goods sold consists primarily of the purchase cost of blank
apparel, embroidery supplies and services, royalties for licensed apparel and
overhead attributable to storing, handling and shipping product. AGI purchases
all of its inventory as finished garments from manufacturers, to approximately
87% of which AGI adds embroidery. The remaining 13% of purchased garments are
sold without embroidery. AGI's selling expenses consist primarily of sales force
commissions, sales management, advertising and marketing, customer service and
order coordination services to control the quality of color and placement of
embroidery on the apparel. In the third quarter of 1996, AGI began accounting
for order coordination services as part of the cost of goods sold. General and
administrative expenses primarily consist of product development and sourcing,
accounting and financial management, bad debt expense, management information
services and administrative staff expenses.
29
Results of Operations
The following table sets forth, for the periods indicated, certain
historical financial data for AGI as a percentage of net sales:
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ------
Statement of Operations Data:
Net sales .................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 68.2% 66.9% 80.2% 66.3% 67.1% 71.0% 64.6%
----- ----- ----- ----- ----- ----- -----
Gross profit ............................. 31.8% 33.1% 19.8% 33.7% 32.9% 29.0% 35.4%
Selling expenses ........................... 18.4% 19.0% 20.2% 18.1% 17.4% 17.3% 15.5%
General and administrative expenses ........ 7.4% 8.5% 11.0% 10.0% 10.7% 14.8% 11.2%
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations ............ 6.1% 5.6% (11.4%) 5.6% 4.7% (3.0%) 8.7%
Interest expense ........................... 1.9% 2.6% 3.3% 4.6% 4.0% 5.1% 3.2%
Other income ............................... (0.6%) (1.1%) (1.1%) (1.4%) (1.2%) (0.9%) (0.5%)
----- ----- ----- ----- ----- ----- -----
Income (loss) before extraordinary item .. 4.9% 4.1% (13.6%) 2.4% 1.9% (7.3%) 6.0%
Extraordinary item-debt extinguishment ..... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.8%
----- ----- ------ ----- ----- ----- -----
Net income (loss) (1) .................... 4.9% 4.1% (13.6%) 2.4% 1.9% (7.3%) 2.1%
===== ===== ====== ===== ===== ===== =====
- ------------------
(1) Net income (loss) of AGI does not include any provision for income tax
because AGI operated as an S Corporation prior to the Acquisition.
Comparison of the Three Months Ended March 31, 1996 and 1997
Net Sales. Net sales for the three months ended March 31, 1997 were
$9.2 million, an increase of $2.7 million, or 42.8%, from $6.5 million in the
same three months in 1996. This increase in sales was primarily due to an
increase in sales of licensed products as AGI became more accepted as a major
supplier by the professional sports leagues. Licensed product sales also
increased due to major orders from AGI's largest retailing customer, J.C.
Penney. Corporate sales also increased due to the productivity of AGI's inside
sales group which started in the third quarter of 1995 and had grown to twelve
salespeople by the first quarter of 1997. AGI's sales in the golf distribution
channel were comparable from period to period.
Gross Profit. AGI's gross profit for the three months ended March 31,
1997 was $3.3 million or 35.4% of net sales, an increase of $1.4 million, or
74.5%, from $1.9 million or 29.0% of net sales in the same three months in 1996.
Gross profit as a percentage of net sales increased 22.1%. This increase in
gross profit is attributable to the decrease in the number of credit memos and
customer claims corresponding with AGI's greater experience with its retail
customers. AGI also sold more product at lower margins during the first quarter
of 1996 to eliminate inventory as product styles and fashion changed. These
style changes occur periodically throughout the industry and are based on
customer demand which cannot be accurately predicted. Gross profits also
increased as the costs of its garments decreased due to arrangements with new
suppliers and improved relationships with existing suppliers. Increased profit
margins were offset by a shift in the mix of product sales towards licensed
products, which have smaller margins due to required royalty payments.
Selling Expenses. Selling expenses for the three months ended March 31,
1997 were $1.4 million or 15.5% of net sales, an increase of $319,136, or 28.6%,
from $1.1 million or 17.3% of net sales in the same three months in 1996.
Expenses as a percent of net sales decreased 10.4%. This decrease was primarily
due to a shift in product mix to licensed products which have a lower
sales commission. The decrease was offset by the costs of AGI's inside sales
group. However, such costs were spread over a greater sales volume.
30
General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 1997 were $1.0 million or 11.2% of
net sales, an increase of $76,776, or 8.0%, from $955,313 or 14.8% of net sales
in the same three months in 1996. This increase was due to the cost of a new,
experienced controller, increased accounting staff salaries and higher bad debt
expense offset by lower depreciation expense as AGI's local area network system
was fully depreciated and replaced by an IBM AS/400 system. General and
administrative expenses as a percentage of net sales decreased 24.3%. This
decrease was a result of the expenses being spread over a greater sales volume.
AGI also experienced a lower rate of bad debt expenses resulting from fewer
customer claims as AGI continued to build experience with retail customers.
Interest Expense and Extraordinary Item. Interest expense for the three
months ended March 31, 1997 was $296,913 or 3.2% of net sales, a decrease of
$34,000, or 10.5%, from $331,751 or 5.1% of net sales in the same three months
in 1996. This decrease was primarily attributable to refinancing AGI's operating
credit with a new bank under more favorable terms. AGI also incurred an
extraordinary expense of $354,000 due to the termination penalty and unamortized
deferred loan fees associated with the refinancing.
Comparison of Years Ended December 31, 1995 and 1996
Net Sales. Net sales for 1996 were $33.5 million, an increase of $2.1
million, or 6.7%, from $31.4 million in 1995. This increase was due to increased
sales of AGI's licensed products as AGI was able to respond to hot market items
during the year. Hot market items are products for which demand arises
unpredictably due to the performance of the particular organizations which
license their trademarks for embroidering on AGI's apparel. The increase in
licensed product sales was partially offset by a decrease in sales of AGI's golf
products resulting from increased competition as other companies continued to
develop market share while AGI recovered from its restructuring to decrease
costs and offset losses from 1994. AGI also experienced significant turnover in
its sales representatives with the corresponding lower productivity of new
representatives. Additionally, AGI had revenue from Ryder Cup sales in 1995.
Because that golf event is held biannually, the sales did not recur in 1996.
Sales of corporate identity apparel were similar in both years.
Gross Profit. Gross profit for 1996 was $11.0 million, an increase of
$442,234, or 4.2%, from $10.6 million in 1995. Gross profit as a percentage of
net sales decreased 2.4%, from 33.7% in 1995 to 32.9% in 1996. This decrease was
due to sales of discontinued garment styles at reduced prices through customary
close-out channels.
Selling Expenses. Selling expenses for 1996 were $5.8 million, an
increase of $154,984, or 2.7%, from $5.7 million in 1995. This increase was
primarily due to the cost of developing an inside sales group. Selling expenses
as a percentage of net sales decreased 3.9%, from 18.1% in 1995 to 17.4% in
1996. This decrease was due to a spreading of fixed costs over greater sales
volume as well as a growth in sales of licensed products with lower sales
commissions.
General and Administrative Expenses. General and administrative
expenses in 1996 were $3.6 million, an increase of $460,996, or 14.7%, from $3.1
million in 1995. General and administrative expenses as a percentage of net
sales increased 7.0%, from 10.0% in 1995 to 10.7% in 1996. This increase was
attributable to the increased labor costs incurred as AGI sought to control
turnover. AGI also increased staffing to support current and anticipated growth.
Interest Expense. Interest expense was $1.3 million or 4.0% of net
sales in 1996, a decrease of $102,010, or 7.1%, from $1.4 million or 4.6% of net
sales 1995. This reduction was the result of costs of acquiring a new credit
line in 1995 as well as reduced need to draw upon AGI's credit line.
Comparison of Years Ended December 31, 1994 and 1995
Net Sales. Net sales for 1995 were $31.4 million, a decrease of
$391,025 or 1.2% from $31.8 million in 1994. This decrease resulted from lower
sales of AGI's golf products as AGI's cash flow did not permit the acquisition
of sufficient inventory to fill orders. Sales of golf products also declined
because key independent sales representatives became captive representatives of
a competitor. Additionally, AGI did not repeat its 1994 decision to sell
products below cost which was necessary in the last quarter of 1994 to raise
required cash. These decreases in 1995 were offset by a moderate increase in
licensed product sales. Licensed product sales were moderated by intense
competition. Sales of corporate identity apparel were similar in both years.
During this period, AGI
31
was also working both (i) to change its reputation from a provider of western
apparel, and (ii) to recover from its reputation as a provider of deeply
discounted apparel which was necessary to provide cash in 1994. In the third
quarter of 1995, AGI also began implementing new strategies which included a
focus on products which could be sold through all of its distribution channels
and a new balance between basic and fashion apparel and an All Seasons
collection. AGI had not yet fully realized the benefits of these new strategies
in 1995.
Gross Profit. Gross profit in 1995 was $10.6 million, an increase of
$4.3 million, or 68.2%, from $6.3 million in 1994. The gross profit as a
percentage of net sales increased 70.2%, from 19.8% in 1994 to 33.7% in 1995.
Margins improved in 1995 due to the discontinuance of the below cost sales
required for liquidity in 1994. AGI also discontinued its practice of selling
low margin, full-front embroidered products on low-cost apparel.
Selling, General and Administrative Expenses. Selling expenses in 1995
were $5.7 million, a decrease of $735,670, or 11.5%, from $6.4 million in 1994.
Selling expenses as a percentage of net sales decreased by 10.4%, from 20.2% in
1994 to 18.1% in 1995. General and administrative expenses in 1995 were $3.1
million, a decrease of $367,137, or 10.5%, from $3.5 million in 1994. General
and administrative expenses as a percentage of net sales decreased 9.1%, from
11.0% in 1994 to 10.0% in 1995. These decreases were due to reduced overhead
mandated by lower cash flow.
Interest Expense. Interest expense in 1995 was $1.4 million or 4.6% of
net sales, an increase of $407,560, or 39.3%, from $1.0 million or 3.3% of net
sales in 1994. This increase was due to delinquency and default fees on AGI's
bank line as well as diligence fees charged by prospective new lenders and
increased rates charged by AGI's new bank effective in July 1995.
Liquidity and Capital Resources
AGI has historically financed its operations primarily through cash
generated from operations and borrowing under a bank line of credit. However, as
overhead increased in 1994, AGI sold inventory to raise cash and create a
capital loss carryback. This carryback was passed through to AGI's shareholders
because AGI was organized as an S corporation. AGI's principal shareholder
loaned the proceeds from the tax benefit to AGI. In 1995, AGI also sold $1.0
million in common equity to generate cash needed for operations. After AGI
reduced overhead and implemented new strategic plans, cash generated from
operations, together with its new debt arrangements, have been sufficient to
finance operations. The loan to the principal shareholder was repaid when AEI
acquired AGI in June 1997. See "The Acquisition and Related Financing."
Cash generated from operations totalled $955,319 in the three months
ended March 31, 1996 compared with $604,187 of cash used in operations in the
same three months of 1997. This cash use resulted from increased sales
generating receivables as AGI maintained its 50 to 60-day collection cycle.
AGI's principal uses of cash historically have been to pay operating expenses,
make capital expenditures and service debt. AGI also made a $300,000
distribution to its shareholders in 1994. AGI's next shareholder distribution
was $725,000 in the second quarter of 1997.
Cash generated from operations totalled $1.1 million, $506,725 and $3.4
million in fiscal years 1994, 1995 and 1996, respectively. Cash generated in
1994 was attributable to below-cost sales of inventory. AGI also reduced
inventory in 1996 through low-margin sales to eliminate discontinued styles.
Beginning at that time, AGI implemented inventory control systems to attempt to
avoid excessive inventory levels and reduce the need for close-out sales. The
success of AGI's inventory control programs is dependent on its ability to
generate and maintain strong relationships with overseas suppliers over which
AGI has little control. See "Risk Factors -- Dependence on Suppliers and Outside
Contractors." Cash generation decreased in 1995 because AGI's bank terminated
its relationship with AGI due to cash flow problems creating defaults in the
prior year. AGI's new bank required AGI to permit the bank to collect
receivables. The bank's collection programs were unsuccessful, and AGI resumed
collecting its own receivables in May 1996.
AGI's accrued expenses and payables also reflected AGI's operating
patterns from 1994 through the first quarter of 1997. These accounts were high
in 1994 due to AGI's need for cash. As AGI began generating cash from profitable
operations in 1995, it was able to reduce accrued expenses and payables. As
sales grew in the first quarter of 1997, accrued expenses grew due to accrued
royalties and commissions on such sales.
32
In January 1997, AGI entered into a $12 million asset-based revolving
line of credit with a new lender, LaSalle National Bank, permitting AGI to
borrow amounts equivalent of up to 85% of certain of its receivables and 55% of
certain of its inventory and to issue letters of credit to finance inventory
purchases up to $5 million. The line of credit bears interest at the rate of
prime plus one percentage point (9.5% as of June 30, 1997) and expires on
January 23, 2000. As of June 30, 1997, AGI had $2.7 million in outstanding
letters of credit, and the amount outstanding on the line of credit was $6.5
million, with another $1.3 million available. The January 1997 debt arrangement
also provides for a $775,000 term loan which is repayable at $9,226 per month
with the balance due January 2000. Interest is at the prime rate plus 1.25
percentage points. The balance on the term loan was $729,000 as of June 30,
1997. AGI used the proceeds from this loan to retire approximately $500,000
worth of equipment leases, making the then fully owned capital collateral for
the loan. The remaining portion of the proceeds was used for general working
capital.
The lenders providing financing in connection with AEI's acquisition of
AGI require AGI to be the named debtor because AGI owns most of the
post-acquisition assets of the Company. See "The Acquisition and Related
Financing" and Notes 9 through 13 of the Notes to the Consolidated Financial
Statements. Therefore, AGI incurred approximately $13.4 million of debt due to
the acquisition. The financing includes a term loan from LaSalle Business
Credit, Inc. for $3.5 million with interest at prime plus three percentage
points, payable in monthly installments of approximately $100,000 beginning July
1, 1997, with certain required prepayments based on cash flow. The proceeds of
this offering will be used to make a required $2.0 million prepayment on this
LaSalle loan. The acquisition financing also included a one-year $2.5 million
loan bearing interest at 13% per year from Imperial Bank. Interest on the
Imperial loan is paid monthly, and the principal is due at the end of the
one-year term. However, Imperial can demand full repayment or cash collateral
upon the completion of this offering. If Imperial demands the collateral, the
interest rate on the loan becomes 11% per year. Imperial can extend the term of
the loan for an additional 24 months, in which case AGI would make monthly
principal payments of approximately $70,000 plus annual payments of a percentage
of certain cash flow. The other debt incurred in connection with the Acquisition
will be converted to AEI common equity or repaid with the proceeds of this
offering. See "Use of Proceeds." When the debt is repaid upon closing of this
offering, the Company will recognize an expense of approximately $4.2 million
representing the unamortized portion of loan fees and discounts.
AGI's borrowing agreements contain covenants which place various
restrictions on financial ratios, levels of indebtedness, capital expenditures,
minimum levels of income, transactions with related parties and the payment of
dividends. In addition, the borrowing agreements contain a cross default
provision and an event of default provision wherein all outstanding amounts will
be due and payable should there be any material adverse change in AGI's
performance or operations or a change in control of AGI. AGI's borrowing
agreements also prohibit payments to AEI except as needed for scheduled
principal and interest payments on AEI's debt obligations to AGI's former
shareholders. AGI's debt arrangements are secured by substantially all of the
Company's assets and are guaranteed by AEI and SEI. AGI has previously sought
and obtained waivers from two lenders with respect to timely reporting of
financial information and for having exceeded its capital expenditures limit.
Capital expenditures totaled $93,000 and $246,000 for the three months
ended March 31, 1996 and 1997, respectively. The increase in expenditures in
1997 was due to the acquisition of sales force automatization systems. Capital
expenditures totaled $581,000, $575,000 and $610,000 in the fiscal years 1994,
1995 and 1996, respectively. Approximately $200,000 of such expenditures each
year are to capitalize embroidery design programs. The expenditures also
included gravity fed warehouse shelving in 1994, an upgrade to the IBM AS/400
computer system and related software development in 1995, furniture and fixtures
for the new outlet store in 1996, as well as routine replacements and upgrades.
These purchases were financed through cash generated by operations, except that
the AS/400 upgrade was financed through an installment sale contract. AGI's
fiscal 1997 capital budget is $500,000. The budget is to complete the sales
force automatization system, new personal computers, an upgrade to the IBM
AS/400 system, a new embroidery machine and a show van. The costs of these
expenditures will be funded with cash generated by operations, except the IBM
upgrade and van were purchased with installment contracts.
AGI believes that the net proceeds from this offering and cash
generated from operations will be sufficient to fund its operations for the next
twelve months. However, there can be no assurance that AGI will not require
additional capital in the future. If AGI were required to obtain additional
financing in the future, there can be no assurance that sources of capital will
be available on terms favorable to the Company, if at all.
33
ANTIGUA ENTERPRISES, INC. ("AEI")
AEI became the corporate parent of AGI on June 16, 1997. Results from
AGI after that date are included in AEI's consolidated financial statements. At
the time of the acquisition, AEI derived most of its revenue from the service of
creating and applying printed and embroidered designs on apparel through its CHL
Services division and SEI subsidiary. AEI sells its services primarily through
its internal sales force. Approximately 25% of AEI's 1996 sales were through
contracts by which AEI added designs to apparel provided by customers, with the
remaining 75% from full-content orders for which AEI sold both the apparel and
the design embellishment to customers. Because AEI typically purchases any blank
apparel needed after an order is placed and fills orders in approximately two
weeks, it operates with little inventory or backlog. When necessary to meet its
production cycle commitments to customers, AEI subcontracts certain design,
embroidery or printing operations. If AEI cannot purchase sufficient blanks to
fulfill an order, it will cancel the remaining portion of the order and request
the customer to re-order the balance in the future. In late 1996, AEI began
warehousing finished inventory to provide order-fulfillment services for
customers who offer apparel to employees as uniforms or through customized
catalogs.
AEI recognizes revenue from the sale of a product at the time it is
shipped to the customer. Orders placed with AEI are cancelable until the product
is altered with printing or embroidery. AEI's warehoused finished goods for its
order-fulfillment programs must be purchased by the customer annually or at the
termination of a warehousing agreement. AEI's net sales consist of gross
revenues less returns, early payment discounts and adjustments for customer
discrepancy claims. Cost of goods sold includes the purchase cost of blank
material, embroidery and screen printing supplies and services, direct labor,
costs of subcontracted operations, and product shipping and handling expenses.
AEI's selling expenses consist of sales force commissions, royalties and
marketing. General and administrative expenses primarily consist of management
and administrative staff expenses, depreciation and amortization and bad debt.
Results of Operations
The following table sets forth, for the periods indicated, certain
historical financial data for AEI as a percentage of net sales:
Six Months Ended
Year Ended December 31 June 30
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ------
Statement of Operations Data:
Net sales .............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 116.8% 81.9% 93.1% 92.2% 79.2% 84.0% 67.0%
------ ------ ------ ------ ------ ------ ------
Gross profit ......................... (16.8%) 18.1% 6.9% 7.8% 20.8% 16.0% 33.0%
Selling expenses ....................... 38.1% 16.6% 9.1% 13.5% 9.1% 5.4% 13.0%
General and administrative expenses .... 242.1% 154.0% 44.0% 52.2% 34.6% 44.2% 25.5%
Amortization of licenses ............... - - - - - - 1.0%
Expenses related to acquisition ........ - - - - - - 24.7%
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations ........ (297.0%) (152.5%) (46.2%) (57.9%) (22.8%) (33.5%) (31.3%)
Interest expense ....................... - 6.4% 2.3% 4.7% 5.6% 3.1% 43.2%
Other income (expense) ................. 4.6% (0.7%) (2.4%) (3.3%) (3.2%) 3.2% 1.5%
------ ------ ------ ------ ------ ------ ------
Net Income (loss) .................... (292.4%) (159.6%) (50.9%) (59.3%) (25.3%) (33.4%) (73.0%)
====== ====== ====== ====== ====== ====== ======
Comparison of the Six Months Ended June 30, 1996 and 1997
Net Sales. Net sales for the six months ended June 30, 1997 were $2.7
million, an increase of $1.5 million, or 117%, from $1.3 million in the same six
months in 1996. Included in the 1997 figure is approximately $1.6 million of
post-acquisition sales by AGI. This increase in sales was offset by a decrease
in sales by CHL Services as AEI discontinued unprofitable products, primarily
34
brokered hockey uniforms and pucks. However, sales by SEI increased as it
expanded its customer base, including new customers attracted by the inventory
SEI could purchase from AGI.
Gross Profit. AEI's gross profit for the six months ended June 30, 1997
was $898,019, an increase of $696,740 or 346%, from $201,279 in the same six
months in 1996. Gross profit as a percentage of net sales increased 106%, from
16.0% in the first six months of 1996 to 33.0% in the same period in 1997. This
increase in gross profit is due to higher margins on sales by AGI, and lower
cost of materials as CHL Services discontinued certain brokered products and
obtained screen printing services from SEI rather than independent contractors.
AEI's direct labor costs increased in 1997, but the costs were spread over a
greater sales volume.
Selling Expenses. Selling expenses for the six months ended June 30,
1997 were $353,755, an increase of $285,825, or 421%, from $67,930 in the same
six months in 1996. Selling expenses as a percent of net sales increased 141%,
from 5.4% in the first six months of 1996 to 13.0% in the same period in 1997.
This increase was due to the inclusion of a partial month of AGI's selling
expenses and a shift toward a greater percentage of commissioned sales in AEI's
other businesses.
General and Administrative Expenses. General and administrative
expenses for the six months ended June 30, 1997 were $695,143 or 25.5% of net
sales, an increase of $140,308, or 25.3%, from $554,835 or 44.2% of net sales in
the same six months in 1996. The increase was the result of the Company's
growth. The increase was offset by the need for only one audit for AEI in 1997.
A second audit occurred in 1996 because the annual shareholders meeting was held
late in the year, and VSE rules require a second audit for shareholders to
receive audited financial statements dated within the specified period. General
and administrative expenses as a percentage of net sales decreased 42.3%. This
decrease was primarily because of the need for only one audit in 1997 and the
lower rate of expenses incurred by AGI. The Company anticipates that the rate of
such expenses will decrease as the accounting functions of its subsidiaries are
consolidated in late 1997.
Loss from Operations. Loss from operations for the six months ended
June 30, 1997 was $850,856 or 31.3% of net sales, an increase of $429,370, or
102%, from $421,486 or 33.5% of net sales in the same six months in 1996. This
increase was primarily due to expenses related to the Acquisition.
Interest Expense. Interest expense for the six months ended June 30,
1997 was $1.2 million or 43.2% of net sales, an increase of $1.1 million, or
2,890%, from $39,348 or 3.1% of net sales in the same six months in 1996. This
increase was due to interest on funds accumulated in anticipation of the
acquisition of AGI and interest on working capital advances from officers and
employees required to supplement unprofitable operations. See "Certain
Relationships and Related Transactions."
Comparison of Years Ended December 31, 1995 and 1996
Net Sales. Net sales for 1996 were $2.9 million, an increase of $1.0
million, or 55.0%, from $1.8 million in 1995. This increase was primarily
attributable to the acquisition of CHL Services in January 1996, by which AEI
expanded the customer base for its apparel operations and augmented CHL's
product offerings with SEI's printing and embroidering services. The increase
also was due to expanded customer base of AEI's previously existing business and
an increase in the amount of product purchased per customer.
Gross Profit. Gross profit in 1996 was $594,962 or 20.8% of net sales,
an increase of $450,881, or 313%, from $144,081 or 7.8% of net sales in 1995.
This increase was due to AEI's ability to negotiate higher margins on its
apparel business as its reputation and customer base grew, spreading fixed costs
over higher sales volume and an increase of the sales price of AEI's products.
The increase also is attributable to improved quality control and production
efficiency. AEI significantly reduced the incidence of defective products as it
discontinued a club sports uniform program experiencing high returns. AEI
reduced its product defect rate in 1996 by improving procedures for
communicating customer design concepts to manufacturing personnel.
Selling Expenses. Selling expenses for 1996 were $259,109, an increase
of $9,675, or 3.9%, from $249,434 in 1995. Selling expenses as a percentage of
net sales decreased 32.6%, from 13.5% of net sales in 1995 to 9.1% of net sales
in 1996. In 1995, AEI incurred significant selling expenses associated with
hiring and training a professional sales force. These expenses decreased in 1996
35
because AEI terminated unproductive sales personnel, and existing personnel
increased their productivity as they began to develop repeat customers. AEI also
changed the compensation structure for the remaining sales force from salary to
commission.
General and Administrative Expenses. General and administrative
expenses in 1996 were $987,548, an increase of $25,220, or 2.6%, from $962,328
in 1995. General and administrative expenses as a percentage of net sales
decreased 32.5%, from 52.2% in 1995 to 34.6% in 1995. This decrease was due to a
reduction in administrative personnel offset by the addition of expenses
incurred by the acquisition of CHL Services and the need for a second audit. Bad
debt expense also decreased due to an increase in orders from customers with
more reliable payment patterns and the termination of the club sports uniform
program which had unfavorable bad debt experience.
Interest Expense. Interest expense was $160,864 or 5.6% of net sales in
1996, an increase of $75,011, or 87.4%, from $85,853 or 4.7% of net sales in
1995. This increase was due to the incidence and servicing of debt incurred to
finance continued operations and the increased cost of factoring receivables.
AEI discontinued factoring in May 1996.
Comparison of Years Ended December 31, 1994 and 1995
Net Sales. Net sales for 1995 were $1.8 million, an increase of
$50,085, or 2.8%, from 1994. This increase was due to larger volume of units
sold offset by the discontinuance of AEI's customized fleece printing program
with a national retailer.
Gross Profit. Gross profit in 1995 was $144,081, an increase of
$20,309, or 16.4%, from $123,772 in 1994. Gross profit as a percentage of sales
increased 13.0%, from 6.9% in 1994 to 7.8% in 1995. This increase was due to a
shift toward more profitable full-content apparel orders and the termination of
most molded plastic product lines. AEI's manufacturing personnel turnover also
decreased in 1995. These margin increases were offset by a one-time expense of
approximately $200,000 resulting from the termination of patented plastic
product inventory.
Selling Expenses. Selling expenses in 1995 were $249,434, an increase
of $86,765, or 53.3%, from $162,669 in 1994. Selling expenses as a percentage of
net sales increased 48.4%, from 9.1% in 1994 to 13.5% in 1995. This increase was
due to expenses associated with hiring and training a professional sales force.
General and Administrative Expenses. General and administrative
expenses in 1995 were $962,328, an increase of $173,333, or 22.0%, from $788,995
in 1994. General and administrative expenses as a percentage of net sales
increased 18.6%, from 44.0% in 1994 to 52.2% in 1995. This increase was due to
bad debt resulting from uncollectible receivables associated with unproductive
sales people and a new club sports uniform program offered through a membership
warehouse. AEI also incurred high liability insurance premiums for a skate board
product sold in 1995 and made more extensive use of a temporary service to
provide accounting staff during that year.
Interest Expense. Interest expense in 1995 was $85,853 or 4.7% of net
sales, an increase of $44,663, or 108%, from $41,190 or 2.3% of net sales in
1994. This increase was due to the incidence and servicing of debt incurred to
finance continued operations.
Liquidity and Capital Resources
AEI's capital needs have fluctuated throughout its history with the
requirements of the businesses operated at the time. AEI has historically
financed its operations through private equity sales to and advances from AEI's
principals and investors. Such funds have been supplemented by proceeds from
factoring receivables through May 1996. This capital was sufficient to operate
AEI's business until 1996 when the Company began private equity placements in
connection with the Acquisition. AEI used significant debt to finance the
Acquisition. This debt is carried on the financial statements of AGI because the
lenders require payment primarily from AGI. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- The Antigua Group,
Inc. --Liquidity and Capital Resources" above. For a description of governmental
economic fiscal, monetary, or potential policies or factors that could
materially affect, directly or indirectly, the operations of the Company or an
investment by United States nationals in the Company, see "Certain Income Tax
Considertions--Certain Canadian Federal Income Tax Considerations" and "Canadian
Governmental Regulation."
36
Net cash used in operations was $628,639, $699,373, $746,389 and
$1,632,535 in 1994, 1995, 1996 and the first six months of 1997, respectively.
The cash use is primarily attributable unprofitable operations. AEI also
expended significant cash to accumulate funds for the Acquisition. AEI's
payables increased in 1996 with the acquisition of CHL Services.
AEI intends to rely on inventory and receivables financing to satisfy
its working capital requirements for at least the next twelve months. AEI
believes that it will continue to experience increased receivables and inventory
as it generates larger corporate customers who demand longer payment terms and
as it continues to shift its product mix toward higher-margin order-fulfillment
programs. There can be no assurance, however, that AEI will not require
additional capital in the future, particularly for replacement of equipment and
acquisition of new equipment to support anticipated growth. The terms of the
financing for the Acquisition prohibit use of funds from AGI to support AEI's
other operations. Therefore, if AEI were required to obtain additional financing
in the future, there can be no assurance that such sources of capital will be
available on terms favorable to the Company, if at all.
AEI has incurred significant expenditures to comply with the reporting
and listing requirements associated with maintaining a public market for its
Common Shares on the VSE. AEI expects that these expenditures will increase as
it seeks to comply with the requirements to maintain a public market for its
shares in the United States. However, because these expenses will be supported
by significantly more revenues due to the Acquisition, their relative impact
should not be as significant in the future.
The terms of the Acquisition require that AEI pay AGI's former
principal shareholder the equivalent of all AGI profits earned from April 1,
1997 until June 16, 1997. AEI has accounted for this obligation as an accrued
liability. See "The Acquisition and Related Financing." This approximately
$700,000 obligation is to be paid quarterly, and the first payment was due on
September 16, 1997. AEI was unable to make the entire payment at that time but
such obligation has since been paid in full. AEI will be required to make the
second quarterly payment on December 16, 1997 and would currently be unable to
make that payment with cash generated from operations of SEI. The terms of the
Acquisition accelerate payment of any amount remaining on the approximate
$700,000 obligation to Mr. Dooley upon certain securities offerings of the
Company, and the Company anticipates satisfying such obligation from the net
proceeds of this offering. The terms of AGI's borrowing agreements do not permit
AGI to make payments to AEI to satisfy this obligation to Mr. Dooley. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - The Antigua Group, Inc. - Liquidity and Capital Resources." If the
Company were unable to meet this obligation to Mr. Dooley with net proceeds of
this offering, the Company would need additional financing to satisfy the
obligation, and there can be no assurance that such financing would be
available, or, if available, that such financing would be on terms favorable to
the Company.
Additional obligations associated with AEI's operations include: (i) a
note payable to Texas Commerce Bank with a principal balance of $16,000 as of
June 30, 1997 bearing interest at 10% per year which AEI intends to repay in
full by December 1997; (ii) a $2,000 monthly payment to the State of Texas
continuing until March 1998 representing delinquent sales taxes and penalties
incurred as the result of AEI's acquisition of Promo, Inc. in 1993; (iii) a note
to a director with a principal and accrued interest balance of $342,733 as of
June 30, 1997, due on demand, bearing interest at 7% per year; (iv) an aggregate
of $193,373 in zero interest notes due on demand after June 1998 by Directors or
shareholders; and (v) notes payable of $334,619 to officers of AGI, due in 1997,
bearing interest at 9% per year. Since June 30, 1997, AEI has repaid $200,000 on
the 7% director note, $334,619 on notes due to AGI officers and $452,707 of
other outstanding debt. Additionally, AEI has approximately $3,500 in monthly
commitments under existing capital equipment leases. AEI has defaulted on
payment of an approximately $100,000 obligation to Sea/Q of America, Inc.
("Sea/Q"). Sea/Q commenced suit to recover this amount but has agreed not to
pursue this claim until after January 15, 1998, in consideration for the Company
having caused the transfer of warrants to Sea/Q. See "Business - Legal
Proceedings." The Company anticipates satisfying the obligation to Sea/Q from
proceeds of this offering. See "Use of Proceeds." The terms of AGI's borrowing
agreements do not permit AGI to make payments to AEI to satisfy this obligation.
If the Company were unable to meet the obligation to Sea/Q with net proceeds of
this offering, the Company would need additional financing to satisfy the
obligation, and there can be no assurance that such financing would be
available, or, if available, that such financing would be on terms favorable to
the Company. The Company's principal financing agreements contain cross default
provisions, and nonpayment of the obligation to Sea/Q, or the institution of
proceedings by Sea/Q, or both, created a primary default under at least one of
its principal financing agreements and may have created cross defaults under
other principal financing agreements. Waivers from lenders with respect to the
event, or events, of default have been obtained. AGI previously sought and
obtained waivers from two lenders in connection with financial reporting
requirements and capital expenditure limits. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - The Antigua Group,
Inc. - Liquidity and Capital Resources."
37
Quarterly Results and Seasonality
The following table presents certain unaudited consolidated financial
information for fiscal 1995, 1996 and applicable quarters of fiscal 1997. In the
opinion of the Company, this information has been prepared on the same basis as
the audited consolidated financial statements appearing elsewhere in this
prospectus and includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the unaudited quarterly results set
forth herein. Operating results for any quarter are not necessarily indicative
of results for any future period or for a full fiscal year. See "Risk Factors --
Important Factors Related to Forward-Looking Statements and Associated Risks."
AGI
Three months ended
--------------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------- -------------------------------------------- --------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
-------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Net sales ............. $ 7,245 $ 7,288 $ 9,432 $ 7,457 $ 6,455 $ 9,262 $ 10,476 $ 7,316 $ 9,219
Cost of goods sold .... 4,918 4,907 6,063 4,937 4,582 6,137 6,812 4,959 5,951
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit .......... 2,327 2,361 3,369 2,520 1,873 3,125 3,664 2,357 3,268
Selling, general and
administrative expense 2,358 2,178 2,391 1,898 2,069 2,407 2,598 2,368 2,465
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ........... (31) 183 978 622 (196) 718 1,066 (11) 803
Other income (expense),
net .................. (143) (314) (242) (312) (274) (260) (265) (158) (252)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item (1) $ (174) $ (131) $ 736 $ 310 $ (470) $ 458 $ 801 $ (169) $ 551
======== ======== ======== ======== ======== ======== ======== ======== ========
(as a percentage of sales)
1995 1996 1997
-------------------------------------------- -------------------------------------------- --------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit ......... 32.1% 32.5% 35.7% 33.8% 29.0% 33.7% 35.0% 32.2% 35.4%
Income (loss) from
operations ......... -0.4% 2.5% 10.4% 8.3% -3.0% 7.8% 10.2% -0.2% 8.7%
Income (loss) before
extraordinary item (1) -2.4% -1.8% 7.8% 4.2% -7.3% 4.9% 7.6% -2.3% 6.0%
- ------------------
(1) Net income (loss) of AGI does not include any provision for income tax
because AGI operated as an S Corporation prior to the Acquisition.
38
AEI
Three months ended
---------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- -------------------------------------- -----------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(in thousands)
Net sales .............. $ 546 $ 673 $ 313 $ 311 $ 520 $ 737 $ 714 $ 887 $ 550 $ 2,172
Cost of goods sold ..... 455 424 334 486 421 634 478 730 369 1,455
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit ........... 91 249 (21) (175) 99 103 236 157 181 717
Selling, general and
administrative expense 321 186 383 322 214 338 175 519 206 843
Amortization of licenses -- -- -- -- -- -- -- -- -- 28
Expenses related to
acquisition ........... -- -- -- -- -- -- -- -- -- 672
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations ........... (230) 63 (404) (497) (115) (235) 61 (362) (25) (826)
Other income (expense), (12) (8) (45) 39 (40) (30) (13) 12 10 (1,146)
net
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ...... $ (242) $ 55 $ (449) $ (458) $ (155) $ (265) $ 48 $ (350) (15) $(1,972)
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(as a percentage of sales)
1995 1996 1997
-------------------------------------- -------------------------------------- -----------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
Gross profit ......... 16.7% 37.0% -6.7% -56.3% 19.0% 14.0% 33.1% 17.7% 32.9% 33.0%
Income (loss) from
operations ........... -42.1% 9.4% -129.1% -159.8% -22.1% -31.9% 8.5% -40.8% -4.5% -38.0%
Net income (loss) .... -44.3% 8.2% -143.5% -147.3% -29.8% -36.0% 6.7% -39.5% -2.7% -90.8%
AGI's business has been seasonal with the highest sales typically
occurring in the second and third quarters of the year. The Company believes
that this seasonality is the result of increased licensed apparel purchases as
consumers prepare for a return to colleges that have license agreements with
AGI. Such seasonality is also affected by the increased interest in licensed
sports apparel during those quarters. The peak in licensed sports apparel often
carries into the fourth quarter depending upon consumer interest in the teams
involved in bowls and championships. AGI's golf apparel business also
contributes to this seasonality as AGI's snowbelt customers increase purchases
during the late first quarter and early second quarter, and sunbelt purchasers
increase purchases in the late third and early fourth quarters, both in
preparation for their busy seasons. AGI's corporate apparel business is less
seasonal because such sales are generally one-time transactions typically
resulting from trade shows, sales calls, and similar marketing efforts. Prior to
the acquisition of AGI, AEI's business did not show seasonal trends because
AEI's performance had been significantly impacted by the timing of major orders
and significant acquisitions or dispositions. Because AGI currently is the major
component of AEI's business, the Company expects AGI's seasonality to be
reflected in AEI's overall performance. The Company also believes that its
business is susceptible to economic cycles as its customers' spending patterns
on marketing and promotional items such as those offered by the Company are
expected to decrease during economic downturns. Significant variability in
orders during quarters may have a material adverse impact on the Company's cash
flow, and a significant decrease in orders could have a material adverse impact
on the Company's results of operations of financial conditions. See "Risk
Factors -- Fluctuations in Quarterly Operating Results; Seasonality."
Inflation
The Company does not believe that inflation has had a material impact
on its business during the last three years. To the extent inflation occurs in
the future, the Company may not be able to pass on increased costs to customers
due to competitive pressures.
39
BUSINESS
Overview
Antigua designs, sources, embroiders, screen prints and markets men's
and women's lifestyle apparel and casual sportswear under the distinctive
Antigua label. The Company has more than 18 years of experience developing
innovative seasonal and year round collections of apparel for the premium 18-80
year old men's and women's markets. The Company has developed a strong
reputation in its respective distribution channels by offering high quality,
fashion apparel with custom embroidery, screen printing and generous fit. In
addition, the Company believes it holds a competitive advantage by having the
capacity and reputation necessary for quick response to "hot markets" (such as
event-related garments) and corporate impulse orders, so called "at once"
business.
The Company sells its products through three distribution channels:
golf; licensed products; and corporate identity apparel. Antigua designs all of
its apparel to appeal to each of these channels. By selecting styles and color
stories which can be marketed to golf, licensed product and corporate
purchasers, the Company believes that it increases its sales potential and
reduces the risk of obsolescence of any particular stockkeeping unit. The
Company also believes that servicing three distribution channels from one
inventory provides the Company with the additional competitive advantage of
responding quickly to shifting demand in its three distribution channels with
fewer stockkeeping units. The inventory comprises three product categories:
* Essentials: Antigua's complete offering of basics, solid knit
shirts, jackets, windshirts and sweaters designed to be in
stock for one to three years.
* All Seasons: A large collection of innovatively designed,
fancy, knit shirts and overtops in stock for one year.
* Spring and Fall Fashion Collections: Small groups of fancy,
knit shirts and overtops designed for a four to six month
selling season.
Golf distribution is the most mature of Antigua's three distribution
channels and is divided into two complementary areas, retail stores and
tournaments and special events. The retail stores include golf shops located on
resort, private, semi-private and public golf courses and off course specialty
stores. Tournaments and special events include major and minor golf tournaments
and events related to golf. All three product categories sell into this
distribution channel in the premium and mid-priced markets through a network of
approximately 35 independent sales representatives. The golf distribution
channel targets approximately 13,000 golf retailers at green grass shops and off
course locations. The Company's account base in this channel includes
approximately 7,900 open accounts. The Company's open accounts are customers
whose credit has been approved by the Company and who have purchased from the
Company on at least one occasion. Of these accounts, approximately 55% are
active in any calendar year, yielding a market penetration of between
approximately 43% and 49% at any point. Approximately 87% of Antigua's product
sold into the golf channel is embroidered with an insignia which depicts the
golf course or club, usually on the left chest or sleeve. The golf distribution
channel accounted for approximately 37% of AGI's sales in 1996 and for the six
months ended June 30, 1997. Antigua has contracts for distribution of its golf
line in Canada, Australia and Japan, but historically most of its golf sales
have been in the United States. The Company plans to expand into Europe and
South America and to increase marketing efforts in Asia in the near future.
Antigua's sales of licensed apparel consists of sportswear embroidered
with professional team, college team and institutional insignias sold to
leagues, teams, area stores and large retail chains with team sport departments
and other general business and institutional accounts. This distribution channel
represents an area of recent volume growth and potential future growth both in
terms of amount and percentage of sales to Antigua. Licensed products sales
accounted for approximately 42% of AGI's sales in 1996 and 38% of sales for the
six months ended June 30, 1997. Positioned by experience, design, quality and
control of outlets as a market leader of the licensed apparel industry,
Antigua's superior quality and innovative designs have led to its growth in this
market. To protect margins and the value built into the brand name, the Company
has limited its distribution of its licensed products line to the higher end
sporting goods and retail department stores. All three product categories
(Essentials, All Seasons and the Spring and Fall Collections) sell into this
distribution channel. Antigua believes that its success in the licensed apparel
industry has been its control of brand identity and its use of lifestyle color
stories which are complementary to team colors, rather than relying solely on
team specific color stories creating greater customer acceptance of licensed
apparel.
40
The Company holds licenses to manufacture, sell and distribute products
bearing the marks of Major League Baseball ("MLB") and the World Series and the
Diamond Club, National Football League ("NFL"), Pro Line and Super Bowl, the
National Basketball Association ("NBA"), the National Hockey League ("NHL") and
the Stanley Cup, the National Collegiate Athletics Association ("NCAA") and the
Final Four, Notre Dame, as well as numerous colleges and universities. The
Company is also licensed by the PGA of America for its championships and its
1997 Ryder Cup matches. The Company believes that its license position with
professional and other sports organizations is the strongest of any of its
competitors in its lifestyle apparel and casual sportswear market.
Antigua views the corporate distribution channel as the largest
potential growth area for the Company. AGI's corporate identity sales in 1996
were approximately 18% of the Company's sales, compared to approximately 23% of
AGI's sales for the six months ended June 30, 1997. With the casualization of
corporate America and as "Casual Friday" moves into the work week, there is a
strong demand for lifestyle sportswear. Corporate outings, employee recognition,
customer appreciation, corporate catalogs are just a few of the product uses.
The year round in stock concept of Essentials and the All Seasons Collections
supply the "at once" impulse needs of this market place.
Antigua's corporate identity products are positioned in the mid- to
premium-price range and are sold through a network of ten independent sales
representatives and through a direct sales force of approximately 20 sales
people in the United States and Canada. The Company's Inside Sales department is
an in-house telemarketing group. This group generates approximately 60% of the
Company's corporate distribution channel sales. The Company's corporate clients
represent all of the screen printing sales and approximately 20% of its net
sales. The Company recently signed a licensing agreement with the Cadillac
Division of General Motors and believes that this license will create additional
brand building in the future.
Market
The Golf Industry. According to Golf Pro magazine, the domestic golf
apparel industry totaled approximately $893 million in 1996 at the wholesale
level. In the past 7 years, the golf apparel market in green grass and resort
shops has become fragmented to where no one company has been able to capture
more than a 10% market share. While golf is Antigua's most mature distribution
channel, the Company has been able to maintain a strong presence in green grass
shops and off course specialty shops over a continued period. AGI has been
selling into this channel since 1979 and has maintained levels of penetration in
this market between 1989 and 1995, according to the 1997 Golf Shop Operations
Survey of the Golf Market, of between 22% in 1989 and 31% in 1995. According to
the same survey, the top companies by brand penetration in the average facility
were Ashworth, Inc., Slazenger, Nike, Izod and Antigua. The Company believes
that its current green grass shops and off course specialty shops penetration is
now even higher than the industry estimates from 1995 because these industry
estimates are completed through sampling and do not include events or growth in
the Company's accounts. According to Golf Shop Operations magazine, there are
approximately 17,500 golf retailers in the United States, including green grass
shops and off course shops. Of these retailers, the Company targets
approximately 13,000 for its golf distribution channel customer base
(discounting the total number because of possible credit problems and
non-viability as an apparel retailer). Based on these industry estimates,
Antigua's golf apparel is sold in approximately 60% of its golf distribution
channel targets and in approximately 45% of golf retailers. The Company has open
accounts with approximately 3,240 private clubs and resorts, 2,500 daily fee
course shops, 1,130 off course specialty stores, 60 direct international buyers,
150 military installation courses and various other golf associations and
miscellaneous buyers. Approximately 55% of the Company's open accounts in this
channel are active during any calendar year.
All product categories of Antigua's inventory sell directly into the
golf channel. The All Seasons Collection, a group of fashionably designed shirts
and outerwear at prices below the majority of its competitors, has met an
increasing market demand for this type of product. In stock throughout the year,
the Essentials and All Seasons Collection sell to large and small tournaments,
retail operations and to various accounts for staff uniforms. The fashion
collections, released in the Spring and Fall offer a more upscale product at
slightly higher prices and are sold into retail and at events. This product
positioning gives Antigua the opportunity to sell its products in a variety of
applications to all levels of the industry from public golf facilities to
upscale resorts and country clubs.
Antigua was an early market entrant in targeting tournaments and
special events as a channel of distribution, and the Company sold to over 2,700
tournaments and special events in 1996 and has sold to over 2,900 through
September 1997. In 1987,
41
the Company established a tournament services department which manages all
product ordering by and delivery to tournaments and special events. This
dedicated capacity provides, in the Company's belief, a competitive advantage by
focusing an in-house group on the special timing and production needs of
tournaments. In addition to processing and supervising tournament orders, the
tournament services department coordinates delivery and last minute order
details with the Company's sales representatives in the tournament's area. The
Company has established strong ties with major tournament sponsors such as the
PGA of America and has an aggressive product presence at the Ryder Cup, PGA
Seniors Championship and PGA Championship. The Company utilizes select celebrity
endorsements, including PGA Tour and NCAA champions, to build its brand
identity. The Company's apparel sales to tournaments benefits the Company by
association with high-profile tournaments and events and provides much larger
than normal sales volume and generally allows tournament sponsors to offer
merchandise at a lower than ordinary credit risk.
Antigua plans to expand its distribution in the golf channel by adding
product categories that will increase square footage at current account
locations and offer more tournament and special event products. This includes
expanding the outerwear collections and the women's collection and creating an
additional pricing tier in the "better" category.
Licensed Apparel. The licensed apparel market totaled approximately
$2.0 billion at the wholesale level in 1996 according to Sports Style Magazine
and is dominated by companies such as Nike, Starter, Reebok, Champion Products
Inc. and The Vanity Fair Corporation, which has acquired Nutmeg Mills and Lee
Sport. The market is dominated by major retailers such as J.C. Penney and Sports
Authority, both of which are customers of Antigua. Open accounts in this channel
include approximately 50 department stores, 900 sporting goods stores, five
large sporting goods stores, 840 specialty stores, 300 high schools and middle
schools, 300 athletic teams and 140 other miscellaneous buyers. Of these open
accounts, approximately 51% are active in any calendar year. In addition to
retailers, Antigua is positioned for, and has an industry reputation for,
providing quick turn around embroidery on quality apparel to serve "hot markets"
and special events such as the Super Bowl and the World Series. Apparel for "hot
markets" and other "at once" business generally is provided by in-stock
Essentials, the All Seasons Collection and selected fancy styles.
The following table shows types of products which may be produced under
selected licenses held by the Company:
NFL NBA MLB NHL NCAA
-----------------------------------------------
Men's
- ----------------------
Polo's X X X X X
Fashion Tops X X X X X
T-Shirts
Embroidered X X X X X
Silk Screen X - X X X
Fleece X X X X X
Sweaters X X X X X
Outerwear/Windwear X X X X X
Bottoms-Shorts/Pants X X X X X
Women's
- ----------------------
Polo's X X X X X
Fleece X X X X X
Sweaters X X X X X
Outerwear/Windwear X X X X X
Bottoms-Shorts X X X X X
Accessories
- ----------------------
Golf Headcovers X X X X X
Golf Towels X X X X X
Golf Travel Accessories X X X X X
Golf Straw Hats - X X X -
Antigua's growth in licensed apparel the last two years has been
approximately 13% in 1995, compared to 1994, and 28% in 1996, compared to 1995,
while the industry has not grown appreciably over that period. The Company
believes that its growth is substantially due to its introduction of the All
Seasons Collection. Taking a subtle and upscale approach to design, the Company
has broadened the demographics of the licensed consumer and reached more
affluent customers. Antigua's customers are able to wear
42
their licensed apparel to work, a sporting event or to other recreational
activities. Colors in the collections are not team specific but rather lifestyle
driven, allowing the retailer to use the team color in the logo. Antigua selects
these color stories based on its own historical sales data, potential shifts in
the marketplace and the creation of new teams in the professional sports
leagues. This careful color selection process reduces close-out risk and allows
the products to sell into all three of the Company's distribution channels
instead of only the licensed product channel.
Corporate Identity Apparel. Antigua currently has approximately 4,600
open corporate accounts. Of these open accounts, approximately 59% are active in
any calendar year. This channel of distribution represents the strongest
potential growth channel for Antigua. AGI's net sales in this channel grew 73%
for the six months ended June 30, 1997 as compared to the same period in 1996.
The overall lifestyle apparel industry is led by companies much larger than
Antigua, such as Tommy Hilfiger, Polo Ralph Lauren Corporation and Levi Strauss
& Co. The Company believes, however, that it competes for its corporate identity
apparel niche in this overall lifestyle apparel marketplace with such other
companies as Vantage, Land's End, Gear for Sport, LaMode and others who
specialize in embroidering or screen printing apparel for corporations and small
businesses. Some of these competitors are also much larger than the Company,
although the Company believes that its portfolio of approximately 18,000 logos
gives it a competitive advantage in this market. The growth of this market has
been aided significantly by the trend toward more relaxed standards of dress in
the workplace. According to the NFD Group, Inc.'s Dressing in America report,
retail sales of casual workplace attire were approximately $12 billion in 1995.
Antigua distributes in this distribution channel through direct sales
to corporations and small businesses for their use in uniform programs, as
corporate gifts and premiums and in catalogs. Antigua also sells to advertising
specialty companies and other brokers who resell Antigua products to
corporations, small businesses and other end users. The Antigua product
categories of Essentials, All Seasons and the Spring and Fall Collections fit
the needs of the corporate apparel market because of price point attractiveness
and the Company's quick turn embroidery and screen printing capacity.
Business Strategy
The Company's strategic goals focus on growth in brand identity and
sales in all three of its distribution channels. The Antigua corporate strategic
goals are as follows:
* Three Channel Products: All of Antigua's products must be viable in
the three channels of distribution: golf, licensed and corporate
identity. The Company believes that this strategy affords it a
competitive advantage because the products are moved from one channel
to another as demand shifts. Antigua can be responsive to fluctuating
demand because it has one inventory, some with long shelf life, for
three distribution channels, rather than one separate inventory for
each channel.
* Product Mix: Antigua strives to maintain a product mix of 60%
Essentials (i.e., solid color shirts, sweaters, jackets, windshirts,
fleece, slacks and shorts) and 40% All Seasons Collections and the
Spring and Fall Collections, (i.e., seasonal designs which reflect a
trending or fashion forward appearance). Management believes that this
product mix gives Antigua a competitive advantage in that the Company
can serve "at once" business and "hot markets" as well as prebooked
fashion collection business. This strategy also allows the Company a
safer inventory risk position in that Essentials have much longer life
spans in the three distribution channels into which the Company sells.
* Small and Large Customer Mix: Antigua serves both large (for example,
The Sports Authority) and small (small businesses or local country club
pro shops) customers. The Company has built a large customer base (over
15,000 open accounts) with an even balance of large and small
customers. The Company's strategy is to maintain this approximate mix
to reduce the Company's risk from concentration of accounts.
* All Seasons Products and Competitive Pricing Model: The All Seasons
Collection allows Antigua to offer apparel that is designed to have
greater longevity than the products of its competitors. Because of this
longevity, Antigua can buy large quantities and reduce its per item
cost. With this price advantage Antigua brings its All Seasons
Collection products to market below many competitors' prices. The
longevity (one year availability) of the All Season Collection appeals
to all three channels of distribution the Company serves and allows the
Company essentially to "prebook" business which is ordered later by
customers as "at once" goods. The Company believes that the All Seasons
Collection provides customers the ability to
43
reorder familiar, proven product without requiring repeat cuts by
manufacturers (which may not be economic) and to include fashion items
in their own catalogs with a reduced risk of offering product that is
sold out prior to their catalogs reaching their end users.
* Sales Expansion in Three Channels: The Company intends to pursue a
strategy of simultaneously increasing sales in all three distribution
channels.
Golf: Antigua will look to grow its golf business by renewing
business relationships with inactive accounts, refining and
providing additional training for its sales force,
capitalizing on its strategic alliances with golf facility
management companies, including Club Corporation of America,
American Golf and Cobblestone and offering additional product
categories (outerwear, women's and special event products).
Licensed Products: Antigua plans to increase its licensed
products sales by offering other products through key national
and regional retailers like J.C. Penney, Sports Authority,
Belks and Jumbo Sports. The Company believes that it currently
holds a competitive advantage in this channel because of its
product design mix, the depth of its portfolio of licensed
logos and its position as one of the higher end providers of
licensed apparel.
Corporate Identity: Because of the relatively large size of
this market and the relatively small size of the Company's
sales force dedicated to this distribution channel, the
Company believes that corporate identity products provide an
important growth opportunity for the Company. Antigua seeks to
add to its corporate identity business by substantially
increasing its sales force (mostly in the Inside Sales
department) and expanding its direct mail activities. The
increasing trend of casual dress in the workplace will
increase opportunities for the Company as consumers wear more
lifestyle apparel, embroidered and screen printed identity
apparel.
Products and Product Design
Antigua's product mix covers a wide range of classifications including
men's and women's shirts, sweaters, outerwear, fleece products, slacks, shorts
and accessories. These classifications break into two specific groups, Basic
items (Essentials) and Fashion items (the All Season Collection and the Spring
and Fall Collections). Basic items represent 60% of Antigua sales and have
long-term marketability, one to three years, in all distribution channels. Basic
items are in-stock and provide the Company with most of its ability to respond
to "at once" orders.
44
Fashion items have shorter term marketability in all of the Company's
distribution channels. Fashion items presented in the All Season Collection have
the longest availability (approximately 12 months), and Spring and Fall
Collections have the shortest availability (four to six months). The Fashion
component of Antigua's product offerings allows the Company to prebook orders,
necessary due to shorter product life span and limited inventory. The Fashion
component also gives the Company the newness required to stimulate the
marketplace consistently and to satisfy the recurring needs of customers in all
three distribution channels.
Product Matrix
- -------------------------------------------------------------------------------
Golf Corporate at Once Corporate Fulfillment Licensed
-----------------------------------------------------------
Essentials X X X X
All Seasons X X X X
Spring Collection X X X
Fall Collection X X X
Outerwear X X X X
Sweaters and vests X X X X
Headwear X X X
Travel Accessories X X X
Head Covers X X X X
Towels X X X X
T Shirts X X X X
Fleece X X X X
The Basic and Fashion items are combined in two catalogs per year.
Catalogs are presented to all of the Company's accounts in July and January of
each year. The July catalog presents the Spring line of the next year. The
January catalog presents the Fall line of the same year. Each catalog allows for
five to six month prebooking period on any new Fashion products and also allows
for immediate booking of in-stock Essentials products.
This twice yearly cycle of product presentation and product mix is
designed expressly to serve all three distribution channels. All of the
Company's products are viable in every channel. By not embroidering a logo or
design until after receipt of an order, the Company tailors a product to that
particular customer's needs, regardless of the distribution channel, and removes
the risk of producing a product in advance that would appeal only to one
customer or to one channel.
Prior to the Acquisition, the Company, between 1993 and 1995, produced
and marketed a range of plastic printed consumer products, including automotive
aftermarket products, toys and various custom products. The Company no longer
markets such products but does continue to produce one screen printed plastic
golf accessory product. From the date of incorporation through acquisition of
SEI in August 1992, the Company invested in various oil and gas properties. The
Company has since disposed of or written off interests in any such properties.
See "Prospectus Summary--Company History."
Distribution and Sales
The Company distributes its products in three distinctive but
complementary distribution channels: golf, licensed products and corporate
identity apparel. The customers in each of these channels use Antigua's products
and services because they desire apparel customized with an embroidered or
screen printed logo. These distribution channels are reached and sales are
consummated through a network of independent and Company employed sales people.
Sales people have specific geographic and distribution channel responsibilities.
The Company currently has 35 golf sales people, 43 licensed product sales people
and 21 corporate identity apparel sales people. The corporate identity apparel
sales force is primarily made up of Company employed telemarketers. This
department, called Inside Sales, is responsible for approximately 60% of the
Company's corporate identity channel sales.
45
All members of the Company's sales forces are provided computer access
to their respective account rosters and the status of all Company inventory by
style, size and color. The Inside Sales telemarketing department utilizes the
company's IBM AS/400 computer system with Business Planning and Control Systems
(BPCS) software, and the outside sales representatives utilize laptop computers
with a custom software package called VRLink, which allows the Company's
salesforce to view from a remote location inventory availability by style, color
and size. This automation of the sales process gives the Company the ability to
react quickly to the marketplace by providing management with accurate, timely
sales information. VRLink also provides sales representatives with greater
certainty that orders written are being written against actual, current
inventory and, therefore, reduces the risk of orders which cannot be filled
timely. The Company is aware that certain of its competitors use VRLink and
similar software programs to allow their respective salesforces to access
inventory and place orders through a computer system. While the Company believes
that its current level of sales force automation is a competitive advantage in
all channels of distribution, the Company is aware that technology is changing
rapidly and that competitors could replicate or exceed this level of computer
automation. To avoid becoming obsolete or uncompetitive, the Company intends to
reassess its capabilities continually and to exploit new technology.
Each channel and respective sales force is managed by a National Sales
Manager who creates a yearly business plan, manages human resource issues,
trains sales people and monitors progress on the business plan. The three sales
managers, one for each distribution channel, report to the President of AGI.
Marketing
General. In the past 18 years the Company has built its brand identity
through promoting its products to retailers in golf and licensed products
channels and to the corporate apparel users, as opposed to the ultimate
consumer. The core of the Company's marketing efforts has traditionally been
support of the Professional Golf Association in small and large tournaments,
junior golf, customer co-op programs (whereby the Company partners with a
retailer in print advertising), league promotions and participation in trade
advertising. Antigua intends to reduce what has been its historical reliance on
trade initiatives in marketing and to create greater consumer awareness of the
brand and consumer demand for the Company's products at the trade level through
a more dynamic marketing plan. The Company intends to integrate the following
components into its revised marketing efforts:
* Product Positioning: Emphasize the Company's use of one inventory to
supply all three distribution channels to send a consistent design and
image message directly to the end consumer.
* Advertising and Public Relations: All print advertising designs and
layouts are completed in-house. Antigua advertises in both trade and
consumer media with a combination of image and product concepts. The
Company also has a monthly direct mail program which focuses on
specific product classifications. Great care is taken to ensure all
print ads reflect a consistent company-wide image and message. Antigua
enlists the services of a public relations firm which has a sports
focus. All press releases are directed to all three distribution
channels.
* Sales Support:
Catalog: The Company produces one catalog for all three
distribution channels with distinctive covers designed for
each channel. As with the advertising, the artwork is produced
in-house and displays the same consistent style and image of
other print media.
Swatchcards: To meet the selling strategy of 60% Basic
(Essentials) product and 40% Fashion, the Company has created
Essentials Swatch cards. This is a comprehensive sampling of
all of the fabrics and colors of each basic product in a
notebook format. The look of this notebook is consistent with
the style and image presented in print advertising, catalogs
and direct mailings.
Point of Purchase: Point of purchase displays depicting the
Antigua image are also given to retail accounts to build brand
recognition.
46
Direct Mail: Antigua mails 6,000 to 15,000 direct mail pieces
during peak marketing periods to its customer base to promote
new and existing products. Mailings are customized for each
distribution channel.
Merchandising Program: In 1997 the Company began an in-store
merchandising program designed to assist the retailer with
visual display, stock analysis and sales support. This program
was designed to increase sales and acquire additional square
footage in the stores.
Internet: The Company maintains a homepage at
"www.Antiguasportswear.com" on the Internet. The page is
purely informational at present, providing limited information
about the Company and links to sites which may be of interest
to the Company's customers. The Company intends to upgrade the
page to allow interactive capacity.
Trade Shows. Antigua markets its golf products nationally at the
Orlando PGA Show in January and the Las Vegas PGA Show in September. Licensed
products are marketed at the Atlanta Super Show, a National Sporting Goods
Association ("NSGA") event, in February and the Chicago NSGA Show in July. The
Company also attends other corporate trade shows, including the Motivation Show
in October and the Premium Incentive Show in May, both held each year in New
York.
Strategic Alliances. Antigua has carefully positioned its distribution
to enhance brand identity and recognition. Upscale licensed products stores such
as The Sports Authority, high profile golf resorts such as Pebble Beach,
Pinehurst and Coeur D'Alene, and premium catalogs such as the Herrington Catalog
have reinforced the brand to both the trade and retail consumers. Agreements
with prestigious companies such as Mercedes Benz and the PGA have provided
positive media attention and serve to enhance the brand further.
Celebrity Endorsements and Key Account and Corporate Sampling Programs.
* Golf: The Company utilizes select professional golf endorsements to
build its brand recognition. Mark Brooks, the 1996 PGA Champion, Billy
Mayfair, 1995 Tour Champion, Chris Johnson, LPGA tour veteran and
reigning LPGA champion and Jim Carter, former NCAA Champion, wear
Antigua products on tour. Antigua also has numerous clothing-only
programs with golf professionals on other smaller tours. The Company
also maintains a very price competitive staff uniform program for golf
course shops and retail stores. The Company believes that having staff
at golf retail shops and off course specialty stores wear the Company's
products is one of the best possible point of sale promotions.
* License: In the licensed products channel, Antigua is the preferred
supplier to the Coaches Club, where selected NFL Coaches wear Antigua
products on non-game days. Antigua is also a Diamond Club supplier. The
Diamond Club supplies clothing for equipment managers of Major League
Baseball teams to wear during the games. As in the golf distribution
channel, Antigua maintains a very price competitive staff uniform
program for stadium and arena employees to provide point of sale
product promotion.
* Corporate: In the corporate channel, Antigua aggressively pursues
relationships with key decision makers such as chief executive
officers, presidents and vice presidents of sales or marketing by
sending sample products to these people. In addition, NBC Sports
announcers wear Antigua shirts while hosting and announcing golf
events. The Company has plans to increase the number of celebrity
endorsements in the near future.
Sponsorships and Promotions.
* Golf: Antigua is an active sponsor of numerous golf tournaments, both
with tour and local club professionals. Among other events, Antigua
sponsors the Antigua South Florida Open, Antigua's Southwest Section
Team Championship and the Kachina Invitational in Scottsdale, Arizona.
The Company also participates in tour event promotions such as tent
sponsorships at major tournaments. The Company sponsors many Junior
tour activities nationally.
47
* License: The Company participates in numerous "in arena" promotions
during sporting events. These promotions assist retailers in selling
products and help to distinguish the brand from competitive products.
Celebrity and league fund raisers are also supported by the licensed
products channel.
* Corporate: Antigua plans and participates in corporate customers'
gatherings and promotions to create brand awareness.
Customer Communication. In the past seven years Antigua has invested
significantly in its Customer Service, Inside Sales, Embroidery Facility and
Quality Control. During peak demand periods, the Inside Sales and Customer
Service departments process over 10,000 incoming communications and initiate
more than 12,000 outgoing communications each month. Antigua's infrastructure
serves to maintain consumer confidence in the Company and fosters long-term
loyalty to the Company's products and services.
Product Development and Sourcing
The product design cycle begins about one year before product is
shipped. Two in-house departments, Sales and Product Development, establish the
general parameters of new product offerings. These departments conduct design
research through market trend and color forecasts and fabric exhibitions. Retail
stores are shopped extensively at the beginning of each cycle for trends and
ideas. Designs are completed and reviewed in an open forum with Sales and
Product Development, and revisions are made to respond to changing sales needs.
The Company then selects appropriate factories for fabrication of the line.
Because of the complexity of the designs, fabrics are the key to successful
product development. Antigua insists on working with the fabric mills directly,
rather than through the garment factory, in order to maintain product quality
and the integrity of the Company's design. Controlling the fabric source also
allows Antigua flexibility when placing re-orders. The Company is able to place
the same style in different cut and sew facilities depending upon production
capacity, offering the Company more options for timely product delivery.
In the past two years, Antigua has changed its production sourcing
dramatically. Prior to 1996, the majority of Antigua's production was based in
Hong Kong. Due to the then pending return of Hong Kong to China and Hong Kong's
relatively high labor prices, efforts were made to develop sources in other
Asian countries which provide attractive prices while maintaining quality.
Production testing and the process of changing resources is a rigorous and
difficult process, lasting a minimum of six to ten months. Over the last two
years, the Company has diversified its production to Pakistan, Indonesia,
Malaysia, Singapore and Saipan. These efforts have significantly lowered prices
at the mill level and diversified production to safeguard against factory or
natural disasters or political disruptions. As a result of sourcing changes, the
Company has significantly decreased its delivery price for most styles,
providing significant margin growth for the future.
Antigua has an extensive quality control program in support of its goal
of delivering generous cut garments of high and uniform quality to its
customers. Garments are checked against Level 4, the highest level, of the
Acceptable Quality Level standard of testing, an international standard for the
garment industry. Each production run is checked at three stages: in-line
(during production); finished product (at the mill after completion); and once
more at Antigua's warehouses in the United States. Quality control personnel
check garments at the Scottsdale warehouses against the same set of
specifications to which the runs are subject during manufacturing and are
checked for fabric weight, shrinkage, design, construction, fire retardance,
adherence to size specification and color correctness. The Company checks
garments a final time prior to shipping after embroidery for correct logo
placement, clarity of stitching and correct color application.
Approximately 95% of the Company's current products are produced in
Pakistan, Indonesia, Malaysia, Singapore and Saipan. The Company plans to double
its sources in these countries and add more internal quality control capacity by
the end of 1998. In addition, the Company is planning to investigate more
opportunities in Central and Latin America and to establish test production in
that region by the first quarter of 1998.
Antigua has taken precautions to ensure that its contract manufacturing
facilities all comply with local child labor laws and have safe working
conditions for their employees. Antigua requires factories to sign a declaration
of fair labor compliance with every order shipped. In addition, the Company's
Sourcing Manager or Vice President of Product Development visits all factories a
minimum of once annually to confirm compliance with Antigua's labor policies.
48
Manufacturing, Embroidery and Screen Printing
Antigua's garment manufacturing is done at various contracted
manufacturing facilities, but almost all of Antigua's decoration (i.e., custom
embroidery and custom screen printing) is done in its Scottsdale or Dallas
facilities. The Company believes that Antigua's decoration quality and capacity
gives the Company a competitive advantage in both the quality of the decoration
and the speed of delivery of the finished product. Antigua has daily embroidery
capacity ranging from 7,000 to 10,000 units per day, utilizing 190 embroidery
sewing heads on machines with various capacities. The Company outsources a
limited amount of embroidery to pre-qualified embroidery contractors which use
similar thread, embroidery equipment and production practices. The Company has
outsourced approximately 11% of embroidery during recent demand periods but
believes that it can outsource as much as 15% to 20%. All outsourced work is
subjected to the same quality assurance standards for in-house embroidery and
must pass Antigua's quality control prior to shipment to Antigua's customers.
The Company's screen print capacity also approaches 10,000 units per working
day.
Management Information Systems & Inventory Management
AGI utilizes an IBM AS/400 computer system to manage all business
transactions and historical data, and the Company is in the process of designing
a program to integrate SEI's record keeping into this system. The Company
anticipates completing the integration of systems during the first half of 1998.
Application systems, known as BPCS (Business Planning and Control Systems),
provide integrated real time information to all departments in Antigua's
infrastructure. The Company currently has over 100 workstations connected to the
internal networks and stores over 15 gigabytes of information on its various
systems. The AS/400 and BPCS databases are also utilized in association with
VRLink, the Company's Sales Force Automation Software system. The VRLink system
provides Antigua's sales representatives with access to their respective
customer rosters and all of Antigua's inventory. Inventory availability for
immediate delivery and for future shipping dates is provided down to the
style/color and size level. The Company's MIS systems are responsive to all
facets of the business, from sourcing to warehousing and embroidery
manufacturing to shipping.
The MIS systems have improved the Company's fill rate percentages for
customer orders in three important ways. First, the MIS systems have improved
the forecasting department's ability to manage and purchase inventory through a
tool set which analyzes sales history, purchasing history and future customer
commitments. Second, the Company's sales force has a clear and concise view of
available inventory which helps assure that customer orders are written and
allocated against actual inventory availability. Third, the Inventory Manager
uses physical inventory and cycle counting tools and systems to control and
manage inventory. As a result of these control mechanisms, the 1996 year end
physical inventory count net adjustments were only .3% of the total inventory
amount.
The Company will continue to exploit technology to improve its business
processes, its distribution of sales information and its communication with
suppliers, customers and business partners. See " -- Distribution and Sales."
Order Booking Cycle and Backlog
The Company receives its orders over a nine month period beginning when
samples are first shown to customers and continuing into the season. The Company
must schedule production in advance of order placement, although it can respond
to order trends over the period by sequencing production in advance of different
groupings of its seasonal collection. The Company maintains Essentials and All
Seasons products in stock throughout the year to enable it to quickly fill "at
once" orders for all three channels of distribution.
The Company begins to take orders for Fall collections in January for
delivery between May and October and for Spring collections between July and
January for delivery between January and May. The Company's backlog, which
consists of open, unfilled customer orders, was approximately $10.8 million as
of September 1, 1997, compared to $5.2 million as of September 1, 1996. Because
of the Company's policy of accepting order cancellations under certain
circumstances, and the lack of contractual provisions prohibiting such
cancellations, the Company typically ships 85-90% of its backlog.
49
The following table compares AGI's booking comparison for the past five
years (numbers marked with an asterisk are estimated numbers generated during a
change in computer system):
1993 1994 1995 1996 1997
---------- ----------- ---------- ---------- ----------
(in thousands)
January $2,067 $2,695 $2,181 $2,179 $3,081
February 2,623 2,635 2,653 2,131 3,291
March 3,167 3,614 3,589 4,218 7,158
April 4,407 4,100 2,930 4,489 4,385
May 3,174 3,689 3,177 4,415 3,315
June 3,173 3,412 3,260 2,999 2,622
July 2,982 2,876 2,988 3,159 3,804
August 3,006 3,605 *3,500 3,305 4,765
September 3,548 3,425 *3,400 4,132 5,453
October 3,050 4,067 *3,600 4,075
November 2,675 4,074 3,497 3,659
December 3,481 3,060 2,426 3,096
---------- ----------- ---------- ---------- ----------
Total $37,353 $41,252 $37,201 $41,857 $37,874
========== =========== ========== ========== ==========
Competition
The Company encounters intense competition in all three of its
distribution channels, much of which is from significantly larger competitors.
The Company considers its main competitors in its golf distribution channel to
be Ashworth, Inc., Izod Club, Polo Ralph Lauren Corporation, Tommy Hilfiger,
Cutter & Buck Inc. and Sport-Haley, Inc. The Company considers its main
competitors in the licensed goods channel to be Nike, Reebok, Starter, Champion
and Vanity Fair. The Company considers its main competitors in the corporate
channel to be Polo Ralph Lauren Corporation, Tommy Hilfiger, the Dockers brand
of Levi Strauss & Co. and the Gear brand of L.A. Gear, Inc. Competition in these
distribution channels is intense and is based primarily on brand recognition, as
well as loyalty, quality, price, style, decoration capacity, design, service and
availability of shelf space in the golf apparel and licensed apparel
distribution channels. The Company also competes, particularly in its golf
distribution channel, with manufacturers of high quality men's and women's
sportswear and general leisure wear, including Nike, Tommy Hilfiger and Nautica
Enterprises Inc. Many of these competitors, as with competitors within
particular distribution channels, have substantially greater experience,
financial and marketing resources, manufacturing capacity, distribution and
design capabilities than the Company. Increased competition in the fashion golf
apparel market, such as Nautica's recent entry into golf apparel, from these
manufacturers or others could result in price reductions, reduced margins or
loss of market share, all of which could have a material adverse effect on the
Company's business, operating results and financial condition. Although the
Company believes that it competes favorably with respect to certain competition
points, particularly style, decoration (embroidery) capacity, service, design
and the diversity of its distribution channels, there can be no assurance that
the Company will compete successfully with its present or potential competition.
Further, recent entries in these distribution channels by competitors offering
apparel comparable to that of the Company will likely intensify competitive
pressures. There can be no assurance that the Company will be able to maintain
market share as new competition develops, to increase its market share at the
expense of its existing competition, or that the Company will not experience
pricing pressures as a result of intensifying competition within these markets.
50
Customers
The Company's customers represent an appreciable cross section of the
United States market. The Company sells to accounts nationwide, which range from
the smallest companies or green grass shops to the largest conglomerates and
retailers in the United States. A sampling of the representative customers of
the Company is set forth below:
Licensed/Retail Licensed Accounts - Golf Accounts - Golf Accounts -
Corporate Accounts Accounts Leagues and Teams Events Country Club
- -------------------- ------------------- --------------------- ------------------------ ---------------------
Anheuser Busch J.C. Penney NFL Properties Walt Disney World - Four Seasons Resort
Oldsmobile Classic
Coca Cola Sports Authority NBA Properties GTE Suncoast Pebble Beach Corp.
NBC Jumbo Sports Cleveland Indians PGA Championship Century Club
U-Haul Dillard's Green Bay Packers Ryder Cup Kapalua C.C.
Jacobson Textron Belks Phoenix Suns Greater Hartford Open Medinah C.C.
Mercedes Benz Sears Colorado Rockies Motorola Open Grayhawk
Hilton Joslin's Texas Rangers Nynex Corp. Oak Hill
Brinker International Gart Brothers Univ. of Florida Quad Cities Classic Mission Hills
Southwest Airlines Caesar's World Notre Dame LPGA Turquoise Classic Grand Cypress
Ameritech Modells San Diego Padres Liberty Mutual Legends Breakers
No single customer accounts for more than 10% of the Company's revenues.
However, the Company sells into three distribution channels, generally sells
more product during certain seasons and sells to a mix of large and small
accounts. As the Company receives orders, the concentration of accounts will
fluctuate. The Company's strategy is to avoid customer concentration and
believes that the loss of any single account would not have a material adverse
impact on the Company's business, financial condition and results of operations
over a long term. Nevertheless, it is possible that at any one point in time the
loss of a significant account, such as J.C. Penney or Sports Authority, could
have a material adverse impact on the Company.
Intellectual Property
The Company has developed significant value in its "Antigua," "Antigua
Sport," "Kachina," "Antech" and "AII Apparel" names and logos. Antigua has
registered and trademarked the Antigua name in the United States, Canada and
Japan and has pending applications for the same in Australia, New Zealand and
the European Community. The Kachina design logo has been trademarked and
registered in the United States, Canada and Japan. The Antigua/Kachina
combination is registered in Germany and Sweden, and there are pending
applications in Ireland, Italy, Korea and the United Kingdom. The Antech and AII
Apparel names are trademarked and registered in the United States. Leading
brands in the apparel industry have historically been subject to competition
from imitators which infringe the trademarks and trade dress of the brand. While
the Company to date has not been aware of a high level of imitation of the
Antigua brand or other marks, there can be no assurances that its business will
not suffer from such imitation in the future.
The Company has created a library of digitized designs on behalf of its
clients. These designs consists of approximately 18,000 logos and names of golf
courses, resorts, sports teams and corporate logos.
Employees
As of August 31, 1997 the Company had 258 employees in Scottsdale, 19
employees in Dallas and seven employees in Toronto. Approximately 60% of the
Company's employees are in manufacturing and maintenance and 10% are in each of:
management; design and customer service; sales; and MIS, administration and
accounting. None of the Company's employees is a member of a union. The Company
considers its relations with its employees to be good.
51
Facilities
The Company leases approximately 42,500 square feet of space in
Scottsdale, Arizona from a partnership of which Mr. Dooley is a partner. See
"Certain Relationships and Related Transactions." The current term of the lease
expires December 31, 1997, but the Company may extend the term of the lease for
two additional one-year periods. This facility houses management, data
processing, customer service, warehousing and embroidery and manufacturing
machines. The Company also leases approximately 30,000 square feet of space for
manufacture, storage and sale (at a Company store) of apparel in a facility in
close proximity to its main facility. The lease for this space expires in
October 1999, and the Company may renew the lease for two additional one-year
periods. The Company leases approximately 16,000 square feet of space in Dallas
from a Director to house its screen printing and corporate sales group. The
lease is month to month. The Company has occupied the building since 1992. The
Company leases approximately 1,500 square feet of space in Toronto to house
sales and customer service. The lease is month to month. There can be no
assurances that the month-to-month facilities will continue to be available to
the Company. However, the Company believes that other adequate facilities could
be located, if necessary. The Company has leased approximately 2,000 square feet
of retail space for an outlet store north of Phoenix, Arizona for a five year
term ending in September 2001. The Company believes that existing facilities are
adequate for its current requirements and that suitable additional or substitute
space is readily available as needed.
Legal Proceedings
Other than as set forth below, the Company is not currently involved in
any material legal proceedings. The Company is subject to claims and lawsuits
from time to time in the ordinary course of its business. While the outcome of
such ordinary course proceedings cannot be predicted with certainty, the Company
believes that the resolution of such current or future ordinary course matters
individually or in the aggregate will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Sea/Q of America, Inc., a New York corporation, filed a lawsuit,
bearing cause No. C975720, against the Company in the Supreme Court of British
Columbia, Canada, on October 23, 1997. The principal beneficial owner of Sea/Q
is Ronnie Strasser, a former director of the Company. In the Statement of Claim,
Sea/Q alleged that the Company had borrowed $100,000 from Sea/Q in or about
August, 1996 and had agreed to repay Sea/Q in full without interest on or before
May 30, 1997. Sea/Q further alleged that the Company had failed to repay Sea/Q.
Sea/Q requested a judgment against the Company for $100,000, plus interest from
May 30, 1997, as well as costs. The Company entered into a settlement with Sea/Q
on October 30, 1997, which was reflected in Minutes of Settlement filed with the
court in British Columbia. Under the settlement, the Company agreed: (i) to pay
Sea/Q $100,000 on or before January 15, 1998; and (ii) to transfer to Sea/Q
warrants to purchase 12,000 Common Shares of the Company with an exercise price
of C$5 until June 1988, and C$5.75 thereafter until the expiration date of June
1999. Sea/Q agreed to waive any interest payable from May 30, 1997 to the date
of repayment, to cease prosecuting the lawsuit until January 15, 1998 and to
dismiss the lawsuit entirely if the Company paid Sea/Q $100,000 on or before
January 15, 1997.
Western Pacific Developments LTD., a British Columbia company, filed a
lawsuit, bearing cause No. C975772, against the Company, Eron Mortgage
Corporation ("Eron"), West Coast Golf Promotions LTD., Brian Slobogian and Frank
Biller in the Supreme Court of British Columbia on October 24, 1997, but
voluntarily dismissed its claim against the Company by filing with the court a
Notice of Discontinuance on October 29, 1997. The Company did not offer or
provide any consideration to Western Pacific in exchange for Western Pacific
filing the Notice of Discontinuance. The effect of the Notice of Discontinuance
is to dismiss Western Pacific's claim against the Company, but is not a bar to
any subsequent legal action by Western Pacific against the Company. In its
Statement of Claim, Western Pacific alleged, among other things, that on or
about February 7, 1997, Western Pacific entered into a loan agreement with Eron,
West Coast and the Company pursuant to which Western Pacific loaned West Coast
C$100,000, with interest payable on a monthly basis in the amount of C$2,000.
Western Pacific also alleged that it was not paid three consecutive monthly
interest payments, and asked for relief in the amount of $106,038.74 with
interest until paid in full. On November 3, 1997, Western Pacific amended its
Statement of Claim to eliminate any reference to the Company. Brian Slobogian,
who was also named as a defendant in the original Statement of Claim for cause
No. C975772, is a former Director of the Company, having served, without
attending any meetings, from June 30, 1997 through his October 10, 1997
resignation. As a result of allegations of misconduct, Mr. Slobogian was ordered
to resign as a director of any issuer by the British Columbia Securities
Commission on October 3, 1997. On that same date, the Registrar of Mortgage
Brokers in British Columbia suspended the registration of Eron, froze related
corporate bank accounts and made application to appoint a judicial trustee for
the investors and receivers of Eron. Eron acted as a finder for the Company in
connection with the Westcoast Debenture (see "The Acquisition and Related
Financing"), but the Company has not engaged in any transactions with Mr.
Slobogian or related entities which are currently the subject of pending
regulatory actions. However, there can be no assurance that the Company will not
receive inquiries in the future concerning its past association with Mr.
Slobogian and Eron or that such past associations with Mr. Slobogian and Eron
will not become the subject of regulatory action.
52
MANAGEMENT
Directors, Executive Officers and Certain Significant Employees
Name Age Position(s)
- ----------------------------- ------------- ----------------------------------------------------------------
Louis B. Lloyd (1) 54 Chairman of the Board of Directors
L. Steven Haynes (2) 36 Chief Executive Officer, Director
Ronald A. McPherson 47 President of AGI
Gerald K. Whitley 57 Vice President of Finance of AGI
Brettina M. Moore 37 Vice President of Product Development of AGI
Joseph M. Blanchette 45 Director of Management Information Services
John W. Wood 45 President of SEI
Thomas E. Dooley, Jr. 57 Chairman of the Board of Directors of AGI, Consultant to AGI
James E. Miles (2) 68 Director
Robert J. McCammon (1) 56 Director
J. Christopher Woods 48 Secretary, Director
James W. Lewis (1)(2) 56 Director
Natale Bosa 52 Director
- ------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
The Company Act (British Columbia) requires that a minimum of one
Director of the Company be ordinarily resident in British Columbia and that a
majority of the Company's Directors be ordinarily resident in Canada. Mr. Woods
and Mr. Bosa are ordinarily resident in British Columbia, and Mr. Miles and Mr.
McCammon are ordinarily resident in Canada.
Louis B. Lloyd has served as Chairman of the Board of Directors of the
Company since August 1992. He is the President and principal beneficial owner of
Belfinance Haussmann, L.L.C. ("Belfinance"), a private investment vehicle and is
the President of Belfinance Securities, Inc., an NASD member. Mr. Lloyd is also
a founder of Absolute Bank, located in the Republic of Georgia, and has served
as a Director of the bank and as the bank's Vice Chairman since its founding in
January 1995. From November 1991 through May 1994, Mr. Lloyd was associated with
Republic New York Securities Corporation, a New York Stock Exchange member firm,
most recently as President and Chief Executive Officer. From November 1981
through July 1990, Mr. Lloyd served in various capacities at Shearson Lehman
Brothers, most recently as a Senior Executive Vice President and head of that
firm's Worldwide Institutional Equity Trading and Sales Departments.
L. Steven Haynes has served as President and Chief Executive Officer of
the Company since its founding in 1992. Mr. Haynes was the Chief Financial
Officer of Concept Communications, a video conference company, from May 1986 to
July 1988. From June 1983 to April 1987, Mr. Haynes was associated with Shearson
Lehman Brothers, most recently as a Vice President in the Capital Markets
division.
Ronald A. McPherson, a former golf professional, has served AGI as
either manager of national sales or Vice President of Sales and Marketing from
September 1979 through August 1997. In September 1997 Mr. McPherson was named
President of AGI.
53
Mr. McPherson is a member of the Board of Directors of the Golf Manufacturers
and Distributors Association and has served on that Board since August 1992. He
is also a member of the Board of Directors of the Samaritan Foundation, a
nonprofit philanthropic corporation supporting the work of Samaritan hospitals.
Gerald K. Whitley has served as Vice President of Finance of AGI since
May 1997 and served AGI as Vice President of Finance and Administration between
August 1985 and May 1997, except for the period from November 1994 to July 1995.
From 1962 to 1984, Mr. Whitley was with Arthur Andersen LLP, becoming an audit
partner of that firm in 1974. Mr. Whitley is a certified public accountant.
Brettina M. Moore is Vice President for Product Development, a position
she has held since November 1994. From September 1984 through November 1994, Ms.
Moore was the Assistant General Manager of the Gainey Ranch Golf Club in
Scottsdale, Arizona. Ms. Moore is the founder of the Association of Golf
Merchandisers. She co-authored that trade association's training manual and has
authored articles on merchandising, buying and managing retail operations for
Golf Shop Operations magazine.
Joseph M. Blanchette has served AGI as Vice President of Information
Technology since September 1997, and from October 1994 to September 1997 as
Director of Management Information Systems. From November 1993 until October
1994, Mr. Blanchette provided Mid-Range (IBM AS/400) computer systems services
to businesses in the Phoenix and Southern California area through JDR Consulting
Group Inc., a company he founded. From November 1988 through November 1993, Mr.
Blanchette was associated with the Information Systems Consulting Group of Ernst
& Young LLP, most recently as Senior Manager, specializing in managing Mid-Range
(IBM AS/400) computing systems engagements.
John W. Wood has served SEI, a subsidiary of the Company, since
November 1993. From April 1992 through May 1993, Mr. Wood served as Vice
President of Compliance Partners, Inc., then a development stage environmental
and engineering company. From January 1988 through April 1992, Mr. Wood was the
Branch Manager of an industrial chemical distribution facility of Unocal Corp.
Thomas E. Dooley, Jr. founded AGI, now a subsidiary of the Company, in
1975 and directed its operations through the Acquisition in June 1997. Mr.
Dooley currently serves AGI as Chairman of the Board of Directors and as a
consultant.
James E. Miles has been a Director of the Company since August 1994.
Mr. Miles is a Professor Emeritus of Psychiatry at the University of British
Columbia and has been a psychiatrist in private practice since November 1990.
Robert J. McCammon was elected to the Board of Directors at the
Company's meeting of shareholders on June 30, 1997. Mr. McCammon has been an
Assistant Coach of the Edmonton Oilers Hockey team since July 1994, was the
President and General Manager of the Tri-Cities Junior "A" Hockey Team from July
1991 through April 1994 and a coach of the Vancouver Canucks Hockey Team from
May 1987 through April 1991.
J. Christopher Woods has served as a Director of the Company since
October 1996. Mr. Woods is engaged in the management of personal investments and
has provided paralegal services to the Company through an affiliation with the
law firm of Tupper, Jonsson & Yeadon of Vancouver, British Columbia. Since
February 1993 Mr. Woods has been the General Manager of 440458 B.C. Ltd., a
private company providing management consulting services to various businesses
including the Company. See "Certain Relationships and Related Transactions." Mr.
Woods also serves as Secretary and a Director of Emerald Dragon Mines Ltd., a
position he has held since February 1993. He additionally has served as
Secretary of Bismillah Ventures Inc. since January 1993 and has been a director
of that entity since October 1994.
James W. Lewis was elected to the Board of Directors at the Company's
meeting of shareholders on June 30, 1997. Mr. Lewis has been the President of
Tradeco Global Securities Inc. since May 1989. Mr. Lewis is also engaged in the
management of personal investments.
Natale Bosa was appointed a Director of the Company on October 23,
1997. For more than the past five years Mr. Bosa has served as President of Bosa
Bros. Construction Ltd. and as President of Bosa Development Corporation, a real
estate development company.
54
Committees of the Board of Directors
The Audit Committee consists of Mr. Haynes, Mr. Miles and Mr. Lewis.
The Audit Committee makes recommendations to the Board of Directors regarding
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by the Company's independent auditors and
reviews and evaluates the Company's audit and control functions.
The Board of Directors established a Compensation Committee in June
1997 and appointed Messrs. Lloyd, McCammon and Lewis, all non-employee
directors, to the Committee. The primary function of the Compensation Committee
is to establish compensation, including bonuses, of the Company's officers.
In 1996 the Board of Directors held two meetings. All Directors
attended more than 75% of the aggregate of board and committee meetings held
during 1996.
Director Compensation
Directors of the Company do not receive fees or other cash compensation
for service as Directors. The Directors may be reimbursed for actual expenses
reasonably incurred in the course of or in connection with the performance of
their duties as Directors. Directors are eligible to receive options for the
purchase of Common Shares.
The Company does not have a stock option plan, but the Company has
granted stand-alone options to Directors pursuant to applicable policy
statements and law. The Company has an outstanding option to a Director of SEI
for 35,000 Common Shares at an exercise price of C$2.90 per Common Share which
expires on August 25, 2000. In connection with the Acquisition, the Company
granted options to acquire 60,000 Common Shares, 20,000 Common Shares, 50,000
Common Shares, 5,000 Common Shares, 5,000 Common Shares, 5,000 Common Shares and
5,000 Common Shares to Mr. Haynes, Mr. McCammon, Belfinance, Mr. Lewis, Mr.
Lloyd, Mr. Miles and Mr. Woods, respectively, all of whom (other than
Belfinance, which is controlled by Mr. Lloyd) are Directors of the Company. The
foregoing options are fully vested, expire on June 16, 1999 and are exercisable
at $5.00 per Common Share. The Company, at the same time, granted two-year
options to acquire an aggregate of 50,000 Common Shares at $5.00 per Common
Share to Directors of SEI and AGI.
Executive Compensation
Summary Compensation. The following table sets forth the compensation
earned by the Company's Chief Executive Officer during 1996 for services
rendered to the Company and its subsidiaries during such year.
Annual Long-Term
Compensation Compensation
----------------- -----------------------
Securities
Name and Principal Position Salary Underlying Options
- ---------------------------------------------------------- ----------------- -----------------------
L. Steven Haynes, Chief Executive Officer ............... $81,000 9,000(1)
- ------------------
(1) These options were originally granted on August 25, 1995 at C$2.05 per
share and were adjusted in accordance with VSE policy to C$2.90 on
January 16, 1996.
See "Management -- Employment and Consulting Contracts, Termination of
Employment and Change-in-Control Arrangements" for a discussion of the
employment agreements of certain executive officers and consultants entered into
in connection with the Acquisition.
55
Option Grants. The following table provides information with respect to
stock option grants made to the Company's Chief Executive Officer for the year
ended December 31, 1996. No stock appreciation rights were granted during 1996.
Individual Grants Potential Realizable Value
- --------------------------------------------------------------------------------------------- at Assumed Annual Rates
Percent of of Stock Price
Total Appreciation For Option
Number of Options Term (2)
Securities Granted to Exercise ----------------------------
underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
- -------------------------- ---------------- -------------- ----------- ------------- ------------ ------------
L. Steven Haynes ........ 9,000(3) 5.1% C$2.90 8/25/97 - -
- ------------------
(1) Based on total grants during the year of 178,000.
(2) Mr. Haynes exercised all of these options on January 29, 1997.
(3) These options were originally granted on August 25, 1995 at C$2.05 per
share and were adjusted in accordance with VSE policy to C$2.90 on
January 16, 1996.
Aggregated Fiscal Year-End Option Values. The following table sets
forth for the Company's Chief Executive Officer the number and value of
securities underlying unexercised options and warrants held at December 31,
1996.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at December 31, 1996 December 31, 1996 (1)
--------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------- -------------- ---------------- -------------- -----------------
L. Steven Haynes ........................... 9,000 - $34,560 -
- ------------------
(1) Based on the difference between the assumed public offering price of
$6.00 per Common Share and the exercise price. However, Mr. Haynes
exercised all of these options on January 29, 1997.
401(k) Plan
In May 1993, the Board of Directors of AGI, adopted a tax qualified
employee savings and retirement plan covering its employees (the "401(k) Plan").
Pursuant to the 401(k) Plan, eligible employees, which does not include officers
of AGI, may elect to reduce their current compensation by up to statutorily
prescribed annual limit and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan provides discretionary matching by AGI. Employees
become 20% vested in the Company's matching contributions after two years of
service, and increase their vested percentages by an additional 20% for each
year of service thereafter. The 401(k) Plan is intended to qualify under Section
401 of the Code, so that contributions to the 401(k) Plan, and income earned on
the 401(k) Plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company will be deductible by
the Company when made.
56
Employment and Consulting Contracts, Termination of Employment and
Change-in-Control Arrangements
The Company entered into employment agreements, effective as of the
closing of the Acquisition, with the following executive officers: (1) L. Steven
Haynes, Chief Executive Officer; (2) Ronald A. McPherson, Vice President of
Sales (and since September 1997, President of AGI); (3) Gerald K. Whitley, Vice
President of Finance; (4) Brettina M. Moore, Vice President of Product
Development; and (5) Joseph M. Blanchette, Director of Management Information
Systems (and since September 1997, Vice President of Information Technology).
Pursuant to such agreements, Messrs. Haynes, McPherson, Whitley, Ms. Moore and
Mr. Blanchette receive annual salaries of $175,000, $120,000, $95,000, $108,000
and $86,000, respectively, and bonuses of 15% (not less than 15% in the case of
Ms. Moore) of annual salary (prorated for a partial year of employment).
Additionally, upon execution of the agreements Messrs. Haynes, McPherson,
Whitley, Ms. Moore and Mr. Blanchette received stock option grants for 55,000
shares, 60,000 shares, 60,000 shares, 40,000 shares and 10,000 shares,
respectively. The stock options granted to Mr. McPherson, Mr. Whitley, Ms. Moore
and Mr. Blanchette are fully vested and are exercisable, at a strike price of
C$6.25 per Common Share, for the options to Mr. McPherson and Mr. Whitley, and
$5.00 per share for the options to Ms. Moore and Mr. Blanchette, over the
two-year period following the grant date. The stock options granted to Mr.
Haynes vested as to fifty percent of the options on the effective date of the
employment agreement, with the second fifty percent vesting on the first
anniversary of the date of grant. Mr Haynes' options are exercisable at C$6.75
during the first year following grant and C$7.75 during the second year. The
term of Mr. Haynes' agreement is three years, and the Company may extend the
term for an additional two-year period. The agreements of Mr. McPherson, Mr.
Whitley, Ms. Moore and Mr. Blanchette provide for an indefinite period of
employment, subject to customary termination provisions. The agreements of Mr.
McPherson and Mr. Whitley provide that if employment is terminated for cause by
the Company or by the employee without good reason, the employee shall receive
only the salary payments earned prior to the date of termination; if employment
is terminated without cause or by the employee for good reason, the employee
will continue to receive salary and health and other benefits for a period of
six months following termination, and all unvested stock options shall vest in
full. The agreements of Mr. Haynes, Ms. Moore and Mr. Blanchette provide that if
employment is terminated by the Company for any reason, the employee will
continue to receive salary and health and other benefits for a period of six
months following termination, and all unvested stock options shall vest in full.
The Company has agreed to provide term life insurance for Mr. Haynes. Each of
the employment agreements further provide that during the term of employment and
for a period of six months, two years in the case of Mr. Haynes, after
termination of employment, the employee will not, subject to certain
limitations, compete with the Company.
In connection with the Acquisition and the execution of employment
agreements, AGI refinanced debts owed to Mr. McPherson and Mr. Whitley. The
approximately $251,000 owed to each of Mr. McPherson and Mr. Whitley under loans
originally made in 1993 have been repaid since the Acquisition. A contingent
payment due to each in respect of their notes, $150,600, was converted into
30,120 Common Shares of the Company and two-year warrants to acquire 15,060
Common Shares at an exercise price of C$6.75 per share during the first year
following grant and C$7.75 during the second year. Under their amended notes,
Mr. McPherson and Mr. Whitley each have the right, prior to the first
anniversary of the closing of the Acquisition, to require the Company to
repurchase, in whole or in part, these shares and warrants for $150,600.
Also in connection with the Acquisition, the Company entered into a
two-year consulting and non-competition agreement with Thomas E. Dooley, Jr. Mr.
Dooley is the founder of AGI and currently serves as Chairman of the Board of
Directors of AGI. See " -- Directors, Executive Officers and Certain Significant
Employees." Pursuant to the consulting and noncompetition agreement, Mr. Dooley
provides AGI with consulting services with respect to manufacturing operations,
marketing and sales activities and relationships with licensors as requested by
the Chief Executive Officer or Board of Directors of AGI. The Company pays Mr.
Dooley an annual fee of $100,000 for services provided under the consulting
agreement, and Mr. Dooley is eligible for an annual bonus based, in part, on the
performance of AGI. In connection with the Acquisition, Mr. Dooley was issued an
option, which expires May 28, 1999, to purchase 50,000 Common Shares at an
exercise price of $5.00 per Common Share. Mr. Dooley will also receive
additional cash consideration in the Acquisition in an amount currently
estimated at $700,000 to be paid in four equal quarterly installments beginning
September 16, 1997, subject to prepayment upon the completion of a securities
offering by the Company with gross proceeds to the Company in excess of
$12,000,000. See "The Acquisition and Related Financing" and "Use of Proceeds."
Mr. Dooley has agreed for a period of two years not to compete with AGI, solicit
business of customers or clients of the Company or solicit or offer employment
to employees of the Company.
57
Subject to VSE approval, the Company has entered into a consulting
agreement with Belfinance, the sole beneficial owner of which is Mr. Lloyd, the
Chairman of the Company's Board of Directors. The agreement has a two year term
commencing September 15, 1997. Pursuant to the agreement, Belfinance will
provide AEI consulting services with respect to potential acquisitions and
strategic matters in the golf apparel industry as requested by the Board of
Directors of AEI. For consulting services under the Agreement, AEI will pay
Belfinance $96,000 annually, Belfinance will be eligible for bonuses or
incentive payments and the Company will issue Belfinance options, which vest in
equal installments over two years, to acquire 50,000 Common Shares at an
exercise price of $5.00 per Common Share. In the event of a termination of the
consulting agreement upon a "Change of Control" (as defined in the consulting
agreement) Belfinance is entitled to receive a lump sum cash payment equal to
three times Belfinance's "Cash Compensation" (also as defined in the consulting
agreement), subject to reduction in certain circumstances to preserve favorable
tax treatment to the Company or in connection with other severance payments to
be made by the Company and, for two years following such termination, benefits
substantially similar to those provided to Belfinance for Mr. Lloyd immediately
prior to such termination.
The Company has agreed to retain Robert J. McCammon as a consultant to
assist AGI with its relationship with the National Hockey League. The Company
will retain Mr. McCammon for a three-year term commencing September 1, 1997 and
has agreed with Mr. McCammon to compensate Mr. McCammon at the rate of $30,000
annually. Mr. McCammon is a Director of the Company.
Limitation of Liability and Indemnification of Officers and Directors
The Company Act (British Columbia) permits a company, with the approval
of the British Columbia Supreme Court, to indemnify a director or officer of the
Company in respect of all costs, charges and expenses actually and reasonably
incurred by him in connection with a civil, criminal or administrative action to
which he is made a party by reason of having been a director, provided that he
acted honestly and in good faith and had reasonable grounds for believing that
his conduct was lawful.
The Articles of the Company provide that, subject to the provisions of
the Company Act, the directors shall cause the Company to indemnify its
directors and may cause the Company to indemnify its officers and the directors
of companies in which the Company is a shareholder.
The Company entered into written indemnity agreements with two
directors, J. Christopher Woods and Fiama Walker, in connection with approval of
the Acquisition. Ms. Walker is no longer a director of the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee was established in August 1997. Prior to its
establishment, the entire Board of Directors performed the functions now
delegated to that Committee, and Mr. Haynes, the Chief Executive Officer,
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation.
58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has obtained VSE approval for a bonus of up to 50,676
Common Shares to Belfinance for having extended a $1,000,000 credit to the
Company in order for the Company to meet short term obligations under the escrow
agreement in connection with, and prior to closing of, the Acquisition. The loan
was repaid with proceeds of the private placement of Series A Preferred. The
Board has not yet caused the issuance of such shares. The Company has approved
the payment of a bonus of 47,192 Common Shares to Mr. Lloyd for having made two
short-term loans to the Company prior to and in connection with the Acquisition
and for having personally guaranteed the notes to Mr. Dooley, as agent for the
shareholders of AGI. The amount of the bonus and payment of the bonus is subject
to the Company obtaining approval from the VSE and the shareholders of the
Company. If approved, the Company anticipates that the bonus will be paid in
Common Shares. The Company has entered into a consulting agreement with
Belfinance. See "Management --Employment and Consulting Contracts, Termination
of Employment and Change-in-Control Arrangements." Mr. Lloyd, through
Belfinance, is also a creditor of the Company. As of September 1, 1997, the
principal and interest, at 7% per annum, due was approximately $333,000. The
Company repaid $200,000 during September 1997, with proceeds of the private
placement of Series A Preferred. Mr. Lloyd leases the Dallas, Texas facility to
the Company at no cost on a month to month basis. A lease for the facility is
under negotiation. For having given a personal guarantee of the Westcoast
Debenture, the Company granted Mr. Lloyd 88,500 Common Shares. The Company
intends to apply to the VSE for the transfer of 95,000 Common Shares to Mr.
Lloyd and Mr. Haynes (in equal parts) from Mr. McCammon. These shares are held
in escrow pursuant to the Escrow Agreement and will remain subject to such
agreement.
The Company has approved the payment of a bonus to Mr. Haynes for
having made a short-term loan to the Company prior to and in connection with the
Acquisition and for having personally guaranteed the notes to Mr. Dooley, as
agent for the shareholders of AGI. The amount of the bonus and payment of the
bonus is subject to approval of the VSE and the shareholders of the Company. If
approved, the Company anticipates that the bonus will be paid in Common Shares.
Mr. Haynes has advanced to the Company approximately $126,500. The advances bear
interest, at 10% per annum, and have no specific terms of repayment. For having
given a personal guarantee of the Westcoast Debenture, the Company granted Mr.
Haynes 88,500 Common Shares. The Company intends to apply to the VSE for the
transfer of 95,000 Common Shares to Mr. Lloyd and Mr. Haynes (in equal parts)
from Mr. McCammon. These shares are held in escrow pursuant to the Escrow
Agreement and will remain subject to such agreement.
On September 15, 1995 the Company entered into a three-year Management
Services Agreement with Renaissance Financial Securities Corp. ("Renaissance").
Robert Moody, Jr., a director of SEI, owns approximately twenty percent of the
share capital of Renaissance. Pursuant to that agreement, Renaissance agreed to
provide management advisory, investment banking and financial services to the
Company for $3,000, $4,000 and $5,000 per month during the first, second and
third years of the term of the agreement, respectively, and an option to acquire
60,000 Common Shares at an exercise price of C$3.50 per share. In order to
secure payment of the fees owed to Renaissance under the agreement, Mr. Haynes
pledged warrants to acquire 214,000 Common Shares of the Company in May 1996.
Following such pledge, the Company paid Renaissance $75,000 and terminated the
agreement, and Renaissance released the pledge of Mr. Haynes' warrants.
Between November 1, 1996 and June 16, 1997, Mr. Lloyd, Mr. Haynes and
Mr. Wood, the President of SEI, advanced funds in the following aggregate,
respective amounts: $501,589, $492,534 and $169,918. Using promissory notes as
consideration, KOZ Capital purchased these payables from Messrs. Lloyd, Haynes
and Wood and also purchased payables representing professional fees owed by the
Company and fees owed by the Company to 440458 B.C. Ltd., of which Mr. Woods, a
Director of the Company, is the General Manager. KOZ Capital purchased an
aggregate amount of payables equal to $1,791,048.45, used the same amount to
subscribe for the KOZ Debenture and secured payment of the notes to the
individuals with the Common Shares underlying the KOZ Debenture.
The Company acquired AGI from Mr. Dooley and its minority shareholders
in June 1997. See "The Acquisition and Related Financing." In connection with
the Acquisition, the Company entered into a consulting agreement with Thomas E.
Dooley, Jr., the founder of AGI. Mr. Dooley currently serves as Chairman of the
Board of Directors of AGI. See "Management -- Employment and Consulting
Contracts, Termination of Employment and Change-in-Control Arrangements." The
Company also leases its primary office space, production facility and warehouse
from D&D Development Co., an Arizona general partnership, of which Mr. Dooley
beneficially owns 50%. See "Business -- Facilities." In the event Mr. Dooley
acquires the partnership interests of the other partners of D&D Development Co.,
the rental rate payable under the lease increases from $.45 per square foot to
$.60 per square foot, representing an annual rental increase of approximately
$76,500. Prior to the Acquisition Closing Date, AGI had elected (beginning July
1, 1988)
59
to be treated as an S Corporation under Subchapter S of the Internal Revenue
Code and comparable state tax laws. Distributions of approximately $300,000 and
$725,000 were paid to AGI shareholders in 1994 and 1997, respectively. These
distributions were made to provide funds to AGI shareholders with which to pay
income taxes on the earnings of AGI attributable to them. See "S Corporation
Distributions."
In connection with the Acquisition and the execution of employment
agreements, AGI refinanced debts owed to Mr. McPherson and Mr. Whitley and
issued, to each, 30,120 Common Shares of the Company and two-year warrants to
acquire 15,060 Common Shares at an exercise price of C$6.75 per share during the
first year following issuance and C$7.75 during the second year in connection
with a contingent payment due to each in respect of their notes. See "Employment
and Consulting Contracts, Termination of Employment and Change-in-Control
Arrangements."
Mr. Wood, the President of SEI, has advanced to the Company
approximately $106,000. The advances bear interest at ten percent (10%) per
annum and have no specific terms of repayment.
The Company has agreed to retain Mr. McCammon as a consultant. Mr.
McCammon is a Director of the Company. See "Management -- Employment and
Consulting Contracts, Termination of Employment and Change-in-Control
Arrangements."
The Company entered into an agreement (the "TradeCo Agreement") in
January 1997 with TradeCo Global Securities, Inc. ("TradeCo"), of which Mr.
Lewis, a Director of the Company, is the President. Due to an oversight, the
Company did not submit the TradeCo Agreement to the VSE for approval within the
required time period, and, accordingly, the Company believes that it may be
without authority to perform under the TradeCo Agreement. The Company has agreed
with TradeCo to enter into a substantially similar agreement, subject to VSE
approval. If approved, TradeCo would provide financial advisory, corporate
finance, merger and acquisition and capital raising advice for a monthly
retainer of $5,000 (subject to increase to not more than $10,000 following a
closing of a public offering of Common Shares) for a one year period. In
addition to the monthly retainer, TradeCo will be eligible under the agreement
to receive fees, in the form of cash, Common Shares or warrants to purchase
Common Shares, upon completion of new financings it initiates. TradeCo has
received from a third party Common Shares and warrants to purchase Common Shares
in connection with financing of the Acquisition. See "The Acquisition and
Related Financing." The Company has also agreed to nominate a nominee of TradeCo
for election to the Company's Board of Directors, Mr. Lloyd and Mr. Haynes have
agreed to vote their shares in favor of such nominee and the Company has agreed
to appoint that nominee to the Compensation Committee of the Board of Directors
and has also agreed to indemnify TradeCo on terms yet to be decided.
The Company entered into a management contract, which has not been
reduced to writing, pursuant to which 440458 B.C. Ltd., a British Columbia
company ("440458 B.C. Ltd."), is entitled to receive compensation for the
performance of management services. For rendering such services, 440458 B.C.
Ltd. is paid C$2,500 per month, reasonable related out-of-pocket expenses plus
applicable taxes. The sole beneficial owner of the shares of 440458 B.C. Ltd. is
a person related to J. Christopher Woods, the Secretary and a Director of the
Company.
In connection with the Acquisition, the Company paid a finder's fee of
131,758 Common Shares to Sportswear Investors, LLC. Gary McCauley, a Director of
AGI, is a member of Sportswear Investors, LLC. See "The Acquisition and Related
Financing."
60
PRINCIPAL AND SELLING SHAREHOLDERS
The following tables set forth certain information regarding the
beneficial ownership of the Company's Common Stock as of September 30, 1997 by
(i) each director, (ii) each named executive officer in the Summary Compensation
Table, (iii) each person who is known by the Company to own beneficially 5% of
more of the Common Stock and (iv) all Directors and executive officers as a
group. Unless otherwise indicated, each person has sole voting and dispositive
power over the shares indicated as owned by such person, subject to community
property laws where applicable. The address of each person or entity listed is
9319 North 94th Way, Scottsdale, Arizona 85258, except as otherwise indicated.
Shares beneficially Shares beneficially
owned prior to the owned after the
Offering Offering (1)
-------------------- -------------------
Name and Address of Beneficial Owner Number Percent Number Percent
- ------------------------------------ ------ ------- ------ -------
Louis B. Lloyd (2) ................................. 1,028,443 20.40% 1,028,443 12.79%
L. Steven Haynes (3) ............................... 428,170 9.61 428,170 5.74
James E. Miles (4) ................................. 85,361 1.96 85,361 1.16
Robert J. McCammon (5) ............................. 124,600 2.86 124,600 1.69
J. Christopher Woods (6) ........................... 5,000 * 5,000 *
James W. Lewis (7) ................................. 834,680 16.93 834,680 10.53
Natale Bosa (8) .................................... 60,555 1.39 60,555 *
Westcoast Golf Promotions Ltd, (9) ................. 2,100,000 32.62 2,100,000 22.25
Suite 500, 1380 Burrard Street
Vancouver, British Columbia, Canada
Thomas E. Dooley, Jr. (10) ......................... 1,223,000 21.99 1,223,000 14.29
12401 East Saddlehorn
Scottsdale, Arizona 85259
Geovest Capital Partners, L.P. (11) ................ 412,000 8.67 412,000 5.32
666 Fifth Avenue, 24th Floor
New York, New York 10103
All Directors and executive officers
as a group (12 persons) (12) ..................... 2,913,169 48.45 2,913,169 32.32
- --------------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." If such option is exercised in full, Mr. Dooley will
beneficially own 773,000 Common Shares, or 9.08%, following this
offering.
(2) Includes 458,075 Common Stock underlying options and warrants to
purchase Common Shares that are exercisable within 60 days (245,000 of
which are held by Belfinance). Also includes 245,000 Common Shares into
which shares of Series A Preferred held by Belfinance may be converted
within 60 days.
(3) Includes 118,720 Common Shares underlying options and warrants to
purchase Common Shares that are exercisable within 60 days.
(4) Includes 12,407 Common Shares underlying options and warrants to
purchase Common Shares that are exercisable within 60 days.
(5) Includes 20,000 Common Shares underlying options and warrants to
purchase Common Shares that are exercisable within 60 days. Also
includes 95,000 Common Shares held in escrow which Mr. McCammon has
agreed to transfer to Mr. Lloyd and Mr. Haynes, in equal parts, subject
to VSE approval. See "Certain Relationships and Related Transactions"
and "Description of Securities - Performance Shares."
(6) Includes 5,000 Common Shares underlying options and warrants to
purchase Common Shares that are exercisable within 60 days.
(7) Includes 160,000 Common Shares into which shares of Series A Preferred
may be converted within 60 days. Also includes 371,000 Common Shares
underlying options and warrants to purchase Common Shares that are
exercisable within 60 days. The 371,000 Common Shares includes warrants
that are exercisable within 60 days to acquire 206,000 Common Shares
owned by Geovest Capital Partners, L.P. ("Geovest"), of which Mr. Lewis
is an investor and Manager. Also includes 206,000 Common shares owned
by Geovest. Mr. Lewis disclaims beneficial ownership of shares owned by
Geovest except to the extent of his pecuniary interest therein arising
from his partnership intrest. Also includes 37,680 Common Shares owned
by TradeCo Global Securities, Inc., of which Mr. Lewis is the Chairman.
Mr. Lewis disclaims beneficial ownership of such shares. Also includes
30,000 Common Shares and warrants to purchase 30,000 Common Shares held
by Investarit AG, of which Mr. Lewis is a shareholder. Mr. Lewis
disclaims beneficial ownership of such shares. See "Certain
Relationships and Related Transactions."
(8) Includes 18,818 Common Shares underlying options and warrants to
purchase Common Shares that are exercisable within 60 days. Mr. Lewis
disclaims beneficial ownership of such shares
(9) Includes units underlying a convertible debenture, which is convertible
within 60 days into 1,050,000 Common Shares and warrants, which are
also exercisable within 60 days, for 1,050,000 Common Shares.
(10) Includes 1,233,000 Common Shares underlying options and warrants to
purchase Common Shares and instruments convertible into Common Shares
within 60 days. See "The Acquisition and Related Financing."
(11) Includes warrants to acquire 206,000 Common Shares that are exercisable
within 60 days.
(12) Includes 1,003,140 Common Shares underlying options and warrants to
purchase Common Shares that are exercisable within 60 days and 405,000
Common Shares into which shares of Series A Preferred may be converted
within 60 days.
61
DESCRIPTION OF SECURITIES
The following description of the Company's capital stock is a summary
only and is qualified in its entirety by reference to the Company's Memorandum
and Articles, copies of which are filed as exhibits to the Registration
Statement of which this prospectus is a part, and by reference to British
Columbia law under which the Company is incorporated.
General
The Company was incorporated in 1986. Since that time it has effected
two consolidations, or reverse-splits, of its common shares, on December 17,
1991 and June 13, 1997, in each case on the basis of 5 pre-consolidation common
shares for 1 post-consolidation common share. The current authorized capital of
the Company consists of 300,000,000 Common Shares without par value (the "Common
Shares") and 30,000,000 Preferred shares without par value, issuable in series
(the "Preferred Shares"). The Preferred Shares are issuable at any time and from
time to time in one or more series, each series consisting of such number of
shares and, subject to the provisions attached to the Preferred Shares as a
class, having such designation and such rights, privileges, restrictions and
conditions attaching thereto as may be determined by the directors of the
Company. The Company has designated 10,000,000 Preferred Shares as Convertible
Preferred Shares Series A (the "Series A Preferred").
As at September 30, 1997, there were 4,338,365 Common Shares (the
Company has received consideration for and is committed to issue, but has not
yet issued, 630,156 of such shares) and 5,730,000 Series A Preferred Shares
(certificates for which have not yet been delivered) issued and outstanding.
Common Shares
The holders of Common Shares are entitled to notice of and to attend at
all meetings of shareholders and to one vote for each share held on all matters
to be voted on by shareholders at such meetings (other than meetings at which
only holders of another class or series of shares are entitled to vote). Subject
to the rights of the holders of the Preferred Shares, the holders of Common
Shares are entitled to receive, pro rata with all other holders of Common
Shares, such dividends as may from time to time be declared in the discretion of
the directors of the Company and are entitled to receive the remaining assets of
the Company in the event of the Company's liquidation, dissolution or
winding-up.
The holders of Common Shares are not entitled to pre-emptive,
subscription or conversion rights, and there are no redemption or sinking fund
provisions applicable to the Common Shares. The holders of Common Shares are not
subject to further calls or assessments by the Company.
Performance Shares
Pursuant to an escrow agreement dated August 4, 1992, among the
Company (then Fair Resources Group Inc.), Montreal Trust Company and certain of
it shareholders (the "Escrow Agreement"), the Company issued 456,992 common
"performance shares" (the "Performance Shares") to certain of its founders and
future principal stockholders. The Performance Shares were issued pursuant to
Local Policy #3-07 of the British Columbia Securities Commission (the "BCSC")
and Policy 19 of the VSE.
The Performance Shares include 25,500 shares which are the remaining
portion of 750,000 shares issued pursuant to an escrow agreement dated December
22, 1988, among the Company (then Fair Harbour Mining Corporation), C. Phillip
Yeandle, and Montreal Trust Company of Canada (the "Original Performance
Shares"). On October 1, 1991, C. Phillip Yeandle transferred the remaining
25,500 Original Performance Shares to Franco s. Cecconi, another then principal
of the Company. Such shares were rolled into the Escrow Agreement in connection
with the acquisition of SEI by Fair Resources Group Inc. in August 1992.
The Performance Shares are held in escrow to be released as the Company
achieves positive operating cash flow on a cumulative basis. The holders of
Performance Shares will be entitled to a pro rata release from escrow on the
basis of one share to be released for each $0.1345 of cash flow to the Company,
calculated as a performance share percentage of 31% of the issued capital of the
Company and an earn-out factor of .3844, subject to approval by BCSC and the
VSE. Performance Shares are permitted to be released on an annual basis.
A total 305,000 of these shares have been returned to treasury and none
of the remaining Performance Shares have been released from escrow, all as a
result of a failure by the Company to meet the performance criteria. The current
total of Performance Shares held in escrow is 151,992. Once released, the
Performance Shares will be freely tradeable in the province of British Columbia.
If any of the 25,500 Original Performance Shares remain unreleased from
the escrow on December 22, 1998, they will be cancelled on such date. Any of the
remaining 126,492 Performance Shares not yet released will be cancelled on
August 4, 2002.
Preferred Shares
Voting. The holders of Series A Preferred shares are not entitled to
notice of or to attend or to vote at any meeting of the shareholders of the
Company, except to approve amendments to the terms of the Series A Preferred
shares or otherwise as required by law. The Series A Preferred shares will rank
on a parity with the Preferred Shares of every other series and will be entitled
to preference over the Common Shares and any other shares ranking junior to the
Series A Preferred with respect to the payment of dividends and the distribution
of assets in the event of the liquidation, dissolution or winding up of the
Company.
Dividends. For a period of 5 years from the date of issuance thereof,
shares of the Series A Preferred shares are entitled to a fixed, cumulative
preferential cash dividend of 12% per annum on the subscription price therefor.
Conversion. The holders of Series A Preferred shares have the right,
for a period of 5 years from their issuance, to convert their Series A Preferred
shares (including accrued and unpaid interest) into Common Shares, on a one for
one basis, without further payment at any time prior to the first anniversary of
their issuance, or with a payment of $1.25, $2.50, $3.75 or $5.00 in the second,
third, fourth, or fifth year following their issuance, respectively.
Retraction. To the extent the Company completes a sale of its
securities by way of an initial public offering through the facilities of the
National Association of Securities Dealers Automatic Quotation System, the
holders of the Series A Preferred shares shall have the right to retract the
Series A Preferred shares at the subscription price thereof together with
accrued but unpaid
62
dividends thereon, but only to the extent that such retraction can be funded
through net proceeds of such initial public offering in excess of US$8,000,000.
Redemption. The Company may at any time redeem the whole or part of the
issued and outstanding Series A Preferred shares upon payment of the sum of
C$6.75 per share together with accrued but unpaid dividends thereon.
Restrictions. Unless otherwise approved by a special resolution of the
holders of the Series A Preferred shares, the Company may not declare or pay any
dividends on the Common Shares, redeem, purchase or make any capital
distribution on the Common Shares or issue any additional Series A Preferred
shares or other shares ranking in priority to or pari passu with the Series A
Preferred shares in respect of the payment of dividends or the return of
capital.
Common Share Purchase Warrants
The Company has the following warrants outstanding as of September 30,
1997:
Number of Common
Shares Issuable
Maturity Date Exercise Price Upon Exercise
- ------------------- ---------------------------------------------------------------------------------- -------------------
July 11, 1998 C$6.25 until July 11, 1997; C$7.50 from July 12, 1997 until maturity 119,400
October 16, 1998 C$5.80 until October 16, 1997; C$6.65 from October 17, 1997 until maturity 210,000
November 30, 1998 C$6.75 until November 30, 1997; C$8.00 from December 1, 1997 until maturity 49,952
May 16, 1999 C$4.50 until May 16, 1998; C$5.20 from May 17, 1998 until maturity 75,889
June 16, 1999 C$6.75 until June 16, 1998; C$8.00 from June 17, 1998 until maturity 40,120
June 16, 1999 C$4.00 until June 16, 1998; C$4.60 from June 17, 1998 until maturity 78,627
June 16, 1999 C$4.00 until June 16, 1998; C$4.60 from June 17, 1998 until maturity 40,000
June 16, 1999 C$5.00 until June 16, 1998; C$5.75 from June 17, 1998 until maturity 120,000
June 16, 1999 C$5.35 until June 16, 1998; C$6.15 from June 17, 1998 until maturity 60,000
July 18, 1999 C$5.91 until July 18, 1998; C$6.95 from July 19, 1998 until maturity 16,000
September 2, 1999 C$4.00 until September 2, 1998; C$4.60 from September 3, 1998 until maturity 115,344
May 7, 2002 $5.00 323,426
May 7, 2002 $5.00 1,078,086
May 7, 2002 $5.00 1,078,086
June 16, 2002 C$7.20 until June 16, 1998; C$8.40 from June 17, 1998 until June 16, 1999; C$9.70 946,000
from June 17, 1999 until June 16, 2000; C$10.85 from June 17, 2000 until June 16,
2001; C$12.10 from June 17, 2001 until maturity
July 18, 2002 C$7.20 until July 18, 1998; C$8.40 from July 19, 1998 until July 18, 1999; C$9.70 200,000
from July 19, 1999 until July 18, 2000; C$10.85 from July 19, 2000 until July 18,
2001; C$12.10 from July 19, 2001 until maturity
Convertible Debentures
The Company has issued two convertible debentures, one in the amount of
$1,791,048.45 (the "KOZ Debenture") to KOZ Capital Corp., a Cayman Islands
corporation, and one in the amount of C$4,200,000 (the "Westcoast Debenture") to
Westcoast Golf Promotions Ltd., a Canadian corporation. The KOZ Debenture bears
interest at 15% per annum and is due in June 1998. The KOZ Debenture is
convertible into 714,454 Common Shares and two-year warrants to purchase an
additional 714,454 Common Shares at a price of C$4.00 per Common Share in the
first year and C$4.60 in the second year. The Westcoast Debenture bears interest
at 15% per annum and matures in June 1998. The Westcoast Debenture is
convertible into 1,144,500 Common Shares and two-year warrants to purchase an
additional 1,144,500 Common Shares at a price of C$4.00 per Common Share in the
first year and C$4.60 in the second year. In connection with the Westcoast
Debenture, the Company granted each of Mr. Lloyd and Mr. Haynes, Directors of
the Company, 88,500 Common Shares as a bonus for their having guaranteed the
Westcoast Debenture and a finder's fee in the form of 177,000 Common Shares to
Eron Mortgage Corp. See "Certain Relationships and Related Transactions."
63
Representatives' Warrants
The Company has also agreed to sell to the Representatives warrants to
purchase up to 300,000 Common Shares at a price of $0.001 per warrant (the
"Representatives' Warrants"). The Representatives' Warrants will be exercisable
for a period of four years, commencing one year after the date of this
prospectus, at an initial per share exercise price equal to 120% of the price to
the public set forth on the cover page of this prospectus. The Representatives'
Warrants are not redeemable by the Company under any circumstances. Neither the
Representatives' Warrants nor the Common Shares issuable upon exercise thereof
may be transferred, assigned or hypothecated until one year from the date of
this prospectus, except that they may be assigned, in whole or in part, to any
successor, officer, director, member or partner of the Representatives.
The holders of the Representatives' Warrants will have no voting,
dividend or other rights as shareholders of the Company unless and until the
exercise of the Representatives' Warrants. The number of securities deliverable
upon any exercise of the Representatives' Warrants or its underlying securities
and the exercise price of the Representatives' Warrants are subject to
adjustment to protect against any dilution upon the occurrence of certain
events, including issuance of stock dividends, stock splits, subdivision or
combination of outstanding stock and reclassification of stock.
The Company has agreed with the Representatives that if, during the
four-year period commencing one year following the date of this prospectus, the
Company registers any of its Common Shares for sale pursuant to a registration
statement (with the exception of Form S-4, Form S-8 or other similar form), it
will use its best efforts, upon request of any of the holders of the
Representatives' Warrants and/or the underlying shares, to include such
securities as a part of the registration statement. The Company will bear all
the costs, except underwriting discounts and the Representatives' legal fees,
for one piggyback registration. In addition, the Company and the Representatives
have agreed that, during the five-year period commencing one year after the date
of this prospectus, the holders of a majority of the Representatives' Warrants
shall have the right to require the Company to prepare and file one registration
statement with respect to a public offering of the Common Stock underlying the
Representatives' Warrants. Such a registration statement shall be kept effective
for a period of up to 120 days, and the Company shall bear all of the costs,
exclusive of underwriting discounts and selling commissions, of one such demand
registration.
Registration Rights
In connection with the Acquisition, the Company entered into a
Registration Rights Agreement with Thomas E. Dooley, Jr., as agent for the
shareholders of AGI. The registration agreement grants Mr. Dooley, as agent, the
right to a demand registration, an additional demand registration if at the time
of the second request the Common Shares may be registered on Commission Form S-3
and piggyback registration rights in the event the Company proposes to register
any of its securities or is required to register securities of any other
shareholders pursuant to registration rights. Registrable securities under the
registration agreement include Common Shares issued in the Acquisition and
Common Shares underlying convertible notes or issuable upon exercise of
warrants. All fees and expenses of such registration will be borne by the
Company. The Company is required to use its best efforts to effect demand
registrations, subject to certain conditions and limitations.
The Company has granted registration rights covering 2,479,598 Common
Shares, subject to adjustment, underlying warrants issued in connection with the
LaSalle Acquisition Loan, the Imperial Acquisition Loan and the Cruttenden
Bridge Acquisition Loan. See "The Acquisition and Related Financing." The
Company granted the right to two demand registrations to Imperial Bank and one
demand registration to each of LaSalle Business Credit, Inc. and Cruttenden Roth
Bridge Fund, L.L.C. The Company also granted piggyback registration rights to
each of these three lenders. All fees and expenses of such registration will be
borne by the Company. The Company is required to use its best efforts to effect
demand registrations, subject to certain conditions and limitations. The Company
has agreed to register the Representatives' Warrants and underlying Common
Shares, subject to certain limitations. See "-- Representatives' Warrants." The
Company also agreed to register Common Shares issued to TradeCo under the
Company's financial advisory agreement with TradeCo upon a public offering. See
"Certain Relationships and Related Transactions."
Transfer Agent and Registrar
Montreal Trust Company of Canada is the transfer agent and registrar
for the Company's Common Shares.
64
CERTAIN INCOME TAX CONSIDERATIONS
Certain Canadian Federal Income Tax Considerations
The following summary presents the principal Canadian federal income
tax consequences of acquiring, holding and disposing of Common Shares generally
applicable to U.S. Holder (as defined below) who purchases Common Shares
pursuant to this offering. This summary is based on the current provisions of
the Income Tax Act (Canada) (the "Tax Act") and the regulations thereunder, all
specific proposals to amend the Tax Act and the regulations thereunder that have
been publicly announced by the Minster of Finance (Canada) prior to the date
hereof and counsel's understanding of the current published administrative
practices of Revenue Canada. This summary does not take into account any other
changes in the law, whether by judicial, governmental or legislative decision or
action, nor does it take into account provincial, territorial or foreign laws.
This summary is of a general nature only and is not intended to be, and should
not be construed to be, legal or tax advice to any prospective investor.
Prospective investors should consult with their own tax advisors with respect to
their own particular circumstances.
The Tax Act contains recently enacted rules (the "mark-to-market
rules") relating to securities held by certain financial institutions. This
summary does not take into account these mark-to-market rules and Holders that
are "financial institutions" for the purposes of these rules should consult
their own tax advisors.
For the purposes of this discussion, a "U.S. Holder" means a person
who, throughout the period during which such holder owns the Common Shares, (i)
is not resident in Canada for purposes of the Tax Act, (ii) is a resident of the
United States for purposes of the Canada-United States Income Tax Convention
(the "Convention"), (iii) holds the Common Shares as capital property for
purposes of the Tax Act, (iv) deals at arm's length with the Company, (v) does
not use or hold, and is not deemed to use or hold, the Common Shares in, or in
the course of, carrying on a business or providing independent personal services
in Canada and (vi) does not own (and is not treated as owning) 10% or more of
the outstanding voting shares of the Company.
Dividends paid or credited on the Common Shares to a U.S. Holder who is
the beneficial owner of such dividends will generally be subject to Canadian
non-resident withholding tax at the rate of 25%. Under the Convention, the rate
of such withholding tax will generally be limited to 15%.
A U.S. Holder will not be subject to tax under the Tax Act in respect
of gains realized on the disposition or deemed disposition (including a deemed
disposition on death) of the Common Shares unless such shares are "taxable
Canadian property" (within the meaning of the Tax Act) to such holder at the
time of the disposition. The Common Shares will generally not constitute taxable
Canadian property to a U.S. Holder unless, at any time during the five-year
period immediately preceding the disposition or deemed disposition of the Common
Shares, the U.S. Holder or persons with whom such holder did not deal at arm's
length or any combination thereof owned or had an interest in or option to
acquire not less than 25% of the issued shares of any class or series of the
capital stock of the Company. Even if the Common Shares are "taxable Canadian
property" to a U.S. Holder, any gain realized
65
by such holder on a disposition of such shares will generally be exempt from
Canadian tax under the Convention provided that at the time of the disposition
the Common Shares do not derive their value primarily from real property
situated in Canada.
United States Federal Income Tax Considerations
This summary is based on the United States Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations promulgated thereunder and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change thereby changing the United
States federal income tax considerations discussed below. This summary does not
address all aspects of United States federal income taxation that may be
relevant to a particular United States Holder based on such United States
Holder's particular circumstances and does not address foreign, state, local or
other tax consequences. In particular, the following summary does not address
the tax treatment of United States Holders who are broker-dealers or who own,
actually or constructively, 10% or more of the Company's outstanding voting
shares, and other certain United States Holders (including, but not limited to,
insurance companies, tax-exempt organizations, financial institutions, S
corporations, mutual funds, small business investment companies, regulated
investment companies, and persons subject to the alternative minimum tax) who
may be subject to special rules not discussed below. This summary applies only
to United States Holders who hold Common Shares as capital assets within the
meaning of section 1221 of the Code, and does not cover all aspects of United
States federal taxation that may be relevant to a purchaser in light of his or
her particular circumstances. Furthermore, estate and gift tax consequences are
not discussed herein. No ruling from the IRS will be requested with respect to
any of the matters discussed herein.
Dividends. For United States federal income tax purposes, a United
States Holder of Common Shares generally will realize, to the extent of the
Company's current and accumulated earnings and profits (as determined for United
States federal income tax purposes), ordinary income (treated as foreign source
dividend income) on the receipt of cash dividends on the Common Shares equal to
the United States dollar value of such dividends on the date of receipt (based
on the exchange rate on such date). The amount realized will not be reduced by
the amount of any Canadian withholding tax (see discussion below regarding
claiming the amount of Canadian tax withholding as a deduction or foreign tax
credit). To the extent, if any, that distributions made by the Company to a
United States Holder of Common Shares exceed the current and accumulated
earnings and profits of the Company, such distributions will be treated as a
tax-free return of capital to the extent of such United States Holder's adjusted
basis for such Common Shares, and to the extent in excess of adjusted basis, as
capital gain, thus reducing the United States Holder's adjusted tax basis in
such Common Shares and increasing the amount of gain (or reducing the amount of
loss) which may be realized by such United States Holder upon a sale or exchange
of the Common Shares. The amount of any distribution which exceeds the United
States Holder's adjusted basis in the Common Shares will be long-term capital
gain if the United States Holder's holding period for such Common Shares exceeds
eighteen months. If the Holder is an individual taxpayer, such long-term capital
gain will be subject to a maximum tax rate of 20%. If an individual Holder has
held Common Shares for eighteen months or less, but more than one year, gains on
the sale or exchange of such stock will be subject to a maximum tax rate of 28%.
Dividends paid on the Common Shares will not be eligible for the dividends
received deduction available in certain cases to United States corporations. In
the case of foreign currency received as a dividend that is not converted by the
recipient into United States dollars on the date of receipt, a United States
Holder will have a tax basis in the foreign currency equal to its United States
dollars value on the date of receipt. Any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including an
exchange for United States dollars, will be ordinary income or loss. Subject to
certain requirements and limitations imposed by the Code, a United States Holder
may elect to claim the Canadian tax withheld or paid with respect to dividends
on the Common Shares either as a deduction or as a foreign tax credit against
the United States federal income tax liability of such United States Holder. In
general, a United States Holder may utilize foreign tax credits only to the
extent of the United States income tax attributable to such holder's foreign
source income, which foreign source income would include any dividends paid by
the Company but generally would not include any gain realized upon a disposition
of Common Shares. The requirements and limitations imposed by the Code with
respect to the foreign tax credit are complex and beyond the scope of this
summary, and consequently prospective purchasers of Common Shares should consult
with their own tax advisers to determine whether and to what extent they would
be entitled to such credit.
Sale or Exchange of Common Shares. For United States federal income tax
purposes, upon a sale or exchange of a Common Share, a United States Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale or exchange and the tax basis of such Common Share. If a Common Share
is held as a capital asset, any such gain or loss will be capital gain or loss,
and will be long-term capital gain or loss if the United States Holder has held
such Common Share for more than eighteen months at the time of the sale or
exchange. In the case of an individual taxpayer, such gain would be subject to a
maximum tax rate of 20%. If an individual
66
Holder holds Common Shares for 18 months or less, but more than one year, gains
on the sale or exchange of stock will be subject to a maximum tax rate of 28%.
The gain, if any, will generally be United States source income. If the amount
realized on such sale is not denominated in United States dollars, the amount
realized will be equal to the United States dollar value thereof determined at
the spot rate on the date of the sale or exchange.
Backup Withholding. Under section 3406 of the Code and applicable
United States Treasury regulations, a non-corporate U.S. Holder of Common Shares
may be subject to backup withholding at the rate of 31% with respect to
"reportable payments," which include dividends paid on, or the proceeds of a
sale, exchange or redemption of, the Common Shares. The payor will be required
to deduct and withhold the prescribed amounts if (i) the payee fails to furnish
a taxpayer identification number ("TIN") to the payor in the manner required,
(ii) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (iii) there has been a "notified payee underreporting" described in
section 3406(c) of the Code or (iv) there has been a failure of the payee to
certify under penalty of perjury that the payee is not subject to withholding
under section 3406(a)(1)(C) of the Code. As a result, if any one of the events
listed above occurs, the Company will be required to withhold an amount equal to
31% from any dividend payment made with respect to the Common Shares to a
non-corporate U.S. Holder. Amounts paid as backup withholding do not constitute
an additional tax and will be credited against the U.S. Holder's United States
federal income tax liabilities, so long as the required information is provided
to the IRS. The Company will report to the U.S. Holders of the Common Shares and
to the IRS the amount of any "reportable payments" for each calendar year and
the amount of tax withheld, if any, with respect to payment on those securities.
Passive Foreign Investment Company ("PFIC"). Shareholders of a PFIC
must pay an interest charge on the portion of any "excess distributions" of the
PFIC allocable to prior years, unless an election has been made by the
shareholder and the PFIC to treat the PFIC as a qualified electing fund ("QEF").
An excess distribution includes (1) all gains from dispositions of PFIC stock,
whether actual or deemed, and whether or not the disposition would ordinarily be
subject to a nonrecognition provision of the Code, and (2) the amount by which
the current year's actual distributions exceed 125% of the average distributions
over the prior three years. The excess distributions are allocated to prior
years during which the corporation was a PFIC, are taxed at the highest marginal
rate in effect for such years and are subject to an interest charge. If the
shareholder has made an election to treat the PFIC as a QEF, the shareholder
generally will be treated as receiving an annual distribution of its share of
the PFIC's earnings and profits, classified as either ordinary income or capital
gain, depending on the underlying income of the PFIC. A foreign corporation will
be characterized as a PFIC if either (1) 75% or more of its gross income is
passive; or (2) the average percentage of assets (as determined under the Code)
held by such corporation during the taxable year which produced passive income
or was held for the production of passive income is at least 50%. For both tests
look-through rules apply such that (1) where a foreign corporation directly or
indirectly owns 25% or more (by value) of the stock of another corporation (the
subsidiary) the assets and income of the subsidiary are treated as owned by the
foreign corporation for purposes of determining PFIC status; (2) dividends,
interest, rents, and royalties received from related persons and the assets to
which such payments relate, are characterized based upon the income of the
related person; and (3) if a foreign corporation owns at least 25% of the stock
of a U.S. corporation then any stock held by the U.S. corporation in a U.S. C
corporation, which is not a regulated investment company or a REIT, is treated
as a nonpassive asset, and the income from the stock is treated as nonpassive
income, when attributed to the foreign corporation for purposes of determining
PFIC status. Under recently enacted tax legislation, a PFIC will not be treated
as such with respect to any shareholders' holding period after December 31, 1997
during which the shareholder is subject to the controlled foreign corporation
rules discussed below. In addition, a shareholder of a PFIC may now make a
mark-to-market election for marketable PFIC stock. If such an election is made,
the shareholder includes in income each year an amount equal to the excess, if
any, of the fair market value of the PFIC stock as of the close of the tax year
over the shareholder's adjusted basis in the stock. If the adjusted basis of
such stock exceeds the fair market value of the stock as of the close of the
taxable year, the shareholder will be allowed a deduction for such taxable year
equal to the lesser of (i) the amount of such excess, or (ii) "unreserved
inclusions." "Unreserved inclusions" means the excess, if any, of the
mark-to-market gains for the stock included by the shareholder for earlier tax
years over the mark-to-market losses for the stock that were allowed as
deductions for earlier tax years. The Company intends to conduct its business in
the future in such a manner that its income and assets will be such that it will
continue not to constitute a PFIC.
Controlled Foreign Corporation ("CFC"). If a U.S. person owns directly
or indirectly 10% or more of the voting power of all classes of stock entitled
to vote of a CFC, such person is taxed on the subpart F income (generally,
passive income (defined below), certain income from transactions with related
parties and certain income from shipping, oil and insurance activities) of such
corporation in the year in which it is earned whether or not such amounts are
actually distributed. A CFC is a foreign corporation
67
more than 50% of the stock of which (by vote or value) is owned directly or
indirectly by U.S. persons who each own 10% or more of the voting power of all
classes entitled to vote. Passive income generally includes: (1) interest (or
income equivalent thereto), dividends, royalties, rents, and annuities; (2) net
gains from the sale or exchange of property which gives rise to any of the above
types of income or does not give rise to income; (3) net gains from the sale or
exchange of an interest in a partnership, trust or REMIC; and (4) net gains from
commodities or foreign currency transactions. The Company is not a CFC and does
not believe that it will become a CFC after this offering.
Personal Holding Companies. A non-United States corporation may be
classified as a personal holding company (a "PHC") for United States federal
income tax purposes if both of the following two tests are satisfied: (i) if at
any time during the last half of the Company's taxable year, five or fewer
individuals (without regard to their citizenship or residency) own or are deemed
to own (under certain attribution rules) more than 50% of the stock of the
corporation by value (the "PHC Ownership Test") and (ii) such non-United States
corporation receives 60% or more of its United States related gross income, as
specifically adjusted, from certain passive sources such as dividends and
royalty payments (the "PHC Income Test"). Such a corporation is taxed (currently
at a rate of 39.6%) on certain of its undistributed United States source income
(including certain types of foreign source income which are effectively
connected with the conduct of a United States trade or business) to the extent
amounts at least equal to such income are not distributed to shareholders. The
Company does not believe that the PHC Ownership Test is currently satisfied, nor
that it will be satisfied after this offering. While there can be no assurance
that the Company will fail to satisfy the PHC Income Test, the Company does not
believe that the PHC Income Test is currently satisfied, nor that it will be
satisfied after this offering.
Foreign Personal Holding Companies. A non-United States corporation
will be classified as a foreign personal holding company (a "FPHC") for U.S.
federal income tax purposes if both of the two following tests are satisfied:
(i) if at any time during the tax year five or fewer individuals who are United
States citizens or residents own or are deemed to own (under certain attribution
rules) more than 50% of all classes of the corporation's stock measured by
voting power or value and (ii) at least 60% (50% in later years) of the
corporation's gross income (regardless of source), as specifically adjusted, is
Foreign Personal Holding Company Income (as that term is defined in the Code).
If such a corporation is classified as an FPHC, a portion of its "undistributed
foreign personal holding company income" (as defined for United States federal
income tax purposes) would be imputed to all of its shareholders who are U.S.
Holders on the last day of the corporation's taxable year, or, if earlier, the
last day on which it is classifiable as an FPHC. Such income would be taxable as
a dividend, even if no cash dividend is actually paid. U.S. Holders who dispose
of their shares prior to such date would not be subject to tax under these
rules. In addition, each United States citizen or resident who is an officer,
director or 10% shareholder of the FPHC is required to file with his or her
income tax return an information return on Form 5471, Information Returns of
United States Persons With Respect to Certain Foreign Corporations (along with
applicable schedules). The Company is not an FPHC and believes that it will not
be classified as an FPHC after this offering.
Foreign Investment Company ("FIC"). A shareholder of an FIC must treat
as ordinary income any gain on the sale of FIC stock to the extent of such
shareholder's ratable share of the FIC's earnings and profits, where such gain
would otherwise be long-term capital gain. An FIC is any foreign corporation (1)
registered under the Investment Company Act of 1940, or (2) engaged primarily in
the business of investing, reinvesting, or trading in securities, commodities or
any interest in securities or commodities during any year in which 50% or more
of its stock (by vote or value) is held, directly or indirectly, by United
States persons. The PFIC rules were enacted after the FIC rules, but did not
repeal the FIC provisions. However, the FIC rules do not apply to the earnings
and profits of a company for any taxable year beginning after 1986 if the
company was a PFIC for that year. The Company is not an FIC and believes that it
will not be classified as an FIC after this offering.
CANADIAN GOVERNMENTAL REGULATION
Canada has no foreign exchange restrictions on the export or import of
capital, nor on the remittance of dividends, interest or other payment to
non-resident security holders. There are no foreign exchange controls other than
applicable withholding taxes. There is no limitation imposed by Canadian law or
by the Articles or other charter documents of the Company on the right of a
non-resident to hold or vote Common Shares or Preferred Shares of the Company
with voting rights (collectively, "Voting Shares"), other than as provided in
the Investment Canada Act (the "Investment Act"). The Investment Act requires
certain "non-Canadian" individuals, governments, corporations or other entities
who wish to acquire a "Canadian business" (as defined in the Investment Act) to
file either a notification or an application for review with the Director of
Investments, Department of Industry, Government of
68
Canada. The Investment Act requires that certain acquisitions of control of a
Canadian business by a "non-Canadian" must be reviewed and approved in advance
by the Minister responsible for the Investment Act on the basis that he is
satisfied that the acquisition is likely to be of benefit to Canada. The
Investment Act provides detailed rules for the determination of whether control
has been acquired and, pursuant to those rules, the acquisition of one-third or
more of the voting shares of a corporation may, in some circumstances, be
considered to constitute an acquisition of control. Failure to comply with the
Investment Act could result in, among other things, an injunction or court order
directing disposition of the assets or shares.
The Competition Act (Canada) (the "Competition Act") is a law of
general application regulating "mergers" (as defined in the Competition Act). A
"merger" is defined in the Competition Act to include the acquisition of control
over a significant interest in the whole or a part of a business of a person.
Where the Competition Tribunal, established under the Competition Tribunal Act
(Canada), finds that a merger "prevents or lessens, or is likely to prevent or
lessen, competition substantially," it has the power, among others, to prohibit
or dissolve the merger. The Competition Act also requires that persons proposing
certain transactions, before completing these transactions, notify the Director
of Investigation and Research appointed under the Competition Act that the
transactions are proposed and supply the Director with certain information. In
such situations, the Competition Act prescribes the time periods following
notification which must expire before the transactions may proceed. In the case
of the acquisition of voting shares of a corporation which are publicly traded,
the acquisition by a person of the voting shares which would result in such
person, together with its affiliates, owning 20 percent or less of the votes of
all outstanding voting shares would not require a notification to be made.
69
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 7,338,365
Common Shares outstanding. The securities laws of the Province of British
Columbia generally impose a hold period of one year from the date of issuance.
During the hold period, Common Shares are unable to be traded in British
Columbia, or through the facilities of the VSE, without the filing of a
prospectus in respect thereof, but the hold period would not apply to sales
outside of British Columbia or through facilities other than the VSE. The one
year hold period also applies to warrants, and the hold period does not
recommence for Common Shares issued upon exercise of warrants. During the fourth
quarter of 1997, the hold period will expire with respect to approximately
278,901 Common Shares and Common Shares underlying warrants. During the first
quarter of 1998, the hold period will expire with respect to 2,643,000 Common
Shares and Common Shares underlying warrants. Hold periods with respect to
Common Shares and Common Shares underlying warants for 6,504,328 shares,
1,576,156 shares and 440,000 shares expire during the second quarter of 1998,
the third quarter of 1998 and the fourth quarter of 1998, respectively.
The Common Shares sold in this offering will be freely tradeable in the
public market without restriction or further registration under the Act unless
held by an "affiliate" of the Company, as that term is defined in Rule 144 under
the Act. The remaining 4,338,365 Common Shares, and the Common Shares underlying
warrants, options and other convertible securities are, or will be when issued,
"restricted securities" as that term is defined in Rule 144 and may be sold only
in compliance with Rule 144, pursuant to registration under the Act or pursuant
to an exemption therefrom. Of such 4,338,365 Common Shares, upon the
availability of public information as required by Rule 144 under the Act,
approximately 2,751,199 will be available for sale under Rule 144. An additional
53,000 Common Shares will become eligible for sale under Rule 144 during the
fourth quarter of 1997, an additional 124,924 Common Shares will become eligible
during the first quarter of 1998, and an additional 880,490 Common Shares will
become eligible for sale under Rule 144 during the second quarter of 1998.
During the third and fourth quarters of 1998 a further 318,752 and 210,000
Common Shares, respectively, will become eligible for sale under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held at least one year from
the date of issuance by the Company or acquisition from an affiliate, may sell
such shares in brokers' transactions or directly to market makers, provided that
the number of shares sold within any three-month period does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume in the Company's Common Shares in the over-the-counter market
during the four calendar weeks preceding the date on which notice of sale was
filed under Rule 144.
Sales under Rule 144 are also subject to certain provisions relating to
notice of sale and availability of current public information about the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the same volume limitations and other restrictions, but without regard to
the one-year holding period.
Further, under Rule 144(k), after two years have elapsed from the
latter of the issuance of the restricted securities by the Company or their
acquisition from an affiliate, a holder of such restricted securities who has
not been an affiliate of the Company for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.
The Company has granted registration rights to certain of its
shareholders, warrant holders and option holders. See "Description of Securities
- - Registration Rights."
Prior to this offering there has been no public market in the United
States for the Common Shares of the Company, and no prediction can be made as to
the effect, if any, that market sales of Common Shares or the availability of
Common Shares for sale will have on the market price of Common Shares from time
to time. Nevertheless, sales of substantial amounts of Common Shares in the
public market, or the perception that such sales could occur, could adversely
affect prevailing market prices and could impair the Company's future ability to
raise capital through the sale of its equity securities.
70
UNDERWRITING
Cruttenden Roth Incorporated and Ferris, Baker Watts, Incorporated are
acting as the representatives (the "Representatives") of each of the
underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in an underwriting agreement dated as of the date hereof
(the "Underwriting Agreement"), the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, the aggregate
number of Common Shares set forth opposite their respective names:
Name Number of Shares
- ---- ----------------
Cruttenden Roth Incorporated ........................
Ferris, Baker Watts, Incorporated ...................
--------------------
Total ......................................
====================
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel and
various other conditions. The nature of the Underwriters' obligations is such
that they are committed to purchase all of the above shares if any are
purchased. The Underwriters propose to offer the Common Shares directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per share to certain other dealers. After this
offering, the offering price and other selling terms may be changed by the
Representatives.
The Company's Common Shares are traded on the Vancouver Stock Exchange.
Until the consummation of this offering, there has been no United States public
market for the Common Shares of the Company. Accordingly, the initial public
offering price has been determined by negotiation between the Company , the
Selling Shareholder and the Representatives. Among the factors considered in
determining the initial public offering price were recent prices of the Common
Shares, the Company's results of operations, current financial condition and
future prospects, the market for its products and services, the experience of
its management, the economics of the industry in general, the general condition
of the equity securities market, the market capitalization and stages of
development of other companies which the Company, the Selling Shareholder and
the Representatives believed to be comparable to the Company and other relevant
factors. There can be no assurance that any active trading market for the Common
Shares will continue or as to the price at which the Common Shares may trade in
the public market from time to time subsequent to the offering made hereby.
A shareholder of the Company has granted to the Underwriters an option,
expiring 45 days from the date of this prospectus, to purchase up to 450,000
additional Common Shares on the same terms as set forth on the cover page of
this prospectus, solely to cover over-allotments, if any, incurred in the sale
of the Common Shares offered hereby. If the Underwriters exercise the option,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional Common Shares as is proportionate to such
Underwriter's initial commitment to purchase shares from the Company.
In connection with this offering, certain Underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Shares.
Such transactions may include stabilization transactions effected in accordance
with the Securities Exchange Act of 1934 pursuant to which such persons may bid
for or purchase Common Shares for the purpose of stabilizing its market price.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Shares in connection with this offering than
they are committed to purchase from the Company, and in such case may purchase
Common Shares in the open market following completion of this offering to
convert all or a portion of such Common Shares or may exercise the Underwriters'
over-allotment option referred to above. In addition, the Representatives, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in this offering), for the account of the other
Underwriters, the selling concession with respect to Common Shares that is
distributed in this offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Shares at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required, and, if they are
undertaken, they may be discontinued at any time.
71
The Company has also agreed to sell to the Representatives warrants to
purchase up to 300,000 Common Shares at a price of $0.001 per warrant. The
Representatives' Warrants will be exercisable for a period of five years,
commencing one year after the date of this prospectus, at an initial exercise
price per share equal to 120% of the price to the public set forth on the cover
page of this prospectus. The Representatives' Warrants are not redeemable by the
Company under any circumstances. Neither the Representatives' Warrants nor the
Common Shares issuable upon exercise thereof may be transferred, assigned or
hypothecated until one year from the date of this prospectus, except that they
may be assigned, in whole or in part, to any successor, officer, director,
member or partner of the Representatives.
The holders of the Representatives' Warrants will not have voting,
dividend or other rights as shareholders of the Company unless and until such
warrants are exercised. The number of securities deliverable upon any exercise
of the Representatives' Warrants and the exercise price of the Representatives'
Warrants are subject to adjustment to protect against dilution upon the
occurrence of certain events, including any stock dividend, stock split,
subdivision or combination of outstanding stock or reclassification of the
Common Shares.
The Company has agreed with the Representatives that if the Company
registers any of its Common Shares for sale pursuant to a registration statement
(other than on Form S-4, Form S-8 or other inappropriate form) during the
five-year period commencing on the date of this prospectus, upon request of any
of the holders of the Representatives' Warrants or the underlying shares, the
Company will use its best efforts to include such securities as a part of such
registration statement. The Company shall bear all of the costs, exclusive of
underwriting discounts and selling commissions, of one such piggyback
registration.
In addition, the Company and the Representatives have agreed that,
during the five-year period commencing one year after the date of this
prospectus, the holders of a majority of the Representatives' Warrants shall
have the right to require the Company to prepare and file one registration
statement with respect to a public offering of the Common Stock underlying the
Representatives' Warrants. Such a registration statement shall be kept effective
for a period of up to 120 days, and the Company shall bear all of the costs,
exclusive of underwriting discounts and selling commissions, of one such demand
registration.
A shareholder of the Company agreed that for a period of 365 days after
the date of this prospectus, and the Company and its executive officers,
directors, certain shareholders and optionholders have agreed that for a period
of 180 days after the date of this prospectus, they will not, with certain
limited exceptions, directly or indirectly offer, sell, contract to sell, grant
any option to sell, or otherwise dispose of Common Shares or other securities
which are substantially similar to the Common Shares or securities convertible
into or exercisable or exchangeable for or any rights to purchase or acquire
Common Shares or securities which are substantially similar to the Common Shares
without the prior written consent of Cruttenden Roth Incorporated.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Company has also agreed to pay to the Representatives a
non-accountable expense allowance equal to 2.5% of the aggregate offering price
to the public in this offering for due diligence and other out-of-pocket
expenses.
The Representatives have informed the Company that the Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
In May 1997, the Cruttenden Roth Bridge Fund, LLC ("Bridge Fund"), an
affiliate of Cruttenden Roth Incorporated, loaned the Company the principal
amount of $1,020,000 (the "Cruttenden Bridge Acquisition Loan") The Cruttenden
Bridge Acquisition Loan bears interest at a rate of thirteen percent (13%) per
annum, is due May 7, 1998 and by its terms must be prepaid within ten (10) days
of consummation of this Offering. The Company intends to repay the outstanding
balance on the Cruttenden Bridge Acquisition Loan from the proceeds of this
Offering. The Company also issued to Bridge Fund a warrant to purchase 1,078,086
Common Shares at an exercise price of $5.00 per share, which expires on May 7,
2002. Cruttenden Roth Incorporated acted as placement agent in connection with
the Cruttenden Bridge Acquisition Loan. The Company paid Cruttenden Roth
Incorporated a funding fee equal to five percent (5%) of the principal amount of
the Cruttenden Bridge Acquisition Loan. See "The Acquisition and Related
Financing," "Use of Proceeds" and "Certain Relationships and Related
Transactions."
72
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon
for the Company by Stikeman, Elliott, Vancouver, British Columbia and Quarles &
Brady, Phoenix, Arizona, and for the Underwriters by Gray Cary Ware &
Freidenrich, San Diego, California.
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP and BDO
Dunwoody, independent public accountants, and are included herein in reliance
upon the authority of said firms as experts in giving said reports.
CHANGES IN INDEPENDENT AUDITOR
Effective April 1, 1997, Arthur Andersen LLP was engaged as principal
independent auditors for the Company. Arthur Andersen LLP succeeded BDO
Dunwoody, Chartered Accountants. The decision to change independent auditors was
approved by the Board of Directors of the Company. In connection with the audits
of the Company's consolidated balance sheet at December 31, 1995 and the
Company's consolidated statements of operations, changes in shareholders' equity
(deficit) and cash flows for the years ended December 31, 1994 and 1995, there
were no disagreements with BDO Dunwoody on any matter of accounting principles
or practices, financial disclosure or auditing scope or procedures. The audit
report of BDO Dunwoody on the consolidated balance sheet at December 31, 1995
and the consolidated statements of operations, changes in shareholders equity
(deficit) and cash flows for the years ended December 31, 1994 and 1995 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principle.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement under the Act
with respect to the Common Shares offered hereby (the "Registration Statement").
This prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. Certain items are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Shares offered hereby, reference is made to the
Registration Statement and the exhibits filed therewith. Statements contained in
this prospectus as to the contents of any contract or other document are not
necessarily complete, and, in each instance where such contract or other
document is an exhibit to the Registration Statement, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, and the exhibits thereto, may
be inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the Commission. In addition, the Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http://www.sec.gov.
73
INDEX TO FINANCIAL STATEMENTS
Antigua Enterprises Inc. Page
----
Report of Independent Public Accountants - Arthur Andersen LLP........... F-2
Report of Independent Public Accountants - BDO Dunwoody ................. F-3
Consolidated Balance Sheets ............................................. F-4
Consolidated Statements of Operations ................................... F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) .... F-6
Consolidated Statements of Cash Flows ................................... F-7
Notes to Consolidated Financial Statements .............................. F-9
The Antigua Group, Inc.
Report of Independent Public Accountants ............................... F-30
Balance Sheets ......................................................... F-31
Statements of Income (Loss)............................................. F-32
Statements of Changes in Stockholders' Investment ...................... F-33
Statements of Cash Flows ............................................... F-34
Notes to Financial Statements .......................................... F-35
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Antigua Enterprises Inc.:
We have audited the accompanying consolidated balance sheet of ANTIGUA
ENTERPRISES INC. (a Canadian registered corporation) formerly known as
Southhampton Enterprises Corp. and Subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, changes in shareholders' deficit
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of the Company as of December 31,
1995, and for the years ended December 31, 1995 and 1994, were audited by other
auditors whose report dated September 13, 1996, expressed an unqualified opinion
on those statements.
We conducted our audit 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 audit provides 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 Antigua Enterprises
Inc. and Subsidiaries as of December 31, 1996, and the results of its operations
and cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
May 7, 1997.
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Antigua Enterprises Inc.
We have audited the Consolidated Balance Sheet of Antigua Enterprises Inc.
(formerly Southhampton Enterprises Corp.) as of December 31, 1995 and the
related Consolidated Statements of Operations, Changes in Shareholders' Equity
(Deficit) and Cash Flows for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States and Canada. Those standards require that we plan and
perform the audits 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 the Company at
December 31, 1995 and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles in the United States and Canada.
BDO DUNWOODY
Vancouver, Canada
September 13, 1996 CHARTERED ACCOUNTANTS
(Internationally BDO Binder)
F-3
ANTIGUA ENTERPRISES INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
--------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(unaudited)
CURRENT ASSETS:
Cash ................................................. $ 1,873 $ 30,240 $ 4,923
Funds in trust ....................................... -- 635,646 --
Accounts receivable, net of allowance for doubtful
accounts of $94,300, $63,500, and $266,587
respectively ....................................... 119,697 540,785 5,970,048
Inventory ............................................ 112,818 174,533 8,576,981
Prepaid expenses ..................................... 10,332 214 220,183
Deferred loan fees, net of accumulated
amortization ....................................... -- -- 2,545,890
------------ ------------ ------------
Total current assets ................ 244,720 1,381,418 17,318,025
DEFERRED ACQUISITION COSTS ............................. -- 1,275,866 --
PROPERTY AND EQUIPMENT, net of
accumulated depreciation ............................. 201,079 190,479 2,544,399
LICENSES, net of accumulated amortization .............. -- -- 18,446,411
OTHER ASSETS ........................................... 19,361 60,189 65,853
------------ ------------ ------------
$ 465,160 $ 2,907,952 $ 38,374,688
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt .................... $ 199,861 $ 423,702 $ 1,088,492
Revolving line of credit ............................. -- -- 6,220,203
Notes payable to bridge lenders, net discount of
$1,858,600 ......................................... -- -- 3,661,400
Current portion of due to directors and officers ..... -- 1,007,908 534,619
Current portion of notes payable to sellers .......... -- -- 383,733
Convertible debentures, net of discount of
$2,602,741 ......................................... -- -- 2,218,949
Accounts payable ..................................... 289,910 536,872 1,659,341
Accrued liabilities .................................. 363,080 330,705 2,712,718
Accrued loan fees due to directors and officers ...... -- -- 2,131,826
------------ ------------ ------------
Total current liabilities ........... 852,851 2,299,187 20,611,281
DUE TO DIRECTORS AND OFFICERS .......................... 402,025 -- 336,106
LONG-TERM DEBT ......................................... 136,471 48,574 1,714,589
NOTES PAYABLE TO SELLERS ............................... -- -- 5,994,267
EQUITY SECURITY SUBSCRIPTION DEPOSITS .................. 513,063 1,629,178 --
REDEEMABLE PREFERRED STOCK, net of
discount of $1,149,257, 30,000,000 shares
authorized and 4,730,000 shares outstanding at
June 30, 1997 ........................................ -- -- 3,580,743
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, 300,000,000 shares authorized and
2,238,691, 2,641,999 and 4,260,565 shares
outstanding at December 31, 1995 and 1996, and
June 30, 1997, respectively, no par value ........... 1,490,389 2,470,461 7,421,446
Additional paid-in capital ........................... 1,414,501 1,512,606 5,809,556
Accumulated equity (deficit) ......................... (4,344,140) (5,052,054) (7,093,300)
------------ ------------ ------------
Total shareholders' equity (deficit) ..... (1,439,250) (1,068,987) 6,137,702
------------ ------------ ------------
$ 465,160 $ 2,907,952 $ 38,374,688
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
ANTIGUA ENTERPRISES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, Six months ended June 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
Sales .................................... $ 1,793,227 $ 1,843,312 $ 2,857,962 $ 1,256,578 $ 2,722,077
Cost of Sales ............................ 1,669,455 1,699,231 2,263,000 1,055,299 1,824,058
----------- ----------- ----------- ----------- -----------
Gross Profit .................... 123,772 144,081 594,962 201,279 898,019
----------- ----------- ----------- ----------- -----------
Selling Expenses ......................... 162,669 249,434 259,109 67,930 353,755
General and Administrative Expenses ...... 788,995 962,328 987,548 554,835 695,143
Amortization of Licenses ................. -- -- -- -- 27,522
Expenses Related to Acquisition .......... -- -- -- -- 672,455
----------- ----------- ----------- ----------- -----------
Operating Expenses .............. 951,664 1,211,762 1,246,657 622,765 1,748,875
----------- ----------- ----------- ----------- -----------
Loss From Operations ..................... (827,892) (1,067,681) (651,695) (421,486) (850,856)
----------- ----------- ----------- ----------- -----------
Other Income (Expense)
Interest Expense ................ (41,190) (85,853) (160,864) (39,348) (1,176,587)
Other ........................... (42,632) 60,661 90,485 40,563 39,762
----------- ----------- ----------- ----------- -----------
(83,822) (25,192) (70,379) 1,215 (1,136,825)
----------- ----------- ----------- ----------- -----------
Net Loss ................................. $ (911,714) $(1,092,873) $ (722,074) $ (420,271) $(1,987,681)
=========== =========== =========== =========== ===========
Net Loss Per Share ....................... $ (0.60) $ (0.56) $ (0.33) $ (0.21) $ (0.77)
=========== =========== =========== =========== ===========
Weighted Average Common Shares Outstanding 1,531,384 1,959,423 2,188,056 2,035,606 2,611,911
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
ANTIGUA ENTERPRISES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
------------------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ------------ ----------- ------------ -----------
BALANCE, December 31, 1993 .................................. 1,815,280 $ 576,271 $1,421,742 $ (2,337,506) $ (339,493)
Net loss .................................................. -- -- -- (911,714) (911,714)
Translation of monetary items ............................. -- -- -- 1,732 1,732
Exercise of options ....................................... 100,600 205,532 -- -- 205,532
Issuance of stock through private placement ............... 92,430 182,111 -- -- 182,111
Exercise of warrants ...................................... 109,869 129,746 -- -- 129,746
Issuance of stock for acquisition of subsidiary ........... 17,500 23,171 -- -- 23,171
Purchase of treasury shares ............................... (2,185) (8,590) -- -- (8,590)
Issuance of stock in exchange for debt .................... 8,385 42,000 -- -- 42,000
Redemption of shares ...................................... (61,000) (5,535) (7,241) -- (12,776)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 .................................. 2,080,879 1,144,706 1,414,501 (3,247,488) (688,281)
Net loss .................................................. -- -- -- (1,092,873) (1,092,873)
Translation of monetary items ............................. -- -- -- (3,779) (3,779)
Exercise of options ....................................... 1,000 2,016 -- -- 2,016
Issuance of stock through private placement ............... 93,867 205,860 -- -- 205,860
Exercise of warrants ...................................... 42,945 86,560 -- -- 86,560
Issuance of stock for acquisition of subsidiary ........... 20,000 51,247 -- -- 51,247
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 .................................. 2,238,691 1,490,389 1,414,501 (4,344,140) (1,439,250)
Net loss .................................................. -- -- -- (722,074) (722,074)
Translation of monetary items ............................. -- -- -- 14,160 14,160
Exercise of options ....................................... 88,000 263,195 -- -- 263,195
Exercise of warrants ...................................... 52,000 109,773 -- -- 109,773
Issuance of shares in private placement ................... 227,929 513,063 -- -- 513,063
Proceeds on sale of treasury stock in
excess of acquisition costs ............................... 2,165 9,695 2,792 -- 12,487
Capital contribution from noninterest bearing notes ....... -- -- 95,313 -- 95,313
Issuance of stock in exchange for debt .................... 33,214 84,346 -- -- 84,346
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 .................................. 2,641,999 2,470,461 1,512,606 (5,052,054) (1,068,987)
Net loss (unaudited) ...................................... -- -- -- (1,987,681) (1,987,681)
Translation of monetary items (unaudited) ................. -- -- -- (24,260) (24,260)
Dividends on preferred stock (unaudited) .................. -- -- -- (29,305) (29,305)
Exercise of options (unaudited) ........................... 45,000 114,318 -- -- 114,318
Issuance of stock through private placement (unaudited) ... 1,361,883 3,911,787 -- -- 3,911,787
Exercise of warrants (unaudited) .......................... 79,925 203,900 -- -- 203,900
Issuance of stock for acquisition of subsidiary (unaudited) 131,758 720,980 -- -- 720,980
Issuance of options (unaudited) ........................... -- -- 271,350 -- 271,350
Issuance of warrants (unaudited) .......................... -- -- 4,025,600 -- 4,025,600
--------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1997 (unaudited) .......................... 4,260,565 $ 7,421,446 $ 5,809,556 $(7,093,300) $ 6,137,702
========= =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
ANTIGUA ENTERPRISES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, Six months ended June 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $ (911,714) $ (1,092,873) $ (722,074) $ (420,271) $ (1,987,681)
Adjustments to reconcile net loss to cash used in
operating activities -
Translation of monetary items .................... 1,732 (3,779) 14,160 -- (24,260)
Depreciation and amortization .................... 90,308 84,948 114,394 44,273 182,282
Accretion of discounts on debt instruments ....... -- -- -- -- 210,335
Loss on disposal of property and equipment or
other assets ................................... 93,635 14,606 11,168 -- --
Changes in assets and liabilities, net of effect
of business acquired -
(Increase) decrease in accounts receivable, net .. (138,280) 147,471 (432,249) (17,067) 416,478
(Increase) decrease in inventory, net ............ 1,456 134,195 78,328 -- (30,310)
(Increase) decrease in prepaid assets ............ 10,165 (9,624) 10,118 -- (2,888,984)
Increase in accounts payable
and accrued liabilities ...................... 224,059 25,683 179,766 -- 2,489,605
----------- ------------ ------------ ------------ ------------
Net cash used in operating activities ........ (628,639) (699,373) (746,389) (393,065) (1,632,535)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and licenses acquired, net effect
of business acquired ............................... (115,124) (71,100) (36,290) (11,906) (64,192)
Proceeds from sale of property and equipment or
other assets ....................................... 27,362 65,096 -- -- --
Cash paid for business acquired ...................... (19,311) (30,059) (37,647) (37,647) (14,613,410)
Deferred acquisition costs ........................... -- -- (1,275,866) (348,765) 1,266,033
----------- ------------ ------------ ------------ ------------
Net cash used in investing activities ........ (107,073) (36,063) (1,349,803) (398,318) (13,411,569)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from directors .............................. 4,528 160,204 605,883 20,466 --
Net borrowing from revolving line of credit .......... -- -- -- -- 68,324
Repayment of long-term debt .......................... (35,067) (29,062) (69,657) (15,802) (2,290,512)
Proceeds from the issuance of notes payable, net of
effect of business acquired ........................ 9,995 66,195 125,000 60,443 1,500,000
Proceeds from the issuance of convertible debentures,
net of discounts ................................... -- -- -- -- 1,628,515
Proceeds from the issuance of bridge loans, net of
discounts .......................................... -- -- -- -- 3,578,000
Equity security subscription deposits ................ 357,293 155,770 1,116,115 -- --
Sale of preferred stock, net of discounts ............ -- -- -- -- 3,322,438
Dividends on preferred stock ......................... -- -- -- -- (29,305)
Sale of common stock ................................. 378,083 294,436 970,377 732,713 2,580,081
Sale (acquisition) of treasury shares ................ (23,590) -- 12,487 -- --
Redemption of shares ................................. (10,000) -- -- -- --
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
Years ended December 31, Six months ended June 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ ------------
(unaudited) (unaudited)
Warrants issued ...................................... -- -- -- -- 4,025,600
----------- ---------- --------- --------- ------------
Net cash provided by financing activities .... 681,242 647,543 2,760,205 797,820 14,383,141
----------- ---------- --------- --------- ------------
INCREASE (DECREASE) IN CASH AND FUNDS IN
TRUST ............................................... (54,470) (87,893) 664,013 6,437 (660,963)
CASH AND FUNDS IN TRUST, beginning of period ........... 144,236 89,766 1,873 1,873 665,886
----------- ---------- --------- --------- ------------
CASH AND FUNDS IN TRUST, end of period ................. $ 89,766 $ 1,873 $ 665,886 $ 8,310 $ 4,923
=========== ========== ========= ========= ============
CASH PAID FOR INTEREST ................................. $ 7,255 $ 62,885 $ 64,186 $ 32,093 $ 179,711
=========== ========== ========= ========= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1994, the Company purchased equipment for $87,993 under capital lease.
In 1994, the Company issued 17,500 Common Shares in connection with the
acquisition.
In 1994, the Company converted notes in the amount of $42,000 into 8,385
Common Shares.
In 1995, the Company issued 20,000 Common Shares in connection with the
acquisition (see Note 3).
In 1996, the Company converted notes in the amount of $55,146 into 21,786
Common Shares and settled certain accrued liabilities of $29,200 in
exchange for the issuance of 11,429 Common Shares.
In 1997, the Company issued 131,758 Common Shares, 245,000 options for
Common Shares, and 250,000 shares of Series A Preferred in connection
with the Acquisition.
In 1997, the Company issued $6,378,000 of notes payable to seller in
connection with the Acquisition.
In 1997, the Company reduced due to directors by $471,803 by issuing
convertible debentures.
In 1997, the Company reduced equity security subscription deposits by
$1,629,178 by issuing Common Shares.
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
ANTIGUA ENTERPRISES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(1) NATURE OF BUSINESS:
Antigua Enterprises Inc. (formerly Southhampton Enterprises Corp.), a British
Columbia Corporation, and its subsidiaries (collectively the Company) are
engaged in the business of production and distribution of various screen-printed
and embroidered apparel products and novelty items in the United States and
Canada. The Common Shares of the Company are currently listed on the Vancouver
Stock Exchange (VSE).
Acquisition
On June 16, 1997, the Company acquired The Antigua Group, Inc, (AGI), a Nevada
company involved in the wholesale distribution of embroidered sportswear and
related accessories (Acquisition). This Acquisition was accomplished by
purchasing 100% of the issued and outstanding capital stock of AGI. This
Acquisition was accounted for as a purchase and the unaudited June 30, 1997
consolidated financial statements of the Company include 14 days of AGI
operations (see Note 3).
Reverse Stock Split
All per share amounts have been adjusted to give effect to the one for five
reverse stock split effected on June 13, 1997.
Management Plans
The Company has increased its revenue base and shareholder equity through the
completion of the AGI acquisition.
The products of AGI are sold in the United States through three primary apparel
markets; Golf, Licensed Goods and Corporate Lifestyle. The Company plans to
increase its penetration in all of these markets by focusing on the following
key elements:
o Brand Identity - The Company intends to leverage the Antigua brand name, built
over the past 18 years, to open up new accounts, markets and opportunities
outside the Golf and Licensed Goods distribution channels.
o Expansion of Product Offerings - The Company plans to expand the product
offerings in the apparel line to better serve the needs of the existing customer
base, including the introduction of outerwear and caps.
o Expansion of Golf Network - The Company intends to increase distributions
through the expansion of its network of independent sales representatives and
through reactivation of inactive accounts.
F-9
o International Expansion - The Company believes that international markets
provide a significant opportunity to increase sales of its fashion apparel and
its Licensed Goods. The Company plans to increase distribution efforts outside
the United States and Canada, particularly in Europe and Asia.
o Expansion of Licensed Products Network - The Company plans to increase margins
and average account size in this channel by expanding the sales representative
network for Licensed Goods and increasing its retail chain customer base. The
Company also plans to exploit opportunities to sell licensed screen printed
products through market programs and dual branding with major corporate clients.
o Full Service - Through the addition of the Company's textile screen printing
capability to Antigua's current lines of business, the Company has the ability
to increase sales to corporate, university and tournament customers. The Company
believes that offering services from screen printing through embroidery market
channels gives the Company a competitive advantage in the casual apparel market.
In addition to the private placements (see Note 13) and the financing
transactions made to finance the Acquisition (see Notes 9, 11 & 12), the Company
is also negotiating with potential new lenders in order to obtain additional
public or private debt or equity financing. Although there can be no assurance
that such debt or equity financing will be available to the Company on
commercially favorable terms, or at all, the Company believes that current
available cash provided by operations of the combined companies, and debt and
equity financing available to the Company will be sufficient to fund operations
over the next year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States and are stated in
United States (US) dollars. These consolidated financial statements include the
accounts of the Company and its subsidiaries. All transactions and balances
between the companies have been eliminated.
Funds in Trust
The funds in trust represent amounts received from various individuals for the
purchase of common stock under private placement agreements which are subject to
VSE approval (see Note 13). A third-party investment manager has been retained
to manage the funds based on direction agreed upon by the Company and the
individual subscribers. The individual subscribers have permitted the
third-party investment manager to expend the funds received as equity security
subscription deposits for Acquisition related costs. As such, these amounts are
considered cash equivalents for statement of cash flow purposes. Subsequent to
December 31, 1996, the trust funds were utilized to make payments to the sellers
in connection with the Acquisition.
Inventory
Inventory is stated at the lower of cost or market determined on a first-in,
first-out basis. Inventory includes apparel and primary raw materials such as
T-shirts, garment dies and inks, and towels.
F-10
Deferred Loan Fees and Debt Discount
Deferred loan fees and debt discounts are amortized over the term of the related
loans using the effective interest rate method.
Other Assets
Other assets are net of accumulated amortization and consist of costs in excess
of the fair value of net assets of acquired business of $72,000 at December 31,
1996 and incorporation costs of $19,000 and $21,000 at December 31, 1995 and
1996, respectively. The excess of the fair value of net assets acquired and
incorporation costs are amortized over periods up to five years using the
straight-line method. Accumulated amortization of these assets was approximately
$1,000 and $33,000 at December 31, 1995 and 1996, respectively.
The Company has evaluated whether events and circumstances have occurred that
indicate the remaining estimated useful life of intangible assets may warrant
revision or that the remaining balance of the intangible costs may not be
recoverable. When factors indicate that intangible assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted future cash flows over the remaining life of the intangible assets
in measuring whether the intangible assets are recoverable.
Based upon the Company's evaluations, $48,095 and $30,059 of other assets were
written off in 1994 and 1995, respectively.
At June 30, 1997, other assets also include refundable deposits.
Loss Per Share
Loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock issued and outstanding, excluding shares held
in escrow (see Note 15) as rights to dividends and assets and property on
dissolution have been waived by the escrow shareholders. Common stock
equivalents are excluded as their inclusion is not dilative. Primary and fully
diluted earnings per share are the same in all periods presented.
Foreign Currency
Transactions in currencies other than US dollars are translated into US dollars
using the current exchange rates as of the dates they are reported. Assets and
liabilities denominated in other currencies are adjusted to reflect the exchange
rate in effect at the balance sheet date. Revenues, expenses, gains and losses
are translated using a weighted average exchange rate for the period.
Translation adjustments arising from the translation of monetary items in the
financial statements are included as a separate component of shareholders'
deficit for the reporting period.
Exchange rates between the Canadian dollar and the US dollar for the periods
reported in these consolidated financial statements are as follows:
December 31, December 31, December 31, June 30,
1994 1995 1996 1997
------------ ------------ ------------ --------
F-11
Average ................ .7321 .7285 .7352 .7287
Period end ............. .7134 .7331 .7296 .7241
Use of Estimates
The preparation of consolidated 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 the financial
statements. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
In management's opinion, methodologies used to determine estimates are adequate
and consistent with prior periods.
Fair Value of Financial Instruments
At December 31, 1995 and 1996, carrying values of cash, funds in trust, accounts
receivables, accounts payable and accrued liabilities and notes payable
approximate fair values since they are short-term in nature or payable upon
demand. It is not practical to estimate fair value of the amounts due to
Directors and officers as the agreements are between related parties.
The Company estimates fair values of financial instruments by using available
market information. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates may not
be indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions or valuation methodologies
could have a material effect on the estimated fair value amounts.
Concentrations of Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
customers comprising the Company's credit base and the geographical dispersion
of the customers.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share (SFAS No. 128). This statement establishes standards for
computing and presenting earnings per share (EPS) and simplifies the standards
for computing EPS previously found in APB Opinion No. 15, Earnings per Share. It
replaces the presentation of primary earnings per share with the presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
The Company is required to adopt SFAS No. 128 for the years ending subsequent to
December 15, 1997. Based on equity and convertible debt instruments currently
outstanding, the new standard is not expected to have a material impact on the
Company's EPS.
Financial Accounting Standards Board has issued SFAS No. 130, Reporting
Comprehensive Income (SFAS No. 130). SFAS No. 130 established standards for
reporting comprehensive income and its components. SFAS No. 130 is effective for
financial statements for periods beginning after December 15, 1997. The Company
has not yet determined the effects of adopting SFAS No. 130.
F-12
Financial Accounting Standards Board has issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131
establishes standards for reporting information about operating statements
within an enterprise. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company has not yet determined
the effects of adopting SFAS No. 131.
Interim Periods
The results of operations for the six months ended June 30, 1996 and 1997, are
not necessarily indicative of the results to be expected for the full year. All
information as of and for the six month periods ended June 30, 1996 and 1997, is
unaudited and, in the opinion of management, contains all adjustments consisting
only of normal recurring adjustments necessary for a fair presentation of such
information for the respective periods.
(3) ACQUISITION OF THE ANTIGUA GROUP, INC. (AGI) (unaudited):
On June 16, 1997, the Company acquired AGI, a Nevada company involved in the
wholesale distribution of embroidered sportswear and related accessories. The
Acquisition was accounted for as a purchase. The accompanying consolidated
financial statements include the operations of AGI for the 14 day period from
June 17, 1997 to June 30, 1997.
The Company entered into an consulting agreement with the former majority
shareholder of AGI which results in an annual commitment of approximately
$100,000. This agreement terminates in June 1999.
In order to facilitate the above transaction, the Company deposited $1,000,000
into an escrow account. The deposit was non-refundable in the event the
Acquisition was not consummated. This amount was paid to the AGI shareholders
subsequent to December 31, 1996.
At December 31, 1996, costs incurred in connection with the Acquisition are
included in Acquisition deposit and related costs. Costs incurred as of December
31, 1996, are as follows:
Deposit paid to AGI shareholders $ 1,000,000
Acquisition costs 275,866
-----------
$ 1,275,866
===========
Selected financial data for AGI as of and for the year ended December 31, 1996,
is as follows:
Working capital $ 4,610,085
Total assets 15,567,399
Current portion of notes payable (inclusive of line of credit) 5,945,490
Notes payable, net of current portion 2,465,321
Common stock 10,373
Total shareholders' equity 4,569,751
Revenue 33,510,364
Net income before taxes 932,867
The purchase price and estimated allocation of such costs are as follows:
F-13
Cash paid to sellers $12,636,482
Notes payable to sellers 6,378,000
Preferred stock and attached warrants issued to sellers (250,000 shares) 250,000
Assets of AGI distributed to the sellers 134,706
Amounts to be paid to the sellers 759,656
Transaction costs 2,920,360
-----------
Total purchase price 23,079,204
Net book value of assets acquired 4,677,674
-----------
Excess of purchase price over net book value
of assets acquired $18,401,530
===========
Allocation of excess of purchase price over net book value of assets
acquired and adjustments to fair value:
Licenses $18,473,933
Inventory (488,956)
Eliminate lifo reserve 186,221
Accrued interest 230,333
-----------
$18,401,530
===========
The licenses are being amortized over 25 years using the straight line method.
(4) OTHER ACQUISITIONS:
Acquisition of CHL Services
On January 31, 1996, the Company acquired certain rights, customer lists and
inventory constituting the business of CHL Services, a division of a Canadian
company involved in the manufacture and distribution of hockey jerseys and
supplies.
Total consideration for the acquisition was:
Cash $ 37,647
Installments payable in two equal installments,
unsecured and noninterest bearing with the final installment
due in April 1997, net of discount of $7,353. 84,310
Note payable, secured by acquired inventory,
noninterest bearing and repayable out of proceeds on sale
of acquired inventory until due in February 1997, net of
discount of $14,935. 126,109
----------
$ 248,066
==========
The business combination was accounted for using the purchase method. The
purchase price was allocated as follows:
Intangible assets $ 72,713
F-14
Office equipment 35,310
Inventory 140,043
----------
$ 248,066
==========
Additionally, a royalty equal to 50% of gross profit from CHL Services on
inventory acquired is payable to the vendor in quarterly installments for a
period up to the first anniversary of the sale. For the year ended December 31,
1996, royalties of approximately $14,600 are included in accounts payable and
accrued liabilities in the accompanying consolidated financial statements.
The Company has entered into an employment agreement with certain management
personnel of CHL Services which results in an annual commitment of approximately
$70,000 per annum plus 10% - 20% of divisional profits until expiration in
January 2001.
The following unaudited pro forma combined results of operations data is
presented as though the merger had occurred on January 1:
1995 1996
------------- --------------
Sales $ 2,424,860 $ 2,903,962
============= ==============
Net loss $ (1,134,873) $ (727,074)
============== ===============
These pro forma combined results of operations are presented for comparative
purposes only and do not purport to be indicative of the actual results that
would have occurred had the CHL Services acquisition been consummated on January
1, 1995, or of future operations of the combined Company.
Acquisition of T-Sports, Inc.
On August 5, 1994, the Company acquired 100% of the issued and outstanding
shares of T-Sports, Inc., a Texas company involved in the manufacturing and
distribution of screen printed golf and novelty towels.
Total consideration for the acquisition was:
Cash $ 25,000
Notes payable, unsecured, noninterest bearing, settled
with the issuance of common shares in 1996 42,250
20,000 common shares at a fair market value of $2.55
issued in 1995 51,247
------------
$ 118,497
============
The business combination was accounted for using the purchase method. A summary
of the fair value of the assets and liabilities assumed at August 5, 1994, is as
follows:
Machinery and equipment $ 15,000
F-15
Accounts receivable 64,000
Inventory 102,369
------------
Total assets 181,369
Total liabilities 95,967
------------
Shareholders' equity $ 85,402
============
The purchase price difference of $33,095 was written off in 1994 due to the
uncertainty regarding continuing future benefits resulting from the acquisition.
In 1995, Texas State filed a lien to enforce payment of $32,400 in past due
taxes which was an existing liability of this acquired subsidiary. This amount
is included in accrued liabilities at December 31, 1996.
(5) LICENSES (unaudited):
As a result of the Acquisition, the Company has a number of license agreements.
Licenses are stated at cost allocated in the Acquisition (see Note 3). Licenses
are amortized over twenty-five years using the straight line method.
The Company has a licensing agreement with National Basketball Association
Properties, Inc. (NBA) which grants the Company the right to use the names,
symbols, emblems, designs and logos of the NBA on certain of its garments. The
license requires royalty payments of approximately 9.25% of sales of NBA
products, subject to an annual minimum required payment of $130,000. The license
expired on July 31, 1997. The Company has renewed the license for an additional
two years.
The Company has licensing agreements with the National Football League (NFL)
which grant the Company the right to use "NFL Marks" on certain of its garments.
These agreements require royalty payments of approximately 10% of sales of NFL
products, subject to certain minimum required payments. These agreements expire
in March 1999. Future minimum required royalty payments range from approximately
$355,000 to $415,000 per year.
The Company has licensing agreements with Major League Baseball Properties, Inc.
(MLB) which grant the Company the right to use the names, characters, symbols,
designs and other similar identifications of the MLB on certain of its garments.
The licenses require royalty payments of 9% of sales of MLB products, subject to
certain annual minimum required payments ranging from $120,000 to $150,000. The
licenses expire December 31, 1999.
The Company has licensing agreements with the National Hockey League (NHL) which
grant the Company the right to use "NHL Marks" on certain of its garments. The
agreement requires royalty payments of 9% on sales of NHL products. Total future
minimum royalties over the term are $20,000. The agreement expires on December
31, 1997.
In addition, the Company is party to numerous market license agreements with
colleges, universities, bowl administrators and prominent sports figures which
allow the Company to use the names of the institution, sporting event or sports
personality on certain of its garments for varying terms.
Royalty expense of AGI was approximately $977,000, $1,245,000 and $717,000 for
the years ended December 31, 1995 and 1996 and the six months ended June 30,
1997, respectively.
F-16
(6) PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are depreciated or amortized
using the straight line method over estimated useful lives as follows:
December 31,
Estimated --------------------- June 30,
Useful Lives 1995 1996 1997
------------ -------- --------- -------
(unaudited)
Office and computer equipment
and furniture 3-5 years $ 29,717 $ 70,307 $ 936,901
Embroidery machine designs 4 years 22,207 51,959 476,035
Leasehold improvements 15 years 18,092 18,092 18,092
Machinery and equipment 3-5 years 251,798 253,096 1,393,472
------- ------- ---------
321,814 393,454 2,824,500
Less: Accumulated depreciation (120,735) (202,975) (280,101)
--------- --------- -----------
$201,079 $ 190,479 $2,544,399
======== ========= ==========
In the event that facts and circumstances indicate that the cost of property and
equipment may be impaired, an evaluation of recoverability would be performed.
This evaluation would include the comparison of the future estimated
undiscounted cash flows associated with the assets to the carrying amount of the
assets to determine if a writedown of the assets is required.
(7) LONG-TERM DEBT:
Long-term debt consisted of the following:
December 31,
---------------------------- June 30,
1995 1996 1997
-------- --------- ----------
(unaudited)
Term loans due to bank (Note 8) $ - $ - $2,228,670
Notes and installments due on acquisition of
CHL Services, noninterest bearing (imputed
at 10%) due in 1997 - 232,707 232,707
Unsecured noninterest bearing demand note
payable to a related party - 100,000 100,000
Other notes payable, interest rates up to 10% due
in various installments through December 1997 259,657 73,776 66,732
Notes payable for equipment purchases,
interest rates up to 21.5% due in various
installments through December 1999 76,675 65,766 174,972
-------- --------- ----------
336,332 472,249 2,803,081
Less: Current portion (199,861) (423,702) (1,088,492)
-------- --------- ----------
$136,471 $ 48,547 $1,714,589
======== ========= ==========
F-17
To provide for interest expense on noninterest bearing notes, interest is
generally measured by the difference between the market value of the goods
received or the note, whichever is more readily determinable, and the face
amount of the note. The market value of a note is determined by discounting all
future payments on the note using an imputed rate of interest. When the note is
between related parties and it is issued for cash and no other stated or
unstated rights are involved, the difference between the cash consideration and
the discounted amount of the payments on the note is treated as additional
paid-in capital. The discount is accounted for as an element of interest over
the life of the note. For amounts due on demand, the notes are reflected at face
value and interest is imputed each period by charging interest expense. This
method allows for the recognition of interest related to the transactions giving
rise to the notes.
Future maturities of long-term debt are as follows:
December 31, 1996 June 30, 1997
----------------- -------------
(unaudited)
1997 $423,702 $1,088,492
1998 25,156 652,468
1999 23,391 644,676
2000 - 119,865
2001 - 120,754
Thereafter - 176,826
-------- ----------
$472,249 $2,803,081
======== ==========
(8) LOAN AGREEMENT WITH BANK (unaudited):
In connection with the Acquisition, the Company assumed the obligations of AGI
under a Loan and Security Agreement (the Loan Agreement) with a bank. The Loan
Agreement provides for a credit facility of up to $12 million, including a
revolving line of credit and outstanding letters of credit. Interest is at the
bank's prime rate plus 1%. The maximum borrowing under the new Loan Agreement
cannot exceed 85% of eligible receivables plus 55% of eligible inventory, as
defined. The Loan Agreement is secured by all of AGI's assets. The Loan
Agreement requires AGI to maintain certain financial covenants including minimum
tangible net worth, interest coverage ratios, debt service coverage ratios and a
ratio of liabilities to tangible net worth. Dividends cannot be paid or
unscheduled payments cannot be made without the prior consent of the bank.
The Loan Agreement includes a term loan of $775,000 with interest at 1.25% over
the bank's prime rate, payable in monthly installments over seven years
beginning March 1, 1997. It also includes a term loan for $1,500,000 with
interest at 3% over the bank's prime rate, payable in monthly installments over
three years beginning July 1, 1997. The amount due on these two loans at June
30, 1997 is $2,228,670 and is included in long-term debt (see Note 7).
(9) ACQUISITION BRIDGE FINANCING (unaudited):
In connection with the Acquisition, effective June 16, 1997 the Company entered
into three bridge financing transactions:
F-18
Financing Transaction One
A lender (Lender One) loaned $2,500,000 (the Promissory Note) to the Company for
the purpose of completing the Acquisition. The Promissory Note has a term of one
year and bears interest at a rate of 13% per annum. Interest only is payable
until the end of the one-year term; principal will be paid at the end of the
term, or at the election of Lender One, the one-year note may be converted into
a further promissory note having a term of three years, with regular periodic
payments of blended principal and interest. Lender One was issued warrants to
purchase 1,078,086 common shares for a period of five years at a price of $5.00
per warrant in payment of a bonus for its advance of $2,500,000 in bridge
financing with respect to the Acquisition. These warrants were valued at
$950,000 which is included in the accompanying financial statements as a
discount on the note.
A finder's fee equivalent to 8% of the sum advanced to the Company by Lender One
was paid to the finder by issuing 68,930 common shares valued at $198,518. These
common shares are subject to a statutory hold period of one year. In addition,
loan costs of $201,423 were paid. Total fees and costs of $399,941 are recorded
as deferred loan fees.
Financing Transaction Two
A lender (Lender Two) loaned $1,020,000 to the Company for the purpose of
completing the Acquisition. The promissory note has a term of one year and bears
interest at a rate of 13% per annum. Lender Two was issued warrants to purchase
1,078,086 common shares for a period of five years at a price of $5.00 per
warrant in payment of a bonus for its advance of $1,020,000 in bridge financing
with respect to the Acquisition. These warrants were valued at $612,000 which is
included in the accompanying financial statements as a discount on the note.
A finder's fee equivalent to 8% of the sum advanced to the Company by Lender Two
was paid to the finder by issuing 28,124 common shares valued at $80,997. These
common shares are subject to a statutory hold period of one year. In addition,
loan costs of $279,100 were paid. Total fees and costs of $360,097 are recorded
as deferred loan fees.
Financing Transaction Three
The senior secured lender for AGI loaned the Company $3,500,000 of which
$2,000,000 is bridge financing and $1,500,000 is a three year term loan (see
Note 8). This term loan bears interest at 3% over the lenders prime rate. The
loan is due in monthly installments over three years beginning June 1, 1997,
however, in the event of a securities offering a $2,000,000 payment must be
made. The lender was issued warrants to purchase 323,426 common shares for a
period of five years at a price of $5.00 per share in payment of a bonus for its
advance of $2,000,000 in bridge financing with respect to the Acquisition. These
warrants were valued at $380,000 which is included in the accompanying financial
statements as a discount on the note. In addition, loan costs of $143,267 were
paid and recorded as deferred loan fees.
(10) DUE TO DIRECTORS AND OFFICERS:
Subsequent to December 31, 1996, certain of the terms related to repayment of
amounts due to Directors and officers were renegotiated. The terms below reflect
the changes which occurred subsequent to May 7, 1997.
F-19
The following amounts were due to Directors and officers at December 31 and June
30:
December 31 June 30,
1995 1996 1997
-------- --------- --------
(unaudited)
Advances from a Director, unsecured bearing interest
at 7% per annum commencing October 1994, $200,000 due
September 1997 and $142,733 due on demand after June 1998. $280,843 $564,535 $342,733
Advances from Directors, unsecured, noninterest bearing
(imputed at 10%) and due on demand after June 1998. 121,182 193,373 193,373
Advances from Directors, unsecured, bearing interest at
7.5% per annum commencing November 1996, and due
in November 1997. - 250,000 -
Notes payable to officers, unsecured, bearing interest at
9% per annum, and due July 1 and September 1, 1997. - - 334,619
-------- --------- --------
402,025 1,007,908 870,725
Less - Current portion - (1,007,908) (534,619)
-------- --------- --------
$402,025 $ - $336,106
======== ========= ========
The Company intends to repay the above amounts due to Directors and officers
with funds from equity security offerings.
(11) NOTES PAYABLE TO SELLERS (unaudited):
In connection with the Acquisition the Company issued notes payable to sellers
as follows:
Payment Terms Interest Amount
Rate
- ------------------------------------------------------ ----------- -----------
Due in quarterly installments of $95,933 beginning
September 16, 1997 with the unpaid balance
due June 16, 2000 8.25% $5,198,000
Due June 16, 1999 8.25% 855,000
Due June 16, 1999 8.25% 325,000
-----------
$6,378,000
===========
Upon a securities offering with gross proceeds of $12,000,000 the unpaid
principal balances are due and payable. Upon any securities offering a minimum
principal payment of $1,594,500 is due and payable.
Upon a securities offering, or at any time thereafter, the sellers may convert
their outstanding principal amount of these notes into shares of the Company's
common stock at the lesser of $7.50 per share or the actual price of such common
stock in the security offering.
These notes are secured by certain security agreements and pledge agreements
executed by the Company.
F-20
In connection with the Acquisition, the Board of Directors of the Company
approved payment of bonuses to two Directors and officers as fees for 1)
personally guaranteeing the seller notes and estimated interest payments, and 2)
making loans to the Company.
The amount of these fees is dependent upon the approval of the shareholders and
the VSE. As of June 30, 1997, the Company has recorded $2,131,826 as an estimate
of this obligation. This is reflected as accrued loan fees due to Directors and
officers in the accompanying financial statements. It is anticipated that this
obligation will be satisfied by the issuance of shares of common stock.
(12) CONVERTIBLE DEBENTURES (unaudited):
As of March 1, 1997, the Company issued $3,023,999 of 15% convertible debentures
due June 1, 1998. These are convertible into 1,144,500 units, each of which
consists of one common share and one two-year non-transferable warrant to
purchase an additional common share at $2.88 in the first year and $3.31 in the
second year. Certain payments were made in connection with this placement:
- A bonus to the lender paid by the issuance of 177,000 common
shares valued at $509,760.
- A guarantee fee to two directors and officers paid by the
issuance of 177,000 common shares valued at $509,760.
- A finder's fee of $226,800.
- An inducement fee of $491,760 paid to a party related to the
lender.
- Legal fees of $27,536.
The above bonus and fees total $1,899,832 and are recorded as discounts on
convertible debentures. In addition, the interest payable during the period
March 1, 1997 to June 16, 1997, is considered a discount on debentures since the
proceeds of the debentures were not available to the Company until the closing
of the Acquisition. The discounts are amortized over the period June 16, 1997 to
June 1, 1998, using the effective interest method.
As of June 16, 1997, the Company issued $1,791,048 of 15% convertible debentures
due in one year, to a company which is related to certain officers and directors
of the Company. These are convertible into 714,454 units, each of which consists
of one common share and one two-year non-transferable warrant to purchase an
additional common share at $2.88 in the first year and $3.31 in the second year.
Certain payments were made in connection with this placement;
- A bonus to the lender paid by the issuance of 124,378 common
shares valued at $356,486.
- A loan fee to the lender of $105,000.
- A finder's fee paid by issuance of two year warrants to
purchase 115,344 common shares at $2.88 in the first year and
$3.31 in the second year. These warrants are valued at
$254,334.
- Legal fees of $105,720.
The above bonus and fees total $821,540 and are recorded as discounts on
convertible debentures.
(13) PRIVATE PLACEMENTS OF EQUITY SECURITIES (unaudited):
On June 16, 1997, the Company completed several private placements of its common
and preferred stock. These private placements were initiated in 1996 and closed
concurrently with the completion of the Acquisition.
F-21
As of December 31, 1996, a third-party investment manager had received
approximately $1.6 million under a combination of these private placements. Such
amounts were held in trust for the subscribers and were available to the Company
upon VSE approval of the Acquisition. As the Company did not have a legal right
to these funds, they were not included in the accompanying financial statements
at December 31, 1996. The Company recorded these amounts as funds in trust once
VSE approval was received or once the subscribers permitted the use of the funds
for the original intended purpose as evidenced in writing. Amounts released by
the subscribers were recorded as equity security subscription deposits until VSE
approval was obtained for the issuance of the stock in accordance with the
private placement.
The following is a summary of the private placements:
Number and Price of Units Description of Placement Gross Proceeds
- -------------------------------- ----------------------------------------------------------- --------------------
162,200 units at $4.58 One common share plus one two-year $742,354
non-transferable warrant to purchase an additional
common share at a price of $4.58 in the first year
and at a price of $5.50 in the second year.
210,000 units at $4.25 One common share plus one two-year $891,923
non-transferable warrant to purchase an additional
common share at a price of $4.25 in the first year
and at a price of $4.87 in the second year.
180,144 units at $4.86 One common share plus one two-year $875,500
non-transferable warrant, two of which will entitle
the shareholder to purchase an additional common
share at a price of $4.86 in the first year and at a
price of $5.55 in the second year. A finder's fee
for this placement was paid by issuing 6,537
common shares valued at $30,657.
4,730,000 convertible To each Share is attached one five-year $4,730,000
limited retractable Series non-transferable detachable share purchase warrant
"A" 12% cumulative to purchase an additional common share at a price
preferred shares at $1.00. of $5.18 in the first year, $6.05 in the second
year, $6.91 in the third year, $7.81 in the
fourth year and at $8.71 in the fifth year.
Each Share is convertible into one common
share within five years upon payment of a
conversion premium above the Purchase Price of
nil during the first year, $0.90 during the
second year, $1.85 during the third year,
$2.75 during the fourth year and $3.65 during
the fifth year after issuance.
F-22
Number and Price of Units Description of Placement Gross Proceeds
- -------------------------------- ----------------------------------------------------------- --------------------
60,000 units at $3.85 One common share plus one non-transferable $231,120
warrant to purchase an additional common share
at a price of $3.85 in the first year and at a price
of $4.43 in the second year. A finder's fee for this
placement was paid by issuing 3,654 common
shares valued at $13,267.
151,778 units at $3.24 One common share plus one two-year $491,760
non-transferable warrant, two of which entitle the
shareholder to purchase an additional common
share at a price of $3.24 in the first year and at a
price of $3.74 in the second year. A finder's fee
for this placement was paid by issuing 12,142
common shares valued at $36,426.
The equity security subscription deposits as of December 31, 1996, related to
funds received under private placements, as discussed above, for use in the
Acquisition.
(14) INCOME TAXES:
The Company records income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). SFAS No.109 requires the use of an asset and
liability approach in accounting for income taxes. Deferred tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities and the tax rates in effect
when these differences are expected to reverse.
The components of the benefit for income taxes consist of the following:
December 31,
----------------------------------------- June 30,
1994 1995 1996 1997
----------- ----------- ----------- -----------
(unaudited)
Current income taxes:
Federal - U.S. and Canadian $ - $ - $ - $ -
State and Provincial - - - -
----------- ----------- ---------- -----------
- - - -
----------- ----------- ---------- -----------
Deferred income taxes:
Federal - U.S. and Canadian - - - -
State and Provincial - - - -
----------- ----------- ---------- -----------
- - - -
----------- ----------- ---------- -----------
Total provision (benefit) for
income taxes $ - $ - $ - $ -
=========== =========== =========== ===========
F-23
The effective income tax rate is different than the amount that would be
computed by applying the United States corporate income tax rate to the income
(loss) before income taxes. The differences are summarized as follows:
December 31,
---------------------------------------------- June 30,
1994 1995 1996 1997
----------- ----------- ----------- ------------
(unaudited)
Tax at the statutory rate (34%) $(309,000) $(372,000) $(246,000) $(796,000)
State income taxes, net of federal benefit (54,000) (66,000) (43,000) (141,000)
Expiration of unutilized net operating loss - 72,000 68,000 -
Increase in deferred tax asset
valuation allowance 363,000 366,000 221,000 937,000
---------- ---------- ---------- -----------
Actual tax expense (benefit) $ - $ - $ - $ -
=========== =========== =========== ===========
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
December 31,
---------------------------- June 30,
1995 1996 1997
---- ---- ------
(unaudited)
Net operating loss carryforwards $ 1,920,000 $ 2,141,000 $ 3,033,000
Valuation allowance (1,920,000) (2,141,000) (3,033,000)
------------- ------------ ------------
$ - $ - $ -
============= ============ ============
Prior to the acquisition date, AGI was an S Corporation under the Federal Income
Tax laws of the United States.
The Company's ability to utilize its net operating losses to offset future
taxable income may be limited under the Internal Revenue Code Section 382 change
in ownership rules. A valuation allowance has been provided since the Company
believes the realizability of the deferred tax asset does not meet the more
likely than not criteria under SFAS No. 109. The Company's accumulated net
operating losses expire in varying amounts between 1997 and 2012.
(15) SHAREHOLDERS' EQUITY:
Escrowed Share Arrangements
At December 31, 1995 and 1996, the Company had 395,992 common shares held in
escrow subject to earn-out provisions involving cash flow. The escrow
shareholders have waived the rights to dividends and assets and property on
dissolution. If the performance measures are not met in the future, the common
shares held in escrow are canceled.
Stock Options and Warrants Issued to Employees and Directors
As permitted under Statement of Financial Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), the Company has elected to account for
stock transactions with employees pursuant to
F-24
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees.
No compensation expense has been recognized for the stock options and warrants
granted. Had compensation cost for the Plan been recorded consistent with SFAS
No. 123, the Company's net loss would have been increased to the following pro
forma amounts:
December 31
--------------------------
1995 1996 June 30, 1997
------------- ------------ -------------
(unaudited)
Net income (loss):
As reported $(1,092,873) $ (722,074) $(1,987,681)
Pro forma (1,154,813) (766,658) (2,128,459)
Earnings (loss) per share:
As reported (.56) (.33) (.77)
Pro forma (.59) (.35) (.81)
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1995, 1996 and 1997, risk free interest
rates ranging from 5.00% to 6.95%, expected terms ranging from two to five
years, and an expected volatility factors ranging from 35% to 55%. The Company
has granted stock options to employees and directors for the purchase of common
shares. The stock option activity is as follows:
Six Months Ended
1995 1996 June 30, 1997
---------------------- ---------------------- ---------------------
(unaudited)
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------ ---- ------- ---- ------- ----
Outstanding at beginning
of period 41,000 $3.95 120,000 $2.75 129,000 $2.12
Granted 80,000 2.10 98,000 2.10 237,000 5.00
Exercised (1,000) 2.10 (88,000) 3.00 (45,000) 2.12
Expired - - (1,000) 2.10 - -
------ ------- -------
Outstanding at end of period 120,000 2.75 129,000 2.12 303,000 4.31
======= ======= ======
Exercisable at end of period 120,000 2.75 129,000 2.12 303,000 4.31
======= ======= ======
Weighted average fair value
of options granted $ 0.60 $ 0.50 $ 0.99
======= ======= ======
Options outstanding at June 30, 1997, have exercise prices ranging from $2.12 to
$5.00, with a weighted average remaining contractual term of 1.5 years.
The Company also has non-transferable share purchase warrants outstanding which
entitle the holder to purchase common shares at a specified exercise prices in
exchange for either one or two warrants, as detailed in the applicable warrant
agreement. The warrant activity is as follows:
F-25
Six Months Ended
1995 1996 June 30, 1997
---------------------- ---------------------- ----------------------
(unaudited)
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
-------- ----- -------- ----- -------- -----
Outstanding at beginning
of period 47,413 $2.00 93,867 $1.25 118,859 $ .72
Granted 93,867 1.25 84,992 2.55 - -
Exercised (42,945) 2.00 (60,000) 2.20 (118,859) .72
Expired (4,468) 2.00 - - - -
------- ------- --------
Outstanding at end of period 93,867 1.25 118,859 1.72 - -
======= ======= ========
Exercisable at end of period 93,867 1.25 118,859 1.72 - -
======= ======= ========
Weighted average fair value
of options granted $ 0.60 $ 0.30 $ -
======= ======= ========
Stock Options and Warrants Issued in Connection with the Acquisition
and Related Financing Transactions
In connection with the Acquisition, the Company granted stock options to AGI
employees in exchange for options outstanding at the acquisition date entitling
these employees to purchase 245,000 common shares at specified exercise prices
ranging from $4.52 to $5.09, with a term of 2 years. The fair value of these
options, of $271,350, has been included in the purchase price of the
acquisition. All options are exercisable, however, as of June 30, 1997, none of
these options have been exercised.
In connection with the financing transactions related to the Acquisition, the
Company issued nontransferable share purchase warrants entitling the holders to
purchase 4,377,690 common shares at specified exercise prices in exchange for
either one or two warrants, as detailed in the applicable warrant agreement.
These warrants have exercise prices ranging from $2.88 to $8.71, with a weighted
average remaining term of 4.4 years and a weighted average exercise price of
$5.30. The fair value of these warrants, of $4,025,600, has been included as
deferred loan fees and discounts in debt in the accompanying financial
statements. All warrants are exercisable, however, as of June 30, 1997, none of
these warrants have been exercised.
Stock Purchase Agreement
In connection with the Acquisition, two officers of AGI each purchased 30,120
Common Shares and two-year warrants to acquire 15,060 Common Shares at an
exercise price of $4.86 per Common Share during the first year and $5.55 per
Common Share during the second year for $150,600 in a private placement (see
Note 13). The officers each have the right, prior to June 16, 1998, to require
the Company to repurchase, in whole or in part, these shares and warrants for
$150,600.
(16) COMMITMENTS AND CONTINGENCIES:
Operating Leases
F-26
The Company leases various building space and equipment under noncancelable
lease agreements. Minimum annual rental commitments are as follows:
As of As of
December 31, 1996 June 30, 1997
----------------- -------------
(unaudited)
1998 $13,399 $621,202
1999 3,622 490,529
2000 3,623 199,750
2001 2,543 67,569
2002 - 23,201
Rental expense charged to operations under these leases was approximately
$15,000, $16,000, $36,000, and $43,000 for the years ended December 31, 1994,
1995, 1996, and the six months ended June 30, 1997 respectively.
Letters of Credit (unaudited)
At June 30, 1997 AGI has outstanding issued letters of credit for approximately
$2,675,000 in connection with its bank credit lines.
Purchase Commitments (unaudited)
At June 30, 1997 AGI had inventory purchase commitments of approximately
$10,000,000.
(17) RELATED PARTY TRANSACTIONS:
Related party transactions not disclosed elsewhere in these financial statements
include:
(a) The Company utilizes 16,000 square feet of office and
warehouse space in a building in Dallas, Texas owned by a
director. This is a month-to-month agreement and no rent is
charged for the use of the facilities. The average annual rent
for similar space is $2.90 per square foot.
(b) Interest expense includes approximately $6,000, $18,000,
$89,000 and $31,000 on advances from Directors for the years
ended December 31, 1994, 1995, 1996 and the six months ended
June 30, 1997, respectively.
(c) AGI utilizes 43,000 square feet of office and warehouse space
in a building in Scottsdale, Arizona owned by a director of
AGI. Rent expense for the building included in the statement
of operations was $8,000 for the six months ended June 30,
1997. The annual rental commitment is $234,000.
(18) PROFIT SHARING PLAN (unaudited):
AGI has a defined contribution profit sharing plan covering substantially all
its employees. All full-time (at least 1000 hours) employees who have completed
one year of service and reached the age of 18 are eligible to participate in the
Plan. Annual Company contributions are made at the discretion of
F-27
management. The discretionary contribution is allocated to participants based on
their eligible contributions. All employee contributions are 100% vested.
Participants vest in Company contributions as follows:
Year of Percentage
Service Vested
------- ---------
1 0
2 0
3 20
4 40
5 60
6 80
7 100
Profit sharing expense for AGI was approximately $24,000, $18,000, $19,000 and
$12,000 for the years ended December 31, 1994, 1995, 1996 and the six months
ended June 30, 1997, respectively.
The Company is in the process of amending the plan to cover all its employees.
(19) SEGMENT INFORMATION:
The Company expanded its operations into Canada as a result of the acquisition
of CHL Services in January 1996 (see Note 4). Financial information by
geographic segment is as follows:
US Canada Total
------------- ------------- -------------
Year Ended December 31, 1996
Revenues $ 1,356,948 $ 1,501,014 $ 2,857,962
Net loss (557,827) (164,247) (722,074)
Identifiable assets 611,674 2,296,278 2,907,952
Six Months Ended June 30, 1997 (unaudited)
Revenues $ 2,284,454 $ 437,623 $ 2,722,077
Net loss (526,211) (1,461,470) (1,987,681)
Identifiable assets 37,307,347 441,666 37,744,013
(20) OTHER SUBSEQUENT EVENTS:
Subsequent to December 31, 1996, the Company is planning an initial public
offering of its common stock in the U.S. The Company plans to issue
approximately 3,000,000 shares at an estimated public offering price between
$5.00 and $7.00 per share. There can be no assurance, however, that the offering
will be completed at a per share price within the estimated range, or at all.
F-28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Antigua Group, Inc.:
We have audited the accompanying balance sheets of THE ANTIGUA GROUP, INC. (a
Nevada corporation) as of December 31, 1996 and 1995, and the related statements
of income, changes in stockholders' investment and cash flows for each of the
three years in the period ended December 31, 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Antigua Group, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Company has given
retroactive effect to the change in the method of accounting for inventory
costs.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 23, 1997 (except with respect to
the matter discussed in Note 2, as to
which the date is September 23, 1997).
F-29
THE ANTIGUA GROUP, INC.
BALANCE SHEETS
December 31, March 31,
--------------------------- ------------
ASSETS 1995 1996 1997
------------- ------------- ------------
(unaudited)
CURRENT ASSETS:
Cash ................................................. $ 16,507 $ 94,099 $ 130,877
Accounts receivable, net of allowance for doubtful
accounts $251,000 in 1997, $249,000 in 1996, and
$170,000 in 1995 (Notes 4 and 5) ..................... 5,435,518 4,304,251 5,160,561
Inventories, net (Note 5) ............................ 9,543,144 8,655,490 8,668,528
Prepaid expenses and other current assets ............ 484,345 274,666 65,978
------------- ------------- ------------
Total current assets ............................ 15,479,514 13,328,506 14,025,944
------------- ------------- ------------
PROPERTY AND EQUIPMENT, at cost (Notes 2, 5 and 6)
Machinery and equipment .............................. 2,430,530 2,760,429 2,791,729
Embroidery machine designs ........................... 1,164,496 916,308 961,308
Office and computer equipment and furniture .......... 2,371,253 2,458,655 2,609,961
Automotive equipment ................................. 57,345 57,345 76,041
------------- ------------- ------------
6,023,624 6,192,737 6,439,039
Less - Accumulated depreciation and amortization. (3,274,812) (3,784,209) (4,010,709)
------------- ------------- ------------
Net property and equipment ...................... 2,748,812 2,408,528 2,428,330
------------- ------------- ------------
OTHER ASSETS ............................................. 29,257 16,459 14,294
------------- ------------- ------------
$18,257,583 $15,753,493 $16,468,568
============= ============= ============
LIABILITIES AND STOCKHOLDERS' INVESTMENTS
CURRENT LIABILITIES:
Current portion of long-term debt (Notes 1, 5 and 6) . $ 791,205 $ 840,594 $ 510,358
Revolving line of credit (Notes 1 and 5) ............. 6,965,131 5,104,896 5,847,406
Accounts payable ..................................... 1,758,303 1,440,243 869,758
Accrued expenses and other current liabilities (Note 3) 1,233,505 1,146,594 1,348,512
------------- ------------- ------------
Total current liabilities ....................... 10,748,144 8,532,327 8,576,034
------------- ------------- ------------
LONG-TERM DEBT, less current portion (Notes 1, 5 and 6) .. 3,373,995 2,465,321 2,940,312
COMMITMENTS AND CONTINGENCIES (Notes 1, 3 and 8)
STOCKHOLDERS' INVESTMENT (Note 7):
Common stock, $.005 stated value, 5,000,000 shares
authorized, 2,074,600 shares issued and outstanding .. 10,373 10,373 10,373
Additional paid-in capital ........................... 1,027,193 1,027,193 1,027,193
Retained earnings .................................... 3,097,878 3,718,279 3,914,656
------------- ------------- ------------
4,135,444 4,755,845 4,952,222
------------- ------------- ------------
Total stockholders' investment .................. $18,257,583 $15,753,493 $16,468,568
============= ============= ============
The accompanying notes are an integral part of these financial statements.
F-30
THE ANTIGUA GROUP, INC.
STATEMENTS OF INCOME (LOSS)
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- ------------
(unaudited) (unaudited)
MERCHANDISE SALES, net of returns ........... $31,793,546 $31,402,521 $33,510,364 $6,455,608 $9,219,127
COST OF SALES ............................... 25,503,503 20,825,025 22,490,634 4,582,489 5,951,204
------------- ------------- ------------- ------------- ------------
Gross profit ....................... 6,290,043 10,577,496 11,019,730 1,873,119 3,267,923
------------- ------------- ------------- ------------- ------------
SELLING EXPENSES ............................ 6,424,000 5,688,330 5,843,314 1,114,028 1,433,164
GENERAL AND ADMINISTRATIVE EXPENSES ......... 3,505,027 3,137,890 3,598,886 955,313 1,032,089
------------- ------------- ------------- ------------- ------------
Total selling, general and
administrative expenses ............ 9,929,027 8,826,220 9,442,200 2,069,341 2,465,253
------------- ------------- ------------- ------------- ------------
Income (loss) from operations ...... (3,638,984) 1,751,276 1,577,530 (196,222) 802,670
------------- ------------- ------------- ------------- ------------
OTHER INCOME (EXPENSE):
Interest expense ........................ (1,037,309) (1,444,869) (1,342,859) (331,751) (296,913)
Other income ............................ 348,122 433,945 385,730 58,172 44,945
------------- ------------- ------------- ------------- ------------
(689,187) (1,010,924) (957,129) (276,982) (251,968)
------------- ------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..... (4,328,171) 740,352 620,401 (469,801) 550,702
EXTRAORDINARY ITEM - LOSS ON
EXTINGUISHMENT OF DEBT (NOTE 5) ............. - - - - (354,325)
------------- ------------- ------------- ------------- ------------
NET INCOME (LOSS) (NOTE 2) .................. $(4,328,171) $ 740,352 $620,401 $(469,801) $196,377
============= ============= ============= ============= ============
The accompanying notes are an integral part of these financial statements.
F-31
THE ANTIGUA GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
Common Stock
------------------------ Additional Total
Paid-in Retained Stockholders'
Shares Amount Capital Earnings Investment
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1993 ......................... 1,886,000 $ 9,430 $ 28,136 $ 6,985,994 $ 7,023,560
Distributions .................................... -- -- -- (300,297) 300,297
Net Loss ......................................... -- -- -- (4,328,171) (4,328,171)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 ......................... 1,886,000 9,430 28,136 2,357,526 2,395,092
Sale of stock .................................... 188,600 943 999,057 -- 1,000,000
Net income ....................................... -- -- -- 740,352 740,352
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 ......................... 2,074,600 10,373 1,027,193 3,097,878 4,135,444
Net income ....................................... -- -- -- 620,401 620,401
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 ......................... 2,074,600 10,373 1,027,193 3,718,279 4,755,845
Net income (unaudited) ........................... -- -- -- 196,377 196,377
----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1997 (unaudited) ................ 2,074,600 $ 10,373 $ 1,027,193 $ 3,914,656 $ 4,952,222
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-32
THE ANTIGUA GROUP, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income (loss) .......................... $(4,328,171) $740,352 $620,401 $(469,801) $196,377
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization ......... 830,839 935,988 950,749 250,800 226,500
Gain on the sale of property and equipment (6,678) (84,774) - - -
Provision for uncollectible accounts .. 250,000 150,493 289,058 19,495 1,510
Provision for slow moving inventory ... 107,314 56,943 82,500 21,715 4,821
Change in assets and liabilities
Decrease (increase) in accounts receivable (136,917) (939,736) 842,209 777,505 (857,820)
Decrease (increase) in inventories .... 2,912,187 117,320 805,154 952,705 (17,860)
Decrease (increase) in prepaid expenses
and other current assets .............. (19,926) (205,705) 209,679 (69,541) 208,688
Decrease in other assets .............. 242,597 36,933 12,799 3,128 2,164
(Decrease) increase in accounts payable 695,542 (19,447) (318,060) (394,337) (570,485)
(Decrease) increase in accrued expenses
and other current liabilities ......... 558,832 (281,642) (86,911) (136,350) 201,918
------------- ------------- ------------ ------------- ------------
Net cash (used in) provided by operating
activities ............................ 1,105,619 506,725 3,407,578 955,319 (604,187)
------------- ------------- ------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ...... (580,990) (574,790) (610,466) (93,605) (246,301)
Proceeds from the sale of property and equipment 9,315 254,339 - - -
------------- ------------- ------------ ------------- ------------
Net cash used in investing activities ...... (571,675) (320,451) (610,466) (93,605) (246,301)
------------- ------------- ------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on revolving line of
credit, net ................................ 6,715,764 (2,791,516) (1,860,235) (646,399) (742,511)
Proceeds from long-term debt ............... 984,014 2,350,030 - - 775,000
Payments on long-term debt ................. (7,933,243) (848,096) (859,285) (156,892) (630,245)
Proceeds from sale of stock ................ - 1,000,000 - - -
Distributions to stockholders .............. (300,297) - - - -
------------- ------------- ------------ ------------- ------------
Net cash provided by (used in) financing
activities ................................. (533,762) (289,582) (2,719,520) (803,291) 887,266
------------- ------------- ------------ ------------- ------------
INCREASE (DECREASE) IN CASH .................... 182 (103,308) 77,592 58,423 36,778
CASH AT BEGINNING OF PERIOD .................... 119,633 119,815 16,507 16,507 94,099
------------- ------------- ------------ ------------- ------------
CASH AT END OF PERIOD .......................... $ 119,815 $ 16,507 $ 94,099 $ 74,930 $ 130,877
============= ============= ============ ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ... $ 1,004,176 $ 1,160,116 $ 954,564 $ 273,085 $ 294,333
============= ============= ============ ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1995, the Company received a note for $25,000 from the majority
shareholder in partial exchange for the sale of the airplane. Additionally,
in 1995, the Company purchased equipment for $116,155 under capital lease.
The accompanying notes are an integral part of these financial statements.
F-33
THE ANTIGUA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 AND
THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(1) OPERATIONS:
The Antigua Group, Inc. (Antigua or the Company) is a wholesale distributor of
sportswear and related accessories. Antigua is a closely held entity and certain
transactions involve the Chairman, who is the majority stockholder. The Company
has elected for federal and state income tax purposes to include taxable income
with that of its stockholders (S Corporation election). Accordingly, no
provision for taxes has been made in the accompanying financial statements (see
Note 8).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements reflect the application of accounting
policies as set forth below.
Inventory (reflecting change in accounting principle)
In prior years, inventories were stated at the lower of LIFO cost (last-in,
first-out) or market. Subsequent to December 31, 1996, the Company changed its
method to state inventories at the lower of FIFO cost (first-in, first-out) or
market. The new method of accounting for inventories was adopted in connection
with the purchase of all the outstanding shares of the Company's Common Stock by
Antigua Enterprises Inc. (formerly Southhampton Enterprises Corp.). The
accompanying financial statements have been restated to apply this new method
retroactively. The effect of the accounting change on net income as previously
reported is:
Year Ended December 31,
-----------------------------------------
1994 1995 1996
------------- --------- ----------
Net income (loss) as previously
reported $(4,356,123) $660,148 $932,867
Adjustment for effect of change in
accounting method 27,952 80,204 (312,466)
------------- --------- ----------
Net income (loss) as adjusted $ (4,328,171) $740,352 $620,401
============= ========= ==========
F-34
Property and Equipment
Property and equipment are depreciated or amortized using the straight-line
method over estimated useful lives as follows:
Estimated
Classification Useful Lives
-------------- ------------
Machinery and equipment 3-15
Embroidery machine designs 1
Office and computer equipment and furniture 3-5
Automotive equipment 3-7
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 the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.
Concentrations of Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
customers comprising the Company's credit base and the geographical dispersion
of the customers.
Fair Value of Financial Instruments
The carrying values of cash, accounts receivables, accounts payable, accrued
expenses and other liabilities and the revolving line of credit approximate fair
values due to the short-term maturities of these instruments. In the aggregate,
the installment purchase notes and capital lease obligations approximate fair
value based on the market rates currently available for instruments with similar
terms and remaining maturities. It is not practical to estimate the fair value
of the notes payable to the Chairman or employees, as the agreements are between
related parties.
The estimated fair value amounts have been determined by the Company using
available market information and valuation methodologies described above.
Considerable judgement is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that the Company could realize in a current market exchange.
F-35
The use of different market assumptions or valuation methodologies could have a
material effect on the estimated fair value amounts.
(3) LICENSES:
The Company has a licensing agreement with National Basketball
Association Properties, Inc. (NBA) which grants the Company the right to use the
names, symbols, emblems, designs and logos of the NBA on certain of its
garments. The license requires royalty payments of approximately 9.25% of sales
of NBA products, subject to an annual minimum required payment of $130,000. The
license expires on July 31, 1997.
The Company has licensing agreements with the National Football League (NFL)
which grant the Company the right to use "NFL Marks" on certain of its garments.
These agreements require royalty payments of approximately 10% of sales of NFL
products, subject to certain minimum required payments. These agreements expire
in March 1999. Future minimum required royalty payments range from approximately
$355,000 to $415,000 per year.
The Company has licensing agreements with Major League Baseball Properties, Inc.
(MLB) which grant the Company the right to use the names, characters, symbols,
designs and other similar identifications of the MLB on certain of its garments.
The licenses require royalty payments of 9% of sales of MLB products, subject to
certain annual minimum required payments ranging from $120,000 to $150,000. The
licenses expire December 31, 1999.
The Company has licensing agreements with the National Hockey League (NHL) which
grant the Company the right to use "NHL Marks" on certain of its garments. The
agreement requires royalty payments of 9% on sales of NHL products. Total future
minimum royalties over the term are $20,000. The agreement expires on December
31, 1997.
In addition, the Company has executed numerous market license agreements with
colleges, universities, bowl administrators, and prominent sports figures which
allow the Company to use the names of the institution, sporting event or sports
personality on certain of its garments for varying terms.
Royalty expense was approximately $1,129,000, $977,000 and $1,245,000 in 1994,
1995 and 1996, respectively.
(4) RELATED PARTY TRANSACTIONS:
Included in accounts receivable at December 31, 1996, is a note receivable from
the Chairman of approximately $125,000 due in December 1997.
During 1996, the Company paid $60,000 consulting fees to a stockholder/board
member.
(5) LOAN AGREEMENT WITH BANK:
F-36
At December 31, 1995 and 1996, the Company had a credit facility of up to $12
million, including a revolving line of credit (LOC) and outstanding letters of
credit. Interest was at the bank's prime rate plus 2%. The maximum borrowing
under the LOC could not exceed 85% of eligible receivables plus 50% of eligible
inventories, as defined. The LOC was secured by all of the Company's assets. The
agreement contained certain covenants which, among other things, required the
Company to maintain an current ratio of 1.00, a minimum tangible net worth of
$5,350,000 and a fixed charge coverage ratio, as defined, of at least 1.10.
Dividends could not be paid or unscheduled payments on subordinated debt could
not be made without the prior consent of the bank. The Chairman (majority
stockholder) of the Company personally guaranteed the LOC.
In January 1997, the Company entered into a Loan and Security Agreement (the
Loan Agreement) with a new bank. The Loan Agreement provides for a credit
facility of up to $12 million, including a revolving line of credit and
outstanding letters of credit. Interest is at the bank's prime rate plus 1%. The
maximum borrowing under the new Loan Agreement cannot exceed 85% of eligible
receivables plus 55% of eligible inventory, as defined. The Loan Agreement is
secured by all of the Company's assets. The Loan Agreement contains certain
covenants which, among other things, require the Company to maintain a minimum
tangible net worth (inclusive of subordinated debt, as defined in the Loan
Agreement) of $5,500,000, an interest coverage ratio of no less than 1.50, a
debt service coverage ratio of no less than 1.25 and a ratio of liabilities to
tangible net worth of no more than 2.0. Dividends cannot be paid or unscheduled
payments cannot be made without the prior consent of the bank.
The Loan Agreement includes a term loan for $775,000 with interest at 1.25% over
the bank's prime rate, payable in monthly installments over seven years
beginning March 1, 1997. A portion of the term loan proceeds were used to retire
$478,000 of installment purchase notes and capital lease obligations subsequent
to year end (see Note 6).
The Loan Agreement was entered into in anticipation of the Acquisition discussed
in Note 8. Upon consummation of the Acquisition, the new arrangement will remain
in place.
As a result of the change in banks and the early extinguishment of the credit
facility the Company incurred a loss of $354,325 due to an early termination fee
of $240,000 and the write-off $114,325 of the unamortized deferred loan fees.
This amount has been recorded as an extraordinary item in 1997.
F-37
(6) LONG-TERM DEBT:
Long-term debt consisted of the following:
December 31, March 31,
----------------------------------- ----------
1995 1996 1997
---------- ---------- ----------
(unaudited)
Subordinated note payable to Chairman,
interest at 8%, interest and principal due
August 31, 1998. Accrued interest at
December 31, 1996 and 1995, was
$81,000 and $71,000, respectively. $1,150,000 $900,000 $900,000
Subordinated note payable to Chairman,
interest at 10%, due in monthly
installments beginning July 1998. If the
principal is paid in full on or before
January 31, 1998, all accrued interest is
waived. Accrued interest at
December 31, 1996 and 1995, was
$175,000 and $55,000, respectively. 1,200,000 1,200,000 1,200,000
Term loan payable to bank, interest at
1 1/4% over the bank's prime rate, due in
monthly installments through February
2000. - - 756,467
Installment purchase notes and capital
lease obligations to finance companies,
secured by equipment, interest ranging
from 7.3% to 12.25%, due in varying
individual installments ranging from
$500 to $18,500 through 2000. 1,175,777 586,049 72,409
Notes payable to employees, interest at
6%, due in total annual installments
ranging from $167,309 to $186,870
through June 1998 (see Note 8). 541,051 521,494 521,494
Note payable to related party, principal
and interest at 8% due in January 1997. 98,372 98,372 -
---------- ---------- ----------
4,165,200 3,305,915 3,450,370
Less - Current portion (791,205) (840,594) (510,358)
---------- ---------- ----------
$3,373,995 $2,465,321 $2,940,012
========== ========== ==========
F-38
Upon consummation of the Acquisition (see Note 8), certain of the outstanding
principal and accrued interest amounts on the subordinated notes due to the
Chairman and various capital lease obligations are due and payable. The amounts
have been classified based on current due dates and have not been classified
based on possible acceleration. Subsequent to year end, $478,000 of the
installment purchase notes and capital lease obligations were retired (see Note
5). The acquiring company anticipates restructuring of the obligations above
concurrently with the closing of the Acquisition.
Long-term debt matures as follows:
Year Ending
December 31, Amount
------------ ------
1997 $ 840,594
1998 2,459,111
1999 5,238
2000 972
----------
$3,305,915
==========
(7) STOCKHOLDERS' INVESTMENT:
Stock Options
The Company applies Accounting Principals Board Opinion 25 and related
Interpretations in accounting for its 1993 Stock Option Plan (Plan). Under the
Plan, a maximum of 210,000 shares can be issued. Options for 43,000 shares have
been granted to current employees at a purchase price of $10.00 per share. These
options are fully vested and are exercisable provided the Company completes a
qualified initial public offering prior to the expiration date of the options.
Options for 10,000 shares were granted in February 1996 to current employees at
an exercise price of $5.78 per share. These options vest at various dates
through February 2000. As of December 31, 1996, options for 1,250 shares at
$5.78 per share qualify for vesting.
Upon completion of the Acquisition (see Note 8), however, all of the outstanding
stock options shall terminate. Accordingly, the fair value of these options is
insignificant. No options have been exercised as of December 31, 1996.
(8) COMMITMENTS AND CONTINGENCIES:
Acquisition
F-39
On July 18, 1996, the shareholders of Antigua entered into an Acquisition
Agreement, as amended (Acquisition), whereby 100% of the Company's issued and
outstanding stock would be acquired by Antigua Enterprises Inc. The anticipated
consideration to be paid to the shareholders of Antigua is approximately
$20,000,000 in cash and promissory notes.
Upon completion of the Acquisition, the S corporation status will be terminated
and the Company will become a taxable entity subject to provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Additionally, subsequent to the completion of the Acquisition and subject to
certain terms in the Loan Agreement (see Note 5), the Company may be eligible to
receive an additional term loan under the Loan Agreement in the amount of
$1,500,000.
Contingent Purchase Price for Stock Purchase
Under terms of shareholder agreements in 1993, the Company exercised its right
to purchase 210,800 shares of common stock owned by employees. Payment was made
by the issuance of notes payable (see Note 6). Additionally, $316,200 of the
contingent purchase price will be payable upon the occurrence, on or before May
31, 2003, of (1) a public offering of the Company's common stock resulting in
net proceeds to the Company of at least $10 million or (2) a sale of
substantially all of the stock or assets of the Company (see above Acquisition).
The Company has not recorded the contingent amount payable as of December 31,
1996.
Operating Leases
The Company leases its primary facility from an affiliate pursuant to a lease
agreement expiring on November 30, 1997. Expense associated with this related
party lease was approximately $249,000 for the year ended December 31, 1994 and
$230,000 for each of the years ended December 31, 1995 and 1996. Remaining
payments in 1997 are expected to be approximately $210,500.
F-40
The Company also leases other building space and equipment under noncancelable
lease agreements. Minimum annual rentals for the other noncancelable leases are
as follows:
1997 $310,300
1998 291,500
1999 237,800
--------
$839,600
========
Lease expense for the years ended December 31, 1994, 1995 and 1996, for these
noncancelable leases was approximately $247,000, $286,000 and $283,000,
respectively.
Letters of Credit
At December 31, 1996, the Company has outstanding issued letters of credit for
approximately $1,658,000 in connection with its bank credit lines.
Purchase Commitments
At December 31, 1996, the Company had inventory purchase commitments of
approximately $8,750,000.
Profit Sharing Plan
The Company has a defined contribution profit sharing plan covering
substantially all employees. All full-time (at least 1000 hours) employees who
have completed one year of service and reached the age of 18 are eligible to
participate in the Plan. Annual Company contributions are made at the discretion
of management. The discretionary contribution is allocated to participants based
on their eligible contributions. All employee contributions are 100% vested.
F-41
Participants vest in Company contributions as follows:
Years of Percentage
Service Vested
--------- -------
1 0
2 0
3 20
4 40
5 60
6 80
7 100
Profit sharing expense was approximately $24,000, $18,000 and $19,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-42
================================================================================
No dealer, sales representative or other person has been authorized to
give any information or to make any representations other than those contained
in this prospectus, and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company, any Selling Shareholder or the Underwriters. This prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation would be unlawful. Neither the delivery of this prospectus nor
any offer or sale hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
------------------
TABLE OF CONTENTS
Page
Prospectus Summary ...........................................................
Risk Factors .................................................................
The Acquisition and Related Financing ........................................
S Corporation Distributions ..................................................
Use of Proceeds ..............................................................
Price Range of Common Shares .................................................
Dividend Policy ..............................................................
Capitalization ...............................................................
Dilution .....................................................................
Unaudited Pro Forma
Consolidated Financial Statements ..........................................
Selected Financial Data ......................................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ..............................................................
Business .....................................................................
Management ...................................................................
Certain Relationships and Related Transactions ...............................
Principal and Selling Shareholders ...........................................
Description of Securities ....................................................
Certain Income Tax Considerations ............................................
Canadian Government Regulation ...............................................
Shares Eligible for Future Sale ..............................................
Underwriting .................................................................
Legal Matters ................................................................
Experts ......................................................................
Changes in Independent Auditor ...............................................
Additional Information .......................................................
Index to Financial Statements ................................................
------------------
Until _______________, 1997 (25 days after the date of this
prospectus), all dealers effecting transactions in the Common Shares, whether or
not participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligations of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
3,000,000 Shares
[logo]
Antigua Enterprises Inc.
Common Shares
------------------
PROSPECTUS
------------------
CRUTTENDEN ROTH
INCORPORATED
FERRIS, BAKER WATTS,
INCORPORATED
_______________, 1997
================================================================================
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the offering described in this Registration Statement, all of which will be
borne by the Company.
Registration Fee ........................................... $3,522
NASD Filing Fee ............................................
Nasdaq Listing Fees ........................................ **
Blue Sky Fees and Expenses ................................. 3,000*
Legal Fees and Expenses .................................... **
Accounting Fees and Expenses ............................... **
Printing and Engraving Expenses ............................ **
Transfer Agent Fee ......................................... **
Miscellaneous .............................................. **
------------
Total ............................................. $ **
============
- ------------------
* Estimated
** To be completed by amendment
Item 14. Indemnification of Directors and Officers
The Company Act (British Columbia) permits a company, with the approval
of the British Columbia Supreme Court, to indemnify a director or officer of the
Company in respect of all costs, charges and expenses actually and reasonably
incurred by him in connection with a civil, criminal or administrative action to
which he is made a party by reason of having been a director provided that he
acted honestly and in good faith and had reasonable grounds for believing that
his conduct was lawful.
The Articles of the Company provide that, subject to the provisions of
the Company Act, the directors shall cause the Company to indemnify its
directors and may cause the Company to indemnify its officers and the directors
of companies in which the Company is a shareholder.
The Company entered into written indemnity agreements with two
directors, J. Christopher Woods and Fiama Walker, with respect to approval of
the Acquisition. Ms. Walker is no longer a director of the Company.
Item 15. Recent Sales of Unregistered Securities
All share amounts reflect a one for five reverse split of the Company's
Common Shares effected on June 13, 1997.
II-1
On December 13, 1994 the Company issued 1,185 shares to a vendor of
services in settlement for a debt of approximately C$8,000. The issuance was not
registered under the Act in reliance upon the exemption from registration
provided by Section 4(2) thereof.
On March 30, 1995 the Company sold 46,933 Common Shares to Mr. Haynes
for C$140,802 and 46,933 Common Shares to an officer of the Southhampton
Enterprises, Inc., a wholly owned subsidiary of the Company, for C$140,799. The
Common Shares were coupled with warrants to acquire an additional 46,933 Common
Shares. The sale was not registered under the Act in reliance upon the exemption
from registration provided by Section 4(2) thereof. On March 1, 1996 Mr. Haynes
exercised warrants to acquire 4,000 Common Shares for an exercise price of
C$13,800. On January 29, 1997 Mr. Haynes and the officer exercised warrants to
acquire 19,467 and 19,466 Common Shares, respectively, for an aggregate exercise
price of C$134,286.
On August 25, 1995 the Company issued options to acquire 98,000 Common
Shares to eight directors. The exercise price of these options was set at C$2.05
on that date, but the options were repriced on January 16, 1996 to C$2.90 per
Common Share. The issuance was not registered under the Act in reliance upon the
exemption from registration provided Rule 701 under the Act. On November 26,
1996 a director exercised an option to acquire 9,000 Common Shares for an
exercise price of C$26,100. On January 29, 1997 four directors exercised options
to acquire 9,000 Common Shares each for an aggregate exercise price of
C$104,400. The issuance was not registered under the Act in reliance upon the
exemption from registration provided by Rule 701 under the Act.
On August 30, 1995 the Company sold 84,992 Common Shares to Mr. Haynes
for C$212,480. The Common Shares are coupled with two-year warrants to acquire
an additional 84,992 Common Shares at an exercise price of C$2.75 per Common
Share during the first year and C$3.50 per Common Share during the second year.
The sale was not registered under the Act in reliance upon the exemption from
registration provided by Section 4(2) thereof. On December 31, 1996 Mr. Haynes
exercised 44,000 share purchase warrants at C$3.50 per Common Share. The
issuance of securities was not registered under the Act in reliance upon the
exemption from registration provided by Section 4(2) thereof.
On January 16, 1996 the Company issued options to acquire 80,000 Common
Shares to six employees. The exercise price of these options was set at C$2.90
per Common Share. The issuance was not registered under the Act in reliance upon
the exemption from registration provided by Rule 701 under the Act. On April 10,
1996, May 2, 1996, July 17, 1996 and September 16, 1996, four employees
exercised options to acquire 2,000, 30,000, 2,000 and 4,000 Common Shares,
respectively. These securities were not sold in a transaction involving any
public offering in the United States and, accordingly, were exempted from
registration under the Act.
On July 9, 1996 the Company issued 11,429 shares to R. James Beadle in
settlement for a debt of approximately C$40,000. These securities were not sold
in a transaction involving any public offering in the United States and,
accordingly, were exempted from registration under the Act.
On July 9, 1996 the Company issued 21,786 shares to a single individual
in exchange for the cancellation of the then remaining indebtedness
(approximately C$76,250) under the agreement for the acquisition by the Company
of T-Sports, Inc. The issuance was not registered under the Act in reliance upon
the exemption from registration provided by Section 4(2) thereof.
On July 11, 1996 the Company sold 162,200 Common Shares and two-year
warrants to purchase a like number of shares at a price of C$6.25 per Common
Share in the first year and C$7.50 in the second year for an aggregate
consideration of C$1,013,750 to a total of 16 investors, including four
directors of the Company or subsidiaries. The sale was not registered under the
Act in reliance upon the exemption from registration provided by Section 4(2)
thereof.
II-2
On July 17, 1996 an employee acquired 2,000 Common Shares from the
registrant upon exercise of an option and payment of C$5,800. The sale was
registered under the Act in reliance upon the exemption from the registration
provided by Rule 701 under the Act.
On September 16, 1996 an employee acquired 4,000 Common Shares from the
registrant upon exercise of an option and payment of C$11,600. The sale was not
registered under the Act in reliance upon the exemption from registration
provided by Rule 701 under the Act.
On October 17, 1996 the Company sold 210,000 Common Shares and two-year
warrants to purchase a like number of shares at a price of C$5.80 per Common
Share in the first year and C$6.65 in the second year for an aggregate
consideration of C$1,218,000 to five investors, four of which were directors of
the Company or subsidiaries. The sale was not registered under the Act in
reliance upon the exemption from registration provided by Section 4(2) thereof.
On January 11, 1997 a director acquired 9,000 Common Shares from the
registrant upon exercise of a warrant and payment of C$26,100. The sale was not
registered under the Act in reliance upon the exemption from registration
provided by Section 4(2) thereof.
On January 29, 1997 a director acquired 40,992 Common Shares from the
registrant upon exercise of a warrant and payment of C$143,472. The sale was not
registered under the Act in reliance upon the exemption from registration
provided by Section 4(2) thereof.
On January 29, 1997 a director and an officer acquired an aggregate of
38,932 Common Shares from the registrant upon exercises of warrants and payment
of C$134,320 in the aggregate. The sale was not registered under the Act in
reliance upon the exemption from registration provided by Section 4(2) thereof.
On March 1, 1997 the Company issued a one-year C$4,200,000 convertible
debenture bearing interest at 15% per annum to a single investor. The debenture
is convertible into 1,144,500 Common Shares of the Company and warrants to
acquire an additional 1,144,500 Common Shares at an exercise price of C$4.00
during the first year following issuance and C$4.60 during the second year after
issuance. In connection with guarantees of the debenture, two directors were
issued an aggregate of 177,000 Common Shares as bonus shares. The Company also
issued 177,000 Common Shares to the investors as an inducement to invest in the
Company. The issuances were not registered under the Act in reliance upon the
exemption from registration provided by Section 4(2) thereof.
On April 21, 1997 the Company sold 4,730,000 convertible limited
retractable Series A 12% cumulative preference shares, which are convertible
into 946,000 Common Shares and warrants to purchase a like number of Common
Shares, to twelve investors, including two directors, a director of a subsidiary
and two entities affiliated with a director, for an aggregate consideration of
C$4,730,000. The convertible preference shares are convertible at C$6.75,
C$8.00, C$9.25, C$10.50 and C$11.75 in the first, second, third, fourth and
fifth years, respectively, and the warrants are exercisable at C$7.20, C$8.40,
C$9.70, C$10.85 and C$12.10 in the first, second, third, fourth and fifth years,
respectively. In connection with the sale, the Company issued warrants to
purchase 238,627 Common Shares to an unaffiliated third party as a finder's fee.
The sale was not registered under the Act in reliance upon the exemption from
registration provided by Section 4(2) thereof.
II-3
On April 21, 1997 the Company sold 151,778 Common Shares and two-year
warrants to purchase 75,889 shares at a price of C$4.50 per Common Share in the
first year and C$5.20 in the second year to a single investor for C$683,000. In
connection with such private placement the Company issued 12,142 Common Shares
to an entity controlled by a former director. The foregoing securities were not
offered or sold in transactions involving any public offering in the United
States and, accordingly, were exempted from registration under the Act.
On June 13, 1997 the Company issued a one-year $1,791,048.45
convertible debenture bearing interest at 12% per annum to a single investor.
The debenture is convertible into 714,454 Common Shares and two-year warrants to
purchase an additional 714,454 Common Shares at a price of C$4.00 per Common
Share in the first year and C$4.60 in the second year. The investor also
received 124,378 Common Shares as bonus shares in connection with the loan to
the Company. The foregoing securities were not offered or sold in transactions
involving any public offering in the United States and, accordingly, were
exempted from registration under the Act. In connection with the convertible
debenture, the Company issued warrants to purchase 115,344 Common Shares to an
unaffiliated third party as a finder's fee in connection with such financing.
The issuance of the warrants was not registered under the Act in reliance upon
the exemption from registration provided by Section 4(2) thereof.
On June 16, 1997 the Company sold 180,144 Common Shares and two-year
warrants to purchase 90,072 shares at a price of C$6.75 per Common Share in the
first year and C$7.75 in the second year for an aggregate consideration of
C$1,215,969 to eight investors, including two current executive officers and one
director of the Company. The sale was not registered under the Act in reliance
upon the exemption from registration provided by Section 4(2) thereof. In
connection with this private placement, the Company issued 6,537 Common Shares
as a finder's fee to an unaffiliated third party. The issuance was not
registered under the Act in reliance upon the exemption from registration
provided by Section 4(2) thereof.
On June 16, 1997 the Company sold 60,000 Common Shares and two-year
warrants to purchase 60,000 shares at a price of C$5.35 per Common Share in the
first year and C$6.15 in the second year. In connection with the sale the
Company issued 3,653 Common Shares to an unaffiliated third party as a finder's
fee. Neither the sale nor the issuance was registered under the Act in reliance
upon the exemption from registration provided by Section 4(2) thereof.
On June 16, 1997 the Company issued warrants for the purchase of
2,479,598 Common Shares to three bridge lenders in connection with financing the
Acquisition and 97,054 Common Shares to an unaffiliated third party as a
finder's fee in connection with such financing. The exercise price of the
warrants is $5.00 per Common Share. The issuance was not registered under the
Act in reliance upon the exemption from registration provided by Section 4(2)
thereof.
On June 30, 1997 the Company issued options to acquire 120,000 Common
Shares to two executive officers. The exercise price of the options is C$6.25
per Common Share. The issuance was not registered under the Act in reliance upon
the exemption from registration provided by Section 4(2) thereof.
On June 30, 1997 the Company issued options to acquire 277,000 Common
Shares to 11 employees and consultants. The exercise price of the options is
$5.00 per Common Share. The issuance was not registered under the Act in
reliance upon the exemption from registration provided by Section 4(2) thereof.
On June 30, 1997 the Company issued options to acquire 75,000 Common
Shares to 13 directors of the Company and its subsidiaries. The exercise price
of the options is $5.00 per Common Share. The issuance was not registered under
the Act in reliance upon the exemption from registration provided by Section
4(2) thereof.
On July 11, 1997 six individuals, including one director, acquired an
aggregate of 28,800 Common Shares from the registrant upon exercise of warrants
and payment of C$180,000 in the aggregate. The sale was not registered under the
Act in reliance upon the exemption from registration provided by Section 4(2)
thereof.
II-4
On July 18, 1997 the Company sold 1,000,000 convertible limited
retractable Series A 12% cumulative preference shares, which are convertible
into 200,000 Common Shares and warrants to purchase a like number of Common
Shares to a single investor for an aggregate consideration of C$1,000,000. The
convertible preference shares are convertible at C$6.75, C$8.00, C$9.25, C$10.50
and C$11.75 in the first, second, third, fourth and fifth years, respectively,
and the warrants are exercisable at C$7.20, C$8.40, C$9.70, C$10.85 and C$12.10
in the first, second, third, fourth and fifth years, respectively. The Company
paid a finder's fee in connection with this placement of 16,000 Common Shares to
an unaffiliated third party. The issuances were not registered under the Act in
reliance upon the exemption from registration provided by Section 4(2) thereof.
On August 18, 1997 three employees acquired an aggregate of 10,000
Common Shares from the registrant upon exercise of a warrant and payment of
C$29,100 in the aggregate. The sale was not registered under the Act in reliance
upon the exemption from registration provided by Section 4(2) thereof.
On August 25, 1997 a director of the registrant acquired 9,000 Common
Shares from the registrant upon exercise of an option and payment of C$26,100.
The sale was not registered under the Act in reliance upon the exemption from
registration provided by Rule 701 under the Act.
On August 29, 1997 a former director of a subsidiary acquired 14,000
Common Shares from the registrant upon exercise of a warrant and payment of
C$105,000. The sale was not registered under the Act in reliance upon the
exemption from registration provided by Section 4(2) thereof.
On September 23, 1997 the Company issued 131,758 Common Shares to
Sportswear Investors, LLC. Mr. McCauley, a member of that entity, is a director
of a subsidiary of the registrant. The issuance was not registered under the Act
in reliance upon the exemption from registration provided by Section 4(2)
thereof.
Item 16. Exhibits and Financial Statement Schedules
a. Exhibits
See Exhibit Index following the certification of the Authorized
Representative. The Exhibit Index is incorporated herein by this reference.
b. Financial Statement Schedules
None.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance on Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offer
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
State of Arizona, on the 10th day of November, 1997.
ANTIGUA ENTERPRISES INC.
By: /s/ L. Steven Haynes
------------------------------------
L. Steven Haynes
Chief Executive Officer, Director
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints L. Steven
Haynes and Gerald K. Whitley, and each of them individually, his true and lawful
attorney in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to the Registration
Statement and file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Louis B. Lloyd
___________________________________________
Louis B. Lloyd Chairman of the Board of Directors November 10, 1997
/s/ L. Steven Haynes
___________________________________________
L. Steven Haynes Chief Executive Officer, Director (Principal November 10, 1997
Executive Officer)
/s/ Gerald K. Whitley
___________________________________________
Gerald K. Whitley Vice President of Finance of AGI (Principal November 10, 1997
Financial Officer and Principal Accounting
Officer)
___________________________________________ Secretary, Director
J. Christopher Woods
/s/ James E. Miles
___________________________________________
James E. Miles Director November 10, 1997
/s/ Robert J. McCammon
___________________________________________
Robert J. McCammon Director November 10, 1997
/s/ James W. Lewis
___________________________________________
James W. Lewis Director November 10, 1997
/s/ Natale Bosa
___________________________________________ November 10, 1997
Natale Bosa Director
II-6
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the
undersigned certifies that it is the duly authorized United States
representative of Antigua Enterprises Inc. and has duly caused this registration
statement to be signed on behalf of it by the undersigned, thereunto duly
authorized, in the city of Scottsdale, Arizona November 10, 1997.
THE ANTIGUA GROUP, INC.
(Authorized U.S. Representative)
By: /s/ L. Steven Haynes
--------------------------------------
L. Steven Haynes
Chief Executive Officer
II-7
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------------- -------------------------------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement among Antigua Enterprises Inc. (the "Registrant") and Cruttenden Roth
Incorporated
2.1 Stock Purchase Agreement between Southhampton Enterprises Corp., Southhampton Enterprises, Inc., and
Thomas E. Dooley, Jr., Gail Dooley, Thomas E. Dooley and Gail Dooley Revocable Trust of 1988, E.
Louis Werner, Jr. Revocable Intervivos Trust of 1982, The Irrevocable Gift Trusts of the Children of
Thomas and Gail Dooley of 1989, dated April 21, 1997 (collectively, the "Sellers")
2.2 Letter Amendment to Stock Purchase Agreement between Southhampton Enterprises Corp., Southhampton
Enterprises, Inc. and the Sellers, dated June 2, 1997
*3.1 Memorandum of Antigua Enterprises Inc.
3.2 Articles of Antigua Enterprises Inc.
*4.1 Specimen Stock Certificate representing the Common Shares
4.2 Warrant to Purchase 50,000 shares of common stock of Antigua Enterprises Inc., Certificate No. W-#1
issued to Thomas E. Dooley, Jr. as agent for Sellers, dated May 29, 1997
4.3 Warrant to Purchase shares of common stock of Southhampton Enterprises Corp. issued to LaSalle
Business Credit, Inc., dated May 7, 1997
4.3.1 Amendment No. 1 to Warrant, dated May 7, 1997
4.4 Warrant to Purchase shares of common stock of Southhampton Enterprises Corp. issued to Imperial Bank,
dated May 7, 1997
4.4.1 Amendment No. 1 to Warrant, dated May 7, 1997
4.5 Warrant to Purchase shares of common stock of Southhampton Enterprises Corp., issued to The
Cruttenden Roth Bridge Fund, L.L.C., dated May 7, 1997
*4.6 Form of Common Share Purchase Warrant issued in private placement of 162,000 units
*4.7 Form of Common Share Purchase Warrant issued in private placement of 210,000
*4.8 Form of Common Share Purchase Warrant issued in private placement of 4,730,000 shares of Series A.
Preferred
*4.9 Form of Common Share Purchase Warrant issued in private placement of 4,730,000 Shares of Series A
Preferred
*4.10 Form of Common Share Purchase Warrant issued in private placement of 4,730,000 shares of Series A
Preferred
*4.11 Form of Common Share Purchase Warrant issued in private placement of 4,730,000 shares of Series A
Preferred
*4.12 Form of Common Share Purchase Warrant issued in private placement of 151,778 units
*4.13 Form of Common Share Purchase Warrant issued in private placement of 60,000 units
*4.14 Form of Common Share Purchase Warrant issued in private placement of 1,000,000 shares of Series A
Preferred
*4.15 Form of Common Share Purchase Warrant issued in private placement of 1,000,000 shares of Series A
Preferred
*4.16 Form of Common Share Purchase Warrant issued in connection with C$4,200,000 Convertible Debenture
*4.17 Form of Common Share Purchase Warrant issued in connection with $1,791,048.45 Convertible Note
*5.1 Opinion of Stikeman, Elliott
10.1 Registration Rights Agreement between Southhampton Enterprises Corp. and Dooley, as agent, effective
as of May 7, 1997
Ex - 1
Exhibit No. Description of Exhibit
- ----------------- -------------------------------------------------------------------------------------------------------
10.2 Intercreditor Agreement by and between LaSalle Business Credit, Inc., Sellers, The Cruttenden
Roth Bridge Fund, L.L.C., Imperial Bank, The Antigua Group, Inc., Southhampton Enterprises Corp.
and Southhampton Enterprises, Inc., dated May 7, 1997
10.3 Employment Agreement between The Antigua Group, Inc. and Ronald A. McPherson, dated May 7, 1997
10.4 Employment Agreement between The Antigua Group, Inc. and Gerald K. Whitley, dated May 7, 1997
10.5 Employment Agreement between The Antigua Group, Inc. and L. Steven Haynes, dated June 16, 1997
10.6 Employment Agreement between The Antigua Group, Inc. and Brett Moore, dated May 29, 1997
*10.7 Employment Agreement between The Antigua Group, Inc. and Joseph M. Blanchette, dated June 16, 1997
*10.8 Form of Independent Sales Representative Agreement
10.9 Lease Agreement between D&D Development Co., an Arizona general partnership, and The Antigua
Group, Inc., dated December 1, 1994
10.9.1 Letter Agreement between D&D Development Co., an Arizona general partnership, and The Antigua
Group, Inc., dated September 20, 1996
10.10 McCormick Ranch Industrial Center III Commercial Lease Agreement between Petroleum, Inc. and
Antigua Group, Inc., dated July 26, 1996
10.10.1 Lease Modification Agreement #1 between Petroleum, Inc. and Antigua Group, Inc., dated October 7,
1996
10.10.2 Lease Modification Agreement #2 between Petroleum, Inc. and Antigua Group, Inc., dated January 7,
1997
**10.11 Term Sheet and License Agreement, National Football Leauge Properties, Inc., dated February 27, 1996
10.12 Loan and Security Agreement between LaSalle Business Credit, Inc. And The Antigua Group, Inc. for
$14,275,000, dated January 23, 1997
10.13 Term Note A (Machinery & Equipment) payable to LaSalle Business Credit, Inc. by The Antigua Group,
Inc. in the original principal amount of $775,000, dated January 23, 1997
10.14 Revolving Loan Note payable to LaSalle Business Credit, Inc. by The Antigua Group, Inc. in the original
principal amount of $12,000,000, dated January 23, 1997
10.15 Trademark Security Agreement between LaSalle Business Credit and The Antigua Group, Inc., dated
January 23, 1997
10.16 Modification Agreement between LaSalle Business Credit, Inc. and The Antigua Group, Inc., dated May
7, 1997
10.17 Loan and Security Agreement between LaSalle Business Credit, Inc. and The Antigua Group, Inc. for
$3,500,000, dated May 7, 1997
10.18 Term Note payable to LaSalle Business Credit, Inc. by The Antigua Group, Inc. in the original principal
amount of $3,500,000, dated May 7, 1997
10.19 Continuing Unconditional Guaranty between LaSalle Business Credit, Inc. and Southhampton Enterprises
Corp., dated May 7, 1997
10.20 Continuing Unconditional Guaranty between LaSalle Business Credit, Inc. and Southhampton Enterprises,
Inc., dated May 7, 1997
10.21 Security Agreement between LaSalle Business Credit, Inc. and Southhampton Enterprises Corp., dated
May 7, 1997
10.22 Security Agreement between LaSalle Business Credit, Inc. and Southhampton Enterprises, Inc., dated May
7, 1997
10.23 Trademark Security Agreement between LaSalle Business Credit, Inc. and The Antigua Group, Inc., dated
May 7, 1997
Ex - 2
Exhibit No. Description of Exhibit
- ----------------- -------------------------------------------------------------------------------------------------------
10.24 Credit Agreement between Imperial Bank, The Antigua Group, Inc. Southhampton Enterprises Corp. and
Southhampton Enterprises, Inc., dated May 7, 1997
10.25 Amendment No. 1 to Credit Agreement and Indemnification Agreement, dated May 30, 1997
10.26 Promissory Note payable to Imperial Bank by The Antigua Group, Inc. in the original principal amount of
$2,500,000, dated May 7, 1997
10.27 Continuing Guarantee and Subordination Agreement between Imperial Bank and Southhampton Enterprises
Corp., dated May 7, 1997
10.28 Continuing Guarantee and Subordination Agreement between Imperial Bank and Southhampton
Enterprises, Inc., dated May 7, 1997
10.29 Security Agreement between Imperial Bank and Southhampton Enterprises Corp., dated May 7, 1997
10.30 Security Agreement between Imperial Bank and Southhampton Enterprises, Inc., dated May 7, 1997
10.31 Security Agreement between Imperial Bank and The Antigua Group, Inc., dated May 7, 1997
10.32 Trademark Security Agreement between Imperial Bank and The Antigua Group, Inc., dated May 7, 1997
10.33 Pledge and Irrevocable Proxy Security Agreement between Imperial Bank and Southhampton Enterprises
Corp., dated May 7, 1997
10.34 Pledge and Irrevocable Proxy Security Agreement between Imperial Bank and Southhampton Enterprises,
Inc., dated May 7, 1997
10.35 Securities Purchase Agreement between The Cruttenden Roth Bridge Fund, L.L.C., The Antigua Group,
Inc., Southhampton Enterprises Corp. and Southhampton Enterprises, Inc., dated May 7, 1997
10.36 Senior Subordinated Secured Note payable to The Cruttenden Roth Bridge Fund, L.L.C. by The Antigua
Group, Inc. in the original principal amount of $1,020,000, dated May 7, 1997
10.37 Guaranty from Southhampton Enterprises Corp. in favor of Cruttenden Roth Bridge Fund, L.L.C., dated
May 7, 1997
10.38 Guaranty from Southhampton Enterprises, Inc. in favor of Cruttenden Roth Bridge Fund, L.L.C., dated
May 7, 1997
10.39 Security and Pledge Agreement between The Cruttenden Roth Bridge Fund, L.L.C. and Southhampton
Enterprises Corp., dated May 7, 1997
10.40 Security and Pledge Agreement between The Cruttenden Roth Bridge Fund, L.L.C. and Southhampton
Enterprises, Inc., dated May 7, 1997
10.41 Security Agreement between The Cruttenden Roth Bridge Fund, L.L.C. and The Antigua Group, Inc.,
dated May 7, 1997
10.42 Promissory Note (Three Year Note) payable to the Sellers by Southhampton Enterprises Corp. in the
original principal amount of $5,198,000, dated May 7, 1997
10.43 Promissory Note (Two Year Note) payable to the Sellers by Southhampton Enterprises Corp. in the
amount of $325,000, dated May 7, 1997
10.44 Promissory Note (Profit Note) payable to the Sellers by Southhampton Enterprises Corp. in the amount of
$855,000, dated May 7, 1997
10.45 Unconditional Guarantee of Payment between the Sellers and Southhampton Enterprises, Inc. and Antigua
Enterprises Inc., dated May 7, 1997
10.46 Security Agreement between Sellers and Southhampton Enterprises Corp., dated May 7, 1997
10.47 Security Agreement between Sellers and Southhampton Enterprises, Inc., dated May 7, 1997
10.48 Security Agreement between Sellers and The Antigua Group, Inc., dated May 7, 1997
10.49 Trademark Security Agreement between Sellers and The Antigua Group, Inc., dated May 7, 1997
10.50 Pledge and Security Agreement and Irrevocable Proxy between the Sellers and Southhampton Enterprises
Corp., dated May 7, 1997
Ex - 3
Exhibit No. Description of Exhibit
- ----------------- -------------------------------------------------------------------------------------------------------
10.51 Pledge and Security Agreement and Irrevocable Proxy between the Sellers and Southhampton Enterprises,
Inc., dated May 7, 1997
10.52 Amendment to Second Amended and Restated Non-Negotiable Note payable to Gerald K. Whitley by The
Antigua Group, Inc. in the original principal amount of $250,964.25, dated June 16, 1997
10.53 Note Amendment Agreement dated July 1, 1995 and Second Amended and Restated Non-Negotiable Note
between Gerald K. Whitley and The Antigua Group, Inc., in the original principal amount of
$334,619.00, dated January 1, 1993
10.54 Amendment to Second Amended and Restated Non-Negotiable Note payable to Ronald A. McPherson by
The Antigua Group, Inc. in the original principal amount of $250,964.25, dated June 10, 1997
10.55 Note Amendment Agreement dated July 1, 1995 and Second Amended and Restated Non-Negotiable Note
between Ronald A. McPherson and The Antigua Group, Inc., in the original principal amount of
$334,619.00, dated January 1, 1993
11.1 Statement Regarding Computation of Earnings Per Share
16.1 Letter from BDO Dunwoody, Chartered Accountants, dated November 5, 1997
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of BDO Dunwoody, Chartered Accountants
*23.3 Consent of Stikeman, Elliott (contained in their opinion filed as Exhibit 5.1 to this Registration Statement)
24.1 Powers of Attorney (contained on Signatures Page)
*24.2 Certified resolution of the Board of Directors of the Registrant appointing the attorneys-in-fact
*24.3 Power of Attorney of Louis B. Lloyd
*24.4 Power of Attorney of L. Steven Haynes
*24.5 Power of Attorney of Gerald K. Whitley
*24.6 Power of Attorney of J. Christopher Woods
*24.7 Power of Attorney of James E. Miles
*24.8 Power of Attorney of Robert J. McCammon
*24.9 Power of Attorney of James W. Lewis
27 Financial Data Schedule (filed by EDGAR only)
- ---------------------
* To be filed by amendment.
** Confidential treatment requested for portions of this exhibit.
Ex - 4