AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION STATEMENT NO. 333-37507
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CONNECTICUT VALLEY SPORTS, INC.
(Name of Small Business Issuer)
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DELAWARE 3484 13-3890380
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
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4004 HIGHWAY 93 NORTH
STEVENSVILLE, MONTANA 59870
(406) 777-5534
(Address and Telephone Number of Principal Executive Offices and Place Of
Business)
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JOHN TILLELI
CHIEF EXECUTIVE OFFICER
CONNECTICUT VALLEY SPORTS, INC.
4004 HIGHWAY 93 NORTH
STEVENSVILLE, MONTANA 59870
(406) 777-5534
(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS LLP ZIMET, HAINES, FRIEDMAN & KAPLAN
JAY M. KAPLOWITZ, ESQ. JAMES MARTIN KAPLAN, ESQ.
101 EAST 52ND STREET 460 PARK AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
TELEPHONE: (212) 752-9700 TELEPHONE: (212) 486-1700
TELECOPIER: (212) 752-9713 TELECOPIER: (212) 223-1151
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
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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. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. THE EXHIBIT INDEX REQUIRED BY ITEM
601 OF REGULATION S-B IS LOCATED AT PAGE OF THE SEQUENTIAL NUMBERING SYSTEM
APPEARING IN THE MANUALLY SIGNED COPY OF THIS REGISTRATION STATEMENT, TOTALING
PAGES, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
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CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY (1) PRICE FEE
Units............................... 1,725,000(2) $5.10 $8,797,500 $2,665.91
Common Stock $.001 par value
("Common Stock").................. 1,725,000(3) -0- -0- -0-
Redeemable Common Stock Purchase
Warrant ("Warrant")............... 1,725,000(4) -0- -0- -0-
Common Stock........................ 1,725,000(5) $6.00 $10,350,000 $3,136.56
Underwriter Warrant................. 1(6) $.0001 $10.00 $--
Units............................... 150,000(7) $5.61 $841,500 $255.00
Common Stock........................ 150,000(8) -0- -0- -0-
Warrants............................ 150,000(9) -0- -0- -0-
Common Stock........................ 150,000(10) $6.00 $900,000 $272.73
Total Registration Fee.............. $6,330.20
Previously Paid..................... $5,830.46
Amount Due Herewith................. $499.74
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.
(2) Includes 225,000 Units subject to an over-allotment option granted to the
Underwriter ("Over-Allotment Option").
(3) Consists of Common Stock included as part of the Units, including Units
which the Underwriter has the option purchase from the Registrant to cover
the over-allotments, if any.
(4) Consists of Warrants included as part of the Units, including Units which
the Underwriter has an option to purchase from the Registrant to cover
over-allotments, if any.
(5) Represents shares of Common Stock issuable upon exercise of the Warrants
contained in the Units. Pursuant to Rule 416, this Registration Statement
also covers an indeterminable number of additional shares of Common Stock
issuable as a result of any future anti-dilution adjustments in accordance
with the terms of the Warrants contained in the Units.
(6) Issuable to the Underwriter. Exercisable to purchase up to 150,000 Units.
(7) Represents the Units issuable upon exercise of the Underwriter's Warrant.
Pursuant to Rule 416, this Registration Statement also covers an
indeterminable number of additional Units issuable as a result of a future
anti-dilution adjustments in accordance with the terms of the Underwriter's
Warrants.
(8) Consists of Common Stock included as part of the Units underlying the
Underwriter's Warrants. Pursuant to Rule 416, this Registration Statement
also covers an indeterminable number of additional of shares of Common Stock
issuable as a result of a future anti-dilution adjustments in accordance
with the terms of the Underwriter's Warrants.
(9) Consists of Warrants included as part of the Units underlying the
Underwriter's Warrants. Pursuant to Rule 416, this Registration Statement
also covers an indeterminable number of additional of Warrants issuable as a
result of a future anti-dilution adjustments in accordance with the terms of
the Underwriter's Warrants.
(10) Represents the Common Stock issuable upon exercise of the Warrants
contained in the Underwriter's Warrant. Pursuant to Rule 416, this
Registration Statement also covers an indeterminable number of additional of
shares of Common Stock issuable as a result of a future anti-dilution
adjustments in accordance with the terms of the Underwriter's Warrants and
the Warrants contained in the Units.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
CONNECTICUT VALLEY SPORTS, INC.
1,500,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK
PURCHASE WARRANT
Connecticut Valley Sports, a Delaware corporation (the "Company"), is
offering hereby (the "Offering") 1,500,000 Units ("Units"), each Unit consisting
of one share of the Company's common stock, $.0001 par value ("Common Stock"),
and one Redeemable Common Stock Purchase Warrant ("Warrant"), through Briarwood
Investment Counsel (the "Underwriter"). The Units, Common Stock and the Warrants
are sometimes collectively referred to as the "Securities." The Common Stock and
Warrants are immediately separable and separately tradable. Each Warrant
entitles the holder thereof to purchase one share of the Company's Common Stock
("Share") at an exercise price of $6.00 per Share, subject to adjustment in
certain circumstances, commencing 2000 [two years from the effective date
of the registration statement of which this Prospectus is a part ("Effective
Date")] and ending on 2003 [five years from the Effective Date]. The
Warrants are subject to redemption by the Company upon not less than 30 days
written notice at $.10 per Warrant at any time commencing 1999 [one year
from the Effective Date] with the prior approval of the Underwriter, provided
the closing bid quotation in the market where the Common Stock trades at the
time of the call for redemption has equaled or exceeded $7.50 for 20 consecutive
trading days ending on the third business day prior to the date of the
redemption notice. Prior to this Offering there has been no market for the
Securities and there can be no assurance that a market will develop or if
developed will be sustained. See "Description of Securities" and "Risk Factors."
Application has been made to have the Units, Common Stock and Warrants
included for quotation on The Nadsaq SmallCap Market under the symbols "CVSPU",
"CVSP" and "CVSPW" respectively and for listing on the Boston Stock Exchange
under the symbols "CVSC", "CVS" and "CVSW", respectively. The offering price of
the Units and the exercise price and other terms of the Warrants have been
determined by negotiation between the Company and the Underwriter and do not
necessarily bear any relation to the Company's earnings, assets, book value, net
worth or any other recognized criteria of value. For a discussion of the factors
considered in determining the offering price and exercise price, see
"Underwriting."
These are Speculative Securities.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTEMENT SEE
"RISK FACTORS" BEGINNING ON PAGE 8 AND
"DILUTION" ON PAGE 18
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURANCY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
UNDERWRITING
DISCOUNT AND PROCEEDS TO THE
PRICE TO PUBLIC COMMISSION (1) COMPANY(2)
Per Unit............................ $5.10 $.51 $4.59
Total (3)........................... $7,650,000 $765,000 $6,885,000
(1) In addition, the Company has agreed to pay the Underwriter a non-accountable
expense allowance equal to 3% of the gross proceeds of this Offering, to sell to
the Underwriter a warrant to purchase 150,000 shares of Common Stock at a
purchase price of $5.50 per share and 150,000 Warrants at a purchase price of
$.11 per Warrant ("Underwriter's Warrant") and to retain the Underwriter as a
financial consultant. The Company has also agreed to pay the Underwriter a
warrant solicitation fee of 5% under certain circumstances and to indemnify the
Underwriter against certain liabilities arising under the Securities Act of
1933, as amended ("Securities Act"). See "Underwriting."
(2) Does not include expenses of the Offering, (estimated to be $655,000)
including the Underwriter's non-accountable expense allowance in the amount of
$229,500 ($263,925 if the Underwriters' Over-allotment Option is exercised in
full).
(3) The Company has granted the Underwriter an option exercisable within 45 days
from the Effective Date to purchase up to 225,000 additional Units
("Over-Allotment Option"), on the same terms as set forth above for the purpose
of covering over-allotments, if any. If the Over-Allotment Option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $8,797,500, $879,750 and $7,917,750,
respectively. See "Underwriting."
The Securities are offered by the Underwriter, as agent for the Company
when, as and if delivered to and accepted by the Underwriter and subject to its
right to reject orders in whole part, the approval of certain legal matters by
counsel and certain other conditions. It is expected that delivery of the
certificates representing the Common Stock and Warrants comprising the Units
will be made against payment therefor at the offices of Briarwood Investment
Counsel, 1851 East First Street, Suite 950 Santa Ana, California 92705 on or
about 1998.
BRIARWOOD INVESTMENT COUNSEL
THE DATE OF THIS PROSPECTUS IS 1998
CERTAIN PERSON'S PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING PURCHASES OF THE UNITS, SHARES AND WARRANTS TO STABILIZE THEIR
MARKET PRICE, PURCHASES OF THE UNITS, SHARES AND WARRANTS TO COVER SOME OR ALL
OF A SHORT POSITION IN THE UNITS, SHARES AND WARRANTS MAINTAINED BY THE
UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING."
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE
DISCUSSIONS IN THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS" BEGINNING ON PAGE 8. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY.
IN SEPTEMBER 1997, CONNECTICUT VALLEY SPORTS, INC. (THE "COMPANY"), THROUGH
AN EXCHANGE OFFER ACQUIRED APPROXIMATELY 97% OF THE OUTSTANDING CAPITAL STOCK OF
CONNECTICUT VALLEY CLASSICS, INC. ("CVC"). CVC OWNS ALL OF THE OUTSTANDING
CAPITAL STOCK OF THE STOCK SHOP, INC. ("STOCK SHOP") WHICH IN TURN, OWNS
APPROXIMATELY 99% OF THE OUTSTANDING CAPITAL STOCK OF COOPER FIREARMS, INC.
("COOPER ARMS"). ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY INCLUDE CVC,
STOCK SHOP AND COOPER ARMS AND THE OPERATIONS OF CVC EXCLUSIVE OF ITS
SUBSIDIARIES ARE REFERRED TO HEREIN AS "CVC CLASSICS." SEE "BUSINESS --
HISTORY."
THE COMPANY
The Company through CVC and CVC's subsidiaries, Stock Shop and Cooper Arms,
designs, engineers, manufactures, assembles, markets and sells custom quality,
mass produced rifles and shotguns used for both hunting and competition (target)
shooting. The Company's firearms are produced to the quality level associated
with rifles produced largely by hand to a customers specifications (custom
quality), but multiple units of the Company's firearms are manufactured in a
production line process to the Company's standard specifications (mass
produced.)
CVC Classics designs, engineers, manufactures, assembles and markets a
premium line of ten shotguns for clay target shooting and hunting. This line is
an improved version of the famed Winchester Model 101 and features lengthened
forcing cones, overboring, mechanical triggers, diamond honed barrels, and
select American walnut with hand checkering. The most popular model, the CVC
Classic Sporter, is intended for sporting clays competition shooting. CVC
Classics' shotguns generally retail from $3,000 without options to in excess of
$10,000 with options and are sold to licensed firearms dealers who are approved
by the Company (the "Approved Dealers"). See "Business - Products -- CVC
Classics."
The Stock Shop manufactures rifle and shotgun stocks used by the Company in
the manufacture of its other firearms and custom manufactures stocks for others.
The Stock Shop also purchases barreled actions manufactured by the
world-renowned firm of J.G. Anschutz GmbH ("Anschutz") under an agreement
between them. These barreled actions are then assembled by the Company, with
stocks and hardware manufactured by it into rifles, designed by the Company
which are sold under the trade name "Anschutz USA Sporting Rifles." The Anschutz
USA Sporting Rifles are sold to the Approved Dealers. The rifles retail for
approximately $1,550 to $1,895 without options, and can generally retail for in
excess of $10,000 with options. See "Business - Products -- The Stock Shop."
Cooper Arms designs, engineers, manufactures, markets and sells a line of
custom quality, mass produced bolt action rifles for hunting and competition.
The Cooper Arms product line consists of five basic models of rifles ranging in
caliber from .17 up to .45-70. The Cooper Arms rifles are produced in AAA select
walnut in a classic design. The rifles are sold to the Approved Dealers and
generally retail from $1,695 to in excess of $6,000 with options.
The Company has designed prototypes of, and intends to market ultra accurate
high performance ammunition for use primarily by military and law enforcement
units. This line of highly accurate ammunition previewed at the Brussels
Military Procurement Exposition in November of 1997. See "Business - Products --
Cooper Arms." The Company intends to commence marketing of specialty labeled
sports apparel and shooting accessories. Products are expected to include caps,
shooting vests, gun cases
3
and cleaning supplies. The products will be targeted at the high grade, high
margin upscale market. See "Business - Products -- Apparel and Accessories."
The Company's goal is to become a leading manufacturer of custom quality,
mass produced firearms and high grade accessories by focusing on the high growth
areas of the firearms market which the Company believes includes various types
of target shooting, such as clay, trap and skeet shooting. The Company's primary
strategies for achieving its goal are to broaden its product line and increase
the scope and efficiency of its manufacturing operations. In order to broaden
its product lines, the Company intends to seek to acquire companies which sell
products which are competitive or complimentary to its current products or to
acquire such product lines. Alternatively, as the Company is doing with
ammunition and apparel and accessories, the Company may develop such product
lines itself. The purchase of additional production equipment at its existing,
or proposed facilities, is expected by management to reduce reliance on third
party suppliers, as well as to increase capacity and manufacturing efficiency.
The Company's address is 4004 Highway 93 North, Stevensville, Montana 59870
and its telephone number is (406) 777-5534.
The Company was incorporated in Delaware in May 1996. CVC was incorporated
in Connecticut in March 1991 and reincorporated in Delaware in May 1995.
4
THE OFFERING
Units Offered................... 1,500,000 Units, each Unit consisting of one share of
Common Stock and one Warrant.
Offering-Price.................. $5.10 per Unit
Common Stock Outstanding
Prior to the Offering (1)..... 2,797,476
After the Offering (1)........ 4,297,476
Warrants Outstanding:
Prior to the Offering......... 50,000
After the Offering(2)......... 1,550,000
Terms of Warrants:
Exercise Price................ The exercise price is $6.00 per share of Common Stock,
subject to adjustment in certain circumstances.
Exercise Period............... The Warrants are exercisable for a period of three years
commencing, unless adjusted pursuant to the redemption
provisions, on , 2000 (two years after the Effective
Date) and expiring on , 2003 (five years after the
Effective Date).
Redemption.................... The Warrants are redeemable by the Company, commencing
1999, one year from the Effective Date with the
prior approval of the Underwriter, at a redemption price
of $0.10 per Warrant on not less than 30 days written
notice, provided that the closing bid price per share of
Common Stock, for 20 consecutive trading days ending on
the third business day prior to the date of the redemption
notice, is at least $7.50, subject to adjustment for
certain events. Upon giving notice of redemption, the
Warrants will become exercisable if they were not
otherwise exercisable. See "Description of Securities --
Redeemable Common Stock Purchase Warrants."
Risk Factors.................. The securities offered hereby involve a high degree of
risk and immediate substantial dilution to public
investors. See "Risk Factors" and "Dilution."
Use of Proceeds............... The net proceeds of the Offering will be used primarily
for acquisitions, construction of a new manufacturing
facility, for research and development, for sales and
marketing, to purchase raw materials, repayment of
indebtedness and for working capital and general corporate
purposes. See "Use of Proceeds."
Proposed NASDAQ Symbols(3).... Units: CVSPU
Common Stock: CVSP
Warrants: CVSPW
Proposed Boston Stock Exchange
Symbols(3).................. Units: CYSU
Common Stock: CVS
Warrants: CVSW
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(1) Assumes no exercise of (i) options to acquire 600,000 shares of Common Stock
pursuant to the Company's 1997 Stock Option Plan, of which options to
acquire 275,000 shares have been granted, (ii)
5
other currently outstanding options and warrants to acquire 250,000 shares
of Common Stock, (iii) the Warrants, (iv) the Underwriter's Warrants, or (v)
the Over-allotment Option. See "Principal Stockholders," "Management" and
"Description of Securities."
(2) Assumes no exercise of (i) the Underwriter's Warrants or (ii) the
Over-allotment Option. See "Description of Securities."
(3) The proposed trading symbols do not imply that a liquid and active market
will be developed or sustained for the Units, Shares and or Warrants upon
completion of the Offering.
6
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below is derived
from and should be read in conjunction with the financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1994 1995 1996 1996 1997
----------- ---------- ----------- ---------- --------------
STATEMENT OF OPERATIONS DATA
Net sales.................................... $ 247,950 $ 74,744 $ 244,725 $ 193,796 $ 365,378
Gross profit (loss).......................... (157,491) (264,502) (331,428) (161,331) (272,933)
Operating loss............................... (402,468) (746,708) (1,090,615) (817,062) (729,953)
Net loss..................................... (449,480) (782,463) (1,102,664) (846,762) (753,523)
Earnings per share........................... (0.84) (0.75) (0.44) (0.35) (0.27)
Weighted average number of shares
outstanding(1)............................. 535,728 1,040,893 2,488,466 2,410,972 2,803,558
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------ --------------------------
1994 1995 1996 1997 AS ADJUSTED(2)
----------- ---------- ----------- ---------- --------------
BALANCE SHEET DATA
Working capital (deficit).................... $ (598,480) $ (49,286) $ 200,083 $ (76,943) $ 6,238,880
Total assets................................. 500,286 736,095 1,126,112 1,107,900 7,114,400
Long-term debt............................... -- 262,500 300,000 384,203 470,026
Total liabilities............................ 901,291 759,059 999,357 1,143,342 1,059,842
Stockholders' equity (deficit)............... (401,005) (22,964) 126,755 (35,442) 6,054,558
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(1) Adjusted for merger with Stock-Shop and recapitalization in 1995. See Notes
1 and 2 to the financial statements.
(2) Gives effect to the sale of securities offered hereby and application of
estimated net proceeds of $6,230,000 and the reclassification in December
1997 of $123,323 in short term debt owed to a company which the Company's
Chairman is a principal to long term debt. See "Use of Proceeds."
7
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH INVESTMENTS IN THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
HISTORY OF LOSSES; GOING CONCERN UNCERTAINTY INCLUDED AS PART OF AUDITOR'S
REPORT; NO ASSURANCE OF PROFITABILITY
For the years ended December 31, 1995, December 31, 1996 and the nine months
ended September 30, 1997, the Company had net losses of $782,463, $1,102,664,
and $753,523 respectively. At September 30, 1997, the Company had an accumulated
deficit of $3,412,069. There can be no assurance that the Company will be able
to integrate successfully the operations of CVC, the Stock Shop and Cooper Arms,
that the Company will be able to successfully implement its business strategy,
that the Company's products wll gain market acceptance, or that the Company will
operate profitably in the future. Due to the Company's continued operating
losses, the independent accountants' opinion on the Company's 1996 and 1995
financial statements indicates that there is a substantial doubt about the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
POSSIBLE NEED FOR ADDITIONAL FINANCING
Although the Company anticipates, based on currently proposed plans, that
the net proceeds of the Offering will be sufficient to satisfy the Company's
anticipated cash requirements for at least 12 months following the date that the
Securities and Exchange Commission declares the Registration Statement of which
this Prospectus is a part effective (the "Effective Date"), there can be no
assurance that the Company will not require additional financing at an earlier
date. If the Company is required to obtain financing in the future, there can be
no assurance that such financing will be available on terms acceptable to the
Company, or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIMITED OPERATIONS OF OPERATING SUBSIDIARIES, NEW PRODUCT LINES
On a limited basis in 1993 and 1994, CVC Classics produced various
prototypes and limited production for two shotguns within the CVC Classic
Sporter family--the CVC Classic Sporter and the Waterfowler. In September 1994,
the Company curtailed such limited production due to a lack of adequate capital
and in order to develop its business plan for long-term, full-scale production
of its products. Subsequent to financing activities that occurred in mid-1995,
CVC Classics recommenced operations in October 1995. In-house manufacturing and
assembly of CVC Classic's premium line of shotguns recommenced after the
acquisition by CVC Classics of the capital stock of the Stock Shop and its
subsidiary Cooper Arms in November 1996. There can be no assurance that the
Company's operations relating to CVC Classic's line of shotguns will produce
significant, or any, revenues or that such operations will be profitable. See
the Financial Statements and Notes thereto included herein and "Business."
The Company has not sold, produced or purchased any Cooper Arms ammunition
or any of the Company's apparel and accessory products or any significant
quantity of firearms stocks. The Company has never engaged in the business of
selling, designing or producing products other than firearms. An evaluation of
ammunition, apparel and accessory, and firearms stocks business lines must be
considered in light of the risks, expenses and difficulties frequently
encountered in connection with establishing new businesses in a competitive
industry. There can be no assurance that these products will gain market
8
acceptance or that the Company will be able to establish recognizable brand
names. Furthermore, there can be no assurance that these business lines will
produce significant or any revenue, or that such operations will be profitable.
See "Business."
INSUFFICIENT FACILITIES
While the Company believes that its current property and equipment are
adequate for its business as currently conducted, the current facilities are not
automated, operate in a comparatively inefficient manner and have insufficient
production capacity to achieve significant growth in production volume.
Therefore the Company believes it is necessary to purchase new manufacturing
equipment and ideally, consolidate and expand its current manufacturing
premises. Failure to do so could cause the Company to have inventory shortages
or force the Company to rely on high cost third party suppliers. Additionally,
the Company manufactures its products at two separate facilities, leading to
inefficiencies. The Company has allocated a portion of the proceeds of this
Offering to improve its manufacturing facilities and intends to raise additional
capital for improvements by issuing industrial development bonds. However, there
can be no assurance that the industrial development bond offering will be
completed, that improvements can be made to the Company's manufacturing
facilities, or that such improvements will enable the Company to operate
profitably. Furthermore, construction of the new facility will take at least 12
months, and could take significatly longer. Although the Company intends to
upgrade its existing facilities during this time period, delays in opening the
new facility could have a material adverse effect on the Company. See "Use of
Proceeds" and "Business -- Property" and "Business -- Manufacturing."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS
A substantial portion of the proceeds of this Offering have been allocated
to acquisitions. As of the date of this Prospectus, the Company has not
identified any particular acquisition targets and no discussions or negotiations
regarding any acquisitions are pending. Stockholders of the Company, therefore,
may have no opportunity to approve specific acquisitions or to review the
financial condition of any potential target. Additionally, there can be no
assurance that the Company will be able to successfully integrate such
acquisitions into the Company, or that such acquisitions will enable the Company
to operate profitably. In addition, a portion of the proceeds are to be used for
working capital and general corporate purposes. Accordingly, management of the
Company will have broad discretion in the application of the proceeds of this
Offering. See "Use of Proceeds."
ABSENCE OF PATENT PROTECTION; POTENTIAL INFRINGEMENT CLAIMS; PROPRIETARY RIGHTS
The Company does not currently have patent protection on its products or
production processes. Its ability to compete effectively with other companies
will depend, in part, on its ability to maintain the proprietary nature of its
products and production processes. The Company may apply for patent protection.
However, there can be no assurance that it will be successful in obtaining such
patents or if obtained, that such patents will afford the Company sufficient
protection. The Company intends to rely substantially on unpatented products and
production processes, and there can be no assurance that others will not copy
any of its designs or processes. See "Business -- Products."
It is not certain that the Company's products or production processes will
not infringe patents or other rights owned by others. Specifically, with respect
to CVC Classics, the basic design and engineering of the CVC Classic Sporter is
largely based on that of the Classic Doubles, previously manufactured by Sports
Japan, Inc. ("Sports Japan"), which Classic Doubles was itself based upon the
shotgun known as the Winchester Model 101 produced by the Winchester Division of
the Olin Corporation ("Winchester"). The Company has no license or other
relationship with Winchester, Olin, or any other party who has patent or
trademark rights in the Winchester Model 101. Management does not believe that
either Sports Japan or Winchester has any viable claims against the Company
based upon unfair competition or protected proprietary rights to such designs
and engineering. Management believes that neither the Winchester
9
Model 101 nor any of its parts are protected by patents and the shotgun itself
is no longer manufactured. Management also believes that Winchester sold the
manufacturing rights to Sports Japan, whose Classic Doubles was an improved
version of the Winchester Model 101 and which company itself ceased operations
and forfeited its firearms manufacturing license in Japan in 1988. Further,
management believes that the CVC Classic Sporter is differentiated from the
Winchester Model 101 and the Classic Doubles by virtue of the different
manufacturing process and the Company's design enhancement. The Company has not
obtained any opinion from patent counsel and there can be no assurance that any
such claims will not be brought against the Company by Winchester, Sports Japan
or persons connected or previously connected with such entities. In the event
that such claims are brought against the Company, even if the Company was
ultimately found not to be liable, the cost to the Company of defending any such
lawsuit could have a materially adverse effect on the Company's operations.
Moreover, if the Company's products infringe patents or proprietary rights of
others, the Company, under certain circumstances could become liable for damages
or be forced to alter its products or production processes, either of which
could have a material adverse effect on the Company.
Cooper Arms holds a registered trademark, No. 74-511,590, granted March 28,
1995 for the mark "17CCM" which is used in connection with a cartridge developed
by Cooper Arms. The Company has applied for the registration of additional
marks, however, there can be no assurance that it will be successful in
obtaining such registrations. The Company's application of the mark "Classic
Sporter" was rejected as being "merely descriptive" and thus not eligible for
trademark protection. The Company is currently appealing the rejection. If the
Company fails to obtain the mark "Classic Sporter," the Company would not be
able to prevent other companies from marketing firearms under the name Classic
Sporter, which could have a material adverse effect on the Company.
Additionally, the Company's trademark counsel has indicated that the name
"Connecticut Valley" may be deemed "confusingly similar" to another company's
name and the Company may be required to change its name or seek another name
under which to market certain products. If the Company were required to cease
using "Connecticut Valley", it could have a material adverse effect on the
Company. Although registration affords the Company the protection of federal
trademark laws against the unauthorized use of the protected mark or a use
deemed "confusingly similar" under federal trademark law, there can be no
assurance that third parties will not infringe on the Company's current or
future trademark registrations or that the Company will have sufficient
resources to defend against any such infringement successfully or at all. See
"Business -- Proprietary Rights."
POSSIBLE INSUFFICIENCY OF INSURANCE
The Company maintains, and intends to continue to maintain, pending product
liability insurance in the amount of $1,000,000 per claim and $1,000,000 in the
aggregate, which management believes will be sufficient to cover liabilities to
the Company arising from injury to people or their property from use of the
Company's products. There can be no assurance that the Company's current
insurance will be adequate to cover unanticipated liabilities. See "Business --
Legal Proceedings."
DEPENDENCE UPON SUPPLIERS
Although the Company assembles its own firearms products, it purchases
certain materials and component parts from third-party suppliers and intends to
use third party suppliers to manufacture all of the products in the Company's
ammunition and apparel and accessories lines. No assurance can be given that the
Company's third-party suppliers will be able to provide the Company with a
timely, uninterrupted and adequate supply of materials. In the event that any of
the Company's third-party suppliers are unable to provide the Company with a
timely, uninterrupted and adequate supply of materials, the Company's ability to
meet its production schedule may be adversely affected. In addition, the Company
does not presently have any long-term contracts with these suppliers and, as a
consequence, any of these relationships may be terminated by the Company or the
supplier at any time. Although the Company believes that
10
other suppliers are available, there can be no assurance that such materials
would be available to the Company on an immediate basis, if needed, or at prices
similar to those now paid by the Company. See "Business -- Suppliers."
DEPENDENCE ON CERTAIN CUSTOMERS
The Company's three largest customers accounted for 42% of net sales for the
nine months ended September 30, 1997. During the nine months ended September 30,
1997, Sporting Clays Market, The Outdoorsman and PJ Vollmer & Co., Inc accounted
for 12%, 17% and 13% of sales, respectively. The Company believes that it has
good relationships with its customers and that they will continue to do business
with the Company. However, the Company has no long term contracts with any of
its customers, all of whom purchase products from the Company pursuant to
purchase orders. Therefore, there can be no assurance that any of its customers,
including its largest customers, will continue to purchase products from the
Company. The loss of customers, particularly the Company's largest customers,
could have a materially adverse effect on the Company's business and results of
operations. See "Business -- Major Customers."
RISK OF NON-PAYMENT BY CUSTOMERS
In recent years, the Company's uncollectible accounts receivable has been
high in relation to total sales. The Company believes that this was partially
due to the changes in management at certain subsidiaries. The Company now
employs procedures to limit the sales on credit terms to customers who pose a
high risk of non-payment. However, there can be no assurance that customers,
particularly those who own one retail store, who are a majority of the Company's
customers, will not fail to pay for the Company's products. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations."
CONCENTRATION OF CREDIT RISK
From time to time the Company maintains cash balances with a Montana
commercial bank in amounts in excess of federal insurance limits. There can be
no assurance that the Company will not suffer losses due to its concentration of
credit risk. See the Financial Statements and Notes thereto included herein.
COMPETITION
The Company competes in a highly specialized competitive environment
directly with many other national and international sporting firearms
manufacturers. Many of these companies are larger, better known and have
significantly greater financial, manufacturing and marketing resources than the
Company. In addition, unlike the Company, many firearms manufacturers are
subsidiaries of larger, more diverse companies on whom they can rely for capital
and other resources. No assurance can be given that the Company will be capable
of competing successfully in the future, or that the Company will be successful
in maintaining or expanding its share of the market for its products. See
"Business -- Competition."
OUTSTANDING FEDERAL EXCISE TAX LIABILITY
As of September 30, 1997 the Company owed approximately $46,000 for federal
excise taxes that were not paid when due during 1997, together with penalties
that have accrued. Although no collection or enforcement actions or proceedings
have been commenced or been threatened against the Company to date, no assurance
can be given that an action or proceeding will not be commenced against the
Company. If commenced, such an action or proceeding could result in fines or a
suspension of the Company's firearms manufacturing license which could
materially and adversely affect the Company's business or operations. The
Company intends to pay the balance of its federal excise tax liability from the
net proceeds of the Offering. See "Use of Proceeds" and "Business -- Licensing
and Government Regulations."
11
LICENSING AND GOVERNMENT REGULATION
The firearms manufacturing industry is subject to extensive regulation by
various federal and State regulatory agencies, including the Bureau of Alcohol,
Tobacco and Firearms ("BATF"). The Company maintains a license issued by BATF
permitting the manufacturing and distribution of firearms and ammunition to a
network of BATF licensed dealers throughout the United States. The license is
renewable every three years and requires the Company to maintain certain records
relating to firearms shipments. In October 1997 the Company's BATF license was
renewed until October 2000. The loss or suspension of any of the Company's
license could have a material adverse effect on the Company.
The Company may export products. Each shipment of firearms shipped outside
the United States must be licensed by the State Department. The State Department
regulates the type of firearms that may be exported to various countries. The
Company must comply with these regulations to be able to export products.
The manufacturing, sale and purchase of firearms is extensively regulated by
federal, state and local governments. While many of the current laws and
regulations do not affect the Company, from time to time, legislation and
regulations that could potentially affect the Company, either beneficially or
adversely, have been proposed by federal and state legislators and regulators.
Management is not aware of any currently pending or proposed legislation or
regulations which, if adopted, would have a materially adverse impact on the
Company's operations. There can be no assurance that BATF or various federal and
state regulators will not adopt regulations or take other actions that would
materially adversely affect the business of the Company. See "Business --
Licensing and Government Regulation."
CONTINUED CONTROL BY MANAGEMENT AND/OR EXISTING STOCKHOLDERS
Following completion of the Offering, the Company's officers, directors and
principal stockholders will own or control an aggregate of approximately 49% of
the Company's issued and outstanding Common Stock. There are no cumulative
voting rights under the Company's certificate of incorporation and therefore,
such stockholders will effectively possess the ability to elect all of the
directors of the Company, to increase its authorized capital, to dissolve or
merge the Company, or to sell its assets, and generally to exert substantial
control over the business and operations of the Company. See "Principal
Stockholders" and "Certain Transactions."
ENVIRONMENTAL REGULATION
The Company's facilities in Montana use and store various hazardous
materials and generate small amounts of hazardous waste. Under various federal,
state and locals laws, ordinances and regulations, an owner or operator of real
property is generally liable for the costs of removal or remediation of
hazardous wastes that are released on its property, regardless of whether the
owner or operator know of, or was responsible for, the release of such hazardous
materials. The Company has not been advised of any non-compliance or violation
of any environmental laws, ordinances and regulations and the Company believes
that it is in substantial compliance with all such laws, ordinances or
regulations applicable to its Montana facilities. The Company, however, has not
performed any environmental studies on its Montana facilities, and as a result,
there may be potential liabilities or conditions which could arise with respect
to the Montana facilities and have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon the efforts and abilities of its
management and engineering/assembly production personnel, who are familiar with
the specific manufacturing details of the Company's products and the production
processes therefor. The success of the Company is largely dependent upon the
experience and expertise of Daniel Cooper, its President and only full time
executive officer. The Company, through its Stock Shop subsidiary, has entered
into an employment agreement with
12
Mr. Cooper. The employment agreement is for a three-year term expiring in March
1999, and provides that Mr. Cooper will receive an annual salary of $48,000, in
addition to stock options and bonuses in certain circumstances and reimbursement
of certain expenses. The Company also intends to enter into employment
agreements with each of Messrs. Tilleli, McCabe, Landis and Wang, each of whom
are currently officers and directors of the Company. Although the specific terms
of these employment agreements have not been negotiated, it is expected that the
annual salary for each individual will not exceed $100,000. The loss of the
services of any of the Company's management or key personnel would likely have a
material adverse effect on the business of the Company. The Company intends to
purchase key man life insurance on Mr. Cooper's life in the amount of
$1,000,000. See "Business -- Personnel," "Management" and "Certain
Transactions."
OFFERING TO BENEFIT INSIDERS, PROCEEDS TO REPAY INDEBTEDNESS
The Company will use a portion of net proceeds to make an aggregate
installment payment of $37,500 on four notes aggregating $300,000 principal
amount that CVC issued to four former officers and directors of CVC, including
an $10,961 payment to Gary Landis who is a director and officer of the Company,
and a $15,120 payment to O. Milton Gosset who is a principal shareholder of the
Company and a former director of CVC. The balance of this aggregate first
installment will be made to two former officers and directors of CVC. The
Company intends to make the remaining installments from operating cash flows,
but if such cash flows are insufficient, a portion of the net proceeds of the
Offering that were allocated to working capital may be used to make the
remaining installment payments. Additionally, the Company owes $123,323 to a
Company controlled by its Chairman, Victor Wang, evidenced by a promissory note
due, with interest accruing at 6% per annum, on the earlier of (i) thirteen
months following the closing of the Offering, or (ii) November 30, 2000. The
Company intends to repay the note from operating cash flows, but if such cash
flows are insufficient, a portion of the net proceeds of the Offering that were
allocated to working capital may be used to repay the note. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions."
SUBSTANTIAL DILUTION; CONSIDERATION PAID BY EXISTING STOCKHOLDERS
Purchasers of Units in the Offering will suffer immediate dilution of $3.61
per share of Common Stock (or 72%) in the net tangible book value of their
investment, assuming $.10 of the offering price per Unit is attributable to the
Warrants. See "Dilution."
Officers, directors and other existing stockholders acquired their shares of
Common Stock at an average per Share price of $1.23 per share, substantially
less than the initial public offering price of $5.00 per share. Accordingly,
investors in the Offering will bear a disproportionate share of the risk of an
investment in the Company. See "Dilution."
LIMITATION ON DIRECTOR LIABILITY, INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's certificate of incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions under Delaware law. This may discourage stockholders from bringing
suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders on behalf of the
Company against a director. In addition, the Company's by-laws provide for
mandatory indemnification of directors and officers. See "Management --
Indemnification of Officers and Directors and Limitation on Directors'
Liability."
ABSENCE OF DIVIDENDS ON COMMON STOCK
Since inception, the Company has not paid any cash dividends on its Common
Stock and it does not anticipate paying such dividends in the foreseeable
future. The payment of dividends by the Company is
13
within the discretion of its Board of Directors and depends upon the Company's
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board. The Company intends to retain earnings, if any, to
finance its operations. In addition, the payment of cash dividends may be
limited or prohibited by the terms of any future loan agreements or any
preferred stock that may be issued by the Company. See "Dividend Policy."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK
The Company's certificate of incorporation, authorizes the issuance of
1,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could decrease the amount of earnings and assets
available for distribution to holders of Common Stock and adversely affect the
relative voting power or other rights of the holders of the Company's Common
Stock. In the event of issuance, the preferred stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. The Company has no present intention to issue
any shares of its preferred stock. However, there can be no assurance that the
Company will not issue shares of preferred stock in the future. The Company has
agreed with the Underwriter that, except for issuance's disclosed in or
contemplated by this Prospectus, it will not issue any securities, including but
not limited to any shares of preferred stock, prior to , 2001 without the
prior written consent of the Underwriter. See "Description of Securities --
Preferred Stock."
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF MARKET PRICE FOR THE UNITS, COMMON STOCK AND WARRANTS
Prior to this Offering, there has been no public trading market for the
Units, Common Stock and the Warrants (collectively, the "Securities"). The
initial public offering price of the Units and the exercise price and other
terms of the Warrants were determined through negotiations between the Company
and the Underwriter and bear no relationship whatsoever to the Company's
earnings, assets, book value per share, net worth, results of operations or
other generally accepted criteria of value. The offering price of the Units, as
well as the exercise price of the Warrants, should not be construed as
indicative of their value. There can be no assurance that an active trading
market for the Units will develop after the Offering or that, if developed, it
will be sustained. As a result, investors will be exposed to a risk of a decline
in the market prices of the Securities after the Offering. The market prices of
the Securities following the Offering may be highly volatile as has been the
case with the securities of many emerging companies. The Company's operating
results and various factors affecting the industry in which the Company competes
may impact the market price of the Company's Securities to a significant degree.
In addition, in recent years the stock market has experienced a high level of
price and volume volatility, and market prices for the securities of many
companies have experienced wide price fluctuations not necessarily related to
the operating performance of such companies. There can be no assurance that the
market price of the Securities will not experience significant fluctuations or
decline below the initial public offering price.
LIMITED UNDERWRITING EXPERIENCE OF UNDERWRITER
Although certain officers of the Underwriter have had experience working on
public offerings, and other corporate finance matters, the Underwriter has not
previously served as the sole or managing underwriter of a firm commitment
public offering. Since the Underwriter's experience in underwriting firm
commitment public offerings is limited, there can be no assurance that the lack
of experience will not adversely affect the public offering of the Company's
Units and the subsequent development, if any, of a trading market for the Units.
See "Risk Factors -- Underwriter's Influence on the Market; Possible Limitations
on Market Making Activities."
14
UNDERWRITER'S INFLUENCE ON THE MARKET; POSSIBLE LIMITATIONS ON MARKET MAKING
ACTIVITIES
A significant number of Units may be sold to customers of the Underwriter.
Such customers subsequently may engage in transactions for the sale or purchase
of Securities through or with the Underwriter. The Underwriter has indicated
that it intends to act as market-maker and otherwise effect transactions in the
Securities. To the extent the Underwriter acts as market-maker in the
Securities, it may exert a dominating influence in the markets for those
Securities. The price and liquidity of the Securities may be significantly
affected to the extent, if any, that the Underwriter participates in such
markets. Furthermore, the Underwriter may discontinue such activities at any
time and from time to time. The Underwriter also has the right to act as the
Company's exclusive agent in connection with any future solicitation of holders
of Warrants to exercise their Warrants. Applicable rules of the Securities and
Exchange Commission prohibit the Underwriter and any other soliciting
broker-dealers from engaging in any market making activities or solicited
brokerage activities with regard to the Units, Common Stock and Warrants for a
period of up to five business days prior to the solicitation of the exercise of
any Warrants until the later of the termination of such solicitation activity or
the termination of any right the Underwriter may have to receive a fee for the
solicitation of the Warrants. As a result, the Underwriter and such soliciting
broker-dealers may be unable to continue to make a market for the Units, Common
Stock and the Warrants during certain periods while the Warrants are
exercisable. Such a limitation, while in effect, could impair the liquidity and
market price of the Common Stock and the Warrants. See "Underwriting."
RISK OF LOW-PRICED SECURITIES; PENNY STOCK REGULATION
The regulations of the Securities and Exchange Commission promulgated under
the Securities Exchange Act of 1934 as amended ("Exchange Act") require
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Unless an exception is
available, those regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. Moreover,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market.
NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF COMMON
STOCK FROM NASDAQ SMALLCAP MARKET OR THE BOSTON STOCK EXCHANGE
Prior to this Offering, there has been no established public trading market
for the Company's Units, Common Stock or Warrants and there is no assurance that
a public trading market for the Company's Securities will develop after the
completion of this Offering. If a trading market does in fact develop for the
Securities offered hereby, there can be no assurance that it will be sustained.
The Company has applied for listing of the Units, Common Stock and Warrants
on Nasdaq SmallCap Market and the Boston Stock Exchange ("BSE"). If the listings
are approved, the continued trading of the Common Stock and the Warrants on
Nasdaq SmallCap and the BSE is conditioned upon the Company
15
meeting certain criteria. If the Company fails to meet any of these criteria,
the Units, Common Stock and/ or the Warrants could be delisted from trading on
Nasdaq SmallCap Market or the BSE, which delisting could materially adversely
affect the trading market for the Units, Common Stock and/or the Warrants. There
can be no assurance that the Securities will not be delisted.
SHARES ELIGIBLE FOR FUTURE SALE
No assurance can be given as to the effect, if any, that future sales of
Common Stock, or the availability of shares of Common Stock for future sales,
will have on the market price of the Common Stock from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of Warrants or stock options), or the possibility of such sales, could adversely
affect the market price of the Units, Common Stock and Warrants and also impair
the Company's ability to raise capital through an offering of its equity
securities in the future. Upon completion of the Offering, the Company will have
4,297,476 shares of Common Stock outstanding, of which only the 1,500,000 shares
of Common Stock included in the Units offered hereby will be transferable
without restriction under the Securities Act. The remaining 2,797,476 shares,
issued in private transactions, will be "Restricted Securities" (as defined in
Rule 144 promulgated under the Securities Act) which may be publicly sold only
if registered under the Securities Act or if sold in accordance with an
applicable exemption from registration, such as Rule 144. In general, under Rule
144, as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled to
sell (together with any person with whom such individual is required to
aggregate sales), within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the Common Stock is quoted on The Nasdaq Stock Market or a
national securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of the
Company for at least three months and who has beneficially owned restricted
securities for at least two years is entitled to sell such restricted shares
under Rule 144 without regard to any of the limitations described above. Holders
of 2,757,475 shares of Common Stock have certain registration rights. Officers,
directors and other security holders of the Company including those with
registration rights, owning and/or having rights to acquire in the aggregate
2,797,476 shares of Common Stock, have entered into agreements not to sell or
otherwise dispose of any securities of the Company, including Common Stock,
prior to , 2000 (two years from the Effective Date) (the "Lock-Up
Agreements") without the prior written consent of the Underwriter, which may be
granted or withheld in the sole and absolute discretion of the Underwriter.
Following expiration of the term of the Lock-Up Agreements, or the earlier
release of the restrictions contained therein, shares will become eligible for
resale pursuant to Rule 144, subject to the volume limitations and compliance
with the other provisions of Rule 144. Furthermore, the holder(s) of the
Underwriter's Warrants (including the securities issuable upon exercise thereof)
have demand and piggyback registration rights with respect to the units issuable
upon exercise of the Underwriter's Warrants. See "Description of Securities,"
"Description of Securities -- Shares Eligible for Future Sale," and
"Underwriting."
ADVERSE EFFECT OF REDEMPTION OF WARRANTS
Under certain conditions, the Warrants may be redeemed by the Company after
, 1999 with the prior written consent of the Underwriter, at a redemption
price of $.10 per Warrant upon not less than 30 days prior written notice to the
holders of such Warrants, provided the closing bid price of the Common Stock has
been at least $7.50 for 20 consecutive trading days ending on the third day
prior to the date the notice of redemption is given.
The Warrants will be exercisable until the close of business on the day
immediately preceding the date fixed for redemption. The redemption of the
Warrants could force the holders (i) to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holders to do
so, (ii) to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants or (iii) to
16
accept the redemption price, which is likely to be substantially less than the
market value of the Warrants at the time of redemption. See "Description of
Securities -- Redeemable Common Stock Purchase Warrants."
NEED FOR FUTURE REGISTRATION OF WARRANTS; STATE BLUE SKY REGISTRATION; EXERCISE
OF WARRANTS
The Warrants and Common Stock will trade separately upon the completion of
the Offering. Purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the Warrants and the shares of Common Stock underlying
the Warrants are not so registered or qualified. In this event, the Company
would be unable to issue shares of Common Stock to those persons desiring to
exercise their Warrants unless and until the Warrants and the underlying shares
of Common Stock are qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions.
There can be no assurance that the Company will be able to effect any required
qualification. The Warrants will not be exercisable unless the Company maintains
a current registration statement on file with the Commission through
post-effective amendments to the registration statement containing the
Prospectus. Although the Company has agreed to file appropriate post-effective
amendments to the registration statement containing the Prospectus and to
maintain a current Prospectus with respect to the Warrants, there can be no
assurance that the Company will file post-effective amendments necessary to
maintain a current Prospectus or that the Warrants will continue to be so
registered. See "Description of Securities -- Redeemable Common Stock Purchase
Warrants."
RELATIONSHIP OF UNDERWRITER TO TRADING
The Underwriter may act as a broker or dealer with respect to the purchase
or sale of the Common Stock and the Warrants in the over-the-counter market
where each is expected to trade. The Underwriter also has the right to act as
the Company's exclusive agent in connection with any future solicitation of
Warrantholders to exercise their Warrants. Regulation M, which was recently
adopted to replace Rule 10b-6, under the Exchange Act may prohibit the
Underwriter from engaging in any market-making activities with regard to the
Company's securities for a period of up to five business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter and any
solicitating broker/dealer may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. Any
temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities.
UNDERWRITER'S WARRANTS AND REGISTRATION RIGHTS
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, the Underwriter's Warrants which entitle
the Underwriter to purchase up to 150,000 shares of Common Stock at a purchase
price of $5.50 per share and 150,000 Warrants at a purchase price of $.11 per
Warrant. The securities issuable upon exercise of the Underwriter's Warrants are
identical to those offered pursuant to this Prospectus. The Underwriter's
Warrants are exercisable for a period of four years commencing one year from the
date of this Prospectus. The exercise of the Underwriter's Warrants and the
Warrants contained in the Underwriter's Warrants may (i) dilute the value of the
shares of Common Stock to be acquired by holders of the Warrants, (ii) adversely
affect the Company's ability to obtain equity capital and (iii) adversely affect
the market price of the Common Stock if the Common Stock issuable upon the
exercise of the Underwriter's Warrants and the Warrants contained in the
Underwriter's Warrants are sold in the public market. The Underwriter has been
granted certain "piggyback" and demand registration rights for a period of seven
years from the Effective Date with respect to the registration under the
Securities Act of the securities directly or indirectly issuable upon exercise
of the Underwriter's Warrants. The exercise of such rights could result in
substantial expense to the Company. See "Underwriting."
17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby,
after underwriting discounts and commissions and other expenses of the Offering
are estimated to be $6,230,000 ($7,228,325 if the Over-allotment Option is
exercised in full). The Company intends to use the net proceeds as follows:
AMOUNT PERCENT
------------ -----------
ACQUISITIONS(1)............................................................................ $ 1,500,000 24%
CONSTRUCTION OF NEW MANUFACTURING FACILITY (2)............................................. 1,250,000 20%
RESEARCH AND DEVELOPMENT (3)............................................................... 975,000 16%
SALES AND MARKETING (4).................................................................... 750,000 12%
RAW MATERIALS (5).......................................................................... 300,000 5%
REPAYMENT OF INDEBTEDNESS (6).............................................................. 83,500 1%
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES............................................. 1,371,500 22%
------------ ---
TOTAL...................................................................................... $ 6,230,000 100%
------------ ---
------------ ---
(1) The Company, as the opportunity arises, intends to acquire other companies,
products or product lines complementary to its existing businesses and may
use a portion of the proceeds of this Offering to pay all, or a portion of,
the purchase price for such acquisitions. Additionally, the portion of the
proceeds of this Offering allocated to acquisitions may be used to purchase
equipment, or as working capital, for such acquisitions. Any decision to
make such an acquisition will be based on a variety of factors, including
the purchase price, and other financial terms of the transaction, and the
business prospects and competitive position of, and technology or products
provided by, the acquisition candidate. As of the Effective Date, the
Company has no agreements, understandings or arrangements with respect to
any such acquisition nor is the Company engaged in any discussions or
negotiations regarding any such acquisition. There can be no assurance that
the Company will successfully consummate any acquisition or successfully
integrate any acquired company or products into its operations. Investors in
this Offering may not have an opportunity to evaluate the specific merits
and risks of any acquisition. Net proceeds which are allocated for
acquisitions but not used for that purpose may be used for working capital.
(2) The Company intends to construct and equip a new manufacturing facility on
property being purchased in Missoula County, Montana that is expected to be
financed in part through the issuance of industrial revenue bonds. The
facility is expected to consist of a 20,000 square foot manufacturing and
warehousing building on approximately 6.3 acres of land. The existing
manufacturing plants and equipment will be relocated in the new consolidated
facility when it is completed. The Company's proposed equipment purchases
include 2 CNC machining centers, a CNC tooling center and other equipment
designed to expand manufacturing capacity and improve efficiency. This
equipment can be used at either the new or existing facilities. There can be
no assurance that the industrial revenue bond financing will be completed.
If the financing is delayed or terminated, the Company intends to utilize
proceeds from the offering designated for construction to make additional
equipment purchases and make other improvements to operations at its
existing facilities.
(3) Research and development costs include the development of certain new
products, as well as attempts to determine more efficient ways to
manufacture existing products.
(4) Sales and marketing expenses include the production of a catalogue of the
Company's products and the costs of print advertising trade shows, sales
literature and sales samples.
(5) The Company intends to purchase metal, wood, supplies and component
assemblies such as barrels and frames.
(6) Repayment of indebtedness consists of approximately $46,000 due for
outstanding federal excise taxes and a payment of $37,500 due on a series of
promissory notes in the aggregate principal amount of $300,000. Of the
$300,000, $87,690 principal amount is due to Gary Landis, an officer and
director of the Company, $120,960 principal amount is due to O. Milton
Gossett, a principal shareholder of the
18
Company and a former officer and director of CVC, and the remainder is due
to two former officers and directors of CVC. The notes bear interest at 9%
per annum and are payable in eight (8) quarterly installments commencing on
the earlier of (i) the closing of the Offering or (ii) November 1, 1998. The
Company intends to make the remaining payments from operating cash flows,
but if such cash flows are insufficient, proceeds of the Offering that were
allocated to working capital may be used to make the remaining installment
payments. See "Certain Transactions." Repayment of indebtedness does not
include trade accounts payable which may be repaid from funds allocated to
working capital.
The foregoing represents the Company's current estimate of the allocation of
the net proceeds of the Offering based upon certain assumptions relating to the
costs associated with the implementation of the Company's present business
plans. Future events, including problems, delays and complications encountered
in implementation of its present plans, as well as changes in economic
conditions, regulatory or competitive conditions and the success of the
Company's marketing activities may make shifts in the allocation of funds
necessary or desirable. Any material reallocation will be made by the Board of
Directors. There can be no assurance that the Company's estimates will prove
accurate or that unforeseen expenses will not be incurred with a resulting
reallocation of the use of the proceeds of this Offering.
The Company believes, based on currently proposed plans, that the net
proceeds of this Offering will satisfy the Company's cash requirements for at
least 12 months followings the Effective Date. Pending the utilization, the net
proceeds will be invested primarily in high grade short term interest bearing
investments. Additional proceeds received as a result of the exercise of the
Over-allotment Option will be added to working capital.
19
DILUTION
At September 30, 1997, the net tangible book value of the Company was
($187,481) or $(0.07) per share of common stock based on 2,747,476 shares of
common stock outstanding. The net tangible book value per share represents the
amount of the Company's total tangible assets less total liabilities and
minority interests, divided by the number of shares of common stock outstanding.
After giving effect to the receipt of the net proceeds (estimated to be
approximately $6,230,000) from the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $5.10 per share, the
proforma net tangible book value of the Company attributable to common stock at
September 30, 1997 would be $5,892,519 or $1.39 per share of common stock. This
would result in dilution to the public investors (i.e. the difference between
the estimated initial public offering price per share of common stock and the
tangible book value thereof after giving effect to this Offering) of
approximately $3.61 per share or (72%). The following table illustrates the per
share dilution assuming $10 of the Offering price per Unit is attributable to
the Warrant included therein.
Assumed initial public offering price......................... $ 5.00
Net tangible book value at September 30, 1997................. (0.07)
Increase in proforma net tangible book value attributable to
new investors............................................... 1.46
---------
Proforma net tangible book value after this Offering.......... 1.39
---------
Proforma dilution of net tangible book value to the new
investors................................................... $ 3.61
---------
---------
The following tables set forth as of September 30, 1997, with respect to the
Company's existing stockholders and investors in this Offering, the number of
shares of Common Stock acquired from the Company, the percentage of ownership of
such shares of Common Stock, the total consideration paid, the percentage of
total consideration paid, and the average price per share paid by the existing
stockholders and by the investors in the Offering:
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
--------------------- ------------------------ PER
NUMBER PERCENT NUMBER PERCENT SHARE
---------- --------- ------------- --------- -----------
Existing stockholders.................... 2,747,476 64.68% $ 3,376,627 31.04% $ 1.23
New investors............................ 1,500,000 35.32 7,500,000 68.96 $ 5.00
---------- --------- ------------- --------- -----
Total.................................... 4,247,476 100.00% $ 10,876,627 100.00% $ 2.56
---------- --------- ------------- --------- -----
---------- --------- ------------- --------- -----
The above table assumes no exercise of the Overallotment Option. The above
table also assumes no exercise of currently outstanding options to purchase
475,000 shares of Common Stock and currently outstanding Warrants to purchase
50,000 shares of Common Stock. The options have exercise prices below the
Offering price, and thus, to the extent they are exercised, will cause further
dilution to new investors. See "Options/SAR Grants in Last Fiscal Year" and
"Certain Transactions."
20
CAPITALIZATION
The following table sets forth the actual capitalization of the company at
September 30, 1997, and as adjusted to give effect to the sale of 1,500,000
units offered hereby and to the application of the net proceeds therefrom, at
the assumed public offering price of $5.10 per unit and the reclassification in
December 1997 of $123,323 in short term debt owed to a company in which the
Company's Chairman is a principal to long term debt.
AS OF SEPTEMBER 30, 1997
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
Long-term debt..................................................................... $ 384,203 $ 470,026
------------- -------------
------------- -------------
Stockholders' Equity
Common Stock, $.0001 par value, 30,000,000 shares authorized on an actual and
adjusted basis, 2,747,476 issued and outstanding on an actual basis and 4,247,476
shares issued and outstanding on an adjusted basis (1) 275 425
Additional paid-in capital......................................................... 3,376,352 9,466,202
Retained earnings (accumulated deficit)............................................ (3,412,069) (3,412,069)
------------- -------------
Stockholders equity (deficit)...................................................... $ (35,442) $ 6,054,558
------------- -------------
Total capitalization............................................................... $ 2,058 $ 6,524,584
------------- -------------
------------- -------------
- ------------------------
(1) Does not give effect to the issuance of 50,000 shares of Common Stock and
50,000 warrants after September 30, 1997.
DIVIDEND POLICY
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. Any earnings, which the Company may realize in the
foreseeable future, will be retained to finance the growth of the Company.
Future dividend policy will depend upon the Company's earnings, capital
requirements, financial condition and other factors considered relevant by the
Company's Board of directors. In addition, the payment of cash dividends may be
limited or prohibited by the terms of any future loan agreements or any
preferred stock that may be issued by the Company. See "Description of
Securities -- Common Stock."
21
SELECTED FINANCIAL DATA
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------ ------------- -------------- ------------- -------------
STATEMENT OF OPERATIONS DATA
Net sales................................. $ 247,950 $ 74,744 $ 244,725 $ 193,796 $ 365,378
Cost of good sold......................... 405,441 339,246 576,153 355,127 638,311
Gross profit (loss)....................... (157,491) (264,502) (331,428) (161,331) (272,933)
Operating expenses........................ 244,977 482,206 759,187 655,731 457,020
Operating loss............................ (402,468) (746,708) (1,090,615) (817,062) (729,953)
Other income (expense).................... (47,012) (35,755) (12,049) (29,700) (23,570)
Net loss.................................. (449,480) (782,463) (1,102,664) (846,762) (753,523)
Earnings per share........................ (0.84) (0.75) (0.44) (0.35) (0.27)
Weighted average number of shares
outstanding (1)......................... 535,728 1,040,893 2,488,466 2,410,972 2,803,558
AT DECEMBER 31, AT SEPTEMBER
------------------------------------------- 30,
1994 1995 1996 1997
------------ ------------- -------------- -------------
BALANCE SHEET DATA
Working capital (deficit)................. (598,480) $ (49,286) $ 200,083 $ (76,943)
Total assets.............................. 500,286 736,095 1,126,112 1,107,900
Long-term debt............................ -- 262,500 300,000 384,203
Total liabilities......................... 901,291 759,059 999,357 1,143,342
Stockholder's equity (deficit)............ (401,005) (22,964) 126,755 (35,442)
- ------------------------
(1) Adjusted for merger with Stock Shop and recapitalization in 1995. See notes
1 and 2 to the financial statements.
COOPER FIREARMS, INC.
SELECTED FINANCIAL DATA
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED
---------------------------- TO AUGUST 13, JUNE 30,
1994 1995 1996 1996
------------- ------------- -------------- ----------------
STATEMENT OF OPERATIONS DATA
Net sales..................................................... $ 959,206 $ 954,002 $ 589,070 $ 534,420
Cost of goods sold............................................ 1,046,630 1,027,871 516,687 461,005
Gross profit (loss)........................................... (87,424) (73,869) 72,383 73,415
Operating expenses............................................ 182,410 396,278 237,190 209,621
Operating loss................................................ (269,834) (470,147) (164,807) (136,206)
Other income (expense)........................................ (17,230) (38,809) (20,267) (15,241)
Net loss...................................................... (287,064) (508,956) (185,074) (151,447)
Earnings per common share..................................... (3.17) (4.19) (1.36) (1.13)
Weighted average number of common shares outstanding.......... 90,565 121,436 135,677 133,465
AT DECEMBER 31,
----------------------------
1994 1995
------------- -------------
BALANCE SHEET DATA
Working capital (deficit)..................................... $ (2,401) $ (117,865)
Total assets.................................................. 781,774 675,636
Long-term debt................................................ 118,621 175,643
Total liabilities............................................. 603,957 669,775
Stockholders' equity.......................................... 177,817 5,861
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and the notes thereto appearing elsewhere in this
Prospectus. This discussion contains forward looking statements that involve
risks and uncertainties. The Company's actual results in the future may differ
materially from the results discussed in such forward looking statements.
Factors that might cause such a difference include, but are not limited to those
discussed in "Risk Factors."
CERTAIN FACTORS AFFECTING COMPARABILITY
On August 13, 1996, the Company acquired all of the preferred stock and 92%
of the common stock of Cooper Arms (in subsequent stock purchases, the Company
increased its ownership in Cooper Arms to approximately 99%) in a transaction
accounted for under the purchase method. This acquisition distorts comparability
between periods. Therefore, pro forma results of operations assuming Cooper Arms
was acquired on January 1, 1995 have been used in this analysis to provide more
meaningful information in the evaluation of the ongoing performance of the
business.
The following pro forma condensed statements of operations do not purport to
be indicative of the consolidated results of operations of the Company that
might have occurred had the acquisition actually taken place on January 1, 1995,
nor are they indicative of future results. Furthermore, these pro forma
condensed consolidated statements of operations do not reflect changes which may
occur as a result of post-merger activities or other matters.
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -------------------
1995 1996 1996
------------- ------------- -------------------
Net sales..................................................... $ 1,028,746 $ 833,795 $ 782,866
Cost of goods sold............................................ 1,367,117 1,092,840 871,814
------------- ------------- -------------------
Gross profit (loss)........................................... (338,371) (259,045) (88,948)
Operating expenses............................................ 878,484 996,377 892,921
------------- ------------- -------------------
Operating loss................................................ (1,216,855) (1,255,422) (981,869)
Other expenses................................................ 74,564 38,960 52,404
------------- ------------- -------------------
Loss before minority interests................................ (1,291,419) (1,294,382) (1,034,273)
Minority interests in net loss of subsidiary.................. 6,644 -- --
------------- ------------- -------------------
Net loss...................................................... $ (1,284,775) $ (1,294,382) $ (1,034,273)
------------- ------------- -------------------
------------- ------------- -------------------
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA AMOUNTS FOR NINE
MONTHS ENDED SEPTEMBER 30, 1996.
Net sales revenue declined $417,488 or 53% from $782,866 in 1996 to $365,378
in 1997, primarily due to lower sales volume. The Company has concentrated its
efforts in 1997 on expanding production capacity, improving efficiency and
securing capital required for both. The Company has temporarily reduced its
current production and marketing efforts to accomplish these objectives.
Furthermore, financial constraints and limitations on production capacity have
forced the Company to temporarily suspend rifle production for portions of 1997.
Consequently, sales volume has suffered. Management believes that it is
necessary for the Company to expand production capacity for it to be able to
produce significant improvement in sales.
23
Gross profit (loss) declined from (11.4%) of net sales in 1996 to (74.7%) in
1997, in part due to inefficiencies in the integration of CVC Classics, Cooper
Arms and Stock Shop production operations. A major inefficiency was the failure
to consolidate production at a single location. In addition, the Company
temporarily suspended rifle production for portions of 1997 as described above.
The lower production volume resulted in a significant increase in fixed overhead
costs allocated to each unit produced.
Operating expenses declined $435,728 or 49% from $892,921 in 1996 to
$457,020 in 1997, primarily due to elimination of duplicated costs after the
merger of CVC and Cooper Arms. Executive compensation was reduced by $127,290
from $175,290 in 1995 to $48,000 in 1996. In addition, management has
significantly reduced bad debt expense from $85,574 in 1996 to $193 in 1997.
This is due to tighter credit policies and improved collection procedures. As a
percentage of net sales, operating expenses increased from 114.1% to 125.1%
primarily due to the decline in net sales.
Loss from operations decreased by $251,916 or 26% from $(981,869) in 1996 to
$(729,953) in 1997, primarily due to the elimination of duplicated costs after
the merger of CVC and Cooper Arms which was partially offset by the decrease in
net sales and inefficiencies in the integration of production operations of CVC
Classics and Cooper Arms.
Interest expense decreased by $36,406 or 58% from $62,570 in 1996 to $26,164
in 1997 reflecting repayment of debt and new low or non-interest-bearing
borrowings from related parties.
There was no income tax expense in either period as a result of the Company
incurring a loss.
As a result, the Company's net loss decreased by $280,750 or 27% from
$(1,034,273) in 1996 to $(753,523) in 1997. As a percentage of net sales, net
loss was (132.1%) in 1996 and (206.2%) in 1997.
PRO FORMA AMOUNTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO PRO FORMA
AMOUNTS FOR YEAR ENDED DECEMBER 31, 1995.
Net sales declined $194,951 or 19% from $1,028,746 in 1995 to $833,795 in
1996, primarily due to lower sales volumes. Due to financial difficulties,
Cooper Arms temporarily suspended operations for approximately three months in
1996. Cooper Arms resumed its production after it was acquired by CVC funded
primarily by the proceeds of $402,383 from CVC's sale of Common Stock in a
private offering and a capital contribution of $1,000,000 from an entity
controlled by the Company's Chairman. See "Certain Transactions."
Gross profit (loss) improved from (32.8%) of net sales in 1995 to (31.1%) in
1996.
Operating expenses increased $117,893 or 13% from $878,484 in 1995 to
$996,377 in 1996, primarily due to an increase of approximately $119,000 in bad
debt expense. This increase was partially attributable to the write off of past
due receivables that existed at the time the Company acquired Cooper Arms and
during the reorganization of CVC, which resulted in the operations being
relocated to Montana. As a percentage of net sales, operating expenses increased
from 85.4% in 1995 to 119.5% in 1996, primarily due to the decline in net sales
and the increase in bad debt expense.
Loss from operations increased by $38,567 or 3% from $(1,216,855) in 1995 to
$(1,255,422) in 1996, primarily due to the decrease in net sales and increase in
bad debt expense which were partially offset by the improvement in gross profit
(loss) percentage. As a percentage of net sales, loss from operations was
(118.2%) in 1995 and (150.6%) in 1996, reflecting the decline in sales volume.
Interest expense decreased by $24,374 or 33% from $74,564 in 1995 to $50,190
in 1996, reflecting repayments of debt and new low or non-interest-bearing
borrowings from related parties.
There was no income tax expense in either period as a result of the Company
incurring a loss.
As a result, the Company's net loss increased by $9,607 or 1% from
$(1,284,775) in 1995 to $(1,294,382) in 1996. As a percentage of net sales, the
net loss was (124.9%) in 1995 and (155.2%) in 1996.
24
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operating cash flow deficit through
loans from stockholders, capital contributions and sales of common stock.
In 1996, the Company had negative cash flows of $(1,123,583) from
operations. The principal uses of cash were the net loss of $1,102,664, an
increase in inventory of $87,873, a decrease in accounts payable and accrued
expenses of $69,053 and a decrease in federal excise tax payable. The principal
source of cash from operations was a decrease in accounts receivable of $47,915.
A temporary suspension of production for parts of 1996 resulted in an increase
in raw materials inventory, since these items did not enter the production cycle
when expected. In addition, the Company purchased raw materials at favorable
prices, taking advantage of discounts in anticipation of the planned increase in
production capacity. Accounts payable and accrued expenses and federal excise
taxes payable decreased as such balances were paid out of the proceeds of the
sale of the Company's Common Stock in a private placement. Cash flows from
investments activities was reduced by $105,728. The principal uses of cash from
investments were the purchase of Cooper Arms for $30,000 and purchase of
equipment for $126,205. The principal source for cash from investments was the
$37,477 in cash obtained in connection with the Cooper Arms acquisition. The
Company raised $402,383 from the sale of Common Stock; and a Company controlled
by its principal shareholder made a capital contribution of $1,000,000. When
reflecting all transactions, the Company had a net increase in cash of $167,330
from $64,204 in 1995 to $231,534 in 1996 and a net increase in working capital
(deficit) of $249,369 from $(49,286) in 1995 to $200,083 in 1996.
The Company had lease commitments at December 31, 1996 for its facilities
totaling $114,325 of which $55,075 and $43,250 is committed for 1997 and 1998,
respectively. The lease commitments end on September 1, 1999.
The Company was also obligated under an employment agreement with its
President at December 31, 1996 at a total of $108,000 in salary, of which
$48,000 is to be paid in 1997. The employment agreement expires on March 31,
1999.
In the first nine months of 1997, the Company used $(599,599) in operating
activities. The principal uses of cash were the net loss of $(753,523) and a
decrease in federal excise taxes payable of $14,249. Cash was provided
principally by increases in accounts payable and accrued expenses (including
accrued interest) of $46,713 and customer deposits of $14,774. Cash flows from
investing activities were decreased by $297,611 as a result of the purchase of
property and equipment and costs incurred related to this Offering. Cash flows
from financing activities increased by $690,466 primarily as a result of
$591,326 from the sale of Common Stock, $98,900 of bank borrowings and a $15,091
advance from an affiliate. When reflecting all these transactions, the Company
had a net decrease in cash of $206,744 from $231,534 in 1996 to $24,790 in 1997
and a net decrease in working capital (deficit) of $277,026 and $200,083 in 1996
to $(76,943) in 1997.
After payment of applicable underwriting discounts and commissions and
certain other expenses of the Offering, the Company expects to receive net
proceeds of approximately $6,230,000 (or approximately 81% of the estimated
gross proceeds of $7,650,000). The Company believes, based on currently proposed
plans, that the proceeds of the Offering will fulfill the Company's working
capital needs for at least 12 months following the Offering. If the Company
continues to grow, bank borrowings, other debt placements and equity offerings
may be considered, in part or in combination as the situation warrants. There
can be no assurance that financing will be available from these sources on terms
acceptable to the Company, if at all.
The Company has incurred substantial recurring operating losses. This raises
substantial doubt about the Company's ability to continue as a going concern.
The auditors have expressed such doubt in their opinion on the Company's
financial statements. If the Company is not able to complete the Offering,
generate additional revenues or reduce its expenses, it is possible that
operations will be discontinued.
25
BUSINESS
HISTORY
CVC was formed to re-engineer, produce and market a high-quality,
American-manufactured version of a sporting shotgun produced first in Japan by
the Olin Corporation as the "Winchester Model 101" and, until 1988, by its
successor company as the "Classic Doubles" Sporter. In 1993 and 1994, CVC
commenced limited production of its American-made model, the "CVC Classic
Sporter" and by 1995 completed the design and engineering of a line of ten
shotguns within the CVC Classic Sporter family. In 1995 and early 1996, CVC
sought to increase production of the CVC Classic Sporter by reaching an
understanding with a manufacturer pursuant to which the manufacturer would
supply and assemble the metal components of the CVC Classic Sporter and CVC
would finish and market the completed product. In mid-1996, management
determined that this arrangement was not performing as expected and it was
discontinued.
The Company was formed in May 1996 for the purpose of acquiring the
outstanding securities of CVC. In September 1997, the Company completed an
exchange offer as a result of which CVC became a majority owned (approximately
97%) subsidiary of the Company.
In November 1996, CVC acquired all of the issued and outstanding capital
stock of the Stock Shop, and indirectly, the Stock Shop's majority-owned
(approximately 99%) subsidiary Cooper Arms. The Company's senior management and
Board of Directors believes this acquisition was necessary in order to expand
the Company's business activities to include in-house manufacturing of CVC
shotguns and create economies of scale in the marketing of the Company's
products. At this time CVC Classics' operations were relocated to a facility in
Montana. Although the Company still experiences inefficiencies related to
operating two separate facilities, it has been able to eliminate some expenses
by conducting all of its operation in Montana.
In August and September 1996, Stock Shop acquired 92% of the outstanding
capital stock of Cooper Arms and all of the assets of the Stock Shop of Montana
LLC, a company under common control, respectively. In August 1997, the Company
acquired an additional 7% of Cooper Arms' outstanding capital stock.
INDUSTRY BACKGROUND
The 1995 Annual Firearms Manufacturing, and Exportation Report ("Report")
compiled by the Bureau of Alcohol, Tobacco and Firearms ("BATF") revealed that
in 1995, 1,331,780 rifles and 1,173,645 shotguns were manufactured in the United
States. According to the Report, of these firearms, 88,899 rifles and 100,877
shotguns were exported.
The National Shooting Sports Foundation's Profile of Participation in the
Hunting and Shooting Sports (1995) ("Profile") reveals that hunting is a stable,
if not growing, recreational activity. Annual hunting license sales have
remained around the 16 million mark since 1983. The Profile indicates that
hunters/shooters between the ages of 35-54 report owning the most shotguns,
while those over 55 own the most centerfire rifles. With respect to target
shooters, the Profile reports that the target shooting segment of the shooting
sports market is growing and cites a survey by American Sports Analysis which
reveals that trap and skeet shooting, with over 4.5 million participants, is on
the rise. Additionally, sporting clay shooting is among the fastest growing
sports, which over the course of a few years attracted approximately 3.1 million
participants.
GROWTH STRATEGY
The Company's goal is to become a leading manufacturer of custom quality,
mass produced firearms and high grade accessories by focusing on the high growth
areas of the firearms market which the Company believes includes various types
of target shooting, such as clay, trap and skeet shooting. The Company's primary
strategies for achieving its goal are to broaden its product line and increase
the scope
26
and efficiency of its manufacturing operations. In order to broaden its product
lines, the Company intends to seek to acquire companies which sell products
which are competitive or complimentary to its current products or to acquire
such product lines. Alternatively, as the Company is doing with ammunition and
clothing and accessories, the Company may develop such product lines itself. The
purchase of additional production equipment at its existing, or proposed
facilities, is expected by management to reduce reliance on third party
suppliers, as well as increase capacity and manufacturing efficiency.
PRODUCTS
The Company manufactures manually operated rifles and shotguns primarily
designed for hunting, target shooting and other shooting sports. The primary
components of each of these firearms are a barrel action and stock. The barrel
is the metallic cylindrical tube through which the projectile passes before it
leaves the firearm. The moving parts that allow one to load, fire and unload a
firearm make up the action. When the barrel is attached to the action, these
metal parts (which contain all the parts necessary for the firearm to function)
may be called a barreled action. The stock is the wood handle of the firearm to
which the barrel and the action are attached. The stock provides proper grip and
balance. Firearms may be decorated by engravings or inlays on the metal parts or
engravings, inlays or checkering on the stock.
A rifle is a long gun with spiral grooves cut into the interior of the
barrel to give the projectile a stabilizing spin after it leaves the barrel. A
rifle fires a single projectile each time the cartridge is ignited by the
pulling of the trigger. Most of the Company's rifles are bolt action rifles.
Bolt action rifles require manual turning, retraction and closing of a bolt
device in order to load ammunition. Lugs are used to lock the bolt into the
action when the rifle is to be fired. Bolt action rifles may be repeating
rifles, which allow more than one (usually three to five) cartridges to be
stored in a magazine and manually fed into the action with the bolt.
A shotgun is also a long gun. In contrast to a rifle, a shotgun fires a
cartridge with a number of projectiles at one time which spread over an area
after being discharged from the barrel. This makes a shotgun the firearm of
choice for shooting moving targets. The concentration of the projectiles from a
given distance is known as the shot pattern. Many shotguns have two barrels,
which are arranged vertically (over-and-under) or horizontally (side by side).
Many shotguns use a rib (a long flat metal piece running the length of the
barrel) to provide a proper sighting plane.
Most shooting sportsmen prefer a high level of accuracy in their firearms.
The accuracy and distance of a rifle or shotgun depends upon the length and
width of the barrel, the precision with which it is manufactured, as well as
other variations. Other features of importance to shotgun users are internal
refinements to the barrel such as diamond honing, to ensure internal smoothness,
a minimal recoil (recoil is the force with which the gun moves backwards against
the shoulder when fired) and overboring for a consistent shot pattern. Rifle
users prefer rifles that are manufactured with high grade barrels (known as
match-grade) and are designed so that glass bedding is used to create a precise
fit between the action and stock and also to prevent the wood in the stock from
touching the barrel which could adversely affect the rifle's accuracy (this
design is known as free floating). A shooting sportsmen may own a wide variety
of rifles or shotguns, creating a market for repeat buyers of the Company's
products.
The Company does not intend to manufacture or market handguns or assault
weapons.
CVC CLASSICS
CVC Classics designs, engineers, manufactures and markets a premium line of
ten shotguns for clay target shooting and hunting which retail from $3,000 to
$4,200 without options and can retail for in excess $10,000 with options. The
CVC Classics shotguns are a 12 gauge, over and under third generation rendition
of the renowned Winchester Model 101. The best selling model in the line is the
CVC Classic Sporter offered in three barrel lengths. The CVC Classic Sporter are
ready for sporting clays competition
27
(which Management believes is the largest and fastest growing segment of the
shotgun industry) as delivered.
Third generation improvements to the CVC Classic Sporter include lengthened
forcing cones, mechanical triggers, and overboring. Improvements to
manufacturing techniques include a one piece frame machined from ordinance 416
stainless steel a machined 4140 steel monobloc, and diamond honed barrels. All
of these improvements provide superior balance, lighter weight, reduced recoil
and better shot patterning. Additionally the shotguns feature select American
walnut with hand checkering. CVC is currently perfecting its rib to barrel laser
beam welding process known as "CVC Fusion(TM)" which fuses the barrels and ribs
into an inseparable structure for improved strength and durability. Management
believes that this technology will provide the strongest barrel assembly
available because the ribs and barrel metal are fused into an inseparable
structure for the life of the shotgun. Moreover, in addition to achieving
greater barrel strength, lighter weight and a unique gun balance, CVC Fusion(TM)
is expected to lower production costs per unit due to the accelerated pace at
which assembly can occur (as compared to soldering) and reduced labor needed in
the assembly process. The Company does not hold a patent on its laser-beam
welding technology and may seek to secure a patent in order to license the
technology to the industry. There can be no assurance, however that even if the
Company applies for patent protection, a patent will be issued.
THE STOCK SHOP
The Stock Shop designs and manufactures high quality firearms stocks.
Currently, the Company only produces stocks for use on the Company's other
products and on a custom basis for retail customers. If the Company is able to
increase capacity in its manufacturing facilities, it may attempt to solicit
contract orders from other firearms manufacturers for large quantities of
firearms stocks on an OEM basis. There can be no assurance that the Company will
be able to increase capacity to a sufficient level for this or that there exists
a market for production of the Company's stocks on an OEM basis.
The Stock Shop also designs, engineers, assembles and markets the "Anschutz
USA Sporting Rifle," based on the Anschutz Model 1700 series barreled action.
The Stock Shop has an agreement with the world renowned firm of J.G. Anschutz
GmbH and its distributor, AcuSport Corporation, whereby AcuSport has agreed to
sell the Stock Shop the Anschutz Model 1700 series barreled action, the Stock
Shop manufactures stocks for and assembles the rifle using the barreled action.
The Stock Shop also acquired the American rights to the use of the name
"Anschutz USA Sporting Rifle." The Company's arrangement with Anschutz is
terminable by either party without notice.
The Stock Shop's Anschutz rifle is available in four calibers and with two
stock designs. The rifles retail from $1,550 to $1,895 without options, and can
retail for in excess of $10,000 with options.
COOPER ARMS
Cooper Arms designs, engineers, manufactures and markets a line of high
quality bolt action rifles for sport hunting and competition. The line consists
of five basic models of rifles, each in various styles, featuring classic
American design, two of which are repeating rifles and three of which are single
shot bolt action varmint rifles. The standard features of the repeating rifles
include three mid-locking lug bolts, box magazine, twin extractors, glass
bedding, single stage fully adjustable match trigger, 24 inch length chrome moly
match barrel (free floated) with .960-.650 straight taper, competition step
crown and 13 inch length of pull. All metal component parts of the repeating
rifles are machined from solid bar stock steel. The standard features of the
single shot varmint rifles include three front-locking lug bolts, Sako-style
extraction system, glass bedding, matte finish, single stage fully adjustable
match trigger, 24 inch stainless steel match grade barrel (free floated) and 13
inch length of pull. Cooper Arms rifles retail from $1,695 without options and
can retail for in excess of $6,000 with options.
28
The Cooper Arms rifles are sold with certain guarantees as to the accuracy
of the rifles and a one year warranty requiring the Company to remedy defects in
the rifle's metal parts. The warranty does not cover damage caused by misuse or
inadequate care. The Cooper Model 36 is the holder of the 1994, 1995, 1996 and
1997 National Rifle Association sanctioned Hunter Class Silhouette US National
Championships.
Cooper Arms also designs and intends to market Cooper Arms ammunition. The
Company has designed prototypes of the ammunition including ammunition which is
especially designed for use with Cooper Arms rifles. The ammunition and the
manufacturing process by which it will be produced were designed to provide
superior accuracy. This design includes using precise processes for placing the
bullet in the brass cartridge and measuring the amount of gun powder used. This
ammunition is primarily intended for use by military and law enforcement units
in the United States and abroad. Manufacturing of the ammunition is being
contracted out to a manufacturer specializing in the production of high grade
ammunition. The Company intends to ensure that the manufacturers maintain high
quality control levels so that the ammunition is produced with the precision
called for in the Company's design. Cooper Arms plans to utilize third party
manufacturers for the production of the ammunition as customer purchase orders
are received and thus avoid keeping ammunition in inventory. This ammunition
previewed at the Brussels Military Procurement Exposition in November of 1997
and the Company expects sales to commence in the second quarter of 1998.
APPAREL AND ACCESSORIES
In the second quarter of 1998, the Company intends to commence marketing of
specialty labeled sports apparel and shooting accessories. The Company is hoping
to capitalize on the consumer's perception and familiarity with its firearms in
order to establish an identifiable brand name. These products are expected to
include caps, shooting vests, hunting coats, shirts, shotgun and rifle cases and
cleaning supplies. The products will be targeted at the high grade, high margin
upscale market. Design and selection of the products will be performed by the
Company and the manufacturing of the products will be contracted out to third
parties. The products will be sold primarily to the approved dealers. The
Company intends to establish a brand name which will be recognized and
associated with high quality firearms and accessories.
MANUFACTURING
In manufacturing shotguns, the Company mills (that is, cuts and forms raw
metal into the required shape and size) approximately 60% of the internal metal
components of the shotguns and produces the stocks. The barrel, as well as other
parts not manufactured by the Company, are purchased from suppliers. As
required, the metal parts purchased from suppliers are heat-treated by the
Company, which also fits or trims and adjusts the parts and finishes the metal.
Finishing is the process by which a metal part is either polished or blued,
which is a chemical process which protects the part against rusting and creates
a dark blue or black finish. The Company then assembles the various components
into finished shotguns which undergo quality control review before being readied
for shipment.
All of the metal components of the Company's rifles are purchased from
suppliers, but the Company produces the stocks itself. The metal parts are fit
and finished by the Company which also assembles them into finished rifles. The
Company produces the stocks for its firearms from raw wood. The process of
profiling (also called milling) the wood, that is, shaping the raw wood block
into the required shape is done by hand with the use of semi-automatic
machinery. The remainder of the production process, which consists of fitting
the profiled wood to the metal parts of the firearm, final shaping, sanding,
placing the design on the wood (known as checkering) and finishing, are
currently done by hand.
The Company's proposed new manufacturing facility is expected to allow the
Company to produce substantially all of the metal parts for the firearms itself:
barrels will continue to be purchased from suppliers at least initially.
Additionally, the equipment which the Company expects to purchase is intended to
automate substantial portions of the manufacturing process which are now
performed by hand. For
29
example, currently producing the stocks is done almost entirely by hand. The new
equipment is intended to automate virtually the entire production process for
the stocks except for certain finishing processes that will be done by hand. See
"Business--Property."
In the event the financing for the new manufacturing facility cannot be
obtained, the Company will install the new equipment in its existing facilities.
This equipment will allow for substantially all of the changes in the Company's
manufacturing operations which the new facility would allow, except rather than
producing all of the component metal parts for rifle production only a majority
of such parts would be produced by the Company. The remainder of the parts would
continue to be purchased from suppliers. However, the new facility would result
in greater manufacturing efficiencies and capacity than would updating the
existing facilities and would also provide for on-site warehousing of finished
goods which is not possible at the existing facilities. Management believes that
the equipment purchased for existing facilities will be transferable to the new
facility. This will enable the Company to make equipment purchases while waiting
to obtain financing and complete construction of the new facility.
SALES AND MARKETING
The Company sells its products primarily to retail stores which specialize
in the sale of firearms and related products. The Company's Approved Dealer list
currently consists of approximately 500 retail stores of which approximately 125
have purchased products during 1997. Before approving a dealer, the Company
reviews each prospect to determine that it holds an appropriate BATF license and
is a "storefront" firearms dealer. The Company may sell to distributors in the
future although it has no current plans to do so.
Sales to the Approved Dealers are solicited by independent sales
representatives retained by the Company who have exclusive territories.
Presently, the Company retains independent sales representatives covering
approximately 35 states and intends to engage representatives to cover the
remaining states. The sales representatives also sell firearms manufactured by
others and are not prohibited from selling directly competitive firearms. The
Company promotes its products at trade shows and shooting competitions or
outings. The Company advertises in shooting and hunting periodicals and provides
dealers with sales literature about its products.
The Company intends to use a portion of the proceeds of the Offering to
produce a direct mail catalogue. The catalogue will include all of the Company's
products and solicit sales of products other than firearms which cannot be sold
by direct mail. The catalogue will enable the Company to market directly to the
higher margin consumer market. Additionally, the Company believes its catalogue
will increase consumer awareness of its products, which could serve to promote
sales in dealer outlets.
COMPETITION
The Company competes in a highly specialized, competitive environment
directly with many other national and international sporting firearms
manufacturers. Many of these companies are larger, better known and have
significantly greater financial, manufacturing and marketing resources than the
Company. In addition, unlike the Company, many firearms manufacturers are
subsidiaries of larger, more diverse companies on whom they can rely for capital
and other resources. No assurance can be given that the Company will be capable
of competing successfully in the future, or that the Company will be successful
in maintaining or expanding its share of the market for its products. The
Company's competition includes the Dakota Arms, Beretta Perazzi, Krieghoff
Ultralight, Kimber and Browning lines of firearms.
MAJOR CUSTOMERS
The Company's three largest customers accounted for 42% of net sales for the
nine months ended September 30, 1997, respectively. During the nine months ended
September 30, 1997, Sporting Clays Market, The Outdoorsman and PJ Vollmer & Co.,
Inc. accounted for 12%, 17% and 13% of sales,
30
respectively. The Company believes that it has good relationships with its
customers and that they will continue to do business with the Company. However,
the Company has no long term contracts with any of its customers, all of whom
purchase products from the Company pursuant to individually placed purchase
orders. Therefore, there can be no assurance that any of its customers,
including its largest customers, will continue to purchase products from the
Company.
SUPPLIERS
Although the Company manufactures certain components of its firearms and
assembles them, it purchases certain materials and other component parts from
third party suppliers. The Company has no long-term contracts with suppliers,
and any of these relationships can be terminated by either party at any time.
Failure to obtain necessary materials from suppliers could interrupt the
Company's production schedule and adversely affect the Company. The Company
intends to use a portion of the proceeds of the offering to increase in-house
manufacturing in order to reduce dependence on metal component part suppliers.
However, the Company will remain dependent on suppliers for raw material and
certain component parts.
The Company intends to use one or more independent manufacturers for the
manufacture of the Cooper Arms ammunition and the apparel and accessories. The
Company will remain dependent on these suppliers for the production of the
ammunition and the apparel and accessories, although the Company believes that
there are a number of manufacturers who are capable of producing the ammunition
and the apparel and accessories.
LICENSING AND GOVERNMENT REGULATION
The firearms manufacturing industry is subject to extensive regulation by
various Federal and State regulatory agencies, including BATF. The Company
maintains licenses issued by the BATF permitting the distribution of firearms
and ammunition to a network of BATF licensed dealers throughout the United
States. The licenses are renewable every three years and require the Company to
maintain certain records relating to Firearms shipments. The Company's BATF
license was originally issued to Cooper Arms in February 1991 and has been
renewed until October 2000. The loss or suspension of any of the Company's
licenses could have a material adverse effect on the Company. The Company's
licenses could be suspended if it fails to pay the 11% federal excise tax due on
all sales of firearms. Currently, the Company owes approximately $46,000 in such
taxes together with interest or penalties. The Company is not aware of any
pending action against the Company with respect to such taxes and intends to pay
all amounts due from the proceeds of this Offering.
The manufacture, sale and purchase of firearms is subject to extensive
governmental regulation, including The Gun Control Act of 1968, The National
Firearms Act, The Arms Export Control Act and The Federal Firearms Act. Since
the Company is not presently selling revolvers, pistols or assault weapons, many
of the provisions of presently effective laws and regulations are not applicable
to the Company's present business.
The Company may export products. Each shipment of firearms shipped outside
the United States must be licensed by the State Department. The State Department
regulates the type of firearms that may be exported to various countries. The
Company must comply with these regulations to be able to export products. There
can be no assurance that as the Company expands its product line or as new laws
or regulations are adopted, or current laws and regulations expanded, that
existing or future laws and regulations would not have a materially adverse
effect on the business of the Company.
Moreover, from time to time, legislation and regulations that could
potentially affect the Company, either beneficially or adversely, have been
proposed by federal and state legislators and regulators. Management is not
aware of any currently pending or proposed legislation or regulations which, if
adopted, would have a materially adverse impact on the Company's operations.
31
PROPRIETARY RIGHTS
The Company does not currently have patent protection on its products or
production processes. Its ability to compete effectively with other companies
will depend, in part, on its ability to maintain the proprietary nature of its
products and production processes. The Company may apply for patent protection.
However, there can be no assurance that it will be successful in obtaining such
patents or if obtained that such patents will afford the Company sufficient
protection. The Company intends to rely substantially on unpatented products and
production processes, and there can be no assurance that others will not copy
any of its designs or processes.
The basic design and engineering of the CVC Classic Sporter is largely based
on that of the Classic Doubles, previously manufactured by Sports Japan, Inc.
("Sports Japan"), which, in turn, was based upon the shotgun known as the
Winchester Model 101 produced by the Winchester Division of the Olin Corporation
("Winchester"). The Company has no license or other relationship with
Winchester, Olin Corporation or any other party who owns a patent or trademark
on the Winchester Model 101. Management does not believe that either Sports
Japan or Winchester has any viable claims against the Company based upon unfair
competition or protected proprietary rights to such designs and engineering.
Management believes that neither the Winchester Model 101 nor any of its parts
are protected by patents, and the shotgun itself is no longer manufactured.
Management also believes that Winchester sold the manufacturing rights to Sports
Japan, whose Classic Doubles was an improved version of the Winchester Model 101
and which company itself ceased operations and forfeited its firearms
manufacturing license in Japan in 1988. Further, management believes that the
CVC Classic Sporter is differentiated from the Winchester Model 101 and the
Classic Doubles by virtue of the different manufacturing process and the
Company's design enhancement. The Company has not obtained any opinion from
patent counsel and there can be no assurance that any such claims will not be
brought against the Company by Winchester, Sports Japan or persons connected or
previously connected with such entities. In the event that such claims are
brought against the Company, even if the Company was ultimately found not to be
liable, the cost to the Company of defending any such lawsuit could have a
materially adverse effect on the Company's operations. Moreover, if the
Company's products infringe patents or proprietary rights of others, the
Company, under certain circumstances, could become liable for damages or be
forced to alter its products, or production processes, either of which could
have a material adverse effect on the Company.
Cooper Arms holds a registered trademark, No. 75-511,590, granted March 28,
1995 for the mark "17CCM" which is used in connection with a cartridge developed
by Cooper Arms. The Company has applied for the registration of additional
markets, however, there can be no assurance that it will be successful in
obtaining such registrations. The Company's application of the mark "Classic
Sporter" was rejected as being "merely descriptive" and thus not eligible for
trademark protection. The Company is currently appealing the rejection. If the
Company fails to obtain the mark "Classic Sporter", the Company would not be
able to prevent other companies from marketing firearms under the name Classic
Sporter, which could have a material adverse effect on the Company.
Additionally, the Company's trademark counsel has indicated that the name
"Connecticut Valley" may be deemed "confusingly similar" to another company's
name and the Company may be required to change its name or seek another name
under which to market certain products. If the Company were required to cease
using "Connecticut Valley", it could have a material adverse effect on the
Company. Although registration affords the Company the protection of federal
trademark laws against the unauthorized use of the protected mark or a use
deemed "confusingly similar" under federal trademark law, there can be no
assurance that third parties will not infringe on the Company's current or
future trademark registrations or that the Company will have sufficient
resources to defend against any such infringement successfully or at all.
PERSONNEL
The Company has approximately 18 full time employees, including 15 in
manufacturing and 3 in corporate and general administration, some of whom also
have production responsibilities. Of the 15
32
employees in manufacturing, 12 are located at the Stevensville, Montana
facility, three are at the Victor Montana facility. None of the Company's
employees are represented by labor organizations and the Company is not aware of
any activities seeking such organization. The Company considers its
relationships with its employees to be satisfactory. See "Management."
PROPERTY
The Company operates two manufacturing facilities. The primary manufacturing
operations are conducted at a 5,200 square foot facility in Stevensville,
Montana, and the manufacturing activities relating to machining and metal work
are conducted at Victor, Montana. The Company's executive offices are located at
the Stevensville facility. The Stevensville facility is leased by the Company
for $2,475 per month for the first 12 months and for $2,750 per month for the
remaining 12 months. The lease is due to expire in July 1998, but is renewable
by the Company for a period of 12 months upon 30 days written notice at a rate
of $3,000 per month. The Company also leases the Victor facility for
approximately $2,000 per month, which lease expires in September 1999.
The Company believes that its current property and equipment are adequate
for its business as currently conducted, however, the current facilities are not
automated, operate in a comparatively inefficient manner and have insufficient
production capacity to achieve significant growth in production volume. The
Company believes that consolidation of its two facilities is desirable and the
acquisition of automated production equipment, such as computer aided design and
manufacturing equipment is necessary for it to increase capacity and operate
more efficiently.
The estimated cost of the acquisition of the necessary property is
$2,200,000 and the estimated cost of the capital equipment and machinery is
$2,300,000. Approximately 75% of the cost of the new facility is to be financed
by the issuance of industrial revenue bonds by Missoula County, Montana. The
Company is presently finalizing the agreements to acquire the real property and
to finance the project.
There can be no assurance that the Company will be successful in obtaining
industrial revenue bond financing for the new manufacturing facility. If it is
unsuccessful in obtaining such financing it would consider conventional
financing for the new manufacturing facility, or a smaller new facility, or if
financing is not available for these alternatives, the Company will purchase new
equipment for its existing facilities.
LEGAL PROCEEDINGS
The Company has a dispute with a former officer and director of CVC which
may give rise to a claim by the Company against such individual for damages. The
Company is currently investigating the matter. Management does not believe that
the matter will have a material affect on the Company.
The Company has been contacted by an individual who injured himself while
firing a firearm manufactured by the Company. This matter was referred to the
Company's insurance carrier. Independent tests have indicated that the injury
was not caused by any defect in the Company's product and the individual has not
pursued any claim against the Company. Management believes that any exposure
relating to this matter in excess of its $25,000 deductible would be covered by
the insurance currently maintained, however, there can be no assurance that
existing insurance coverage is adequate for this or any other claim.
In December 1997, McLemore Sporting Arms, Inc., an operator of a retail
store which was a customer of Cooper Arms commenced a lawsuit in the Fifth
District Court, Franklin Parish, Louisiana against it and CVC seeking
approximately $35,000 representing plaintiff's loss from the purchase of
allegedly defective rifles plus unspecified additional monetary damages for
other costs incurred by the customer and damage to the customer's commercial
reputation. The Company believes it has meritorious defenses to the action and
intends to vigorously defend this lawsuit.
The Company is not currently a party to any litigation, or aware of any
potential litigation that it believes could have a material adverse effect on
the Company or its business. See "Risk Factors--Possible Insufficiency of
Insurance."
33
MANAGEMENT
The directors and executive officers of the Company, together with their
ages and a brief Description of their employment histories, are as follows:
NAME AGE POSITION AND OFFICE
- ------------------------------------ --- ---------------------------------------------------------------------
Daniel Cooper....................... 43 President and Director
Victor Wang......................... 32 Chairman of the Board and Director of Marketing
John Tilleli........................ 26 Chief Executive Officer and Director
Gary D. Landis...................... 55 Vice President-Marketing, Secretary and Director
Edward McCabe....................... 40 Treasurer (Chief Financial Officer) and Director
None of the Company's executive officers intends to devote his full business
time to the affairs of the Company except for Mr Cooper.
The Company's by-laws contain a provision dividing the Board of Directors
into three classes. Initially, Class I, Class II and Class III directors shall
serve terms of one, two and three years, respectively. As the initial term of
each class concludes, directors of that class shall be elected to serve a term
of three years or until their respective successors have been duly elected.
Directors of the Company are not compensated for acting in such capacities.
John Tilleli has been elected to Class I, Edward McCabe and Gary D. Landis
have been elected to Class II, Victor Wang and Dan Cooper have been elected to
Class III. At the Effective Date, the Company intends to add at least two
independent directors, who shall be added to the classes so that the number of
directors in each class is as evenly distributed as possible.
Daniel Cooper has served as a Director and officer, since September 1996,
and has been President of the Company and its subsidiaries since August 1997. He
founded The Stock Shop of Montana, LLC, the predecessor of the Stock Shop, and
has served as its President since its inception. Mr. Cooper founded Cooper Arms
and served as its President and a Director from October 1990 to February 1995
and from August 1996 to date. Mr. Cooper organized the North American Divide
Expedition in 1980 and led the Expedition on a 6 year hike of the North American
Continental Divide from Mexico to the Bering Strait of Alaska. This
accomplishment was recognized by the Guinness Book of World Records. Mr. Cooper
holds a BS in Environmental Studies and International Affairs from Lewis and
Clark College (1979).
Victor Wang has served as Chairman of the Board and Director of Marketing of
the Company since its inception. Mr. Wang is a principal shareholder of Duke &
Co., Inc., a registered broker/dealer, and has served as an officer and director
of Duke & Co., Inc. since 1993. From 1991 to 1993, Mr. Wang served as Chairman
of the Board and Chief Executive Officer of Questron Technologies Incorporated,
a publicly traded alternate dispute resolution company. Mr. Wang has a BS from
Johns Hopkins University (1989) and is licensed as a General Securities
Principal and Corporate Securities Limited Representative.
John Tilleli has served as a Director and Chief Executive Officer of the
Company since its inception. He has served as Secretary of The Stock Shop of
Montana, LLC, the predecessor of Stock Shop, Inc., since March 1996. Mr. Tilleli
is presently employed as Vice President of Corporate Finance of Duke & Co.,
Inc., a registered broker/dealer, where he works on mergers, acquisitions, and
other corporate finance matters. He has held that position since February, 1994.
From 1993 to 1994, Mr. Tilleli was employed as a registered representative for
Russo Securities, Inc. Mr. Tilleli has a BBA in Finance from the University of
Miami (1993) and is licensed as a General Securities Representative, General
Securities Options Principal and Uniform Securities Agent.
Gary D. Landis is one of CVC's founders and has served as a Director of the
Company and CVC since CVC's inception. He also served as CVC's Chief Executive
Officer from 1991 until September 1996, when he was appointed Vice President of
Marketing. Mr. Landis operates a consulting business, Gary Landis Consulting.
Mr. Landis was the managing director of all healthcare businesses at Compton
34
Partners, a division of Saatchi & Saatchi Advertising. Mr. Landis has been in
the advertising business for 33 years, having spent 29 years with Saatchi &
Saatchi both in the United States and abroad. During that period, Mr. Landis
managed subsidiary companies for 19 years. Mr. Landis has a BA from the
University of Illinois.
Edward McCabe has served as a Director, Treasurer and Chief Financial
Officer of the Company since its inception. Mr. McCabe has been employed as
Chief Financial Officer of Duke & Co., Inc., a registered broker/dealer, since
December 1995. From January 1993 to November 1995, Mr. McCabe served as the
Controller for Concord Holding Corporation, a publicly traded company engaged in
the financial services business. Prior thereto, he served as the Controller for
Adler Coleman & Co. from December 1984 to July 1992. Mr. McCabe holds a BS from
St. Peter's College (1982).
EMPLOYMENT AGREEMENTS
None of the Company's executive officers are subject to employment
agreements with the Company, except for Mr. Cooper whose employment agreement
with The Stock Shop of Montana, LLC, Stock Shop's predecessor, was assigned to
Stock Shop in connection with the September 1996 acquisition of The Stock Shop
of Montana, LLC. See "Certain Transactions." Mr. Cooper receives an annual
salary of $48,000 and may receive a performance related bonus or stock options.
Mr. Cooper's three year employment contract expires on March 31, 1999 and
continues on the same terms and conditions until that time. The Company intends
to enter into employment agreements with each of Messrs. Wang, Tilleli, McCabe
and Landis. Although no terms have yet been agreed upon, the Company expects
that none of these employment agreements will provide for an annual salary in
excess of $100,000.
EXECUTIVE COMPENSATION
The following table sets forth cash compensation paid by the Company to, as
well as any other compensation paid to or earned by, the Chief Executive Officer
of the Company and those executive officers, if any, compensated at greater than
$100,000 for services rendered to the Company in all capacities during the
fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------- -----------------
OTHER ANNUAL RESTRICTED
COMPENSATION STOCK
NAME AND YEAR SALARY BONUS AWARD(S)
PRINCIPAL POSITION ($) ($) ($) ($) (#)
(A) (B) (C) (D) (E) (F)
- ---------------------------------------------- --------- --------- ------ --------------------- -----------------
John Tilleli, CEO............................. 1996 0 0
Joe Bishoff(2)................................ 82,131
1996 1995 48,577
SECURITIES
UNDERLYING
NAME AND OPTIONS/SARS
PRINCIPAL POSITION
(A) (G)
- ---------------------------------------------- -------------
John Tilleli, CEO............................. 50,000(1)
Joe Bishoff(2)................................
- ------------------------
(1) Represents shares of Common Stock underlying currently exercisable options.
(2) Mr. Bishof served as the Chief Executive Officer of Cooper Arms until
shortly prior to the Company's acquisition of Cooper Arms in 1996.
35
EMPLOYEE STOCK OPTION PLAN
In September 1997, the Board of Directors adopted and approved the Company's
1997 Stock Option Plan (the "Plan" or the "1997 Stock Option Plan"). The Plan is
to be administered by the Board of Directors or by the committee appointed by
the Board (the "Plan Administrator"). Pursuant to the Plan, options to acquire
an aggregate of 600,000 shares of Common Stock may be granted, 275,000 of which
have been granted.
Each of the Company's subsidiaries had adopted a stock option plan. In
December 1997, the Company cancelled each subsidiary's plan so that no shares or
options will be issued pursuant to those plans.
The following table set forth options issued by the Stock Shop in 1996.
These options were exchanged for options to purchase the Company's Common Stock
on identical terms pursuant to the Company's September 1997 private offering in
which it acquired 97% of CVC.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
-------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
(A) (B) (C) (D) (E)
- ----------------------------------------------- ------------- ----------------- ---------------- ---------------
John Tilleli, CEO.............................. 50,000 18% $ .0001 9/1/2001
Daniel Cooper, President....................... 25,000 9% $ 3.45 9/1/2001
Victor Wang, Chairman.......................... 150,000 55% $ .0001 9/1/2001
Edward McCabe, CFO............................. 50,000 18% $ .0001 9/1/2001
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's certificate of incorporation and by-laws provide that the
Company shall indemnify all officers and directors of the Company to the full
extent permitted by the Delaware General Corporation Law. Under such provision,
any director or officer who is in his capacity as such is made or threatened to
be made a party to any suit or proceeding, may be indemnified if the Board of
Directors determines such director or officer acted in good faith and in manner
he or she reasonably believed to be in or not opposed to the best interest of
the Company. The certificate of incorporation, by-laws and Delaware law further
provide that such indemnification is not exclusive of any other rights to which
such individual may be entitled under the certificate of incorporation, the
by-laws, any agreement, vote of shareholders or disinterested directors or
otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted or directors of officers pursuant to the foregoing provision
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy and
therefore is unenforceable.
36
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning stock
ownership of all persons known by the Company to own beneficially five percent
or more of the outstanding Common Stock, each Director and certain executive
officers and all officers and directors as a group, and as adjusted to reflect
the sale of the Units offered hereby.
AMOUNT AND NATURE PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF OF BENEFICIAL COMMON STOCK OWNED
BENEFICIAL OWNER OR OWNERSHIP ----------------------------------
IDENTITY OF GROUP NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------------- ------------------ ----------------- ---------------
Victor Wang(2)................................................ 1,730,000 55.0% 37.2%
The C.I.T. Trust(2)........................................... 1,380,000 49.3% 32.1%
O. Milton Gossett............................................. 171,884 6.1% 4.0%
156 Ridgefield Ave.
South Salem, NY 10590
John Tilleli (4).............................................. 50,000 1.8% 1.2%
Gary D. Landis................................................ 132,446 4.7% 3.1%
12 Taylor Lane
Westport, CT 06880
Edward McCabe (4)............................................. 50,000 1.8% 1.2%
Daniel Cooper (5)............................................. 370,595 13.2% 8.6%
All officers and directors as a group (5 persons)............. 2,333,041 71.7% 49.0%
- ------------------------
(1) Except as set forth herein the business address of each individual is c/o
Connecticut Valley Classics, 4004 Highway 93 North, Stevensville, MT 59870.
(2) Includes 350,000 shares underlying currently exercisable options and
1,380,000 shares owned by the C.I.T. Trust, of which Mr. Wang disclaims
beneficial ownership.
(3) The beneficiaries of the C.I.T. Trust are the children of the Company's
Chairman, Victor Wang.
(4) Includes 50,000 shares underlying currently exercisable options.
(5) Includes 6,250 shares underlying currently exercisable options. Does not
include 18,750 shares issuable upon exercise of options which are not
currently exercisable and will not become exercisable within sixty days from
the date of this Prospectus.
CERTAIN TRANSACTIONS
CVC is currently indebted to Messrs. Landis, Gossett, Dean Jendsen and
George Carey, all of whom are or were officers, directors or stockholders of
CVC, in the aggregate amount of $300,000, plus interest, accruing at the rate of
9% per annum, of approximately $37,500 since June 1995. The loans are to be
repaid in eight quarterly installments. The first installment will be due on the
earlier of November 1, 1998 or the closing of this Offering.
In December 1995, Victor Wang, a principal stockholder and director received
200,000 options to purchase shares of CVC's Common Stock as additional
consideration for a $75,000 loan made by Mr. Wang to the Company. The options
are exercisable at $2.76 per share for a three year period terminating in
December 1998. The Company repaid the $75,000 loan in March 1996. These 200,000
options were exchanged for 200,000 options to purchase shares of the Company's
Common Stock pursuant to the Company's September 1997 Private Offering.
Between May 1992 and December 1, 1997, a company in which Victor Wang is a
principal advanced CVC approximately $123,323, none of which has been repaid. On
December 1, 1997, the Company executed a promissory note to evidence these
advances. Pursuant to the note, the Company is to repay the
37
principal, together with interest accruing at 6% per annum from December 1,
1997, on the earlier of (i) thirteen months following the closing of the
Offering, or (ii) November 30, 2000. Additionally, Mr. Wang loaned $50,000 to
CVC in 1996 pursuant to a promissory note bearing interest at a rate of 9% per
annum. This loan was repaid in September 1996.
Between September 1995 and May 1997, the Company sold a total of 553,954
shares of stock in three separate private placements at purchase prices ranging
from $3.45 to $3.85 per share. Duke & Co., Inc., a company in which the
Company's Chairman is a principal, acted as placement agent in these offerings
and received a commission of 10% of the gross proceeds and a non-accountable
expense allowance of 3% of the gross proceeds.
In March 1996, Mr. Wang acquired a 70% membership interest in The Stock Shop
of Montana, LLC for $86,500. In connection with such transaction, Mr. Wang
agreed to use his best efforts to assist The Stock Shop of Montana, LLC to (i)
obtain a $200,000 line of credit, and (ii) restructure its secured debt. In
order to aid the Company in obtaining this line of credit, Mr. Wang hypothecated
a $30,000 certificate of deposit as collateral for this line of credit with
Rocky Mountain Bank, Rocky Mountain Bank continues to hold this certificate of
deposit in Mr. Wang's name as collateral for the Company's loan in the amount of
$15,000.
In September 1996, the Stock Shop acquired The Stock Shop of Montana, LLC
and Messrs. Wang, Tilleli and McCabe were appointed as officers and/or directors
of the Stock Shop.
In November 1996, CVC acquired all of the issued and outstanding common
stock of the Stock Shop from its stockholders, which included Mr. Wang and Mr.
Daniel Cooper, officers, directors and stockholders of CVC, by an exchange of
1,300,000 shares of the CVC's Common Stock for 1,300,000 shares of the Stock
Shop's common stock. In addition, CVC replaced options previously issued to
employees of the Stock Shop with options to purchase the same number of shares
of CVC's Common stock on the same terms, which included options to purchase
150,000 shares of the Stock Shop's common stock to Mr. Wang, options to purchase
50,000 shares to each of Messrs. Tilleli and McCabe and options to purchase
25,000 shares to Mr. Cooper. Each of these options to acquire CVC Common Stock
were exchanged in September 1997 for options to acquire the Company's Common
Stock. See "Management" and "Principal Stockholders."
In September 1996, a company in which Victor Wang is a principal paid
$1,000,000 to CVC. No additional stock was issued to Mr. Wang or his company as
part of this transaction. For financial reporting purposes, the Company has
accounted for this as a contribution to additional paid in capital and no
portion of this $1,000,000 will be repaid.
In September 1997, the Company completed an exchange offer as a result of
which CVC became a majority owned (approximately 97%) subsidiary of the Company.
Pursuant to the exchange, the Company issued an aggregate of 2,747,476 shares of
its Common Stock and granted options to acquire up to 475,000 shares of its
Common Stock. There exists the potential that an additional 230,000 options to
acquire stock of CVC will be granted to certain of CVC's current and former
principals, thereby decreasing the percentage of ownership the Company has in
CVC. However, even if all 230,000 CVC options are granted and exercised, CVC
will continue to be a majority owned subsidiary of the Company.
In the future, the Company will present all proposed transactions between
the Company and its officers, directors or 5% stockholders, and their affiliates
to the Board of Directors for its consideration and approval. Any such
transaction will require approval by a majority of the disinterested directors
and such transactions will be on terms no less favorable than those available to
disinterested third parties.
38
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.0001 par value per share, and 1,000,000 shares of "blank check"
preferred stock, $.0001 par value per share. As of the date of the Prospectus,
2,797,476 shares of Common Stock and no shares of Preferred Stock are issued and
outstanding.
The following are brief descriptions of the securities offered hereby and
other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's certificate of
incorporation, the Company's by-laws and Delaware law. The following statements
do not purport to be complete or give full effect to statutory or common law,
and are subject in all respects to the applicable provisions of the certificate
of incorporation, by-laws and state law.
UNITS
Each Unit consists of one share of Common Stock and one Warrant to purchase
one share of Common Stock. The securities comprising the Units will be
separately tradable or transferable immediately upon issuance.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share, and subject
to the rights of holders of the of preferred stock, if any, to receive dividends
when, as and if declared by the Board of Directors and to share ratably in the
assets of the Company legally available for distribution to holders of Common
Stock in the event of the liquidation, dissolution or winding up of the Company.
Holders of the Common Stock do not have subscription, redemption, conversion or
preemptive rights.
Each share of Common Stock is entitled to one vote on any matter submitted
to the holders, including the election of directors. Holders of Common Stock do
not have cumulative voting rights. Therefore, holders of a majority of the
outstanding shares of Common Stock entitled to vote for the election of
directors may elect all of the directors to be elected, if they so choose, and
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. Except as otherwise required by the Delaware General
Corporation Law, all stockholder action (other than the election of directors,
who are elected by plurality vote), is subject to approval by a majority of the
shares of Common Stock present at a stockholders' meeting at which a quorum (a
majority of the issued and outstanding shares of Common Stock) is present in
person or by proxy, or by written consent pursuant to Delaware law.
All shares of Common Stock outstanding are fully paid and non-assessable,
and the shares of Common Stock offered hereby and the shares of Common Stock
issuable upon exercise of the Warrants, when issued upon payment of the purchase
price set forth on the cover page of the Prospectus or payment of the exercise
price specified in the Warrants, as the case may be, will be fully paid and
non-assessable.
The Board of Directors is authorized to issue additional shares of Common
Stock within the limits authorized by the Company's Certificate of Incorporation
without further stockholder action. The Company has agreed with the Underwriter
that it will not issue any securities, including but not limited to shares of
Common Stock, prior to , [three years from the Effective Date]
except as disclosed in or contemplated by this Prospectus, without the prior
written consent of the Underwriter.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and Continental
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent").
39
Each Warrant will be separately transferable and will entitle the registered
holder thereof to purchase one share of Common Stock at $6.00 per share (subject
to adjustment as described below) commencing 2000 (two years from the
Effective Date) and ending, , 2003 (five years from the
Effective Date) (the "Exercise Period"). The exercise price and the number of
shares of Common Stock issuable upon the exercise of each Warrant are subject to
adjustment in the event of a stock split, stock dividend, recapitalization,
merger, consolidation or certain other events. A holder of Warrants may exercise
such Warrants by surrendering the certificate evidencing such Warrants to the
Warrant Agent, together with the form of election to purchase on the reverse
side of such certificate attached thereto properly completed and executed and
the payment of the exercise price and any transfer tax. If less than all of the
Warrants evidenced by a Warrant certificate are exercised, a new certificate
will be issued for the remaining number of Warrants.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, upon payment of the exercise price specified in the Warrants, each share
of Common Stock will be fully paid and nonassessable. Holders of Warrants will
not have any voting or other rights as stockholders of the Company unless and
until Warrants are exercised and shares issued pursuant thereto.
Under certain conditions, the Warrants may be redeemed by the Company after
, 1999 with the prior written consent of the Underwriter at a
redemption price of $.10 per Warrant upon not less than 30 days prior written
notice to the holders of such Warrants, provided the closing bid price of the
Common Stock has been at least $7.50 for 20 consecutive trading days ending on
the third day prior to the date the notice of redemption is given. The Warrants
will be exercisable until the close of business on the day immediately preceding
the date fixed for the redemption of the Warrants in the notice of redemption.
The Company will pay the Underwriter a fee of 5% of the exercise price of
each Warrant exercised, provided (i) the market price of the Common Stock on the
date the Warrant was exercised was equal to or greater than the Warrant exercise
price on that date, (ii) the funds constituting the exercise price of the
Warrant was solicited by the Underwriter, (iii) the Warrant was not held in a
discretionary account, (iv) the disclosure of compensation arrangements was made
in documents provided to the holders of the Warrants, (v) the solicitation of
the exercise of the Warrant was not a violation of Rule 101 of Regulation M
under the Exchange Act and (vi) the Underwriter is designated in writing as the
soliciting NASD member. The Underwriter and any other soliciting broker/dealers
will be prohibited from engaging in any market making activities or solicited
brokerage activities with regard to the Company's securities during the periods
prescribed by Rule 101 of Regulation M before the solicitation of any Warrant
until the later of the termination of such solicitation activity or the
termination of any right the Underwriter and any other soliciting broker/dealer
may have to receive a fee for the solicitation of the exercise of the Warrants.
For a holder of a Warrant to exercise the Warrant, there must be a current
registration statement on file with the Securities and Exchange Commission and
various state securities commissions. The Company will be required to file
post-effective amendments to the registration statement when events require such
amendments and to take appropriate action under the state securities laws. While
it is the Company's intention to file post-effective amendments when necessary
and to take appropriate action under state securities laws, there can be no
assurance that the Company will file all post-effective amendments required to
maintain the effectiveness of the registration statement or that the Company
will take all appropriate action under state securities laws. If the
registration statement is not kept current for any reason, the Warrants will not
be exercisable, and holders thereof may be deprived of value.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without further stockholder approval, to issue
40
preferred stock with dividend, liquidation, conversion, voting or other rights
that could decrease the amount of earnings and assets available for distribution
to holders of Common Stock or adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. As of
the date of the Prospectus, no shares of preferred stock are outstanding. The
Company has no present intention to issue any shares of preferred stock. The
Company has agreed with the Underwriter that, except for issuances disclosed in
or contemplated by this Prospectus, it will not issue any securities, including
but not limited to any shares of preferred stock, prior to ,
2001 without the prior written consent of the Underwriter.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
Following the consummation of the Offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law, the State of Delaware's
"business combination" statute. In general, such statute prohibits a publicly
held Delaware corporation from engaging in various business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless (i) the transaction is approved by the Board of Directors
prior to the date the interested stockholder obtained such status; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the "interested stockholder" owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and officers and
(b) employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date
the "business combination" is approved by the Board of Directors and authorized
at an annual or special meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
"interested stockholder." A "business combination" includes mergers, asset sales
and other transactions. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and will make
available such other periodic reports as the Company may deem to be appropriate
or as may be required by law. The Company's fiscal year end December 31. The
Company has filed a Registration Statement on Form 8-A with the Commission to
register under, and be subject to the reporting requirements of, the Exchange
Act.
TRANSFER AGENT AND WARRANT AGENT
The Company has engaged Continental Stock Transfer & Trust Co. to act as
Transfer Agent for the Company's Units and Common Stock and Warrant Agent for
the Warrants.
41
SHARES ELIGIBLE FOR FUTURE SALE
All of the 2,797,476 shares of Common Stock of the Company outstanding as of
the date of this Prospectus, are "restricted securities." Of this amount
2,048,675 are owned by "affiliates" of the Company, as those terms are defined
in Rule 144 promulgated under the Securities Act. Absent registration under the
Securities Act, the sale of such shares is subject to Rule 144, as promulgated
under the Securities Act. In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least one year is entitled to sell in brokerage transactions, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on NASDAQ or a stock exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Rule 144 also permits a
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least two years to sell such shares
without regard to any of the volume limitations as described above. Holders of
2,757,475 shares of Common Stock have certain registration rights. All of the
Company's existing securityholders, including those with registration rights,
have agreed not to sell or otherwise dispose of any of their shares of Common
stock now owned or issuable upon the exercise of currently exercisable warrants
for a period of two years from the date of this Prospectus, without the prior
written consent of the Underwriter. No prediction can be made as to the effect,
if any, that sales of shares of Common Stock or the availability of such shares
for sale will have on the market prices of the Company's securities prevailing
form time to time. The possibility that substantial amounts of Common Stock may
be sold under Rule 144 into the public market may adversely affect prevailing
market prices for the Common Stock and could impair the Company's ability to
raise capital in the future through the sale of equity securities.
42
UNDERWRITING
Briarwood Investment Counsel Inc. (the "Underwriter") has agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
from the Company 1,500,000 Units, each consisting of one share of Common Stock
and one Warrant. The Underwriter is committed to purchase and pay for all of the
Units offered hereby if any of such securities are purchased. The Units are
being offered by the Underwriter subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus. The Underwriter may allow to certain dealers who are members of the
National Association of Securities Dealers, Inc. the ("NASD") concessions, not
in excess of $ per Unit.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 225,000 additional
Units at the public offering price set forth on the cover page of this
Prospectus, less the underwriting discounts and commissions. The Underwriter may
exercise this option from time to time, in whole or in part, solely for the
purpose of covering overallotments, if any, made in connection with the sale of
the Units offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering ($229,500). The Company
has also agreed to pay all expenses in connection with qualifying the shares of
Common Stock and Warrants included in the Units offered hereby for sale under
the laws of such states as the Underwriter may designate, including expenses of
counsel retained for such purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees, for an
aggregate of $10.00 warrants (the "Underwriter's Warrants") to purchase up to
150,000 shares of Common Stock at an exercise price of $5.50 per share and
150,000 Warrants at an exercise price of $.11 per Warrant (110% of the public
offering price per Security). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
Prospectus, except to the officers and partners of the Underwriter or members of
the selling group, and are exercisable during the four-year period commencing
one year from the date of this Prospectus (the "Warrant Exercise Term"). During
the Warrant Exercise Term, the holders of the Underwriter's Warrants are given,
at nominal cost, the opportunity to profit form a rise in the market price of
the Common Stock. To the extent that the Underwriter's Warrants are exercised,
dilution to the interests of the Company's shareholders will occur. Further, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the Sale of the Underwriter's Warrants, the underlying shares of
Common Stock or the underlying Warrants, or the shares of Common Stock issuable
upon any exercise of such underlying Warrants, may be deemed additional
underwriting compensation. Subject to certain limitations and exclusions, the
Company has agreed, at the request of the holders of a majority of the
Underwriter's Warrants, at the Company's expense, to register the Underwriter's
Warrants, the shares of Common Stock and Warrants underlying the Underwriter's
Warrants, and the shares of Common Stock issuable upon exercise of the
underlying Warrants, under the Securities Act on one occasion during the
three-year period commencing one year from the date of this Prospectus and to
include such Underwriter's Warrants and such underlying securities in any
appropriate registration statement which is filed by the Company during the
Warrant Exercise Term. The Units issuable upon exercise of the Underwriter's
Warrant and the Securities of which the Units are comprised of are being
registered by this Prospectus. Additionally, the Company has granted the
Underwriter piggyback registration rights with respect to these Securities for a
period of seven years.
43
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Underwriter a fee of 5% of the exercise price for each Warrant
exercised, provided, however, that the Underwriter will not be entitled to
receive such compensation in Warrant exercise transactions in which (i) the
market price of Common Stock at the time of exercise is lower than the exercise
price of the Warrants; (ii) the Warrants are held in any discretionary account;
(iii) disclosure of compensation arrangements is not made, in addition to the
disclosure provided in this Prospectus, in documents provided to holders of the
Warrants at the time of exercise; (iv) the exercise of Warrants is unsolicited
by the Underwriter; or (v) the solicitation of exercise of the Warrants was in
violation of Regulation M promulgated under the Exchange Act.
The Company has agreed, for a period of three years from the date of this
Prospectus, to engage a designee of the Underwriter as a non-voting advisor to
the Company's Board of Directors or, at the Underwriter's request, to nominate
and use its best efforts to elect a designee of the Underwriter as a director of
the Company. The Underwriter has not yet, and has no current intention to
exercise its right to designate such person.
In addition, the Company has agreed to enter into a consulting agreement to
retain the Underwriter as a financial consultant for a period of two years
following the consummation of this offering at a monthly fee of $2,083.34 (or an
aggregate of $50,000), $25,000 of which aggregate fee is payable upon the
closing of this Offering and the balance on the first anniversary thereof. The
consulting agreement will not require the consultant to devote a specific amount
of time to the performance of its duties thereunder. It is anticipated that
these consulting services will be provided by principals of the Underwriter
and/or members of the Underwriter's corporate finance department who, however,
have not been designated as of the date hereof. In the event that the
Underwriter originates a financing or a merger, acquisition, joint venture or
other transaction to which the Company is a party, the Underwriter will be
entitled to receive a finder's fee in consideration for origination of such
transaction.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
The Company's officers, directors and shareholders have agreed not to sell
or otherwise dispose of any of their shares of Common Stock for a period of two
years from the date of this Prospectus, without the prior written consent of the
Underwriter other than in connection with private transfers pursuant to which
the transferees agree to be bound by the same provisions.
Prior to this offering, there has been no public trading market for the
Units or the Common Stock or Warrants. Consequently, the initial public offering
price of the Units and the exercise price of the Warrants have been determined
by negotiations between the Company and the Underwriter. Among the factors
consider in determining the initial public offering price and the exercise price
were the Company's financial condition and prospects, management, market prices
of similar securities of comparable publicly-traded companies, certain financial
and operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities markets.
Although it has no obligation to do so, the Underwriter intends to engage in
market-making actives or solicited brokerage activities with respect to the
purchase or sale of Common Stock or Warrants in the over-the-counter market
where such securities will trade. However, no assurance can be given that the
Underwriter will continue to participate as a market maker in the securities of
the Company or that another broker/dealer will make a marker in such securities.
The Underwriter has the right to act as the Company's exclusive agent in
connection with any future solicitation of holders of the Warrants to exercise
their Warrants. Unless granted an exemption by the Securities and Exchange
Commission from Regulation M under the Exchange Act, the Underwriter will be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities during the period prescribed
by Regulation M before the solicitation of the exercise of any Warrant based
upon a prior solicitation until the later of the termination of such
solicitation activity or the termination by waiver or
44
otherwise of any right the Underwriter many have to receive a fee for the
exercise of the Warrants following such solicitation. As a result, the
Underwriter and soliciting broker/dealers may be unable to continue to make a
market for the Company's securities during certain periods while the Warrants
are exercisable. Such a limitation, while in effect, could impair the liquidity
and market price of the Company's securities.
While certain officers of the Underwriter have significant experience in
corporate financing and the underwriting of securities, the Underwriter has not
previously underwritten any public offering. Accordingly, there can be no
assurance that the Underwriter's limited public offering experience will not
affect the Company's offering of the Units and subsequent development of a
trading market, if any.
LEGAL MATTERS
Certain legal matters in connection with the securities being offered hereby
will be passed upon the Company by Gersten, Savage, Kaplowitz & Fredericks, LLP
("GSKF"), New York, New York. GSKF owns 110,000 shares of Common Stock and
50,000 Warrants which are identical to the Warrants offered hereby. Certain
legal matters will be passed upon for the Underwriter by Zimet, Haines, Friedman
& Kaplan, New York, New York.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods (which contain an explanatory paragraph regarding
uncertainties relating to the Company being a going concern) set forth in their
report appearing elsewhere herein, and is included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
The financial statements of Cooper Firearms, Inc. included in this
Prospectus have been audited by David Tarlow & Co., P.C., independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
Securities offered hereby (the "Registration Statement"). This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits thereto as permitted by the Rules and Regulation of the Commission. For
further information with respect to the Company and such securities, reference
is made to the Registration Statement and to the exhibits filed therewith.
Statements contained in this Prospectus as to the contents of any contracts or
other document referred to herein are not necessarily complete and where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all aspects by the provision of such exhibit to
which reference is made for a full statement of the provisions thereof. The
Registration Statement including exhibits filed therewith, may be inspected,
without charge, at the principal office of the Commission located at 450 Fifth
Street N.W., Room 1024, Washington, D.C. 20549. Copies of all or any part of the
Registration Statement (including the exhibits thereto) also may be obtained
from the Public Reference Section of the Commission at its principal office in
Washington, D.C., at the Commission's prescribed rates. Electronic registration
statements filed through the Electronic Data Gathering Analysis and Retrieval
system are publicly available through the Commission's web site at
http: //www.sec.gov.
On the date of the Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
45
Commission. Such reports, proxy and information statements and other information
can be inspected and copies at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of such material also may be obtained from the Public Reference Section
of the Commission at prescribed rates. The Commission maintains a web site at
http: //www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other reports containing audited financial
statements and such other reports as the Company deems appropriate or as may be
required by law.
46
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
-----------
CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants...................................................... F-1
Financial Statements:
Consolidated Balance Sheets........................................................................... F-2
Consolidated Statements of Operations................................................................. F-3
Consolidated Statements of Stockholders' Equity....................................................... F-4
Consolidated Statements of Cash Flows................................................................. F-5
Notes to Consolidated Financial Statements............................................................ F-7
COOPER FIREARMS, INC.
Report of Independent Certified Public Accountants...................................................... F-20
Financial Statements:
Statements of Operations.............................................................................. F-21
Statements of Stockholders' Equity.................................................................... F-22
Statements of Cash Flows.............................................................................. F-23
Notes to Financial Statements......................................................................... F-24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Officers and Directors
Connecticut Valley Sports, Inc.
Stevensville, Montana
We have audited the accompanying consolidated balance sheet of Connecticut
Valley Sports, Inc. (formerly Connecticut Valley Classics, Inc.) and
Subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1996 and 1995. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Connecticut
Valley Sports, Inc. and Subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 3 to the
financial statements, the company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
---------------------------------------
BDO Seidman, LLP
New York, New York
February 15, 1997, except for Note 1
which is September 17, 1997
F-1
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
UNAUDITED
ASSETS
CURRENT ASSETS
Cash................................................................................ $ 231,534 $ 24,790
Accounts receivable, net of allowance for doubtful accounts of $47,860 in 1996
and $20,643 in 1997............................................................... 46,653 48,034
Inventories......................................................................... 475,827 477,329
Other current assets................................................................ 18,862 7,872
------------ -------------
Total current assets................................................................ 772,876 558,025
------------ -------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation of $182,884 in 1996
and $265,486 in 1997.............................................................. 278,454 353,566
------------ -------------
DEFERRED COSTS
Deferred costs, less accumulated amortization of $101,590 in 1996 and $119,064 in
1997.............................................................................. 29,513 152,039
------------ -------------
OTHER ASSETS
Due from stockholders............................................................... 30,000 30,000
Due from affiliated companies....................................................... 14,269 14,270
Other assets........................................................................ 1,000 --
------------ -------------
Total other assets.............................................................. 45,269 44,270
------------ -------------
Total assets.................................................................... $1,126,112 $ 1,107,900
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses............................................... $ 280,022 $ 306,485
Customer deposits................................................................... 16,425 31,199
Federal excise tax payable.......................................................... 60,454 46,205
Notes payable....................................................................... 41,740 42,906
Notes payable to stockholders....................................................... 23,770 22,450
Accrued interest.................................................................... 42,150 62,400
Due to affiliated companies......................................................... 108,232 123,323
------------ -------------
Total current liabilities....................................................... 572,793 634,968
Notes payable--less current maturities.............................................. -- 84,203
Notes payable to stockholders....................................................... 300,000 300,000
Deferred credit on acquisition...................................................... 126,564 124,171
------------ -------------
Total liabilities............................................................... 999,357 1,143,342
------------ -------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock $.0001 par value, 1,000,000 shares authorized and -0- shares issued
and outstanding in 1997........................................................... -- --
Common stock $.01 par value, 3,000,000 shares authorized and 2,655,471 shares issued
and outstanding in 1996 and $.0001 par value, 30,000,000 shares authorized and
2,747,476 shares issued and outstanding in 1997................................... 26,555 275
Additional paid-in-capital.......................................................... 2,872,769 3,376,352
Accumulated deficit................................................................. (2,772,569) (3,412,069)
------------ -------------
Total stockholders' equity (deficit)............................................ 126,755 (35,442)
------------ -------------
Total liabilities and stockholders' equity...................................... $1,126,112 $ 1,107,900
------------ -------------
------------ -------------
The accompanying notes are an integral part of these financial statements.
F-2
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------- ------------ ------------
UNAUDITED
Net sales................................................ $ 74,744 $ 244,725 $ 193,796 $ 365,378
Cost of goods sold....................................... 339,246 576,153 355,127 638,311
------------ ------------- ------------ ------------
Gross profit (loss)...................................... (264,502) (331,428) (161,331) (272,933)
------------ ------------- ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses........... 332,206 685,800 570,157 456,827
Writedown of inventory to lower of cost or market........ 150,000 -- -- --
Bad debts................................................ -- 73,387 85,574 193
------------ ------------- ------------ ------------
Total operating expenses............................... 482,206 759,187 655,731 457,020
------------ ------------- ------------ ------------
Operating loss......................................... (746,708) (1,090,615) (817,062) (729,953)
------------ ------------- ------------ ------------
OTHER INCOME (EXPENSE)
Other income............................................. -- 11,230 10,166 2,594
Interest expense......................................... (35,755) (29,923) (42,303) (26,164)
------------ ------------- ------------ ------------
Total other income (expense)........................... (35,755) (18,693) (32,137) (23,570)
------------ ------------- ------------ ------------
Loss before minority interests........................... (782,463) (1,109,308) (849,199) (753,523)
Minority interests in net loss of subsidiary............. -- 6,644 2,437 --
------------ ------------- ------------ ------------
Net loss............................................... $ (782,463) $ (1,102,664) $ (846,762) $ (753,523)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Loss per share........................................... $ (0.75) $ (0.44) $ (0.35) $ (0.27)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Weighted average number of shares outstanding............ 1,040,893 2,488,466 2,410,972 2,803,558
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-3
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
----------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ----------- ------------ ------------- --------------
YEAR ENDED DECEMBER 31, 1995
Balance--January 1, 1995.................. 470,000 $ 210,000 $ 238,442 $ (887,442) $ (439,000)
Issuance of stock......................... 860,000 8,600 39,123 47,723
Reorganization............................ -- (205,300) 205,300 --
Proceeds from private placement........... 237,269 2,373 816,204 818,577
Expenses related to private placement..... (182,981) (182,981)
Stockholder loans contributed to
capital................................. 365,180 365,180
Net loss--year ended December 31, 1995.... (782,463) (782,463)
---------- ----------- ------------ ------------- --------------
Balance--December 31, 1995................ 1,567,269 $ 15,673 $ 1,481,268 $ (1,669,905) $ (172,964)
---------- ----------- ------------ ------------- --------------
---------- ----------- ------------ ------------- --------------
YEAR ENDED DECEMBER 31, 1996
Balance--January 1, 1996.................. 1,567,269 $ 15,673 $ 1,481,268 $ (1,669,905) $ (172,964)
Issuance of stock......................... 910,000 9,100 58,699 67,799
Contribution of capital................... 1,000,000 1,000,000
Proceeds from private placement........... 178,202 1,782 406,606 408,388
Expenses related to private placement..... (73,804) (73,804)
Net loss--year ended December 31, 1996.... (1,102,664) (1,102,664)
---------- ----------- ------------ ------------- --------------
Balance--December 31, 1996................ 2,655,471 $ 26,555 $ 2,872,769 $ (2,772,569) $ 126,755
---------- ----------- ------------ ------------- --------------
---------- ----------- ------------ ------------- --------------
NINE MONTHS ENDED
SEPTEMBER 30, 1997 UNAUDITED
Balance--January 1, 1997.................. 2,655,471 $ 26,555 $ 2,872,769 $ (2,772,569) $ 126,755
Proceeds from private placement........... 183,993 1,840 706,533 708,373
Expenses related to private placement..... (117,047) (117,047)
Acquisition of minority interest in Cooper
Firearms, Inc........................... 790 8 (8) -- --
Acquisition of and reorganization as
Connecticut Valley Sports, Inc.......... (92,778) (28,128) (85,895) 114,023 --
Net loss--nine months ended September 30,
1997.................................... (753,523) (753,523)
---------- ----------- ------------ ------------- --------------
Balance--September 30, 1997............... 2,747,476 $ 275 $ 3,376,352 $ (3,412,069) $ (35,442)
---------- ----------- ------------ ------------- --------------
---------- ----------- ------------ ------------- --------------
The accompanying notes are an integral part of these financial statements.
F-4
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1995 1996 1996 1997
----------- ------------- ------------ -----------
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $ (782,463) $ (1,102,664) $ (846,762) $ (753,523)
Adjustments to reconcile net loss to net cash used by operating
activities:
Minority interest in net loss of subsidiary................. -- (6,644) (2,437) --
Depreciation and amortization............................... 73,874 104,996 68,465 97,579
Changes in operating assets, net of effect of acquisition of
Cooper Firearms, Inc.:
(Increase) decrease:
Accounts receivable................................... (22,188) 47,915 (10,312) (1,381)
Inventories........................................... 34,846 (87,873) 76,734 (1,502)
Other current assets.................................. (14,544) 4,773 13,035 10,990
Other assets.......................................... (1,000) -- -- 1,000
Increase (decrease) in:
Accounts payable and accrued expenses................. 125,339 (69,053) (129,086) 26,463
Customer deposits..................................... (12,756) 9,891 34,377 14,774
Federal excise tax payable............................ -- (51,924) (8,222) (14,249)
Accrued interest payable.............................. 15,150 27,000 38,203 20,250
----------- ------------- ------------ -----------
Net cash used by operating activities........................... (583,742) (1,123,583) (766,005) (599,599)
----------- ------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment of loan receivable.................................... -- 13,000 13,000 --
Acquisition of subsidiary....................................... -- (30,000) (30,000) --
Cash of acquired subsidiary..................................... -- 37,477 37,477 --
Purchases of property and equipment............................. (171,401) (126,205) (77,412) (157,611)
Advance of loan receivable...................................... (13,000) -- -- --
Deferred costs.................................................. (4,232) -- -- --
----------- ------------- ------------ -----------
Net cash used by investing activities........................... (188,633) (105,728) (56,935) (157,611)
----------- ------------- ------------ -----------
F-5
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1995 1996 1996 1997
----------- ------------- ------------ -----------
UNAUDITED
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans payable....................................... 47,115 1,225 1,225 98,900
Advances from stockholders...................................... 507,151 92,170 92,170 --
Advances to stockholders........................................ -- (94,269) (80,000) --
Repayment of loan receivable from stockholder................... -- 50,000 -- --
Repayments to stockholders...................................... -- (163,100) (52,122) (1,320)
Advances from affiliates........................................ -- 108,232 16,330 15,091
Proceeds from private placement................................. 818,577 408,388 408,388 708,373
Expenses related to private placement........................... (182,981) (73,804) (73,804) (117,047)
Capital contributed............................................. -- 1,000,000 1,000,000 --
Issuance of stock............................................... 47,723 67,799 67,799 --
Deferred costs.................................................. -- -- -- (140,000)
Repayment of notes payable...................................... (405,000) -- -- (13,531)
----------- ------------- ------------ -----------
Net cash provided by financing activities....................... 832,585 1,396,641 1,379,986 550,466
----------- ------------- ------------ -----------
Net increase (decrease) in cash............................... 60,210 167,330 557,046 (206,744)
Cash at beginning of period..................................... 3,994 64,204 64,204 231,534
----------- ------------- ------------ -----------
Cash at end of period........................................... $ 64,204 $ 231,534 $ 621,250 $ 24,790
----------- ------------- ------------ -----------
----------- ------------- ------------ -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Notes payable to stockholders transferred to additional paid-in
capital....................................................... $ 365,180 $ -- $ --
The company purchased all of the preferred stock and 91.65% of
the common stock of Cooper Firearms, Inc. for $30,000. In
conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired............................... $ -- $ 310,479 $ 310,479 $ --
Cash paid for the capital stock............................. -- (30,000) (30,000) --
----------- ------------- ------------ -----------
Liabilities assumed....................................... $ -- $ 280,479 $ 280,479 $ --
----------- ------------- ------------ -----------
----------- ------------- ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.......................................... $ 20,605 $ 23,190 $ 4,100 $ 10,094
Cash paid for income taxes...................................... $ 317 $ 1,291 $ 1,243 $ 1,464
The accompanying notes are an integral part of these financial statements.
F-6
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 1--ORGANIZATION AND NATURE OF BUSINESS
Connecticut Valley Sports, Inc. ("CVS") was incorporated on March 28, 1996
under the laws of the State of Delaware.
On September 17, 1997, CVS, an inactive shell corporation acquired 2,747,476
shares of common stock representing 96.73% of the outstanding stock of
Connecticut Valley Classics, Inc. ("CVC"). The surviving entity changed its name
from CVC to Connecticut Valley Sports, Inc. Pursuant to the terms of the
acquisition, CVC shareholders exchanged their stock for shares in CVS on a one
for one basis.
CVC is the continuing entity for financial reporting purposes, and the
financial statements prior to September 17, 1997 represent its financial
position and results of operations. The assets, liabilities and results of
operations of CVS (which were minimal) are included as of September 17, 1997.
CVS and its subsidiaries manufacture and sell custom quality production bolt
action rifles and high quality shot guns used for both sport hunting and
competition. The company also manufactures and sells firearm stocks used in the
production of rifles. Customers are located throughout the United States and
parts of Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Connecticut
Valley Sports, Inc. and its majority-owned subsidiaries Connecticut Valley
Classics, Inc., The Stock Shop, Inc., and Cooper Firearms, Inc. All material
intercompany transactions and balances have been eliminated. The consolidated
statement of operations reflects amounts for Cooper Firearms, Inc. as of August
13, 1996, the date it was acquired.
B) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
C) INVENTORIES
Inventories are valued at the lower of cost or market on a first-in,
first-out basis.
D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
accelerated methods over estimated useful lives of five to seven years for
furniture and fixtures, molds and tools, and machinery and equipment and over
the remaining term of the lease to which leasehold improvements relate.
F-7
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E) ORGANIZATION AND START-UP COSTS
Organization and start-up costs are stated at cost. Amortization is provided
using the straight line method over a period of 36-60 months.
F) REVENUE RECOGNITION
Revenue from the sale of firearms is recognized when the product is shipped.
G) INCOME TAXES
The company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities, if any, are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
H) STOCK-BASED COMPENSATION
The company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB 25). Stock-based
compensation includes all transactions under which employees receive shares of
stock or other equity instruments (such as options) in the company or events
where the company incurs liabilities to employees in amounts that are based on
the price of its stock. Under APB 25, the company recognizes compensation
expense for employee options in the amount of the excess of the fair value of
stock underlying options over the exercise price of such options. The expense is
recorded on the date the company issues stock or grants options as compensation.
I) LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires that certain long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. This standard is effective for fiscal years that begin
after December 15, 1995. The company's adoption of this pronouncement on January
1, 1996 did not have a material impact on the company's consolidated financial
statements.
J) DEFERRED CREDIT
Deferred credit on acquisition (negative goodwill arising from the
acquisition of Cooper Firearms, Inc. described in Note 13) is amortized on a
straight-line basis over its estimated useful life of 40 years.
F-8
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K) INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of September 30, 1997, and for
the nine months ended September 30, 1996 and 1997 reflect all adjustments
(consisting of recurring accruals) management considers necessary for a fair
presentation of financial position, results of operations and cash flows.
Results of operations for the nine months ended September 30, 1997 are not
indicative of results to be expected for the year.
L) LOSS PER SHARE DATA
Net loss per common and common equivalent share using the weighted average
number of common and common equivalent shares outstanding was computed by
applying Securities and Exchange Commission Staff Accounting Bulletin No. 83
(SAB 83). Pursuant to SAB 83, common and common equivalent shares issued by the
company during the twelve months immediately preceding its initial public
offering at a price below the initial public offering price together with common
share equivalents which result from the grant of common stock options and
warrants having exercise prices below the initial public offering price during
the same period have been included in the calculation of the shares used in
computing net loss per share as if they were outstanding for all periods prior
to the initial public offering. Net loss per share for these periods has been
computed using the treasury stock method, under which the number of shares
outstanding reflects an assumed use of the proceeds from the issuance of such
shares and from the assumed exercise of such options and warrants to repurchase
shares of the company's common stock at the initial public offering price.
M) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is
effective for financial statements issued for periods ending after December 15,
1997. Statement 128 simplifies the computation of earnings per share by
replacing the presentation of primary earnings per share with a presentation of
basic earnings per share, as defined. The statement requires dual presentation
of basic and diluted earnings per share by entities with complex capital
structures. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Statement 128 is not expected to
have a significant impact on the company's financial statements.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement 130") and Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("Statement 131") were issued. Statement 130 addresses
standards for reporting and display of comprehensive income and its components,
and Statement 131 requires disclosure of reportable operating segments. Both
statements are effective for the Company's 1998 fiscal year. These
pronouncements are not expected to materially affect the company's financial
statements.
F-9
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 3--GOING CONCERN
As shown in the accompanying financial statements, the company has incurred
substantial recurring operating losses. This raises substantial doubt about the
company's ability to continue as a going concern.
Management believes the company will generate new business and improve
operating efficiency in future years. In addition, the company intends to raise
funds through a public offering of its common stock. Management believes that
the proceeds from the offering will be sufficient to provide working capital
until the company is able to increase revenues and improve operating efficiency.
If the company is not able to complete the public offering, generate significant
new business or reduce its expenses, it is possible operations will be
discontinued. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 4--INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Finished goods.................................................. $ 101,791 $ 47,763
Work in process................................................. 42,235 62,493
Raw materials................................................... 331,801 367,073
------------ -------------
$ 475,827 $ 477,329
------------ -------------
------------ -------------
NOTE 5--PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
depreciable lives are as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Furniture and fixtures.......................................... $ 11,159 $ 10,898
Molds and tools................................................. 304,625 323,982
Machinery and equipment......................................... 132,840 264,568
Leasehold improvements.......................................... 12,714 19,604
------------ -------------
461,338 619,052
Accumulated depreciation........................................ (182,884) (265,486)
------------ -------------
Property and equipment, net................................... $ 278,454 $ 353,566
------------ -------------
------------ -------------
Depreciation expense amounted to $46,019 and $77,879 for the years ended
December 31, 1995 and 1996, and $46,934 and $82,501 for the nine months ended
September 30, 1996 and 1997, respectively.
F-10
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 6--DEFERRED COSTS
Major classifications of deferred costs and their respective amortization
periods are as follows:
AMORTIZATION DECEMBER 31, SEPTEMBER 30,
PERIOD 1996 1997
------------ ------------ -------------
Display models.................................... 36 months $ 15,425 $ 15,425
Organization costs................................ 60 months 36,406 36,406
Start-up costs.................................... 60 months 79,272 79,272
Stock issuance costs.............................. -- 140,000
------------ -------------
131,103 271,103
Accumulated amortization.......................... (101,590) (119,064)
------------ -------------
Deferred costs, net............................... $ 29,513 $ 152,039
------------ -------------
------------ -------------
The stock issuance costs are related to a proposed public offering of the
company's common stock. If the offering does not take place, these costs will be
expensed.
NOTE 7--NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
First Security Bank, due July, 1996, interest at 8.75% per
annum, secured by all of the former assets of SSLLC with a
book value of approximately $87,000. This note was refinanced
with Rocky Mountain Bank (see below) in 1997.................. $ 41,740 $ --
Rocky Mountain Bank, due January, 2000, interest at 9.25% per
annum, collateral-ized by a $20,000 Certificate of Deposit
(included in cash), monthly payments inclusive of interest of
$1,339.86..................................................... -- 35,060
Equipment lease, due January, 2002, interest at 8.85% per annum,
monthly payments inclusive of interest of $1,735.30,
collateralized by equipment with a book value of $98,705 at
June 30, 1997................................................. -- 77,049
Rocky Mountain Bank, due September, 1998, interest at 8.1% per
annum......................................................... -- 15,000
------------ -------------
41,740 127,109
Less: Current portion........................................... 41,740 42,906
------------ -------------
Long-term debt.................................................. $ -- $ 84,203
------------ -------------
------------ -------------
F-11
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 7--NOTES PAYABLE (CONTINUED)
Maturities of long-term debt are as follows:
YEARS ENDED
SEPTEMBER 30,
- --------------------------------------------------------------
1998.......................................................... $ 42,906
1999.......................................................... 30,537
2000.......................................................... 24,539
2001.......................................................... 19,004
2002.......................................................... 10,123
----------
$ 127,109
----------
----------
NOTE 8--NOTES PAYABLE TO STOCKHOLDERS
The company has notes payable to its stockholders as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Notes payable to four (4) stockholders payable in eight (8)
equal quarterly installments commencing November 1, 1998
inclusive of interest at 9%................................... $ 300,000 $ 300,000
Demand notes, non-interest bearing.............................. 23,770 22,450
------------ -------------
323,770 322,450
Less: Current portion........................................... (23,770) (22,450)
------------ -------------
Long-term debt.................................................. $ 300,000 $ 300,000
------------ -------------
------------ -------------
Maturities of long-term debt are as follows:
YEARS ENDED
DECEMBER 31,
- --------------------------------------------------------------
1997.......................................................... $ 23,770
1998.......................................................... 37,500
1999.......................................................... 150,000
2000.......................................................... 112,500
----------
$ 323,770
----------
----------
F-12
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 9--RELATED PARTY TRANSACTIONS
The company and other entities controlled by its chairman have advanced
funds to each other for operating purposes. Other than as described in Note 8,
related party loans are non-interest bearing and have no scheduled repayment
dates. In accordance with the intentions of the parties involved, the balances
payable to affiliates have all been classified as current, and the balances due
from shareholders and affiliates have been classified as non-current.
The company has also issued options to certain executives. See Note 17.
NOTE 10--INCOME TAXES
The company had available net operating loss carryforwards for tax purposes
at December 31, 1996. Due to a change in ownership, the availability of these
losses to offset future taxable income is severely restricted. The company must
continue to operate as a firearms manufacturer until 1998, and an annual limit
on the use of prior losses based on the value of the company at the time of the
ownership change multiplied by the long-term tax exempt rate will apply. This
results in a limitation on utilization of the losses of approximately $2,000 per
year and affects approximately $2,000,000 of the total available carryforward.
The amounts and expiration dates of these losses are as follows:
EXPIRATION DATE
DECEMBER 31, AMOUNT
- ------------------------------------------------------------ ------------
2006........................................................ $ 559,199
2007........................................................ 94,026
2008........................................................ 375,989
2009........................................................ 275,605
2010........................................................ 795,863
2011........................................................ 454,277
------------
$ 2,554,959
------------
------------
As of December 31, 1996, the company has a net operating loss carryforward
(after applying change of ownership limitations described above) of
approximately $580,000 which results in a deferred tax asset of approximately
$232,000 which has been offset by a valuation allowance.
The consolidated statements of operations include losses of $129,766 and
$40,939 for the years ended December 31, 1996 and 1995, respectively, incurred
by The Stock Shop of Montana, LLC prior to its merger with The Stock Shop, Inc.
Since SSLLC was taxed as a partnership under the provisions of Subchapter K of
the Internal Revenue Code, this loss may only be deducted by SSLLC's members.
NOTE 11--COMMITMENTS
a) The company conducts its primary operations from a facility that is
leased under an agreement which expires July 29, 1998. There is an option to
renew the lease for an additional 12 months at $3,000 per month. The company has
an option to purchase the property at fair market value which expires on July
10,
F-13
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 11--COMMITMENTS (CONTINUED)
1998. The company is responsible for all costs of utilities, repairs,
maintenance, upkeep, insurance, and real estate taxes in addition to the basic
rent.
The company leases a second facility under an agreement which expires on
September 1, 1999.
Future minimum rental payments under these leases are as follows:
YEARS ENDING YEARS ENDING
DECEMBER 31, AMOUNT SEPTEMBER 30, AMOUNT
- ------------------------------ ---------- ------------------------------ ---------
1997.......................... $ 55,075 1998.......................... $ 51,500
1998.......................... 43,250 1999.......................... 22,000
1999.......................... 16,000
---------- ---------
$ 114,325 $ 73,500
---------- ---------
---------- ---------
Rent expenses for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997 were $15,188, $29,465, $14,022 and
$44,387, respectively.
b) The company has employment agreements with its President of Manufacturing
and its Production Manager that expire on March 31, 1999. Future minimum
payments under the contracts are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
- -------------------------------------------------------------- ----------
1997.......................................................... $ 78,000
1998.......................................................... 78,000
1999.......................................................... 19,500
----------
$ 175,500
----------
----------
NOTE 12--SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The company has concentrated its credit risk for cash by maintaining
accounts at Rocky Mountain Bank in excess of federal insurance limits. The
maximum loss that would have resulted from that risk totalled $127,419 at
December 31, 1996, for the excess of deposits over amounts that would have been
covered by federal insurance.
NOTE 13--MERGERS AND ACQUISITIONS
In September 1996, The Stock Shop, Inc. ("SSI") acquired all of the assets
of The Stock Shop of Montana, LLC ("SSLLC"), a company under common control, in
exchange for the assumption of all of SSLLC's liabilities. The transaction has
been accounted for in a manner similar to that in pooling-of-interests
accounting and the operations of SSLLC have been recorded by SSI as of the
beginning of the
F-14
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED)
year. SSI did not issue any new shares of stock as part of the transaction. The
book value of SSLLC's net assets (liabilities) at the date of combination
consisted of the following:
Accounts receivable.............................................. $ 2,625
Prepaid expenses................................................. 452
Property and equipment, net of accumulated depreciation of
$5,595......................................................... 8,383
Start-up costs, net of accumulated amortization of $1,058........ 3,174
Due from member.................................................. 80,000
Accounts payable and accrued expenses............................ (42,000)
Notes payable (current).......................................... (47,215)
Due to affiliated companies...................................... (140,602)
---------
$(135,183)
---------
---------
On November 15, 1996, CVC acquired all of the outstanding stock of SSI in
exchange for 1,300,000 shares of its own common stock. The transaction has been
accounted for as a pooling-of-interests, and the operations of SSI are reflected
for all periods presented.
SSI's consolidated balance sheet (including the assets, liabilities and
equity of SSLLC acquired in the pooling described above) as of December 31, 1995
was as follows:
ASSETS
CURRENT ASSETS
Cash...................................................... $ 5,565
Accounts receivable....................................... 17,366
Inventory................................................. 7,319
Other current assets...................................... 900
---------
Total current assets.................................. $ 31,150
PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated
depreciation of $2,516.................................. 11,462
START-UP COSTS
Start-up costs, net of accumulated amortization of $423... 3,809
---------
Total assets.......................................... $ 46,421
---------
---------
F-15
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED)
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 29,422
Notes payable to LLC members.............................. 13,100
Notes payable--bank....................................... 47,115
---------
Total liabilities..................................... $ 89,637
Members' equity (deficit)................................. (43,216)
---------
Total liabilities and members' equity (deficit)........... $ 46,421
---------
---------
The company's consolidated statement of operations included the following
amounts attributable to SSI:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Revenues.................................... $ 87,038 $ 51,600
Net income (loss)........................... (40,939) (129,766)
The consolidated net loss for the year ended December 31, 1995 is comprised
of the following:
Net loss of CVC before effect of merger with
SSI............................................ $(741,524)
Net loss of SSLLC................................ (40,939)
---------
Consolidated net loss............................ $(782,463)
---------
---------
Consolidated revenue for the year ended December 31, 1995 is the same amount
as originally reported by CVC prior to the merger with SSI.
On August 13, 1996, the company acquired all of the preferred stock and
91.65% of the common stock of Cooper Firearms, Inc. for $30,000. The transaction
has been accounted for under the purchase method for financial reporting
purposes. The deferred credit which arose from the purchase of this stock at a
discount is being amortized over a period of 40 years.
Pro forma information assuming the acquisition had occurred on January 1,
1995 is as follows:
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1995 1996 1996
------------- ------------- -------------
Revenues..................... $ 1,028,746 $ 833,795 $ 782,866
Net loss..................... $ (1,284,775) $ (1,294,382) $(1,034,273)
F-16
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED)
On August 15, 1997, the company issued 790 shares of its common stock in
exchange for an additional 5.79% interest in Cooper Firearms, Inc. The company
issued one share of CVC stock for every ten shares of Cooper Firearms, Inc.
stock exchanged.
NOTE 14--REGULATION OF FIREARMS BY U.S. GOVERNMENT
As a manufacturer of firearms, the company must comply with the regulations
of the Bureau of Alcohol, Tobacco and Firearms. Requirements include an
accountability of each serial numbered gun and the payment of an 11% federal
excise tax as the guns are shipped and invoiced. Failure to comply with these
regulations can lead to fines and suspension of manufacturing and sales
operations.
NOTE 15--CONTINGENCIES
The company has been notified that an individual injured himself while
firing a weapon produced by the company. This individual has retained counsel.
Management intends to vigorously defend this matter and has referred it to its
insurance company. The insurer has not yet determined whether this is a covered
claim under the policy. The amount or range of potential loss cannot be
reasonably estimated at this time, but management does not expect it to be
material. No accrual has been made for this loss contingency in the financial
statements.
NOTE 16--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, accounts
receivable and accounts payable and accrued expenses approximated fair value as
of December 31, 1996 because of the relatively short-term maturity of these
instruments. The carrying values of long-term receivables and long-term debt,
including the current portion, approximated fair value as of December 31, 1996,
based upon quoted market prices.
NOTE 17--STOCK OPTIONS
CVC adopted a stock option plan on August 29, 1995 authorizing it to issue
four members of management options to purchase 230,000 shares of CVC common
stock. These options may not be issued unless CVC attains certain levels of
profitability. CVC will issue 125,000 of these options if it achieves one year
of after-tax profitability. Another 60,000 options will be issued if CVC's after
tax profitability is $250,000. If CVC's net income reaches $500,000, it will
issue an additional 45,000 options. The exercise prices of these options will be
determined by CVC's Board of Directors when they are issued. To date, CVC has
not yet met such criteria. Upon issuance, these options will vest immediately
and have no expiration date. These options are not exercisable with respect to
CVS stock. To date, no options have been issued pursuant to this plan.
CVC adopted a second stock option plan on August 29, 1995 authorizing it to
issue its employees options to purchase an aggregate of up to 125,000 shares of
CVC common stock. These options are issuable at the discretion of CVC's board of
directors based upon employee performance with terms as the
F-17
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 17--STOCK OPTIONS (CONTINUED)
board deems appropriate. These options will not be exercisable with respect to
CVS stock. To date, no options have been issued pursuant to this plan.
In December 1995, the company issued its chairman an option to purchase
200,000 shares of the company's common stock at an exercise price of $2.76 per
share. The options were issued as additional consideration for the company to
obtain a $75,000 loan from the chairman. The right to exercise this option
vested immediately and expires in December 1998. The exercise price of this
option exceeds management's estimate of the market value of the stock on the
grant date, and, accordingly, the option has an immaterial value. The chairman
has not yet exercised any portion of this option.
In September 1996, SSI awarded one of its directors (now a director of CVS)
an option to purchase 25,000 shares of SSI's common stock at an exercise price
of $3.45 per share. Pursuant to the mergers of SSI and CVC and CVC and CVS, this
option is now available to the individual with respect to CVS common stock. The
right to exercise this option vests in increments of 6,250 shares per year for
four years beginning September 1, 1997. The option expires on September 1, 2001.
The exercise price of this option exceeds management's estimate of the market
value of SSI's common stock on the grant date, and are considered to have an
immaterial value. The director has not yet exercised any portion of this option.
In September 1996, SSI awarded three of its directors (now directors of CVS)
options to purchase 250,000 shares of SSI's common stock at an exercise price of
$0.0001 per share. Pursuant to the mergers of SSI and CVC and CVC and CVS, these
options are now available to the individuals with respect to CVS common stock.
The right to exercise these options vested immediately and expires on September
1, 2001. Management's estimate of the market value of SSI's common stock on the
grant date exceeds the exercise price of these options by an amount which
results in an immaterial expense. Accordingly, the options had an immaterial
value at the time of their issuance, and no expense has been recorded in
connection therewith. The directors have not yet exercised any portion of these
options.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("Statement 123"), requires the company to provide pro forma
information regarding net loss and loss per share as if compensation cost for
the company's stock option plans had been determined in accordance with the fair
value-based method prescribed in Statement 123. The company estimates the fair
value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1995 and 1996, respectively: no dividends paid for all years; expected
volatility of 40.7% and 38.9%; risk free interest rates of 5.51% and 6.60%; and
expected lives of 5.0 and 4.0 years.
Under the accounting provisions of Statement 123, there would be no material
difference between the company's net loss and loss per share from that reported
in the financial statements in accordance with Accounting Principles Board
Opinion No. 25.
NOTE 18--CAPITAL CONTRIBUTION
In September 1996, a company in which the Chairman is a principal paid the
company $1,000,000. No additional stock was issued to the Chairman or his
company as a result of this transaction. The company has accounted for this as a
contribution to additional paid-in capital.
F-18
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 19--REORGANIZATION
In 1995, the company reincorporated in Delaware. As part of this
transaction, the company changed the par value of its stock from $1 per share to
$0.01 per share.
In 1997, the company was reorganized as Connecticut Valley Sports, Inc. as
described in Note 1. As part of this transaction, the company changed the par
value of its stock from $0.01 per share to $0.0001 per share.
NOTE 20--PREFERRED STOCK
The company has authorized the issuance of 1,000,000 shares of "blank check"
preferred stock. This stock may be issued with any rights, preferences or
designations as determined by the Board of Directors at the time of its issuance
without stockholder approval. Management has no present intention to issue any
shares of this preferred stock.
NOTE 21--MAJOR CUSTOMERS
During the nine months ended September 30, 1997, the company generated
approximately 42% of its sales from three customers.
NOTE 22--SUBSEQUENT EVENTS
The company has filed a registration statement with the Securities Exchange
Commission for an initial public offering of 1,500,000 units. Each unit will
consist of one share of the company's common stock and one warrant entitling the
holder thereof to purchase one additional share of the company's common stock at
an exercise price of $6. The offering price is expected to be $5.10 per unit.
F-19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Officers and Directors
Cooper Firearms, Inc.
Stevensville, Montana
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Cooper Firearms, Inc. for the year ended December 31,
1995 and for the period from January 1, 1996 to August 13, 1996. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 3, on August 13, 1996, The Stock Shop, Inc. acquired
all of the company's preferred stock and 91.65% of its common stock.
In our opinion, the statements of operations, stockholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
operations and cash flows of Cooper Firearms, Inc. for the year ended December
31, 1995 and for the period from January 1, 1996 to August 13, 1996, in
conformity with generally accepted accounting principles.
/s/ DAVID TARLOW & CO., P.C.
---------------------------------------
David Tarlow & Co., P.C.
New York, New York
May 8, 1997
F-20
COOPER FIREARMS, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS
JANUARY 1, ENDED JUNE 30,
1996 1996
YEAR ENDED TO --------------
DECEMBER 31, AUGUST 13,
1995 1996 UNAUDITED
------------ --------------
Net sales......................................................... $ 954,002 $ 589,070 $ 534,420
Cost of goods sold................................................ 1,027,871 516,687 461,005
------------ -------------- --------------
Gross profit (loss)............................................... (73,869) 72,383 73,415
------------ -------------- --------------
OPERATING EXPENSES
Selling, general and administrative expenses...................... 316,278 209,828 191,621
Writedown of inventory to lower of cost or market................. 80,000 -- --
Bad debts......................................................... -- 27,362 18,000
------------ -------------- --------------
Total operating expenses...................................... 396,278 237,190 209,621
------------ -------------- --------------
Operating loss................................................ (470,147) (164,807) (136,206)
Interest expense.................................................. 38,809 20,267 15,241
------------ -------------- --------------
Net loss...................................................... $ (508,956) $ (185,074) $ (151,447)
------------ -------------- --------------
------------ -------------- --------------
The accompanying notes are an integral part of these financial statements.
F-21
COOPER FIREARMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
TREASURY STOCK--
PREFERRED PREFERRED STOCK
STOCK CLASS B CLASS C COMMON STOCK COMMON
---------------------- ---------------------- --------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- --------- ---------- ----------- ---------
YEAR ENDED DECEMBER 31, 1995
Balance--January 1, 1995..... 28,661 $ 716,525 10,000 $ 125,000 117,085 $ 690,221 2,324 $ (23,240)
Shares issued................ 23,000 287,500 6,300
Shares issued in lieu of
interest................... 1,100 11,000
Warrants exercised........... 6,500 44,000
Common stock repurchased..... 550 (5,500)
Net loss--year ended December
31, 1995...................
----------- --------- ----------- --------- --------- ---------- ----- ---------
Balance--December 31, 1995... 28,661 $ 716,525 33,000 $ 412,500 130,985 $ 745,221 2,874 $ (28,740)
----------- --------- ----------- --------- --------- ---------- ----- ---------
----------- --------- ----------- --------- --------- ---------- ----- ---------
JANUARY 1, 1996 TO AUGUST 13,
1996
Balance--January 1, 1996..... 28,661 $ 716,525 33,000 $ 412,500 130,985 $ 745,221 2,874 $ (28,740)
Warrants exercised........... 5,000 30,000
Shares issued in lieu of
interest................... 1,120 14,000
Debt converted to common
stock...................... 2,424 300,000
Net loss--period from January
1, 1996 to August 13,
1996.......................
----------- --------- ----------- --------- --------- ---------- ----- ---------
Balance--August 13, 1996..... 28,661 $ 716,525 33,000 $ 412,500 139,529 $1,089,221 2,874 $ (28,740)
----------- --------- ----------- --------- --------- ---------- ----- ---------
----------- --------- ----------- --------- --------- ---------- ----- ---------
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
YEAR ENDED DECEMBER 31, 1995
Balance--January 1, 1995..... $(1,330,689) $ 177,817
Shares issued................ 287,500
Shares issued in lieu of
interest................... 11,000
Warrants exercised........... 44,000
Common stock repurchased..... (5,500)
Net loss--year ended December
31, 1995................... (508,956) (508,956)
------------- -------------
Balance--December 31, 1995... $(1,839,645) $ 5,861
------------- -------------
------------- -------------
JANUARY 1, 1996 TO AUGUST 13,
1996
Balance--January 1, 1996..... $(1,839,645) $ 5,861
Warrants exercised........... 30,000
Shares issued in lieu of
interest................... 14,000
Debt converted to common
stock...................... 300,000
Net loss--period from January
1, 1996 to August 13,
1996....................... (185,074) (185,074)
------------- -------------
Balance--August 13, 1996..... $(2,024,719) $ 164,787
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-22
COOPER FIREARMS, INC.
STATEMENTS OF CASH FLOWS
JANUARY 1,
1996
YEAR ENDED TO SIX MONTHS
DECEMBER 31, AUGUST 13, ENDED JUNE 30,
1995 1996 1996
------------ -------------- --------------
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................... $ (508,956) $ (185,074) $ (151,447)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................. 25,141 12,738 13,252
Loss on sale of property and equipment........................ -- 3,702 3,702
(Increase) decrease in:
Accounts receivable......................................... 107,610 29,809 (38,400)
Inventory................................................... 39,902 (3,555) (39,469)
Other current assets........................................ 9,306 13,328 7,590
Other assets................................................ 1,957 16,605 16,605
Increase (decrease) in:
Accounts payable and accrued expenses....................... (55,934) (14,218) 64,853
Customer deposits........................................... 12,930 (7,987) (6,191)
Federal excise tax payable.................................. 50,290 (16,959) 27,206
------------ -------------- --------------
Net cash used by operating activities............................. (317,754) (151,611) (102,299)
------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................... (24,303) (10,307) (10,307)
Proceeds from sales of property and equipment..................... -- 170,035 170,035
------------ -------------- --------------
Net cash provided (used) by financing activities................ (24,303) 159,728 159,728
------------ -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans payable......................................... 95,000 -- --
Repayments of loans payable....................................... (21,026) (188,934) (188,934)
Net advances of bank line-of-credit............................... 24,475 23,700 23,700
Capital stock issued.............................................. 342,500 44,000 44,000
Purchase of treasury stock........................................ (5,500) -- --
Advance from stockholder.......................................... -- 100,000 100,000
Financing costs incurred.......................................... (3,325) -- --
------------ -------------- --------------
Net cash provided (used) by financing activities................ 432,124 (21,234) (21,234)
------------ -------------- --------------
Net increase (decrease) in cash................................. 90,067 (13,117) 36,195
Cash at beginning of period....................................... (39,473) 50,594 50,594
------------ -------------- --------------
Cash at end of period............................................. $ 50,594 $ 37,477 $ 86,789
------------ -------------- --------------
------------ -------------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES
Notes payable assumed by purchaser of property and equipment...... $ -- $ 106,082 $ 106,082
Notes payable to stockholder converted to stock................... $ -- $ 300,000 $ --
Supplemental Disclosure of Cash Flow Information
Cash paid for interest............................................ $ 24,744 $ 20,909 $ 15,241
Cash paid for income taxes........................................ $ 51 $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-23
COOPER FIREARMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS
ENDED JUNE 30, 1996)
NOTE 1--ORGANIZATION AND NATURE OF BUSINESS
Cooper Firearms, Inc., was incorporated in 1990 under the laws of the State
of Montana. The company manufactures and sells custom quality production bolt
action rifles used for both sport hunting and competition. Customers are located
throughout the United States and parts of Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B) INVENTORIES
Inventories are valued at the lower of cost or market on a first-in,
first-out basis.
C) DEPRECIATION
Depreciation is provided using accelerated methods over the estimated useful
lives of the assets.
D) AMORTIZATION
Amortization of loan fees and start-up costs is provided using the straight
line method over a period of 36-60 months.
E) INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements for the six months ended June 30,
1996 reflect all adjustments (consisting of recurring accruals) management
considers necessary for a fair presentation of results of operations and cash
flows.
F) LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", which requires
that certain long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. This standard is effective for fiscal years that begin after
December 15, 1995. The company's adoption of this pronouncement on January 1,
1996 did not have a material impact on the company's financial statements.
NOTE 3--SUBSEQUENT EVENTS
On August 13, 1996, The Stock Shop, Inc. acquired all of the preferred stock
and 91.65% of the common stock of the company.
F-24
COOPER FIREARMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS
ENDED JUNE 30, 1996)
NOTE 4--DEPRECIATION
The company recorded depreciation expense of $23,440 for the year ended
December 31, 1995 and $9,967 for both the six months ended June 30, 1996 and the
period from January 1, 1996 to August 13, 1996.
NOTE 5--REGULATION OF FIREARMS BY U.S. GOVERNMENT
As a manufacturer of firearms, the company must comply with the regulations
of the Bureau of Alcohol, Tobacco and Firearms. Requirements include an
accountability of each serial numbered gun and the payment of an 11% federal
excise tax as the guns are shipped and invoiced. Failure to comply with these
regulations can lead to fines and suspension of manufacturing and sales
operations.
NOTE 6--CONTINGENCIES
The company has been notified that an individual injured himself while
firing a weapon produced by the company. This individual has retained counsel.
Management intends to vigorously defend this matter and has referred it to its
insurance company. The insurer has not yet determined whether this is a covered
claim under the policy. The amount or range of potential loss cannot be
reasonably estimated at this time, but management does not expect it to be
material. No accrual has been made for the loss contingency in the financial
statements.
F-25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE AND REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED ON AS HAVING BEEN AUTHORIZED FOR THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
---------
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 18
Dilution....................................... 20
Capitalization................................. 21
Dividend Policy................................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 26
Management..................................... 34
Principal Stockholders......................... 37
Certain Transactions........................... 37
Description of Securities...................... 39
Shares Eligible for Future Sale................ 42
Underwriting................................... 43
Legal Matters.................................. 45
Experts........................................ 45
Financial Statements........................... 47
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTION.
CONNECTICUT VALLEY
SPORTS, INC.
1,500,000 Units
Each Unit Consisting of One
Shares of Common Stock and One
Redeemable Common
Stock Purchase Warrants
BRIARWOOD INVESTMENT
COUNSEL, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such an officer or
director. The restated Certificate of Incorporation and By-laws of the Company
provide for indemnification of its officers and directors to the full extent
authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be paid by the
Company in connection with the issuance and distribution of the securities being
registered:
SEC Registration Fee.......................................................... $ 6,330.20
NASD Filing Fee............................................................... $ 2,414.75
NASDAQ Filing Fee............................................................. * $25,000.00
Printing Engraving Expenses................................................... * $75,000.00
Legal Fees and Expenses....................................................... * $125,000.00
Accounting Fees and Expenses.................................................. * $120,000.00
Blue Sky Fees and Expenses.................................................... * $40,000.00
Transfer Agent and Registrar Fees and Expenses................................ * $ 3,500.00
Underwriter's Non-accountable Expense Allowance............................... $229,500.00
Miscellaneous................................................................. * $28,236.41
----------
Total..................................................................... $655,000.00
- ------------------------
* Estimate
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold securities to the
individuals listed below. The issuances of these securities were considered to
be exempt from registration under Rule 505 and 506 of Regulation D of the Act,
as amended, and the regulations promulgated thereunder or Section 4(2) of the
Act. Each purchaser of the securities in such transaction represented his
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the certificates for the securities issued in such transaction.
Each purchaser of the securities in such transaction had adequate access to
information about the Registrant. Except as set forth below, there were no
underwriters or placement agents involved in the transactions and there were no
underwriting discounts or commissions paid in connection therewith.
In September 1997, the Company issued an aggregate of 2,747,476 shares of
its Common Stock to 56 investors in exchange for 2,747,476 shares of Common
Stock of Connecticut Valley Classics, Inc. ("CVC"). As a result of the exchange,
CVC became a 97% owned subsidiary of the Company.
In October 1997, the Company issued 50,000 shares of common stock to
Gersten, Savage, Kaplowitz & Fredricks, LLP in exchange for legal services
rendered. This transaction was exempt from registration pursuant to Section 4(2)
of the Act.
II-1
CVC, the Company's predecessor and majority owned subsidiary has sold
securities to the individuals listed below in the past three years:
In May 1995, Victor Wang acquired 470,000 shares of CVC common stock for
$50,000 and undertaking obligations to provide additional financing for CVC in
the future. This transaction was exempt from registration pursuant to Section
4(2) of the Act.
In September 1995, CVC closed a private placement in which it issued 237,269
shares of common stock at an offering price of $3.45 per share. Sales were made
to 26 accredited investors. Duke & Co., Inc. acted as placement agent and
received a placement agent fee of 10% of the gross proceeds as well as a 3%
non-accountable expense allowance. In March 1996, an additional 132,692 shares
of common stock were sold to 11 other accredited investors on the same terms and
conditions in another private placement. These transactions were exempt from
registration pursuant to Rule 506 of Regulation D.
In connection with these private placements, 60,000 shares of common stock
were issued to Gersten, Savage, Kaplowitz & Fredericks, LLP as compensation for
legal services rendered. This transaction was exempt pursuant to Section 4(2) of
the Act.
In November 1996, the CVC issued 910,000, 364,000 and 26,000 shares to
Victor Wang, Daniel Cooper and Jason Stacey, respectively, in connection with
the acquisition of the Stock Shop, Inc. Mssrs. Wang, Cooper and Stacey had
acquired their shares in the Stock Shop, Inc. in connection with the acquisition
by the Stock Shop, Inc. of all of the assets of the Stock Shop LLC. These
transactions were exempt from registration pursuant to Section 4(2) of the Act.
From March through May 1997, CVC has a series of closings on a private
placement in which it issued 183,993 shares of common stock at an offering price
of $3.85 per share. Sales were made to 13 accredited investors. Duke & Co., Inc.
acted as placement agent and received a placement agent fee of 10% of the gross
proceeds as well as a 3% non-accountable expense allowance. This transaction was
exempt from registration pursuant to Rule 506 of Regulation D.
In August 1997, CVC issued 790 shares of stock to eight individuals in
exchange for their shares in the Company's majority owned Cooper Arms
subsidiary. This transaction was exempt from registration pursuant to Section
4(2).
ITEM 16. EXHIBITS
1.1 Form of Underwriting Agreement between the Company and Briarwood Investment Counsel
1.2 Form of Underwriter's Warrant
1.3 Form of Investment Banking Agreement between the Company and Briarwood Investment
Counsel, Inc.
3.1* Certificate of Incorporation of the Company and Amendments thereto
3.2* By-laws of the Company
4.1** Specimen Common Stock Certificate
4.2** Specimen Warrant Certificate
4.3 Form of Warrant Agreement
4.4** Form of public warrant agreement
5.1** Form of opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
10.1 Form of employment agreement with Dan Cooper, President of the Company
10.2 The Company's 1997 Stock Option Plan
II-2
10.3 Lease Agreement between the Company and Curtis L. Merriman
10.4 Lease Agreement between the Company and Bitteroot Investments, L.L.C.
10.5 Agreement between the Company and J.G. Anschutz GmbH
10.6 Agreement between the Company and AcuSport Corporation
21.1* List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
23.2 Consent of David A. Tarlow & Co., P.C.
23.3 Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP, counsel for the Company
(included in Exhibit 5.1 to this Registration Statement)
24.1* Power of Attorney
27** Financial Data Schedule
- ------------------------
* Filed with the initial filing on October 9, 1997
** To be filed by Amendment
ITEM 17 UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to any charter provision, by-law contract arrangements statute,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any Prospectus required by section 10(a)(3) of the Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to suit information in the registration statement.
(2) That, for the purpose of determining any liability under the Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the Offering of such
securities at that time shall be deemed to be the initial bona fide Offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the Offering.
(4) For determining any liability under the Act, treat the information omitted
from the form of Prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of Prospectus filed by the
small business issuer under Rule 424(b)(1), or (4) or 497(h), under the Act
as part of this registration statement as of the time the Commission
declared it effective.
II-3
(5) For determining any liability under the Act, treat each post-effective
amendment that contains a form of Prospectus as a new registration statement
at that time as the initial bona fide Offering of those securities.
(6) To provide to the Underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such names
as required by the Underwriter to permit prompt delivery to each purchaser.
II-4
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form SB-2 and has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York on January 8, 1998.
CONNECTICUT VALLEY SPORTS, INC.
By: /s/ JOHN TILLELI
-----------------------------------------
John Tilleli
Pursuant to the requirements of the Act, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOHN TILLELI Chief Executive Officer
- ------------------------------ January 8, 1998
John Tilleli
* President and Director
- ------------------------------ January 8, 1998
Dan Cooper
* Chairman and Director
- ------------------------------ January 8, 1998
Victor Wang
* Treasurer (Principal
- ------------------------------ Accounting Officer) and January 8, 1998
Edward McCabe Director
* Vice President-Marketing,
- ------------------------------ Secretary and Director January 8, 1998
Gary Landis
/s/ JOHN TILLELI
- ------------------------------
*by John Tilleli as attorney
in fact
II-5
EXHIBIT INDEX
ITEM 16. EXHIBITS
- --------- --------------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement between the Company and Briarwood Investment Counsel, Inc.
1.2 Form of Underwriter's Warrant
1.3 Form of Investment Banking Agreement between the Company and Briarwood Investment Counsel, Inc.
3.1* Certificate of Incorporation of the Company and Amendments thereto
3.2* By-laws of the Company
4.1** Specimen Common Stock Certificate
4.2** Specimen Warrant Certificate
4.3 Form of Warrant Agreement
4.4** Form of public warrant agreement
5.1** Form of opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
10.1 Form of employment agreement with Dan Cooper, President of the Company
10.2 The Company's 1997 Stock Option Plan
10.3 Lease Agreement between the Company and Curtis L. Merriman
10.4 Lease Agreement between the Company and Bitteroot Investments, L.L.C.
10.5 Agreement between the Company and S.G. Anschutz GmbH
10.6 Agreement between the Company and AcuSport Corporation
21.1* List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
23.2 Consent of David A. Tarlow & Co., P.C.
23.3 Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP, counsel for the Company (included in Exhibit
5.1 to this Registration Statement)
24.1 Power of Attorney (included on the signature page of this Registration Statement)
27** Financial Data Schedule
- ------------------------
* Filed with the initial filing on October 9, 1997
** to be filed by Amendment