As filed with the Securities and Exchange Commission on August 14, 2000
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Aarica Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Texas 6159 76-0427502
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Number) Identification Number)
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Aarica Holdings, Inc.
1000 Winderley Place, Suite 124
Maitland, Florida 32751
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices
and principal place of business)
Carol Kolozs, President
Aarica Holdings, Inc.
1000 Winderley Place, Suite 124
Maitland, Florida 32751
(407) 667-9411
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------
Copies To:
Maurice J. Bates, Esq. Norman R. Miller, Esq.
Maurice J. Bates, L.L.C. Wolin, Ridley & Miller LLP
5910 North Central Expressway 3100 Bank One Center
Suite 1480 1717 Main Street
Dallas, Texas 75206 Dallas, Texas 75201-4681
(214) 237-3223 (214) 939-4906
Approximate date of commencement 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, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box.
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Per Share Aggregate Offering Price Registration Fee
(1) (1) (1)
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Units 1,150,000 $10.00 $11,500,000 $3,036
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Common Stock, par
value $.01 (2) 1,150,000 (2) (2) (2)
____________________________________________________________________________________________________________
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Redeemable Common Stock
Purchase Warrants (2) 1,150,000 (2) (2) (2)
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Common Stock, par
value $.01 (3) 1,150,000 $12.00 $13,800,000 $3,643
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Underwriter's Warrants (4) 150,000 $ .01 $100 $1
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Units Underlying the
Underwriter's Warrants 150,000 $12.00 $1,800,000 $ 475
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Common Stock, par
value $.01 (5) 150,000 (5) (5) (5)
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Redeemable Common Stock
Purchase Warrants 150,000 (5) (5) (5)
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Common Stock, par
value $.01 (6) 150,000 $14.40 $2,160,000 $ 570
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Total $29,260,100 $ 7,725
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Included in the units. No additional registration fee is required.
(3) Issuable upon the exercise of the redeemable common stock purchase
warrants. Pursuant to Rule 416 there are also registered an
indeterminate number of shares of common stock, which may be issued
pursuant to the anti-dilution provisions applicable to the redeemable
common stock purchase warrants, the underwriters' warrants and the
redeemable common stock purchase warrants issuable under the
underwriters' warrants.
(4) Underwriters' warrants to purchase up to 150,000 units, consisting of an aggregate of 150,000 shares of
common stock and 150,000 redeemable common stock purchase warrants.
(5) Included in the units underlying the underwriters' warrants. No additional registration fees are
required.
(6) Issuable upon exercise of redeemable common stock purchase warrants underlying the underwriters' units.
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The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE WOULD
NOT BE PERMITTED OR LEGAL.
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Initial Public Offering Prospectus
1,000,000 Units
Consisting of 1,000,000 Shares of Common Stock and
1,000,000 Redeemable Common Stock Purchase Warrants
Aarica Holdings, Inc.
Aarica Holdings, Inc. The Offering:
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o Aarica manufactures, designs, markets and distributes o We are offering 1,000,000 units, each
Aarica is offering 00000 shares of common unit consisting of one share of common
athletic footwear and accessories in Mexico stock and one warrant to purchase one share
for United States and European brands. of common stock for five years through
Institutional Equity Corporation on a firm
o Aarica Holdings, Inc. commitment basis
1000 Winderley Place,
Suite 124 o The underwriter has an option to
Maitland, Florida 32751 purchase an additional 150,000 units to
Telephone: (407) 667-9411 cover any over-allotments. The 150,000
shares included in the over-allotment units
will be provided by certain selling
Per Unit Total shareholders.
-------- -----
Public offering price $ o We intend to use the offering proceeds
Underwriting discounts $ for possible acquisition of businesses,
Proceeds to Aarica $ brands or products, reduction of debt,
advertising and sales development,
purchases of manufacturing equipment
and working capital and other general
corporate purposes.
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<PAGE>
Investing in our units, common stock and warrants involves certain
risks. See Risk Factors beginning on page 6.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
INSTITUTIONAL EQUITY CORPORATION
Prospectus dated 2000
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................................................... 3
Selected Consolidated Financial Information.............................................................. 5
Risk Factors............................................................................................. 6
We have a history of operating losses and are still in the development stage of our business.................. 6
The strength of our competitors makes it difficult to compete with their distribution operations in Mexico.... 6
We are highly dependent on our licensing agreements with Lotto and L.A. Gear and the loss of
such agreements would have an adverse impact on our revenues.................................................. 6
We are dependent upon the proceeds of this offering to finance our operations................................. 6
We do not have product liability insurance and could be subject to claims for defective products which
could have a material adverse effect on our business.......................................................... 6
Mexican economic conditions and government policies have had an adverse impact on our business
in the past and we continue to be subject to prevailing Mexican economic conditions and changes
in government policies........................................................................................ 7
Exchange rate fluctuations in the Mexican peso have had an adverse impact on our financial condition
in the past and we continue to be subject to possible fluctuations in the Mexican currency.................... 7
We are subject to duties on Asian imports.............................................................. 7
The imposition of monetary exchange controls would adversely affect our business....................... 7
You may be limited in your ability to enforce civil liabilities against Aarica since most of our
assets and operations are located in Mexico.......................................................... 8
Our Articles of Incorporation provide indemnification and limitation of directors' liability to Aarica
and its shareholders................................................................................. 8
Loss of Carol Kolozs and other management personnel would adversely impact our business................ 8
We do not anticipate paying dividends.................................................................. 8
After the offering, Mr. Kolozs will continue to control the vote on matters submitted to shareholders.. 8
Dilution to new shareholders will be approximately 82.7%............................................... 8
Use of Proceeds.......................................................................................... 9
Dividend Policy ......................................................................................... 9
Dilution................................................................................................. 10
Capitalization .......................................................................................... 11
Management's Discussion and Analysis of Financial Condition and Results Of Operations ................... 12
Business of Aarica ...................................................................................... 15
Additional Information .................................................................................. 20
Management............................................................................................... 21
Certain Relationships and Related Transactions........................................................... 24
Principal Shareholders................................................................................... 25
Description of Securities..................................................................................26
Shares Eligible For Future Sale ......................................................................... 27
Plan of Distribution .................................................................................... 28
Legal Matters............................................................................................ 30
Experts.................................................................................................. 30
Consolidated Financial Statements........................................................................ F-1
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4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. Before making an investment decision, you should read the entire
prospectus carefully, including the consolidated financial statements and
related notes, in order to understand our business and this offering fully.
References in this prospectus to "Aarica"," We", "Our" and "Us", refer to
Aarica Holdings, Inc., a Texas corporation, which owns 99% of the outstanding
capital stock of Aarica Holdings, Mexico, S. A. de C. V., a Mexican holding
company organized to own substantially all of the stock of five Mexican
subsidiaries. Unless otherwise indicated, the information in this prospectus
assumes the underwriters' over-allotment option and the underwriters' warrants
are not exercised.
Aarica and its Business
Aarica is a Texas corporation which, through Mexican subsidiaries,
manufactures athletic footwear for American and international brands, including
L.A. Gear, Puma, Wilson, K-Swiss and Lotto. We also design sportswear, athletic
footwear and sports accessories for L.A. Gear and Lotto for whom we are the
exclusive distributor in Mexico.
Our executive offices in the United States are located at 1000 Winderley
Place, Suite 124, Maitland, Florida 32751, telephone (407) 667-9411 and in
Mexico City at Lago Chalco No. 156, Col Anahuac Mexico, D. F. 11320. The
telephone number in Mexico is (525) 260-05-82.
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The Offering
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Securities offered ......................... 1,000,000 units. Each unit consists of one share of common
stock and one warrant to purchase an additional share of common
stock. The shares and the warrants included in the units will
automatically separate 30 days from the date of this prospectus,
after which the common stock and warrants in the units will
trade separately.
Warrants.................................... The warrants included in the units will be exercisable
commencing 30 days after the offering. The exercise price of a
warrant is (120% of the offering price of the units). We may
redeem some or all of the outstanding warrants for $.05 per
warrant at any time on 30 days prior written notice if the
closing price of the common stock on the ______________Market is
at least (150% of the offering price of the units) per share for
10 consecutive trading days.
Common stock to be outstanding
after the offering....................... 4,000,000 (1) (2)
Warrants to be outstanding
after the offering....................... 1,000,000 warrants (3)
Use of Proceeds............................. Possible acquisition of businesses, brands or products,
reduction of debt, advertising and sales development, purchases
of manufacturing equipment and working capital.
Proposed market symbols.....................
Common stock ___
Units ___
Warrants ___
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(1) The 4,000,000 shares of common stock to be outstanding after the offering do not include:
o Up to 1,000,000 shares issuable upon exercise of the warrants;
o Up to 150,000 shares issuable upon exercise of the warrants included in the underwriters' over-allotment
option;
o 100,000 shares of common stock issuable upon exercise of the underwriters'
warrants and 100,000 shares issuable upon exercise of the warrants included
in the underwriters' warrants;
o 105,000 shares issuable upon exercise of warrants issued to a selling agent in a private placement in
June 1999;
o 350,000 shares of common stock which may be issued under the company's stock
compensation plan; o 250,000 shares issuable to Continental Capital & Equity
Corporation ("CCEC") at $2.00 per share upon exercise of outstanding stock options.
(2) Includes 200,000 shares to be issued to Robert E. Schmidt, Jr., a director of the company.
(3) The 1,000,000 warrants to be outstanding after the offering do not include up to 150,000 warrants issuable
upon exercise of the over-allotment option, 100,000 warrants underlying the
underwriters' warrants and 105,000 warrants issued to the selling agent in
a private placement in June 1999.
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<PAGE>
Selected Consolidated Financial Information
The following selected financial data has been derived from our audited
balance sheets and statements of operations for the fiscal years ended December
31, 1999 and 1998. This selected financial data should be read in conjunction
with the consolidated financial statements and related footnotes included in
this prospectus.
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Years Ended Three Months Ended
December 31, March 31,
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1999 1998 2000 1999
---- ---- ---- ----
Unaudited
Operating Data:
Net sales $5,433,254 $5,742,454 $1,205,042 $1,023,239
Loss before extraordinary item (1,918,833) (931,256)
Extraordinary item-debt settlements 4,051,402 1,326,117
Net income (loss) 2,132,569 394,861 (329,929) (446,896)
Loss per share before extraordinary item (.71) (.36) (.12) (.17)
Extraordinary item earnings per share 1.50 .51
Earnings (loss) per share .79 .15 (.12) (.17)
Weighted average common shares 2,703,836 2,600,000 2,800,000 2,600,000
outstanding
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As of December 31, 1999 March 31, 2000
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Actual Unaudited As Adjusted
(1)
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Balance Sheet Data:
Total assets $4,633,055 $4,792,705 $10,694,705
Total liabilities 5,879,139 6,368,718 3,768,718
Shareholders' equity (deficit) (1,246,084) (1,576,013) 6,925,987
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(1) As adjusted to reflect the sale of the units offered by this prospectus at
an offering price of $9.00 to $11.00 per unit and the application of the
net proceeds therefrom. The calculations in this table and elsewhere in
this prospectus are based on $10 per share, the mid-point of the range of
this offering.
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Risk factors
You should carefully consider each of the following risk factors and
all of the information in this prospectus before deciding to invest in the
securities offered through this prospectus. Some of the risks listed below
relate to our business specifically. Other risks relate to doing business in
Mexico and to the ownership of our stock. The risks described below are not the
only ones facing our company. There may be additional risks relating to, our
company specifically and to publicly traded companies generally, not
specifically identified that may adversely affect our business and the market
price for our stock.
Risk factors relating to our business
We have a history of operating losses and are still in the development
stage of our business. We have been in business for approximately 10 years and
have experienced a variety of conditions which have negatively impacted our
ability to sustain consistent profits, such as the Mexican financial crisis in
1995 and a shortage of operating capital. We are essentially still in the
development stage in our operations. For the fiscal years ended December 31,
1998 and December 31 1999 we had net income of $394,861 and $2,132,569,
respectively. Such profits however, are the results of extraordinary gains on
the extinguishment of debt. Disregarding these gains from extinguishment of
debt, we had net losses of $835,574 and $1,623,527 for such years, respectively.
For the three months ended March 31, 2000, we realized a net loss of $329,929
compared to a net loss of $446,896 for the same period of 1999. We had
accumulated losses of $2,022,023 and $4,247,806 at March 31, 2000 and 1999,
respectively. We will likely continue to incur significant expenses associated
with the development and operation of our businesses, a substantial portion of
which may be incurred before the realization of the related revenues. These
expenditures, together with associated early operating expenses, may result in
operating losses until an adequate revenue base is established. We cannot assure
that we will be able to operate profitability in the future.
The strength of our competitors makes it difficult to compete with
their distribution operations in Mexico. Aarica competes in Mexico with a number
of major brands such as Nike, Fila, Reebok and other local distributors for
market share in its distribution operations for athletic footwear and related
accessories. These major brands and some of the local brands have greater
financial, marketing and sales resources than Aarica. Our major brand
competitors in distribution do not have facilities in Mexico for the manufacture
of athletic footwear, our major product. In connection with our manufacturing
activities, we compete with entities that have manufacturing operations based
outside of NAFTA countries, such as China, Spain, and other Eastern European
countries. However, imports of athletic footwear from non-NAFTA countries are
subject to very substantial duties, ranging from 35-350% in Mexico.
We are highly dependent on our licensing agreements with Lotto and L.A.
Gear and the loss of such agreements would have an adverse impact on our
revenues. Approximately 70% of our current net sales are derived from licensing
agreements with Lotto and L.A. Gear for the manufacture and distribution of
their products. The termination of either of these licensing agreements would
have a material adverse effect on our operations. Our current license agreements
extend through December 2007 and July 2018 for L.A. Gear and Lotto,
respectively, and the licensors can terminate the agreements in the event Aarica
breaches the license covenants. We intend to lessen our dependence on our
current licencors by obtaining new licensing agreements with other international
brand manufacturers and distributors. We also intend to develop our own in-house
brands of products for niche markets in the United States and Mexico, but there
is no guarantee that we will be able to accomplish this in the near future. We
are currently producing soccer gloves and shin guards under the Lotto brand and
intend to develop these and other products for marketing under our own brands.
We are obligated to make minimum royalty payments to L.A. Gear of $75,000 in
2000, $100,000 in 2001, $150,000 in 2002 and $200,000 thereafter and to Lotto in
the amount of $110,000 in 2000, thereafter increasing by approximately 11%
annually. At December 31, 1999, we were in compliance with our royalty
obligations to L.A. Gear and Lotto.
We are dependent upon the proceeds of this offering to finance our
operations. Our shortage of working capital in the past has severely impaired
our ability to efficiently purchase raw materials, manage our manufacturing
output and allow us to develop new products and customers. Our ability to
overcome this shortage in working capital is dependent upon the receipt of
proceeds from this offering. In the event this offering is not completed, we may
not be able to obtain the required financing to implement our business plan.
We do not have product liability insurance and could be subject to
claims for defective products which could have a material adverse effect on our
business. We do not currently carry product liability insurance. Management has
made this determination because the majority of our revenues are generated in
Mexico and it believes that product liability suits are less likely to be
successful in Mexico than in the United States. Although management's research
has shown that successful product liability suits are rare in the athletic
footwear industry in the United States, there have been successful suits brought
against manufacturers. Management will continue to evaluate the feasibility and
cost effectiveness of carrying product liability insurance. A successful
material product liability suit against Aarica would have a material adverse
impact on Aarica and its operations. We will seek to obtain product liability
insurance if distribution is expanded into the United States.
Risk factors relating to doing business in Mexico
Mexican economic conditions and government policies have had an adverse
impact on our business in the past and we continue to be subject to prevailing
Mexican economic conditions and changes in government policies. Substantially
all of our existing assets and revenues are located and generated in Mexico. In
addition, a majority of the proceeds from this offering are to be invested in
the development of our business in Mexico. Our business is, and will continue to
be, affected by prevailing conditions in the Mexican economy and is, to a
significant extent, vulnerable to economic trends and changes in government
policies. The Mexican government has exercised and continues to exercise
significant influence over many aspects of the Mexican economy. Accordingly,
actions taken or policies established by legislative, executive or judicial
authorities in Mexico that affect the economy of Mexico could have material
adverse effects on Mexican entities in general and on our business in
particular. We cannot assure that future economic, political or diplomatic
developments in or affecting Mexico will not impair our business, results of
operations, financial condition, liquidity (including the ability to obtain
financing), or materially adversely affect the market price of our securities. A
new president of Mexico was elected in July 2000. While the new president has
publicly announced his intention to foster increased trade relations between
Mexico and the United States and Canada which could result in increased business
for the company, there is no assurance that he will be able to implement this
policy, or if implemented, it will be beneficial to the company.
Exchange rate fluctuations in the Mexican peso have had an adverse impact on our
financial condition in the past and we continue to be subject to possible
fluctuations in the Mexican currency. Exchange rate fluctuations could have a
material adverse effect on our business and our ability to service our U. S.
dollar-denominated liabilities, including liabilities under our license
arrangements with L.A. Gear and Lotto and our importing arrangements with our
Asian manufacturers.
Although U. S. our dollar-denominated indebtedness has decreased
considerably in recent months, we may, in the future, incur both peso and
non-peso-denominated indebtedness. As a result of our plan of operations in
Mexico, we will generate both dollar and peso-denominated receivables in the
sale of our products originating in Mexico. As our peso-denominated revenues
increase, our foreign exchange risk will also increase. The peso has stabilized
in recent months and we do not currently hedge against the risk of exchange rate
fluctuations although we may implement such a strategy if management foresees a
peso devaluation that would have a material adverse impact on our business.
Within the last six years, the exchange rate has remained stable and in
periods has appreciated against the dollar as reflected in the following table:
Average Exchange Rate--Pesos per U.S. Dollar (Source: Banco de Mexico)
----------------------------------------------------------------------
Date Pesos per Dollar
---- ----------------
7/31/00 9.3425
6/30/00 9.8350
3/31/00 9.2575
12/31/99 9.4950
12/31/98 9.9055
12/31/97 8.0638
12/31/96 7.8900
12/31/95 7.6850
12/31/94 5.0750
We are subject to duties on Asian imports. Currently, the company pays
a duty of 35% on products imported from Asia. We cannot assure that these duties
will not be increased or that non-duty barriers will not be put into effect by
the Mexican government.
The imposition of monetary exchange controls would adversely affect our
business. In recent years, the Mexican economy has suffered balance of payment
deficits and shortages in foreign exchange reserves. While the Mexican
government does not currently restrict the ability of Mexican or foreign persons
or entities to convert pesos to dollars or to transfer dollars outside Mexico,
we cannot assure that the Mexican government will not institute a restrictive
exchange control policy in the future. Any such restrictive exchange control
policy would materially adversely affect the Company's ability to convert pesos
into dollars and could also have a material adverse effect on the Company's
business and financial condition, including a negative effect on operating
profits.
You may be limited in your ability to enforce civil liabilities against
Aarica since most of our assets and operations are located in Mexico.
Enforcement by investors of civil liabilities under the United States federal
securities laws may be adversely affected by the fact that although Aarica is a
Texas corporation with offices in the United States, its operating subsidiaries
and substantially all of the assets of the business are located in Mexico and
substantially all of the proceeds of this offering will be used in Mexico. In
addition, Carol Kolozs, a United States citizen and President of Aarica, resides
in both the United States and Mexico. Consequently, it may not be possible for
investors to effect service of process within the United States upon such
persons or the Mexican subsidiaries or to enforce against them judgments of a
United States court predicated upon the civil liability provisions of the United
States federal securities laws.
Risk factors relating to our company and its securities
Our Articles of Incorporation provide indemnification and limitation of
directors' liability to Aarica and its shareholders. Our Articles of
Incorporation contain a provision, authorized by the Texas Business Corporation
Act, which provides indemnification for any director, officer, or former
director or officer, against liability incurred in his official capacity with
the corporation, including expenses and attorneys fees. We have been advised
that it is the position of the Securities and Exchange Commission that insofar
as these provisions may be invoked to disclaim liability for damages arising
under the securities laws, that such provisions are against public policy as
expressed in the securities laws and are therefore unenforceable.
Loss of Carol Kolozs and other key management personnel would adversely
impact our business. We believe that our success depends upon the continued
services of Carol Kolozs, our President and Chief Executive Officer. If one or
more of our executives were unable or unwilling to continue in their present
positions, our business could be materially adversely affected. We do not
currently have employment agreements with Mr. Kolozs or any executive officer or
employee. We cannot assure that we will be able to employ qualified personnel on
terms acceptable to the company in the event of the loss of any members of our
present management team. We do not presently carry key man insurance on the life
of any employee.
We do not anticipate paying dividends in the foreseeable future. We
have never paid cash dividends on the common stock of any of the Mexican
subsidiaries, the Mexican holding company or Aarica, and we do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends is at
the discretion of the board of directors and will depend on our earnings,
financial condition and other factors as the board may consider relevant. We
currently plan to retain any earnings to provide for our development and growth.
Therefore, an investor cannot expect to receive dividend income in the
foreseeable future from an investment in our securities.
After the offering, Mr. Kolozs will continue to control the vote on
matters submitted to shareholders. Upon completion of this offering, Mr. Kolozs
will own 2,250,000 shares or 56.3% of the outstanding 4,000,000 shares of common
stock and will be able to control the vote on all matters submitted to
shareholders, including the election of directors. Mr. Kolozs pledged all of his
shares as collateral for a loan to the company from Schmidt International but
retained voting rights as long as the Schmidt International loan is not in
default. If the Schmidt International loan is not paid in accordance with its
terms, Schmidt International would be able to foreclose on his guarantee and
take control of the 2,250,000 shares of the company's stock pledged by Mr.
Kolozs as collateral for the loan.
Dilution to new shareholders will be approximately 82.7% Carol Kolozs
acquired his stock in Aarica at a cost less than that at which the investors
purchasing in this offering will pay for their shares. Therefore, new investors
will bear most of the risk of loss, while control of Aarica will remain in the
hands of Mr. Kolozs. Immediately after this offering, the book value of your
shares will be approximately $1.73. This represents dilution of $8.27 per share
or 82.7% from the purchase price you will pay in the offering.
<PAGE>
Use of proceeds
We estimate that the net proceeds we will receive from the sale of the
1,000,000 units in this offering will be approximately $8,500,000. This is based
upon an assumed initial public offering price of $9.00 to $11.00 per unit, after
deducting estimated underwriting fees and other expenses of the offering. If
exercised, the over-allotment option will be fulfilled with shares held by
selling shareholders and we will not receive additional net proceeds if the
over-allotment option is exercised.
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The following table summarizes our intended use of these net proceeds:
Percent of
Application of net proceeds Amount Net Proceeds
--------------------------- ------ ------------
Acquisitions (1) $ 3,500,000 41.2%
Repayment of certain indebtedness (2) 3,250,000 38.2
Advertising and sales development 500,000 5.9
Purchase of manufacturing equipment 250,000 2.9
Working capital and general
corporate purposes 1,000,000 11.8
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Total $ 8,500,000 100.0%
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(1) The company has no acquisitions pending but intends to identify a
going business, brand name or product that would offer
distribution possibilities throughout the world.
(2) Includes indebtedness of $2,600,000 owed to Schmidt International
LLC, a limited liability company substantially owned by Robert E.
Schmidt, Jr., a director. The Schmidt International indebtedness
is due October 31, 2000 and bears interest at 5% above the prime
rate. Also includes payment of taxes due the Mexican government,
estimated to be approximately $500,000, whose payment terms are
under negotiation.
Our anticipated use of net proceeds is based upon our current status of
operations and business plan. It is possible that the application of funds may
vary depending upon a number of factors including, without limitation, changes
in the economic climate and governmental policies in Mexico, an increase in
orders for athletic shoes and the need for additional raw materials, the
availability of bank or other financing and other factors beyond our control. We
currently estimate that the net proceeds from this offering will be sufficient
to meet our liquidity and working capital requirements for the next 24 months.
Additional financing may be required to implement our long-term business plan.
We cannot assure that any such financing will be available when needed on terms
acceptable to us, if it is available at all.
Pending use of the net proceeds from this offering, we may invest the
net proceeds in short-term interest bearing accounts, government securities or
bank certificates of deposit in the United States and Mexico.
dividend policy
Neither Aarica nor its subsidiaries have paid dividends on their common
stock and it is not anticipated that we will do so in the forseable future. We
plan to retain future earnings, if any, to finance operations and expansion of
our business.
<PAGE>
dilution
Our net tangible book value at March 31, 2000, was a deficit of
$1,576,013, or approximately $(.56) per share. Our net tangible book value is
determined by subtracting the total amount of our liabilities from the total
amount of our tangible assets and dividing the remainder by the weighted number
of shares of our common stock outstanding.
The pro forma as adjusted net tangible book value per share after this
offering will be approximately $6,925,987 or $1.73 per share after giving effect
to the sale of the 1,000,000 shares we are offering at an assumed initial public
offering price of $9.00 to $11.00 (no value assigned to the warrants) and the
receipt of the net proceeds therefrom. This would represent an immediate
increase in the net tangible book value per share of common stock of $2.29 to
existing shareholders and an immediate dilution of $8.27 per share to new
investors.
<TABLE>
<S> <C> <C>
The following table illustrates this per share dilution:
Assumed initial public offering price per share $10.00
Net tangible book value per share as of March 31, 2000 $0.56
Increase per share attributable to new investors 2.29
------------
Adjusted net tangible book value per share after this offering 1.73
--------------
Dilution per share to new investors in this offering- $8.27
=====
--------------
Percentage dilution 82.7%
</TABLE>
The following table presents the following data as of March 31, 2000, and
assumes an initial public offering price of $9.00 to $11.00 per share for our
new investors: o The number of shares of common stock acquired from us; o The
total cash consideration paid; o The average price per share paid before
deducting estimated underwriting fees and estimated expenses of
the offering; and
o The average price per share paid by the existing shareholders.
<TABLE>
<CAPTION>
Shares of Common Stock Aggregate Consideration Average Price
Purchased
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing Shareholders 2,800,000 (1) 70.0% $446,010 .4% $1.48
New investors 1,000,000 20.0% 10,000,000 99.6% $10.00
--------- ----- ----------- -----
Total 4,000,000 (2) 100.0% $10,,446,000 100.0% $2.61
============= ====== ============ ======
--------------
</TABLE>
<TABLE>
<S> <C>
(1) Does not include 200,000 shares to be issued to Robert E. Schmidt, Jr., a director
(2) The 4,000,000 shares of common stock to be outstanding after the offering do not include:
o Up to 1,000,000 shares issuable upon exercise of the warrants;
o Up to 150,000 shares issuable upon exercise of the warrants included in the underwriters' over-allotment
option;
o 100,000 shares of common stock issuable upon exercise of the underwriters'
warrants and 100,000 shares issuable upon exercise of the warrants included
in the underwriters' warrants;
o 350,000 shares of common stock which may be issued under the company's stock
compensation plan; o 250,000 shares issuable to CCEC at $2.00 per share upon
exercise of outstanding stock options;. o 105,000 shares issuable upon exercise
of warrants issued to a selling agent in a private placement in
</TABLE>
June 1999. Such warrants are "out of the money" and as such have
insignificant value and are not recorded in the financial statements and
will have no effect on the calculation of earnings per share.
<PAGE>
capitalization
The following table sets forth our capitalization as of March 31, 2000:
o on an actual basis; and
o on a pro forma as adjusted basis to give effect to the sale of
1,000,000 shares at an assumed initial public offering price of
$9.00 to $11.00 per share and the application of the estimated
net proceeds of $8,500,000 after deducting estimated
underwriting discounts and commissions and our estimated
offering expenses.
<TABLE>
<S> <C> <C>
Actual As Adjusted
Total assets $ 4,792,705 $10,694,705
Total current liabilities 6,368,718 3,768,718
Total long-term debt -- --
Shareholders equity (deficit):
Common stock, $0.01 par value,
20,000,000 shares authorized,
2,800,000 shares issued and
outstanding, 4,000,000 as adjusted (1) (2) 28,000 40,000
Additional paid-in capital 418,010 8,908,010
Accumulated losses (2,022,023) (2,022,023)
----------- -----------
Total shareholders' equity (deficit): ($1,576,013) $ 6,925,987
------------ ------------
Total liabilities and shareholders' equity (deficit): $ 4,792,705 $10,694,705
================== ===========
--------------
</TABLE>
<TABLE>
<S> <C>
(1) The 4,000,000 shares as adjusted for this offering do not include:
o Up to 1,000,000 shares issuable upon exercise of the warrants;
o Up to 150,000 shares issuable upon exercise of the warrants included in the underwriters' over-allotment
option;
o 100,000 shares of common stock issuable upon exercise of the
underwriters' warrants and 100,000 shares issuable upon exercise
of the warrants included in the underwriters' warrants;
o 105,000 shares issuable upon exercise of warrants issued to a selling agent in a private placement in
June 1999;
o 350,000 shares of common stock which may be issued under the company's stock
compensation plan; o 250,000 shares issuable to CCEC at $2.00 per share upon
exercise of outstanding stock options; and
(2) Includes 200,000 shares to be issued to Robert E. Schmidt, Jr., a director of the company.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Comparison of Years Ended December 31, 1999 and 1998
Net income increased from $394,861 in 1998 to $2,132,569 in 1999. The
increase was the result of favorable bank debt settlements partially offset by
higher cost of sales and higher selling, general and administrative expenses.
Net sales decreased 5.4% to $5.4 million; however, the sales decline of
approximately $970,000 at the manufacturing company was largely offset by
increased sales of its distribution companies. In 1998, the manufacturing
company fabricated shoes with high cost imported shoe components for one of our
customers. The selling price of these shoes was approximately double that of the
other shoes produced, resulting in a sharp increase in average selling price in
1998 versus 1999. The lack of working capital in 1999 prevented the company from
seeking additional business from existing customers and from pursuing new
customers as the company lacked adequate funding needed to support the resulting
increases in receivables and inventories.
Gross profit decreased to 5.3 % of sales in 1999 versus 18.8% of sales
in 1998. In 1999, the company paid higher raw material and shipping costs due to
insufficient cash to purchase materials in economic quantities. Direct labor and
overhead costs increased due to inadequate financing that has inhibited the
company from operating in an efficient and profitable manner creating
inefficiencies in staffing and equipment utilization. In December of 1999 the
company reconfigured its production environment to modular manufacturing to
provide more efficient and versatile production.
Selling, general and administrative expenses increased to 28% in 1999
from 24% in 1998 due in part to the reduction in sales as well as the impact of
modest wage increases.
Extraordinary income in both years resulted from gains from settlement
of debt to creditors with the largest amount being $3,756,098 in 1999 for the
reduction of debt owed to Banco Bilbao Vizcaya Mexico, S.A. Net interest expense
declined from $409,158 in 1998 to $233,842 in 1999 due primarily to the impact
of the bank debt restructuring. Other, net expense in 1999 of $221,996 was
mainly for the recording of penalties and charges on taxes and import duties
owed to the Mexican government. These are part of the taxes, penalties and
charges that the company is disputing as discussed in Liquidity and Capital
Resources.
Comparison of Quarters Ended March 31, 2000 and 1999
Net sales increased 17.8% due to the introduction of the L.A. Gear
product line in June 1999 and expansion of the Lotto product line. Gross profit
increased to 15.7% from 5.1% of net sales mainly due to sales volume and margin
improvements at the distribution companies and a reduction in labor costs at the
manufacturing company.
The manufacturing operations accounted for the majority of the losses
in these periods. New plant management was hired to implement a modular
production configuration, and significant one-time training and implementation
costs were incurred during the 2000 first quarter. Operating loss declined by
$150,205 in the 2000 quarter versus the 1999 quarter.
The 1999 first quarter includes a translation gain of $183,547 whereas
the 2000 quarter has a translation loss of $2,896. Interest expense declined by
$90,896 due to the settlement of bank debt.
Recent Developments
The company had a sales increase of approximately 70% in the second
quarter ended June 30, 2000, reaching total net sales in excess of $2 million
for the quarter, as compared to net sales of $1,205,402 in the quarter ended
March 31, 2000. The major part of this growth was due to the establishment of
letters of credit through a credit facility provided by Robert E. Schmidt Jr., a
director, which allowed the company to import a significant quantity of Lotto
soccer shoes for sale to our retailers and distributors.
The sales at our distribution companies have been impaired due to a
lack of working capital to finance purchases, which has limited the availability
of product to sell to our distributors. As a result of the above-mentioned
credit facility we have placed orders for approximately 200,000 pairs of
imported Lotto soccer shoes for sale in the year 2000, which should allow us to
increase our sales in the full year 2000 as reflected in the second quarter
sales. These purchases should enable us to sell more shoes in 2000 than the
approximately 56,000 pairs sold in 1999.
We have not been able to initiate the distribution of imported L.A.
Gear athletic footwear due to the lack of financing; however, letters of credit
have recently been established through the above mentioned credit facility. We
expect to receive our first 10,000 pairs of imported L.A. Gear athletic footwear
in September 2000 to complement other models to be manufactured in our Zacatecas
plant beginning in October.
Liquidity and Capital Resources
The company's cash position at March 31, 2000 was $386,571 of available
cash compared to $242,809 at March 31,1999. The increase was due primarily to
faster collection of receivables resulting from a more aggressive receivable
management and collection program implemented in January 2000.
The company has financed its working capital requirements since October
1999 principally through borrowings from Schmidt International. The company
borrowed $750,000 in December 1999 to settle debt with Banco Bilbao Vizcaya
Mexico, S.A. with a gain of $3,756,098 recorded in 1999 and in addition borrowed
approximately $450,000 in 1999 and $400,000 in the quarter ended March 31, 2000
for the payment of certain debt obligations, resulting in settlements favorable
to the company, and other working capital purposes. Schmidt International has
committed to loaning the company a total of $2,600,000, of which approximately
$200,000 was not borrowed as of August 14, 2000. This loan matures on October
31, 2000. Management believes that it will be able to negotiate an extension if
the initial public offering is not consummated before October 31, 2000 and that
the remaining $200,000 loan commitment together with the cash flow from
operations will be adequate to fund operations until the initial public offering
is closed.
Net proceeds of approximately $8,500,000 from this offering will be
used to pay the debt owed to Schmidt International, purchase manufacturing
equipment, and for general working capital and corporate purposes and to make
acquisitions if an appropriate target company becomes available. If the initial
public offering is not successful, the Company must negotiate an extension with
Schmidt International and may ultimately need to find alternative sources to
finance its working capital requirements.
Current liabilities exceeded current assets by $2,085,045 at December
31, 1999 and $2,458,120 at March 31, 2000. The decrease in working capital was
mainly due to the loss from operations in the quarter ended March 31, 2000.
Accounts receivable - trade declined $455,705 from December 31, 1999 to
March 31, 2000 due to higher sales in the fourth quarter of 1999 versus the
first quarter of 2000 and increased collection efforts. Accounts receivable
increased by $695,294 from December 31, 1998 to December 31, 1999 due to higher
sales in the fourth quarter of 1999 compared to the fourth quarter 1998 and due
to the impact of our L.A. Gear distribution company which was not operating at
December 31, 1998.
Prepaid expenses increased by $92,562 from December 31, 1999 to March
31, 2000 due to prepaid loan costs that are being amortized to the maturity date
of the loan and payments related to this initial public offering that will be
reclassified to shareholders' equity at the time of the offering. Notes payable
to related parties increased $462,001 between the same dates mainly due to
borrowings from Schmidt International.
Accounts payable - suppliers increased $425,040 from December 31, 1998
to December 31, 1999 due to our L.A. Gear distribution company and payables
related to imported athletic footwear received in December 1999.
Other accounts payable and accrued liabilities increased by $578,631
from December 31, 1998 to December 31, 1999 due mainly to an increase in
customer advances and liabilities related to letters of credit.
Accrued taxes payable of $1,530,928 at March 31, 2000 and $1.355,392 at
December 31, 1999 are principally unpaid payroll and value added taxes and
import duties and related penalties and charges. The company is currently
disputing certain of the import duties and is negotiating a settlement with the
Mexican Government on the total taxes and duties recorded. Although no assurance
can be given, Management believes that it will be successful in negotiating a
significant reduction in the amount recorded. The accrued taxes payable
increased $501,705 from December 31, 1998 to December 31, 1999 due to accruals
for certain duties and taxes as well as unpaid payroll taxes.
The net book value of machinery and equipment decreased approximately
$185,000 from 1998 to 1999 as a result of depreciation. The company made minimal
capital expenditures in 1998 and 1999 due to limited cash.
Seasonality
Sales typically are higher in the second half of the year than the first half
with the fourth quarter normally being the largest sales quarter due to holiday
sales.
Inflation
According to Banco de Mexico, inflation in Mexico was 12.3% and 18.6%
in 1999 and 1998, respectively. The accumulated inflation reported from January
1 to June 30, 2000 was 4.39% in 2000 compared to 7.17% for the same period in
1999. These inflation levels are substantially above the levels experienced in
the United States. Generally, the company has been able to include the effects
of raw material price increases in the selling price of its products, and the
cost of labor has not kept up with the general rate of inflation. Therefore, the
company does not believe that inflation has had a material effect on the results
of operations for the periods presented.
Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes the accounting and reporting standards for all
derivative financial instruments, including those embedded in other contracts,
and for hedging activities. The statement, to be applied prospectively, will be
effective for the company's quarter ending March 31, 2001. The company does not
presently have any derivative financial instruments; however, the company
reserves the right utilize derivative financial instruments in the future.
Forward Looking Statements
Forward-looking statements in this prospectus are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Potential risks and
uncertainties include, but are not limited to: general business and economic
conditions; the competitive pricing environment within the markets which the
company serves; labor interruptions; interruptions in the supply of raw
materials and services; a significant increase in the price of raw materials;
availability of credit from lenders and vendors; government regulations; and a
change in consumer interest for the products which the company sells.
<PAGE>
BUSINESS OF AARICA
General
Through its Mexican subsidiaries, the company currently manufactures
athletic footwear for five international brands: L.A. Gear, Puma, Wilson,
K-Swiss and Lotto, pursuant to purchase orders from those companies. Aarica also
is the designer and exclusive distributor in Mexico for L.A. Gear and Lotto for
sportswear, athletic footwear and accessories. Beginning in January 2000, the
company began importing Lotto athletic shoes from Asia to complement existing
lines manufactured in its Nasco facility. The company has also recently
contracted with Asian manufacturers for the production of certain models of L.A.
Gear athletic footwear.
History
The Company commenced business in 1990 with the establishment in Mexico of
Aarica Sport, S. A. de C. V. ("Aarica Sport") as the exclusive licensor and
distributor of the Italian brand Lotto by Carol Kolozs. The organization of
Aarica Sport was an outgrowth of Mr. Kolozs' prior business experience in owning
and operating Lotto Southeast in the United States, which distributed Lotto
products from 1981 to 1985.
The evolution of the Mexican market was advanced with the establishment of
the North American Free Trade Agreement ("NAFTA") in the early 1990s. Mr.
Kolozs' strategy was to establish the Lotto brand in Mexico through the
importation of Asian-manufactured products and, once established, to transition
from imported products to domestically (Mexican) made products. The culmination
of this strategy came in early 1992 with the structuring of a joint venture
agreement with a Taiwanese group which resulted in the establishment of Taimex
Industries, S. A. de C. V., ("Taimex") to manufacture athletic footwear in a
modern manufacturing facility in the Mexican State of Zacatecas. Mr. Kolozs
subsequently bought out the Taiwanese group. The company's shoe manufacturing is
currently conducted through a new subsidiary, North America Shoe Corporation, S.
A. de C. V. ("Nasco"), which utilizes the Taimex facility.
The Taimex plant, a 100,000 square foot manufacturing facility
constructed to the company's specifications, commenced operations in 1994 with a
contract from Wal-Mart for the production of athletic footwear. This contract
resulted in the export of 1.2 million pairs of shoes to Wal-Mart stores in the
United States over a two and one-half year period. The Wal-Mart contract
provided experience in high volume production and even though marginally
profitable, the contract provided training and established the platform for the
current production of more sophisticated international brands.
The Mexican economy in 1994 was not prepared to effectively compete in a
global environment. This resulted in a disproportionate balance of trade, and it
became evident that imports from non-treaty countries would have to be halted or
greatly diminished. For all footwear that originated in China, a compensatory
duty was implemented. Other duty and non-duty barriers were put into effect,
which halted imports of footwear, virtually eliminating international brands
from the Mexican market. At the same time, the Mexican government stopped
artificially supporting its currency, which resulted in a re-structuring of the
country's economy. This set the stage for domestic production of various
products.
In March 1998, the company entered into a license agreement with L.A.
Gear, Inc. of Los Angeles, California which granted the company the right to use
the L.A. Gear name and trademark in Mexico. We offer a broad spectrum of fashion
athletic products to ladies and children due to L.A. Gear's strong brand
identification among these market segments.
Market Segments
The athletic footwear market can be divided into four segments: the
brand, the manufacturer, the distributor, and the retailer. Brands are companies
such as New Balance, Wilson, K-Swiss and Lotto. Their primary concerns are
product design and marketing. The manufacturers are responsible for making the
products. Virtually all of the major brands outsource their manufacturing to
independent contractors. Distributors are responsible for establishing
relationships with retailers and for transporting the product to the retailer.
Retailers sell the end product to the consumer.
Most of the international brands (Nike, Reebok, Fila, New Balance, Puma,
Lotto, L.A. Gear, K-Swiss and Vans) are available in the market in Mexico and
are sold in first-tier retail outlets including sports specialty stores,
department stores, and shoe or apparel stores. In Mexico, management believes
there are approximately 2,500 such retail outlets, which reach approximately 45%
of the population. The distribution strategy of the company in Mexico is to
license complementary brands which offer niche market competitive advantages,
for example Lotto for soccer, Mexico's number one sport, L.A. Gear for women's
athletics and men's casual, and L.A. Lights, a sub-brand of L.A. Gear, for
children's lighted footwear. Athletic shoes, although produced for sports, are
also worn as a casual statement or as an expression of fashion. This social
statement and status, represented by the wearing of branded products, as in the
United States, is significant, and forms a part of the everyday expression of
the younger Latin population. The company competes principally on sales price
and the performance and name recognition of the brands that it offers in these
niche markets.
Business Strategy
<TABLE>
<S> <C>
The company's business strategy will be:
o to utilize its modern manufacturing facilities in Mexico for the production of high quality,
internationally branded athletic footwear and accessories;
o to develop new licensing agreements with internationally recognized brand name companies for the
manufacture and distribution of their products;
o to develop in-house brands for distribution to niche markets;
o to expand the distribution, throughout the United States, Latin America and Canada, of its licensed and
manufactured products; and
o to identify a brand name or product for acquisition that would offer
distribution possibilities throughout the world.
</TABLE>
Though our manufacturing operation was originally structured to be a
resource for manufacturing athletic footwear for a variety of customer/brands,
it has always been the company's strategy to utilize this resource to enhance
its own distribution. This process was delayed due to financial and capital
deficiencies experienced after the Mexican financial crises of 1995. It is
currently the intention of management to utilize its manufacturing capacity to
increase profitability by producing more products for its own distribution.
Mexico has aggressively exploited the free trade agreements recently
adopted. Since the onset of the North American Free Trade Agreement in 1990, the
first free trade agreement entered into by Mexico, which included the United
States and Canada, Mexico has aggressively concluded agreements with Bolivia,
Chile, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua,
Venezuela, Israel and the European community, which went into effect on July 1,
2000.
The company believes that the above mentioned free trade agreements,
together with the democratization process occuring within Mexico, evidenced by
the winning of the July 2000 presidential elections by the opposition party for
the first time in 71 years, will result in increased growth and investment in
Mexico, which will be beneficial to the company.
Manufacturing
The company manufactures high-quality athletic footwear pursuant to
purchase orders with Lotto, K-Swiss, Wilson, L.A. Gear, and Puma, through its
wholly owned subsidiary, Nasco. The Nasco manufacturing facility consists of a
100,000 square foot building on nine acres of land housing manufacturing
operations, offices and dormitories for the company's foreign technicians. The
complex was built in 1994 to the company's specifications pursuant to an
agreement with the State of Zacatecas and leased back to the company. The
facility includes state-of-the-art manufacturing equipment purchased from Taiwan
which enables the company to manufacture most types of footwear composed of a
synthetic sole, glued and stitched to a variety of uppers (including athletic
footwear, work shoes, casual shoes and outdoor and hiking footwear). Other than
dress shoes and cowboy boots, this type of construction is considered to be at
the high end of the value scale for these categories. The facility is located in
a rural, agricultural area that provides a low-cost work force. The
manufacturing of functional athletic footwear under international standards is a
complex and difficult process, and very labor intensive. Most products require
the sourcing of as many as twenty-five different materials and components which
must meet all specifications and quality standards. Transformation to a finished
product may take as many as eighty operations. Regional companies capable of
providing this service within acceptable quality standards in an efficient and
cost-effective basis are in great demand. Nasco's training and experience has
been significant in obtaining sales to international sports brands, and the
company intends to continue its technical development in search of new and
profitable sales opportunities.
The company has space and equipment to produce 90,000 pairs of shoes
per month in a normal 45 hour work week with a single production shift. The
company could either hire additional employees or purchase equipment in lieu of
hiring employees to achieve a monthly production level of 90,000 pairs of shoes
per month. Although the company has achieved a production level of 60,000 pairs
of shoes per month, it is currently producing approximately 20,000-25,000 pairs
of shoes per month due to financial constraints and a shift in corporate
strategy. In 1997, the company ceased producing large orders of simpler less
expensive shoes and sandals to customers such as Wal-Mart Stores, Inc. and began
producing more complex value added athletic footwear which requires more
operations and a greater variety of models. In December 1999, the company
reconfigured its plant from mass production lines to production modules that
permit greater production flexibility. The plant reconfiguration has resulted in
greater output per employee, cross training, and the ability to efficiently
produce a greater variety of models at the same time.
The company intends to use approximately $250,000 of the proceeds from
this offering to purchase automated stitching equipment to further increase the
manufacturing productivity. The company believes that it has sufficient
production capacity to meet current and projected demand for its current product
lines.
Distribution
The company is the exclusive manufacturer and distributor of the
Italian brand Lotto for athletic footwear, sports wear and accessories in Mexico
pursuant to a license agreement with Lotto originally entered into in 1990. The
company's Lotto footwear products are manufactured primarily at the Nasco
facility and distributed in Mexico through the company's 99%-owned subsidiary,
Aarica Sport, S. A. de C. V. The company distributes these products primarily to
sport boutique outlets and department stores. Beginning in January 2000, the
company began importing from Asia certain models of Lotto athletic footwear to
complement existing models manufactured at its Nasco plant.
We have an exclusive license agreement with L.A. Gear, Inc.
for the design, manufacture and distribution of L.A. Gear shoes, accessories and
clothing in Mexico. L.A. Gear products are sold through the same channels of
distribution as our Lotto products. We have not been able to initiate the
distribution of imported L.A.Gear athletic footwear due to the lack of
financing; however, letters of credit have recently been established. We expect
to receive our first 10,000 pairs of imported L.A.Gear athletic footwear in
September 2000 to complement other models to be manufactured in our Nasco plant
beginning in October 2000.
We sell our products through an in-house sales force consisting of a
national sales manager and seven representatives that are paid primarily on a
commission basis. The company has established sales regions in Mexico. Sales
regions and accounts are assigned to salesmen based upon their experience and
past success. The internal sales force is directly responsible for calling on
the retail trade locations in Mexico, which consist primarily of department
stores, sport boutique shops, specialty stores and shoe stores. Orders are
received by the responsible salesman and forwarded to administrative support
personnel for processing. Orders in the vicinity of Mexico City are delivered by
the company and orders outside of the Mexico City area are shipped by freight,
collect. Shipments outside the country are normally paid in advance or supported
by letters of credit.
Design
Aarica Sport employs six persons in our Mexico City offices who spend full
time on the design of sportswear, such as work-out clothing, jackets, training
and running apparel, athletic carrying bags and athletic accessories such as
soccer shin guards and goalie gloves for L.A. Gear and Lotto. These items are
manufactured for us in Mexico for distribution through our subsidiaries, West
Coast Sports S.A. de C.V. (L.A. Gear) and Aarica Sport (Lotto).
Other Products
The company currently manufactures sports accessories such as goalie
gloves and shin guards for soccer, at the Nasco facility for distribution under
the Lotto brand name and intends to expand its manufactured products. Current
plans include the development of a product line of shin guards and goalie gloves
under the house brand "Aspro", to be marketed directly to retailers in the
United States, Canada and Latin America. Aspro Sports Products Manufacturing, S.
A. de C. V. ("Aspro") was organized in 1997 to produce the accessories sold by
Aarica Sport and to develop additional accessories for sale in Mexico and the
United States. Management intends to concentrate on products that are compatible
with products currently produced. The company's license agreements do not
restrict the company from manufacturing or distributing products that compete
with like category products covered by the license agreements.
License Agreements
The company currently has a license agreement with Lotto for the
manufacture and distribution in Mexico of sportswear, athletic footwear and
related accessories. The Lotto license agreement began in 1990 and was renewed
effective July 29, 1998, for an initial term of ten years with an automatic
renewal for an additional ten years. Royalties are payable at 5% of net sales
with minimum royalties of $110,000 for 2000, increasing by approximately 11%
annually. In addition, the company is obligated to spend 4% of net sales on
advertising, sales and promotion of Lotto products in the licensed territory.
The company entered into an exclusive license agreement with L.A. Gear
in March 1998, amended in November 1999, for the manufacture and distribution in
Mexico and the United States of L.A. Gear footwear, apparel and related
accessories. The L.A. Gear license agreement was entered into for an initial
term of five years with an automatic renewal for five years. Royalties are
payable at 4% of net sales, with minimum royalties of $75,000 in 2000, $100,000
in 2001, $150,000 in 2002 and $200,000 annually thereafter.
<PAGE>
Raw Materials
The Mexican footwear manufacturing industry is in an expansion mode and
the infrastructure supporting raw material suppliers has been expanded and
upgraded for the development of more complete and sophisticated product lines.
The company has three suppliers that individually account for 13% or more of
total raw material purchases. The materials provided by these suppliers are
available from other sources within Mexico. The principal raw materials used by
the company in the manufacture of athletic shoes are leather, woven and
non-woven fabrics for shoe covering, pvc coated materials and foam padding. Most
raw materials necessary to manufacture athletic footwear are available today in
Mexico. All raw materials utilized by the company have multiple sources of
supply, and Management believes that the loss of any particular supplier would
not create an undue hardship on the company. There are few limitations in the
importing of raw materials from non-treaty countries, and no limitations in
purchasing from treaty countries such as the United States and Canada. The only
major component the company currently purchases outside of Mexico is the
outsole, which is imported from Asia with a 13% import duty. Outsoles are
shipped by boat on a minimum 60-day delivery schedule. If the company is able to
develop production on Nasco's assembly lines to meet Management's objective for
economy of scale, the company would add an out-sole production facility to its
manufacturing plant. The in-house production of outsoles would provide greater
flexibility, greater control over delivery schedules, and a reduction in costs.
In-house production would enable the company to sell excess production in the
local market providing an additional source of revenue.
Trademarks
The company uses the tradenames and trademarks "Aarica" in the
categories of footwear, clothing and accessories. The tradenames and trademarks
were registered in Mexico by Mr. Kolozs, who assigned the registrations to the
company.
Competition
The company competes in Mexico with a number of major brands such as
Nike, Fila, Reebok and other local distributors for market share in its
distribution operations. These major brands and some of the local brands have
greater financial, marketing and sales resources than the company. The company's
major brand competitors in distribution do not have facilities in Mexico for the
manufacture of athletic footwear, the company's principal product. Management
believes its modern manufacturing facility at Nasco gives it the ability to
produce a greater variety of products than its competitors and offer more
competitive pricing. In addition, the company competes favorably on the basis of
pricing due to its Mexican based manufacturing and its high level of vertical
integration. The company's principal competition, from a manufacturing
perspective, is from Southeast Asian based footwear manufacturers. Management
believes that the company's cost of production compares favorably to these
competitors due to tariffs on goods imported from Southeast Asia.
Properties
The company's commercial and distribution offices are located in Mexico
City in a 40,000 square foot facility which also houses its marketing, sales,
administrative, financial support, warehousing, product development and
distribution operations. The current lease expires on September 30, 2005, with
an annual rental of approximately $96,000 plus an added value tax, plus annual
inflation increases. The company has an option to purchase the property for
$1,000,000. The company considers this facility adequate for the foreseeable
future. The company's United States office is based in Maitland, Florida
consisting of approximately 1,500 square feet of executive office space at an
annual rental of $8,000, one-half of which is paid by Mr. Kolozs, who also uses
the space for personal purposes.
The company manufactures its products in a 90,000 square foot facility
in the State of Zacatecas, Mexico. The Government of Zacatecas arranged for the
facility to be built on behalf of the company and the company executed a lease
agreement which provided for an annual rental cost of approximately $100,000.
From the inception of the lease, the company has been able to successfully
negotiate a waiver of the rental payments through June 1999. The company is
seeking a formal waiver of the rent for the years subsequent to June 1999. In
the event the company is required to begin paying rent, the annual rental will
be approximately $100,000, plus an added value tax, plus annual inflation
increases under a lease agreement which expires in April 2000 but provides for a
one year extension.
Company Policy on Prison and Child Labor
It is the company's policy to ask its vendors to sign an agreement that
they do not use child or prison labor in the manufacture of goods sold to the
company.
Mexican Regulatory Matters
Environmental Regulation
The company is subject to the provisions of the Ley General de
Equilibrio Ecologico y Proteccion al Ambiente (the General Law on Ecology and
Protection of the Environment, or the "Environmental Law"), the regulations
issued thereunder and several technical environmental norms issued by the
Secretaria de Ambiente, Recursos Naturales y Pesca (Ministry of the
Environmental, Natural Resources and Fisheries or "SEMARNAP"), which is the
federal ministry in Mexico in charge of supervising and regulating environmental
matters. The SEMARNAP is, in turn, assisted by other governmental authorities
such as the Secretaria de Salud (Ministry of Health), the Secretaria de
Comunicacion y Transportes (Ministry of Transportation and Communications), the
Secretaria de Marina (Secretary of Navy) and the Transportation and
Communications), the Secretaria de Marina (Secretary of Navy) and the Secretaria
de Energia (Ministry of Energy). In addition, the company is subject to
environmental laws and regulations issued by the governments of each of the
states of Mexico in which its facilities are located.
The Environmental Law and regulations thereunder require that
authorizations be obtained from SEMARNAP prior to carrying out any activity that
may have an adverse impact on the environment. In particular, these
environmental regulations address chemical, petrochemical and oil refining
activities as well as the construction of gas pipelines. In order to obtain
authorization, SEMARNAP requires the submission of an environmental impact
analysis based upon such analysis and other information it may request. SEMARNAP
is entitled to grant or deny its authorization for any activity.
Since the enactment of the Environmental Law, several technical
environmental regulations have been issued. These regulations are applicable to
Mexican industry in general, and specifically set forth, among other things,
permissible levels of emissions, water discharges and hazardous substances
discharges as well as atmospheric pollution levels. Other technical regulations
are issued for specific industries. The Mexican environmental regulatory
framework is generally updated and revised annually.
There are currently no material legal or administrative proceedings
pending against the Company with respect to any environmental matters, and
management does not believe that continued compliance with environmental laws
will have a material adverse effect on the Company's financial condition or
results of operations.
The Company does not expect that the cost of maintaining compliance
with environmental laws or environmental requirements related to NAFTA or the
recent admission of Mexico to the Organization for Economic Cooperation and
Development will cause a significant increase in the Company's environmental
expenditures.
Foreign Investment Legislation
Foreign investment in the capital stock of Mexican companies is
regulated by the 1993 Ley de Inversion Extranjera (the "Foreign Investment Law")
and the 1998 Regulations applicable thereto (the "Foreign Investment
Regulations"). Under the Foreign Investment Law, foreign investment is defined,
in general, as (i) the participation of foreign investors in the capital stock
of Mexican corporations, or investments made therein by a Mexican corporation in
which the foreign capital has a majority participation, and (ii) the
participation of foreign investors in certain activities regulated by the
Foreign Investment Law. Foreign investors are defined as individuals or entities
that are not Mexican nationals. The Comision Nacional de Inversiones Extranjeras
(the Foreign Investment Commission) and the Registro Nacional de Inversiones
Extranjeras (the National Registry of Foreign Investments) of the Secretaria de
Comercio y Fomento Industrial (the Ministry of Commerce and Industrial
Development) are responsible for the administration of the Foreign Investment
Law and the Foreign Investment Regulations.
As a general rule, the Foreign Investment Law allows foreign investment
in the capital stock of Mexican companies except those engaged in certain
specified restricted industries. The company is not restricted as to ownership
of subsidiaries in Mexico.
Mexican federal law requires that each Mexican corporation shall have
at least two shareholders.
Employees
At March 31, 2000, the Company had approximately 460 administrative,
sales, design and production employees.
Union Contract and Labor Relations
With approximately 320 unionized workers, Nasco is the largest employer
among the company and its subsidiaries. Nasco employees are affiliated with
Confederacion de Trabajadores Mexicanos ("CTM"), the largest union in Mexico.
The collective bargaining agreement between Nasco and CTM provides for yearly
negotiations in the month of October, alternating between negotiations on wages
in one year and benefits under the contract in the next year. Daily wages are
categorized as (i) $3.30 for (A) category workers, (ii) $3.60 for (B) category
-workers, and (iii) $4.15 for (C) category workers. Under the union contract,
these wages are paid for seven days, although a normal work week consists of 45
hours. In addition, an on time and daily attendance bonus of $8.00 and food
coupons worth $12.00 are provided monthly. Vacations range from one week for the
first year to two weeks during the fourth year, and thereafter a bonus of 25% of
base wages is added to vacation pay. Mexican labor laws mandate a bonus of 15
days to be paid on or before December 18 of each year. Under the union contract
with Nasco, this bonus was extended to 17 days. Additionally, mandated social
benefits, such as social security, housing subsidies and retirement funds are
calculated at approximately 30% of base salary.
The Company has a good working relationship with the union and its
employees and has never experienced a work stoppage.
Mexican Labor Laws
Employee Severance Benefits
In accordance with Mexican labor law, the company is liable for
separation payments, which consist of the payment of three months plus 20 days
of salary for each year of service to employees terminating under certain
circumstances.
The Company is also liable for seniority premium payments of 12 days of
salary (up to a maximum of twice the minimum wage) for each year of service to
employees who (i) retire or are terminated, once they have reached 15 years of
service with the company; and (ii) are terminated under certain circumstances,
with no seniority requirement. The majority of the company's employees have been
recently hired and the potential seniority premium liability is not considered
significant.
Employee Profit-Sharing
The Mexican companies are subject to statutory employee profit sharing
at a rate of 10% based on taxable income, after certain adjustments, primarily
to exclude the effects of restated depreciation and the tax gain or loss from
monetary position. The amount for 1999 was approximately $4,500. There were no
distributions in 1998.
ADDITIONAL INFORMATION
Aarica has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. We have filed with the
Securities and Exchange Commission a registration statement on Form SB-2
(including any amendments thereto) under the Securities Act with respect to the
units offered. This prospectus does not contain all of the information,
exhibits, and schedules contained in the registration statement. For further
information about Aarica and the units, read the registration statement, the
exhibits and any schedules attached. Statements made in this prospectus
regarding the contents of any contract or document filed as an exhibit to the
registration statement are not necessarily complete and, in each instance, you
are referred to a copy of each contract, document or exhibit filed with the
registration statement. Each such statement is qualified in its entirety by such
reference. The registration statement, the exhibits, and the schedules filed
with the Commission may be inspected, without charge, at the Commission's public
reference facilities. These facilities are located at
o Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549; o
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661; and o Suite 1300, Seven World Trade Center, New York, New York
10048.
Copies of the materials may also be obtained at prescribed rates by
writing to the Commission, Public Reference Section, 450 Fifth Street, NW,
Washington, D.C. 20549. The Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission at http://www.sec.gov.
As a result of this offering, Aarica will become subject to the
reporting requirements of the Exchange Act. Therefore, we will file periodic
reports, proxy statements, and other information with the Commission. Following
the end of each calendar year, we will furnish our shareholders with annual
reports containing audited consolidated financial statements certified by
independent public accountants and proxy statements. For the first three
quarters of each calendar year, we will provide quarterly reports containing
unaudited consolidated financial information.
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the Company's
directors and executive officers at June 30, 2000.
<TABLE>
<S> <C> <C> <C>
Name Title Age
---- ----- ---
Carol Kolozs President, Director 53
John J. Stitz Secretary, Treasurer, Chief Financial Officer 44
James Schnorf (1) Director, Assistant Secretary 46
Patrick L. M. Williams (2) Director 60
Robert E. Schmidt, Jr. (3) Director 60
--------------
(1) Chairman of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee and Compensation Committee.
</TABLE>
Our directors are elected at each annual meeting of shareholders. The
officers are appointed annually by the board of directors. Officers and
directors hold office until their respective successors are elected and
qualified or until their earlier resignation or removal.
Carol Kolozs is the founder and has been President and a director of
the company since its organization in November 1998 and has held such positions
with the Mexican subsidiaries since their organization in 1990. Mr. Kolozs has
over 30 years experience in the United States and Mexico in domestic and
international business ventures. From 1981 to 1985 Mr. Kolozs was owner of Lotto
Southeast, a company that represented Lotto products in the Southeastern United
States, where he was responsible for sales, marketing, and promotion of Lotto
products. Lotto Southeast and Lotto U.S.A. were sold to HH Brown Shoe Company, a
major United States footwear company, in 1985. Because of this association with
Lotto, in 1989 Lotto offered Mr. Kolozs a license to distribute Lotto athletic
footwear, clothing and accessories in Mexico. This license led to Mr. Kolozs
founding Aarica Sport in 1990 as the first phase of an integrated business in
Mexico for the manufacture and distribution of branded athletic products in
Mexico, the United States and Latin America. He was awarded the "Palmas de Oro"
(Golden Palms) Industrialist of the Year Award for all of Mexico in 1995 for his
pioneering and development of Aarica' business concepts. Mr. Kolozs is a United
States citizen and is bi-lingual in English and Spanish.
John J. Stitz was appointed Secretary, Treasurer and Chief Financial
Officer of the company in June 2000. Mr. Stitz was Vice President and Chief
Financial Officer of RVM Industries, Inc., a publicly traded holding company in
Akron, Ohio engaged through its subsidiaries in the manufacture of aluminum
truck trailers, aluminum billets and extrusions and street signs. Mr. Stitz has
over 15 years experience in financial management positions and six years as
audit manager with a national accounting firm. His experience includes SEC
reporting, consolidations and foreign currency translations. He is a Certified
Public Accountant with a B. S. degree in Accountancy from Wake Forest University
and an MBA from The Wharton School of the University of Pennsylvania. Mr. Stitz
is bi-lingual in English and Spanish. He relocated to Mexico City in June 2000.
James Schnorf was elected a Director and Secretary of the company in
February 1999. He resigned as Secretary with the appointment of Mr. Stitz. He
has been the Chief Financial Officer of Continental Capital & Equity Corporation
("Continental") since February 1998 and also serves as the General Manager.
Continental is a financial public relations firm based in Longwood, Florida. His
responsibilities include activities involving financing, taxes operations, risk
management, management information systems, strategic agreements,
mergers/acquisitions, and human resource matters. He possesses approximately ten
years' experience from 1976 to 1985 in various managerial capacities at
Caterpillar, Inc. a Fortune 100 manufacturer of earth moving equipment and
diesel engines. Mr. Schnorf's experience also includes controller
responsibilities from 1986 to 1987 for a division of Sequa Corp., a New York
Stock Exchange entity specializing in the aerospace industry. From 1988 through
1995, Mr. Schnorf served as Chief Financial Officer and Secretary-Treasurer of
Stevens Industries, Inc., a large manufacturer/distributor of laminate wood
products. Before joining Continental, Mr. Schnorf was the Chief Executive
Officer of Cardinal Capital, L.L.C., a limited liability company responsible for
managing a fund that provides mezzanine financing and which takes controlling
interest positions in emerging growth companies.. Mr. Schnorf earned a BS degree
in accounting from Eastern Illinois University and an MBA from the University of
Illinois. Certified as a CPA and CMA, Mr. Schnorf is an active member of the
Mensa Society, the Institute of Certified Management Accountants, the American
Institute of Certified Public Accountants, and the Financial Executives
Institute. Mr. Schnorf is a past President of the Eastern Illinois University
School of Business Advisory Board and a past member of the University of
Illinois Executive MBA Alumni Association Board of Directors and was elected as
the Year 2000 Distinguished Alumnus of the Eastern Illinois University School of
Business.
Patrick L. M. Williams was elected a director of the company in February
1999. Since June 1986, he has been Senior Executive Vice President of RDV
Sports, Inc., Orlando, Florida. RDV Sports is the parent company of the Orlando
Magic basketball team of the National Basketball Association, the Solar Bears of
the International Hockey League and the Orlando Miracle of the Women's National
Basketball League. Mr. Williams is responsible for administration, promotional
and public relations activities for all teams owned by the parent company. In
1996, he was named one of the 50 most influential people in NBA history by a
national publication. Mr. Williams also spent seven years in the Philadelphia
Phillies organization of the National Baseball League, two as a player and five
in the front office and was employed in the Minnesota Twins baseball
organization for three years. Mr. Williams holds a bachelors degree in Physical
Education from Wake Forest University and a masters degree in Physical Education
from Indiana University.
Robert E. Schmidt, Jr. was elected a director of the company in April 2000.
Mr. Schmidt is Chief Executive Officer of Boulder Venture, Inc., headquartered
in Milwaukee, Wisconsin with offices in Tampa and Ft. Lauderdale, Florida,
Phoenix, Arizona and Denver, Colorado. Mr. Schmidt has operated under various
company names since 1963 and continues to do so. In 1980, Mr. Schmidt formed a
real estate development and construction company known as Corporate Development.
The name Boulder Venture, Inc. ("Boulder Venture") was adopted in 1996. Boulder
Venture is currently engaged in commercial real estate development on a national
scale. Boulder Venture, directly or through various entities owned and
controlled by Mr. Schmidt, has assets in excess of $140 million. Boulder Venture
manages all properties in-house. The portfolio includes: Walgreens, 7-Eleven,
Staples, Winn Dixie, Publix, Smiths, and ABCO (all food stores), Starbucks, Sams
Clubs, Sears, Best Buy, Barnes and Noble, as well as apartment buildings, office
buildings and other commercial properties. Mr. Schmidt is a past board member of
the Metropolitan Builders Association of Greater Milwaukee, and a past member of
NAHB Multi Family and Commercial Building Council.
Advisory Board; Audit and Compensation Committees
The board of directors established an Advisory Board on April 12, 2000 and
named Robert E. Schmidt, III, Chairman. It is anticipated that the company will
add additional members to the Advisory Board and to activate the board upon
completion of this offering. The duties of the Advisory Board and the Audit and
Compensation Committees will be established at a later date. Robert E. Schmidt,
III is the son of Robert E. Schmidt, Jr. He has been with Boulder Venture, Inc.
for over ten years. and currently is President of the firm. Mr. Schmidt, III
graduated from the University of Colorado in 1989, with a major in Economics.
Significant Employee
Emanuel Bartoni, 29, has been employed by the company in its Mexico City
offices since 1993 in various capacities. He was appointed Commercial Director
of Aarica Sport S.A. de C.V. in 1995 and is responsible for the development of
all products distributed by the company as well as procurement and marketing
strategies. Mr. Bartoni is a citizen of Italy and was a consultant to Lotto S.
p. A., Italy, from August 1992 until October 1993 for new product development
and distribution of soccer footwear, clothing and accessories in Europe. From
September 1991 to October 1992 he helped develop and coordinate logistics and
publicity for Adidas, Italy, for the Olympic Games in Barcelona, Spain.
Executive Compensation
The following table sets forth the compensation awarded to, earned by,
or paid to the chief executive officer (the "Named Executive Officer") for
services rendered to the Company's subsidiaries in all capacities for the fiscal
years ended December 31, 1998 and 1999. No other executive officer was paid more
than $100,000 in salary and bonus for such fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Annual Compensation All Other
<S> <C> <C> <C> <C>
Principal Position Fiscal Year Salary Bonus Compensation
------------------ ----------- ------ ----- -------------
Carol Kolozs, President December 31, 1999 $148,000 - -
December 31, 1998 $148,000 - -
December 31, 1997 $148,000 - -
</TABLE>
The company recently hired John Stitz as Secretary, Treasurer and Chief
Financial Officer at a base salary of $100,000 per year and intends to hire one
or more vice-presidents and other executives. It is not anticipated that any one
executive to be hired will be compensated at an annual rate in excess of
$100,000. Compensation of Directors
Directors who are employees of the company will not receive any
remuneration in their capacity as directors. Outside directors will receive an
annual retainer of $5,000 and $1,000 per meeting attended, $1,000 for chairing a
committee of the board of directors, and $500 for each committee meeting
attended. No compensation will be paid for telephonic meetings of the board or a
committee. Outside directors may elect to receive an additional 5,000 options in
lieu of the $5,000 annual retainer. As of the date hereof, Messrs. Schnorf,
Williams and Schmidt have each elected to take the additional 5,000 options at
the offering price of the Units in this offering in lieu of their $5,000 annual
retainer. Outside directors will also participate in the company's stock
option/share plan.
Stock Compensation Plan
In April 2000, the company adopted a stock compensation plan for key
employees and directors pursuant to which such individuals may be granted
options/shares involving an aggregate of up to 350,000 shares of common stock.
Under the plan, shares of common stock may be granted as incentive compensation
to employees, officers, directors, and advisor to the company or any parent,
subsidiary or affiliate of the company.
The number of shares reserved and the shares granted are subject to
adjustment in the event of any subdivision, combination, or reclassification of
shares. The plan will terminate in 2010. Either incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options, or both may be granted at the discretion of the board of
directors or a committee of the board of directors. The exercise price of any
incentive option will not be less than the fair market value of the shares at
the time the option is granted. The options granted are exercisable within the
times or upon the events determined by the board or committee set forth in the
grant, but no option is exercisable beyond ten years from the date of the grant.
The board of directors or committee administering the plan will determine
whether each option is to be an ISO or non-qualified stock option; the number of
shares; the exercise price; the period during which the option may be exercised;
and any other terms and conditions of the option. The holder of an option may
pay the option price in cash, shares of the company with a fair market value
equal to the purchase price, or partly in shares and partly in cash.
The options can only be transferred by will or by the laws of descent
and distribution. Except in the case of death, disability or change in control,
no option shall be exercisable for more than 90 days after an employee ceases to
be an employee unless the employment of the employee was terminated, as
conclusively determined by the committee, due to disloyalty, dishonesty, illegal
conduct, or gross negligence, in which case the option terminates upon
termination of employment. An optionee who was a director or advisor to the
company may at the time of this offering exercise his options at any time within
three years after his status as a director or advisor is terminated to the
extent that he was entitled to exercise his option at such date, unless his
termination was due to death or disability. If an optionee's employment as an
employee, director, or advisor, is terminated because of permanent disability or
death, the committee shall have the right to extend the exercise period for not
longer than five years from the date of termination. An optionee who becomes a
director or advisor after this offering may exercise his options at any time
within one year after his status as a director or advisor is terminated to the
extent that he was entitled to exercise his option at such date, unless his
termination was due to death or disability.
The plan also permits the award of Stock Appreciation Rights to
optionees. The committee may award to an optionee, with respect to each share of
common stock covered by an option, a related SAR permitting the optionee to be
paid the appreciation on the related option. An SAR granted with respect to an
ISO must be granted together with the related option. An SAR granted with
respect to a non-qualified option may be granted together with or subsequent to
the grant of the related option. The exercise of the SAR shall cancel and
terminate the right to purchase an equal number of shares covered by the related
option.
The plan can be amended or terminated at any time. The plan will be
administered by the compensation committee of the board of directors which will
be composed entirely of directors who are "disinterested persons" as defined in
Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The compensation
committee currently consists of Patrick L. M. Williams and Robert E. Schmidt,
Jr. At the date of this prospectus, options to purchase 25,000 shares at the
public offering price of the common stock in this offering have been granted to
each of the directors other than Mr. Kolozs. Such options ae exercisable
immediately. In addition, options to purchase 100,000 shares each have been
granted at the offering price of the common stock in this offering to John J.
Stitz, Chief Financial Officer and Emanuel Bartoni, Commercial Director of
Aarica Sport S.A. de C.V. Such options are exercisable 20% each year beginning
in June 2001.
Indemnification
The company's Articles of Incorporation provide for indemnification of
any director, officer or former director or officer of the corporation to the
fullest extent permitted by the Texas Business Corporation Act which provides
that a corporation may indemnify an individual made a party to a proceeding
because the individual is or was a director or officer against liability in his
official capacity with the corporation, including expenses and legal fees. The
company's By-laws also provide indemnification and, as provided by the Texas
Business Corporation Act, empower the company to purchase and maintain insurance
on behalf of any person who may be indemnified under the Texas Business
Corporation Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to its Articles of Incorporation and By-laws, or
otherwise, the company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the organization of the company, Carol Kolozs,
President and a director of the company, acquired 2,600,000 shares of the
company's Common stock in exchange for 99.9% of the outstanding stock of the
Mexican holding company and the four Mexican subsidiaries. Mexican law requires
that each Mexican corporation shall have at least two shareholders. The company
owns 99.9% of the outstanding common stock of the Mexican holding company, which
owns approximately 99% of the outstanding common stock of three Mexican
subsidiaries and 80% of the outstanding common stock of Aspro. As the other
shareholder, in compliance with Mexican law, Mr. Kolozs' owns one share of the
Mexican holding company and one share of each of the four Mexican subsidiaries.
In April 1998, Continental Capital and Equity Corporation ("CCEC")
extended the company an unsecured revolving line of credit in the amount of
$300,000 which bears interest at an annual rate of 10% on the unpaid principal
balance thereof. The line of credit expired December 31, 1998, but was extended
by CCEC until June 30, 2000. In June 2000, CCEC elected to capitalize the
outstanding balance of approximately $300,000, including unpaid interest, in
exchange for 150,000 shares of the company's stock from the personal holdings of
Carol Kolozs.
James R. Schnorf, an officer and director of CCEC, was elected a director of
the company in February 1999.
For its services related to this offering, CCEC will be paid a
consulting fee equal to two percent of the gross proceeds of this offering,
payable at the closing of the offering. CCEC was paid a fee equal to 200,000
shares of the company's common stock from the personal holdings of Mr. Kolozs
for CCEC's services related to the private offering of common stock by the
company in 1999. Subject to approval of the underwriter, 20% of all CCEC shares
will be freely marketable, and the balance shall have "piggy back" registration
rights. In June 2000, CCEC also was granted an option to purchase 250,000 shares
at $2.00 per share. The company intends to retain CCEC for investor relations
services after completion of this offering at an anticipated cost of $180,000
for a period of at least 12 months. In addition, CCEC may be granted an as yet
undetermined number of options to purchase common stock at prices beginning at
110% to 120% of the offering price of the common stock in this offering.
The company owed Schmidt International $1,478,820 at December 31, 1999.
Robert E. Schmidt, Jr., a member of Schmidt International is a director of the
company. Schmidt International has agreed to provide the company a borrowing
line in an amount up to $2,600,000 and to provide guarantees or to discount
certain letters of credit. The note evidencing the loan bears interest at the
prime rate plus 5% (currently 14.5%), and is secured by the common stock of the
company owned by Carol Kolozs and a lien on certain assets of the company. The
company intends to repay the Schmidt International loan from the proceeds of
this offering.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of August 14, 2000,
regarding the beneficial ownership of the company's Common stock immediately
prior to, and after, the sale of the Securities offered hereby, for o each
person owning beneficially 5% or more of the Common stock, o each director and
executive officer of the company, and o all directors and executive officers of
the company as a group.
<TABLE>
<CAPTION>
Percent Owned
Name and Address of Number of Before After
Beneficial Owner Shares Owned the Offering the Offering
<S> <C> <C> <C>
Carol Kolozs (1) 2,250,000 75.0% 56.3%
195 Wekiva Springs Road
Longwood, Florida 32779
James Schnorf (2) 635,000 19.4 14.9
195 Wekiva Springs Road
Longwood, Florida 32779
Robert E. Schmidt, Jr. (3) 225,000 7.4 5.6
4340 Hillsborough Avenue
Tampa, Florida 33614
Patrick L. M. Williams (4) 25,000 - -
Two Magic Place
8701 Maitland Summit Blvd.
Orlando, Florida 32810
John J. Stitz -0- - -
Lago Chalco No. 156
Col. Anahuac
Mexico, D. F. 11320
All directors and executive officers
as a group (five persons) (5) 3,135,000 94.3% 72.5%
</TABLE>
--------
(1) Shares are pledged as collateral to Schmidt International for loans to the
company from Schmidt International. If the over-allotment option is exercised in
full, Mr. Kolozs' holdings would be 2,175,000 shares or 54.4 %.
(2) Held by CCEC, of which Mr. Schnorf is an officer and director. Includes
options to purchase 250,000 shares at $2.00 per share within 60 days from
the date of this prospectus. Mr. Schnorf disclaims beneficial interest in
the shares held by CCEC. If the over-allotment option is exercised in full,
CCEC's holdings would be 560,000 shares or 14.0%. Mr. Schnorf holds options
to purchase 25,000 shares at the offering price of the shares offered
hereby within 60 days from the date of this prospectus in his capacity as a
director.
(3) Includes options to purchase 25,000 shares at the offering price of the
shares offered hereby within 60 days from the date of this prospectus and
200,000 shares which the company has agreed to issue to Mr. Schmidt.
(4) Includes options to purchase 25,000 shares at the offering price of the
shares offered hereby within 60 days from the date of this prospectus.
(5) If the over-allotment option is exercised in full, holdings would be
2,985,000 shares or 69.0% after the offering.
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the company consists of 20,000,000
shares of common stock, $.01 par value per share, and 3,000,000 shares of
preferred stock, $.01 par value per share. As of June 30, 2000 there were
2,800,000 shares of common stock issued and outstanding and no shares of
preferred stock outstanding. There were 19 holders of the common stock.
Units
Each unit consists of one share of common stock and one warrant which
entitles the holder to purchase one share of common stock at (120% of the
offering price) until 2005. The shares and the warrants included in the units
will automatically separate 30 days from the date of this prospectus, after
which the common stock and warrants in the units will trade separately. If the
over-allotment option is exercised, the selling shareholders will provide the
shares included in the over-allotment units and the company will provide the
warrants and the shares of common stock underlying such warrants.
Common Stock
Shareholders are entitled to share ratably in any dividends paid on the
common stock when, as and if declared by the board of directors. Each share of
common stock is entitled to one vote on matters submitted to shareholders.
Cumulative voting is denied. There are no preemptive or redemption rights
available to shareholders of common stock. Upon liquidation, dissolution or
winding up of Aarica, the holders of common stock are entitled to share ratably
in the net assets legally available for distribution. All outstanding shares of
common stock are, and the shares, the units and the shares underlying the units,
to be issued in this offering will be fully paid and non-assessable.
Redeemable Common Stock Purchase Warrants
The warrants will be issued in registered form under, governed by, and
subject to the terms of a warrant agreement between Aarica and American Stock
Transfer & Trust Company as warrant agent. The following statements are brief
summaries of certain provisions of the warrant agreement. Copies of the warrant
agreement may be obtained from Aarica or the warrant agent and have been filed
with the Commission as an exhibit to the registration statement of which this
prospectus is a part.
Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $________ per share (120% of the offering price per
share) at any time after the common stock and warrants become separately
tradable until ( 5 years from the date of this prospectus). We may reduce the
exercise price of the warrants for a period of at least 20 days. The right to
exercise the warrants will terminate at the close of business on (5 years from
the date of this prospectus). The warrants contain provisions that protect the
warrant holders against dilution by adjustment of the exercise price in certain
events, including but not limited to stock dividends, stock splits,
reclassification or mergers. A warrant holder will not possess any rights as a
shareholder of Aarica. Shares of common stock, when issued upon the exercise of
the warrants in accordance with the terms thereof, will be fully paid and
non-assessable.
At any time after the warrants become separately tradable we may redeem
some or all of the warrants at a call price of $0.05 per warrant, upon thirty
(30) day's prior written notice if the closing sale price of the common stock on
the __________ Exchange has equaled or exceeded (150% of the offering price per
share) for ten (10) consecutive days immediately preceding the notice of
redemption.
The warrants may be exercised only if a current prospectus relating to
the underlying common stock is then in effect and only if the shares are
qualified for sale or exempt from registration under the securities laws of the
state or states in which the purchaser resides. So long as the warrants are
outstanding, we have undertaken to file all post-effective amendments to the
registration statement required to be filed under the Securities Act, and to
take appropriate action under federal law and the securities laws of those
states where the warrants were initially offered to permit the issuance and
resale of the common stock issuable upon exercise of the warrants. However,
there can be no assurance that we will be in a position to effect such action,
and the failure to do so may cause the exercise of the warrants and the resale
or other disposition of the common stock issued upon such exercise to become
unlawful.
Preferred Stock
The board of directors, without further action by the shareholders, is
authorized to issue up to 3,000,000 shares of preferred stock, $.01 par value.
The preferred shares may be issued in one or more series. The terms as to any
series, as relates to any and all of the relative rights and preferences of
shares, including without limitation, preferences, limitations or relative
rights with respect to redemption rights, conversion rights, voting rights,
dividend rights and preferences on liquidation will be determined by the board
of directors. The issuance of preferred stock with voting and conversion rights
could have an adverse affect on the voting power of the holders of the common
stock. The issuance of preferred stock could also decrease the amount of
earnings and assets available for distribution to holders of the common stock.
In addition, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control. We have no plans or commitments to
issue any shares of preferred stock.
Transfer Agent, Registrar and Warrant Agent
The Transfer Agent, Registrar and Warrant Agent for the units, common
stock and warrants will be American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 4,000,000 shares of
common stock issued and outstanding. Of these shares, the 1,000,000 shares sold
in this offering will be freely tradable in the public market without
restriction under the Securities Act, except shares purchased by an "affiliate"
(as defined in the Securities Act) of Aarica. The remaining 2,800,000 shares,
will be "restricted shares" within the meaning of the Securities Act. Restricted
shares cannot be publicly sold unless registered under the Securities Act or
sold in accordance with an applicable exemption from registration, such as that
provided by Rule 144 under the Securities Act.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell restricted shares if at
least one year has passed since the later of the date such shares were acquired
from Aarica or any affiliate of Aarica. Rule 144 provides, however that within
any three-month period such person may only sell up to the greater of 1% of the
then outstanding shares of common stock (approximately 40,000 shares following
the completion of this offering) or the average weekly trading volume in our
shares during the four calendar weeks immediately preceding the date on which
the notice of the sale is filed with the Commission. Sales pursuant to Rule 144
also are subject to certain other requirements relating to manner of sale,
notice of sale and availability of current public information. Anyone who is not
an affiliate for a period of at least 90 days is entitled to sell restricted
shares under Rule 144 without regard to the limitations if at least two years
have passed since the date such shares were acquired from us or any affiliate.
Any affiliate is subject to such volume limitations regardless of how long the
shares have been owned or how they were acquired.
After this offering, Mr. Kolozs will own 2,250,000 shares of the common
stock (2,175,000 if his allotted shares are sold in the over-allotment option).
Mr. Kolozs and the other officers and directors will enter into an agreement
with the underwriters agreeing not to sell or otherwise dispose of any shares
for one year after the date of this prospectus without the prior written consent
of the underwriters. The 200,000 shares acquired in a private offering in June
1999 Became eligible for sale under Rule 144 in June 2000. The 150,000 shares
acquired by CCEC in June 2000, will be eligible for sale under Rule 144 in June
2001. These shares, together with any of the 200,000 shares received by CCEC in
June 1999 not sold in the over-allotment will be subject to a six-month lock-up.
We cannot predict the effect, if any, that an offer or sale of these
shares would have on the market price. Nevertheless, sales of significant
amounts of restricted shares in the public markets could adversely affect the
fair market price of the shares, as well as impair our ability to raise capital
through the issuance of additional equity shares.
<PAGE>
Plan of distribution
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Institutional Equity
Corporation., has severally agreed to purchase from us and we have agreed to
sell to the underwriters, the respective number of units set forth opposite
their respective names at the initial public offering price, less the
underwriting discounts set forth on the cover page of this prospectus:
Underwriters Number of Units
Institutional Equity Corporation
Total 1,000,000
The underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the shares of common stock and
our warrants are subject to approval of certain legal matters by counsel to the
underwriter and to certain other events. The underwriters are obligated to
purchase all shares of common stock and warrants we are offering (other than
those covered by the over-allotment option described below), if any such shares
are purchased.
We have been advised by the representatives of the underwriters that
the underwriters propose initially to offer the units to the public at the
offering price set forth on the cover page of this prospectus and through
members of the NASD. The representatives have also advised us that the
underwriters may allow a concession, not in excess of $___ per unit, and in
their discretion, to certain domestic dealers who are members of the NASD and
which domestic dealers agree to sell our securities in conformity with the NASD
Conduct Rules. The initial public offering price and concessions will not be
changed by the representatives until after the offering has been completed.
At the closing of the sale of our securities that we are offering, we
will sell to the underwriters, the underwriter's warrants, for nominal
consideration, entitling the underwriters to purchase an aggregate of 100,000
units containing 100,000 shares of common stock and 100,000 warrants. The
underwriters' warrants shall be non-exercisable and non-transferable, other than
a transfer to affiliates of the underwriters or members of the selling group for
a period of twelve months following the effective date. The underwriters'
warrants and the underlying securities shall contain anti-dilution provisions
and are redeemable. The underwriters' warrants will be exercisable for a period
of four years commencing one year following the effective date and, if the
underwriters' warrants are not exercised during such period, they shall, by
their own terms, automatically expire.
The exercise price of each underwriters' warrants shall be:
o $____ per unit and
o $____ per share of common stock underlying the warrant,
which are 120% of the public offering price of our units and 150% of public
offering price of the shares of common stock underlying our warrants.
In addition, we have granted to the underwriters a single demand
registration right and unlimited piggy back registration rights with respect to
our common stock and our warrants underlying the underwriter's warrants for a
period commencing at the beginning of the second year and concluding at the end
of the fifth year following the effective date.
The warrants will not be redeemable for a period of twelve months
following the effective date, at which time the warrants may be redeemed by us
for $0.05 per warrant on not less than thirty days prior written notice, subject
to exercise by the underwriters, if the closing bid price for our common stock
has been at least $___ per share for thirty consecutive trading days. If we
exercise our right to redeem warrants, the warrants may still be exercised by
the underwriters until the close of business on the day immediately before the
date fixed for redemption. If any warrant called for redemption is not exercised
by such time, it will not be exercisable, and the underwriters will be entitled
only to the redemption price.
We may not redeem the warrants at any time that a current registration
statement under the Securities Act covering the shares of common stock issuable
upon exercise of our warrants is not in effect. The issuance of such shares to
the underwriters must be registered, qualified or exempt under the laws of the
state in which the underwriters reside. If required, we will file a new
registration statement with the Securities and Exchange Commission with respect
to the securities underlying the warrants prior to the exercise of such warrants
and will deliver a prospectus with respect to such securities to the underwriter
as required by Section 10(a)(3) of the Securities Act.
Under Rule 2710(a)(7)(A) of the NASD Conduct Rules, the warrants
acquired by the underwriters will be restricted from sale, transfer, assignment
or hypothecation for a period of one year from the effective date of this
offering, except to officers or partners (not directors) of the underwriters and
members of the selling group and their officers or partners.
In addition to the above, we have granted to the underwriters an option
exercisable for 45 days from the effective date, to purchase up to an additional
150,000 units containing 150,000 shares of common stock and 150,000 warrants at
the initial public offering price, less the underwriting discount set forth on
the cover page of this prospectus. The underwriters, or the underwriters
individually at their option, may exercise this option solely to cover
over-allotments in the sale of our securities being offered by this prospectus.
Prior to this offering, there has been no public market for our
securities and there can be no assurances that an active public market for our
securities will be developed or, if developed, sustained after this offering.
The initial public offering price of our units and the exercise price and terms
of our warrants have been arbitrarily determined by negotiations between us and
the underwriters and may bear no relationship to our current earnings, book
value, net worth or other established valuation criteria. The factors considered
in determining the initial public offering prices included:
<TABLE>
<S> <C>
o an evaluation by our management and the underwriters of the history of and prospects for the industry in
which we compete,
o an assessment of management,
o our prospects,
o our capital structure, and
o certain other factors deemed relevant.
</TABLE>
The initial public offering prices do not necessarily bear any
relationship to our assets, book value, earnings or other established criterion
of value. Such prices are subject to change as a result of market conditions and
other factors, and no assurance can be given that a public market for the shares
of class A common stock and/or warrants will develop after the close of the
public offering, or if a public market in fact develops, that such public market
will be sustained, or that our units, shares of common stock and/or warrants can
be resold at any time at the initial public offering prices or any other prices.
We have agreed to pay our underwriters an underwriting discount as a
commission equal to ten percent of the gross proceeds of this offering,
including the gross proceeds from the sale of the over-allotment option, if
exercised. We have also agreed to reimburse the underwriters on a
non-accountable basis for their expenses in the amount of two percent of the
gross proceeds of this offering, including proceeds from any securities
purchased under the over-allotment option. The underwriters' expenses in excess
of the non-accountable expense allowance will be paid by the underwriters. To
the extent that the expenses of the underwriters are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the underwriters.
If the underwriters, at their election at any time one year after the
date of this prospectus, solicits the exercise of the warrants, Aarica will be
obligated, subject to certain conditions, to pay the underwriters a warrant
solicitation fee equal to 5% of the aggregate proceeds received by Aarica as a
result of the solicitation. No warrant solicitation fees will be paid within one
year after the date of this prospectus. No solicitation fee will be paid if the
market price of the common stock is lower than the then exercise price of the
warrants. No solicitation fee will be paid if the warrants being exercised are
held in a discretionary account at the time of their exercise, except where
prior specific approval for exercise is received from the customer exercising
the warrants and no solicitation fee will be paid unless the customer exercising
thee warrants states in writing that the exercise was solicited and designates
in writing the underwriters or other broker-dealer to receive compensation in
connection with the exercise.
We have agreed to indemnify the underwriters against any costs or
liabilities incurred by the underwriters by reasons of misstatements or
omissions to state material facts in connection with statements made in the
registration statement or the prospectus. The underwriters have, in turn agreed
to indemnify us against any liabilities by reason of misstatements or omissions
to state material facts in connection with the statements made in the
prospectus, based on information relating to the underwriters and furnished in
writing by the underwriters. To the extent that this indemnification may purport
to provide exculpation from possible liabilities arising from the federal
securities laws, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and therefore unenforceable.
Shares of common stock held by our existing shareholders immediately
prior to the effective date and any other securities issued for a period of
twelve months from the effective date (other than those offered in this
prospectus, including the underlying securities, the underwriters' warrants and
the underlying the securities), are subject to a one year lock-up period, with
the exception of 200,000 shares of common stock issued in connection with bridge
financing in the amount of $500,000, and any of CCEC's shares acquired in July
1999 which are not sold in the over-allotment option, which are subject to a six
month lock-up period. CCEC's 150,000 shares acquired in June 2000, as
consideration of cancellation of approximately $300,000 of debt will be subject
o a six month lock-up from the effective dated of this prospectus and become
eligible for sale under Rule 144 in June 2001. The lock-up periods begin on the
later of the date of issuance or the effective date, and are subject to early
termination at the sole discretion of the underwriters. An appropriate legend
referring to these restrictions will be marked on the face of the certificates
representing all such securities. Moreover, for a period of twelve months from
the effective date, we will not sell or otherwise dispose of any securities
without the prior written consent of the underwriters.
The underwriters shall have the right to designate a member of the
board of directors, or at the underwriters' option, to designate one individual
to attend the meetings of our board of directors for a period of five years
after the effective date. If Robert A. Shuey, III, a principal of Institutional
Equity Corporation, is designated as a member of the board of directors, he will
receive an annual retainer of $5,000 and $1,000 per meeting attended, $1,000 for
chairing a committee of the board of directors, and $500 for each committee
meeting attended.
The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to the
underwriting agreement which is filed as an exhibit to the registration
statement.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock and warrants, including stabilizing transactions in accordance with
Rule 104 of Regulation M. Under Regulation M persons may bid for or purchase of
common stock for the purpose of stabilizing its market price.
In connection with this offering, certain underwriters may engage in passive
market making transactions in the units on the _______exchange in accordance
with Rule 103 of Regulation M.
Listing application
We intend to apply for listing of the units, common stock and warrants on the
______ Exchange under the trading symbols ____ ,____ ,and ____, respectively.
LEGAL MATTERS
Legal matters in connection with our class A common stock and our
warrants being offered in this prospectus will be passed upon for us by Maurice
J. Bates, L.L.C., Dallas, Texas. Certain legal matters will be passed upon for
the underwriters by the law firm of Wolin, Ridley & Miller, LLP, Dallas, Texas.
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports
<PAGE>
Report of Independent Public Accountants
To the Shareholders of
Aarica Holdings, Inc. and Subsidiaries,
We have audited the accompanying consolidated balance sheets of AARICA HoldingS,
inc. (a United States corporation) AND SUBSIDIARIES (see Note 1) as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' deficit and cash flows for the years then ended. 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 auditing standards generally accepted
in the United States. 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 discussed in Note 1 to the accompanying financial statements, the Company was
reorganized during 1998. As a result, Aarica Holdings, Inc. was incorporated on
November 2, 1998 to become the holding company of all of the companies of the
group. Since the reorganization involved a combination of companies with common
stockholders, it was accounted for in a manner similar to a pooling-of-interests
by retroactively reflecting the reorganization in the accompanying financial
statements as if it had occurred as of the beginning of the earliest period
presented.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aarica Holdings, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
July 15, 2000
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Consolidated balance sheets as of December 31, 1999 and 1998
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C>
Assets
1999 1998
---------------- --------------
Current assets:
Cash and cash equivalents-
Available 214,654 254,409
Restricted 262,544 -
----------------------------------------
477,198 254,409
Accounts receivable-
Trade 1,598,320 903,026
Other 146,222 104,729
----------------------------------------
1,744,542 1,007,755
Inventories 1,544,696 1,706,650
Prepaid expenses 27,658 20,908
----------------------------------------
Total current assets 3,794,094 2,989,722
Machinery and equipment 830,079 1,014,717
Other assets 8,882 7,252
----------------------------------------
Total assets $ 4,633,055 $ 4,011,691
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Consolidated balance sheets as of December 31, 1999 and 1998
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C>
Liabilities and shareholders' deficit
1999 1998
---------------- --------------
Current liabilities:
Suppliers $ 1,352,280 $
927,240
Accrued taxes 1,355,392 853,687
Notes payable to related parties 1,852,111 953,489
Other accounts payable and accrued liabilities 1,319,356 740,725
----------------------------------------
Total current liabilities 5,879,139 3,475,141
Long-term debt - 4,335,213
Shareholders' deficit:
Common stock, $.01 par value; 20,000,000 authorized shares; 2,800,000 and
2,600,000 shares outstanding at December 31, 1999 and1998,
respectively 28,000 26,000
Preferred stock, $.01 par value; 3,000,000
authorized shares - -
Additional paid-in capital 418,010 -
----------------------------------------
446,010 26,000
Accumulated losses (1,692,094) (3,824,663)
----------------------------------------
Total shareholders' deficit (1,246,084) (3,798,663)
----------------------------------------
Total liabilities and shareholders' $ 4,633,055 $ 4,011,691
deficit
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Consolidated statements of operations
For the years ended December 31, 1999 and 1998
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C>
1999 1998
---------------- -------------
Net sales $ 5,433,254 $ 5,742,454
Cost of sales 5,146,857 4,661,644
---------------------------------------
Gross profit 286,397 1,080,810
Operating expenses:
Selling, general and administrative 1,540,461 1,397,621
----------------------------------------
Operating loss (1,254,064) (316,811)
Other income (expenses):
Interest, net (233,842) (409,158)
Translation loss (157,102) (136,343)
Other, net (221,996) 665
---------------------------------------
(612,940) (544,836)
---------------------------------------
Loss before asset tax (1,867,004) (861,647)
Provision for asset tax 51,829 69,609
---------------------------------------
Loss before extraordinary item (1,918,833) (931,256)
Extraordinary item - Bank and creditor settlements 4,051,402 1,326,117
---------------------------------------
Net income $ 2,132,569 $ 394,861
=========== ===========
Weighted average shares 2,703,836 2,600,000
=========== ===========
Basic and diluted earnings per share:
Loss before extraordinary item $ (0.71) $ (0.36)
Extraordinary item 1.50 0.51
---------------------------------------
Net income $ 0.79 $ 0.15
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Consolidated statements of shareholders' deficit
For the years ended December 31, 1999 and 1998
(Stated in U.S. dollars)
<TABLE>
<CAPTION>
Capital Stock Additional Total
--------------- --------------
Paid-in Accumulated Shareholders'
Shares Amount Capital Losses
------ ------ ------- ----------------
Deficit
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 2,600,000 $ 26,000 $ - $ (4,219,524) $ (4,193,524)
Net income - - 394,861 394,861 -
---------------------------------- ------------------- ----------------------------
Balance as of December 31, 1998 2,600,000 26,000 - (3,824,663) (3,798,663)
Issuance of common shares 200,000 2,000 418,010 - 420,010
Net income - - - 2,132,569 2,132,569
Balance as of December 31, 1999 ---------------- ------------------- ---------------- -------------------
2,800,000 $ 28,000 $ 418,010 $ (1,692,094) $ (1,246,084)
========= ============ ============ ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Consolidated statements of cash flows
For the years ended December 31, 1999 and 1998
(Stated in U.S. dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- -------------
Cash flows from operating activities:
Net income $ 2,132,569 $ 394,861
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization 215,922 195,411
Decrease (increase) in-
Trade receivables (660,047) 75,896
Other accounts receivable (37,567) 161,481
Prepaid expenses (8,502) 18,204
Inventories 161,954 (24,612)
Increase (decrease) in-
Suppliers 390,041 33,157
Accrued taxes 469,027 270,721
Notes payable to related parties 860,726 (728,459)
Other accounts payable and accrued liabilities 552,653 (88,679)
-----------------------------------------
Net cash provided by operating activities 4,076,776 307,981
Cash flows from investing activities:
Additions to machinery and equipment (31,284) (259,708)
Other assets (1,363) 27,285
-----------------------------------------
Net cash used in investing activities (32,647) (232,423)
Cash flows from financing activities:
Proceeds from long-term debt (3,722,727) 377,149
Loan payments (750,000) -
Increase in capital stock 420,010 -
-----------------------------------------
Net cash (used in) provided by financing activities (4,052,717) 377,149
-----------------------------------------
Effect of exchange rate changes on cash 231,377 (600,736)
Net increase (decrease) in cash and cash equivalents 222,789 (148,029)
Cash and cash equivalents at beginning of year 254,409 402,438
-----------------------------------------
Cash and cash equivalents at end of year $ 477,198 $ 254,409
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 40,904 $ 36,197
=========== ===========
Interest paid $ 19,542 $ -
=========== ===========
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Notes to consolidated financial statements as of December 31, 1999 and 1998
(Stated in U.S. dollars)
Aarica Holdings, Inc. and Subsidiaries
Notes to consolidated financial statements as of December 31, 1999 and 1998
(Stated in U.S. dollars)
1 Description of business and summary of significant accounting policies:
-------------------------------------------------------------------------------
Description of business-
The Company through its subsidiaries designs, manufactures and sells athletic
footwear and sportswear principally in Mexico. The primary customers are large,
international footwear distributors as well as distributors and retailers in
Mexico. The Company has a manufacturing facility in Fresnillo, Zacatecas, Mexico
and a distribution facility and administrative office in Mexico City.
The Company has received a letter of intent from Institutional Equity
Corporation of Dallas, Texas for a proposed firm commitment underwriting to
raise approximately $10 million from the issuance of units consisting of common
stock and warrants to purchase common stock in an initial public offering. The
Company anticipates filing a registration statement with the Securities and
Exchange Commission on Form SB-2 in August 2000 in anticipation of a late 2000
offering.
Use of estimates-
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and use certain assumptions that affect the reported amounts of assets
and liabilities and the required disclosure of contingent assets and liabilities
in the financial statements. Actual results could differ from those estimates.
Basis of presentation-
The accompanying consolidated financial statements include the financial
statements of Aarica Holdings, Inc. and its wholly-owned subsidiary, Aarica
Holdings Mexico, S.A. de C.V., which in turn has the following subsidiaries:
<TABLE>
<S> <C> <C> <C>
% Ownership
- Aarica Sport, S.A. de C.V. 99.9
- Taimex Industries, S.A. de C.V. 100.0
- Aarica Sport Products Manufacturing, S.A. de C.V. 80.0
- West Coast Sports, S.A. de C.V. 99.9
</TABLE>
The Company was reorganized during 1998. As a result, Aarica Holdings Mexico,
S.A. de C.V. was incorporated in December 1998 to become the holding company of
all of the Mexican companies of the group. Additionally, Aarica Holdings, Inc
was incorporated in November 1998 as the owner of the Mexican holding company.
Since the reorganization involved a combination of companies with common
stockholders, it was accounted for in a manner similar to a pooling-of-interests
by retroactively reflecting the reorganization in the accompanying financial
statements as if it had occurred as of the earliest period presented.
All significant intercompany transactions and balances have been eliminated in
the accompanying consolidated financial statements. The minority interest was
not recorded, since the effect was negative as of December 31, 1999 and 1998.
Consolidation of foreign subsidiaries-
Aarica Holdings, Inc., a holding company without any substantive operations, is
incorporated in the United States and records its transactions in U.S. dollars.
However, all of its subsidiaries are Mexican corporations that record all of
their transactions and operations in Mexican pesos.
The functional currency of the Mexican operations is considered to be the U.S.
dollar. Accordingly, all Mexican peso amounts are translated into U.S. dollars
using the "remeasurement " approach prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 52, as follows:
<TABLE>
<S> <C>
(a) Quoted year-end rates of exchange are used to remeasure monetary assets and liabilities.
(b) All nonmonetary assets and shareholders' deficit accounts are remeasured
at the rates of exchange in effect at the time the items were originally
recorded.
(c) Revenues and expenses are remeasured at the average rates of exchange in
effect during the year, except for cost of sales, depreciation and
amortization, which are translated at the rates of exchange in effect when
the respective assets were manufactured or acquired.
(d) The translation gain or loss arising from the remeasurement is included in
the determination of net income or loss of the period.
</TABLE>
Adjustments to conform with accounting principles generally accepted in the
United States-
Certain accounting policies applied by the Mexican subsidiaries in their
accounts (and in their financial statements prepared for use in Mexico) conform
with accounting principles generally accepted in Mexico, but do not conform with
accounting principles generally accepted in the United States. The accompanying
consolidated financial statements have been prepared for use in the United
States and, as explained below, reflect certain adjustments required to conform
them with the accounting principles generally accepted in that country. Those
adjustments are as follows:
- The Mexican subsidiaries prepare their local financial statements
recognizing the effects of inflation as required by accounting principles
generally accepted in Mexico. These effects are not reflected in the
accompanying consolidated financial statements since this accounting
practice does not conform with accounting principles generally accepted in
the United States.
- In accordance with accounting principles generally accepted in Mexico, the
Mexican subsidiaries record by means of the liability method the future
effects of income taxes and employee profit sharing related to the
cumulative temporary differences between accounting and taxable income,
which arise from specific items whose turnaround period can be determined
and that are not expected to be replaced by items of a similar nature and
amount. Since there are no significant nonrecurring temporary differences,
the Mexican subsidiaries have not recorded any deferred or prepaid income
taxes or employee profit sharing effects in their local currency financial
statements. In accordance with accounting principles generally accepted in
the United States, the Mexican subsidiaries recognize by means of the
liability method the deferred and/or prepaid effects resulting from all
temporary differences.
-
<PAGE>
The Mexican subsidiaries amortize preoperating expenses over a five-year term
for local financial statement purposes. However, such deferral does not
conform with accounting principles generally accepted in the United
States, and accordingly in the accompanying consolidated financial
statements such expenses were charged against income when incurred.
Cash equivalents-
Cash equivalents are primarily bank deposits valued at market (cost plus accrued
interest). In addition, cash equivalents at December 31, 1999 include a
restricted trust fund to guarantee letters of credit issued by the Company in
the amount of $262,544.
Inventories-
All inventories are stated at average cost, which does not exceed market.
Machinery and equipment-
Machinery and equipment are stated at cost. When machinery and equipment are
retired or otherwise disposed of, the cost is removed from the books,
accumulated depreciation is charged with an amount equivalent to the
depreciation previously provided on the retired asset, and the difference is
charged or credited to income.
Depreciation of machinery and equipment is calculated using the straight-line
method over the following estimated useful lives:
Years
Machinery and equipment 10
Molds 3
Furniture and fixtures 10
Transportation equipment 4
Computer equipment 3
Impairment of long-lived assets-
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived
Assets to be Disposed of", requires that long-lived assets, such as machinery
and equipment, and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. The amount of impairment, if any, is measured
based on projected future cash flows (using a discount rate reflecting the
Company's average cost of funds) compared to the carrying value of those assets.
Employee severance benefits-
In accordance with Mexican Labor Law, the Mexican subsidiaries are liable for
separation payments, which consist of the payment of three months plus 20 days
of salary for each year of service to employees terminating under certain
circumstances. These payments are charged to the results of the period in which
they are made, since they have no vesting provisions.
<PAGE>
Also under Mexican Labor Law, the Mexican subsidiaries are also liable for
seniority premium payments of 12 days of salary (up to a maximum of twice the
minimum wage) for each year of service to employees who:
- Retire or are terminated, once they have reached 15 or more years of
service with the Company.
- Are terminated under certain circumstances, regardless of the years of service
to the Company.
This seniority premium benefit qualifies as a defined benefit plan under SFAS
No. 87. However, since the average seniority of the Company's employees is very
low due to the high turnover of its employees, the potential seniority premium
liability is not considered significant and thus has not been recorded.
Income taxes-
Deferred income taxes are provided by the liability method for all temporary
differences between the amounts of assets and liabilities for financial and tax
reporting purposes, computed in accordance with SFAS No. 109, "Accounting for
Income Taxes".
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities 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. A valuation
allowance is established for any deferred tax asset for which it is more likely
than not that the related benefits will not be realized.
Financial instruments-
The Company's financial instruments include cash equivalents, accounts
receivable, accounts payable and notes payable. Due to the short-term nature of
these items, the fair value of these instruments approximates their recorded
value. Additionally, the Company does not have material financial instruments
with off-balance sheet risk.
Revenue recognition-
Sales and related cost of sales are recorded when goods are delivered by us to
the customers.
Advertising costs-
Advertising costs (approximately $47,000 and $32,000 in 1999 and 1998,
respectively) are expensed as incurred.
Recently issued accounting pronouncements-
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes the accounting and reporting standards for all derivative
financial instruments, including those embedded in other contracts, and for
hedging activities. The statement, to be applied prospectively, will be
effective for the Company's quarter ending March 31, 2001. The Company does not
presently have any derivative financial instruments; however, there can be no
assurance that the Company will not utilize in derivative financial instruments
in the future.
<PAGE>
Inventories:
<TABLE>
<S> <C> <C>
1999 1998
---------------- -------------
Raw materials $ 913,179 $ 773,720
Work in progress 128,442 431,185
Finished goods 256,451 246,373
---------------- --------------
1,298,072 1,451,278
Merchandise in transit 246,624 255,372
----------------- -----------------
$ 1,544,696 $ 1,706,650
=========== ===========
</TABLE>
As of December 31, 1999, irrevocable letters of credit in the amount of $276,490
were issued related to purchase commitments of inventories with foreign
suppliers.
3 Machinery and equipment:
<TABLE>
<S> <C> <C>
1999 1998
------------- -------------
Machinery and equipment $ 1,175,941 $ 1,175,941
Molds 36,203 33,662
Furniture and fixtures 249,866 226,166
Transportation equipment 81,619 76,576
Computer equipment 99,790 99,790
---------------------------------------
1,643,419 1,612,135
Less : Accumulated depreciation (813,340) (597,418)
---------------------------------------
$ 830,079 $ 1,014,717
=========== ===========
</TABLE>
The Company manufactures its products at its facility in the State of Zacatecas,
Mexico. The government of Zacatecas arranged for the facility to be built on
behalf of the Company, and the Company executed a lease agreement that provided
for an annual rental cost of approximately $100,000. From the inception of the
lease through June 1999, the Company has been able to successfully negotiate a
waiver of the rental payments. The Company is seeking a formal waiver of the
rent subsequent to June 1999. In the event the Company is required to begin
paying rent, the annual rental will be approximately $100,000, plus value-added
tax, with annual Mexican inflation increases under a lease agreement which
expires in April 2001 that includes for a one-year extension option. The Company
has accrued $57,500 at December 31, 1999 with respect to this matter.
The Company's commercial and distribution offices are located in Mexico City.
The current lease expires on September 30, 2005, with an annual rental of
approximately $96,000 plus value-added tax, with annual Mexican inflation
increases. The Company paid approximately $75,947 and $75,973 in 1999 and 1998,
respectively, for the rent of the facility in Mexico City. The Company's United
States office is based in Maitland, Florida, and its annual rental is $8,000.
<PAGE>
4 Long-term debt:
On January 14, 2000, Aarica Sport, S.A. de C.V. and Taimex Industries, S.A.
de C.V. completed the restructuring of their long-term debt of $4,506,096 with
Banco Bilbao Vizcaya Mexico, S.A. (BBV). As a result of this restructuring,
$3,756,096 of principal and interest was forgiven and is presented in the
statement of operations as an extraordinary gain. The residual amount of
$750,000 was paid in January 2000 with borrowings from Schmidt International,
LLC . Because the negotiation of this agreement was completed in December 1999,
this transaction was recorded as of December 31, 1999. An additional settlement
of $295,306 with creditors was also
recorded as an extraordinary gain.
A prior debt settlement with BBV resulted in an extraordinary gain of $935,329
in 1998. The Company also had settlements with other creditors that generated
additional extraordinary gains of $390,788 in 1998.
5 Notes payable to related parties:
Notes payable to related parties are as follows:
<TABLE>
<S> <C> <C>
1999 1998
---------------- -------------
Schmidt International, LLC $ 1,478,820 $ 251,264
Continental Capital & Equity Corporation 280,012 295,393
Carol Kolozs 93,279 406,832
----------------------------------------
$ 1,852,111 $ 953,489
=========== ===========
</TABLE>
The Company had interest expense with related parties of $68,081 and $50,231 in
1999 and 1998, respectively.
As part of its debt restructuring, the Company signed a note payable to Schmidt
International, LLC (Schmidt) for $1,478,820 and another to Continental Capital &
Equity Corporation (CCEC) for $280,012. The notes payable to Schmidt and CCEC
bear annual interest rates of Prime + 5% and 10%, respectively. The Schmidt note
is secured by 2,400,000 shares of the Company owned by Carol Kolozs, majority
shareholder, President and Director of the Company.
In June 2000 the Company obtained an additional loan from Schmidt Int. in the
amount of $600,000 to provide working capital and funds for a portion of the
costs of the planned initial public offering (IPO). The loan is due October 31,
2000, bears interest at the rate of prime plus 5% per annum (14.50% as of June
30, 2000), and requires interest payments only until maturity date. Management
believes the Company will be able to successfully negotiate an extension of the
maturity date if the IPO is not consummated by October 31,2000.
On June 29, 2000 CCEC exchanged its outstanding principal and interest from its
revolving credit line to the Company in the approximate balance of $300,000 for
150,000 shares of common stock from the personal holdings of Carol Kolozs,
majority shareholder, President and Director of the Company. The conversion of
the note agreement established certain restrictions and obligations for the
Company, of which the most important are:
- The Company is limited in the quantity of shares (and the respective share
prices) that can be issued (other than the IPO) without the consent of
CCEC.
<PAGE>
- A purchase option for up to 250,000 new shares of the Company's common
stock at a price of $2.00 per share was issued to CCEC for services
provided through June 2000. Also, in the event the IPO has not been
consummated on or before February 28, 2001, the option exercise price of
the 250,000 shares will be $0.05 per share.
6 Income tax system:
Income and asset tax regulations-
The Mexican subsidiaries are subject to income and asset taxes. Income taxes are
computed taking into consideration the taxable and deductible effects of
inflation, such as depreciation calculated on restated asset values and the
deduction of purchases in place of cost of sales, which permit the deduction of
current costs, and taxable income is increased or reduced by the effects of
inflation on certain monetary assets and liabilities through the inflationary
component. Beginning in 1999, the income tax rate increased from 34% to 35%,
with the obligation to pay this tax each year at a rate of 30% (transitorily 32%
in 1999) and the remainder upon distribution of earnings.
The asset tax is computed at an annual rate at 1.8% of the average of the
majority of restated assets less certain liabilities, and the tax is paid only
to the extent that it exceeds the income taxes of the period. Any required
payment of asset taxes is refundable against the excess of income taxes over
asset taxes for the preceding three, and following ten years.
The provisions for income taxes and employee profit sharing have been determined
on the basis of the taxable income of each individual company and not on a
consolidated basis.
The results of operations of the U.S. holding company have not been significant
to date, and that company has not yet generated any taxable income in the U.S.
Mexican employee profit sharing-
The Mexican subsidiaries are subject to statutory employee profit sharing, which
is calculated based on taxable income, after certain adjustments, primarily to
exclude the effects of restated depreciation and the tax gain or loss from
monetary position. The amount for 1999 was approximately $4,500 (included in
operating expenses) and for 1998 there was no employee profit sharing.
Analysis of provisions and balances-
The tax effect of temporary differences that generated deferred tax liabilities
(assets) under SFAS No. 109 as of December 31, 1999 and 1998 are as follows:
<PAGE>
Deferred income taxes-
The components of the net deferred income taxes liability as of December 31 are
as follows:
<TABLE>
<S> <C> <C>
1999 1998
---------------- -------------
Current-
Inventories $ 445,143 720,379
Non-deductible reserves (104,085) (129,173)
Settlements with creditors 1,311,848 -
Non-current-
Tax loss carryforwards (2,169,628) (1,792,323)
----------------------------------------
(516,722) (1,201,117)
Valuation allowance 516,722 1,201,117
----------------------------------------
$ - $ -
=========== ===========
</TABLE>
Due to the uncertainty of the realization of the net deferred income tax assets,
the Company has provided a 100% valuation allowance for the related potential
future tax savings.
As of December 31, 1999, the Company cancelled deferred employee profit sharing
in amount of $131,378 that will not materialize, since the Company transferred
its employees to the new companies. As a result, the new companies do not have
any deferred charge to record (see Note 12).
In addition, the provisions for income taxes computed by applying the local
statutory rate to income taxes as reconciled to the actual provisions are as
follows for the years ended December 31:
<TABLE>
<S> <C> <C> <C> <C>
1999 % 1998 %
---------------- - ---------------- -
Tax at statutory rate $ 766,129 35 157,920 34
Add (deduct)- 35
Tax inflation adjustments, net (15,944) (1) (230,930) (50)
Prospective change in statutory rate - - 4,645 1
Non-deductible expenses 70,789 3 58,651 13
Other (5,201) 1 3,858 1
------------------- -------------------
815,773 37 (5,856) (1)
Valuation allowance (815,773) (37) 5,856 1
------------------- -------------------
$ - 0 $ - 0
========== ==========
</TABLE>
Tax loss carryforwards-
As of December 31, 1999 the Mexican subsidiaries had the following tax loss
carryforwards, which will be indexed for inflation through the date used to
offset future taxable income, as follows (translated from Mexican pesos to U.S.
dollars at the December 31, 1999 exchange rate):
<TABLE>
<S> <C>
Expiration Date Amount
2004 $ 2,063,661
2005 4,135,277
---------------------
$ 6,198,938
============
</TABLE>
7 Issuance of common stock:
---------------------------------
On July 22, 1999, the Company increased its capital stock in the amount of
$2,000 through the issuance of 200,000 shares of common stock for cash.
Additional paid-in capital of $418,010 resulted from this transaction.
8 Common and preferred stock:
-----------------------------------
The Company is authorized to issue 20,000,000 shares of common stock at a par
value of $.01 per share. In addition, the Company is authorized to issue
3,000,000 shares of preferred stock, none of which was issued as of December 31,
1999. The features of the preferred stock may vary, among other things, as to
the rate of dividend, conversion privilege and liquidation rights, based upon
the resolution of the Board of Directors at the time of issuance.
9 Earnings per common share:
----------------------------------
Earnings (loss) per common share are computed by dividing the related amounts by
the weighted average number of common stock equivalent shares outstanding.
10 Royalties:
The Company has entered into two licensing agreements requiring royalty payments
ranging from 4% to 5% of specified product sales. Royalties are charged to
expense under the licensing agreements and totaled $105,000 and $25,000 in 1999
and 1998, respectively. Pursuant to these agreements, the future minimum
guaranteed royalty payments are approximately $185,000 in 2000 and $222,000 in
2001.
11 Concentrations of credit risk:
Financial instruments that potentially expose the Company to credit risk consist
principally of cash and cash equivalents and trade receivables. Cash and cash
equivalents are placed with high quality financial institutions, and the Company
limits the amount of credit exposure with any one financial institution.
One customer accounted for approximately 46% of the Company's net sales in 1998.
No sales to any single customer accounted for more than 10% of net sales in
1999.
12 Subsequent events:
In 2000 two new companies were incorporated, Aarica Services, S.A. de C.V.
and North American Shoe Company, S.A. de C.V. (NASCO). All employees of the
Company were transferred into these new companies.
<PAGE>
13 Contingencies:
On November 16, 1999 the "maquiladora" program of Taimex, S.A. de C.V.
(subsidiary company) was cancelled by the Commerce and Industrial Ministry
(SECOFI). This program permitted Taimex not to pay import taxes if inventories
were to be exported within two years. As a result of renegotiations, NASCO
became eligible for this program on April 14, 2000, so the Company will be able
to continue with this benefit. However, SECOFI could claim the import taxes for
the Taimex inventories that have to be exported after November 16, 1999, and
consequently there is a contingency of the amount of $315,658 as of the issue
date of these consolidated financial statements.
The Company has not paid various taxes on which surcharges and restatements of
approximately $187,460 have been computed. The surcharges and restatements have
not been recorded since the Company's attorney believes that such amounts can be
eliminated through negotiations favorable to the Company. In addition, the
Company has approached the tax authorities and arranged for installment payments
of some of the delinquent taxes, but the majority has not yet been officially
arranged with those authorities.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated balance sheet as of March 31, 2000
(Stated in U.S. dollars)
Assets
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents-
Available $ 386,571
Restricted 463,887
---------------------
850,458
Accounts receivable-
Trade 1,142,615
Other 264,923
---------------------
1,407,538
Inventories 1,630,665
Prepaid expenses 21,937
---------------------
Total current assets 3,910,598
Machinery and equipment 780,663
Other assets 101,444
---------------------
Total assets $ 4,792,705
===========
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated balance sheet as of March 31, 2000
(Stated in U.S. dollars)
<TABLE>
<S> <C>
Liabilities and shareholders' deficit
Current liabilities:
Suppliers $ 1,278,345
Accrued taxes 1,530,928
Notes payable to related parties 2,314,112
Other accounts payable and accrued liabilities 1,245,333
---------------------
Total current liabilities 6,368,718
Shareholders' deficit:
Common stock, $.01 par value; 20,000,000 authorized 28,000
shares; 2,800,000 shares outstanding
Preferred stock, $.01 par value; 3,000,000
authorized shares -
Additional paid-in capital 418,010
---------------------
446,010
Accumulated losses (2,022,023)
---------------------
Total shareholders' deficit (1,576,013)
---------------------
Total liabilities and shareholders' $ 4,792,705
deficit
===========
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated statements of operations
For the three months ended March 31, 2000 and 1999
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C>
2000 1999
---------------- -------------
Net sales $ 1,205,042 $ 1,023,239
Cost of sales 1,016,082 970,936
---------------------------------------
Gross profit 188,960 52,303
Operating expenses:
Selling, general and administrative 402,361 415,909
----------------------------------------
Operating loss (213,401) (363,606)
Other income (expenses):
Interest, net (119,972) (210,868)
Translation (loss) gain (2,896) 183,547
Other, net 6,798 (54,105)
---------------------------------------
(116,070) (81,426)
---------------------------------------
Loss before asset tax (329,471) (445,032)
Provision for asset tax 458 1,864
---------------------------------------
Net loss $ $
(329,929) (446,896)
=========== ===========
Weighted average shares outstanding 2,800,000 2,600,000
=========== ===========
Basic and diluted earnings per share:
Net loss $ (0.11) $ (0.17)
=========== ===========
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated statements of cash flows
For the three months ended March 31, 2000 and 1999
(Stated in U.S. dollars)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
---------------- -------------
Cash flows from operating activities:
Net loss $ (329,929) $ (446,896)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization 74,523 108,069
Decrease (increase) in-
Trade receivables 496,596 (74,519)
Prepaid expenses 6,716 (40,768)
Other accounts receivable (110,369) (182,913)
Inventories (86,733) 52,462
Increase (decrease) in-
Suppliers (114,172) 35,695
Taxes payable 130,688 259,514
Related parties 396,696 342,099
Other accounts payable and accrued liabilities (113,246) (279,953)
-----------------------------------------
Net cash provided by (used in) operating activities 350,770 (227,210)
Cash flows from investing activities:
Additions to machinery and equipment (25,107) (12,905)
Additions to other assets (92,301) (1,002)
-----------------------------------------
Net cash used in investing activities (117,408) (13,907)
Cash flows from financing activities:
Proceeds from long-term debt - 486,075
-----------------------------------------
Net cash provided by financing activities - 486,075
-----------------------------------------
Effect of exchange rate changes on cash (256,558)
139,898
Net increase in cash and cash equivalents 373,260 (11,600)
Cash and cash equivalents at beginning of period 477,198 254,409
-----------------------------------------
Cash and cash equivalents at end of period $ 850,458 $ 242,809
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 10,523
$
-
=========== ===========
Interest paid
$ $
- -
=========== ===========
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Notes to unaudited consolidated financial statements as of March 31, 2000
(Stated in U.S. dollars)
1 Basis of presentation of interim financial statements:
The information in this report reflects all adjustments, which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods included herein. All adjustments other than those described in
this report are, in the opinion of management, of a normal and recurring nature.
These consolidated financial statements include the accounts of Aarica Holdings,
Inc. and its subsidiaries listed in Notes 1 and 13 to the consolidated financial
statements for the years ended December 31, 1999 and 1998.
The results are not necessarily indicative of the results to be expected for the
full fiscal year. The financial statements should be read in conjunction with
the financial statement disclosures contained in the Company's annual financial
statements for the years ended December 31, 1999 and 1998.
2 Cash and cash equivalents:
Restricted cash equivalents include a trust fund to guarantee letters of credit
issued by the Company in the amount of $463,887.
3 Inventories:
Inventories were comprised of the following as of March 31, 2000:
Raw materials $ 641,715
Work in progress 99,686
Finished goods 857,120
--- -----
1,598,521
Merchandise in transit 32,144
--------
$ 1,630,665
===========
As of March 31, 2000, irrevocable letters of credit in the amount of $493,599
were issued related to purchase commitments of inventories from foreign
suppliers.
4 Contingencies:
See Note 13 to the consolidated financial statements as of December 31, 1999 and
1998 for a discussion of contingencies and other related items. There have been
no significant changes in the status of those contingencies.
<PAGE>
Aarica Holdings, Inc.
1,000,000 Units
Each Unit
consisting of 1,000,000 shares of Common Stock
and
1,000,000 redeemable common stock purchase warrants
---------------------------
PROSPECTUS
---------------------------
Institutional Equity Corporation
1-877-467-7891
<PAGE>
V
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Pursuant to Section 2.02-1 of the Texas Business Corporation Act, a
corporation may indemnify an individual made a party to a proceeding because the
individual is or was a director against liability incurred in his official
capacity with the corporation including expenses and attorneys fees.
Article VI of the Articles of Incorporation provides as follows:
"The Corporation shall indemnify any director or officer, or former
director or officer of the Corporation, or any person who may have served at its
request as a director or officer of another corporation of which this
Corporation owns shares of capital stock or of which it is a creditor to the
fullest extent permitted by the Texas Business Corporation act and as provided
in the By-laws of the Corporation."
Article VII of the by-laws provides as follows:
"Section 1. Indemnification.
The corporation shall indemnify its present or former directors and
officers, employees, agents and other persons to the fullest extent permissible
by, and in accordance with, the procedures contained in Article 2.02 of the
Texas Business Corporation Act. Such indemnification shall not be deemed to be
exclusive of any other rights to which a director, officer, agent or other
person may be entitled, consistent with law, under any provision of the articles
of Incorporation or By-laws of the corporation, any general or specific action
of the board of directors, the terms of any contract, or as may be permitted or
required by law."
"Section 2. Insurance and Other Arrangements
"Pursuant to Section R of Article 2.02-1of the Texas Business
Corporation Act, the corporation may purchase and maintain insurance or another
arrangement on behalf of any person who is or was a director, officer, employee,
or agent or the corporation or who is or was serving at the request of the
corporation a a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, against any liability asserted against him or
her and incurred by him or her in such capacity or arising out of his or her
status as such person, whether or not the corporation would have the power to
indemnify him or her against that liability under article 2.02-1 of the Texas
Business Corporation Act."
Item 25. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Estimated expenses in connection with the public offering by the Company of
the securities offered hereunder are as
follows:
Securities and Exchange Commission Filing Fee $ 7,725
NASD Filing Fee* 3,426
Nasdaq Application and Listing Fee 9,000
Accounting Fees and Expenses* 100,000
Legal Fees and Expenses 100,000
Printing* 50,000
Fees of Transfer Agent and Registrar* 3,500
Underwriters' Non-Accountable Expense Allowance 200,000
Miscellaneous* 26,349
---- ------
Total* 500,000
== =======
----------------
* Estimated.
</TABLE>
Item 26. Recent Sales of Unregistered Securities
In November 1998, the registrant issued 2,600,000 shares of its common
stock to Carol Kolozs, its Chief Executive Officer and founder, in exchange for
all of his interest in Aarica Holdings Mexico, S. A. de C. V., a newly organized
Mexican holding company which had acquired from him substantially all of the
stock of four Mexican subsidiaries. Mr. Kolozs was founder of the registrant and
relied upon the exemption from registration provided by section 4 (2) of the
Securities Act of 1933, as amended (the "Securities Act") for transactions not
involving a public offering. No underwriter was involved in the transaction and
the certificate for Mr. Kolozs' shares was stamped with a restrictive legend and
a stop transfer order was placed on the transfer records of the company. Mr.
Kolozs transferred 200,000 of his shares in July 1999 to CCEC for services
rendered to the company through that date. CCEC agreed to take the shares for
investment and not with a view to distribution. The certificate is stamped with
a restrictive legend and a stop transfer order was placed on the transfer
records of the company. In June 2000, the company granted CCEC options to
purchase 250,000 shares at $2.00 per share for services rendered to the company
from August 1999 through June 30, 2000. The options were taken for investment
and not with a view to distribution.
In June 1999, the registrant sold 200,000 of its common stock to 17
persons in a private offering pursuant to Rule 506 of Regulation D under the
Securities Act. The shares were sold in units consisting of 10,000 shares at
$25,000 per unit. Each investor represented to the registrant and the selling
agent that he/she was an accredited investor as defined in Regulation D. The
units were sold though Kashner Davidson Securities Corporation, a member firm of
the National association of Securities Dealers, Inc. The registrant received
gross proceeds of $500,000 and paid Kashner Davidson commissions of 10% on the
securities sold by Kashner Davidson and granted warrants to Kashner Davidson to
purchase 105,000 shares of the registrant's common stock at $2.50 per share,
exercisable for five years. The securities were sold without registration in
reliance upon the exemption from registration provided by Regulation D. The
certificates issued bear a restrictive legend prohibiting transfer in the
absence of an effective registration statement or an opinion of counsel that
registration is not required. Each investor was screened by the issuer and the
selling agent prior to accepting his/her subscription and provided support for
the representation that he/she was an accredited investor.
In June 2000, Mr. Kolozs transferred 150,000 shares of common stock
from his personal holdings to CCEC in consideration for CCEC's cancellation of
an outstanding note in the amount of $300,000 owed by the company. CCEC. CCEC
agreed to take the shares for investment and not with a view to distribution.
The certificate is stamped with a restrictive legend and a stop transfer order
was placed on the transfer records of the company. No underwriter was involved
in the transaction. The parties relied upon the exemption contained in section
4(1) of the Securities Act for transactions by any person other than an issuer,
underwriter or dealer.
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Item 27. Exhibits
Exhibit No Item
Exhibit 1.1 Form of Underwriting Agreement.(1)
Exhibit 1.2 Form of Underwriters' Warrant Agreement.(1)
Exhibit 3.1 Articles of Incorporation of the Registrant. (1)
Exhibit 3.2 Bylaws of the Registrant (1)
Exhibit 5.1 Opinion of Maurice J. Bates L.L.C.(2)
Exhibit 10.1 Stock Compensation Plan (1)
Exhibit 10.2 Warrant Agreement with American Stock Transfer & Trust Company. (1)
Exhibit 10.3 (i) Loan Agreement with Robert E. Schmidt, Jr. (1)
(ii) First Amendment to Loan Agreement (1) (iii) Second
Amendment to Loan Agreement (1) (iv) Third Amendment to
Loan Agreement (1) (v) Amended and Restated Pledge
Agreement (1) (vi) Amended and Restated Guaranty
Agreement (1) (vii) Assignment of Loan (1) (viii) Amended
and Restated Security Agreement (1)
(ix) Amended and Restated Guaranty Agreement, Carol Kolozs. (1)
(x) Amended and Restated Guaranty Agreement, Aarica Holdings, Inc. (1)
(xi) Amended and Restated Guaranty Agreement, Aarica Sport, S.A. de C.V. (1)
(xii) Amended and Restated Guaranty Agreement, Taimex Industries, S.A. de C.V. (1)
(xiii) Note Extension (1)
Exhibit 10.4 Warrant Agreement with Kashner Davidson Securities Corporation (1)
Exhibit 10.5 Lease on Nasco building. (1)
Exhibit 10.6 Sublease on Mexico City offices. (1)
Exhibit 10.7 License agreement with L.A. Gear. (1)
Exhibit 10.8 License agreement with Lotto. (1)
Exhibit 10.9 Sample purchase order for K-Swiss. (1)
Exhibit 10.10 Sample purchase order for Wilson Sporting Goods Co. DE Mexico, SA. DE CV (1)
Exhibit 10.11 Copy of Nasco union contract. (1)
Exhibit 10.12 Sample employee contract. (1)
Exhibit 21 Subsidiaries of the Registrant. (1)
Exhibit 23.1 Consent of Arthur Andersen, L L. P., Certified Public Accountants.(1)
Exhibit 23.2 Consent of Maurice J. Bates, L.L.C. to be contained in his opinion filed as Exhibit 5.1 to
this registration statement.(2)
Exhibit 27 Financial Data Schedule (1)
--------------
(1) Filed herewith
(2) To be filed by amendment
</TABLE>
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(2) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(a) Include any Prospectus required by Section 10(a)(3) of the Securities Act;
(b) Reflect in the Prospectus any facts or events which, individually or
together, represent a fundamental change in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would exceed that which
was registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected on the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(c) Include any additional or changed material information on the plan of
distribution.
(3) For determining liability under the securities act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(4) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of
the securities at that time as the initial bona fide offering
of those securities.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised
that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy, as
expressed in the Act and is, therefore, unenforceable.
(6) In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the shares of the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(7) For the purposes of determining any liability under the
Securities Act, treat the information omitted from the form of
prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was
declared effective.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Orlando, State of Florida on August 14, 2000.
Aarica Holdings, Inc.
By: /s/ Carol Kolozs
----------------
Carol Kolozs, President,
Principal Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints Carol Kolozs and John J. Stitz,
and each for them, his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities (until revoked in writing), to sign any and all
further amendments to this Registration Statement (including post-effective
amendments), and to file same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
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<S> <C> <C>
Signature Title Date
/s Carol Kolozs President, Director August 14, 2000
-------------------
Carol Kolozs (Principal Executive Officer)
/s/ John J. Stitz Chief Financial Officer, Secretary, August 14, 2000
-----------------
John J, Stitz Treasurer (Principal Financial
Officer)
/s/ James R. Schnorf Director August 14, 2000
--------------------
James R. Schnorf
_____________________ Director August , 2000
Patrick L. M. Williams
/s/ Robert E. Schmidt, Jr. Director August 14, 2000
-------------------------
Robert E. Schmidt, Jr.
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