As filed with the Securities and Exchange Commission on January 16, 2001
Registration No. 333-43794
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO.2 to
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) IndustrialClassification Identification Number)
</TABLE>
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. Kirkpatrick & Lockhart LLP
One Galleria Tower 3100 Bank One Center
13355 Noel Road 1717 Main Street
Suite 300 Dallas, Texas 75201-4681
Dallas, Texas 75240 Phone (214) 939-4906
Phone (972) 308-8893 Fax (214) 939- 4949
Fax (972) 308-8841
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)
----------------------------------------------------------------------------------------------------------------------------------
Units 1,150,000 $10.00 $11,500,000 $3,036
----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 (2) 1,150,000 (2) (2) (2)
---------------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants (2) 1,150,000 (2) (2) (2)
---------------------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 (3) 1,150,000 $12.00 $13,800,000 $3,643
---------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants (4) 100,000 $ .01 $ 100 $ 1
---------------------------------------------------------------------------------------------------------------------------------
Units Underlying the
Underwriter's Warrants 100,000 $12.00 $1,200,000 $ 360
---------------------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 (5) 100,000 (5) (5) (5)
--------------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants 100,000 (5) (5) (5)
--------------------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 (6) 100,000 $18.00 $1,800,000 $ 540
--------------------------------------------------------------------------------------------------------------------------------
Total $28,300,100 $ 7580
</TABLE>
(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.
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.
SUBJECT TO COMPLETION, DATED JANUARY 16, 2001
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.
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Aarica Holdings, Inc. The Offering:
o Aarica designs, manufactures and distributes
athletic footwear, sportswear and sports accessories o We are offering 1,000,000 units, and
in Mexico for United States and European brands. each unit consisting of one share of common stock
and one warrant to purchase one share of
stock common stock for five years through Rushmore
o Aarica Holdings, Inc. Securities Corporation on a firm commitment
1000 Winderley Place, basis. We anticipate that the initial
Suite 124 public offering price will be between $9.00
Maitland, Florida 32751 and $11.00 per unit.
Telephone: (407) 667-9411
o The underwriter has an option to
purchase an additional 150,000 units to
Per Unit Total cover any over-allotments. The 150,000
-------- ----- shares included in the over-allotment units
Public offering price $ will be provided by certain selling shareholders.
Underwriting discounts $
Proceeds to Aarica $
o We intend to use the offering proceeds for possible
acquisition of businesses, brands or products, reduction
of debt, advertising and sales development, purchases
of manufacturing equipment and working capital and
other general corporate purposes.
</TABLE>
We have applied to list our units, common stock and warrants on the
Boston Stock Exchange and the NASDAQ SmallCap Market under the
following symbols:
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<S> <C> <C>
Boston Stock Exchange: NASDAQ SmallCap Market
Units AHM/U ARHI/U
Common stock AHM ARHI
Warrants AHM/W ARHI/W
</TABLE>
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.
RUSHMORE SECURITIES CORPORATION
Prospectus dated 2001
1
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TABLE OF CONTENTS
<S> <C>
Page
Prospectus Summary....................................................................................... 3
Selected Consolidated Financial Information.............................................................. 5
Risk Factors............................................................................................. 6
We have a history of operating losses and may continue to incur operating losses
until an adequate operating revenue base is established.............................................. 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
We are subject to prevailing Mexican economic conditions and changes in government policies............ 7
We are subject to fluctuations in the Mexican peso which have had an adverse impact on
our financial condition in the past ................................................................. 7
We are subject to duties on imports which could limit the variety of footwear that we sell............. 7
The imposition of monetary exchange controls would adversely affect our business....................... 7
Loss of Carol Kolozs and other key management personnel would adversely impact our business............ 8
Dilution to new shareholders will be approximately 84.8%............................................... 8
We must keep our prospectus current under the Securities Act and state securities acts for
warrant holders to be able to exercise their warrants............................................... 8
Management will retain broad discretion in the use of the offering's proceeds.......................... 8
Significant sales of common stock in the market by existing shareholders could adversely
affect market prices of the common stock............................................................. 8
The representative of the underwriters lacks experience in equity offerings, which could
adversely affect our offering........................................................................ 8
There has been no prior market for the securities offered and we cannot assure that an active trading
market will develop.................................................................................. 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 ...................................................................................... 16
Additional Information .................................................................................. 22
Management............................................................................................... 23
Certain Relationships and Related Transactions........................................................... 27
Principal Shareholders................................................................................... 28
Description of Securities..................................................................................29
Shares Eligible for Future Sale ......................................................................... 30
Plan of Distribution .................................................................................... 31
Legal Matters............................................................................................ 34
Experts....................................................................................................34
Consolidated Financial Statements........................................................................ F-1
</TABLE>
2
<PAGE>
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 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,
designs, manufactures and distributes athletic footwear, sportswear and sports
accessories for United States and European brands. We currently design and
manufacture athletic footwear for the L.A. Gear and Lotto brands for which we
are the exclusive distributors in Mexico. We also design and distribute
sportswear and sports accessories for these brands. We have manufactured
athletic footwear for Puma, Wilson and K-Swiss brands during 2000 and New
Balance and Vans during 1998 and 1999.
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 NASDAQ SmallCap Market
or the Boston Stock Exchange 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....................... 3,825,000 (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.
</TABLE>
Proposed Market Symbols:
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<S> <C> <C>
Boston Stock Exchange: NASDAQ SmallCap Market
Units AHM/U ARHI/U
Common stock AHM ARHI
Warrants AHM/W ARHI/W
</TABLE>
-----------------
(1) The 3,825,000 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;
3
<PAGE>
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 425,000 shares issuable to Continental Capital & Equity
Corporation upon exercise of outstanding stock
options at $2.00 per share; and
o 275,000 shares issuable to Robert E. Schmidt, Jr., a director of the
company upon the exercise of options at $2.00 per share.
(2) Includes 25,000 shares issued to CCEC in October 2000 upon the exercise of
stock options at $2.00 per share. (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.
<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, unaudited balance sheet as of September 30, 2000 and
unaudited statements of operations for the nine months ended September 30, 2000
and 1999. 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 Nine Months Ended
December 31, September 30,
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
1999 1998 2000 1999
---- ---- ---- ----
Unaudited
Operating Data:
Net sales $5,433,254 $5,742,454 $4,963,996 $3,751,198
Loss before extraordinary item (500,843) (467,115)
Extraordinary item-debt settlements 2,633,412 861,976
Net income (loss) 2,132,569 394,861 (1,551,744) (1,435,334)
Loss per share before extraordinary item (1) (.19) (.18) (.55) (.54)
Extraordinary item earnings per share .98 .33
Earnings (loss) per share .79 .15 (.55) (.54)
Weighted average common shares
outstanding 2,703,836 2,600,000 2,800,000 2,671,898
</TABLE>
As of
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<CAPTION>
<S> <C> <C>
Dec. 31, 1999 September 30, 2000
------------- ---------
Actual Unaudited (2) As Adjusted (2) (3)
------ ------------- -------------------
Balance Sheet Data:
Total assets $4,633,055 $4,419,536 $9,419,536
Total liabilities 5,879,139 6,867,364 3,617,364
Shareholders' equity (deficit) (1,246,084) (2,447,828) 5,802,172
</TABLE>
---------------
(1) Basic and diluted.
(2) Includes 25,000 shares issued to CCEC in October 2000 upon the exercise of
stock options at $2.00 per share. (3) 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.
5
<PAGE>
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 may continue to incur
operating losses until an adequate operating revenue base is established. 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. 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 net income
however, was the result of extraordinary gains on the extinguishment of debt.
Disregarding these gains from extinguishment of debt, we had net losses before
asset and income taxes of $861,647 and $1,867,004 for such years, respectively.
For the nine months ended September 30, 2000, we realized a net loss of
$1,551,744 compared to a net loss of $1,435,334 for the same period of 1999. We
had accumulated losses of $3,243,838 at September 30, 2000. 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 may result in
operating losses until an adequate revenue base is established. We cannot assure
that we will be able to operate profitably 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 could have greater
financial, marketing and sales resources than Aarica.
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 90% of our net sales in the second half of 2000 are
expected to be derived from licensing agreements with Lotto and L.A. Gear for
the manufacture and distribution of their products and this trend is expected to
continue in 2001. 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 licensors 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. We are 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 believes
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
6
<PAGE>
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
We are 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 substantial portion of the
proceeds from this offering is 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.
We are subject to fluctuations in the Mexican peso which have had an adverse
impact on our financial condition in the past. 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. For example, the peso lost value against the dollar, from
5.0750 pesos per dollar as of December 31, 1994 to 9.6350 pesos per dollar as of
December 31, 2000, as reflected in the following table:
Average Exchange Rate--Pesos per U.S. Dollar (Source: Banco de Mexico)
----------------------------------------------------------------------
Date Pesos per Dollar
---- ----------------
12/31/00 9.6350
9/30/00 9.4375
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
Although our U. S. 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 years 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.
We are subject to duties on imports which could limit the variety of
footwear that we sell. Currently, the company imports footwear from Asian
suppliers and pays a duty of 35%. If these duties were to be increased or
compensatory duties or non-duty trade barriers were to be imposed by the Mexican
government, our ability to import could be adversely affected which could limit
the variety of footwear that we sell.
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
7
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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.
Risk factors relating to our company and its securities
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.
Dilution to new shareholders will be approximately 84.8%. 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.
We must keep our prospectus current under the Securities Act and state
securities acts for warrant holders to be able to exercise their warrants.
Holders of the warrants will be able to exercise their warrants only if a
current registration statement relating to the underlying shares is then in
effect and only if the shares are qualified for sale under the securities laws
of the jurisdiction in which the holders of the warrants reside. For the life of
the warrants, the company will use its best efforts to maintain such a
registration statement but no assurance can be given that it will be able to do
so.
Management will retain broad discretion in the use of the offering's
proceeds. The company intends to use the proceeds of this offering for the
purposes specified under "Use of Proceeds" but management will have broad
discretion in the application of such proceeds, such as for the acquisition of
other businesses, brand names or products and for working capital. We have
allocated $3,500,000 of our net proceeds for the acquisition of unspecified
businesses, brand names or products. Shareholders will not have a vote on any
such acquisitions and will be dependent upon management's skill in making any
such acquisitions. There can be no assurance that management will be successful
in the negotiations of any acquisitions and, if an acquisition is consummated,
that it would be on terms that will be beneficial to the company.
Significant sales of common stock in the market by existing
shareholders could adversely affect market prices of the common stock. Upon the
completion of this offering, existing shareholders will own 2,825,000 of the
3,825,000 shares outstanding. Of these 2,825,000 shares, 575,000 shares will be
eligible for sale under Rule 144 beginning approximately June 2001 and the
remaining 2,250,000 shares will be subject to the underwriters lock-up for one
year from the date of this prospectus. Significant sales by such existing
shareholders could adversely affect prevailing market prices of the company's
stock and impair its ability to raise capital through the sale of its equity
securities.
The representative of the underwriters lacks experience in equity
offerings, which could adversely affect our offering. The representative of the
underwriters has only co-managed a public offering of its own equity securities
and this lack of experience could adversely impact our offering. A new
investment banker for the representative, however, recently joined the firm and
has had substantial experience in managing equity offerings similar to our
offering.
There has been no prior market for the securities offered and we cannot
assure that an active trading market will develop. Prior to this offering, there
has been no public market for our securities. We have applied for listing of our
securities on the Boston Stock Exchange and the NASDAQ SmallCap Market. We
cannot assure that either of these listings will be approved or, if approved,
that a meaningful, active market will develop or, if such a market should
develop that it will be sustained with sufficient liquidity to permit someone to
sell their shares at any time. We cannot assure that the securities could ever
be sold at or near the offering price, or at all, in the event of an emergency.
8
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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 $8,250,000. This is based
upon the $10 mid-point of 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.
The following table summarizes our intended use of these net proceeds:
<TABLE>
<S> <C> <C>
Percent of
Application of net proceeds Amount Net Proceeds
--------------------------- ------ ------------
Acquisitions (1) $ 3,500,000 42.4%
Repayment of certain indebtedness (2) 3,250,000 39.4
Purchase of manufacturing equipment 250,000 3.0
Working capital and general
corporate purposes 1,250,000 15.2
------------ ----
Total $ 8,250,000 100.0%
=========== ======
</TABLE>
----------------------
(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 of the company. The Schmidt International indebtedness is due February
15, 2001 and bears interest at 5% above the prime rate. Also includes payment of
taxes due the Mexican government and certain accounts payable totaling
approximately $650,000.
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 foreseeable future. We
plan to retain future earnings, if any, to finance operations and expansion of
our business.
9
<PAGE>
Dilution
Our net tangible book value at September 30, 2000 was a deficit of
$2,447,828, or approximately $(.87) 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 average
number of shares of our common stock outstanding. We used the 25,000 shares
issued in October 2000 to CCEC in computing the net tangible book value.
The pro forma as adjusted net tangible book value per share after this
offering will be approximately $5,802,172 or $1.52 per share after giving effect
to the sale of the 1,000,000 shares we are offering based upon the $10 mid-point
of an assumed initial public offering price of $9.00 to $11.00 per unit, (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 $2.39 to existing shareholders and an immediate
dilution of $8.48 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share $10.00
Net tangible book value per share as of September 30, 2000 $(0.87)
Increase per share attributable to new investors 2.39
------
Adjusted net tangible book value per share after this offering 1.52
Dilution per share to new investors in this offering $8.48
======
Percentage dilution 84.8%
</TABLE>
The following table presents the following data as of December 31, 2000,
and assumes an initial public offering price of $10 per share (the mid-point of
an assumed 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
and upon the exercise of outstanding options by officers,
directors and affiliates at prices below the offering price of
the units.
<TABLE>
<CAPTION>
Shares of Common Stock Purchased Aggregate Consideration Average Price
--------------------------------- -------------------------------- -----------------
--------------------------------- -------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Number Percent Amount Percent Per Share
---------------- ---------- --------------- ----------- ----------------
---------------- ---------- --------------- ----------- -----------------
Existing shareholders 3,525,000 (1) 77.9% $1,976,000 16.5% $.56
New investors 1,000,000 22.1% 10,000,000 83.5% $10.00
------------- ------- ------------- -------
Total 4,525,000 (1) 100.0% $11,976,000, 100.0%
============= ======= ============= =======
</TABLE>
--------------
(1) The 3,525,000 shares held by existing shareholders include:
o 425,000 shares issuable to CCEC upon exercise of stock options at $2.00
per share;
o 275,000 shares issuable to Robert E. Schmidt, Jr., a director of the
company upon the exercise of options at $2.00 per share; and
o 25,000 shares issued to CCEC in October 2000 upon the exercise of stock
options at $2.00 per share. (2) The 4,525,000 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, of which 275,000 outstanding options are
exercisable at the offering price of the units in this offering; and
o 105,000 shares issuable upon exercise of warrants at $2.50 per share
issued to the selling agent in a private placement in June 1999.
10
<PAGE>
Capitalization
The following table sets forth our capitalization as of September 30, 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 the $10 mid-point of an assumed initial
public offering price of $9.00 to $11.00 per share and the
application of the estimated net proceeds of $8,250,000 after
deducting estimated underwriting discounts and commissions and
our estimated offering expenses.
<TABLE>
<S> <C> <C>
Actual As Adjusted
Total assets $ 4,419,536 $9,419,536
Total current liabilities (2) 6,867,364 3,617,364
Total long-term debt -- --
Shareholders equity (deficit):
Common stock, $0.01 par value,
20,000,000 shares authorized,
2,825,000 shares issued and
outstanding, 3,825,000 as adjusted (1) (2) 28,250 38,250
Additional paid-in capital (2) 767,760 9,007,760
Accumulated losses (3,243,838) (3,243,838)
----------- ------------
Total shareholders' equity (deficit): ($2,447,828) $ 5,802,172
------------ ------------
Total liabilities and shareholders' equity (deficit): $ 4,419,536 $ 9,419,536
============ ============
</TABLE>
--------------
(1) The 3,825,000 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 425,000 shares issuable to CCEC at $2.00 per share upon exercise of
outstanding stock options; and
o 275,000 shares issuable to Robert E. Schmidt, Jr., a director of the
company upon the exercise of options at $2.00 per share.
(2) Includes 25,000 shares issued to CCEC in October 2000 upon the
exercise of stock options at $2.00 per share.
11
<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 as described below
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 our distribution companies. We expect manufacturing sales to
third parties to decline significantly in 2000 and 2001 as we shift production
to sales to our distribution companies due to the sales growth by these
companies. We began production of shoes for sale by our L.A. Gear distribution
company in October 2000. Overall, we expect sales to increase moderately in 2000
versus 1999. In 1998, the manufacturing company accepted a short-term commitment
from New Balance de Mexico, S.A. de C.V. to assemble rather than manufacture
approximately $2,500,000 of shoes with high cost imported shoe components. 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. Due to the lack of working capital in 1999, the company was unable to
purchase sufficient raw materials to complete existing sales orders and
therefore could not seek additional business.
Gross profit decreased to 5.3 % of sales in 1999 versus 18.8% of sales
in 1998. In 1999, the manufacturing company paid higher raw material and
shipping costs due to insufficient cash to purchase materials in economic
quantities. Direct labor and overhead costs as a percentage of sales increased
mainly because labor and overhead costs were not reduced with the approximately
$970,000 decline in manufacturing sales. Sales decreases due to production
disruptions caused by inadequate financing were not planned and therefore, labor
and overhead costs were not adjusted accordingly. 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 28.4% of net
sales in 1999 from 24.3% 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 amounts being $3,756,096 ($2,441,463 net
of income tax effects) and $935,329 ($607,964 net of income tax effects) in 1999
and 1998, respectively, for the reduction of U.S. dollar debt owed to Banco
Bilbao Vizcaya Mexico, S.A. based on two settlement agreements. The majority of
the debt to this bank was incurred prior to 1995 for inventory and working
capital financing and for the purchase of manufacturing equipment. Due to the
financial crisis that occurred in Mexico in 1995, banks, with the assistance of
the Mexican government, have been settling delinquent debts that were incurred
during and before the 1995 financial crisis. The company was able to extinguish
the bank debt with $750,000 of financing provided by Schmidt International and
record the related extraordinary income in 1999. The remaining extraordinary
income was a result of settlements of accounts payable with vendors. 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 expenses in 1999
of $221,996 were mainly for the recording of inflation adjustments and
surcharges on taxes and import duties owed to the Mexican government.
12
<PAGE>
Comparison of Nine Month Periods Ended September 30, 2000 and 1999
Net sales increased 32.3% in 2000 largely due to the cash and letter of
credit financing provided by Schmidt International which enabled the company to
more nearly meet demand for its products by manufacturing and importing more
Lotto product, including an expansion of the Lotto line, and which also allowed
the company to introduce the L.A. Gear product line in June 1999. In 1999 the
company was not able to meet the demand for its Lotto products because it did
not have the financial ability to manufacture and import all of the product that
it could have sold.. Gross profit increased to 14.5% from 10.7% of net sales
mainly due to an increase in sales volume in the distribution companies and a
reduction in labor and overhead costs at the manufacturing company as costs were
adjusted to lower manufacturing levels as described in the Comparison of Years
Ended December 31, 1999 and 1998. In addition, new plant management was hired to
implement a modular production configuration, and although significant one-time
training and implementation costs were incurred during the 2000 first quarter,
these changes resulted in an increase in the gross profit in the 2000 period
versus the 1999 period.
The manufacturing operations accounted for the majority of the losses
from operations in these periods due to operating below capacity as a result of
inadequate financing as described in the Comparison of Years Ended December 31,
1999 and 1998. The inadequate financing prohibited the company from accepting
some purchase orders from customers because it could not finance the purchase of
materials and also resulted in the company paying premiums for the procurement
of materials because it could not purchase materials in economic quantities and
purchased materials from vendors willing to provide credit. With the proceeds
from this offering the company believes that it will have sufficient working
capital to produce a sufficient volume to operate profitably. We believe that
the L.A. Gear production, which began in October 2000, along with the demand for
our Lotto product will be sufficient to generate a profitable volume; however,
the company is also seeking new brands to manufacture and sell.
The increase in selling, general and administrative expenses is due
mainly to the recording of inflation adjustments and surcharges on unpaid
payroll and value added taxes and import duties. Due to the inability to pay
these taxes the company incurred approximately $534,000 and $154,000 of expenses
for inflation adjustments and surcharges in the 2000 and 1999 periods,
respectively. Of the $534,000 recorded in 2000, approximately $324,000 are
expenses of 1999 and 1998; however, the company did not record these expenses in
1999 and 1998 because the company filed protests with the Mexican tax authority
disputing the form of payment of approximately $642,000 of taxes, inflation
adjustments and surcharges. The understanding of the company was that it did not
need to record inflation adjustments and surcharges on protested taxes. The
company in August 2000 received a favorable ruling on approximately $566,000 of
disputed taxes but received legal advice that, in spite of winning the protest,
the Mexican tax authority has other permissible procedures that it can attempt
to utilize to seek payment of the taxes. Moreover, the company was advised that
the liability for inflation adjustments and surcharges must continue to be
recorded until the Mexican tax authority has utilized all of the procedures
available to it, the company has reached a settlement with the tax authority, or
until the end of a five year period commencing with the initial ruling. The
company expects to eliminate the costs of inflation adjustments and income taxes
by paying its tax liabilities on time. The proceeds from this offering will
enable the company to become current on its installment arrangements with the
Mexican government and pay current taxes on time. Although there can be no
assurance of success, the company will seek to negotiate settlements with the
Mexican tax authority which result in payments of an amount significantly less
than the $2,046,464 of liabilities recorded. The company believes that it is
possible, with the change in the Presidential ruling party in December 2000,
that tax relief will be granted to businesses that owe taxes due to statements
made by the new government although no specific plan has been established. Any
reductions in taxes will result in income to the company. See the discussion of
taxes under Liquidity and Capital Resources.
Selling, general and administrative expenses in the 2000 period include
approximately $200,000 of bad debt expense, of which $145,563 is an increase in
the allowance for doubtful accounts, recorded in an effort to as accurately as
possible state collectible accounts receivable in anticipation of this offering.
The company had average bank debt outstanding during the 1999 period of
approximately $4,500,000 bearing interest at LIBOR plus 5% whereas the average
debt owed to Schmidt International during the 2000 period was approximately
$2,000,000 bearing interest at the prime rate plus 5%. The company believes that
the interest expense incurred in the 2000 period is higher than it would pay on
similar levels of debt after the offering because it believes that it will be
able to borrow at a rate less than prime plus 5%. The interest expense in 2000
includes approximately $85,000 of Schmidt International loan costs in addition
13
<PAGE>
to interest expense of prime plus 5%. Interest expense in 2000 also includes
approximately $120,000 of expense to a non-affiliated individual in Mexico
incurred to finance a letter of credit at an annual interest rate of
approximately 70% in order to finance one purchase of imported product which was
profitable even after incurring this interest. This arrangement was entered into
prior to the involvement of Schmidt International. The company does not
anticipate these types of costs to occur after this offering.
The net loss for the 2000 period was $1,551,744 compared to $1,435,334
in the 1999 period. The 2000 net loss includes approximately $939,000 of
unusually high expenses as described above caused by inability to adequately
finance working capital. Excluding these expenses, which the company does not
expect to recur at this level as a result of this offering, the company showed a
significant improvement in 2000 compared to 1999.
Liquidity and Capital Resources
The company's cash position at September 30, 2000 was $204,699 of
available cash compared to $242,809 at December 31,1999. Restricted cash
decreased at September 30, 2000 due to the liquidation of the related letter of
credit.
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 $3,756,096 ($2,441.463 net of income tax effects)
recorded in 1999 and in addition borrowed approximately $450,000 in 1999 and
$1,350,000 in 2000 for the payment of certain debt obligations, resulting in
settlements favorable to the company, and other working capital purposes.
Schmidt International has loaned the company a total of approximately $2,550,000
through September 30, 2000. This loan matures on February 15, 2001. Management
expects to close this offering prior to February 15, 2001 and believes that
proceeds from the exercise of stock options, together with the cash flow from
operations, will be adequate to fund operations until this offering is closed.
Although the financing provided by Schmidt International has enabled
the company to increase sales and inventories, the company has not been able to
pay its obligations on time. Net proceeds of approximately $8,250,000 from this
offering will be used to pay the debt owed to Schmidt International, pay taxes
and related inflation adjustments and surcharges to the Mexican government and
certain accounts payable, purchase manufacturing equipment, for general working
capital and corporate purposes and to make acquisitions if one or more
appropriate target companies become available. 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.
If this 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.
The company raised $420,010, net of expenses, in a private offering of
its common stock in June 1999.
Current liabilities exceeded current assets by $2,085,045 at December
31, 1999 and $3,191,925 at September 30, 2000. See the unaudited consolidated
statements of cash flows for the nine months ended September 30, 2000 and 1999
for the changes in the components of working capital.
Accounts receivable - trade 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. Accounts
receivable - trade, before allowance for doubtful accounts of $265,563 at
September 30, 2000 and $120,000 at December 31, 1999 decreased by $17,712.
Prepaid expenses increased by $220,745 from December 31, 1999 to
September 30, 2000 due to approximately $35,000 of prepaid Schmidt International
loan costs that are being amortized to the maturity date of the loan and
approximately $190,000 of payments related to this offering that will be
reclassified to shareholders' equity at the time of the offering.
14
<PAGE>
Inventories increased $273,738 from December 31, 1999 to September 30,
2000 mainly due to the financing provided by Schmidt International which enabled
the company to carry more inventories to support the increase in net sales.
Accounts payable - trade increased $900,641 from December 31, 1998 to
December 31, 1999 due to our L.A. Gear distribution company, payables related to
imported athletic footwear received in December 1999, and liabilities related to
letters of credit. Accounts payable - trade decreased $238,762 from December 31,
1999 to September 30, 2000 mainly due to the payment of the liability incurred
to finance a letter of credit.
Other accrued expenses and liabilities decreased from December 31, 1999
to September 30, 2000 mainly due to a reduction of customer advances as the
company shifted production from sales to third parties to its distribution
companies.
Notes payable to related parties increased $898,622 from December 31,
1998 to December 31, 1999 due to borrowings from Schmidt International. An
increase in borrowings from Schmidt International between December 31, 1999 and
September 30, 2000 was partially offset by a $300,000 reduction in debt to CCEC
which was satisfied by shares of company stock from the personal holdings of
Carol Kolozs. The company recorded a capital contribution of $300,000 in
connection with this transaction.
Accrued taxes payable of $2,046,464 at September 30, 2000 and
$1,355,392 at December 31, 1999 are principally unpaid payroll and value added
taxes and import duties and related inflation adjustments and surcharges. The
increase is due to the company's inability to pay taxes in 2000 and the
recording of inflation adjustments and surcharges as explained in the Comparison
of Nine Month Periods Ended September 30, 2000 and 1999. The company has
agreements with the Mexican government to pay approximately $1,170,000 in
installments. The company will pay the remaining taxes by entering into another
agreement to pay in installments or by utilizing proceeds from this offering to
pay taxes currently due with the possibility of negotiating a reduction in the
liability recorded or by a combination thereof. The accrued taxes payable
increased $501,705 from December 31, 1998 to December 31, 1999 due to accruals
for import duties and value added 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 resources.
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 ("Bank of Mexico"), inflation in Mexico
was 8.9%, 12.3% and 18.6% in 2000, 1999 and 1998, respectively. Bank of Mexico
has set an inflation goal of 6.5% for 2001. 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 may
utilize derivative financial instruments in the future.
15
<PAGE>
Forward Looking Statements
This prospectus contains forward looking statements relating to the company's
future economic performance, possible acquisitions of businesses and brand
names, our operating and growth strategies, plans and objectives of management
for future operations, and other financial items that are based on the beliefs
of, as well as assumptions made by and information currently known to our
management. The words "expects," "intends," "believes," anticipates," "may,"
"will," "could" and "should" and similar expressions and variations thereof are
intended to identify forward-looking statements. All forward looking statements
attributable to us, or persons acting on our behalf, are expressly qualified by
the cautionary statements included in this prospectus. The cautionary statements
set forth in this prospectus are intended to emphasize that actual results may
differ materially from those contained in any forward looking statement.
16
<PAGE>
BUSINESS OF AARICA
General
Aarica is a Texas corporation which, through Mexican subsidiaries,
designs, manufactures and distributes athletic footwear, sportswear and sports
accessories for United States and European brands. We currently design and
manufacture athletic footwear for the L.A. Gear and Lotto brands for which we
are the exclusive distributors in Mexico. We design and import from Asian
manufacturers models of Lotto and L.A. Gear athletic footwear that we can
purchase more economically than manufacture due to the large number of sizes and
color variations. We also design and distribute sportswear and sports
accessories, fabricated by other Mexican companies, for these brands. We have
manufactured athletic footwear for Puma, Wilson and K-Swiss brands during 2000
and New Balance and Vans during 1998 and 1999.
History
The company commenced business in 1990 with the establishment in Mexico of
Aarica Sport, S. A. de C. V. 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 company was reorganized in 1998 through the organization under Mexican
law of Aarica Holdings, Mexico, S.A. de C.V., which acquired substantially all
of the stock of four Mexican subsidiaries from Mr. Kolozs. Simultaneously, Mr.
Kolozs organized Aarica Holdings, Inc. under Texas law and exchanged the stock
of Aarica Mexico for 2,600,000 shares of the Texas company. All of the company's
business to date has been conducted in Mexico through the subsidiaries but the
company plans to expand its operations to the United States, Canada and more of
Latin America.
The evolution of the Mexican market was advanced with the establishment of
the North American Free Trade Agreement 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., 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., which
utilizes the Zacatecas facility.
The Zacatecas plant, a 100,000 square foot manufacturing facility
constructed to the company's specifications, commenced operations in 1994 with a
contract from Wal-Mart Stores, Inc. 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 although marginally
profitable, 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
17
<PAGE>
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 athletic 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
The company's business strategy is:
o to utilize its modern manufacturing facility 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.
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 crisis of 1995. In October
2000, the company implemented this strategy with the commencement of production
of L.A. Gear athletic footwear at its Zacatecas facility for our L.A. Gear
distribution company. It is the intention of management to utilize this
important manufacturing resource to increase profitability by producing more
products for its own distribution. We expect the majority of our 2001 production
to be dedicated to our own distributed products.
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 Economic Community, which went into effect on
July 1, 2000.
The company believes that the above mentioned free trade agreements,
together with the democratization process occurring 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.
Proposed Acquisitions
The company plans to expand its operations throughout the United
States, Latin America and Canada through one or more acquisitions of profitable
businesses or brand names that will offer established distribution outlets. Mr.
Kolozs has been involved in the distribution of athletic footwear and wearing
apparel in the United States and Mexico for nearly 20 years and during that time
has established numerous contacts in the industry who make known to him other
businesses and brands which may be available for acquisition, joint venture or
other strategic alliance relationships. In the past, the company has had
discussions with several potential acquisition partners but has not had the
financing available to consummate an acquisition. The company has allocated
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<PAGE>
approximately $3,500,000 of the proceeds of this Offering for such purposes and
believes that it will be able to finance a substantial acquisition with such
proceeds, debt and the use of company stock.
The company believes that if it is able to acquire a profitable
business with distribution outlets in the United States, it will be able to
utilize these outlets to distribute in the United States the products it
currently designs, manufactures and distributes in Mexico.
Manufacturing
The company manufactures high-quality athletic footwear through its
wholly owned subsidiaries, Taimex and Nasco. Taimex provides the manufacturing
equipment and materials and Nasco provides the labor to produce the footwear.
The 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. Training and experience have 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 workweek 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 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.
The company also manufactures soccer shin guards and goalie gloves in
this facility.
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 Zacatecas
facility and distributed in Mexico through the company's 99%-owned subsidiary,
Aarica Sport. 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 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 expect to begin distribution of imported L.A. Gear
athletic footwear in November 2000 to complement other models manufactured in
our plant.
We sell our products through an in-house sales force consisting of a
national sales manager and eleven 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
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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.
In 1998, 46% of the company's net sales were to New Balance de Mexico,
S.A. de C.V. No customer accounted for more than 10% of net sales in 1999.
Design and Development
The company employs ten persons who design and develop athletic
footwear and apparel such as work-out clothing, jackets, training and running
apparel, athletic carrying bags and athletic accessories such as soccer balls,
shin guards and goalie gloves for L.A. Gear and Lotto.
Other Products
The company currently manufactures sports accessories, such as goalie
gloves and shin guards for soccer, at the Zacatecas 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. Aarica Sports Products
Manufacturing, S. A. de C. V. 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 design, manufacture and
distribution in Mexico 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.
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 its 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.
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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 in Zacatecas 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 from the
lessor, an unaffiliated party, 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 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 required to
begin paying an annual rental of approximately $100,000, plus an added value
tax, plus annual Mexican inflation increases under a lease agreement which
expires in April 2001, with 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), the regulations issued under the General Law 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 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 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.
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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 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 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 December 31, 2000, the Company had approximately 320 employees,
including 31 administrative, 13 sales, 10 design and development and 266
production and distribution employees.
Union Contract and Labor Relations
With approximately 250 unionized workers, Nasco is the largest employer
among the company and its subsidiaries. Nasco employees are affiliated with
Confederacion de Trabajadores Mexicanos, the largest union in Mexico. The
collective bargaining agreement between Nasco and the union provides for yearly
negotiations in the month of March, 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 workweek 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 after four years 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.
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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.
Litigation
The company is not currently a party to any material pending litigation
or proceedings that would materially affect its business or assets.
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.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the Company's
directors and executive officers at December 31, 2000.
<TABLE>
<S> <C> <C>
Name Title Age
---- ----- ---
Carol Kolozs President, Director 54
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
</TABLE>
--------------
(1) Chairman of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee and Compensation Committee.
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 inception. 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's 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, acquisitions, risk management, management information systems,
employee benefits, consolidations and foreign currency translation. 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 and 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
since February 1998 and also serves as the General Manager. CCEC 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 of 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 laminated wood products. Before joining CCEC, 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
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<PAGE>
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 Employees
Emanuel Bartoni, 30, 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.
Francisco Cos Sustaita, 45, was employed in December 2000 as Director of Sales.
He worked 12 years for Adidas de Mexico, S.A. de C.V. as Director of Sales from
1993 to December 2000 and in various sales positions from 1986 to 1989. He was
responsible for managing a sales force of 20 persons in 3 sales offices. He
developed and implemented the company's sales plan and selected domestic and
imported products and styles to be sold by Adidas in Mexico. He was Commercial
Director of Lazer Deportes, S.A. de C.V. (Slazenger) from 1990 to 1993 and was
responsible for sales, promotion and distribution.
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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, 2000, 1999 and 1998. No other executive officer was
paid more than $100,000 in salary and bonus for such fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Annual Compensation All Other
<S> <C> <C> <C> <C>
Principal Position Fiscal Year Salary Bonus Compensation
------------------ ----------------- --------- ----- -------------
Carol Kolozs, President December 31, 2000 $200,000 - -
December 31, 1999 $148,000 - -
December 31, 1998 $148,000 - -
</TABLE>
The company hired John Stitz as Secretary, Treasurer and Chief
Financial Officer in June 2000 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 plus $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. Messrs. Schnorf, Williams and Schmidt have each elected to accept
5,000 options at the offering price of the Units in this offering in lieu of
their $5,000 annual retainer for the year 2000. Outside directors will also be
eligible to participate in the company's stock compensation 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 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 advisors 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 at the time of this offering may 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
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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 are 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.
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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 the three existing
Mexican subsidiaries, 80% of the outstanding common stock of Aspro, and 99% of
two Mexican companies incorporated in 2000. 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 Mexican subsidiaries with 99% ownership.
The company owed Mr. Kolozs $93,279 and $406,832 without interest, at December
31, 1999 and December 31, 1998, respectively.
In April 1998, Continental Capital and Equity Corporation extended the
company an unsecured revolving line of credit in the amount of $300,000 with
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. Mr. Kolozs contributed 150,000 of his personal shares to CCEC
in cancellation of the CCEC debt and 200,000 of his personal shares to CCEC for
its services in the 1999 private offering without any consideration from the
company in order to prevent dilution of the company's outstanding shares. In
June 2000, CCEC was granted an option to purchase 250,000 shares at $2.00 per
share and in September 2000, CCEC was granted on option to purchase 200,000
shares at $2.00 per share. In October 2000, CCEC exercised options for 25,000
shares. 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 provided the company a borrowing line in an
amount of approximately $2,600,000 which expires December 31, 2000 and has
provided guarantees and has discounted certain letters of credit. The note
evidencing the loan bears interest at the prime rate plus 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. In October 2000, the company also
granted Mr. Schmidt options to purchase 275,000 shares of the company's common
stock for five years at $2.00 per share beginning January 1, 2001. The option
must be exercised in 25,000 share increments and may be called by the company
beginning in April 2001 if the closing price of the company's stock is $15 per
share for ten consecutive trading days.
All future transactions between the company and its officers, directors
or 5% shareholders, and their respective affiliates, will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the independent disinterested directors of the
company. Any forgiveness of loans must be approved by a majority of the
company's disinterested directors who do not have an interest in the transaction
and who have access, at the company's expense, to the company's or independent
counsel. Past transactions with affiliates were approved by a majority of
disinterested directors at the time of the transaction, except the issuance of
1,000 shares to Mr. Kolozs at the time of the company's organization when he was
the only director.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of December 31,
2000, regarding the beneficial ownership of the company's common stock
immediately prior to, and after, the sale of the units 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
<S> <C> <C> <C>
Name and Address of Number of Before After
Beneficial Owner Shares Owned the Offering the Offering
Carol Kolozs (1) 2,250,000 80.4% 59.2%
1000 Winderley Place
Maitland, Florida 32751
James Schnorf (2) 835,000 25.7 19.6
195 Wekiva Springs Road
Longwood, Florida 32779
Robert E. Schmidt, Jr. (3) 300,000 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) 3,410,000 96.1% 74.9%
</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 2,200,000 shares or 57.8 %.
(2) Held by CCEC, of which Mr. Schnorf is an officer and director. Includes
options to purchase 425,000 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 735,000 shares or 17.9%. 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
275,000 shares at $2.00 per share beginning January 1, 2001.
(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
3,260,000 shares or 70.7% after the offering.
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<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 December 31, 2000 there were
2,825,000 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
summaries of the material 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.
Selling Agent's Warrants
The selling agent in the June 1999 private placement received warrants
to purchase 105,000 shares of the common stock at $2.50 per share until June 30,
2004. The exercise price may be paid in cash, stock of the company or by tender
of a portion of the warrants based on the exercise price and the closing price
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<PAGE>
of the common stock on the trading date preceding the tender. The number of
shares issuable upon exercise of the warrants is subject to adjustment in the
event of a stock dividend, spin-off, split up or reduction in number of shares
outstanding. The holder of the warrants has demand and "piggy-back" registration
rights with respect to the common stock issuable upon exercise of the warrants
at the company's expense.
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 3,825,000 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 2,825,000 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 38,250 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 (2,200,000 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 by private investors in a
private offering in June 1999 became eligible for sale under Rule 144 in June
2000 and the 200,000 shares acquired by CCEC in July 1999 became eligible for
sale under Rule 144 in July 2000. The 150,000 shares acquired by CCEC in June
2000 will be eligible for sale under Rule 144 in June 2001. The 150,000 CCEC
shares, together with any shares acquired by CCEC upon the exercise of stock
options, 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.
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Plan of distribution
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Rushmore Securities
Corporation, have 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
Rushmore Securities Corporation
Total 1,000,000
In January 2001, Rushmore Securities Corporation ("Rushmore") was
substituted as representative of the underwriters because the manager of
investment banking of the former representative was employed by Rushmore to be
its manager of investment banking. Rushmore is a registered broker dealer which
has been in business for more than three years and , as a firm has only served
as co-manager of an equity offering of its own securities three years ago and
thus lacks experience in managing an equity offering such as this offering.
However, the new investment banker with Rushmore has substantial experience in
such offerings and has managed nine equity offerings since October 1997 which
successfully raised approximately $65,000,000. There is no other relationship
between the company and Rushmore. The lack of investment banking experience of
Rushmore could adversely impact our offering.
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. The
underwriters have advised us that they do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
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 underwriter's 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
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<PAGE>
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 underwriters may still exercise the
warrants 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 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 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, the company and the selling shareholders 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. All of the
shares of common stock included in the over-allotment units will be sold to the
underwriters by the selling shareholders and the company will not receive any
proceeds from the sale of such shares. 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:
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.
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 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
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<PAGE>
gross proceeds of this offering, including proceeds from any securities
purchased under the over-allotment option. The underwriters will pay the
underwriters' expenses in excess of the non-accountable expense allowance. 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, solicit 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
the 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 prior to the
effective date (other than those subject to the over-allotment option), are
subject to a one year lock-up period, with the exception of 200,000 shares of
common stock issued in the June 1999 private placement, and shares acquired by
CCEC and Robert E. Schmidt, Jr. upon the exercise of stock options, which are
subject to a six month lock-up period from the date of exercise. CCEC's 150,000
shares acquired in June 2000, as consideration for cancellation of approximately
$300,000 of debt will be subject to a six month lock-up from the effective date
of this prospectus and become eligible for sale under Rule 144 in June 2001
unless registered under the Securities Act prior to that date. The lock-up
periods begin on the later of the date of issuance or the effective date of this
prospectus, and are subject to early termination at the sole discretion of the
underwriters. If the over-allotment option is exercised, Mr. Kolozs will sell up
to 50,000 shares and CCEC will sell up to 100,000 of the shares it acquired in
July 1999. An appropriate legend referring to these restrictions is or 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 representative of Rushmore,
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.
In connection with the offering, Rushmore, on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of units in excess of the number of units to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the units in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of bids or purchases of units
made for the purpose of preventing or retarding a decline in the market price of
the units while the offering is in progress. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Rushmore Securities Corporation, in covering syndicate short positions or making
stabilizing purchases, repurchases units originally sold by that syndicate
member.
34
<PAGE>
In addition to the foregoing activities, the underwriters may make
short sales of the company's units and may purchase the company's units on the
open market to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of units than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' "overallotment" option to purchase additional
units in the offering. The underwriters may close out any covered short position
by either exercising their overallotment option or purchasing units in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of units
available for purchase in the open market as compared to the price at which they
may purchase units through the overallotment option.
"Naked" short sales are sales in excess of the overallotment option.
The underwriters must close out any naked short position by purchasing units in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the units in the open market after pricing that could aversely affect investors
who purchase in the offering.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the company's units or preventing or retarding a decline in
the market price of the company's units.
These activities may cause the price of the units to be higher than the
price that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected on the Boston Stock Exchange
and/or the NASDAQ SmallCap Market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued at
any time.
Listing applicationS
We have applied for listing of the units, common stock and warrants on
the Boston Stock Exchange and the NASDAQ SmallCap Market under the trading
symbols: AHM/U, AHM and AHM/W on the Boston Stock Exchange and ARHI/U, ARHI, and
ARHI/W on the NASDAQ SmallCap Market, respectively. We cannot assure that either
application will be approved.
LEGAL MATTERS
The legality of our units, common stock and 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 Kirkpatrick & Lockhart 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.
35
<PAGE>
AARICA HOLDINGS, INC.
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements
<TABLE>
<S> <C>
Page
Report of Arthur Andersen, Independent Public Accountants..............................................F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998...........................................F-2
Consolidated Statements of Operations
for the years ended December 31, 1999 and 1998.......................................................F-3
Consolidated Statements of Shareholders' Deficit
for the years ended December 31, 1999 and 1998.......................................................F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1999 and 1998.......................................................F-5
Notes to Consolidated Financial Statements as of December 31, 1999 and 1998............................F-6
Unaudited Consolidated Financial Statements as of September 30, 2000
Unaudited Consolidated Balance Sheet as of September 30, 2000..........................................F-15
Unaudited Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999....................................................................F-17
Unaudited consolidated statement of Shareholders' Deficit for the nine months
ended September 30, 2000.............................................................................F-18
Unaudited Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 and 1999....................................................................F-19
Notes to Unaudited Consolidated Financial Statements as of September 30, 2000..........................F-21
</TABLE>
36
<PAGE>
Report of Independent Public Accountants
To the Shareholders of
Aarica Holdings, Inc.
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.
/s/ Arthur Andersen
Mexico City, D.F.
July 15, 2000 (except with respect to
the matters discussed in Notes 1 and 5, as to which the dates are August 15,
2000 and December 29, 2000, respectively).
F-1
<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 $ 214,654 $ 254,409
Restricted cash 262,544 -
Accounts receivable-
Trade, net of allowance for doubtful accounts of $120,000 and
$142,000 in 1999 and 1998, respectively 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
============ ============
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable-trade $ 2,314,127 $ 1,413,486
Accrued taxes 1,355,392 853,687
Notes payable to related parties 1,852,111 953,489
Other accrued expenses and liabilities 357,509 254,479
----------- -----------
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 and 1998,
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' deficit $ 4,633,055 $ 4,011,691
============== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
<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 expense (233,842) (409,158)
Translation loss (157,102) (136,343)
Other income (expense) (221,996) 665
---------- -----------
(612,940) (544,836)
----------- -----------
Loss before provisions for asset and income taxes (1,867,004) (861,647)
Provisions for asset and income taxes (1,366,161) (394,532)
----------- -----------
Loss before extraordinary item (500,843) (467,115)
Extraordinary item - Bank and creditor settlements, net of
related income tax effects of $1,417,990 in 1999 and
$464,141 in 1998 2,633,412 861,976
------------ -----------
Net income $ 2,132,569 $ 394,861
============ ============
Weighted average shares outstanding 2,703,836 2,600,000
============ ============
Earnings per share:
Loss before extraordinary item $ (0.19) $ (0.18)
Extraordinary item 0.98 0.33
------------ ------------
Net income $ 0.79 $ 0.15
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-3
<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>
<S> <C> <C> <C> <C> <C>
Capital Stock
-------------------------------
Additional Total
Paid-in Accumulated Shareholders'
Shares Amount Capital Losses Deficit
-------------- -------------- -------------- -------------- --------------
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.
F-4
<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>
<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 (used in) by
operating activities-
Extraordinary item- Bank and creditor settlements (3,722,727) (1,326,117)
Depreciation and amortization 215,922 195,411
Decrease (increase) in-
Restricted cash (262,544) -
Trade receivables (660,047) 75,896
Other accounts receivable (37,567) 161,481
Prepaid expenses (5,973) 18,204
Inventories 161,954 (24,612)
Increase (decrease) in-
Accounts payable-trade 1,108,789 33,157
Accrued taxes 469,027 270,721
Other accrued expenses and liabilities 93,481 (88,679)
------------ -----------
Net cash used in operating activities (507,116) (289,677)
------------ -----------
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 notes payable to related parties 1,167,814 597,658
Payments on notes payable to related parties (307,088) -
Proceeds from long-term debt - 377,149
Loan payments (750,000) -
Increase in capital stock 420,010 -
------------ -----------
Net cash provided by financing activities 530,736 974,807
------------ -----------
Effect of exchange rate changes on cash (30,728) (600,736)
------------ -----------
Net decrease in cash and cash equivalents (39,755) (148,029)
Cash and cash equivalents at beginning of year 254,409 402,438
------------- -----------
Cash and cash equivalents at end of year $ 214,654 $ 254,409
============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 40,904 $ 36,197
============ ============
Interest paid $ 324,935 $ 277,658
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Notes to consolidated financial statements as of December 31, 1999 and 1998
(Stated in U.S. dollars)
9
Aarica Holdings, Inc. and Subsidiaries
Notes to consolidated financial statements as of December 31, 1999 and 1998
(Stated in U.S. dollars)
Description of business and summary of significant accounting policies:
1. 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 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
filed 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:
% 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
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.
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.
F-6
<PAGE>
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:
(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 loss arising from the remeasurement is included in the
determination of net income of the period.
Cash equivalents-
Cash equivalents are primarily bank deposits valued at market (cost plus accrued
interest).
Restricted cash-
Restricted cash represents 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
F-7
<PAGE>
Impairment of long-lived assets-
The Company periodically evaluates the carrying value of long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed of ". Under SFAS No. 121, long-lived
assets to be held and used on operations are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
fully recoverable. An impairment loss is recognized if the sum of the expected
long-term undiscounted cash flow is less than the carrying amount of the
long-lived assets being evaluated.
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 and the occurrence has been
rare.
Also under Mexican Labor Law, the Mexican subsidiaries are 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 financial instruments with
off-balance sheet risk.
Revenue recognition-
Sales and related cost of sales are recorded when title passes to the customer,
generally when the goods are delivered to the customer or independent carrier.
Estimated provisions for returns and allowances are provided for in the same
period the related sales are recorded.
F-8
<PAGE>
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 invest in such instruments in the future.
2 Inventories:
<TABLE>
<S> <C> <C>
1999 1998
---------- ----------
Raw materials $ 613,179 $ 773,720
Work-in-progress 128,442 431,185
Finished goods 556,451 246,373
----------- ------------
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>
F-9
<PAGE>
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 all rental payments. The Company is required to begin paying an annual
rental of approximately $100,000, plus value-added tax, with annual Mexican
inflation increases under a lease agreement which expires in April 2001 but
includes 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.
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 ($2,441,463 net of income tax effects) 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 ($191,949 net of income tax effects)
with creditors was also recorded as an extraordinary gain.
A prior debt settlement with BBV resulted in an extraordinary gain of $935,329
($607,964 net of income tax effects) in 1998. The Company also had settlements
with other creditors that generated additional extraordinary gains of $390,788
($254,012 net of income tax effects) 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 incurred interest expense on liabilities to 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.
F-10
<PAGE>
In June 2000 the Company obtained an additional loan from Schmidt 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 bears interest at the rate
of prime plus 5% per annum (14.50% as of June 30, 2000) and does not require any
interest payments until the maturity date. On December 29, 2000, the Company
obtained an extension of both Schmidt loans to February 15, 2001. Management
believes the Company will be able to successfully negotiate an extension of the
maturity date if the IPO is not consummated.
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.
- 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. 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 taxes:
Income and asset tax regulations-
The Mexican subsidiaries are subject to income and asset taxes. According to
Mexican Law, income taxes are computed taking into consideration the taxable and
deductible effects of inflation, such as depreciation calculated on asset values
restated for effects of inflation, the deduction of inventory purchases in place
of cost of sales, and the effects of inflation on certain monetary assets and
liabilities. 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.
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:
F-11
<PAGE>
<TABLE>
<S> <C> <C>
1999 1998
---------- ----------
Deferred tax assets
Current-
Non-deductible reserves $ 104,085 $ 129,173
Non-current-
Tax loss carryforwards 2,169,628 1,792,323
---------- ----------
2,273,713 1,921,496
---------- ----------
Deferred tax liabilities
Current-
Inventories (445,143) 720,379
Non-current-
Settlements with creditors (1,311,848) -
----------- -----------
(1,756,991) 720,379
----------- -----------
Net deferred tax assets 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 the deferred taxes and valuation
allowance for employee profit sharing in the amount of $131,378 that will not
materialize since the Company transferred its employees to the new companies
mentioned in Note 12. As a result, the new companies do not have any deferred
taxes or valuation allowance to record.
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) (66,430) (14)
Bank settlement - (164,500) (36)
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 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):
Expiration Date Amount
2004 $ 2,063,661
2005 4,135,277
------------
$ 6,198,938
============
The U.S. Holding Company is subject to U.S. income taxes. The only deferred
income tax items are tax loss carryforwards that have been reduced 100% by a
valuation allowance. As of December 31, 1999 tax loss carryforwards are follows:
Expiration Date Amount
2018 $ 129,975
2019 183,027
------------
$ 313,002
============
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 (loss) per common share:
Basic earnings (loss) per common share is computed by dividing the net income or
loss by the weighted average number of common shares outstanding. Diluted
earnings (loss) per share reflects the possible dilution that could occur if all
options or contracts to issue common stock were exercised or converted. Basic
earnings (loss) per share is the same as diluted earnings (loss) per share in
1999 and 1998. In June 1999, the Company issued 105,000 warrants at $2.50 per
share to Kashner Davidson Securities Corporation, which are not included in the
computation of loss per share because they are antidilutive.
F-12
<PAGE>
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. These licensing agreements expire on July 29, 2008 and December 31, 2002
with an automatic renewal until July 29, 2018 and December 31, 2007 for Lotto
and L.A. Gear, respectively.
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 wholly-owned subsidiaries of Aarica Holdings Mexico, S.A. de
C.V. 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 in order to minimize the statutory employee benefit
costs to the Company.
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 to receive 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 in 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 of approximately
$70,000 have been computed. The surcharges have not been recorded since the
Company believes that such amounts will be eliminated through negotiations with
the tax authorities.
F-13
<PAGE>
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen
Mexico City, D.F.
January 12, 2001
F-14
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated balance sheet as of September 30, 2000
(Stated in U.S. dollars)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 204,699
Accounts receivable-
Trade, net of allowance for doubtful accounts of $265,563 1,435,045
Other 18,858
-------------
1,453,903
Inventories 1,818,434
Prepaid expenses 248,403
-------------
Total current assets 3,725,439
Machinery and equipment 687,025
Other assets 7,072
-------------
Total assets $ 4,419,536
=============
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
F-15
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated balance sheet as of September 30, 2000
(Stated in U.S. dollars)
<TABLE>
<S> <C>
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable-trade $ 2,075,365
Accrued taxes 2,046,464
Notes payable to related parties ,618,815
Other accrued expenses and liabilities 176,720
-----------
Total current liabilities 6,917,364
Shareholders' deficit:
Common stock, $.01 par value; 20,000,000 authorized shares;
2,800,000 shares outstanding 28,000
Preferred stock, $.01 par value; 3,000,000
authorized shares -
Additional paid-in capital 718,010
------------
746,010
Accumulated losses (3,243,838)
------------
Total shareholders' deficit (2,497,828)
------------
Total liabilities and shareholders' deficit $ 4,419,536
============
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
F-16
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated statements of operations
For the nine months ended September 30, 2000 and 1999
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C>
2000 1999
------------ ------------
Net sales $ 4,963,996 $ 3,751,198
Cost of sales 4,244,723 3,351,689
------------ ------------
Gross profit 719,273 399,599
Operating expenses:
Selling, general and administrative 1,908,578 1,080,878
------------ -----------
Operating loss (1,189,305) (681,369)
Other income (expenses):
Interest expense (500,558) (538,741)
Translation gain (loss) 53,662 (131,308)
Other 124,957 (31,416)
------------ -----------
(321,939) (701,465)
------------ -----------
Loss before asset tax (1,511,244) (1,382,834)
Provision for asset tax 40,500 52,500
------------ -----------
Net loss $ (1,551,744) $ (1,435,334)
============ ===========
Weighted average shares outstanding 2,800,000 2,671,898
============ ===========
Loss per share
$ (0.55) $ (0.54)
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-17
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated statements of shareholders'
deficit For the nine months ended September
30, 2000
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional Total
Capital Stock Paid-in Accumulated Shareholders'
Shares Amount Capital Losses Deficit
---------------- ---------------- ---------------- ---------------- ---------------
Balance as of December 31, 1999 $ 2,800,000 $ 28,000 $ 418,010 $ (1,692,094) $ (1,246,084)
Contribution of capital - - 300,000 - 300,000
Net loss - - - (1,551,744) (1,551,744)
---------------- ---------------- ---------------- ---------------- ---------------
Balance as of September 30, 2000 $ 2,800,000 $ 28,000 $ 718,010 $ (3,243,838) $ (2,497,828)
================ ================ =============== ================ ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-18
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Unaudited consolidated statements of cash flows
For the nine months ended September 30, 2000 and 1999
(Stated in U.S. dollars)
<TABLE>
<S> <C> <C>
2000 1999
------------ -------------
Cash flows from operating activities:
Net loss $ (1,551,744) $ (1,435,334)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 147,881 153,440
Increase in allowance for doubtful accounts 145,563 -
Decrease (increase) in-
Restricted cash 262,544 -
Trade receivables 31,621 86,202
Prepaid expenses (220,723) (35,687)
Other accounts receivable 128,662 (48,605)
Inventories (261,499) (348,815)
Increase (decrease) in-
Accounts payable-trade (257,689) 421,804
Accrued taxes 680,743 339,792
Other accrued expenses and liabilities (183,844) (103,010)
------------- ------------
Net cash used in operating activities (1,078,485) (970,213)
------------- ------------
Cash flows from investing activities:
Additions to machinery and equipment (50,692) (18,958)
Other assets 1,883 (1,037)
------------- ------------
Net cash used in investing activities (48,809) (19,995)
------------- ------------
Cash flows from financing activities:
Bank loans - 872,350
Issuance of capital stock - 420,010
Proceeds from notes payable to related parties 1,063,208 208,781
Payments on notes payable to related parties ( 28,248) (187,931)
------------- ------------
Net cash provided by financing activities 1,034,960 1,313,210
------------- ------------
Effect of exchange rate changes on cash 82,379 (335,071)
------------- ------------
Net decrease in cash and cash equivalents (9,955) (12,069)
Cash and cash equivalents at beginning of period 214,654 254,409
------------- ------------
Cash and cash equivalents at end of period $ 204,699 $ 242,340
============= ============
Supplemental disclosure of noncash financing activity:
Noncash conversion of debt to additional capital $ 300,000 $ -
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-19
<PAGE>
Aarica Holdings, Inc. and Subsidiaries
Notes to unaudited consolidated financial statements as of September 30, 2000
(Stated in U.S. dollars)
2
1 Basis of presentation of interim financial statements:
-----------------------------------------------------
The accompanying interim consolidated financial statements reflect 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 12 to the consolidated financial statements as of December
31, 1999 and 1998.
The results of the interim periods are not necessarily indicative of the results
to be expected for the full fiscal year. The accompanying financial statements
should be read in conjunction with the Company's annual financial statements as
of December 31, 1999 and 1998.
2 Inventories:
Inventories were comprised of the following as of September 30, 2000:
Raw materials $ 583,840
Work-in-progress 64,524
Finished goods 1,017,596
-------------
1,665,960
Merchandise-in-transit 152,474
-------------
$ 1,818,434
=============
3 Notes payable to related parties:
Notes payable to related parties are as follows as of September 30, 2000:
Schmidt International, LLC $ 2,553,005
Carol Kolozs 65,810
------------
$ 2,618,815
============
In addition, accounts payable-trade includes $461,802 to Schmidt International
for import taxes, freight and related costs for importations.
4 Stock compensation plan:
The Company adopted the 2000 Stock Compensation Plan (the "Plan") in April 2000
for the granting of options to employees, directors and advisors to acquire up
to 350,000 shares of the Company's common stock. The Plan authorizes the
granting of incentive stock options to employees of the Company and nonqualified
stock options to employees, directors and advisors. The exercise price of
incentive stock options shall not be less than the fair market value of the
shares on the date of the grant. The exercise price of nonqualified stock
options is established on the date of the grant. The board of directors or
committee administering the Plan will determine the number of shares, exercise
price, period during which the option may be exercised (which may not exceed ten
years), and any other terms and conditions of the option. The Plan terminates in
April 2010. The Company has elected to follow the disclosure-only option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", and to account for the Plan in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Options issued to persons other than employees will be
accounted for based on the fair value of the consideration received or the fair
value of the options issued, whichever is more reliably measurable at the date
of the grant.
In April 2000 the Company granted nonqualified options to purchase 75,000 shares
of common stock to outside directors and in June 2000 granted incentive stock
options to purchase 200,000 shares to employees at the initial public offering
price. The options to the outside directors vested immediately. The options to
employees vest 20% per year over a period of five years. No compensation expense
has been recognized or disclosed because the initial public offering price (the
exercise price) is expected to be significantly above the estimated fair market
value of the shares at the date of the grants.
5 Shareholder's deficit:
As described in Note 5 to the consolidated financial statements as of December
31, 1999 and 1998, Continental Capital & Equity Corporation exchanged $300,000
of debt principal and interest for 150,000 shares of common stock from the
personal holdings of Carol Kolozs, majority Shareholder, President and Director
of the Company. A contribution of capital was recorded at the amount of the debt
reduction. The Company also issued an option to CCEC for 250,000 new shares of
the Company's common stock at $2.00 per share. No expense has been recorded or
disclosed for these options because the exercise price of the options that
vested when granted is estimated to equal the fair market value of the stock at
the grant date of June 29, 2000.
6 Earnings (loss) per common share:
As of September 30, 2000 the Company has issued the following options and
warrants:
- 105,000 warrants to Kashner Davidson Securities Corporation in June 1999
at $2.50 per share.
- 250,000 options to CCEC in June 2000 at $2.00 per share.
- 200,000 options to employees in June 2000 at the initial public offering
price.
- 75,000 options to outside directors in April 2000 at the initial public
offering price.
- 200,000 options to CCEC in September 2000 at $2.00 per share
See Note 9 to the consolidated financial statements as of December 31, 1999 and
1998 for a discussion of earnings (loss) per share.
7 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 as of September 30,
2000.
F-20
<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
--------------
Rushmore Securities Corporation
972-308-8835
<PAGE>
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
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 $ 7,579
NASD Filing Fee* 3,426
Nasdaq Application and Listing Fee 9,000
Boston Stock Exchange Filing Fee 14,000
Fees payable to CCEC 200,000
Accounting Fees and Expenses* 150,000
Legal Fees and Expenses 100,000
Printing* 40,000
Fees of Transfer Agent and Registrar* 3,500
Underwriters' Non-Accountable Expense Allowance 200,000
Miscellaneous* 22,495
------
Total* $750,000
========
* Estimated.
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
II-1
<PAGE>
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 in connection with the private placement in June 1999.
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.
In September 2000, the company granted CCEC options to purchase 200,000 shares
at $2.00 per share for services rendered to the company from April 1998 through
September 2000. In October 2000, CCEC purchased 25,000 shares at $2.00 per share
($50,000) pursuant to the September 2000 options to provide working capital to
the company. The certificate is stamped with a restrictive legend and a stop
transfer order was placed on the transfer records of the company. The options
and shares purchased thereunder were taken for investment and not with a view to
distribution. The certificate and options are marked with a restrictive legend
restricting transferability in the absence of an effective registration
statement or an opinion of counsel satisfactory to the company that registration
is not required.
In June 1999, the registrant sold 200,000 of its common stock to 17
persons at $2.50 per share or an aggregate of $500,000, 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 at
$2.00 per share 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 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.
In April 2000, the company's board of directors granted options to purchase
25,000 shares each to James Schnorf, Robert E. Schmidt, Jr. and Patrick L. M.
Williams, all of whom are directors of the company. The options are for a term
of six years, shall expire 10 years from the date of grant and may be exercised
20% each year, beginning April 2000 at the offering price of the common stock in
this offering.
In June 2000, the company's board of directors granted options to
purchase 100,000 shares of the company's common stock to each of John J. Stitz,
the Chief Financial Officer and Emanuel Bartoni, Commercial Director of the
company's subsidiary in Mexico at the offering price of the common stock in this
offering. The options were granted under the company's stock compensation plan
and are intended to be incentive options under Section 422 of the Internal
Revenue Code of 1986. The options vest 20% each year beginning June 27, 2001 and
may not be transferred except by the laws of descent and distribution and may
not be exercised for more than 90 days after they cease to be an employee of the
company.
All of the above options were granted in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act for transactions
not involving a public offering. The shares and options may be included in a
registration statement on Form S-8 upon conclusion of the company's public
offering.
In October 2000, the company granted options to purchase 275,000 shares
of its common stock to Robert E. Schmidt, Jr., a director, for $2.00 per share
as partial consideration for the Schmidt International loans and extensions. The
company relied upon the exemption contained in section 4(2) of the Securities
Act for transactions not involving a public offering.
II-2
<PAGE>
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. (3)
Exhibit 3.2 Bylaws of the Registrant (3)
Exhibit 5.1 Opinion of Maurice J. Bates L.L.C.(3)
Exhibit 10.1 Corrected Stock Compensation Plan (3)
Exhibit 10.2 Warrant Agreement with American Stock Transfer & Trust
Company. (3)
Exhibit 10.3 (i) Loan Agreement with Robert E. Schmidt, Jr. (3)
(ii) First Amendment to Loan Agreement (3)
(iii) Second Amendment to Loan Agreement (3)
(iv) Third Amendment to Loan Agreement (3)
(v) Amended and Restated Pledge Agreement (3)
(vi) Assignment of Loan (3)
(vii) Amended and Restated Guaranty Agreement (3)
(viii) Amended and Restated Security Agreement. (3)
(ix) Guaranty Agreement, Aarica Holdings, Inc. (3)
(x) Amended and Restated Guaranty Agreement, Taimex
Industries, S.A. de C.V. (3)
(xi) Amended and Restated Guaranty Agreement, Aarica
Sport, S.A. de C.V. (3)
(xii) Schmidt Note Extension to 12/15/00. (3)
(xiii) Schmidt Note Extension to 2/15/01.(1)
Exhibit 10.4 Warrant Agreement with Kashner Davidson Securities
Corporation (3)
Exhibit 10.5 Lease on Nasco building. (3)
Exhibit 10.6 Sublease on Mexico City offices. (3)
Exhibit 10.7 License agreement with L.A. Gear. (3)
Exhibit 10.8 License agreement with Lotto. (3)
Exhibit 10.9 Sample purchase order for Wilson Sporting Goods Co.
DE Mexico, SA. DE CV (3)
Exhibit 10.10 Sample purchase order for K-Swiss. (3)
Exhibit 10.11 Copy of Nasco union contract. (3)
Exhibit 10.12 Sample employee contract. (3)
Exhibit 10.13 Conversion of CCEC note. (3
Exhibit 10.14 CCEC Consulting Agreement, as amended (3)
Exhibit 10.15 Schmidt option (3)
Exhibit 10.16 CCEC September 2000 option (3)
Exhibit 21 Subsidiaries of the Registrant. (3)
Exhibit 23.1 Consent of Arthur Andersen, Certified Public
Accountants.(1)
Exhibit 23.2 Consent of Maurice J. Bates, L.L.C. included in
opinion filed as Exhibit 5.1 to this registration
statement.(3)
-----------------------------
(1) Filed herewith
(2) To be filed by amendment
(3) Previously filed
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
(1) 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;
II-3
<PAGE>
(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.
II-4
<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 January 16, 2001.
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.
Signature Title Date
/s Carol Kolozs President, Director January 16, 2001
-------------------
Carol Kolozs (Principal Executive Officer)
/s/ John J. Stitz Chief Financial Officer, Secretary, January 16, 2001
-----------------
John J, Stitz Treasurer (Principal Financial
Officer)
/s/ James R. Schnorf Director January 16, 2001
--------------------
James R. Schnorf
_____________________ Director
Patrick L. M. Williams
/s/ Robert E. Schmidt, Jr. Director January 16, 2001
-------------------------
Robert E. Schmidt, Jr.
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