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As filed with the Securities and Exchange Commission on August 22, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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V-FORMATION, INC.
(Exact name of small business issuer as specified in its charter)
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NEW JERSEY 3949 22-3345169
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
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170 BEAVER BROOK ROAD
LINCOLN PARK, NEW JERSEY 07035
(973) 872-9400
Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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RICHARD STELNICK, CHIEF EXECUTIVE OFFICER
V-FORMATION, INC.
170 BEAVER BROOK ROAD
LINCOLN PARK, NEW JERSEY 07035
(973) 872-9400
(Name, address and telephone number of agent for service)
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Copies of all communications to:
J. ROBERT HORTON, ESQ.
FRED D. ZEMEL, ESQ.
GOODWIN, PROCTER & HOAR LLP
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 813-8800
FACSIMILE: (212) 355-3333
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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CALCULATION OF REGISTRATION FEE
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--------------------------- ------------- ------------------ ------------------ ------------
Proposed Proposed Maximum Amount of
Title of Each Class of Amount to Maximum Offering Aggregate Offering Registration
Securities to be Registered be Registered Per Price Security Price (2) Fee
--------------------------- ------------- ------------------ ------------------ ------------
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Common Stock (1), no par 10,554,923 $12.00 $18,000,000 $4,752
value
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(1) Certain of these securities represent conversion stock underlying
preferred stock or are the subject of a rescission offer to be
commenced following effectiveness of this Registration Statement, as
more fully described in the prospectus forming a part of this
Registration Statement.
(2) Aggregate price, excluding interest, to be payable by Registrant if the
rescission offer covered by this Registration Statement is accepted at
the level estimated by Registrant.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
V-FORMATION, INC.
10,554,923 Shares of Common Stock (No Par Value)
[10,554,923 Shares represents
7,579,775 outstanding prior to offering but not registered
PLUS
1,500,000 new shares registered pursuant to offering]
500,000 Shares of Conversion Stock Underlying Preferred Stock,
Series A (No Par Value)
102,390 Shares of Conversion Stock Underlying Preferred Stock,
Series B (No Par Value)
622,758 Shares of Conversion Stock Underlying Preferred Stock,
Series C (No Par Value)
250,000 Shares of Conversion Stock Underlying Preferred Stock,
Series D (No Par Value)
(less shares if any for which rescission is exercised)
This Prospectus is designed to accomplish two objectives: 1) to provide
disclosure to new investors in connection with the Company's current offering of
1,500,000 shares at $12.00 per share; and, 2) to serve as an offer of rescission
to certain existing shareholders of the Company to whom shares may have been
offered and sold without full compliance with state and Federal securities laws.
As set forth herein, the rescission offer is limited to Common Stock purchased
by non-accredited investors. The Company believes based on prior discussion with
existing shareholders that approximately 12 shareholders holding approximately
100,000 shares of Common Stock valued are expected to elect rescission, with a
maximum exposure to the Company expected of approximately $375,000. The Company
reserves the right to retract the rescission offer in the event the rescission
claims amount exceeds $750,000. The Company will pay shareholders electing to
accept the rescission offer within 90 days of the Company's receipt of their
notice of election to accept the rescission offer.
All shares of Common Stock registered hereby, namely the shares offered for
purchase and shares already purchased (including conversion shares underlying
Preferred Stock) to be registered, will be restricted for public resale through
July 31, 2001, after which time such shares shall not be so restricted.
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THE OFFERING
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Common Stock Offered 1,500,000 shares
Common Stock to be outstanding after registration
(less shares if any for which rescission is exercised) 10,554,923 shares
Conversion stock underlying preferred stock,
to be outstanding after registration:
Series A, covering 500,000 conversion shares 500,000 shares
Series B, covering 102,390 conversion shares 102,390 shares
Series C, covering 594,438 conversion shares 622,758 shares
Series D, covering 250,000 conversion shares 250,000 shares
</TABLE>
USE OF PROCEEDS The Company intends to use the net proceeds of the offering
for the reduction of financial institution debt, expansion of
the Company's business and funding the rescission. See "Use of
Proceeds".
RISK FACTORS The securities offered hereby offer a high degree of risk and
immediate substantial dilution. See "Risk Factors" and
"Dilution".
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THESE SECURITIES HAVE NOT BE APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ___________, 2000.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a registration statement on Form SB-2 (together with all amendments,
exhibits and schedules thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
common stock, no par value, of the Company (the "Common Stock") offered hereby
and underlying its four series of preferred stock. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement. Statements made
in this Prospectus concerning the content of any document are not necessarily
complete, although the material terms thereof are described in this Prospectus
and, in each instance, reference is made to the copy of the document included as
an exhibit to the Registration Statement. Each such statement is qualified in
its entirety by this reference. The Registration Statement may be inspected
without charge at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of all or any portion of the Registration Statement may be
obtained from the Public Reference Section of the SEC upon payment of prescribed
fees. The SEC also maintains a worldwide web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. Registrant's
registration statement will be filed electronically.
The Company will be subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will file with the SEC
reports, proxy statements and other information. Such materials may be inspected
and copied at the offices of the SEC in the manner described above.
The Company intends to furnish its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three quarters of each
fiscal year.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on the beliefs and assumptions of the
Company's management and on information available to management at the time such
statements were made. Forward-looking statements include information concerning
possible or assumed future results of the Company's operations, earnings,
industry conditions, demand and pricing for the Company's products and other
aspects of its business,. Although not exclusively, forward looking statements
herein generally are located under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and identified by statements therein preceded by,
followed by or including the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions.
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Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Although the Company makes such
statements based on assumptions it believes to be reasonable, actual results
will surely differ and such differences may be material. Many of the factors
that will determine these results are beyond the Company's ability to control or
predict with any degree of certainty. The Company does not intend to revise any
forward-looking statements in this Prospectus in light of future events.
Prospective purchasers of Common Stock are Company shareholders electing to
exercise the rescission rights conferred herein. are cautioned not to put undue
reliance on any forward-looking statements and may therefore not assume that
changes that occur or come to light after the date hereof and that affect such
forward-looking statements will be incorporated therein.
The "Risk Factors" set forth below and the following factors, among
others, could cause the Company's results to differ from any results included in
any forward-looking statement: (a) variations in demand for the Company's
products; (b) changes in market conditions unfavorable to the sports industry;
(c) significant fluctuations in the performance of debt and equity markets in
the U.S. or worldwide; (d) enactment of state or federal legislation or changes
in government policy or regulation (including accounting standards) adversely
affecting the Company's operations; (e) adverse results in litigation; and (f)
increase in U.S. or international interest rates. See "Risk Factors" below.
The executive office of the Company is located at 170 Beaver Brook
Road, Lincoln Park, New Jersey 07035, and the telephone number is (973)
872-9400.
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TABLE OF CONTENTS
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Page
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Available
Information............................................................................................... 4
Special Note Regarding Forward-looking Statements......................................................... 4
Prospectus Summary........................................................................................ --
The Company............................................................................................... 7
Risk Factors.............................................................................................. 11
Use of Proceeds........................................................................................... 18
Determination of Offering Price........................................................................... 20
Dividend Policy........................................................................................... 20
Capitalization............................................................................................ 21
Dilution.................................................................................................. 21
Selling Security Holders.................................................................................. 22
Plan of Distribution...................................................................................... 22
Legal Proceedings......................................................................................... 22
Directors, Executive Officers, Promoters And Control Persons.............................................. --
Director Compensation..................................................................................... --
Security Ownership of Certain Beneficial Owners and Management............................................ 26
Description of Securities................................................................................. 27
Indemnification of Officers and Director.................................................................. 30
Certain Transactions...................................................................................... 31
Business.................................................................................................. 31
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 38
Description of Property................................................................................... 41
Market for Common Equity and Related Stockholder Matters.................................................. 41
Executive Compensation.................................................................................... 42
Rescission Offer.......................................................................................... 42
Financial Statements...................................................................................... 46
Changes in and Disagreement With Accountants.............................................................. 72
Experts................................................................................................... 72
Legal Matters............................................................................................. 72
Additional Information.................................................................................... 72
Information not Required in Prospectus.................................................................... 74
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THE COMPANY
The following summary is qualified in its entirety by the more detailed
information, including financial statements and financial information appearing
or referred to in this memorandum. Each prospective investor is urged to read
this memorandum in its entirety.
V-Formation, Inc. (the "Company"), is a multi-faceted, innovative,
sports technologies company that has made significant advances in the
development and marketing of revolutionary inline skates. Formed in January of
1995, the Company has experienced substantial growth as a result of increased
sales revenue and product demand. The Company believes that with suitable
capital funding it will be well positioned to make substantial market
penetration with respect to its product lines and add substantially to its
growth. Additionally, through the use and acquisition of intellectual properties
that are either owned or licensed exclusively by the Company, the Company has
established a broad foundation it has used to attain the accomplishments it has
enjoyed to date, and that it intends to use as a springboard for future growth.
Presently, all the Company's sports products incorporate cutting edge technology
in their design and implementation. Importantly, all the Company's key
technologies are proprietary, licensable and transferable. The Company's
objective is to become the premier sports and sports related technologies firm
in the sports entertainment industry.
COMPANY BUSINESS UNITS
The Company has divided its operations into the following business
units:
- V-Form Skates
- Nexed Sports Clothing
- Roll Ice Interchangeable Use Sports Footwear
- Wheels of Fire
- Soft Machine Software
- On Net Sports Internet
While each of the business units manages the development, marketing and
sale of the products and technologies assigned to such unit (as described
below), the Company serves as the head of all the business units, coordinating
their efforts, monitoring their operations, and managing their administrative
needs.
The V-Form unit is responsible for the design, manufacturing,
marketing, sale and further development of its six product lines.
- V-FORM SKATES - The V-Form unit is responsible for the design,
manufacturing, marketing, sale and further enhancement of the
Company's original flagship product, the "V-Form Skate". The
Company believes that its proprietary V-Formation skating system
is the first major product innovation in inline skating since the
introduction of the original Rollerblade(R) inline skates in the
1980's. The Company holds exclusive
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license for U.S. patent number 5,303,940 as well as possessing its
own U.S. patent number 6,003,882 encompassing what is commonly
known as the V-Form Skate technology. The V-Form Skate chassis,
unlike any other skate chassis in the world, off-sets its wheels
at alternating angles ranging from 2(degree)to 16(degree). This
unique design enables the skate user to maneuver, stop and emulate
ice skating in a revolutionary manner, creating a
"Virtual-Ice"(TM) sensation.
- NEXED - In October of 1999, the Company acquired Nexed Hockey,
Inc., as well as the services of its founder Todd Trickle. The
Nexed product line includes athletic apparel, footwear and
accessories. The Nexed product line, although independently
marketable, is designed to compliment and be coordinated with the
Company's hard goods skates line. The Nexed product line has been
well received in the marketplace and its unit sales have steadily
increased to approximately $250,000 in the first six months of
2000, doubling the Company's original projections. The Company
anticipates further substantial growth in Nexed product line
revenue by year end. As published in "Surfside Hockey News", Nexed
has received the coveted "Best New Apparel Y2K All-Star Product
Award" for its new edge in hockey apparel.
- ROLL-ICE - The Company has introduced new and innovative
technologies though its Roll-Ice product line. Specifically, the
Roll-Ice technology gives users the ability to customize athletic
footwear, using one pair of boots for multiple purposes. For
example, the Roll-Ice design allows a skater to quickly and
effortlessly change an ice skate into a roller skate or a hiking
boot. The key to this technology is the creation of a cavity in
the sole of the skate boots into which interchangeable sole
attachments can be mounted. The Company has a competitive
advantage with the revolutionary Roll-Ice technology since it has
the exclusive license rights for the Roll-Ice technology patents
(U.S. Patents Nos. 5,847,927; 5,839,734; 5,662,338; and
5,810,368). Moreover, the Company holds the exclusive rights to
sub-license the Roll-Ice technology. The Company considers the
Roll-Ice license agreement a major development in fostering the
Company's growth as a recognized leader in the sports technology
sector. The Company intends on bringing the Roll-Ice technology to
market during Q2 of 2002.
- WHEELS OF FIRE - The newest addition to the Company's product line
is an illuminated skate wheel technology (U.S. Patent Number
5,718,499) known as "Wheels Of Fire". The Wheels of Fire
technology, embedded in skate wheels, creates a self-generating
illumination system by which the skate wheels light up in a
flashing mode as the skates moves. This innovative technology was
brought to the Company by hockey legend Slava Fetisov (currently
an assistant coach for the New Jersey Devils), who, as owner of
the patent for the technology, granted the Company the exclusive
global license to make and sell products incorporating the Wheels
of Fire technology. The Company intends to market Wheels of Fire
products under the brand names "Lava Wheels", "Meteorlites" and
"Sparkees" to skate, skateboard, and scooter users world-wide. As
part of the first phase of its marketing program, the Company
intends to bring to market products incorporating Wheels of Fire
technology in this year's Christmas selling season through
television, Internet and retail sales marketing and distribution
efforts.
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- SOFT MACHINE UNIT - The Company has entered into an agreement
whereby, upon payment of $50,000, the Company will acquire
certain software programs as well as the rights to all
intellectual properties currently owned, in development or that
may be created by the founder of Soft Machine, Inc.. In
connection with the software acquisition, the Soft Machine, Inc.
founder will become employed by the Company in September 2000.
The parties have also agreed that once the revenue budget for the
software is more fully understood, they will negotiate in good
faith and establish certain performance based compensation. The
primary product developed by the Soft Machine unit is "Quick
Plot". Quick Plot is a tracking and billing program for
engineers, architects and designers. There are presently 50 users
of Quick Plot version 1.0 licensed. The Company intends to market
Quick Plot to a large, educated market of 4 million Auto Cad
users and developers worldwide. The Company's goal is for Quick
Plot to secure greater market penetration once Quick Plot
Versions 2 & 2.2 (Quick Plot for Auto Cad 14 & Quick Plot Auto
Cad 2000) are made available to service oriented vertical markets
utilizing Auto Cad 2000, Windows NT / 98 and Windows NT / 95,
which is expected to occur by the Spring of 2001.
In addition to Quick Plot, the Soft Machine division plans to
introduce "Sportds" management software, an expanded version of
Quick Plot for the sporting goods industry. The Company estimates
that Sportds software will be ready for beta testing by year end
2000. Featuring a user-friendly graphical interface "Sportds" will
be an administration utility enabling users to manage sporting
goods operations, including but not limited to:
- Digital Exchange Reporting (DER)
- Fulfillment Mandate Procedures (FMP)
- Competitive Insight Analysis (CIA)
- Network Convergence Flexibility (NCF)
Tracking, billing, reporting and forecasting will be available on
one complete menu-driven software system. Sporting goods
manufacturers, distributors and retailers, with a few keystrokes,
will be able to:
- Manage costs, production, communication and finances.
- Generate cash flow budgets, gross margin percentages, pro
forma income statements, ration analysis, and expedite
inventory turnover.
- Evaluate market conditions in order to define market faith and
gain perspective among buyers and suppliers regarding
excellence vs. expedience, absolute integrity vs. situational
ethics, servant leadership vs. manipulative counsel, and
product resistance vs. reverse perception.
- ON NET SPORTS INTERNET - The Company has acquired from On Net
Sports, Inc. all its assets relating to Internet broadcast media,
affording the Company an opportunity to provide a fully
interactive, sports oriented broadcast platform for Internet
users. The Company intends to provide programming in a radio
style "sports talk" format 24 hours a day, 7 days a week by
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the fourth quarter of 2000. As consideration for the acquisition,
the Company will arrange for full time employment for On Net
Sport's founder. The parties have also agreed as soon as
practicable to determine revenue milestones for the broadcast unit
and incentive compensation for On Net Sport's founder. The Company
intends its On Net Sports broadcast format to be the first
broadcast to offer Internet users a visual/audio feed combination.
The Company believes that On Net Sports has identified a talented
management team to (i) host a Company - owned virtual store to
sell branded apparel, logo merchandise, sports and computer
equipment by Q4 2000 and (ii) establish an equivalent broadcast
version in Spanish.
OTHER SIGNIFICANT ACCOMPLISHMENTS
Prior to its lobbying efforts the Company had become victim to a unique
customs phenomena in the U.S. Harmonized Tariff Schedule known as tariff
inversion in that the dutiable rate for components placed the Company at a
disadvantage as compared to foreign competitors. In 1997, the Company lobbied
Congress to enact legislation to amend the Tariff Schedule. As a direct result
of the Company's efforts recognized nationally, the Tariff Schedule now provides
for the duty-free entry of certain inline skates. The legislation was passed by
both the House (HR-1882) and the Senate (S-1288). As a result, the Company has
enjoyed the benefit of the eliminated tariff and revenues have increased as a
result.
OPERATION LOCATIONS
The Company operates two primary facilities. The corporate offices are
located in Lincoln Park, New Jersey and the manufacturing and distribution
fulfillment center is located in Paterson, New Jersey. Additionally, the Company
has five regional offices in Chandler, AZ, Colorado Springs, CO, Hermosa Beach,
CA, Holiday, FL, and Huntington Woods, MI; as well as international distributors
in Canada, Australia, , Italy, Switzerland and the United Kingdom.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
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YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
(AUDITED) (UNAUDITED)
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1998 1999 2000
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Revenues ...................................... 678,437 760,533 722,311
Net Loss ...................................... (14,861,147) (4,640,497) (6,172,022)
Net Loss per share ............................
Basic ................................ (2.56) (0.71) (0.86)
Weighted average number of shares outstanding
Basic ................................ 5,812,466 6,522,704 7,188,095
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BALANCE SHEET DATA:
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DECEMBER 31, JUNE 30, 2000
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1999 1998
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(UNAUDITED)
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Working capital (deficit)........... (79,184) (694,003) ($937,646)
Total assets........................ 1,613,753 1,666,087 $1,833,062
Long term debt...................... 449,834 910,896 $450,949
Accumulated deficit................. (48,757,791) (44,117,294) (54,929,813)
Stockholders' equity (deficit)...... 386,322 (753,026) (312,234)
</TABLE>
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RISK FACTORS
A purchase of the securities offered herein involves a very high degree
of risk, including the possibility of the loss of the purchaser's entire
investment. The securities should only be purchased by persons who can afford
the loss of the entire investment. Prospective investors, prior to making an
investment decision, should carefully consider, along with other information in
this memorandum, the following:
POSSIBLE INABILITY TO SELL COMMON STOCK OFFERED
The Company may not be able to sell all the Common Stock being offered
pursuant to this offering. Therefore, the Company may not be able to accomplish
some or all the proposed proceeds described herein from the sale of the Common
Stock. If the Company raises enough cash to rescind the sale of the shares owned
by holders electing rescission, but not enough to accomplish all of the uses of
proceeds described herein, the Company will apply the cash raised to the uses of
proceeds in the order set forth in this Prospectus. There is a risk that the
Company will be unable to raise enough cash to fund the rescission offer in
which case rescission liability may remain and its proposed use of proceeds may
be frustrated. Additionally, if the Company is not able to raise enough cash by
this offering to enable it to undertake its intended business development
efforts as set forth above, the Company may be forced to take on conventional
debt by taking out loans against purchase orders to continue its operations.
Even if the Company sells all the Common Stock being offered pursuant to this
offering, the Company anticipates requiring additional capital within the next
12 months unless it (i) increases production efforts in stages in accordance
with cash flows that arise from paid receivables, or (ii) takes out loans
against purchase orders.
DEVELOPMENT STAGE BUSINESS
To date, the Company has not had any meaningful operations in its new
product lines. The operations of the Company are subject to all the risks
inherent in the establishment of a new business enterprise, including the
absence of extensive operating history. The likelihood of success of the Company
must be considered in light of the problems, expenses, complications
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and delays frequently encountered in connection with the development of a new
business. Even after revenues are recognized, there can be no assurance that the
Company will realize profitable operations from the conduct of its business at
any time.
This Prospectus is based upon management's plans and projections for the
Company's development; however, there can be no assurance that the Company will
develop as outlined here. If the Company's plans prove to be unsuccessful,
investors in the Company may lose all or a substantial portion of their
investment. Further, there is no assurance that the Company's operations, even
if properly financed, will be profitable or will produce positive cash flow.
EXPANSION RISKS
With aggressive expansion and growth, as planned, capital requirements
of the Company will increase, and there can be no assurance that the Company
will be able to satisfy such increased capital requirements.
SEASONALITY
The Company's business is largely dependent upon the sports
entertainment industry, which is highly cyclical and dependent upon consumer
spending. Economic factors adversely affecting the sports entertainment business
sectors and consumer spending could adversely impact the Company. Increased
revenues and operating income are generally experienced during the second and
fourth calendar quarters as a result of the sporting goods industry's selling
season, the peak sales and production period of the year. Decreased revenues and
operating income are generally experienced during January, February, July and
August of each year as a result of retailer inventory surges and tradeshow
participation, as well as changeover in product lines for the new model year.
The Company's historical results of operations may not reflect cyclical or
season fluctuations in revenues and operating income it may face in the future
because the Company's growth trend through successive periods has masked the
effect of any such fluctuations.
FINANCIAL PROJECTIONS
The forward looking statements that may imply financial projections
listed in this Prospectus are based upon assumptions by the Company's
management with regard to future events. These various assumptions may prove to
be inaccurate. Financial results will surely vary from any actual projections
that might have been made and such variations could be material, which could
substantially alter the return to investors. Accordingly, the Company has
elected not to project financial projections herein.
MARKETING STUDIES
While extensive internal research has quantified the market, the
opportunity and the capital requirements outlined herein, no independent studies
with regard to feasibility, management or marketing have been conducted at the
expense of the Company or by any independent third parties with respect to the
Company's present and future business prospects and capital requirements. In
addition, there can be no assurances that the Company's products and services
will find sufficient commercial acceptance in the marketplace to enable the
Company to fulfill its long and short term goals, even if adequate financing is
available. See "Business."
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PERSONNEL AND MANAGEMENT RISKS
Continued success of the Company is dependent upon its ability, in a
competitive environment, to attract and retain qualified personnel. The
Company's projected growth will require the recruitment, retention, and
integration of additional highly qualified individuals. Even if such personnel
can be hired, the projected growth in staff could present further management
risks. Also, the Company may need to fill important executive positions in the
future. While management is hopeful that qualified personnel can be hired, the
market for such individuals is highly competitive and there can be no assurances
that these critical positions can be filled on a timely basis.
MARKET AND BUSINESS RISKS
A considerable portion of the Company's strategic plans is predicated
on management's belief that the inline skate market will continue to grow and
this will account for the increased revenues projected for the sale of products
offered by the Company. Increased revenues projected by the Company are based
upon continued increased distribution and additional channels. However, there
can be no assurances that the Company's products and services offered will be
acceptable to potential customers. The market for the roller skate industry is
intensely competitive, evolving and subject to technological change. Due to this
changing environment, the use of roller skates similar to those produced by the
Company may become enhanced, thereby attracting additional competition to its
industry segment. The Company faces competition from companies, many of which
have greater financial and management resources, research and development
facilities and manufacturing and marketing capabilities, including brand name
recognition, than the Company. There can be no assurance that technological and
other developments by the Company's competitors or potential competitors will
not make the Company's products less competitive in the market. The Company's
ability to compete effectively will depend upon its ability to attract and
retain qualified personnel, innovate its manufacturing techniques and processes,
make adequate provision for its raw material requirements and supplies through
long-term supply agreements, maintain and expand its technological capabilities,
market and sell existing products to new customers, develop new products for
existing and new customers, service its products and further develop its sales
force. No assurance can be given that the Company will be able to compete
effectively. Such competition could materially and adversely affect the
Company's business, operating results or financial condition. Additionally,
since the market for V-Form skates is new and evolving, it is difficult to
predict the future growth rate, if any, and size of this market. There can be no
assurance that the market for V-Form skates will develop further or that the
Company's product will be accepted by additional consumers in substantial
numbers.
ECONOMIC UNCERTAINTY
Adverse economic conditions could have a negative impact on the
Company's projected business. In a recession, consumers are less inclined to
make certain types of expenditures. While management believes that a severe and
prolonged economic downturn to be highly unlikely, any substantial business
downturn could jeopardize the profitability and continued operation of the
Company.
13
<PAGE> 14
CONTROL BY PRINCIPAL SHAREHOLDERS
After the offering, and following the conversion of the Preferred Stock
to Common Stock, the persons who were principal shareholders prior to the
offering will continue to own a majority of the Company's outstanding Common
Stock of the Company, will be able to elect all Directors and will be in a
position to continue to control the affairs of the Company.
LONG-TERM, ILLIQUID INVESTMENT RISKS - ABSENCE OF PUBLIC MARKET
The Common Stock will be freely tradable as a matter of law after July
31, 2000 (subject to blue sky requirements of certain states). It cannot be
assumed that an "active" public market will then develop or thereafter exist for
the Common Stock. The Company does not intend at present to list the Common
Stock on the NASDAQ or other nation exchange. Therefore, an investment in the
Company may be illiquid even when the trading restriction lapses and should be
considered a long-term commitment. Also, various future economic events that are
not predictable at this time may have an impact on the returns achieved by this
investment. Purchasers of Common Stock may, therefore, experience substantial
difficulty in selling their shares of the underlying Common Stock should they
desire to do so. See "Description of Securities."
PROTECTION OF PROPRIETARY ASSETS
The Company seeks to protect from infringement the patents held and
licensed by it, as referenced above. However, there can be no assurance that
steps taken by the Company to protect its intellectual property will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In the event that protective measures are
not successful, the Company's business, operating results and financial
condition could be materially and adversely affected. In addition, the Company's
growth strategy includes a plan to enter the international market and the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
The Company is also subject to the risk of adverse claims and
litigation alleging infringement of intellectual property rights of others.
Although the Company believes that its technology does not infringe on the
proprietary rights of others and has not received any notice of claimed
infringements, there can be no assurance that third parties will not assert
infringement claims against the Company in the future based on patents or trade
secrets or that any such claims if made would not be successful. The Company
could incur substantial costs in defending itself and its customers against any
such claims, regardless of the merits of such claims. Parties making such claims
may be able to obtain injunctive or other equitable relief, which could
effectively block the Company's ability to sell its products in the United
States and abroad, and could result in an award of substantial damages. In the
event of a successful claim of infringement, the Company and its customers and
end-users may be required to obtain one or more licenses from third parties.
There can be no assurance that the Company or its customers could obtain
necessary licenses from third parties at a reasonable cost or at all. The
defense of any lawsuit could result in time-consuming and expensive litigation,
damages, license fees, royalty payments and restrictions on the Company's
ability to sell its products, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
14
<PAGE> 15
DEPENDENCE ON CONTRACT MANUFACTURING; LIMITED SOURCE SUPPLIERS
The Company may in the future experience problems with its various
component suppliers, such as inferior quality, insufficient quantities and late
delivery. There can be no assurance that such problems will not generate
material liabilities for the Company or adversely impact the Company's relations
with its customers in the future. In addition, the Company may experience
pricing pressure from its contract manufacturers. There can be no assurance that
the Company will be able to manage its contract manufacturers effectively or
that these manufacturers will meet the Company's future requirements for timely
delivery of products of sufficient quality and quantity. In order to meet demand
for its products, the Company will have to coordinate its efforts with those of
its suppliers and contract manufacturers. The inability of the Company's
contract manufacturers to provide adequate supplies of high-quality products or
the loss of any of the Company's contract manufacturers could cause a delay in
the Company's ability to fulfill orders while the Company identifies a
replacement manufacturer and could have a material adverse effect upon the
Company's business, operating results and financial condition.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE AND UNINSURED RISKS
Due to the nature of the Company's products, the Company is subject to
product liability claims involving personal injuries allegedly related to V-Form
skates. The Company currently carries an occurrence-based product liability
insurance policy. The Company believes that its insurance has been and continues
to be adequate to cover product liability claims. Nevertheless, any future
claims are subject to the uncertainties related to litigation, and the ultimate
outcome of such proceedings or claims cannot be predicted. Due to the
uncertainty with respect to the nature and extent of manufacturers' and
distributors' liability for personal injuries, there is no assurance that the
Company's product liability insurance will be adequate to cover such claims.
Further, there can be no assurance that insurance will remain available or, if
available, that it will not be prohibitively expensive. Although the Company
believes it has adequate insurance coverage against hazards and risks that are
typical in the business conducted by it and that such coverage is in reasonable
amounts, there can be no assurance that due to certain unforeseen circumstances
such insurance will be adequate in every instance. In addition, certain hazards
and risks may be specifically excluded from coverage under the policies
maintained by the Company or otherwise may be unavailable to the Company or
other companies within the industry. The loss of insurance coverage or claims
exceeding that coverage or uninsured risks or hazards could have a material
adverse effect on the Company's business, results of operations and financial
condition.
DILUTION
The price per share of the Common Stock offered pursuant to this
offering is substantially higher than the net tangible book value per share of
the Common Stock as of June, 30, 2000. Therefore, purchasers of Common Stock
offered pursuant to this offering will incur an immediate and substantial
dilution in the value of their shares, and may incur additional dilution upon
the exercise of outstanding stock options. See "Dilution". Moreover,
shareholders of the Company do not have preemptive rights to purchase additional
stock sold, and thus additional capital raises could dilute the equity ownership
of the purchasers in this offering.
15
<PAGE> 16
CUSTOMER CONCENTRATION
As is customary in the industry, the Company does not have long-term
contracts with any of its customers. While management expects the Company's
customer base to expand in the future, a limited number of large orders from a
small number of customers may continue to account for a significant portion of
the Company's sales during any given period for the foreseeable future. The loss
of, or a reduction in business from, any of its major customers could have a
material adverse effect on the Company's results of operations. See "Business -
Sales and Marketing."
GOVERNMENT REGULATION; PRODUCT RECALLS
Certain of the Company's products may be subject to regulation by the
Federal Consumer Products Safety Commission (the "CPSC"), and may therefore be
subject to recall if requested by the CPSC. In addition, the Company may be
required to change or modify its current or future products in order to comply
with CPSC's rules or other rules and regulations related to the safety of its
products or any future rules or regulations. In the event the Company is
required to modify or change its products, it may incur substantial additional
costs related to design and manufacture and may incur significant down-time in
being able to produce inventory for sale, all of which could have a material
adverse effect upon the Company. Although the Company is not aware of any
current proceeding by the CPSC that would result in the recall of the Company's
product, any recall of the Company's products could result in significant
expense to the Company. There can be no assurance that the Company will have the
necessary funds available to it to conduct any recall or that, if conducted, it
will have funds available to continue its operations. See "Business - Government
Regulation."
DEPENDENCE UPON MANAGEMENT; LIMITED PERSONNEL
The success of the Company is dependent upon the efforts and abilities
of its Chief Executive Officer, Richard Stelnick. The Company has also relied
heavily on the services of Robert Miragliotta, Chief Financial Officer of the
Company, and Theodore Ellenis, Executive Vice-President of the Company. The loss
of the services of Messrs. Stelnick, Miragliotta or Ellenis would likely have a
material adverse affect on the Company's operations, at least in the short term.
The Company believes that it will be necessary to increase its
permanent sales, marketing product design and administrative staff in order to
implement its business plan. Although the Company believes that necessary
additional personnel to staff the Company are available, there can be no
assurance that the Company will be successful in assembling an effective staff
in a timely manner particularly as the Company faces considerable competition
from other companies for such personnel. There can be no assurance that the
Company will be able to attract and retain additional qualified personnel, and
any inability to do so could have a material adverse effect on the Company. See
"Business - Management."
ABILITY TO MANAGE GROWTH
The Company anticipates a period of rapid growth that is expected to
place a strain on the Company's administrative, financial and operational
resources. The Company's ability to manage any staff and facilities growth
effectively will require it to improve its operational, financial and management
controls, to continue to improve its reporting systems and procedures, to
install new management information systems and to train, motivate and manage its
employees.
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<PAGE> 17
There can be no assurance that the Company will install such management
information systems in an efficient and timely manner or that the new systems
will be adequate to support the Company's operations. If the Company is unable
to hire, train and retain qualified personnel to implement the necessary
services effectively, its ability to attract repeat sales could be adversely
affected, which could limit the Company's growth opportunities. If the Company's
management is unable to manage growth effectively, for example if the Company's
sales and marketing efforts exceed its capacity to obtain inventory in a timely
manner, the Company's business, operating results and financial condition could
be adversely affected. See "Business" and "Management."
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
inception and does not anticipate paying any dividends on its Common Stock in
the foreseeable future. Earnings, if any, will be used to finance the
development and expansion of the Company's business. See "Dividend Policy."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
As of the date of this Prospectus, the Company has outstanding options
and warrants to purchase approximately 8,160,186 shares of Common Stock at
prices ranging from $.10 to $6.00 per share. To the extent that outstanding
options and warrants are exercised, dilution of the holders of the Common Stock
will occur and sales of the Company's Common Stock underlying these options and
warrants may adversely affect the Company's ability to raise additional capital
and could also adversely affect then prevailing market prices for the Common
Stock.
POSSIBLE INABILITY TO RESCIND FOR CASH
Depending on the number of shareholders who qualify and elect to
rescind their purchases and the amount of Common Stock the Company is able to
sell pursuant to this offering, the Company may not be able to rescind all the
shares of the holders electing rescission. Furthermore, interest on the amount
rescinding shareholders may be entitled to will continue to accrue at the rate
applicable according to the state in which such shares were purchased. Funding
for the rescission offer, including interest thereon, is not currently available
and will not be available unless and until the Company raises enough by this
offering to rescind the shares of the holders electing and qualifying for
rescission.
RIGHTS OF RESCINDABLE SHAREHOLDERS
The effect of a rescission offering under federal securities laws is
uncertain, and shareholders entitled to rescission but who elect not to rescind
may continue to hold rights against the Company under federal securities laws
following the rescission offer until the statute of limitation has run.
PENDENCY OF NEW JERSEY BUREAU OF SECURITIES ACTION AND POTENTIAL ACTION BY OTHER
REGULATORY AUTHORITIES
Based upon its dealings to date with the Bureau, the Company remains
confident that, working with the Bureau, it will be able during 2000 to raise
publicly, the capital necessary for
17
<PAGE> 18
operations, and at the same time, effectively correct any stock issuances that
may have violated New Jersey securities registration laws and effectively
correct any stock issuances so violative of other state or federal securities
laws.
While the Company believes that the rescission offering made herein
will effectively correct any stock issuances that may have violated New Jersey
state securities laws and effectively correct any stock issuances so violative
of other state and federal securities laws, no assurance along these lines can
be given and despite its optimism, the Company may in the end be unable to
secure a complete dismissal by New Jersey or to negotiate a manageable monetary
settlement, including reimbursement of state costs, for prior violations and may
become a respondent in other state or federal administrative actions. Moreover,
while the Company believes it highly unlikely, one or more cognizant securities
agencies may seek and secure an injunction against the Company's issuance of
securities, which could materially adversely affect the Company's operations.
LACK OF DUE DILIGENCE ON BEHALF OF RESCINDABLE SHAREHOLDERS
No independent legal counsel or other professional advisor has been
retained to represent the interests of the shareholders entitled to rescission
or purchasers of the common stock issued pursuant to this offering, and no
underwriter, broker, dealer or other person has conducted any "due diligence" or
other review of this offering on behalf of such purchasers. The Company
encourages such shareholders or purchasers to consult with their legal,
accounting and/or financial advisors with respect to investment in the Common
Stock of the Company.
USE OF PROCEEDS
The Company expects the net proceeds from this offering will be used to
provide funds for:
- costs of this registration
- capital equipment and inventory
- marketing and sales
- acquisitions
- research and development
- working capital reserve
- shareholder rescission
The following represents the Company's best estimate of its use of the
net proceeds of this registration based upon its present plans, the state of its
business operations, , and current conditions in the sports-entertainment
industry. The Company reserves the right to change the use of the net proceeds
without shareholder approval if unanticipated developments in the Company's
business, business opportunities, or changes in economic, regulatory or
competitive conditions, makes shifts in the allocation of net proceeds necessary
or desirable. See "Business".
FINANCING REQUIREMENTS
The Company is seeking investment capital of $18,000,000 through the
sale of the Common Stock in order to launch an ambitious marketing program;
further invest in technological development research and development; provide
operating capital; fund payments for rescission offering; facilitate the
acquisition of certain trademarks; and accomplish additional
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<PAGE> 19
objectives as listed below. A portion of the proceeds of this offering will be
used to provide credit assurance in the form of deposits or to facilitate
letters of credit to assure capacity commitment.
<TABLE>
<CAPTION>
PROPOSED USE OF NET PROCEEDS ($) (1)
ASSUMING NET PROCEEDS OF ASSUMING NET PROCEEDS OF
APPROXIMATELY $16,000,000 APPROXIMATELY $5,000,000
<S> <C> <C> <C> <C>
Short Term Debt 1,400,000 440,000
V-Formation
- Marketing / Adv. @ 550,000 172,000
- Inventory / Mfg. @ 1,450,000 452,000
- R & D / Design @ 300,000 94,000
------------------------------- -----------------------------
2,300,000 718,000
Nexed by V-Form
- Marketing / Adv. @ 550,000 172,000
- Inventory / Mfg. @ 1,700,000 530,000
- Design / Admin. @ 250,000 78,000
------------------------------- -----------------------------
2,500,000 780,000
Roll-Ice
- Research & Development @ 1,000,000 312,000
- Inventory / Mfg. @ 1,950,000 608,000
- Marketing / Adv. @ 550,000 172,000
------------------------------- -----------------------------
3,500,000 1,092,000
Soft Machine, Inc. (SMI)
- Equipment @ 900,000 281,000
- Admin. @ 650,000 203,000
- Marketing @ 450,000 140,000
------------------------------- -----------------------------
2,000,000 624,000
On Net Sports
- Equipment @ 950,000 296,000
- Admin. @ 1,250,000 390,000
- Marketing / Adv. @ 800,000 250,000
------------------------------- -----------------------------
3,000,000 936,000
Working Capital (2) 1,500,000 468,000
Total Net Proceeds ($) 16,200,000 5,058,000
========== =========
(Exclusive of underwriter fees and expenses)
</TABLE>
(1) Excluded from this table are fees listed on the front of this
prospectus. Refer to front of prospectus for such fees.
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<PAGE> 20
(2) Included in this figure are anticipated rescission funding costs
(expected to be approximately $375,000) and amounts to be applied to working
capital.
If the maximum amount of Common Stock is sold, management believes that
the proceeds, exclusive of the proceeds from the Company's operations, will
provide sufficient funds to satisfy anticipated cash requirements for at least
18 months from the date of this registration. If less than the maximum amount of
stock is sold, the Company will utilize those proceeds and profits generated
from operations to maximize capability, and adjust the Company's annual
operating budget accordingly. There can be no assurances that the Company will
be able to raise the maximum amount of proceeds from this registration, or that
the Company will ever be able to maintain profitable operations.
Although the Company intends to use a portion of the proceeds to repay
its financial institution debt, it intends to acquire a revolving line of credit
facility with a borrowing base equal to the amount required necessary to
facilitate letters of credit and to finance major equipment purchases. The
Company intends to utilize the resulting increased borrowing availability under
such new line of credit as necessary in the ordinary course of its business,
including for increased inventories and receivables and continued growth of the
Company and its subsidiaries. In addition, the Company may use a portion of such
increased borrowing availability to acquire businesses that the Company believes
are compatible with its business strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Pending their use as
set forth above, the Company intends to use the net proceeds of this
registration/offering to make short-term reduction in the Company's working
capital lines of credit or to invest in short-term, investment grade, interest
bearing securities. The described use of proceeds is based upon management's
assumptions concerning certain acquisitions, development, financial and other
matters that may affect the Company in the future. If development of the
Company's core business varies materially from these assumptions, the Company
may reallocate some of the proceeds in the best interests of the Company.
DETERMINATION OF OFFERING PRICE
While the Company has not had the benefit of an underwriter analysis of
the proposed offering price or an independent appraisal of the Company in
determining the offering price, the Company has taken into account such
subjective factors as current sales and projections, new product introduction
dates, value of intellectual property and market conditions, that it believes
fairly support the offering price and the implied market valuation for the
Company. The pricing in this offering suggests a pre-money valuation of
approximating $120,000,000.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends on its
Common Stock. The payment by the Company of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition, as well as other
relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings, if
any, for use in the Company's business operations.
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<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 2000:
<TABLE>
<CAPTION>
JUNE 30, 2000 (UNAUDITED)
------------------------------------------------------------
<S> <C>
Cash................................................. $178,302
Working Capital...................................... ($937,646)
Long Term Debt....................................... $450,949
Short Term Debt...................................... $1,044,042
==========
Stockholders' equity (deficit):
Preferred Stock, no par value,
7,500,000 shares authorized, 1,475,148
shares issued and outstanding............... $5,286,470
Common stock, no par value, 4,500,000
shares authorized, 7,579,775 shares
outstanding,................................ 18,705,744
Paid in Capital...................................... $30,747,110
Treasury Stock....................................... (121,745)
Accumulated Deficit.................................. (54,929,813)
Total capitalization................................. 245,111
Total stockholders' equity (deficit)................. (312,234)
</TABLE>
DILUTION
The Company's net tangible book value (deficit) at June 30, 2000 was
($788,538), or ($.10) per share. "Net tangible book value per share" represents
the Company's total tangible assets less its total liabilities, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale of
the Common Stock offered hereby at an assumed offering price of $12 per share,
and application of net proceeds therefrom, and assuming that all the offering
price is allocated to the Common Stock, pro forma net tangible book value at
June 30, 2000 would have been approximately $14,871,462, or $1.64 per share.
This represents an immediate increase in net tangible book value per share of
$1.74 to existing shareholders and an immediate dilution of $10.36 per share to
the investors purchasing the Company's shares at the assumed public offering
price. The following table illustrates this dilution in net tangible book value
to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share $12.00
Net tangible book value (deficit) per share before offering ($0.10)
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C> <C>
Increase per share attributable to new investors 1.74
Pro forma net tangible book value per share after offering ---- 1.64
------
Dilution to new investors $10.36
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased from the Company, the effective cash contribution made and the average
price per share paid by existing shareholders and by purchasers of the Common
Stock offered hereby (assuming a public offering price of $12 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION(1)
---------------- ------------------- AVERAGE
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE(1)
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Existing Shareholders 7,579,675 83.5% $18,705,744 51% $2.47
New Investors 1,500,000 16.5% $18,000,000 49% $12.00
--------- ----- ----------- ------
Total 9,079,675 100.0% $36,705,744 100%
========= ====== =========== ======
</TABLE>
The anti-dilutive impact of the volume of rescission shares and of the
rescission pricing is expected to be de minimis.
(1) Excludes 1,446,828 shares issueable upon conversion of Series A, B, C
and D preferred stock, which, if included, would increase the average price per
share, increase total consideration and increase price per share paid by
existing shareholders.
SELLING SECURITY HOLDERS
There are no selling security holders except for shareholders electing
rescission.
PLAN OF DISTRIBUTION
The Company plans the distribute the securities registered hereby
without the assistance of an underwriter. The Company reserves the right, from
time to time, to engage brokers in the selling effort, and to compensate for
their efforts at market rates not to exceed 5% of the subscription funds
generated through their efforts, or by the issuance of warrants of comparable
value. No employees of the Company will be compensated for their selling efforts
on behalf of the Company. The Company's plan of distribution is fluid but is
expected to emphasize solicitation of the Company's existing shareholder base.
LEGAL PROCEEDINGS
SETTLED LITIGATION
- The Brandner Corp. (TBC) vs. V-Formation, et al.
- Jeannette Brandner d/b/a Laser Skate vs. V-Formation et al.
The above-referenced matters were commenced or removed to U.S.
District Court, Southern District of New York in mid 1996, each alleging claims,
among others, for patent infringement arising from the Company's exploitation of
the V-Form technology patent for roller skates. These matters were settled in
late 1997 and mid 1998 confirming the Company's
22
<PAGE> 23
right to exploit the patents in the manner that had been subject to dispute.
The financial terms of these settlements, which confirmed the Company's usage
of the '940 patent, were ordered confidential; however, pursuant to the Laser
Skate settlement, Laser Skate continues to receive a royalty payment of $4 per
skate which remains consistent with the terms of the original license agreement
as executed between Mr. Stelnick and Laser Skate. All settlement terms were
satisfied in full with all claims and cross-claims dismissed without prejudice.
- Pantio Holding, Ltd. vs. V-Formation, et al. Monte Carlo World Holdings
vs. V-Formation, et al.
- V-Formation, Inc. vs. Regal International Capital. V-Formation, Inc.
vs. Aberlyn Holding Company.
The above-referenced actions were commenced in U.S. District
Court, Southern District of New York in March of 1997 alleging that the
Company's placement agent and the Company had misrepresented the amount of
control the plaintiff shareholders who had purchased Series B Preferred Stock
would have after acquiring an interest in the Company. The parties agreed to
settle the cases by converting the Series B Preferred Stock to senior debt to
be repaid quarterly over 4 years. Of the $1,050,000 so converted to debt,
approximately $567,000 remains outstanding and is intended to be retired
through the use of proceeds from this offering. See "Use of Proceeds". The
second of the two above-referenced related actions involved claims for, among
other things, fraud and misrepresentation. Pursuant to the settlement of these
cases in March 2000, the Company agreed to pay $195,000 over five years, of
which $175,000 remains outstanding.
PENDING LITIGATION
- Librie vs. V-Formation, Inc.
The above-referenced action was commenced in Superior Court of New
Jersey, Passaic County in January 1999 alleging product liability damages. The
case is being handled by the Company's general liability insurance carrier and
the Company believes that its exposure in this case is limited to its $10,000
policy deductible.
- V-Formation, Inc. et al vs. John B.M. Frohling, Esq. and McCarthy,
Hudak and Frohling P.C.
The above-referenced action was commenced in the Superior Court of
New Jersey for Essex County, June 1999. The Company alleges malpractice in
connection with its previous counsel. The Company seeks the full recovery of
fees and additional recovery for punitive damages. The matter is still in the
discovery phase.
- Administrative Complaint by New Jersey Bureau of Securities
In December 1999, the New Jersey Bureau of Securities (of the
Division of Law, Department of Law and Public Safety) served an administrative
complaint on the Company alleging, first, that it had sold unregistered
securities in violation of New Jersey securities laws and used unregistered
agents for the purpose and, second, that it had failed to disclose or misstated
material information about the Company in selling its securities. The Company
has advised
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<PAGE> 24
the Bureau it would vigorously contest the second administrative charge, which
it believes to be without merit, but that it will concede for settlement
purposes that it has issued unregistered securities and cure the deficiency by
offering rescission to affected shareholders. Based upon informal discussions
with Bureau representatives, the Company believes that the rescission offer set
forth herein once funded will lead to prompt dismissal of the Bureau's entire
administrative complaint.
The Company can offer no assurance that the SEC or any other cognizant
state securities law agency will consider any past securities violations over
which it has jurisdiction corrected by a successful registration and rescission
program. The Bureau may despite dismissal of its administrative complaint,
determine to impose a monetary penalty on the Company. The Company does not
believe that any such penalty or the rescission elections, if any, by
rescinding shareholders electing to exchange their shares for original purchase
price plus statutory interest, will materially adversely affect its financial
position or materially interfere with its planned capital raise.
Based upon its dealings to date with the Bureau, the Company remains
confident that, working with the Bureau, it will be able during 2000 to raise
publicly through this offering the capital necessary for operations, and at the
same time, effectively correct any stock issuances that may have violated New
Jersey securities registration laws and effectively correct any stock issuances
so violative of other state or federal securities laws.
MANAGEMENT
The following tables set forth certain information concerning each
director and executive officer in the Company:
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard Stelnick 46 Chairman & Chief Executive Officer
Robert Miragliotta 50 Vice Chairman & Chief Financial Officer
Joseph Colonese, Jr. 33 President & Director
Theodore Ellenis 36 Executive Vice President & Director
Todd Trickle 39 Chief Operating Officer (Nexed) & Director
Nicholas Veenstra 50 Director
Roger Vogel 51 Director
Slava Fetisov 39 Director Elect Nominee
</TABLE>
Richard Stelnick, the Company's founder, currently serves as the Chief Executive
Officer and Chairman of the Board. Prior to founding the Company in 1995, Mr.
Stelnick served as the Chief Executive Officer of Star-Lo Electric, Inc. where,
within seven years, Mr. Stelnick transformed Star-Lo Electric from a small
residential family owned business into a profitable commercial and industrial
electrical contractor. Fifteen years ago, Mr. Stelnick was involved in a case
relating to the failure to make proper disposition of property, and while Mr.
Stelnick vehemently denied the allegations, he was convicted and served time for
a short period. Mr. Stelnick's primary responsibilities at the Company are
Strategic Corporate Development and
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<PAGE> 25
Marketing. Mr. Stelnick is an active manager in Company day to day operations
focusing on marketing and promotion of all Company product lines. Independent of
his occupation, Mr. Stelnick is a lifetime skater and hockey player (ice &
roller). Mr. Stelnick attended Brooklyn Technical High School, Staten Island
Community College, and Pace University, completing his education in 1976.
Robert Miragliotta, CPA/MBA joined the Company in November of 1995 as Chief
Financial Officer and was elected to the Board of Directors in December of 1995.
Prior to joining the Company, Mr. Miragliotta was Managing Partner of the CPA
firm Miragliotta & Associates. From 1990 to 1992, Mr. Miragliotta served as Vice
President & Chief Financial Officer for The Gitano Group Retail Stores, a
specialty wholesaler and fashion retailer. Mr. Miragliotta focuses upon
corporate finance, strategic development and shareholder relations. Mr.
Miragliotta remains a sports-enthusiast. He attended Fairleigh Dickinson
University and received his MBA (Masters Business Administration) in 1974.
Joseph Colonese, Jr. joined the Company May 1995 and serves as both the
President and as a Director. Prior to joining the Company, Mr. Colonese was
employed with Austin-Healey where he served as Executive Project Engineer. From
1990 until 1993, Mr. Colonese was employed by Star-Lo Electric, Inc. where he
served as a Field Engineer. Mr. Colonese's primary responsibilities include new
product and technology development, research and development, and manufacturing.
Mr. Colonese is both the author and patent holder of U.S. Patent No. 6,003,882,
supporting the Company's flagship product, which is assigned to the Company. Mr.
Colonese directs V-Form West's operations located in Colorado Springs, CO. Mr.
Colonese was graduated from New Jersey Institute of Technology.
Theodore Ellenis joined the Company in November of 1995 and serves as both the
Executive Vice President and as a director. Prior to joining the Company, Mr.
Ellenis served as the Vice President National Accounts / Eastern Region for
Motor Cargo. From 1993 to 1994 he served as the NY District Director of Preston
Trucking, a division of Yellow Freight. From 1991 to 1993, Mr. Ellenis served as
the Senior Accounts Manager for RPS, Inc. (Roadway Package System). From 1990 to
1991, Mr. Ellenis served as the Financial Districts Account Manager / NYC for
the NCR Corporation. Mr. Ellenis is a graduate of William Paterson University
and serves as an adjunct Professor, teaching Transportation & Logistics, at
William Paterson University.
Todd Trickle was elected to the Company's Board of Directors in November 1999
and currently serves as the Chief Operating Officer of the Company's Nexed
business unit. Mr. Trickle's Board appointment became effective on January 1,
2000. Prior to founding Nexed, Mr. Trickle served as the President of the
Chandler Sports Spectrum. From 1994 to 1998, Mr. Trickle served as the President
of Gear Roller Hockey. From 1990 until 1994, Mr. Trickle served as the Vice
President for ITC and international trade company. Mr. Trickle holds a Masters
in Business Administration from Lutheran University.
Nicholas J. Veenstra was appointed to the Company's Board of Directors in March
1998. Mr. Veenstra is the principal of the Glen Rock Stair Corporation and has
served as the President of Glen Rock Stair Corp for more than ten years.
Roger Vogel was elected to the Company's Board of Directors in March 2000. Mr.
Vogel's appointment became effective July 1, 2000. Mr. Vogel currently serves as
the Area Manager of B.T.G. Pharmaceuticals for the New York Tri-State Region.
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<PAGE> 26
Slava Fetisov will be appointed to the Board of Directors upon the consummation
of this registration / offering. Mr. Fetisov is currently the President of VF-2
Corp., the licensor of "Wheels of Fire" and serves as the Assistant Coach for
the NHL franchise the New Jersey Devils. Prior to founding VF-2, Mr. Fetisov was
employed as a professional athlete in the NHL and has secured two Stanley Cup
titles.
Directors are elected to serve until the next annual meeting of
shareholders or until a successor is duly elected and qualified. Executive
officers are duly elected by the Board of Directors to serve until their
respective successors are elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
Advisory Committee
The Board of Directors has established an Advisory Committee comprised
of Dennis Bartlett, Henry Groenewal, Eric Minkow, Edward Nyland, Lisa Stanislaw,
Roger Steiginga, William Soodsma, James Veenstra, Ralph Wiegers and Michael
Schwartz to make recommendations concerning the engagement of professional
service providers and long-term strategic planning. The Advisory Committee is
chaired by Richard Stelnick.
Capital Review Committee
The Board of Directors has established a Capital Review Committee
comprised of Ted Cohen, Andrew Felix, Keith Fleischman, Craig Hoogstra, Allan
Jeltema and Bruce Wenger to make recommendations concerning major equipment
financing and reviews related risk / insurance matters. The Capital Review
Committee is chaired by Robert Miragliotta.
Media & Entertainment
The Board of Directors has established the Media & Entertainment
Committee comprised of Slava Fetisov, David E. Kelley and Martin Klebba to make
recommendations and lend assistance with respect to substantiating long-term
strategic alliances with major media and entertainment concerns such as the
National Hockey League and ESPN. The Media & Entertainment Committee is chaired
by Theodore Ellenis.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive as compensation
warrants for Board service. In 1999 such warrant covered amounted in the
aggregate to 991,830 shares at an exercise price of ranging from $.10 to $6 per
share. All directors are reimbursed for expenses incurred in connection with
attendance at meetings.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of June 30, 2000, with
respect to the Company's Common Stock including Common Stock issuable upon
conversion of its Series A, B, C and D preferred stock owned by (i) each person
known to the Company to be the beneficial
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<PAGE> 27
owner of more than five percent (5%) of the Company's Common Stock, (ii) each
director, (iii) the named executive officer, and all (iv) other executive
officers and directors as a group. As of June 30, 2000 there were 7,579,775
shares of Common Stock (so including) issued and outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND PERCENTAGE OF
BENEFICIAL OWNER NATURE OF OWNERSHIP OWNERSHIP
---------------- ------------------- ---------
<S> <C> <C>
Richard Stelnick 1,000,000 shares 13.2%
Robert Miragliotta 750,000 shares 9.9%
Joseph Colonese 750,000 shares 9.9%
Theodore Ellenis 134,000 shares 2.1%
Todd Trickle 4,000 shares 0.1%
Nicholas Veenstra(1) 143,559 shares 1.9%
Roger Vogel 13,000 shares .2%
Slava Fetisov 50,000 shares .7%
All officers and directors as a 2,844,559 shares 37.8%
group (8 persons)
</TABLE>
(1) Mr. Veenstra owns 11,834 preferred series C and 96,999 preferred series D
stock, which are convertible to Common Stock with conversion premiums of 16% and
132%, respectively, of the purchase price. Such preferred stock have no voting
rights.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 45,000,000 shares of Common Stock,
no par value, and 7,500,000 shares of Preferred Stock, no par value. As of the
date of this Prospectus, there are 7,579,775 shares of Common Stock outstanding
and 1,475,148 shares of Preferred Stock, Series A, B, C and D, outstanding.
Common Stock issuable upon conversion of the preferred stock amounts to
1,475,148 shares. Although to be registered hereby, the Common Stock and such
conversion stock will be restricted from public trading until after July 31,
2000.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors then up for election. The holders of
Common Stock are entitled to receive ratably such dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining which are
available for distribution to them after payment of liabilities and after
provision has been made for each class of stock, if any, including preferred
having preference
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<PAGE> 28
over the Common Stock. Holders of shares of Common Stock, as such, have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue 7,500,000 shares of Preferred Stock
from time to tine in one or more series, in all cases ranking senior to the
Common Stock with respect to payment of dividends and in the event of the
liquidation, dissolution or winding-up of the Company. All Series of Preferred
Stock are non-voting, unless two or more quarterly dividends (whether or not
declared) on the Series A Preferred Stock are unpaid, in which instance the
Series A Preferred Stockholders, voting as a class, have the right to appoint
two Directors. The Board has the power, without stockholder approval, to issue
shares of one or more series of Preferred Stock, at any time, for such
consideration and with such relative rights, privileges, preferences and other
terms as the Board may determine (including terms relating to dividend rates,
redemption rates, liquidation preferences and voting, sinking fund and
conversion or other rights). The rights and terms relating to any new series of
Preferred Stock could adversely affect the voting power or other rights of the
holder of the Common Stock or could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company.
The Series A 6% Cumulative Preferred Stock pays cumulative annual
dividends (if and when declared by the board) of $.06 per share, is redeemable
by the holder at $1 per share plus all unpaid dividends, after 18 months from
the date of issuance, and is convertible into common stock on a share-for-share
basis.
In the event of any liquidation, dissolution or winding up of the
Company, the Series A preferred stockholders are entitled to receive $.06 per
share, and the Series B preferred stockholders $2.93 per share, together with
all unpaid dividends on these shares, in preference to dividends on the other
preferred stock series.
The Series B 8% Cumulative Preferred Stock pays annual dividends of 8%
of the original series issue price (commencing November 1, 1997) and is
cumulative. The stock may not be redeemed, but is convertible into common stock.
The number of shares issueable upon conversion is determined by dividing the
original issue price plus unpaid dividends plus the forced conversion premium
(18% of original issue price, if applicable) by the conversion price at the time
in effect. The Company may force the conversion of the stock on the consummation
of the sale of the Company's common stock in a bona fide underwriting commitment
pursuant to a registration statement under the Securities Act of 1933, as
amended, which results in aggregate cash proceeds in excess of $10 million, and
the public offering price is not less than $5 per share.
During 1999, the Company commenced a private placement in which it sold
508,372 equity units. This offering continued during January and February 2000
during which two months the Company sold an additional 27,202 shares for
$163,208. Each unit consists of one share of Series C 8% Cumulative Preferred
Stock and two detachable Preferred Series C Warrants exercisable for a period of
three years. Each warrant entitles the holder to purchase one share of Series C
Preferred Stock for $6 per share. Proceeds of the issuance received in 1999
totaled $3,018,158.
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<PAGE> 29
The Series C Preferred Stock has an 8% cumulative dividend payable in
either cash or stock, at the discretion of the Company except that, if the
Company fails to register common stock within one year from the date of issuance
(June 1999 through February 2000) the Company is required to pay 8% dividends
per annum, payable quarterly commencing November 2000. The Series C Preferred
Stock is also convertible into common stock on a share-for-share basis with a
conversion premium of not less than 16% ($0.96 per share) of the original $6 per
share purchase price of the Series C Preferred Stock. The Series C Preferred
Stock has no voting rights. Shareholders have piggyback and demand registration
rights.
During February 2000, the Company completed a private placement in
which it sold 83,333 equity units at $9.00 per unit. Each unit consists of three
shares of Series D 8% Cumulative Convertible Preferred Stock and three
detachable Preferred Series D Warrants. Proceeds from the issuance totaled
$750,000. The Series D Preferred Stock has an 8% cumulative dividend payable
after the first year in either cash or stock, at the discretion of the Company.
The Series D Preferred Stock is convertible into common stock on a
share-for-share basis with a conversion premium of not less than 132% ($3.96 per
share) of the original $3 per share purchase price of the Series D Preferred
Stock.
The Preferred Series D Warrants are exercisable until December 31,
2000. The exercise price for each Preferred Series D Warrant will be equal to
50% of the original purchase price of the Preferred Series D Unit ($4.50). Each
warrant upon exercise will entitle the holder to receive one share of the
Company's Series D Preferred Stock, which may be converted into common stock on
a share-for-share basis with a conversion premium of not more than 55% ($2.47)
of the original purchase price of the Preferred Series D Warrant.
The Series D Preferred Stock has no voting rights. Shareholders have
piggyback and demand registration rights.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends on its
Common Stock. The payment by the Company of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition, as well as other
relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings, if
any, for use in the Company's business operations.
TRANSFER AGENT AND WARRANT AGENT
The Company acts as its own transfer agent for the Common Stock and the
warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering and assuming approximately
100,000 shares are returned for rescission, the Company will have approximately
10.5 million shares of Common Stock, including preferred stock conversion
shares, outstanding (assuming no exercise of Warrants). All shares of Common
Stock being outstanding are deemed to be "restricted securities," as that term
is defined under Rule 144 promulgated under the Securities Act, in that
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<PAGE> 30
such shares were acquired by the stockholders of the Company in transactions not
involving a public offering, and, as such, may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144, or pursuant to another exemption under the
Securities Act. Such 10.5 million restricted shares of Common Stock will become
eligible for sale under Rule 144, subject to the volume limitations prescribed
by the Rule and the contractual restrictions described below on various dates
commencing July 31, 2000.
In general, under Rule 144 a person (or persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act),
is entitled to sell within any three-month period a number of restricted shares
beneficially owned for at least one year that does not exceed the greater of (i)
1% of the then outstanding Common Stock, or (ii) an amount equal to the average
weekly trading volume in the Common Shares during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed an
affiliate and has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume or other resale
requirements.
The Company's officers and directors have agreed not to sell or
otherwise dispose of any securities of the Company beneficially owned by them
for a period of 12 months from the date of this Prospectus.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation and Bylaws provide for
indemnification of directors and officers. The Company believes such
indemnification will assist the Company in continuing to attract and retain
talented directors and officers in light of the risk of litigation directed
against directors and officers of publicly held corporations. The Company's
Articles of Incorporation and Bylaws provide that the Company shall indemnify
each person who may serve or who has served at any time as a director or
officer, or who at the request of the Board of Directors of the Company may
serve or at any time has served as director or officer of another corporation or
enterprise, and such person's respective heirs, administrators, successors and
assigns, against any and all expenses, including judgments, attorney's fees and
amounts paid in settlement (before and after suit is commenced), actually and
necessarily incurred by such person in connection with the defense or settlement
of any claim, action, suit or proceeding in which such person is made a party,
or are a party, or which may be asserted against them by reason of being or
having been a director or officer of the Company or any such other corporation
or enterprise, if such person acted in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Company, or its shareholders, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that such person's conduct was not
unlawful. Such indemnification shall be in addition to any other rights to which
those indemnified may be entitled under any law, bylaw, agreement, vote of
shareholders or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and
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<PAGE> 31
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company 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
Securities Act and will be governed by the final adjudication of such issue.
CERTAIN TRANSACTIONS
During the two years preceding this offering, there were no material
Company transactions in which an officer, director, executive officer or any
person known to be a beneficial owner of more than 5% of the Company's stock was
a party.
BUSINESS
GENERAL
The Company is a multi-faceted sports technologies company incorporated
in New Jersey in 1995. The Company has experienced increasing sales revenue and
product demand of recent and thus substantial growth. The Company's objective is
to become the premier sports and related technologies firm in the sports product
and entertainment industry.
The Company was originally founded by its current CEO and Chairman,
Richard Stelnick, to respond to the perceived demand for technological
innovation in the high-end recreational sporting goods market. The Company has
built a broad foundation utilizing intellectual properties owned or licensed by
the Company. The Company's key technologies are proprietary, licensable and
transferable, which the Company considers to be important factors for further
and future expansion. Each of Company's patented technologies has applications
endemic to the sporting goods industry as well as outside the industry. The
Company's skate and clothing products are differentiated in the marketplace by
their unique design. For example, the Company's original flagship product, the
V-Form skate, represents the first major advance in skating technology since the
introduction in the 1980's of the original Rollerblade in-line skate.
The Company has also influenced international trade policy. In 1997,
the Company effectively lobbied Congress to enact amendments favorable to the
skate industry to the Harmonized Tariff Schedule of the United States. Prior to
these amendments, the Company and other skate manufacturers had been burdened
with extra import duties for certain skate components. The amended legislation
(HR-1882 and S-1288, known as the "V-bill") provides for the duty-free entry of
certain inline skate components.
The Company's corporate offices are in Lincoln Park, New Jersey and the
manufacturing and distribution fulfillment center is in Paterson, New Jersey.
The Company maintains five regional offices in Chandler, AZ, Colorado Springs,
CO, Hermosa Beach, CA, Holiday, FL, and Huntington Woods, MI. It affiliates with
international distributors in Australia, Canada, Italy, Switzerland and the
United Kingdom.
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The Company has divided its operations into the following business
units:
- V-Form Skates
- Nexed Sports Clothing
- Roll Ice Interchangeable Use Sports Footwear
- Wheels of Fire
- Soft Machine Software
- On Net Sports Internet
While each of the business units manages the development, marketing and
sale of the products and technologies assigned to such unit (as described
below), the Company's executive office supervises all the business units,
coordinating their efforts, monitoring their operations, and managing their
administrative needs.
STRATEGY
The Company's strategy is to continue an increase its current efforts
to increase sales and market penetration for its V-Form Skate and Nexed clothing
line, and to introduce vigorously in 2000 its Wheels of Fire product line and in
the second quarter of 2002 its Roll-Ice product line. The Company also intends
to materially expand the user base for the software created by its Soft Machine
unit and to introduce through its On Net Sports unit a fully interactive, sports
oriented broadcast platform for Internet users and to capture associate
advertising revenue. Its skate and clothing lines will require an expansion of
its production capacity. In carrying out its strategy, the Company will continue
to focus on "brand identity, brand equity." While it has identified no further
acquisitions, the Company intends to continue to be receptive to acquisition
opportunities.
The Company focuses on leveraging its relationships with customers to
obtain additional business by cross-selling the products of each of its business
units. For example, because of the V-Form skate and accessory line, the Company
has been able to effect leverage in its relationships and obtain instant market
penetration for Nexed. Management strongly believes that the ability to provide
retailers and customers with a full line of products and services designed to
meet their increasing demands distinguishes the Company from its competitors and
provides it with a competitive advantage.
The Company intends also to evaluate strategic alliances and joint
ventures on an ongoing basis and seek opportunities that allow it to expand the
scope of its operations, add sales and marketing capabilities and share capital
expenditures, while continuing to control product quality. The Company is
currently evaluating several opportunities, which, if successful, could increase
distribution of several products.
PROVIDING TECHNOLOGICAL LEADERSHIP AND PRODUCT INNOVATION
The Company intends to continue to take a proactive approach to product
line introduction and expansion and encourage collaboration among its product
development teams of designers and athletes and the engineering teams of its
suppliers.
OPERATIONS
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The V-Form unit is responsible for the design, manufacturing,
marketing, sale and further development of four sports product lines, namely
V-Form skates, Nexed, Roll-Ice and Wheels of Fire (detailed descriptions of
these units are set forth below).
- V-FORM SKATES - The V-Form unit is responsible for the design,
manufacturing, marketing, sale and further enhancement of the Company's
original flagship product, the "V-Form Skate". The Company believes
that its proprietary V-Formation skating design is the first major
product innovation in inline skating since the introduction of the
original Rollerblade inline skates in the 1980's. The Company
exclusively owns two patents for the V-Form Skate chassis. The V-Form
Skate chassis, unlike any other skate chassis in the world, off-sets
its wheels at alternating angles ranging from 2(degree)to 16(degree).
This unique design enables the skate user to maneuver, stop and emulate
ice skating in a revolutionary manner, creating a "Virtual-Ice"(TM)
sensation.
INDUSTRY OVERVIEW - Published reports by cognizant industry
associations record a 12.5% growth in sporting goods sales over the past five
years, although relatively level the past three years, with sales of over $45
billion for 1999. The industry is dominated by the following leading equipment
manufacturers: (1) Nike; (2) Adidas - Solomon; (3) Reebok; (4) Spalding; and,
(5) Rawlings. This total is comprised of some $19 billion for equipment, $13
billion for footwear and $13 billion for apparel.
The National Sporting Goods Association reports that approximately 27
million people participated in inline skating in 1998. The overall sporting
goods market is dominated by a host of suppliers.
INLINE SKATE COMPETITION - Currently the inline market is saturated
with "me-too" products with over 15 inline manufacturers in the market.
According to the most recent publicized studies in Sportstyle Magazine (May
1997) the market-share leaders, that is those with over a 5% market share, in
the inline market were comprised of Rollerblade - est. 33%, Ultrawheels - est.
12%, Roller Derby - est. 11%, Bauer (Nike) - est. 8%, and Variflex - est. 7%. At
present the Company commands approximately 2% of market share and it believes
that it can capture additional market share within 18 months. The inline
industry predicts that both the roller hockey and aggressive market shares will
continue to increase in the future.
The inline skating industry is segmented into three distinct markets:
aggressive, roller hockey, and recreational/fitness. The Company believes that
its V-Form skate appeals to consumers in all three market segments and believes
that it can capture a greater portion of the current market for recreation and
fitness. It also believes that it can capture a portion of the traditional quad
(2 x 2) roller skate market of 27 million users characterized by safety
preferences. The Company believes that its V- technology, which permits virtual
ice stops, will attract such consumers.
While the Company has initially emphasized the roller hockey market,
its V-Form skate has also generated interest in the recreational skate market
which it intends to pursue.
COMPETITIVE ADVANTAGES - The Company's skate technology incorporates
several patented features that the Company believes represent the first
significant advancements in inline skate performance including, greater speed;
improved braking characteristics; a tighter turning
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radius (40 to 50% tighter than conventional skates, closely emulating the
performance of ice skates); a custom-engineered boot designed to create greater
comfort and responsiveness; quick release wheels that can be changed in less
than 1 minute, in contrast to the cumbersome wheel assembly of conventional
inline skates that, on average require 20 to 30 minutes per change. Excessive
time required for wheel change and rotation is frequently cited as a major
drawback to conventional inline skates, which often results in skaters using
worn or damaged wheels. Wheels mounted in a "V" configuration offer two centers
for a skater's body weight, resulting in less fatigue to the foot and ankle, and
more stability with less "wash-out" in turns.
- NEXED - The Nexed product line includes athletic apparel, footwear and
accessories. While the Nexed product line is designed to compliment and
be coordinated with the Company's hard goods line, i.e., skates and
accessories, the Nexed product line is also independently marketable.
The Nexed product line has been well received in the marketplace and
its unit sales have steadily increased to approximately $250,000 in the
first six months of 2000, doubling the Company's original projections.
The Company anticipates further substantial growth in Nexed product
line revenue by year's end. As published in "Surfside Hockey News",
Nexed has received the coveted "Best New Apparel Y2K All-Star Product
Award" for their new edge in hockey apparel. Editor/Publisher Al
DiRoberto has stated in that publication that, "This apparel is going
to explode!."
Subject to funding, the Company intends to continue it brand
identity market penetration to year's end by expanding its distribution
of pants and bags, including kids models for Back to School, setting up
its brand equity market saturation, and in 2001 exploiting the jersey
and glove market. The Company will also seek to expand its "Hockey as
Lifestyle" apparel line that offers clothing both for on and off rink
use. The marketing campaign will promote a "Prepare For The Nexed Life"
with slogan such as "Who's Got Nexed?".
- ROLL-ICE INTERNATIONAL - The Company has introduced new and innovative
technologies though its Roll-Ice product line. Specifically, the
Roll-Ice technology provides users the ability to customize athletic
footwear, using one pair of boots for multiple purposes. For example,
the Roll-Ice design allows a skater to quickly and effortlessly change
an ice skate into a roller skate or a hiking boot. The key to this
technology is the creation of a cavity in the sole of the skate boots
into which interchangeable sole attachments can be mounted.
Importantly, the Company has a competitive advantage with the
revolutionary Roll-Ice technology since it has the exclusive license
rights for the Roll-Ice technology patents (U.S. Patents Nos.
5,847,927; 5,839,734; 5,662,338; and 5,810,368). The Company also holds
the exclusive rights for sub-licensing the Roll-Ice technology. The
Company considers the Roll-Ice license agreement a major development in
fostering the Company's growth as a recognized leader in the sports
technology sector. The Company intends to bring the Roll-Ice technology
to market during Q2 of 2002.
The Company intends to introduce at least one Roll-Ice model in 2001
dually equipped for ice and roller use. At the same time, it will
utilize focus group studies to assist it in determining the most
propitious market segment to approach. The Company also intends to
develop ancillary applications for the Roll-Ice technology including
inline skating plus one or more of the following sports activities:
golf, soccer, football, baseball/softball and hiking, or two or more of
the foregoing applications with or without inline roller skating.
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- WHEELS OF FIRE - The newest addition to the Company's product line is
an illuminated skate wheel technology (U.S. Patent Number 5,718,499)
known as "Wheels Of Fire". The Wheels of Fire technology, when embedded
in skate wheels, creates a self-generating illumination system by which
the skate wheels light up and flash prominently as the skater moves.
This innovative technology was brought to the Company by hockey legend
Slava Fetisov (currently an assistant coach for the New Jersey Devils),
who, as owner of the patent for such technology, granted the Company
the exclusive global license to make and sell products incorporating
the Wheels of Fire technology. The Company intends to market Wheels of
Fire products under the brand names "Lava Wheels", "Meteorlites" and
"Sparkees" to millions of skate, skateboard, and scooter users
world-wide. As part of the first phase of its marketing program, the
Company intends to bring to market products incorporating Wheels of
Fire technology in this year's Christmas selling season through
television, Internet and retail sales marketing and distribution
efforts. The Company intends to initiate a three pronged marketing
approach using network television, big box retailers and Internet
on-line stores followed by a full product launch during the super show
in February 2001.
- SOFT MACHINE SOFTWARE - The Company has entered into an agreement
whereby, upon payment of $50,000, the Company will acquire certain
software programs as well as the rights to any and all intellectual
properties currently owned, in development or that may be created by
the founder of Soft Machine, Inc.. In connection with the software
acquisition, the Soft Machine, Inc. founder will become employed by
the Company in September 2000. The parties have also agreed that
subsequent to employment, and once the revenue budget for the software
is more fully understood, they will negotiate in good faith certain
performance based compensation.
The primary product developed by the Soft Machine unit is "Quick
Plot". Quick Plot is a tracking and billing program for engineers,
architects and designers. There are presently 50 users of Quick Plot
version 1.0 licensed. Since there are over 4 million Auto Cad users
(generally architects and engineers) and developers worldwide, the
Company anticipates that it will be able to market Quick Plot to a
large, educated market. The Company's goal is for Quick Plot to gain
substantial market acceptance once Quick Plot Versions 2 & 2.2 (Quick
Plot for Auto Cad 14 & Quick Plot Auto Cad 2000) are made available to
service oriented vertical markets utilizing Auto Cad 2000, Windows NT
/ 98 and Windows NT / 95, which is expected to occur by the Q2 of
2001. The Company expects to make Quick Plot available to Auto Cad
users in the fall of 2000, with a 90 day free trial working demo. Auto
Cad users number in excess of 3.5 million worldwide. The marketing
program is also designed to elicit favorable testimonials in return
for free lifetime use of the Quick Plot software.
Based upon market acceptance from Auto Cad users, the Company intends
the release of Quick Plot, version 2, suitable for use by a larger
service market including attorneys and accountants. This marketing
plan will advertise as Mach One Software, which best typifies Quick
Plot's "instant gratification" for designing end-users.
In addition to Quick Plot, the Soft Machine unit plans to introduce
"Sportds" management software, an expanded version of Quick Plot for
the sporting goods industry. The Company estimates that Sportds
software will be ready for beta testing by year end. Featuring a
user-friendly graphical interface "Sportds" will be an administration
utility which enables a user to manage sporting goods
operations, including but not limited to:
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<PAGE> 36
- Digital Exchange Reporting (DER)
- Fulfillment Mandate Procedures (FMP)
- Competitive Insight Analysis (CIA)
- Network Convergence Flexibility (NCF)
Tracking, billing, reporting and forecasting will be available on one
complete menu-driven software system. Sporting goods
manufacturers, distributors, and/or retailers with a few keystrokes
will be able to:
- Manage costs, production, communication and finances.
- Generate cash flow budgets, gross margin percentages, pro
forma income statements, ration analysis, and expedite
inventory turnover.
- Evaluate market conditions in order to define market faith and
gain perspective among buyers and suppliers regarding
excellence vs. expedience, absolute integrity vs. situational
ethics, servant leadership vs. manipulative counsel, and
product resistance vs. reverse perception.
The Company intends to establish "Sportds" as the go to management
system for the sporting goods industry, and to establish "Sportds"
as the standard in the business. The March 2000 Forrester
Research Report which states; "Software spending by U.S. companies is
expected to grow from $3.1 billion in 1999 to $14.5 billion by 2003".
If successful in its introduction of "Sportds", and given the expected
market growth, the Company anticipates additional sales revenues from
this product line.
- ON NET SPORTS - The Company has acquired from On Net Sports, Inc.
all its assets relating to Internet broadcast media, affording the
Company an opportunity to provide a fully interactive, sports oriented
broadcast platform for Internet users. The Company intends to provide
programming in a radio style "sports talk" format, 24 hours a day, 7
days a week by Q4 of 2000. As consideration for the acquisition, the
Company will arrange for full time employment for On Net Sport's
founder. The parties have also agreed as soon as practicable to
determine revenue milestones for the broadcast unit and incentive
compensation for On Net Sport's founder.
The Company intends its On Net Sports broadcast format to be the first
broadcast to offer Internet users a visual/audio feed combination. The
Company believes that On Net Sports has identified a talented
management team to (i) host a Company owned virtual store to sell
branded apparel, logo merchandise, sports and computer equipment by Q4
of 2000 and (ii) establish an equivalent broadcast version in
Spanish.
The Company's marketing strategy and On Net Sports' slogan will be
based upon former New York Mets World Series hero Tommie Agee's 1969
quote, "If I can touch it, I can catch it".
Street & Smith's Sports Business Journal (December 20-26, 1999)
reported that the annual U.S. sports-related internet market is
approximately $300 million, all but a small portion from advertising
revenues. As reported by Media Metrix, in 1999 there were a number of
sports sites online, including: ESPN.com, SportsLine.com, NFL.com,
CNNSI.com, NBA.com and SportingNews.com. The Company intends to
penetrate the Internet sports communications
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<PAGE> 37
market by offering an interactive medium 7 days a week - 24 hour, with
advertising costs favorable to that charged by competitors.
On Net Sports' operations will be headquartered at the Company's
corporate offices.
PATENTS, TRADEMARKS AND LICENSES
The Company holds a variety of intellectual properties in the form of
patent ownership or exclusive license (7 patents) and trademarks (7 trademarks -
5 registered and 2 pending). A complete listing and detailed description of each
in relation to the individual business unit and/or subsidiary is as follows:
As protection for its flagship product, the V-Form skate, in December
1997 the Company obtained a license for U.S. Patent No. 5,303,940 entitled
"Skate Having Angularly Mounted Wheels," which now provides the Company with the
exclusive right to manufacture, distribute and sub-license the technology, as
defined, within the United States. The '940 patent expires in 2012, subject to
renewal for up to 5 years.
As protection for its Roll-Ice product line, in December 1999 the
Company obtained U.S. Patent No. 6,003,882 entitled "Customizable Skate with
Removable Wheel Hangers," which provides the Company with the sole right to
manufacture and distribute the V-Form skate brand and any skating product
utilizing such technology, as defined, in the United States. The '882 patent
expires in 2019.
In further protection of the Roll-Ice product line, in July 1999 the
Company entered into an agreement with Roll-Ice International LLC whereby the
Company obtained an exclusive license to exploit U.S. Patent Numbers; 5,662,338;
5,818,368; 5,839,734, and, 5,847,927 entitled "The Peripheral Edge Technology."
Such licenses provide the Company with the exclusive right to manufacture,
distribute and sublicense any product utilizing such technology within the
United States. These patents expire beginning in 2018.
As protection for its Wheels on Fire product line, the Company has
acquired the exclusive license for U.S. Patent No. 5,718,499 entitled "Inline
Skate Wheel Lighting System," which provides the Company with the exclusive
right to manufacture, distribute and sub-license an inline roller skate wheel
utilizing such technology within the United States. The '499 patent expires in
2018.
The Company holds a variety of the registered U.S. trademarks;
"V-Formation", "V-Form", "Street Smart", "Tomorrow's Technologies Today" and
"Virtual Ice" used in connection with the Company's V-Form skate. The Company
has an application pending for a U.S. trademark for "Nexed" and "Nexed by
V-Form" to be used in connection with its clothing line. The Company intends to
apply for additional trademark protection as appropriate, including for On Net
Sports and Soft Machine.
EMPLOYEES
As of August 21, 2000 the Company has 30 employees assigned as follows:
7 management/administrative, 14 sales and clerical, 7 production employees, and
2 engineering and sourcing. The Company's operations are non-union. There has
been no history of labor
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<PAGE> 38
strikes or unrest at any of the Company's facilities. The Company believes that
its relations with its employees remains satisfactory. In addition, management
believes that the available labor force in the geographic areas where its
facilities are located are sufficient to support the expansion anticipated the
next 12 months.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations includes certain forward-looking statements. When used in
this report, the words "expects," "intends," "plans," and "anticipates" and
similar terms are intended to identify forward looking statements that relate to
the Company's future performance. Such statements involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed here. Factors that might cause such a difference include, but
are not limited to, those discussed under "Business - Special Considerations."
INTRODUCTION
Results of operations for the year ended December 1999 reflect the
Company maturing into a company with worldwide distribution of several products.
Prior to 1998, management's efforts were primarily directed toward conducting
research and development, applying for patent approvals, developing
manufacturing and distribution arrangements for its sporting goods products and
obtaining initial capital and financing to fund these activities.
The Company was formed in January 1995 to engage in marketing a line of
high quality sporting goods focusing primarily on an innovative inline skate
under the trademark V-Formation. The V-Formation skate differs from traditional
inline skates by offering the consumer a skate that utilizes the Company's
angled wheel technology instead of the straight-line wheel design of traditional
inline skates, resulting in enhanced performance. Since its incorporation, the
Company's efforts have been focused primarily on designing, engineering and
developing its patented V-Formation product line of inline skates and other
Company technology. During the years ended December 31, 1998 and 1999,
respectively, the Company had revenues of approximately $678,000 and $761,000.
Substantially all revenue was derived from sales of its in-line skates employing
the Company's technology.
The Company's V-Form skates differ from traditional inline skates in
appearance and in performance. The Company believes that its proprietary
V-Formation skating system is the first major product innovation in inline
skating since the introduction of the original Rollerblade inline skates in the
1980's. The Company has a U.S. patent for its new skate chassis that displaces
wheels at alternating sixteen-degree angles. The Company believes that the
angled wheels allow the skates better wheel and bearing usage duration due to
reduced stress tolerance and heat transfer rates. The Company also believes that
the design allows the skater to maneuver, stop and emulate ice skating in a
fashion creating a Virtual Ice(TM) sensation. Because of these characteristics,
the Company believes that its V-Formation(TM) skates enhance the experience of
inline skating while providing a more stable, body-friendly platform which will
appeal to all skaters from beginner to advanced. The Company believes these
product features provide the Company with a skate superior to any other product
commercially available and should eventually provide the Company with a
competitive advantage in the inline skate market.
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<PAGE> 39
On July 15, 1999, the Company and Roll-Ice International L.L.C., a
Michigan based corporation, entered into an exclusive licensing agreement that
enables the Company to manufacture, use and sell four patents that represent new
skate designs. The Roll-Ice intellectual properties allow ice and roller hockey
players greater creativity, increased maneuverability and better torsional
rigidity.
On October 1, 1999, the Company acquired the clothing product line of
Nexed Hockey, Inc. a Chandler, Arizona based corporation. Todd Trickle, Nexed
founder and former CEO of Gear Roller Hockey, serves as chief operating officer
of the Nexed business unit at the Company.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Gross revenue for the twelve months ended December 31, 1999 were
$760,533 versus $678,437 for the same twelve months in 1998. For the year ended
December 1999, skate sales represented approximately 96% of gross revenue.
Further, of the five skate models sold, model VF-2500 accounted for nearly one
half of all skate sales. The V3 Fluid model was introduced during the last
quarter of 1999. The V3 Fluid skate accounted for approximately 21% of annual
skate units sold within that compressed time period. Also during 1999, a limited
number of high-end model PBH-3000 skates were introduced and sold. The PBH-3000
was the official skate of Pro Beach Hockey, a roller hockey tournament, which
was aired eighty-one hours on ESPN/ESPN2 over a three-month period.
Sales in 1999 were adversely affected by the installation of new rivet
machines at the factory. It was necessary to virtually shut down production of
skates while the new machinery was installed and tested. During the third
quarter of 1999 (the period of installation and testing), skate production
decreased by 49%.
Cost of sales for the twelve months ended December 31, 1999 was
$756,139 versus $629,533 for the same twelve-month period in 1998. As noted
above, during 1999, the Company had not achieved operating level efficiency
primarily due to the assembly operation being idle to allow for installation of
new, more efficient equipment.
Selling, general and administrative expenses for the twelve months
ended December 31, 1999 totaling $3,107,068 were $288,607 lower than that
recognized for the same twelve months in 1998 of $3,395,675. Operating expenses
paid in stock and warrants decreased by $10,011,575 to $1,305,525. The decrease
of equity-based expense is primarily due to a legal agreement reached in 1998
which, when utilizing the Black-Sholes Model for valuing the equity granted,
calculated the settlement amount to be $6,109,143.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During the second quarter of 1998, the Company introduced its V2 skate
model, which was the first of the Company's one-piece molded chassis skates. The
following quarter, an additional skate model, the VF2500 began shipping to
retailers. The two models mentioned virtually accounted for all 1998 skate
sales, which were approximately $678,000 versus $284,612 for the same twelve
months in 1997.
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<PAGE> 40
Cost of sales for the twelve months ended December 31, 1998 was
$629,533 versus $272,492 for the same period of 1997. Gross margins were
negatively affected in 1998 since the Company did not achieve operating
efficiency due to the retooling for the new one-piece molded chassis and the
start-up cost associated with initial product introduction. Cost of sales were
anticipated to decrease on a product basis as start-up costs associated with
initial product introduction phase out and higher volume levels absorb a greater
portion of overhead costs.
Operating expenses for the twelve months ended December 31, 1998 of
$3,472,438 were $940,196 higher than that recognized for the same twelve months
in 1997 of $2,532,242. The Company believes that increases in expenses were
chiefly attributable to the product launch and development. Significant
increases were incurred in selling and promotional expenses, which included
advertising. Operating expenses paid in stock and warrants decreased by
$16,409,541 to $6,109,143. The decrease of equity-based expense is primarily due
to the issuance of warrants issued to employees in 1997 which, when utilizing
the Black-Sholes Model for valuing the equity granted, calculated the issuance
to employees at $22,518,684.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the twelve-month period
ended December 31, 1999 was $3,593,816 as compared to $3,237,111 during the same
period in 1998. Although net losses for the twelve months period ended December
31, 1999 were significantly lower than the prior year, higher expenditures were
incurred during 1999 for operating assets and liabilities, primarily repayment
of higher levels of accounts payable and accrued expenses.
Net cash provided from investing activities during the twelve months
ended December 31, 1999 was a positive $143,588 as compared to an overall usage
of $206,900 during the same period in 1998. Of the total provided in 1999,
$339,692 pertained to the sale of marketable securities and the balance was
activities related to capital expenditures for equipment, patents and
trademarks. The majority of the $206,900 used in 1998 was for capital
expenditures for equipment, patents and trademarks.
Net cash provided by financing activities totaled $3,575,471 for the
twelve month period ended December 31, 1999 versus $3,398,522 for the same
period in 1998. The cash was provided primarily by the sale of stock for both
years.
The Company follows the customary practice in the sporting goods
industry of offering extended payment terms to credit-worthy customers on
qualified orders. The Company's working capital requirements generally peak in
the third and fourth quarters as it builds inventory and makes shipments under
these extended payment terms, resulting in accounts receivable.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Gross revenue for the six months ended June 30, 2000 were $722,311
versus $420,430 for the same six months in 1999. Skate sales during the
six-month period represented approximately 69% of gross revenue. The V3 Fluid
model, which was introduced during the final quarter of 1999, accounted for over
one half of all skate sales and also represented approximately 37% of total
gross revenue. The Nexed product line of athletically branded soft goods was
introduced into the marketplace in the Q2 of 2000. During the compressed time
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<PAGE> 41
period, the sales of Nexed pants and backpacks accounted for approximately 21%
of total gross revenue for the six-month period ending June 30, 2000.
Cost of sales for the six months ended June 30, 2000 was $751,740
versus $445,589 for the same six-month period in 1999. The increase in costs of
sales is mainly attributable to the increase in sales by approximately 72%.
Selling, general administrative expenses for the six months ended June
30, 2000 totaling $1,680,649 increased by less than 10% over the comparable
period in the prior year despite the large increase in sales of 72% as noted
above.
Operating expenses paid in stock and warrants increased by $4,372,230
to $4,429,158. The increase of equity-based expenses is primarily due to the
issuance of shares relating to a legal settlement during the first quarter of
2000 which, when utilizing the Black-Sholes Model for valuing the equity
granted, calculated the settlement issuance at $4,410,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six-month period June
30, 2000 was $1,537,550 as compared to $1,644,214 during the same period in
1999.
Net cash provided by financing activities totaled $1,599,667 versus
$1,389,622 for the same period in 1999. The cash was provided primarily by the
sale of stock in both years and proceeds from notes payable in 2000.
DESCRIPTION OF PROPERTY
All the Company's current operations, with the exception of the
regional sales offices, are conducted at facilities located in the metropolitan
New York/New Jersey area. The Company's existing facilities are adequate for
current operations. Additional facilities will be leased as needed.
The following schedule summarizes the location and function of each of
the Company's facilities:
<TABLE>
<CAPTION>
LOCATION PRIMARY USE
<S> <C>
Lincoln Park, New Jersey Executive Offices, Management &
Marketing
Paterson, New Jersey Assembly & Distribution
Chandler, Arizona Nexed R & D
Colorado Springs V-Form R & D
Hermosa Beach, California Sales & Marketing
Holiday, Florida Sales & Marketing
Huntington Woods, Michigan Sales & Marketing
</TABLE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At present the Company does not intend to list is stock on any
exchange. No shares may be sold pursuant to Rule 144 prior to July 31, 2001.
Common Shares are held of record by 347 persons.
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<PAGE> 42
EXECUTIVE COMPENSATION
Total compensation for the Company's four executive staff for 1999 was
$382,000. The CEO's cash compensation for 1999 was $120,000. None of the
Company's other executive officers nor any other subordinate employee, received
cash compensation in excess of $100,000 in 1999.
STOCK OPTIONS
No options were granted during the first fiscal year to Mr. Stelnick,
the named officer of the Company.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION VALUES
No executive officers exercised stock options during the 1999 fiscal
year, and the only executive officers who held stock options at the end of the
year were CEO Richard Stelnick, who held 1,400,000 options, CFO Robert
Miragliotta who held 1,050,000, and President Joseph Colonese who held
1,050,000.
EMPLOYMENT AGREEMENTS
Messrs. Stelnick, Colonese, Miragliotta and Ellenis have four-year
employment agreements expiring December 31, 2002, calling for aggregate salaries
of $394,000, $408,000 and $410,000, respectively, for the four executives for
the years 2000, 2001 and 2002.
RESCISSION OFFER
SEE RISK FACTORS BEGINNING ON PAGE ___ FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY OFFEREES IN CONNECTION WITH THE RESCISSION OFFER
BACKGROUND
In December 1999, the New Jersey Bureau of Securities (of the Division
of Law, Department of Law and Public Safety) served an administrative complaint
on the Company alleging, first, that it had sold unregistered securities in
violation of New Jersey securities laws and used unregistered agents for the
purpose and, second, that it had failed to disclose or misstated material
information about the Company in selling its securities. The Company has advised
the Bureau it would vigorously contest the second administrative charge, which
it believes to be without merit, but that it will concede for settlement
purposes that it has issued unregistered securities and cure the deficiency by
offering rescission to affected shareholders. Based upon informal discussions
with Bureau representatives, the Company believes that the rescission offer set
forth herein once funded will lead to prompt dismissal of the Bureau's entire
administrative complaint.
Accordingly, the Company is hereby offering to rescind certain sales of
its Common Stock made to certain purchasers and to return their payment price
plus interest. The rescission offer is subject to a written election within 30
days of the date of this Prospectus by any
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<PAGE> 43
shareholder who wishes to rescind and to the condition that the Company's total
liability for rescission does not exceed $750,000. While the Company cannot be
certain and has taken no poll of shareholders, based upon informal discussions
to date, it expects that less than 15 of the Company's shareholders holding
approximately 100,000 shares at an average purchase price of $3 per share will
elect rescission, thereby creating a rescission liability of some $300,000.
SHAREHOLDERS ENTITLED TO RESCISSION
This rescission offer is open to all non-accredited holders of Common
Stock for whom the applicable statute of limitations relating to rescission
rights relative to Common Stock purchased has not expired as of the date of this
Prospectus (such shares of Common Stock so held being hereinafter referred to as
"Rescindable Shares"). Relevant statute of limitations for the federal
securities act is one year, but may vary from state to state.
Apart from its wish to settle the above administrative complaint by the
New Jersey Bureau of Securities, the Company is undertaking this rescission
offer as a precaution against potential claims by holders of Rescindable Shares
but without admitting non-compliance with federal or state securities or blue
sky laws. However, the current position of the Securities and Exchange
Commission is that failure to accept a rescission offer does not necessarily
terminate liability, if any, under federal securities laws. At present, no
claims for rescission have been made against the Company.
RESCISSION OFFERING
The Company reserves the right to withdraw the rescission offer, within
30 days after the date of this Prospectus, as to shareholders in any state where
the rescission offer cannot legally be made because the Company is unable to
obtain registration, an exemption therefrom, or any other necessary approval to
permit the rescission offer under the securities laws of such state.
This rescission offer constitutes an offer to redeem the Rescindable
Shares. Therefore, subsequent to this offering, no holder of outstanding
Rescindable Shares shall have a right of redemption, rescission or purchase
including statutory rights of rescission unless otherwise set forth in writing,
whether such shareholder accepts this right of rescission or not. However, this
does not affect any statutory right of rescission that applicable law prohibits
from being extinguished by this rescission offer. Particularly, the effect of a
rescission offering under federal securities laws is uncertain, and holders of
Rescindable Shares may continue to hold rights against the Company under federal
securities laws following the rescission offer until the statute of limitations
has expired. The federal statute of limitations is one year from the date of
purchase, and state statutes of limitations vary.
With respect to shareholders who do not elect to rescind their
purchases of Rescindable Shares, their shares will be registered along with the
shares of purchasers pursuant to this offering. In the future, the Company may
propose a recapitalization that would require the exchange of outstanding
Rescindable Shares for Common Stock of the Company.
Shareholders considering rescission are encouraged to seek independent
assistance of counsel to confirm the accuracy of these interest rates and to
determine any additional recourse available to them.
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Any shareholder who wishes to rescind should contact Mr. Robert
Miragliotta, the Company's Chief Financial Officer, at 170 Beaver Brook Road,
Lincoln Park, New Jersey 07035, telephone (973) 872-9400, facsimile
(973)872-9472, to determine whether his or her purchase falls within the
rescission period and whether, at the time of purchase, the shareholder did not
qualify as an accredited investor. Generally speaking, individual accredited
investors under federal law are persons whose current annual income is at least
$200,000, and whose income exceeded such level for the two prior years, or
together with one spouse is $300,000, and together exceeded such level for the
two prior years, or persons whose net worth or joint net worth exceeds
$1,000,000. Mr. Miragliotta can assist shareholders in determining whether their
purchases fall in the rescission period applicable to them and whether at the
time of purchase they were not accredited.
All shareholders who wish to consider or accept the rescission offer
must communicate with Mr. Miragliotta within 30 days of the date of this
Prospectus. After such 30 day period the rescission offer will terminate. The
election to rescind must extend to all Rescindable Shares purchased by the
shareholder.
EFFECT OF REJECTION
Shareholders holding Rescindable Shares who do not accept the
rescission offer will be deemed to hold registered securities under the
Securities Act subject to any restrictions upon transfer to which they agreed at
the time the Rescindable Shares were acquired. Rejection of the rescission offer
will not necessarily bar shareholders from seeking rescission or damages under
Federal or state securities laws. If a holder of Rescindable Shares were to
assert a claim based upon a violation thereof, the position of the Securities
and Exchange Commission is that liabilities under the Federal securities laws
are not terminated by making a rescission offer that is not accepted.
PAYMENT OF THE RESCISSION PRICE
Upon rescission the electing shareholder will be required to exchange
his or her Rescindable Shares for payment of the cash purchase price thereof
plus statutory interest according to his or her state of residence or purchase
at the time of purchase. Mr. Miragliotta is available to advise as to applicable
interest rates, which generally cover the range of 6-12%. Interest will run
retroactively to date of purchase. The Company reserves the right to withdraw
this rescission offer even if accepted if the rescission liability exceeds
$750,000. Rescission payments are expected to be made within 60 days of the
termination of the 30 day rescission period, but the Company reserves the right
to defer rescission funding up to 6 months after such termination to enable it
to raise sufficient funds in this offering.
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V-FORMATION, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Balance sheets as of December 31, 1999 and 1998 and June 30, 2000 F-3-F-4
Statements of operations for the years ended December 31, 1999 and 1998 and
for the six-month periods ended June 30, 2000 and 1999 F-5
Statements of stockholders' equity (deficit) for the years ended December 31, 1999
and 1998 F-6
Statements of stockholders' equity (deficit) for the six-month periods ended
June 30, 2000 and 1999 F-7
Statements of cash flows for the years ended December 31, 1999 and 1998 and for the
six-month periods ended June 30, 2000 and 1999 F-8
Notes to financial statements F-9-F-27
</TABLE>
45
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
Board of Directors
V-Formation, Inc.
Lincoln Park, New Jersey
We have audited the accompanying balance sheets of V-Formation, Inc. as of
December 31, 1999 and 1998, and the related statements of operations and
stockholders' equity (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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of V-Formation, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that, in the absence of commitments for additional capital and/or financing,
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HORTON & COMPANY, L.L.C.
March 10, 2000, except for Note 11,
as to which the date is August 17, 2000
F-2
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<PAGE> 47
V-FORMATION, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 178,302 $ 160,186 $ 34,943
Marketable securities - available for sale -- -- 339,692
Accounts receivable, net of allowance for doubtful accounts
of $21,000 in 2000 and 1999 and $33,490 in 1998 285,077 117,362 103,088
Inventories 355,715 342,949 279,338
Prepaid expenses and other current assets 115,909 77,916 57,153
---------- ---------- ----------
Total current assets 935,003 698,413 814,214
Property and equipment, net 378,318 365,983 372,775
Patents and trademarks, net of accumulated amortization
of $97,467 in 2000, $78,993 in 1999 and $45,950 in 1998 476,304 500,870 392,961
Security deposits 43,437 48,487 86,137
---------- ---------- ----------
$1,833,062 $1,613,753 $1,666,087
========== ========== ==========
</TABLE>
See notes to financial statements
F-3
47
<PAGE> 48
V-FORMATION, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 324,042 $ 294,798 $ 374,086
Notes payable 720,000 -- 242,500
Accounts payable and accrued expenses 650,305 482,799 799,631
Notes payable to shareholders -- -- 92,000
------------ ------------ ------------
Total current liabilities 1,694,347 777,597 1,508,217
------------ ------------ ------------
Long-term debt, net of current maturities 450,949 449,834 910,896
------------ ------------ ------------
Stockholders' equity (deficit):
Preferred stock - no par value, 7,500,000 shares
authorized, 1,475,148 shares issued and outstanding in 2000
1,196,828 shares issued and outstanding in 1999
602,390 shares issued and outstanding in 1998 5,286,470 4,366,554 800,000
Common stock - no par value, 45,000,000 shares authorized,
8,038,524 shares issued, 7,579,675 shares outstanding in
2000 7,279,174 shares issued, 6,820,325 shares outstanding in 1999
6,729,942 shares issued, 6,276,593 shares outstanding in 1998 18,705,744 14,163,144 12,347,768
Additional paid-in capital, as restated in 1998 30,747,110 30,736,160 30,317,125
Accumulated deficit, as restated in 1998 (54,929,813) (48,757,791) (44,117,294)
------------ ------------ ------------
(190,489) 508,067 (652,401)
Less: treasury stock at cost, 458,849 shares in 2000 and 1999
and 453,349 shares in 1998 (121,745) (121,745) (100,625)
------------ ------------ ------------
(312,234) 386,322 (753,026)
------------ ------------ ------------
$ 1,833,062 $ 1,613,753 $ 1,666,087
============ ============ ============
</TABLE>
See notes to financial statements
F-4
48
<PAGE> 49
V-FORMATION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------
2000 1999 1999 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales $ 722,311 $ 420,430 $ 760,533 $ 678,437
Cost of goods sold 751,740 445,589 756,139 629,533
------------ ------------ ------------ ------------
Gross profit (loss) (29,429) (25,159) 4,394 48,904
------------ ------------ ------------ ------------
Operating expenses:
Selling and promotional 327,360 452,244 1,540,265 1,228,938
General and administrative 1,297,057 1,020,658 1,566,803 2,166,737
Depreciation and amortization 56,232 59,121 118,242 76,763
------------ ------------ ------------ ------------
1,680,649 1,532,023 3,225,310 3,472,438
------------ ------------ ------------ ------------
Loss from operations before stock-based
compensation (1,710,078) (1,557,182) (3,220,916) (3,423,534)
------------ ------------ ------------ ------------
Operating expenses paid in stock and warrants:
Employee compensation -- 30,660 318,660 4,895,393
Fees and commissions 19,158 26,268 251,188 177,376
Charitable contributions -- -- 489,000 135,188
Litigation settlement 4,410,000 -- -- 6,109,143
Interest -- -- 246,677 --
------------ ------------ ------------ ------------
4,429,158 56,928 1,305,525 11,317,100
------------ ------------ ------------ ------------
Loss from operations (6,139,236) (1,614,110) (4,526,441) (14,740,634)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 229 4,737 4,839 21,885
Interest expense (33,015) (70,360) (118,149) (136,698)
Loss on disposal of assets -- (746) (746) (5,700)
------------ ------------ ------------ ------------
(32,786) (66,369) (114,056) (120,513)
------------ ------------ ------------ ------------
Net loss, as restated for 1998 $ (6,172,022) $ (1,680,479) $ (4,640,497) $(14,861,147)
============ ============ ============ ============
Loss per common share $ (0.86) $ (0.26) $ (0.71) $ (2.56)
============ ============ ============ ============
Weighted average shares outstanding 7,188,095 6,456,852 6,522,704 5,812,466
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-5
49
<PAGE> 50
V-FORMATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK-NO PAR
COMMON STOCK-NO PAR VALUE VALUE
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 (shares restated) 5,453,269 $5,162,100 602,390 $800,000
Sales of stock for cash (shares restated) 656,135 3,553,000
Issuance of stock for employee compensation 75,240 381,190
Issuance of stock for services (shares restated) 522,774 3,131,093
Issuance of warrants for services (shares
restated)
Purchase of treasury stock
Stock donated to charities 22,524 120,385
Net loss for the year, as restated
--------- ---------- -------- ----------
Balance at December 31, 1998 6,729,942 12,347,768 602,390 800,000
Sales of stock for cash 242,883 1,427,282 508,372 3,018,158
Issuance of stock for employee compensation 19,110 144,660
Issuance of stock in brand acquisition 4,000 24,000
Issuance of stock for services 10,739 64,434 4,566 59,396
Warrants exercised 251,000 26,000
Issuance of warrants for employee compensation
Issuance of warrants for services
Issuance of warrants for interest
Stock dividends 21,500 129,000
Purchase of treasury stock
Stock donated to charities 81,500 489,000
Net loss for the year
--------- ----------- --------- ----------
Balance at December 31, 1999 7,279,174 $14,163,144 1,196,828 $4,366,554
========= =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 (shares restated) 450,075 $(85,625) $22,590,793 $(29,256,147)
Sales of stock for cash (shares restated)
Issuance of stock for employee compensation
Issuance of stock for services (shares restated)
Issuance of warrants for services (shares 7,726,332
restated)
Purchase of treasury stock 3,274 (15,000)
Stock donated to charities
Net loss for the year, as restated (14,861,147)
------- --------- ---------- -----------
Balance at December 31, 1998 453,349 (100,625) 30,317,125 (44,117,294)
Sales of stock for cash
Issuance of stock for employee compensation
Issuance of stock in brand acquisition
Issuance of stock for services
Warrants exercised
Issuance of warrants for employee compensation 174,000
Issuance of warrants for services 127,358
Issuance of warrants for interest 246,677
Stock dividends (129,000)
Purchase of treasury stock 5,500 (21,120)
Stock donated to charities
Net loss for the year (4,640,497)
------- --------- ----------- ------------
Balance at December 31, 1999 458,849 $(121,745) $30,736,160 $(48,757,791)
======= ========= =========== ============
See notes to financial statements
</TABLE>
F-6
50
<PAGE> 51
V-FORMATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK-NO PAR VALUE PREFERRED STOCK-NO PAR VALUE
------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance at January 1, 1999 6,729,942 $12,347,768 602,390 $800,000
Sales of stock for cash 237,883 1,427,282 17,067 102,400
Issuance of stock for employee compensation 5,110 30,660
Issuance of stock for services 5,378 26,268
Warrants exercised 1,000 1,000
Purchase of treasury stock
Net loss for the period
--------- ----------- ------- --------
Balance at June 30, 1999 6,979,313 $13,832,978 619,457 $902,400
========= =========== ======= ========
Balance, at January 1, 2000 7,279,174 $14,163,144 1,196,828 $4,366,554
Sales of stock for cash 277,202 913,208
Issuance of stock for services 250 1,500 1,118 6,708
Issuance of stock in settlement of litigation 735,000 4,410,000
Issuance of warrants for services
Warrants exercised 24,100 131,100
Net loss for the period
--------- ----------- --------- ----------
Balance at June 30, 2000 8,038,524 $18,705,744 1,475,148 $5,286,470
========= =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
-------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
<S> <C> <C> <C> <C>
Balance at January 1, 1999 453,349 $(100,625) $30,317,125 $(44,117,294)
Sales of stock for cash
Issuance of stock for employee compensation
Issuance of stock for services
Warrants exercised
Purchase of treasury stock 3,500 (10,500)
Net loss for the period (1,680,479)
------- --------- ----------- ------------
Balance at June 30, 1999 456,849 $(111,125) $30,317,125 $(45,797,773)
======= ========= =========== ============
Balance, at January 1, 2000 458,849 $(121,745) $30,736,160 $(48,757,791)
Sales of stock for cash
Issuance of stock for services
Issuance of stock in settlement of litigation
Issuance of warrants for services 10,950
Warrants exercised
Net loss for the period (6,172,022)
------- --------- ----------- ------------
Balance at June 30, 2000 458,849 $(121,745) $30,747,110 $(54,929,813)
======= ========= =========== ============
See notes to financial statements
</TABLE>
F-7
51
<PAGE> 52
V-FORMATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------
2000 1999 1999 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,172,022) $ (1,680,479) $ (4,640,497) $(14,861,147)
Adjustments to reconcile net loss to net cash
used in operating activities:
Bad debts -- -- -- 1,455
Depreciation and amortization 56,232 59,121 118,242 76,763
Employee compensation paid in stock and warrants -- 30,660 318,660 4,895,393
Fees and commissions paid in stock and warrants 19,158 26,268 251,188 177,376
Litigation settlement paid in stock and warrants 4,410,000 -- -- 6,109,143
Debt incurred in litigation settlement 195,000 -- -- --
Charitable contributions paid in stock and warrants -- -- 489,000 135,188
Interest paid in warrants -- -- 246,677 --
Loss on disposal of assets -- 746 746 5,700
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (167,715) (4,289) (14,274) (90,413)
(Increase) decrease in inventories (12,766) 23,269 (63,611) 172,715
(Increase) decrease in prepaid expenses
and other current assets (37,993) 57,254 (20,763) --
(Increase) decrease in security deposits 5,050 31,600 37,650 (5,250)
Increase (decrease) in accounts payable 271,172 37,586 (194,548) 147,452
Increase (decrease) in accrued expenses (103,666) (225,950) (122,285) (1,486)
------------ ------------ ------------ ------------
Net cash used in operating activities (1,537,550) (1,644,214) (3,593,815) (3,237,111)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Sale (purchase) of marketable securities -- 339,692 339,692 (21,872)
Capital expenditures for equipment, patents
and trademarks (44,001) (97,962) (196,104) (185,028)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities (44,001) 241,730 143,588 (206,900)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from (repayment of) notes payable 570,000 52,500 (242,500) 47,500
Proceeds from (repayment of) shareholder loans 150,000 214,000 (92,000) 92,000
Principal payments under loan agreements (164,641) (397,060) (540,350) (278,978)
Proceeds from issuance of common stock 131,100 1,428,282 1,453,282 3,553,000
Proceeds from issuance of preferred stock 913,208 102,400 3,018,158 --
Purchase of treasury stock -- (10,500) (21,120) (15,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,599,667 1,389,622 3,575,470 3,398,522
------------ ------------ ------------ ------------
Net increase (decrease) in cash 18,116 (12,862) 125,243 (45,489)
Cash, beginning of period 160,186 34,943 34,943 80,432
------------ ------------ ------------ ------------
Cash, end of period $ 178,302 $ 22,081 $ 160,186 $ 34,943
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-8
52
<PAGE> 53
V-FORMATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of V-Formation, Inc. is
presented to assist in understanding the financial statements. The
financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
HISTORY AND BUSINESS ACTIVITY
V-Formation, Inc. (the "Company") was organized in January 1995 and
was in the development stage through December 31, 1996. In January
1997, the Company commenced the sale of patented V-configuration
roller skates to sporting goods retailers located throughout the
United States and Canada. During 1999, the Company acquired the Nexed
brand of hockey equipment and apparel (Note 9).
Since inception, the Company has incurred significant losses in
connection with expenditures for research and development,
organization and promotion of the Company's product, and will continue
to incur significant losses until the commencement of a significant
revenue stream. At December 31, 1999 and 1998, the Company had working
capital deficiencies of approximately $79,000 and $694,000, and
stockholders' equity (deficit) of approximately $386,000 and
$(753,000), respectively. The Company has been dependent on capital
raised from the sale of common and preferred stock and loans from
unrelated parties. The Company anticipates that it will require
additional capital and/or financing to continue as a going concern
until it attains an adequate and consistent revenue stream and
profitable operations. There can be no assurance, however, that
sufficient capital and/or additional financing will be available.
Accordingly, there can be no assurance as to the recoverability of the
Company's assets.
The Company's need for additional capital and/or financing in the
absence of commitments therefor, raise substantial doubt about its
ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of
these uncertainties.
F-9
53
<PAGE> 54
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL REPORTING
The unaudited financial statements for the six-month periods ended
June 30, 2000 and 1999 reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of financial
position, results of operations and cash flows of the interim
periods presented.
CASH EQUIVALENTS
The Company considers all highly-liquid investments, with an original
maturity of three months or less when purchased, to be cash
equivalents.
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
During the years ended December 31, 1999 and 1998, the Company paid
interest expense of $119,158 and $116,871, respectively.
SUPPLEMENTARY SCHEDULES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------
2000 1999 1999 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Equipment acquired under capitalized
leases $ - $ - $ - $ 79,768
=========== ======== ========= ==========
Stock and warrants issued for
employee compensation $ 19,158 $ 30,660 $ 318,660 $4,895,393
=========== ======== ========= ==========
Stock and warrants issued for fees
and commissions $ 1,500 $ 26,268 $ 251,188 $ 177,376
=========== ======== ========= ==========
Stock and warrants issued for
litigation settlements $ 4,410,000 $ - $ - $6,109,143
=========== ======== ========= ==========
Stock and warrants donated to
charities $ - $ - $ 489,000 $ 135,188
=========== ======== ========= ==========
Warrants issued as interest expense $ - $ - $ 246,677 $ -
=========== ======== ========= ==========
Stock issued and capitalized as
patent and trademark costs $ - $ - $ 24,000 $ 41,900
=========== ======== ========= ==========
Stock issued as dividends $ - $ - $ 129,000 $ -
=========== ======== ========= ==========
</TABLE>
F-10
54
<PAGE> 55
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consists principally of cash and
accounts receivable. The Company's policies do not require collateral
to support accounts receivable. However, because of the diversity and
credit worthiness of individual accounts which comprise the total
balance, management does not believe that the Company is subject to
any significant credit risk.
At December 31, 1999, the Company had a balance in one bank which was
approximately $17,000 in excess of the $100,000 limit insured by the
FDIC. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk with
regard to cash.
At December 31, 1999, the Company had accounts receivable from one
customer in the amount of $20,109, representing 17% of the
accounts receivable balance at that date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's receivables and payables are current on normal terms
and, accordingly, are believed by management to approximate fair
value. Management also believes that notes payable, long-term debt and
capital lease obligations approximate fair value when current interest
rates for similar debt securities are applied.
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in,
first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on
the straight-line and accelerated methods over the estimated useful
lives of the respective assets. Additions and improvements are
capitalized, whereas costs of maintenance and repairs are expensed as
incurred.
LONG-LIVED ASSETS
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
No such impairment indicators have been identified by the Company.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock warrants.
F-11
55
<PAGE> 56
1. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS AND TRADEMARKS
The Company has various patents of technology concerning its
V-configuration skates, and has trademarked various names and logos.
The costs associated with the acquisition of a patent, and the costs of
registering the patents and trademarks are capitalized and amortized on
the straight-line basis over their remaining lives, estimated to be 17
years.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred
and are included in operating expenses.
ASSETS HELD UNDER CAPITAL LEASES
The Company is the lessee of office furniture, office equipment, and a
motor vehicle under capital leases expiring in various years through
2000. The assets and liabilities under capital leases are recorded at
the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over their
estimated productive lives. Depreciation of assets under capital leases
is included in depreciation expense.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets, if any,
for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on
the difference between the financial statements and tax bases of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation
allowances, if any, are provided when the expected realization of tax
assets does not meet a "more likely than not" criterion.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as
available-for-sale securities, as defined by the SFAS. Any unrealized
gains and losses will be reflected as an amount in a separate
component of stockholders' equity until realized.
WARRANTIES
Estimated future warranty obligations are provided by charges to
operations in the period in which the related revenue is recognized.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss applicable
to common stockholders by the weighted average number of common stock
outstanding during the period.
F-12
56
<PAGE> 57
2. MARKETABLE SECURITIES
Marketable securities consist of a mutual bond fund. At December 31,
1998, the fair market value of the fund equaled the cost of this
investment. There were no realized or unrealized gains or losses for
this investment for the years ended December 31, 1999 and 1998. This
investment was collateral for the Company's line of credit that was
terminated during 1999 (Note 5).
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of: JUNE 30, DECEMBER 31,
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Finished goods $110,210 $116,251 $ 51,295
Raw materials 245,505 226,698 228,043
--------- --------- ---------
$355,715 $342,949 $279,338
======== ======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, less
accumulated depreciation:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------ LIFE IN
2000 1999 1998 YEARS
---- ---- ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Leasehold improvements $ 4,302 $ 4,302 $ 4,302 10
Molds and tooling 355,736 317,783 306,373 7
Motor vehicles 7,703 7,703 7,703 7
Office equipment 118,591 107,541 103,546 5-7
Furniture and fixtures 25,742 25,742 25,742 7
Machinery and equipment 90,912 89,820 26,820 7
---------- ---------- ----------
602,986 552,891 474,486
Less: accumulated depreciation 224,668 186,908 101,711
--------- --------- ---------
$378,318 $365,983 $372,775
======== ======== ========
</TABLE>
Included above are motor vehicles, office furniture and equipment held
under capitalized leases with a cost of $104,245 at December 31, 1999
and 1998. Accumulated depreciation at December 31, 1999 and 1998 was
$57,224 and $32,871, respectively. Depreciation on assets held under
capitalized leases amounted to $24,353 and $19,427 for the years
ended December 31, 1999 and 1998, respectively.
F-13
57
<PAGE> 58
5. LONG-TERM DEBT
Long-term debt consists of the following obligations:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Notes payable in 18 equal quarterly installments of $77,153, including
interest at 8%, commencing April 1, 1998 and due July 1, 2002. These
notes are collateralized by consent judgments in favor of the creditors,
signed by the Company and certain of its officers, and certain covenants
that restrict officers' compensation, restrict the making of loans and
prohibit the declaration or payment of cash dividends (see Note 7). $ 565,183 $ 693,033 $ 991,359
Capital lease obligations, payable in monthly
installments of $4,620, including interest from 11.4% to
18.9%, due through January 2002. 34,808 51,599 88,495
Unsecured, non-interest bearing note with principal of $20,000 due in
April 2000 and the balance payable in five annual installments of
$35,000. The unpaid balance of the note is payable in full in the event
of sale or merger of the Company, or in the event the Company receives
net funding of $1,500,000, or more, from an equity offering (see Note 12). 175,000 -- --
Installment note payable in monthly installments of
$3,205 plus interest at prime plus 1-1/2% (9-1/4% at
December 31, 1998) through March 2004. This obligation
is collateralized by the assets of the Company and is
guaranteed by an officer of the Company and the Small
Business Administration. -- -- 205,128
---------- ---------- ----------
774,991 744,632 1,284,982
Less current maturities 324,042 294,798 374,086
---------- ---------- ----------
$ 450,949 $ 449,834 $ 910,896
========== ========== ==========
</TABLE>
Following is the schedule of maturities of long-term debt:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
2000 $294,798
2001 299,227
2002 150,607
-------
$744,632
</TABLE>
F-14
58
<PAGE> 59
6. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consist of the following: JUNE 30, DECEMBER 31,
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Line of credit available to a maximum amount of $620,000. The obligation
bears interest at the bank's index rate plus 1.5% and is collateralized
by the assets of one of the Company's officers and one of its directors. $570,000 $ -- $ --
Unsecured notes payable to Company stockholders. The notes bear interest
at 12%. Principal and interest are payable from the proceeds of the
Company's planned public offering. 150,000 -- --
Line of credit available to a maximum amount of $250,000. This
obligation bears interest at the bank's prime rate (8.5% at December 31,
1998), was collateralized by the Company's marketable securities and
expired December 31, 1998. -- -- 242,500
-------- -------- --------
$720,000 $ -- $242,500
======== ======== ========
</TABLE>
7. STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1999, the New Jersey Bureau of Securities (of the Division
of Law, Department of Law and Public Safety) served an administrative
complaint on the Company alleging, first, that it had sold unregistered
securities in violation of New Jersey securities laws and used
unregistered agents for the purpose and, second, that it had failed to
disclose or misstated material information about the Company in selling
its securities. The Company has advised the Bureau it would vigorously
contest the second administrative charge, which it believes to be
without merit, but that it will concede for settlement purposes that it
has issued unregistered securities and cure the deficiency by offering
rescission to affected shareholders. The Company believes that such a
rescission offer, adequately funded and properly carried out, will lead
to prompt dismissal of the Bureau's entire administrative complaint.
The Company currently intends to carry out the rescission offer and at
the same time to raise necessary capital for operations by filing, in
the third quarter of 2000, a registration statement under the federal
Securities Act of 1933, under which the selling agent to be selected
will commit to a best efforts placement of the Company's securities.
The Company can offer no assurance that such capital-raising effort
will succeed or succeed at the level intended by the Company, or that
the SEC or any other cognizant state securities law agency will
consider any past securities violations over which it has jurisdiction
corrected by a successful registration and rescission program. The
Bureau may also, despite dismissal of its administrative complaint,
determine to impose a monetary penalty on the Company. The Company does
not believe that any such penalty or the rescission elections, if any,
by shareholders electing to exchange their shares for original purchase
price plus statutory interest, will materially adversely affect its
financial position or materially interfere with its planned capital
raise.
F-15
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<PAGE> 60
7. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
Based upon its dealings to date with the Bureau, the Company remains
confident that, working with the Bureau, it will be able during 2000 to
raise publicly, the capital necessary for operations, and at the same
time, effectively correct any stock issuances that may have violated
New Jersey securities registration laws and effectively correct any
stock issuances so violative of other state or federal securities laws.
PREFERRED STOCK
The Company has authorized 7,500,000 shares of preferred stock.
As of December 31, 1999, the Company has issued 500,000
shares of Series A, 102,390 shares of Series B, and 594,438 shares of
Series C preferred stock. All series of preferred stock are
non-voting, unless two or more quarterly dividends (whether or not
declared) on the Series A Preferred Stock are unpaid, in which
instance the Series A preferred stockholders, voting as a class, have
the right to appoint two directors.
The following is a summary of activity of the various series of
preferred stock for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
SERIES A:
Beginning balance 500,000 $500,000 500,000 $500,000
Activity - - - -
------- ------- ------- --------
Ending balance 500,000 $500,000 500,000 $500,000
======= ======== ======= ========
SERIES B:
Beginning balance 102,390 $300,000 102,390 $300,000
Activity - - - -
------- ------- ------- -------
Ending balance 102,390 $300,000 102,390 $300,000
======= ======== ======= ========
SERIES C:
Beginning balance - $- - $-
Sales of stock for cash 508,372 3,018,158 - -
Issuance of stock for services 4,566 59,396 - -
Stock donated to charities 81,500 489,000 - -
------ ------- ------- --------
Ending balance 594,438 $3,566,554 - $-
======= ========== ======= ========
TOTAL:
Beginning balance 602,390 $800,000 602,390 $800,000
Sales of stock for cash 508,372 3,018,158 - -
Issuance of stock for services 4,566 59,396 - -
Stock donated to charities 81,500 489,000 - -
------ ------- ------- -------
Ending balance 1,196,828 $4,366,554 602,390 $800,000
========= ========== ======= ========
</TABLE>
F-16
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<PAGE> 61
7. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
The following is an unaudited summary of activity of the various
series of preferred stock for the six-month periods ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
--------------------------------
2000 1999
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
SERIES A:
Beginning balance 500,000 $500,000 500,000 $500,000
Activity - - - -
------- ------- ------- -------
Ending balance 500,000 $500,000 500,000 $500,000
======= ======== ======= ========
SERIES B:
Beginning balance 102,390 $300,000 102,390 $300,000
Activity - - - -
------- ------- ------- -------
Ending balance 102,390 $300,000 102,390 $300,000
======= ======== ======= ========
SERIES C:
Beginning balance 594,438 $3,566,554 - $-
Sales of stock for cash 27,202 163,208 17,067 102,400
Issuance of stock for services 1,118 6,708 - -
----- ----- ------ -------
Ending balance 622,758 $3,736,470 17,067 $102,400
======= ========== ====== ========
SERIES D:
Beginning balance - $- - $-
Sales of stock for cash 250,000 750,000 - -
------- ------- ------- --------
Ending balance 250,000 $750,000 - $-
======= ======== ======= ========
TOTAL:
Beginning balance 1,196,828 $4,366,554 602,390 $800,000
Sales of stock for cash 277,202 913,208 17,067 102,400
Issuance of stock for services 1,118 6,708 - -
----- ----- ------ -------
Ending balance 1,475,148 $5,286,470 619,457 $902,400
========= ========== ======= ========
</TABLE>
The Series A 6% Cumulative Preferred Stock pays cumulative annual
dividends (if and when declared by the board) of $.06 per share,
is redeemable by the holder at $1 per share plus all unpaid dividends,
after 18 months from the date of issuance, and is convertible into
common stock on a share-for-share basis.
F-17
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<PAGE> 62
7. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
The Series B 8% Cumulative Preferred Stock pays annual dividends
of 8% of the original series issue price (commencing November
1, 1997) and is cumulative. The stock may not be redeemed, but is
convertible into common stock. The number of shares issueable upon
conversion is determined by dividing the original issue price plus
unpaid dividends plus the forced conversion premium (18% of original
issue price, if applicable) by the conversion price at the time in
effect. The Company may force the conversion of the stock on the
consummation of the sale of the Company's common stock in a bona fide
underwriting commitment pursuant to a registration statement under the
Securities Act of 1933, as amended, which results in aggregate cash
proceeds in excess of $10 million, and a public offering price of not
less than $5 per share.
In the event of any liquidation, dissolution or winding up of the
Company, the Series A preferred stockholders are entitled to receive
$.06 per share, and the Series B preferred stockholders $2.93 per
share, together with all unpaid dividends on these shares, with the
Series A stockholders receiving preference in the order of
distribution.
In October 1996, the Company entered into subscription agreements
with two companies for the sale of Series B Preferred Stock.
In 1997, these companies sought rescission of the subscriptions.
In February 1998, the Company offered an agreement for rescission,
which was accepted. The agreement provided for the repayment of
$1,050,000 plus accrued interest from October 4, 1996, to be paid
in quarterly installments commencing April 1, 1998, with interest
on the unpaid balance at 8% per annum. Accordingly, the Company has
recorded the rescission of the sale of the Series B Preferred Stock
together with the repayment obligation in the financial statements
as if such rescission agreement was effectuated during 1997 (Note 5).
During 1999, the Company commenced a private placement in
which it sold 508,372 equity units. Each unit consists of one
share of Series C 8% Cumulative Preferred Stock and two detachable
Preferred Series C Warrants. Proceeds of the issuance received in 1999
totaled $3,018,158. The Series C Preferred Stock has an 8% cumulative
dividend payable in either cash or stock, at the discretion of the
Company except that, if the Company fails to register common stock
within one year from the date of issuance (June 1999 through February
2000) the Company is required to pay 8% dividends per annum, payable
quarterly commencing November 2000. The Series C Preferred Stock is
also convertible into common stock on a share-for-share basis with a
conversion premium of not less than 16% ($0.96 per share) of the
original $6 per share purchase price of the Series C Preferred Stock.
The Preferred Series C Warrants are exercisable for a period of
three years. Each warrant entitles the holder to purchase one share of
Series C Preferred Stock for $6 per share.
The Series C Preferred Stock has no voting rights. Shareholders
have piggyback and demand registration rights.
F-18
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<PAGE> 63
7. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Company has issued warrants to purchase its common stock in
connection with the sale of its common stock, and as compensation to
employees and unrelated service providers.
The following is a summary of common stock warrants issued and
outstanding at December 31, 1999 (all of which are exercisable):
<TABLE>
<CAPTION>
RANGE OF WEIGHTED
DATE NUMBER OF EXERCISE AVERAGE
ISSUED SHARES PRICE EXPIRATION DATE EXERCISE PRICE
<S> <C> <C> <C> <C>
1995 512,500 $1.00 to $2.00 July 31, 2000 $1.98
1996 530,501 $1.00 to $4.50 July 31, 2000 $1.08
1997 4,748,723 $0.10 to $5.48 July 31, 2000 through
December 31, 2002 $0.46
1998 1,519,949 $2.00 to $6.00 July 31, 2000 through
December 31, 2005 $3.55
1999 819,213 $3.00 to $6.00 July 31, 2000 through
--------- December 31, 2000 $5.36
8,130,886
=========
</TABLE>
On December 31, 1998, 6,031,323 warrants that were due to expire
were extended through December 31, 1999. As a consequence of extending
the expiration dates of the warrants, the Company provided greater
value to the warrant holders, thereby incurring additional
compensation cost for that incremental value. Such additional
compensation cost totaled $3,976,341. Since the additional
compensation cost arising from the extension of the warrants had not
been previously recorded, the 1998 financial statements have been
restated (Note 11). On December 31, 1999, 6,552,686 warrants that were
due to expire, were extended through 2000. Since there was no
substantive incremental value provided to warrant holders, no
additional compensation cost was recorded as a result of the
extensions granted in 1999.
During the years ended December 31, 1999 and 1998, no warrants were
cancelled or expired. During 1999, warrants were exercised to purchase
251,000 shares of common stock.
In conjunction with the private placement of Series C Preferred
Stock, which took place during 1999, the Company issued 1,188,876
warrants. Each warrant entitles the holder to purchase one share of
Series C Preferred Stock for $6 per share. The warrants are
exercisable for a period of three years.
DIVIDENDS
At December 31, 1998, dividends on the Series A and Series B
Cumulative Preferred Stock were in arrears by $45,000 and $30,000,
respectively. If such dividends are in arrears, no dividends shall be
declared, nor shall there be any redemption of shares having a rank
lower in priority to the Series A Preferred Stock with respect to
dividends. All dividends in arrears for 1998 and dividends due for
1999 were paid in stock during 1999.
F-19
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<PAGE> 64
8. STOCK-BASED COMPENSATION
During 1999 and 1998, the Company issued common stock, preferred stock
and warrants to purchase common and preferred stock to employees,
charities and unrelated service providers as compensation. The
following is the summary of stock and warrants issued for
compensation:
<TABLE>
<CAPTION>
NUMBER OF COMPENSATION
SHARES AMOUNT
<S> <C> <C>
1998: Common stock issued to employees 75,240 $ 381,190
Common stock issued to charities 22,524 120,385
Common stock issued to service providers 522,774 3,131,093
--------- ----------
620,538 $3,632,668
========= ==========
Warrants issued to employees 15,000 $ -
Warrants re-issued to employees - 4,514,203
Warrants issued to investors 234,305 -
Warrants issued to charities 19,737 -
Warrants re-issued to charities - 14,803
Warrants issued to service providers 1,263,644 3,109,149
Warrants re-issued to service providers - 88,177
--------- ----------
1,532,686 $7,726,332
========= ==========
1999: Common stock issued to employees 19,110 $ 144,660
Common stock issued in connection with
brand acquisition 4,000 24,000
Common stock issued to service providers 10,739 64,434
--------- ----------
33,849 $ 233,094
========= ==========
Warrants issued to employees 95,610 $ 174,000
Warrants issued to investors 536,500 -
Warrants issued to charities 28,725 -
Warrants issued to service providers 80,562 127,358
Warrants issued as interest 77,816 246,677
--------- ----------
819,213 $ 548,035
========= ==========
Series C Preferred stock issued to service 4,566 $ 59,396
providers
Series C Preferred stock issued to charities 81,500 489,000
--------- ----------
86,066 $ 548,396
========= ==========
Series C Preferred warrants issued to
service providers 300,000 $ -
========= ==========
</TABLE>
F-20
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<PAGE> 65
8. STOCK-BASED COMPENSATION (CONTINUED)
The amounts of compensation charged to operations on account of
employees and service providers who received common stock has been
determined based upon the fair value of the common stock as of the
date of issuance. Such fair value has been estimated by Management
based upon contemporaneous sales of common stock for cash.
The amount of compensation charged to operations on account of
employees who received warrants has been determined in accordance with
the provisions of APB 25. Such fair value has been estimated by
Management based upon contemporaneous sales of common stock for cash.
Had compensation been determined in accordance with SFAS No. 123,
utilizing the Black-Scholes-Model for valuing warrants granted
(assuming no dividend yield; a risk-free interest rate of 6%; expected
life of one year; and no expected volatility) there would have been no
material effect on the compensation costs recorded.
The amount of compensation charged to operations on account of service
providers who received warrants has been determined in accordance with
SFAS No. 123, utilizing the Black-Scholes-Model for valuing warrants
granted (assuming no dividend yield; a risk-free interest rate of 6%;
expected life of one year; and no expected volatility).
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
In January 1996, the Company entered into employment agreements with
five officers. These agreements were for a three-year period and
expired December 31, 1998. During 1999, four agreements were extended
for an additional four-year period and expire December 31, 2002.
Officers' salary expense was $428,108 and $428,958 for 1999 and 1998,
respectively. The minimum aggregate annual salaries are $394,000,
$408,000 and $410,000 for the years 2000, 2001 and 2002, respectively.
REAL PROPERTY LEASE OBLIGATIONS
The Company is obligated under a lease agreement for the rental of
office space. The lease is for a period of five years expiring October
31, 2001, and may be renewed for an additional five-year period at a
31% increase in rent. Annual base rent under this lease is $80,750, to
be adjusted annually by the consumer price index. Rent expense under
this lease was $83,889 and $76,230 for the years ended December 31,
1999 and 1998, respectively.
The Company entered into a lease agreement for the rental of factory
and warehouse space in January 1998. This lease commenced March 1,
1998 and expires February 28, 2001. The Company is also responsible
for increases in its pro rata share of the provision for real estate
taxes and utilities.
F-21
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<PAGE> 66
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
REAL PROPERTY LEASE OBLIGATIONS (CONTINUED)
Minimum lease payments under this lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $112,921
2001 86,146
--------
$199,067
========
</TABLE>
VEHICLE LEASE OBLIGATIONS
The Company is obligated under 17 operating leases for automobiles,
vans and trucks. These leases range from 24 to 48 months, all of
which expire by October 2003. Vehicle rental expense was $164,072 and
$134,534 for the years ended December 31, 1999 and 1998, respectively.
Minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $141,940
2001 104,920
2002 26,592
2003 1,340
--------
$274,792
========
</TABLE>
ROYALTY AGREEMENT
The Company is obligated under a product and license agreement whereby
it has agreed to pay royalties on sales of V-Formation skates,
V-Formation skate products and other trademark products. Royalties are
computed as follows:
- for all trademark products other than skates and skate products,
royalties shall be paid at 3% and 2% of the wholesale selling price
for 1998 and 1999, respectively.
- for all skates and skate products, royalties shall be paid at $6 per
pair for 1998; $4 per pair through April 19, 2011 and $2 per pair
thereafter. The Company guaranteed minimum payments of $60,000 and
$240,000 for 1998 and 1999, respectively.
F-22
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<PAGE> 67
9. COMMITMENT AND CONTINGENCIES (CONTINUED)
SPONSORSHIP AGREEMENT
The Company entered into a sponsorship agreement granting the Company
advertising rights, the right to identify itself as an associate of the
Hockeyball Associates, the right to make authorized use of certain
Hockeyball Associates trademarks, and the right to use authorized
endorsements of Hockeyball Associates team members for the 1998 and 1999
Pro Beach Hockey season. The Company's sponsorship fee was $300,000 for
1998 and $183,000 for 1999.
FINANCING ARRANGEMENTS
During May 1999, the Company entered into a $350,000 line of credit
agreement with a financial institution. In April 2000, the line was
increased to $620,000. The obligation bears interest at the bank's index
rate plus 1.5%. The obligation is collateralized by the assets of one of
the Company's officers and one of its directors (Note 6).
LICENSING AGREEMENT
During July 1999, the Company entered into an agreement that grants the
Company the exclusive world-wide rights for the manufacture, sale and use
of a patented skate design. Among other uses, the design permits either
an ice skating blade or an in-line roller skate chassis to be attached
interchangeably to the same boot. The agreement is in effect for the
duration of the patents.
In consideration of the licensing agreement, the Company is obligated to
pay a royalty of $0.235 for each pair of skates sold that is covered by
the patents. The minimum annual royalty payment is $60,000 for the term of
the license and is payable in quarterly installments of $15,000.
As further consideration, the Company granted warrants to purchase 300,000
shares of Series C Preferred stock at $6.00 per share. Such rights are
exercisable for the duration of the agreement.
BRAND ACQUISITION
Effective October 1, 1999, the Company acquired the Nexed brand of hockey
equipment and apparel. Prior to the Company's acquisition of the brand
name, Nexed had no operations. Nexed was, and continues to be, in the
development stage. Consideration consisted of 4,000 shares of the
Company's common stock valued at $24,000, warrants to purchase 37,500
shares of the Company's common stock at an exercise price of $6 per share,
plus a cash payment of $21,000. The brand acquisition was recorded as an
addition to the patent and trademark account at the fair value of the
consideration paid, which totaled $45,000. In addition, the Company
entered into an employment agreement with the former owner of the Nexed
brand.
F-23
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<PAGE> 68
10. INCOME TAXES
As of December 31, 1999, the Company has net operating losses available
for carryforward to offset future years' taxable income. The amounts and
expiration dates of the net operating losses are as follows:
<TABLE>
<CAPTION>
EXPIRATION
DATES
--------------------
FEDERAL STATE AMOUNT
------- ----- ------
<S> <C> <C>
2010 2002 $ 220,000
2011 2003 1,595,000
2012 2004 2,600,000
2018 2005 3,534,000
2019 2006 3,335,000
-----------
$11,284,000
===========
</TABLE>
Deferred income taxes arise from temporary differences in reporting
assets and liabilities for income tax and financial accounting purposes
primarily resulting from net operating losses and from temporary
differences in recognition of stock-based compensation deductions. As of
December 31, 1999, the components of the deferred tax assets and the
related tax effects of the temporary differences are as follows:
Non-current deferred income tax assets arising from:
<TABLE>
<S> <C>
Net operating loss carryforward $ 3,385,000
Temporary differences in recognition
of stock-based compensation 11,242,000
Valuation allowance (14,627,000)
------------
$ -
============
</TABLE>
Because of the uncertainty of the Company's ability to generate taxable
income in the future to utilize the deferred tax assets, such assets have
been fully reserved through a valuation allowance. The net increase in
the deferred income tax asset and the offsetting valuation allowance was
$1,392,000 and $4,458,000 for the years ended December 31, 1999 and 1998,
respectively.
11. RESTATEMENT
The Company's financial statements as of December 31, 1998 and for the
year then ended have been restated. The restatement arises because certain
stock warrants that were due to expire during 1998, were extended by the
Company. By extending the expiration dates of the warrants, the Company
provided greater value to the warrant holders, thereby incurring
additional compensation cost for that incremental value. The additional
compensation cost had not been recorded in the 1998 financial statements
as previously presented.
F-24
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<PAGE> 69
11. RESTATEMENT (CONTINUED)
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
As previously
reported As restated
-------- -----------
<S> <C> <C>
Balance sheet:
Additional paid-in capital $ 26,340,784 $ 30,317,125
Accumulated deficit $(40,140,953) $ (44,117,294)
Statement of operations:
Operating expenses paid in stock and
warrants $ 7,340,759 $ 11,317,100
Net loss $(10,884,806) $ (14,861,147)
</TABLE>
In addition, disclosures in the shareholders' equity section of the
balance sheet and in the statement of stockholders' equity have been
restated to reflect the correct number of shares issued and outstanding as
of December 31, 1998. The restatement had no effect on the balances
previously presented on the December 31, 1998 balance sheet or in the
statement of operations for the year then ended.
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
As
previously
reported As restated
-------- -----------
<S> <C> <C>
Number of shares issued at January 1, 1998 5,003,269 5,453,269
Stock issued for cash 666,135 656,135
Stock issued for services 524,582 522,774
Stock issued for employee compensation 75,240 75,240
Stock donated to charities 22,524 22,524
--------- ---------
Number of shares issued at December 31, 1998 6,291,750 6,729,942
========= =========
</TABLE>
12. INTERIM FINANCIAL INFORMATION (UNAUDITED)
ASSET ACQUISITIONS
In May 2000, the Company entered into an agreement to acquire 100% of On
Net Sports, Inc. ("ONSI"). ONSI is a development stage company that
intends to be the world's first 24 hour-a-day sports talk Internet
webcasting station offering an interactive, real-time arena for news,
statistics and scores. ONSI has had no operations to date.
Under the terms of the agreement, the Company agreed to provide exclusive
financial and management consultation with respect to arranging
capitalization or financing and has agreed to provide for financing as
follows: $1 million on or before October 1, 2000; $1 million on or before
July 1, 2001; $1 million required on or before April 1, 2002; and to help
arrange for appropriate senior term debt and/or mezzanine financing. In
addition, the agreement provides the management of ONSI with the
opportunity to reacquire 49% of ONSI pursuant to defined income goals to
be mutually determined.
F-25
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<PAGE> 70
12. INTERIM FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
ASSET ACQUISITIONS (CONTINUED)
During June 2000, the Company entered into an agreement whereby it
acquired certain software programs as well as the rights to any and all
intellectual properties currently owned, in development or which may be
created by the software developer. The software and intellectual property
rights were acquired by Soft Machine, Inc. ("SMI") a newly-created,
wholly-owned subsidiary of V-Formation, Inc.
As consideration, the Company agreed to a payment of $50,000 to be made
on or before September 1, 2000. In addition, the Company agreed to
provide for employment agreements for the executive management of SMI; an
annual performance incentive of 3.75% of net SMI profit to be paid
against mutually-determined income goals; stock options based on
performance; a dedicated operational budget for research and development
and for commercial exploitation of marketable intellectual properties;
human resources and administrative support services; and consultation
with respect to all marketing management, operational and financing
efforts.
SETTLEMENT AGREEMENT
On March 15, 2000, the Company entered into a settlement agreement to
resolve a legal dispute. The dispute arose from a 1996 transaction in
which the plaintiffs acted as brokers by introducing various parties that
subsequently invested in V-Formation, Inc.'s Series B Preferred Stock.
Although a part of that transaction was later rescinded, and the Company
agreed to repay a portion of the proceeds invested (in the form of a
loan), the plaintiffs asserted that they were entitled to a finder's fee
for having made the introduction. Under the terms of the settlement
agreement, the Company agreed to a payment of $20,000 within 30 days of
the settlement and a promissory note in the amount of $175,000, payable
in annual installments of $35,000, without interest. The unpaid balance
of the note is payable in full in the event of sale or merger of the
Company, or in the event the Company receives net funding of $1,500,000
or more from an equity offering. In addition, the Company issued 735,000
shares of its common stock valued at $4,410,000.
PREFERRED STOCK ISSUANCES
During January and February 2000, the Company concluded a private
placement which commenced in 1999 (Note 7) by selling 27,202 shares of
its Series C Preferred Stock. Proceeds received in 2000 from sales of
Series C Preferred Stock totaled $163,208.
During February 2000, the Company completed a private placement in which
it sold 83,333 equity units at $9.00 per unit. Each unit consists of
three shares of Series D 8% Cumulative Convertible Preferred Stock and
three detachable Preferred Series D Warrants. Proceeds from the issuance
totaled $750,000. The Series D Preferred Stock has an 8% cumulative
dividend payable after the first year in either cash or stock, at the
discretion of the Company. The Series D Preferred Stock is convertible
into common stock on a share-for-share basis with a conversion premium of
not less than 132% ($3.96 per share) of the original $3 per share
purchase price of the Series D Preferred Stock.
F-26
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<PAGE> 71
12. INTERIM FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
PREFERRED STOCK ISSUANCES (CONTINUED)
The Preferred Series D Warrants are exercisable until December 31, 2000.
The exercise price for each Preferred Series D Warrant will be equal to
50% of the original purchase price of the Preferred Series D Unit
($4.50). Each warrant upon exercise will entitle the holder to receive
one share of the Company's Series D Preferred Stock, which may be
converted into common stock on a share-for-share basis with a conversion
premium of not more than 55% ($2.47) of the original purchase price of
the Preferred Series D Warrant.
The Series D Preferred Stock has no voting rights. Shareholders have
piggyback and demand registration rights.
F-27
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<PAGE> 72
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During the past two years the Company has not changed its accountants nor
has the Company had any material disagreements with its accountants.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Horton & Company, L.L.C., independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and is included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the rescission offer and the securities offered by this
Prospectus will be passed upon for the Company by Goodwin, Procter & Hoar LLP,
New York, New York.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the rescission offer. This
Prospectus, filed as a part of such Registration Statement, does not contain all
of the information set forth in, or annexed as exhibits to, the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and this offering, reference is made to the Registration Statement,
including the exhibits filed therewith, which may be inspected without charge at
the Office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549;
and at the following regional offices: Midwest Region Office, Northwestern
Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511, and
the Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of the Registration Statement may be obtained from the
Commission at its principal office upon payment of prescribed fees. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, where the contract or other document
has been filed as an exhibit to the Registration Statement, each statement is
qualified in all respects by reference to the applicable document filed with the
Commission.
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<PAGE> 73
No dealer, sales person or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must nit
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities offered by this Prospectus, or an offer to sell or a solicitation of
an offer to buy any securities by anyone in any jurisdiction in which such offer
or solicitation is not authorized or is unlawful. The delivery of this
Prospectus shall not, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
-----------------------
Until __________, 2000 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities offered hereby,
whether or not participating in this distribution may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
V-FORMATION, INC.
OFFER OF 1,500,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
----------------------
____________, 2000
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
[to be supplied]
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
[to be supplied]
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
[to be supplied]
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Bylaws of the Registrant.
*5.1 Opinion of Goodwin, Procter & Hoar LLP
*10.1 Exchange Agreement
*10.2 [Stock Option Plan].
*23.1 [Employment Agreements]
Consent of Horton & Company, L.L.C., Independent Certified
Public Accountants.
*23.2 Consent of Goodwin, Procter & Hoar LLP (will be contained in
such firm's opinion filed as Exhibit 5.1).
*24.1 A power of attorney relating to the signing of amendments
hereto is incorporated in the signature pages of this
Registration Statement.
*27 Financial Data Schedule (SEC use only).
</TABLE>
-----------------
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts which, individually or
together, represent a fundamental change in the information set
forth in the Registration Statement; and
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<PAGE> 75
(iii) include any additional or changed material information on the
plan of distribution.
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
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<PAGE> 76
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
the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the city of Lincoln
Park, State of New Jersey, on August 22, 2000.
V - FORMATION, INC.
By: /s/
------------------------
Richard Stelnick
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints J. Robert Horton as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities (until
revoked in writing) to sign any and all amendments (including pre-effective
amendments and post-effective amendments and amendments thereto) to this
Registration Statement on Form SB-2 of V-Formation, Inc. and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, each acting alone or in his substitute,
may lawfully do or cause to be done by virtue hereof.
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<PAGE> 77
In accordance with 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.
<TABLE>
<CAPTION>
Signatures Title(s) Date
---------- -------- ----
<S> <C> <C>
/s/___________ Chief Executive Officer and August 22, 2000
Chairman
Richard Stelnick
/s/___________ Chief Financial Officer and August 22, 2000
Director
Robert Miragliotta (Principal Financial and
Accounting Officer
/s/___________ Executive Vice President and August 22, 2000
Director
Theodore Ellenis
</TABLE>
77
