<PAGE>
As Filed with the Securities and Exchange Commission on June 16, 1997.
................................................................................
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
................................................................................
ACTIVE ANKLE SYSTEMS, INC.
(Name of small business issuer in its charter)
Kentucky 3842 61-1163669
- ----------------------- --------------------- ------------------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) IdentificationNumber)
organization)
................................................................................
509 Barret Avenue
Louisville, Kentucky 40204
(502) 582-2655
(Address and telephone number of principal executive offices)
................................................................................
509 Barret Avenue
Louisville, Kentucky 40204
(Address of principal place of business or intended place of business)
<PAGE>
................................................................................
Diane K. Lilly
509 Barret Avenue
Louisville, Kentucky 40204
(502) 582-2655
(Name, address and telephone number of agent for service)
Please send copies of communications to:
James N. Williams, Esq.
Middleton & Reutlinger
2500 Brown & Williamson Tower
Louisville, Kentucky 40202
(502) 584-1135
Approximate date of proposed sale to the public: As soon as practical after the
effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the offering. [ ]________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
Title of each class Dollar Amount Proposed Proposed Amount of
of securities to to be maximum maximum registration fee
be registered registered offering price per aggregate
unit offering price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of $4,000,000 $40.00 $4,000,000.00(1) $1,212.12
Common Stock
with no par value
- -------------------------------------------------------------------------------------------------
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states
<PAGE>
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.
Disclosure alternative used (check one): Alternative 1 X ; Alternative 2
--- ---
(1) Before deducting offering expenses estimated to be $117,212 in the
aggregate, comprised of the following: Securities and Exchange Commission fees
($1,212), State Divisions of Securities fees ($5,000), printing and engraving
fees ($10,000), legal and accounting fees ($100,000), and escrow agent fees
($1,000). If all of the Shares being offered are not sold, the proceeds to the
Company will be reduced accordingly.
................................................................................
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE A SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
PRELIMINARY PROSPECTUS DATED JUNE 16, 1997
ACTIVE ANKLE SYSTEMS, INC.
100,000 Shares of Common Stock (total maximum)
45,000 Shares of Common Stock (total minimum)
Active Ankle Systems, Inc., a Kentucky corporation (the "Company"), is
offering for sale a maximum of 100,000 and minimum of 45,000 shares of its
common stock, without par value (the "Common Stock" or the "Shares"), at a per
share offering price of $40.00 from the date this Prospectus is effective for a
period one hundred eighty (180) days thereafter.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. THE SECURITIES OFFERED HEREBY SHOULD NOT BE
PURCHASED BY ANYONE WHO CANNOT AFFORD A LOSS OF HIS ENTIRE INVESTMENT. SEE
"RISK FACTORS" ON PAGES __ THROUGH __ OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY AND SUCH AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Preliminary Prospectus is June ____, 1997.
1
<PAGE>
INVESTMENT IN SMALL BUSINESSES INVOLVES A HIGH DEGREE OF RISK, AND INVESTORS
SHOULD NOT INVEST ANY FUNDS IN THIS OFFERING UNLESS THEY CAN AFFORD TO LOSE
THEIR ENTIRE INVESTMENT . SEE QUESTION NO. 2 FOR THE RISK FACTORS THAT
MANAGEMENT BELIEVES PRESENT THE MOST SUBSTANTIAL RISKS TO AN INVESTOR IN THIS
OFFERING.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION
OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY FEDERAL
OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF ANY
SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE
ACCURACY OR COMPLETENESS OF ANY PROSPECTUS OR SELLING LITERATURE.
This offering has been registered for offer and sale in the following states:
STATE STATE FILE NO. EFFECTIVE DATE
- -------------------------------------------------------------------------------
Kentucky
- -------------------------------------------------------------------------------
Indiana
- -------------------------------------------------------------------------------
Ohio
- -------------------------------------------------------------------------------
Illinois
- -------------------------------------------------------------------------------
California
- -------------------------------------------------------------------------------
Washington
- -------------------------------------------------------------------------------
Tennessee
- -------------------------------------------------------------------------------
Massachusetts
- -------------------------------------------------------------------------------
North Carolina
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Georgia
- -------------------------------------------------------------------------------
Florida
- -------------------------------------------------------------------------------
Rhode Island
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
West Virginia
- -------------------------------------------------------------------------------
PART I - NARRATIVE INFORMATION REQUIRED IN PROSPECTUS
ITEM 1. SIGNIFICANT PARTIES
(a) ISSUER'S DIRECTORS.
Full Name Business Address Residential Address
--------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Louisville, KY 40222 Louisville, KY 40222
Andrew Pfeifer 531 Fairfield Drive 531 Fairfield Drive
Louisville, KY 40206 Louisville, KY 40206
Gary G. Herzberg 509 Barret Avenue 2903 River's Edge Rd.
Louisville, KY 40204 Louisville, KY 40222
Ronald W. Schultz 509 Barret Avenue 6708 Foxcroft Road
Louisville, KY 40204 Prospect, KY 40059
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Louisville, KY 40204 New Albany, IN 47150
John C. Nichols, II 1510 North Wind Road 1510 North Wind Road
Louisville, KY 40207 Louisville, KY 40207
Douglas D. Stegner 1644 Cherokee Road 1644 Cherokee Road
Louisville, KY 40205 Louisville, KY 40205
James T. Crain, Jr. Day Enterprises 18 Glenwood Road
620 West Main Street Louisville, KY 40258
Suite 320
Louisville, KY 40202
(b) ISSUER'S OFFICERS.
Full Name and Position Business Address Residential Address
---------------------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Chairman of the Board Louisville, KY 40222 Louisville, KY 40222
3
<PAGE>
Gary G. Herzberg 509 Barret Avenue 2903 River's Edge Rd.
President and CEO Louisville, KY 40204 Louisville, KY 40222
Ronald W. Schultz 509 Barret Avenue 6708 Foxcroft Road
Treasurer and CFO Louisville, KY 40204 Prospect, KY 40059
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Senior Vice President Louisville, KY 40204 New Albany, IN 47150
Diane K. Lilly 509 Barret Avenue 3205 Edwardsville Galena Road
Secretary and Assistant Louisville, KY 40204 Georgetown, IN 47122
Treasurer
Christina B. Wessling 509 Barret Ave. 1721 Southerland Dr.
Assistant Secretary Louisville, KY 40204 Louisville, KY 40205
(c) ISSUER'S GENERAL PARTNERS.
None. Issuer is a corporation.
(d) RECORD OWNERS OF FIVE (5) PERCENT OR MORE OF ANY CLASS OF THE ISSUER'S
EQUITY SECURITIES.
Based Upon the share holdings as of 3/31/97:
Full Name Business Address Residential Address
--------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Louisville, KY 40222 Louisville, KY 40222
Douglas D. Stegner 1644 Cherokee Road 1644 Cherokee Road
Louisville, KY 40205 Louisville, KY 40205
Ronald W. Schultz 509 Barret Avenue 6708 Foxcroft Road
Louisville, KY 40204 Prospect, KY 40059
Andrew Pfeifer 531 Fairfield Dr. 531 Fairfield Dr.
Louisville, KY 40206 Louisville, KY 40206
John C. Nichols, II 1510 North Wind Rd. 1510 North Wind Rd.
Louisville, KY 40207 Louisville, KY 40207
Joan Cralle Day c/o Mr. James T. Crain, 509 Jarvis Lane
Jr. Louisville, KY 40207
620 West Main St., #320
Louisville, KY 40202
Assuming that all options are exercised, and that all preferred stock is
converted, the following additional shareholders would own at least Five (5)
Percent:
4
<PAGE>
Gary G. Herzberg 509 Barret Ave. 2903 River's Edge Rd.
Louisville, KY 40204 Louisville, KY 40222
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Louisville, KY 40204 New Albany, IN 47150
(e) BENEFICIAL OWNERS OF FIVE (5) PERCENT OR MORE OF ANY CLASS OF THE ISSUER'S
EQUITY SECURITIES.
Same as stated in paragraph (d) above.
(f) PROMOTERS OF THE ISSUER.
Full Name Business Address Residential Address
--------- ---------------- -------------------
Henry H Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Louisville, KY 40222 Louisville, KY 40222
Andrew Pfeifer 531 Fairfield Dr. 531 Fairfield Dr.
Louisville, KY 40206 Louisville, KY 40206
Gary G. Herzberg 509 Barret Avenue 2903 River's Edge Rd.
Louisville, KY 40204 Louisville, KY 40222
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Louisville, KY 40204 New Albany, IN 47150
(g) AFFILIATES OF THE ISSUER.
None.
(h) COUNSEL TO THE ISSUER WITH RESPECT TO THE PROPOSED OFFERING.
Middleton & Reutlinger, P.S.C.
2500 Brown & Williamson Tower
Louisville, KY 40202
5
<PAGE>
(i) UNDERWRITER(S) WITH RESPECT TO THE PROPOSED OFFERING.
None.
(j) UNDERWRITER'S DIRECTORS.
No Underwriters. No Directors.
(k) UNDERWRITER'S OFFICERS.
No Underwriters. No Officers.
(l) UNDERWRITER'S GENERAL PARTNERS.
No Underwriters. No General Partners.
(m) COUNSEL TO THE UNDERWRITER(S).
No Underwriter. No Counsel.
(n) The financial statements of Active Ankle Systems, Inc. at June 30, 1996
and 1995 and for the years then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
6
<PAGE>
ITEM 2. RELATIONSHIP WITH ISSUER OF EXPERTS NAMED IN REGISTRATION STATEMENT
The Company is independent of all named experts and counsel in this Prospectus.
No expert or counsel has any financial interest in the Company.
ITEM 3. SELLING SECURITY HOLDERS
No security holder of the Company is offering securities.
ITEM 4. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During the Company's two most recent fiscal years or any later interim period,
no principal independent accountant resigned (or declined to stand for
re-election) or was, dismissed.
ITEM 5. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
There are no indemnification provisions for directors, officers and controlling
persons of the Company specifically dealing with liability under the Securities
Act. The following general provisions are applicable to indemnification of
directors, officers and controlling persons:
The Company's Articles of Incorporation and Bylaws authorize the Company to
indemnify its directors and officers to the full extent permitted by Kentucky
law.
KRS Sec. 271B.8-510 provides the authority to indemnify directors. The statute
permits corporations to indemnify an individual made a party to a proceeding
because he or she is or was a director against liability incurred in the
proceeding if:
(a) he or she conducted himself in good faith; and
(b) he or she reasonably believed:
(1) In the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in the best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to its best interests; and
(c) In the case of any criminal proceedings, the director had no
reasonable cause to believe his or her conduct was unlawful.
Further, KRS 271.B.8-520 provides for mandatory indemnification for a director
who was wholly successful, or the merits or otherwise, in the defense of any
proceeding to which he was a party
7
<PAGE>
because he or she was a director of the corporation against reasonable expense
incurred by him in connection with the proceedings.
KRS 271B.8-560 provides for certain mandatory and permissive indemnification for
corporate officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to Kentucky law and the Company's Articles of
Incorporation and Bylaws, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
8
<PAGE>
TABLE OF CONTENTS
Page
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business and Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Offering Price Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . 32
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Dividends, Distributions and Redemptions . . . . . . . . . . . . . . . . . 37
Officers and Key Personnel of the Company. . . . . . . . . . . . . . . . . 37
Directors of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 41
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Management Relationships, Transactions and Remuneration. . . . . . . . . . 46
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Federal Tax Aspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Miscellaneous Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Management's Discussion and Analysis of Certain Relevant Factors . . . . . 50
EXHIBITS
Exhibit 3.(i) - Articles of Incorporation, as amended
Exhibit 3.(ii) - Bylaws
Exhibit 5 - Opinion of Counsel
Exhibit 23 - Auditor's Consent
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Tender Offer
Exhibit 99.2 - Deferred Compensation Agreements
Exhibit 99.3 - Escrow Agreement
THIS PROSPECTUS CONTAINS ALL OF THE REPRESENTATIONS BY THE COMPANY CONCERNING
THIS OFFERING, AND NO PERSON SHALL MAKE DIFFERENT OR BROADER STATEMENTS THAN
THOSE CONTAINED HEREIN. INVESTORS ARE CAUTIONED NOT TO RELY UPON ANY
INFORMATION NOT EXPRESSLY SET FORTH IN THIS PROSPECTUS.
9
<PAGE>
THE COMPANY
1. EXACT CORPORATE NAME: Active Ankle Systems, Inc.
------------------------------------------------------
STATE AND DATE OF INCORPORATION: Kentucky, June 7, 1989
-------------------------------------------
STREET ADDRESS OF PRINCIPAL OFFICE: 509 Barret Avenue, Louisville, KY 40204
----------------------------------------
COMPANY TELEPHONE NUMBER: (502) 582-2655
--------------------------------------------------
FISCAL YEAR: June 30
---------------------------------------------------------------
PERSON(S) TO CONTACT AT COMPANY WITH RESPECT TO OFFERING: Gary G. Herzberg,
------------------
President, CEO and Director; Andrew Pfeifer, Director; Glen R. Snow, Senior
---------------------------------------------------------------------------
Vice President and Director; Henry H. Porter, Jr., Chairman and Director
---------------------------------------------------------------------------
TELEPHONE NUMBER (IF DIFFERENT FROM ABOVE): ( ) Same
--------------------------------
RISK FACTORS
2. LIST IN THE ORDER OF IMPORTANCE THE FACTORS WHICH THE COMPANY CONSIDERS TO
BE THE MOST SUBSTANTIAL RISKS TO AN INVESTOR IN THIS OFFERING IN VIEW OF ALL
FACTS AND CIRCUMSTANCES OR WHICH OTHERWISE MAKE THE OFFERING ONE OF HIGH RISK OR
SPECULATIVE (I.E., THOSE FACTORS WHICH CONSTITUTE THE GREATEST THREAT THAT THE
INVESTMENT WILL BE LOST IN WHOLE OR IN PART, OR NOT PROVIDE AN ADEQUATE RETURN).
(1) ARBITRARY OFFERING PRICE. The price of the Shares
offered herein was arbitrarily determined by the Company based upon
such factors as an increase in revenues and earnings, based on the
successful results of the use of proceeds to be raised by this
offering and anticipated future performance. On January 31, 1997,
the Company obtained an independent appraisal report of the
Company's existing business (excluding any expansion as described
herein), and the appraised value was $13.95 per share. The pricing
of these Shares does not bear any relationship to the assets, book
value, or net worth, cash flows or past operating results of the
Company, and should not be considered to be an indication of the
actual value of the Company.
(2) DILUTION. Purchasers of the Common Stock offered herein
will suffer an immediate dilution of net tangible book value per
share (as of March 31, 1997, adjusted for the issuance of preferred
stock, and assuming conversion of such preferred stock into common
stock, and assuming the tendering of an estimated 19,729 shares
pursuant to a tender offer discussed elsewhere herein). The
Company's net tangible book value based on the Company's successful
conclusion of this offering is $24.42 per share (if the maximum is
sold) and $16.00 (if the minimum is sold) and the offering price
for the securities offered herein is $40 per share. Therefore,
investors will suffer an immediate dilution to their investment of
$24.00 if the minimum is sold and $15.58 if the maximum is sold,
based on the pre-offering net tangible book value of the Company,
(as of March 31, 1997, as adjusted for the issuance of the
preferred stock) which is $6.26. Additionally, holders of options
and warrants have been granted certain rights which include but are
not limited to an exercise price
1
<PAGE>
significantly lower than the offering price. Further, investors will not have a
preemptive right to acquire the Company's unissued shares which could result in
additional dilution.
(3) SIGNIFICANT COMPETITION. In the ankle brace business and catalog
business there are numerous competitors, many of which are larger and with more
resources than the Company. Some companies have introduced rigid stirrup-type
braces that are similar in design and function to the Active Ankle at lower
prices. The Company intends to continue as a marketer of a line of proprietary
ankle braces and other products, as well as selling at retail the products of
other manufacturers, as described in this Prospectus. While the Company
believes it offers a significant improvement in product and delivery/sales
systems versus existing similar enterprises, the business in which the Company
competes is subject to numerous competitive factors which include, among others,
service and product design. There can be no assurance that other companies
with significantly greater financial, marketing, technological or other
resources than the Company will not develop and market products and sales
techniques similar to those of the Company, which could have an adverse effect
upon the Company's profitability. Accordingly, there can be no assurance that
the Company will be able to successfully compete in the industry.
(4) ANTICIPATED OPERATING LOSSES. The Company anticipates operating
losses in its retail and catalog operations over the next several years, and
there can be no assurance as to when, if ever, the Company will have positive
operating results and cash flow.
(5) "FORWARD-LOOKING STATEMENTS." Information included in this
Prospectus contains "forward-looking statements" which can be identified by
the use of forward-looking terminology such as "believes," "contemplates,"
"expects," "may," "will," "should," "would," or "anticipates," or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
encompassed within the forward-looking statements will be achieved.
Important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
materially from the future results encompassed within such forward-looking
statements are discussed herein under the caption "RISK FACTORS" and in other
information included herein. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
(6) UNPROVEN RETAIL CONCEPT. The Company's concept of marketing through
consumer resource centers selling orthopedic soft goods and training room
sundries to the general public is new and unproven.
(7) LACK OF RETAIL AND CATALOG BUSINESS EXPERIENCE. The Company has
been a marketer of ankle products, but has no track record in retail or
catalog, although Company personnel have experience in these areas. The
Company may not be able to secure acceptable locations, negotiate
commercially acceptable leases, or employ the personnel necessary to manage
the operations.
2
<PAGE>
(8) RELIANCE ON KEY PERSONNEL. The Company has a relatively small number
of key management personnel, and is reliant upon those people to fulfill its
business plan. If one or more of them should become ill, incapacitated, die or
otherwise become unavailable to the Company, it could significantly affect the
Company's ability to attain its goals. Further, no such key personnel have a
contractual employment agreement or non-competition agreement with the Company.
(9) ABILITY TO MAINTAIN SALES AND DISTRIBUTION. By opening retail
stores and operating a catalog, the Company will be in competition with
retail and catalog distributors of the Active Ankle. Moreover, the Company
currently relies upon a series of distributors who wholesale the Company's
product; there can be no assurance that the Company can maintain such a
relationship in the future. The Company has plans to terminate its
distribution agreement with one of its team and retail distributors to
eliminate distribution conflicts and there is no assurance that all customers
can be retained.
(10) OFFERING NOT SUFFICIENT TO CAPTURE U.S. MARKET; WORKING CAPITAL
INSUFFICIENT IF MINIMUM SOLD. The amount to be raised in the offering is not
sufficient to saturate the U.S. Market. If the Company is successful in its
first four consumer resource centers, it will be necessary to raise additional
debt or equity capital in order to attain the long-term goals in the Company's
business plan.
If the minimum amount of shares is sold, the working capital provided by
the offering will be insufficient to purchase all of the inventory needed,
and to satisfy other working capital needs, to fulfill the Company's business
plan. It would become necessary to utilize existing working capital and the
Company's existing line of credit for the funds to implement the business
plan.
(11) CONTINUED CONTROL BY OFFICERS AND DIRECTORS OF THE COMPANY. Upon
completion of this offering (and assuming that 19,729 shares are tendered
pursuant to the Tender Offer, and that all options and warrants are exercised
and preferred shares are converted), officers and directors of the Company
are expected to have beneficial ownership and voting control over
approximately 55.4% of the common stock (if the minimum shares are sold) and
38.2% (if the maximum shares are sold) of the outstanding shares of the
common stock of the Company. As a result, current officers and directors may
be in a position to elect a majority of the directors of the Company and to
control decisions pertaining to financing, material expenditures, on-going
operations, investment decisions and issuance of additional securities.
(12) LACK OF A PUBLIC TRADING MARKET. No public market exists for the
Shares offered herein, and no significant market is expected to develop as a
result of this offering. Although these shares are registered and may be
freely-tradable in certain states, purchasers should view their investment in
these securities for long-range investment purposes only and not with a view to
resell or otherwise dispose of their shares in the near future. Furthermore,
the shares may not be readily accepted as collateral for a loan.
3
<PAGE>
(13) LIMITED LIQUIDITY. The Shares offered herein are offered in reliance
on an exemption from the registration and reporting requirements under the laws
of some states and thus are a restricted security with respect to such states.
Further, the Shares contained herein are registered only under the Securities
laws of those States itemized in this Prospectus and may only be bought, sold,
resold or otherwise transferred as authorized within those specific States
listed.
(14) DIVIDENDS NOT ANTICIPATED. The Company has never paid a dividend.
For the foreseeable future, the Company anticipates that earnings will be
retained to be used in the business. There can be no assurance that any
dividends will be paid in the foreseeable future.
(15) RISKS INHERENT IN SELF-UNDERWRITING. Since there are no underwriters
involved in this offering, the Company will not have the benefit of the
independent due diligence examination performed by an underwriter to insure that
the disclosures are accurate and the Company may, because it is not a securities
broker, have difficulty selling the Shares.
(16) GOVERNMENT REGULATION. Medical devices in the United States are
highly regulated in such areas as product development, testing, marketing and
manufacturing. In general, these statutes and regulations require that
manufacturers adhere to certain standards designed to ensure the safety and
effectiveness of medical devices. As of July 17, 1995, Section 510 of the Food
& Drug Act requires that manufacturers must list their devices with the FDA.
The Company has listed with the FDA. Since its inception in 1989, the Company
has operated in full compliance with all applicable regulations and foresees no
reason why it cannot continue to enjoy such as status. However, there can be no
assurance that the Company will remain in compliance with all regulations and
absence of such a status could have a material adverse effect on the Company's
financial position, operating results and cash flow.
(17) AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The
Company's Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to designate and issue
additional series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
discouraging, delaying or preventing a change in control of the Company. See
Offering Price Factors.
NOTE: IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS
NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS
PROSPECTUS POTENTIAL INVESTORS SHOULD KEEP IN MIND OTHER POSSIBLE
RISKS THAT COULD BE IMPORTANT.
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BUSINESS AND PROPERTIES
3. WITH RESPECT TO THE BUSINESS OF THE COMPANY AND ITS PROPERTIES:
(a) DESCRIBE IN DETAIL WHAT BUSINESS THE COMPANY DOES AND PROPOSES TO DO,
INCLUDING WHAT PRODUCTS OR GOODS ARE OR WILL BE PRODUCED OR SERVICES THAT ARE OR
WILL BE RENDERED:
THE CURRENT BUSINESS OF THE COMPANY
The Company markets sports medicine products. Its primary product is an ankle
orthosis (in layman's terms, a "brace") which is unique in form and purpose (the
"Active Ankle"). The Active Ankle has anatomically correct hinges which fit the
ankle and permit normal foot movement up and down but limit the movement of the
ankle from side to side. Its solid U shape cups the heel while a posterior
strap prevents the ankle brace from moving in the shoe from activity. By using
different plastic shells, padding, and strapping systems, the Active Ankle can
be tailored to needs and desires of a particular user and used as either an
injury prevention device, support for an acute ankle injury or for
rehabilitation.
The Company has research, development, and field testing programs and has a new
knee brace undergoing conceptual development.
The Company sells to the medical sector, primarily orthopedic surgeons, but also
to hospitals and other clinics where the brace is used in the treatment of acute
injuries. Sales to the medical sector are about 30% of total sales.
Approximately 30% of the Company sales are to sports teams at all levels - club,
high school, college and professional, where the brace is used primarily as a
device to prevent ankle injuries but also is used as a rehabilitation brace.
Sales to the retail sector, primarily sporting goods stores, total approximately
30% of sales. The Company sells internationally in Japan, Canada, The United
Kingdom, Switzerland, Norway, Germany, Taiwan, Australia, and other foreign
countries.
The Company distributes its products through three primary distributors. EBI, a
subsidiary of Biomet, Inc, distributes the Active Ankle to orthopedic surgeons,
hospitals, and sports medicine clinics. The Volleyball Connection, Inc.
distributes the Active Ankle to retail stores and consumer catalogs through a
network of manufacturers representatives. Cramer Products, Inc. distributes the
Active Ankle to professional catalogs and team dealers who sell mainly to teams
as well as to retail accounts. The Company sells directly to foreign
distributors as well as to selected domestic accounts.
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HISTORY
The Company was formed in 1989 by a group of venture investors to acquire the
product and business of Mr. Rick Peters, an athletic trainer who invented the
Active Ankle. Mr. Peters' efforts began in 1984 as a class project. After
obtaining patent protection, Mr. Peters sought financing to bring the Active
Ankle to market. The Company commenced operations in June, 1989, and spent two
years conducting market research. Sales commenced in 1990 when the Active Ankle
was positioned as a rehabilitation device for use by medical and athletic
training personnel to deal with an ankle injury. The initial distribution was
through medical distribution systems. In 1992, a contact was made with U.S.
Volleyball (the U.S. men's and women's national volleyball teams) and the brace
was tested by U.S. Volleyball. Based on feedback from customers and the
Company's experience, the Active Ankle proved to be a brace which produced
significant injury reduction rates for volleyball players. In 1992, distribution
agreements were established with The Volleyball Connection, Inc. and Cramer
Products, Inc. to distribute the Active Ankle to retail and team accounts and
medical distribution through Biomet, Inc. was expanded. In 1993, the Company
made a strategic decision to reposition the brace as a preventative device and
to expand its marketing effort to other sports such as basketball. A revised
model of the Active Ankle, the "T2", a lower profile, lighter and more
convenient brace was introduced into the market in June, 1995.
INDUSTRY OVERVIEW
The Company participates in the Orthopedic Soft Goods industry. The term
"orthopedic soft goods" is taken from a 1996 report entitled "U.S. Orthopedic
Soft Goods Product Markets" by Frost & Sullivan, an international market
research firm with offices throughout the country, including New York. All
descriptions herein of competitors and/or industries are taken from this study.
This report is referred to as the Frost & Sullivan Report. The products in this
industry are used to brace or support portions of a person's body that have been
injured, sprained or fractured or, in some cases, to prevent injury. The
industry is largely segmented by the body extremity for which a product is used.
The segments that comprise the industry include ankle, knee, wrist, back, elbow,
shoulder, cervical, etc.
According to a forecast of the U.S. Orthopedic Soft Goods market by Frost &
Sullivan, total industry revenues were approximately $661 million in 1996. For
the past two years, industry growth has averaged 4.5% annually and future growth
is forecast at 6.4%. As a percent of overall sales, ankle products represent
25% of industry sales, knee products 43% of sales and wrist and back products 9%
of sales with other categories being less than 5% of the total industry. The
majority of sales occur in the medical and institutional markets such as
orthotic and prosthetic shops, hospitals, medical clinics or medical equipment
dealers.
Industry retail sales are approximately $90 million, of which ankle products
represent 27% of sales, knee products 34% of sales and wrist products 20% of
sales. Retail outlets include drug stores, sporting goods stores, and mass
merchandisers.
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The Company participates in the Ankle Brace and Support segment of the market.
Total ankle segment sales are estimated at $164 million. The market is further
broken into three sub segments - soft ankle supports, rigid ankle stirrups and
lower leg walkers, representing 37%, 38% and 25% of the market, respectively.
Soft ankle supports are constructed from various combinations of nylon, rayon,
cotton and neoprene and use a variety of hook and loop, strap or lace closures
often with various forms of stays to provide support. The rigid stirrup brace
consists of a molded rigid shell that conforms to the ankle with various forms
of padding for compression and closure systems. Lower leg walkers are devices
like a boot into which the foot is inserted. Walkers have various forms of
padding and hinges that limit range of motion and are used primarily in acute
situations in place of casting. While the Active Ankle itself falls into the
rigid stirrup category, from a competitive situation in the medical, team and
retail markets, it is competing with the soft ankle supports.
COMPETITION
According to the Frost & Sullivan report, .there are some 74 manufacturers
who compete in the ankle segment. 61 market a soft ankle support, 33 a
rigid stirrup brace and 22 a lower leg walker. In the non-retail rigid brace
category, Aircast, Inc. has approximately a 65% market share, Centec
Orthopaedics (a division of Royce Medical Company) a 15% share and the
Company an 8% share. Aircast, Inc. was the first company to develop the
rigid brace, creating the category, and is dominant in the hospital and
clinical market.
In the soft brace category, Smith & Nephew, Inc., Medical Specialties, Inc.,
Professional Products, Inc. and Zimmer, Inc. are the dominant braces in the
medical category. Swede-O, Inc. and McDavid Kneeguard, Inc. are leaders in the
team and retail business.
DISTRIBUTION
MEDICAL.
Distribution in the industry is highly fragmented with a variety of patterns,
depending upon sector. In the medical sector, most manufacturers distribute
direct with company salespeople, although several firms use manufacturers
representatives. Heavy emphasis is placed on gaining use by orthopedic surgeons
as a practice pattern and on sales to clinics and hospitals. The selling
emphasis in medical is on performance and price, supported by research.
The Company has had a distribution arrangement with Biomet, Inc. since 1992.
Initially, Active Ankles were sold by Biomet's independent distributor system
which focused on selling joint implants and soft goods to orthopedic surgeons.
When Biomet, Inc. acquired Kirschner Medical Products, Inc., Active Ankle's
distribution was transferred to the AOA division of Kirschner in 1994. AOA
focused on selling a broad line of orthopedic soft goods to surgeons, hospitals
and clinics. With the merger of AOA into EBI, Inc, another Biomet subsidiary in
1996, distribution was
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transferred to EBI. EBI's primary line of business is the sale of electronic
bone growth simulators and external fixation devices to orthopedic surgeons
through a company sales force.
TEAM AND RETAIL.
Team and retail distribution is also highly fragmented. Most manufacturers and
distributors sell through a network of multi-line sales representatives who
place the product with team dealers, medical and sports medicine catalogs,
consumer catalogs and retail stores. A large proportion of sales to teams and
institutional customers occur through specialized catalogs which focus on
medical products. For a product like the Active Ankle, the certified athletic
trainer is the primary purchaser or influencer of purchase. For the retail
account, the sporting goods store sports medicine buyer is the key person in the
purchase process.
Cramer Products, Inc. of Gardner, KS has been an Active Ankle distributor since
1992. Through its catalog and an independent representative sales force of
about 60, Cramer distributes Active Ankle to the key catalog houses such as
Micro Bio-Medics, Inc., Sports Health, a division of School Health Corp., and
Alert Services, Inc., sporting goods stores who focus on team business and some
national retail accounts.
The Volleyball Connection, Inc. of Louisville, Kentucky has been a distributor
since 1992 and distributes though an independent representative sales force to
national sports goods chains, specialty sporting goods stores and certain
catalogs such as Eastbay and Spike Nashbar.
SEASONALITY
While the medical sector does not appear to have seasonality, the team and
retail sectors are seasonal, tied to the school year and seasonal sports
schedules. August and September are higher sales months with seasonal lows in
December, January and July.
GOVERNMENTAL REGULATION
The U.S. Food and Drug Administration (FDA) device regulations apply to firms
that make devices intended for human use. As of July 17, 1995, Section 510
of the FDA Act, manufacturers must list their devices with the FDA. The
Company has listed and complied with this requirement. The Active Ankle does
not require FDA approval, is exempt from premarket notification procedures
and is exempt from current goods manufacturing practice regulation.
MANUFACTURING
The Active Ankle is assembled in the U.S. by two contract assembly plants, using
components and parts manufactured by other vendors. One of these manufacturers,
K-P Ventures, Inc., is heavily dependent on Active Ankle.
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EMPLOYEES
At March 31, 1997, the Company employed 11 management, sales and administrative
persons located at Corporate headquarters. Five of the Company's employees are
certified athletic trainers with 7 to 35 years experience as a trainer. Senior
management has from 4 to 8 years experience with the Company and industry. In
addition, the management has from 10 to 20 years experience with small
businesses.
THE MARKET OPPORTUNITY
The overall market for orthopedic soft goods has been discussed previously (see
Industry Overview). There are several trends in the retail market place which
suggest there is an opportunity for a multi-faceted marketer of orthopedic soft
goods.
Sports medicine and fitness encompass a broad range of disciplines and a wide
variety of products. The market is highly fragmented with many large and small
marketing and manufacturing companies. Historically, the sports medicine market
focused on the professional, major college or high level athlete. This is
beginning to change and the market is being driven by a number of factors:
(a) There is an increased awareness of the role of fitness in health, an
increased emphasis on exercise and sports, and an increased emphasis on
wellness.
(b) There is a desire by amateur and leisure time athletes to use the same
techniques, gear and equipment for training that high level athletes use.
(c) There is an increasing interest in self care and injury protection.
This is coming both from a more active population with an interest in
health as the "baby boomers" age, and the health care system in general is
moving towards prevention and protection as evidenced by HMO penetration,
medical practice focus, and more managed care in non hospital settings.
The emergence of sports medicine clinics, dedicated wellness clinics,
cardiac and occupational rehabilitation centers and health and fitness
clubs illustrate this trend. Management believes that a significant
percentage of injured people do not seek medical attention.
(d) The targets for any sports medicine and fitness products are expanding
from the active 16 to 22 year old group to the 35 to 55 age group, which is
growing faster than the general population.
(e) More physicians are turning toward off-the-shelf products or sending
consumers elsewhere as medical reimbursement practices change. In
addition, based on the experience of the Company, physicians are
increasingly reluctant to carry an inventory of products for patients.
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The experience of the Company in the market suggests that the average consumer
has very limited knowledge of sports medicine or orthopedic soft goods products.
In general, the products must be demonstrated or tried and recommended by a
knowledgeable person in athletic training, medicine or clinical setting. Most
orthopedic soft goods have not reached the mass market because of lack of
knowledge on the part of the buying public and wholesale and retail
distribution systems.
In the existing market, companies marketing to institutional and retail
customers are not prepared to evaluate and provide advice or recommendations on
orthopedic soft goods to their customers. Even in medical markets, few sales
people have personal knowledge to change historic practice patterns to more
effective ones. Increasingly, products to the medical trade are sold on the
basis of price and equivalency, creating a gap in the market driven by
recommendations that existing organizations are not prepared to address.
There is a gap in this overall market:
- Management believes that a significant percentage of injured persons
do not seek medical assistance; many self-prescribe.
- No distributor reaches a broad customer profile: general
consumer, senior citizen, athletes, clinics, schools and doctors,
all of whom have need for orthopedic soft goods to maintain and
increase quality of life.
- Depth and breadth of sports medicine products is limited,
particularly at retail.
- With the exception of the medical sector, there is limited
product knowledge and expertise available to the purchaser.
- Orthopedic soft goods are generally inaccessible to the general
public.
- Compared to most consumer goods, marketing and merchandising are
limited.
The Business Plan of the Company is to address this gap in the market through a
multi prong plan of product and distribution system development. One element is
the Company's product business which will focus on the development and marketing
of high value, high function sports medicine products. A second is an
institutional catalog focused on the athletic trainer and medical professional,
and the third is a consumer resource center which will offer a range of
professional products to the general consumer, recreational programs such as
Little Leagues and serve as a referral outlet for the medical and clinic sector.
These segments will overlap and reinforce each other. The consumer resource
center will be an outlet for medical referrals, with the catalog as an adjunct
for non stock items. The catalog will
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serve the needs of the traditional athletic program as well as serve as an
extension of the consumer resource center and as a marketing tool for the
center.
A key marketing element is a group of regional directors who will be responsible
for marketing the resource center, catalog and products to the institutional
markets and will develop special promotions and a referral network.
THE BUSINESS PLAN OF THE COMPANY
The business plan of the Company is to leverage the sales base, management and
marketing expertise of the Company to build a multi-stage business in orthopedic
soft goods and athletic trainer supplies. There are three parts to the business
plan:
PROPRIETARY PRODUCTS. The Company will continue its existing business by
aggressively marketing its products through its existing distribution
system as well as adding distribution through the new catalog and consumer
resource centers. The Company will continue its efforts to develop product
line extensions of the Active Ankle as well as the development and
marketing of additional high value, high function sports medicine products.
The Company plans to develop new products both internally as well as
through licensing and acquisition.
SPORTS MEDICINE CATALOG. The Company will develop a sports medicine
catalog which will offer a broad line of sports medicine and orthopedic
soft goods to the institutional market such as schools, teams, hospitals,
clinics and other professional outlets. This catalog will target those who
already purchase through catalogs as well as serve as a marketing device
for the product and consumer divisions. The Company may acquire an
existing catalog company to develop this business area and the Company
is exploring possible acquisitions. There are no agreements in
principle at the present time.
CONSUMER RESOURCE CENTERS. These retail centers will be located in
shopping centers, and will offer orthopedic soft goods and training room
supplies to the consumer market. They will be 1,500 to 2,500 square feet
in size, upscale in decor and treatment and will be staffed primarily by
athletic trainers who will provide the expertise for a consumer to buy the
product that best fits his or her need. In addition to selling to the
general public, the centers will be a referral resource for doctors,
clinics and athletic trainers to send their patients and athletes as well
as provide a resource for college, high school and recreational teams and
clubs, such as Little Leagues, who need sports medicine products.
PROPRIETARY PRODUCTS BUSINESS PLAN
The Company will continue to market and develop the Active Ankle, increasing
volume through additional market penetration to additional sports and broader
distribution, both domestically and internationally.
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While the Active Ankle is a patented product, it does not depend upon the
patents as a part of its competitive profile, rather focusing on its strong
features and proven functions. The Active Ankle has been positioned as a high
value, high function brace for both prevention of ankle injuries and as a
rehabilitation device. The Company has been able to maintain premium pricing on
the basis of its value. Certain competitors have announced products which
appear to look similar to the Active Ankle. The Company has not been able to
evaluate these products fully and ascertain, whether under the
law, these products infringe on Active Ankle's patent or trade style.
The Company has marketed its product through a program of grass roots marketing
based on samples. The Company advertises to consumers to create consumer demand
and provide support to its distributors and retailers. The Company will
continue and expand these activities.
The Company tests its products in actual use as well as in academic and medical
research. The Company has R&D arrangements with a major university
biomechanical engineer as well as with a university rapid prototyping center.
The Company is continuously reviewing and evaluating the needs in the
marketplace, as well as the cost and function of the Active Ankle. Product
improvements and enhancements are under development, particularly a lower cost
brace which can compete on a price basis in the medical market.
The Company has under development a new form of knee pad for volleyball. The
product is designed to provide enhanced protection with less bulk and improved
ease of use. Prototype units are undergoing testing by seven major collegiate
volleyball programs. Completion of initial testing is expected in July 1997,
after which the Company will evaluate and make the decision regarding a
potential launch.
Design and marketing parameters are being developed for other new products and
two products developed by others are under evaluation. Assuming these products
meet the Company's market and function expectations, exclusive license
agreements will be negotiated.
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SPORTS MEDICINE CATALOG BUSINESS PLAN
The Company will publish a catalog with product offerings which will parallel
that of the consumer center but offer additional items focused on the
professional trade. In general, the products carried in the catalog will be the
same as the competition. However, as a point of difference, rather than carry
the same or similar items from a variety of vendors, the catalog will focus on a
limited number of products which offer efficacy and quality for specific needs
at different price points. In addition, the Company will focus on customer
service.
SPORTS MEDICINE CATALOG INDUSTRY OVERVIEW
The catalog operation will participate in the marketing and sales of orthopedic
soft goods and training room supplies and equipment. Its principal target
customers are the athletic trainer or coach at colleges, junior colleges and
high schools, orthopedic physicians, physical therapists as well as organized
sports activities, hospital and physical therapy clinics.
Catalog companies have historically distributed a full line of products directed
at a specific segment of the institutional market. These segments include
hospitals, nurses, and industrial markets with sports medicine in many cases
being a secondary target. For the most part, these catalogs offer a wide
variety of products in each product category with little information on quality
or efficacy, that decision being left to the purchaser. These catalogs do not
reach the general consumer, nor do they reach team or athletic activities
without a professional trainer involved, such as high school, recreational,
youth sports or club programs.
Industry size is unknown, as there is a wide variety of similar operations which
serve various facets of the institutional market, such as hospitals, industry,
clinics, nursing homes, school nurses and athletic trainers. The catalog market
directed at athletic trainers is estimated by the Company's management at $25
million with another $25 million purchased by athletic trainers from retail
dealers. There is a limited number of catalogs which offer products to the
general public. These catalogs focus more on health and beauty aids rather than
professional level products.
COMPETITION
There are approximately eleven significant companies in the U.S. who distribute
orthopedic, medical and first aid supplies to the athletic training market. Of
these, seven have catalogs, the others selling via pricing sheets and catalogs
from vendors whose products they distribute. The major companies are Micro
Bio-Medics, Inc., Sports Health, a division of School Health Corp., Alert
Services, Inc., Medco Supply, Inc., Athletic Medical, Inc., Econoline Products,
Inc., Seneca, and Mundy's, Inc. These companies range in size from less than $.5
million sales to in excess of $100 million.
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SALES, MARKETING AND DISTRIBUTION
Although all the above companies sell athletic training supplies through a
catalog, most are regionally focused and target customers in two or three
states. Most distribute the Active Ankle in addition to other ankle products.
Three of these companies distribute throughout the United States and only one
has more than one distribution center.
For the most part, these companies have limited sales forces and sell primarily
through distributing their catalog through the mail and at trade shows and
either receiving orders or, in the case of most large customers, responding to
bid requests. Marketing efforts are primarily through attendance at trade shows
focused on the athletic trainer and physical therapists.
Under the Company's business plan, there will be a regional marketing director
for the consumer resource centers, product operations and catalog operations who
would promote the entire business to athletic trainers, doctors, clinics and
other professionals via a calling program. The Company will also participate in
trade shows and other promotional efforts. Market research suggests that
calling on accounts presents a significant competitive advantage over the
competition who have limited sales forces.
In addition, because the Company already has sponsorship programs in place with
many institutions as well as endorsers, there are joint promotional
opportunities such as sponsorships and seminars. The Company is unique in that
it has a strong grass roots program in place with athletic trainers throughout
the U.S. This grass roots network offers the opportunity to capture sales to
athletic programs by offering equivalent or better sales, service and pricing.
SEASONALITY
While the medical and industrial sectors do not exhibit seasonality, sales of
athletic training products is highly seasonal, tied to the school year and sport
season. August and September are seasonal highs with seasonal lows in July,
December and January.
GOVERNMENT REGULATION
The catalog industry has no specific government regulation.
MANUFACTURING
Most catalog companies do not manufacture any products but offer the products of
a wide variety of vendors, although they may do some repackaging of vendor's
products.
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FACILITIES
The Company plans to lease approximately 5,000 square feet of warehouse space to
conduct catalog operations. The capital equipment is conventional shelving,
computer equipment and software.
PERSONNEL
The catalog operations will employ a general manager, a purchasing agent/bid
specialist, an administrative assistant, and a shipping/receiving person with
part time seasonal help. The employees are not expected to be unionized.
CONSUMER RESOURCE CENTER BUSINESS PLAN
INDUSTRY OVERVIEW
Historically, sales of orthopedic soft goods and athletic trainer supplies have
been directed to and through the institutional markets of schools, hospitals,
and clinics and have not been available to the general public. For the most
part, products available to the general public have been limited in breadth and
depth, focusing on relatively low value, low priced, low function products such
as ankle and knee sleeves, wrist braces, back braces and orthotic supplies.
The products are distributed through various retail outlets such as sporting
goods stores, mass merchants, and pharmacies with none of these outlets carrying
a complete line.
One of the characteristics of this market is that the average consumer has very
limited knowledge of orthopedic soft goods or trainer supplies, and relies on
professional advice. For this reason, only the simplest products are available
to the consumer. For the most part, the products are not advertised to the
public nor is any selling expertise available to the general public. As
previously discussed, there is consumer interest in this product category, but
lack of knowledge and distribution has limited growth of retail sales.
The consumer resource center is a new form of distribution, making available
specialty products to the general market in a conveniently accessible way
coupled with high service in the form of expertise to assist the consumer in
meeting their need.
COMPETITION
This industry is an emerging form of distribution. A few small retailers of
orthopedic supplies have emerged across the U.S. in the past two years. One of
these retailers has two outlets, the remainder one. None is associated with
major catalog companies or product manufacturers. Sales of individual outlets
are believed by management in the $300,000 to $500,000 year range. The product
offerings are similar to those envisioned by the Company and in some cases, the
sales staff is comprised of
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athletic trainers offering sales expertise. These retailers have typically
moved from the institutional side of the business, have been founded by athletic
trainers and orthopedic surgeons, and they have not focused on the athletic
trade or general consumer, but rely primarily upon referrals from medical
professionals. These outlets are generally located in strip malls. Advertising
and marketing are generally limited.
There are several retailers who offer portions of the expected product line.
Sporting goods stores, pharmacies, and mass merchants offer limited lines of
sundry items. There are some stores focusing on backs or feet which offer
portions of the lines envisioned. Several consumer catalogs offer portions of
the product line but tend to focus more on health and beauty aids versus
orthopedic and trainer supplies.
PRODUCT LINE
The consumer resource center will offer orthopedic soft goods and trainer
supplies. Orthopedic soft goods will include bracing for various joints of the
body, cold and heat packs, safety equipment such as first aid kits and guards,
trainer sundries such as tape, balms, specialized bandages, underwrap, cinder
suds, etc. In each product category there will be one high value, high function
product, one product with a price and function orientation and one low level
product. Products will be selected on the basis of function and quality. The
product base and vendors will parallel that of the catalog operation.
MARKETING
For the most part, with the exception of the Company, manufacturers do not
consumer market, relying on trade promotions and advertising as the basis of
their marketing programs. Further, with the fragmentation of the industry, the
focus on institutional sales, and the limited resources of most manufacturers,
traditional consumer marketing has not emerged. Advertising has not been a
source of consumer information. Marketing has been directed at the
institutional trade rather than the consumer and organized recreational
activities.
The Company has a strong network of professionals and athletic trainers in
place. In addition, the Company has team and school sponsorships as well as
high profile endorsers. The consumer resource center will be able to use these
sponsorships. The resource centers will develop additional sponsorship
opportunities with various groups such as the mall walkers, club volleyball,
high school and local college teams.
In addition, the Company plans to offer a series of seminars and educational,
in-store activities such as injury management, stretching, sports technique, and
rehabilitation as a part of an in-store program.
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PHYSICAL PLANT
The consumer resource centers will be leased 1,500 to 2,500 square foot
facilities in major shopping malls. The Company believes high traffic, high
visibility locations, which are convenient to consumers, are a key to sales
volume. In addition, the stores will be both a beneficiary of and a contributor
to mall traffic with the marketing plan of education and special promotions.
The stores will project an image of professionalism. The estimated investment
in leasehold improvements will be approximately $60 per square foot. The stores
will have seating areas for trying and fitting products, and a podium area for
in-store seminars and promotions, autograph signings, etc.
GEOGRAPHIC LOCATION
The initial four stores will be located in cities near the Company's
headquarters in Louisville, Kentucky. Initial stores are expected in
Louisville, Kentucky; Lexington, Kentucky; Indianapolis, Indiana; and
Cincinnati, Ohio. The expected direction of growth from the initial sites will
be to Tennessee, Georgia, Florida, Ohio, Indiana, Illinois and Michigan.
STAFFING
The consumer resource centers will be staffed primarily by Certified Athletic
Trainers who are certified by state governments or by the Board of
Certification, a sister organization of the National Association of Athletic
Trainers, and by college students enrolled in a program to become Certified
Athletic Trainers. There will be a permanent full time staff of two persons per
store supplemented by qualified part time associates.
(b) DESCRIBE HOW THESE PRODUCTS OR SERVICES ARE TO BE PRODUCED OR RENDERED
AND HOW AND WHEN THE COMPANY INTENDS TO CARRY OUT ITS ACTIVITIES. IF THE
COMPANY PLANS TO OFFER A NEW PRODUCT(S), STATE THE PRESENT STAGE OF DEVELOPMENT,
INCLUDING WHETHER OR NOT A WORKING PROTOTYPE(S) IS IN EXISTENCE. INDICATE IF
COMPLETION OF DEVELOPMENT OF THE PRODUCT WOULD REQUIRE A MATERIAL AMOUNT OF
RESOURCES OF THE COMPANY, AND THE ESTIMATED AMOUNT. IF THE COMPANY IS OR IS
EXPECTED TO BE DEPENDENT UPON ONE OR A LIMITED NUMBER OF SUPPLIERS FOR ESSENTIAL
RAW MATERIALS, ENERGY OR OTHER ITEMS, DESCRIBE. DESCRIBE ANY MAJOR EXISTING
SUPPLY CONTRACTS.
The proprietary product operation has vendors who supply the parts for the
Active Ankle to the Company's specifications. The Company owns the tooling used
to injection-mold the plastic parts. As a policy, the Company out-sources as
much as it can, concentrating on management, marketing and development. While
the Company has major supply arrangements with Velcro, Inc., and High Tech Mold
and Tool, Inc., there are alternate suppliers who can meet the Company's needs.
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The Company has under development a new form of knee pad for volleyball.
The product is designed to provide enhanced protection with less bulk and
improved ease of use. Prototype units are undergoing testing by seven major
collegiate volleyball programs. Completion of initial testing is expected in
July, 1997 after which the Company will evaluate the tests and make the decision
regarding a potential launch.
Design and marketing parameters are being developed for other new products.
Two products developed by others are under evaluation. Assuming these products
meet the Company's market and function expectations, exclusive license
agreements may be negotiated.
(c) DESCRIBE THE INDUSTRY IN WHICH THE COMPANY IS SELLING OR EXPECTS TO
SELL ITS PRODUCTS OR SERVICES AND, WHERE APPLICABLE, ANY RECOGNIZED TRENDS
WITHIN THAT INDUSTRY. DESCRIBE THAT PART OF THE INDUSTRY AND THE GEOGRAPHIC
AREA IN WHICH THE BUSINESS COMPETES OR WILL COMPETE.
INDICATE WHETHER COMPETITION IS OR IS EXPECTED TO BE BY PRICE, SERVICE, OR
OTHER BASIS. INDICATE (BY ATTACHED TABLE IF APPROPRIATE) THE CURRENT OR
ANTICIPATED PRICES OR PRICE RANGES FOR THE COMPANY'S PRODUCTS OR SERVICES, OR
THE FORMULA FOR DETERMINING PRICES, AND HOW THESE PRICES COMPARE WITH THOSE OF
COMPETITORS' PRODUCTS OR SERVICES, INCLUDING A DESCRIPTION OF ANY VARIATIONS IN
PRODUCT OR SERVICE FEATURES. NAME THE PRINCIPAL COMPETITORS THAT THE COMPANY
HAS OR EXPECTS TO HAVE IN ITS AREA OF COMPETITION. INDICATE THE RELATIVE SIZE
AND FINANCIAL AND MARKET STRENGTHS OF THE COMPANY'S COMPETITORS IN THE AREA OF
COMPETITION IN WHICH THE COMPANY IS OR WILL BE OPERATING. STATE WHY THE COMPANY
BELIEVES IT CAN EFFECTIVELY COMPETE WITH THESE AND OTHER COMPANIES IN ITS AREA
OF COMPETITION.
PROPRIETARY PRODUCTS
With 74 manufacturers of ankle braces in the market place, competition
occurs on two levels. One, there is a large group of essentially similar ankle
braces, which, while certain features are emphasized, largely compete on the
basis of price. There is a second group with proprietary features, such as the
Aircast and Active Ankle, which compete on the basis of product features and
function. The Company created a new category of brace and has premium-priced
the product based on function and proprietary features. With the expiration of
the patent on the Aircast brace in 1998, and with competitors introducing braces
with Active Ankle look-alike characteristics, management believes the basis of
competition in institutional markets will be price. The Company will address
future price competition in several ways. First, the Company may change its
distribution. Second, the Company has reduced product cost by approximately 35%
over the past three years and plans to continue that effort. Third, the Company
plans to develop and market new forms of the Active Ankle.
In medical markets, the principal competition is Aircast, Inc., with a
market share of approximately 65% and a long established market position,
largely in hospitals. Active Ankle's
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<PAGE>
market share is higher in the sports medicine clinics and in orthopedic offices
than Active Ankle's market share in hospitals. The Company has successfully
competed with Aircast for the past 7 years.
In the team sports market, the key competitors are McDavid Knee Guard,
Inc., Swede-O, Inc., and Mueller Sports Medicine, Inc. These companies have had
strong positions with soft, lace up braces and are introducing rigid braces.
These companies are believed to be approximately the same size as the Company or
larger. The Company has built a strong brand awareness and market presence
through its marketing programs and will continue those efforts.
SPORTS MEDICINE CATALOG
The catalog operation will be competing with competitors ranging in size
from in excess of $100 million in sales to less than $500,000 in sales. Key
direct competitors include Medco Supply Company, Alert Services, Inc., and
Econoline Products, Inc. These companies are focused primarily on the school
and athletic trainer market. Micro Bio-Medics, Inc. and Sports Health, a
division of School Health Corp., focus on the hospital and school nurse market,
respectively, but also sell to the target market. Each of these competitors
sells the Active Ankle, as well as other ankle braces.
In terms of product line, the Company's product line will be similar to
that of its competitors. A key point of difference is expected to be a more
limited product line, focused on products with quality and efficacy. Posted
catalog prices will be comparable to those of the competition, and the catalog
operations will respond to requests for bid on a competitive basis.
Another difference from the competition will be the marketing effort. The
regional director of marketing, coupled with the consumer resource center, are
unique in the industry. The Company will have a larger sales force than the
competition in each of its regions of operation.
CONSUMER RESOURCE CENTERS
Because the consumer resource centers are a new concept, there currently
are only isolated comparable retail outlets. Portions of the product line are
available in a wide variety of retail outlets such as sporting goods stores,
mass merchants, medical equipment dealers and medical clinics. However, a large
portion of the product offerings are not available at all to the general public.
The key competitive elements will be knowledgeable service provided by trained
personnel and products not generally available in conveniently accessible form.
NOTE: BECAUSE THE PROSPECTUS FOCUSES PRIMARILY ON DETAILS CONCERNING THE
COMPANY RATHER THAN THE INDUSTRY IN WHICH THE COMPANY OPERATES OR WILL
OPERATE, POTENTIAL INVESTORS MAY WISH TO CONDUCT THEIR OWN SEPARATE
INVESTIGATION OF THE COMPANY'S INDUSTRY TO OBTAIN BROADER INSIGHT IN
ASSESSING THE COMPANY'S PROSPECTUS.
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(d) DESCRIBE SPECIFICALLY THE MARKETING STRATEGIES THE COMPANY IS
EMPLOYING OR WILL EMPLOY IN PENETRATING ITS MARKET OR IN DEVELOPING A NEW
MARKET. SET FORTH IN RESPONSE TO QUESTION 4 BELOW THE TIMING AND SIZE OF THE
RESULTS OF THIS EFFORT WHICH WILL BE NECESSARY IN ORDER FOR THE COMPANY TO BE
PROFITABLE. INDICATE HOW AND BY WHOM ITS PRODUCTS OR SERVICES ARE OR WILL BE
MARKETED (SUCH AS BY ADVERTISING, PERSONAL CONTACT BY SALES REPRESENTATIVES,
ETC.), HOW ITS MARKETING STRUCTURE OPERATES OR WILL OPERATE AND THE BASIS OF ITS
MARKETING APPROACH, INCLUDING ANY MARKET STUDIES. NAME ANY CUSTOMERS THAT
ACCOUNT FOR, OR BASED UPON EXISTING ORDERS WILL ACCOUNT FOR A MAJOR PORTION (20%
OR MORE) OF THE COMPANY'S SALES. DESCRIBE ANY MAJOR EXISTING SALES CONTRACTS.
The Company's business lines will be marketed by regional marketing
directors who through a calling and special promotion program will reach
athletic trainers, schools, sports clubs, doctors and medical clinics. The
objective is to build a network of referrals to the consumer centers and catalog
and product sales. The elements of this marketing program are sampling,
education, school and club sponsorship, consumer advertising and trade shows.
The consumer resource centers will do direct newspaper and radio advertising as
well as special in-store promotions focused on athletes, education, and medical
information.
The Company currently sells through the following distributors who handle
in excess of 20% of the Company's Sales:
Volleyball Connection, Inc.
Biomet, Inc.
Cramer Products, Inc.
(e) STATE THE BACKLOG OF WRITTEN FIRM ORDERS FOR PRODUCTS AND/OR SERVICES
AS OF A RECENT DATE (WITHIN THE LAST 90 DAYS) AND COMPARE IT WITH THE BACKLOG OF
A YEAR AGO FROM THAT DATE.
AS OF: _____/_____/_____ $____________
(A RECENT DATE)
AS OF: _____/_____/_____ $____________
(ONE YEAR EARLIER)
None, no backlog. The Company maintains sufficient out-sourcing capacity,
and the short production time allows the Company to fill orders within 30 days.
EXPLAIN THE REASON FOR SIGNIFICANT VARIATIONS BETWEEN THE TWO FIGURES, IF
ANY. INDICATE WHAT TYPES AND AMOUNTS OF ORDERS ARE INCLUDED IN THE BACKLOG
FIGURES. STATE THE SIZE OF TYPICAL ORDERS, IF THE COMPANY'S SALES ARE SEASONAL
OR CYCLICAL, EXPLAIN.
Not applicable.
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(f) STATE THE NUMBER OF THE COMPANY'S PRESENT EMPLOYEES AND THE NUMBER OF
EMPLOYEES IT ANTICIPATES IT WILL HAVE WITHIN THE NEXT 12 MONTHS. ALSO, INDICATE
THE NUMBER BY TYPE OF EMPLOYEE (I.E., CLERICAL, OPERATIONS, ADMINISTRATIVE,
ETC.) THE COMPANY WILL USE, WHETHER OR NOT ANY OF THEM ARE SUBJECT TO COLLECTIVE
BARGAINING AGREEMENTS, AND THE EXPIRATION DATE(S) OF ANY COLLECTIVE BARGAINING
AGREEMENT(S). IF THE COMPANY'S EMPLOYEES ARE ON STRIKE, OR HAVE BEEN IN THE
PAST THREE YEARS, OR ARE THREATENING TO STRIKE, DESCRIBE THE DISPUTE. INDICATE
ANY SUPPLEMENTAL BENEFITS OR INCENTIVE ARRANGEMENTS THE COMPANY HAS OR WILL HAVE
WITH ITS EMPLOYEES.
The Company has 3 employees in senior management, 3 in administration, 4 in
marketing and 1 in manufacturing and development. During the coming 12 months,
the Company expects to add 13 full time and 12 part time employees in the
consumer and catalog operations. No employees are subject to collective
bargaining agreements nor are any anticipated.
The Company offers all employees health and life insurance, a 401(k)
retirement plan, and discretionary bonuses and stock options based on
performance.
(g) DESCRIBE GENERALLY THE PRINCIPAL PROPERTIES (SUCH AS REAL ESTATE,
PLANT AND EQUIPMENT, PATENTS, ETC.) THAT THE COMPANY OWNS, INDICATING ALSO WHAT
PROPERTIES IT LEASES AND A SUMMARY OF THE TERMS UNDER THOSE LEASES, INCLUDING
THE AMOUNT OF PAYMENTS, EXPIRATION DATES AND THE TERMS OF ANY RENEWAL OPTIONS.
INDICATE WHAT PROPERTIES THE COMPANY INTENDS TO ACQUIRE IN THE IMMEDIATE FUTURE,
THE COST OF SUCH ACQUISITIONS AND THE SOURCES OF FINANCING IT EXPECTS TO USE IN
OBTAINING THESE PROPERTIES, WHETHER BY PURCHASE, LEASE OR OTHERWISE.
The Company leases 4,400 square feet of office space at a gross rent of $6
per square foot under a lease which expires in 2001. There is one five-year
renewal option. The Company owns the tooling for the Active Ankle and various
office equipment and furniture.
The sports medicine catalog will be operated in leased warehouse space
under normal commercial terms. The Company expects to invest approximately
$100,000 in equipment and computers.
The consumer resource centers will lease space in regional shopping centers
under normal commercial terms including rent, common area charges, and
percentage rent. The average consumer resource center will have approximately
$150,000 in leasehold improvements and fixed assets.
(h) INDICATE THE EXTENT TO WHICH THE COMPANY'S OPERATIONS DEPEND OR ARE
EXPECTED TO DEPEND UPON PATENTS, COPYRIGHTS, TRADE SECRETS, KNOW-HOW OR OTHER
PROPRIETARY INFORMATION AND THE STEPS UNDERTAKEN TO SECURE AND PROTECT THIS
INTELLECTUAL PROPERTY, INCLUDING ANY USE OF CONFIDENTIALITY AGREEMENTS,
COVENANTS-NOT-TO-COMPETE AND THE LIKE. SUMMARIZE THE PRINCIPAL TERMS AND
EXPIRATION DATES OF ANY SIGNIFICANT LICENSE AGREEMENTS. INDICATE THE AMOUNTS
EXPENDED BY THE COMPANY FOR RESEARCH AND DEVELOPMENT DURING THE LAST FISCAL
YEAR, THE
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<PAGE>
AMOUNT EXPECTED TO BE SPENT THIS YEAR AND WHAT PERCENTAGE OF REVENUES RESEARCH
AND DEVELOPMENT EXPENDITURES WERE FOR THE LAST FISCAL YEAR.
Several features of the Active Ankle are patented, but the Company relies
primarily upon marketing and product features. There is a license agreement
with the inventor of the Active Ankle under which royalty payments of 3% of
Active Ankle sales are due until the expiration of the base patent in 2001.
The Company invested $12,368 or 0.5% of sales in research and development
in fiscal year 1996 and expects to spend $61,580 or 2.4% of sales in fiscal year
1997.
(i) IF THE COMPANY'S BUSINESS, PRODUCTS, OR PROPERTIES ARE SUBJECT TO
MATERIAL REGULATION (INCLUDING ENVIRONMENTAL REGULATION) BY FEDERAL, STATE, OR
LOCAL GOVERNMENTAL AGENCIES, INDICATE THE NATURE AND EXTENT OF REGULATION AND
ITS EFFECTS OR POTENTIAL EFFECTS UPON THE COMPANY.
The Company is subject to regulation by the Food and Drug Administration as
discussed under the Business of the Company. In the opinion of management,
regulation is not a material factor in the business operations.
(j) STATE THE NAMES OF ANY SUBSIDIARIES OF THE COMPANY, THEIR BUSINESS
PURPOSES AND OWNERSHIP, AND INDICATE WHICH ARE INCLUDED IN THE FINANCIAL
STATEMENTS ATTACHED HERETO. IF NOT INCLUDED, OR IF INCLUDED BUT NOT
CONSOLIDATED, PLEASE EXPLAIN.
The Company has no subsidiaries.
(k) SUMMARIZE THE MATERIAL EVENTS IN THE DEVELOPMENT OF THE COMPANY
(INCLUDING ANY MATERIAL MERGERS OR ACQUISITIONS) DURING THE PAST FIVE YEARS, OR
FOR WHATEVER LESSER PERIOD THE COMPANY HAS BEEN IN EXISTENCE. DISCUSS ANY
PENDING OR ANTICIPATED MERGERS, ACQUISITIONS, SPIN-OFFS OR RECAPITALIZATION. IF
THE COMPANY HAS RECENTLY UNDERGONE A STOCK SPLIT, STOCK DIVIDEND OR
RECAPITALIZATION IN ANTICIPATION OF THIS OFFERING, DESCRIBE (AND ADJUST
HISTORICAL PER SHARE FIGURES ELSEWHERE IN THIS PROSPECTUS ACCORDINGLY).
The Company has not made any acquisitions or spin-offs during the last five
years. There have been no dividends paid on the Common Stock. A
recapitalization is contemplated as a part of this offering and is summarized in
the attached Exhibit A, Tender Offer.
The Company in June, 1997, made a Tender Offer to its shareholders at a
price of $27 per share. A copy of the Tender Offer is attached as Exhibit A.
The following shares were tendered and will be redeemed out of the proceeds of
this offering:
[Insert upon completion of Tender Offer]
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Less than 30% of the shares are expected by management to tender, but the exact
figure will be included in the final Prospectus.
In June, 1997, the Company sold 4,125 preferred, $40 par value,
convertible, 6% non-cumulative shares. The total funds received was $165,000.
Each share may be converted into two common shares after July 1, 1999.
In September, 1994, the Company raised $255,175 in a private offering of
common stock at a price of $25 per share and issuance of warrants to purchase
5,103 shares of common stock at $25 per share. $217,405 in debt was retired
out of the proceeds of this offering.
In January, 1993, the Company accomplished a ten for one stock split. This
did not change the relative percentage of ownership of shares.
4. (a) IF THE COMPANY WAS NOT PROFITABLE DURING ITS LAST FISCAL YEAR, LIST
BELOW IN CHRONOLOGICAL ORDER THE EVENTS WHICH IN MANAGEMENT'S OPINION MUST OR
SHOULD OCCUR OR THE MILESTONES WHICH IN MANAGEMENT'S OPINION THE COMPANY MUST OR
SHOULD REACH IN ORDER FOR THE COMPANY TO BECOME PROFITABLE, AND INDICATE THE
EXPECTED MANNER OF OCCURRENCE OR THE EXPECTED METHOD BY WHICH THE COMPANY WILL
ACHIEVE THE MILESTONES.
EVENT OR EXPECTED MANNER OF DATE OR NUMBER OF MONTHS
MILESTONE OCCURRENCE OR METHOD OF AFTER RECEIPT OF PROCEEDS
ACHIEVEMENT WHEN SHOULD BE ACCOMPLISHED
Not applicable. The Company was profitable during the last fiscal year.
(b) STATE THE PROBABLE CONSEQUENCES TO THE COMPANY OF DELAYS IN ACHIEVING
EACH OF THE EVENTS OR MILESTONES WITHIN THE ABOVE TIME SCHEDULE, AND
PARTICULARLY THE EFFECT OF ANY DELAYS UPON THE COMPANY'S LIQUIDITY IN VIEW OF
THE COMPANY'S THEN ANTICIPATED LEVEL OF OPERATING COSTS. (SEE QUESTION NOS. 11
AND 12.)
Not applicable.
NOTE: AFTER REVIEWING THE NATURE AND TIMING OF EACH EVENT OR MILESTONE,
POTENTIAL INVESTORS SHOULD REFLECT UPON WHETHER ACHIEVEMENT OF EACH
WITHIN THE ESTIMATED TIME FRAME IS REALISTIC AND SHOULD ASSESS THE
CONSEQUENCES OF DELAYS OR FAILURE OF ACHIEVEMENT IN MAKING AN
INVESTMENT DECISION.
As to Question 4, if more than five events or milestones exist, add
additional lines as necessary. A "milestone" is a significant point in the
Company's development or an obstacle which the Company must overcome in order to
become profitable.
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OFFERING PRICE FACTORS
IF THE SECURITIES OFFERED ARE COMMON STOCK, OR ARE EXERCISABLE FOR OR
CONVERTIBLE INTO COMMON STOCK, THE FOLLOWING FACTORS MAY BE RELEVANT TO THE
PRICE AT WHICH THE SECURITIES ARE BEING OFFERED.
5. WHAT WERE NET, AFTER-TAX EARNINGS FOR THE LAST FISCAL YEAR?
TOTAL: $140,048 ($1.90 per share).
6. IF THE COMPANY HAD PROFITS, SHOW OFFERING PRICE AS A MULTIPLE OF EARNINGS.
ADJUST TO REFLECT FOR ANY STOCK SPLITS OR RECAPITALIZATION, AND USE CONVERSION
OR EXERCISE PRICE IN LIEU OF OFFERING PRICE, IF APPLICABLE.
OFFERING PRICE PER SHARE = $40/$1.90 = 21.1
----------------------------------
NET AFTER-TAX EARNINGS LAST YEAR PER SHARE
7. (a) WHAT IS THE NET TANGIBLE BOOK VALUE OF THE COMPANY? (IF DEFICIT, SHOW
IN PARENTHESIS.) FOR THIS PURPOSE, NET TANGIBLE BOOK VALUE MEANS TOTAL ASSETS
(EXCLUSIVE OF COPYRIGHTS, PATENTS, GOODWILL, RESEARCH AND DEVELOPMENT COSTS AND
SIMILAR INTANGIBLE ITEMS) MINUS TOTAL LIABILITIES.
$478,846 ($6.26 per share) (Based on historical net tangible book
value and shares of common stock outstanding as of March 31, 1997, adjusted
for the net proceeds from the issuance of preferred stock in June, 1997, and
assuming conversion of such preferred stock into shares of common stock.)
IF THE NET TANGIBLE BOOK VALUE PER SHARE IS SUBSTANTIALLY LESS THAN
THIS OFFERING (OR EXERCISE OR CONVERSION) PRICE PER SHARE, EXPLAIN THE
REASONS FOR THE VARIATION.
The net tangible book value is substantially less than the offering price.
Fixed assets are not a significant factor in the business because the Company
out-sources its manufacturing. The tooling and molding are owned by the
Company, but the fixed assets associated with the manufacturing process are not
held by the Company. The Company has expended its funds in building market
position and brand awareness.
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<PAGE>
The Company was a start-up for its first five years. As a start-up, the
Company invested resources in only product development and marketing. Operating
losses resulted in negative retained earnings.
The Company believes its present value is attributable to product quality,
name recognition, product functionality and market share of the rigid ankle
brace segment of the market.
The Company expects to continue to minimize capital requirements by
out-sourcing and not acquiring tangible assets, but concentrating on building
sales and earnings.
(b) STATE THE DATES ON WHICH THE COMPANY SOLD OR OTHERWISE ISSUED
SECURITIES DURING THE LAST 12 MONTHS, THE AMOUNT OF SUCH SECURITIES SOLD, THE
NUMBER OF PERSONS TO WHOM THEY WERE SOLD, ANY RELATIONSHIP OF SUCH PERSONS TO
THE COMPANY AT THE TIME OF SALE, THE PRICE AT WHICH THEY WERE SOLD AND, IF NOT
SOLD FOR CASH, A CONCISE DESCRIPTION OF THE CONSIDERATION. (EXCLUDE BANK DEBT.)
The Company has a class of preferred stock which has a $40 par and
liquidation value per share, carries a 6% non-cumulative dividend, and each
share is convertible after July 1, 1999 into two shares of the Company's
Common Stock. A total of 100,000 of such preferred shares are authorized,
and a total of 4,125 shares of the preferred stock are issued and
outstanding. The 4,125 shares were sold at a cash sale price of $40 per
share on June 10, 1997 . The preferred shares were sold to six accredited
investors, all of whom are either stockholders, officers or directors of the
Company prior to the filing of this registration statement. The proceeds
from this preferred stock offering are to be used as seed money for the
development of a catalog sales division. The preferred stock offering was
an exempt offering under Rule 506 of Regulation D of the Securities Act.
During the past 12 months, the Company has issued to employees and
consultants to the Company options to purchase 4,000 and 300 shares of common
stock, respectively, at an exercise price of $25 per share.
8. (a) WHAT PERCENTAGE OF THE OUTSTANDING SHARES OF THE COMPANY WILL THE
INVESTORS IN THIS OFFERING HAVE? (ASSUME EXERCISE OF OUTSTANDING OPTIONS,
WARRANTS OR RIGHTS AND CONVERSION OF CONVERTIBLE SECURITIES, IF THE RESPECTIVE
EXERCISE OR CONVERSION PRICES ARE AT OR LESS THAN THE OFFERING PRICE. ALSO
ASSUME EXERCISE OF ANY OPTIONS, WARRANTS OR RIGHTS AND CONVERSIONS OF ANY
CONVERTIBLE SECURITIES OFFERED IN THIS OFFERING.)
IF THE MINIMUM IS SOLD: 37.0%
IF THE MAXIMUM IS SOLD: 56.7%
This assumes that 19,729 shares are tendered pursuant to the Tender Offer.
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<PAGE>
(b) WHAT POST-OFFERING VALUE IS MANAGEMENT IMPLICITLY ATTRIBUTING TO THE
ENTIRE COMPANY BY ESTABLISHING THE PRICE PER SECURITY SET FORTH ON THE COVER
PAGE (OR EXERCISE OR CONVERSION PRICE IF COMMON STOCK IS NOT OFFERED)? (TOTAL
OUTSTANDING SHARES AFTER OFFERING TIMES OFFERING PRICE, OR EXERCISE OR
CONVERSION PRICE IF COMMON STOCK IS NOT OFFERED.)
IF THE MINIMUM IS SOLD: Approximately $4,850,000
IF THE MAXIMUM IS SOLD: Approximately $7,050,000
(These figures assume all preferred shares are converted, all options are
exercised [and cash received], but does not assume any shares are tendered under
the Tender Offer.)
(FOR ABOVE PURPOSES, ASSUME OUTSTANDING OPTIONS ARE EXERCISED IN
DETERMINING "SHARES" IF THE EXERCISE PRICES ARE AT OR LESS THAN THE
OFFERING PRICE. ALL CONVERTIBLE SECURITIES, INCLUDING OUTSTANDING
CONVERTIBLE SECURITIES, SHALL BE ASSUMED CONVERTED AND ANY OPTIONS,
WARRANTS OR RIGHTS IN THIS OFFERING SHALL BE ASSUMED EXERCISED.)
*THESE VALUES ASSUME THAT THE COMPANY'S CAPITAL STRUCTURE WOULD BE
CHANGED TO REFLECT ANY CONVERSIONS OF OUTSTANDING CONVERTIBLE
SECURITIES AND ANY USE OF OUTSTANDING SECURITIES AS PAYMENT IN THE
EXERCISE OF OUTSTANDING OPTIONS, WARRANTS OR RIGHTS INCLUDED IN THE
CALCULATION. THE TYPE AND AMOUNT OF CONVERTIBLE OR OTHER SECURITIES
THUS ELIMINATED WOULD BE:
19,703 shares are under stock options and warrants.
8,250 shares are subject to conversion from the preferred shares.
THESE VALUES ALSO ASSUME AN INCREASE IN CASH IN THE COMPANY BY THE AMOUNT
OF ANY CASH PAYMENTS THAT WOULD BE MADE UPON CASH EXERCISE OF OPTIONS, WARRANTS
OR RIGHTS INCLUDED IN THE CALCULATIONS. THE AMOUNT OF SUCH CASH WOULD BE:
Approximately $500,000
NOTE: AFTER REVIEWING THE ABOVE, POTENTIAL INVESTORS SHOULD CONSIDER WHETHER
OR NOT THE OFFERING PRICE (OR EXERCISE OR CONVERSION PRICE, IF
APPLICABLE) FOR THE SECURITIES IS APPROPRIATE AT THE PRESENT STAGE OF
THE COMPANY'S DEVELOPMENT.
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<PAGE>
USE OF PROCEEDS
9. (a) THE FOLLOWING TABLE SETS FORTH THE USE OF THE PROCEEDS FROM THIS
OFFERING:
<TABLE>
<CAPTION>
If Minimum If Maximum
Sold Sold
---------- ----------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Total Proceeds $1,800,000 100.0% $4,000,000 100.0%
LESS: OFFERING EXPENSES
Commissions and Finders Fee 0.0 0.0% 0.0 0%
Legal & Accounting 100,000 5.6% 100,000 2.5%
Copying & Advertising 10,000 0.5% 10,000 0.2%
Other (Specify):
Registration Fees 6,212 0.3% 6,212 0.2%
Escrow Fees 1,000 0.1% 1,000 0.0%
-------- ---- --------- ----
Total 117,212 6.5% 117,212 2.9%
-------- ---- --------- ----
Net Proceeds from Offering 1,682,788 93.5% 3,882,788 97.1%
Use of Net Proceeds
Debt Repayment 79,495 4.7% 79,495 2.0%
Fixed Assets 981,000 58.3% 981,000 25.3%
Recapitalization (1) 533,000 31.7% 533,000 13.7%
Working Capital 89,293 5.3% 2,289,293 59.0%
-------- ---- --------- -----
Total Use of Net Proceeds: $1,682,788 100.0% $3,882,788 100.0%
</TABLE>
(1) This figure assumes tender of an estimated 19,729 shares of the
Company's common stock at $27/share.
(B) IF THERE IS NO MINIMUM AMOUNT OF PROCEEDS THAT MUST BE RAISED BEFORE
THE COMPANY MAY USE THE PROCEEDS OF THE OFFERING, DESCRIBE THE ORDER OF PRIORITY
IN WHICH THE PROCEEDS SET FORTH ABOVE IN THE COLUMN "IF MAXIMUM SOLD" WILL BE
USED.
Not Applicable.
NOTE: AFTER REVIEWING THE PORTION OF THE OFFERING ALLOCATED TO THE PAYMENT
OF OFFERING EXPENSES, AND TO THE IMMEDIATE PAYMENT TO MANAGEMENT AND
PROMOTERS OF ANY FEES, REIMBURSEMENTS, PAST SALARIES OR SIMILAR
PAYMENTS, A POTENTIAL INVESTOR SHOULD CONSIDER WHETHER THE REMAINING
PORTION OF HIS INVESTMENT, WHICH WOULD BE THAT PART AVAILABLE FOR
FUTURE DEVELOPMENT OF THE COMPANY'S BUSINESS AND OPERATIONS, WOULD BE
ADEQUATE.
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<PAGE>
10. (a) IF MATERIAL AMOUNTS OF FUNDS FROM SOURCES OTHER THAN THIS OFFERING ARE
TO BE USED IN CONJUNCTION WITH THE PROCEEDS FROM THIS OFFERING, STATE THE
AMOUNTS AND SOURCES OF SUCH OTHER FUNDS, AND WHETHER FUNDS ARE FIRM OR
CONTINGENT. IF CONTINGENT, EXPLAIN.
None
(b) IF ANY MATERIAL PART OF THE PROCEEDS ARE TO BE USED TO DISCHARGE
INDEBTEDNESS, DESCRIBE THE TERMS OF SUCH INDEBTEDNESS, INCLUDING INTEREST RATES.
IF THE INDEBTEDNESS TO BE DISCHARGED WAS INCURRED WITHIN THE CURRENT OR PREVIOUS
FISCAL YEAR, DESCRIBE THE USE OF THE PROCEEDS OF SUCH INDEBTEDNESS.
$79,495 of the proceeds will be used to repay a term loan due Bank One in
September, 2000, with interest of 1% over the bank's index rate, which loan is
guaranteed by several of the shareholders.
(c) IF ANY MATERIAL AMOUNT OF THE PROCEEDS ARE TO BE USED TO ACQUIRE
ASSETS, OTHER THAN IN THE ORDINARY COURSE OF BUSINESS, BRIEFLY DESCRIBE AND
STATE THE COST OF THE ASSETS AND OTHER MATERIAL TERMS OF THE ACQUISITIONS. IF
THE ASSETS ARE TO BE ACQUIRED FROM OFFICERS, DIRECTORS, EMPLOYEES OR PRINCIPAL
STOCKHOLDERS OF THE COMPANY OR THEIR ASSOCIATES, GIVE THE NAMES OF THE PERSONS
FROM WHOM THE ASSETS ARE TO BE ACQUIRED AND SET FORTH THE COST TO THE COMPANY,
THE METHOD FOLLOWED IN DETERMINING THE COST, AND ANY PROFIT TO SUCH PERSONS.
All proceeds will be used to acquire assets in the ordinary course of
business and no assets are being acquired from officers, directors, principal
shareholders or their associates, except that a portion of the proceeds will be
used to fund the Tender Offer, a copy of which is attached as Exhibit A.
(d) IF ANY AMOUNT OF THE PROCEEDS ARE TO BE USED TO REIMBURSE ANY OFFICER,
DIRECTOR, EMPLOYEE OR STOCKHOLDER FOR SERVICES ALREADY RENDERED, ASSETS
PREVIOUSLY TRANSFERRED, OR MONIES LOANED OR ADVANCED, OR OTHERWISE, EXPLAIN:
$79,495 of the proceeds will be used to repay a term loan due Bank One in
September of 2000 with an interest rate of 1% over the bank's index rate, which
loan is guaranteed by several of the shareholders.
11. INDICATE WHETHER THE COMPANY IS HAVING OR ANTICIPATES HAVING WITHIN THE
NEXT 12 MONTHS ANY CASH FLOW OR LIQUIDITY PROBLEMS AND WHETHER OR NOT IT IS IN
DEFAULT OR IN BREACH OF ANY NOTE, LOAN, LEASE OR OTHER INDEBTEDNESS OR FINANCING
ARRANGEMENT REQUIRING THE COMPANY TO MAKE PAYMENTS. INDICATE IF A SIGNIFICANT
AMOUNT OF THE COMPANY'S TRADE PAYABLES HAVE NOT BEEN PAID WITHIN THE STATED
TRADE TERM. STATE WHETHER THE COMPANY IS SUBJECT TO ANY UNSATISFIED JUDGMENTS,
LIENS OR SETTLEMENT OBLIGATIONS AND THE AMOUNTS THEREOF. INDICATE THE COMPANY'S
PLANS TO RESOLVE ANY SUCH PROBLEMS.
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<PAGE>
The Company does not anticipate any cash flow or liquidity problems over
the next twelve months. The Company is not in default or breach of any note,
lease or other financing arrangement. The Company's trade payables are current.
There are no unsatisfied judgments, liens, or settlement obligations.
12. INDICATE WHETHER PROCEEDS FROM THIS OFFERING WILL SATISFY THE COMPANY'S
CASH REQUIREMENTS FOR THE NEXT 12 MONTHS AND WHETHER IT WILL BE NECESSARY TO
RAISE ADDITIONAL FUNDS. STATE THE SOURCE OF ADDITIONAL FUNDS, IF KNOWN.
The offering proceeds will satisfy the Company's cash needs for the next
twelve months in developing and implementing its business plan. However, if
only the minimum number of shares are sold, the Company will be required to
utilize existing working capital or funds from its existing line of credit (on
which the balance is currently zero) for funds to implement the business plan.
Significant additional funds will be required in future years to implement
growth and expansion plans.
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CAPITALIZATION
13. INDICATE THE CAPITALIZATION OF THE COMPANY AS OF THE MOST RECENT BALANCE
SHEET DATE (ADJUSTED TO REFLECT ANY SUBSEQUENT STOCK SPLITS, STOCK
DIVIDENDS, RECAPITALIZATION OR REFINANCING) AND AS ADJUSTED TO REFLECT THE
SALE OF THE MINIMUM AND MAXIMUM AMOUNT OF SECURITIES IN THIS OFFERING AND
THE USE OF THE NET PROCEEDS THEREFROM:
The following table sets forth the actual capitalization of the Company as
of March 31, 1997, and as adjusted to give effect to: (a) the issuance and sale
by the Company of the minimum and maximum number of shares of common stock in
this offering (45,000 and 100,000 shares, respectively) and the application of
the net proceeds therefrom and (b) the issuance of shares of convertible
preferred stock in June, 1997. This table should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Amount Outstanding
----------------------------------------
As of: As Adjusted
3/31 /97 Minimum Maximum
-------- ------- ----------
<S> <C> <C> <C>
Debt:
Short-term debt (average interest rate ____%) $ 0 $ 0 $ 0
---------- ---------- ----------
Long-term debt (average interest rate 9.5%) (1) $ 79,495 $ 0 $ 0
---------- ---------- ----------
Total debt $ 79,495 $ 0 $ 0
---------- ---------- ----------
Stockholders equity (deficit):
Preferred Stock-par value
(by class of preferred in order of
preferences)
Convertible Preferred Stock,
$40 par value amd liquidation
value per share, authorized
shares: 100,000, outstanding
shares: 4,125, as adjusted (2) $ 0 $ 165,000 $ 165,000
----------
Common stock, no par value,
Authorized shares: 2,000,000,
issued and outstanding shares: 68,217 (as
adjusted 113,217 minimum,
168,217 maximum) (1) $1,048,315 $2,118,608 $4,318,608
Additional paid in capital $ 0 $ 0 $ 0
---------- ---------- ----------
30
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Retained earnings (deficit) $(669,835) $(669,835) $(669,835)
---------- ---------- ----------
Total Stockholders equity (deficit) $ 378,480 $1,613,773 $3,813,773
---------- ---------- ----------
Total Capitalization $ 457,975 $1,613,773 $3,813,773
---------- ---------- ----------
</TABLE>
(1) Reflects the sale of the minimum and maximum amount of common stock in this
offering at $40 per share and the estimated use of proceeds of : a)
retirement of long-term debt of $79,495; b) the tendering of an estimated
19,729 shares of the Company's common stock at $27/share, pursuant to the
Tender Offer; and c) estimated expenses of the offering of $117,212.
(2) In June, 1997, the Company issued the preferred stock for cash, which
shares are each convertible after July 1, 1999 into two shares of common
stock.
31
<PAGE>
NUMBER OF PREFERRED SHARES
AUTHORIZED TO BE OUTSTANDING:
NUMBER OF PAR VALUE
CLASS OF PREFERRED SHARES PER SHARE
- ------------------ ------ ---------
ONE CLASS 100,000 40.00
NUMBER OF COMMON SHARES AUTHORIZED: 2,000,000 shares. Par or stated value per
share, if any:
None.
NUMBER OF COMMON SHARES RESERVED TO MEET CONVERSION REQUIREMENTS OR FOR THE
ISSUANCE UPON EXERCISE OF OPTIONS, WARRANTS OR RIGHTS: 19,703 shares to meet
options outstanding and 8,250 shares to meet conversion requirements.
DESCRIPTION OF SECURITIES
14. THE SECURITIES BEING OFFERED HEREBY ARE:
[X] Common Stock
[ ] Preferred or Preference Stock
[ ] Notes or Debentures
[ ] Units of two or more types of securities, composed of: ______________
[ ] Other ___________________________________
15. THESE SECURITIES HAVE:
Yes No
[X] [ ] Cumulative voting rights
[ ] [X] Other special voting rights
[ ] [X] Preemptive rights to purchase in new issues of shares
[ ] [X] Preference as to dividends or interest
[ ] [X] Preference upon liquidation
[ ] [X] Other special rights or preferences (specify): ____
Explain: _______________________________
16. ARE THE SECURITIES CONVERTIBLE? ( ) Yes (X) No
32
<PAGE>
IF SO, STATE CONVERSION PRICE OR FORMULA. N/A
DATE WHEN CONVERSION BECOMES EFFECTIVE: / /
DATE WHEN CONVERSION EXPIRES: / /
17. (a) IF THE SECURITIES ARE NOTES OR OTHER TYPES OF DEBT SECURITIES: Not
applicable.
(1) WHAT IS THE INTEREST RATE? N/A %.
IF INTEREST RATE IS VARIABLE OR MULTIPLE RATES, DESCRIBE: Not
Applicable.
(2) WHAT IS THE MATURITY DATE? N/A
IF SERIAL MATURITY DATES, DESCRIBE: Not Applicable.
(3) IS THERE A MANDATORY SINKING FUND? ( ) (X) No. Describe
Not Applicable.
(4) IS THERE A TRUST INDENTURE? ( ) Yes (X) No
NAME, ADDRESS AND TELEPHONE NUMBER OF TRUSTEE: Not Applicable.
(5) ARE THE SECURITIES CALLABLE OR SUBJECT TO REDEMPTION?
( ) Yes (X) No. DESCRIBE, INCLUDING REDEMPTION PRICES:
Not Applicable.
(6) ARE THE SECURITIES COLLATERALIZED BY REAL OR PERSONAL PROPERTY?
( ) Yes (X) No. DESCRIBE: Not Applicable.
(7) IF THESE SECURITIES ARE SUBORDINATED IN RIGHT OF PAYMENT OF
INTEREST OR PRINCIPAL, EXPLAIN THE TERMS OF SUCH SUBORDINATION.
Not applicable.
HOW MUCH CURRENTLY OUTSTANDING INDEBTEDNESS OF THE COMPANY IS SENIOR
TO THE SECURITIES IN RIGHT OF PAYMENT OF INTEREST OR PRINCIPAL? Not
applicable.
HOW MUCH INDEBTEDNESS SHARES IN RIGHT OF PAYMENT ON AN EQUIVALENT
(PARI PASSU) BASIS? $0.00
HOW MUCH INDEBTEDNESS IS JUNIOR (SUBORDINATED) TO THE SECURITIES?
$0.00
33
<PAGE>
(b) IF NOTES OR OTHER TYPES OF DEBT SECURITIES ARE BEING OFFERED AND THE
COMPANY HAD EARNINGS DURING ITS LAST FISCAL YEAR, SHOW THE RATIO OF EARNINGS TO
FIXED CHARGES ON AN ACTUAL AND PRO FORMA BASIS FOR THAT FISCAL YEAR. "EARNINGS"
MEANS PRETAX INCOME FROM CONTINUING OPERATIONS PLUS FIXED CHARGES AND
CAPITALIZED INTEREST. "FIXED CHARGES" MEANS INTEREST (INCLUDING CAPITALIZED
INTEREST), AMORTIZATION OF DEBT DISCOUNT, PREMIUM AND EXPENSE, PREFERRED STOCK
DIVIDEND REQUIREMENTS OF MAJORITY OWNED SUBSIDIARY, AND SUCH PORTION OF RENTAL
EXPENSE AS CAN BE DEMONSTRATED TO BE REPRESENTATIVE OF THE INTEREST FACTOR IN
THE PARTICULAR CASE. THE PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES SHOULD
INCLUDE INCREMENTAL INTEREST EXPENSE AS A RESULT OF THE OFFERING OF THE NOTES OR
OTHER DEBT SECURITIES.
Not Applicable.
NOTE: CARE SHOULD BE EXERCISED IN INTERPRETING THE SIGNIFICANCE OF THE RATIO
OF EARNINGS TO FIXED CHARGES AS A MEASURE OF THE "COVERAGE" OF DEBT
SERVICE, AS THE EXISTENCE OF EARNINGS DOES NOT NECESSARILY MEAN THAT
THE COMPANY'S LIQUIDITY AT ANY GIVEN TIME WILL PERMIT PAYMENT OF DEBT
SERVICE REQUIREMENTS TO BE TIMELY MADE. SEE QUESTION NOS. 11 AND 12.
SEE ALSO THE FINANCIAL STATEMENTS AND ESPECIALLY THE STATEMENT OF CASH
FLOWS.
18. IF SECURITIES ARE PREFERENCE OR PREFERRED STOCK: Not Applicable.
ARE UNPAID DIVIDENDS CUMULATIVE? ( ) Yes ( ) No
ARE SECURITIES CALLABLE? ( ) Yes ( ) No Explain:
NOTE: ATTACH TO THIS PROSPECTUS COPIES OR A SUMMARY OF THE CHARTER, BYLAW OR
CONTRACTUAL PROVISION OR DOCUMENT THAT GIVES RISE TO THE RIGHTS OF
HOLDERS OF PREFERRED OR PREFERENCE STOCK, NOTES OR OTHER SECURITIES
BEING OFFERED.
19. IF SECURITIES ARE CAPITAL STOCK OF ANY TYPE, INDICATE RESTRICTIONS ON
DIVIDENDS UNDER LOAN OR OTHER FINANCING ARRANGEMENTS OR OTHERWISE:
Under the terms of the term loan described above, the Company has no
specific restrictions on dividends except as implied by covenants on debt to
worth ratio and net worth. The net worth covenant requires a tangible net worth
of $150,000 as of June 30, 1996 and $200,000 thereafter. The Company had a
tangible net worth of $378,480 on March 31,1997. It is management's intention
to repay this debt out of proceeds from this offering.
20. CURRENT AMOUNT OF ASSETS AVAILABLE FOR PAYMENT OF DIVIDENDS (IF DEFICIT
MUST BE FIRST MADE UP, SHOW DEFICIT IN PARENTHESIS): $100,497 as of
3/31/97
34
<PAGE>
PLAN OF DISTRIBUTION
21. THE SELLING AGENTS (THAT IS, THE PERSONS SELLING THE SECURITIES AS AGENT
FOR THE COMPANY FOR A COMMISSION OR OTHER COMPENSATION) IN THIS OFFERING
ARE: NONE. (SEE RESPONSE PROVIDED TO QUESTION 24.)
22. DESCRIBE ANY COMPENSATION TO SELLING AGENTS, OR FINDERS, INCLUDING CASH,
SECURITIES, CONTRACTS OR OTHER CONSIDERATION IN ADDITION TO THE CASH
COMMISSION SET FORTH AS A PERCENT OF THE OFFERING PRICE ON THE COVER PAGE
OF THIS PROSPECTUS. ALSO INDICATE WHETHER THE COMPANY WILL INDEMNIFY THE
SELLING AGENTS OR FINDERS AGAINST LIABILITIES UNDER THE SECURITIES LAWS.
("FINDERS" ARE PERSONS WHO FOR COMPENSATION ACT AS INTERMEDIARIES IN
OBTAINING SELLING AGENTS OR OTHERWISE MAKING INTRODUCTIONS IN FURTHERANCE
OF THIS OFFERING.)
There are no selling agents or finders involved with this offering. All
sales are being conducted by Officers and Directors of the Company as
described in response to question 24 below. Those Officers and Directors
involved as Agents on behalf of the Company in consummating sales of the
securities described herein will not receive any form of additional
consideration for their efforts in respect to this offering.
23. DESCRIBE ANY MATERIAL RELATIONSHIPS BETWEEN ANY OF THE SELLING AGENTS OR
FINDERS AND THE COMPANY OR ITS MANAGEMENT.
There are no selling agents or finders involved in this offering.
NOTE: AFTER REVIEWING THE AMOUNT OF COMPENSATION TO THE SELLING AGENTS OR
FINDERS FOR SELLING THE SECURITIES, AND THE NATURE OF ANY RELATIONSHIP BETWEEN
THE SELLING AGENTS OR FINDERS AND THE COMPANY, A POTENTIAL INVESTOR SHOULD
ASSESS THE EXTENT TO WHICH IT MAY BE INAPPROPRIATE TO RELY UPON ANY
RECOMMENDATION BY THE SELLING AGENTS OR FINDERS TO BUY THE SECURITIES.
24. IF THIS OFFERING IS NOT BEING MADE THROUGH SELLING AGENTS, THE NAMES OF
PERSONS AT THE COMPANY THROUGH WHICH THIS OFFERING IS BEING MADE:
NAME: Gary G. Herzberg NAME: Glen R. Snow
ADDRESS: 509 Barret Avenue ADDRESS: 509 Barret Avenue
Louisville, Kentucky Louisville, Kentucky
Telephone No.(502) 582-2655 Telephone No. (502) 582-2655
NAME: Andrew Pfeifer NAME: Henry H. Porter, Jr.
ADDRESS: 509 Barret Avenue ADDRESS: 509 Barret Avenue
Louisville, Kentucky Louisville, Kentucky
Telephone No.(502) 582-2655 Telephone No.(502) 582-2655
35
<PAGE>
25. IF THIS OFFERING IS LIMITED TO A SPECIAL GROUP, SUCH AS EMPLOYEES OF THE
COMPANY, OR IS LIMITED TO A CERTAIN NUMBER OF INDIVIDUALS (AS REQUIRED TO
QUALIFY UNDER SUBCHAPTER S OF THE INTERNAL REVENUE CODE) OR IS SUBJECT TO
ANY OTHER LIMITATIONS, DESCRIBE THE LIMITATIONS AND ANY RESTRICTIONS ON
RESALE THAT APPLY:
This offering is not limited to any special group of individuals and there
are no restrictions on the resale of shares issued through this offering.
(See response provided to question 27 with respect to the voluntary
restriction placed on certain pre-offering shareholders.)
WILL THE CERTIFICATES BEAR A LEGEND NOTIFYING HOLDERS OF SUCH RESTRICTIONS?
( ) Yes (X) No
26. (a) NAME, ADDRESS AND TELEPHONE NUMBER OF INDEPENDENT BANK OR SAVINGS AND
LOAN ASSOCIATION OR OTHER SIMILAR DEPOSITORY INSTITUTION ACTING AS
ESCROW AGENT IF PROCEEDS ARE ESCROWED UNTIL MINIMUM PROCEEDS ARE
RAISED:
Bank One Kentucky
416 West Jefferson Street - 4th Floor
Louisville, Kentucky 40202
(502) 566-2117
Attn: Bette J. Purucker
(b) DATE AT WHICH FUNDS WILL BE RETURNED BY ESCROW AGENT IF MINIMUM
PROCEEDS ARE NOT RAISED:
180 days after the registration of this prospectus is effective.
WILL INTEREST ON PROCEEDS DURING ESCROW PERIOD BE PAID TO INVESTORS?
( ) Yes (X) No
27. EXPLAIN THE NATURE OF ANY RESALE RESTRICTIONS ON PRESENTLY OUTSTANDING
SHARES, AND WHEN THOSE RESTRICTIONS WILL TERMINATE, IF THIS CAN BE DETERMINED:
None on common shares. The 4,125 preferred shares outstanding may be
transferred only upon receipt of an opinion of counsel that such transfer will
not violate any securities laws; such shares are convertible into 8,250 shares
of common stock after July 1, 1999.
NOTE: EQUITY INVESTORS SHOULD BE AWARE THAT UNLESS THE COMPANY IS ABLE TO
COMPLETE A FURTHER PUBLIC OFFERING OR THE COMPANY IS ABLE TO BE SOLD
FOR CASH OR MERGED WITH A PUBLIC COMPANY THAT THEIR INVESTMENT IN THE
COMPANY MAY BE ILLIQUID INDEFINITELY.
36
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS
28. IF THE COMPANY HAS WITHIN THE LAST FIVE-YEARS PAID DIVIDENDS, MADE
DISTRIBUTIONS UPON ITS STOCK OR REDEEMED ANY SECURITIES, EXPLAIN HOW MUCH AND
WHEN:
The Company has not paid any dividends.
In June, 1997, the Company made a Tender Offer for its common shares.
____________ [number of shares to be determined after Tender Offer completed]
were tendered, and, therefore, if this offering is successful, the Company will
be obligated to redeem these shares at $27.00 per share, or a total
consideration of $________ [to be inserted after expiration of Tender Offer].
By written agreement dated January 31, 1995, the 4,900 shares owned by Mr.
Rick Peters were redeemed. Mr. Peters also agreed to a noncompetition covenant,
received a consulting fee through December, 1995, and a patent royalty on sales
of the Active Ankle. The royalty will cease when the patent expires in 2001.
OFFICERS AND KEY PERSONNEL OF THE COMPANY
29. CHIEF EXECUTIVE OFFICER: TITLE: President and CEO
NAME: Gary G. Herzberg AGE: 57
Office Street Address: TELEPHONE NO.:
509 Barret Avenue (502 ) 582-2655
Louisville, Kentucky 40204
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
GARY G. HERZBERG
Owner of 200 common shares of Active Ankle, 1,250 preferred shares and options
to purchase 7,100 shares of common stock.
MR. HERZBERG, age 57, was elected President and Chief Executive Officer of the
Company in April, 1994. He has served on the Board since February, 1994. Before
joining the Company, he was President and Chief Executive Officer of National
Records Management Corporation of Louisville, KY, where he currently serves as
Chairman of the Board and CEO. Prior to joining National Records, Mr. Herzberg
was a consultant affiliated with International Finance and Management Group,
Inc., Minneapolis, MN, specializing in planning, financial and project
management. From 1977-1982 he was Vice President and Treasurer of BATUS, Inc.
Prior experience includes executive
37
<PAGE>
positions with General Mills, Inc., International Multifoods, Inc., Piper,
Jaffray and Hopwood, an executive on loan to the Minnesota and Kentucky State
Governments and a shipboard officer in the U.S. Navy. Mr. Herzberg is a
graduate of the U.S. Naval Academy and holds a Masters Degree in Industrial
Administration from Carnegie Mellon University.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 90%
30. CHIEF MARKETING OFFICER: TITLE: Senior Vice President
NAME: Glen R. Snow AGE: 47
Office Street Address: TELEPHONE NO.:
509 Barret Avenue (502) 582-2655
Louisville, Kentucky 40204
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
GLEN R. SNOW
Owner of 1,000 common shares of Active Ankle, 150 preferred shares and options
to purchase 4,000 shares of common stock.
MR. SNOW, age 47, is Senior Vice President of Marketing. He served as Vice
President, Sales and Marketing of the Company since 1990 and as a director since
April, 1995. He is a certified athletic trainer and has served as an athletic
trainer for Ball State University, The University of Washington, the Seattle
Seahawks Professional Football Team, and Floyd Central High School. He has
consulted with a variety of schools and teams on athletic training services and
facilities. Mr. Snow is active in the National Athletic Trainers Association
and the NATA Education and Research Committee. He has held district offices,
committee appointments as well as being named National High School Trainer of
the Year three times. He was recently inducted into the State of Indiana
Trainers Association Hall of Fame. Prior business experience includes positions
as Director of Corporate Development for Baxter Physical Therapy, a division of
Baxter International, and Development Director at Ball State University. Mr.
Snow holds Bachelor of Science and Master of Arts degrees from Ball State
University.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 100%
38
<PAGE>
31. CHIEF FINANCIAL OFFICER: TITLE: Chief Financial Officer
NAME: Ronald W. Schultz AGE: 64
Office Street Address: TELEPHONE NO.:
509 Barret Avenue (502) 582-2655
Louisville, Kentucky 40204
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
RONALD W. SCHULTZ
Owner of 6,640 common shares of Active Ankle, and options to purchase 500 shares
of common stock.
MR. SCHULTZ, age 64, is Chief Financial Officer, Treasurer and a founder of the
Company. He served as the Company's Chief Executive Officer and Treasurer from
1989 to 1993, Chief Financial Officer since June, 1995, and as a director since
1989. He was Chief Executive Officer for Innovative Computer Management
Systems, Inc., a computer software firm, from 1987 to 1988. From 1985 to 1987,
Mr. Schultz was President of Equine Dynamics Ltd., a start-up company in the
horse products industry that included four retail stores and three manufacturing
facilities. From 1985 to 1988, Mr. Schultz was also a part owner and Director
of JML Computers, Inc., a retail computer business. From 1956 to 1984, Mr.
Schultz held various executive positions in Finance, Marketing and Human
Resources Management with the General Electric Company. Mr. Schultz received
his MBA from Northwestern University in 1962, and his Bachelor of Business
Administration in 1954, from the University of Minnesota.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
Indicate amount of time to be spent on Company matters if less than full
time: 100%
32. OTHER KEY PERSONNEL:
(A) NAME: Andrew Pfeifer AGE: 40
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
531 Fairfield Dr. (502) 895-3336
Louisville, Kentucky 40206
39
<PAGE>
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
ANDREW PFEIFER
Owner of 3,906 common shares of Active Ankle, 1,250 preferred shares and
warrants to purchase 1,023 shares of common stock.
MR. PFEIFER, age 40, became a Director of the Company in 1992. He retired as a
Global Partner of AMVESCAP Plc. (NYSE:AVC), a global investment management
company, in 1997. Mr. Pfeifer's responsibilities included CFO, Treasurer,
account management, portfolio management and credit analysis for PRIMCO Capital
Management, Inc., an AMVESCAP member company. In 1985, Mr. Pfeifer co-founded
PRIMCO Capital Management, Inc., an investment management company which was
purchased by AMVESCAP Plc. in 1990. From 1974 to 1985, Mr. Pfeifer held
positions with SCA Services, Inc., Coopers & Lybrand and William M. Mercer, Inc.
He is a Chartered Financial Analyst (CFA), Certified Public Accountant (CPA),
and a Certified Employee Benefit Specialist (CEBS). Mr. Pfeifer received his
Bachelor of Science Degree from Indiana University Southeast in 1978.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 10%
OTHER KEY PERSONNEL:
(B) NAME: Henry H. Porter, Jr. AGE: 61
TITLE: Chairman of the Board
Office Street Address: TELEPHONE NO.:
5806 River Knolls Dr. (502) 426-4161
Louisville, Kentucky 40222
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
HENRY H. PORTER, JR.
Owner of 19,760 common shares of Active Ankle, 1,250 preferred shares and
warrants to purchase 2,000 shares of common stock.
40
<PAGE>
MR. PORTER, age 62, is Chairman of the Board. A founder of the Company, has
served as a Director and Chairman since the Company's incorporation in 1989. He
served as the Company's President from October, 1993 to April of 1994. Since
1980, Mr. Porter has been a professional director, private investor and self
employed consultant. From 1977 to 1980, he was Senior Vice President , Chief
Financial Officer, Director and Executive Committee member of Brown and
Williamson Industries, Inc. and its successor, BATUS, Inc. From 1962 to 1976,
Mr. Porter was with General Mills, Inc. and from 1969 to 1976 was its Vice
President Finance and Treasurer. Currently, Mr. Porter is a director of SEI
Corporation and several small private companies. Mr. Porter received a Master's
Degree in Business Administration from Harvard Graduate School of Business
Administration and a Bachelor of Arts degree from Yale University.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 10%
DIRECTORS OF THE COMPANY
33. NUMBER OF DIRECTORS: 8.
IF DIRECTORS ARE NOT ELECTED ANNUALLY, OR ARE ELECTED UNDER A VOTING TRUST
OR OTHER ARRANGEMENT, EXPLAIN: Not Applicable.
34. INFORMATION CONCERNING OUTSIDE OR OTHER DIRECTORS (I.E., THOSE NOT
DESCRIBED ABOVE):
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
EDUCATION (DEGREES, SCHOOLS, AND DATES):
NAME: John C. Nichols II AGE: 65
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
1510 North Wind Rd. (502) 896-4712
Louisville, Kentucky 40207
JOHN C. NICHOLS II
Owner of 5,900 common shares of Active Ankle.
Mr. Nichols, a founder of the Company, has served as a director since 1989.
Since 1984, he has been President of Northdel, Inc., a financial consulting and
equipment leasing firm. From 1974 to
41
<PAGE>
1984, Mr. Nichols was Senior Vice President and Chief Financial Officer of Conna
Corporation. From 1956 to 1974, Mr. Nichols was Vice President of the
Commercial Division of Citizens Fidelity Bank and Trust Company, Louisville,
Kentucky. Mr. Nichols received a Bachelor of Science Degree in Commerce from
the University of Kentucky and graduate degrees from Rutgers Graduate School of
Banking, the Columbia School of Banking and the Indiana Management School.
It is expected that Mr. Nichols will tender all of his shares pursuant to the
Tender Offer.
NAME: Douglas D. Stegner AGE: 68
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
1644 Cherokee Rd. (502) 458-8017
Louisville, Kentucky 40205
DOUGLAS D. STEGNER
Owner of 11,609 common shares of Active Ankle, and warrants to purchase 954
shares of common stock.
Mr. Stegner has served as a director of the Company since 1989. He is President
of Stegner Group, Inc., a real estate development firm, and Chairman of Stegner
Investment Associates, an investment advisory firm. He also serves on several
boards of charitable organizations in the Louisville area. Prior to a long
career of leadership in the employee benefit services profession, Mr. Stegner
attended graduate school at Butler University and received a Bachelor of
Business from the University of Wisconsin.
It is anticipated that Mr. Stegner will tender all of his shares pursuant to the
Tender Offer.
NAME: James T. Crain, Jr. AGE: 58
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
620 West Main St., #320 (502) 581-1148
Louisville, Kentucky 40202
JAMES T. CRAIN, JR.
Owner of no common shares of Active Ankle.
Mr. Crain has served as a director of the Company since 1992. He is
Executive Director of the Cralle Foundation and Day Enterprises. Joan Cralle
Day, the Principal of Day Enterprises, owns 6,982 common shares and warrants
to purchase 826 common shares of the Company. Mr. Crain, for eight years,
was Executive Vice President and Group Head of the Trust and Investment
Division of Liberty National Bank. Prior to joining Liberty National Bank,
Mr. Crain had, for 18 years, been associated with the Trust Departments of
United
42
<PAGE>
Kentucky Bank and Louisville Trust Company. Mr. Crain is a member of the Board
of Trustees of Lindsey-Wilson College and is Chairman of the Associates Board of
Georgetown College. Mr. Crain serves on the Board of Directors of Carman
Industries, NUMA Technologies, and several other small companies. Mr. Crain
received his B.A. degree from the University of Kentucky in 1960 and his J.D.
degree in 1963 from the University of Louisville.
35(a). HAVE ANY OF THE OFFICERS OR DIRECTORS EVER WORKED FOR OR MANAGED A
COMPANY (INCLUDING A SEPARATE SUBSIDIARY OR DIVISION OF A LARGER ENTERPRISE) IN
THE SAME BUSINESS AS THE COMPANY?
( ) YES (X) NO
Explain:
(b) IF ANY OF THE OFFICERS, DIRECTORS OR OTHER KEY PERSONNEL HAVE EVER
WORKED FOR OR MANAGED A COMPANY IN THE SAME BUSINESS OR INDUSTRY AS THE COMPANY
OR IN A RELATED BUSINESS OR INDUSTRY, DESCRIBE WHAT PRECAUTIONS, IF ANY,
(INCLUDING THE OBTAINING OF RELEASES OR CONSENTS FROM PRIOR EMPLOYERS) HAVE BEEN
TAKEN TO PRECLUDE CLAIMS BY PRIOR EMPLOYERS FOR CONVERSION OR THEFT OF TRADE
SECRETS, KNOW-HOW OR OTHER PROPRIETARY INFORMATION.
Not Applicable.
(c) IF THE COMPANY HAS NEVER CONDUCTED OPERATIONS OR IS OTHERWISE IN THE
DEVELOPMENT STAGE, INDICATE WHETHER ANY OF THE OFFICERS OR DIRECTORS HAS EVER
MANAGED ANY OTHER COMPANY IN THE START-UP OR DEVELOPMENT STAGE AND DESCRIBE THE
CIRCUMSTANCES, INCLUDING RELEVANT DATES.
Not Applicable.
(d) IF ANY OF THE COMPANY'S KEY PERSONNEL ARE NOT EMPLOYEES BUT ARE
CONSULTANTS OR OTHER INDEPENDENT CONTRACTORS, STATE THE DETAILS OF THEIR
ENGAGEMENT BY THE COMPANY.
Not Applicable.
(e) IF THE COMPANY HAS KEY MAN LIFE INSURANCE POLICIES ON ANY OF ITS
OFFICERS, DIRECTORS OR KEY PERSONNEL, EXPLAIN, INCLUDING THE NAMES OF THE
PERSONS INSURED, THE AMOUNT OF INSURANCE, WHETHER THE INSURANCE PROCEEDS ARE
PAYABLE TO THE COMPANY AND WHETHER THERE ARE ARRANGEMENTS THAT REQUIRE THE
PROCEEDS TO BE USED TO REDEEM SECURITIES OR PAY BENEFITS TO THE ESTATE OF THE
INSURED PERSON OR A SURVIVING SPOUSE.
Not Applicable.
36. IF A PETITION UNDER THE BANKRUPTCY ACT OR ANY STATE INSOLVENCY LAW WAS
FILED BY OR AGAINST THE COMPANY OR ITS OFFICERS, DIRECTORS OR OTHER KEY
PERSONNEL, OR A RECEIVER, FISCAL
43
<PAGE>
AGENT OR SIMILAR OFFICER WAS APPOINTED BY A COURT FOR THE BUSINESS OR PROPERTY
OF ANY SUCH PERSONS, OR ANY PARTNERSHIP IN WHICH ANY OF SUCH PERSONS WAS A
GENERAL PARTNER AT OR WITHIN THE PAST FIVE YEARS, OR ANY CORPORATION OR BUSINESS
ASSOCIATION OF WHICH ANY SUCH PERSON WAS AN EXECUTIVE OFFICER AT OR WITHIN THE
PAST FIVE YEARS, SET FORTH BELOW THE NAME OF SUCH PERSONS, AND THE NATURE AND
DATE OF SUCH ACTION.
None.
NOTE: AFTER REVIEWING THE INFORMATION CONCERNING THE BACKGROUND OF THE
COMPANY'S OFFICERS, DIRECTORS AND OTHER KEY PERSONNEL, POTENTIAL
INVESTORS SHOULD CONSIDER WHETHER OR NOT THESE PERSONS HAVE ADEQUATE
BACKGROUND AND EXPERIENCE TO DEVELOP AND OPERATE THIS COMPANY AND TO
MAKE IT SUCCESSFUL. IN THIS REGARD, THE EXPERIENCE AND ABILITY OF
MANAGEMENT ARE OFTEN CONSIDERED THE MOST SIGNIFICANT FACTORS IN THE
SUCCESS OF A BUSINESS.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
37. PRINCIPAL OWNERS OF THE COMPANY (THOSE WHO BENEFICIALLY OWN DIRECTLY OR
INDIRECTLY 10% OR MORE OF THE COMMON AND PREFERRED STOCK PRESENTLY OUTSTANDING)
STARTING WITH THE LARGEST COMMON STOCKHOLDER. INCLUDE SEPARATELY ALL COMMON
STOCK ISSUABLE UPON CONVERSION OF CONVERTIBLE SECURITIES (IDENTIFYING THEM BY
ASTERISK) AND SHOW AVERAGE PRICE PER SHARE AS IF CONVERSION HAS OCCURRED.
INDICATE BY FOOTNOTE IF THE PRICE PAID WAS FOR A CONSIDERATION OTHER THAN CASH
AND THE NATURE OF ANY SUCH CONSIDERATION.
<TABLE>
<CAPTION>
Average No. of Shares % if All
Price No. of % of Held After Offering Securities
Name Per Share Shares Held Total if All Securities Sold Sold
- ---- --------- ----------- ----- ---------------------- ----
<S> <C> <C> <C> <C> <C>
Douglas D. Stegner $16.28 12,563 13.1% 1,500 0.8%
Henry H. Porter, Jr.
(Preferred)* $20.00 2,500 2.6% 2,500 1.4%
Henry H. Porter, Jr.
(Common) $15.24 21,760 22.6% 21,760 12.3%
Henry H. Porter, Jr.
(Total) $15.75 24,260 25.2% 24,260 13.7%
Gary G. Herzberg $20.00 2,500 2.6% 2,500 1.4%
(Preferred)*
Gary G. Herzberg $25.00 7,300 7.6% 7,300 4.1%
(Common)
Gary G. Herzberg
(Total) $23.72 9,800 10.2% 9,800 5.5%
</TABLE>
NOTE: Shares shown above include shares of common stock outstanding as of
June 10, 1997, shares of common stock reserved for conversion of
preferred stock and shares of common stock reserved for exercise of
currently outstanding options and warrants. The number of shares
assumes 19,729 shares are tendered pursuant to the Tender Offer.
38. NUMBER OF SHARES BENEFICIALLY OWNED BY OFFICERS AND DIRECTORS AS A GROUP:
BEFORE OFFERING: 82,150 common shares (85.4% OF TOTAL OUTSTANDING)
AFTER OFFERING:
45
<PAGE>
a) ASSUMING MINIMUM SECURITIES SOLD:
67,341 common shares (55.4% of total outstanding)
b) ASSUMING MAXIMUM SECURITIES SOLD:
67,341 common shares (38.2% of total outstanding)
These figures assume that 14,809 shares will be tendered by directors or
officers pursuant to the Tender Offer. These figures include options and
warrants.
MANAGEMENT RELATIONSHIPS,
TRANSACTIONS AND REMUNERATION
39. (a) IF ANY OF THE OFFICERS, KEY PERSONNEL OR PRINCIPAL STOCKHOLDERS ARE
RELATED BY BLOOD OR MARRIAGE, PLEASE DESCRIBE.
The Company was sub-leasing office space from a business partially owned by
a stockholder of the Company until November 30, 1995. Rent expense for the
years ended June 30, 1996 and 1995 amounted to $4,600 and $11,565, respectively.
The Company owed certain stockholders during fiscal 1995 under notes
payable. Interest expense on these loans amounted to approximately $3,000 in
1995. The loans were repaid during fiscal 1995. In addition, the Company
incurred $4,105 and $7,384 in loan guarantee fees to certain stockholders during
1996 and 1995 respectively. Those loan guarantee fees continue until the
long-term debt is paid in full.
(b) IF THE COMPANY HAS MADE LOANS TO OR IS DOING BUSINESS WITH ANY
OF ITS OFFICERS, DIRECTORS, KEY PERSONNEL OR 10% STOCKHOLDERS, OR ANY OF
THEIR RELATIVES (OR ANY ENTITY CONTROLLED DIRECTLY OR INDIRECTLY BY ANY SUCH
PERSONS) WITHIN THE LAST TWO YEARS, OR PROPOSES TO DO SO WITHIN THE FUTURE,
EXPLAIN. (THIS INCLUDES SALES OR LEASE OF GOODS, PROPERTY OR SERVICES TO OR
FROM THE COMPANY, EMPLOYMENT OR STOCK PURCHASE CONTRACTS, ETC.) STATE THE
PRINCIPAL TERMS OF ANY SIGNIFICANT LOANS, AGREEMENTS, LEASES, FINANCING OR
OTHER ARRANGEMENTS.
None.
(c) IF ANY OF THE COMPANY'S OFFICERS, DIRECTORS, KEY PERSONNEL OR 10%
STOCKHOLDERS HAS GUARANTEED OR CO-SIGNED ANY OF THE COMPANY'S BANK DEBT OR OTHER
OBLIGATIONS, INCLUDING ANY INDEBTEDNESS TO BE RETIRED FROM THE PROCEEDS OF THIS
OFFERING, EXPLAIN AND STATE THE AMOUNTS INVOLVED.
46
<PAGE>
Certain shareholders have guaranteed a bank term loan at Bank One. The
guarantee fee is 3% annually. The balance due as of March 31, 1997, was
$79,495. This loan is expected to be paid from the proceeds of this offering.
40. (a) LIST ALL REMUNERATION BY THE COMPANY TO OFFICERS, DIRECTORS AND KEY
PERSONNEL FOR THE LAST FISCAL YEAR:
Cash,
Salary & Bonus Other Stock Options
Gary G. Herzberg
Chief Executive Officer $72,500 $15,869* 1,000
Glen R. Snow
Senior Vice President, $72,500 $ 125 1,000
Marketing
Ronald W. Schultz
Chief Financial Officer $39,500 $ 135 500
Total:
Directors as a group
(number of persons: 3) $184,500 $16,129 2,500
This is a deferral of salary pursuant to a written deferred compensation
agreement with Mr. Herzberg.
(b) IF REMUNERATION IS EXPECTED TO CHANGE OR HAS BEEN UNPAID IN PRIOR
YEARS, EXPLAIN:
Beginning in Fiscal Year 1997, non-management directors receive a fee of
$250.00 per meeting attended, which may be taken in cash or stock, plus
out-of-pocket expenses.
(c) IF ANY EMPLOYMENT AGREEMENTS EXIST OR ARE CONTEMPLATED, DESCRIBE:
No current employment agreements.
41. (a) NUMBER OF SHARES SUBJECT TO ISSUANCE UNDER PRESENTLY OUTSTANDING STOCK
PURCHASE AGREEMENTS, STOCK OPTIONS, WARRANTS OR RIGHTS: 19,703 shares are
subject to issuance under outstanding options and warrants. INDICATE WHICH HAVE
BEEN APPROVED BY SHAREHOLDERS. STATE THE EXPIRATION DATES, EXERCISE PRICES AND
OTHER BASIC TERMS FOR THESE SECURITIES:
47
<PAGE>
19,703 shares are subject to options or warrants. All options or
warrants are exercisable at $25/share. 6,000 are 10 year options, and the
remainder are five year options. All 5 year options expire in fiscal years
1998 through 2001. Gary G. Herzberg is the only person holding 10 year
options; he holds a total of 6,000 ten year options, 4,000 of which were
granted to him in 1994 and 2,000 in 1995; 20% of each grant becomes
exercisable each year after the grant date and expire ten years after the
grant date. The following are the persons who hold these options and warrants:
Henry H. Porter, Jr. 2,000
Douglas D. Stegner 954
Joan Cralle Day 826
Ronald W. Schultz 500
Andrew Pfeifer 1,023
Glen R. Snow 4,000
Gary G. Herzberg 7,100
Diane Lilly 1,000
Christina Wessling 500
Greg Deuser 200
Scott Morton 1,000
Jim Whitesel 300
Ron O'Neil 300
------
19,703
(b) NUMBER OF COMMON SHARES SUBJECT TO ISSUANCE UNDER EXISTING STOCK
PURCHASE OR OPTION PLANS BUT NOT YET COVERED BY OUTSTANDING PURCHASE,
AGREEMENTS, OPTIONS OR WARRANTS:
6,400 shares.
(c) DESCRIBE THE EXTENT TO WHICH FUTURE STOCK PURCHASE AGREEMENTS, STOCK
OPTIONS, WARRANTS OR RIGHTS MUST BE APPROVED BY SHAREHOLDERS.
There are no provisions in the Company's Articles of Incorporation or
Bylaws, or in any plan or contract, which require shareholder approval of such
future transactions. The Company is subject to general corporate legal
requirements governing the necessity to obtain shareholder approval of such
transactions.
42. IF THE BUSINESS IS HIGHLY DEPENDENT ON THE SERVICES OF CERTAIN KEY
PERSONNEL, DESCRIBE ANY ARRANGEMENT TO ASSURE THAT THESE PERSONS WILL REMAIN
WITH THE COMPANY AND NOT COMPETE UPON ANY TERMINATION: None.
NOTE: AFTER REVIEWING THE ABOVE, POTENTIAL INVESTORS SHOULD CONSIDER WHETHER
OR NOT THE COMPENSATION TO MANAGEMENT AND OTHER KEY PERSONNEL DIRECTLY
OR INDIRECTLY, IS REASONABLE IN VIEW OF THE PRESENT STAGE OF THE
COMPANY'S DEVELOPMENT.
48
<PAGE>
LITIGATION
43. DESCRIBE ANY PAST, PENDING OR THREATENED LITIGATION OR ADMINISTRATIVE
ACTION WHICH HAS HAD OR MAY HAVE A MATERIAL EFFECT UPON THE COMPANY'S
BUSINESS, FINANCIAL CONDITION OR OPERATIONS, INCLUDING ANY LITIGATION OR
ACTION INVOLVING THE COMPANY'S OFFICERS, DIRECTORS OR OTHER KEY PERSONNEL.
STATE THE NAMES OF THE PRINCIPAL PARTIES, THE NATURE AND CURRENT STATUS OF
THE MATTERS, AND AMOUNTS INVOLVED. GIVE AN EVALUATION BY MANAGEMENT OR
COUNSEL, TO THE EXTENT FEASIBLE, OF THE MERITS OF THE PROCEEDINGS OR
LITIGATION AND THE POTENTIAL IMPACT ON THE COMPANY'S BUSINESS, FINANCIAL
CONDITION, OR OPERATIONS.
Except as stated below, there is no litigation, past, pending or
threatened or administrative action which has had or may have a material
effect upon the Company's business, financial condition or operations,
including any litigation or action involving the Company's Officers,
Directors or other key personnel. The Company has received correspondence
which implies that the Company may have infringed on a patent held by a
competitor. The cost of defending any claim, if asserted, could have a
material adverse impact on the Company's financial statements. In view of
the facts that the competitor has known about the Company and its products
since 1984, and the competitor has been wholly non-responsive to the
Company's positions of non-infringement since December of 1992,
management is of the view that the probability that the competitor will
actually assert a claim against the Company is low. Based on these
facts, and further based on the advice of outside legal counsel that the
Company's products do not infringe on the competitor's patent, it is
management's opinion that the ultimate resolution of this matter will not
have a material adverse effect on the Company's financial statements.
FEDERAL TAX ASPECTS
44. IF THE COMPANY IS AN S CORPORATION UNDER THE INTERNAL REVENUE CODE OF 1986,
AND IT IS ANTICIPATED THAT ANY SIGNIFICANT TAX BENEFITS WILL BE AVAILABLE
TO INVESTORS IN THIS OFFERING, INDICATE THE NATURE AND AMOUNT OF SUCH
ANTICIPATED TAX BENEFITS AND THE MATERIAL RISKS OF THEIR DISALLOWANCE.
ALSO, STATE THE NAME, ADDRESS AND TELEPHONE NUMBER OF ANY TAX ADVISOR THAT
HAS PASSED UPON THESE TAX BENEFITS. ATTACH ANY OPINION OR ANY DESCRIPTION
OF THE TAX CONSEQUENCES OF AN INVESTMENT IN THE SECURITIES BY THE TAX
ADVISOR.
The Company is unaware of any tax advantages which would become available
as a result of an investment in the securities described herein.
NAME OF TAX ADVISOR: Not applicable
Address
------------------------------
--------------------------------------
Telephone No. ( )
-----------------------
NOTE: POTENTIAL INVESTORS ARE ENCOURAGED TO HAVE THEIR OWN PERSONAL TAX
CONSULTANT CONTACT THE TAX ADVISOR TO REVIEW DETAILS OF THE TAX BENEFITS AND THE
EXTENT THAT THE BENEFITS WOULD BE AVAILABLE AND ADVANTAGEOUS TO THE PARTICULAR
INVESTOR.
MISCELLANEOUS FACTORS
45. DESCRIBE ANY OTHER MATERIAL FACTORS, EITHER ADVERSE OR FAVORABLE, THAT WILL
OR COULD AFFECT THE COMPANY OR ITS BUSINESS (FOR EXAMPLE, DISCUSS ANY
DEFAULTS UNDER MAJOR
49
<PAGE>
CONTACTS, ANY BREACH OF BYLAW PROVISIONS, ETC.) OR WHICH ARE NECESSARY TO
MAKE ANY OTHER INFORMATION IN THIS DISCLOSURE DOCUMENT NOT MISLEADING OR
INCOMPLETE.
The Company is unaware of any information, either adverse or favorable
including any defaults under major contracts, breach of bylaws or any other
items which would need to be provided to make the information contained
within this Disclosure Document not misleading or incomplete.
FINANCIAL STATEMENTS
46. PROVIDE THE FINANCIAL STATEMENTS REQUIRED BY PART F/S OF THIS PROSPECTUS
SECTION FOR FORM 1-A.
See attached Exhibit C, Historical Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CERTAIN RELEVANT FACTORS
47. IF THE COMPANY'S FINANCIAL STATEMENTS SHOW LOSSES FROM OPERATIONS, EXPLAIN
THE CAUSES UNDERLYING THESE LOSSES AND WHAT STEPS THE COMPANY HAS TAKEN OR
IS TAKING TO ADDRESS THESE CAUSES.
The Company lost money during the start up but has made a profit during
each of the past two fiscal years and projects profits for fiscal year
1997. Losses from 1990 through 1994 resulted as sales grew from zero to
78,000 braces in 1994. The Company invested heavily in marketing and staff
during this period to build the business. There were significant product
refinements made during this early period with the help of the Company
athletic trainer network, and feedback from teams wearing the product.
48. DESCRIBE ANY TRENDS IN THE COMPANY'S HISTORICAL OPERATING RESULTS.
INDICATE ANY CHANGES NOW OCCURRING IN THE UNDERLYING ECONOMICS OF THE
INDUSTRY OF THE COMPANY'S BUSINESS WHICH, IN THE OPINION OF MANAGEMENT,
WILL HAVE A SIGNIFICANT IMPACT (EITHER FAVORABLE OR ADVERSE) UPON THE
COMPANY'S RESULTS OF OPERATIONS WITHIN THE NEXT 12 MONTHS AND GIVE A ROUGH
ESTIMATE OF THE PROBABLY EXTENT OF THE IMPACT, IF POSSIBLE.
This discussion is based upon past operating experience. If the offering
is successful, the Company's operations will change significantly (as
described elsewhere in this Prospectus).
The Company anticipates operating losses in its retail and catalog
operations over the next several years, and there can be no assurance
as to when, if ever, the Company will have positive operating results and
cash flow.
FISCAL YEAR 1996 V. FISCAL YEAR 1995
The Company increased unit brace sales from 136,109 units in 1995 to
173,134 units in 1996. Cost reductions and design changes reduced average
cost per brace from $6.19 in 1995 to $5.79 in 1996 resulting in an
improvement in gross margin percent from 54.9% to
50
<PAGE>
58.3%. Sales revenue increased 29% to $2,404,236 and net income was
$140,048, up 54% over 1995.
Marketing and promotional costs increased as planned to 23.1% of sales in
1996 compared to 18.6% in 1995. These marketing investments supported the
Company's market share growth and contributed to building name and brand
awareness.
General and administrative expenses increased 24.6%, reflecting the
addition of three certified athletic trainers to the staff. This personnel
increase enables the Company to dedicate specific resources to the
medical, team, retail and international markets. The addition of these
talented people is critical to provide the human resources for future
growth.
The Company generated positive cash flow from operations enabling debt
reduction and a working capital increase. Close management of inventory
and receivables provided funds to grow and not use a working capital line
from December 1995 through June 1996. Continuing profitability and an
expanded $300,000 working capital line are providing the Company the
flexibility to continue aggressively marketing the Active Ankle brace
and to fund research and development of new products.
9 MONTHS FISCAL YEAR 1997 V. 9 MONTHS FISCAL YEAR 1996
Unit Active Ankle brace sales for nine months ending March 31, 1997 of
139,489 are up 11.5% over the 125,143 for last year's nine month period.
Average product cost of $5.61 in nine months is $.34 per brace below last
years $5.95 and average price is $.12 per brace higher than last year
resulting in an increase in gross margin from 57.1% to 59.9%. Sales
revenue increased 12.5% to $1,952,133 and net income is $100,497, down
from last year's first nine months of $132,438. The reduction is due
primarily to the impact of an increase in marketing and marketing
personnel costs to build market capacity.
Marketing and promotional costs increased 20% to 22.4% of sales for nine
months 1997 compared to 21.0% in the first nine months of 1996. Building
name and brand awareness continues to be critical to the Company's
growth.
General and administrative expenses increased 31.0%, continuing to reflect
the personnel additions in early 1996 and the $30,000 non-operating legal
expense for trademark defense.
Positive cash flow from operations generated by the Company in first the
nine months of fiscal 1997 provided funds for long term debt reduction of
$48,550, a reduction of trade payables of $29,405 and an ending cash
balance of $84,666. No borrowing is anticipated against the credit line
of $300,000 through the end of the fiscal year, June 30, 1997.
49. IF THE COMPANY SELLS A PRODUCT OR PRODUCTS AND HAS HAD SIGNIFICANT SALES
DURING ITS LAST FISCAL YEAR, STATE THE EXISTING GROSS MARGIN (NET SALES
LESS COST OF SUCH SALES AS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES) AS A PERCENTAGE OF SALES FOR THE LAST FISCAL YEAR:
58.3%. WHAT IS THE ANTICIPATED GROSS MARGIN FOR NEXT YEAR OF OPERATIONS?
Approximately 60% for the fiscal year ending June 30, 1997. IF THIS IS
EXPECTED TO CHANGE, EXPLAIN. ALSO, IF REASONABLY CURRENT GROSS MARGIN
FIGURES ARE AVAILABLE FOR THE INDUSTRY, INDICATE THESE FIGURES AND THE
SOURCE OR SOURCES FROM WHICH THEY ARE OBTAINED.
51
<PAGE>
Industry figures are not readily available.
50. FOREIGN SALES AS A PERCENT OF TOTAL SALES FOR LAST FISCAL YEAR: 8%.
DOMESTIC GOVERNMENT SALES AS A PERCENT OF TOTAL DOMESTIC SALES FOR LAST
FISCAL YEAR: Not material.
EXPLAIN THE NATURE OF THESE SALES, INCLUDING ANY ANTICIPATED CHANGES:
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Page
- ------- ----
Report of Independent Auditors. . . . . . . . . . . . . . . . . F-2
Balance Sheets as of June 30, 1996 and 1995 . . . . . . . . . . F-3
Statements of Income for the Years Ended June 30, 1996 and 1995 F-4
Statements of Stockholders' Equity for the Years Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the Years Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-7
Unaudited
- ---------
Condensed Balance Sheet as of March 31, 1997 . . . . . . . . . F-17
Condensed Statements of Income for the Nine Months Ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . F-18
Condensed Statement of Stockholders' Equity for the
Nine Months Ended March 31, 1997 . . . . . . . . . . . . . F-19
Condensed Statements of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . F-20
Notes to Condensed Financial Statements . . . . . . . . . . . . F-21
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Active Ankle Systems, Inc.
We have audited the accompanying balance sheets of Active Ankle Systems, Inc. as
of June 30, 1996 and 1995, and the related statements of income, stockholders'
equity 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Active Ankle Systems, Inc. at
June 30, 1996 and 1995, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Louisville, Kentucky
August 9, 1996, except for
Note 13, as to which the date
is June 6, 1997
F-2
<PAGE>
Active Ankle Systems, Inc.
Balance Sheets
JUNE 30
1996 1995
-----------------
ASSETS
Current assets:
Cash $ 90,263 $ 57,005
Trade accounts receivable 145,336 113,778
Inventories, principally raw materials 153,241 244,063
Prepaid expenses 61,950 36,058
------------------------
Total current assets 450,790 450,904
Machinery and equipment, net 151,411 133,458
Patents, net of accumulated amortization
of $10,164 in 1996 and $7,402 in 1995 43,978 42,321
Other assets 20,015 21,730
------------------------
Total assets $ 666,194 $ 648,413
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ - $ 55,000
Current portion of long-term debt 53,748 27,108
Trade accounts payable 220,972 287,403
Accrued liabilities 42,194 39,480
------------------------
Total current liabilities 316,914 408,991
Long-term debt 74,297 104,487
Stockholders' equity:
Common stock, no par value:
Authorized shares-2,000,000
Issued and outstanding shares-68,097 1,045,315 1,045,315
Accumulated deficit (770,332) (910,380)
------------------------
Total stockholders' equity 274,983 134,935
------------------------
Total liabilities and stockholders' equity $ 666,194 $ 648,413
------------------------
------------------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Active Ankle Systems, Inc.
Statements of Income
YEAR ENDED JUNE 30
1996 1995
---------------------------
Net sales $ 2,404,236 $ 1,867,621
Cost of sales 1,001,950 842,309
---------------------------
Gross profit 1,402,286 1,025,312
Selling, general and administrative expenses 1,239,410 898,094
---------------------------
Operating income 162,876 127,218
Interest expense 21,135 34,084
---------------------------
Income before income tax expense 141,741 93,134
Income tax expense 1,693 2,200
---------------------------
Net income $ 140,048 $ 90,934
---------------------------
---------------------------
Earnings per common share $ 1.90 $ 1.21
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Active Ankle Systems, Inc.
Statements of Stockholders' Equity
Years ended June 30, 1996 and 1995
TOTAL
STOCKHOLDERS'
COMMON ACCUMULATED EQUITY
STOCK DEFICIT (DEFICIT)
-------------------------------------------
Balances at July 1, 1994 $ 816,540 $ (1,001,314) $ (184,774)
Issuance of 10,707 shares of
common stock 258,175 - 258,175
Repurchase of 4,900 shares of
common stock (29,400) - (29,400)
Nen income - 90,934 90,934
----------------------------------------
BALANCES AT JUNE 30, 1995 1,045,315 (910,380) 134,935
Net income - 140,048 140,048
----------------------------------------
Balances at June 30, 1996 $1,045,315 $ (770,332) $ 274,983
----------------------------------------
----------------------------------------
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Active Ankle Systems, Inc.
Statements of Cash Flows
YEAR ENDED JUNE 30
1996 1995
-------------------------
OPERATING ACTIVITIES
Net income $ 140,048 $ 90,934
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 37,474 34,243
Amortization 5,508 6,753
Loss on sale of machinery and equipment 1,607 2,777
Changes in operating assets and liabilities:
Trade accounts receivable (31,558) 12,042
Inventories 90,822 (143,822)
Prepaid expenses (25,892) (20,683)
Trade accounts payable (66,431) 161,251
Accrued liabilities 2,714 (8,356)
-------------------------
Net cash provided by operating activities 154,292 135,139
INVESTING ACTIVITIES
Payments for machinery and equipment (57,034) (69,058)
Proceeds from sale of machinery and equipment - 400
Other assets (5,450) (11,441)
-------------------------
Net cash used in investing activities (62,484) (80,099)
FINANCING ACTIVITIES
Payments on notes payable to banks and
other notes payable (55,000) (236,000)
Payments on notes payable to
stockholders - (107,000)
Issuance of long-term debt 106,000 121,000
Payments on long-term debt (109,550) (14,635)
Proceeds from issuance of common stock - 258,175
Purchase of outstanding common stock - (29,400)
-------------------------
Net cash used in financing activities (58,550) (7,860)
-------------------------
Net increase in cash 33,258 47,180
Cash at beginning of year 57,005 9,825
-------------------------
Cash at end of year $ 90,263 $ 57,005
-------------------------
-------------------------
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements
June 30, 1996
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES
NATURE OF OPERATIONS
Active Ankle Systems, Inc. (the Company) produces and sells various types of
ankle support orthoses (braces). The Company sells to three market segments
(athletes, teams/schools and medical providers) throughout the United States,
each comprising approximately one-third of net sales. The braces are assembled
by two independent companies located in Louisville and Taylorsville, Kentucky.
A summary of the Company's significant accounting policies follows:
USE OF ESTIMATES
The preparation of the 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.
REVENUE RECOGNITION
Sales are recognized when customer orders are completed and shipped. Credit is
extended to customers based on an evaluation of their financial condition and
collateral is not required.
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out cost flow method, or market.
MACHINERY AND EQUIPMENT
Machinery and equipment is stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives which range from 3 to 7 years, using the straight-
line method.
F-7
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES (CONTINUED)
AMORTIZATION OF PATENTS
Patents are being amortized over a seventeen year period using the straight-line
method.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $195,000 and $116,000 in 1996 and 1995, respectively.
2. MACHINERY AND EQUIPMENT, NET
Machinery and equipment, net consists of the following:
1996 1995
-------------------------
Tooling and manufacturing equipment $ 129,315 $ 106,353
Office furniture and computer equipment 100,224 57,056
-------------------------
229,539 163,409
Less accumulated depreciation (78,128) (52,701)
Construction in progress-tooling - 22,750
-------------------------
$ 151,411 $ 133,458
-------------------------
-------------------------
3. DEBT
The Company has available $100,000 under a line of credit with a bank which
expires in October 1996, all of which is unused at June 30, 1996. Advances bear
interest, payable quarterly, equal to the bank's index rate plus one percentage
point (9.25% at June 30, 1996). The line has subsequently been renewed (see Note
13). The Company owed another bank $35,000 under a line of credit for that same
amount at June 30, 1995 which was repaid during 1996.
F-8
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
3. DEBT (CONTINUED)
Long-term debt consists of the following:
1996 1995
--------------------------
Installment note payable to bank at the
bank's index rate plus 1% (9.25% at June
30, 1996), monthly principal and interest
payments of $2,300 due through August 2000
with a final balloon payment due in September
2000, secured by substantially all assets
and guarantees by certain shareholders
(see below) $ 94,043 $ -
Note payable to bank repaid during 1996 - 71,000
Note payable to an unrelated corporation at
8.25%, due in August 1997, secured by
substantially all assets 34,002 43,026
Installment note payable repaid during 1996 - 17,569
------------------------
128,045 131,595
Less current portion 53,748 27,108
------------------------
$ 74,297 $ 104,487
------------------------
------------------------
In the event the stockholder guarantors are called upon to perform under their
guarantee, they have the right to purchase sufficient shares of common stock, at
fair value at the time the guarantee was granted, to satisfy their obligation.
Aggregate annual maturities of long-term debt are as follows:
1997 $ 53,748
1998 21,652
1999 23,741
2000 26,033
2001 2,871
-----------
$ 128,045
-----------
The carrying amounts of the Company's borrowings approximate fair value.
4. INCOME TAXES
At June 30, 1996, the Company has net operating loss carryovers of approximately
$748,000 for federal income tax reporting purposes which are available to offset
any future taxable income and which expire in various amounts in the years 2005
through 2009.
F-9
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are as follows:
1996 1995
-------------------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 282,634 $ 340,456
Depreciation and amortization (21,536) (11,898)
Other 6,497 2,009
-------------------------
Net deferred tax assets 267,595 330,567
Valuation allowance for net deferred tax
assets (267,595) (330,567)
-------------------------
$ - $ -
-------------------------
-------------------------
Income tax expense relates to local income taxes. The significant components of
income tax expense are as follows:
1996 1995
-------------------------
Current federal, state and local tax expense $ 48,927 $ 37,744
Benefit of operating loss carryforward (47,234) (35,544)
-------------------------
$ 1,693 $ 2,200
-------------------------
-------------------------
A reconciliation of the normal statutory federal income tax on the Company's
pretax income with the Company's actual income tax expense follows:
1996 1995
-------------------------
Tax at U.S. statutory rate of 34% $ 48,192 $ 31,666
State income taxes, net of federal benefit 7,087 4,657
Reduction of valuation allowance for net
deferred tax assets (62,972) (38,433)
Other, net 9,386 4,310
-------------------------
$ 1,693 $ 2,200
--------------------------
--------------------------
F-10
<PAGE>
Active Ankle Systems, Inc.
Notes to Condensed Financial Statements (unaudited)
5. COMPUTATION OF EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common and
common equivalent shares outstanding during each period. Shares of common stock
issuable under the Company's stock option plans, warrants and convertible
preferred stock issues are treated as common stock equivalents when dilutive.
A summary of the components of the weighted average shares of common and common
equivalent shares outstanding during the years ended June 30, 1996 and 1995
computed in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin No. 83, "Earnings Per Share in an Initial Public Offering,"
is as follows:
1996 1995
------------------------
Weighted average number of common shares
outstanding throughout the period 68,097 69,254
Common shares issuable upon assumed
conversion of convertible preferred stock
(see Note 13) 8,250 8,250
Common shares issued at $25 per share
(see Note 13) 170 170
Common shares issuable upon exercise of
outstanding stock options issued at an
exercise price of $25 per share (see Note 13) 4,300 4,300
Less assumed repurchase of common shares at an
estimated IPO price of $40 per share related to:
Convertible preferred stock (4,125) (4,125)
Common shares issued (106) (106)
Stock options (2,688) (2,688)
------------------------
(6,919) (6,919)
------------------------
Total weighted average shares and equivalents
outstanding 73,898 75,055
------------------------
------------------------
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years ended June 30, 1996 and 1995 relating to interest
expense was $21,135 and $63,806, respectively.
Noncash investing and financing activities included $19,230 of additions to
machinery and equipment financed by trade accounts payable at June 30, 1995.
F-11
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
7. COMMON STOCK, OPTIONS AND WARRANTS
The Company has three stock option plans that provide for both incentive and
non-qualified stock options. At June 30, 1996, a total of 21,000 shares of
common stock are reserved for issuance under the stock option plans, as follows:
EXERCISE
PRICE PER EXPIRATION
SHARES SHARE DATE
---------------------------------------------------
1992 Plan 2,000 $ 25 April 1998
2,000 25 April 2004
2,000 Not granted
1994 Plan 2,000 25 July 2004
2,000 25 June 2005
1,500 25 December 1999
500 25 January 2000
4,000 Not granted
1995 Plan 300 25 June 2001
4,700 Not granted
Options expiring in 2004 and 2005 are exercisable equally over five years from
the date of grant. The options granted under the 1995 Plan are exercisable
equally over three years from the date of grant. All other options granted
were exercisable at the date of grant. Options for a total of 7,200 shares
of common stock are exercisable at June 30, 1996.
During 1995, the Company issued stock warrants in conjunction with common
stock sold during the year. A total of 5,103 shares of common stock are
reserved for these warrants at an exercise price of $25 per share. The
warrants expire on September 1, 1999. In July 1989, the Company issued stock
warrants to its stockholders for 1,000 shares of common stock at an exercise
price of $6 per share. During the year ended June 30, 1995, a portion of
these warrants were exercised for 500 shares of common stock. The remaining
warrants expired August 1, 1994.
On January 20, 1995, an employee owning shares of the Company's common stock
resigned. Under the terms of his employment agreement, the former employee
returned his shares of stock and agreed not to compete for a period of two
years. Additionally, the Company will pay the former employee a royalty on net
sales of braces covered in whole or in part by applicable patents until the
patents expire in 2001. The royalty rate began at 5% and decreased to 3% on
cumulative net sales greater than $2,000,000.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 encourages, but does not
require, companies to recognize compensation expense related to the grants of
stock or
F-12
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
7. COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
stock options to employees under plans such as the Company's stock option plans.
Companies choosing not to adopt SFAS No. 123 will continue to account for such
grants using the accounting prescribed by Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB25), but will be required
to make certain disclosures about their plans, including pro forma net income
and earnings per share under the new method. The Company is first required to
follow the rules of SFAS No. 123 in 1997. The Company expects to continue to
follow APB25 for expense recognition and to make the disclosures required by
SFAS No. 123. Accordingly, the Company expects that SFAS No. 123 will have no
effect on the Company's earnings or financial position.
8. SALES TO MAJOR CUSTOMERS
Sales to major customers as a percentage of net sales were as follows:
1996 1995
---------------------
Customer A 30% 28%
Customer B 28 26
Customer C 25 20
9. RELATED PARTY TRANSACTIONS
The Company was sub-leasing office space from a business partially owned by a
stockholder of the Company until November 30, 1995. Rent expense for the years
ended June 30, 1996 and 1995 amounted to $4,600 and $11,565, respectively.
The Company owed certain stockholders during fiscal 1995 under notes payable.
Interest expense on these loans amounted to approximately $3,000 in 1995. The
loans were repaid during fiscal 1995. In addition, the Company incurred $4,105
and $7,384 in loan guarantee fees to certain stockholders during 1996 and 1995,
respectively.
10. FOREIGN OPERATIONS
The Company had approximately $182,000 and $240,000 of net sales to distributors
in foreign countries during the years ended June 30, 1996 and 1995,
respectively. All amounts collected from sales to foreign customers are in U.S.
dollars.
F-13
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
11. EMPLOYEE BENEFIT PLAN
In January 1996, the Company established a defined (401k) contribution plan
covering substantially all employees. In accordance with Plan provisions,
employee contributions are matched 25% for the first 4% of the employee's
contributions. Company contributions amounted to $390 in 1996.
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with various individuals and sports
teams for their endorsement of the Company's products. The terms of the
agreements vary from 1 to 3 years. Future payments under these agreements amount
to $48,000 at June 30, 1996.
The Company leases office space from a third party for $2,240 per month. The
lease is noncancelable and expires February 2001, with a five-year renewal
option period. Future minimum rental payments under this operating lease are as
follows:
1997 $ 26,880
1998 26,880
1999 26,880
2000 26,880
2001 17,920
----------
$ 125,440
----------
----------
Operating lease rental expense for the year ended June 30, 1996 was
approximately $9,000 (exclusive of the lease rental expense disclosed in Note
9).
The Company has received correspondence which implies that the Company may have
infringed on a patent held by a competitor. The cost of defending any claim, if
asserted, could have a material adverse impact on the Company's financial
statements. In view of the facts that the competitor has known about the Company
and its products since 1984, and the competitor has been wholly non-responsive
to the Company's positions of non-infringement since December of 1992,
management is of the view that the probability that the competitor will actually
assert a claim against the Company is low. Based on these facts, and further
based on the advice of outside legal counsel that the Company's products do not
infringe on the competitor's patent, it is management's opinion that the
ultimate resolution of this matter will not have a material adverse effect on
the Company's financial statements.
F-14
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
13. SUBSEQUENT EVENTS
In July 1996, the Company granted options to purchase 4,300 shares of common
stock at $25 per share which expire in 2001. During the eleven months ended May
31, 1997, certain Directors elected to receive 170 shares of the Company's
common stock (at the rate of $25 per share) in lieu of cash for their director
fees.
Effective August 30, 1996, the bank line of credit was renewed in the amount of
$300,000. Borrowings are limited to 80% of trade accounts receivable less than
90 days outstanding. Advances bear interest equal to the bank's index rate plus
.5%. The line expires October 15, 1997 and is cross collateralized with the
installment note payable to the bank.
During the eleven months ended May 31, 1997 the Company renewed agreements
with certain sports teams for their endorsement of the Company's products.
The terms of the agreements are for three to four years and require payments
of approximately $120,000 in total.
At a special meeting on May 29, 1997, the Company's stockholders approved:
a. a new class of voting preferred shares (100,000 shares authorized);
b. an increase in the authorized number of common shares from 100,000 to
2,000,000 shares;
c. cancellation of a Shareholders Agreement dated September 30, 1995
providing for, upon the death of certain stockholders, a put option
for the estate of the deceased stockholder with respect to the
stockholder's shares of stock;
d. an initial public offering (IPO) of common shares; and
e. a tender offer to purchase for cash the Company's common shares.
The preferred stock has a $40 par and liquidation value per share; carries
a 6% non-cumulative dividend and each share is convertible after July 1, 1999
into two shares of the Company's common stock. In June 1997, 4,125 shares of
the preferred stock were sold for $40 per share to existing stockholders
and/or directors of the Company.
The planned IPO is for the sale of a maximum of 100,000 and minimum of 45,000
shares of the Company's common stock at an expected offering price of $40 per
share. The Company's tender offer for its common stock is for a per share price
of $27. The offer is not conditional upon any minimum number of shares being
tendered; however, the offer is subject to the sale of a minimum of $1,800,000
of shares to the public in the IPO.
F-15
<PAGE>
Active Ankle Systems, Inc.
Condensed Balance Sheet (Unaudited)
March 31, 1997
ASSETS
Current assets:
Cash $ 84,666
Trade accounts receivable 170,576
Inventories, principally raw materials 206,621
Prepaid expenses 21,867
----------
Total current assets 483,730
Machinery and equipment, net of
accumulated depreciation of $113,283 135,569
Patents, net of accumulated amortization of $12,854 48,377
Other assets 16,257
----------
Total assets $ 683,933
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 20,944
Trade accounts payable 191,567
Accrued liabilities 34,391
----------
Total current liabilities 246,902
Long-term debt 58,551
Stockholders' equity:
Common stock, no par value:
Authorized shares-2,000,000
Issued and outstanding shares-68,217 1,048,315
Accumulated deficit (669,835)
----------
Total stockholders' equity 378,480
----------
Total liabilities and stockholders' equity $ 683,933
----------
----------
SEE ACCOMPANYING NOTES.
F-16
<PAGE>
Active Ankle Systems, Inc.
Condensed Statements of Income (Unaudited)
NINE MONTHS
ENDED MARCH 31
1997 1996
---------------------------
Net sales $ 1,952,133 $ 1,735,241
Cost of sales 781,891 744,211
---------------------------
Gross profit 1,170,242 991,030
Selling, general and administrative expenses 1,058,626 839,650
---------------------------
Operating income 111,616 151,380
Interest expense 9,358 17,333
---------------------------
Income before income tax expense 102,258 134,047
Income tax expense 1,761 1,609
---------------------------
Net income $ 100,497 $ 132,438
---------------------------
---------------------------
Earnings per common share $ 1.36 $ 1.79
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
F-17
<PAGE>
Active Ankle Systems, Inc.
Condensed Statement of Stockholders' Equity (Unaudited)
Nine months ended March 31, 1997
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT EQUITY
----------------------------------------------
Balances at July 1, 1996 $ 1,045,315 $ (770,332) $ 274,983
Issuance of 120 shares
of common stock 3,000 - 3,000
Net income - 100,497 100,497
--------------------------------------------
Balances at March 31, 1997 $ 1,048,315 $ (669,835) $ 378,480
--------------------------------------------
--------------------------------------------
SEE ACCOMPANYING NOTES.
F-18
<PAGE>
Active Ankle Systems, Inc.
Condensed Statements of Cash Flows (Unaudited)
NINE MONTHS
ENDED MARCH 31
1997 1996
--------------------------
OPERATING ACTIVITIES
Net income $ 100,497 $ 132,438
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 39,433 21,095
Amortization 6,448 4,588
Loss on disposal of assets 1,166 1,058
Directors' compensation 3,000 -
Changes in operating assets and liabilities:
Trade accounts receivable (25,240) (55,935)
Inventories (53,380) 56,576
Prepaid expenses 40,083 5,131
Trade accounts payable (29,405) (34,808)
Accrued liabilities (7,803) (7,124)
-------------------------
Net cash provided by operating activities 74,799 123,019
INVESTING ACTIVITIES
Payments for machinery and equipment (27,021) (48,520)
Insurance recovery related to damaged
equipment 2,264 -
Other assets (7,089) (6,085)
-------------------------
Net cash used in investing activities (31,846) (54,605)
FINANCING ACTIVITIES
Payments on notes payable to banks
and other notes payable - (55,000)
Issuance of long-term debt - 106,000
Payments on long-term debt (48,550) (87,745)
-------------------------
Net cash used in financing activities (48,550) (36,745)
-------------------------
Net (decrease) increase in cash (5,597) 31,669
Cash at beginning of period 90,263 57,005
-------------------------
Cash at end of period $ 84,666 $ 88,674
-------------------------
-------------------------
SEE ACCOMPANYING NOTES.
F-19
<PAGE>
Active Ankle Systems, Inc.
Notes to Condensed Financial Statements (Unaudited)
1. GENERAL
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the financial statements
of Active Ankle Systems, Inc. (the Company) for the years ended June 30, 1996
and 1995 included elsewhere herein. Results of operations for the period ended
March 31, 1997, are not necessarily indicative of results to be expected for the
year ending June 30, 1997.
2. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1997:
Installment note payable to bank
at the bank's index rate plus 1%
(9.5% at March 31, 1997), monthly
principal and interest payments of
$2,300 due through August 2000 with
a final balloon payment due in
September 2000, secured by substantially
all assets and guarantees by certain
shareholders $ 79,495
Less current portion 20,944
---------
$ 58,551
---------
---------
3. INCOME TAX EXPENSE
Income tax expense for the nine months ended March 31, 1997 and 1996 differs
from the amount of income tax expense that would result from applying the
domestic federal statutory tax rate to pretax income principally due to the
utilization of net operating loss carryforwards for federal income tax purposes.
F-20
<PAGE>
Active Ankle Systems, Inc.
Notes Condensed to Financial Statements (Unaudited) (continued)
4. COMPUTATION OF EARNINGS PER SHARE
A summary of the components of the weighted average shares of common and common
equivalent shares outstanding during the nine months ended March 31, 1997 and
1996 computed in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin No. 83, "Earnings Per Share in an Initial Public Offering,"
is as follows:
1997 1996
------------------------
Weighted average number of common shares
outstanding throughout the period 68,160 68,097
Common shares issuable upon assumed
conversion of convertible preferred stock 8,250 8,250
Common shares issued at $25 per share during
the eleven months ended May 31, 1997 107 170
Common shares issuable upon exercise of
outstanding stock options issued at an
exercise price of $25 per share 4,300 4,300
Less assumed repurchase of common shares at
an estimated IPO price of $40 per share
related to:
Convertible preferred stock (4,125) (4,125)
Common shares issued (106) (106)
Stock options (2,688) (2,688)
------------------------
(6,919) (6,919)
------------------------
Total weighted average shares and
equivalents outstanding 73,898 73,898
------------------------
------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. The Company
is required to adopt SFAS 128 in December 1997, and at that time will present
earnings per share (EPS) for all prior periods using the methodology specified
by SFAS 128. Although the Company has not yet determined the full effect of SFAS
128, it believes that basic EPS as computed under SFAS 128 will be greater than
primary EPS under the prior accounting rules because basic EPS excludes the
dilutive effect of common stock equivalents (such as stock options awarded to
the Company's employees and the Company's convertible preferred stock). Diluted
EPS under SFAS 128 is computed similarly to fully diluted EPS pursuant to prior
accounting rules.
F-21
<PAGE>
PART II - INFORMATION
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and Bylaws authorize the Company to
indemnify its directors and officers to the full extent permitted by Kentucky
law.
KRS Sec. 271B.8-510 provides the authority to indemnify directors. The statute
permits corporations to indemnify an individual made a party to a proceeding
because he or she is or was a director against liability incurred in the
proceeding if:
(a) he or she conducted himself in good faith; and
(b) he or she reasonably believed:
(1) In the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in the best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to its best interests; and
(c) In the case of any criminal proceedings, the director had no
reasonable cause to believe his or her conduct was unlawful.
Further, KRS 271.B.8-520 provides for mandatory indemnification for a director
who was wholly successful, or the merits or otherwise, in the defense of any
proceeding to which he was a party because he or she was a director of the
corporation against reasonable expense incurred by him in connection with the
proceedings.
KRS 271B.8-560 provides for certain mandatory and permissive indemnification for
corporate officers.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. *
Securities and Exchange Commission Fee $ 1,212
Escrow Fees 1,000
Legal and Accounting Fees 100,000
Printing Fees 10,000
State Securities Filing Fees 5,000
---------
$ 117,212
* All amounts estimated except Securities and Exchange Commission Filing Fee.
II-1
<PAGE>
ITEM 3. UNDERTAKINGS.
Not Applicable.
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
The Company has a class of preferred stock which has a $40 par and
liquidation value per share, carries a 6% non-cumulative dividend, and each
share is convertible after July 1, 1999 into two shares of the Company's
Common Stock. A total of 100,000 of such preferred shares are authorized,
and a total of 4,125 shares of the preferred stock are issued and
outstanding. The 4,125 shares were sold at a cash sale price of $40 per
share in June, 1997 . The preferred shares were sold to six individuals,
all of whom are either stockholders, officers or directors of the Company
prior to the registration of this Prospectus. The proceeds of this preferred
stock offering are to be used as seed money for the development of a catalog
sales division. The preferred stock offering was an exempt offering under
Rule 506 of Regulation D of the Securities Act.
The Company has issued during the past 12 months 4,300 options to employees
and consultants to the Company at a price of $25 per share.
During Fiscal 1997, 170 shares have been issued as directors' fees.
ITEM 5 INDEX TO EXHIBITS.
Exhibit 3.(i) - Articles of Incorporation as amended
Exhibit 3.(ii) - Bylaws
Exhibit 5 - Opinion of Counsel
Exhibit 23 - Auditor's Consent
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Tender Offer
Exhibit 99.2 - Deferred Compensation Agreements
Exhibit 99.3 - Escrow Agreement
ITEM 6 DESCRIPTION OF EXHIBITS.
Exhibit 3.(i) - Articles of Incorporation as amended
Exhibit 3.(ii) - Bylaws
Exhibit 5 - Opinion of Counsel
Exhibit 23 - Auditor's Consent
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Tender Offer
Exhibit 99.2 - Deferred Compensation Agreements
Exhibit 99.3 - Escrow Agreement
II-2
<PAGE>
SIGNATURES:
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all the requirements of filing on Form SB-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Louisville, State of KY, on June 13, 1997.
(Registrant) ACTIVE ANKLE SYSTEMS, INC.
By: /s/ Gary G. Herzberg
---------------------------------------------------------
Gary G. Herzberg, President and CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Officers Directors
- -------- ---------
/s/ Gary G. Herzberg /s/ Henry H. Porter
- ------------------------------------- -----------------------------------
Gary G. Herzberg Henry H. Porter, Jr.
President and Chief Executive Officer
Date: June 13, 1997 Date: June 13, 1997
-------------------------------- ------------------------------
/s/ Andrew Pfeifer
-----------------------------------
Andrew Pfeifer
Date: June 13, 1997
------------------------------
/s/ Ronald W. Schultz
- ------------------------------------
Ronald W. Schultz /s/ Gary G. Herzberg
Treasurer and Chief Financial Officer -----------------------------------
Gary G. Herzberg
Date: June 13, 1997
------------------------------
Date: June 13, 1997
------------------------------
/s/ Ronald W. Schultz
-----------------------------------
Ronald W. Schultz
Date: June 13, 1997
------------------------------
II-3
<PAGE>
/s/ Glen R. Snow
-----------------------------------
Glen R. Snow
Date: June 13, 1997
------------------------------
/s/ Douglas D. Stegner
-----------------------------------
Douglas D. Stegner
Date: June 13, 1997
------------------------------
/s/ James T. Crain, Jr.
-----------------------------------
James T. Crain, Jr.
Date: June 11, 1997
------------------------------
/s/ John C. Nichols II
-----------------------------------
John C. Nichols II
Date: June 10, 1997
------------------------------
II-4
<PAGE>
ARTICLES OF INCORPORATION
OF
ACTIVE ANKLE SYSTEMS, INC.
--------------------------
The undersigned, acting as the incorporator of a corporation organized
under and pursuant to the provisions of Chapter 271B of the Kentucky Revised
Statutes, hereby adopt the following Articles of Incorporation for such
corporation:
ARTICLE I
---------
The name of the corporation is Active Ankle Systems, Inc.
ARTICLE II
----------
The aggregate number of shares which the corporation shall have authority
to issue is 5,000.
ARTICLE III
-----------
The address of the initial registered office of the corporation is 601 West
Main Street, Louisville, Kentucky 40202, and the name of its initial registered
agent at such address is Michael V. Brodarick.
ARTICLE IV
----------
The mailing address of the principal office of the corporation is 3720
Hillsdale Road, Louisville, Kentucky 40222.
ARTICLE V
---------
The name and address of the incorporator is Henry H. Porter, 3720 Hillsdale
Road, Louisville, Kentucky 40222.
<PAGE>
ARTICLE VI
----------
The number of directors constituting the initial board of directors of the
corporation is 1, who shall serve as director until the first annual meeting of
the shareholders or until his successors are elected and shall qualify. His
name and address is: Henry H. Porter, Jr., 3720 Hillsdale Road, Louisville,
Kentucky 40222.
ARTICLE VII
-----------
Section 1. No director of the corporation shall be personally liable to
the corporation or its shareholders for monetary damages for any breach of
his/her duties as a director, except for liability (i) for any transaction in
which the director's personal financial interests is in conflict with the
financial interests of the corporation or its shareholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or are known
to the director to be a violation of law; (iii) for any vote for or assent to an
unlawful distribution to shareholders as prohibited under K.R.S. 271B.8-330; or
(iv) for any transaction from which the director derived an improper personal
benefit.
Section 2. If the Kentucky Business Corporation Act is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Kentucky
Business Corporation Act, as so amended, and without the necessity for further
shareholder action in respect thereof.
Section 3. Any repeal or modification of this Article by the shareholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation hereunder in respect of any act or omission
occurring prior to the time of such repeal or modification.
2
<PAGE>
IN WITNESS WHEREOF, I have made, signed and acknowledged these Articles of
Incorporation in triplicate originals, this 7th day of June, 1989.
---------------------------------------
HENRY H. PORTER, Incorporator
COMMONWEALTH OF KENTUCKY )
)ss
COUNTY OF JEFFERSON )
SUBSCRIBED and SWORN to before me by Henry H. Porter, on this 7th day of
June, 1989.
My Commission Expires:--------------------------
---------------------------------------
Notary Public
State at Large, Kentucky
3
<PAGE>
AMENDMENT TO ARTICLES OF INCORPORATION OF
ACTIVE ANKLE SYSTEMS, INC.
1. The name of the corporation is Active Ankle Systems, Inc.
2. The text of the Amendment adopted is
ARTICLE II
The aggregate number of preferred shares which the
corporation shall have authority to issue is one hundred
thousand. The terms and rights of preferred shares shall be
established from time to time by the corporation's board of
directors; such preferred shares may be issued in series, at
the discretion of the board of directors
The aggregate number of common shares which the corporation
shall have authority to issue is two million.
3. The foregoing Amendment was adopted as of May 29, 1997.
4. Active Ankle Systems, Inc. has only one class of stock, being no par value
common stock and has 68,097 shares outstanding which are entitled to vote
on the Amendment. 61,317 shares were represented at the meeting, pursuant
to which 59,597 votes were cast in favor of the Amendment, and no votes
were cast against the Amendment.
---------------------------------
GARY G. HERZBERG, President
THIS DOCUMENT PREPARED BY:
- -----------------------------
James N. Williams
MIDDLETON & REUTLINGER
2500 Brown & Williamson Tower
Louisville, Kentucky 40202
(502) 584-1135
<PAGE>
BYLAWS
OF
ACTIVE ANKLE SYSTEMS, INC.
ARTICLE I
OFFICES
The registered office of the Corporation in the Commonwealth of Kentucky
shall be at the address stated in its Articles of Incorporation, but such
address may be changed from time to time by the Board of Directors.
The Corporation shall have a principal office, and such other offices,
either within or without the Commonwealth of Kentucky, as the Board of Directors
may designate or the business of the Corporation may be, but need not be, the
same as its registered office and, until otherwise determined, shall be located
at 3720 Hillsdale Road, Louisville, Kentucky 40222.
ARTICLE II
SHAREHOLDERS
SECTION 1 - ANNUAL MEETING. The annual meeting of Shareholders shall be
held on the first Friday in March in each year, beginning with the year 1990, at
the hour of 10:00 a.m., local time, for the election of Directors and such other
business as may properly come before the meeting. If the day fixed for the
annual meeting shall be a legal holiday, such meeting shall be held on the next
succeeding business day. If the election of Directors shall not be held on the
day designated for any annual meeting, or at any adjournment thereof, the Board
of Directors shall cause the election to be held at a special meeting of the
Shareholders as soon thereafter as may be practicable.
SECTION 2 - SPECIAL MEETING. Special meetings of the Shareholders may be
called by the Board of Directors, by the Chief Executive Officer or by the
holders of not less than one-third (1/3) of the outstanding shares entitled to
vote at such meeting.
SECTION 3 - PLACE OF MEETING. The Board of Directors or the Chief
Executive Officer may designate any place, either within or without the
Commonwealth of Kentucky, as the place of meeting for any annual meeting, or for
any special meeting called by the Board of Directors or by the Chief Executive
Officer, respectively. A waiver of notice signed by all Shareholders entitled
to vote at a meeting may designate any place, either within or without the
Commonwealth of Kentucky, as the place for the holding of such meeting. If no
designation is made, or if a special meeting be otherwise called the place of
meeting shall be the principal office of the Corporation, except as otherwise
provided in Section 5 of this Article.
SECTION 4 - NOTICE OF MEETING. Written notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called,
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shall be delivered not less than ten (10) nor more than fifty (50) days before
the date of the meeting, either personally or by mail, by or at the direction of
the Chief Executive Officer, Secretary or the persons calling the meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the Shareholders at their addresses as they appear on
the stock transfer books of the Corporation, with postage thereon prepaid.
SECTION 5 - MEETING OF ALL SHAREHOLDERS. If all of the Shareholders shall
meet at any time and place, either within or without the Commonwealth of
Kentucky, and consent to the holding of a meeting, such meeting shall be valid
without call or notice and at such meeting any corporate action may be taken.
SECTION 6 - CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the
purpose of determining Shareholders entitled to notice of or to vote at any
meeting of Shareholders or any adjournment thereof, or Shareholders entitled to
receive payment of any dividend, or in order to make a determination of
Shareholders for any other proper purpose, the Board of Directors of the
Corporation may provide that the stock transfer books shall be closed for a
stated period but not to exceed, in any case, seventy (70) days. A
determination of shareholders entitled to notice of or to vote at a
shareholders' meeting shall be effective for any adjournment of the meeting
unless the Board of Directors fixes a new record date, which it shall do if the
meeting is adjourned to a date more than one hundred twenty (120) days after the
date fixed for the original meeting.
If a court orders a meeting adjourned to a date more than one hundred
twenty (120) days after the date fixed for the original meeting, it may provide
that the original record date continues in effect or it may fix a new record
date.
SECTION 7 - VOTING RECORD. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall use the stock transfer books
as the complete record of the Shareholders entitled to vote at each meeting of
Shareholders or any adjournment thereof, arranged in alphabetical order, with
the address of and the number of shares held by each. Such record shall be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any Shareholder during the whole time of the meeting for
the purposes thereof. The original stock transfer books shall be prima facie
evidence as to who are the Shareholders entitled to examine such list or stock
transfer books or to vote at any meeting of Shareholders.
SECTION 8 - QUORUM. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of Shareholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noted. The Shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough Shareholders to leave less than a quorum.
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SECTION 9 - PROXIES. At all meetings of Shareholders, a Shareholder may
vote in person or by proxy executed in writing by the Shareholder or by his duly
authorized attorney-in-fact. Such proxy shall be filed with the Secretary of
the Corporation before or at the time of the meeting. No proxy shall be valid
after eleven (11) months from the date of its execution, unless otherwise
provided in the proxy. The revocation of a proxy shall not be effective until
the Secretary of the Corporation has received written notice of the revocation.
SECTION 10 - VOTING OF SHARES. Subject to the provisions of Section 12,
each outstanding share entitled to vote shall be entitled to one vote upon each
matter submitted to a vote at a meeting of Shareholders.
SECTION 11 - VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another Corporation may be voted by either the President or such
Corporation or by proxy appointed by him/her unless the Board of Directors of
such Corporation should determine otherwise, in which event any other person
authorized to vote such shares shall produce a certified copy of a resolution of
the Board of Directors of such Corporation so indicating.
Shares held by an administrator, executor, guardian, conservator, or
committee may be voted by him/her, either in person or by proxy, without a
transfer of such shares into his/her name. Shares standing in the name of a
Trustee may be voted by him/her, either in person or by proxy, but no Trustee
shall be entitled to vote shares held by him/her without a transfer of such
shares into his/her name.
Shares standing in the joint names of three (3) or more fiduciaries shall
be voted in the manner determined by the majority of such fiduciaries, unless
the instrument or order appointing such fiduciaries otherwise directs.
Shares standing in the name of a Receiver may be voted by such Receiver,
and shares held by or under the control of a Receiver may be voted by such
Receiver without the transfer thereof into his/her name if authority so to do be
contained in an appropriate order of the Court by which such Receiver was
appointed.
A Shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
SECTION 12 - CUMULATIVE VOTING. At each election for Directors each
Shareholder entitled to vote at such election shall have the right to cast, in
person or by proxy, as many votes in the aggregate as he/she shall be entitled
to vote under the Corporation's Articles of Incorporation, multiplied by the
number of Directors to be elected at such election; and each Shareholder may
cast the whole number of votes for one (1) candidate, or distribute such votes
among two (2) or more candidates.
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SECTION 13 - INFORMAL ACTION BY SHAREHOLDERS. Any action required or
permitted to be taken at a meeting of the Shareholders may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the Shareholders entitled to vote with respect to the subject
matter thereof.
ARTICLE III
DIRECTORS
SECTION 1 - GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors.
SECTION 2 - NUMBER, TENURE AND QUALIFICATIONS. The number of Directors of
the Corporation shall be five (5), but may be increased or decreased from time
to time by amendment to this Bylaw, but no decrease shall have the effect of
shortening the term of any incumbent Director. Each Director shall hold office
until the next annual meeting of Shareholders and until his/her successor shall
have been elected and qualified. Directors need not be a resident of Kentucky
nor a Shareholder of the Corporation.
SECTION 3 - REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw, immediately after, and at
the same place as, the annual meeting of Shareholders. The Board of Directors
may provide, by resolution, the time and place, either within or without the
Commonwealth of Kentucky, for the holding of additional regular meetings without
other notice than such resolution.
SECTION 4 - SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chief Executive Officer, the Present,
or a majority of the Directors. The person or persons authorized to call
special meetings of the Board of Directors may fix any place, either within or
without the Commonwealth of Kentucky, as the place for holding any special
meeting of the Board of Directors called by them.
SECTION 5 - NOTICE. Notice of any special meeting shall be given at least
two (2) days previously thereto by (a) telephoned or personally delivered to
each director at least forty-eight hours before the time of the meeting; or (b)
mailed to each director at his last known address at least ninety-six hours
before the time of the meeting; or (c) by telegram. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail in a
sealed envelope, so addressed, with postage thereon prepaid. If notice be given
by telegram, such notice shall be deemed to be delivered when the telegram is
delivered to the telegraph company. Any Director may waive notice of any
meeting and such waiver must be in writing. A Director's attendance at or
participation in a meeting shall waive any required notice to him of the
meeting, unless the Director at the beginning of the meeting (or promptly upon
his arrival) objects to holding the meeting or transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.
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SECTION 6 - QUORUM. A majority of the Board of Directors fixed by Section
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the Board of Directors, but if less than such majority is
present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
SECTION 7 - MANNER OF ACTING. The act of the majority of the Directors
present at the meeting at which a quorum is present shall be the act of the
Board of Directors.
The Board of Directors may permit any or all directors to participate in a
regular or special meeting by, or conduct the meeting through the use of, any
means of communication by which all directors participating may simultaneously
hear each other during this meeting. A Director participating in a meeting by
this means shall be deemed to be present in person at the meeting.
SECTION 8 - ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board of Directors, or by a committee thereof, at a meeting may
be taken without a meeting if a consent in writing, setting forth the action
taken, shall be signed by all of the Directors, or by all of the members of the
committee, as the case may be. Such consent shall have the same effect as a
unanimous vote.
SECTION 9 - VACANCIES. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining Directors,
though less than a quorum of the Board of Directors. A Director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
Directors may be filled by election by the Board of Directors for a term of
office continuing only until the next election of the Directors by the
Shareholders.
SECTION 10 - COMPENSATION FOR ATTENDANCE. Directors, as such, shall not
receive a stated salary for their services but, by resolution of the Board of
Directors, each Director may be paid his/her expenses, if any, of attendance at
each meeting of the Board of Directors or any committee thereof, and may be paid
a fixed sum for attendance at each such meeting, or both. No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
SECTION 11 - EXECUTIVE AND OTHER COMMITTEES. The Board of Directors, by
resolution adopted by a majority of the entire Board of Directors, may designate
from among its members an executive committee and one or more other committees
each of which, to the extent provided in such resolution, shall have and may
exercise all the authority of the Board of Directors. However, such committee
shall not: (a) authorize distributions; (b) approve or propose to Shareholders
action that the Delaware Code requires be approved by Shareholders; (c) fill
vacancies on the Board of Directors or on any of its committees; (d) amend
Articles of Incorporation pursuant to K.R.S. 271B.10-020; (e) adopt, amend or
repeal bylaws; (f) approve a plan of merger not requiring Shareholder approval;
(g) authorize or approve reacquisition of shares, except according to a formula
or method prescribed by the Board of Directors; or (h) authorize or approve the
issuance
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or sale or contract for sale of shares, or determine the designation and
relative rights, preferences, and limitations of a class or series of shares,
except that the Board of Directors may authorize a committee (or a senior
executive officer of the Corporation) to do so within limits specifically
prescribed by the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1 - NUMBER. The officers of the Corporation shall be a Chief
Executive Officer, a President and a Secretary (who may be the same person), and
may have, one or more Vice Presidents (the number thereof to be determined by
the Board of Directors), and a Treasurer, each of whom shall be elected by the
Board of Directors. Such other officers and assistant officers as may be deemed
necessary may be elected or appointed by the Board of Directors. The
Corporation may have a Chairman of the Board and a Vice Chairman of the Board.
Any two or more officers may be held by the same person.
SECTION 2 - ELECTION AND TERM OF OFFICE. The officers of the Corporation
to be elected by the Board of Directors shall be elected annually by the Board
of Directors at the first meeting of the Board of Directors held after each
annual meeting of Shareholders. If the election of officers shall not be held
at such meeting, such election shall be held as soon thereafter as practicable.
Each officer shall hold office until his/her successor shall have been duly
elected and shall have qualified or until his/her death or until he/she shall
resign or shall have been removed in the manner hereinafter provided.
SECTION 3 - REMOVAL. Any officer or agent may be removed by the Board of
Directors, whenever in its judgment the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
SECTION 4 - VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 5 - CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be
the principal executive officer of the Corporation and, subject to the control
of the Board of Directors, shall in general supervise and control all of the
business and affairs of the Corporation. He/She shall, when present, preside at
all meetings of the Shareholders and of the Board of Directors. He/She may
sign, with the Secretary or any other proper officer of the Corporation
thereunto authorized by the Board of Directors, certificates for shares of the
Corporation, and deeds, mortgages, bonds, contracts or other instruments which
the Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these Bylaws to some other officer or agent of the Corporation,
or shall be required by law to be
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otherwise signed or executed; and in general shall perform all duties incident
to the office of President and such other duties as may be prescribed by the
Board of Directors from time to time.
SECTION 6 - PRESIDENT. The President shall be the Chief Executive Officer
unless another person is so designated. If another person is so designated, the
President shall be the Chief Operating Officer of the Corporation, responsible
to the Chief Executive Officer, and shall have such other duties as established
by the Board of Directors.
SECTION 7 - VICE PRESIDENTS. In the absence of the President or in the
event of his/her death, inability or refusal to act, the Vice President (or in
the event there may be more than one Vice President, the Vice Presidents in the
order designated at the time of their election, or in the absence of any
designation, then in the order of their election) shall perform the duties of
the President, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the President. Any Vice President may sign, with
the Secretary or an Assistant Secretary, certificates for shares of the
Corporation; and shall perform such other duties as from time to time may be
assigned to him/her by the Chief Executive Officer or by the Board of Directors.
SECTION 8 - SECRETARY. The Secretary shall (a) keep the minutes of the
proceedings of the Shareholders and of the Board of Directors in one or more
books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; (c) be
custodian of the corporate records and of the seal of the Corporation and see
that the seal of the Corporation is affixed to all certificates for shares prior
to the issue thereof and to all documents, the execution of which on behalf of
the Corporation under its seal is duly authorized; (d) keep a register of the
post office address of each Shareholder which shall be furnished to the
Secretary by such Shareholder; (e) sign with the President, or a Vice President,
certificates for shares of the Corporation, the issuance of which shall have
been authorized by resolution of the Board of Directors; (f) have general charge
of the stock transfer books of the Corporation; and (g) in general perform all
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him/her by the Chief Executive Officer or by the Board
of Directors.
SECTION 9 - TREASURER. The Treasurer shall (a) have charge and custody of
and be responsible for all funds and securities of the Corporation; (b) receive
and give receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositaries as shall be selected in accordance
with the provisions of Article V of these Bylaws; and (c) in general perform all
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him/her by the Chief Executive Officer or by the Board
of Directors.
If required by the Board of Directors, the Treasurer shall give a bond for
the faithful discharge of his/her duties in such sum and with such surety or
sureties as the Board of Directors shall determine.
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SECTION 10 - ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
Assistant Secretaries, when authorized by the Board of Directors, may sign with
the Chief Executive Officer, or a Vice President, certificates for shares of the
Corporation, the issuance of which shall have been authorized by a resolution of
the Board of Directors. The Assistant Treasurers shall respectively, if
required by the Board of Directors, give bonds for the faithful discharge of
their duties in such sums and with such sureties as the Board of Directors shall
determine. The Assistant Secretaries and Assistant Treasurers, in general,
shall perform such duties as shall be assigned to them by the Secretary or
Treasurer, respectively, or by the Chief Executive Officer or by the Board of
Directors.
SECTION 11 - SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he/she is also a Director of
the Corporation.
SECTION 12 - STANDARDS OF CONDUCT FOR OFFICERS. An officer with
discretionary authority shall discharge his duties under that authority in good
faith, on an informed basis, and in a manner he honestly believes to be in the
best interests of the Corporation.
An officer shall be considered to discharge his duties on an informed basis
if he makes, with the care an ordinarily prudent person in a like position would
exercise under similar circumstances, inquiry into the business and affairs of
the Corporation, or into a particular action to be taken or decision to be made.
In discharging his duties an officer shall be entitled to rely on information,
opinions, reports, or statements, including financial statements and other
financial data, if prepared or presented by (a) one (1) or more officers or
employees of the Corporation whom the officer honestly believes to be reliable
and competent in the matters presented; or (b) legal counsel, public
accountants, or other persons as to matters the officer honestly believes are
within the person's professional or expert competence.
SECTION 13 - DIRECTOR LIABILITY. No director of the Corporation shall be
personally liable to the Corporation or its Shareholders for monetary damages
for any breach of his/her duties as a director, except for liability (a) for any
transaction in which the director's personal financial interests is in conflict
with the financial interests of the Corporation of its Shareholders; (b) for
acts or omissions not in good faith or which involve intentional misconduct or
are known to the director to be a violation of law; (c) for any vote for or
assent to an unlawful distribution to Shareholders as prohibited under K.R.S.
271B-8.330; or (d) for any transaction from which the director derived an
improper personal benefit.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
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SECTION 1 - CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
SECTION 2 - LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
SECTION 3 - CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents, of the Corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
SECTION 4 - DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies, or other depositaries as the Board of Directors may
select.
ARTICLE VI
CERTIFICATE FOR SHARES AND THEIR TRANSFER
SECTION 1 - CERTIFICATES FOR SHARES. Certificates representing shares of
the Corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary. The signatures of
such officers upon a certificate may be facsimiles if the certificate is
manually signed on behalf of a transfer agent or a registrar, other than the
Corporation itself or one of its employees. Each certificate for shares shall
be consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number of
shares and the date of issue, shall be entered on the stock transfer books of
the Corporation. All certificates surrendered to the Corporation for transfer
shall be canceled, except that in case of a lost, destroyed or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the Corporation as the Board of Directors may prescribe.
SECTION 2 - TRANSFER OF SHARES. Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record thereof or by his/her legal representative, who shall furnish proper
evidence of authority to transfer, or by his/her attorney thereunto authorized
by power of attorney duly executed and filed with the Secretary of the
Corporation, and on surrender for cancellation of the certificate for such
shares. The person in whose name shares stand on the books of the Corporation
shall be deemed by the Corporation to be the owner thereof for all purposes. An
agreement among Shareholders, or an agreement between Shareholders and the
Corporation, may impose restrictions on the transfer or registration of transfer
of the Corporation.
ARTICLE VII
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FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of July and
end on June 30 in each year.
ARTICLE VIII
DIVIDENDS
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends on its outstanding shares in the manner and upon the terms
and conditions provided by law and its Articles of Incorporation.
ARTICLE IX
CORPORATE SEAL
The Board of Directors may provide a corporate seal which shall be circular
in form and shall have inscribed thereon the name of the Corporation and the
state of Incorporation and the words "CORPORATE SEAL." The corporate seal may
be used on the certificates and resolutions of the Corporation.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice is required to be given to any Shareholder or Director
of the Corporation under the provisions of these Bylaws, or under the provisions
of the Articles of Incorporation, or under the provisions of the Kentucky
Business Corporation Act, a waiver thereof in writing signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
ARTICLE XI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify each of its Directors and officers who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he/she is or was a Director or officer of the
corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another Corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he/she
acted in good faith and in a manner he/she reasonably believed to be in or not
opposed to the best interests of the Corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
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Except as provided hereinbelow, any such indemnification shall be made by
the Corporation only as authorized in the specific case upon a determination
that indemnification of the Director or officer is proper in the circumstances
because he/she has met the applicable standard of conduct set forth above such
determination shall be made: (a) by the Board of Directors by a majority vote of
a quorum of Directors who were or are not parties to such action, suit, or
proceeding; or (b) by the Shareholders.
Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
the final disposition of such action, or proceeding if authorized by the Board
of Directors and upon receipt of an undertaking by or on behalf of the Director
or officer to repay such amount unless it shall ultimately be determined that
he/she is entitled to be indemnified by the Corporation.
To the extent that a Director or officer has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to above, or
in defense of any claim, issue or matter therein, he/she shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him/her in connection therewith, without any further determination that he/she
has met the applicable standard of conduct set forth above.
ARTICLE XII
BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account and shall also keep minutes of the proceedings of its members, Board of
Directors, committees having and exercising any of the authority of the Board of
Directors, and the membership committee, and shall keep at the principal office
a record giving the names and addresses of the members entitled to vote. All
books and records of the Corporation may be inspected by any member, or his
agent or attorney, for any proper purpose at any reasonable time.
ARTICLE XIII
AMENDMENTS
The Shareholders may alter, amend or repeal the Bylaws at any annual or
special meeting of Shareholders at which a majority of the outstanding shares of
the Corporation is present by the vote of such majority, provided that the
notice of such meeting shall have included notice of such proposed amendment.
The Board of Directors shall have the power and authority to alter, amend or
repeal Bylaws of the Corporation at any regular or special meeting at which a
quorum is present by the vote of a majority of the entire Board of Directors,
subject always to the power of the Shareholders under Kentucky law to repeal or
change such Bylaws.
ARTICLE XIV
EXPENSES
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The Corporation shall reimburse each of its Directors and officers for any
and all expenses and debts incurred by said Directors and officers in the course
of their employment and usual business activities. Furthermore, each officer of
the Corporation may be paid a reasonable salary as compensation by the
Corporation. Each such reimbursement and/or salary shall be deducted as a
business expense pursuant to Section 162 of the Internal Revenue Code of 1954,
as amended, and any and all regulations appurtenant thereto. Provided, however,
that should the deductions for any such reimbursement or salary, or any portion
thereof, be disallowed by the Internal Revenue Service, said Director or officer
shall return any and all sums paid to him/her in the form of such reimbursement
of expenses or salary to the Corporation in such a manner as to allow said
Directors and officers to deduct the sums returned from their individual income,
pursuant to the provisions and regulations of the Internal Revenue Code of 1954,
as amended. It shall be the duty of the Board of Directors to enforce payment
of each such amount disallowed.
____________________________________
RONALD W. SCHULTZ
CHIEF EXECUTIVE OFFICER
____________________________________
MICHAEL V. BRODARICK
SECRETARY
DATE:________________________
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June 16, 1997
Active Ankle Systems, Inc.
509 Barret Avenue
Louisville, Kentucky 40204
Dear Sirs:
We have acted as special counsel to Active Ankle Systems, Inc. in
connection with the offering of 100,000 shares of common stock, pursuant to a
Prospectus date June 13, 1997 ("Prospectus")
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate or
similar records and other instruments as we have deemed necessary or
appropriate for the purposes of this opinion. In such examinations we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to authentic original
documents of all documents submitted to us as certified, conformed or
photostatic copies or facsimiles. We have also assumed (i) the due
incorporation and valid existence of you, (ii) that you have the requisite
corporate power and authority to enter into and perform the transactions
described in the Prospectus and (iii) the due authorization, execution and
delivery of the Prospectus by you.
Based upon the foregoing, we are of opinion as follows:
Upon receipt of the consideration stated in the Prospectus (i.e. $40 in
cash per share), and upon subsequent issuance of the shares, each share will,
in our opinion, be legally issued, fully paid and nonassessable.
We are admitted to practice only in the State of Kentucky and express no
opinion as to matters governed by any laws other than the laws of the State
of Kentucky and the federal laws of the United States of America, and we
express no opinion as to the effect on the matters covered by this letter of
the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency,
quoted, cited or otherwise referred to without our prior written consent.
Very truly yours,
MIDDLETON & REUTLINGER
<PAGE>
TENDER OFFER
OFFER TO PURCHASE FOR CASH
BY
ACTIVE ANKLE SYSTEMS, INC.
SHARES OF ITS COMMON STOCK
AT $27 NET PER SHARE
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., LOUISVILLE, KENTUCKY,
TIME ON ________________, 1997, UNLESS THIS OFFER IS EXTENDED.
------------
------------
Active Ankle Systems, Inc., a Kentucky corporation (the "Company"), is
offering to purchase from each record holder ("Holder") of its common stock
("Shares"), all or any portion of the Shares owned by such Holder, for a price
of $27 per share in cash, upon the terms and conditions stated herein and the
Election attached hereto as Exhibit A.
------------
------------
THIS OFFER IS NOT CONTINGENT UPON ANY MINIMUM NUMBER OF
SHARES BEING TENDERED; THE OFFER IS HOWEVER, CONTINGENT UPON
THE SALE OF A MINIMUM OF $1,800,000 OF SHARES TO THE PUBLIC,
PURSUANT TO A PUBLIC OFFERING DESCRIBED IN THE PRELIMINARY
PROSPECTUS ATTACHED AS EXHIBIT B.
------------
------------
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES IN THIS
OFFER. EACH SHAREHOLDER MUST MAKE HIS OR HER OWN DECISION WHETHER TO TENDER
SHARES AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN INFORMED
THAT SOME OF ITS SHAREHOLDERS AND DIRECTORS WILL TENDER SOME OR ALL OF THEIR
SHARES. THOSE WHO HAVE ON THE DATE HEREOF ALREADY EXPRESSED TO MANAGEMENT AN
INTENT TO TENDER ARE LISTED ON EXHIBIT C HERETO.
------------
------------
NOTE THAT SOME OF THE DIRECTORS ARE TENDERING THEIR SHARES, AND THEREFORE HAVE A
CONFLICT OF INTEREST.
<PAGE>
------------
------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------
------------
The Offer does not constitute an offer or solicitation by the Company or
any other person for the purchase of any securities other than the securities
covered by this Offer. The Offer is not being made to, and tenders will not be
accepted from, holders of Shares in any jurisdiction in which the making of the
Offer or acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, in its sole discretion, take such action
as it may deem necessary to make the Offer in any such jurisdiction and to
extend the Offer to holders of Shares in such jurisdiction.
------------
------------
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING
SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFER OTHER
THAN THOSE CONTAINED IN THIS OFFER OR IN THE ELECTION. IF MADE OR GIVEN, SUCH
RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY.
------------
------------
THE COMPANY HAS OBTAINED AN APPRAISAL BY A LOUISVILLE ACCOUNTING FIRM, A
COPY OF WHICH HAS ALREADY BEEN SUPPLIED TO ALL SHAREHOLDERS. THE COMPANY
MAKES NO REPRESENTATION AS TO THE ACCURACY OF SUCH VALUATION, NOR TO ITS
METHODOLOGY OR RELIABILITY. THE COMPANY ONLY DISCLOSES THE EXISTENCE OF SUCH
VALUATION. ANY SHAREHOLDER MAY CONTACT _________________ AT
_______________________ WHO IS AVAILABLE FOR CONSULTATION, AT NO COST TO THE
SHAREHOLDER OR HIS/HER FINANCIAL ADVISOR OR ACCOUNTANT.
------------
------------
2
<PAGE>
IMPORTANT
PROCEDURE TO MAKE ELECTION
ANY SHAREHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH SHAREHOLDER'S
SHARES SHOULD COMPLETE AND SIGN THE ELECTION ATTACHED AS EXHIBIT A, OR A COPY
THEREOF, AND DELIVER SAME (BY MAIL, EXPRESS, OR PERSONAL DELIVERY) TO THE
COMPANY, ATTN: GARY G. HERZBERG, 509 BARRET AVENUE, LOUISVILLE, KENTUCKY 40204,
NO LATER THAN ________, 1997, AT 5:00 P.M.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE SHOULD BE ADDRESSED TO GARY G.
HERZBERG OR RONALD W. SCHULTZ, ACTIVE ANKLE SYSTEMS, INC. 509 BARRET AVENUE,
LOUISVILLE, KENTUCKY 40204, TELEPHONE 502-582-2655.
3
<PAGE>
TABLE OF CONTENTS
INTRODUCTION
DESCRIPTION OF THE OFFER
PROCEDURE FOR TENDERING SHARES
NONCOMPLIANCE BY SHAREHOLDER
WITHDRAWAL RIGHTS
CANCELLATION OF TENDER
PRELIMINARY PROSPECTUS
MISCELLANEOUS
EXHIBITS
A - Form For Election
B - Preliminary Prospectus
C - List of Shareholders Who Have Expressed an Intent Not to Tender
4
<PAGE>
INTRODUCTION
The Board of Directors of the Company has adopted a business plan which
changes the overall strategic direction of the Company. The Company currently
is the manufacturer of patented ankle braces. The new business plan will expand
the Company's operations into consumer and catalog sales. The plan is described
in the Preliminary Prospectus attached as Exhibit B.
Because the new plan represents a departure from past operations, the Board
of Directors determined that the present shareholders should be given the
opportunity to sell their shares. The Board has approved the transaction to the
extent that it can. However, because they all are shareholders of the Company,
the transaction represents a conflict of interest transaction under applicable
law. Therefore, there is not a majority of the Board who can under the Kentucky
corporation law approve the transaction. Accordingly, the transaction has been
submitted to the Company's shareholders, who approved the transaction.
Neither the Company, nor any Shareholder of the Company, nor any director
or officer, makes any representation as to the fairness of the offered price of
$27 per share. The Company has obtained an independent valuation from Cotton &
Allen, a Louisville accounting firm, and that document has previously been
furnished to each Shareholder. No representation is made as to the accuracy or
methodology of the Cotton & Allen valuation; it is attached solely as a matter
of disclosure. Each Shareholder is advised to consult with his/her own
financial advisor or accountant; each Shareholder or her/his financial advisor
may contact Robert Montgomery at Cotton & Allen (without cost to the
shareholder), who is available to ask any questions a Shareholder or financial
advisor may have about the valuation report.
Each Shareholder is advised that he/she must make his/her own decision as
to whether to tender shares.
DESCRIPTION OF THE OFFER
The offer is to purchase all or any portion of each Shareholder's Shares at
a cash price of $27 per share. The only contingency is that the Company be
successful in selling at least $1,800,000 of additional common stock offered
pursuant to the Preliminary Prospectus attached as Exhibit B. If the Company is
not so successful, then this Offer is null and void. If the Company is
successful, then the Shares tendered shall be purchased within 30 days after
receipt of the first $1,800,000, receipt by the Company of the stock
certificate for the tendered shares and proof of ownership acceptable to the
Company.
Each Shareholder may tender all or any portion of the Shares owned by that
Shareholder. There is no minimum number of shares to be tendered.
5
<PAGE>
The shares will be purchased for cash (i.e. ready funds), subject to no
deductions other than any deductions required by applicable tax laws.
The Offer will remain open until Midnight on the tenth day after the date
hereof. Thereafter, the Offer shall be deemed to have been declined in full by
any Shareholder who has not tendered an Election in the form attached as Exhibit
A.
The Company reserves the right, in its sole discretion, at any time or from
time to time, to extend the period of time during which the Offer is open, by
giving oral or written notice to the Shareholders of such extension and making a
public announcement thereof. There can be no assurance, however, that the
Company will exercise its right to extend the offer.
PROCEDURE FOR TENDERING SHARES
To tender Shares, the Shareholder need only execute a copy of the Election
(attached as Exhibit A) and return the executed original to Gary G. Herzberg,
Active Ankle Systems, Inc., 509 Barret Avenue, Louisville, Kentucky 40204. Any
method which results in such Election actually arriving in Mr. Herzberg's hands
is acceptable; however, such Election shall not be complete unless and until
such Election is in Mr. Herzberg's possession, and it is the responsibility of
the Shareholder to make sure that the Election is in Mr. Herzberg's hands.
No signature guarantee is required. The certificate for the shares must be
supplied before payment, but need not accompany the Election.
NONCOMPLIANCE BY SHAREHOLDER
The Company reserves the absolute right to reject any tender which does not
comply strictly with the terms of the Offer or which, in the opinion the
Company's legal counsel, would be contrary to any law or regulation. In
addition, the Company reserves the right, in its absolute discretion, to waive
any noncompliance.
WITHDRAWAL RIGHTS
Any Shareholder may withdraw his/her tender through the expiration date of
this Tender Offer. After that date, the tender shall be irrevocable.
6
<PAGE>
CANCELLATION OF TENDER
This Offer may be terminated at the will of the Company, before or after
filing of an Election by a Shareholder, and will be terminated upon the
occurrence of any of the following:
(1) The failure of the Company to sell at least $1,800,000 of the shares
offered pursuant to the Preliminary Prospectus, a draft of which is attached as
Exhibit B.
(2) If there is threatened, instituted or pending any action or proceeding
by any government or governmental, regulatory or administrative agency or
authority or tribunal or any other person, domestic or foreign, or before any
court, authority, agency or tribunal which challenges the making of the Offer,
the acquisition of some or all of the Shares pursuant to the Offer or otherwise
relates in any manner to the Offer or the offering of shares pursuant to the
Preliminary Prospectus attached as Exhibit B.
(3) If there is threatened, instituted or pending any action or proceeding
by any government or governmental, regulatory or administrative agency or
authority or tribunal or any other person, domestic or foreign, or before any
court, authority, agency or tribunal which: (a) in the sole judgment of the
Company, make the acceptance for purchase of some or all of the Shares illegal
or otherwise restrict or prohibit consummation of the Offer; (b) delay or
restrict the ability of the Company, or render the Company unable, to accept for
purchase some or all of the Shares; (c) materially impair the contemplated
benefits of the Offer to the Company; or (d) materially affect the business,
condition (financial or other), income, operations or prospects of the Company,
taken as a whole, or otherwise materially impair in any way the contemplated
future conduct of the business of the Company.
(4) If at any time any event occurs which, in the sole judgment of the
Company, would materially impair the business, condition (financial or other),
income, operations or prospects of the Company, taken as a whole, or otherwise
materially impair in any way the contemplated future of the conduct of the
business of the Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition. Any such condition may be waived by the Company, without the Company
having any obligation to do so.
PRELIMINARY PROSPECTUS
The contents of the Preliminary Prospectus attached as Exhibit B are hereby
incorporated by reference as if fully set forth herein, and shall be an integral
part of this Offer.
7
<PAGE>
Shareholders should consult their tax advisors regarding the tax treatment
of the proceeds of this sale. The Company makes no representation regarding the
tax consequences of tendering shares pursuant hereto, depending upon the
circumstances of each shareholder.
MISCELLANEOUS
The Offer is not being made to any person or Holder in any jurisdiction
where the making of the Offer would be in violation of applicable Blue Sky or
other applicable laws. The Company is not aware of any such jurisdiction, but
if it does learn of such a jurisdiction, it will make a good faith effort to
comply with such laws. If compliance is not, in the sole judgment of the
Company, practicable, this Offer shall be null and void as to such Shareholder.
ACTIVE ANKLE SYSTEMS, INC.
By: ______________________________
Gary G. Herzberg, President
8
<PAGE>
EXHIBIT A
FORM FOR ELECTION
<PAGE>
EXHIBIT B
PRELIMINARY PROSPECTUS
<PAGE>
EXHIBIT C
LIST OF SHAREHOLDERS
WHO HAVE EXPRESSED AN INTENT NOT TO TENDER
Shareholder Shares Owned Shares Tendered Shares Retained
- ----------- ------------ --------------- ---------------
Henry H. Porter, Jr. 19,700 -0- 19,700
Gary G. Herzberg 200 -0- 200
Ronald W. Schultz 6,640 -0- 6,640
Glen R. Snow 1,000 -0- 1,000
Andrew Pfeifer 3,846 -0- 3,846
Greg Deuser 1,000 -0- 1,000
Joan Cralle-Day 6,932 -0- 6,932
Bosworth M. Todd 3,000 -0- 3,000
-----
42,318
<PAGE>
ELECTION
ACTIVE ANKLE SYSTEMS, INC.
To: Diane Lilly
Corporate Secretary
Active Ankle Systems, Inc.
509 Barret Avenue
Louisville, Kentucky 40206
Re: Tender Offer for Shares
Check one:
_____ Notice is hereby given to Active Ankle Systems, Inc. that the undersigned
shareholder of such corporation hereby elects to sell ___ shares to the
Corporation at a price of $27 per share. The remainder of the shares owned by
me, if any, will be retained by me and I reject the tender offer for those
shares. I understand that this sale is contingent upon the successful sale of
at least $1,800,000 of common shares to the public, pursuant to the preliminary
prospectus which has been supplied to me.
or
_____ Notice is hereby given to Active Ankle Systems, Inc. that the undersigned
elects not to sell any shares.
EXECUTED this ___ day of ______, 1997.
---------------------------------
Printed Name:
--------------------
<PAGE>
ACTIVE ANKLE/HERZBERG
DEFERRED COMPENSATION AGREEMENT
THIS DEFERRED COMPENSATION AGREEMENT ("Agreement"), entered into as of the
8th day of November, 1995, between ACTIVE ANKLE SYSTEMS, INC., a Kentucky
corporation having its principal office and place of business in Louisville,
Kentucky ("Company") and GARY G. HERZBERG, of Louisville, Kentucky
("Executive").
RECITALS:
A. Executive desires to provide for the deferral of a portion of his
salary and of any incentive cash bonus to which he may be entitled for services
rendered to the Company pursuant to plans and resolutions adopted by the Board
of Directors of the Company.
B. Company believes that such deferral will be in its best interests as
it will increase Executive's financial ability to meet certain of his financial
needs, thereby enabling Executive to better perform his services to company
while employed.
AGREEMENT:
NOW, THEREFORE, in consideration of the recitals, and for other good and
valuable consideration, the receipt, mutuality and sufficiency of which are
hereby acknowledged, the parties hereto do hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following words and
phrases shall have the meanings set forth below:
a. ACCOUNT. The Herzberg Deferred Compensation Account established
pursuant to Section 2.
b. BENEFIT. An amount equal to the credit balance of the Account.
c. COMMITTEE. The Compensation Committee provided for in
Section 12.
d. COMPANY. Company and any subsidiary or sub-subsidiary of Company
or any successor to Company, whether by merger, purchase of assets or otherwise.
e. DEFERRED AMOUNT. That portion of the salary or incentive cash
bonus which would otherwise be paid to the Executive by Company for a period or
periods after Executive elects to defer hereunder. Initially, the Deferred
Amount shall be $625 of Executive's periodic salary. If
<PAGE>
the Executive elects to defer a different amount pursuant to Section 2, then the
term Deferred Amount shall mean such different amount.
f. RETIREMENT. Termination of Executive's employment with Company
for any reason.
2. ELECTION TO CHANGE DEFERRED AMOUNT.
a. TIMING OF ELECTION. Executive may elect, to any period of
service for which compensation is payable, to defer a different Deferred Amount
which will be payable for the subsequent period(s) of service.
b. FORM OF ELECTION. Each such election shall be in writing, shall
be addressed to the Compensation Committee, shall state the Deferred Amount
(whether in a dollar amount, or in a percentage, of Executive's salary or
incentive cash bonus or both) Executive elects to defer and shall be effective
for succeeding period(s) of service of the Company unless revoked or modified by
Executive before a period of service.
3. DEFERRED COMPENSATION ACCOUNT. Company shall, upon execution of this
Agreement, create on its books and records a special account to be called the
"Herzberg Deferred Compensation Account" to which Account it shall annually
credit (i) the Executive's Deferred Amount and (ii) the amounts, if any, which
the Company would have contributed to any qualified "employee pension benefit
plan" which it maintains if the Deferred Amount had been paid in cash to
Executive. Each credit to the Account representing a Deferred Amount shall be
made at the time Company would have made cash payments to Executive of amounts
constituting a Deferred Amount or would have made contributions to the qualified
plan(s) on behalf of the Executive.
4. INVESTMENT OF ACCOUNT. The amounts credited to the Account shall be
invested by the Company in accordance with instructions of the Committee and
such investments shall be made from time to time, in such securities and in such
proportions and amounts as the Committee, in its sole discretion, but after
consultation with Executive, shall determine, except that the Account shall at
all times be invested in common stocks, preferred stocks, corporate bonus or
debentures (whether or not convertible) mutual funds, United States Treasury
obligations, municipal or other tax exempt bonds, bank savings accounts or other
cash equivalents or in such other investments as the Committee shall, from time
to time, determine (except that uninvested amounts of cash may be retained from
time to time between investments).
5. IDENTIFICATION AND ANNUAL VALUATION OF ACCOUNT INVESTMENTS.
a. RECORDKEEPING OF ACCOUNT. The Company shall keep books and
records showing the investments made with Deferred Amounts and other credits to
the Account, and any and all other investments made from gains, dividends and
other amounts credited to the Account.
2
<PAGE>
b. VALUATION. At least once a year during the time the Account is
maintained, Company will notify Executive in writing of the identity and
approximate value, as of the immediately preceding June 30, of the investments
which have been made under the terms of this Agreement.
6. STATUS OF INVESTMENTS. All Account investments made by the Company
shall be deemed to be made solely for the purpose of aiding Company in measuring
and meeting its obligations under this Agreement. The Company shall be named
the sole owner of all such investments and of all rights and privileges
conferred by the terms of the instruments evidencing such investments. Except
as provided in Section 4, the terms of this Agreement place no obligation upon
Company to invest or to continue to invest any portion of the amount in the
Account, to invest in or to continue to invest in any specific asset, to
liquidate any particular investment, or to apply in any specific manner the
proceeds from the sale, liquidation, or maturity of any particular investment.
No provision or clause of this Agreement shall cause such investments to be
treated as anything but part of the general assets of company, nor shall
anything stated herein cause such investments to represent the vested, secured
or preferred interest of Executive, his beneficiary, surviving spouse, heirs or
estate.
7. PAYMENT OF BENEFIT TO EXECUTIVE FOLLOWING RETIREMENT.
a. DEFAULT PAYMENT OF BENEFIT. Commencing not later than six months
following Executive's Retirement, Company agrees to commence payment of the
Benefit to Executive, if living, otherwise to his beneficiary, and if no such
beneficiary is designated, or if the designated beneficiary shall predecease the
Executive, to his surviving spouse, heirs or estate, as the Committee, in its
sole discretion, shall determine; provided, if Executive's Retirement occurs
prior to his age 65 for a reason other than death or total and permanent
disability (as determined by the Committee) the committee may, in its sole
discretion, direct the Company to commence payment of the Benefit to the
Executive when he attains AGE 65 OR AT ANY EARLIER DATE. The Benefit shall be
paid in installments no less frequently than monthly over a 15-year period. The
amount of the installments to be paid in the first year shall be determined by
dividing the Benefit on the date the first installment is to be paid by 15, and
paying that amount in 12 equal monthly installments. The amount of the
installments to be paid in each of the succeeding 14 years shall be determined
by dividing the remaining Benefit by the number of years remaining over which
the Benefit is to be paid, and paying that amount in 12 equal monthly
installments.
b. EXECUTIVE ELECTION OF PAYMENT OF BENEFIT. Notwithstanding the
provisions of Section 7.a., the Executive may, upon the execution of this
Agreement and at the time he makes an election under Section 2.a. to defer a
different amount, direct that the Benefit be paid in amounts, and over periods,
including a one-term cash payment, other than as set forth in Section 7.a.
c. INVESTMENTS CONTINUE DURING PERIOD BENEFIT BEING PAID. During
the period the Benefit is being paid by the Company under this Section 7, the
balance of the Benefit remaining in the Account shall continue to be credited to
the Account.
3
<PAGE>
8. ACCELERATION OF PAYMENT OF BENEFIT TO EXECUTIVE.
a. REQUEST OF THE ACCELERATION. The Benefit payable to Executive,
his beneficiary, surviving spouse or estate pursuant to Section 7 may, in the
sole discretion of the Committee, be accelerated in whole or in part, but only
(i) upon the written request of Executive, if living, or by his beneficiary,
surviving spouse, heirs or estate, as the case may be, and (ii) to enable the
Executive or his beneficiary, surviving spouse, heirs or estate to meet
situations of financial hardship, emergency or necessity. No such written
request shall obligate the Company to accelerate the payment of the Benefit
hereunder.
b. UNFORESEEN EMERGENCY. Notwithstanding the provisions of 8.a., in
the event of an "unforeseeable emergency," the Company shall make a payment from
the Benefit to Executive, if living, or to his beneficiary, surviving spouse,
heirs or estate, as the case may be, in an amount not to exceed the amount
reasonably needed to satisfy the unforeseeable emergency. As used herein, the
term "unforeseeable emergency" shall have the meaning set forth in Treas. Regs.
Section 1.457-2(h)(4), a copy of which is attached hereto as Exhibit A.
may, upon the execution of this Agreement and at the time he makes an election
under Section 2.a. to defer a different amount, direct that the Benefit be paid
in amounts, and over periods, including a one-time cash payment, other than as
set forth in Section 7.a.
9. DESIGNATION OF BENEFICIARY. Executive shall designate in writing,
upon the form attached hereto as Exhibit B, a beneficiary or beneficiaries of
the Benefit which may be payable in the event of his death, which designation
may include the designation of contingent beneficiary or beneficiaries and
Executive may from time to time change such designation of beneficiary or
beneficiaries (or contingent beneficiary or beneficiaries).
10. NO CONTRACT OF EMPLOYMENT. This Agreement does not constitute a
contract of employment between Executive and Company, and Company reserves the
right to terminate Executive's employment for any reason, at any time,
notwithstanding the existence of this Agreement. Conversely, this Agreement
does not obligate Executive to remain in the employ of Company, and he reserves
the right, at any time, to terminate his employment for any reason.
11. ASSIGNMENT OR ANTICIPATION. Neither Executive nor his beneficiary,
surviving spouse nor estate shall have any right to commute, sell, assign,
transfer or otherwise convey the right to receive the Benefit hereunder, which
Benefit and all the rights thereto are expressly declared to be nonassignable
and non-transferrable, and in the event of any attempted assignment or transfer,
the Company shall have no further liability hereunder. The Benefit shall not,
in any manner, be subject to garnishment, attachment, execution, levy, debts,
contracts, liabilities, engagements or torts of the person or estate entitled to
such Benefit, provided that the Benefit shall in all respects be subject to
offset against any indebtedness due the Company by Executive, his beneficiary,
surviving spouse or estate and shall be subject to offset against any and all
other claims, demands and causes of action the Company may have against the
Executive, his beneficiary, surviving spouse or estate.
4
<PAGE>
12. COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors, or if the Compensation Committee is not at any time constituted, the
Board of Directors as a whole, shall constitute the Committee. Every decision
or action of the Committee shall be valid if concurred in by a majority of the
members then in office, which concurrence may be had without a formal meeting.
Members of the Committee shall not be liable to any person for any actions or
omissions in connection with their duties upon the Committee, except for fraud
or willful misconduct. The Committee shall have the powers and duties conferred
upon it under this Agreement.
13. PARTIES AFFECTED. All of the terms, provisions and conditions of this
Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by the parties hereto, and their respective heirs, personal
representatives, successors and assigns.
14. NOTICE. Any notice, demand or other communication to either party
under this Agreement shall be in writing and shall be deemed to have been duly
given if (i) delivered personally against a receipt, or (ii) deposited in the
United States mail, postage prepaid, return receipt requested, addressed if to
Executive, as follows:
Gary G. Herzberg
451 Baxter Avenue
Louisville, Kentucky 40204
and if to Company, as follows:
Active Ankle Systems, Inc.
451 Baxter Avenue
Louisville, Kentucky 40204
Attention of the Chairman of the Board
15. TERMINATION OF THE AGREEMENT. The Board of Directors of Company
reserves the right to terminate this Agreement at any time, provided that the
exercise of such right shall not have the effect of terminating the obligation
of the Company to pay Executive the Benefit determined as of the date of
termination of this Agreement.
16. HEADINGS. The headings in this Agreement are included for purposes of
convenience only and shall not be considered a part of this Agreement in
construing or interpreting any provision hereof.
17. GOVERNING LAW. This Agreement shall be interpreted under, and
governed by, the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of
the day, month and year first above written.
5
<PAGE>
ACTIVE ANKLE SYSTEMS, INC.
By:_______________________________________
Title:____________________________________
("Company")
_______________________________________
GARY G. HERZBERG
("Executive")
6
<PAGE>
EXHIBIT A
(4) UNFORESEEABLE EMERGENCY. For purposes of this paragraph (h), an
unforeseeable emergency is, and if the plan provides for payment in the case of
an unforeseeable emergency must be defined in the plan as, severe financial
hardship to the participant resulting from a sudden and unexpected illness or
accident of the participant or of a dependent (as defined in section 152(a)) of
the participant, loss of the participant's property due to casualty, or other
similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the participant. The circumstances that will
constitute an unforeseeable emergency will depend upon the facts of each case,
but, in any case, payment may not be made to the extent that such hardship is or
may be relieved --
(i) Through reimbursement or compensation by insurance or
otherwise,
(ii) By liquidation of the participant's assets, to the extent
the liquidation of such assets would not itself cause severe
financial hardship, or
(iii) By cessation of deferrals under the plan.
Examples of what are not considered to be unforeseeable emergencies include
the need to send a participant's child to college or the desire to purchase a
home.
<PAGE>
EXHIBIT B
DESIGNATION OF BENEFICIARY
The undersigned does hereby designate the following person or persons to be
the beneficiary of the Benefits to be received under the Deferred Compensation
Agreement between the undersigned and Active Ankle Systems, Inc. dated November
8, 1995, in the event of the undersigned's death prior to the time that the
entire Benefit has been paid to him:
----------------------------------------------
In the event that the above designated beneficiary is not living at the
time when Benefits under the Agreement would be payable to such beneficiary, the
undersigned does hereby designate the following person to be the contingent
beneficiary of the Benefits:
----------------------------------------------
Date:
-------------------- ------------------------------------------
Gary G. Herzberg
<PAGE>
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is entered into as of the ___ day
of June, 1997, by and between ACTIVE ANKLE SYSTEMS, INC. a Kentucky corporation
("Issuer") and BANK ONE KENTUCKY, NA ("Escrow Agent").
RECITALS:
A. Issuer proposes to offer for sale to subscribers an aggregate of
100,000 shares (the "Shares") at a price of $40.00 per Share, payable at the
time of subscribing for a Share. The payment will be paid into the escrow
created by this Agreement.
B. Issuer intends to sell the Shares on a best-efforts "minimum or none"
basis in a registered offering (the "Offering") by delivering to each subscriber
a Prospectus (the "Prospectus") describing the Offering.
C. Issuer desires to establish an escrow account in which funds received
from subscribers would be deposited pending completion of the Escrow Period (as
defined below). Bank One Trust Company, NA agrees to serve as Escrow Agent in
accordance with the terms and conditions set forth herein.
AGREEMENT:
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. APPOINTMENT OF ESCROW AGENT. Issuer hereby appoints Bank One
Kentucky, NA as Escrow Agent and Escrow Agent shall establish an escrow account
(the "Escrow Account") on its books named "Active Ankle 1997 Public Offering
Escrow Account." Commencing upon the execution of this Agreement, Escrow Agent
shall act as Escrow Agent and hereby agrees to receive and disburse the proceeds
from the offering of the Shares in accordance with the terms herewith. Issuer
agrees to notify the Escrow Agent promptly of the closing of the offering and
sale of the Shares.
2. PAYMENTS INTO ESCROW. Issuer shall cause all checks received from
subscriber for Shares to be promptly deposited into the Escrow Account. Issuer
shall deliver to the Escrow Agent checks of the subscribers made payable to the
order of "Active Ankle 1997 Public Offering Escrow Account." Any checks that
are received by Escrow Agent that are not made payable to the Escrow Account
shall be returned to the Issuer. Issuer shall furnish to the Escrow Agent at
the time of each deposit of the above-mentioned funds a list containing the name
of each subscriber, the subscriber's address, the number of Shares purchased,
and the amount of the check being delivered to the Escrow Agent (see Exhibit A
for the form to be used). Prior to the receipt of the Minimum (as described
below), the Issuer is aware and understands that it is not entitled to any
proceeds from subscriptions deposited into the Escrow Account and no amounts
<PAGE>
deposited in the Escrow Account during the Escrow Period shall become the
property of the Issuer or any other entity, or be subject to the debts of the
Issuer or any other entity.
3. TERMINATION OF ESCROW. The Escrow Period shall commence on the date
hereof and shall terminate ten (10) business days following the earlier to occur
of the following dates:
(a) The date upon which Escrow Agent confirms upon written request of the
Issuer that it has received into the Escrow Account and collected gross
subscription proceeds from the sale of 45,000 Shares, aggregating in
deposited funds the total amount of at least $1,800,000.00 (the "Minimum");
or
(b) The "Cessation Date," which for the purposes of this Agreement shall
be 180 days after the date on which the U.S. Securities and Exchange
Commission authorizes the sale of Shares, unless Issuer elects to continue
to offer the Shares for sale until some later date, as permitted by the
Prospectus but no later than March 31, 1998; or
(c) The date upon which a determination is made by the Issuer to terminate
the Offering prior to the sale of the Minimum, as communicated to Escrow
Agent in writing.
Notwithstanding anything to the contrary contained herein, the Cessation
Date is intended to signify the date of the cessation of the Offering as
provided in the Prospectus, and not the termination of the Escrow Period of this
Agreement; and upon the occurrence of any of the events described in (a), (b) or
(c) above, the Escrow Period shall continue for such ten (10) business-day
period solely for the limited purposes of collecting subscribers' checks that
have been deposited prior to such event and disbursing funds from the Escrow
Account as provided herein. Escrow Agent will not accept deposits of
subscribers' checks after notice that any of the events described in
subparagraphs (a), (b) and (c) has occurred.
4. DUTIES OF ESCROW AGENT. The Escrow Agent will deposit the
subscribers' checks for collection and credit the proceeds to the Escrow Account
to be held by it under the terms of this Agreement. Notwithstanding anything to
the contrary contained herein, Escrow Agent is under no duty or responsibility
to enforce collection of any checks delivered to Escrow Agent hereunder. The
Escrow Agent hereby is authorized to forward each check for collection and
deposit the proceeds in the Escrow Account. As an alternative, the Escrow Agent
may telephone the bank on which the check is drawn to confirm that the check has
been paid. Additionally, to insure that such funds have cleared normal banking
channels for collection, Escrow Agent is authorized to hold for ten (10)
business days funds to be released. Issuer shall immediately reimburse Escrow
Agent any monies paid to it if thereafter the subscriber's check is returned
unpaid. Any item returned unpaid to the Escrow Agent on its first presentation
for payment shall be returned to Issuer and need not be again presented by the
Escrow Agent for collection. Issuer agrees to reimburse Escrow Agent for the
cost incurred with any returned check. For purposes of this Agreement, the term
"collected funds" or the term "collected" when referring to the proceeds of
subscribers' checks shall mean all funds received by Escrow Agent that have
cleared normal banking channels and are in the form of cash. The Escrow Agent
shall invest the funds deposited
2
<PAGE>
in the Escrow Account as instructed in writing by Issuer, and shall in no
event be liable for any investment loss. Upon termination of the escrow, all
earnings shall belong to and be paid to Issuer.
5. PROCEDURE UPON TERMINATION OF ESCROW. If prior to the Cessation Date,
subscriber's checks in an amount of at least the Minimum have been deposited in
the Escrow Account, upon request from Issuer, Escrow Agent will confirm the
amounts collected by it from subscriber's checks. If such amount is at least
equal to the Minimum, the Issuer may send Escrow Agent a written notice
providing a list of all accepted subscribers, specifying the total amount of
their subscription to be remitted to Issuer, and containing a request to
terminate the Escrow Period and remit such amount, less any fees or other
amounts then owing from Issuer to Escrow Agent hereunder, to the Issuer as
promptly as possible, but in no event later than ten (10) business days after
such termination, by issuing its bank check payable to the Issuer or by
depositing such amount directly into the account of Issuer maintained with Bank
One Kentucky, NA, as designated in writing by Issuer to Escrow Agent. The
Escrow Period shall not terminate upon receipt by Escrow Agent of such notice,
but shall continue for such (10) business-day period solely for the limited
purposes of collecting subscribers' checks that have been deposited prior to
Escrow Agent's receipt of such notice and disbursing funds from the Escrow
Account as provided herein. Escrow Agent will not accept deposits of
subscriber's checks after receipt of such notice.
If, on the Cessation Date, the Minimum Amount has not been deposited with
the Escrow Agent and collected, or if Issuer notifies the Escrow Agent in
writing that Issuer elects to terminate the Offering as provided in paragraph
3(c) above, the Escrow Agent shall then issue and mail its bank checks to the
subscribers in the amount of the subscribers' respective checks, without
deduction, penalty or expense to the subscriber, and shall, for this purpose, be
authorized to rely upon the names and addresses of subscribers furnished it as
contemplated above. No subscriber shall be paid interest with respect to such
deposited funds. The purchase money returned to each subscriber shall be free
and clear of any and all claims of the Issuer and any of its creditors. For
each subscription for which the Escrow Agent has not collected funds but has
submitted the subscriber's check for collection, the Escrow Agent shall promptly
issue a check to such subscriber in the amount of the collected funds from such
subscriber's check after the Escrow Agent has collected such funds. If Escrow
Agent has not yet submitted such subscriber's check for collection, the Escrow
Agent shall promptly remit the subscriber's check directly to such subscriber.
At such time as Escrow Agent shall have made the payments and remittances
provided in the Agreement, the Escrow Agent shall be completely discharged and
released of any and all further liabilities and responsibilities hereunder.
6. FEES TO ESCROW AGENT. As consideration for its agreement to act as
Escrow Agent as herein described, Issuer agrees to pay the Escrow Agent its fees
described on the attached fee schedule (Exhibit B). Further, Issuer agrees to
pay all disbursements and advances incurred or made by the Escrow Agent in
performance of its duties hereunder, including reasonable fees, expenses and
disbursements of its counsel, all in accordance with the attached fee schedule
or the
3
<PAGE>
other provisions of this Agreement. No such fees or reimbursements shall
be paid out of or chargeable to the funds on deposit in the Escrow Account until
such time as the Minimum has been collected.
Escrow Agent shall promptly issue a check in the amount of the collected
funds from the subscriber's check to the rejected subscriber after the Escrow
Agent has cleared such funds. If Escrow Agent has not yet submitted a rejected
subscriber's check for collection, the Escrow Agent shall promptly remit the
subscriber's check directly to the subscriber.
7. TERMINATION OF THIS AGREEMENT. This Agreement shall automatically
terminate upon the earlier of (i) twenty (20) days after the Cessation Date or
(ii) twenty (20) days after the date upon which the Escrow Agent has delivered
the final portion of Escrow Account funds pursuant to the terms of this
Agreement.
8. RESIGNATION BY ESCROW AGENT. Escrow Agent reserves the right to
resign hereunder, upon ten (10) days prior written notice to Issuer. In the
event of said resignation, and prior to the effective date thereof, Issuer, by
written notice to Escrow Agent, shall designate a successor escrow agent to
assume the responsibilities of Escrow Agent under this Agreement, and Escrow
Agent immediately shall deliver any undisbursed Escrow Account funds to such
successor escrow agent. If Issuer shall fail to designate such a successor
escrow agent within such time period, the Escrow Agent may deliver any
undisbursed funds into the registry of any court having jurisdiction.
9. RIGHTS, ETC. OF ESCROW AGENT. The parties hereto agree that the
following provisions shall control with respect to the rights, duties,
liabilities, privileges and immunities of the Escrow Agent:
(a) Escrow Agent shall have no obligation to invest the Escrow Account
without the written direction of Issuer.
(b) The Escrow Agent shall have no responsibility except for the
safekeeping and delivery of the amounts deposited in the Escrow Account in
accordance with this Agreement. The Escrow Agent shall not be liable for
any act done or omitted to be done under this Agreement or in connection
with the amounts deposited in the Escrow Account, except as a result of the
Escrow Agent's gross negligence or willful misconduct. The Escrow Agent is
not a party to, nor is it bound by, nor need it give consideration to, the
terms or provisions of, even though it may have knowledge of, (i) any
agreement or undertaking by, between or among the Issuer and any other
party, except this Agreement, (ii) any agreement or undertaking that may be
evidenced by this Agreement, (iii) any other agreements that may now or in
the future be deposited with the Escrow Agent in connection with this
Agreement. The Escrow Agent is not a party to, is not responsible for, and
makes no representation with respect to the offer, sale or distribution of
the Shares including, but not limited to, matters set forth in any offering
documents prepared and distributed in connection with the offer, sale and
distribution of the Shares. The Issuer covenants that it will not commence
any action against the Escrow Agent at law, in
4
<PAGE>
equity, or otherwise as a result of any action taken or thing done by the
Escrow Agent pursuant to this Agreement, or for any disbursement made as
authorized herein upon failure of the Issuer to give the notice within the
times herein prescribed. The Escrow Agent has no duty to determine or
inquire into any happening or occurrence of or of any performance or
failure of performance of the Issuer or of any other party with respect to
agreements or arrangements with any other party. If any question, dispute
or disagreement arises among the parties hereto and/or any other party with
respect to the funds deposited in the Escrow Account or the proper
interpretation of this Agreement, the Escrow Agent shall not be required to
act and shall not be held liable for refusal to act until the question or
dispute is settled, and the Escrow Agent has the absolute right at its
discretion to do either or both of the following:
(i) withhold and/or stop all further performance under this
Agreement until the Escrow Agent is satisfied, by receipt of a
written document in form and substance satisfactory to the Escrow
Agent and executed and binding upon all interested parties hereto
(who may include the subscribers), that the question, dispute, or
disagreement had been resolved; or
(ii) file a suit in interpleader and obtain by final judgment,
rendered by a court of competent jurisdiction, an order binding all
parties interested in the matter. In any such suit, or should the
Escrow Agent become involved in litigation in any manner whatsoever
on account of this Agreement or the Escrow Account, the Escrow Agent
shall be entitled to recover from the Issuer its attorneys' fees and
costs.
The Escrow Agent shall never be required to post a bond in
connection with any services hereunder. The Escrow Agent may consult
with counsel of its own choice and shall have full and complete
authorization and protection for and shall not be liable for any action
taken or suffered by it hereunder in good faith and believed by it to be
authorized hereby, nor for action taken or omitted by it in accordance
with the advice of such counsel (who shall not be counsel for the Issuer).
(c) The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth in this Agreement and may rely and
shall be protected in acting or refraining from acting upon any written
notice, instruction or request furnished to it hereunder and believed by it
to be genuine and to have been signed or presented by the proper party or
parties and to take statements made therein as authorized and correct
without any affirmative duty of investigation.
(d) The Issuer hereby agrees to indemnify the Escrow Agent for, and to
hold it harmless against, any loss, liability, or expense (including,
without limitation, all legal expenses incurred in enforcing any of the
provisions of this Agreement or otherwise in connection herewith) incurred
without gross negligence or willful misconduct on the part of the Escrow
Agent, arising out of or in connection with its entering into this
Agreement
5
<PAGE>
and carrying out its duties hereunder, including the costs and expenses of
defending itself against any claim of liability hereunder or arising out of
or in connection with the sale of the Shares. This covenant shall survive
the termination of this Agreement.
(e) The Escrow Agent shall not be bound by any modification, amendment,
termination, cancellation, rescission or supersession of this Agreement
unless the same shall be in writing and signed by all of the other parties
hereto and, if its duties as Escrow Agent hereunder are affected thereby,
unless it shall have given prior written consent thereto.
10. NOTICES. Notices required to be sent hereunder shall be delivered by
hand, sent by an express mail service or sent via United States mail, postage
prepaid, certified, return receipt requested, to the following address:
If to Issuer:
Active Ankle Systems, Inc.
509 Barret Avenue
Louisville, Kentucky 40204
Attention: Gary G. Herzberg, President
If to Escrow Agent:
Bank One Kentucky, NA
416 West Jefferson Street - 4th Floor
Louisville, KY 40202
Attention: Bette J. Purucker
No notice to the Escrow Agent shall be deemed to be delivered until
actually received by the Escrow Agent. From time to time any party hereto may
designate an address other than the address listed above by giving the other
parties hereto not less than five (5) days advance notice of such change in
address in accordance with the provisions hereof.
11. GOVERNING LAWS. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Kentucky.
EXECUTED on the date first written above.
ISSUER: By:___________________________
Gary G. Herzberg, President
ACTIVE ANKLE SYSTEMS, INC.
6
<PAGE>
ESCROW AGENT:
BANK ONE KENTUCKY, NA
By: ______________________________
Title: ___________________________
<PAGE>
EXHIBIT A
FORM TO ACCOMPANY SUBSCRIBERS' CHECKS
ACTIVE ANKLE 1997 PUBLIC OFFERING
- --------------------------------------------------------------------------------
NAME AND ADDRESS OF SUBSCRIBER AMOUNT OF CHECK NUMBER OF
SHARES
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT B
FEE SCHEDULE
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 9, 1996 (except Note 13, as to which the
date is June 6, 1997) in the Registration Statement (Form SB-1) and the
related Prospectus of Active Ankle Systems, Inc. for the registration of
100,000 shares of its common stock.
Louisville, Kentucky
June 16, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
ACTIVE ANKLE SYSTEMS, INC.'S FINANCIAL STATEMENTS FOR THE YEAR ENDED
JUNE 30, 1996 AND CONDENSED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> JUN-30-1996 MAR-31-1997
<CASH> 90,263 84,666
<SECURITIES> 0 0
<RECEIVABLES> 145,336 170,576
<ALLOWANCES> 0 0
<INVENTORY> 153,241 206,621
<CURRENT-ASSETS> 450,790 483,730
<PP&E> 229,539 248,852
<DEPRECIATION> 78,128 113,283
<TOTAL-ASSETS> 666,194 683,933
<CURRENT-LIABILITIES> 316,914 246,902
<BONDS> 74,297 58,551
0 0
0 0
<COMMON> 1,045,315 1,048,315
<OTHER-SE> (770,332) (669,835)
<TOTAL-LIABILITY-AND-EQUITY> 666,194 683,933
<SALES> 2,404,236 1,952,133
<TOTAL-REVENUES> 2,404,236 1,952,133
<CGS> 1,001,950 781,891
<TOTAL-COSTS> 1,001,950 781,891
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,135 9,358
<INCOME-PRETAX> 141,741 102,258
<INCOME-TAX> 1,693 1,761
<INCOME-CONTINUING> 140,048 100,497
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 140,048 100,497
<EPS-PRIMARY> 1.90 1.36
<EPS-DILUTED> 1.90 1.36
</TABLE>
