<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 333-33567
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
AMENDMENT NO. 5
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROLLERBALL INTERNATIONAL INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE
(STATE OF INCORPORATION) 394 95-4478767
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
9255 DOHENY ROAD, SUITE 2705
LOS ANGELES, CALIFORNIA 90069
(310) 275-5313
(ADDRESS AND TELEPHONE NUMBER
OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. JACK FORCELLEDO
CHIEF EXECUTIVE OFFICER
ROLLERBALL INTERNATIONAL INC.
9255 DOHENY ROAD, SUITE 2705
LOS ANGELES, CA 90069
TELEPHONE (310) 275-5313
FACSIMILE (310) 275-3081
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
VICTOR J. DIGIOIA, ESQ. KENNETH S. GOODWIN, ESQ.
BRIAN C. DAUGHNEY, ESQ. COLEMAN & RHINE LLP
GOLDSTEIN & DIGIOIA, LLP 1120 AVENUE OF THE AMERICAS
369 LEXINGTON AVENUE NEW YORK, NY 10036
NEW YORK, NY 10017 TELEPHONE (212) 840-3330
TELEPHONE (212) 599-3322 FACSIMILE (212) 840-3744
FACSIMILE (212) 557-0295
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
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 of 1933, as amended
("Securities Act"), please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuing basis pursuant to Rule 415 under the Securities Act,
check the following box: [X]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value(2)....................... 1,437,500 Shares $6.00 $8,625,000 $2,613
- --------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(3)........ 125,000 Warrants $.001 $125 $1.00
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(4)....................... 125,000 Shares $9.90 $1,237,500 $372
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(5)....................... 495,873 Shares $3.75 $1,859,525 $563
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(6)....................... 247,936 Shares $6.00 $1,487,616 $450
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(7)....................... 140,000 Shares $6.00 $700,000 $212
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(8)....................... 152,392 Shares $6.00 $914,352 $277
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(9)....................... 82,127 Shares $6.00 $492,762 $149
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(10)...................... 106,667 Shares $6.00 $400,000 $121
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value(11)...................... 120,000 Shares $6.00 $720,000 $218
- --------------------------------------------------------------------------------------------------------------------------------
Totals........................... 3,032,495 16,436,880 $4,976
================================================================================================================================
</TABLE>
(1) Total estimated solely for the purpose of determining the registration fee.
The number of shares to be received upon exercise of, and the exercise
price of convertible debentures and warrants, the underlying shares of
which are being registered hereby, are subject to adjustment in certain
circumstances. Also includes such additional shares as may be required as a
result of rounding off after conversions and contemplated stock split to be
effective prior to the effective date. See footnotes 4, 5, 6, 7 below. The
total fee has previously been paid.
(2) Includes 187,500 shares of Common Stock subject to sale upon exercise of
over-allotment option granted to the Underwriter.
(3) Represents warrants to purchase 125,000 shares of Common Stock to be issued
to the Underwriter.
(4) Reserved for issuance upon exercise of warrants to be issued to the
Underwriter. Pursuant to Rule 416 of the Securities Act of 1933, as
amended, ("Securities Act"), there are also being registered such
additional number of shares issuable as may become issuable pursuant to the
anti-dilution provisions of the warrants.
(5) Represents shares of Common Stock issuable upon conversion of $1,859,525 of
12% convertible debentures ("12% Debentures") which shares are to be sold
by certain selling security holders. The 12% Debentures are convertible at
a per share conversion price (the "Conversion Price") equal to 75% of the
initial public offering price; therefore, as the initial public offering
price, and likewise the Conversion Price, increases or decreases, as the
case may be, the number of shares issuable upon conversion decreases or
increases, respectively. However, the maximum offering price will always
remain at $1,859,525, the aggregate principal amount of the 12% Debentures.
The number of shares registered reflects an offering price of $5.00 per
share.
(6) Represents shares of Common Stock issuable upon the exercise of 247,936
outstanding Common Stock purchase warrants issued in private placement
offerings by the Company and held by certain selling security holders. For
purposes of calculating the registration fee, the public offering price has
been assumed to be $6.00 per share, the exercise price of the warrants.
Pursuant to Rule 416 of the Securities Act, there are also being registered
such additional number of shares as may become issuable pursuant to the
anti-dilution provisions of the warrants.
(7) Represents shares of Common Stock issued, held by and to be sold by selling
security holders holding, in the aggregate, $700,000 of promissory notes.
For purposes of calculating the registration fee, the public offering price
has been assumed to be $6.00 per share.
(8) Represents issued and outstanding shares of Common Stock to be sold by
certain selling stockholders.
(9) Represents shares of Common Stock issuable upon exercise of 82,127
outstanding Common Stock purchase warrants issued to the Underwriter in
1994. For purposes of calculating the registration fee, the offering price
has been assumed to be $1.68 per share, the exercise price of the warrants.
Pursuant to Rule 416 of the Securities Act, there are also being registered
such additional number of shares of Common Stock as may become issuable
pursuant to the anti-dilution provisions of the warrants.
(10) Represents shares of Common Stock issuable upon conversion of $400,000
principal amount of promissory note which shares are to be sold by a
certain selling stockholder. The note is convertible at a per share price
equal to 75% of the initial public offering price; therefore, as the
initial public offering price, and likewise the conversion price, increases
or decreases, as the case may be, the number of shares issuable upon
conversion decreases or increases, respectively. For purposes of
calculating the registration fee, the public offering price has been
assumed to be $6.00 per share. The maximum offering price will always
remain at $400,000. The number of shares registered reflects an offering
price of $5.00 per share.
(11) Represents shares of Common Stock to be issued to a selling stockholder
holding a $600,000 promissory note which entitles the holder to such number
of shares determined by dividing the principal amount of the note by the
initial public offering price, which shares are to be sold by the Selling
Stockholder. For purposes of calculating the registration fee, the public
offering price has been assumed to be $6.00 per share. The number of shares
registered reflects an offering price of $5.00 per share.
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering of shares of Common Stock, par value $.001
per share, to be sold by the Company (the "Company Prospectus") and one to be
used in connection with the sale of 1,256,771 shares of Common Stock, par value
$.001 per share, to be sold by certain selling stockholders (the "Stockholder
Prospectus"). The Company Prospectus and the Stockholder Prospectus will be
identical in all respects except for the alternate pages for the Stockholder
Prospectus included herein which are labeled "Alternate Pages for Stockholder
Prospectus."
<PAGE> 4
CROSS REFERENCE SHEET
PURSUANT TO ITEM 502(f) OF REGULATION S-B
BETWEEN REGISTRATION STATEMENT AND FORM OF PROSPECTUS
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS
----------------------- ---------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus............................ Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information and Risk Factors............. Prospectus Summary; The Company; Risk
Factors; Summary Consolidated
Financial Information
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Outside Front Cover Page of
Prospectus; Underwriting
6. Dilution......................................... Dilution
7. Selling Security Holders......................... Selling Security Holders
8. Plan of Distribution............................. Inside Front Cover; Underwriting
9. Legal Proceedings................................ Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons................................ Management
11. Security Ownership of Certain Beneficial Owners
and Management................................. Management; Principal Stockholders
12. Description of Securities........................ Description of Capital Stock
13. Interests of Named Experts and Counsel........... Not Applicable
14. Disclosure of Commission Position on
Indemnification................................ Description of Capital Stock
15. Organization With Last Five Years................ Certain Relationships and Related
Transactions
16. Description of Business.......................... Business
17. Management's Discussion and Analysis or Plan..... Management's Discussion and Analysis
18. Description of Property.......................... Business -- Facilities
19. Certain Relationships and Related Transactions... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related Stockholder
Matters........................................ Outside Front Cover of Prospectus;
Risk Factors
21. Executive Compensation........................... Management -- Executive Compensation
22. Financial Statements............................. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............ Not Applicable
</TABLE>
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
PROSPECTUS
1,250,000 SHARES
ROLLERBALL INTERNATIONAL INC.
[ROLLERBALL LOGO]
COMMON STOCK
Rollerball(R) International Inc. ("Rollerball" or the "Company") is hereby
offering 1,250,000 shares (the "Shares") of its common stock, par value $.001
per share (the "Common Stock"). Prior to this offering, there has been no public
market for the Common Stock, and there can be no assurance such a market will
develop or be sustained. It is currently estimated that the initial public
offering price per Share will be between $5.00 and $6.00. The initial public
offering price of the Shares has been arbitrarily determined by negotiation
between the Company and Auerbach, Pollak & Richardson, Inc. (the "Underwriter")
and is not necessarily related to the Company's assets, book value, results of
operations, or any other established criteria of value. The Company has applied
to have its Common Stock approved for quotation on the SmallCap Market of the
Nasdaq Stock Market, Inc. ("Nasdaq") under the proposed symbol "ROLL".
This Prospectus also relates to the offer and sale by certain security
holders of the Company (the "Selling Stockholders") assuming an initial public
offering price of $5.50 per Share, of a total of 1,256,771 shares of Common
Stock comprised of: (i) an aggregate of 450,794 shares of Common Stock (the
"Conversion Shares"), issuable upon conversion of $1,859,525 principal amount of
outstanding 12% convertible debentures ("12% Debentures") at a conversion price
equal to 75% of the offering price of the Shares, which 12% Debentures were
issued by the Company in a private offering completed in September 1996 (the
"1996 Private Offering"); (ii) 225,397 shares of Common Stock (the "1996 Warrant
Shares") issuable upon exercise of outstanding warrants ("1996 Warrants") issued
by the Company in the 1996 Private Offering; (iii) 152,392 shares of issued and
outstanding Common Stock ("1994 Shares") issued by the Company in connection
with the exercise of Common Stock purchase warrants ("1994 Warrants") issued in
a private offering completed in June 1994 ("1994 Private Offering"); (iv)
140,000 shares ("Bridge Shares") of Common Stock issued by the Company in a
private offering ("1997 Bridge Offering") completed in April 1997; (v) 82,127
shares of Common Stock ("Agent Warrant Shares") issuable upon exercise of
outstanding warrants ("Agent Warrants") issued by the Company to the Underwriter
for services rendered to the Company in connection with the 1994 Private
Offering; and (vi) 206,061 shares of Common Stock ("1997 Loan Shares") issuable
by the Company at the closing of this offering to one of the Selling
Stockholders in consideration of a loan in the principal amount of $1,000,000
made by such Selling Stockholder to the Company in October 1997 ("1997 Loan").
The Conversion Shares, 1996 Warrant Shares, 1994 Shares, Bridge Shares, Agent
Warrant Shares and 1997 Loan Shares are sometimes referred to herein as the
"Selling Stockholder Shares." The Selling Stockholders have agreed not to offer,
sell or otherwise dispose of an aggregate of all 1,256,771 Selling Stockholder
Shares for a period of six months from the date hereof without the prior written
consent of the Underwriter. The Company will not receive any proceeds from the
sale of the Selling Stockholder Shares. See "Risk Factors," "Use of Proceeds"
and "Concurrent Sales."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT
SHOULD INVEST IN THE SHARES. FOR A DESCRIPTION OF CERTAIN RISKS AND IMMEDIATE
SUBSTANTIAL DILUTION, SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
=======================================================================================================================
</TABLE>
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) warrants to purchase 125,000 Shares of Common Stock
exercisable over a period of four years, commencing one year from the date
hereof at a per share exercise price equal to 165% of the initial public
offering price of the Shares ("Underwriter's Warrants"), which exercise
price and amount of securities is subject to adjustment in certain
circumstances and (ii) a non-accountable expense allowance equal to 3% of
the total price to the public. In addition, the Company has agreed to
indemnify the Underwriter for certain liabilities under the Securities Act
of 1933, as amended ("Securities Act"). See "Underwriting" and "Use of
Proceeds."
(2) Before deducting expenses payable by the Company, estimated at $ or
$ per Share ($ or $ per Share if the Underwriter
exercises its over-allotment option in full), including the Underwriter's
nonaccountable expense allowance and expenses associated with the Selling
Stockholder Shares. See "Underwriting."
(3) The Company has granted an option to the Underwriter exercisable within 45
days after the date of this Prospectus, to purchase up to 187,500 additional
shares to cover over-allotments, if any, at the public offering price less
underwriting discounts and commissions. If the over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company would be $ , $ , and
$ , respectively. See "Underwriting."
The Shares are being offered by the Underwriter subject to prior sale, when,
as and delivered to and accepted by the Underwriter, and subject to approval of
certain legal matters by counsel for the Underwriter. The Underwriter reserves
the right to withdraw, cancel or modify such offer and to reject any order
either in whole or in part. It is expected that delivery of certificates
evidencing the Shares offered hereby will be made against payment therefor at
the offices of counsel to the Underwriter on or about March , 1998.
AUERBACH, POLLAK & RICHARDSON, INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 6
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and therefore has not
filed any reports with the Securities and Exchange Commission (the
"Commission"). Upon completion of this offering, the Company intends to register
under the Exchange Act and furnish its stockholders with annual reports
containing audited financial statements reported on by independent auditors and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 7
STATE LEGENDS
FOR CALIFORNIA RESIDENTS ONLY:
The Commissioner of Corporations of the State of California (the
"Commissioner") has imposed investor suitability standards of $65,000 of income
and $250,000 of net worth, excluding home, home furnishings and automobiles, or
in the alternative, a minimum net worth of at least $500,000, excluding home,
home furnishings and automobiles, for all sales of Shares of the Company to
residents of the State of California. California residents wishing to invest
must show their eligibility. The secondary trading exemption ordinarily provided
by Section 25104(h) will be withheld until under Section 25101.1 the Company
becomes a "reporting company" under Section 13 or 15d of the Securities and
Exchange Act of 1934 and the Company files a required notice with the
Commissioner prior to any such sales.
FOR OHIO RESIDENTS ONLY:
For all sales and secondary market transactions for all Ohio investors
until the Company's Common Stock becomes a covered security pursuant to Section
18 of the Securities Act of 1933, as amended, all Ohio purchasers must have an
annual gross income of $65,000 and a minimum net worth of $250,000, or a minimum
net worth of $500,000, exclusive of homes, automobiles and furnishings.
FOR RESIDENTS OF ARIZONA, ARKANSAS, INDIANA, MASSACHUSETTS, MICHIGAN, MISSOURI,
OKLAHOMA, OREGON, PENNSYLVANIA AND VERMONT ONLY:
Purchasers in these states must have annual gross income of $65,000 and a
minimum net worth of $65,000 exclusive of home, home furnishings and
automobiles, or in the alternative, a minimum net worth of $150,000, exclusive
of home, home furnishings and automobiles.
3
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with the more detailed information and financial statements, and the
notes relating thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, all references in this Prospectus to numbers of shares of Common
Stock and to related per share data and information give retroactive effect to
the (i) reverse split of the outstanding shares of Common Stock on an
approximate 0.6:1 basis and (ii) the surrender for cancellation of 600,000
shares of Common Stock owned by Mr. Jack Forcelledo, the Company's Chief
Executive Officer, both to be effected prior to the effective date of the
Registration Statement ("Effective Date") of which this Prospectus forms a part.
Unless otherwise specified, all information in this Prospectus assumes an
initial public offering price of $5.50 per Share, the mid-point of the price
range stated on the cover of this Prospectus, and no exercise of the over-
allotment option granted to the Underwriter.
THE COMPANY
ROLLERBALL INTERNATIONAL INC. ("Rollerball" or the "Company") develops,
manufactures, distributes and markets an innovative, patented design of inline
skates under the registered trademark Rollerball. The Rollerball skate differs
from traditional inline skates (e.g. Rollerblade(R), Bauer(R), Ultra-Wheels(R),
etc.) by offering the consumer a skate that has spherical-shaped wheels instead
of the flat, disk-shaped wheels of traditional inline skates, resulting in
enhanced performance. Since its incorporation in 1994, the Company's efforts
have been focused on designing, engineering and developing the Rollerball line
of in-line skates. The Company has been granted several United States and
foreign patents which protect its innovative skateball designs and technology.
Since its formation, the Company has expanded its product line to presently
include 18 models of inline skates that appeal to a wide range of price and
performance levels for use in recreational, fitness, hockey and aggressive
skating. During the year ended December 31, 1997 the Company had sales for 9 of
its models resulting in sales of approximately $2,023,000. The Company intends
to commercially introduce the other 9 models during the first half of fiscal
1998. Rollerball also offers related accessories including helmets, safety pads
and replacement parts. The Company's sales have been limited to date and have
been primarily in the international market. With the proceeds of this offering,
the Company intends to aggressively market and sell its products in the United
States.
Rollerball's inline skates differ from traditional inline skates in
appearance and in performance. The Company believes that its proprietary
Rollerball skating system is the next generation of inline skates and the first
major product innovation in inline skating since the introduction of the
original Rollerblade(R) skate in the 1970's. Rollerball offers inline skates
with unique patented spherical wheels that are slightly smaller than a tennis
ball (70mm or 60mm in size) and are engineered to create support and balance
when in contact with the skating surface. The spherical cross section of the
Radial Skateball Technology(TM) provides a uniform, unchanging shape and a
greater area of contact with respect to the skating surface. Rollerball's design
allows a skater to achieve levels of acceleration, balance and maneuverability
greater than that which can be achieved by comparably priced traditional inline
skates. Furthermore, because of these characteristics, the Company believes that
its Rollerball skates enhance the experience of inline skating while providing a
more stable, body-friendly platform which appeals to all skaters from beginner
to advanced. The Company believes these product features provide Rollerball with
a skate superior to any other product commercially available and will enable
Rollerball to compete with the major inline skate manufacturers both in the
United States and worldwide.
Rollerball intends to use the proceeds of this offering to expand its
business through widespread introduction of the Rollerball product lines into
the United States retail market, the continued expansion and penetration of the
Company's product lines in international markets, investment in the development
of the next generation of Rollerball products, the building of tooling, molds
and inventory, the establishment of a third party licensing program for the
Rollerball trademarks in clothing, entertainment and toys and the increase of
marketing and sales through direct response television and other at-home
shopping services throughout the world.
The Company was incorporated in the State of Delaware on March 7, 1994. The
principal executive offices of the Company are located at 9255 Doheny Road,
Suite 2705, Los Angeles, California 90069 and its telephone number is (310)
275-5313.
4
<PAGE> 9
THE OFFERING
Common Stock offered................ 1,250,000 shares
Common Stock Outstanding
Prior to offering(1)(2)........... 2,683,568 shares
Common Stock to be Outstanding
Immediately After offering(1)(3).... 4,590,423 shares
Use of Proceeds..................... The net proceeds of this offering will
be used for: increasing inventory;
marketing, advertising and promotional
support; purchase of equipment such as
tools and molds; product design and
research; repay certain debt; and
working capital. See "Use of Proceeds."
Risk Factors........................ An investment in the Shares offered
hereby is speculative and involves a
high degree of risk, including risks
associated with the Company's ability
to continue as a going concern as set
forth in the auditor's report to the
financial statements appearing
elsewhere in this Prospectus; default
on certain debt; limited operating
history; accumulated deficit and recent
losses; dependence on third-party
manufacturing and suppliers; and other
risks. See "Risk Factors."
Proposed Nasdaq SmallCap Market
Symbol(4)........................... "ROLL"
- ---------------
(1) Does not include: (i) 125,000 shares of Common Stock reserved for issuance
upon exercise of the Underwriter's Warrants to be issued to the Underwriter;
(ii) 99,025 shares of Common Stock reserved for issuance upon the exercise
of outstanding warrants; (iii) 750,000 shares of Common Stock reserved for
issuance under the Company's 1994 employee stock option plan ("1994 Employee
Plan") of which options to purchase 244,826 shares of Common Stock have been
issued to date; (iv) 100,000 shares of Common Stock reserved for issuance
under the Company's 1997 Non-Employee Director Plan ("Director Plan"), none
of which options have been issued to date; (v) 16,936 shares reserved for
issuance upon conversion of outstanding convertible notes (other than the
12% Debentures); (vi) 225,397 1996 Warrant Shares; and (vii) 82,127 Agent
Warrant Shares. Includes 140,000 Bridge Shares deemed issued and outstanding
as of November 1, 1997.
(2) Does not include: (i) 450,794 Conversion Shares; and (ii) 206,061 1997 Loan
Shares.
(3) Includes: (i) 450,794 Conversion Shares; and (ii) 206,061 1997 Loan Shares.
(4) It is a condition precedent to the offering that the Company's Common Stock
be accepted for listing on the Nasdaq SmallCap Market. The Nasdaq SmallCap
Market quotation does not imply that a liquid and active market will
develop, or be sustained, for the Shares upon completion of the offering.
There can be no assurance that the Company will, if accepted by the Nasdaq
SmallCap Market, continue to meet the maintenance criteria for quotation on
the Nasdaq SmallCap Market.
5
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
The summary financial information was derived from the financial statements
of the Company. The summary should be read in conjunction with Management's
Discussion and Analysis, the financial statements of the Company and the related
notes, each appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994(1) 1995 1996 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales.................................. $ 469,703 $4,201,658 $4,850,416 $2,022,692
Gross (Loss) Profit........................ (104,349) 1,439,641 1,746,637 679,418
Operating Expenses......................... 1,250,523 1,487,162 2,197,574 2,406,016
Loss before Income Taxes................... (1,356,066) (84,317) (547,503) (3,144,439)
Net Loss................................... (1,356,866) (85,117) (548,303) (3,145,239)
Pro Forma net loss per share............... $ (.17) $ (.97)
========== ===========
Pro Forma weighted average number of shares
outstanding(2)........................... 3,149,712 3,238,635
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------
DECEMBER 31, PRO FORMA
----------------------- PRO AS
1995 1996 ACTUAL FORMA(3) ADJUSTED(4)
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)... $(713,420) $(1,637,787) $(3,495,039) $(1,264,039) $4,659,055
Total assets................... 583,804 1,915,177 2,797,856 2,797,856 6,602,324
Debt........................... -- 1,775,000 3,575,000 1,400,000 100,000
Notes payable to
stockholders................. 345,000 260,000 250,000 250,000 75,000
Stockholders' (deficit)
equity....................... (398,307) (911,610) (2,414,689) (183,689) 5,504,811
</TABLE>
- ---------------
(1) Fiscal 1994 reflects operations from inception in March 1994 through
December 1994.
(2) Pro forma net loss per share of Common Stock has been computed for all
periods presented and is based on the weighted average number of shares
outstanding during the period, including the Conversion Shares and Bridge
Shares.
(3) Gives effect to the conversion of $1,859,525 principal amount of 12%
Debentures into 450,794 Conversion Shares. The 12% Debentures automatically
convert on the Effective Date into Common Stock at a per share conversion
rate of 75% of the initial public offering price of the Shares. Also gives
effect to the conversion of $400,000 principal amount of the 1997 Loan into
96,970 1997 Loan Shares and the issuance of 109,091 1997 Loan Shares. See
"Risk Factors -- Default on Certain Debt" for additional information
regarding the Company's default as to the 12% Debentures and Bridge Notes.
(4) Adjusted to give effect to the sale of the 1,250,000 Shares offered hereby
at $5.50 per share and the anticipated use of the estimated proceeds
therefrom, including repayment of principal and interest on the Company's
$700,000 principal amount 12% subordinated debentures ("Bridge Notes")
issued in the 1997 Bridge Offering. Also reflects the waiver of $106,000 of
accrued salary for Mr. Forcelledo. As of November 1, 1997 the Bridge Notes
commenced bearing interest at 18% per annum. See "Risk Factors -- Default on
Certain Debt" and "Use of Proceeds."
6
<PAGE> 11
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of risk
and should be considered only by those investors who can afford the risk of loss
of their entire investment. In addition to the other information in this
Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Shares offered by this Prospectus. Prospective
investors should note that this Prospectus contains certain "forward-looking
statements," including, without limitation, statements containing the words
"believes," "anticipates," "expects," "intends," "should," "seeks to," and
similar words. Prospective investors are cautioned that all such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to, the risk factors set forth in this Prospectus. The accompanying
information contained in this Prospectus identifies all material risk factors
that could cause such difference.
DECLINE IN SALES IN FISCAL YEAR 1997. The Company has had limited sales to
date and has primarily directed its efforts to refining the Radial Skateball
Technology(TM) concept and testing new product prototypes and component parts.
During the fiscal year ended December 31, 1997, the Company experienced a
significant decrease in sales compared to the fiscal year ended December 31,
1996. For the year ended December 31, 1997, the Company had sales of
approximately $2,023,000 compared to sales of $4,850,000 for the previous year.
The decrease in sales was primarily the result of several factors, including the
lack of adequate funds for inventory purchases and marketing and advertising,
the Company's decision to switch production and marketing efforts to its four
ball skates from two ball skates, and a decrease in demand for two ball skates
from retailers. The Company intends to focus its marketing upon its four ball
skates and newer models, and increase its marketing efforts with the proceeds of
this offering. See "Management Discussion and Analysis" and "Business -- Sales
and Marketing."
ACCUMULATED DEFICIT; RECENT LOSSES; EXPLANATORY PARAGRAPH IN AUDITOR'S
REPORT. The Company has been operating with negative working capital since its
inception. For the fiscal year ended December 31, 1997, the Company had a net
loss of $3,145,239 as compared to a net loss of $548,303 for the fiscal year
ended December 31, 1996. For the year ended December 31, 1995, the Company had a
net loss of $85,117 and a working capital deficit of 713,420. At December 31,
1996 and December 31, 1997, the Company had an accumulated deficit of $1,990,286
and $5,135,525, respectively. The Company's independent auditors have stated in
their report that there is substantial doubt about the Company's ability to
continue as a going concern. The continuation of the Company's operations is
materially dependent on the receipt of additional capital from this offering or
other sources. Although the Company currently anticipates a minimal net profit
for the fiscal year 1998, these earnings are dependent upon increased sales of
the Company's product. If sales do not increase as anticipated the Company may
have losses as a result of anticipated significant expenses, including marketing
and advertising costs, development costs, and general and administrative
expenses. Because the Company anticipates incurring significant expenses in
connection with the continued development and marketing of its products, there
can be no assurance that the Company will achieve sufficient additional revenues
to offset anticipated operating costs. Inasmuch as the Company will continue to
have high levels of operating expenses and will be required to make significant
expenditures to market its products in a highly competitive industry, the
Company may experience significant operating losses that could continue until
such time, if ever, that the Company is able to generate sufficient additional
revenues to support its operations. See "Management's Discussion and Analysis."
DEFAULT ON CERTAIN DEBT. As of October 31, 1997 the Company was in payment
default with respect to the 12% Debentures, the principal amount of which was
$1,859,525 (inclusive of $84,525 of accrued interest). Pursuant to the terms of
the 12% Debentures, payment of all principal and interest was automatically due
October 31, 1997. The 12% Debentures contain terms which provide that upon the
effectiveness of the Company's registration statement in an initial public
offering, the principal amount of the 12% Debentures shall be automatically
converted into the Conversion Shares at the per share conversion price of 80% of
the offering price. There are no conditions in the 12% Debentures requiring
holders to declare or notify the Company of any payment default. Although the
Company believes that under the terms of the 12% Debentures it may have the
ability to require the holders of the 12% Debentures to accept the Conversion
7
<PAGE> 12
Shares as payment therefore, the Company has determined it to be in its best
interests to avoid potential disagreements with the holders and obtain an
amicable resolution of the issue with the holders of the 12% Debentures. The
Company is unable to repay the debt represented by the 12% Debentures. The
Company has made all interest payments on the 12% Debentures up to and including
January 31, 1998. The Company has requested that the holders of the 12%
Debentures waive all defaults and extend the maturity date to April 30, 1998. In
order to obtain such waiver, the Company has proposed to the holders of the 12%
Debentures that the conversion price be reduced from 80% of the offering price
to 75% of the offering price and to pay an additional 6% interest from November
1, 1997 through the date of payment. Additionally, the Company has proposed that
the exercise price of the 1996 Warrants (which were received by the holders of
the 12% Debentures) be reduced from 120% of the offering price of the shares to
equal the offering price. There can be no assurance that all or any holders of
the 12% Debentures will waive any defaults and extend the maturity date.
Further, there can be no assurance that the holders of the 12% Debentures will
not demand payment of their 12% Debentures and decline to accept the Conversion
Shares. In the event that the holders demand cash payment, the Company's
proposed use of proceeds for this offering may be significantly altered to
include payments to the holders. In such event, the Company would have
significantly less cash available to implement its business plan. See "Use of
Proceeds" and "Management Discussion and Analysis."
In connection with the 1997 Bridge Offering, the Company issued $700,000
principal amount of Bridge Notes. Pursuant to the terms of the Bridge Notes,
payment of principal and interest was due and payable upon the earlier of
October 31, 1997 or consummation of the public offering. The Company does not
have the funds to repay the Bridge Notes without the proceeds of this offering.
Certain holders of the Bridge Notes have delivered notice of default to the
Company. The Bridge Notes provide for a default interest rate of 18% from the
date of default on October 31, 1997 to the date of payment. See "Use of
Proceeds" and "Management's Discussion and Analysis."
LIMITED OPERATING HISTORY; RAPID GROWTH. The Company was incorporated in
1994, has had limited sales to date and has not been in business long enough to
enable an investor to make a reasonable judgment as to its future performance.
Since its inception, the Company's efforts have been focused upon design and
development of its Radial Skateball Technology(TM) products and not on sales or
marketing. Since the commencement of operations, the Company's operating
expenses have grown rapidly and the Company intends to continue to expand
operations after the conclusion of this offering. The Company's limited sales to
date have been primarily in international markets and with the Home Shopping
Network(R) ("HSN") and the Company intends, with the proceeds of this offering,
to emphasize the marketing and sale of its products on a greatly expanded basis
in the United States. From its inception through December 31, 1997, the Company
has had approximately $11,544,000 in total sales, of which $7,008,000 were in
the international market and $4,536,000 were U.S. domestic sales. For the fiscal
year ended December 31, 1997 the Company had total sales of $2,023,000, of which
$526,000 were in international markets and the remainder were U.S. domestic
sales. The likelihood of the success of the Company must be considered in light
of the problems, expenses, difficulties, complications and delays frequently
encountered in connection with a developing business and the competitive
environment in which the Company will operate. There can be no assurance the
Company will be able to implement its business plans or manage the growth of its
operations. See "Business" and "Management's Discussion and Analysis."
NEED FOR ADDITIONAL FUNDS. Based on the Company's operating plan,
management believes that the proceeds from this offering and anticipated cash
flow from operations and other sources such as the exercise of outstanding
convertible securities, will be sufficient to meet the Company's anticipated
cash needs and finance its plans for expansion for at least the next 12 months
from the Effective Date of this offering. Thereafter, the Company may need
additional financing to meet its plans for expansion and to expand its product
lines. In addition, in the event the holders of the 12% Debentures do not waive
all defaults and accept the Conversion Shares instead of cash payments, the
Company will be required to use portions of the proceeds of this offering for
some repayments. As a result the Company would be required to reallocate the use
of proceeds and may not be able to fully implement its business plan. The
Company does not currently have any line of credit or any lending facility
available to it. The Company has been discussing obtaining a line of credit from
financial institutions and intends further discussions following this offering.
No assurance can be given that the
8
<PAGE> 13
Company will be successful in obtaining additional financing on favorable terms,
if at all. See "Use of Proceeds" and "Management's Discussion and Analysis."
RELIANCE ON MAJOR CUSTOMERS. Three of the Company's largest customers
represented 67% of total sales for the fiscal year ended December 31, 1996, and
82% of total sales for the year ended December 31, 1997. For the year ended
December 31, 1997 these three customers accounted for 56%, 15% and 11%
respectively, of total sales. These three customers were the Home Shopping
Network, Inc. ("HSN"), Carrefour France, a hypermarket located in France and The
J.C. Penney Company. As is customary in the industry, the Company does not have
long-term contracts with any of its customers. While management expects the
Company's customer base to expand, a limited number of large orders may continue
to account for a significant portion of the Company's sales during any given
period for the foreseeable future. The loss of, or a reduction in business from,
any of its major customers could have a material adverse effect on the Company's
results of operations. See "Business -- Sales and Marketing."
BROAD DISCRETION IN REALLOCATION OF PROCEEDS. Approximately $414,376
(7.6%) of the proceeds of this offering have been allocated to working capital.
The Company may reallocate certain uses of the proceeds from this offering
within the disclosed uses in the event of changes in the Company's business plan
or financial position (due to unanticipated expenses, delays, problems or
otherwise). See "Use of Proceeds."
USE OF PROCEEDS TO REPAY DEBT. The Company has allocated approximately
$1,719,000 (31%) of the net proceeds of this offering to repay outstanding debt.
These funds will not therefore be available to the Company for general purposes
such as purchasing inventory, advertising, hiring of personnel or the expansion
of its business. Of the total debt being repaid, $620,000 will be paid to Sercap
Holdings LLC, an entity of which Mr. Lawrence Stumbaugh is an officer and
director. Mr. Stumbaugh became a director of the Company in October 1997 and
resigned as a director in March 1997. An additional $122,800 of the debt being
repaid is being utilized to repay accrued salary of an officer. See "Use of
Proceeds" and "Management."
INTELLECTUAL PROPERTY. The Company was granted a United States Patent (No.
5,590,890) by the United States Patent and Trademark Office on January 7, 1997
on the basis of its original Radial Skateball Technology(TM). The Company has
filed additional patent applications and will continue to do so as it improves
its products and develops new products. In February 1997 the Company obtained a
United States Patent (No. 378,115) for its GFX(R) Skate design. The Company has
also been granted patents and/or has filed patent applications in several other
countries and has registered the trademark "Rollerball" in the United States and
several other countries. The Company has trademark applications pending in other
foreign countries. The Company has filed for a 3-D trademark protection in
Germany and filed for similar trademark protections in Europe. Rollerball cannot
be registered as a trademark in the People's Republic of China and certain other
foreign countries. Trademark applications have been allowed for the Rollerball
name in other market/business segments such as clothing, toys and entertainment
(CD-ROM, comic books, video and broadcast television). There can be no assurance
that any existing patents or patent applications, if granted, and related
trademark protection will be effective in protecting the Company's products from
duplication by other manufacturers. Although the Company believes that the
products sold by it do not and will not infringe upon the patents or violate the
proprietary rights of others, it is possible that such infringement or violation
has occurred or may occur.
The Company has recently received correspondence from Metro-Goldwyn-Mayer
("MGM"), a motion picture entity which alleged that the Company's use of the
name "Rollerball" infringed upon MGM's alleged trademark rights in the name
"Rollerball" which was the name of a 1975 film produced by MGM. The Company was
granted a United States trademark for the Rollerball name in 1995 with respect
to, among other things, in-line skates and related products. Based upon advice
of counsel, the Company does not believe that MGM has any such rights in the
name and intends to vigorously defend itself against MGM's allegations. Although
neither party has commenced litigation in this matter, there can be no assurance
that this dispute will not result in litigation. In the event that litigation
results, the Company can be expected to incur significant costs to defend
itself. Based upon advice of counsel, the Company believes that it has strong
and meritorious defenses to the claims of MGM. See "Legal Proceedings."
9
<PAGE> 14
In the event that products sold by the Company are determined to infringe
upon the patents or proprietary rights of others, the Company could be required
to modify its products or obtain a license for the manufacture and/or sale of
such products, or could be prohibited from selling such products. There can be
no assurance that, in such an event, the Company would be able to do so in a
timely manner, upon acceptable terms and conditions, or at all, and the failure
to do any of the foregoing could have a material adverse effect upon the
Company. In addition, there can be no assurance that the Company will be able to
afford the expense of any litigation which may be necessary to enforce its
rights under its currently issued patents or any patents issued in the future or
with respect to the enforcement or defense of trademark rights. Moreover, there
can be no assurance that the Company will have the financial or other resources
necessary to defend a patent infringement or proprietary rights violation
action. In addition, if the Company's products or proposed products are deemed
to infringe upon the patents or proprietary rights of others, the Company could,
under certain circumstances, become liable for damages, which could also have a
material adverse effect on the Company. The Company's products are also sold in
many other countries and even though the Company may obtain patents in such
countries, the Company's ability to obtain adequate protection may be limited in
such countries. See "Business -- Patents and Trademarks."
DEPENDENCE ON THIRD-PARTY AND FOREIGN MANUFACTURING AND SUPPLIERS. The
Company does not own or lease any manufacturing facilities and does not
manufacture any of the component parts for its products, and purchases all skate
components from unaffiliated suppliers. Other than the Radial Skateballs which
are produced in the United States, substantially all of the Company's components
are manufactured in foreign countries including the People's Republic of China.
The Company relies upon two independent agents to obtain manufacturing of
certain component parts in foreign countries. The Company does not have any
contracts with manufacturers or suppliers. Foreign manufacturing is subject to a
number of risks, including transportation delays and interruptions, political
and economic disruptions, the impositions of tariffs and import and export
controls and changes in governmental policies. While the Company has not
experienced any material adverse effects due to such risks, there can be no
assurance that such events will not occur in the future with the result of
possible increases in costs and delays of, or interferences with, product
deliveries resulting in losses of revenues and goodwill. The chassis and safety
brakes for the Company's RB(R) and GFX(R) skates are produced in foreign
countries which may subject the Company to a risk of loss of its molds and
tooling associated with such products in the event of a dispute with a foreign
manufacturer or other occurrence such as those noted above. Further, purchasing
products from manufacturers located in the People's Republic of China subjects
the Company to an additional risk of substantially higher duty rates in the
event that the United States government does not renew the most-favored nation
trade status extended to the People's Republic of China. No assurance can be
given that the United States will continue the People's Republic of China's
most-favored nation trade status. The Company believes that, at the present
time, it has sufficient sources of supply of component parts, and that in the
event any existing supplier ceases to furnish component parts to the Company,
alternative sources are available. There can be no assurance, however, that the
future production and assembly capacity of the Company's current suppliers and
manufacturers will be sufficient to satisfy the Company's requirements or that
alternate suppliers and manufacturers will be available on commercially
reasonable terms, or at all. See "Business -- Manufacturing and Assembly."
IMMEDIATE SUBSTANTIAL DILUTION; DILUTION RESULTING FROM EXERCISE OF OPTIONS
AND WARRANTS. The purchasers of the Shares will incur an immediate and
substantial dilution in the net tangible book value of the Shares after this
offering of $4.55 per Share (83% of the public offering price) from the public
offering price of $5.50 per Share. This dilution calculation gives effect to the
conversion of all of the principal amount of the 12% Debentures, repayment in
full of the Bridge Notes, repayment of $600,000 principal amount of the 1997
Loan, the surrender and cancellation of 600,000 Shares of Common Stock and
conversion of $400,000 principal amount of the 1997 Loan.
At the Effective Date, the Company will have outstanding at the
consummation of this offering 604,826 options and 531,549 warrants, of which
425,978 options and warrants have exercise prices of less than the offering
price of the shares. As a result, holders of these options and warrants will
receive shares of Common Stock upon exercise at a cost below that paid by
investors in this offering. The exercise in full of these options and warrants
may dilute the net book value per share of the Common Stock, resulting in
further dilution to investors. See "Dilution."
10
<PAGE> 15
FOREIGN CURRENCY AND FOREIGN EXCHANGE RATES. The Company's products are
primarily sourced through independent purchasing agents from suppliers located
in Taiwan, the People's Republic of China and Thailand. Approximately 26% of its
parts are sourced in Taiwan, 34% in the People's Republic of China and 27% in
Thailand. The Company negotiates the cost of its products directly with its
suppliers in United States Dollars and its purchases are primarily effected
through letters of credit in United States Dollars. As a result, exchange rate
fluctuations could have a minor effect upon the Company's ability to negotiate
favorable price terms with suppliers, which may adversely effect the cost of
goods sold and the resultant gross margins for the Company's products. In
addition, in the event the exchange rate between United States dollars and the
currency used by the Company's foreign suppliers fluctuates, it may become
uneconomical or impractical for either the suppliers or the Company to continue
their relationship. Many countries in the Far East have been experiencing
significant currency instability and devaluations in recent months, including
Thailand. To date the Company has not experienced any material effect from the
recent economic turmoil in Asia. This economic turmoil has not resulted in
difficulty for the Company in obtaining products from its suppliers since the
suppliers are paid in United States Dollars. In addition, since the Company has
not recently attempted to market its products in Asia in any material manner,
the Company's sales have not been materially affected. The Company believes that
its parts and supplies can be purchased from several different producers in
various countries and therefore its ability to obtain supplies and parts would
not be materially adversely affected by currency fluctuations for any
substantial period of time. A substantial portion of the Company's business is
conducted through Hong Kong which has recently been transferred to the People's
Republic of China. There can be no assurance that the new government will
continue to utilize Hong Kong's current currency system. In such event, the
Company would need to obtain alternative supply arrangements, and there can be
no assurance that alternative suppliers would be available, or if available, on
terms acceptable to the Company. See "Management's Discussion and Analysis."
DEPENDENCE ON ONE PRODUCT LINE. Substantially all of the Company's
revenues have been generated, and will continue to be generated, by sales of
inline skates and related athletic protective equipment. No assurance can be
given that consumer demand for these products in general or the Company's
products in particular will continue in the future. A reduction in the demand
for these products would have a material adverse effect on the Company's results
of operations. The Company's profitability and sales will also depend on the
strength of foreign and United States economies, which can dictate consumers'
spending habits on leisure-related goods, including the Company's products. No
prediction can be made about the future of the economy of the United States or
any foreign country in which the Company will offer its products for sale. As
the Company's products are leisure-related products, any prolonged downturn in
the economy, whether real or perceived, could adversely affect consumer demand
for the Company's products. See "Business."
COMPETITION. The market for the Company's products, internationally and in
the United States, is highly competitive and the Company anticipates competition
to continue to be intense in the foreseeable future. This competition is direct
(i.e., companies that make similar products) and indirect (i.e., companies that
participate in the sporting goods and accessories market, but are not direct
competitors of the Company). The Company's products compete with other sports
related products, such as those products used in golf, tennis, running and
bicycling as well as numerous other activities. The Company competes with major
inline skate manufacturers such as Rollerblade(R), First Team Sports(R),
Variflex(R), Roller Derby(R), California Pro(R), Bauer(R) and K2(R). Most of the
Company's competitors have significantly greater financial, technical,
manufacturing and marketing resources, and broader name recognition, than the
Company. See "Business -- Competition."
PRODUCT LIABILITY CLAIMS; INSURANCE. Although the Company has incurred no
product liability claims to date, the Company may become subject to product
liability claims, including claims for serious personal injury or death, due to
the nature of its products. The Company believes that it has adequate liability
insurance for risks arising in the normal course of business, including product
liability insurance with respect to all of its products. There can be no
assurance, however, that the Company will be able to maintain insurance at
reasonable cost, if at all, that insurance will be adequate to cover liabilities
resulting from product liability claims or that the Company will have funds
available to pay any claims over the limit of its insurance. As sales of the
Company's products increase, it will become potentially exposed to a larger
number of liability claims
11
<PAGE> 16
which could therefore exceed the amount of its insurance policies. Successful
assertion against the Company of one or a series of large uninsured claims, or
of one or a series of claims exceeding any insurance coverage, could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business."
GOVERNMENT REGULATION; PRODUCT RECALLS. Certain of the Company's products
may be subject to regulation by the Federal Consumer Products Safety Commission
(the "CPSC"), and may therefore be subject to recall if requested by the CPSC.
In addition, the Company may be required to change or modify its current or
future products in order to comply with CPSC's rules or other rules and
regulations related to the safety of its products or any future rules or
regulations. In the event the Company is required to modify or change its
products, it may incur substantial additional costs related to design and
manufacture, and may incur significant down-time in being able to produce
inventory for sale, all of which could have a material adverse effect upon the
Company. The Company is not aware of any current proceeding by the CPSC which
would result in the recall of the Company's products. A recall of the Company's
products could result in significant expense to the Company. There can be no
assurance that the Company will have the necessary funds available to it to
conduct any recall or that if conducted, it will have funds available for its
continued operation. See "Business -- Government Regulation."
DEPENDENCE UPON EXECUTIVE OFFICERS; LIMITED PERSONNEL. The success of the
Company is dependent upon the efforts and abilities of its founder, Chairman,
President and Chief Executive Officer, Jack Forcelledo. The loss of the services
of Mr. Forcelledo would have a material adverse affect on the Company's
operations. The Company has entered into a four-year employment agreement with
Mr. Forcelledo and has obtained "key man" life insurance in the amount of
$1,000,000 on the life of Mr. Forcelledo, of which the Company is a beneficiary.
It is unlikely that the proceeds of this insurance would be adequate to
compensate the Company for the loss of the services provided by Mr. Forcelledo.
See "Management."
To date, the Company has relied additionally on the services of independent
technical, production, sales and marketing personnel to develop and sell its
products. In addition, the Company has used two independent agents (Lucky Yeh
International Ltd. ("LYI") and PCL International, Inc. ("PCL")) to obtain
foreign suppliers and manufacturing facilities. The Company has only seven
full-time employees. After the conclusion of this offering, the Company intends
to increase its permanent staff to operate the Company and implement its
business plans. The Company has not determined the number of employees to be
hired following this offering, and hiring will be based significantly upon its
ability to increase sales. The Company anticipates that if it does increase its
staff, the additional employees will be hired for sales and marketing, product
design and administrative positions during the next 12 months. Although the
Company believes that necessary additional personnel to staff the Company are
available, there can be no assurance that the Company will be successful in
assembling an effective staff in a timely manner. See "Use of Proceeds" and
"Business -- Management."
ROYALTY ARRANGEMENTS. The Company has certain contractual commitments to
pay royalties to five individuals who had assisted the Company in obtaining its
Radial Skateball Technology(TM). Under the current agreements, the Company has
agreed to pay Messrs. Giuseppe Consarino and Steve Kimmel each a royalty of 1%
of net sales, except sales based on a letter of credit, and .6% of net sales
based on a letter of credit. Mr. Consarino's royalty payment cannot exceed a
maximum of $350,000 in any fiscal year. Mr. Forcelledo has had a royalty
agreement with the Company which provides for a 3% royalty on net sales which
royalty Mr. Forcelledo has agreed to terminate in full effective January 1,
1997. During the fiscal years ended December 31, 1996 and December 31, 1997 the
Company incurred expenses of $167,068 and $10,446, respectively with respect to
these royalty agreements. Messrs. Giusseppe Rosso, Franco Rosso and Ettore
Carenni, the originators of the Radial Skateball Technology(TM), are entitled to
be paid an aggregate royalty of 2.5% of the cost of goods sold, after certain
deductions including expenses for patents and trademarks. To date no royalty
payments have been paid to Messrs. Giusseppe Rosso, Franco Rosso and Ettore
Carenni nor have any accrued, as a result of these deductions which equaled
approximately $2,000,000 as of December 31, 1997. The agreements require the
royalties to be paid in perpetuity; however, the terms of all the royalty
agreements provide that their royalty payments may be reduced pro rata to any
reduction in royalty payments agreed to by the other party in connection with a
public offering by the Company. Mr. Kimmel has agreed to reduce his royalty
payment by 50%. The Company intends to reduce the other royalty payments by a
similar amount.
12
<PAGE> 17
These royalty reductions will be effective upon the Effective Date. Although the
Company believes that it has the right to unilaterally reduce the amount of
these royalty fees, there can be no assurance that the other parties will not
instigate litigation against the Company. Investors should consider the effects
of the royalty agreements on the Company's income in the future. See "Financial
Statements", "Management's Discussion and Analysis" "Management -- Employment
Agreements" and "Business -- Royalty Arrangements".
ABILITY TO MANAGE GROWTH. The Company anticipates a period of rapid growth
that is expected to place a strain on the Company's administrative, financial
and operational resources. The Company's ability to manage any staff and
facilities growth effectively will require it to improve its operational,
financial and management controls, to continue to improve its reporting systems
and procedures, to install new management information systems and to train,
motivate and manage its employees. There can be no assurance that the Company
will install such management information systems in an efficient and timely
manner or that the new systems will be adequate to support the Company's
operations. If the Company is unable to hire, train and retain qualified
personnel to implement the necessary services effectively, its ability to
attract repeat sales could be adversely affected, which could limit the
Company's growth opportunities. If the Company's management is unable to manage
growth effectively, such as if the Company's sales and marketing efforts exceed
its capacity to obtain inventory in a timely manner, the Company's business,
operating results and financial condition could be adversely affected. See
"Business" and "Management."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS. Following the completion
of this offering, current management of the Company will own, in the aggregate,
approximately 26% of the outstanding Common Stock (excluding options held by
management). The election of directors is by plurality vote and there is no
cumulative voting. Accordingly, the existing management may be able to
significantly influence the election of the Board of Directors of the Company
and to direct the affairs of the Company. In addition, under the 1994 Employee
Plan and the Director Plan, the Company has reserved for issuance an aggregate
of 850,000 shares (13.2% of Common Stock outstanding assuming the issuance of
all 850,000 options) which may be issued pursuant to options granted under these
plans to employees and directors. As of March 20, 1998, there were 244,826
options outstanding. Of the 244,826 outstanding options, 159,731 are held by
members of the Company's management. In the event that the 159,731 options were
exercised, management would own an additional 3.4% of the outstanding Common
Stock. An additional 360,000 options will be granted to officers and directors
on the Effective Date, 300,000 of which vest over a four year period. In the
event that these additional 360,000 options were exercised, management would own
approximately an additional 7.3% of the Common Stock. See "Management" and
"Principal Stockholders."
FACTORS INHIBITING TAKEOVER. Certain provisions of the Company's Amended
and Restated Certificate of Incorporation and Bylaws may be deemed to have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
stockholder might consider in the Company's or the stockholder's best interest.
The Company's Amended and Restated Certificate of Incorporation authorizes the
Board of Directors to determine the rights, preferences, privileges and
restrictions of unissued series of preferred stock and the designation of any
such series, without any vote or action by the Company's stockholders. Thus, the
Board of Directors can authorize and issue shares of preferred stock with voting
or conversion rights that could adversely affect the voting or other rights of
holders of the Company's Common Stock. In addition, the issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of any preferred stock which might be
issued could contain terms which could contain special voting rights or increase
the costs of acquiring the Company. Other provisions of the Company's
Certificate of Incorporation and Bylaws divide the Company's Board of Directors
into three classes, each of which classes will serve for different three-year
periods which may have the effect of delaying, deferring or preventing a change
in control of the Company. These provisions may not be amended without the
affirmative vote of not less than 66 2/3% of the issued and outstanding shares
entitled to vote thereon. See "Description of Capital Stock -- Preferred Stock"
and "--Certain Charter, ByLaw and Statutory Provisions."
The Company is subject to Section 203 of the Delaware General Corporation
Law ("DGCL") which prevents transactions between the Company and an "interested
stockholder" unless certain conditions are satisfied. The applicability of
Section 203 may have the effect of delaying, deferring or preventing "changes in
13
<PAGE> 18
control" of the Company, even if such event would be beneficial to the then
existing stockholders. See "Description of Capital Stock -- Certain Provisions
of Delaware Law."
LACK OF DIVIDENDS. The Company has not paid any dividends on its Common
Stock since its inception and does not anticipate paying any dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance the development and expansion of the Company's business. See "Dividend
Policy."
NO PRIOR MARKET FOR THE COMMON STOCK; DETERMINATION OF OFFERING
PRICE. Prior to this offering, there has been no public market for the Common
Stock of the Company. While the Company has applied for the listing of the
Common Stock on the Nasdaq SmallCap Market, there can be no assurance that an
active trading market for the Common Stock will be established, or if so
established, sustained. The initial offering price for the Shares has been
arbitrarily determined through negotiation between the Company and the
Underwriter based on such factors as the business potential and earnings
prospects of the Company and prevailing market conditions. Such price may not be
indicative of the market price of the Shares after this offering has been
consummated. See "Underwriting."
POSSIBLE DELISTING; PENNY STOCK REGULATION. It is a condition of this
offering that the Company's Common Stock be accepted for listing on the Nasdaq
SmallCap Market. Under Nasdaq rules, in order to maintain listing on the Nasdaq
SmallCap Market, a company must have, among other things, $2,000,000 of net
tangible assets or market capitalization of $35,000,000 or $500,000 of net
revenue in each of the two previous fiscal years and a minimum bid price of
$1.00 per share. The Company will, upon consummation of this offering, satisfy
the maintenance criteria for continued listing on the Nasdaq SmallCap Market. In
addition, Nasdaq reserves the right to withdraw or terminate the Company's
listing on the Nasdaq SmallCap Market at any time and for any reason in its
discretion. In the event that the Company is unable to maintain continued
quotation on the Nasdaq SmallCap Market, quotation, if any, of the Common Stock
would be in the over-the-counter market in what are commonly referred to as the
"pink sheets" of the National Quotation Bureau, Inc. or on the National
Association of Securities Dealers OTC Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of or to obtain accurate
quotations as to the price of such securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. In addition, if the Company's
securities do not meet an exception to the penny stock regulations cited above,
trading in the Company's securities would be covered by Rule 15g-9 promulgated
under the Exchange Act for non-Nasdaq and non-national securities exchange
listed securities. Under such rule, broker/dealers who recommend such securities
to persons other than established customers and accredited investors (generally,
individuals with net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses) must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities are exempt from this rule
if the market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Shares could be adversely affected
because the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market. See "Description of Capital Stock" and "Underwriting."
LIMITATIONS ON DIRECTOR LIABILITY. The General Corporation law of Delaware
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, with certain exceptions. These provisions may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against a director. In addition, the Company's Amended
and Restated Certificate of Incorporation provides for mandatory indemnification
of directors and
14
<PAGE> 19
officers to the fullest extent permitted or not prohibited by Delaware law. See
"Description of Capital Stock -- Indemnification of Directors and Officers."
SHARES ELIGIBLE FOR FUTURE SALE; UNDERWRITER'S WARRANTS. Upon completion
of this offering, there will be 4,590,423 shares of Common Stock outstanding, of
which the 1,250,000 Shares sold pursuant to this offering will be tradeable
without restriction by persons other than "affiliates" of the Company. The
450,794 Conversion Shares, 140,000 Bridge Shares, 206,061 1997 Loan Shares,
152,392 1994 Shares, 82,127 Agent Warrant Shares and 225,397 Warrant Shares held
by the Selling Stockholders and registered under the registration statement of
which this Prospectus forms a part, will be freely tradeable as long as the
prospectus related thereto remains current and effective, subject to any lock-up
agreements obtained by the Underwriter. Of the 4,590,423 shares of Common Stock
which will be outstanding, 3,169,631 shares of Common Stock will be freely
tradeable pursuant to Rule 144 promulgated under the Securities Act commencing
90 days from the date of this Prospectus. Of such shares, 1,179,318 are owned by
officers or directors of the Company. No prediction can be made as to the
effect, if any, that future sales of shares of Common Stock will have on the
market price of the shares of Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock, or the perception that these sales could
occur, could adversely affect prevailing market prices for the Common Stock and
could impair the ability of the Company to raise additional capital through the
sale of its equity securities or through debt financing.
The Company and its officers, directors and certain stockholders, including
the Selling Stockholders, have agreed (the "Lock-Up Agreements") not to sell or
otherwise dispose of certain of their shares of Common Stock or other securities
of the Company (other than pursuant to private transfers in connection with
which the transferees agree to be bound by the same "lock-up" provision) without
the prior written consent of the Underwriter. The lock-up period is six months
from the Effective Date with respect to 1,040,710 Selling Stockholder Shares.
The 206,061 1997 Loan Shares are subject to an unconditional and non-reversible
lock-up period of 12 months from the effective date. The lock-up period is 18
months from the Effective Date with respect to the 1,394,469 shares of
outstanding Common Stock owned by all other officers and directors of the
Company. Notwithstanding the foregoing, in the event that the closing price of
the Company's Common Stock is at least 120% of the initial offering price
commencing 12 months from the Effective Date, the officers and directors may
sell the same number of shares as would be available for sale by them under Rule
144 commencing after said 12th month. The Underwriter has no current intention
of waiving the Lock-Up Agreements prior to their expiration. The waiver of any
particular Lock-Up Agreement will not constitute a waiver of all Lock-Up
Agreements, and to the extent the Company is made aware of any waiver, it does
not intend to provide notice of same to any other stockholders. See
"Underwriting" and "Shares Eligible for Future Sale."
In addition to the Lock-Up Agreement in favor of the Underwriter, pursuant
to the request of certain state securities authorities, Jack and Elizabeth
Forcelledo have entered into an agreement with the Company which further
restricts their ability to sell their shares of Common Stock (1,159,318 shares)
and options (364,653 options). This agreement precludes the sale, assignment or
transfer of the shares and options (the "Escrowed Shares") for a period of two
years from the Effective Date. Commencing on the third anniversary of the
Effective Date through the fourth anniversary thereof, sales or the transfers
are limited to 2 1/2% of the total Escrowed Shares per quarter. After the fourth
anniversary date all of the Escrowed Shares may be sold or transferred.
The Selling Stockholders include five persons who are either officers or
employees of the Underwriter and hold 56,782 Selling Stockholder Shares. These
persons have agreed not to sell any of their shares for six months following the
offering pursuant to the Lock-Up Agreements. Because these five persons have a
relationship with the Underwriters, there may be a conflict of interest in the
Underwriter's decision regarding whether to waive the Lock-Up Agreement or any
part thereof.
Following completion of this offering, the Underwriter will hold the
Underwriter's Warrants to purchase up to 125,000 shares of Common Stock. The
Underwriter's Warrants will entitle the Underwriter to purchase shares at 165%
of the offering price for a period of four years commencing one year from the
closing of this offering. The exercise of the Underwriter's Warrants may dilute
the book value per share of Common Stock.
15
<PAGE> 20
The holders of such warrants may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company and have the opportunity to benefit from increases in the price of
the Common Stock without risk of an equity investment. The Company has agreed to
register under federal and state securities laws the Common Stock underlying the
Underwriter's Warrants for resale. Such registration rights could involve
substantial expenses to the Company and may adversely affect the terms upon
which the Company may obtain additional financing. See "Underwriting."
CONCURRENT REGISTRATION OF SELLING STOCKHOLDER SHARES. The holders of the
Selling Stockholder Shares have the right to require that such shares be
included in the registration statement of which this Prospectus forms a part.
The Selling Stockholder Shares are being registered simultaneously with this
offering. The Selling Stockholders have agreed not to offer, sell or transfer
their Selling Stockholder Shares for a period of six months from the Effective
Date without the prior written consent of the Underwriter. Sales of the Selling
Stockholder Shares, or even the potential of such sales could adversely affect
the market price of the Common Stock. See "Shares Eligible for Future Sale",
"Concurrent Sales" and "Underwriting."
UNDERWRITER'S INFLUENCE UPON MANAGEMENT OF THE COMPANY. Pursuant to the
terms of the Company's agreement with the Underwriter, the Underwriter has the
right to nominate a person to serve on the Company's Board of Directors for a
period of three(3) years. The Company has agreed to use its best efforts to
obtain the election of such nominee. Although the Underwriter has not determined
to nominate any person to serve, in the event of election of such person to the
Company's Board of Directors the Underwriter may be deemed to have a degree of
influence on the Company. See "Underwriting".
UNDERWRITER'S INFLUENCE ON THE MARKET. A significant number of the shares
of Common Stock offered hereby may be sold to customers of the Underwriter. Such
customers subsequently may engage in transactions for the sale or purchase of
such securities through or with the Underwriter. Although it has no obligation
to do so, the Underwriter intends to make a market in the Common Stock and may
otherwise effect transactions in such securities. If it participates in such
market, the Underwriter may exert a dominating influence on the market, if one
develops, for the Common Stock. Such market-making activity may be discontinued
at any time. Moreover, if the Underwriter (or its affiliated persons) exercises
the Underwriter's Warrants or Agent Warrants, it may be required under
Regulation M promulgated under the Exchange Act to temporarily suspend its
market-making activities. The price and liquidity of the Common Stock may be
significantly affected by the degree, if any, of the Underwriter's participation
in such market. See "Underwriting."
FUTURE ISSUANCES OF STOCK BY THE COMPANY; AUTHORIZED PREFERRED
STOCK. Following this offering, the Company will have 50,000,000 shares of
Common Stock authorized, of which 4,590,423 shares will be issued and
outstanding, assuming that the over-allotment option has not been exercised, and
an additional 396,304 shares will have been reserved for issuance underlying
outstanding warrants and an aggregate of 850,000 shares for issuance under the
1994 Employee Plan and the Director Plan of which options to purchase 244,826
are issued and outstanding. An additional 360,000 options will be granted on the
Effective Date, 300,000 of which vest over a four year period. The Company will
also have 10,000,000 shares of preferred stock, $.10 par value per share (the
"Preferred Stock"), authorized, none of which have been issued as of the date
hereof.
The Company will not issue, for a period of one year from the Effective
Date, any options or warrants which have an exercise price per share less than
the offering price of the Shares in this offering.
No options or warrants that will be outstanding at the Effective Date will
have an exercise period longer than five years.
The Company's Amended and Restated Certificate of Incorporation authorizes
the issuance of the Preferred Stock with such designations, rights and
preferences as may be determined from time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's Common Stock. The balance of the Company's authorized
shares of Common Stock and all of the Preferred Stock are not reserved for any
purpose and may be issued without any action or approval by the Company's
stockholders. The Company will not offer or sell
16
<PAGE> 21
Preferred Stock to any officer, director, 5% shareholder of the Company or
affiliate or associate of such persons without the approval by a majority of the
Company's independent directors who do not have an interest in the transaction
and who have access, at the Company's expense, to the Company's or independent
counsel. The Company does not have any present intention to issue any additional
securities (other than in connection with its option plans and the exercise of
currently outstanding options, warrants or other convertible securities) during
the 12 months following this offering. See "Description of Capital Stock."
17
<PAGE> 22
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,250,000 Shares offered hereby after deducting the Underwriter's discount and
commissions ($687,500) and the estimated expenses of this offering ($605,000),
and assuming an initial public offering price of $5.50 per share, are
approximately $5,583,000 (approximately $6,480,000 if the Underwriter's
over-allotment option is exercised in full). The application of these proceeds
is intended to be made over the next 12 months substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE OF
AMOUNT NET PROCEEDS
---------- -------------
<S> <C> <C>
Inventory(1)............................................... $2,000,000 35.6%
Marketing, advertising and promotional support............. 1,000,000 17.8%
Repayment of 1997 Loan(2).................................. 620,000 10.8%
Repayment of Bridge Notes(3)............................... 801,500 14.3%
Molds and tooling, and product hardware.................... 250,000 4.4%
Product designs, research and development.................. 200,000 3.6%
Repayment of outstanding debt(4)........................... 175,000 3.2%
Payment of accrued officer's salary(5)..................... 122,800 2.7%
Working Capital(6)......................................... 414,376 7.6%
---------- -----
Total............................................ $5,582,876 100.0%
========== =====
</TABLE>
- ---------------
(1) Includes the purchase of skate components, finished product assemblies and
short term warehousing for distribution to the United States.
(2) The terms of the 1997 Loan provide that $600,000 of such loan is to be
repaid upon consummation of this offering. The 1997 Loan bears interest at
12% per annum. The proceeds of the 1997 Loan were used for inventory
purchases, to pay costs of this offering and general corporate purposes.
(3) The terms of the Bridge Notes provide for repayment in full of all principal
and interest upon consummation of this offering. The Bridge Notes bore
interest at 12% per annum. As of October 31, 1997 the Bridge Notes were in
default and are entitled to an additional 6% of interest for a total
interest rate of 18% per annum. The amount noted includes interest owed
through March 31, 1998. The proceeds of the issuance of the Bridge Notes
were utilized for inventory purchases, costs of this offering and general
corporate purposes.
(4) The Company will repay $175,000 of loans from stockholders and former
officers and directors of the Company. The loans are due upon demand and
bear interest at 12% per annum. The proceeds of the loans were used for
working capital. See "Certain Relationships and Related Transactions."
(5) At the closing of this offering, $122,000 will be paid to Mr. Forcelledo for
partial payment of accrued salary to the date of this Prospectus. Mr.
Forcelledo has agreed to waive the payment of $106,000 of the total accrued
salary of $228,000 otherwise payable to him. See "Management -- Employment
Agreements."
(6) Includes the development and completion of the Company's administrative and
operational infrastructure, selling, general and administrative expenses and
other general corporate purposes. Includes the payment of $69,000 to a
creditor of the Company. See "Legal Proceedings." These funds may also be
utilized to pay officer's salaries.
Of the $605,000 of offering expenses, the Company has previously paid
approximately $190,000.
The above amounts and priorities for the use of proceeds represent
management's estimates based upon current operating plans and certain strategic
assumptions, including those relating to the Company's future revenue levels and
expenditures, and assumptions regarding industry and general economic and other
conditions. Although the Company does not contemplate any changes in the
proposed use of proceeds, to the extent the Company finds that adjustment is
required to the use of proceeds of this offering, the amounts
18
<PAGE> 23
shown may be adjusted among the uses indicated above, or certain portions of the
net proceeds may be used for other purposes. Such shifts will be at the
discretion of the Company. Any material changes in the use of proceeds by the
Company will be reported by the Company in its Exchange Act reports. In the
event the Company is able to obtain a credit line for inventory purchases, the
Company may utilize all or some of the proceeds allocated above for inventory
purchases for additional marketing, advertising and working capital. The Company
reserves the right to enter into short term borrowing in the future as business
conditions or the Company's needs may require.
Included in the estimated offering expenses are approximately $90,000 of
expenses which were paid from the proceeds of the 1997 Loan and 1997 Bridge
Offering.
There can be no assurance that all or any holders of the 12% Debentures
will waive any defaults, or will not demand payment in cash and decline to
accept the Conversion Shares. In the event that any holders of the 12%
Debentures refuse to accept the Conversion Shares in payment of the 12%
Debentures, the Company will be required to use proceeds of this offering up to
a maximum of $1,859,525 to repay the 12% Debentures, plus additional sums for
interest. The use of proceeds set forth above would require reallocation as a
result thereof.
The Company anticipates that it will commence the application of the
proceeds upon completion of this offering and that such proceeds will be applied
over the next twelve months. The Company believes that the net proceeds of this
offering will be sufficient to satisfy its requirements to implement its
business plans over such period.
To the extent the over-allotment option is exercised, any proceeds from
such exercise will be used for working capital.
The Company will not derive any proceeds from the sale of the Selling
Stockholder Shares by the Selling Stockholders, although it will receive the
exercise price of the 1996 Warrants in the event a 1996 Warrant is exercised by
a Selling Stockholder. In the event that all of the 225,397 1996 Warrants are
exercised, the Company will receive $1,239,684 of proceeds. Any proceeds
received from the exercise of 1996 Warrants will be used for working capital
purposes. Additionally, in the event that all of the Agent Warrants are
exercised, the Company will receive $137,973, which proceeds will be used for
working capital purposes.
Pending the use of the offering proceeds, the net proceeds of this offering
will be invested in short-term interest-bearing deposits or United States
government securities.
DIVIDEND POLICY
The Company has not paid dividends since inception and the Company does not
expect to pay dividends in the foreseeable future. The Company intends to retain
all of its available funds for the operation and expansion of its business.
19
<PAGE> 24
DILUTION
At December 31, 1997 the Company had negative net tangible book value of
$(3,783,632) or $(1.41) per share of Common Stock. At December 31, 1997, the
Company had a pro forma negative net tangible book value of $(1,552,632) or
$(.46) per share of Common Stock after giving effect to the conversion of the
12% Debentures and the issuance of the 1997 Loan Shares. After giving effect to
the sales by the Company of 1,250,000 Shares at an offering price of $5.50 per
Share, and the application of the estimated proceeds therefrom, the pro forma
net tangible book value of December 31, 1997 would have been $.95 per share. Net
tangible book value per share is the Company's total tangible assets less its
total liabilities, divided by the number of shares of Common Stock outstanding.
This represents an immediate increase in pro forma net tangible book value of
$1.41 per share of Common Stock to the pre-offering stockholders and an
immediate dilution of $4.55 per share (83% of the offering price) to purchasers
of the Shares. Dilution represents the difference between the initial public
offering price paid by purchasers in this offering and the net tangible book
value per share immediately after completion of this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $5.50
Pro Forma Net tangible book value per share before this
offering............................................... $(.46)
Increase in pro forma net tangible book value per share
attributable
to the sale of the Shares offered hereby............... $1.41
-----
Pro forma net tangible book value per share after this
offering.................................................. $ .95
-----
Dilution per share to new stockholders...................... $4.55
=====
</TABLE>
The following table sets forth, on a pro forma basis as of the date of this
Prospectus, a comparison of (i) the number of shares of Common Stock acquired
from the Company by investors pursuant to this offering and acquired from the
Company by the pre-offering stockholders of the Company, (ii) the total
consideration paid to the Company and (iii) the respective average purchase
price per share paid by the investors and the pre-offering stockholders.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Current stockholders................... 3,340,423(2) 73% $ 3,551,836 34% $1.06
New stockholders....................... 1,250,000 27% 6,875,000 66% $5.50
--------- --- ----------- ---
Total........................ 4,590,423 100% $10,426,836 100%
========= === =========== ===
</TABLE>
- ---------------
(1) Does not give effect to: (i) 125,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants; (ii) 850,000 shares of Common Stock
reserved for issuance under the Company's option plans of which options to
purchase 244,826 shares have been issued; and (iii) 396,304 shares of Common
Stock reserved for issuance upon the exercise of outstanding Common Stock
purchase warrants.
(2) Gives effect to the issuance of: (i) the Conversion Shares; (ii) the 1997
Loan Shares and (iii) the surrender and cancellation of 600,000 shares.
At the Effective Date, the Company will have outstanding 604,826 options
and 531,549 warrants with exercise prices ranging from $1.68 per share to $9.90
per share. In the event that all of the outstanding options and warrants were
exercised, at an aggregate exercise price of $5,926,524, new investors would own
approximately 20% of the outstanding Common Stock and would have paid 36% of the
total consideration paid for all outstanding Common Stock of the Company. See
"Capitalization", "Management" and Note 9 to the Financial Statements.
20
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(1) ADJUSTED(1)(2)
----------- ----------- --------------
<S> <C> <C> <C>
Short Term Debt:
Notes Payable to Stockholders................. $ 250,000 $ 250,000 $ 75,000
Bridge Notes.................................. 700,000 700,000 --
1997 Loan..................................... 1,000,000 600,000 --
12% Debentures................................ 1,775,000 -- --
----------- ----------- -----------
Total Short Term Debt(3).............. $ 3,725,000 $ 1,550,000 $ 75,000
Long Term Note Payable.......................... 100,000 100,000 100,000
Stockholders' Equity:
Preferred Stock, par value $.10 per share,
10,000,000 shares authorized, no shares
outstanding................................ -- -- --
Common Stock, par value $.001 per share,
50,000,000 shares authorized, 2,683,568
(actual) shares outstanding, 3,340,423 pro
forma outstanding and 4,590,423 outstanding
pro forma as adjusted(4)................... 2,684 3,340 4,590
Additional Paid-In Capital.................... 2,718,152 4,948,496 10,635,746
Retained Deficit.............................. (5,135,525) (5,135,525) (5,135,525)
----------- ----------- -----------
Total Stockholders' Equity (Deficit).......... (2,414,689) (183,689) 5,504,811
----------- ----------- -----------
Total Capitalization.................. $ 1,410,311 $ 1,466,311 $ 5,679,811
=========== =========== ===========
</TABLE>
- ---------------
(1) Gives effect to the issuance of the Conversion Shares and the 1997 Loan
Shares.
(2) Adjusted to reflect the application of the net proceeds of the Shares
offered hereby assuming a $5.50 per share offering price and the forgiveness
of accrued salary of $106,000 by Mr. Forcelledo. See "Use of Proceeds" and
"Management's Discussion and Analysis."
(3) See Notes 4 and 5 to the Financial Statements for further information as to
short term debt and obligations, interest rates and maturity dates of such
indebtedness.
(4) Does not give effect to: (i) 125,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants; (ii) 850,000 shares of Common Stock
reserved for issuance under the Company's option plans of which options to
purchase 244,826 shares have been issued; and (iii) 396,304 shares of Common
Stock reserved for issuance upon the exercise of outstanding Common Stock
purchase warrants.
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company designs, manufactures and distributes inline skates using its
patented Radial Skateball Technology(TM), which utilizes a ball instead of the
traditional wheel to provide skaters with better balance, maneuverability and
control. inline skating has been one of the fastest-growing segments of the
sporting goods industry, and the Company's products target the entire spectrum
of skaters, ranging from beginner to advanced, including models for recreation,
fitness, hockey and aggressive skating.
Rollerball was founded by Chairman, President and Chief Executive Officer
Jack Forcelledo in 1994. The Company has primarily devoted its efforts to
refining the Radial Skateball Technology(TM) concept, testing new product
prototypes, designing new component parts and introducing new products since its
inception. Additionally, management has expanded significant efforts obtaining
patent and trademark protection and developing manufacturing and supplier
relationships. By the second quarter of 1997, the Company had completed the
design, testing and manufacturing processes for 18 different skate models at
various price points covering the recreation, fitness, hockey and aggressive
segments of the inline skate market and had established a nationwide network of
sales representatives to launch the distribution of the product through various
channels.
Test marketing of the Company's products to date has primarily occurred in
international markets and, to a limited extent, through HSN in the United
States. Prior to this offering, the Company has operated on limited funds, with
virtually no funds allocated for sales and marketing. From inception in March
1994 through the year ended December 31, 1997, the Company has generated more
than $11 million in revenue from this limited sales and marketing program. Upon
completion of this offering, the Company plans a full-scale introduction of its
products into the United States retail marketplace, additional development and
licensing of the Rollerball trademark and ongoing introductions of new products
and innovative technologies for inline skating and related accessories.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 were $2,022,692,
which represents a decrease of $2,827,724, or 58.3%, as compared to the year
ended December 31, 1996. This decrease was primarily attributable to the lack of
funds necessary to purchase the inventory needed to fulfill sales orders, which
included funds to switch to four ball skate production. In addition, there was a
general decrease in orders from retailers throughout the inline skate industry
due to major retailers taking heavy inventory positions in 1996 which were not
offset by increased retail sales. The Company did not decrease its prices
significantly during the year ended December 31, 1997 as compared to the year
ended December 31, 1996 and therefore was not materially affected by any such
changes.
Gross Profit. Gross profit for the year ended December 31, 1997 was
$679,418, which represents a decrease of $1,067,219, or 61.1%, compared to the
year ended December 31, 1996. The decrease in gross profit was primarily due to
decreased sales volume for the year ended December 31, 1997 as compared to the
year ended December 31, 1996. Gross margin for the year ended December 31, 1997
was 33.6%, which represents a decrease of 2.4% as compared to the year ended
December 31, 1996. The decrease was related to air freight bills for inventory
shipments to meet several sales deadlines during the year ended December 31,
1997.
Selling and Marketing Expenses. Selling and marketing expenses for the
year ended December 31, 1997 were $1,229,943, which represents a decrease of
$231,061, or 15.8%, as compared to the year ended December 31, 1996. The
decrease in selling and marketing expenses for the year ended December 31, 1997
was primarily due to a reduction in expenses under several royalty agreements,
including the elimination of the royalty agreement of Jack Forcelledo effective
January 1, 1997 and decreased royalties due to lower sales compared to the year
ended December 31, 1996. The other significant reason for the decrease in
selling and marketing expenses was the reduction in sales commissions paid given
the decreased levels of sales for the year ended December 31, 1997 as compared
to the year ended December 31, 1996. Advertising costs, including costs related
to tradeshows, for the year ended December 31, 1997 were $283,115, which
represents an increase of
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$24,807 or 9.6%, as compared to $258,308 for the year ended December 31, 1996.
These increased advertising costs offset the aforementioned decrease in selling
and marketing expenses.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1997 were $1,176,073, which represents an
increase of $439,503, or 59.7%, compared to the year ended December 31, 1996.
The dollar increase was primarily due to the salary of Jack Forcelledo,
increased insurance expenses and other general costs associated with the
operations of the business. Salary payments to Mr. Forcelledo during fiscal year
1997 increased to $160,000 from $100,000 in fiscal year 1996. The increase in
general and administrative costs also includes additional rent expenses; the
addition of medical insurance for employees and consultant costs; increased
depreciation from fixed asset additions and increases in professional fees for
third party consulting services. Management anticipates a significant decrease
in general and administrative expenses as a percentage of sales in the near
future; however, dollar amounts would likely increase should revenues grow.
Interest. The Company's interest expense for the year ended December 31,
1997 was $1,417,841 as compared to interest expense of $96,566 for the year
ended December 31, 1996. This increase was attributable to the Company's
increased interest payable on debt incurred including amortization of debt
issuance costs during the year ended December 31, 1997, pursuant to the 1996
Private Offering and the Bridge Notes. Management expects a large decrease in
interest expense in the future as $3,475,000 of debt on which the Company is
making interest payments and amortizing debt issuance costs will either be
converted into equity or paid from the proceeds upon the initial public
offering. This assumption that interest costs will decrease assumes that the
holders of the 12% Debentures accept the Conversion Shares and do not demand
cash payments therefore.
Net Loss. Net loss for the year ended December 31, 1997 was $3,145,239
which represents an increase of $2,596,936, compared to a $548,303 net loss for
the year ended December 31, 1996. The increase in net loss resulted primarily
from additional interest expense as a result of the 1996 Private Offering and
the 1997 Bridge Offering and the related amortization of debt issuance costs. In
addition, large losses occurred due to the decrease in the Company's sales
coupled with increased expenditures for general and administrative expenses for
the year ended December 31, 1997 compared to the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales for the year ended December 31, 1996 were $4,850,416,
which represents an increase of $648,758, or 15.4%, compared to the fiscal year
ended December 31, 1995. This increase was primarily attributable to the
increased sales in the international market and sales to HSN.
Gross Profit. Gross profit for the fiscal year ended December 31, 1996 was
$1,746,637, which represents an increase of $306,996, or 21.3%, compared to
gross profit of $1,439,641 in the fiscal year ended December 31, 1995. The
increase in gross profit was primarily due to increased sales for the Company's
inline skates and accessories for 1996. Gross margin for the fiscal year ended
December 31, 1996 was 36%, which represents an increase of 1.7% as compared to
the fiscal year ended December 31, 1995. The increase in gross margin was
primarily related to the Company's efforts in obtaining cost reductions from
various suppliers related to certain inline skate models.
Selling and Marketing Expenses. Selling and marketing expenses for the
fiscal year ended December 31, 1996 were $1,461,004, which represents an
increase of $517,497, or 54.8%, compared to the fiscal year ended December 31,
1995. Selling and marketing expenses represented 30.1% of net sales for the
fiscal year ending December 31, 1996. The increase was due to increased sales
volume resulting in increased commissions and royalties during fiscal year 1996
as well as increased design costs for development of new skate lines.
General and Administrative Expenses. General and administrative expenses
for the fiscal year ended December 31, 1996 were $736,570, which represents an
increase of $192,915, or 35.5%, compared to the fiscal year ended December 31,
1995. General and administrative expenses for the fiscal year 1996 represented
15.2% of 1996 net sales. The dollar increase for 1996 over 1995 was primarily a
function of increased sales for
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the Company in fiscal year 1996 over 1995, as well as increases in employees'
compensation and depreciation and amortization of significant expenditures for
molding, tooling, patents and trademarks.
Interest. The Company's interest expense for the fiscal year ended
December 31, 1996 was $96,566, an increase of $59,770, or 162.4%, compared to
the fiscal year ended December 31, 1995. This increase was primarily
attributable to the Company's increased interest payable on the loans from
stockholders for this period over the fiscal year ending December 31, 1995 and
interest costs associated with the 12% Debentures issued in the 1996 Private
Offering.
Net Loss. Net loss for the fiscal year ended December 31, 1996 was
$548,303, an increase of $463,186 compared to a $85,117 net loss for the fiscal
year ended December 31, 1995. The increase in net loss resulted primarily from
the increase in the Company's sales and profit margins offset by increased
expenditures for selling and marketing expenses, general and administrative
expenses, and interest expense for the years ended December 31, 1996 compared to
the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its activities principally from
operating cash flow, loans from stockholders and private offerings of debt and
equity securities. The Company does not have any lending arrangement with a
financial institution and therefore there were no balances outstanding with
commercial banks and lending institutions as of the year ended December 31,
1997. The Company owed $3,825,000 principal amount of loans as of December 31,
1997, of which $350,000 principal amount was owed to certain stockholders of the
Company. Approximately $1,600,000 of such debt will be repaid out of the
proceeds of this offering and an additional $1,859,525 (12% Debentures) will be
converted into the Conversion Shares. See "Use of Proceeds."
As of October 31, 1997 the Company was in payment default of the 12%
Debentures which default continues to the date of this Prospectus. The Company
has requested that the holders of the 12% Debentures waive all defaults and
extend the payment date until the earlier of consummation of this offering or
April 30, 1998. Payment of the Bridge Notes was due on October 31, 1997 and the
Company has received several default notices from holders of the Bridge Notes.
The Company does not have the funds to pay the principal and interest of the 12%
Debentures and Bridge Notes without the proceeds of this offering. In the event
that the holders of the 12% Debentures do not accept the Conversion Shares in
payment of the 12% Debentures, the Company will be required to utilize cash
proceeds of this offering to repay such holders. Unless the holders of
substantially all of the 12% Debentures waive all defaults and accept the
Conversion Shares, it is doubtful that the offering will be consummated. See
"Use of Proceeds".
As of December 31, 1996, the Company had a stockholders' deficit of
$911,610, as compared to a stockholders' deficit of $2,414,689 as of December
31, 1997. The Company's current ratio as of December 31, 1997 was 0.32, as
compared to 0.42 as of December 31, 1996.
Substantially all of the Company's overseas sales are conducted through
letters of credit in U.S. Dollars. As a result, the Company has minimal exposure
to currency fluctuations and does not believe that it is subject to any material
risk with respect thereto. The Company does, however, conduct a significant
portion of its manufacturing and sales activities through Hong Kong which was
returned to the People's Republic of China in July 1997. There can be no
assurance that the Chinese government may not change the Hong Kong currency
which, in turn, may have an effect upon the Company's utilization of U.S.
Dollars based on letters of credit.
To date, more than 98% of the Company's customers have paid for purchases
through irrevocable letters of credit in order to facilitate direct shipments
from overseas through the Company's Hong Kong-based manufacturing and sales
agent, LYI. Because of this high percentage of letter of credit sales, the
Company has not had a significant reserve for bad debts. As the Company's sales
reflect more domestic sales and less letter of credit sales, the Company will be
required to closely monitor any potential credit risks and perhaps increase the
amount of its reserve.
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Payments to suppliers are obtained through LYI which receive payment terms
from suppliers and issues payment to them upon collection of the letters of
credit. The Company's short-term debt consists of accrued expenses (primarily
consisting of accruals for consultant services and royalties payable) and loans
from officers and directors, investors in the 1996 Private Offering and the 1997
Bridge Offering and the 1997 Loan. The Company currently has long-term debt of
$100,000 principal amount bearing interest at 12% per annum which is due and
payable in January 1999.
During the period May 1994 to June 1994, the Company sold, in the 1994
Private Offering, 1,023.75 units of its securities, each unit consisting of 618
shares of Common Stock and 206 1994 Warrants. Each unit had a purchase price of
$900. The offering was conducted under Section 4(2) and/or Regulation D of the
Securities Act. The 1994 Warrants entitled the holders to purchase one share of
Common Stock for an exercise price of $1.00 per share. The Company received net
proceeds of approximately $813,756 from the 1994 Private Offering after payment
of commissions of $90,000 and offering expenses of approximately $17,619. The
Underwriter also received the Agent Warrants. The Agent Warrants have an
exercise price of $1.68 per share and expire in May 1998. As of July 15, 1997,
152,392 of the 1994 Warrants had been exercised and the remainder had expired.
In June 1997 the Company received net proceeds of approximately $242,000 from
the exercise of the 1994 Warrants after payment of $10,258 in commissions to the
Underwriter. The registration statement of which this Prospectus forms a part
includes the 152,392 1994 Shares which have been registered for resale by
certain of the Selling Stockholders and the 82,127 Agent Warrant Shares.
During the period August 1996 to September 1996, the Company sold in a
private offering under Section 4(2) and/or Regulation D of the Securities Act,
$1,775,000 principal amount of 12% Debentures. The Company received net proceeds
of approximately $1,576,000 after payment of commissions and offering expenses
of approximately $199,000. A single investor has requested, and the Company has
agreed, that all interest payments due to such investor be added to the
principal amount of such investor's note. As of December 31, 1997 the total
amount of interest due to such investor was approximately $56,000 convertible
into 13,576 Conversion Shares. The Underwriter served as placement agent in the
1996 Private Offering. The 12% Debentures contain terms by which they were to be
automatically converted into shares of Common Stock at a conversion price equal
to 80% of the per share offering price of the Company's initial public offering
provided the offering occurred prior to October 31, 1997. Payment of the
principal amount of the 12% Debentures was due on October 31, 1997. The Company
has made interest payments to the 12% Debenture holders for the period ending
January 31, 1998. As of November 1, 1997 the Company was in default. The Company
has requested that the holders of the 12% Debentures waive all defaults and
extend the maturity date to April 30, 1998. In order to obtain such waiver, the
Company has proposed to the holders that the conversion price of the 12%
Debentures be reduced to 75% of the offering price of the Shares and to pay an
additional 6% interest from November 1, 1997 through the date of payment. The
Company has also proposed reducing the exercise price of the 1996 Warrants to
equal the offering price of the Shares. Based upon an initial public offering
price of $5.50 per share, and assuming the Company's proposal is accepted, the
holders of the 12% Debentures will receive 450,794 Conversion Shares at the
closing of this offering. The purchasers in the 1996 Private Offering also
received one 1996 Warrant to purchase one share of Common Stock for every two
shares received upon conversion of the 12% Debentures, an aggregate of 225,397
warrants. The 1996 Warrants are exercisable for three years from the date of
issuance. The registration statement of which this Prospectus forms a part
includes the Conversion Shares and 1996 Warrant Shares which have been
registered for resale by certain of the Selling Stockholders.
During the period from March 1997 through April 1997, the Company sold, in
a private offering under Section 4(2) and/or Regulation D of the Securities Act,
$700,000 principal amount of the Company's 12% Bridge Notes. The Bridge Notes
were due and payable upon the earlier of (i) October 31, 1997 or (ii) five days
after the consummation of this offering. The Company has received notice default
from several holders of the Bridge Notes. The terms of the Bridge Notes provide
for a default rate of interest at 18% per annum. The Bridge Notes are junior
unsecured obligations of the Company. Investors in the Bridge Notes also
received, as of November 1, 1997, the Bridge Shares. The Company intends to use
proceeds of this offering to repay all interest and principal on the Bridge
Notes. The Company realized net proceeds of $623,000 from the sale of the Bridge
Notes after payment of sales commissions and offering expenses of approximately
$77,000. The
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Underwriter acted as placement agent with respect to the placement of the Bridge
Notes. The registration statement of which this Prospectus forms a part includes
the 140,000 Bridge Shares which have been registered for resale by certain of
the Selling Stockholders.
In September 1997 the Company obtained a loan for an unaffiliated third
party of $100,000 bearing interest at 12% per annum. The loan is payable in full
in January 1999. Interest payments are payable semi-annually. The lender also
has the right to receive from Jack Forcelledo, the Company's Chief Executive
Officer, such number of shares equal to the principal amount of the loan divided
by the initial public offering price of the Shares.
In October 1997 the Company received a loan from Sercap Holdings LLC., a
company controlled by a holder of 12% Debentures, in the principal amount of
$1,000,000. The lender also is entitled to receive such number of shares of
Common Stock equal to $600,000 principal amount of the loan divided by the
initial public offering price of the Shares in this offering. Based upon an
initial offering price of $5.50 per Share, the lender will receive an aggregate
of 206,061 1997 Loan Shares at the closing of this offering. The loan is divided
into two separate notes, one of which, in the principal amount of $600,000, is a
term note bearing interest at 12% per annum and payable upon the earlier of the
closing of this offering or December 31, 1998. The second portion of the loan is
represented by a convertible note in the principal amount of $400,000 which
shall automatically be converted into Common Stock upon closing of this offering
at a per share price equal to 75% of the initial offering price of the Shares.
The lender also received the right to nominate one person to the Board of
Directors of the Company. Mr. Lawrence Stumbaugh, a controlling person (as
defined under the Securities Act) of Sercap Holdings LLC, was appointed to the
Board of Directors of the Company as the designee of Sercap Holdings LLC and
served in such capacity from October 1997 until March 20, 1998. Sercap Holdings
LLC has determined not to exercise its right at this time. See "Management." The
proceeds of the loan have been utilized by the Company primarily for working
capital and for certain limited offering expenses. The Registration Statement of
which this Prospectus forms a part includes the 206,061 1997 Loan Shares which
have been registered for resale by the lender who is a Selling Stockholder. Mr.
Stumbaugh is also a Selling Stockholder whose shares are subject to a Lock-Up
Agreement.
Upon completion of this offering, the Company will receive net proceeds of
approximately $5,613,000, and intends to use the net proceeds to continue to
focus upon significantly expanding the marketing and sales of its products in
the United States. Approximately $1,719,000 will be utilized to terminate
outstanding debt. A significant portion of the remaining net proceeds will be
utilized to purchase inventory. In addition, the Company plans to expand its
international distribution. The Company intends to develop additional
distribution arrangements in order to more aggressively take advantage of growth
opportunities which the Company believes exist for its products both within and
outside the United States. The Company also intends to evaluate the development
of additional products that offer mass market appeal and represent a strategic
fit with the Company's products and sourcing and distribution methods.
Management anticipates that the balance of the net proceeds from this
public offering, together with internally generated funds from projected sales
and potential borrowings, will be sufficient to meet the Company's presently
projected cash and working capital requirements for the Company's next 12
months. Pending the use of the proceeds, the Company intends to invest the net
proceeds in investment grade, interest bearing securities. See "Use of
Proceeds."
At March 23, 1998 the Company had outstanding 244,826 options with exercise
prices ranging from $3.37 to $5.05 and 356,549 warrants (including 225,397 1996
Warrants) with exercise prices ranging from $1.68 to $5.50. In the event that
all of such options and warrants were exercised in full, the Company would
receive approximately $2,442,000 in gross proceeds. Any proceeds from the
exercise of options and warrants will be used for working capital purposes.
In the event that less than all of the holders of the 12% Debentures
decline to accept the Conversion Shares and demand payment in cash, the Company
will be required to utilize cash proceeds of this offering for such payments.
The Company would therefore be required to reallocate the net proceeds. See "Use
of Proceeds."
The Company is currently in discussions with several banking institutions
with respect to obtaining a credit line facility for working capital and letter
of credit purposes. These discussions are in the early stages
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and there can be no assurance that a line of credit will be obtained by the
Company. The Company intends to continue these discussions following this
offering.
EFFECTS OF INFLATION/SEASONALITY
The Company's sales have not been adversely affected by inflation and does
not believe inflation will be a material factor in its sales in the foreseeable
future. The Company's purchase of component parts is likewise not effected by
inflation at the present time.
Due to the Company's limited sales history, it is difficult to conclude as
to the effects of seasonality on the Company's sales. In addition, most of the
Company's sales have historically been in international markets where seasons
change at different times around the globe. The Company anticipates its domestic
sales being somewhat affected by climate changes in the United States, such as
higher sales during warmer months of the year and lower sales during the colder
months, with the exception of the holiday season. But as discussed above, the
Company's international presence will provide somewhat of a buffer to the
effects of seasonality on its total sales.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995 the Financial Accounting Standards Board (the "FASB")
issued its Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The provisions of SFAS 123 were adopted
by the Company for the fiscal year ended December 31, 1996. Disclosures required
by the Company's election may be found in Note 1 of Notes to Financial
Statements.
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." This pronouncement provides for the
calculation of Basic and Diluted earnings per share which is different from the
current calculation of Primary and Fully Diluted earnings per share. The
pronouncement was adopted by the Company in fiscal 1997.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued two new disclosure standards. The Company's
results of operations and financial position will be unaffected by
implementation of these new standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS No. 130") establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise," establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
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BUSINESS
INTRODUCTION
The Company develops, manufactures, distributes and markets an innovative,
patented design of inline skates under the registered trademark Rollerball. The
Rollerball skate differs from traditional inline skates (e.g. Rollerblades(R),
Bauer(R), Ultra-Wheels(R), etc.) by offering the consumer a skate that has
spherical-shaped wheels instead of the flat, disk-shaped wheels of traditional
inline skates, resulting in enhanced performance. Since its incorporation in
1994, the Company's efforts have been focused upon designing, engineering and
developing the Rollerball line of inline skates. The Company has been granted
several United States and foreign patents which protect its innovative skateball
designs and technology. Since its formation, the Company has expanded its
product line to presently include 18 models of inline skates that appeal to a
wide range of price and performance levels for use in recreational, fitness,
hockey and aggressive skating. During the year ended December 31, 1997 the
Company had sales for 9 of its models resulting in sales of approximately
$2,023,000. The Company intends to commercially introduce the other 9 models
during the first half of fiscal 1998. Rollerball also offers related accessories
including helmets, safety pads and replacement parts. To date the Company has
had limited sales which have been primarily to the international market. With
the proceeds of this offering, the Company intends to aggressively market and
sell its products in the United States.
Rollerball's inline skates differ from traditional inline skates in
appearance and in performance. The Company believes that its proprietary
Rollerball skating system is the next generation of inline skates and the first
major product innovation in inline skating since the introduction of the
original Rollerblade(R) inline skate in the 1970's. Rollerball offers inline
skates with unique patented spherical wheels that are slightly smaller than a
tennis ball (70mm or 60mm in size) and are engineered to create support and
balance when in contact with the skating surface. The spherical cross section of
the Radial Skateball Technology(TM) provides a uniform, unchanging shape and a
greater area of contact with the skating surface. Rollerball's design allows a
skater to achieve levels of acceleration, balance and maneuverability greater
than that which can be achieved by comparably priced traditional inline skates.
Furthermore, because of these characteristics, the Company believes that its
Rollerball skates enhance the experience of inline skating while providing a
more stable, body-friendly platform which will appeal to all skaters from
beginner to advanced. The Company believes these product features provide
Rollerball with a skate superior to any other product commercially available and
will enable Rollerball to compete with the major inline skate manufacturers both
in the United States and worldwide.
STRATEGY
The Company's primary goal is to become a leading developer and marketer of
inline skates and accessories to the recreational/fitness segment through retail
channels of distribution (specialty sporting goods stores, sporting goods
stores, mass merchandisers and direct mail catalogues), as well as through
direct response television (television home shopping channels/services and
infomercials) throughout the world. The Company's secondary objective is to
expand the distribution and sales of accessories and replacement parts and to
aggressively seek out and establish licensing arrangements with third parties
for the licensing of the Rollerball trademarks for use in clothing, toys and
entertainment categories. The attainment of this secondary goal will, in
management's opinion, support the Company's primary goal both by contributing
licensing revenue to the Company, and by building consumer awareness of the
Rollerball brand name. While the Company has had discussions with potential
licensees, no agreements have been consummated and there can be no assurance
that the Company's licensing efforts will be successful.
The Company believes that a key factor in the Company's development is the
continual design improvement and refinement of its products. Management expends
significant time, effort and resources on the refinement of the Company's
existing product line based upon its observations and research of market trends
and competing products. The Company intends to continue to emphasize the unique
design of its skateballs and the enhanced performance characteristics of its
skates. The balance enhancement characteristics of the Radial Skateball
Technology(TM) will also be emphasized by the Company to promote its products to
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inexperienced skaters, occasional recreational skaters, and skaters who would
ordinarily not attempt inline skating.
The Company's strategic business plan is to:
1) Successfully penetrate the United States retail market through
increased marketing and sales efforts aimed at generating distribution with
the key sporting goods and mass merchandising distributors;
2) Continue to expand upon its current international market base by
engaging additional distributors and strategically expanding into the
Canada, South America and Eastern European countries;
3) Successfully complete the development, engineering and tooling of
Rollerball's next generation of skates; and
4) Provide marketing support to the expanding distribution and sales
base of Rollerball inline skates and accessories by licensing the
Rollerball trademarks in clothing and entertainment categories.
The Company may also consider establishing licensing arrangements with
third party specialty inline skate manufacturers and marketers whereby the
Company may sublicense the marketing and distribution of certain of its
products.
INDUSTRY BACKGROUND
Roller skating first became popular in the United States in the 1930's, and
the most common skate in use at that time was the traditional four wheel roller
skate. Skating as an outdoor activity dramatically increased in popularity with
the development of urethane wheels in the 1960's, which made skates more
enjoyable for outdoor use.
The inline skate market was created in the 1970's with the introduction of
Rollerblade(R), the current dominant manufacturer of inline skates. Inline
skates were originally sold primarily through specialty sporting goods
retailers, at prices ranging from $100 up to $400, to cross-training athletes
and as a summer training product for serious ice hockey players. According to
the Sporting Goods Manufacturing Association ("SGMA"), sales of inline skates
grew to more than $625 million in 1996. SGMA has reported that the sport now
claims more than 30 million participants, and with respect to the number of
participants, inline skating has surpassed other sports such as golf, baseball,
tennis, bowling and downhill skiing in market size.
The development and success of inline skates has dramatically changed the
demographics of roller skating. Boys and girls, as well as men and women, now
skate in nearly equal numbers. The inline skate has substantially replaced the
four wheel skate throughout the marketplace. Management of the Company believes
that roller skating, dominated now by inline skates, will continue to be a
popular form of entertainment and exercise for many years to come.
The inline skate market is composed of four distinct and key segments with
manufacturers strategically positioning their products to meet the requirements
of each segment. The market segments are: (1) recreational/fitness; (2) roller
hockey; (3) aggressive (stunt and extreme skating); and to a lesser extent (4)
speed skating. Based upon industry sales figures, the recreational/fitness
segment accounts for 75% of sales; the roller hockey segment accounts for 8% of
sales; the aggressive segment accounts for 16% of sales; and the speed skating
segment accounts for 1% of sales. According to industry sales of inline skates,
the recreational/fitness segment has the most participants and also offers the
widest selection of skates. Roller hockey has demonstrated strong growth in
recent years primarily as a function of the increase of participants in "street"
hockey and the proliferation of roller hockey leagues and teams.
PRODUCT DESIGN, DEVELOPMENT AND ENGINEERING
All the design, development and engineering of the Company's skate models
is performed by the Company in Southern California. The production engineering
of the skates is facilitated via a combination of in-house efforts and also in
association with unaffiliated third parties in both the United States and in
Asia. The Company does not yet design or manufacture the skate boots, which it
purchases from third party vendors
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<PAGE> 34
in Thailand, Taiwan and the People's Republic of China. The selection of the
style, materials and quality of the boots and liners for each model is, however,
under the strict supervision of the Company's management.
The Company believes that the major performance advantages of the patented
Rollerball skates over the competition's standard three, four or five wheel
inline skates are enhanced stability, balance and control, combined with special
acceleration and maneuverability features. The enhanced features result from the
unique physical design of the Rollerball wheels, trade-named Radial Skateballs.
The standard inline skate is able to achieve high speed in straight line
skating, but requires a substantial adjustment in speed on curves to avoid
accidents caused by the loss of wheel traction at extreme excursion angles,
resulting in skidding and falling. Rollerball skates are not only able to
accelerate quickly and achieve high speed in a straight line; but, because of
the extended range of contact area available, Rollerball Radial Skateballs allow
the skater to maintain greater velocity on curves with a reduced risk of losing
control. Providing up to 300% more usable riding surface area than a typical
inline skate wheel, the spherical-shaped wheels are specifically designed to
provide high levels of balance and stability when contacting the skating
surface, even at combined lean angles 20 degrees greater than the typical inline
wheel. This greater lean angle capability provides the skater with maximum
maneuverability since the skater can approach curves with a high degree of
excursion -- almost a 45 degree angle -- which enables the skater to maintain
velocity and execute difficult acrobatic stunts. The Rollerball skate products
allow the skater to perform aggressive turning maneuvers more easily than that
of any other type of inline skate. During high angle maneuvering and extreme
bank angles, the Rollerball skate, due to the physics of its spherical wheel
design, maintains uniform traction and limits slipping and skidding which
enables a skater to make sharper turns under maximum control. Because of the
Rollerball skates' enhancements in acceleration, balance and maneuverability,
the Company believes it will appeal to all skaters.
[graphic]
Safety testing of the Company's products is performed by the Company, by
independent testing laboratories and by the Company's third party manufacturers.
All of the Company's products meet United States, Canadian and European safety
regulations. The Company's third-party manufacturers are chosen for their
ability to produce quality products based on the company's standards, and these
manufacturers are required to monitor quality assurance.
Although there have been only limited product sales to date, the Company
has not experienced any significant product returns or complaints based upon the
design, performance or quality of its products.
PRODUCTS
The Rollerball product line is comprised of four groups which will
facilitate a tiered marketing approach. The product lines are differentiated by
price points, performance levels and target markets, retailer and consumer
markets.
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<PAGE> 35
The skates are produced with either two or four Radial Skateballs. The
Radial Skateballs currently are manufactured in 2 size ranges and types: type
1-70MM diameter injection molded B.A.S.F. Elastollan(TM) TPU
(thermopolyurethane) over a nylon core, and type 2-60MM diameter cold-cast
urethane over polyurethane cores. The Company's 18 different models are
differentiated by the number of Radial Skateballs (2 or 4), appearance and
style, quality of bearings, and materials for the chassis and boots.
The four Rollerball skate product groups are:
RB(R) -- six models of 2-70mm ball skates priced to retail from $59 to $89;
GFX(3) and GFX(4)(R)/CARBON -- six models of 4-60mm ball skates with
high-glass-content, carbon enhanced nylon chassis and ABEC-3 bearings and
priced to retail from $90 to $149;
G-FORCE(R) ALLOY -- four models of 4-60mm ball skates with 6000 series
aircraft quality aluminum chassis and ABEC-3 bearings and priced to retail
from $159 to $179; and
AGGRESSIVE -- two models of 4-60mm ball skates aimed at the aggressive
skate market with either high-glass content, carbon enhanced nylon chassis
and ABEC-3 bearings or the 6000 series aircraft-quality aluminum chassis
and ABEC-5 bearings, and priced to retail from $199 to $249.
MANUFACTURING AND ASSEMBLY
The Company's current product lines and component parts are manufactured
for the Company by unaffiliated third party vendors located in the United
States, Taiwan, the People's Republic of China and Thailand. The skates are
composed of three subassemblies: (i) the boot assembly (boot shell, liner and
laces or buckles); (ii) the chassis (which is attached to the bottom of the
boot); and (iii) the wheel assembly (the skateball, bearings and required axles
and hardware for mounting the wheels to the chassis). The assembly of all two
ball skate models occurs in the People's Republic of China and Thailand.
Accessories are assembled in the People's Republic of China, Taiwan and/or
Thailand. All final assembly for four ball skates is conducted in either
Thailand or Southern California. The graphic design of all packaging is
controlled by the Company in California and the printing of the packaging is
performed in Hong Kong, the People's Republic of China, Taiwan or in the United
States. The Company owns all the molds, dies and other tooling associated with
manufacturing the chassis (skate trucks), the skateballs (wheels), safety brakes
and wheel hardware components. The Company currently utilizes 8-10 different
manufacturers for component parts and assembly.
With the proceeds of this offering, the Company intends to design, engineer
and tool several proprietary boot designs for its four ball skate product lines.
The Company believes that this will result in less dependence upon third party
manufacturers. Additionally, the Company will explore relocating the manufacture
of more component parts to Mexico, Canada or the United States and may use
proceeds of this offering to develop relationships with manufacturers in such
locations.
After assembly, the products are shipped to various FOB ("free on board")
points: Hong Kong, Bangkok and/or the Company's Los Angeles warehouse. If the
products are sold on an FOB Hong Kong, letter of credit basis, the merchandise
for the specific customer is delivered to the customer's consolidator in Hong
Kong. If the goods are to be shipped to the United States, the Company's Hong
Kong agent assumes responsibility for all freight forwarding and traffic to the
United States.
The Company has entered into an agency agreement with LYI pursuant to which
LYI acts as the Company's agent for purchasing from their known suppliers
located in the People's Republic of China and Taiwan. LYI also has been
retained, on a non-exclusive basis, as a sales representative for sales outside
of America and Japan. For its services, the Company pays LYI a fee of 12% of the
factory cost of the products and a sales commission ranging from 3% to 8% of net
sales. The agreement with LYI is terminable by either party on 90 days prior
written notice. During the fiscal years ended December 31, 1996 and 1997 the
Company paid approximately $394,000 and $120,000, respectively to LYI. Of such
payments, agency fees constituted $315,000 and $120,000 during these periods and
the remaining fees were sales commissions. All agency fees are accounted for as
costs of sales.
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<PAGE> 36
The Company has entered into an oral sourcing agreement with PCL pursuant
to which PCL will serve as the Company's agent for purchasing from skate
component manufacturers in Taiwan and Thailand. PCL will act as an additional
sourcing agent to the Company. For its services, the Company has agreed to PCL a
fee of 3% to 6% (based upon the annual purchasing amounts) of the factory cost
of the products for any services provided. The Company is negotiating a
definitive agreement with PCL. There can be no assurance that the Company will
be successful in these efforts.
The Company believes that there are alternative third parties available to
assist it in its sourcing in Asia and elsewhere in the world in the event that
the PCL and/or LYI arrangements are terminated.
SALES AND MARKETING
The Company's primary focus to date has been on designing and developing
its product line with only limited efforts on marketing and sales. Primarily all
of the Company's sales to date of two-ball skates have been in the international
market. The Company has had only test sales of its four-ball skates. The Company
currently sells its products through an international network of independent
distributors and agents, and in certain cases, directly by senior management to
the buyers and buying groups of certain retail accounts in 22 foreign countries.
Three of the Company's largest customers represented 67% of total sales for the
fiscal year ended December 31, 1996, and three customers, The Home Shopping
Network ("HSN"), J.C. Penney and Carrefour France, accounted for 56%, 11% and
15%, respectively, of total sales for the year ended December 31, 1997. To date
the Company has had approximately $3,600,000 of sales of its two ball skates to
HSN which sales efforts are made directly with HSN by the Company's senior
management without the use of any independent distributors or agents. Other
sales to the United States market, which to date have been limited, are made
through a national network of independent sales representative groups who sell
through direct contact with buyers and retail accounts, and work under the
management of the Company. These sales representative groups are paid on a
standard, commission-only basis. During fiscal 1996 and 1997 the Company,
accrued approximately $10,000 for sales commissions to Mr. James Hartnett, the
Company's Secretary and Vice President.
The Company intends to market its products to retail sporting goods chains,
specialty sporting goods shops, mass and hypermarket merchandisers and through
HSN in the United States. The Company's four-ball skate models will be
distributed almost exclusively through retail sporting good chains and
speciality sporting goods shops. Sales of the two-ball lines have been made to
catalog houses in France, Germany and the United Kingdom and the product
appeared in the J.C. Penney 1997 holiday catalog. The Company's marketing
strategy emphasizes the unique design of the Rollerball skate, as well as its
superior performance features which enable the skater to have increased control,
balance, maneuverability with a strong price to value relationship. The Company
also believes its product line affords retailers competitive profit margins
which the Company uses to promote its products to retail merchandisers.
Rollerball intends to offer retailers an integrated point of sale package
comprised of product displays, in-store identification, sales information and a
complete range of accessories and replacement parts, from helmets, pads and
guards to wheels, bearings, hardware sets and full replacement chassis
assemblies. The Company will also provide to the trade educational and technical
support as well as teaching clinics on how to sell the Rollerball product line.
For consumers, the Company intends to offer promotional programs providing
skating instruction on techniques while reinforcing the advantages offered by
Rollerball products.
The Company advertises and promotes its inline skates through various
marketing methods customary to the trade. Rollerball participates in all major
national and international trade shows and exhibitions, and provides in-store
merchandising videos, trade and consumer advertising, and inline skating
promotions. The Company has formed its own "Team Rollerball", a group of skaters
who demonstrate the product advantages of Rollerball skates as well as promote
the sport of inline skating. Team Rollerball has held exhibitions throughout the
world and several members of the team are seen regularly on HSN in its
advertising and sales activities. With the proceeds of this offering, the
Company's sales and marketing efforts will be significantly expanded.
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<PAGE> 37
The Company's sales and marketing materials, including product positioning
and demonstration videos, have been translated from English into several
languages to facilitate the presentation of the Company's product lines to
international buyers, buying groups, and to enhance public relations and
in-store presentations.
PATENTS AND TRADEMARKS
The Company has devoted considerable effort to protecting its Rollerball
technology and trademarks throughout key world markets. The Company received
United States utility Patent (No. 5,590,890) on January 7, 1997 covering the
core technology for its Radial Skateball. The Company also has a United States
design patent (D378115) on February 18, 1997 covering its GFX(R) design. The
Company has also filed numerous other utility and design patent applications in
the United States and certain other foreign countries. The "Rollerball" brand
name is a registered trademark in the United States, Canada and several other
countries with trademark applications under review in other markets and the new
European Union registrations for countries not already covered by the current
registrations. The Rollerball trademark cannot be registered in the People's
Republic of China, Sweden and Argentina due to conflicting marks and has also
been opposed in Chile. Trademark applications have been allowed for the
Rollerball name in other market/business segments such as clothing, toys and
entertainment (CD-ROM, comic books, video & broadcast television). The Company
has filed for a 3-D trademark in Germany to cover the German market and has
applied to extend this coverage to include all of the European Union countries.
This type of trademark protection extends to the overall "shape" and "look" of
the product(s) covered by the application.
The Company has recently received correspondence from MGM, a motion picture
entity which alleged that the Company's use of the name "Rollerball" infringed
upon MGM's alleged rights in the name "Rollerball" which was the name of a 1975
film produced by MGM. The Company was granted a United States trademark for the
Rollerball name in 1995 with respect to, among other things, in-line skates and
related products. Based upon advice of counsel, the Company does not believe
that MGM has any such rights in the name and intends to vigorously defend itself
against MGM's allegations. Although neither party has commenced litigation in
this matter, there can be no assurance that the dispute will not result in
litigation. In the event that litigation results, the Company can be expected to
incur significant costs to defend itself. Based upon advice of counsel, the
Company believes that it has strong and meritorious defenses to the claims of
MGM.
The Company believes that by initiating this legal protection in product
categories other than skates and accessories, it is building a strong marketing
tool that can be exploited through licensing arrangements or internal
developments. There can be no assurance that any application by the Company to
register any additional trade names and trademarks used by the Company will be
approved and/or that the right to the use of any such trademarks outside of
their respective current areas of usage will not be claimed by others. There can
be no assurance as to the extent of the protection that the Company will obtain
as a result of having such trademarks registered or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its trademark or license rights. Failure of the Company to successfully
enforce license and trademark rights may have a material adverse impact on the
Company's business.
ROYALTY AGREEMENTS
The Company has certain contractual commitments to pay royalties to four
individuals who had assisted the Company in obtaining its Radial Skateball
Technology(TM). Under the current agreements, the Company has agreed to pay
Messrs. Giuseppe Consarino and Steve Kimmel each a royalty of 1% of net sales,
except sales based on a letter of credit, and .6% of net sales based on a letter
of credit. Mr. Consarino's royalty payment can not exceed a maximum of $350,000
in any fiscal year. Mr. Forcelledo has had a royalty agreement with the Company
which provides for a 3% royalty on net sales which royalty Mr. Forcelledo has
agreed to terminate effective January 1, 1997. During the fiscal years ended
December 31, 1996 and December 31, 1997, the Company incurred expenses of
$167,068 and $10,446 with respect to these royalty agreements. Messrs. Giusseppe
Russo, Franco Rosso and Ettore Carenni, the originators of the Radial Skateball,
are entitled to an aggregate royalty of 2.5% of the cost of goods sold, after
certain deductions including expenses for patent and trademarks. Mr. Franco
Rosso also receives a consulting fee of $4,000 per month. To date, no royalty
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<PAGE> 38
payments have been paid to Messrs. Giusseppe Rosso, Franco Rosso and Ettore
Carenni, nor have any accrued, as a result of these deductions which equalled
approximately $2,000,000 as of December 31, 1997. The agreements require the
royalties to be paid in perpetuity; however, the terms of the agreements with
Mr. Consarino, Mr. Rosso and Mr. Kimmel provide that their royalty payments may
be reduced pro rata to any reduction in royalty payments agreed to by the other
party in connection with a public offering by the Company. Mr. Kimmel has agreed
to reduce his royalty payment by 50%. The Company intends to reduce the royalty
payments to Messrs. Giusseppe Rosso, Franco Rosso, Ettore Carenni and Consarino
by a similar amount. Although the Company believes that it has the right to
unilaterally reduce the amount of the royalties based upon the terms of the
agreements, there can be no assurance that the parties to these agreements will
not instigate litigation against the Company.
COMPETITION
The market for the Company's products is highly competitive and the Company
anticipates competition to continue to be intense in the foreseeable future.
This competition is direct (i.e., companies that make similar products) and
indirect (i.e., companies that participate in the sporting goods and accessories
market, but are not direct competitors of the Company). The Company competes
with major inline skate manufacturers such as Rollerblade(R), Bauer(R) First
Team Sports(R), Roller Derby(R), Variflex(R), California Pro(R) and K2(R). Most
of the Company's competitors have significantly greater financial, technical,
manufacturing and marketing resources, and broader name recognition than the
Company.
The Company intends to compete in the inline skate market by offering a
unique skate design that provides superior performance. The Company believes
that the Rollerball skates' enhanced capacity for acceleration, balance and
maneuverability will increase the fun of inline skating while providing a more
stable, body-friendly platform appealing to all skaters from the beginner to
advanced.
GOVERNMENT REGULATION
Certain of the Company's products are subject to regulation by the CPSC,
and may therefore be subject to recall requested by the CPSC. In addition, the
Company may be required to change or modify its current or future products in
order to comply with the CPSC's rules or other rules and regulations related to
the safety of its products or any future rules or regulations. In the event the
Company is required to modify or change its products, it may incur substantial
additional costs related to design and manufacture, and may incur significant
down-time in being able to produce inventory for sale, all of which could have a
material adverse effect upon the Company. The Company is not aware of any
current proceeding by the CPSC which would result in the recall of the Company's
products. A recall of the Company's products could result in significant
expenses to the Company. There can be no assurance that the Company will have
the necessary funds available to it to conduct any recall or that if conducted,
it will have funds available for its continued operation.
FACILITIES
The Company leases approximately 1,600 square feet for the Company's
principal office in Los Angeles, California pursuant to a two year lease
agreement at an aggregate monthly rent of $3,750 per month. The Company also
leases from time to time an additional 1,300 square feet at a cost of $3,000 per
month at the same location as its principal offices. This additional space is
leased only as the Company's needs require. The Company also leases, on an as
needed basis, warehouse and assembly space at a separate location in Los
Angeles, California on a month-to-month basis pursuant to an oral agreement. The
warehouse and assembly space constitutes approximately 8,000 square feet and has
a rental expense of approximately $3,900 per month. The Company will consider,
as its requirements dictate, moving to new executive and administrative offices
after the conclusion of this offering and also intends to secure additional
warehouse space. Although these new facilities have not been identified as of
the date hereof, the Company believes that suitable facilities at reasonable
rental costs will be available.
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EMPLOYEES
To date, the Company has operated with a limited full time staff and has
outsourced its manufacturing, assembly and distribution requirements. This
business strategy enabled the Company to maintain a low overhead and conserve
capital. After the conclusion of this offering, the Company intends to establish
a larger full time staff of administrative and technical personnel. At the
present time, the Company has seven full-time employees.
LEGAL PROCEEDINGS
The Company is not presently a party to any material litigation, nor does
it have knowledge of any threatened or pending material litigation except as
disclosed below.
See "-- Patents and Trademarks" above for information regarding a possible
dispute between the Company and MGM regarding the Company's use of the name
Rollerball.
In January 1998 Toys "R" Us-Delaware, Inc., a toy merchandiser, instituted
a suit to collect the sum of $69,000 from the Company. The plaintiff alleges
that the Company owes the money as a result of the settlement of certain
disputes and that the Company has failed to timely make previously agreed upon
payments. The suit is entitled Toys "R" Us-Delaware, Inc. v. Rollerball
International, Inc. (Case No. BC184762) and has been brought in the Los Angeles
Superior Court, Los Angeles, CA. The Company has agreed to pay the $69,000
within 60 days of the close of the offering and intends to use a portion of the
proceeds of this offering to pay the amount owed.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information concerning the current officers and three
directors and two prospective directors of the Company. The Company expects that
the two additional directors, both of whom are identified in the table below,
and neither of whom are or will be employees of the Company, will be elected to
the Board of Directors upon consummation of this offering.
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Jack Forcelledo...................... 56 Chairman of the Board, Chief
Executive Officer and President
Arthur Dale Baker.................... 45 Vice President, Design and
Development
James T. Hartnett.................... 38 Vice President, Administration and
Secretary
Kenneth Teasdale..................... 27 Chief Financial Officer
Elizabeth Forcelledo................. 53 Director
John T. Botti........................ 33 Director (designee)
Michael Katz......................... 55 Director (designee)
</TABLE>
Jack Forcelledo is the founder of Rollerball International Inc., and has
been Chairman, President and Chief Executive Officer of the Company since its
inception in 1994. Mr. Forcelledo has more than twenty-eight years of management
experience in both domestic and international consumer products with Fortune 500
companies and entrepreneurial ventures. From 1988 through 1994 Mr. Forcelledo
was a private investor and operated the Forcelledo Marketing Group, an
unincorporated entity. Forcelledo Marketing Group conducted limited business
activities and was involved with assisting other entrepreneurial ventures in
marketing their products, including pre-incorporation activities of the Company.
From 1981 to 1988, he was President of Matchbox International and Vice Chairman
of the Board of Universal Matchbox (Toys) Group, Ltd., a New York Stock Exchange
traded company. From 1969 to 1981, Mr. Forcelledo served in various marketing
capacities with Mattel Toys, Ralston Purina and Keebler Foods and was
responsible for the management, development and marketing of several
internationally recognized products including breakfast cereals, pet foods,
snack/cracker and toy products. Mr. Forcelledo holds Bachelor of Arts, Bachelor
of Journalism and a Masters of Arts degrees from the University of Missouri.
Arthur Dale Baker has served as the Company's Vice President of Design and
Development since its inception. From June 1991 to March 1994 Mr. Baker was the
owner and President of Arthur Baker Design, a private design firm. Mr. Baker has
over twenty years of experience in industrial design and engineering,
specializing in transportation products, automotive products and sporting goods
such as skates, surfboards, boogie boards and skateboards. From May 1989 to June
1991, he was Director of Design and Engineering for Senter Engineering. Mr.
Baker holds a Bachelor of Fine Arts and Master of Arts degrees from the
University of Tulsa and is a graduate of the Art Center College of Design in
Pasadena, California.
James T. Hartnett has been employed by the Company as a planning and
financial consultant since its inception and he has served as the Company's Vice
President of Administration and Secretary since March 1997. From 1988 to March
1997, Mr. Hartnett was the owner and president of Norstar Consulting Services.
Prior to such time, from 1981 through 1985, Mr. Hartnett was employed as a
senior consultant at Price Waterhouse. From 1986 through 1988, Mr. Hartnett was
employed as the Director of Finance at The Coulter Group. Mr. Hartnett is a
graduate of the University of Notre Dame where he received Bachelor of Business
Administration and the University of Southern California with a Master of
Business Administration degree.
Kenneth Teasdale joined the management team as the Company's Chief
Financial Officer in September 1997. From January 1994 to September 1997 Mr.
Teasdale was employed at Grobstein, Horwath & Company LLP during which time Mr.
Teasdale was employed in various capacities culminating in the position of
Senior Accountant. From September 1991 through January 1994 Mr. Teasdale was
employed as an accounting assistant at For Windows Only, a privately held
Company. Mr. Teasdale is a Certified Public Accountant and
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<PAGE> 41
a graduate of California State University, Northridge where he received a
Bachelor of Science degree in Accounting.
Elizabeth Forcelledo has been a director of the Company since its inception
in 1994. From 1988 to 1994 Ms. Forcelledo was a private consultant to the
television industry and involved in several entrepreneurial ventures. From 1986
to 1988 Mrs. Forcelledo was a creative consultant to the ABC Television Network
and the Lifetime Network. From 1981 to 1985, she served as Vice President of
Program Development for the ABC Television Network owned and operated television
stations. She has more than twenty-six years of experience in producing,
creating, writing, and consulting for various TV talk/information programs
including Live with Regis and Kathy Lee, AM Los Angeles, the Entertainment
Tonight Pilot, AM New York, and The Vidal Sassoon Show. Ms. Forcelledo attended
Notre Dame College and St. Louis University.
John T. Botti, director designee, has served as President, Chief Executive
Officer and Director of Bitwise Designs, Inc., a Nasdaq SmallCap listed company,
since its formation in August 1985. Mr. Botti graduated from Rensselaer
Polytechnic Institute with a B.S. degree in electrical engineering with a
concentration in computer systems design and a Master of Business Administration
degree.
Michael Katz, director designee, is an executive consultant to the
interactive software and multi-media industry. Since 1994 Mr. Katz has been
President of Michael Katz and Associates, a private consulting firm to the
interactive software and multimedia industry. Mr. Katz has been on the Board of
Directors of TimeSink Inc. since 1996. From 1996 to 1997 Mr. Katz was also the
Non-Executive Chairman of the Board of Directors of Entertainment On-line US,
the privately held United States division of a United Kingdom on-line game
network company. From 1990 to 1994 Mr. Katz was a private consultant to and
investor in the video game industry and the President of the consumer division
of Triox Technologies, Inc. From 1989 to 1990 Mr. Katz was President of Sega of
America. From 1985 through 1989 Mr. Katz was President of the video game
division of Atari, Inc. From 1979 through 1983 Mr. Katz was a vice president of
marketing at Coleco Industries. Mr. Katz was marketing director of new product
categories at Mattel Toys from 1975 to 1979. Mr. Katz holds a Bachelor of Arts
from Cornell University and a Masters of Business Administration from Columbia
Business School.
The director designees will be appointed to the Board of Directors on or
shortly following the Effective Date. From October 1997 to March 20, 1998 Mr.
Lawrence Stumbaugh served as a director of the Company. Mr. Stumbaugh served as
the nominee of Sercap Holding LLC. Pursuant to the terms of the agreements
governing the 1997 Loan received by the Company in October 1997, Sercap Holdings
has the right to have a designee on the Company's Board of Directors. Sercap
Holding LLC has determined to forego such rights at the present time.
The number of directors comprising the entire Board of Directors is such
number as determined in accordance with the By-Laws of the Company. The
Company's By-Laws provide that the number of directors shall be not less than
three nor more than eleven. Prior to the Effective Date, the Company's Amended
and Restated Certificate of Incorporation will provide the Company with a
classified or "staggered" Board of Directors. The classified or "staggered"
Board of Directors will be comprised of three classes of directors elected for
initial terms expiring at the year 1998, 1999 and 2000 annual meetings of
stockholders. Thereafter, each class will be elected for a term of three years.
By reason of the classified Board of Directors, one class of the Board comes up
for re-election each year. Any further amendment to the Company's Certificate of
Incorporation affecting the classified Board may only be adopted upon the
affirmative vote of not less than 66 2/3% of the issued and outstanding shares
entitled to vote thereon. Officers serve at the discretion of the Board of
Directors of the Company. There are no family relationships among any of the
officers or directors except that Elizabeth Forcelledo is the wife of Jack
Forcelledo.
Upon the Effective Date, the Board of Directors will be comprised of four
persons. Mr. Forcelledo will serve as the Class 1 Director to serve for a term
of three years until the 2000 annual meeting of stockholders; Mr. Botti and Mrs.
Forcelledo will serve as Class 2 Directors to serve for a term of two years
until the 1999 annual meeting of stockholders; and Mr. Katz will serve as the
Class 3 Director to serve for a term of one year until the Company's 1998 annual
meeting of stockholders. Thereafter, each class of directors standing for re-
election shall be elected for a term of three years. Pursuant to the listings
maintenance policies of the Nasdaq
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SmallCap Market, the Company's present Board of Directors must include at least
two (2) independent directors. Upon the Effective Date, the Company's
independent directors will be Messrs. Katz and Botti.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all plan and non-plan
compensation awarded to, or paid by the Company during the years ended December
31, 1997, 1996 and 1995 for Mr. Jack Forcelledo, the sole executive officer
during such periods. No other officer or director received compensation equal to
or in excess of $100,000 during such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
------------------------
NO. OF
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
FISCAL ------------------- OTHER ANNUAL STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) GRANTED
--------------------------- ------ --------- ------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack Forcelledo Chairman,..... 1997 $160,000 $0 $ 0 0 0
President and Chief 1996 $100,000(1) $0 $88,448(2) 0 0
Executive Officer 1995 $100,000(1) $0 $73,041(2) 0 0
</TABLE>
- ---------------
(1) Represents accrued and unpaid salary. Upon closing of this offering, Mr.
Forcelledo will be paid $150,000 of the accrued salary. At March 23, 1998,
Mr. Forcelledo was owed approximately $228,000 in accrued salary. Mr.
Forcelledo has agreed to forego payment of $106,000 of such accrued amount.
The remainder of accrued salary ($122,000) will be paid at the closing of
this Offering. See "Use of Proceeds."
(2) Reflects royalty payments under Mr. Forcelledo's royalty agreement which has
been terminated as of January 1, 1997.
Stock Options
No stock options were granted during the last fiscal year to Mr.
Forcelledo, the named executive officer of the Company.
Aggregated Option/SAR Exercises
The following table contains information with respect to the named
executive officer concerning options held as of the fiscal year ended December
31, 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AS OF AT DECEMBER 31,
ACQUIRED ON VALUE DECEMBER 31, 1997 1997(1)
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jack Forcelledo............ 0 0 64,653/0 (2) 137,711/0
</TABLE>
- ---------------
(1) Assuming a market value of $5.50 per share.
(2) The options were granted in April 1994. The five year options have an
exercise price of $3.37 per share. See "Employment Agreements." Does not
include options to purchase 300,000 shares to be granted on the Effective
Date pursuant to Mr. Forcelledo's employment agreement which will be entered
into on or about the Effective Date of this offering and be deemed effective
January 1, 1997. The options will have an exercise price equal to the
initial offering price of the Shares. The options include both incentive and
non-incentive stock options. See "Stock Option Plans."
38
<PAGE> 43
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive any fee in
addition to their regular salary for serving on the Board of Directors.
Non-employee directors will not receive cash renumeration but will be eligible
to participate in the Director Plan. Non-employee directors upon consummation of
this offering will receive options to purchase 10,000 shares exercisable at the
initial offering price of the Shares. Additionally, on the anniversary date of
their service, each non-employee director will receive an additional 10,000
options with an exercise price at the then current market price of the Common
Stock. Directors will be reimbursed for travel expenses for attendance at any
meeting of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
As of the closing of this offering, the Board of Directors will establish
an audit committee ("Audit Committee"), comprised of the two independent
directors Messrs. Botti and Katz. It is anticipated that the Audit Committee
will be responsible for reviewing the Company's internal accounting policies and
procedures as well as the scope of the work performed by the Company's
independent auditors, including implementation of any recommendations made by
the Company's independent auditors.
The Board of Directors shall also establish a compensation committee
("Compensation Committee") consisting of Messrs. Forcelledo, Botti and Katz. The
Compensation Committee will be responsible for the negotiation, review and
approval of the compensation of senior executives of the Company. The
Compensation Committee will also be responsible for administration of the 1994
Employee Plan and the Director Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into a four-year employment agreement with Jack
Forcelledo commencing January 1, 1997, which will expire in December 31, 2000
pursuant to which Mr. Forcelledo shall serve as Chairman, President and Chief
Executive Officer. Pursuant to the terms of the agreement, Mr. Forcelledo will
receive a base salary of $160,000 for fiscal year 1997 with annual increases up
to a base salary of $235,000 in year 2000. Mr. Forcelledo is entitled to bonus
payments commencing in fiscal year 1998. In the event the Company has net income
after taxes of $750,000 during fiscal 1998, Mr. Forcelledo will be entitled to a
bonus of 7% of net income plus 10% of any amount above $750,000. In the event
the Company has net income after taxes of $1,650,000 during fiscal 1999, Mr.
Forcelledo will be entitled to a bonus of 7% of net income plus 10% of any
amount above $1,650,000. In the event the Company has net income after taxes of
$2,400,000 during fiscal 2000, Mr. Forcelledo will be entitled to a bonus of 7%
of the net income plus 10% of any amount above $2,400,000.
Mr. Forcelledo will also receive five year stock options to purchase
300,000 shares vesting in increments of 75,000 shares per year commencing on the
date of this Prospectus. Only a portion of these options will qualify as
incentive stock options In the event of Mr. Forcelledo's death or disability
which prevents him from performing his duties, all unvested options shall
immediately vest. The options will have an exercise price equal to the offering
price of the Shares and be granted under the Company's 1994 Employee Plan.
Pursuant to the terms of his employment agreement, Mr. Forcelledo
terminated certain royalty rights which he was granted in connection with the
transfer of the Radial Skateball Technology(TM) to the Company. The technology
which was transferred resulted in the Company's now patented technology. Under
the terminated royalty agreement, Mr. Forcelledo was entitled to payments equal
to 3% of net sales.
In addition, Mr. Forcelledo is provided with the Company's standard health
and other benefits and a policy of life insurance in the amount of $500,000
payable to a beneficiary to be named by Mr. Forcelledo. He also receives an
automobile allowance of $500 per month and reimbursement for expenses incurred
on behalf of the Corporation and in connection with the performance of his
duties. Additionally, Mr. Forcelledo will receive a one-time payment of $122,000
out of the proceeds of the offering which represents partial payment of $228,000
of accrued salary through March 23, 1998. Mr. Forcelledo has agreed to forego
the remainder of the accrued salary ($106,000).
39
<PAGE> 44
The agreement also contains certain provisions regarding severance payments
to Mr. Forcelledo in the event of the termination of his employment prior to the
expiration of the term for (i) a "Change in Control" or (ii) termination without
"cause" or (iii) in the event that the Company declines to offer Mr. Forcelledo
a new employment agreement upon terms at least equal to the expired agreement at
the end of his employment term. A "Change of Control" is defined to mean any of
the following events: (i)(x) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's Common Stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for the liquidation or dissolution of the Company, or (iii)
any person (as such term is used in Sections 13(d) and 13(d)(2) of the Exchange
Act, who is not a beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of 20% or more of the Company's outstanding Common Stock on the
date of the Agreement, shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) of 20% or more of the Company's outstanding
Common Stock, or (iv) during any period of two consecutive years, individuals
who at the beginning of such period constituted the entire Board of Directors
shall cease for any reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. A Change of
Control shall not include any sale of securities in this offering, the
conversion of convertible securities outstanding at the Effective Date, the
exercise of any right to designate a director arising under the underwriting
agreement executed in connection with this offering, or the expansion of the
Board of Directors with the consent of Mr. Forcelledo. Upon the occurrence of a
"Change of Control", Mr. Forcelledo will be entitled to receive a lump sum
severance payment equal to three times the annual salary for the previous year.
Mr. Forcelledo may be terminated "for cause" which includes theft or fraud and
certain other acts and in such event, in which event he will not be entitled to
any severance payment.
Effective August 18, 1997, the Company entered into a one-year employment
agreement with Mr. Teasdale, its Chief Financial Officer. Pursuant to the terms
of the agreement, Mr. Teasdale receives an annual salary of $75,000. Mr.
Teasdale will also receive, on the Effective Date, five-year options to purchase
20,000 shares of Common Stock at an exercise price equal to the offering price
of the Shares. The agreement also provides for Mr. Teasdale to receive a car
allowance and medical and insurance benefits as are provided to the Company's
employees. In the event Mr. Teasdale's employment is terminated by the Company
prior to the expiration of the term, Mr. Teasdale is entitled to receive
severance equal to the greater of (i) the compensation due him for the remainder
of the term or (ii) six month's compensation.
STOCK OPTION PLANS
1994 Employee Plan
In September 1994, the Company adopted the 1994 Employee Plan. The 1994
Employee Plan provides for the grant of options to purchase up to 750,000 shares
of the Company's Common Stock. Under the terms of the 1994 Employee Plan,
options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), or options which do not so
qualify ("NSOs"). As of March 23, 1997, the Company had reserved 244,826 shares
for outstanding options under the 1994 Employee Plan. None of the outstanding
options have an exercise period exceeding five years.
The 1994 Employee Plan will be administered by the Compensation Committee
which will have the discretion to determine the eligible employees to whom
options will be granted, the exercise period, exercise price and vesting
schedule of each option, the number of shares subject to each option, and
whether an option will be an ISOs or NSOs. The Compensation Committee shall have
full authority to interpret the Plan and to establish and amend rules and
regulations relating thereto. The Compensation Committee or the full Board of
40
<PAGE> 45
Directors may also grant bonuses or authorize loans to or guarantee loans
obtained by an optionee to enable such optionee to pay any taxes that may arise
in connection with the exercise or cancellation of an option.
Under the 1994 Employee Plan, and in order to qualify as an ISO under the
Code the exercise price of an option designated as an ISO shall not be less than
the fair market value of the Common Stock on the date the option is granted.
However, in the event an option designated as an ISO is granted to a ten percent
stockholder (as defined in the 1994 Employee Plan) such exercise price shall be
at least 110% of such fair market value. Exercise prices of NSOs options may be
less than such fair market value but in no event shall the exercise price of
NSOs be less than 85% of the fair market price on the date of grant. The
aggregate fair market value of shares subject to options granted to a
participant which are designated as ISOs which become exercisable in any
calendar year shall not exceed $100,000. The "fair market value" of a share of
Common Stock will be (i) the closing price if the Common Stock is traded on a
national securities exchange, or (ii) the closing Nasdaq SmallCap Market bid
price, or (iii) if the Company's Common Stock is not quoted on the Nasdaq
SmallCap Market, as reported by the National Quotation Bureau, Inc., or a market
maker of the Company's Common Stock, or (iv) if the Common Stock is not quoted
by any of the above, by the Board of Directors acting in good faith.
Unless sooner terminated, the Plan will expire in September 2004.
Director Plan
In December 1997, the Board of Directors adopted the Director Plan which
was approved by a majority of the Company's stockholders on December 31, 1997.
The Director Plan provides for issuance of a maximum of 100,000 shares of Common
Stock upon the exercise of stock options granted under the Director Plan.
Options may be granted under the Director Plan until July 2007 to (i)
non-executive directors as defined (ii) members of any advisory board
established by the Company who are not full-time employees of the Company or any
of its subsidiaries and (iii) consultants. The Director Plan provides that each
non-executive director will automatically be granted an option to purchase
10,000 shares of Common Stock, upon joining the Board of Directors, and on each
October 1st thereafter, provided such person has served as a director for the 12
months immediately prior to such October 1st. Similarly, each eligible member of
an advisory board will receive, upon joining the advisory board, and on each
October 1st thereafter, an option to purchase 1,000 shares of the Company's
Common Stock, providing such person has served as a member of the advisory board
for the previous 12 month period. The Company has not established any advisory
board and has no present plans to create any advisory board. The Company has no
plans to issue options under the Director Plan to consultants at this time.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. The
"fair market value" will be the (i) the closing price of a share of Common Stock
if the Common Stock is traded on a national securities exchange or (ii) the
closing bid price as reported by the Nasdaq SmallCap Market, or (iii) if the
Company's Common Stock is not quoted on the Nasdaq SmallCap Market, as reported
by the National Quotation Bureau, Inc., or a market maker of the Company's
Common Stock, or (iv) if the Common Stock is not listed on or quoted by any of
the above by the Board of Directors acting in good faith. Until otherwise
provided in the Director Plan the exercise price of options granted under the
Director Plan must be paid at the time of exercise, either in cash, by delivery
of shares of Common Stock of the Company or by a combination of each. The term
of each option commences on the date it is granted and unless terminated sooner
as provided in the Director Plan, expires five years from the date of grant. The
Director Plan will be administered by the Compensation Committee. The Committee
has no discretion to determine which non-executive director or advisory board
member will receive options or the number of shares subject to the option, the
term of the option or the exercisability of the option. However, the Committee
will make all determinations of the interpretation of the Director Plan. Options
granted under the Director Plan are not qualified for incentive stock option
treatment.
41
<PAGE> 46
As of March 24, 1998, no options have been granted under the Director Plan.
On the Effective Date the Company shall issue 30,000 options to its three
non-employee directors with an exercise price equal to the offering price of the
Shares. The Director Plan will expire in December 2007.
The Company will not issue, for a period of one year from the Effective
Date, any options under either the 1994 Employee Plan or the Director Plan, or
any Warrants, which have an exercise price less than the offering price of the
Shares.
42
<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of March 23, 1998 with
respect to the Company's Common Stock owned by each person known to the Company
to be the beneficial owner of more than five percent (5%) of the Company's
Common Stock, each director and designees, the named executive officer, and all
other executive officers and directors as a group. The information herein gives
effect to the surrender and cancellation of 600,000 shares of Common Stock by
Mr. Jack Forcelledo. As of March 22, 1998 there were 2,683,568 shares of Common
Stock issued and outstanding.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE PERCENTAGE
BENEFICIAL BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER POSITION WITH COMPANY(1) OWNERSHIP(2) OFFERING OFFERING(3)
- ------------------------------------ ------------------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Jack Forcelledo(4)..................... Chairman of the Board, 1,159,318 46% 25.4%
President, Chief
Executive Officer
Kenneth Teasdale(5).................... Chief Financial Officer 20,000 0% 0%
Elizabeth Forcelledo(4)................ Director 1,159,318 46% 25.4%
John T. Botti.......................... Director (designee) 0 0 0
c/o Bitwise Designs, Inc.
Technology Center
Schenectady, NY 12306
Michael Katz........................... Director (designee) 0 0 0
One San Rafael Avenue
Tiburon, CA 94920
Sercap Holdings LLC(6)................. 206,061 7.1% 4.5%
c/o 3535 Piedmont Road N.E.
Suite 440
Atlanta, GA 30305
All Officers, Directors and Designees % %
as a Group (5 persons)(3)(4)(5)...... 1,179,318 44 26
</TABLE>
- ---------------
(1) Unless indicated, all addresses are c/o the Company at 9255 Doheny Road,
Suite 2705, Los Angeles CA 90069.
(2) Each person listed has sole voting and investment power over the shares
listed as beneficially owned unless otherwise indicated.
(3) Includes issuance of the Conversion Shares, Bridge Shares and 1997 Loan
Shares.
(4) Includes 1,159,318 shares of Common Stock owned jointly by Mr. Forcelledo
and Mrs. Forcelledo. Does not include five year options to purchase 64,653
shares with an exercise price of $3.37 per share which were granted in April
1994 and five year options to purchase 300,000 shares with an exercise price
equal to the public offering price of the shares which will be granted on
the Effective Date.
(5) Mr. Teasdale will receive on the effective date five year options to
purchase 20,000 shares of Common Stock at an exercise price equal to the
public offering price of the Shares.
(6) Sercap Holdings LLC has the right to acquire 206,061 shares of Common Stock
under the terms of the 1997 Loan. Does not include shares owned by Mr.
Lawrence Stumbaugh, a controlling person of Holdings LLC. Mr. Lawrence
Stumbaugh, a Selling Stockholder, has the right to receive 6,060 Conversion
Shares. Mr. Stumbaugh also owns 3,030 1996 Warrants which have an exercise
price equal to the initial public offering price of the Shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1994, in connection with the founding of the Company, the Company
issued 2,351,158 shares of Common Stock to Jack Forcelledo, the Company's
Chairman of the Board and Chief Executive Officer, and Elizabeth Forcelledo, his
wife. During 1994, Mr. Forcelledo sold or gifted an aggregate of 591,840 shares
to certain individuals including 178,271 shares of Common Stock transferred to
Anthony Forcelledo, a former director of the Company and the brother of Jack
Forcelledo, and 178,271 shares of Common Stock transferred
43
<PAGE> 48
to Victoria and Walter Nelson. Victoria Nelson is the sister of Elizabeth
Forcelledo, a director of the Company. The foregoing shares were issued to Mr.
Jack Forcelledo for nominal consideration.
Mr. Jack Forcelledo has agreed to surrender for cancellation 600,000 shares
of Common Stock on the Effective Date assuming the offering is consummated.
In March 1995, April 1995 and March 1996 the Company received an aggregate
of $148,000 principal amount loans from Jack Forcelledo and his spouse,
Elizabeth Forcelledo. The loans bore interest at 12% per annum. Prior to June
30, 1997, the loans had been repaid in full.
The Company and Jack Forcelledo had previously entered into a royalty
agreement whereby Mr. Forcelledo received a royalty equal to 3% of net sales of
the Company's products; provided, however, with respect to sales generated by
letter of credit, the royalty fee was 1.8%. Mr. Forcelledo has agreed to
terminate his royalty agreement effective January 1, 1997 and waive any amounts
due.
From December 1994 through May 1995 the Company received loans in the total
principal amount of $125,000 from Mr. Virgil Wenger, a former officer and
director of the Company. The loans bear interest at 12% per annum and are due
upon demand. As of December 31, 1997 the amount due to Mr. Wenger for principal
and interest was approximately $115,000. The Company intends to use a portion of
the proceeds from this offering to repay the loans in full. See "Use of
Proceeds." In connection with the making of these loans to the Company, Mr.
Wenger received an aggregate of 18,570 five year options at an exercise price of
$3.37 per share. The options were granted as of the date of the loans.
The Company has received loans from Mr. Anthony Forcelledo in the aggregate
principal amount of $60,000 in the last three years. The loans bear interest at
12% per annum and are payable upon demand. At December 31, 1997 the total amount
of principal and interest due Mr. Anthony Forcelledo was approximately $65,000.
The Company intends to use a portion of the proceeds from this offering to repay
these loans. See "Use of Proceeds." In the making of these loans to the Company,
Mr. Forcelledo received an aggregate of 7,874 five year options at an exercise
price of $3.37 per share. The options were granted as of the date of the loans.
In October 1997 the Company received the 1997 Loan in the principal amount
of $1,000,000 from Sercap Holdings LLC of which Mr. Lawrence Stumbaugh is a
principal and officer. Mr. Stumbaugh is a director of the Company. The terms of
the agreements governing the 1997 Loan provide that Sercap Holdings LLC has the
right to have a designee on the Board of Directors of the Company. Mr. Stumbaugh
was appointed to the Board of Directors in October 1997 and resigned in March
1998. The 1997 Loan is represented by two notes of $400,000 principal amount and
of $600,000 principal amount, respectively. The 1997 Loan bears interest at 12%
per annum. See "Management's Discussion and Analysis", "Management" and
"Concurrent Sales."
During 1994 the Company utilized the services of Anthony Forcelledo for
which it had accrued an expense of $31,000. The accrued expense was paid in
fiscal 1997. Additionally, since 1994 the Company has utilized the services of
Mrs. Nelson as a consultant. These individuals provided sales and marketing
services to the Company. Mrs. Nelson was paid $30,000 and $31,000 for her
services during fiscal 1996 and 1997, respectively.
Except as provided herein, the Company has not entered into any material
transactions or series of similar transactions with any director, executive
officer, any shareholder owning 5% or more of the Company's Common Stock or any
affiliates of any of the foregoing. It is the Company's policy that all
transactions in which an officer, director, a 5% shareholder or affiliate has a
personal interest (i) will be approved by the majority of independent and
disinterested directors and (ii) must be on terms no less favorable to the
Company that could be obtained in arms-length negotiation with non-affiliated
parties. With respect to any such proposed transactions the Company will provide
its counsel or independent counsel to its independent directors at the Company's
expense. The Company will maintain at least two such independent directors on
its Board of Directors. At the time the above transactions were initiated, the
Company lacked sufficient disinterested independent directors to approve or
ratify the transactions.
For information concerning employment agreements with, and compensation of,
the Company's executive officers and directors, see "Management -- Employment
Agreements."
44
<PAGE> 49
CONCURRENT SALES
The holders of the Selling Stockholder Shares have the right to require
that these shares be included in any registration statements filed by the
Company. The rights were granted to the Selling Stockholders in privately
negotiated arms length transactions evidenced by written agreements. All of the
Selling Stockholder Shares are being registered under the Securities Act as part
of the registration statement of which this Prospectus forms a part. All of
these shares will be freely tradeable (assuming exercise of any applicable
convertible security) on the date of this Prospectus. The Selling Stockholders
have agreed, however, pursuant to the Lockup Agreements, not to offer, sell or
transfer any Selling Stockholder Shares for a period of six months from the date
hereof without the prior written consent of the Underwriter. The Underwriter may
consent to the sale of any or all of such shares at any time at its discretion.
No predictions can be made as to the effect, if any, that sales of Selling
Stockholder Shares or the availability of such shares for sale will have on the
market price of the Common Stock prevailing from time to time. Sales of the
Selling Stockholder Shares or even the potential of such sales may have an
adverse effect on the market price of the Common Stock. The Company will not
receive any proceeds from the sale of the Selling Stockholder Shares by the
Selling Stockholders although the Company will receive the exercise price of any
warrant exercised.
All figures below have been rounded down to the nearest whole share. The
Company will deliver cash to any Selling Stockholder entitled to a fractional
share.
A. CONVERSION SHARES
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK COMMON STOCK
OWNED PRIOR COMMON STOCK TO BE OWNED AFTER
NAME TO OFFERING(1) OFFERED HEREBY(1) OFFERING(2)
---- -------------- ------------------ -------------
<S> <C> <C> <C>
Robert E. Powers.......................... 6,060 6,060 *
William Arthur Hamilton................... 6,060 6,060 *
J. Susan Wilkinson Trust.................. 6,060 6,060 *
J. Susan Wilkinson Revocable Trust........ 12,121 12,121 *
Stephen L. Gehring........................ 6,060 6,060 *
Charles Roeske............................ 24,242 24,242 *
Orthopedic Clinic, P.A. .................. 4,848 4,848 *
Robert B. Reuther......................... 6,060 6,060 *
Paul E. and Dorothy L. Bushnell........... 6,060 6,060 *
Jerry Daniel.............................. 9,696 9,696 *
Aperdev Investments....................... 12,121 12,121 *
Ting Liu.................................. 24,242 24,242 *
Barry Weisler............................. 12,121 12,121 *
East West Management...................... 12,121 12,121 *
Faisal Finance............................ 141,702 141,702 3.1%
Cary Toner................................ 6,060 6,060 *
Larry A. Berman Prof. Sharing............. 6,060 6,060 *
Kadflx, Inc. ............................. 12,121 12,121 *
Robert W. Roten........................... 6,060 6,060 *
Gary Schwartz............................. 12,121 12,121 *
William F. Broderson...................... 12,121 12,121 *
Richard A. Westphal....................... 6,060 6,060 *
Penelope K. Riggio........................ 6,060 6,060 *
Lawrence Stumbaugh(3)..................... 6,060 6,060 *
Stepwen, Inc.............................. 6,060 6,060 *
Terry K. Collier.......................... 6,060 6,060 *
Charles Roeske............................ 24,242 24,242 *
Alan Talesnick............................ 6,060 6,060 *
Euro Pharmaceutical Distributors.......... 12,121 12,121 *
Eng-Chye Low.............................. 9,696 9,696 *
Joseph Doria.............................. 6,060 6,060 *
Xanadu Associates, LLC.................... 12,121 12,121 *
Steven M. Sternberg....................... 6,060 6,060 *
Sub-Total................................. 450,794 450,794
</TABLE>
45
<PAGE> 50
B. 1996 WARRANT SHARES
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK COMMON STOCK
OWNED PRIOR COMMON STOCK TO BE OWNED AFTER
NAME TO OFFERING OFFERED HEREBY OFFERING(2)
- ---- ------------ ------------------ -------------
<S> <C> <C> <C>
Robert E. Powers.......................... 3,030 3,030 *
William Arthur Hamilton................... 3,030 3,030 *
J. Susan Wilkinson Trust.................. 3,030 3,030 *
J. Susan Wilkinson Revocable Trust........ 6,060 6,060 *
Stephen L. Gehring........................ 3,030 3,030 *
Charles Roeske............................ 12,121 12,121 *
Orthopedic Clinic, P.A. .................. 2,424 2,424 *
Robert B. Reuther......................... 3,030 3,030 *
Paul E. and Dorothy L. Bushnell........... 3,030 3,030 *
Jerry Daniel.............................. 4,848 4,848 *
Aperdev Investments....................... 6,060 6,060 *
Ting Liu.................................. 12,121 12,121 *
Cary Toner................................ 3,030 3,030 *
Larry A. Berman Prof. Sharing............. 3,030 3,030 *
Kadflx, Inc............................... 6,060 6,060 *
Robert W. Roten........................... 3,030 3,030 *
Gary Schwartz............................. 6,060 6,060 *
William F. Broderson...................... 6,060 6,060 *
Richard A. Westphal....................... 3,030 3,030 *
Penelope K. Riggio........................ 3,030 3,030 *
Stepwen, Inc.............................. 3,030 3,030 *
Terry K. Collier.......................... 3,030 3,030 *
Charles Roeske............................ 12,121 12,121 *
Alan Talesnick............................ 3,030 3,030 *
Euro Pharmaceutical Distributors.......... 6,060 6,060 *
Eng-Chye Low.............................. 4,848 4,848 *
Joseph Doria.............................. 3,030 3,030 *
Xanadu Associates, LLC.................... 6,060 6,060 *
Steven M. Sternberg....................... 3,030 3,030 *
Lawrence Stumbaugh(3)..................... 3,030 3,030 *
Barry Weisler............................. 6,060 6,060 *
East West Management...................... 6,060 6,060 *
Faisal Finance............................ 70,851 70,851 3.1%
Sub-Total................................. 225,397 225,397
</TABLE>
C. BRIDGE SHARES
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK COMMON STOCK
OWNED PRIOR COMMON STOCK TO BE OWNED AFTER
NAME TO OFFERING OFFERED HEREBY OFFERING(2)
- ---- ------------ ------------------ -------------
<S> <C> <C> <C>
Sagax Fund II Ltd. ....................... 18,182 18,182 *
James M. Freitag.......................... 9,091 9,091 *
Frank Woodward............................ 9,091 9,091 *
BG Bank................................... 18,182 18,182 *
AIC Diversified Services, Inc. ........... 9,091 9,091 *
Fred Meyers............................... 9,091 9,091 *
Lawrence S. Sheets........................ 9,091 9,091 *
Highbridge Fund Ltd. ..................... 18,182 18,182 *
Russell J. Azzarello...................... 9,091 9,091 *
Ignazio Posadio........................... 9,091 9,091 *
Melvin Yablon............................. 4,545 4,545 *
George Casella............................ 4,545 4,545 *
Sub-Total................................. 127,273 127,273
</TABLE>
46
<PAGE> 51
D. 1994 SHARES
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK COMMON STOCK
OWNED PRIOR COMMON STOCK TO BE OWNED AFTER
NAME TO OFFERING OFFERED HEREBY OFFERING(2)
- ---- ------------ ------------------ -------------
<S> <C> <C> <C>
Charles D. Mayer.......................... 10,696 10,696 *
Bruce L. Gordon........................... 10,696 10,696 *
Steven Harter............................. 2,674 2,674 *
Harry B. Bressler......................... 8,022 8,022 *
Guido Iacovelli........................... 2,674 2,674 *
Scott Winjum, O.D......................... 10,696 10,696 *
Dr. Donald Spector........................ 1,337 1,337 *
B&C Partners.............................. 10,696 10,696 *
Sand Castle Trading L.P. ................. 1,337 1,337 *
Maverick Investment Profit Sharing Plan &
Trust................................... 8,022 8,022 *
Florine Atkins............................ 1,337 1,337 *
Susanne Robbins........................... 2,674 2,674 *
Richard Rex Harris........................ 10,696 10,696 *
Pete J. Nickolopoulos..................... 2,674 2,674 *
GMM Defined Benefit Plan.................. 1,337 1,337 *
Joan Dziekanski........................... 1,337 1,337 *
Ralph Z. Levene, M.D...................... 10,696 10,696 *
Joseph A. Sullivan........................ 2,674 2,674 *
James A. Tagle
Sharon L. Go-Tagle Family Trust......... 5,348 5,348 *
Niels Lauersen............................ 21,393 21,393 *
Andrew Ege................................ 741 741 *
Thomas & Karen Finn....................... 1,337 1,337 *
Peter F. Szabo............................ 5,348 5,348 *
BeDour Construction, Inc.................. 2,674 2,674 *
Kelly Dorris.............................. 1,337 1,337 *
Rayna Ragonetti........................... 1,308 1,308 *
Dr. Randy A. Spector...................... 1,337 1,337 *
Jerry Daniels............................. 3,863 3,863 *
Eric L. Goldstein......................... 1,486 1,486 *
Aperdev Investments Inc................... 5,942 5,942 *
Sub-Total................................. 152,392 152,392
------- ------- ------
</TABLE>
E. AGENT WARRANT SHARES
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK COMMON STOCK
OWNED PRIOR COMMON STOCK TO BE OWNED AFTER
NAME TO OFFERING OFFERED HEREBY OFFERING(2)
---- ------------ ------------------ -------------
<S> <C> <C> <C>
Hugh Regan................................ 29,712 29,712 *
Jane Collins.............................. 14,856 14,856 *
Michelle Szatkowski....................... 5,942 5,942 *
David Wenger.............................. 13,906 13,906 *
Virgil Wenger............................. 3,803 3,803 *
Robert Haag............................... 3,342 3,342 *
Andrew Haag............................... 3,342 3,342 *
Lisa Deloache............................. 743 743 *
Michael P. Considine...................... 6,480 6,480 *
Sub-Total................................. 82,127 82,127
</TABLE>
47
<PAGE> 52
F. 1997 LOAN SHARES
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK COMMON STOCK
OWNED PRIOR COMMON STOCK TO BE OWNED AFTER
NAME TO OFFERING OFFERED HEREBY OFFERING(2)
---- ------------ ------------------ -------------
<S> <C> <C> <C>
Sercap Holdings LLC(3)................... 206,061 206,061 4.5%
Totals........................................ -- -- 26.8%
</TABLE>
- ---------------
* denotes less than 1%
(1) Does not include convertible securities held by the named Selling
Stockholder which are included elsewhere in this table.
(2) Percentage is based upon 4,590,423 shares of Common Stock outstanding after
this offering.
(3) Mr. Lawrence Stumbaugh is a principal of Sercap Holdings LLC. Mr. Stumbaugh
disclaims beneficial ownership of the shares owned by Sercap Holdings LLC.
48
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
the DGCL and to provisions contained in the Company's Amended and Restated
Certificate of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
Reference is made to such exhibits for a detailed description of the provision
thereof summarized below.
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.001 per share, and 10,000,000 shares of Preferred Stock, par value $.10
per share. As of the date of this Prospectus, there were 2,683,568 shares of
Common Stock and no shares of Preferred Stock issued and outstanding. Prior to
the Effective Date, the Company will effect approximately a 0.6:1 reverse stock
split of its Common Stock. All discussions in this Prospectus give effect to the
reverse stock split unless otherwise stated.
COMMON STOCK
Subject to the rights of the holders of any shares of Preferred Stock which
may be issued in the future, holders of shares of Common Stock of the Company
are entitled to cast one vote for each share held at all stockholders' meetings
for all purposes, including the election of the Board of Directors. See
"-- Preferred Stock."
Holders of Common Stock have the right to share ratably in such dividends
on shares of Common Stock as may be declared by the Board of Directors out of
funds legally available therefore. See "Dividend Policy." Upon liquidation or
dissolution, each outstanding share of Common Stock will be entitled to share
equally in the assets of the Company legally available for distribution to
stockholders after the payment of all debts and other liabilities, subject to
any superior rights of the holders of Preferred Stock.
Holders of Common Stock have no pre-emptive rights. There are no conversion
or redemption privileges or sinking fund provisions with respect to the Common
Stock. All of the outstanding shares of Common Stock are, and all of the shares
of Common Stock offered hereby will be, validly issued, fully paid and
nonassessable. The Common Stock does not have cumulative voting rights so
holders of more than 50% of the outstanding Common Stock can elect 100% of the
Directors of the Company if they choose to do so, subject to the rights of
holders of Preferred Stock, if any.
PREFERRED STOCK
The Board of Directors is empowered to issue Preferred Stock from time to
time in one or more series, without stockholder approval, and with respect to
each series to determine (subject to limitations prescribed by law) (1) the
number of shares constituting such series, (2) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (3) whether
the shares of each series shall be redeemable and the terms of any redemption
thereof, (4) whether the shares shall be convertible into Common Stock or other
securities and the terms of any conversion privileges, (5) the amount per share
payable on each series or other rights of holders of such shares on liquidation
or dissolution of the Company, (6) the voting rights, if any, for shares of each
series, (7) the provision of a sinking fund, if any, for each series, and (8)
generally any other rights and privileges not in conflict with the Certificate
of Incorporation for each series and any qualifications, limitations or
restrictions thereof. The Company currently has no plans to issue any Preferred
Stock.
The Company will not offer or sell Preferred Stock to any officer,
director, 5% shareholder of the Company or any affiliate or associate of such
persons without the approval by a majority of the Company's independent
directors who do not have an interest in the transaction and who have access, at
the Company's expense, to the Company's or independent legal counsel.
WARRANTS
At March 24, 1998, the Company has issued and outstanding Common Stock
purchase warrants to purchase an aggregate of 406,549 shares of Common Stock,
inclusive of the Agent Warrants and 1996 Warrants. The 1996 Warrants have a
three year term which expires three years from the date of this offering. The
exercise price of the 1996 Warrants will equal the initial public offering price
of the Shares in this
49
<PAGE> 54
offering, subject to adjustment in certain circumstances. The Agent Warrants
expire in May 1998 and have an exercise price of $1.68 per share, subject to
adjustment in certain circumstances.
The remaining 99,025 outstanding warrants have exercise prices ranging from
$3.37 per share to the initial public offering price of the Shares in this
offering. These warrants have five year terms from the date of grant and expire
in June 2000, October 2000, June 2002 and October 2002, respectively.
Shares issuable upon exercise of the warrants, following payment therefor,
will be validly issued, fully paid and non-assessable. The warrants do not
confer upon the holders any voting or other rights as stockholders.
None of the warrants are redeemable by the Company. Holders of 297,279
warrants are entitled to have the Company register the shares of Common Stock
for resale under the Securities Act concurrent with the Registration Statement
of which this Prospectus forms a part or in a future registration statement. The
Company is simultaneously registering for resale 297,279 shares issuable upon
exercise of such warrants. See "Concurrent Sales".
The exercise prices of the warrants was negotiated between the Company and
the holders and should not be construed to be predictive of or to imply that any
price increases or decreases in the Company's Common Stock will occur in the
future. For the life of the warrants, the holders thereof have the opportunity
to profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided for by the warrants.
CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
The Company's Amended and Restated Certificate of Incorporation contains
certain provisions that could discourage potential takeover attempts and make
more difficult attempts by stockholders to change management. The Amended and
Restated Certificate of Incorporation provides for a classified Board of
Directors consisting of three classes (Class 1, Class 2 and Class 3) as nearly
equal in size as practicable. Each class will hold office until the third annual
meeting for election of directors following the election of such class;
provided, however, that the initial terms of the directors in the first, second
and third classes of the Board of Directors will expire in 2000, 1999 and 1998,
respectively. The Company's Amended and Restated Certificate of Incorporation
provides that no director may be removed with or without cause by the vote of
less than 66 2/3% of the total outstanding voting power of the securities of the
Company which are then entitled to vote in the election of directors. The
Amended and Restated Certificate of Incorporation permits the Board of Directors
to create new directorships and the Company's Bylaws permit the Board of
Directors to elect new directors to serve the full terms of the class of
directors in which the new directorship was created. The Bylaws also provide
that the Board of Directors (or its remaining members, even if less than a
quorum) is empowered to fill vacancies on the Board of Directors occurring for
any reason for the remainder of the term of the class of directors in which the
vacancy occurred. A vote of not less than 66 2/3% of the total outstanding
voting power of the securities of the Company which are then entitled to vote in
the election of directors is required to amend the foregoing provisions of the
Amended and Restated Certificate of Incorporation.
CERTAIN PROVISIONS OF DELAWARE LAW
Certain provisions in the Amended and Restated Certificate of
Incorporation, the Bylaws and the DGCL could have the effect of delaying,
deferring or preventing changes in control of the Company.
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the Company's outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with the Company for three years following the date that person became an
interested stockholder unless: (i) before that person became an interested
stockholder, the Board of Directors approved the transaction in
50
<PAGE> 55
which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon completion of the transaction that resulted
in the interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced (excluding stock held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) on or
following the date on which that person became an interested stockholder, the
business combination is approved by the Company's Board and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock of the Company not owned by the
interested stockholder.
Under Section 203 of the DGCL, these restrictions also do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors (but not
less than one) who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eighth of the Company's Amended and Restated Certificate of
Incorporation provides that, to the full extent permitted by the DGCL, directors
shall not be personally liable to the Company or its stockholders for damages
for breach of any duty owed to the Company or its stockholders.
The Amended and Restated Certificate of Incorporation and Bylaws of the
Company provide that the Company shall, to the fullest extent permitted by
applicable law, as amended from time to time, indemnify all directors of the
Company, as well as any officers or employees of the Company to whom the Company
has agreed to grant indemnification.
The Company will apply for directors' and officers' liability insurance
which is intended to provide the Company's Directors and officers protection
from personal liability in addition to the protection provided by the Company's
Amended and Restated Certificate of Incorporation and Bylaws as described above.
There can be no assurance that the Company will be able to retain such
insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Continental Stock
Transfer and Trust Company, 2 Broadway, New York, New York 10004.
STOCKHOLDER REPORTS
The Company will distribute annual reports to its stockholders, which will
include financial statements audited and reported on by independent accountants,
and will provide such other reports as management may deem necessary or
appropriate to keep stockholders informed of the Company's operations.
51
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 4,590,423 shares of Common
Stock outstanding, of which the 1,250,000 Shares sold pursuant to this offering,
assuming the over-allotment option is not exercised, will be tradable without
restriction by persons other than "affiliates" of the Company. In addition,
1,958,635 shares of Common Stock previously issued are owned by non-affiliates
of the Company, have been held more than two years and will be freely tradable,
subject to the Lock-Up Agreements referred to below. Officers and directors will
own upon completion of this Offering 1,179,318 shares of Common Stock. All of
the Selling Stockholder Shares held by the Selling Stockholders and registered
hereby, will be freely tradable as long as the prospectus covering such sales
remains current and effective, subject to the Lock-up Agreements. The remaining
shares of issued and outstanding Common Stock will be "restricted" securities
within the meaning of the Securities Act, and may not be sold in the absence of
registration under the Securities Act or an exemption therefrom, including the
exemptions contained in Rule 144 under the Securities Act. Without regard to the
Lock-up Agreements with the Underwriter, referred to below, such shares will
become available for sale under Rule 144 at various times commencing 90 days
from the date of the Prospectus. No prediction can be made as to the effect, if
any, that future sales of shares of Common Stock will have on the market price
of the shares of Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that these sales could occur, could
adversely affect prevailing market prices for the Common Stock and could impair
the ability of the Company to raise additional capital through the sale of its
equity securities or through debt financing. The Lock-Up Agreements will remain
in effect for six months for the Selling Stockholders under which they will
agree not to sell or otherwise dispose of any of their shares of Common Stock or
other securities of the Company (other than pursuant to private transfers in
connection with which the transferees agree to be bound by the same "lock-up"
provision). The officers and directors of the Company have agreed to a lock-up
period of 18 months with respect to all securities of the Company held by them;
provided, however, commencing one year after the Effective Date, the officers
and directors will be allowed to sell such number of shares of Common Stock as
they would be able to sell under Commission Rule 144 if the Company's Common
Stock has a market price of at least 120% of the public offering price. The
206,061 1997 Loan Shares to be issued to Sercap Holdings LLC will be subject to
a lock-up period of one year from the Effective Date. See "Underwriting".
In addition to the Lock-Up Agreements in favor of the Underwriter, certain
state securities authorities have required that Mr. Jack Forcelledo and his wife
Elizabeth Forcelledo, enter into an agreement not to sell or transfer any of
their 1,159,318 shares of Common Stock or 34,653 options for at least two years
after the Effective Date. From the second anniversary through the fourth
anniversary, the Forcelledo's may sell 2 1/2% of their securities per quarter.
52
<PAGE> 57
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company, and the Company has agreed
to sell to such Underwriter, an aggregate of 1,250,000 Shares. Set forth below
is a summary of all of the material terms of the Underwriting Agreement. A
complete copy of the Underwriting Agreement is included in the Registration
Statement of which this Prospectus form is a part.
The Underwriter is committed on a "firm commitment" basis to purchase and
pay for all of the Shares offered hereby (other than shares offered pursuant to
the over-allotment option) if any Shares are purchased. The Shares are being
offered by the Underwriter subject to prior sale, when, as and if delivered to
and accepted by the Underwriter and subject to approval of certain legal matters
by counsel and to certain other conditions. It is a condition to the
Underwriting Agreement that the Company's Common Stock be accepted for listing
on the Nasdaq Small Cap Market.
The Underwriter has advised the Company that the Underwriter proposes to
offer the Shares to the public at the public offering price set forth on the
cover page of this Prospectus and the Underwriter may allow to certain dealers
who are members of the NASD concessions, not in excess of $. per share, of
which not in excess of $ per share may be reallowed to other dealers who are
members of the NASD. After the initial distribution of the Shares in this
offering is completed, the public offering price, the concessions, and
reallowance may be changed by the Underwriter. The Underwriter has informed the
Company that it does not expect any sales of the Shares offered hereby to be
made to discretionary accounts of the Underwriter.
The Company has granted an option to the Underwriter, exercisable during
the 45 day period commencing on the date of this Prospectus, to purchase up to
an aggregate of 187,500 additional Shares at the public offering price, less the
underwriting discounts and commissions. The Underwriter may exercise this option
in whole or, from time to time, in part solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the Shares offered
hereby. To the extent that the Underwriter exercises such option, the
Underwriter will have a firm commitment, subject to certain conditions, to
purchase the additional Shares underlying the portion of the option exercised.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the aggregate offering price of the Shares offered hereby
(including any Shares purchased pursuant to the Underwriter's over-allotment
option), of which $40,000 has been paid to date. The Company has also agreed to
pay all expenses in connection with qualifying the Shares offered hereby for
sale under the laws of such states as the Underwriter may designate, including
the expenses of counsel retained for such purposes by the Underwriter.
The Company has also agreed pursuant to the Underwriting Agreement to allow
the Underwriter to designate a nominee of the Board of Directors for a period of
three years. The Company has agreed to use its best efforts to obtain the
election of the Underwriter's nominee. In the event the Underwriter declines to
nominate an individual to the Board of Directors, the Company has agreed to
allow an individual selected by the Underwriter to attend all the Board of
Directors' meetings.
The Company has agreed to sell to the Underwriter and its designees,
Underwriter's Warrants to purchase up to 125,000 shares of Common Stock at an
exercise price per share equal to 165% of the initial public offering price per
share of the Shares offered hereby. The Underwriter's Warrants may not be
transferred, except during a one year period commencing on the Effective Date,
to officers of the Underwriter, and thereafter to officers or employees who are
stockholders of the Underwriter, and are exercisable during the four-year period
commencing one year from the date of the Prospectus (the "Warrant Exercise
Term").
53
<PAGE> 58
During the Warrant Exercise Term, the holders of the Underwriter's Warrants are
given, at nominal cost, the opportunity to profit from a rise in the market
price of the Common Stock. To the extent that the Underwriter's Warrants are
exercised or exchanged, dilution to the interests of the Company's stockholders
will occur. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holders of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in the Underwriter's Warrants.
Any profit realized by the Underwriter on the sale of the Underwriter's Warrants
or the underlying shares of Common Stock may be deemed additional underwriting
compensation. The Underwriter's Warrants provide for reductions, which in
certain circumstances could be material, in the exercise price of the
Underwriter's Warrants upon the occurrence of certain events, including
adjustment of the type of securities issuable upon exercise of the Underwriter's
Warrants to reflect changes in the Common Stock and to reflect stock dividends,
stock splits and mergers, recapitalizations or sales of assets. The Company has
agreed to register the Underwriter's Warrants and the underlying shares of
Common Stock under the Securities Act on one occasion during the Warrant
Exercise Term and to include such Underwriter's Warrants and shares in any
appropriate registration statement that is filed by the Company during the
Warrant Exercise Term.
Certain persons, including current employees and officers of the
Underwriter, hold Agent Warrants to purchase 82,127 shares of Common Stock of
the Company. The Agent Warrants were originally issued to the Underwriter in
1994 as consideration for its services as placement agent in the 1994 Private
Offering. The Agent Warrants have an exercise price of $1.68 per share. The
Agent Warrants expire in May 1998. The Agent Warrant Shares are being registered
in the Registration Statement of which this Prospectus forms a part. See
"Concurrent Sales".
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price has been arbitrarily determined by
negotiation between the Company and the Underwriter. In determining the offering
price, the Underwriter and the Company considered, among other things, market
prices of similar securities of comparable publicly traded companies, the
financial condition and operating information of companies engaged in activities
similar to those of the Company, the financial condition and prospects of the
Company and the general condition of the securities market.
In connection with the offering, the Underwriter and selling group members
(if any) and its affiliates may engage in transactions that stabilize, maintain
or otherwise affect the market price of the Common Stock. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriter also may
create a short position for the account of the Underwriter by selling more
Common Stock in connection with this offering then it is committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following completion of this offering to cover all or a portion of such short
position. In addition, the Underwriter may impose "penalty bids" under
contractual arrangements whereby it may reclaim from an a dealer participating
in this offering for its account, the selling concession with respect to the
Common Stock that is distributed in this offering but subsequently purchased for
its account in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if any is undertaken,
may be discontinued at any time.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Goldstein & DiGioia, LLP, 369 Lexington Avenue, New York, New York
10017. Goldstein & DiGioia, LLP holds five year warrants to purchase 50,000
shares of Common Stock at an exercise price equal to the public offering price
of the Shares. Certain legal matters in connection with the sale of the Shares
offered hereby will be passed upon for the Underwriter by Coleman & Rhine LLP.
54
<PAGE> 59
EXPERTS
The financial statements of Rollerball International Inc. at December 31,
1997 and 1996, and for each of the two-years in the period ending December 31,
1997, 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.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement on Form
SB-2, together with exhibits thereto, under the Securities Act containing
information concerning the securities offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to the Company and the securities offered hereby, reference is made to
the registration statement and the exhibits filed as part thereof. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete. In each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the registration statement, each such statement being qualified in all respects
by such reference.
The registration statement and exhibits can be inspected without charge and
copied, upon payment of the fees prescribed by the Commission, at the public
reference section of the Commission's principal office, 450 5th Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the Commission's regional
offices located at the Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New
York, New York 10048. The Commission also maintains a World Wide Web site at
http://www.sec.gov.
55
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-1
Balance Sheets as of December 31, 1996 and 1997............. F-2
Statements of Operations for the years ended December 31,
1996 and 1997............................................. F-3
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996 and 1997.......................... F-4
Statements of Cash Flows for the years ended December 31,
1996 and 1997............................................. F-5
Notes to Financial Statements............................... F-6
</TABLE>
<PAGE> 61
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Rollerball International Inc.
We have audited the accompanying balance sheets of Rollerball International
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the two years ended December
31, 1997. 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 Rollerball International,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Rollerball International, Inc. will continue as a going concern. As more fully
discussed in Note 1 to the financial statements, the Company has incurred a loss
of $3,145,000 for the year ended December 31, 1997. At December 31, 1997, the
Company had a working capital deficit of $3,495,000 and was in payment default
on certain debt. These conditions raise substantial doubt about the Company's
ability to continue as a going concern unless it is able to raise sufficient
additional capital to continue to fund operations. Management's plans as to
these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of Rollerball
International Inc. to continue as a going concern.
Ernst & Young LLP
Los Angeles, California
February 21, 1998, except
Note 12 as to which the date
is March 31, 1998
F-1
<PAGE> 62
ROLLERBALL INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY (DEFICIT)
-------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ----------------
(UNAUDITED)
(NOTE 10)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 394,667 $ 344,208
Accounts receivable............................... 27,009 43,508
Inventory......................................... 467,637 479,518
Debt issuance costs (Note 5)...................... 165,880 623,885
Prepaid expenses.................................. 133,807 126,387
----------- -----------
Total current assets................................ 1,189,000 1,617,506
Deferred stock offering costs....................... 75,493 234,594
Property and equipment, net (Note 2)................ 287,982 435,292
Intangible assets, net of accumulated amortization
of $33,570 (1996) and $61,035 (1997).............. 362,702 510,464
----------- -----------
Total assets........................................ $ 1,915,177 $ 2,797,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 159,007 $ 393,655
Accrued expenses (Note 3)......................... 603,907 973,231
Notes payable to stockholders (Note 4)............ 260,000 250,000
Advances from stockholders (Note 7)............... 28,873 20,659
Debt (Note 5)..................................... 1,775,000 3,475,000
----------- -----------
Total current liabilities........................... 2,826,787 5,112,545
Note Payable (Note 5)............................... -- 100,000
Commitments and contingencies (Note 8)
Stockholders' equity (deficit) (Notes 9 and 10):
Preferred stock -- $.10 par value, 5,000,000
shares authorized; no shares issued or
outstanding
Common stock -- $.001 par value, 50,000,000 shares
authorized; 2,391,176 shares issued and
outstanding (1996), 2,683,568 (1997) and
3,340,423 (pro forma).......................... 2,391 2,684 $ 3,340
Additional paid-in capital........................ 1,076,285 2,718,152 4,948,496
Accumulated deficit............................... (1,990,286) (5,135,525) (5,135,525)
----------- ----------- -----------
Total stockholders' equity (deficit)................ (911,610) (2,414,689) $ (183,689)
----------- ----------- ===========
Total liabilities and stockholders' equity
(deficit)......................................... $ 1,915,177 $ 2,797,856
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 63
ROLLERBALL INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1997
---------- -----------
<S> <C> <C>
Net sales................................................... $4,850,416 $ 2,022,692
Cost of sales............................................... 3,103,779 1,343,274
---------- -----------
Gross profit................................................ 1,746,637 679,418
Operating expenses:
Selling and marketing..................................... 1,461,004 1,229,943
General and administrative................................ 736,570 1,176,073
---------- -----------
Total operating expenses.................................... 2,197,574 2,406,016
---------- -----------
Loss from operations........................................ (450,937) (1,726,598)
Interest expense............................................ 96,566 1,417,841
---------- -----------
Loss before provision for income taxes...................... (547,503) (3,144,439)
Provision for income taxes (Note 6)......................... 800 800
---------- -----------
Net loss.................................................... $ (548,303) $(3,145,239)
========== ===========
Pro forma net loss per common share:
Basic..................................................... $ (.17) $ (.97)
===== =====
Diluted................................................... $ (.17) $ (.97)
===== =====
Pro forma weighted average common shares outstanding........ 3,149,712 3,238,635
========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 64
ROLLERBALL INTERNATIONAL INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995........................ 2,384,242 $2,384 $1,041,292 $(1,441,983) $ (398,307)
Conversion of notes in
1996..................... 6,934 7 34,993 -- 35,000
Net loss for the year ended
December 31, 1996........ -- -- -- (548,303) (548,303)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1996........................ 2,391,176 2,391 1,076,285 (1,990,286) (911,610)
Exercise of warrants........ 152,392 153 242,007 -- 242,160
Stock to be granted with
debt..................... -- -- 700,000 -- 700,000
Stock issued with Bridge
Notes (Note 5)........... 140,000 140 699,860 -- 700,000
Net loss for the year ended
December 31, 1997........ -- -- -- (3,145,239) (3,145,239)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1997........................ 2,683,568 $2,684 $2,718,152 $(5,135,525) $(2,414,689)
========= ====== ========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 65
ROLLERBALL INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------------------
1996 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (548,303) $(3,145,239)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 97,528 143,392
Amortization of debt issuance costs.................... 33,176 1,088,995
Changes in assets and liabilities:
Accounts receivable.................................. 126,406 (16,499)
Inventory............................................ (467,637) (11,881)
Prepaid expenses..................................... (44,082) 7,420
Deferred stock offering costs........................ (75,493) (159,101)
Accounts payable..................................... 70,764 234,648
Accrued expenses..................................... 139,974 369,324
---------- -----------
Net cash used in operating activities....................... (667,667) (1,488,941)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (198,650) (258,401)
Increase in intangible assets............................... (234,449) (180,063)
---------- -----------
Net cash used in investment activities...................... (433,099) (438,464)
FINANCING ACTIVITIES
Proceeds from debt.......................................... 1,775,000 1,700,000
Proceeds from notes and loans payable to stockholders....... 35,000 90,000
Payments on loans to stockholders........................... (141,062) (8,214)
Debt issuance costs......................................... (199,056) (147,000)
Exercise of warrants........................................ -- 242,160
---------- -----------
Net cash provided by financing activities................... 1,469,882 1,876,946
---------- -----------
Increase (decrease) in cash................................. 369,116 (50,459)
Cash at beginning of period................................. 25,551 394,667
---------- -----------
Cash at end of period....................................... $ 394,667 $ 344,208
========== ===========
Cash paid during the period for:
Interest.................................................. $ 67,310 $ 181,538
Income taxes.............................................. 800 800
</TABLE>
See accompanying notes.
F-5
<PAGE> 66
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION AND BUSINESS ACTIVITY
Rollerball International Inc. (the "Company") develops, manufactures,
distributes and markets inline skates, and related accessories under the
Rollerball trademark throughout Europe, Asia and North America through
independent sales representatives and distributors. The Company was incorporated
in Delaware on March 7, 1994.
BASIS OF PRESENTATION
The Company was organized in 1994 and a majority of its efforts have been
in the development of the in-line skate with limited international distribution.
Since inception, the Company has incurred cumulative net losses of approximately
$5.1 million through December 31, 1997, and anticipates continued losses for
fiscal 1998. On December 31, 1997, the Company had a working capital deficit of
approximately $3,495,000. In addition the Company is in payment default on
several debt agreements (see Note 5). The Company plans to finance its
operations primarily through proceeds from equity offerings, including the
Company's proposed initial public offering (the "Offering"). The Company will
require substantial additional funds in order to advertise and distribute its
products as currently contemplated. The Company anticipates that its existing
capital resources, including the net proceeds of the Offering if completed on
the terms presently anticipated, will be adequate to fund its capital needs for
at least 12 months.
Without such additional funding, the Company may be required to delay or
reduce its scope of distribution of its products. As there can be no assurance
that the Company will be able to raise additional funds on acceptable terms, if
at all, these conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
might result from the possible inability of the Company to continue as a going
concern.
REVENUE RECOGNITION
The Company recognizes revenue from product sales to customers upon
shipment. The Company provides a warranty of its products against defects for a
specified period and has policies permitting customers to return products under
certain circumstances. In addition, certain of the Company's distributors and
agents are entitled to rebates upon attaining specified sales levels. Provision
is made on the sale date for the estimated amount of product returns and rebates
that may occur under these programs. Amounts related to warranty, returns and
rebates have not been significant.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company makes periodic evaluation of the credit worthiness of its
customers and generally does not require collateral. Credit losses relating to
the Company's customers, mainly mass merchant retailers, have consistently been
within management's expectations and are provided for in the financial
statements.
The Company operates predominantly within one industry segment where
certain customers represent a significant portion of the Company's business.
During the years ended December 31, 1996 and 1997, approximately 67% and 82% of
the Company's sales were made to three customers.
The Company's products are primarily sourced through independent purchasing
agents from suppliers located in Taiwan, the People's Republic of China and
Thailand. The Company negotiates the cost of its products directly with its
suppliers in United States Dollars and its purchases are primarily effected
through letters of credit in United States Dollars. As a result, exchange rate
fluctuations could have an effect upon the
F-6
<PAGE> 67
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's ability to negotiate favorable price terms with suppliers, which may
adversely effect the cost of goods sold and the resultant gross margins for the
Company's products.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist principally of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the related assets which
range between five and seven years.
DEBT ISSUANCE COSTS
Fees associated with the issuance of the debt are being amortized by the
interest method over the term of the debt.
INTANGIBLE ASSETS
Intangible assets include $140,080 and $209,615 at December 31, 1996 and
1997, respectively, in costs incurred for trademarks and $251,356 and $358,434
at December 31, 1996 and 1997, respectively, related to patents, which are both
being amortized using the straight-line method over 15 years.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, stock based compensation is measured
using either the intrinsic value method as prescribed by Accounting Principal
Board Opinion No. 25 or the fair value method described in SFAS No. 123. The
Company will use APB 25 and provide the pro forma disclosure required by SFAS
123 if material. The pro forma impact on net loss and pro forma loss per common
share were not material.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred income taxes are recognized using the asset and
liability method by applying income tax rates to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Deferred tax assets and liabilities are adjusted for income tax rate changes.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share has been computed (Basic and diluted)
for all periods presented and is based on the weighted average number of shares
outstanding during the period including the 12% Subordinated Convertible
Debentures ("12% Debentures") that will automatically convert upon the closing
of the Company's initial public offering (using the as if converted method from
the date of issuance), the shares issued to holders of the Bridge Notes and 1997
Loan Shares, all that will be issued upon closing of the Company's initial
public offering. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletins, common stock equivalents issued during the 12-month period prior to
the initial public offering are included in the calculation as if they were
outstanding for all periods (using the treasury stock method at the assumed
public offering price). There are no common stock equivalents resulting from
dilutive stock options.
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Accounting for Earnings Per Share"
("SFAS No. 128") is effective for the Company in fiscal 1997. The adoption of
SFAS No. 128 did not have an impact on amounts presented.
F-7
<PAGE> 68
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense, including
costs related to trade shows, amounted to $258,308 and $283,115 for the years
ended December 31, 1996 and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and amounted to
$60,178 and $159,235 for the years ended December 31, 1996 and 1997,
respectively.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
-------- --------
<S> <C> <C>
Office and trade show equipment........................ $ 94,825 $134,043
Molds and tooling...................................... 284,405 485,474
Machinery and equipment................................ 41,634 59,748
-------- --------
420,864 679,265
Less accumulated depreciation.......................... 132,882 243,973
-------- --------
$287,982 $435,292
======== ========
</TABLE>
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
Accrued officer salary............................ $ 200,000 $ 231,800
Accrued consulting fees........................... 166,060 345,606
Accrued interest.................................. 59,374 189,078
Other accruals.................................... 178,473 206,747
---------- ----------
$ 603,907 $ 973,231
========== ==========
</TABLE>
F-8
<PAGE> 69
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
Unsecured notes payable bearing interest at 12%
per annum, due on demand........................ $ 178,000 $ 168,000
Unsecured convertible note payable bearing
interest at 12% per annum, due on demand and
convertible into common stock at $3.37 per
share........................................... 7,000 7,000
Unsecured convertible notes payable bearing
interest at 12% per annum, due on demand and
convertible into common stock at $5.05 per
share........................................... 75,000 75,000
---------- ----------
$ 260,000 $ 250,000
========== ==========
</TABLE>
In connection with the $168,000 in unsecured notes payable to stockholders,
the Company provided the stockholders with warrants to purchase an additional
26,444 shares of common stock at $3.37 per share. The warrants do not expire
during the period of indebtedness.
The $7,000 and $75,000 unsecured convertible notes payable to stockholder
are convertible into shares of common stock at $3.37 per share and $5.05 per
share, respectively, at the stockholder's discretion. As of December 31, 1997
holders of the $168,000 unsecured notes payable had not exercised their
warrants. As of December 31, 1997, one of the holders of the convertible notes
payable converted $35,000 of the notes into common shares.
The fair market values of the Company's unsecured notes payable to
stockholders are estimated to be the same as the amounts reported for such notes
in the Company's balance sheet.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
SHORT TERM DEBT ---------- ----------
<S> <C> <C>
12% Subordinated Convertible Debentures......... $1,775,000 $1,775,000
12% Bridge Notes................................ -- 700,000
Sercap Holdings LLC 12% Notes................... -- 1,000,000
---------- ----------
$1,775,000 $3,475,000
========== ==========
LONG TERM DEBT
12% unsecured note payable...................... $ -- $ 100,000
========== ==========
</TABLE>
During the period August 1996 to September 1996 ("1996 Private Offering"),
the Company sold 12% Debentures in the principal amount of $1,775,000. The 12%
Debentures automatically convert into common stock in connection with an initial
public offering at a per share conversion price equal to 80% of the initial
public offering price. The 12% Debentures bear interest at 12% payable quarterly
and are due on October 31, 1997. Based upon an initial offering price of $5.50
per share, the 12% Debentures will be convertible into 450,794 shares of Common
shares. The holders of the 12% Debentures also received a warrant to purchase
one share of common stock for every two shares received upon conversion of the
12% Debentures, an aggregate of 225,397 warrants. The warrants are exercisable
for three years from issuance at an exercise price equal to 100% of the per
share offering price. Debt issue costs associated with the 12% Debentures were
$199,000 and
F-9
<PAGE> 70
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
have been amortized over the term of the note with $33,176 being amortized for
the year ended December 31, 1996 and $165,824 being amortized for the year ended
December 31, 1997.
From March 1997 through April 1997, the Company sold $700,000 of the
Company's 12% Bridge Notes ("Bridge Notes"). The Bridge Notes are due and
payable upon the earlier of October 31, 1997 or five days after the consummation
of an initial public offering. The Bridge Notes are junior unsecured obligations
of the Company. Holders are also entitled to receive at the closing of an
initial public offering such number of shares of the Company's Common Stock as
shall equal the principal amount of the Bridge Notes divided by the initial
public offering price of the shares or at a price of $5.00 per share in event
there is no initial public offering by October 31, 1997. The value of these
shares, $700,000, is being amortized as debt issuance costs. Holders of the
Bridge Notes were deemed to have received 140,000 shares of Common Stock
effective November 1, 1997. Debt issuance costs associated with the Bridge Notes
were $777,000, including the shares of common stock to be received, and are
being amortized over the term of the notes with the entire amount being
amortized in the year ended December 31, 1997.
In September 1997 the Company obtained an unsecured $100,000 loan from an
individual. The loan bears interest at 12%, and is due January 31, 1999. In
addition the principal officer/stockholder granted the individual the right to
receive shares of common stock equal to the principal amount of the note divided
by the initial public offering price. Such shares will come from the principal
officer/stockholder.
In October 1997 the Company received a loan from Sercap Holdings LLC
("Sercap"), a company controlled by a holder of 12% Debentures, in the principal
amount of $1,000,000. Sercap also is entitled to receive such number of shares
of Common Stock as equal $600,000 principal amount of the loan divided by the
initial public offering price of the Shares in this offering. The loan is
divided into two separate notes, one of which, in the principal amount of
$600,000 is a term note bearing interest at 12% per annum and payable upon the
earlier of the closing of this offering or December 31, 1998. The second portion
of the loan is represented by a convertible note in the principal amount of
$400,000 which shall automatically be converted into shares of Common Stock upon
closing of this offering at a price per share equal to 75% of the initial
offering price. Sercap also received the right to nominate one person to the
Board of Directors of the Company. The proceeds of the loan have been utilized
by the Company to pay expenses of this offering, inventory purchases and working
capital. Assuming an initial offering price of $5.50 per share, 206,061 shares
of Common Stock would be issued in accordance with the October 1997 Loan.
As of October 31, 1997, the Company was in default with respect to the 12%
Debentures and the Bridge Notes regarding repayment. The Company has requested
that the holders of the 12% Debentures waive all defaults and extend the
maturity to April 30, 1998.
6. INCOME TAXES
The provision for income taxes reflected in the statements of operations
for all periods represents the minimum state taxes due as there is no federal or
state taxable income as a result of operating losses incurred by the Company. At
December 31, 1997, the Company has approximately $3,679,000 and $2,326,000 in
federal and state operating loss carryovers expiring through 2011 available to
offset future taxable income. Certain ownership changes in the Company could
result in an annual limitation on the utilization of these operating loss
carryforwards. No benefit for these operating loss carryforwards has been
recorded in the accompanying financial statements as their realizability is not
assured.
F-10
<PAGE> 71
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1996 1997
--------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization........ $ (45,919) $ (41,711)
State income taxes................... (38,135) (125,008)
--------- -----------
Total deferred tax liabilities......... (84,054) (166,719)
Deferred tax assets:
Accrued expenses..................... 89,000 587,754
Pre-incorporation expenses........... 97,146 77,889
Net operating losses................. 662,662 1,511,051
--------- -----------
Total deferred assets.................. 848,808 2,178,694
Valuation allowance.................... (764,754) (2,011,975)
--------- -----------
Net deferred tax assets................ 84,054 166,719
--------- -----------
Total deferred taxes................... $ -- $ --
========= ===========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company has advances from stockholders that are noninterest bearing and
are due on demand.
The principal stockholder and officer of the Company has a royalty
agreement which provides for payment by the Company of a royalty fee of 3% of
the net sales which are not based on a letter of credit and 1.8% of the net
sales which are based on letters of credit. The royalty agreement will be
terminated (effective January 1, 1997) upon the entering into of an employment
agreement (Note 8). Royalty expense pursuant to this agreement amounted to
$88,448 and none for the years ended December 31, 1996 and 1997, respectively.
During 1994 the Company utilized the services of the brother of the
principal stockholder/chief executive officer for which it accrued expenses of
$31,000. The accrued expense was paid in fiscal 1997. Additionally since 1994
the Company has utilized the services of the sister-in-law of the principal
stockholder/chief executive officer. This person is the sister of a director of
the Company. The sister-in-law was paid $30,000 and $31,000 for her services
during fiscal 1996 and 1997, respectively. These persons provided sales and
marketing services to the Company.
8. COMMITMENTS AND CONTINGENCIES
LEASE
The Company leases its office space and sales office on a month-to-month
basis, including utilities. The aggregate monthly rent was $5,750 at December
31, 1996 and $6,750 at December 31, 1997. Rent expense for the years ended
December 31, 1996 and 1997 was $49,470 and $56,989 respectively.
ROYALTY AGREEMENTS
In addition to the royalty agreement with the principal stockholder and
officer, the Company has entered into royalty agreements with two individuals
which require the Company to pay royalties based on a certain percentage of net
sales less certain deductions as defined. The royalties to each individual are
based on 1% of net sales, except for sales based on a letter of credit, for
which the royalty percentage is .6% of net sales. One of the agreements limits
the royalty payment to $350,000 for any fiscal year. In addition, the Company
has an agreement with the originator of the Radial Skateball Technology(TM)
which provides for a monthly consulting fee of $4,000 per month through March
24, 2002 and a royalty based on 2.5% of cost of goods sold after certain
deductions including expenses for patents and trademarks. Royalty expense,
including amounts to the principal stockholder (Note 7), for the years ended
December 31, 1996 and 1997, was $167,068 and $10,446 respectively. All royalty
agreements provide for payment of royalties in perpetuity.
F-11
<PAGE> 72
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OFFICER COMPENSATION
The Company will enter into a four-year employment agreement with the
principal stockholder/officer providing for a base compensation of $160,000 for
fiscal 1997 with annual increases up to a base salary of $235,000 in the year
2000. In addition, the principal stockholder/officer will be entitled to bonus
payments commencing in 1998 of 7% of net income plus 10% of any amount above
$750,000. For 1999 and 2000 the bonus will be calculated based on net income of
$1,650,000 and $2,000,000, respectively, with the principal stockholder/officer
entitled to 7% of the base net income and 10% of any amount above the base. The
royalty agreement with the principal stockholder officer will be terminated upon
entering into the employment agreement effective as of January 1, 1997.
LITIGATION
The Company has recently received correspondence from Metro-Goldwyn-Mayer
("MGM"), a motion picture entity which alleged that the Company's use of the
name "Rollerball" infringed upon MGM's alleged trademark rights in the name
"Rollerball" which was the name of a 1975 film produced by MGM. The Company was
granted a United States trademark for the Rollerball name in 1995 with respect
to, among other things, in-line skates and related products. Based upon advice
of counsel, the Company does not believe that MGM has any such rights in the
name and intends to vigorously defend itself against MGM's allegations. Although
neither party has commenced litigation in this matter, there can be no assurance
that this dispute will not result in litigation. In the event that litigation
results, the Company can be expected to incur significant costs to defend
itself. Based upon advice of counsel, the Company believes that it has strong
and meritorious defenses to the claims of MGM.
9. STOCKHOLDERS' EQUITY
In a private offering during the period May 1994 to June 1994 ("1994
Private Offering"), the Company sold 1023.75 units of its securities, each unit
consisting of 618 shares of common stock and 206 common stock purchase warrants.
Cash proceeds were $813,756, net of the related costs of $107,619. The warrants
entitled the holders to purchase one share of common stock for an exercise price
of $1.68 per share. As part of the private placement, the underwriter received
82,127 warrants to purchase common stock at $1.68 per share as part of its fee.
At December 31, 1997, 82,127 warrants were outstanding in connection with this
private placement. In 1997 warrants issued in connection with the 1994 Private
Offering were exercised and 152,392 shares were issued and the remaining
warrants expired. The Company received net proceeds of approximately $242,000
from the exercise of these warrants.
In September 1994, the Company adopted the 1994 Employee Plan which
provides for the grant of options to purchase 750,000 shares of the Company's
common stock at not less than fair value for incentive stock options ("ISOs").
During 1994, 181,298 options were granted at an exercise price of $3.37 per
share and during 1995, 62,758 were granted at an exercise price of $5.05 per
share. All of the options vested immediately on the date of grant. No options
have been exercised as of December 31, 1997. A total of 505,944 shares remain
available for grant pursuant to the 1994 Employee Plan.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: weighted-average risk-free interest rates of 6%;
dividend yields of 0%; weighted-average volatility factors of the expected
market price of the Company's common stock of .01; and a weighted average
expected life of the option of 5 years. The impact on net loss and earnings per
share was not material.
F-12
<PAGE> 73
ROLLERBALL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ 244,826 $4.21 244,826 $4.21
Granted............................... -- -- -- --
Exercised............................. -- -- -- --
Canceled.............................. -- -- -- --
------- ----- ------- -----
Outstanding at end of year.............. 244,826 $4.21 244,826 $4.21
======= ===== ======= =====
Exercisable at end of year.............. 244,826 $4.21 244,826 $4.21
Weighted average fair value of options
granted during the year............... -- --
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.37 to $5.05. The weighted average remaining contractual life of those options
is 5 years.
In December 1997, the Board of Directors adopted the Non-Executive Director
Stock Option Plan (the "Director Plan") which was approved by a majority of the
Company's stockholders at the same time. The Director Plan provides for issuance
of a maximum of 100,000 shares of common stock upon the exercise of stock
options granted under the Director Plan. Options may be granted under the
Director Plan until July 2007 to (i) non-executive directors as defined, (ii)
members of any advisory board established by the Company who are not full-time
employees of the Company or any of its subsidiaries, and (iii) consultants. The
exercise price for options granted pursuant to the plan shall be at 100% of fair
value. No options have been granted under the Director Plan.
10. PRO FORMA ADJUSTMENT (UNAUDITED)
Pro forma disclosure has been provided showing the automatic conversion of
the 12% Debentures at their carrying amount into 450,794 shares of common stock
and the issuance of 206,061 shares associated with the 1997 Loan. All share
issuances are based on an assumed initial public offering price of $5.50 per
share.
11. GEOGRAPHIC DATA
Export sales by geographic location are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
---------- ----------
<S> <C> <C>
Japan................................... $ 575,988
Europe.................................. 1,281,530 $ 525,541
Asia (excluding Japan).................. 91,362
---------- ----------
$1,948,880 $ 525,541
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
In July 1997, the Company's Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission relating to
an initial public offering of 1,250,000 shares of common stock and in December
1997 a reverse stock split of approximately .6 to 1 to be effected prior to the
effective date of the Registration Statement. In addition the principal
stockholder/officer has agreed to surrender for cancellation 600,000 shares of
common stock of the Company on the effective date of the Registration Statement.
All references to share and per share amounts of common stock have been
retroactively restated to reflect the stock split and the cancellation.
F-13
<PAGE> 74
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO, OR A
SOLICITATION OF, ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Summary Financial Information......... 6
Risk Factors.......................... 7
Use of Proceeds....................... 18
Dividend Policy....................... 19
Dilution.............................. 20
Capitalization........................ 21
Management's Discussion and
Analysis............................ 22
Business.............................. 28
Management............................ 36
Summary Compensation Table............ 38
Principal Stockholders................ 43
Certain Relationships and Related
Transactions........................ 43
Concurrent Sales...................... 45
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 55
Additional Information................ 55
Report of Independent Auditors........ F-1
Financial Statements.................. F-2
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS)
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
1,250,000 SHARES
[ROLLERBALL LOGO]
ROLLERBALL
INTERNATIONAL INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
AUERBACH, POLLAK &
RICHARDSON, INC.
, 1998
======================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative in nature
to procure a judgment in its favor, by reason of the fact that he is or was a
director, officer, employee or agent 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) and, in a proceeding not by or in
the right of the corporation, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such suit or
proceeding, if he acted in good faith and in a manner 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 reason to believe his conduct was
unlawful. Delaware law further provides that a corporation will not indemnify
any person against expenses incurred in connection with an action by or in the
right of the corporation if such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for the expenses which such court shall deem proper.
The Bylaws of the Company provide for indemnification of officers and
directors of the Company to the greatest extent permitted by Delaware law for
any and all fees, costs and expenses incurred in connection with any action or
proceeding, civil or criminal, commenced or threatened, arising out of services
by or on behalf of the Company, providing such officer's or director's acts were
not committed in bad faith. The Bylaws also provide for advancing funds to pay
for anticipated costs and authorizes the Board of Directors to enter into an
indemnification agreement with each officer or director.
In accordance with Delaware law, the Company's Certificate of Incorporation
contains provisions eliminating the personal liability of directors, except for
breach of a director's fiduciary duty of loyalty to the Company or to its
stockholders, acts or omission not in good faith or which involve intentional
misconduct or a knowing violation of the law, and in respect of any transaction
in which a director receives an improper personal benefit. These provisions only
pertain to breaches of duty by directors as such, and not in any other corporate
capacity, e.g., as an officer. As a result of the inclusion of such provisions,
neither the Company nor stockholders may be able to recover monetary damages
against directors for actions taken by them which are ultimately found to have
constituted negligence or gross negligence, or which are ultimately found to
have been in violation of their fiduciary duties, although it may be possible to
obtain injunctive or equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders in any particular case,
stockholders may not have an effective remedy against the challenged conduct.
The form of Underwriting Agreement included as Exhibit 1 provides for
indemnification of the Company and certain controlling persons under certain
circumstances, including liabilities under the Securities Act of 1933, as
amended (the "Act").
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and therefore is
unenforceable.
II-1
<PAGE> 76
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the securities
being registered herein are estimated.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 4,976
NASD Registration Fee....................................... 2,056
Underwriter's Non-Accountable Expense....................... 206,250
Printing and Engraving Expenses............................. 90,000
Accounting Fees and Expenses................................ 100,000
Legal Fees and Expenses..................................... 150,000
Blue Sky Fees and Expenses.................................. 35,000
Nasdaq Fee.................................................. 9,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous Fees and Expenses............................. 3,000
Total............................................. $605,282
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information gives effect to the reverse split of Common Stock
(approximately .6 to 1) to be effected prior to the Effective Date:
During the period May 1994 to June 1994, the Company sold, in the 1994
Private Offering, 1,023.75 units of its securities, each unit consisting of 618
shares of Common Stock and 206 1994 Warrants. Each unit had a purchase price of
$900. The offering was conducted under Section 4(2) and/or Regulation D of the
Securities Act to sophisticated investors. The 1994 Warrants entitled the
holders to purchase one share of Common Stock for an exercise price of $1.00 per
share. The Company received net proceeds of approximately $813,756 from the 1994
Private Offering after payment of commissions of $90,000 and offering expenses
of approximately $17,619. The Underwriter also received the Agent Warrants. The
Agent Warrants have an exercise price of $1.68 per share and expire in May 1998.
As of July 15, 1997, 152,392 of the 1994 Warrants had been exercised and the
remainder had expired. In June 1997 the Company received net proceeds of
approximately $242,000 from the exercise of the 1994 Warrants after payment of
$10,258 in commissions to the Underwriter. The registration statement of which
this Prospectus forms a part includes the 152,392 1994 Shares which have been
registered for resale by certain of the Selling Stockholders and the 82,127
Agent Warrant Shares.
During the period August 1996 to September 1996, the Company sold to
sophisticated investors in a private offering under Section 4(2) and/or
Regulation D of the Securities Act, $1,775,000 principal amount of 12%
Debentures. The Company received net proceeds of approximately $1,576,000 after
payment of commissions and offering expenses of approximately $199,000. A single
investor has requested, and the Company has agreed, that all interest payments
due to such investor be added to the principal amount of such investor's note.
As of December 31, 1997 the total amount of interest due to such investor was
approximately $56,000 convertible into 13,576 Conversion Shares. The Underwriter
served as placement agent in the 1996 Private Offering. The 12% Debentures
contain terms by which they were to be automatically converted into shares of
Common Stock at a conversion price equal to 80% of the per share offering price
of the Company's initial public offering provided the offering occurred prior to
October 31, 1997. Payment of the principal amount of the 12% Debentures was due
on October 31, 1997. The Company has made interest payments to the 12% Debenture
holders for the period ending January 31, 1998. As of November 1, 1997 the
Company was in default. The Company has requested that the holders of the 12%
Debentures waive all defaults and extend the maturity date to April 30, 1998. In
order to obtain such waiver, the Company has proposed to the holders that the
conversion price of the 12% Debentures be reduced to 75% of the offering price
of the Shares and to pay an additional 6% interest from November 1, 1997 through
the date of payment. The Company has also proposed reducing the exercise price
of the 1996 Warrants to equal the offering price of the Shares. Based
II-2
<PAGE> 77
upon an initial public offering price of $5.50 per share, and assuming the
Company's proposal is accepted, the holders of the 12% Debentures will receive
442,085 shares of Common Stock at the closing of this offering. The purchasers
in the 1996 Private Offering also received one 1996 Warrant to purchase one
share of Common Stock for every two shares received upon conversion of the 12%
Debentures, an aggregate of 215,152 warrants. The 1996 Warrants are exercisable
for three years from the date of issuance. The registration statement of which
this Prospectus forms a part includes the Conversion Shares and 1996 Warrant
Shares which have been registered for resale by certain of the Selling
Stockholders.
During the period from March 1997 through April 1997, the Company sold to
sophisticated investors, in a private offering under Section 4(2) and/or
Regulation D of the Securities Act, $700,000 principal amount of the Company's
12% Bridge Notes. The Bridge Notes were due and payable upon the earlier of (i)
October 31, 1997 or (ii) five days after the consummation of this offering. The
Company has received notice default from several holders of the Bridge Notes.
The terms of the Bridge Notes provide for a default rate of interest at 18% per
annum. The Company has requested that the holders of the Bridge Notes waive
defaults until February 28, 1998. The Bridge Notes are junior unsecured
obligations of the Company. Investors are also entitled to receive at the
closing of this offering such number of shares of the Company's Common Stock as
shall equal the principal amount of the Bridge Notes divided by the initial
public offering price of the Shares. Based upon an initial offering price of
$5.50 per Share, investors in the Bridge Offering will receive an aggregate of
127,273 Bridge Shares at the closing of this offering. The Company intends to
use proceeds of this offering to repay all interest and principal on the Bridge
Notes. The Company is in default under the Bridge Notes and the Company has
requested that the holders waive all defaults until February 28, 1998. The
Company realized net proceeds of $623,000 from the sale of the Bridge Notes
after payment of sales commissions and offering expenses of approximately
$77,000. The Underwriter acted as placement agent with respect to the placement
of the Bridge Notes. The registration statement of which this Prospectus forms a
part includes the 127,273 Bridge Shares which have been registered for resale by
certain of the Selling Stockholders.
In September 1997 the Company obtained a loan of $100,000 bearing interest
at 12% per annum. The loan is payable in full in January 1999. Interest payments
are payable semi-annually. The lender also has the right to receive from Jack
Forcelledo, the Company's Chief Executive Officer, such number of shares equal
to the principal amount of the loan divided by the initial public offering price
of the Shares.
In October 1997 the Company received a loan from Sercap Holdings LLC., a
company controlled by a holder of 12% Debentures, in the principal amount of
$1,000,000. The lender also is entitled to receive such number of shares of
Common Stock equal to $600,000 principal amount of the loan divided by the
initial public offering price of the Shares in this offering. Based upon an
initial offering price of $5.50 per Share, the lender will receive an aggregate
of 206,061 1997 Loan Shares at the closing of this offering. The loan is divided
into two separate notes, one of which, in the principal amount of $600,000, is a
term note bearing interest at 12% per annum and payable upon the earlier of the
closing of this offering or December 31, 1998. The second portion of the loan is
represented by a convertible note in the principal amount of $400,000 which
shall automatically be converted into Common Stock upon closing of this offering
at a per share price equal to 75% of the initial offering price of the Shares.
The lender also received the right to nominate one person to the Board of
Directors of the Company. Mr. Lawrence Stumbaugh, a principal and officer of
Sercap Holdings LLC, was appointed to the Board of Directors of the Company in
October 1997 as the designee of Sercap Holdings LLC. See "Management." Mr.
Stumbaugh resigned from the Board of Directors in March 1998. The proceeds of
the loan have been utilized by the Company to pay expenses of this offering, for
inventory purchases and for working capital. The Registration Statement of which
this Prospectus forms a part includes the 206,061 1997 Loan Shares which have
been registered for resale by the lender who is a Selling Stockholder. Mr.
Stumbaugh is also a Selling Stockholder whose shares are subject to a Lock-Up
Agreement.
II-3
<PAGE> 78
ITEM 27. EXHIBITS
The exhibits designated with an asterisk (*) are filed herewith. Those
Exhibits without any asterisk have previously been filed.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1* Form of Underwriting Agreement between the Company and
Auerbach, Pollak & Richardson, Inc.
1.2 Form of Selected Dealers Agreement
3.1 Certificate of Incorporation
3.2 Amended and Restated Certificate of Incorporation of the
Registrant
3.3 Bylaws
3.4 Amended and Restated Bylaws
4.1 Form of Common Stock Certificate
4.2 Form of Underwriter's Warrant to be issued to the
Underwriter
4.3 Form of 1996 Warrant issuable to holders of 12% Debentures
4.4 Form of 12% Convertible Debenture in the aggregate principal
amount of $1,775,000
4.5 Form of 12% Bridge Note in the aggregate principal amount of
$700,000
4.6 Form of $400,000 principal amount Note dated October 24,
1997 in favor of Sercap Holdings LLC.
4.7 Form of $600,000 principal amount Note dated October 24,
1997 in favor of Sercap Holdings LLC.
4.8 Form of $100,000 principal amount Loan Agreement dated
September 22, 1997 between Jack Forcelledo and David Field.
4.9 Form of Agent Warrants issued to Auerbach, Pollak &
Richardson Inc., in June 1994
4.10* Form of Waiver Letter to holders of 12% Debentures extending
maturity date to April 30, 1998
4.11 Form of Lock-In Agreement between the Company and Jack and
Elizabeth Forcelledo
5.1* Opinion and Consent of Goldstein & DiGioia, LLP Esqs.
10.1 Lease agreement for principal offices located at 9255 Doheny
Road Suite 2705 Los Angeles California 90069.
10.2 Lucky Yeh Distribution Agreement
10.3 Consarino Royalty Agreement, entered into in March 1995.
10.4 Franco Rosso Consulting Agreement dated as of March 25, 1995
and Royalty Agreement among the Company, Franco Rosso,
Ettore Carenini and Guisseppe Rosso dated March 25, 1995
10.5 Kimmel Royalty Agreement
10.6 Form of Employment Agreement dated as of January 1, 1997
between the Company and Jack Forcelledo
10.7 1994 Employee Stock Option Plan
10.8 1997 Non-Executive Director Option Plan
10.9 Restated Royalty Agreement dated August 7, 1992 by and
between Jack Forcelledo, Elizabeth Forcelledo and the
Company
10.10 Form of Employment Agreement dated August 18, 1997 between
the Company and Kenneth Teasdale
10.11 Reinstatement of FMG Royalty Agreement dated March 20, 1995
between the Company and Jack and Beth Forcelledo
10.12 Form of Registration Rights Agreement among the Company and
the holders of 12% Debentures dated as of September 1996
10.13 Rollerball Skate Agreement between Forcelledo Marketing
Group and Guisseppe Rosso entered into in August 1992
23.1* Consent of Ernst & Young LLP, independent auditors (included
in Part II)
23.2* Consent of Goldstein & DiGioia, LLP is contained in their
opinion filed as Exhibit 5.1 to this Registration Statement
23.3 Consent of John T. Botti, director designee
23.4 Consent of Michael Katz, director designee
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
24.1* Power of Attorney contained in signature page at Part II of
the Registration Statement
27 Financial Data Schedule
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereto) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) (i) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) The Registrant will provide to the Underwriter at the closing of the
Offering Share certificates in such denominations and registered in such names
as required by the Underwriter to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C. The undersigned registrant hereby undertakes:
II-5
<PAGE> 80
A. To supplement the Prospectus contained in this Registration
Statement if the Underwriter releases between 5% and 10% of the Selling
Stockholders' shares of common stock from the "lock-up" agreements referred
to in the Prospectus prior to the expiration date of such agreements; and
B. To file a post-effective amendment to this Registration Statement
if the Underwriter releases in excess of 10% of the Selling Stockholders
shares from the lock-up agreements prior to the expiration date of such
agreements.
II-6
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 Amendment No. 5 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 31st
day of March, 1998.
ROLLERBALL INTERNATIONAL INC.
By: /s/ JACK FORCELLEDO
------------------------------------
Jack Forcelledo, Chairman,
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below substitutes and appoints Jack Forcelledo, his true and lawful
attorney-in-fact and agents, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agent or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ JACK FORCELLEDO Chairman, President, Chief Executive March 31, 1998
- --------------------------------------------- Officer and Director
Jack Forcelledo
/s/ ELIZABETH FORCELLEDO Director March 31, 1998
- ---------------------------------------------
Elizabeth Forcelledo
/s/ KENNETH TEASDALE Chief Financial Officer March 31, 1998
- ---------------------------------------------
Kenneth Teasdale
</TABLE>
II-7
<PAGE> 82
EXHIBIT INDEX
The Exhibits designated with an asterisk (*) are filed herewith. Those
Exhibits without any asterisk have been previously filed.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
1.1 Form of Underwriting Agreement between the Company and
Auerbach, Pollak & Richardson, Inc. ........................
1.2 Form of Selected Dealers Agreement..........................
3.1 Certificate of Incorporation................................
3.2 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.3 Bylaws......................................................
3.4 Amended and Restated Bylaws.................................
4.1 Form of Common Stock Certificate............................
4.2 Form of Underwriter's Warrant to be issued to the
Underwriter.................................................
4.3 Form of 1996 Warrant issuable to holders of 12%
Debentures..................................................
4.4 Form of 12% Convertible Debenture in the aggregate principal
amount
of $1,775,000...............................................
4.5 Form of 12% Bridge Note in the aggregate principal amount of
$700,000....................................................
4.6 Form of $400,000 principal amount Note dated October 24,
1997 in favor of Sercap Holdings LLC........................
4.7 Form of $600,000 principal amount Note dated October 24,
1997 in favor of Sercap Holdings LLC........................
4.8 Form of $100,000 principal amount Loan Agreement dated
September 22, 1997 between Jack Forcelledo and David
Field.......................................................
4.9 Form of Agent's Warrant issued in June 1994.................
4.10 Form of Waiver Letter to holders of 12% Debentures extending
maturity date to April 30, 1998.............................
4.11 Form of Lock-In Agreement between the Company and Jack and
Elizabeth Forcelledo........................................
5.1 Opinion and Consent of Goldstein & DiGioia, LLP Esqs. ......
10.1 Lease agreement for principal offices located at 9255 Doheny
Road Suite 2705
Los Angeles California 90069................................
10.2 Lucky Yeh Distribution Agreement............................
10.3 Consarino Royalty Agreement, entered into in March 1995.....
10.4 Franco Rosso Consulting Agreement dated as of March 25, 1995
and Royalty Agreement among the Company, Franco Rosso,
Ettore Carenini and Guisseppe Rosso dated March 25, 1995....
10.5 Kimmel Royalty Agreement....................................
10.6 Form of Employment Agreement dated as of January 1, 1997
between the Company and Jack Forcelledo.....................
10.7 1994 Employee Stock Option Plan.............................
10.8 1997 Non-Executive Director Option Plan.....................
10.9 Restated Royalty Agreement dated August 7, 1992 by and
between Jack Forcelledo, Elizabeth Forcelledo and the
Company.....................................................
10.10 Form of Employment Agreement dated August 18, 1997 between
the Company and Kenneth Teasdale............................
10.11 Reinstatement of FMG Royalty Agreement dated March 20, 1995
between the Company and Jack and Beth Forcelledo............
10.12 Form of Registration Rights Agreement among the Company and
the holders of 12% Debentures dated as of September 1996....
10.13 Rollerball Skate Agreement between Forcelledo Marketing
Group and Guisseppe Rosso entered into in August 1992.......
23.1* Consent of Ernst & Young LLP, independent auditors (included
in Part II).................................................
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
23.2 Consent of Goldstein & DiGioia, LLP is contained in their
opinion filed as Exhibit 5.1 to this Registration
Statement...................................................
23.3 Consent of John T. Botti, director designee.................
23.4 Consent of Michael Katz, director designee..................
24.1 Power of Attorney contained in signature page at Part II of
the Registration Statement..................................
27 Financial Data Schedule.....................................
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 21, 1998 except for Note 12 as to which the
date is March 31, 1998, in the Registration Statement (Form SB-2) and the
related Prospectus of Rollerball International, Inc. for the registration of
1,250,000 shares of its common stock.
ERNST & YOUNG LLP
Los Angeles, California
March 31, 1998
