AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EARTH AND OCEAN SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-3195264
(STATE OR OTHER JURISDICTION (I.R.S.
OF INCORPORATION OR EMPLOYER
ORGANIZATION) IDENTIFICATION
3949 NUMBER)
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
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70 AIRPORT ROAD
HYANNIS, MASSACHUSETTS 02601
(508) 778-5528
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JON A. GLYDON, PRESIDENT
EARTH AND OCEAN SPORTS, INC.
70 AIRPORT ROAD
HYANNIS, MASSACHUSETTS 02601
(508) 778-5528
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
EDWIN L. MILLER, JR.,ESQ. DAVID F. DIETZ, P.C.
TESTA, HURWITZ & THIBEAULT, LLP GOODWIN, PROCTER & HOAR LLP
125 HIGH STREET EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02109
(617)248-7000 (617)570-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) UNIT(2) OFFERING PRICE(2) FEE
Common Stock, $.01 par value 1,581,250 shares $11.00 $17,393,750 $ 5,271
Representatives' Warrants 137,500 warrants $ .01 $ 1,375 $ 1
Common Stock issuable
upon exercise of
Representatives' Warrants 137,500 shares $11.00 $ 1,512,500 $ 459
TOTAL REGISTRATION FEE $5,731
(1) Includes 206,250 shares which the Underwriters have the option to purchase
from the Company to cover over allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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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 27, 1997
PROSPECTUS
[LOGO] 1,375,000 SHARES
EARTH AND OCEAN SPORTS, INC.
COMMON STOCK
The 1,375,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby are being issued and sold by Earth and Ocean Sports,
Inc. (the "Company" or "EOS"). Prior to the offering contemplated hereby (the
"Offering"), there has been no public market for the Common Stock of EOS. It is
currently estimated that the initial public offering price will be in the range
of $9.00 to $11.00 per share. For a discussion of the factors to be considered
in determining the initial public offering price, see "Underwriting." EOS has
applied to list the Common Stock for quotation on the Nasdaq National Market
System under the symbol "EOSI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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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.
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNT(1) COMPANY (2)
Per Share $ $ $
Total $ $ $
(1) Excludes a non-accountable expense allowance equal to one percent (1.0%) of
the gross proceeds from the sale of the Common Stock payable to H.C.
Wainwright & Co., Inc. and Cruttenden Roth Incorporated, as representatives
of the Underwriters (the "Representatives"), and the value of warrants to
be issued to the Representatives to purchase a number of shares of Common
Stock equal to ten percent (10%) of the number of shares being offered
hereby at an exercise price of 150% of the initial public offering price
(the "Representatives' Warrants"). The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $635,000, including the Representatives' non-accountable expense
allowance.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 206,250 shares of Common Stock at the Price to Public less
the Underwriting Discount shown above, solely to cover overallotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $________ ,
$_______ and $ ______ , respectively. See "Underwriting."
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The shares of Common Stock are offered severally by the Underwriters named
herein, when, as and if received and accepted by them, subject to their right to
reject orders in whole or in part and subject to other conditions. It is
expected that delivery of the certificates for the shares of Common Stock will
be made against payment therefor through the offices of H.C. Wainwright & Co.,
Inc., Boston, Massachusetts on or about_______ , 1997.
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H.C. WAINWRIGHT & CO., INC. CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
Inside Front Cover Gatefold:
- ----------------------------
[Graphics of Company Logo's: Earth and Ocean Sports, Inc. corporate logo,
photograph of globe and the following product logo's: A-Tach, B2, R-Lite, Liquid
Force, Spiral Fm Wakeboards, Flite and TracTop.]
[Five Action photographs of the Company's wakeboards in use; plus logo's of
Liquid Force wakeboards and FM wakeboards]
[Six action photographs of the Company's bodyboards in use; plus B2, A-Tach and
Trac-Top product logo's.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVERALLOTMENTS, ENTERING OF STABILIZING BIDS, EFFECTING SYNDICATE SHORT COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
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BZ, R-Lite and TracTop are registered trademarks, and A-Tach, FM, Green
Cell, High Suction, Liquid Force, Madrid, Spiral, Suction, Super Suction and
Wavemaster are trademarks of the Company. All other trademarks or tradenames
referred to in this prospectus are the property of their respective owners.
2
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including the financial
statements and the notes thereto, appearing elsewhere in this prospectus.
Investors should carefully consider the information set forth under the caption
"Risk Factors."
THE COMPANY
The Company is a designer, manufacturer and marketer of branded active
sports products. The Company currently offers five brands and over 40 models of
bodyboards, two brands and nine models of wakeboards and two brands and over 20
models of snowboards, as well as complementary sports apparel and accessories.
In the United States, the Company sells its products primarily through a network
of over 100 independent sales representatives working with the Company's
internal sales and technical specialists, and internationally through a network
of over 30 distributors. The Company's domestic customers include over 1,000
specialty shops, 20 national and regional sporting goods retail chains and over
20 mass merchandisers.
An increasing number of consumers are participating in active sports, which
generally require the purchase of non-team sports products. Active sports
products include those currently marketed by the Company -- bodyboards,
wakeboards and snowboards -- as well as in-line skates, skateboards, surfboards
and similar sports products. Bodyboards are surf riding boards that are shorter,
wider, smaller, lighter, more maneuverable and easier to learn than surfboards,
and can be used in a much broader range of locations and surf conditions. A
bodyboarder rides waves primarily lying prone on the board and is able to
complete a variety of aerial maneuvers. Wakeboards are towed behind a boat or
personal watercraft and are ridden standing sideways like a surfboard.
Wakeboards are more buoyant than water skis and allow the rider to perform a
wide range of aerial jumps and acrobatic tricks.
The typical active sports enthusiast is a "dedicated consumer" who devotes
significant time, attention and disposable income to a chosen sport. Active
sports enthusiasts frequently become participants in multiple sports that are
appropriate for different seasons and spend a significant portion of their
recreational budget on active sports equipment. There has been significant
recent growth in the active sports industry. The Surf Industry Manufacturing
Association projected that an estimated 1.75 million Americans would actively
(at least four times) surf in 1996, compared to 1.1 million people in 1992. In
addition, the Company believes that wakeboarding is having the same effect on
water skiing as snowboarding has had on alpine skiing. According to the Water
Sports Industry Association, water ski participants have declined from 13.8
million in 1991 to 11.1 million in 1994, while sales of wakeboards have
increased at a compound annual growth rate of 58%. According to Snow Industries
America, snowboard unit sales have grown at an annual compound growth rate of
50% from 135,000 units in the 1992-1993 season to 456,000 in the 1995-1996
season.
The Company implements a multi-sport, multi-brand market segmentation
approach in which each product brand is sold only into its designated channel of
distribution, thereby protecting the integrity of each brand and the longevity
of its unique market position. The Company's multi-brand strategy is to
initially develop premium sports products for dedicated consumers, and to
subsequently introduce multiple brands with multiple price points and
performance characteristics. High, middle and lower range bodyboard brands are
marketed to specialty shops, sporting goods retailers and mass merchandisers,
respectively. The Company currently markets high and middle range wakeboard and
snowboard brands through specialty shops and sporting goods retailers,
respectively.
Unlike many other active sports companies that purchase products for resale,
the Company has developed broad process manufacturing expertise and is an
integrated manufacturer of all of its own bodyboards, wakeboards and snowboards.
In addition, the Company believes that it is the largest manufacturer of
bodyboards in the United States. The Company's manufacturing expertise and
integrated manufacturing operations have enabled it to be a low cost producer,
to become a leader in product innovation, to carefully maintain performance
features and quality control, and to quickly respond to market trends and
incorporate technological improvements.
3
The Company has grown through internal product development and through six
product line acquisitions since 1993. The Company's growth strategy is to become
a leading provider of active sports products in each of its target markets by
(i) identifying growth segments within the active sports industry and entering
these markets through either the introduction or acquisition of new products;
(ii) extending the Company's well-recognized brand names into new global
markets; (iii) fully utilizing the Company's extensive distribution network
through increased product penetration; and (iv) pursuing strategic acquisitions.
The Company was incorporated in Massachusetts in 1993. Its executive offices
are located at 70 Airport Road, Hyannis, Massachusetts 02601, and its telephone
number is (508) 778-5528.
THE OFFERING
Common Stock offered by
the Company............. 1,375,000 shares
Common Stock to be
outstanding after the
Offering(1)............. 3,196,457 shares
Use of proceeds........... To repay indebtedness to the Company's senior lender
and to the principal stockholder, for working
capital and other general corporate purposes, and
for possible acquisitions.
Proposed Nasdaq National
Market symbol........... EOSI
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(1) Excludes (i) 208,214 shares issuable upon the exercise of unvested
outstanding employee stock options with a $0.66 weighted average exercise
price, (ii) 600,000 shares reserved for issuance upon exercise of options to
purchase Common Stock under the Company's employee and outside director
stock plans, of which unvested options for 60,000 shares have been granted
at an exercise price equal to the initial public offering price, (iii)
237,175 shares reserved for issuance upon exercise of warrants held by the
Company's senior lender at an exercise price equal to 90% of the initial
public offering price and (iv) 137,500 shares issuable upon exercise of the
Representatives' Warrants. See "Management," "Certain Transactions" and
"Underwriting."
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
FISCAL YEARS ENDED OCTOBER 31, THREE MONTHS ENDED JANUARY 31,
------------------------------ ------------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 9,144 $ 11,372 $ 12,404 $ 2,029 $ 2,875
Gross profit 3,575 4,342 4,819 753 844
Income (loss) from operations 456 629 306 (204) (137)
Net income (loss) 37 58 (291) (338) (321)
Net income (loss) per common and common
equivalent share(1) $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
Weighted average common and common
equivalent shares outstanding(1) 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
Supplemental net income (loss)(2) $ 305 $ (150)
Supplemental net income (loss) per common
and common equivalent share(2) $ 0.11 $ (0.05)
Supplemental weighted average common and
common equivalent shares outstanding(3) 2,721,891 2,812,815
4
JANUARY 31, 1997
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PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED(4)(5)
------ --------- --------
(UNAUDITED)
BALANCE SHEET DATA:
Cash ........................................................ $ 4 $ 4 $ 5,324
Working capital (deficit) ................................... (375) (375) 9,565
Total assets ................................................ 10,174 10,174 15,344
Short-term obligations ...................................... 4,267 4,267 84
Long-term obligations, less current portion ................. 345 345 33
Subordinated note payable to principal stockholder .......... 3,800 2,050 --
Stockholders' equity (deficit) .............................. (664) 1,086 13,239
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(1) Computed as described in Note 2(j) of Notes to Financial Statements.
(2) Supplemental net income (loss) and net income (loss) per common and common
equivalent shares gives effect to (i) the conversion of $1.75 million of
subordinated indebtedness to the principal stockholder into 218,750 shares
of Common Stock on March 17, 1997 for the periods ended October 31, 1996
and January 31, 1997, and (ii) the use of net proceeds of the Offering to
repay $1,189,463 and $2,337,200 at October 31, 1996 and January 31, 1997,
respectively, to the principal stockholder for all remaining outstanding
subordinated indebtedness and accrued interest thereon and to repay
$4,839,689 and $4,495,500 at October 31, 1996 and January 31, 1997,
respectively, to the Company's senior lender as if these events had
occurred at the beginning of each period. Supplemental net income (loss)
consists of net income (loss) increased or decreased by the effect of
reduced interest expense associated with (i) and (ii) above. Supplemental
net income (loss) per common and common equivalent shares represents
supplemental net income (loss) divided by the supplemental weighted average
common and common equivalent shares outstanding.
(3) Supplemental weighted average common and common equivalent shares
outstanding consists of the weighted average common and common equivalent
shares outstanding plus (i) shares issued upon conversion of $1.75 million
of subordinated indebtedness to the principal stockholder into 218,750
shares of Common Stock on March 17, 1997, and (ii) the number of shares of
Common Stock issued in the Offering to generate net proceeds, at an assumed
initial public offering price of $10.00 share, necessary to repay
$2,337,200 of subordinated indebtedness and accrued interest to the
principal stockholder and $4,495,500 to the Company's bank.
(4) Presented on a pro forma basis to give effect to (i) the conversion of
$1.75 million of subordinated indebtedness to the principal stockholder
into 218,750 shares of Common Stock on March 17, 1997 and (ii) the issuance
of 109,500 shares valued at $10 per share to CR Management Associates,
L.P.(CRM) as consideration amending their Management Agreement.
(5) Adjusted to reflect the sale by the Company of 1,375,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $10.00
per share, the receipt of the estimated net proceeds therefrom and the
application of the net proceeds to repay $2,337,200 of subordinated
indebtedness and accrued interest thereon to the principal stockholder and
$4,495,500 to the Company's senior lender.
Except as otherwise noted or the context otherwise requires, all
information contained in this prospectus (i) assumes no exercise of the
Underwriters' overallotment option, (ii) reflects a 750-for-one stock split
effected in February 1997, (iii) reflects the conversion of $1.75 million of
subordinated indebtedness into 218,750 shares of Common Stock (the "Indebtedness
Conversion"), and (iv) reflects the filing of Amended and Restated Articles of
Organization prior to the closing of the Offering to effect a 1.684575-for-one
stock split (together with the stock split previously effected, the "Stock
Splits") of the Company's outstanding Common Stock, to increase the authorized
Common Stock, to create an undesignated class of Preferred Stock and to effect
certain other changes. See "Description of Capital Stock," "Underwriting" and
Note 11 of Notes to Financial Statements. The Company's fiscal year ends on
October 31. All references to fiscal years in this prospectus refer to the
fiscal years ending in the calendar years indicated (e.g., fiscal 1996 refers to
the fiscal year ended October 31, 1996).
5
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE
TERMS "ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES" AND SIMILAR TERMS AS
THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS.
Seasonality; Fluctuations in Quarterly Operating Results. Because the
substantial majority of the Company's net sales currently are derived from water
sports products, sales of the Company's products are generally highly seasonal
and dependent on weather conditions. This results in a disproportionately low
percentage of the Company's sales occurring in the first and fourth quarters
when sales of water sports products are typically lowest. Net sales in the first
and fourth quarters of fiscal 1996 accounted for approximately 16.5% and 14.1%,
respectively, of net sales for the full year, and the Company incurred operating
losses in both such quarters. Because much of the Company's operating expenses
are fixed in nature, a decline in net sales relative to internal expectations
would have a material adverse effect on the Company's results of operations. In
addition, the nature of the Company's business requires it to make relatively
large investments in inventory in anticipation of these products' selling
seasons, and relatively large investments in receivables during and shortly
after such seasons. Moreover, the contraction and expansion of the Company's
operations resulting from seasonal demand for the Company's products is
difficult to manage efficiently. Apart from seasonal factors and weather
conditions, demand for the Company's products fluctuates in response to consumer
buying patterns, discretionary spending habits, general economic conditions in
the United States and abroad and other factors. The Company's operating results
also fluctuate from quarter to quarter as a result of the timing of order
shipments and new product introductions. Furthermore, the Company's gross
margins will fluctuate with product mix, the timing of product price adjustments
and the mix of domestic sales and international sales (which are international
distributor-based and consequently have lower gross margins). The Company's
operating results for any interim period are not indicative of the results for
the entire year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Industry and Product Concentration. The Company's future success depends
significantly on continued growth in the active sports industry. In general,
purchases of discretionary sporting goods tend to decline in periods of economic
uncertainty, and the popularity of particular sports tends to be cyclical.
Moreover, the market for active sports products is characterized largely by
image-conscious, brand-driven, young consumers. Consequently, the Company's
future success is highly dependent upon its ability to regularly update its
products and maintain brand images that are attractive to these consumers. Any
failure by the Company to accurately predict and target future trends or to
maintain such brand images and products could have a material adverse effect on
the Company's business. Additionally, a substantial majority of the Company's
current sales are derived from bodyboards and wakeboards. Although the Company
has also begun to sell snowboards, the Company's sales of snowboards to date
have not comprised a significant portion of the Company's total sales. The
Company's sales growth has been attributable in part to its introduction of
internally developed wakeboard products and its continuing introduction of a
number of bodyboard brands. There can be no assurance that the active sports
market will continue to grow generally or with respect to the products currently
marketed by the Company, or that the Company will be in a position to take
advantage of any future growth opportunities in the active sports market. See
"Business -- Industry Background" and "Business -- Products."
Competition and Product Innovation. The active sports industry is highly
competitive, with competition mainly centering on product innovation,
performance and styling, brand name recognition, price, marketing and delivery.
The Company's historical sales growth has been attributable in part to its
6
ability to introduce new products either through internal development or
acquisition. The Company believes that a major factor in its future success will
be its ability to continue to develop and acquire in a timely manner innovative
new products and brands in anticipation of market trends and to improve its
existing products, and there can be no assurance of its ability to do so.
Competitors in each of the Company's product lines include companies with
greater brand recognition and financial, distribution, marketing and other
resources than the Company. In addition, there are no significant capital,
technological or manufacturing barriers to entry in the sporting goods markets
currently served by the Company. Furthermore, each of these markets faces
competition from other sports and leisure activities, and sales of sports and
leisure products are affected by changes in consumer preferences, which are
difficult to predict. There can be no assurance that competitors will not emerge
or rapidly acquire market share in these markets or that these markets will not
be adversely effected by increased competition from other sports and leisure
activities. See "Business -- Competition."
Acquisition-Related Risks. The Company may, when and if the opportunity
arises, acquire other businesses or product lines that are compatible with the
Company's business. The Company may face significant competition from other
companies with greater financial resources in pursuing such acquisition
candidates. There can be no assurance that the Company will find any suitable
acquisition candidates and complete any future acquisitions, or that, with
respect to any future acquisitions that may be completed, the Company will be
successful in integrating the operations, technologies and products of the
acquired companies, in avoiding the diversion of management attention from other
business concerns or in conducting operations in markets with which the Company
has limited or no prior experience. Moreover, there can be no assurance that the
anticipated benefits of an acquisition will be realized. Future acquisitions by
the Company could result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, all of which could materially
adversely affect the Company. See "Business -- Growth Strategy."
Manufacturing Risks. The Company manufactures all of its own bodyboards,
wakeboards and snowboards. As a manufacturer, the Company continually faces
risks regarding the availability and cost of raw materials and labor, the
potential need for additional capital equipment, increased maintenance costs,
plant and equipment obsolescence, quality control and excess capacity. The
Company has manufacturing facilities located in California, which are subject to
the risk of earthquakes or other natural disasters. Although the Company
maintains business interruption insurance to reduce the potential effect of any
such disaster, a disruption in the Company's manufacturing or distribution
caused by a natural disaster affecting one of its manufacturing facilities could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, the Company may need to add production capacity in
the future, and there can be no assurance that the Company will be able to add
such capacity either on a cost effective basis or in a timely manner. See
"Business -- Manufacturing and Suppliers."
Dependence on Polyethylene Foam and other Component Suppliers. The
polyethylene foam used in the Company's products is available from only three
suppliers in the United States. The Company has developed a close working
relationship with two of these foam suppliers, and has a supply contract with
one of these suppliers that expires in June 1998. The Company's future success
may depend on its ability to maintain such relationships, concerning which there
can be no assurance. During fiscal 1996, one foam supplier experienced a
significant interruption in its production and delivery of polyethylene foam, as
well as quality problems. As a result of this interruption, the Company
sustained a substantial loss of business due to material shortages and having to
pay spot market prices. Any future interruption in the Company's ability to
obtain adequate supplies of polyethylene foam could have a material adverse
effect on the Company's business, financial condition and results of operations.
Most component materials other than polyethylene foam are available from a broad
range of suppliers in the United States. However, growth in the snowboard
industry and other factors have resulted in shortages and, in some cases, price
increases in certain raw materials necessary for the production of the Company's
products, and such shortages or price increases may recur. At times, the Company
has also experienced delays in the receipt of products from its suppliers as a
result of shortages in raw materials, including fiberglass and P-Tex. Such
shortages and delays could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Manufacturing and Suppliers."
7
Material Benefit to Principal Stockholders. SSPR, L.P. is the Company's
principal stockholder and provided the Company's initial capital, consisting of
$150,000 in equity and subordinated debt in the amount of $1.35 million. SSPR,
L.P. subsequently advanced a total of $2.6 million in subordinated debt. On
March 17, 1997, $1.75 million of the subordinated indebtedness was converted
into 218,750 shares of Common Stock. The Company will repay the remaining
principal and accrued interest on this subordinated indebtedness (which at March
26, 1997 was $2,580,342) upon completion of the Offering. See "Principal
Stockholders." Messrs. Conway and Roth, directors of the Company, are general
partners of SSPR, L.P. See "Certain Transactions."
Risks of International Business. The Company's business is subject to the
risks generally associated with doing business internationally, including
changes in demand resulting from fluctuations in exchange rates, foreign
governmental regulation and changes in economic conditions. These factors, among
others, could influence the Company's ability to sell its products in
international markets. Unanticipated changes in the value of the U.S. dollar
relative to that of certain foreign currencies could have a material adverse
effect on the Company's sales or results of operations. These factors have
resulted in recent weakness in the Company's sales in Japan, and the Company
expects that this weakness will continue. The Company has not engaged, and does
not presently intend to engage, in currency hedging activities. In addition, the
Company's business is subject to the risks associated with legislation and
regulation relating to imports, including quotas, duties or taxes and other
charges, restrictions or retaliatory actions on imports to the United States and
other countries in which the Company's products are sold or manufactured.
Product Liability. The Company's products are used in recreational settings
involving a high degree of inherent risk. In many cases, users of the Company's
products may engage in imprudent or even reckless behavior while using such
products, thereby increasing the risk of injury. Although, with one exception,
the Company has never been a party to any product liability litigation, the
Company may be subject in the future to product liability lawsuits involving
serious personal injuries or death allegedly relating to its products. Product
liability claims may include allegations of failure to warn, design defects or
defects in the manufacturing process. The Company maintains product liability,
general liability and excess liability insurance coverage. There can be no
assurance that such coverage will continue to be available at a reasonable cost
to the Company, that such coverage will be available in sufficient amounts to
cover one or more large claims, or that the Company's insurer will not disclaim
coverage as to any future claim. The successful assertion of one or more large
claims against the Company that exceed available insurance coverage or changes
in the Company's insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business -- Legal Proceedings."
Dependence on Third-Party Selling Efforts. The Company relies on third
parties to sell, and in some cases to distribute, its products to retailers. In
general, many factors, such as general economic conditions, financial
conditions, marketing considerations or governmental regulations may affect the
ability of these parties to sell the Company's products, which, in turn, may
adversely affect the Company's financial performance. In the United States, the
Company uses independent sales representatives who work under contract.
Generally, such contracts may be terminated by either party upon ninety days'
notice. Internationally, the Company uses distributors under informal
arrangements. Several of the Company's international distributors carry and
distribute competing product lines. The Company's Japanese distributor accounted
for approximately 11.5%, 15.5%, 11.4% and 22% of the Company's net sales in
fiscal 1994, 1995 and 1996 and for the three months ended January 31, 1997,
respectively. The loss of the services of the Company's Japanese distributor or
difficulties encountered with any of the Company's independent sales
representatives or distributors would have a material adverse effect on the
Company's financial condition and results of operations. See "Business -- Sales
and Distribution."
Limited Protection of Intellectual Property. There are relatively few
technological or other barriers to entry into the Company's business, and the
Company's products may be replicated by competitors. There can be no assurance
that current or future competitors will not offer competing
8
products or products substantially identical to the Company's products at lower
prices. Although the Company has patents and patent applications pending in the
United States and certain foreign countries and expects to file for patent
protection for future innovations, where available, the Company does not believe
that its existing patent portfolio affords material protection to its business.
The Company relies to a significant extent on both common law and registered
trademarks in the United States and certain foreign countries. There can be no
assurance that existing or additional trademarks will not be infringed or
asserted to be invalid.
The Company has received from time to time, and may receive in the future,
claims from third parties asserting intellectual property rights relating to the
Company's products and product features. The Company has received notice from a
competitor challenging the Company's right to register its Liquid Force
trademark for its wakeboards. The Company believes that it is entitled to such
registration. There can be no assurance, however, that the Company will be
successful in registering this trademark or that an infringement action will not
be brought by this competitor challenging the Company's right to use its Liquid
Force trademark. See "Business -- Intellectual Property" and "Business -- Legal
Proceedings."
Dependence on Key Personnel. The Company is highly dependent upon the
ability and experience of its senior executives, none of whom have employment
agreements with the Company. The loss of the services of any of the Company's
executive officers could adversely affect the Company's ability to conduct its
operations. Furthermore, the market for key personnel in the active sports
industry is highly competitive. There can be no assurance that the Company will
be able to attract and retain key personnel with the skills and expertise
necessary to manage its business in the future.
Liquidity. The Company from time-to-time has been in violation of certain
operating covenants under its credit facilities. The Company intends to repay
amounts outstanding under its existing credit facilities with a portion of the
net proceeds of the Offering. There can be no assurance, however, that in the
future the Company will be able to obtain credit on favorable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Potential Adverse Impact of Environmental Regulations. The Company is
subject to federal, state and local governmental regulations relating to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in its manufacturing process. There can be no assurance that
changes in environmental regulations or in the kinds of raw materials used by
the Company will not impose the need for additional capital equipment or other
requirements. Any failure by the Company to control the use of, or adequately
restrict the discharge of, hazardous substances under present or future
regulations could subject it to substantial liability or could cause its
manufacturing operations to be suspended. Such liability or suspension of
manufacturing operations could have a material adverse effect on the Company's
results of operations. See "Business -- Environmental and Regulatory Matters."
No Prior Public Market; Offering Price; Possible Volatility of Stock Price.
Prior to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after completion of the Offering. The initial public offering price of
the shares offered hereby will be determined by negotiation among the Company
and the representatives of the Underwriters. See "Underwriting" for a
description of the factors to be considered in determining the initial public
offering price. Following the completion of the Offering, future announcements
concerning the Company or its competitors, quarterly variations in operating
results, the introduction of new products or changes in product pricing policies
by the Company or its competitors, weather patterns that may be perceived to
affect the demand for the Company's products, changes in earnings estimates by
analysts or changes in accounting policies, among other factors, could cause the
market price of the Common Stock to decline, perhaps substantially. In addition,
stock markets in general and the Nasdaq National Market in particular have
experienced extreme price and volume fluctuations, which have particularly
affected the market prices of securities of many smaller public companies for
reasons frequently unrelated to the operating performance of such companies. See
"Underwriting."
9
Effective Control by Principal Stockholders. After giving effect to the sale
of the shares of Common Stock offered hereby, SSPR, L.P., Mr. Glydon and the
other members of management of the Company will beneficially own in the
aggregate over 50% of the outstanding shares of Common Stock. As a result, these
stockholders will have the ability to control or exert significant influence
over the outcome of fundamental corporate transactions requiring stockholder
approval, including mergers and sales of assets and the election of the members
of the Company's Board of Directors. See "Certain Transactions," "Principal
Stockholders" and "Shares Eligible for Future Sale."
Potential Adverse Impact of Shares Eligible for Future Sale. Sales of
substantial amounts of Common Stock in the public market following the Offering
could adversely affect the market price of the Common Stock. In addition to the
1,375,000 shares of Common Stock offered hereby, substantially all of the shares
of Common Stock owned by current stockholders of the Company will be eligible
for sale in accordance with Rule 144 or Rule 701 beginning 90 days after the
date of this Prospectus. However, holders of all of such shares have agreed not
to offer, sell or otherwise dispose of any shares of Common Stock owned by them
for 180 days from the date of this Prospectus without the prior written consent
of H.C. Wainwright & Co., Inc. In addition, SSPR, L.P. and the Company's senior
lender, which owns a warrant to purchase shares of Common Stock, have the right
in certain circumstances to require the Company to register their shares under
the Securities Act for resale to the public. Sales of substantial amounts of the
Common Stock (including through the issuance of such shares in connection with
future acquisitions), or the availability of such shares for sale, may adversely
affect the prevailing market price for the Common Stock and could impair the
Company's ability to obtain additional capital through an offering of its equity
securities. See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting."
Potential Adverse Impact of Issuance of Preferred Stock; Antitakeover
Effect of Charter and Bylaw Provisions and Massachusetts Law. The Company's
Board of Directors has the authority to issue up to 500,000 shares of Preferred
Stock and to fix the rights, preferences, privileges and restrictions of such
shares without any further vote or action by the Company's stockholders.
Although the Company has no current plans to issue shares of Preferred Stock,
the potential issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. In addition, certain provisions of the Company's
corporate charter and bylaws and of Massachusetts law may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which certain stockholders may deem
to be in their best interests). See "Description of Capital Stock."
Absence of Dividends. The Company has never declared or paid cash dividends
on the Common Stock and does not anticipate paying cash dividends in the
foreseeable future. In addition, the terms of the Company's credit facility with
its bank prohibit the payment of dividends. Furthermore, any future decision
with respect to dividends will depend on future earnings, future capital needs
and the Company's operating and financial condition, among other factors.
Dilution. The Offering involves immediate and substantial dilution to new
investors in the net tangible book value per share of their Common Stock. At the
assumed initial public offering price of $10 per share, investors in the
Offering will incur dilution of $6.18 per share. At March 31, 1997, 208,214
shares of Common Stock were subject to outstanding stock options at a $0.66
weighted average exercise price. To the extent these options and certain
outstanding warrants are exercised, further dilution may be experienced. See
"Dilution."
10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,375,000 shares of
Common Stock offered hereby (at an assumed initial public offering price of
$10.00 per share, after deducting the estimated underwriting discount and
offering expenses) are estimated to be $12,152,500 ($14,050,000 if the
Underwriters' overallotment option is exercised in full).
The Company intends to use the net proceeds of the Offering to repay its
outstanding indebtedness to its senior lender ($6,100,000 at March 26, 1997) and
its outstanding indebtedness ($2,580,342 at March 26, 1997), including accrued
interest, to its principal stockholder, SSPR, L.P., and for working capital and
general corporate purposes. The Company's credit facilities are described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- New Credit Facilities." The indebtedness to SSPR, L.P. is
represented by demand notes with interest at 10%.
In addition, the Company considers on a continuing basis potential
acquisitions of technologies, businesses or product lines complementary to the
Company's business and may use a portion of the net proceeds for such
acquisitions. The Company has no present understandings, agreements or
commitments with respect to any such acquisitions.
Pending such uses, the Company expects to invest the net proceeds in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in the
foreseeable future. In addition, the Company's loan agreement with its
commercial bank prohibits the payment of cash dividends.
11
CAPITALIZATION
The following table sets forth, as of January 31, 1997, the capitalization
of the Company stated on a pro forma basis to reflect the Stock Splits, the
Indebtedness Conversion, the filing of Amended and Restated Articles of
Organization and the issuance of 109,500 shares of Common Stock to CR Management
Associates, L.P.("CRM") and stated on a pro forma as adjusted basis to reflect
the sale by the Company of the 1,375,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $10.00 per share and the
application of the net proceeds of the Offering as described in "Use of
Proceeds." The information in this table is qualified by, and should be read in
conjunction with, the financial statements and the notes thereto appearing
elsewhere in this prospectus.
JANUARY 31, 1997
----------------
PRO FORMA AS
PRO FORMA(1) ADJUSTED(2)
--------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Short-term obligations $ 4,267 $ 84
======= ========
Long-term obligations $ 345 33
Subordinated note to principal stockholder 2,050 --
Stockholders' equity:
Preferred Stock, $.01 par value, 500,000 shares authorized, no
shares issued or outstanding -- --
Common Stock, $.01 par value, 15,000,000 shares authorized;
1,821,457 shares issued and outstanding, pro forma;
3,196,457 shares issued and outstanding, pro forma as
adjusted (1),(2),(3) 18 32
Additional paid-in capital 2,979 15,118
Accumulated deficit (1,911) (1,911)
------ ------
Total stockholders' equity 1,086 13,239
----- ------
Total capitalization $ 3,481 $13,272
======= =======
- ---------------
(1) Presented on a pro forma basis to give effect to (i) the conversion of
$1.75 million of subordinated indebtedness to the principal stockholder
into 218,750 shares of Common Stock on March 17, 1997 and (ii) the issuance
of 109,500 shares to CRM as consideration for amending the management
agreement upon consummation of the Offering.
(2) Adjusted to reflect the sale by the Company of 1,375,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $10.00
per share, and the application of the net proceeds as described in "Use of
Proceeds."
(3) Excludes (i) 208,214 shares issuable upon the exercise of unvested
outstanding employee stock options with a $0.66 weighted average exercise
price, (ii) 600,000 shares reserved for issuance upon exercise of options
to purchase Common Stock under the Company's employee and outside director
stock plans, of which unvested options for 60,000 shares have been granted
at an exercise price equal to the initial public offering price, (iii)
237,175 shares reserved for issuance upon exercise of warrants held by the
Company's senior lender at an exercise price equal to 90% of the initial
public offering price and (iv) 137,500 shares issuable upon exercise of the
Representatives' Warrants. Includes 109,500 shares to be issued to CRM upon
consummation of the Offering. See "Management," "Certain Transactions" and
"Underwriting."
12
DILUTION
The pro forma net tangible book value of the Company at January 31, 1997 was
$(93,320), or ($0.05) per share of Common Stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities after giving effect to (i) the conversion of $1.75 million of
subordinated indebtedness to principal stockholder into 218,750 shares of Common
Stock that occurred on March 17, 1997 and (ii) the issuance of 109,500 shares of
Common Stock to CRM (as described in "Certain Transactions") divided by the
total number of shares of Common Stock outstanding on a pro forma basis. After
giving effect to the sale of the 1,375,000 shares of Common Stock offered by the
Company hereby, at an assumed initial public offering price of $10.00 per share
and after deducting the estimated underwriting discount and offering expenses,
the pro forma net tangible book value of the Company at January 31, 1997 would
have been $12,209,180, or $3.82 per share of Common Stock. This represents an
immediate increase in such pro forma net tangible book value of $3.87 per share
to existing stockholders and an immediate dilution of $6.18 per share to
investors purchasing shares in the Offering. The following table illustrates
this per share dilution:
Assumed initial public offering price per share $10.00
Pro forma net tangible book value per share before the
Offering $ (0.05)
Increase in net tangible book value per share attributable to
new investors 3.87
----
Pro forma net tangible book value per share after the Offering 3.82
----
Dilution per share to new investors $6.18
=====
The following table sets forth, as of March 26, 1997, on a pro forma basis
giving effect to the issuance of 109,500 shares of Common Stock to CRM (as
described in "Certain Transactions"), the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company, and the
average price paid per share by existing stockholders and to be paid by the
purchasers of the shares offered by the Company hereby (at an assumed initial
public offering price of $10.00 per share and before deducting the estimated
underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION
---------------- -------------------
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
Existing stockholders 1,821,457 57.0% $ 1,902,298 12.2% $ 1.04
New investors 1,375,000 43.0% 13,750,000 87.8% $10.00
--------- ---- ---------- ----
Total 3,196,457 100.0% $15,652,298 100.0%
========= ===== =========== =====
The foregoing tables assume no exercise of the Underwriters' overallotment
option. The foregoing tables exclude 208,214 shares of Common Stock issuable
upon exercise of outstanding employee stock options with a $0.66 weighted
average exercise price, and 237,175 shares issuable upon exercise of a warrant
held by the Company's senior lender with an exercise price equal to 90% of the
initial public offering price. To the extent these options and warrant are
exercised, there will be further dilution to new investors. The foregoing tables
include 109,500 shares to be issued to CRM as consideration for amending the
management agreement upon consummation of the Offering. See "Capitalization."
13
SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected financial data
of the Company. The statement of operations data for the year ended October 31,
1996 and the balance sheet data as of October 31, 1996 have been derived from
the Company's financial statements audited by Arthur Andersen LLP, independent
public accountants, which are included elsewhere in this prospectus. The
statement of operations data for the years ended October 31, 1994 and 1995 and
the balance sheet data as of October 31, 1995 have been derived from financial
statements audited by Richard A. Eisner & Company, LLP, independent public
accountants, which are included elsewhere in this prospectus. The statement of
operations data for the period from inception (July 13, 1993) to October 31,
1993 and the balance sheet data as of October 31, 1993 and 1994 have been
derived from financial statements audited by Richard A. Eisner & Company, LLP,
not included in this prospectus. The selected financial data as of January 31,
1997 and for the three months ended January 31, 1996 and 1997 have been derived
from the Company's unaudited financial statements which have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended January 31, 1997 are not
necessarily indicative of the results to be expected for the year. This data is
qualified by the more detailed financial statements and notes thereto included
elsewhere in this prospectus and should be read in conjunction therewith and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
FISCAL YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
----------- -----------
PERIOD FROM
INCEPTION
(JULY 13, 1993 TO
OCTOBER 31, 1993) 1994 1995 1996 1996 1997
----------------- ---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 1,641 $ 9,144 $ 11,372 $ 12,404 $ 2,029 $ 2,875
Cost of goods sold 1,148 5,569 7,030 7,585 1,276 2,031
---------- ---------- ---------- ---------- ---------- -----------
Gross profit 493 3,575 4,342 4,819 753 844
Operating expenses:
Product development and engineering -- 188 236 338 68 153
Selling and marketing 249 1,634 1,898 2,704 534 501
General and administrative 266 797 898 938 190 285
Amortization of intangible assets 170 500 681 533 165 43
---------- ---------- ---------- ---------- ---------- -----------
Total operating expenses 685 3,119 3,713 4,513 957 981
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations (192) 456 629 306 (204) (137)
Interest expense (80) (439) (555) (597) (134) (184)
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before provision (benefit)
for income taxes (272) 17 74 (291) (338) (321)
Provision (benefit) for income taxes -- (20) 16 -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) $ (272) $ 37 $ 58 $ (291) $ (338) $ (321)
========== ========== =========== =========== ========== ===========
Net income (loss) per common and common
equivalent share $ (0.13) $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
========== ========== ========== ========== ========== ===========
Weighted average common and common equivalent
shares outstanding(1) 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
========= ========= ========= ========= ========= =========
Supplemental net income (loss)(2) $ 305 $ (150)
========== ===========
Supplemental net income (loss) per common
and common equivalent share(2) $ 0.11 $ (0.05)
========== ===========
Supplemental weighted average common and
common equivalent shares outstanding(3) 2,721,891 2,812,815
========= =========
14
OCTOBER 31, JANUARY 31, 1997
-------------------------------- ---------------------
1993 1994 1995 1996 ACTUAL PROFORMA(4)
---- ---- ---- ---- ------ --------
(UNAUDITED)
-----------
BALANCE SHEET DATA:
Cash $ 6 $ 33 $ 34 $ 8 $ 4 $ 4
Working capital (deficit) (272) (364) (496) (964) (375) (375)
Total assets 4,479 5,414 6,234 9,665 10,174 10,174
Short-term obligations 1,595 2,255 2,685 4,425 4,267 4,267
Long-term obligations, less current portion 767 556 434 539 345 345
Subordinated note payable to principal stockholder 1,775 1,775 1,775 2,700 3,800 2,050
Stockholders' equity (deficit) (149) (113) (54) (343) (664) 1,086
- -----------
(1) Computed as described in Note 2(j) of Notes to Financial Statements.
(2) Supplemental net income (loss) and net income (loss) per common and common
equivalent shares gives effect to (i) the conversion of $1.75 million of
subordinated indebtedness to the principal stockholder into 218,750 shares
of Common Stock on March 17, 1997 for the periods ended October 31, 1996
and January 31, 1997 and (ii) the use of net proceeds of the Offering to
repay $1,189,463 and $2,337,200 at October 31, 1996 and January 31, 1997,
respectively, to the principal stockholder for all remaining outstanding
subordinated indebtedness and accrued interest thereon and to repay
$4,839,689 and $4,495,500 at October 31, 1996 and January 31, 1997,
respectively, to the Company's senior lender as if these events had
occurred at the beginning of each period. Supplemental net income (loss)
consists of net income (loss) decreased by the effect of reduced interest
expense associated with (i) and (ii) above. Supplemental net income (loss)
per common and common equivalent shares represents supplemental net income
(loss) divided by supplemental weighted average common and common
equivalent shares outstanding.
(3) Supplemental weighted average common and common equivalent shares
outstanding consists of the weighted average common and common equivalent
shares outstanding plus (i) shares issued upon conversion of $1.75 million
of subordinated indebtedness to the principal stockholder into 218,750
shares of Common Stock on March 17, 1997 and (ii) the number of shares of
Common Stock issued in the Offering (1,375,000 shares) to generate
$12,152,500 in net proceeds, at an assumed initial public offering price of
$10 per share, necessary to repay $2,337,200 of subordinated indebtedness
and accrued interest thereon to the principal stockholder and $4,495,500 to
the Company's senior lender.
(4) Presented on a pro forma basis to give effect to the conversion of $1.75
million of subordinated indebtedness to the principal stockholder into
218,750 shares of Common Stock upon the consummation of the Offering.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a designer, manufacturer and marketer of branded active
sports products. The Company currently offers five brands and over 40 models of
bodyboards, two brands and nine models of wakeboards and two brands and over 20
models of snowboards, as well as complementary sports apparel and accessories.
The Company was formed in July 1993 through the acquisition of the BZ bodyboard
product line from Packaging Industries, Inc. The Company has grown through
internal product development as well as through the acquisition of additional
product lines. The Company began selling snowboards in fiscal 1994 as a
distributor of two European snowboard brands and, through the acquisition of the
Spiral brand, began manufacturing snowboards in 1996. The Company developed its
own line of wakeboards and began manufacturing and selling wakeboards in fiscal
1996. The Company markets apparel, accessories and other products which leverage
the name recognition of its core products as well as its expertise in the use of
certain materials. The Company also markets spa covers, kickboards, exercise
mats and other products which leverage its knoweledge of foam materials.
The components of the Company's net sales by product line are as follows:
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------- -----------
PRODUCT LINE 1994 1995 1996 1996 1997
------------ ---- ---- ---- ---- ----
(UNAUDITED)
-----------
Bodyboards $7,408,000 $ 7,771,000 $ 6,809,000 $1,282,000 $ 1,071,000
Snowboards 111,000 926,000 873,000 130,000 221,000
Wakeboards(1) -- -- 1,517,000 71,000 553,000
Accessories 1,146,000 1,900,000 1,726,000 366,000 608,000
Other 479,000 775,000 1,479,000 180,000 422,000
------- ------- --------- ------- -------
$9,144,000 $11,372,000 $12,404,000 $2,029,000 $2,875,000
========== =========== =========== ========== ==========
===========
(1) Includes bindings
Cost of goods sold consists of materials, labor and manufacturing overhead.
The Company manufactures bodyboards in two leased facilities in California. The
cost of bodyboards is substantially impacted by the Company's ability to receive
favorable pricing for the primary component, polyethylene foam. The Company
began manufacturing snowboards and wakeboards in its Kirkland, Washington
facility in fiscal 1996. The Company was able to convert this facility from
snowboard manufacturing to wakeboard and snowboard manufacturing. The Company's
ability to manufacture both snowboards and wakeboards at this facility enables
it to spread the fixed cost of this facility over a larger number of production
units thereby reducing its per board manufacturing costs. Prior to establishing
its manufacturing facility, the Company purchased snowboards from contract
manufacturers for resale.
Gross profit varies by brand and by channel of distribution. Accordingly,
gross margin will vary each period depending on both the sales mix by brand and
by channel of distribution.
Product development and engineering expense consists of costs incurred to
develop, design and engineer new products and product enhancements. These costs
consist primarily of salary and related costs and outside consultant costs.
The Company sells its products in the United States primarily through a
network of independent sales representatives. Internationally, the Company sells
its products through a network of independent local distributors. Selling and
marketing expense includes costs incurred by the Company to establish brand
identity and support its brands in the market. The Company also incurs expenses
to support its sales representatives and distributors. These expenses include
the cost of internal sales and marketing personnel, advertising in dedicated
consumer magazines, sponsorship and attendance at major industry trade shows and
sponsorship of professional team riders.
16
General and administrative expense consists of salaries and related costs of
finance and administrative personnel, computer and communication costs,
liability insurance and management fees to CR Management Associates, L.P.
("CRM"). CRM is an affiliate of the Company's principal stockholder, and
provides the Company with various management consulting services, including
assistance in strategic planning, sales and marketing, acquisition strategy and
implementation, and financial and treasury planning. Management believes that
the consulting fees paid to CRM are comparable to those that would be payable to
an unaffiliated third party. The Company has, from time-to-time, used the
services of up to five employees of CRM. Upon the consummation of the Company's
proposed initial public offering, the agreement with CRM will be amended to
provide for a fixed term and an annual fee cap of $300,000. CRM will receive
109,500 shares of Common Stock as compensation for this amendment. Upon
consummation of the proposed initial public offering, the Company will record a
noncash charge of $1,095,000 representing the fair market value of the
securities to be issued to CRM.
Amortization of intangible assets consists of the write-off of intangible
assets over their estimated useful lives of 3-15 years (see Note 2(g) of Notes
to Financial Statements). The intangible assets were acquired as part of the
acquisition of the Company in 1993 and from subsequent product line
acquisitions. Based upon intangible asset balances as of October 31, 1996, the
Company expects amortization expense related to these intangibles to decrease in
future periods.
The Company experiences seasonal fluctuations in its operating results. In
fiscal 1996 the Company generated approximately 70% of its net sales from water
sports products. Sales of water sports products occur principally in the second
and third fiscal quarters. Because much of the Company's operating expenses are
fixed, seasonal fluctuations in net sales have resulted in operating losses in
certain quarters. The Company has historically incurred an operating loss in the
first and fourth quarters due to lower net sales from water sports products. The
Company also experiences fluctuations in its operating results due to weather
conditions.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales:
FISCAL YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
----------- -----------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.9 61.8 61.1 62.9 70.7
---- ---- ---- ---- ----
Gross profit 39.1 38.2 38.9 37.1 29.3
Operating expenses:
Product development and engineering 2.0 2.1 2.7 3.3 5.3
Selling and marketing 17.9 16.7 21.8 26.3 17.4
General and administrative 8.7 7.9 7.6 9.4 9.9
Amortization of intangible assets 5.5 6.0 4.3 8.2 1.5
--- --- --- --- ---
Total operating expenses 34.1 32.7 36.4 47.2 34.1
---- ---- ---- ---- ----
Income loss from operations 5.0 5.5 2.5 (10.1) (4.8)
Interest expense (4.8) (4.9) (4.8) (6.6) (6.4)
--- --- ---- ----- -----
Income (loss) before provision (benefit) for
income taxes 0.2 0.6 (2.3) (16.7) (11.2)
Provision (benefit) for income taxes 0.2 0.1 -- -- --
--- --- ---- ----- -----
Net income (loss) 0.4% 0.5% (2.3)% (16.7)% (11.2)%
=== === ==== ===== =====
Fiscal Quarter Ended January 31, 1997 compared to Fiscal Quarter Ended
January 31, 1996
Net sales. Net sales increased 41.7% to $2,875,000 in the first quarter of
fiscal 1997 from $2,029,000 in the first quarter of fiscal 1996. The increase of
$846,000 was primarily due to increased sales of the Company's wakeboards,
accessories and other product categories, partially offset by a 16.5% decline in
the sale of bodyboards. Bodyboard sales were negatively impacted by the
Company's decision to effect certain strategic realignments among three of its
distributors during the first quarter of fiscal 1997. Net sales for the
17
first quarter of 1997 included approximately $200,000 in sales of two
discontinued brands of snowboards which the Company had previously purchased for
resale prior to establishing its own snowboard manufacturing facility in
Kirkland, Washington.
Gross profit. Gross profit increased 12.1% to $844,000 in the first quarter
of fiscal 1997 from $753,000 in the first quarter of fiscal 1996. The increase
of $91,000 was primarily due to higher net sales for the period. Gross profit
for the first quarter of fiscal 1997 as a percentage of net sales was 29.3%
compared to 37.1% in the first quarter of fiscal 1996. The decrease in gross
profit as a percentage of net sales was partially due to the lower margins
realized on the close-out sales of imported snowboards. In addition, the decline
in bodyboard sales caused the Company to scale back levels of production at its
Madera and Oceanside, California manufacturing facilities. The lower production
rates resulted in idle manufacturing capacity and unfavorable manufacturing
variances during the first quarter of fiscal 1997.
Product development and engineering. Product development and engineering
expense increased 125% to $153,000 in the first quarter of fiscal 1997 from
$68,000 in the first quarter of fiscal 1996. The increase of $85,000 was
primarily due to design costs for new wakeboard products and start-up expense
for the Company's new multi-product manufacturing facility in Orlando, Florida.
Selling and marketing. Selling and marketing expenses were $501,000 in the
first quarter of fiscal 1997 as compared to $534,000 in the first quarter of
fiscal 1996. As a percentage of net sales, selling and marketing expenses
decreased to 17.4% in the first quarter of fiscal 1997 as compared to 26.3% in
the first quarter of fiscal 1996. The decrease in selling and marketing expenses
as a percentage of net sales was primarily the result of higher net sales for
the first quarter of fiscal 1997.
General and administrative. General and administrative expenses increased
50.0% to $285,000 in the first quarter of fiscal 1997 from $190,000 in the first
quarter of fiscal 1996. The $95,000 increase in general and administrative
expense was primarily due to increases in payroll and related benefits as the
Company continued to expand its administrative capabilities to manage the growth
of the business.
Amortization of intangible assets. Amortization of intangible assets in the
first quarter of fiscal 1997 was $43,000, a decrease of $122,000 from $165,000
of amortization expense for the first quarter of fiscal 1996. The decrease was
primarily due to certain intangible assets which were acquired in July 1993
becoming fully amortized during fiscal 1996.
Interest expense. Interest expense increased 37.3% to $184,000 in the first
quarter of fiscal 1997 from $134,000 in the first quarter of fiscal 1996. The
increase of $50,000 was primarily due to higher average debt borrowings in the
first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996.
Fiscal Year Ended October 31, 1996 compared to Fiscal Year Ended October
31, 1995
Net sales. Net sales increased 9.1% to $12,404,000 in fiscal 1996 from
$11,372,000 in fiscal 1995. The increase of $1,032,000 in fiscal 1996 was
primarily the result of wakeboard product sales which began in 1996. Sales of
bodyboard products decreased in fiscal 1996 from fiscal 1995 primarily due to
the Company's inability to fill certain orders as a result of delays in
receiving raw material from its principal foam supplier. This supplier
experienced problems in manufacturing commencing in March 1996. This delay
prevented the Company from meeting shipment targets and resulted in the
cancellation of a significant number of customer orders. The Company has
submittted a claim to its business interruption insurance carrier with respect
to losses incurred as a result of this delay, although there can be no assurance
that the Company will succeed in recovering such losses under this claim.
Bodyboard and snowboard sales in 1996 were also negatively impacted by the
increased strength of the U.S. Dollar against the Japanese Yen and French Franc.
Product sales to the Company's Japanese and French distributors are denominated
in U.S. Dollars. Sales of other products increased in fiscal 1996 from fiscal
1995 primarily due to an increase of approximately $430,000 in sales of camp and
exercise mats and the receipt of $250,000 of royalties from the license of the
Company's trademark for use in certain merchandise.
Gross profit. Gross profit increased 11% to $4,819,000 in fiscal 1996 from
$4,342,000 in fiscal 1995. The increase of $477,000 in fiscal 1996 was primarily
due to an increase in net sales. Gross profit as a percentage of net sales was
38.9% in fiscal 1996 as compared to 38.2% in fiscal 1995. The increase in gross
profit as a percentage of net sales was primarily due to an increase, as a
percentage of total net sales, in higher margin wakeboard and other product
sales and the $250,000 license fee discussed above.
18
Product development and engineering. Product development and engineering
expense increased 43.2% to $338,000 in fiscal 1996 from $236,000 in fiscal 1995.
The increase of $102,000 was primarily due to the development of wakeboard
products that were first introduced in the second quarter of fiscal 1996.
Selling and marketing. Selling and marketing expense increased 42.4% to
$2,704,000 in fiscal 1996 from $1,899,000 in fiscal 1995. The increase of
$805,000 was primarily due to selling and marketing expense related to the
introduction of wakeboard products in fiscal 1996. In addition, snowboard
selling and marketing expense increased in fiscal 1996 from fiscal 1995 due
primarily to the introduction of team rider sponsorships. Selling and marketing
expense increased to 21.8% of net sales in fiscal 1996 from 16.7% of net sales
in fiscal 1995.
General and administrative. General and administrative expense was $938,000
in fiscal 1996 and $898,000 in fiscal 1995. The Company has made a concerted
effort to control general and administrative expense despite the growth in
sales. The increase of $40,000 was due primarily to an increase in payroll and
related costs and professional fees. General and administrative expense
decreased to 7.6% of net sales in fiscal 1996 from 7.9% of net sales in fiscal
1995.
Amortization of intangible assets. Amortization of intangible assets
decreased 21.9% to $532,000 in fiscal 1996 from $681,000 in fiscal 1995, a
decrease of $149,000. The decrease in amortization expense resulted primarily
from a non-compete agreement becoming fully amortized during 1996.
Interest expense. Interest expense increased 7.6% to $597,000 in fiscal 1996
from $555,000 in fiscal 1995. The increase of $42,000 is primarily due to an
increase in average borrowings in 1996 from 1995.
Income tax expense. The Company had no federal or state income tax expense
in fiscal 1996 as it generated a net loss. In fiscal 1995, the Company had a
state income tax provision but had no federal tax liability due to the use of
net operating loss carryforwards.
Fiscal year Ended October 31, 1995 Compared To Fiscal Year Ended October
31, 1994
Net sales. Net sales increased 24.4% to $11,372,000 in fiscal 1995 from
$9,144,000 in fiscal 1994. The increase of $2,228,000 in fiscal 1995 was
primarily the result of snowboard product sales which began in 1995 through the
acquisition of the Spiral brand. Sales of accessories, and other products also
increased in fiscal 1995 from fiscal 1994 principally due to a full year's sales
of TracTop accessories.
Gross profit. Gross profit increased 21.5% to $4,342,000 in fiscal 1995 from
$3,575,000 in fiscal 1994. The increase of $767,000 in fiscal 1995 was primarily
due to an increase in net sales. Gross profit as a percentage of net sales was
38.2% in fiscal 1995 as compared to 39.1% in fiscal 1994. The decrease in gross
profit percentage in fiscal 1995 was due primarily to the introduction of
snowboards in 1995 which generated a lower gross margin percentage than
bodyboards.
Product development and engineering. Product development and engineering
expense increased 25.5% to $236,000 in fiscal 1995 from $188,000 in fiscal 1994.
The increase of $48,000 was primarily due to the hiring of bodyboard team riders
in fiscal 1995 who expend a certain percentage of their efforts in product
development.
Selling and marketing. Selling and marketing expense increased 16.2% to
$1,899,000 in fiscal 1995 from $1,634,000 in fiscal 1994. The increase of
$265,000 was primarily due to selling and marketing expense related to snowboard
products first introduced in fiscal 1995 as well as an increase in bodyboard
selling and marketing expense. Selling and marketing expense decreased to 16.7%
of net sales in fiscal 1995 from 17.9% of net sales in fiscal 1994 primarily due
to an increase in net sales.
General and administrative. General and administrative expense increased
10.4% to $898,000 in fiscal 1995 from $797,000 in fiscal 1994. The increase of
$101,000 in general and administrative expenses was primarily due to general
increases in expenses associated with growth as well as an increase in bad debt
expense in 1995. General and administrative expenses decreased to 7.9% of net
sales in fiscal 1995 from 8.7% of net sales in fiscal 1994 primarily due to an
increase in net sales.
Amortization of intangible assets. Amortization of intangible assets
increased 36.2% to $681,000 in fiscal 1995 from $500,000 in fiscal 1994. The
increase of $181,000 in amortization expense primarily relates to a full year of
amortization of intangible assets acquired in 1994 and amortization of
intangibles assets acquired in 1995.
19
Interest expense. Interest expense increased 26.4% to $555,000 in fiscal
1995 from $439,000 in fiscal 1994. The increase of $116,000 is primarily due to
an increase in average borrowings in 1995 from 1994.
Income tax expense. The Company had no federal income tax provision in 1995
and 1994 due to operating loss carryforwards. In fiscal 1995, the Company had a
state income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations in fiscal 1996 and the first quarter of
fiscal 1997 primarily through borrowings from various sources including its
principal stockholder and its bank. During the first quarter of fiscal 1997, the
Company borrowed $1,100,000 under a subordinated note to its principal
stockholder. The Company utilized cash in the first quarter of 1997 to fund
operating activities of $721,000, for the repayment of debt of $351,000 and for
purchases of property and equipment of $50,000. Cash used for operating
activities in the first quarter of fiscal 1997 consisted primarily of an
increase in accounts receivable. During fiscal 1996, net borrowings under the
revolving line of credit with a bank, the subordinated note payable to its
principal stockholder and capital leases were $1,600,000, $925,000 and $65,386,
respectively. The Company utilized the proceeds from these financings in fiscal
1996 to fund operating activities of $806,000, product line acquisitions of
$607,000 and capital equipment purchases of $986,000. Cash used for operating
activities in 1996 consisted primarily of increases in accounts receivable and
inventory of $736,000 and $1,380,000, respectively, partially offset by an
increase in accounts payable of $975,000. These increases reflect the impact of
the acquisitions of the Flite brand and QPI products in 1996 and the
introduction of wakeboard products in 1996. Capital expenditures in 1996 were
primarily attributable to the expansion of manufacturing capacity for wakeboards
and snowboards.
In fiscal 1995, the Company financed its operations primarily through cash
generated from operating activities of $487,000 and from financing activities of
$315,000. Cash was used for acquisitions of product lines and capital equipment
purchases of $168,000 and $633,000, respectively. Cash generated from operations
consisted primarily of the cash earnings of the Company partially offset by an
increase in accounts receivable.
The Company had a $3,800,000 subordinated note payable to its principal
stockholder at January 31, 1997 which is payable upon demand and which bears
interest at 10%. The Company has accrued $287,000 of interest payable on this
note as of January 31, 1997. The note is subordinated to bank borrowings and its
repayment is subject to repayment of outstanding bank debt. On March 17, 1997,
outstanding indebtedness of $1,750,000 to the principal stockholder was
converted into 218,750 shares of Common Stock. The Company intends to utilize
the proceeds of the Offering to repay the remaining balance of approximately
$2,200,000 in principal and $380,000 in interest outstanding on the subordinated
note.
At January 31, 1997, the Company had a revolving line of credit and term
loan agreement with a bank. The Company has entered into new credit facilities.
See "New Credit Facilities" below.
The Company has entered into various capital lease arrangements to finance
the purchase of capital equipment. These capital lease agreements require
monthly payments of approximately $16,000 including interest at rates ranging
from 9.0% to 16.7%.
The Company is a party to a management consulting agreement with CRM. The
fee payable under this agreement is $15,000 per month plus 1% of consolidated
net sales in excess of $12 million. During fiscal 1994, 1995 and 1996, the
Company paid CRM $180,000 per year. This agreement has been amended to provide
for different terms effective upon the consummation of the Offering. See
"Certain Transactions."
The Company requires capital to finance the growth of its operations,
including working capital, for capital expenditures and for the acquisition of
additional product lines. The Company estimates that cash required for capital
expenditures over the next twelve months is approximately $550,000. In addition,
the Company acquired a product line subsequent to January 31, 1997 which
required cash payments of $100,000. The Company believes that its current cash
flow from operations, its new credit
20
facilities and the anticipated net proceeds of the offering will be adequate to
meet its anticipated cash requirements, excluding cash expended for additional
product lines for at least the next 12 months although the Company's cash
requirements may change due to acquisitions or if its working capital
requirements are greater than expected. There can be no assurance that the
Company will be able to raise additional capital on terms acceptable to the
Company or on a timely basis if such need should occur.
The Company does not believe that inflation has had or is likely to have a
material impact on its results of operations or liquidity, although it is
difficult to accurately anticipate the effects of inflation.
NEW CREDIT FACILITIES
On March 26, 1997, the Company entered into new credit facilities with
Jackson National Life Insurance Company consisting of a $7 million revolving
credit facility, a $3.45 million term loan and a $30 million discretionary
acquisition facility (together, the "Credit Facilities"). The Credit Facilities
are secured by first priority liens on all of the assets of the Company and its
subsidiaries, if any. Furthermore, two of the Company's stockholders have
pledged their Common Stock as additional security for the loans.
The revolving credit facility provides for borrowings of up to a maximum of
$7 million. The interest rate payable on the revolving credit facility is a
floating rate equal to 30-day LIBOR plus 3.0%, as well as a 0.5% per annum
charge on the unused line. Borrowings under the revolving credit facility may be
used for general corporate purposes, including working capital requirements. The
Company may prepay borrowings under the revolving credit facility (subject to
certain conditions), and may reborrow (up to the maximum limit then in effect)
any amounts that are repaid or prepaid. The revolving credit facility terminates
on March 31, 2005, or earlier upon a change of control of the Company (as
defined), at which time all borrowings become due and payable.
The term loan is a $3.45 million eight-year loan due March 31, 2005, or
earlier upon a change of control of the Company (as defined). This loan will be
repaid from the proceeds of the Offering, and the Company will not be able to
re-borrow under this portion of the Credit Facilities.
The acquisition facility provides for up to $30 million to be advanced to
the Company to finance future acquisitions. Advances are subject to credit
approval by the lender. Therefore, no assurance can be given that any such
advances will be available to the Company. The acquisition facility terminates
on March 31, 2005, or earlier upon a change of control of the Company (as
defined).
The Credit Facilities also provide for certain fees to be paid to the
lender. In addition, at the closing of the Credit Facilities, the lender was
issued a warrant to purchase up to 187,175 shares of the Company's Common Stock
at a price to be fixed at 90% of the initial public offering price of the
Offering. Upon the consummation of the Offering, the senior lender will be
issued warrants to purchase an additional 50,000 shares of the Company's Common
Stock at 90% of the initial public offering price. The Company will amortize the
value of the warrants (estimated to be $887,000) over the eight-year term of the
credit facilities.
The Credit Facilities contain restrictions upon the Company's ability to
incur indebtedness, grant liens, make capital expenditures, enter into
acquisitions, mergers or consolidations; and dispose of assets; make dividend
payments, other restricted payments or investments. In addition, the Credit
Facilities require the Company to meet certain financial covenants, including
maintenance of minimum cash flow levels and of fixed charge coverage, interest
expense coverage and total indebtedness to cash flow ratios.
21
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for the nine fiscal quarters ended January 31, 1997. In the opinion
of the Company's management, this information has been prepared on the same
basis as the audited financial statements appearing elsewhere in this prospectus
and includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the unaudited quarterly results set forth herein.
The Company's quarterly results may fluctuate significantly in the future. See
"Risk Factors -- Seasonality; Fluctuations in Quarterly Operating Results."
QUARTER
ENDED
FISCAL YEAR ENDED OCTOBER 31, 1995 FISCAL YEAR ENDED OCTOBER 31, 1996 JANUARY 31,
---------------------------------- ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1997
-- -- -- -- -- -- -- -- ----
(IN THOUSANDS)
Net sales $1,933 $3,835 $3,417 $2,187 $2,029 $4,684 $3,929 $1,762 $2,875
Cost of goods sold 1,163 2,285 2,162 1,420 1,276 2,899 2,370 1,040 2,031
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit 770 1,550 1,255 767 753 1,785 1,559 722 844
Operating expenses:
Product development and
engineering 53 60 70 54 68 86 95 89 153
Selling and marketing 346 579 557 417 534 750 802 618 500
General and administrative 160 194 295 248 190 236 214 299 285
Amortization of intangible
assets 164 165 165 186 165 160 144 63 43
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 723 998 1,087 905 957 1,232 1,255 1,069 981
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations 47 552 168 (138) (204) 553 304 (347) (137)
Interest expense (127) (149) (142) (137) (134) (119) (203) (141) (184)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes (80) 403 26 (275) (338) 434 101 (488) (321)
Provision (benefit) for
income taxes -- -- -- 16 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $ (80) $ 403 $ 26 $ (291) $ (338) $ 434 $ 101 $ (488) $ (321)
====== ====== ====== ====== ====== ====== ====== ====== ======
The following table sets forth the quarterly financial data for the periods
indicated as a percentage of net sales:
QUARTER
ENDED
FISCAL YEAR ENDED OCTOBER 31, 1995 FISCAL YEAR ENDED OCTOBER 31, 1996 JANUARY 31,
---------------------------------- ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1997
-- -- -- -- -- -- -- -- ----
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.2 59.6 63.3 64.9 62.9 61.9 60.3 59.0 70.6
---- ---- ---- ---- ---- ---- ---- ---- ----
Gross profit 39.8 40.4 36.7 35.1 37.1 38.1 39.7 41.0 29.4
Operating Expenses:
Product development and
engineering 2.7 1.6 2.0 2.5 3.4 1.8 2.4 5.0 5.3
Selling and marketing 17.9 15.1 16.3 19.1 26.3 16.0 20.4 35.1 17.4
General and administrative 8.3 5.1 8.6 11.3 9.4 5.0 5.4 17.0 9.9
Amortization of intangible
assets 8.5 4.3 4.8 8.5 8.1 3.4 3.7 3.6 1.5
---- ---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 37.4 26.1 31.7 41.4 47.2 26.2 31.9 60.7 34.1
Income (loss) from operations 2.4 14.3 5.0 (6.3) (10.1) 11.9 7.8 (19.7) (4.7)
Interest expense (6.6) (3.9) (4.2) (6.3) (6.6) (2.5) (5.2) (8.0) (6.4)
Income (loss) before provision
(benefit) for income taxes (4.2) 10.4 0.8 (12.6) (16.7) 9.4 2.6 (27.7) (11.1)
Provision (benefit) for
income taxes 0.0 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0
---- ---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) (4.1)% 10.4% 0.8% (13.3)% (16.7)% 9.4% 2.6% (27.7)% (11.1)%
==== ==== === ===== ===== === === ===== =====
The Company's net sales and operating results are subject to quarterly and
seasonal fluctuations. As discussed previously, the Company has experienced
lower net sales and operating losses in the first and fourth fiscal quarters due
to the seasonality of water sports products. In addition, the Company is
22
susceptible to quarterly fluctuations due to material shortages, problems at key
suppliers, weather conditions and the impact of foreign currency exchange rates.
The Company's expense levels are based, in part, on its expectation of future
net sales. Therefore, if net sales levels are below expectations, the Company's
operating results are likely to be adversely affected. In addition, a high
percentage of the Company's expenses are fixed in the short-term and significant
fluctuations in revenue could adversely impact operating results from quarter to
quarter.
Net sales for the fourth quarter of fiscal 1996 were $1,762,000, a decrease
of 19.4% from net sales for the comparable quarter in fiscal 1995. This decline
in net sales in comparable fourth quarters in 1996 and 1995 is due to a decrease
in sales of bodyboards and snowboards partially offset by wakeboard sales which
began in fiscal 1996. The decrease in bodyboard sales was primarily due to the
impact of the strengthening U.S. Dollar against the Japanese Yen and French
Franc on Japanese and French sales as well as the timing of certain shipments.
The decrease in snowboard sales was primarily due to the impact of the
strengthening U.S. Dollar against the Japanese Yen and French Franc on Japanese
and French sales, the lack of snow in Southern California and the impact of an
oversupply of snowboards on demand for the Company's products.
See "Overview" for a description of a non-cash charge to be recorded upon
consummation of the Offering.
Impact of Inflation
Increases in the inflation rate are not expected to materially impact the
Company's operating expenses.
23
BUSINESS
INTRODUCTION
The Company is a designer, manufacturer and marketer of branded active
sports products. The Company currently offers five brands and over 40 models of
bodyboards, two brands and nine models of wakeboards and two brands and over 20
models of snowboards, as well as complementary sports apparel and accessories.
In the United States, the Company sells its products primarily through a network
of over 100 independent sales representatives working with the Company's
internal sales and technical specialists, and internationally through a network
of over 30 distributors. The Company's domestic customers include over 1,000
specialty shops, 20 national and regional sporting goods retail chains and over
20 mass merchandisers. The Company's growth strategy is based in part upon
offering additional products and brands through its existing distribution
channels.
The Company implements a multi-sport, multi-brand market segmentation
approach in which each product brand is sold only into its designated channel of
distribution, thereby protecting the integrity of each brand and the longevity
of its unique market position. The Company's multi-brand strategy is to
initially develop premium sports products for dedicated consumers, and to
subsequently introduce multiple brands with multiple price points and
performance characteristics. High, middle and lower range bodyboard brands are
marketed to specialty shops, sporting goods retailers and mass merchandisers,
respectively. The Company currently markets high and middle range wakeboard and
snowboard brands through specialty shops and sporting goods retailers,
respectively.
Unlike many other active sports companies that purchase products for resale,
the Company has developed broad process manufacturing expertise and is an
integrated manufacturer of all of its own bodyboards, wakeboards and snowboards.
In addition, the Company believes that it is the largest manufacturer of
bodyboards in the United States. The Company's manufacturing expertise and
integrated manufacturing operations have enabled it to be a low cost producer,
to become a leader in product innovation, to carefully maintain performance
features and quality control, and to quickly respond to market trends and
incorporate technological improvements.
INDUSTRY BACKGROUND
An increasing number of consumers are participating in active sports, which
generally require the purchase of non-team sports products. Active sports
products include those currently marketed by the Company -- bodyboards,
wakeboards and snowboards -- as well as in-line skates, skateboards, surfboards
and similar sports products. Bodyboards are surf riding boards that are shorter,
wider, smaller, lighter, more maneuverable and easier to learn than surfboards,
and can be used in a much broader range of locations and surf conditions. A
bodyboarder rides waves primarily lying prone on the board and is able to
complete a variety of aerial maneuvers. Wakeboards are towed behind a boat or
personal watercraft and are ridden standing sideways like a surfboard.
Wakeboards are more buoyant than water skis and allow the rider to perform a
wide range of aerial jumps and acrobatic tricks.
There has been significant recent growth in the active sports industry. The
Surf Industry Manufacturing Association projected that an estimated 1.75 million
Americans would actively (at least four times) surf in 1996, compared to 1.1
million people in 1992. Although these statistics reflect growth in the overall
surf industry, the Company believes that growth rates in the bodyboard segment
are similar to those of the broader surf industry. In addition, the Company
believes that wakeboarding is having the same effect on water skiing as
snowboarding has had on alpine skiing. According to the Water Sports Industry
Association, water ski participants have declined from 13.8 million in 1991 to
11.1 million in 1994, while sales of wakeboards have grown at a compound annual
rate of 58%. According to Snow Industries America, snowboard unit sales have
grown at an annual compound growth rate of 50% from 135,000 units in the
1992-1993 season to 456,000 in the 1995-1996 season.
The typical active sports enthusiast is a "dedicated consumer" who devotes
significant time, attention and disposable income to a chosen sport. Active
sports enthusiasts frequently become participants in multiple sports that are
appropriate for different seasons and spend a significant portion of their
recreational budget on active sports equipment. Participants in active sports
are principally in the 10 to 24 year old age
24
bracket, which numbers approximately 55 million people in the United States and
is expected to grow over the next ten years to 62 million people, representing a
growth rate of twice the rest of the population. The Company believes that
international participation in active sports also is growing rapidly.
The active sports industry is highly fragmented, and consists of many
sporting goods companies that market multiple brands in one or more active
sports markets. There are also multiple channels of distribution in this market,
principally consisting of specialty shops, which market high-performance product
lines, sporting goods retailers which market middle- and high-performance
product lines, and mass merchandisers, such as nationwide chain stores and
membership clubs, which market lower-cost, lower-performance product lines.
BUSINESS STRATEGY
The Company's business strategy is to focus on active sports products and
markets where the Company believes it can establish itself as a market leader or
significant participant at multiple price points. The following are the key
components of this business strategy:
Multi-Brand Approach to Market Segmentation. The Company has implemented
a multi-brand product approach pursuant to which, as a market matures, the
Company increases its market penetration by offering not only premium
products but also a broad range of products with multiple price points and
performance characteristics. For example, high, middle and lower range
bodyboard brands are marketed to specialty shops, sporting goods retailers
and mass merchandisers, respectively. The Company markets wakeboard and
snowboard brands through specialty shops and sporting goods retailers. This
multi-brand approach preserves the integrity of each brand within its
designated distribution channel and promotes retailer loyalty by protecting
against brand erosion from other distribution channels.
Multi-Sport Approach. Active sports are subject to consumer trends and
seasonal factors. To mitigate the impact of such factors, the Company has
diversified its product lines from bodyboards to wakeboards and snowboards.
For example, the Company introduced snowboards to provide revenue during the
winter season. The Company has grown, and intends to continue to grow,
through a combination of brand acquisitions and development in these and
other growing active sports markets.
Integrated Low-Cost Manufacturing. Unlike many other companies that
purchase active sports products for resale, the Company is an integrated
manufacturer of all of its own bodyboards, wakeboards and snowboards, as
well as all principal subassemblies. The Company is the largest manufacturer
of bodyboards in the United States, and has developed broad process
technology expertise, with particular expertise in foam-based and
compression molded plastics manufacturing and other materials technologies.
The Company manufactures multiple products in the same plant and is able to
conduct year-round research and development at its facilities. This
manufacturing expertise and integrated manufacturing operations have enabled
the Company to be a low cost producer, to become a leader in product
innovation, to carefully maintain performance features and quality control,
and to quickly respond to market trends and incorporate technological
improvements.
Product Innovation. The Company believes that innovative product design
and styling are important to the Company's ability to meet changing consumer
needs. The Company believes it is a leader in innovation in the products
that it offers, and many of its products have been designed with distinctive
features for consumers who demand high performance and advanced
capabilities. For example, in 1996 the Company introduced Green Cell foam
for its bodyboards which, due to its cell structure, provides enhanced
performance and appearance. The Company also introduced the first
skateboard-shaped wakeboard and invented a lightweight boot binding system
with half the weight of some competitive bindings.
Worldwide Distribution Network. The Company has established distribution
networks for its products both in the U.S. and internationally. Products are
sold through a combination of over 100 independent sales representatives,
twelve Company sales personnel and over 30 distributors. Each product is
carefully matched to a particular distribution channel. The Company believes
that the strength of its distribution network, combined with the Company's
well-recognized brand names and reputation for developing innovative
products, have allowed it to quickly introduce new products. The Company's
new product and branding strategies are based in part upon offering
additional products through its existing distribution channels.
25
GROWTH STRATEGY
The Company has grown through internal product development and through six
product line acquisitions since 1993. The Company's growth strategy is to become
a leading provider of active sports products in each of its target markets by
(i) identifying growth segments within the active sports industry and entering
these markets through either the introduction or acquisition of new products;
(ii) extending the Company's well recognized brand names into new global
markets; (iii) fully utilizing the Company's extensive distribution network
through increased product penetration; and (iv) pursuing strategic acquisitions.
Internal Growth. The Company believes that its established distribution
network and reputation for developing and introducing high quality innovative
products has enabled and will continue to enable the Company to introduce new
products to its established customer base. The Company's strategy of initially
developing premium products for dedicated consumers, and subsequently
introducing multiple brands with multiple price points, has enabled the Company
to grow while preserving the reputation of its premium brands. The Company is
constantly researching and evaluating new global markets into which its brands
can be introduced.
Strategic Acquisitions. The Company has made a number of strategic product
line and brand acquisitions which have expanded its range of active sports
products and increased the number of markets in which the Company operates. The
acquisitions consist of the following:
Madrid. This bodyboard company was acquired in 1993 to provide a branded
bodyboard product line to warehouse price clubs. Since the acquisition,
sales of this line have increased over 300%.
TracTop. This surf accessory company was acquired in 1994 to leverage the
Company's knowledge and skills in the surf products industry while adding a
new product category. The Company has successfully expanded this product
line to include surfboard and bodyboard bags and other related accessories.
Spiral. This snowboard brand was acquired in 1995 to provide the Company
with a snowboard brand for the sporting goods retailer market. Spiral has
been a recognized snowboard brand for almost seven years, and its snowboards
are known for their lightweight design.
QPI. This product line consists of bodyboards, kickboards and camp mats
and was acquired in 1996 to leverage the manufacturing expertise of the
Company and its distribution network.
Flite. This snowboard brand was acquired in 1996 to give the Company a
snowboard brand for the specialty shop market. The Flite brand, which has
been in existence for over 20 years, also increased the Company's molding
capabilities and added another snowboard manufacturing technology.
FM. This wakeboard brand was acquired in 1997 to provide the Company with
an established, well-recognized brand for the sporting goods retailer
market.
Consistent with its growth strategy, the Company continuously evaluates
acquisition opportunities where the Company has a strategic advantage. Ideal
acquisition candidates include companies, product lines or brands that: (i) are
supported by a dedicated consumer base served by dedicated consumer
publications; (ii) have a reputation for quality and performance; (iii) have
potential for growth; or (iv) can be manufactured at the Company's facilities or
utilize raw materials or technology that is within the Company's special
expertise. The Company frequently becomes aware of acquisition opportunities
because it is an established active sports marketer and has successfully
integrated into its business several acquired product lines and employees of
acquired businesses.
26
TECHNOLOGY AND DESIGN
The Company has developed particular expertise in foam-based and compression
molded plastics manufacturing and other materials technologies. The Company
believes it is a leader in product innovation, and many of its products have
been designed with distinctive features for consumers who demand high
performance and advanced capabilities. The key components of the Company's
technology expertise and innovative designs include:
Extrusion Technology. The Company acts as its own source of
extrusion-coated materials and manufactures its own extruded products. The
Company has developed unique blends of copolymer materials with multiple
density resins and high molecular strength for the bottoms and rails of its
bodyboards. This technology creates superior flex characteristics that allow
the rider to pull up on the nose of the board trapping air between the board
and the water, which increases the speed and maneuverability of the board.
Foam and Other Materials Expertise. The Company's materials expertise has
enabled it to develop proprietary materials not available to competitors.
The Company often works with foam manufacturers to create unique materials.
This expertise has allowed the Company to achieve a higher standard of
performance in its boards.
Proprietary Lamination Technology. The Company has created its own method
for laminating foam and has successfully eliminated the use of glue to bond
different foams together. Machinery developed by the Company laminates
multiple densities of materials together, which changes a lightweight foam
core into a high performance product.
Proprietary Compression Molding Techniques. Using proprietary compression
molding techniques, the Company has created lightweight,
improved-performance wakeboards and snowboards. Its most recent innovation
involves using high pressure to produce hermetically sealed pinch lines on
the infinitely variable surfaces of a complex curve. This technique
increases the life of the board and creates a more consistent flex pattern
that improves performance.
The following diagrams depict certain elements of the technologies used
in the Company's products.
BODYBOARD WRAP-UP RAIL CONSTRUCTION SPIRAL SNOWBOARD AND
WAKEBOARD CAP CONSTRUCTION
SEAM/TOP DECK TOPSHEET
MEETS BOTTOM STAINLESS STEEL INSERT
GRAPHIC FIBERGLASS
HIGH-DENSITY FOAM POLYMATRIX CORE
TOP DECK
FOAM CORE
HIGH-DENSITY INNER FOAM LAYER FIBERGLASS
PRINTED FILM/ STEEL EDGE
BOTTOM GRAPHIC LOW FRICTION BASE
BODYBOARD EXTRUDED SLICK-SKIN FLITE SNOWBOARD
BOTTOM CONSTRUCTION SANDWICH CONSTRUCTION
HIGH-DENSITY FOAM TOPSHEET
TOP DECK STAINLESS STEEL INSERT
FIBERGLASS
HIGH-DENSITY ABS
FOAM TAIL PIECE VERTICALLY LAMINATED
ASPEN WOOD CORE
HIGH-DENSITY FIBERGLASS
FOAM CORE STEEL EDGE
LOW FRICTION BASE
HIGH-DENSITY
FOAM INNER DECK
SLICK BOTTOM
HIGH-DENSITY
FOAM RAIL
27
PRODUCTS
The Company designs, manufactures and markets a full line of bodyboards,
wakeboards, snowboards and accessories for the active sports industry. The
following chart shows the suggested retail price range and the primary
distribution channel for each of the Company's product lines.
SPORTING SUGGESTED
SPECIALTY GOODS MASS RETAIL
BRANDS SHOPS RETAILERS MERCHANDISERS PRICE($)
BODYBOARDS
BZ X 75-300
R-Lite X 90-175
A-Tach X 40-200
Madrid X 30-60
Wave Master X 10-30
WAKEBOARDS
Liquid Force X 250-600
FM X 200-400
SNOWBOARDS
Flite X 350-550
Spiral X 250-350
ACCESSORIES AND APPAREL X X 10-100
OTHER PRODUCTS X X X 10-100
BODYBOARDS
Bodyboards are surf riding boards that are shorter, wider, smaller, lighter,
more maneuverable and easier to learn than surfboards, and can be used in a much
broader range of locations and surf conditions. A bodyboarder rides waves
primarily lying prone on the board and is able to complete a variety of aerial
maneuvers. Bodyboards range in price from approximately $10 to $300, versus $600
to $800 for a surfboard. The Company's experience has been that many bodyboard
enthusiasts purchase up to three or four bodyboards per year. Bodyboards vary
widely in complexity of design and construction and resulting performance and
endurance characteristics, and range from a simple piece of exposed foam, to
boards with a foam core plus a "top deck" or skin, to a foam core with a top and
bottom deck with an extra bottom layer or "slick skin." The extra layers prolong
the life of the board, enhance performance and give a faster and more
controllable ride. The Company extrusion coats the bottoms of its high-end
boards and uses no glue in their assembly, which results in enhanced performance
and durability.
The Company designs and manufactures a full line of bodyboards with a
variety of performance characteristics and prices. The Company has five brands
and over 40 models of bodyboards. The Company has been selected by an Hawaiian
lifeguard association to exclusively develop and market specialized rescue
boards. The Company also works with lifeguard associations around the world to
develop specialized boards for their rescue needs.
BZ ProBoards. BZ ProBoards are the Company's highest performance
bodyboards and incorporate the industry's most advanced technology. Every
board is hand shaped and finished in the Company's plant in Oceanside,
California using proprietary technology to produce a multi- density extruded
slick skin that provides the rider with a board of superior stiffness with
low weight and a controlled performance ride. The 33 models of BZ ProBoards
are sold exclusively through more than 1,000 surf shops in 20 countries.
28
R-Lite. The Company created the R-Lite brand in 1990 to fill a need for
extremely lightweight, high-end performance boards. These boards are less
durable than BZ ProBoards. Like BZ ProBoards, they are sold exclusively
through specialty shops.
A-Tach. A-Tach bodyboards are the Company's mid-range bodyboards in price
and performance. Using patent pending, co-extrusion film-to-foam technology,
and made from many of the same premium materials as BZ ProBoards, A-Tach
boards are known for their light weight and high flex characteristics, which
makes them attractive to the intermediate level rider. A-Tach bodyboards are
sold to sporting goods stores. Among A-Tach's largest customers are Sports
Chalet, Sports Authority, SportMart and Oshmans.
Madrid/Wave Master. The Company acquired the Madrid line to gain an
additional export brand of bodyboard and to provide a line suitable for
warehouse clubs. The Wave Master brand is sold to chain stores and mass
merchandisers.
Net sales of bodyboards in fiscal 1996 accounted for approximately 55% of
the Company's total net sales.
WAKEBOARDS
Wakeboards are towed behind a boat or personal watercraft and are ridden
standing sideways like a surfboard. Wakeboards are more buoyant than water skis
and allow the rider to perform a wide range of aerial jumps and acrobatic
tricks. Wakeboards can also be towed behind a relatively low power boat or a
personal water craft (such as a Jet Ski(R)) allowing them to be used by a
broader range of consumers. Wakeboards range in price from approximately $130 to
$800, versus $90 to $700 for water skis. High performance wakeboards require
precision engineering and precise tolerances. The Company believes that these
manufacturing requirements can serve as a barrier to companies seeking entry to
the high performance segment of the wakeboard market.
The Company designs and manufactures wakeboards under its Liquid Force and
FM brands.
Liquid Force. The Company developed this brand internally through the
combined efforts of its research and development and marketing departments.
Liquid Force uses advanced materials and unique construction techniques
providing competitive performance characteristics, including multi-concave
venturi hulls and low profile rails. These boards were used by three of the
top ten riders in the 1996 World Championships. In addition, the Company has
recently introduced the first wakeboard designed specifically for women, a
specialty board designed for competition and tricks, and a full line of
performance clothing. The Company's seven models of Liquid Force wakeboards
are sold domestically primarily through over 200 specialty shops, including
snow and surf, water ski and skate stores, and internationally through
distributors in more than 20 countries.
FM. The Company acquired the FM brand to expand its distribution of high
quality wakeboards into sporting good retailers and to marine and ski board
catalogues. The Company plans to expand its selection of boards available
under the FM brand as well as the brand's international distribution.
The Company also has introduced high performance wakeboard bindings under
the trademarks Suction, High Suction and Super Suction, which are extremely
lightweight. These bindings use durable thermoplastics rather than rubber,
which permit the use of vivid graphics. These bindings range in price from
$130 to $260. The Company offers both brands of bindings on its Liquid Force
and FM boards.
Net sales of wakeboards and bindings in fiscal 1996 accounted for
approximately 12% of the Company's total net sales.
29
SNOWBOARDS
In 1994, the Company entered the snowboard market with distribution
agreements with two Austrian snowboard manufacturers, F2 and Duotone. The
Company acquired its Spiral brand and its compression molding technology in 1995
and the Flite brand in 1996. These brands are targeted at the mid-range and
premium markets, respectively. The Company currently sells more than 20 models
of snowboards.
Performance characteristics in snowboards vary widely and are dependent on
the materials used in their construction, shape and weight. The Company has
developed two specific technologies, one for full cap construction and one for
laminated (or sandwich) construction. The Company believes that its snowboard
manufacturing technologies are among the most advanced in the world and that its
snowboards are among the lightest in the industry. In recent East Coast
competitions, the Company's amateur and professional teams placed first through
third in multiple competition categories.
The Company's snowboard brands are as follows:
Flite. Flite snowboards, introduced by the Company in 1997 for the
1997/1998 season, incorporate advanced technology and are positioned at the
high performance, free-style segment of the snowboard market. The Company
manufactures its Flite snowboards utilizing a vertically laminated wood core
with triaxially braided fiberglass resulting in outstanding torsion control
(flex) characteristics. The line of ten boards includes two new professional
rider endorsed boards.
Spiral. The Company manufactures and markets the Spiral brand to
mainstream riders who require a quality board at a competitive price.
Because of their performance characteristics, these snowboards are also
suitable for advanced snowboarders. Spiral's hermetically sealed cap
construction boards feature a matrix core which extends the life of the
board, have low distortion ratios, and are extremely lightweight. The Spiral
line features seven models of boards.
BZ. In 1995 the Company introduced BZ snowboards into Japan, successfully
leveraging the brand loyalty of its high quality bodyboards. BZ snowboards
are designed to be lightweight, facilitating use by lighter riders. This
line consists of five models and are marketed exclusively in Japan.
Net sales of snowboards in fiscal 1996 accounted for approximately 7% of
the Company's total net sales.
ACCESSORIES AND APPAREL
The Company designs, manufactures and markets related accessories for its
bodyboard, wakeboard and snowboard products. Such accessories include carrying
and storage bags which protect boards from dents, scrapes and high temperatures
during transport; TracTop traction enhancing pressure-sensitive stick-ons and
coatings which increase a rider's stability; surf fins for bodyboarders; leashes
used by riders to maintain contact with their boards; and other products used in
the maintenance and care of surfboards.
The Company has designed and markets performance-related clothing under its
BZ, A-Tach and Liquid Force brands. The Company sells its apparel through the
Company's existing channels of distribution for display alongside its existing
hardgoods products in retail outlets. The Company's objective for its apparel
line is to capitalize on the strong personal association that the core group of
enthusiasts have for their chosen sport and brand. Management believes that the
dollar volume of softgoods in the bodyboard, wakeboard and snowboard markets is
at least 50% of total sales while it represented less than 1% of the Company's
1996 revenues. In 1996, the Company entered into a licensing agreement with a
Japanese company that markets high-end apparel under the BZ name to Japanese
department stores.
Net sales of accessories and apparel in fiscal 1996 accounted for
approximately 14% of the Company's total net sales.
30
OTHER PRODUCTS
The Company also manufactures and sells a series of products which
capitalize on its expertise in foam technology and manufacturing or which
leverage its existing relationships with distributors and retailers. These
products accounted for approximately 12% of the Company's total net sales in
fiscal 1996.
SALES AND DISTRIBUTION
Each of the Company's brands is developed for a specific target market and
distribution channel with appropriate price points, features and performance
characteristics. The Company uses this marketing and distribution strategy to
protect the integrity of its brands. The Company believes that its track record
in protecting its brands and distribution channels is an important competitive
advantage. The Company's new product and branding strategies are based in part
upon offering additional products through its existing distribution channels.
The three main retail channels of distribution for the Company's products in the
United States are as follows:
Specialty Shops. These retailers, which include snow and surf, water ski
and skate stores, sell the Company's premium bodyboard, snowboard and
wakeboard brands, including BZ ProBoards and R-Lite bodyboards, Liquid Force
wakeboards and Flite snowboards. The Company's products are sold through
more than 1,000 specialty shops. Specialty shops cater to dedicated
consumers looking for performance products, sports enthusiasts and more
experienced riders.
Sporting Goods Retailers. These stores sell the Company's A-Tach
bodyboards, FM wakeboards and Spiral snowboards. Sporting goods retailers
target mainstream consumers looking for value and performance. Sporting
goods retailers that sell the Company's products include Big Five, Oshmans,
SportMart, Sports Authority and Sports
Chalet.
Mass Merchandisers. These retailers, which include large chain stores and
membership clubs, offer the Company's entry-level brands, such as Wavemaster
and Madrid bodyboards. These retailers sell primarily to consumers motivated
by price rather than design and performance. Mass merchandisers that sell
the Company's products include BJ's Wholesale Club, Costco, Kmart, Sam's
Club and Walmart.
In the United States, the Company sells its brands primarily through a
network of over 100 independent sales representatives chosen for their expertise
in specific retail channels. The sales representatives collaborate with the
Company's internal team of sales and technical specialists. Internationally, the
Company sells its products through a network of over 30 distributors in 33
countries. The Company works closely with its international distributors to help
ensure that its policies of limited distribution and market segmentation are
followed worldwide.
MARKETING
The Company markets by extensive advertising in "consumer enthusiast"
magazines. The Company has made a significant investment in professional team
riders in all sports for all advertised brands. The Company has endorsement
relationships with well-known riding professionals who compete around the world
using products within each product category. Brands are featured at all major
trade shows. The Company conducts numerous special event marketing activities in
all global markets, including on-snow demonstrations, water sports clinics and
demonstrations featuring team riders and local enthusiasts.
PRODUCT DEVELOPMENT
The Company's goal is for 25% of its sales to come from products that are
less than four years old. The Company strives to be a technological leader in
each of its product lines by drawing on the expertise of its internal product
development team. In addition, the Company has integrated its professional team
31
riders into its product development process, allowing regular testing of both
prototypes and finished products. The Company's integrated manufacturing
facilities allow it to rapidly produce, test and bring to market production
models incorporating new designs. In fiscal 1994, 1995 and 1996, the Company
spent approximately $188,000, $236,000 and $338,000, respectively, on research
and development.
MANUFACTURING AND SUPPLIERS
The Company manufactures virtually all of its products and their principal
subassemblies. Bodyboards are manufactured at its California and Florida
manufacturing facilities, and wakeboards and snowboards are manufactured at the
Company's Washington State manufacturing facility. By manufacturing both
wakeboards and snowboards in the same plant, the Company is able to leverage its
proprietary process technology and manufacturing techniques to enhance the
performance characteristics of its product lines. The Company believes that its
internal manufacturing capabilities provide it with a competitive advantage over
companies that outsource their products. The Company believes that its cost of
these goods is generally 20%-30% less than most of its competitors and that its
ability to work year round on research and development allows the Company to be
a leader in innovation. By using its manufacturing facilities to make products
in more than one sports season and by selling in both hemispheres, plant
utilization is maintained throughout most of the year. Continuous capital
investment in tools and equipment, as well as manufacturing expertise, have
allowed the Company to increase levels of production and improve manufacturing
efficiencies. Capital expenditures for the 1996 fiscal year were approximately
$1.6 million.
Each of the Company's products undergoes quality assurance testing
throughout the manufacturing process. The Company is able to produce uniform
products as a result of its integrated manufacturing process and a continuous
quality assurance program.
The Company purchases component materials from third parties. Most component
materials, other than polyethylene foam, are available from a broad range of
suppliers in the United States. The polyethylene foam used in the Company's
bodyboards is available from only three suppliers in the United States. Because
it is one of the largest users of polyethylene foam in the United States, the
Company believes that it receives favorable pricing for the foam it purchases.
The Company has developed a close working relationship with two foam suppliers,
and has a supply contract with one of these suppliers that expires in June 1998.
During 1996 one vendor had a significant interruption to its manufacturing, as
well as quality problems. This caused the Company to sustain a loss of business
due to the consequential material shortages. The Company has submitted a claim
to its business interruption insurance carrier with respect to this loss
although there can be no assurance that the Company will succeed in recovering
under this claim. Any future interruption in the Company's ability to obtain
adequate supplies of polyethylene foam could have a material adverse effect on
its business. See "Risk Factors -- Manufacturing Risks" and "Risk Factors --
Dependence on Polyethylene Foam and Other Component Suppliers."
CUSTOMERS
In fiscal 1996, the Company's customers included over 1,000 specialty shops,
over 20 national and regional sporting goods retailers and over 20 mass
merchandisers. Tasker, Ltd., the Company's exclusive distributor in Japan,
accounted for approximately 11.5%, 15.5% and 11.4% of the Company's net sales in
fiscal 1994, 1995 and 1996, respectively. Costco, Inc. accounted for
approximately 10% of the Company's net sales for fiscal year 1994. No other
customer accounted for more than 10% of sales in 1994, 1995 or 1996.
COMPETITION
The active sports industry is highly competitive, with competition mainly
centering on product innovation, performance and styling, brand name
recognition, price, marketing and delivery. Competitors in each of the Company's
product lines include companies with a greater market share and companies with
greater brand recognition and financial, distribution, marketing and other
resources than the Company. In bodyboards, the Company competes principally
against Mattel, Inc. (Morey), and a number of small competitors. In wakeboards,
the Company competes principally against HO, Inc. (Hyperlite). In snowboards,
the dominant competitor is Burton Industries, Inc. There are several other
companies with significant market shares including K2, Inc. (K2), Morrow
Snowboards, Inc. and Ride,
32
Inc., and numerous other competitors. There are no technological or
manufacturing barriers to entry that would preclude a large ski or sporting
goods company or any other well-financed competitor from entering the Company's
markets. Each of these markets faces competition from other sports and leisure
activities, and sales of sports and other leisure products typically are
affected by changes in consumer preferences. See "Risk Factors -- Competition
and Product Innovation."
INTELLECTUAL PROPERTY
In the course of its business, the Company employs various trademarks, trade
names and service marks, including its logos, in the packaging and advertising
of its products. The Company is the owner of 20 registered trademarks, as well
as numerous foreign trademark registrations and unregistered trademarks. The
Company believes the strength of its service marks, trademarks and trade names
are of considerable value and importance to its business and intends to continue
to protect and promote them as appropriate. There can be no assurance, however,
that any of the Company's trademarks are enforceable or are otherwise capable of
protecting the goodwill associated with them. The loss of any significant mark
could have a material adverse effect on the Company.
The Company currently holds 12 United States patents and has filed four
patent applications, as well as various foreign counterparts. Included among
these patents are the Company's Rainbow Plank patent covering coloration
technology used to decorate its boards and its Slick Skins patent covering the
use of slick skins on the top deck of bodyboards. Although the Company believes
that such patents have some utility in maintaining the Company's competitive
position, it does not consider its patents to be material to its business. It is
the practice of the Company to require its employees involved in research and
product development activities to execute confidentiality and invention
assignment agreements.
The Company does not believe that it is infringing any intellectual
property rights of third parties, and except as described under "Legal
Proceedings," is not engaged in any intellectual property disputes. See "Risk
Factors -- Limited Protection of Intellectual Property."
EMPLOYEES
As of March 1, 1997, the Company employed 75 full-time employees and 235
part-time and seasonal employees, including five full-time employees in general
and administrative, 20 in sales, marketing and customer service, ten in product
engineering, research and development and 40 in manufacturing. The Company's
employees are not subject to a collective bargaining agreement, and the Company
considers its employee relations to be good. In addition, the Company engages
the services of over 100 professional team riders, most of whom are independent
contractors.
FACILITIES
The Company's headquarters are located in Hyannis, Massachusetts and consist
of approximately 10,000 square feet of office and general warehouse space. This
facility is used by corporate management and the customer service, accounting
and finance staff. The Company's Oceanside, California and Madeira, California
facilities consist of approximately 35,000 square feet and 42,000 square feet,
respectively, of leased plant, warehousing and office space, and are used by
corporate marketing, and sales management, manufacturing and research staff. The
Company manufactures bodyboards at its California facilities. The Company's
Kirkland, Washington State facility consists of approximately 18,000 square feet
of leased plant, warehousing and office space, and is used by corporate
marketing, sales management and manufacturing staff. The Company's wakeboards
and snowboards are manufactured at its Washington State facility. The Company
also leases approximately 15,000 square feet of plant and warehousing space in
Lakeland, Florida. The Company manufactures bodyboards and accessories at this
facility. The Company rents its headquarters office and warehouse space in
Hyannis as a tenant-at-will. The Company's other leases expire at various dates
through July 1999 with certain renewal options. The Company believes that if any
of its leases were not to be renewed, adequate alternative space would be
available. The Company believes that its existing facilities are adequate for at
least its current and near-term future needs.
33
ENVIRONMENTAL AND REGULATORY MATTERS
The Company's operations are subject to Federal, state and local laws and
regulations relating to the environment, consumer products, health and safety,
and other regulatory matters. The Company believes that it has obtained all
material permits and that its operations are in substantial compliance with all
material applicable laws and regulations. See "Risk Factors -- Potential Adverse
Impact of Environmental Regulations."
LEGAL PROCEEDINGS
The Company is not a party to any litigation except as set forth below and
except for non-material litigation incidental to its business.
One of the Company's competitors challenged the Company's trademark
application for the Company's Liquid Force trademark for its wakeboards. See
"Risk Factors -- Limited Protection of Intellectual Property."
In August 1996, the Company was one of several named defendants in a product
liability action for an unspecified amount of damages arising out of the death
of one of the plaintiffs. The Company believes that such claim is without merit.
The Company has asserted that it never owned the product line involved in the
accident and expects to be dismissed from the case. With this exception, the
Company has never been a party to any product liability litigation. The Company
may in the future, due to the nature of its products, become a defendant in a
product liability lawsuit for serious personal injuries or death allegedly
relating to its products. Product liability claims may include allegations of
failure to warn, design defects or defects in the manufacturing process. The
Company believes, however, that injuries resulting from the use of bodyboards,
wakeboards and snowboards, unlike certain other sports such as skiing, virtually
always arise from the inherent dangers of the sport itself, rather than from
product defects. The Company believes that it has adequate liability insurance
for the risks arising in the normal course of its business, including product
liability insurance for all of its products. No assurance can be given, however,
that the Company will not be the subject of claims in excess of its coverage
limits, or that insurance will continue to be available on commercially
reasonable terms, or at all. See "Risk Factors -- Product Liability" and "Risk
Factors -- Limited Protection of Intellectual Property."
34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of March
1, 1997 are as follows:
NAME AGE POSITION
---- --- --------
Jon A. Glydon 49 President, Chief Executive Officer and Director
Brooks R. Herrick 59 Senior Vice President, Chief Financial Officer and
Treasurer
Eric S. George 36 Senior Vice President of Engineering
Steven J. Roth 48 Chairman of the Board
Gustav A. Christensen(1)(2) 49 Director
Thomas H. Conway 57 Director
Dr. James L. McKenney (1)(2) 67 Director
- ---------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
JON A. GLYDON has been the President, Chief Executive Officer and a
director of the Company since its organization in 1993. Prior to that, Mr.
Glydon was President of PI, Inc., a foam manufacturing and consumer products
company, for more than two years. The Company purchased its bodyboard business
from PI, Inc. in 1993. Mr. Glydon has more than twenty years of marketing and
manufacturing experience in the consumer products industry.
BROOKS R. HERRICK joined the Company in March 1997 as Senior Vice President,
Chief Financial Officer and Treasurer. From 1993 to 1996, Mr. Herrick was Vice
President -- Finance and Corporate Controller of Amtrol, Inc., a manufacturer
and marketer of flow and expansion control technology. From 1989 to 1993, he was
the Director of Internal Audit of Damon Corporation, which operates clinical
laboratories.
ERIC S. GEORGE joined the Company in 1995 as Vice President of Engineering
and in March 1997 was promoted to Senior Vice President of Engineering. From
1994 to 1995, he was Vice President of Operations of Next Generation Films, a
manufacturer of coextruded polyethylene films. From 1989 to 1994, Mr. George was
a manufacturing manager for Beresford Packaging, a polyethylene film bag
manufacturing company. Mr. George has 15 years of experience in manufacturing
management.
STEVEN J. ROTH has been a director of the Company since its organization.
Mr. Roth has been a general partner of CR Management Associates, L.P., a private
equity investment firm and the Company's founding stockholder, for more than
five years. Mr. Roth has been involved in the venture capital industry for more
than 13 years.
GUSTAV A. CHRISTENSEN joined the Board of Directors of the Company in
February 1997. Mr. Christensen has been Chairman of the Board of Alpha-Beta
Technologies, Inc., a biotechnology firm, since August 1991.
35
THOMAS H. CONWAY has been a director of the Company since its organization.
Mr. Conway has been a general partner of CR Management Associates, L.P., a
private equity investment firm and the Company's founding stockholder, for more
than five years. For more than 15 years, Mr. Conway has been involved in
corporate turnaround activities, including as President, Chief Executive Officer
and a director of Xyvision, Inc., a text processing software company, from
August 1991 to October 1996.
DR. JAMES L. MCKENNEY joined the Board of Directors of the Company in
February 1997. Dr. McKenney is the John G. McLean Professor of Business
Administration (Emeritus) at the Harvard Business School, and has been a faculty
member of the Harvard Business School since 1960. He is also a director of
Xyvision, Inc.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
There are no family relationships among any of the executive officers or
directors of the Company.
Upon the closing of the Offering, the Company's Board of Directors will be
divided into three classes, with the members of each class of directors serving
for staggered three-year terms. Mr. Christensen and Dr. McKenney will serve in
the class the term of which expires in 1998; Mr. Glydon will serve in the class
the term of which expires in 1999; and Messrs. Conway and Roth will serve in the
class the term of which expires in 2000. Upon the expiration of the term of each
class of directors, directors comprising such class of directors will be elected
for a three-year term at the next succeeding annual meeting of stockholders.
COMPENSATION COMMITTEE -- INTERLOCKS AND INSIDER PARTICIPATION
Prior to February 1997, the Company did not have a Compensation Committee of
the Board of Directors. In February 1997, the Board of Directors established a
Compensation Committee which consists of Mr. Christensen and Dr. McKenney, both
of whom are non-employee directors.
DIRECTOR COMMITTEES AND COMPENSATION
Committees. The Audit Committee consists of Mr. Christensen and Dr.
McKenney. The Audit Committee will review with the Company's independent
auditors the scope and timing of their audit services and any other services
they are asked to perform, the auditor's report on the Company's financial
statements following completion of their audit and the Company's policies and
procedures with respect to internal accounting and financial controls. In
addition, the Audit Committee will make annual recommendations to the Board of
Directors for the appointment of independent auditors for the ensuing year.
The Compensation Committee consists of Mr. Christensen and Dr. McKenney.
The Compensation Committee will review and evaluate the compensation and
benefits of all officers of the Company, review general policy matters relating
to compensation and benefits of employees of the Company and make
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also will administer the Company's 1997 Equity Incentive
Plan. See " -- Equity Plans."
Director Compensation. Directors who are not employees of the Company (also
referred to as "outside directors"), who currently consist of Messrs.
Christensen, Conway, McKenney and Roth, receive an annual retainer of $2,000 and
fees of $500 per day for attending regular meetings of the Board of Directors
and $250 per day for participating in meetings of the Board of Directors held by
means of conference telephone and for participating in certain meetings of
committees of the Board of Directors. Payment of director fees is made
quarterly. Directors are also reimbursed for reasonable out-of-pocket expenses
incurred in attending such meetings.
The Company is a party to a management consulting agreement (the
"Consulting Agreement") with CR Management Associates, L.P. ("CRM"). Messrs.
Conway and Roth, directors of the Company, are principals of CRM. During fiscal
1996, the Company paid CRM an aggregate of $180,000 pursuant to the Consulting
Agreement. See "Certain Transactions."
36
1997 Non-Employee Directors Stock Option Plan. The Company has adopted a
directors stock option plan (the "Directors Plan") providing for the annual
grant of stock options to purchase shares of Common Stock to outside directors.
A total of 150,000 shares of Common Stock have been reserved for issuance under
the Directors Plan.
Under the Directors Plan, each eligible director has been or will be granted
an option to purchase 15,000 shares of Common Stock upon the later of the
adoption of the plan or the director's first appointment or election to the
Board of Directors. Each such option granted prior to the date of the final
prospectus for the Offering will be deemed to be granted simultaneously with the
execution of the underwriting agreement for the Offering at an exercise price
equal to the initial public offering price. When and if the initial option is
fully vested after a five-year vesting period, options to purchase 3,000 shares
of Common Stock will be granted on the date of the Company's next annual meeting
of stockholders following the final vesting date of the initial option, provided
that such director's service as a director will continue after such meeting.
The exercise price of options granted under the Directors Plan will be 100%
of the fair market value per share of the Common Stock on the date the option is
granted. Options initially granted to each director under the Directors Plan
will become exercisable at the rate of 20% of the shares subject to the option
on the first through fifth anniversaries of the date of grant of the initial
option. Options granted after the initial five-year vesting period will be fully
vested upon grant. The options will expire on the tenth anniversary of the grant
date. If an optionee ceases to be a director of the Company after his or her
option becomes exercisable, the option will remain exercisable in accordance
with its terms. If an optionee ceases to be a director of the Company for any
reason prior to the time his or her option becomes fully exercisable, the option
will terminate with respect to the shares as to which the option is not then
exercisable.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the compensation earned
by the Company's Chief Executive Officer for services rendered in all capacities
to the Company in fiscal 1996. No other executive officer of the Company
received salary and bonus of $100,000 or more for fiscal 1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION(1)
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(2) COMPENSATION($)
--------------------------- --------- -------- ------- ---------------
Jon A. Glydon ........................ $125,000 $10,000 104,444 0
President, Chief Executive Officer
and Director
- ----------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include medical, group life
insurance or other benefits which are available to all salaried employees
of the Company, and certain perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996 to its executive officers. Subsequent to October 31, 1996, Mr. Glydon,
in connection with a Management Equity Reorganization Plan dated as of
October 31, 1996, was permitted to purchase 156,666 shares of Common Stock
at a nominal purchase price, and was granted an option to purchase 104,444
shares of Common Stock at a nominal exercise price per share. The option is
shown in the table for clarity of presentation.
(3) Mr. Herrick, who joined the Company in March 1997, would be among the four
most highly compensated individuals had he been with the Company during
fiscal 1996. Mr. Herrick's base salary is $125,000.
37
Option Grants. The following table provides information concerning grants of
stock options made during fiscal 1996 by the Company to the Company's Chief
Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK
SECURITIES GRANTED TO EXERCISE OR PRICE APPRECIATION
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM(2)
NAME OPTIONS GRANTED FISCAL YEAR $/SHARE(1) DATE 5%($) 10%($)
---- --------------- ----------- ------- ---- ----- ------
JON A. GLYDON 104,444 55% $.01 1/31/02 $289 $638
- ----------
(1) All options were granted at not less than fair market value as determined
by the Board of Directors of the Company as of the date of grant.
Subsequent to October 31, 1996, Mr. Glydon, in connection with a Management
Equity Reorganization Plan dated as of October 31, 1996, was permitted to
purchase 156,666 shares of Common Stock at a nominal purchase price, and
was granted an option to purchase 104,444 shares of Common Stock at a
nominal exercise price per share. The options are shown in the table for
clarity of presentation.
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compounded rates of appreciation of
the Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the time of such exercise and the future
performance of the Company's Common Stock.
(3) Mr. Herrick, who joined the Company in March 1997, was granted an option to
purchase 16,846 shares of Common Stock at an exercise price per share of
$8.00.
Option Exercises and Unexercised Option Holdings. The following table
provides information regarding unexercised stock options held as of October 31,
1996 by the Company's Chief Executive Officer. Such person did not exercise any
stock options in fiscal 1996.
FISCAL YEAR-END OPTION VALUES
SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END(1) OPTIONS AT YEAR-END(2)
---------------------- -------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
JON A. GLYDON -- 104,444 -- 1,042,352
- -------------
(1) Subsequent To October 31, 1996, Mr. Glydon, In Connection With A Management
Equity Reorganization Plan Dated As Of October 31, 1996, Was Permitted To
Purchase 156,666 Shares Of Common Stock At A Nominal Purchase Price, And
Was Granted An Option To Purchase 104,444 Shares Of Common Stock At A
Nominal Exercise Price Per Share. The Options Are Shown In The Table For
Clarity Of Presentation.
(2) There Was No Public Trading Market For The Common Stock As Of October 31,
1996. Accordingly, These Values Have Been Calculated On The Basis Of An
Assumed Initial Public Offering Price Of $10.00 Per Share, Less The
Applicable Exercise Price.
38
EQUITY PLANS
Management Incentive Program. The Company Management Incentive Program was
established in 1993 for the benefit of employees designated to participate in
the program. The program was terminated as of October 31, 1996, as described
below.
Under the cash incentive portion of this program, an aggregate of 25% of the
Company's net income was distributable to employee participants in the program.
Under a "phantom stock" portion of this program, upon the sale of the business
of the Company to an unaffiliated third party, the employee participants were
entitled to receive an aggregate of up to 25% of the net proceeds of sale that
are available for distribution to the stockholders of the Company after
deducting a return to all stockholders of their invested capital (debt and
equity) plus a 10% compounded return thereon. A total of 25 points was allocable
under the phantom stock portion of the program. Upon the adoption of the program
in 1993, an aggregate of 5.0 phantom stock points were allocated to six employee
participants for each year of service with the Company, including 4.0 points per
year allocated to Mr. Glydon. Additional point allocations were made to a total
of 18 employee participants after the initial point allocation. As of October
31, 1996, a total of 25 points had been allocated pursuant to the program. The
program provided that in the event of an initial public offering of the
Company's Common Stock, the Board of Directors was entitled to terminate the
program and substitute an equity program on terms deemed equitable by the Board
of Directors. As of October 31, 1996, pursuant to a Management Equity
Reorganization Plan, the program was terminated, and each participant was
permitted to purchase, at a nominal price, shares of Common Stock corresponding
to the participant's vested phantom equity percentage in the Company, and each
participant received a stock option, at a nominal exercise price per share,
corresponding to the participant's unvested phantom equity percentage. Mr.
Glydon purchased 156,666 shares, and 11 other employee participants purchased an
aggregate of 73,110 shares. In addition, Mr. Glydon was granted an option to
purchase 104,444 shares of Common Stock, and 18 other employee participants were
granted stock options to purchase an aggregate of 86,924 shares. The options
vest in accordance with the vesting schedule of the 1993 Management Incentive
Program.
1997 Equity Incentive Plan. The Company's 1997 Equity Incentive Plan (the
"1997 Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in February 1997. The 1997 Plan provides for the issuance of a
maximum of 450,000 shares of Common Stock pursuant to the grant to employees of
"incentive stock options" within the meaning of the Internal Revenue Code and
the grant of non-qualified stock options, stock awards or opportunities to make
direct purchases of stock in the Company to employees, consultants, directors
and officers of the Company.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each option,
(ii) when the option becomes exercisable, (iii) the exercise price of the option
(which in the case of an incentive stock option cannot be less than the market
price of the Common Stock as of the date of grant), (iv) the duration of the
option and (v) the time, manner and form of payment upon exercise of an option.
An option is not transferable by the optionholder except by will or by the laws
of descent and distribution. Generally, no incentive stock option plan may be
exercised more than 90 days following termination of employment. However, in the
event that termination is due to death or disibility, the option is exercisable
for a maximum of 180 days after such termination.
No options have been granted to date under the 1997 Plan.
401(K) PLAN
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
All employees of the Company who have worked at the Company for more than one
year and are over 21 years old are eligible to participate in the 401(k) Plan.
The 401(k) Plan provides that each participant may contribute a portion of his
or her pre-tax compensation (up to 15% and to a statutorily prescribed annual
limit) to the 401(k) Plan. The percentage elected by certain highly compensated
participants may be required to be lower. All amounts contributed to the 401(k)
Plan by employee participants and earnings on these contributions are fully
vested at all times. The Company, at its discretion, may contribute to the
401(k) Plan. Such Company contributions become fully vested upon a participant's
completion of six years of service. The Company has never made a discretionary
contribution.
39
CERTAIN TRANSACTIONS
Consulting Agreement with CR Management Associates, L.P. The Company is a
party to a Consulting Agreement, dated July 19, 1993, with CR Management
Associates, L.P. ("CRM"), a management consulting firm. CRM is an affiliate of
SSPR, L.P., the Company's principal stockholder, and Messrs. Conway and Roth,
directors of the Company, are principals of CRM. Pursuant to the terms of the
Consulting Agreement, CRM has provided, and continues to provide the Company
with, various management consulting services. During 1996, CRM provided
assistance in strategic planning; sales and marketing; new product development;
acquisition strategy, prospect evaluation and implementation; financial planning
and budgeting; and sourcing new credit facilities. CRM has advised the Company
that it estimates that it provided more than two person-years of assistance
during 1996. The fee payable by the Company to CRM under the Consulting
Agreement is $15,000 per month plus 1% of consolidated net sales in excess of
$12,000,000 per year. Following the closing of the Offering, the Consulting
Agreement provides that the annual fee shall be capped at $300,000 with a
five-year term. The Consulting Agreement may be amended or modified, or extended
at the end of its term, only with the approval of a majority of the outside
directors of the Company who are not affiliated with CRM. In exchange for this
amendment, the Company will issue 109,500 shares of Common Stock to CRM at the
closing of the Offering.
Indebtedness to SSPR, L.P. SSPR, L.P. is the Company's principal
stockholder and provided the Company's initial capital, consisting of $150,000
in equity and subordinated debt in the amount of $1.35 million. SSPR, L.P.
subsequently advanced an aggregate of $2.6 million in subordinated debt. The
subordinated notes are payable on demand, with interest at 10% per year, and are
subordinated to senior debt, as defined. In March 1997, SSPR, L.P. converted
$1.75 million principal amount into 218,750 shares of Common Stock. The
remaining principal and interest owing under the subordinated notes will be
repaid from the proceeds of the Offering.
Equity Issuances to Management and Certain Directors. Subsequent to the end
of its 1996 fiscal year, the Company issued shares of Common Stock and options
to purchase Common Stock to Mr. Glydon pursuant to the Company's Management
Equity Reorganization Plan, and to Messrs. Conway and Roth pursuant to the
Company's 1997 Non-Employee Directors Stock Option Plan. See "Management --
Director Committees and Compensation" and "Management -- Equity Plans."
40
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1997 (i) by each person
or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director of the Company, (iii)
by the Company's chief executive officer and (iv) by all directors and executive
officers of the Company as a group. Unless otherwise indicated below, to the
knowledge of the Company, each person or entity listed below has sole voting and
investment power over the shares of Common Stock shown as beneficially owned,
except to the extent authority is shared by spouses under applicable law.
PERCENT
BENEFICIALLY OWNED(1)
---------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
---------------- ------------------ -------- --------
SSPR, L.P. 1,482,181 86.6% 46.4%
c/o CR Management Associates, L.P.
92 Hayden Avenue
Lexington, Massachusetts 02173
Jackson National Life Insurance Company(2) 187,175 9.9 6.9
c/o PPM America, Inc.
225 W. Wacker Drive
Chicago, Illinois 60606
Jon A. Glydon (3) 156,666 9.2 4.9
Gustav A. Christensen (4) -- -- --
Thomas H. Conway (4)(5) 1,482,181 86.6 49.8
Dr. James J. McKenney (4) -- -- --
Steven J. Roth (4)(6) 1,482,181 86.6 49.8
All executive officers and directors as a group (7 persons) (7) 1,638,847 95.7 54.7
(1) The number of shares of Common Stock deemed outstanding prior to the
Offering consists of 1,711,957 shares of Common Stock outstanding as of
March 31, 1997. The number of shares of Common Stock deemed outstanding
after the Offering includes an additional 1,375,000 shares of Common Stock
which are being offered for sale by the Company in the Offering and 109,500
shares which are being issued to CR Management Associates, L.P. ("CRM"), an
affiliate of SSPR, L.P., in connection with a reduction of the consulting
fee currently being charged to the Company by CRM, or a total of 3,196,457
shares. The number of shares deemed outstanding after the Offering does not
include any employee or director stock options or the Representatives'
Warrants, none of which are exercisable within 60 days of March 31, 1997.
The number of shares deemed outstanding does not include the 187,175 shares
issuable upon exercise of warrants held by Jackson National Life Insurance
Company ("JNL") or the 50,000 shares issuable upon exercise of a warrant to
be issued to JNL upon the closing of the Offering, except as noted in note
below.
(2) Shares used to calculate the percentage of the Company's Common Stock
beneficially owned by JNL include 187,185 shares of Common Stock issuable
upon exercise of a warrant held by JNL, and, after the Offering, also
include 50,000 shares issuable upon exercise of a warrant being issued to
JNL upon the closing of the Offering.
(3) Does not include 104,444 shares issuable upon exercise of an unvested stock
option.
(4) Does not include shares subject to an unvested option granted under the
1997 Non-Employee Directors Stock Option Plan.
(5) Consists, prior to the Offering, solely of the shares held by SSPR, L.P.,
of which Mr. Conway is a general partner and may be deemed to share voting
and investment power. Mr. Conway disclaims beneficial ownership of such
shares. Shares used to calculate the percentage of the Company's Common
Stock beneficially owned after the Offering include 109,500 shares being
issued to CRM upon the closing of the Offering; Mr. Conway is a general
partner of CRM and may be deemed to share voting and investment power with
respect to such shares. Mr. Conway disclaims beneficial ownership of such
shares.
(6) Consists, prior to the Offering, solely of the shares held by SSPR, L.P.,
of which Mr. Roth is a general partner and may be deemed to share voting
and investment power. Mr. Roth disclaims beneficial ownership of such
shares. Shares used to calculate the percentage of the Company's Common
Stock beneficially owned after the Offering include 109,500 shares being
issued to CRM upon the closing of the Offering; Mr. Roth is a general
partner of CRM and may be deemed to share voting and investment power with
respect to such shares. Mr. Roth disclaims beneficial ownership of such
shares.
(7) See preceding footnotes.
41
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of the Offering and the filing of Restated
Articles of Organization (the "Restated Articles"), the authorized capital stock
of the Company will consist of 15,000,000 shares of Common Stock, $.01 par value
per share, and 500,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock").
COMMON STOCK
As of March 31, 1997, there were 1,711,957 shares of Common Stock
outstanding (giving effect to the Stock Splits), held of record by 13
stockholders. Based upon the number of shares outstanding as of that date and
giving effect to the issuance of the 1,375,000 shares of Common Stock offered
hereby and the 109,500 shares to be issued to CRM (see "Certain Transactions"),
there will be 3,196,457 shares of Common Stock outstanding upon the closing of
the Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. There are no shares of Preferred Stock
outstanding.
PREFERRED STOCK
Upon the closing of the Offering, the Board of Directors will be authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, to issue from time to time up to an aggregate of 500,000 shares of
Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company. The Company has no present plans
to issue any shares of Preferred Stock.
WARRANTS
In connection with the Offering, the Company will issue to the
Representatives warrants to purchase a number of shares of Common Stock equal to
ten percent (10%) of the number of shares being offered hereby at an exercise
price of 150% of the initial offering price. In addition, the Company's senior
lender, Jackson National Life Insurance Company ("JNL"), is the holder of a
warrant to purchase 187,175 shares of Common Stock, and at the closing of the
Offering will be issued a warrant to purchase an additional 50,000 shares of
Common Stock, each with an exercise price equal to 90% of the initial public
offering price.
REGISTRATION RIGHTS
The Company, SSPR, L.P. ("SSPR"), CRM, Mr. Glydon and JNL (the "Rights
Holders") are parties to a Registration Rights Agreement, pursuant to which,
upon the request of the Rights Holders, the Company will use its best efforts to
effect the registration under the applicable federal and state
42
securities laws of any of the shares of Common Stock held by them for sale in
accordance with their intended method of disposition thereof, and will take such
other actions as may be necessary to permit the sale thereof in other
jurisdictions, subject to certain limitations specified in the Registration
Rights Agreement. The Rights Holders will also have the right, which they may
exercise at any time and from time-to-time, to include the shares of Common
Stock held by it in certain other registrations of common equity securities of
the Company initiated by the Company on its own behalf or on behalf of its other
stockholders. The Company will agree to pay all out-of-pocket costs and expenses
(other than underwriters' discounts and commissions and transfer taxes) in
connection with each such registration. The Registration Rights Agreement will
contain indemnification and contribution provisions: (i) by the Rights Holders
for the benefit of the Company and related persons; and (ii) by the Company for
the benefit of the Rights Holders and the other persons entitled to effect
registrations of Common Stock pursuant to its terms and related persons.
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND BY-LAWS
Following the Offering, the Company expects that it will have more than 200
stockholders, thus making it subject to Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
publicly-held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
Board of Directors prior to becoming an interested stockholder, (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation) at
the time it becomes an interested stockholder, or (iii) the business combination
is approved by both the Board of Directors and the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 5% or more of the outstanding voting stock of the corporation. A
"business combination" includes a merger, a stock or asset sale, and certain
other transactions resulting in a financial benefit to the interested
stockholder.
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly-held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects to opt out of the statute's coverage. The Company's Restated
By-Laws, as amended (the "Restated By-Laws"), contain provisions which give
effect to Section 50A. See "Management -- Executive Officers and Directors."
The Company's Restated By-Laws include a provision excluding the Company
from the applicability of Massachusetts General Laws Chapter 110D, entitled
"Regulation of Control Share Acquisitions." In general, this statute provides
that any stockholder of a corporation subject to this statute who acquires 20%
or more of the outstanding voting stock of a corporation may not vote such stock
unless the stockholders of the corporation so authorize. The Board of Directors
may amend the Company's Restated By-Laws at any time to subject the Company to
this statute prospectively.
The Restated By-Laws require that nominations for the Board of Directors
made by a stockholder comply with certain notice procedures. A notice by a
stockholder of a planned nomination must be given not less than 60 and not more
than 90 days prior to a scheduled meeting, provided that if less than 70 days'
notice is given of the date of the meeting, a stockholder will have ten days
within which to give such notice. The stockholder's notice of nomination must
include particular information about the stockholder, the nominee and any
beneficial owner on whose behalf the nomination is made. The Company may require
any proposed nominee to provide such additional information as is reasonably
required to determine the eligibility of the proposed nominee.
The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company not
less than 60 and not more than 90 days prior to the scheduled meeting, provided
in certain circumstances that a ten-day notice rule applies. The notice from the
stockholder must describe the proposed business to be brought before the meeting
and
43
include information about the stockholder making the proposal, any beneficial
owner on whose behalf the proposal is made, and any other stockholder known to
be supporting the proposal. The Restated By-Laws require the Company to call a
special stockholders meeting at the request of stockholders holding at least 75%
of the voting power of the Company.
The Restated Bylaws provide that the directors and officers of the Company
shall be indemnified by the Company to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. In addition, the Restated Articles provide that the
directors of the Company will not be personally liable for monetary damages to
the Company for breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to the Company or its stockholders, acted in bad
faith, knowingly or intentionally violated the law, authorized illegal dividends
or redemptions or derived an improper personal benefit from their action as
directors.
The Restated Articles provide that any amendment to the Restated Articles,
the sale, lease or exchange of all or substantially all of the Company's
property and assets, or the merger or consolidation of the Company into or with
any other corporation may be authorized by the approval of the holders of a
majority of the shares of each class of stock entitled to vote thereon, rather
than by two-thirds as otherwise provided by statute, provided that the
transactions have been authorized by a majority of the members of the Board of
Directors and the requirements of any other applicable provisions of the
Restated Articles have been met.
In addition, the Restated Articles provide that shares of the Company's
Preferred Stock may be issued in the future without stockholder approval and
upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. See "Description of
Capital Stock -- Preferred Stock".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
44
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have 3,196,457 shares of
Common Stock outstanding. Of these shares, the 1,375,000 shares sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 1,821,457 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. All of the Restricted Shares will become eligible for
sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning 90 days after the date hereof; all of these shares are
subject to Lock-up Agreements. In addition, SSPR has the right to have its
Restricted Shares registered by the Company under the Securities Act as
described below.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
31,965 shares immediately after the Offering) or (ii) the average weekly trading
volume in the Common Stock in the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who was not an Affiliate.
Rule 701 under the Securities Act provides that the shares of Common Stock
acquired on the exercise of currently outstanding options may be resold by
persons, other than Affiliates, beginning 90 days after the date of this
prospectus, subject only to the manner of sale provisions of Rule 144, and by
Affiliates, beginning 90 days after the date of this prospectus, subject to all
of the provisions of Rule 144 other than the minimum holding period.
OPTIONS AND WARRANTS
As of the closing of the Offering, options to purchase a total of 268,214
shares of Common Stock will be outstanding and held by employees and directors
of the Company. In addition, as of such date, JNL will hold warrants to purchase
237,175 shares of Common Stock. All of the shares issuable pursuant to such
options and warrants are subject to Lock-up Agreements.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding employee stock options and Common Stock issuable pursuant to the
Company's stock option plans that do not qualify for an exemption under Rule 701
from the registration requirements of the Securities Act. The Company expects to
file these registration statements shortly following the closing of the
Offering, and such registration statements are expected to become effective upon
filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Lock-up Agreements.
LOCK-UP AGREEMENTS
All of the Company's stockholders, optionholders and warrantholders have
agreed, pursuant to the Lock-up Agreements, that they will not, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise sell or dispose of (or announce any offer, sale, offer of
sale, contract of sale, grant of any option to purchase or any other sale or
disposition) any shares of Common
45
Stock or other capital stock of the Company or any securities convertible into,
or exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this prospectus
without the prior written consent of H.C. Wainwright & Co., Inc.
REGISTRATION RIGHTS
SSPR, CRM, JNL and Mr. Glydon are parties to a registration rights
agreement with the Company pursuant to which they will be entitled to require
the Company to register under the Securities Act all or any portion of the
outstanding Common Stock then owned by them. See "Description of Capital Stock
- -- Registration Rights."
46
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "Underwriters"), for whom H.C. Wainwright & Co.,
Inc. and Cruttenden Roth Incorporated are acting as representatives (the
"Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company the respective number of shares of Common Stock set
forth opposite its name below at the initial public offering price less the
underwriting discount set forth on the cover page of this prospectus. The
Underwriting Agreement provides that subject to the terms and conditions set
forth therein, the Underwriters are obligated to purchase all of the shares of
Common Stock being sold pursuant to the Underwriting Agreement if any of the
shares of Common Stock are purchased. Under certain circumstances, under the
Underwriting Agreement, the commitments of non-defaulting Underwriters may be
increased.
NUMBER OF
UNDERWRITER SHARES
----------- ------
H.C. Wainwright & Co., Inc.
Cruttenden Roth Incorporated
---------
Total 1,375,000
=========
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Company has granted the Underwriters an option to purchase up to an
additional 206,250 shares of Common Stock at the initial public offering price
set forth on the cover page of this prospectus, less the underwriting discount.
Such option, which will expire 30 days after the date of this prospectus, may be
exercised solely to cover overallotments, if any, made in connection with the
sale of shares of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
initially by that Underwriter bears to the total number of shares of Common
Stock to be purchased initially by the Underwriters. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,375,000 shares of Common Stock are being offered hereby.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock,
including overallotments, entering stabilizing bids, effecting syndicate short
covering transactions and penalty bids. An overallotment means the confirming of
sales of Common Stock in excess of the number of shares of Common Stock offered
hereby. A stabilizing bid means the placing of any bid, or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate short covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the Offering. A penalty bid
means an arrangement that permits the Representatives to reclaim a selling
concession from a syndicate member in connection with the Offering when shares
of Common Stock sold by the syndicate member are
47
purchased in syndicate covering transactions. Such transactions may stabilize
the market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
On the closing of the Offering, the Company will sell to the
Representatives, individually and not as representatives of the Underwriters,
for nominal consideration, the Representatives' Warrants entitling the
Representatives to purchase an aggregate of 137,500 shares of Common Stock at an
initial exercise price per share equal to 150% of the initial public offering
price hereunder. The Representatives' Warrants will be exercisable for a period
of four years commencing one year after the date of this prospectus and will
contain certain demand and incidental registration rights relating to the
underlying Common Stock. The Representatives' Warrants cannot be transferred,
assigned or hypothecated, in whole or in part, for a period of twelve months
from the date of their issuance, except that they may be assigned to any officer
or partner of the Representatives.
For the life of the Representatives' Warrants, their holders have the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as the Representatives' Warrants
remain unexercised, the terms under which the Company could obtain additional
capital may be adversely affected. Moreover, the holders of the Representatives'
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 its
securities on terms more favorable than those provided by the Representatives'
Warrants. Additionally, if the Representatives should exercise their
registration rights to effect a distribution of the underlying shares of Common
Stock, the Representatives, prior to and during such distribution, would be
unable to make a market in the Common Stock. If the Representatives must cease
making a market, the market and market price for the Common Stock may be
adversely affected and holders of the Common Stock may be unable to sell the
Common Stock.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of one percent (1.0%) of the gross proceeds of the Offering, which
will include proceeds from the overallotment option, if exercised. The
Representatives' expenses in excess of the non-accountable expense allowance,
including their legal expenses, will be borne by the Representatives.
The Company has granted H.C. Wainwright & Co., Inc. the right to act as the
Company's managing underwriter and financial advisor on an exclusive basis until
December 16, 1998 with respect to any sales of equity securities by the Company,
any sale or disposition of the Company or any of its assets or the acquisition
by the Company of any securities or assets of any other business entity.
The Underwriters do not intend to sell any of the Company's securities to
accounts for which they exercise discretionary authority.
The Company and the holders of all of the Common Stock and options and
warrants to purchase Common Stock outstanding prior to the Offering have agreed
that they will not offer, contract, sell or otherwise dispose of directly or
indirectly any shares of Common Stock for a period of 180 days following the
date of this prospectus, without the prior written consent of the
Representatives except, in the case of the Company, for the shares of Common
Stock offered hereby, the issuance of shares of Common Stock upon the exercise
of outstanding stock options and any additional stock options granted under the
1997 Equity Incentive Plan and 1997 Non-Employee Director Stock Option Plan, and
the issuance of shares of Common Stock as consideration for the acquisition of
one or more businesses provided the recipients thereof agree in writing to be
bound by the same restrictions, and, in the case of the stockholders, for gifts
of the Common Stock provided the donee agrees in writing to be bound by the same
restrictions.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations among the Company and the Underwriters. Among the factors to be
considered in such negotiations, in addition to prevailing market conditions,
will be certain financial information of the Company, an assessment of the
Company's management, estimates of the business potential and earnings prospects
of the Company, the present state of the Company's development and operations,
the present
48
state of the Company's industry in general and other factors deemed relevant.
The initial public offering price set forth on the cover page of this prospectus
should not, however, be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering price.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933, as
amended, or contribute to payments the Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company as of and for the fiscal year ended
October 31, 1996 included in this prospectus and elsewhere in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report. The financial statements of the Company as of October 31, 1995 and for
the fiscal years ended October 31, 1994 and 1995 included in this prospectus
have been so included in reliance on the report of Richard A. Eisner & Company,
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Richard A. Eisner & Company, LLP was the Company's independent accountant
for the periods prior to October 31, 1995. The change in the independent
accountant from Richard A. Eisner & Company, LLP to Arthur Andersen LLP was
approved by the Board of Directors. During the period of Richard A. Eisner &
Company, LLP's engagement by the Company, there were no disagreements between
Richard A. Eisner & Company, LLP and the Company on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure and no reportable events relating to the relationship between the
Company and Richard A. Eisner & Company, LLP.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the Commission, this prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this prospectus regarding the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof
may be obtained from such office upon payment of the prescribed fees. In
addition, the Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (including
the Company) that file electronically with the Commission which can be accessed
at http://www.sec.gov.
The Company intends to furnish holders of its Common Stock offered hereby
with annual reports containing financial statements audited by an independent
accounting firm and with quarterly reports containing unaudited summary
financial statements for each of the first three quarters of each fiscal year.
49
EARTH AND OCEAN SPORTS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants ............................................................... F-2
Report of Independent Public Accountants ............................................................... F-3
Balance Sheets As of October 31, 1995 and 1996 and January 31, 1997 (Unaudited) and Pro Forma
Balance Sheet as of January 31, 1997 (Unaudited) ..................................................... F-4
Statements of Operations for the Years Ended October 31, 1994, 1995 and 1996 and
the Three Months Ended January 31, 1996 and 1997 (Unaudited) ......................................... F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended October 31, 1994,
1995 and 1996 and the Three Months Ended January 31, 1997
(Unaudited) and Pro Forma Statement of Stockholders' Equity
(Deficit) for the Three Months Ended January 31, 1997 (Unaudited) .................................... F-6
Statements of Cash Flows for the Years Ended October 31, 1994, 1995 and 1996 and
the Three Months Ended January 31, 1996 and 1997 (Unaudited) ......................................... F-7
Notes to Financial Statements .......................................................................... F-8
F-1
After the 1.684575-for-1 stock split discussed in Note 11 (a) to the Company's
financial statements is effected, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Earth and Ocean Sports, Inc.:
We have audited the accompanying balance sheet of Earth and Ocean Sports,
Inc. ( a Massachusetts Corporation) as of October 31, 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 Earth and Ocean Sports, Inc.
as of October 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Boston, Massachusetts
February 13, 1997
(except with respect to Note (6),
as to which the date is March 27, 1997)
F-2
After the 1.684575-for-1 stock split discussed in Note 11 (a) to the Company's
financial statements is effected, we expect to be in a position to render the
following audit report.
/s/ RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
March 27, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EARTH AND OCEAN SPORTS, INC.:
We have audited the accompanying balance sheet of Earth and Ocean Sports,
Inc. (a Massachusetts Corporation) as of October 31, 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the two years in the period ended October 31, 1995. 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 enumerated above present fairly, in
all material respects, the financial position of Earth and Ocean Sports, Inc. at
October 31, 1995, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 1995, in conformity with
generally accepted accounting principles.
Cambridge, Massachusetts
December 29, 1995
F-3
EARTH AND OCEAN SPORTS, INC.
BALANCE SHEETS
OCTOBER 31,
------------------- PRO FORMA
JANUARY 31, JANUARY 31,
1995 1996 1997 1997
---- ---- ---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 33,800 $ 8,055 $ 4,115 $ 4,115
Accounts receivable, net of allowance for doubtful accounts
of $38,000, $152,000 and $162,000 in 1995, 1996 and 1997,
respectively 1,431,200 2,167,653 2,767,074 2,767,074
Inventories 1,813,600 3,220,612 3,133,588 3,133,588
Prepaid expenses and other current assets 305,000 408,630 413,194 413,194
------- ------- ------- -------
Total current assets 3,583,600 5,804,950 6,317,971 6,317,971
PROPERTY AND EQUIPMENT, NET 1,570,700 2,779,770 2,676,625 2,676,625
INTANGIBLE ASSETS, NET 1,079,900 1,080,104 1,179,618 1,179,618
--------- --------- --------- ---------
$ 6,234,200 $ 9,664,824 $ 10,174,214 $ 10,174,214
=========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving line of credit $ 2,365,500 $ 3,964,697 $ 3,739,992 $ 3,739,992
Current portion of long-term debt obligations 319,700 460,034 527,446 527,446
Accounts payable 710,700 1,593,533 1,961,647 1,961,647
Accrued expenses 370,800 510,937 176,481 176,481
Interest payable to principal stockholder 312,600 239,463 287,255 287,255
------- ------- ------- -------
Total current liabilities 4,079,300 6,768,664 6,692,821 6,692,821
--------- --------- --------- ---------
LONG-TERM DEBT OBLIGATIONS, LESS CURRENT PORTION 434,200 538,836 345,095 345,095
------- ------- ------- -------
SUBORDINATED NOTE PAYABLE TO PRINCIPAL STOCKHOLDER 1,775,000 2,700,000 3,800,000 2,050,000
--------- --------- --------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock -- $.01 par value --
Authorized -- 500,000 shares
Issued and outstanding -- none -- -- -- --
Common stock -- $.01 par value --
Authorized -- 15,000,000 shares
Issued and outstanding -- 1,263,431 shares in 1995, 1,493,207
shares in 1996 and 1997 and 1,821,457 shares pro forma 12,634 14,932 14,932 18,214
Additional paid-in capital 137,366 137,366 137,366 2,979,084
Accumulated deficit (204,300) (494,974) (816,000) (1,911,000)
-------- -------- -------- ----------
Total stockholders' equity (deficit) (54,300) (342,676) (663,702) 1,086,298
------- -------- -------- ---------
$ 6,234,200 $ 9,664,824 $ 10,174,214 $ 10,174,214
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
EARTH AND OCEAN SPORTS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
------------------------------- -------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
NET SALES $ 9,143,800 $ 11,371,900 $ 12,404,051 $ 2,028,900 $ 2,874,662
COST OF GOODS SOLD 5,568,900 7,029,600 7,585,115 1,275,900 2,030,589
--------- --------- --------- --------- ---------
Gross profit 3,574,900 4,342,300 4,818,936 753,000 844,073
--------- --------- --------- ------- -------
OPERATING EXPENSES:
Product development and engineering 188,400 236,300 338,300 67,500 152,900
Selling and marketing 1,633,600 1,898,600 2,704,179 533,700 500,669
General and administrative 797,100 897,600 938,055 190,100 284,632
Amortization of intangible assets 499,600 680,700 532,424 165,500 43,289
------- ------- ------- ------- ------
Total operating expenses 3,118,700 3,713,200 4,512,958 956,800 981,490
--------- --------- --------- ------- -------
Income (loss) from operations 456,200 629,100 305,978 (203,800) (137,417)
INTEREST EXPENSE (439,400) (554,700) (596,652) (133,700) (183,609)
-------- -------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes 16,800 74,400 (290,674) (337,500) (321,026)
PROVISION (BENEFIT) FOR INCOME TAXES (19,900) 16,000 -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 36,700 $ 58,400 $ (290,674) $ (337,500) $ (321,026)
========== =========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
========== =========== =========== ========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 2) 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
========= ========= ========= ========= =========
SUPPLEMENTAL NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 2) $ 0.11 $ (0.05)
=========== ===========
SUPPLEMENTAL WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2) 2,721,891 2,812,815
========= =========
The accompanying notes are an integral part of these financial statements.
F-5
EARTH AND OCEAN SPORTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
------------
TOTAL
ADDITIONAL STOCKHOLDERS'
$.01 PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIT)
------ ----- ------- ------- ---------
BALANCE, OCTOBER 31, 1993 1,263,431 $12,634 $ 137,366 $ (299,400) $ (149,400)
Net income -- -- -- 36,700 36,700
------- ----- --------- ---------- ---------
BALANCE, OCTOBER 31, 1994 1,263,431 12,634 137,366 (262,700) (112,700)
Net income -- -- -- 58,400 58,400
------- ----- --------- ---------- ---------
BALANCE, OCTOBER 31, 1995 1,263,431 12,634 137,366 (204,300) (54,300)
Issuance of common stock under management incentive
plan 229,776 2,298 -- -- 2,298
Net loss -- -- -- (290,674) (290,674)
------- ----- --------- ---------- ---------
BALANCE, OCTOBER 31, 1996 1,493,207 14,932 137,366 (494,974) (342,676)
Net loss (Unaudited) -- -- -- (321,026) (321,026)
------- ----- --------- ---------- ---------
BALANCE, JANUARY 31, 1997 (Unaudited) 1,493,207 14,932 137,366 (816,000) (663,702)
========= ======= ========== =========== ============
Issuance of common stock to CRM (Unaudited) 109,500 1,095 1,093,905 (1,095,000) --
------- ----- --------- ---------- ---------
Conversion of subordinated note payable to principal
stockholder (Unaudited) 218,750 2,187 1,747,813 -- 1,750,000
------- ----- --------- ---------- ---------
PRO FORMA BALANCE, JANUARY 31, 1997 (Unaudited) $1,821,457 $18,214 $2,979,084 $(1,911,000) $1,086,298
========= ====== ========= ========== =========
The accompanying notes are an integral part of these financial statements.
F-6
EARTH AND OCEAN SPORTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 36,700 $ 58,400 $ (290,674) $ (337,500) $ (321,026)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Depreciation and amortization 801,800 843,500 1,012,404 236,400 210,665
Changes in current assets and liabilities, net
of acquisition of product lines --
Accounts receivable (124,900) (566,800) (736,453) (526,100) (599,421)
Inventories (780,200) 117,000 (1,380,258) (666,400) 87,024
Prepaid expenses and other current
assets (32,500) (238,700) (103,629) 254,500 (4,565)
Accounts payable 287,700 123,300 975,214 539,800 368,114
Accrued expenses (85,000) 41,100 (209,863) (298,600) (509,456)
Interest payable to principal stockholder 162,900 109,000 (73,137) (22,000) 47,792
------- ------- ------- ------- ------
Net cash provided by (used in)
operating activities 266,500 486,800 (806,396) (819,900) (720,873)
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of product lines (see below) (143,400) (168,000) (607,342) -- --
Increase (decrease) in intangible assets -- -- (93,657) (28,900) 17,858
Purchases of property and equipment (283,300) (632,600) (986,276) (112,200) (49,890)
-------- -------- -------- -------- -------
Net cash used in investing activities (426,700) (800,600) (1,687,275) (141,100) (32,032)
-------- -------- ---------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line
of credit 1,129,600 541,500 1,599,197 666,300 (224,705)
Proceeds from long-term debt obligations 400,000 3,224,800 925,000 400,000 1,100,000
Payments on long-term debt obligations (1,318,900) (3,435,900) (232,526) (108,300) (77,776)
Proceeds under capital leases -- -- 239,343 -- --
Payments under capital leases (24,100) (15,500) (65,386) (18,300) (48,554)
Proceeds from issuance of stock under management
incentive plan -- -- 2,298 -- --
-------- -------- ---------- -------- -------
Net cash provided by financing
activities 186,600 314,900 2,467,926 939,700 748,965
-------- -------- ---------- -------- -------
NET INCREASE (DECREASE) IN CASH 26,400 1,100 (25,745) (21,300) (3,940)
CASH, BEGINNING OF PERIOD 6,300 32,700 33,800 33,800 8,055
-------- -------- ---------- -------- -------
CASH, END OF PERIOD $ 32,700 $ 33,800 $ 8,055 $ 12,500 $ 4,115
=========== ============ ============ ========== ===========
ACQUISITION OF PRODUCT LINES:
Working capital $ 5,400 $ (61,700) $ (119,136) $ -- $ --
Property and equipment (275,300) (92,400) (354,014) -- --
Patents and trademarks (86,700) (150,000) (407,692) -- --
Goodwill (15,000) (43,900) (76,500) -- --
Liabilities assumed -- 180,000 350,000 -- --
Note payable issued 228,200 -- -- -- --
-------- -------- ---------- -------- -------
Net cash used to acquire product
lines $ (143,400) $ (168,000) $ (607,342) $ -- $ --
=========== ============ ============ ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for --
Interest $ 274,000 $ 444,000 $ 669,818 $ 155,700 $ 135,817
=========== ============ ============ ========= ==========
Income taxes $ 18,500 $ 800 $ 1,256 $ -- $ --
=========== ============ ============ ========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases $ -- $ 23,047 $ 303,539 $ -- $ --
=========== ============ ============ ========= ==========
The accompanying notes are an integral part of these financial statements.
F-7
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Earth and Ocean Sports, Inc. (the Company) is a manufacturer, distributor
and marketer of premium name brand surf, water and snow sports products for
recreational markets. The Company's products include bodyboards, wakeboards,
snowboards and related accessories. The Company was incorporated in
Massachusetts on July 13, 1993.
The Company is subject to a number of risks which include the ability to
finance future operations. The Company has historically financed its operations
with borowings from its principal stockholder and its bank. On March 26, 1997,
the Company entered into a new credit facility (see Note 6).
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies described below and elsewhere in the accompanying notes to
financial statements.
(a) Pro Forma Information
The pro forma balance sheet and statement of stockholders' equity (deficit)
as of January 31, 1997 gives effect to the conversion of $1,750,000 of
subordinated indebtedness to the principal stockholder into 218,750 shares of
common stock on March 17, 1997 and the issuance of 109,500 shares valued at $10
per share to CR Management Associates, L.P. (CRM) as consideration for amending
the management agreement effective upon consummation of the Company's proposed
initial public offering (see Note 9). The Company will record a charge to
operations for the value of such shares upon the consummation of the Company's
proposed initial public offering.
(b) Interim Financial Statements
The accompanying balance sheet as of January 31, 1997, and the statements of
operations and cash flows for the three months ended January 31, 1996 and
January 31, 1997, and the statement of stockholders' equity (deficit) for the
three months ended January 31, 1997 are unaudited, but in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The results of operations for the three months ended January 31, 1997
are not necessarily indicative of the results to be expected for the entire
fiscal year.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash Equivalents
The Company considers all highly liquid investments with original purchase
maturities of three months or less to be cash equivalents. There were no cash
equivalents at October 31, 1995 and 1996 and January 31, 1997.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
OCTOBER 31,
---------------------- JANUARY 31,
1995 1996 1997
--------- --------- ---------
Raw materials ................... $ 642,200 $ 1,380,743 $ 1,457,804
Work-in-process ................. 7,300 -- 101,929
Finished goods .................. 1,164,100 1,839,869 1,573,855
--------- --------- ---------
$ 1,813,600 $ 3,220,612 $ 3,133,588
=========== =========== ===========
Work-in-process and finished goods inventories consist of material, labor
and manufacturing overhead.
F-8
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(f) Depreciation and Amortization
Property and equipment are stated at cost. The Company provides for
depreciation and amortization on property and equipment using the straight-line
method by charges to operations that allocate the cost of assets over their
estimated useful lives. The cost of property and equipment and their estimated
useful lives are as follows:
OCTOBER 31,
ESTIMATED ---------------------- JANUARY 31,
ASSET CLASSIFICATION USEFUL LIFE 1995 1996 1997
- -------------------- ----------- ---- ---- ----
Machinery and equipment ..................... 7 Years $1,263,835 $ 1,598,330 $ 1,607,007
Equipment under capital leases .............. Life of lease 95,565 636,714 636,714
Plates, dies and molds ...................... 5 Years 555,600 1,256,248 1,297,406
Construction in progress .................... -- 98,700 9,165 26,213
Leasehold improvements ...................... Life of lease 9,000 166,072 149,079
----- ------- -------
2,022,700 3,666,529 3,716,419
Less -- Accumulated depreciation and
amortization .............................. 452,000 886,759 1,039,794
------- ------- ---------
$1,570,700 $ 2,779,770 $ 2,676,625
========== =========== ============
(g) Intangible Assets
Patents, trademarks and goodwill are being amortized on a straight-line
basis over their estimated useful lives. Noncompete, consulting and supply
agreements are amortized on a straight-line basis over the lives of the
agreements.
Intangible assets consist of the following:
OCTOBER 31,
ESTIMATED ---------------------- JANUARY 31,
ASSET CLASSIFICATION USEFUL LIFE 1995 1996 1997
- -------------------- ----------- ---- ---- ----
Noncompete agreement ....................... 3 Years $1,318,000 $ 1,318,000 $ 1,318,000
Supply agreement ........................... 5 Years 500,000 500,000 500,000
Goodwill ................................... 15 Years 93,700 173,920 175,200
Patents .................................... 7-15 Years 208,000 253,727 254,112
Trademarks ................................. 15 Years 150,000 566,949 570,427
Other ...................................... 3 Years 115,900 141,053 143,053
Deferred financing costs ................... 3 Years 68,100 77,900 227,899
------ ------ -------
2,453,700 3,031,549 3,188,691
Less -- Accumulated amortization ........... 1,373,800 1,951,445 2,009,073
--------- --------- ---------
$1,079,900 $ 1,080,104 $ 1,179,618
========== =========== ============
F-9
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(h) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. The Company
has no significant off-balance-sheet concentration of credit risk such as
foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company's accounts receivable credit risk is not concentrated
within any geographic area and no customer represented a significant credit risk
to the Company. One customer accounted for approximately 11.5%, 15.5%, 11.4%,
10.4% and 21.7% of net sales for the years ended October 31, 1994, 1995 and 1996
and the three months ended January 31, 1996 and 1997, respectively.
(i) Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which include
cash, accounts receivable, revolving line of credit, accounts payable and notes
payable, approximate their fair value.
(j) Net Income (Loss) Per Common and Common Equivalent Share
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding during the
periods, computed in accordance with the treasury stock method. Net loss per
common and common equivalent share is based upon the weighted average number of
common shares outstanding. The weighted average number of common and common
equivalent shares outstanding used in computing net income (loss) assumes that
common stock issued and common stock options and warrants granted in the twelve
months preceding the Company's proposed initial public offering have been
outstanding for all periods presented, computed in accordance with the treasury
stock method.
(k) Supplemental Net Income (Loss) Per Common and Common Equivalent Share
Supplemental net income (loss) per common and common equivalent share gives
effect to the (i) the conversion of $1,750,000 of subordinated indebtedness to
principal stockholder into 218,750 shares of common stock and (ii) the use of
net proceeds of the proposed initial public offering to repay $1,189,463 and
$2,337,200 at October 31, 1996 and January 31, 1997, respectively, to principal
stockholder and $4,839,689 and $4,495,500 at October 31, 1996 and January 31,
1997, respectively, to the Company's bank as if these events had occurred at the
beginning of each period.
Supplemental net income (loss) consists of net income (loss) increased or
decreased by the effect of reduced interest expense associated with (i) and (ii)
above. Supplemental net income (loss) per common and common equivalent share
represents supplemental net income (loss) divided by the supplemental weighted
average common and common equivalent shares outstanding.
(l) Postretirement Benefits
The Company has no obligations for postretirement benefits under SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions, or
postemployment benefits under SFAS No. 112, Employers' Accounting for
Postemployment Benefits, as it does not currently offer such benefits.
F-10
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(m) Asset Carrying Values
The Company applies SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. SFAS No. 121
requires the Company to continually evaluate whether events and circumstances
have occurred that indicate that the estimated remaining useful life of
long-lived assets and certain identifiable intangibles and goodwill may warrant
revision or that the carrying value of these assets may be impaired. To compute
whether assets have been impaired, the estimated gross cash flows for the
estimated remaining useful life of the asset are compared to the carrying value.
To the extent that the gross cash flows are less than the carrying value, the
assets are written down to the estimated fair value of the asset. The
application of this standard did not have a material effect on the Company's
financial position or results of operations.
(n) Accounting for Stock-based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. The Company has determined that it
will continue to account for stock-based compensation for employees under
Accounting Principles Board (APB) Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company is required to disclose the pro
forma net income or loss and per share amounts in the notes to the financial
statements using the fair-value-based method. The Company has computed the pro
forma disclosures required under SFAS No. 123 for all options granted for the
year ended October 31, 1996 and the three months ended January 31, 1997 using
the Black-Scholes option pricing model prescribed by SFAS No. 123. The effect of
SFAS No. 123 on pro forma net loss was not material for the year ended October
31, 1996 or the three months ended January 31, 1997. The Company has not
computed the pro forma effect for the year ended October 31, 1995 or the three
months ended January 31, 1996, as there were no options granted or outstanding
during those periods.
(o) Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified in order to conform with the current year's presentation.
(3) ACQUISITIONS
On July 13, 1993, in connection with the Company's formation, pursuant to an
asset purchase and sale agreement with a corporation, the Company acquired
certain assets and assumed certain liabilities of a division of a business for
consideration consisting of $2,525,000 in cash and $1,100,000 of deferred
payments, which were recorded at their discounted value of $929,700 to reflect
imputed interest. The purchase price was allocated to the assets acquired and
liabilities assumed as follows:
Inventory ........................................ $ 919,600
Property and equipment ........................... 714,700
Covenant not to compete .......................... 1,300,000
Supply agreement ................................. 500,000
Goodwill and other assets ........................ 209,300
Assumed liabilities .............................. (188,900)
--------
Total ..................................... 3,454,700
=========
F-11
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) ACQUISITIONS -- (CONTINUED)
In March 1994, pursuant to an asset purchase agreement with a corporation,
the Company acquired certain assets and assumed certain liabilities for
consideration consisting of $143,400 in cash, including acquisition costs, and a
$253,300 note payable, which was recorded at this discounted value of $228,200
to reflect imputed interest. The purchase price was allocated to the assets
acquired and liabilities assumed as follows:
Accounts receivable ....................... $ 53,700
Inventory ................................. 62,900
Property and equipment .................... 275,300
Patents ................................... 86,700
Goodwill .................................. 15,000
Assumed liabilities ....................... (122,000)
--------
Total ............................... $ 371,600
=========
In September 1995, the Company acquired certain assets and assumed certain
liabilities of a snowboard manufacturer, for consideration of approximately
$168,000 in cash, including acquisition costs. The purchase price was allocated
to the assets acquired and liabilities assumed as follows:
Inventory ................................. $ 61,700
Property and equipment .................... 92,400
Trademark ................................. 150,000
Goodwill .................................. 43,900
Assumed liabilities ....................... (180,000)
--------
Total ............................... $ 168,000
=========
In addition, the previous owners will receive certain royalties on future
sales of the corporation's products, as defined.
In July 1996, pursuant to an asset purchase agreement with a corporation,
the Company acquired certain assets for consideration of $476,500 in cash,
including acquisition costs. The purchase price was allocated to the assets
acquired as follows:
Inventory ................................ $ 77,336
Property and equipment ................... 222,664
Trademark ................................ 100,000
Goodwill ................................. 76,500
------
Total .............................. $ 476,500
=========
In July 1996, the Company purchased from a bank certain assets and assumed
certain liabilities of a bankrupt snowboard manufacturer for consideration of
approximately $131,000 in cash, including acquisition costs. The purchase price
was allocated to assets acquired and liabilities assumed as follows:
Inventory ................................ $ 41,800
Property and equipment ................... 131,350
Trademarks ............................... 307,692
Assumed liabilities ...................... (350,000)
--------
Total .............................. $ 130,842
=========
In February 1997, pursuant to an asset purchase agreement, the Company
acquired certain assets of a wakeboard manufacturer for consideration of
$100,000 in cash.
F-12
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
OCTOBER 31,
------------------- JANUARY 31,
1995 1996 1997
---- ---- ----
Assumed liabilities from acquisitions ......... $ 180,000 $ 353,440 $ 45,916
Deferred tax liability ........................ 128,000 -- --
Accrued payroll ............................... -- 59,949 63,989
Other ......................................... 62,800 97,553 66,576
------ ------ ------
$ 370,800 $510,937 $ 176,481
========= ======== =========
(5) REVOLVING LINE OF CREDIT
In April 1995, the Company entered into a secured revolving line-of-credit
agreement with a bank, that expires on March 31, 1997, pursuant to which the
Company may borrow a maximum of $4,000,000 based on a borrowing formula related
to inventory and accounts receivable levels, as defined. Subsequent to year-end,
the borrowing maximum was increased from $4,000,000 to $4,400,000. The line of
credit bears interest at the bank's base rate (8.25% at January 31, 1997) plus
1%. At October 31, 1995 and 1996 and January 31, 1997, borrowings under the
revolving line of credit were $2,365,500, $3,964,697 and $3,739,992,
respectively. The bank has a first priority perfected interest in all assets of
the Company. The revolving line-of-credit agreement contains certain restrictive
covenants, including, but not limited to, maintenance of certain levels of
working capital and debt ratios. At October 31, 1996, the Company was in default
with certain of these ratios. The covenants in default have been waived by the
bank through March 31, 1997, at which time the revolving loan is scheduled for
renewal. Amounts outstanding under this line of credit agreement were repaid
from the proceeds of the Credit Facility on March 26, 1997 as discussed in Note
6 below.
(6) CREDIT FACILITY
The Company entered into new credit facilities with Jackson National Life
Insurance Company on March 26, 1997 consisting of a $7,000,000 revolving credit
facility, a $3,450,000 term loan and a $30,000,000 discretionary acquisition
facility (together, the "Credit Facilities"). The Credit Facilities are secured
by first priority liens on all of the assets of the Company and its
subsidiaries, if any. In addition, two of the Company's stockholders have
pledged their common stock of the Company as additional security for the loans.
The revolving credit facility provides for borrowings of up to a maximum of
$7,000,000 based upon 85% of eligible receivables and 50% of inventory, as
defined. The interest rate on the revolving credit facility is a floating rate
equal to 30-day LIBOR plus 3%, as well as a 0.5% per annum charge on the unused
portion of the line. Borrowings under the revolving credit facility may be used
for general corporate purposes, including working capital requirements. The
Company may prepay borrowings under the revolving credit facility, subject to
certain conditions, and may reborrow, up to the maximum limit then in effect,
any amounts that are repaid or prepaid. The revolving credit facility terminates
on March 31, 2005 or earlier upon a change of control of the Company, as
defined, at which time all borrowings become due and payable.
The term loan is a $3,450,000 eight year loan due March 31, 2005, or earlier
upon a change of control of the Company, as defined. The interest rate on the
term loan is a floating rate equal to 30-day LIBOR plus 3.25%. Annual
prepayments are required equal to 50% of free cash flow and 100% of net cash
proceeds, as defined, of certain financing transactions, sales of property and
other events. Such prepayments will be applied first to the term loans and then
to the revolving credit facility.
F-13
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) CREDIT FACILITY -- (CONTINUED)
The acquisition facility provides for up to $30,000,000 to be advanced to
the Company to finance future acquisitions. Advances are subject to credit
approval by the lender. Therefore, no assurance can be given that any such
advances will be available to the Company. The acquisition facility terminates
on March 31, 2005, or if earlier upon a change of control of the Company, as
defined.
The Credit Facilities also provide for certain fees to be paid to the
lender. In addition, the lender was issued a warrant to purchase up to 187,175
shares of the Company's common stock at a price to be fixed at 90% of the
initial public offering price of the Company's proposed initial public offering.
Upon the consummation of the proposed initial public offering, the senior lender
will be issued warrants to purchase an additional 50,000 shares of the Company's
common stock at 90% of the initial public offering price. The Company has
estimated the value of the Warrants to be $887,000 using the Black-Scholes
option pricing model. The Company will amortize the value of the warrants over
the eight-year term of the credit facilities.
The Credit Facilities contain restrictions upon the Company's ability to
incur indebtedness, grant liens, make capital expenditures, enter into
acquisitions, mergers or consolidations, dispose of assets, make dividend
payments, make other restricted payments or investments. In addition, the Credit
Facilities require the Company to meet certain financial covenants, including
maintenance of minimum cash flow levels and of fixed charge coverage, interest
expense coverage and total indebtedness to cash flow ratios.
(7) LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations consist of the following:
OCTOBER 31,
-------------------- JANUARY 31,
1995 1996 1997
---- ---- ----
Capital lease obligations ..................... $ 39,700 $ 517,196 $ 468,643
Term note payable to bank, due in monthly
payments of $19,444 through June 1998,
interest at the bank's base rate plus 1.25%
(8.25% at October 31, 1996 and January 31,
1997) ....................................... 622,200 408,340 330,564
Deferred payments to subcontractor, net of
debt discount of $11,900 and $3,500 in 1995
and 1996, respectively, payable at $6,111
per month through March 31, 1997 ............ 92,000 73,334 73,334
------ ------ ------
753,900 998,870 872,541
Less -- Current portion ....................... 319,700 460,034 527,446
------- ------- -------
$ 434,200 $ 538,836 $345,095
========= ========= ========
The term note payable to bank was repaid from the proceeds of the Credit
Facility on March 26, 1997 as discussed in Note 6.
The Company leases manufacturing and other equipment under several lease
agreements that require monthly payments totaling approximately $16,000,
including interest at rates ranging from 9.0% to 16.7%, and expire at various
dates through October 2000.
F-14
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) LONG-TERM DEBT OBLIGATIONS -- (CONTINUED)
Future minimum lease payments under capital lease obligations at October
31, 1996 were as follows:
FISCAL YEAR AMOUNT
----------- ------
1997 ................................................................ $ 182,632
1998 ................................................................ 161,350
1999 ................................................................ 155,077
2000 ................................................................ 100,121
-------
Total minimum lease payments ...................................... 599,180
Less -- Amount representing interest ................................ 81,984
------
Obligations under capital leases .................................. 517,196
Less -- Current portion of capital lease obligations ................ 149,461
-------
$ 367,735
=========
(8) SUBORDINATED NOTE PAYABLE TO PRINCIPAL STOCKHOLDER
The Company has a subordinated note payable to its principal stockholder,
which bears interest at 10%. The note is due upon demand but no sooner than the
date of full payment of amounts outstanding from the bank (see Note 5). The
balances outstanding under this note were $1,775,000, $2,7000,000 and $3,800,000
at October 31, 1995 and 1996 and January 31, 1997, respectively. On March 17,
1997, the principal stockholder converted $1,750,000 of indebtedness under this
note into 218,750 shares of common stock.
(9) COMMITMENTS AND CONTINGENCIES
(a) Facility Leases
The Company rents its corporate headquarters office and warehouse space in
Massachusetts as a tenant at will and leases its California, Washington and
Florida manufacturing facilities under operating lease arrangements. The leases
expire at various dates, through July, 1999 with certain renewal options. Rent
expense for the years ended October 31, 1994, 1995 and 1996 amounted to
approximately $270,000, $270,000 and $362,000, respectively.
Future minimum lease payments under these leases are as follows:
FISCAL YEAR TOTAL
----------- -----
1997 ...................................... $ 251,000
1998 ...................................... 133,000
1999 ...................................... 62,000
------
Total ................................... $ 446,000
=========
(b) Consulting Agreement with Related Party
The Company has an agreement with CRM to provide services to the Company for
payments of $15,000 monthly plus 1% of annual revenues over $12,000,000. This
agreement continues until terminated by mutual consent. The general partner of
the limited partnership that owns the majority of the common stock of the
Company and that made the subordinated loan to the Company described in Note 8
is also the
F-15
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) COMMITMENTS AND CONTINGENCIES -- (Continued)
(b) Consulting Agreement with Related Party -- (Continued)
Chairman of the consulting firm. Management fees amounted to $180,000 for
each of the years ended October 31, 1994, 1995 and 1996 and are included in
general and administrative expenses in the accompanying statements of
operations. Upon the consummation of the Company's proposed initial public
offering, the management agreement with CRM will be amended to provide for a
fixed annual fee of $300,000. CRM will receive 109,500 shares of common stock as
consideration for this amendment. Upon consummation of the proposed initial
public offering, the Company will record a noncash charge of $1,095,000
representing the fair market value of the securities to be issued to CRM.
(c) Litigation
In the ordinary course of business, the Company is party to various types of
litigation. The Company believes it has meritorious defenses to all claims, and,
in its opinion, all litigation currently pending or threatened will not have a
material effect on the Company's financial position or results of operations.
(10) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the provisions of SFAS No. 109, deferred tax
assets or liabilities are computed based on the differences between the
financial statement and income tax bases of assets and liabilities using
currently enacted tax rates. Deferred income tax expenses or credits are based
on changes in the assets or liabilities from period to period.
Through October 31, 1996, the Company had generated net operating loss
carryforwards for federal and state income tax purposes of approximately
$1,031,000, which expire through 2011. Net operating loss carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of certain cumulative changes in ownership interests
of significant stockholders over a three-year period in excess of 50%, as
defined. In the event of a public offering, the Company may experience a change
in ownership in excess of 50%. The Company does not believe that these changes
in ownership will significantly impact the Company's ability to utilize its net
operating loss carryforwards.
At October 31, 1995 and 1996, the Company had no current tax liability. The
Company's deferred tax assets and liabilities consist of the following :
OCTOBER 31,
-----------------------
1995 1996
---- ----
Net operating loss carryforwards ..................... $ 116,800 $ 413,000
Allowance for doubtful accounts ...................... 9,000 47,000
Other temporary differences .......................... 4,800 36,000
Depreciation ......................................... (96,800) (307,000)
Amortization and depreciation ........................ (25,300) (34,000)
Employment and promotion agreement ................... (5,900) --
--------- --------
2,600 155,000
Less -- Valuation allowance .......................... -- (155,000)
--------- --------
$ 2,600 $ --
========= ==========
F-16
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) INCOME TAXES -- (Continued)
Under SFAS No. 109, the Company cannot recognize a deferred tax asset unless
it concludes that it is "more likely than not" that the deferred tax asset would
be realized. Due to the net loss in the fiscal year ended October 31, 1996, the
Company has recorded a full valuation allowance against its otherwise
recognizable deferred tax asset.
Current income tax expense (benefit), amounting to $(19,900) and $16,000 for
the years ended October 31, 1994 and 1995, respectively, included in the
accompanying statements of operations, represents state income tax expense
(benefit). The Company had no current federal income tax expense in 1994 and
1995 due to utilization of net operating loss carryforwards. The principal
permanent adjustments to book taxable income relate to the nondeductibility of
meals and entertainment expenses and goodwill amortization.
(11) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Increase in Authorized Shares and Stock Split
The accompanying financial statements have been retroactively restated for
an increase in authorized capital stock to 500,000 shares of $.01 par value
preferred stock and 15,000,000 shares of $.01 par value common stock and to
reflect a 1.684575-for-1 split of the common stock. These changes will be
effective upon the consummation of the Company's proposed initial public
offering of common stock.
(b) Recapitalization
In February 1997, the Company amended its Articles of Incorporation
increasing the number of authorized shares of the Company's common stock to
1,500,000 shares and declared a 750-for-1 stock split, to be effective prior to
the closing of the Company's proposed initial public offering of common stock
contemplated herein. Accordingly, all share and per share amounts of common
stock have been retroactively restated for all periods presented to reflect the
stock split.
(c) Management Incentive and Stock Option Plans
The Company had a Management Incentive Plan (the Incentive Plan) that
provided for the distribution to certain key employees of 25% of net income. The
Incentive Plan was to terminate when, and if, an initial public offering occurs.
The Company charged a total of $37,800 and $55,000 to expense under the
Incentive Plan for the years ended October 31, 1994 and 1995, respectively.
The Company terminated the Incentive Plan in 1996 and issued 229,776 shares
of common stock for $.01 per share and granted options to purchase 191,368
shares of common stock for $.01 per share to the key employees who participated
in the Incentive Plan. The employees purchased the shares and the options were
granted at the fair market value on October 31, 1996 as determined by an
independent appraisal. These options vest ratably over a period of up to five
years, depending upon the employee's length of service with the Company. In
March 1997, the Company granted 16,846 options to a senior executive at an
exercise price of $8.00 per share, which is 80% of the assumed initial public
offering price.
(d) Option Plans
In February 1997, the Company's 1997 Equity Incentive Plan (the "1997 Plan")
was adopted by the Board of Directors and approved by the Company's
stockholders. The 1997 Plan provides for the issuance of a maximum of 450,000
shares of Common Stock pursuant to the grant to employees of "incentive stock
options" within the meaning of the Internal Revenue Code and the grant of
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock in the Company to employees, consultants, directors and
officers of the Company.
F-17
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(11) STOCKHOLDERS' EQUITY (DEFICIT) -- (Continued)
(d) Option Plans -- (Continued)
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each option,
(ii) when the option becomes exercisable, (iii) the exercise price of the option
(which in the case of an incentive stock option cannot be less than the market
price of the Common Stock as of the date of grant), (iv) the duration of the
option and (v) the time, manner and form of payment upon exercise of an option.
No options have been granted to date under the 1997 Plan.
In January 1997, the 1997 Stock Option Plan for Nonemployee Directors (the
Directors Plan) was adopted by the Company's Board of Directors and will become
effective upon the closing of the Company's proposed initial public offering.
Under the terms of the Directors Plan, an aggregate of 150,000 options may be
granted and individuals who become members of the board prior to January 1, 1998
shall automatically receive 15,000 options. In addition, each non-employee
director will receive annually options to purchase 3,000 shares on the date of
each annual meeting of the Company's stockholders held after the closing of
initial public offering. The options will vest ratably over five years on each
yearly anniversary of the date such options were granted and expire ten years
from the date of grant.
(12) TRADEMARK LICENSE
In August 1996, the Company entered into a License Agreement under which the
licensee has the right to sell merchandise bearing certain of the Company's
trademark names. The Company received and recorded as revenue in fiscal 1996 the
initial license fee of $250,000. The Company is entitled to additional license
fees of $300,000 for the period January 1, 1998 to December 31, 1998 and
$350,000 for the period January 1, 1999 to December 31, 1999. The Company is
also entitled to a royalty on sales of merchandise bearing the licensed
trademark names in excess of certain minimum amounts. The license agreement
expires on December 31, 1999, unless extended by both parties.
(13) 401(K) PLAN
In January 1995, the Company established the Earth and Ocean Sports, Inc.
Employee Pension Plan (the Plan), which is a deferred contribution plan under
Section 401(k) of the Internal Revenue Code. The Plan allows all full-time
employees over 21 years of age who have completed one year of service with the
Company to make pretax deferred contributions to the Plan of up to 15% of annual
compensation or the maximum annual limitations, as defined. Contributions by the
Company to the Plan are discretionary and determined by the Board of Directors.
There were no discretionary contributions to the Plan for the years ended
October 31, 1995 and 1996.
(14) NEW ACCOUNTING STANDARD
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128, establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This statement is effective for fiscal years
ending after December 15, 1997 and early adoption is not permitted. When
adopted, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its fiscal year ended October
31, 1998 and does not believe that the effect of the adoption of this standard
would be materially different from the amounts presented in the accompanying
statements of operations.
F-18
INSIDE BACK COVER:
- ------------------
[Four action photographs of the Company's snowboards in use; plus Spiral and
Flite product logo's]
================================================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THE
PROSPECTUS.
--------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 11
Dividend Policy 11
Capitalization 12
Dilution 13
Selected Financial Data 14
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 16
Business 24
Management 35
Certain Transactions 40
Principal Stockholders 41
Description of Capital Stock 42
Shares Eligible for Future Sale 45
Underwriting 47
Legal Matters 49
Experts 49
Change in Independent Public Accountants 49
Additional Information 49
Index to Financial Statements F-1
----------------------
UNTIL _____ , 1997 (25 DAYS AFTER THE 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 THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
1,375,000 SHARES
[LOGO]
EARTH AND OCEAN
SPORTS, INC.
COMMON STOCK
----------
PROSPECTUS
----------
H.C. WAINWRIGHT & CO., INC.
CRUTTENDEN ROTH
INCORPORATED
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discount) payable in connection
with the sale of the Common Stock offered hereby are as follows:
SEC registration fee .............................................. $ 5,731
NASD filing fee ................................................... 2,391
Nasdaq National Market listing fee ................................ 27,900
Representatives' non-accountable expense allowance ................ 137,500
Printing and engraving expenses ................................... 75,000
Legal fees and expenses ........................................... 200,000
Accounting fees and expenses ...................................... 100,000
Blue Sky fees and expenses (including legal fees) ................. 10,000
Transfer agent and registrar fees and expenses .................... 10,000
Miscellaneous ..................................................... 66,478
------
Total ........................................................... $635,000
========
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Massachusetts Business Corporation Law provides for indemnification of
the Company's directors and officers for liabilities and expenses that they may
incur in such capacities, except with respect to any matter that the indemnified
person shall have been adjudicated in any proceeding not to have acted in good
faith in the reasonable belief that his or her action was in the best interest
of the Company. Reference is made to the Company's amended and restated
corporate charter and by-laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
The Company expects to obtain a directors and officers liability insurance
for the benefit of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued any unregistered securities except upon its
incorporation and except as follows. The Company issued unregistered securities
to an aggregate of 19 employees in connection with a reorganization of
management's equity interest in the Company pursuant to a Management Equity
Reorganization Plan, dated as of October 31, 1996. Pursuant to the Management
Equity Reorganization Plan, the Company's "phantom stock" plan was terminated
and the participating employees were issued an aggregate of 136,400 shares of
Common Stock at a nominal purchase price and options to purchase an aggregate of
113,600 shares of Common Stock in consideration thereof. The Company's chief
financial officer, who joined the Company in March 1997, was granted an option
to purchase 16,846 shares of Common Stock at an exercise price per share of
$8.00. In addition, the Company's senior lender has been or will be issued
warrants to purchase an aggregate of 237,175 shares of Common Stock at an
exercise price to be equal to 90% of the initial public offering price. No
underwriters were involved in the foregoing sales of securities. Such sales were
made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Section 4(2) thereof relative to sales by an issuer
not involving any public offering or the rules and regulations thereunder, or,
in the case of options to purchase Common Stock, Rule 701 under the Securities
Act. All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act.
II-1
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
EXHIBIT NO.
-----------
1.1 -- Form of Underwriting Agreement.
1.2* -- Form of Warrant Agreement between the Registrant and the Representatives.
3.1 -- Current form of Articles of Organization of the Company, as amended.
3.2 -- Form of Amended and Restated Articles of Organization of the Company, to be effective
upon completion of the Offering.
3.3 -- Current form of By-laws of the Company.
3.4 -- Form of Amended and Restated By-laws of the Company, to be effective upon completion
of the Offering.
4.1* -- Specimen certificate representing the Common Stock.
5.1* -- Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 -- Management Equity Reorganization Plan.
10.2 -- 1997 Equity Incentive Plan.
10.3 -- 1997 Non-Employee Director Stock Option Plan.
10.4* -- Registration Rights Agreement among the Company, SSPR, L.P. CR Management Associates,
L.P. ("CRM"), Jon A. Glydon and Jackson National Life ("JNL").
10.5 -- Consulting Agreement between the Company and CRM dated July 13, 1993, as amended.
10.6 -- Lease between the Company and Oceanside Associates dated March 30, 1992 as amended.
10.7 -- Lease between the Company and Allied Venture Number 1 dated December 13, 1995.
10.8 -- Lease between the Company and Joe P. Ruthven Investments dated July 9, 1996.
10.9* -- Loan Agreement among the Registrant, SSPR, L.P. and Jackson National Life dated March 26, 1997.
11.1 -- Calculation of earnings per share.
16.1* -- Letter re Change in Certifying Accountant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Richard A. Eisner & Company, LLP.
23.3 -- Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1 -- Power of Attorney (see page II-4).
27.1 -- Financial Data Schedule.
- -----------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
II-2
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, 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
Securities 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 Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Securities Act , the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, 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.
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN HYANNIS, MASSACHUSETTS ON MARCH 26,
1997.
EARTH AND OCEAN SPORTS, INC.
By: /s/ JON A. GLYDON
---------------------------------
JON A. GLYDON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Earth and Ocean Sports, Inc.,
hereby severally constitute and appoint Jon A. Glydon, Brooks R. Herrick and
Edwin L. Miller Jr., and each of them singly, our true and lawful attorneys,
with full power to them and each of them singly, to sign for us in our names in
the capacities indicated below, any registration statement related to the
Offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933 (a "462(b) Registration Statement"), any and all
amendments and exhibits to this registration statement or any 462(b)
Registration Statement, and any and all applications and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of the securities covered hereby or thereby, and generally to do all things in
our names and on our behalf in such capacities to enable Earth and Ocean Sports,
Inc. to comply with the provisions of the Securities Act of 1933 and all
requirements of the Securities and Exchange Commission.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ JON A. GLYDON PRESIDENT, CHIEF EXECUTIVE OFFICER AND MARCH 26, 1997
---------------------------------- DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
JON A. GLYDON
/s/ BROOKS R. HERRICK SENIOR VICE PRESIDENT, CHIEF FINANCIAL MARCH 26, 1997
---------------------------------- OFFICER AND TREASURER (PRINCIPAL
BROOKS R. HERRICK FINANCIAL AND ACCOUNTING OFFICER)
/s/ GUSTAV A. CHRISTENSEN DIRECTOR MARCH 26, 1997
----------------------------------
GUSTAV A. CHRISTENSEN
/s/ THOMAS H. CONWAY DIRECTOR MARCH 26, 1997
----------------------------------
THOMAS H. CONWAY
/s/ DR. JAMES L. MCKENNEY DIRECTOR MARCH 26, 1997
----------------------------------
DR. JAMES L. MCKENNEY
/s/ STEVEN J. ROTH DIRECTOR MARCH 26, 1997
----------------------------------
STEVEN J. ROTH
II-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Earth and Ocean Sports, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Earth and Ocean Sports, Inc. included in this
registration statement and have issued our report thereon dated February 13,
1997 (except with respect to Note (6), as to which the date is March 27, 1997).
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 16(b) above is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 13, 1997
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Earth and Ocean Sports, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Earth and Ocean Sports, Inc. included in this
registration statement and have issued our report thereon dated December 29,
1995. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 16(b) above
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.
/s/ RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
December 29, 1995
S-2
EARTH AND OCEAN SPORTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE, BALANCE,
BEGINNING OF END OF
PERIOD INCREASES(1) DEDUCTIONS PERIOD
------ --------- ---------- ------
ACCOUNTS RECEIVABLE RESERVE:
October 31, 1995 ....................... $ 36,900 $240,501 $(239,801) $ 37,600
======== ======== ========= =========
October 31, 1996 ....................... $ 37,600 $245,857 $(131,557) $ 151,900
======== ======== ========= =========
January 31, 1997 ....................... $151,900 $ 27,638 $ (18,038) $ 161,500
======== ======== ========= =========
(1) Includes allowances for doubtful accounts and sales returns.
S-3