<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number _________
MILLENNIUM DIRECT, INC.
formerly known as Kid Rom, Inc.
-------------------------------------------
(Name of Small Business Issuer in its charter)
DELAWARE 13-3786306
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
HCR 30-A, NORTH BLENHEIM, NY 12131 12131
- ------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (607) 588-8885
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of Exchange on which
to be so registered each class is to be registered
N/A N/A
- --------------------- ----------------------
Securities to be registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
-------------------------------------------
(Title of Class)
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ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
Millennium Direct, Inc. (the "Company", "Millennium" or the
"Registrant") was incorporated in the State of Delaware on September 13, 1994 as
Kid Rom, Inc. ("KRI"). The Company develops, produces and distributes
entertaining and educational videos for the toddler, children and teenage
markets. In February 1998, KRI acquired UltraDerma, Ltd. ("UDL"), a company
which develops, markets and distributes anti-aging skin care products. On
November 18, 1999, KRI changed its name from Kid Rom, Inc. to Millennium Direct,
Inc. The Company's corporate office is located at HCR 30-A, North Blenheim, New
York 12131.
(b) BUSINESS OF ISSUER
The Company currently operates two divisions, children's videos (KRI's
business since incorporation) and skin care products (the business of UDL
acquired in February, 1998).
CHILDREN'S VIDEOS. The Company attempts to make its videos both
entertaining and educational. All children's videos developed by the Company
have five characteristics which the Company hopes will distinguish it from its
competition:
(i) All videos involve a form of animated transportation vehicle
or construction equipment;
(ii) All videos include children interacting with animated and live
equipment and asking questions regarding how the equipment
works or operates;
(iii) All videos feature original music and narrative soundtracks;
(iv) All videos demonstrate a theme or moral that the Company
believes worthy of instilling in children; and
(v) All videos are free of violence.
The Company has completed two videos, "Toby the Tugboat" and "Brett the
Jet", which the Company believes feature these characteristics, and is currently
seeking to develop others. The videos are less than 30 minutes each and can be
adapted for sale or syndication in foreign markets. In addition, the Company is
seeking to develop both additional videos and several weekly combination live
action/animated shows aimed at the teenage market. In developing its videos and
weekly shows, the Company attempts to create characters with cross-over
merchandising appeal into areas such as clothing, board games, interactive
CD-ROM games, books, toys, dolls and video games.
In "Toby the Tugboat", two children are shown traveling through New
York Harbor aboard a real tugboat. The animated "Toby the Tugboat" appears on
screen and teaches the children how small tugboats, with their large engines,
are necessary for moving huge ocean-going vessels around the harbor. The moral
is that no matter how big or small one is, it is what is inside that matters
most. The theme song "Toby the Tugboat" was written specifically for the video,
which is targeted at children between the ages of 3 and 8.
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"Brett the Jet" is a video about teamwork. It features jets, cargo
planes, acrobatic planes and commercial airlines. The animated "Brett the Jet"
shows two brothers, ages 10 and 12, the importance of teamwork by showing how
people in the radar tower, the ground crew and the crew aboard the plane all
work together to help different types of planes fly safely and securely. This
video also features an original soundtrack and title song.
The Company contracts on a case-by-case basis with various writers,
animators, directors, producers, musicians and post-production staff to complete
the videos and prepare them for videotape release. Currently, these contracts
are on a fixed fee basis but may, in the future, be on a revenue sharing basis.
The Company markets its videos through general video distributors,
specialists in the toddler and children's markets and direct response television
and print advertising. The Company is also seeking to distribute its videos
directly to major video store chains as well as through educational
institutions, direct mail catalogs and internet advertising.
ANTI-AGING COSMETICS AND SKIN CARE PRODUCTS. The Company has developed
a proprietary anti-aging formula designed to rejuvenate skin cells and eliminate
wrinkles and other signs of aging. The Company's signature line of cosmetics and
skin care products, sold under the TheraCel brand name, is an all natural
product that does not use any acid-based ingredients. In addition to the
TheraCel brand, the Company owns a patent on a pillow designed to help minimize
the facial wrinkles some women experience after a night of sleep.
The Company contracts with outside sources for the manufacture,
bottling, packaging and distribution of its skin care products. Some of these
contracts are at a fixed rate while others are on a per unit basis. The Company
markets these products through direct response television.
The Company's target market for its skin care products is primarily
women between the ages of 28 and 55.
The Company centralizes its management, production, sales and marketing
divisions for both the videos and the skin care products all within the
Millennium corporate entity. Financial information concerning production,
development, sales, marketing, operating costs and other expenses of the Company
are maintained in accordance with generally accepted accounting principles, but
not allocated according to specific product.
ACQUISITION OF ULTRADERMA, LTD.
On February 1, 1998, the Company, through a wholly-owned subsidiary,
acquired substantially all of the assets, of UDL (the "Acquisition") for a total
purchase price of $6,334,600. The consideration consists of $400,000 in cash and
the issuance of 3,025,000 restricted shares of the common stock of the Company,
par value $.0001 per share (the "Common Stock"), which such shares were valued
at $5,934,600. Concurrent with the Acquisition and the agreement thereto (the
"Acquisition Agreement"), the Company executed a letter agreement (the "Letter
Agreement") which granted to Ardis Balis, the Chairperson and Founder of UDL,
certain anti-dilution rights pursuant to which the Company agreed to maintain
Ms. Balis' interest in the Company, pending a registered public offering of the
Company's securities, at not less than fifty-one percent (51%) of the issued and
outstanding Common Stock. For purposes of such calculation, the Company is
permitted to include shares of Common Stock held by George Balis, the Chairman
and Chief Executive Officer of the Company and the husband of Ardis Balis.
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SUBSTANTIAL THIRD PARTY AGREEMENT; SALES AND MARKETING
The Company's marketing strategy regarding its children's videos is to
further enhance the image and awareness of its videos by producing entertaining,
educational and non-violent characters and stories. The Company will continue to
promote the "TheraCel" brand, and other skin care products, by seeking to
demonstrate the ease, safety and effectiveness of its products. The Company
currently sells all of its products directly to consumers through direct
response advertising. The Company has entered into a Production Services and
Marketing Agreement (the "Production Agreement") with a third party marketing
corporation (the "Marketer") to absorb much of the high costs of producing new
direct response television advertising and producing other print and television
advertising, manufacturing, packaging and warehousing, fulfillment and database
management costs.
Pursuant to the Production Agreement, the Company retains all
proprietary information and trademarks as well as the customer list, while
giving to the Marketer a percentage based on media advertising dollars spent and
sales achieved. This strategy reduces the Company's costs and risk. Once a
consumer has purchased products from the Company, the Company seeks to sell him
or her additional products that might be of interest. Through flyers and other
promotional mailings, consumers are urged to re-order products once their
current supply has been exhausted and order additional products manufactured by
the Company. Alternatively, consumers can elect to enroll in Company programs
which automatically charge their credit cards and sends replenishment supplies
at requested intervals.
In September 1999, the Company terminated a sales and marketing
agreement with a prior marketer (the "Previous Marketer"). Although the Previous
Marketer successfully launched the TheraCel product line through a media
infomercial campaign, it was not prepared to handle the immediate large volume
of sales generated by the infomercial. The Previous Marketer sought to improve
its fulfillment, customer service and call center abilities and decreased its
media purchases to make these changes, as it, too, realized its facilities in
this area were not working effectively. The Company was not satisfied with the
changes the Previous Marketer made to cure these problems. In addition, the
Company was approached by other potential marketers who not only offered what
management believed were superior call center, customer service and fulfillment
capabilities, but, in the opinion of management, significantly better financial
arrangements, which could permit the Company's gross profit margin to be
materially improved. As part of the termination agreement, the Company and the
Previous Marketer agreed that the Previous Marketer would continue to sell on
behalf of the Company the approximately 10,000 units remaining in the Previous
Marketer's possession, and the Company anticipates receiving $1,000,000 in gross
sales if all of such inventory is sold at a price of $100 per unit. There is no
deadline for this sale of remaining inventory, but the Previous Marketer
continues to have an obligation to report all sales to the Company, which has
retained audit rights with respect to such inventory. In June, 1999, the Company
also terminated a separate licensing agreement it had with the Previous Marketer
to assist the Company in distributing the children's videos produced by the
Company. The Company paid $59,000, in the form of 200,000 shares of Common
Stock, to terminate its agreement with respect to the children's videos. Other
than as set forth above, neither the Previous Marketer nor the Company has any
rights, liabilities or obligations to the other.
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PACKAGING, WAREHOUSING, SHIPPING AND DISTRIBUTION
Currently, the Company undertakes all costs and obligations with
respect to the packaging, warehousing, shipping and distribution needs for the
children's videos. All of the Company's packaging, warehousing, shipping and
distribution needs with respect to its skin care products are served by the
Marketer pursuant to the Production Agreement. The Company seeks to enter into a
similar agreement with respect to the children's videos, although no assurance
can be given that such an arrangement can be made or that it will be on terms
favorable to the Company. With respect to the Company's skin care products,
fulfillment center hired by the Company receives orders via the Company's direct
response advertising or via the Internet and transmits these orders to the
appropriate contractor. These contractors each have facilities which the Company
uses to package, store and ship its products. This eliminates the need for the
Company to undertake the cost and administrative burden of large scale warehouse
and other fulfillment services. Management believes that concentrating their
efforts on developing and marketing their brands, and on sales and
merchandising, rather than operating a warehouse, will result in a much greater
rate of growth without any diminution in services to its customers. As the
Company's business grows, it will continually examine the costs and benefits of
obtaining its own distribution center.
QUALITY CONTROL
A vital concern to management is quality control. Strict quality
control standards are required in order to maintain and build relationships with
consumers. The Company carefully monitors the output of its producers and
contractors to insure they produce videos and skin care products consistent with
the brand and image of the Company. All contractors and vendors, including video
producers and post-production staff, are carefully supervised by the Company.
INVENTORY
Due to the nature of the Company's video business, the Company does not
regularly maintain inventory in any material amount. Once fully produced and
ready for distribution, thousands of videos can be produced in a short period of
time, eliminating the need to anticipate sales. Because the Company only orders
goods after they have received orders from purchasers, inventory is kept to a
minimum.
Although the Company's skin care products can be made and packaged
relatively easily, due to the Company's marketing strategy for these products
inventory must be kept on hand. The Company's current method of marketing is
through direct response television. By law, orders received via such medium must
be fulfilled within thirty (30) days of receipt of a credit card number from the
consumer. The Production Agreement requires the Marketer to provide the funds
necessary for the Company to purchase and maintain such inventory. This
arrangement allows the Company to advance minimal funds prior to sales of its
products.
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RESEARCH AND DEVELOPMENT
Because of the Production Agreement, the Company's most significant
expenditure is in the writing, animation and overall production of its videos
and in the research and development area of its skin care products. The ability
to utilize the same video characters multiple times (through sequels and
cross-merchandising) and the success of the Company's current anti-aging and
other skin care products will have a large impact on the ability of the Company
to keep these costs as low as possible.
EXPANSION STRATEGY
The Company believes that it can successfully build on its existing
customer base and marketing, packaging and shipping relationships and expand its
market share in both the children's video and skin care markets. The Company has
no plans to open additional offices, but could enter into additional
distribution arrangements and/or licensing arrangements as business warrants.
The Company may also expand the number of suppliers and manufacturers it
contracts with if there is a surge in demand for the Company's product lines.
The Company has the capacity to, and intends to, hire additional employees with
respect to development of its electronic commerce efforts. There can be no
assurance that the Company will be successful in any of these efforts.
ELECTRONIC COMMERCE
The Company is seeking to develop its own website in connection with
its skin care products, which is also intended to contain a link to a separate
site to purchase the children's videos produced by the Company.
LEASED FACILITIES
The Company leases property for use as its executive offices at HCR
30-A, North Blenheim, New York, from Ardis Balis, the President and a director
of the Company, at a rate of $2,000 per month. The Company currently has no
policy with respect to investments or interests in real estate, real estate
mortgages or securities of, or interests in, persons primarily engaged in real
estate activities.
EMPLOYEES
As of November 15, 1999, the Company employs three full-time
individuals who operate in executive, administrative, sales, marketing and
production capacities. None of the Company's employees is represented by a labor
organization and the Company considers its relationship with its employees to be
excellent.
COMPETITION
There are many companies that offer similar or competitive products to
the products produced by the Company. Both the children's video and skin care
industries are occupied by some of the largest, most well-known companies in the
world, including Disney, Time-Warner, Revlon, Estee Lauder, Scimitar and Anchor
Bay. Despite this substantial and intense competition against foreign and
domestic competitors with substantially greater resources and distribution
capabilities than the Company, the Company seeks to distinguish itself in
specialized niches within these industries by attempting to offer unique stories
and characters for its children's videos and by seeking to develop patented and
proprietary products for skin care and anti-aging not offered by its larger
competitors.
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FORWARD-LOOKING STATEMENTS
This Form 10-SB contains certain forward-looking statements based on
our expectations, assumptions, estimates and projections about our business
plan. These forward-looking statements involve risks and uncertainties. No one
should rely on any of these forward-looking statements. The Company uses words
such as "anticipates," "believes," "plans," "expects," "intends," "may,"
"estimates," "predicts," "potential," "could" and similar expressions to
identify forward-looking statements, however, actual results will almost
certainly differ, and in some cases materially differ, from those anticipated in
these forward-looking statements as a result of many factors, including, but not
limited to, a lack of adequate funds, an inability to compete with companies
with far greater resources, lack of acceptance among consumers of any of the
Company's current or future products, the inability of the Company to capitalize
on the initial success of its products, a dependence on key personnel of the
Company, the possible termination of the Production Agreement and/or termination
of relations between any of its suppliers or distributors, product liability for
any of its products, governmental regulation and the introduction of "copycat"
or "knockoff" products sold at a steep discount to the products of the Company.
The Company undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
GOVERNMENT REGULATION
The cosmetics and skin care products sold by the Company are not
subject to regulation by the Food and Drug Administration (the "FDA") because
the Company only sells topically applied cosmetics and moisturizers. Similarly,
the Company's manufacturing facilities located within the United States are not
subject to FDA regulation because they only manufacture topically-applied
cosmetics and moisturizers. Compliance with federal, state and local laws and
regulations pertaining to discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had, and is not
anticipated to have, a material effect upon the capital expenditures, earnings
or competitive position of the Company.
(c) REPORTS TO SECURITY HOLDERS.
(1) The Company is not required to deliver an annual report to security
holders and at this time does not anticipate the distribution of such a report.
(2) Upon the Securities and Exchange Commission ("SEC") declaring this
Form 10-SB effective, the Company will be obligated to file periodic reports
with the SEC under Section 15(d) or 13(a) of the Exchange Act.
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(3) The public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally,
the SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, which can be found at http://www.sec.gov.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
As set forth in Item 1(b) above, the Company is active in two areas:
children's videos and skin care products. The videos, all of which are free of
violence, are a combination of live action/animation with original music and
narrative soundtracks. The videos are less than 30 minutes each and can be
adapted for sale or syndication in foreign markets. In addition, the Company is
seeking to develop both additional videos and several weekly combination live
action/animated shows aimed at the teenage market. In developing its videos and
weekly shows, the Company attempts to create characters with cross-over
merchandising appeal into areas such as clothing, board games, interactive
CD-ROM games which are both entertaining and educational, books, toys, dolls and
video games. The Company contracts on a case-by-case basis with various writers,
animators, directors, producers, musicians and post-production staff to complete
the videos and prepare them for videotape release.
The Company has developed a proprietary line of skin care products
designed to combat the effects of aging by rejuvenating skin cells and
eliminating wrinkles and other signs of aging. In addition to the TheraCel
brand, the Company also owns a patent on a pillow designed to help minimize the
facial wrinkles some women experience after a night of sleep. The Company
contracts with outside sources for the manufacture, bottling, packaging and
distribution of its skin care products.
RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1998 COMPARED WITH
YEAR ENDED DECEMBER 31, 1997
As a result of the acquisition of UDL and its TheraCel product line,
the execution of an exclusive sales and marketing agreement for this product
line with the Previous Marketer, and the commencement of a successful media
infomercial campaign, the Company had net sales of $6,064,378 for the year ended
1998 versus no sales for the year ended 1997. The Company's gross profit for
the year ended 1998 was $480,469 or 7.9% of net sales, versus no gross profit
for the year ended 1997. Operating expenses for the year ended 1998 were
$495,562, an increase of $432,492 or 685% over the $63,070 in operating expenses
for the year ended 1997 due to significantly higher marketing and general and
administrative expenses associated with the UDL acquisition, including costs of
certain anti-dilution provisions contained therein, and the launch of the
TheraCel product line.
As a result of the above, the loss from operations, before depreciation
and amortization, was $15,093 for the year ended 1998, an improvement of $47,799
from the loss from operations, before depreciation and amortization, of $63,070
for the year ended 1997.
As of December 31, 1998, the Registrant had cash of $321,704. As of
December 31, 1998, the Registrant had total liabilities of $223,399 and total
stockholders' equity of $6,875,534. As of December 31, 1997, the Registrant had
cash of $100,300. As of December 31, 1997, the Registrant had total liabilities
of $900 and total stockholders' equity of $182,826. These changes resulted
primarily from the acquisition of UDL and the resulting increase in sales
thereafter, as well as cash received through the sale of Common Stock.
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RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
1999 COMPARED WITH THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
Net sales of $544,350 for the nine month period ended September 30,
1999 represented a decrease of $4,003,932, or 88% from net sales of $4,548,282
for the nine month period ended September 30, 1998. The Company's gross profit
decreased $324,530, or 90%, to $35,822 for the nine month period ended September
30, 1999 from $360,352 for the nine month period ended September 30, 1998. The
declines in net sales and gross profit are attributable to a decrease in media
purchases and ultimately the termination of the Company's exclusive sales and
marketing agreement with the Previous Marketer to market the TheraCel product
line. Despite the Previous Marketer's initial success in launching the TheraCel
product line, the Company was dissatisfied with the performance of the Previous
Marketer's fulfillment and call centers to satisfactorily handle the large
volume of sales generated by the infomercials. During the fourth quarter of
1999, the Company entered into an exclusive Production Services and Marketing
Agreement with a new marketer for the TheraCel product line as well as the
Anti-Wrinkle Pillow product line. The Company believes that through improved
fulfillment and call center capabilities offered by the new marketer, along with
financial terms which are superior to those under the terminated agreement, the
Company should be able to increase sales and enhance gross profits in the year
2000 as compared to 1999 and 1998 levels. Operating expenses increased $13,852,
or 4%, to $357,356 for the nine month period ended September 30, 1999 from
$343,504 for the nine month period ended September 30, 1998 due to costs
associated with the termination of the Children's Video marketing agreement not
fully offset by lower marketing expenses.
As a result of the above, the Company incurred a loss from operations,
before depreciation and amortization, of $321,534 for the nine months ended
September 30, 1999 versus income from operations,before depreciation and
amortization, of $16,848 for the nine months ended September 30, 1998.
As of September 30, 1999, the Registrant had cash of $237,754, total
liabilities of $79,800 and total stockholders' equity of $6,684,967. As of
September 30, 1998, the Registrant had cash of $287,754, total liabilities of
$78,900 and total stockholders' equity of $6,686,624. These changes resulted
primarily from the termination of the TheraCel marketing agreement as noted
above, as well as cash received through the sale of Common Stock.
LIQUIDITY AND CAPIAL RESOURCES
The Company has financed its operations and met its capital
requirements primarily through funds raised in private placements conducted
since 1996. Beginning in 1998 with its acquisition of UDL, the Company has been
able to finance, in part, operations from income. The principal uses of
operating cash are to develop and produce the Company's children's videos and to
continue to market its line of skin care products.
YEAR 2000 COMPUTER ISSUES
What is commonly known as the "Year 2000 Issue" arises because many
computer software and hardware systems use only two digits to represent the
year. As a result, these systems and programs may not calculate dates beyond
1999, which may cause errors in information or system failures.
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With respect to its internal systems, the Company is taking appropriate
steps to remediate the year 2000 issues and does not expect the costs of these
efforts to be material. However, the year 2000 readiness of the Company's
suppliers may vary. While the Company does not believe the year 2000 matters
discussed above will have a material impact on its business, financial condition
or results of operations, it is uncertain whether or to what extent the Company
may be affected by such matters.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases property for use as its executive offices at HCR
30-A, North Blenheim, New York, from Ardis Balis, the President and a director
of the Company, at a rate of $2,000 per month. The Company currently has no
policy with respect to investments or interests in real estate, real estate
mortgages or securities of, or interests in, persons primarily engaged in real
estate activities.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following persons are known to the Registrant to be officers,
directors and beneficial owners of more than five percent of the Registrant's
common stock as of November 18, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- ------------------------ ----------------
<S> <C> <C>
George Balis 651,050 (1) 7.42%
HCR 30-A
North Blenheim, New York 12131
Ardis Balis 3,825,000 (2) 43.63%
HCR 30-A
North Blenheim, New York 12131
Michael Sietz-Honig 0 --
395 South End Avenue
Apt. 6DD
New York, New York 10208
Dan Gorczycki 137,000 1.56%
340 East 93rd Street
Apt. 9A
New York, New York 10128
</TABLE>
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<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- ------------------------ ----------------
<S> <C> <C>
John Rissi 155,000 1.76%
30 East 85th Street
Apt. 3E
New York, New York 10028
Giltner Stevens 152,000 1.73%
2531 East 32nd Street
Joplin, Missouri 64804
ALL OFFICERS AND
DIRECTORS AS A
GROUP (6 Individuals) 4,920,050 56.13%
<FN>
(1) Excludes shares owned by Ardis Balis, Mr. Balis' wife, as to which shares
Mr. Balis disclaims beneficial ownership.
(2) Excludes shares owned by George Balis, Ms. Balis' husband, as to which
shares Ms. Balis disclaims beneficial ownership.
</FN>
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
A. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS. The current
officers and directors will serve for one year or until their respective
successors are elected and qualified. They are:
<TABLE>
<CAPTION>
NAME AGE DATE OF POSITION
ELECTION
<S> <C> <C> <C>
George Balis 49 September, 1994 Chairman of the Board
HCR 30-A of Directors, Chief
North Blenheim Executive Officer,
New York 12131 Secretary
Ardis Balis 47 February, 1998 President, Director
HCR 30-A
North Blenheim,
New York 12131
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE DATE OF POSITION
ELECTION
<S> <C> <C> <C>
Michael Sietz-Honig 50 November, 1999 Executive Vice-President
395 South End Avenue
Apt. 6DD
New York, New York 10208
Dan Gorczycki 36 November, 1999 Director
340 East 93rd Street
Apt. 9A
New York, New York 10128
John Rissi 36 November, 1999 Director
30 East 85th Street
Apt. 3E
New York, New York 10028
Giltner Stevens 52 November, 1999 Director
2531 East 32nd Street
Joplin, Missouri 64804
</TABLE>
GEORGE BALIS. George Balis, the Chairman of the Board of Directors,
Chief Executive Officer and Secretary of the Company, was in the private
practice of law from 1975 through 1986, concentrating in the areas of
securities, corporation and entertainment law. From 1986 through 1992, Mr. Balis
was Chairman and President of American Screen Company, a diversified
entertainment company which, among other things, developed properties for motion
picture and television release. From 1993 to 1998, Mr. Balis was in the private
practice of law specializing in corporate and entertainment matters. In January,
1998, Mr. Balis became full-time chairman and Chief Executive Officer of the
Company. Mr. Balis has served on various boards of directors of corporations in
the cosmetics, entertainment and gourmet food industries. Mr. Balis is a
graduate of both Columbia University's School of Law and Graduate School of
Business, and is admitted to practice law in the State of New York.
ARDIS BALIS. Ardis Balis, the President and a director of the Company,
founded UltraDerma, Ltd., a company which was acquired by the Company in
February, 1998. Ms. Balis has both financed and researched the development of
rejuvenative skin care products. She has appeared on numerous instructional
videos, informercials and television talk shows. For the past five years, Ms.
Balis has been the Chief Executive Officer and President of UltraDerma, Ltd.
MICHAEL SIETZ-HONIG. Michael Sietz-Honig, Vice President of the
Company, was Vice President of Marketing for Peter Pan Entertainment from 1997
through 1998, where he conceived the marketing strategy behind the Denise Austin
series of exercise videos, accessories and equipment. This strategy utilized
direct response television which was later expanded into a nationwide
distribution agreement. He supervised the in-house telemarketing unit for the
Denise Austin videos, using them as a vehicle to upsell and back-sell related
videos and other special interest videos and audio entertainment based on
consumer feedback. Prior to that Mr. Sietz-Honig spent 20 years as a writer and
creative director for numerous advertising agencies, including J. Walter
Thompson, Grey Advertising, Gianettino & Meredith and Griffin Bacal, where he
was responsible for clients such as General Foods, Blue Cross/Blue Shield, and
Canon. Mr. Sietz-Honig has served as a Strategic Planning and Creative
Consultant for MGM Grand Hotels, Dreamworks, JC Penny and Kentucky Fried
Chicken.
12
<PAGE>
DAN E. GORCZYCKI, C.P.A.. Dan Gorczycki, a director of the Company, is
currently also a director of Holliday, Fenoglio, Fowler, L.P., a division of
Amresco, Inc. Mr. Gorczycki is currently involved in the placement of financing
and debt restructuring in real estate transactions. His experience includes work
in institutional real estate sales for firms including Landauer Associates,
where he worked from 1997 until 1999, Julien J. Studley, Inc., where he worked
from 1995 through 1997, and Legg Mason. Mr. Gorczycki additionally was employed
by The Greater New York Savings Bank from 1993 until 1995 where he was
responsible for completing workouts on overleveraged assets. Mr. Gorczycki's
career also contained experience in the financial services industry at both
Cowen & Company (now SG Cowen) and Salomon Brothers (now Salomon Smith Barney)
as a financial analyst. Mr. Gorczycki started his professional career at Price
Waterhouse, where he worked for the Small Business Group as an auditor. Mr.
Gorczycki received his MBA from New York University and a BS from St. John's
University. He is both a Certified Public Accountant (inactive) and a Licensed
Real Estate Salesperson in New York and a member of the Real Estate Board of New
York.
JOHN RISSI. John Rissi, a director of the Company, began his career in
telecommunications sales for Cable & Wireless Communications, Inc. where he
oversaw a sales staff of more than 30 sales representatives from 1986 to 1989.
In February 1989, Mr. Rissi started his own marketing company, Tele-Save, where
he marketed telecommunications services for companies including AT&T, Worldcom
and Sprint. In August 1995, Mr. Rissi entered into an agreement with VoiceNet
Corporation to market their credit calling card program. In April 1999, Mr.
Rissi co-founded Mutual Media Corporation, Inc., a marketing company that
specializes in marketing major web sites throughout the world. Mr. Rissi
received his B.S. at Hofstra University.
GILTNER STEVENS. Giltner Stevens, a director of the Company, currently
serves as a corporate director for several companies and is Chairman of the
Board of Directors of Arvest Bank of Joplin, Missouri. From 1977 to 1999, he
served as the President and Chief Executive Officer of The Brady Stevens
Company, which specializes in residential re-sales, as well as commercial and
industrial property management. He received a B.S. in business administrations
from the University of Missouri. He currently serves as President of the House
Corporation of Beta Theta Pi Fraternity in Columbia, Missouri.
B. SIGNIFICANT EMPLOYEES. None.
C. FAMILY RELATIONSHIPS. George Balis is the husband of Ardis Balis.
They were married in May, 1998. Mr. Balis currently serves as the Chairman of
the Board of Directors (the "Board"), the Chief Executive Officer and Secretary
of the Company. Mrs. Balis currently serves as President and a member of the
Board.
13
<PAGE>
D. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. There have been no events
under any bankruptcy act, no criminal proceedings and no judgments, injunctions,
orders or decrees material to the evaluation of the ability and integrity of any
director, executive officer, promoter or control person of Registrant during the
past five years.
ITEM 6. EXECUTIVE COMPENSATION.
It is intended, as of the date of filing of this Form 10-SB, that each
of George Balis, Ardis Balis and Michael Sietz-Honig will execute employment
agreements with the Company in form and substance to be negotiated and agreed
between the Company and each such individual. These employment agreements are
expected to include base salaries, expense allowances, bonuses and a portion of
the pre-tax profit of the Company as compensation for their services to the
Company, in addition to the opportunity to acquire additional shares of Common
Stock. These employment agreements are expected to include non-competition,
confidentiality and non-raid provisions to be negotiated.
On November 18, 1999, each of George Balis and Ardis Balis was issued
350,000 shares of Common Stock, as compensation for services rendered by each of
them as officers and directors of the Company in 1999. No other compensation has
been paid to any officer or director of the Registrant since 1996 and, other
than as set forth above, no compensation has been accrued since that time
through September 30, 1999. George Balis received 300,000 shares of Common
Stock, having a value of $15,000, as a director's fee for his service as a
director in 1997. Mr. Balis is not owed any further compensation for any
services rendered to the Company prior to November 15, 1999. Additionally,
300,000 shares of Common Stock, having a value of $15,000, were issued to an
individual in 1997 for his services as a director in 1997 (the "Former
Director"). The Former Director no longer serves as a director of the Company
and is not owed any further compensation. Pursuant to a certain surrender
agreement executed by and between the Company and the Former Director on
February 26, 1999, the Former Director surrendered to the Company all 300,000
shares issued to him as compensation for his services as a director in 1997. The
Company sought to return these shares to the Company's treasury, but such
surrender has not yet been reflected on the books and records of the transfer
agent. For purposes of calculating the issued and outstanding shares of Common
Stock, the Company does not include these 300,000 shares. Certain officers have
received loans from the Company, which such terms are set forth in Item 7 below.
Directors who are not members of management currently do not receive any
compensation for their service as such.
14
<PAGE>
The following table sets forth all cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, to
officers, directors and certain key employees.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
SALARY BONUS OTHER
<S> <C> <C> <C> <C>
NAME AND PRINCIPAL POSITION
George Balis 1998 -0- -0- -0-
Chairman, Chief Executive Officer 1997 -0- -0- $15,000 (1)
and Secretary 1996 -0- -0- -0-
Ardis Balis (2) 1998 -0- -0- -0-
President and Director
Michael Sietz-Honig (3)
Executive Vice-President
<FN>
- --------------------
(1) Paid in the form of 300,000 shares of Common Stock as director's
compensation.
(2) Ms. Balis became an employee of the Company in February, 1998.
(3) Mr. Sietz-Honig became an employee of the Company in March, 1999.
</FN>
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of December 31, 1997, George Balis owed the Company $9,031 for money
advanced to him. Such amount was repaid by Ardis Balis in 1998 through the
application of proceeds from the acquisition of UDL by the Company. As of
December 31, 1998, the Company owed Ardis Balis $162,500 in cash pursuant to the
acquisition by the Company of UltraDerma, Ltd. Such amount, plus an additional
$213,427 (which such amount was advanced to Ms. Balis as a loan from the
Company), was paid in cash to Ms. Balis. Accordingly, as of September 30, 1999,
there was a balance owed by Ms. Balis to the Company of $50,927, which such
amount remains outstanding.
As of December 31, 1998, the Company had invested $161,621 to obtain a
nineteen percent (19%) equity interest in a company which develops and markets
gourmet snack foods.
15
<PAGE>
On May 1, 1998 and September 28, 1998, George Balis transferred 400,000
shares and 200,000 shares, respectively, of Common Stock to Ardis Balis to
enable the Company to meet its obligation to Ms. Balis with respect to the
Acquisition Agreement. On November 18, 1999 the Company issued an additional
450,000 shares of Common Stock to Ardis Balis to enable the Company to meet its
obligation to Ms. Balis with respect to the Acquisition Agreement. The
Acquisition Agreement requires the Company to insure that Ardis Balis, until
such time as the Company shall complete a registered public offering of its
shares, maintain an equity position in the Company at no less than 51% of all
issued and outstanding shares of Common Stock of the Company. For purposes of
such calculation, the Company is permitted to include shares of Common Stock
held by George Balis, the Chairman and Chief Executive Officer of the Company
and the husband of Ardis Balis.
ITEM 8. DESCRIPTION OF SECURITIES.
(a) COMMON OR PREFERRED STOCK.
The Company is authorized by its Certificate of Incorporation, as
amended, to issue an aggregate of 10,000,000 shares of Common Stock, par value
$.0001 per share (the "Common Stock"). On November 18, 1999, the Company amended
its Certificate of Incorporation to authorize a total of 25,000,000 shares of
Common Stock and 10,000,000 blank check preferred shares (the "Preferred
Stock"). As of November 19, 1999, 8,765,947 shares of Common Stock were issued
and outstanding. Other than the Common Stock and Preferred Stock, the Company is
not authorized to issue any other class of capital stock.
All outstanding shares of Common Stock are of the same class and have
equal rights and attributes. The holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of shareholders of the
Company. All shareholders are entitled to share equally in dividends, if any, as
may be declared from time to time by the Board out of funds legally available.
In the event of liquidation, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of all liabilities. The
shareholders do not have cumulative or preemptive rights.
The Board is expressly authorized at any time, to provide for the
issuance of the Preferred Stock in one or more series, with such voting powers,
and with such designations, preferences and relative participating, option or
other special rights as expressed in the resolution or resolutions providing for
the issue thereof and adopted by the Board.
The description of certain matters relating to the securities of the
Company is a summary and is qualified in its entirety by the provisions of the
Company's Certificate of Incorporation and By-Laws, copies of which have been
filed as exhibits to this Form 10-SB.
(b) DEBT SECURITIES. None.
(c) OTHER SECURITIES TO BE REGISTERED. None.
16
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. The Company's common stock is traded in the
over-the-counter market on the NASDAQ OTC Bulletin Board. The following chart
summarizes trading activity in the Company for fiscal years 1999 and 1998. The
following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. The source of
the following information was the OTC Bulletin Board Quarterly Quote Summary
Report received from Nasdaq Trading Market Services.
Common Stock,
$0.0001 par value
BID
PERIOD HIGH LOW
FISCAL YEAR 1999
First Quarter
(January through March) 1.5313 0.375
Second Quarter
(April through June) 1.0625 0.375
Third Quarter
(July through September) 0.5625 0.25
FISCAL YEAR 1998
First Quarter
(January through March) 10.3125 2.75
Second Quarter
(April through June) 4.8125 0.625
Third Quarter
(July through September) 2.8125 1.25
Fourth Quarter
(October through December) 2.625 1.50
(b) HOLDERS. As of November 19, 1999, there were approximately 95
record holders of 8,765,947 shares of the Company's Common Stock.
17
<PAGE>
(c) DIVIDENDS. The Company has not paid any cash dividends to date and
does not anticipate or contemplate paying dividends in the foreseeable future.
It is the present intention of management to utilize all available funds for the
development of the Company's business.
ITEM 2. LEGAL PROCEEDINGS.
There are not presently any material pending legal proceedings to which
the Registrant is a party or as to which any of its property is subject, and no
such proceedings are known to the Registrant to be threatened or contemplated
against it.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are not and have not been any disagreements between the
Registrant and its accountants on any matter of accounting principles, practices
or financial statement disclosure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In February, 1997, the Company issued 2,300,000 shares of Common Stock
at a price of $.0001 per share. This transaction was exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) thereof, since they were issued solely to members of management and
directors of the Company. Also in February, 1997, the Company issued 578,000
shares of Common Stock for par value ($.0001) as compensation for services
rendered. This transaction was exempt from registration under the Securities
Act, pursuant to Section 4(2) thereof since they were issued solely to members
of management and directors of the Company.
In December, 1997, the Company issued 600,000 shares of Common Stock to
two individuals as compensation for serving as directors of the Company. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act since they were issued solely to members of management and
directors of the Company. Also in December, 1997, the Company sold 398,000
shares of Common Stock for $.25 per share, which such transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act and Regulation
D promulgated thereunder, specifically, Rule 504 thereof. Also in December,
1997, the Company sold 82,353 shares of Common Stock for $.25 per share. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, specifically, Rule 504
thereof.
In March, 1998, the Company issued 500,000 shares of Common Stock to
Ardis Balis, an officer and director of the Company, pursuant to the Acquisition
Agreement, which transaction was exempt from registration pursuant to Section
4(2) of the Securities Act.
In April, 1998, the Company issued 800,000 shares to Ardis Balis to
comply with the terms of the Acquisition Agreement. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act. Also in April,
1998, the Company sold 300,000 shares at a price per share of $.16 and 250,000
shares for $.25 per share. These transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder, specifically, Rule 504 thereof.
18
<PAGE>
In April, 1998, the Company issued 400,000 shares of Common Stock at
par value, $.0001, to George Balis, an officer and director of the Company. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act.
In April, 1998, the Company sold 100,000 shares at a price of $.50 per
share, and an additional 100,000 shares for $.85 per share, which such
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, specifically, Rule 504
thereof.
Also in April, 1998, the Company issued 350,000 shares to Ardis Balis
to remain in compliance with the terms of the Acquisition Agreement. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act. Additionally, the Company sold 350,000 restricted shares of
Common Stock for $.35 per share, which such transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, specifically, Rule 504 thereof. In April, 1998, the
Company sold an additional 300,000 shares of Common Stock at $.166 per share.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, specifically, Rule 504
thereof.
In July, 1998, the Company issued 275,000 shares to Ardis Balis to
remain in compliance with the terms of the Acquisition Agreement, which such
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act. Also in July, 1998, the Company sold 75,000 shares to one entity
and 200,000 shares to another entity, both at a price per share of $.50, and
both exempt from registration pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder, specifically, Rule 504 thereof.
In September, 1998, the Company sold 137,500 shares, pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
specifically, Rule 504 thereof, for $.50 per share. Also in September, 1998, the
Company issued 700,000 shares to Ardis Balis to remain in compliance with the
terms of the Acquisition Agreement. Also in September, 1998, the Company sold
120,000 shares of Common Stock for $.20 per share, pursuant to an exemption from
registration pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, specifically, Rule 504 thereof.
In September, 1998, in three unrelated transactions, the Company sold
50,000 shares of Common Stock at $.30 per share, 80,000 shares at $.50 per share
and 50,000 shares at $.65 per share, all pursuant to an exemption from
registration pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, specifically, Rule 504 thereof.
In October, 1998, the Company sold 2,985 shares of Common Stock at $.40
per share, pursuant to an exemption from registration pursuant to Section 4(2)
of the Securities Act and Regulation D promulgated thereunder, specifically,
Rule 504 thereof.
19
<PAGE>
In November, 1998, the Company sold 25,000 shares of Common Stock for
services rendered, which such services were valued at $44,500, or $.56 per
share. This transaction was exempt from registration pursuant to Section 4(2) of
the Securities Act.
In November, 1998, the Company sold 75,000 shares at $.80 per share.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, specifically, Rule 504
thereof.
In three unrelated transactions in December, 1998, the Company sold
80,000, 290,000 and 30,000 shares of Common Stock each for $.50 per share,
pursuant to an exemption from registration pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, specifically, Rule 504
thereof.
In December, 1998, the Company sold 25,000 shares for $.80 per share,
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder, specifically, Rule 504 thereof. Also in December, 1998, the Company
sold 12,000 shares of Common Stock for $.48 per share, pursuant to Section 4(2)
of the Securities Act and Regulation D promulgated thereunder, specifically,
Rule 504 thereof.
In January, 1999, the Company sold 170,000 shares for $.50 per share,
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder, specifically, Rule 504 thereof.
In February, 1999, the Company issued 75,000 restricted shares for
services rendered valued at $69,750, or $.93 per share, which such transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act.
In March, 1999, the Company sold 30,000 shares of Common Stock,
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder, specifically, Rule 504 thereof, for $.50 per share.
In April, 1999, the Company sold 750,000 shares of Common Stock,
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder, specifically, Rule 504 thereof, for $.25 per share. Also in April,
1999, the Company sold 20,000 shares of Common Stock for services rendered
valued at $11,200, or $.56 per share, which such transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act.
In July, 1999, the Company sold 200,000 shares of Common Stock in
consideration for the termination of a marketing agreement, valued at $59,375 or
$.296 per share. Also in July, 1999, the Company issued 50,000 shares of
restricted Common Stock in connection with services rendered, valued at $13,250,
or $.265 per share, which such transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act.
Pursuant to the Production Agreement, the Marketer, among other things,
would create and produce a 30-minute direct response television commercial and a
one- or two-minute television commercial for the Company's skin care products.
20
<PAGE>
Pursuant to the Production Agreement, the Company also entered into an incentive
based Stock Option Agreement (the "Option Agreement") with the Marketer.
Pursuant to the Option Agreement, the Company granted the Marketer options to
buy a number of shares of Common Stock, at a particular price per share, based
on the total number of Product Units sold in each Performance Year, as such
terms are defined in the Option Agreement. The Option Agreement is for a total
of three Performance Years. Options to purchase Common Stock are exercisable for
a period of five (5) years from the end of the then-applicable Performance Year.
If the Option Agreement continues for three Performance Years and the Marketer
qualifies for the maximum number of options in each Performance Year, the
Company will issue the Marketer options to purchase 270,000 shares of Common
Stock at an exercise price of $.55 for the first Performance Year (based on the
sale of 95,000 Product Units at a current retail sales price of $149 per Product
Unit), options to purchase 480,000 shares of Common Stock at an exercise price
of $.50 for the second Performance Year (based on the sale of 160,000 Product
Units) and options to purchase 600,000 shares of Common Stock at an exercise
price of $.50 for the third Performance Year (based on the sale of 200,000
Product Units).
In November, 1999, the Company issued 350,000 shares of Common Stock to
Ardis Balis and 350,000 shares to George Balis for services rendered by each of
them as officers and directors of the Company during 1999. Additionally, the
Company issued 400,000 shares of Common Stock to be in compliance with the terms
of the Acquisition Agreement. All of these transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act since they were
issued solely to members of management and directors of the Company. Also in
November, 1999, the Company sold 50,000 shares of Common Stock for services
rendered, which such services were valued at $5,000, or $.10 per share. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The By-laws and Certificate of Incorporation of the Company include an
indemnification provision that indemnifies to the maximum extent permitted by
law, any person who is or was a director, officer, agent, fiduciary or employee
of the Company against any claim, liability or expense arising, because of a
person serving, at the Company's request, in any of the roles described above.
The Company may purchase, to the maximum extent permitted by law,
indemnification insurance. No directors of the Company will have any personal
liability for monetary damages to the Company or its shareholders for breach of
his or her fiduciary duty as a director except if: the director breaches his or
her loyalty, does not act in good faith, does not follow the law, or derives an
improper personal benefit.
PART III
ITEM 1. INDEX TO FINANCIAL STATEMENTS AND EXHIBITS.
(a) INDEX TO FINANCIAL STATEMENTS.
PAGE
Independent Accountants' Report
Years ended December 31, 1998 and 1997.......... F-1
Balance Sheets
As of December 31, 1998 and 1997................ F-2
Statement of Changes in Shareholders' Equity
Years ended December 31, 1998 and 1997.......... F-3
Statement of Income
Years ended December 31, 1998 and 1997.......... F-4
21
<PAGE>
Statement of Cash Flows
Years ended December 31, 1998 and 1997.......... F-5
Notes to Financial Statements
Years ended December 31, 1998 and 1997.......... F-6
Balance Sheet
As of September 30, 1999........................ F-12
Statement of Income
Three and Nine Months ended September 30, 1999
and 1998...................................... F-13
Statement of Cash Flows
Three and Nine Months ended September 30, 1999
and 1998...................................... F-14
Notes to Financial Statements
Nine Months ended September 30, 1999............ F-17
(b) EXHIBITS.
3.1 Certificate of Incorporation
3.2 Amendments to the Certificate of Incorporation
3.3 Bylaws
3.4 Application for Authority to Conduct Business in the State of New York
10.1 Production Services and Marketing Agreement, dated November 3, 1999
between the Company and Marketer, and related Stock Option Agreement
23 Consent of Independent Auditors
27.1 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
as amended, the registrant has caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
MILLENNIUM DIRECT, INC.
By: /S/ GEORGE BALIS
--------------------------
George Balis
Chief Executive Officer
Date: November 19, 1999
<PAGE>
KID ROM, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
KID ROM, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF INCOME F-3
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-11
<PAGE>
VLAHAKIS & ASSOCIATES, CPA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Kid Rom, Inc.:
We have audited the accompanying consolidated balance sheets of Kid Rom, Inc.
and, commencing February 1, 1998, its wholly owned subsidiary Ultra Derma, Ltd.,
as of December 31, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 prsent fairly, in all
material respects, the financial position of Kid Rom, Inc. and, commencing
February 1, 1998, its wholly owned subsidiary Ultra Derma, Ltd., as of December
31, 1998 and 1997, and the results of its operations and cash flows for the
years then ended in conformity with generally accepted accounting principles.
Stamford, NY
November 15, 1999
F-1
<PAGE>
KID ROM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Current Assets:
Cash $321,704 $100,300
Accounts receivable 336,690
Inventory 15,000
-------------- ------------
Total Current Assets 673,394 100,300
Video costs 253,702 70,008
Office furniture and equipment - less accumulated depreciation
of $5,180 in 1998 and $1,097 in 1997 11,399 4,387
Intangible assets - less accumulated amortization of
$323,183 in 1998, (see Footnote #3) 5,988,817
Investments (see Footnote #7) 161,621
Investments, other 10,000
Receivables from stockholders 9,031
-------------- ------------
Total Assets $7,098,933 $183,726
============== ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current Liabilities:
Payable to stockholder $162,500 $0
Accrued expenses payable 60,899 900
-------------- ------------
Total Current Liabilities 223,399 900
Stockholders' Equity:
Common stock - authorized 10,000,000 shares, $0.0001 par
value, issued and outstanding - 6,500,947 shares
in 1998 and 1,001,078 shares in 1997 650 100
Additional paid-in capital 7,317,343 282,826
Retained deficit (442,459) (100,100)
-------------- ------------
Total Stockholders' Equity 6,875,534 182,826
-------------- ------------
Total Liabilities and Stockholders' Equity $7,098,933 $183,726
============== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
KID ROM, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Income
Sales, net $6,064,378 $0
Commissions (4,669,794)
Cost of goods sold (914,115)
----------- -----------
Gross Margin 480,469 0
Expenses
Marketing 299,627 11,328
General and administrative 106,532 49,942
Professional fees 29,127
Other, net of interest income of $300 for 1998 60,276 1,800
----------- -----------
Total Expenses 495,562 63,070
----------- -----------
Loss before depreciation, amortization and provision for income taxes (15,093) (63,070)
Depreciation 4,083 1,097
Amortization 323,183
----------- -----------
327,266 1,097
----------- -----------
Loss before provision for income taxes (342,359) (64,167)
Provision for income taxes (see Footnote #8) - -
----------- -----------
Net loss $ (342,359) $ (64,167)
=========== ===========
Net loss per common share-basic: $ (0.08) $ (1.45)
=========== ===========
Net loss per common share-diluted: $ (0.08) $ (1.45)
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
KID ROM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL DEFICIT TOTAL
---------------- -------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $20 $134,445 $(35,933) $98,532
Net loss (64,167) (64,167)
Common stock issued 387 148,074 148,461
One-for-one thousand reverse stock
split (see Footnote #5) (307) 307 0
---------------- -------------------- ---------------- --------------------
BALANCE, DECEMBER 31, 1997 100 282,826 (100,100) 182,826
Net loss (342,359) (342,359)
Common stock issued 550 7,034,517 7,035,067
---------------- -------------------- ---------------- --------------------
BALANCE, DECEMBER 31, 1998 $650 $7,317,343 $(442,459) $6,875,534
================ ==================== ================ ====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
KID ROM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (342,359) $ (64,167)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 327,266 1,097
Marketing expenses 257,250
General and administrative expenses 30,000
Changes in operating assets and liabilities:
Accounts receivable (336,690)
Inventory (15,000)
Accrued expenses 59,999 900
----------------- ----------------
Net cash used in operating activities (49,534) (32,170)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets (214,900)
Purchase of investments (171,621)
Addition to video costs (114,474)
Purchase of office furniture and equipment (11,095) (5,484)
----------------- ----------------
Net cash used in investing activities (512,090) (5,484)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 773,997 118,461
Receivable from stockholder 9,031 (8,130)
----------------- ----------------
Net cash provided by financing activities 783,028 110,331
NET INCREASE IN CASH 221,404 72,677
CASH, BEGINNING OF YEAR 100,300 27,623
----------------- ----------------
CASH, END OF YEAR $321,704 $100,300
================= ================
<FN>
Supplemental disclosure of non-cash operating, investing and
financing activities.
At various times during 1998, the Company issued common stock in
the amounts of $257,250, $69,220 and $5,934,600 to pay for marketing
expenses and to purchase video costs and intangible assets, respectively.
Furthermore, the Company obtained $162,500 in short term, non-interest
bearing financing from Boyd in connection with the UltraDerma Acquisition.
On December 31, 1997, the Company issued common stock in the amount of
$30,000 to pay for certain general and administrative expenses.
</FN>
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Kid Rom, Inc. (the "Company") is engaged principally in the development and sale
of certain premium skincare products which are marketed under the TheraCel brand
name. These products, which the Company acquired in February 1998 (see Footnote
#3), are marketed primarily in the United States through direct response
television.
The Company also develops and produces programming for the toddlers, children's
and educational markets. To date, the Company has completed two children's
videos, "Brett The Jett" and "Toby The Tugboat", and has several others under
development (collectively the "Children's Videos").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany transactions have been
eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
footnotes. Actual results could differ from those estimates.
Cash consists of amounts on deposit in non-interest bearing accounts maintained
at several major banking institutions.
Revenue is recognized when product is shipped by the Company's authorized
distributor (see Footnote # 4).
Inventory is stated at the lower of cost, as determined utilizing the first-in,
first-out (FIFO) method, or market.
Office furniture and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using an accelerated method over a five
year useful life for both financial reporting and income tax reporting purposes.
The Company intends to amortize video costs, which include the associated costs
of developing and producing the Children's Videos, once such videos are sold.
F-6
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 - BUSINESS ACQUISITION
On February 1, 1998, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and assumed a certain marketing agreement (see
Footnote #4) of UltraDerma, Ltd. ("UltraDerma", and its sole shareholder "Boyd")
for a total purchase price of $6,334,600 (the "UltraDerma Acquisition").
UltraDerma develops and markets premium skincare products marketed under the
TheraCel brand name. The consideration consisted of $400,000 in cash of which
$237,500 was paid during 1998 and $162,500 in 1999, in each instance from the
Company's on hand balances, and the issuance of 3,025,000 restricted shares of
the Company's common stock which were valued at $5,934,600. As a result of the
acquisition, the Company changed the name of its subsidiary to UltraDerma, Ltd.
Concurrent with the UltraDerma Acquisition, the Company granted Boyd certain
anti-dilution rights (the "Anti-Dilution Rights"). Pursuant to these rights, the
Company has agreed to maintain Boyd's interest in the Company, pending a
registered public offering of the Company's common shares, at no less than 51%
of the issued and outstanding common shares. For purposes of this calculation,
the Company is permitted to include shares held by its chairman, who subsequent
to the acquisition became affiliated with Boyd. The Company estimates its
contingent obligation under these anti-dilution provisions to be approximately
$60,000 and has included such amount in other expenses for 1998.
The acquisition was accounted for as a purchase and, accordingly, UltraDerma's
results are included in the consolidated financial statements since the date of
acquisition. The total purchase price has been allocated to the acquired assets
based upon their respective fair market values. The components of intangible
assets included in the allocation of the purchase price, including goodwill
which represents the excess of the purchase price over the fair value of assets
acquired, along with their related straight-line amortization periods, were:
<TABLE>
<CAPTION>
Amortization
Amount period (years)
- ---------------------------------------------------- -------------------------- -------------------------
<S> <C> <C>
Trademarks $2,700,000 15
Product development 1,350,000 15
Patents 300,000 15
Goodwill 1,962,000 25
- ---------------------------------------------------- -------------------------- -------------------------
Total $6,312,000
</TABLE>
F-7
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 - BUSINESS ACQUISITION, continued
The unaudited pro forma combined results of operations, as if the assets of
UltraDerma had been acquired at the beginning of 1998 and 1997, are estimated to
be:
<TABLE>
<CAPTION>
(in dollars, except per share data) 1998 1997
- ---------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Net sales $6,174,300 $ 37,100
Net (loss) $ (373,100) $(457,600)
Net loss per share $ (0.09) $ (10.33)
</TABLE>
The pro forma results include amortization of the intangibles presented above.
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of 1998 and
1997, nor are they necessarily indicative of future consolidated results.
NOTE 4 - COMMITMENTS
On June 20, 1997, UltraDerma entered into a sales representative and service
agreement (the "Rep Agreement") with a certain distributor (the "Distributor")
which was subsequently assumed by the Company effective February 1, 1998 in
connection with the UltraDerma Acquisition. Under the terms of the Rep
Agreement, the Distributor was granted the exclusive right to market and
distribute, on an agency basis, the Theracel product line. In addition, the
Distributor agreed to perform certain related accounting, administrative and
other services. The Rep Agreement had an initial term of one year which
commenced during September 1997 upon the completion of an infomercial, as
produced and paid for by the Distributor, and is automatically renewed on an
annual basis thereafter, subject to certain cancellation rights held by the
Company and the Distributor pertaining to minimum sales levels for a given
contract year (see Footnote #9). The results of this Rep Agreement, including
the commissions due the Distributor which are based on a specified percentage of
sales, are included in the accompanying financial statements beginning February
1, 1998, the date of the UltraDerma Acquisition.
In February 1998, the Company granted the aforementioned Distributor an
exclusive license to reproduce, market and sell the Company's portfolio of
Children's Videos. Under the terms of the licensing agreement, the Distributor
agreed to produce, at its expense, several broadcast quality commercials
relating to the Children's Videos and to air, at its expense, these commercials
F-8
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 - COMMITMENTS, continued
during appropriate cable television programs. The agreement, which requires the
Distributor to pay the Company a specified royalty for each video sold, had an
initial term of one year which commenced during May 1998 and is automatically
renewed on an annual basis thereafter, provided certain minimum sales levels are
met for a given contract year (see Footnote #9). During 1998, the Company did
not recognize any revenue under this agreement.
The Company had no obligations which required the payment of interest during
1998 and 1997.
NOTE 5 - STOCKHOLDERS' EQUITY
On November 25, 1997, the Board of Directors declared a one-for-one thousand
reverse stock split on the Company's common stock payable on December 22, 1997.
As a result of the reverse split, $307 was transferred from common stock to
additional paid-in capital representing the par value of the common shares so
reversed. All references to number of shares, except shares authorized, and to
per share information in the consolidated financial statements have been
adjusted to reflect the stock split on a retroactive basis.
NOTE 6 - NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for each year. The weighted average number
of shares used to compute basic loss per share for the years ended December 31,
1998 and 1997 were 4,291,061 and 44,302, respectively.
Diluted loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the year plus, for 1998, the
incremental shares that would have been outstanding had the Company been
required to issue additional shares pursuant to the Anti-Dilution Rights. In
1998, issuance of shares pursuant to these rights would have been anti-dilutive
and therefore, were not considered in the computation of diluted loss per share.
As a result, for the years ended December 31, 1998 and 1997 diluted loss per
share equals basic loss per share.
F-9
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 - RELATED PARTIES
The Company leases its office space, on a month-to-month basis, from Boyd. For
1998 and 1997, the Company recorded rent expense under these leases of
approximately $29,800 and $14,400, respectively.
At December 31, 1997, the Company held an unsecured note receivable from its
chairman in the amount of $9,031. This note, which bears interest at 8% per
annum and is payable on demand, arose from advances made to the chairman during
1997. The note was repaid, along with $300 of interest, in 1998.
At December 31, 1998, the Company had invested $161,621 to obtain a 19% equity
interest in a company which develops and markets gourmet snack foods. The
Company's investment, which is controlled by Boyd and the Company's chairman, is
carried at cost which approximates fair value.
NOTE 8 - INCOME TAXES
There is no current or deferred tax expense for the years ended December 31,
1998 and 1997 due to the Company's net loss for those years. Future tax
benefits, such as net operating loss carryforwards, are not recognized in the
accompanying financial statements.
The difference between the statutory federal income tax rate (35%) and the
Company's effective tax rate (0%) for 1998 and 1997 is attributable to an
increase in net operating loss carryforwards.
NOTE 9 - SUBSEQUENT EVENTS
On June 3, 1999, the Company agreed to pay the Distributor approximately $59,000
to terminate the Children's Videos licensing agreement. This payment, which
consisted of 200,000 restricted shares of the Company's common stock, will be
reflected as an expense during 1999.
At September 30, 1999, the Company had made aggregate, non-interest bearing
advances of $25,462 to both its chairman and Boyd.
F-10
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 - SUBSEQUENT EVENTS, continued
On September 15, 1999, the Company exercised its cancellation rights under the
Rep Agreement with the Distributor and terminated such agreement effective
September 20, 1999.
At September 30, 1999, the Company had made aggregate advances which bear market
rates of interest of $25,462 to both its chairman and Boyd.
During November 1999, the Company entered into several related production and
marketing agreements with a new marketing company (the "Marketer") to market the
Company's TheraCel product line. Pursuant to these agreements, the Marketer will
develop direct response television advertising and perform certain
manufacturing, warehousing and other services in exchange for certain fees which
will cover the Marketer's costs and include a specified percentage of sales. The
Company will retain its trademarks and other proprietary information. In
connection with these agreements, the Company granted the Marketer certain
incentive based stock options to acquire common stock of the Company. These
options are exercisable for a period of up to five years following the
completion of a Performance Year, as such term is defined in the option
agreement, and allow the Marketer to acquire, based on units sold, up to
1,350,000 shares at exercise prices ranging from $.50 to $1.00 per share.
During November 1999, the Company intends to file Form 10-SB, General Form for
Registration of Securities of Small Business Issuers ("Form 10-SB") pursuant to
Section 12 of the Securities Exchange Act of 1934 ("Exchange Act"). Upon the
Securities and Exchange Commission ("SEC") declaring such Form 10-SB effective,
the Company will be obligated to file periodic reports with the SEC under
section 15(d) or 13(a) of the Exchange Act.
F-11
<PAGE>
KID ROM, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1999
--------------------
<S> <C>
Current Assets:
Cash $287,754
Accounts Receivable 269,129
Inventory 5,260
--------------------
Total Current Assets 562,143
Video Costs 262,582
Office furniture and equipment- less accumulated
depreciation of $8,582 7,997
Intangible assets-less accumulated amortization
of $602,043 5,709,957
Investments (see Footnote #7) 161,921
Investments-other 10,000
Receivable from stockholder 50,924
--------------------
Total Assets $6,765,524
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued expenses payable $78,900
--------------------
Stockholders' Equity:
Common stock - authorized 10,000,000 shares,
$0.0001 par value, issued and outstanding 7,565,947 shares 757
Additional paid-in capital 7,732,122
Retained deficit (1,046,255)
--------------------
Total Stockholders' Equity 6,686,624
--------------------
Total Liabilities and Stockholders' Equity $6,765,524
====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-12
<PAGE>
KID ROM, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Sales, net $ 82,891 $1,516,094 $ 544,350 $4,548,282
Commissions (71,385) (1,167,448) (470,874) (3,502,344)
Cost of goods sold (5,490) (228,529) (37,654) (685,586)
------------- ---------------- -------------- --------------
Gross Margin 6,016 120,117 35,822 360,352
Expenses
Marketing 133,879 74,906 182,390 224,720
General and Administrative 18,693 17,865 72,831 51,508
Professional 13,860 7,281 43,135 21,845
Other 59,000 15,144 59,000 45,431
------------- ---------------- -------------- --------------
Total Expenses 225,432 115,196 357,356 343,504
Loss before depreciation, amortization and
provision for income taxes (219,416) 4,921 (321,534) 16,848
Depreciation 1,133 1,021 3,402 3,062
Amortization 92,953 80,795 278,860 242,387
------------- ---------------- -------------- --------------
94,086 81,816 282,262 245,449
Loss before provision for income taxes (313,502) (76,895) (603,796) (228,601)
Provision for income taxes (see footnote #8) - - - -
------------- ---------------- -------------- --------------
Net loss $(313,502) $ (76,895) $(603,796) $ (228,601)
============= ================ ============== ==============
Net loss per common share--basic $(0.04) $(0.01) $(0.09) $(0.06)
======= ======= ======= =======
Net loss per common share--diluted $(0.04) $(0.01) $(0.09) $(0.06)
======= ======= ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-13
<PAGE>
KID ROM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(313,502) $(76,895) $(603,796) $(228,601)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 94,086 81,816 282,262 245,449
Marketing expenses 97,670 257,250
General and Administrative Expenses 59,000
Changes in operating assets and liabilities:
Accounts receivable (6,506) (102,042) 67,561 (336,690)
Inventory 1,490 9,740 (15,000)
Accrued expenses 6,001 18,001 59,280
----------- ----------- ----------- -----------
Net cash used in operating activities (218,431) (97,121) (69,562) (18,312)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets (214,900)
Purchase of investments (10,000) (300) (171,621)
Addition to video costs (33,617) (8,880) (80,855)
Purchase of office furniture and equipment (269) (11,095)
----------- ----------- ----------- -----------
Net cash used in investing activities 0 (43,886) (9,180) (478,471)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 193,481 258,216 580,442
Receivable from stockholder, net 118,394 107,983 (213,424) 19,014
----------- ----------- ----------- -----------
118,394 301,464 44,792 599,456
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH (100,037) 160,457 (33,950) 102,673
CASH, BEGINNING OF PERIOD 387,791 42,516 321,704 100,300
----------- ----------- ----------- -----------
CASH, END OF PERIOD $287,754 $202,973 $287,754 $202,973
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-14
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - THE COMPANY
Kid Rom, Inc. (the "Company") is engaged principally in the development and sale
of certain premium skincare products which are marketed under the TheraCel brand
name. These products, which the Company acquired in February 1998 (see Footnote
#3), are marketed primarily in the United States through direct response
television.
The Company also develops and produces programming for the toddlers, children's
and educational markets. To date, the Company has completed two children's
videos, "Brett The Jett" and "Toby The Tugboat", and has several others under
development (collectively the "Children's Videos").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany transactions have been
eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
footnotes. Actual results could differ from those estimates.
Cash consists of amounts on deposit in non-interest bearing accounts maintained
at several major banking institutions.
Revenue is recognized when product is shipped by the Company's authorized
distributor (see Footnote # 4).
Inventory is stated at the lower of cost, as determined utilizing the first-in,
first-out (FIFO) method, or market.
Office furniture and equipment are stated at cost, less accumulated
depreciation.
Depreciation is computed using an accelerated method over a five year useful
life for both financial reporting and income tax reporting purposes. The Company
intends to amortize video costs, which include the associated costs of
developing and producing the Children's Videos, once such videos are sold.
F-15
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
NOTE 3 - BUSINESS ACQUISITION
On February 1, 1998, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and assumed a certain marketing agreement (see
Footnote #4) of UltraDerma, Ltd. ("UltraDerma", and its sole shareholder "Boyd")
for a total purchase price of $6,334,600 (the "UltraDerma Acquisition").
UltraDerma develops and markets premium skincare products marketed under the
TheraCel brand name. The consideration consisted of $400,000 in cash of which
$237,500 was paid during 1998 and $162,500 in 1999, in each instance from the
Company's on hand balances, and the issuance of 3,025,000 restricted shares of
the Company's common stock during 1998 which were valued at $5,934,600. As a
result of the acquisition, the Company changed the name of its subsidiary to
UltraDerma, Ltd.
Concurrent with the UltraDerma Acquisition, the Company granted Boyd certain
anti-dilution rights (the "Anti-Dilution Rights"). Pursuant to these rights, the
Company has agreed to maintain Boyd's interest in the Company, pending a
registered public offering of the Company's common shares, at no less than 51%
of the issued and outstanding common shares. For purposes of this calculation,
the Company is permitted to include shares held by its chairman, who subsequent
to the acquisition became affiliated with Boyd. The Company estimates its
contingent obligation under these anti-dilution provisions to be approximately
$60,000 and expensed such amount in 1998.
The acquisition was accounted for as a purchase and, accordingly, UltraDerma's
results are included in the consolidated financial statements since the date of
acquisition. The total purchase price has been allocated to the acquired assets
based upon their respective fair market values. The components of intangible
assets included in the allocation of the purchase price, including goodwill
which represents the excess of the purchase price over the fair value of assets
acquired, along with their related straight-line amortization periods, were:
<TABLE>
<CAPTION>
Amortization
Amount period (years)
- ---------------------------------------------------- -------------------------- -------------------------
<S> <C> <C>
Trademarks $2,700,000 15
Product development 1,350,000 15
Patents 300,000 15
Goodwill 1,962,000 25
- ---------------------------------------------------- -------------------------- -------------------------
Total $6,312,000
</TABLE>
F-16
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
NOTE 3 - BUSINESS ACQUISITION, continued
The results of operations for the nine months ended September 30, 1998 do not
include the results of UltraDerma prior to the acquisition as such amounts were
not significant.
NOTE 4 - COMMITMENTS
On June 20, 1997, UltraDerma entered into a sales representative and service
agreement (the "Rep Agreement") with a certain distributor (the "Distributor")
which was subsequently assumed by the Company effective February 1, 1998 in
connection with the UltraDerma Acquisition. Under the terms of the Rep
Agreement, the Distributor was granted the exclusive right to market and
distribute, on an agency basis, the Theracel product line. In addition, the
Distributor agreed to perform certain related accounting, administrative and
other services. The Rep Agreement had an initial term of one year which
commenced during September 1997 upon the completion of an infomercial, as
produced and paid for by the Distributor, and is automatically renewed on an
annual basis thereafter, subject to certain cancellation rights held by the
Company and the Distributor pertaining to minimum sales levels for a given
contract year. On September 15, 1999, the Company exercised these cancellation
rights and terminated the Rep Agreement effective September 20, 1999. The
results of this Rep Agreement, including the commissions due the Distributor
which are based on a specified percentage of sales, are included in the
accompanying financial statements beginning February 1, 1998, the date of the
UltraDerma Acquisition.
In February 1998, the Company granted the aforementioned Distributor an
exclusive license to reproduce, market and sell the Company's portfolio of
Children's Videos. Under the terms of the licensing agreement, the Distributor
agreed to produce, at its expense, several broadcast quality commercials
relating to the Children's Videos and to air, at its expense, these commercials
during appropriate cable television programs. The agreement, which requires the
Distributor to pay the Company a specified royalty for each video sold, had an
initial term of one year which commenced during May 1998 and is automatically
renewed on an annual basis thereafter, provided certain minimum sales levels are
met for a given contract year. On June 3, 1999, the Company agreed to pay the
Distributor approximately $59,000 to terminate this licensing agreement. The
payment, which consisted of 200,000 restricted shares of the Company's common
stock, was recorded as a cancellation fee in 1999. The Company did not recognize
any revenue under this agreement since its inception.
The Company had no obligations which required the payment of interest during
1998 and 1997.
F-17
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
NOTE 5 - NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for each period. The weighted average number
of shares used to compute basic loss per share for the three months ended
September 30, 1999 and 1998, were 7,440,947 and 5,521,379, respectively, and for
the nine months ended September 30, 1999 and 1998, were 7,074,003 and 3,675,987,
respectively.
Diluted loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period, plus the incremental
shares that would have been outstanding had the Company been required to issue
additional shares pursuant to the Anti-Dilution Rights. In 1999 and 1998,
issuance of shares pursuant to these rights would have been anti-dilutive and
therefore, were not considered in the computation of diluted loss per share. As
a result, diluted loss per share for the three months ended September 30, 1999
and 1998, and for the nine months ended September 30, 1999 and 1998, equals
basic loss per share for each respective period.
NOTE 6 - RELATED PARTIES
The Company leases its office space, on a month-to-month basis, from Boyd. The
Company recorded rent expense under these leases of $6,000 and $3,600 for the
three months ended September 30, 1999 and 1998, respectively and $18,000 and
$10,800 for the nine months ended September 30, 1999 and 1998, respectively.
At December 31, 1997, the Company held an unsecured note receivable from its
chairman in the amount of $9,031. This note, which bears interest at 8% per
annum and is payable on demand, arose from advances made to the chairman during
1997. The note was repaid, along with $360 of interest, in 1998.
At September 30, 1999, the Company had invested $161,921 to obtain a 19% equity
interest in a company which develops and markets gourmet snack foods. The
Company's investment, which is controlled by Boyd and the Company's chairman, is
carried at cost which approximates fair value.
At September 30, 1999, the Company had made aggregate advances which bear market
rates of interest of $25,462 to both its chairman and Boyd.
F-18
<PAGE>
KID ROM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
NOTE 7 - INCOME TAXES
There is no current or deferred tax expense for the three months and nine months
ended September 30, 1999 and 1998, respectively, due to the Company's net loss
for those periods. Future tax benefits, such as net operating loss
carryforwards, are not recognized in the accompanying financial statements.
The difference between the statutory federal income tax rate (35%) and the
Company's effective tax rate (0%) for the three months and nine months ended
September 30, 1999 and 1998, respectively, is attributable to an increase in net
operating loss carryforwards.
NOTE 8 - SUBSEQUENT EVENTS
During November 1999, the Company entered into several related production and
marketing agreements with a new marketing company (the "Marketer") to market the
Company's TheraCel product line. Pursuant to these agreements, the Marketer will
develop direct response television advertising and perform certain
manufacturing, warehousing and other services in exchange for certain fees which
will cover the Marketer's costs and include a specified percentage of sales. The
Company will retain its trademarks and other proprietary information. In
connection with these agreements, the Company granted the Marketer certain
incentive based stock options to acquire common stock of the Company. These
options are exercisable for a period of up to five years following the
completion of a Performance Year, as such term is defined in the option
agreement, and allow the Marketer to acquire, based on units sold, up to
1,350,000 shares at exercise prices ranging from $.50 to $1.00 per share.
During November 1999, the Company intends to file Form 10-SB, General Form for
Registration of Securities of Small Business Issuers ("Form 10-SB") pursuant to
Section 12 of the Securities Exchange Act of 1934 ("Exchange Act"). Upon the
Securities and Exchange Commission ("SEC") declaring such Form 10-SB effective,
the Company will be obligated to file periodic reports with the SEC under
section 15(d) or 13(a) of the Exchange Act.
F-19
<PAGE>
EXHIBIT INDEX
EXHIBITS.
3.1 Certificate of Incorporation
3.2 Amendments to the Certificate of Incorporation
3.3 Bylaws
3.4 Application for Authority to Conduct Business in the State of New York
10.1 Production Services and Marketing Agreement, dated November 3, 1999
between the Company and Marketer, and related Stock Option Agreement
23 Consent of Independent Auditors
27.1 Financial Data Schedule
F-20
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
KID ROM, INC.
The undersigned, a natural person, for the purpose of
organizing a corporation (hereinafter called the "corporation") for
conducting the business and promoting the purposes hereinafter stated,
under the provisions and subject to the requirements of the General
Corporation Law of the State of Delaware, hereby certifies that:
ARTICLE FIRST: The name of the Corporation is:
KID ROM, INC.
ARTICLE SECOND: The address of the registered office of the
corporation in the State of Delaware is 32 Loockerman Square, Suite
L-100, in the City of Dover, County of Kent; and the name of the
registered agent in charge thereof is The Prentice-Hall Corporation
System, Inc.
ARTICLE THIRD: The nature of the business and the purposes to
be conducted and promoted by the corporation, which shall be in
addition to the authority of the corporation to conduct any lawful
business, to promote my lawful purpose, and to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is 10,000,000, all of which
shall have a $.0001 par value per share. All such share are of one
class and are shares of Common Stock.
ARTICLE FIFTH: The name and mailing address of the
incorporator is as follows:
George E. Baviello
520 Madison Avenue
New York, New York 10022-4235
ARTICLE SIXTH: The corporation is to have perpetual existence.
ARTICLE SEVENTH: The personal liability of the directors of
the corporation is hereby eliminated to the fullest extent permitted by
the provisions of paragraph (7) of subsection (b) of Section 102 of the
General Corporation Law of the State of Delaware, as the same may be
amended and supplemented.
<PAGE>
ARTICLE EIGHTH: The Corporation shall, to the fullest extent
permitted by the provisions of Section 145 of the General Corporation
Law of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the
expenses, liabilities, or other matters referred to in or covered by
said section, and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of
the heirs, executors, and administrators of such a person.
I, the undersigned, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and
record this Certificate, and do certify that the facts herein stated
are true, and I have accordingly hereunto set my hand this 13th day of
September, 1994.
/s/ George Baviello
George E. Baviello - Incorporator
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION
OF KID ROM, INC.
It is hereby certified that:
1. The name of the corporation (the "Corporation") is Kid Rom, Inc.
2. The certificate of incorporation of the Corporation is hereby amended by
striking out Articles First and Fourth thereof and by substituting in lieu of
said Articles the following new Articles:
ARTICLE FIRST: " The name of the corporation is Millennium Direct,
Inc. (the "Corporation")."
ARTICLE FOURTH: " The total number of shares of Common Stock which
the corporation shall have authority to issue is twenty five
million (25,000,000) at a par value of $.0001 per share.
The total number of shares of Preferred Stock which the
corporation shall have authority to issue is ten million
(10,000,000), par value $.0001 per share and having the rights,
preferences and privileges as the Board of Directors shall
determine from time to time.
3. The amendments of the certificate of incorporation herein certified have been
duly adopted and written consent has been given in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
be executed this 18th day of November 1999.
By:_/s/ George Balis_______
Name: George S. Balis
Title: Chief Executive Officer
<PAGE>
CERTIFICATE
FOR RENEWAL AND REVIVAL OF CHARTER
OF
KID ROM, INC.
KID ROM, INC., a corporation organized under the laws of the State of
Delaware, the Certificate of Incorporation of which was filed in the office of
the Secretary of State on the thirteenth day of September A.D. 1994, the charter
of which was voided for nonpayment of taxes, now desires to procure a
restoration, renewal and revival of its charter, and hereby certifies as
follows:
1. The name of this corporation is:
KID ROM, INC.
2. Its registered office in the State of Delaware is located at 1013
Centre Road, in the City of Wilmington, THE PRENTICE-HALL CORPORATION SYSTEMS,
INC.
3. The date when the restoration, renewal, and revival of the charter
of this company is to commence is the twenty-eighth day of February, A.D., 1998,
same being prior to the date of the expiration of the charter. This renewal and
revival of the charter of this corporation is to be perpetual.
4. This corporation was duly organized and carried on the business
authorized by its charter until the first day of March, A.D., 1998, at which
time its charter became inoperative and void for non-payment of taxes and this
certificate for renewal and revival is filed by authority of the duly elected
directors of the corporation in accordance with the laws of the State of
Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of Section
312 of the General Corporation Law of the State of Delaware, as amended, KID
ROM, INC. has caused this certificate to be signed by Chairman, this 18th day of
November A.D. 1999.
/s/ George S. Balis
Authorized Officer
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KID ROM, INC.
Kid Rom, Inc., a corporation duly organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY:
FIRST: That Article Fourth of the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
ARTICLE FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is 10,000,000, all
of which shall have a $.0001 par value per share. All such
shares are of one class and are shares of Common Stock at the
effective time of this amendment to the Certificate of
Incorporation, each 1,000 shares of outstanding Common Stock
shall be automatically combined into one (1) share of Common
Stock. No fractional shares of Common Stock shall be issued
upon such combination effected by this amendment, but in lieu
thereof, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such
fractional interest multiplied by the average trading price of
a share of common stock for the thirty (30) days preceding the
effective date of this amendment.
SECOND: That said amendment was duly adopted in accordance with the
provisions of Section 228 and 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, Kid Rom, Inc. has caused this Certificate of
Amendment to be signed by George S. Balis, its President, this 25th day of
November 1996.
By: /s/ George Balis
Name: George S. Balis
Title: President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KID ROM, INC.
Kid Rom, Inc., a corporation duly organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY:
FIRST: That Article Fourth of the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
ARTICLE FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is 10,000,000, all
of which shall have a $.0001 par value per share. All such
shares are of one class and are shares of Common Stock. At the
effective time of this amendment to the Certificate of
Incorporation, each 20 shares of outstanding Common Stock
shall be automatically combined into one (1) share of Common
Stock. No fractional shares of Common Stock shall be issued
upon such combination effected by this amendment, but in lieu
thereof, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such
fractional interest multiplied by the average trading price of
a share of common stock for the thirty (30) days preceding the
effective date of this amendment.
SECOND: That said amendment was duly adopted in accordance with the
provisions of Section 228 and 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, Kid Rom, Inc. has caused this Certificate of
Amendment to be signed by George S. Balis, its President, this 20th day of
November 1998.
By: /s/ George Balis
Name: George S. Balis
Title: President
<PAGE>
CERTIFICATE FOR RESTORATION, RENEWAL AND
REVIVAL OF CERTIFICATE OF INCORPORATION
OF KID ROM, INC.
Pursuant to Section 312
of the General Corporation Law
of the State of Delaware
Kid Rom, Inc., a Delaware corporation (the "Corporation"), the
certificate of incorporation of which was filed in the office of the Secretary
of State on the 13th day of September, 1994, recorded in the office of the
Recorder of Deeds for New Castle County, and thereafter voided for non-payment
of taxes, now desires to procure a restoration, renewal and revival of its
certificate of incorporation, and hereby certifies as follows:
1. The name of the Corporation is Kid Rom, Inc.
2. The registered office of the Corporation in the State of Delaware is
located in New Castle County at 1013 Centre Road, Wilmington, Delaware
19805. The name and address of the registered agent of the Corporation
is The Prentice-Hall Corporation System, Inc., 1013 Centre Road,
Wilmington, Delaware 19805.
3. The Renewal and revival of the certificate of incorporation of the
Corporation is to be perpetual.
4. The Corporation was duly organized and carried on the business
authorized by its certificate of incorporation until the 1st day of
March A. D. 1996, at which time its certificate of incorporation
became inoperative and void for non-payment of taxes. This certificate
for renewal and revival is filed by authority of the duly elected
directors of the Corporation in accordance with the laws of the State
of Delaware.
IN WITNESS WHEREOF, Kid Rom, Inc., has caused this Certificate for
Restoration, Renewal and Revival of the Certificate of Incorporation to be
executed by George Balis, its authorized officer, this 24th day of October,
1996.
Kid Rom, Inc.
__/s/ George Balis_______________
Title: President
Name: George S. Balis
<PAGE>
EXHIBIT 3.3
BY-LAWS
OF
MILLENNIUM DIRECT, INC.
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
Section 1. Certificates Representing Stock. (a) Certificates
representing stock in the corporation shall be signed by, or in the name of, the
corporation by the Chairman or Vice-Chairman of the Board of Directors, if any,
or by the President or a Vice-President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or
all the signatures on any such certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if her were such officer,
transfer agent, or registrar at the date of issue.
(b) Whenever the corporation shall be authorized to issue more
than one class of stock or more than one series of any class of stock, and
whenever the corporation shall issue any shares of its stock as partly paid
stock, the certificates representing shares of any such class or series or of
any such partly paid stock shall set forth thereon the statements prescribed by
the General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
(c) The corporation may issue a new certificate of stock or
uncertificated shares in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Board of Directors may
require the owner of the lost, stolen or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
<PAGE>
Section 2. Uncertificated Shares. Subject to any conditions imposed by
the General Corporation Law, the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of any or all classes or
series of the stock of the corporation shall be uncertificated shares. Within a
reasonable time after the issuance or transfer of any uncertificated shares, the
corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
Section 3. Fractional Share Interests. The corporation may, but shall
not be required to, issue fractions of a share. If the Corporation does not
issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined, or (3) issue scrip or warrants in registered form
(either represented by a certificate or uncertificated) or bearer form
(represented by a certificate) which shall entitle the holder to receive a full
share upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share or an uncertificated fractional share shall,
but scrip or warrants shall not unless otherwise provided therein, entitle the
holder to exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the Corporation in the event of liquidation.
The Board of Directors may cause scrip or warrants to be issued subject to the
conditions that they shall become void if not exchanged for certificates
representing the full shares or uncertificated full shares before a specified
date, or subject to the conditions that the shares for which scrip or warrants
are exchangeable may be sold by the corporation and the proceeds thereof
distributed to the holders of scrip or warrants, or subject to any other
conditions which the Board of Directors may impose.
Section 4. Stock Transfers. Upon compliance with provisions restricting
the transfer or registration of transfer of shares of stock, if any, transfers
or registration of transfers of shares of stock of the corporation shall be made
only on the stock ledger of the corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
Section 5. Record Date For Stockholders. In order that the corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting. In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
2
<PAGE>
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining the stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by the General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the corporation having custody of the book in which proceedings of meeting of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by the General Corporation Law, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on which
the Board of Directors adopts the resolution taking such prior action. In order
that the corporation may determine the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
Section 6. Meaning of Certain Terms. As used herein in respect of the
right to notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in lieu of
meeting, as the case may be, the term "share" or "shares" or "share of stock" or
"shares of stock" or "stockholder" or "stockholders" refers to an outstanding
share or shares of stock and to a holder or holders of record of outstanding
shares of stock when the corporation is authorized to issue only one class of
shares of stock, and said reference is also intended to include any outstanding
share or shares of stock and any holder or holders of record of outstanding
shares of stock of any class upon which or upon whom the certificate of
incorporation confers such rights where there are two or more classes or series
of shares of stock or upon which or upon whom the General Corporation Law
confers such rights notwithstanding that the certificate of incorporation may
provide for more than one class or series of shares of stock, one or more of
which are limited or denied such rights thereunder; provided, however, that no
such right shall vest in the event of an increase or a decrease in the
authorized number of shares of stock of any class or series which is otherwise
denied voting rights under the provisions of the certificate of incorporation,
except as any provision of law may otherwise require.
Section 7. Stockholder Meetings.
- Time. The annual meeting shall be held on the date and at the time
fixed, from time to time, by the directors, provided that the first annual
meeting shall be held on a date within thirteen months after the organization of
the corporation, and each successive annual meeting shall be held on a date
within thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date and at the time fixed by the directors.
3
<PAGE>
- Place. Annual meetings and special meetings shall be held at such
place, within or without the State of Delaware, as the directors may, from time
to time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
- Call. Annual meetings and special meetings may be called by the
directors or by any officer instructed by the directors to call the meeting.
- Notice or Waiver of Notice. Written notice of all meetings shall be
given, stating the place, date, hour of the meeting and stating the place within
the city or other municipality or community at which the list of stockholders of
the corporation may be examined. The notice of an annual meeting shall state
that the meeting is called for the election of directors and for the transaction
of other business which may properly come before the meeting, and shall (if any
other action which could be taken at a special meeting is to be taken at such
annual meeting) state the purpose or purposes. The notice of a special meeting
shall in all instances state the purpose or purposes for which the meeting is
called. The notice of any meeting shall also include, or be accompanied by, any
additional statements, information, or documents prescribed by the General
Corporation Law. Except as otherwise provided by the General Corporation Law, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten days nor more than sixty days before the date of the meeting,
unless the lapse of the prescribed period of time shall have been waived, and
directed to each stockholder at his record address or at such other address
which he may have furnished by request in writing to the Secretary of the
corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States Mail. If a meeting is adjourned to
another time, not more than thirty days hence, and/or place is made at the
meeting, it shall not be necessary to give notice of the adjourned meeting
unless the directors, after adjournment, fix a new record date for the adjourned
meeting. Notice need not be given to any stockholder who submits a written
waiver of notice signed by him before or after the time stated therein.
Attendance of a stockholder at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, not the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice.
4
<PAGE>
- Stockholder List. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote at any meeting of
stockholders.
- Conduct of Meeting. Meetings of the stockholders shall be presided
over by one of the following officers in the order of seniority and if present
and acting-the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice-President, or, if none of the foregoing is in office
and present and acting, by a chairman to be chosen by the stockholders. The
Secretary of the corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the Chairman of the meeting shall appoint a secretary of
the meeting.
- Proxy Representation. Every stockholder may authorize another person
or persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that is irrevocable and, if, and only as long as it is coupled with
an interest sufficient in law to support an irrevocable power. A proxy may be
made irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the corporation generally.
- Inspectors. The directors, in advance of any meeting, may, but need
not, appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If any inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspectors at such meeting
with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question, or matter determined by him
or them and execute a certificate of any fact found by him or them. Except as
otherwise required by subsection (e) of Section 231 of the General Corporation
Law, the provisions of that Section shall not apply to the corporation.
5
<PAGE>
- Quorum. The holders of a majority of the outstanding shares of stock
shall constitute a quorum at a meeting of stockholders for the transaction of
any business. The stockholders presents may adjourn the meeting despite the
absence of a quorum.
- Voting. Each share of stock shall entitle the holder thereof to one
vote. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Any other action shall be authorized by a majority of
the votes cast except where the General Corporation Law prescribes a different
percentage of votes and/or a different exercise of voting power, and except as
may be otherwise prescribed by the provisions of the certificate of
incorporation and these Bylaws. In the election of directors, and for any other
action, voting need not be by ballot.
Section 8. Stockholder Action Without Meetings. Any action required by
the General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Action taken pursuant to this paragraph shall be
subject to the provisions of Section 228 of the General Corporation Law.
ARTICLE II
DIRECTORS
Section 1. Functions and Definition. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors
of the corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
Section 2. Qualifications and Number. A director need not be a
stockholder, a citizen of the United States, or a resident of the State of
Delaware. The initial Board of Directors shall consist of one (1) person.
Thereafter, the number of directors may be fixed from time to time by action of
the stockholders or of the directors, or, if the number is not fixed, the number
shall be one (1). The number of directors may be increased or decreased by
action of the stockholders or of the directors.
6
<PAGE>
Section 3. Election and Term. The first Board of Directors, unless the
members thereof shall have been named in the certificate of incorporation, shall
be elected by the incorporator or incorporators and shall hold office until
first annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. Any director may resign
at any time upon written notice to the corporation. Thereafter, directors who
are elected at an annual meeting of stockholders, and directors who are elected
in the interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting resignation or removal. Except as the
General Corporation Law may otherwise require, in the interim between annual
meetings of stockholders or of special meetings of stockholders called for the
election of directors and/or for the removal of one or more directors and for
the filling of any vacancy in that connection, newly created directorships and
any vacancies in the Board of Directors, including unfilled vacancies resulting
from the removal of directors for cause or without cause, may be filled by the
vote of a majority of the remaining directors then in office, although less than
a quorum, or by the sole remaining director.
4. MEETINGS.
- TIME. Meetings shall be held at such time as the Board shall
fix, except that the first meeting of a newly elected Board shall be held as
soon after its election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or
without the State of Delaware as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings may be called by or
at the direction of the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, of the President, or of a majority of the directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. Notice need not be given to any director or to any member of
a committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
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- QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these Bylaws which govern a meeting of the directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the Board, or
any such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any
and if present and acting, shall preside at all meetings. Otherwise, the
Vice-Chairman of the Board, if any and if present and acting, or the President,
if present and acting, or any other director chosen by the Board, shall preside.
Section 5. REMOVAL OF DIRECTORS. Except as may otherwise be
provided by the General Corporation Law, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors.
Section 6. COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
any such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the corporation to be
affixed to all papers which may require it.
Section 7. WRITTEN ACTION. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board or committee.
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ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President,
a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by
the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board,
an Executive Vice- President, one or more other Vice-Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
with such title as the resolution of the Board of Directors choosing them shall
designate. Except as may otherwise be provided in the resolution of the Board of
Directors choosing him, no officer other than the Chairman or Vice-Chairman of
the Board, if any, need be a director. Any number of offices may be held by the
same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each
officer shall be chosen for a term which shall continue until the meeting of the
Board of Directors following the next annual meeting of stockholders and until
his successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and
perform such duties in the management and operation of the corporation as shall
be prescribed in the resolutions of the Board of Directors designating and
choosing such officers and prescribing their authority and duties, and shall
have such additional authority and duties as are incident to their office except
to the extent that such resolutions may be inconsistent therewith. The Secretary
or an Assistant Secretary of the corporation shall record all of the proceedings
of all meetings and actions in writing of stockholders, directors, and
committees of directors, and shall exercise such additional authority and
perform such additional duties as the Board shall assign to him. Any officer may
be removed, with or without cause, by the Board of Directors. Any vacancy in any
office may be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of
Directors shall prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall
be subject to change, by the Board of Directors.
<PAGE>
EXHIBIT 3.4
APPLICATION FOR AUTHORITY
OF
MILLENNIUM DIRECT, INC.
--------------------
Under Section 1304 of the Business Corporation Law
FIRST: The name of the corporation is Millennium Direct, Inc.
(the "Corporation").
SECOND: The jurisdiction of incorporation of the Corporation is
the State of Delaware. The date of incorporation of the Corporation is September
13, 1994.
THIRD: The business which the Corporation proposes to do in the
State of New York is as follows:
To engage in any act or activity permitted by the laws of the
State of Delaware for which corporations may be organized under the Business
Corporation Law of the State of New York, provided that the corporation is not
to engage in any act or activity requiring the consent or approval of any state
official, department, board, agency or other body without such consent or
approval first being obtained.
FOURTH: The office of the Corporation in the State of New York
is to be located at Schohairie County.
FIFTH: The Secretary of State of the State of New York is
designated as the agent of the Corporation upon whom process against the
Corporation may be served. The post office address within the State of New York
to which the Secretary of State of the State of New York shall mail a copy of
any process against the corporation served upon said Secretary of State is
Millennium Direct, Inc., HCR 30-A North Blenheim, New York 12131.
SIXTH: The Corporation has not, since its incorporation,
engaged in any activity in the State of New York except as set forth in
paragraph (b) of Section 1301 of the Business Corporation Law.
Dated: November 18, 1999
/s/ George Balis
George Balis
Chief Executive Officer
<PAGE>
EXHIBIT 10.1
PRODUCTION SERVICES AND MARKETING AGREEMENT
This Production Services and Marketing Agreement ("Agreement") is made
as of this 3rd day of November, 1999, between hawthorne direct inc, an Iowa
corporation with offices at 300 North 16th Street, Fairfield, Iowa 52556
(hereinafter referred to as "Hawthorne"), and Kid Rom, Inc., a Delaware
corporation with offices at 400 East 71st Street, New York, New York 10021
("Product Owner").
WHEREAS, Hawthorne is in the business of consumer product advertising,
marketing, television commercial production, media purchasing and management,
telemarketing management, fulfillment management, and management of marketing
campaigns utilizing television and other means; and
WHEREAS, Product Owner controls the marketing rights and certain
intellectual property for a product which improves skin wrinkles, tone and
texture, and which is currently known as Theracel (the "Product"); and
WHEREAS, Hawthorne and Product Owner desire that Hawthorne provide
certain services relating to the packaging, marketing, promotion and fulfillment
of the Product through direct response television and other means, and
WHEREAS, Hawthorne is willing to provide such services on the terms set
forth herein;
NOW, THEREFORE, in consideration of the promises contained in this
Agreement, Hawthorne and Product Owner agree, as follows:
1. Exclusive Rights. Product Owner hereby grants and gives to
Hawthorne the exclusive and unrestricted worldwide right to advertise, promote,
market and sell the Product through all forms of direct response and retail
marketing, including but not limited to infomercials and short form direct
response television commercials; QVC, HSN and other television home shopping
channels; radio; inbound and outbound telemarketing; credit card syndications;
package inserts; print advertising; direct mail solicitations; interactive and
non-interactive internet marketing such as web pages and email; catalogs; retail
stores (mass and specialty); and, in addition, other mutually agreed upon
marketing channels. During the term of this Agreement Product Owner shall not
market or sell the Product itself or through third parties through the marketing
channels as to which Hawthorne has exclusive rights without Hawthorne's prior
written approval.
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2. Product Description. A description of the Product is set forth on
Attachment A.
3. Covenant Not To Compete. During the term of this Agreement, and for
a period of one year thereafter, neither Hawthorne nor Product Owner will market
any products that compete directly with the Product ("Competitive Product") in
the marketing channels as to which Hawthorne has exclusive rights hereunder,
unless agreed, in writing, by both parties. When Hawthorne is "functioning as an
advertising agency," meaning that it is performing services for traditional
advertising agency fees and commissions without receiving a percentage of sales
as part of its compensation, a "Competitive Product" means a product that
improves skin wrinkles by using live organic matter. On the other hand, when
Hawthorne receives a percentage of the sales as part of its compensation, a
"Competitive Product" means a product or line of products, applied externally,
whose purpose is to improve skin wrinkles or retard the person's aging process.
4. Intellectual Property/Marketing Materials
(a) During the term of this Agreement, Product Owner
grants to Hawthorne the exclusive right to use all
existing and future trademarks and copyrights (hereinafter referred to
collectively as "Product Intellectual Property") associated with the Product.
Product Owner represents and warrants that it is the lawful owner of all such
rights as are necessary to provide the exclusive use of the Product Intellectual
Property to Hawthorne hereunder, and that Hawthorne's use of the Product
Intellectual Property shall not infringe upon the rights of third parties.
(b) Product Owner shall make reasonably available to
Hawthorne original copies of all Product packaging,
and sales and marketing materials, whether in electronic, video or printed
format (hereinafter referred to collectively as "Product Marketing Materials").
A description of currently existing Product Intellectual Property and Product
Marketing Materials is set forth as Attachment B.
5. Hawthorne Duties and Responsibilities. Subject to the remaining
provisions of this Agreement, including the payments to be made to Hawthorne by
Product Owner, Hawthorne shall be responsible to:
(a) Create and produce a 30-minute direct response
television commercial ("Infomercial"), which offers the Product, and exercise
best efforts to deliver final edit of Infomercial to Product Owner on or before
March 6, 2000;
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(b) Create and produce a one and/or two-minute (as
determined by Hawthorne in consultation with Product
Owner) television commercial ("Spot"), which offers the Product Owner's
Anti-Wrinkle Pillow, and exercise best efforts to deliver final edit of Spot to
Product Owner on or before January 7, 2000.
(c) Develop, with Product Owner's approval, Product
pricing and offers for all marketing campaigns as
contemplated by this Agreement;
(d) Investigate, contract with and set up appropriate
agreements and procedures with suppliers of packaging, telemarketing,
fulfillment, customer service, banking and merchant account services for the
Product direct response marketing campaigns implemented hereunder;
(e) Create telemarketing scripts for Product direct
response marketing campaigns implemented hereunder;
(f) Design and execute a media test ("Media Test") for the
Infomercial and Spot (hereinafter referred to, collectively, as "Commercials");
(g) Create sub-masters and copies of Commercials ("Dubs")
as required to air on various broadcast television stations and cable networks
(hereinafter referred to, collectively, as the "Stations");
(h) Evaluate the results of the Media Tests and make
recommendations to Product Owner relative to potential adjustments, if any, to
Product pricing, offer structure, telemarketing scripts, or creative content of
the Commercials;
(i) Provided that the sales results of the Commercials
meet pre-established criteria ("Media Ratios") as established from time to time
by Hawthorne with the approval of Product Owner, which shall not be unreasonably
withheld, design, execute, manage and maintain an ongoing direct response
television marketing campaign for the sale of the Product by Product Owner
("Roll Out"); provided, however, that no cessation of the Roll Out shall affect
Hawthorne's rights to market the product through other marketing channels
authorized hereunder, or to subsequently resume a Roll Out of the Commercials in
the event of successful results from marketing the Product in other marketing
channels.
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(j) Select, with the approval of Product Owner, which
shall not be unreasonably withheld or delayed, the merchant account,
telemarketer, fulfillment house and other suppliers (collectively "Service
Suppliers") qualified to market the Product via means in addition to television,
as set forth in Section 1 herein ("Integrated Marketing Channels"); fund the
expenses related to setting up the Service Suppliers; and, subsequent to the
Media Test, and subject to Sections 5(i), (k), and (p) fund the purchase of
Product packaging and media time;
(k) Advance to Product Owner in a timely manner such funds
as shall be necessary to cover the direct out-of-pocket costs payable by Product
Owner to the manufacturer of the Product to cover such an amount of Product and
packaging as Hawthorne, after consultation with Product Owner, reasonably
determines to be warranted for the Roll Out and by the results of anticipated
results of marketing the Product through the Integrated Marketing Channels. The
Product shall be purchased from Product suppliers jointly selected by Product
Owner, and through Product packaging suppliers selected by Hawthorne
(collectively, "Approved Suppliers"). Hawthorne shall also arrange for
warehousing and shipment of packaged Product to fulfillment vendor(s);
(l) Manage the Customer List (as defined hereafter);
(m) With consent of Product Owner, which shall not be
unreasonably withheld, add an upsell script to be read to Commercial customers
calling the 800#, encouraging them to accept a 30 day free trial offer in a
discount shopping club ("Upsell Club");
(n) Generate semi-weekly, weekly, and monthly reports for
Hawthorne and Product Owner that provide forecasts and results of Product
marketing campaigns;
(o) Distribute all funds from merchant account and other
depositories of Product sales revenues to Product Owner, Hawthorne, suppliers
and Product customers (Product refunds) in accordance with the priorities
established in Section 7(k) herein, and in payment of all other contractual
obligations entered into by Hawthorne as required to fulfill its obligations of
this Agreement;
(p) Develop with the consent of Product Owner, which shall
not be unreasonably withheld or delayed, an integrated marketing plan to market
the Product via Integrated Marketing Channels, it being understood that
Hawthorne shall reasonably determine what media purchases, if any, shall be made
as part of the marketing plan and may refrain from any aspect of marketing
through Integrated Marketing Channels, or cease any marketing that has
commenced, based on media results or other sales criteria as reasonably
determined by Hawthorne;
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(q) Maintain adequate accounting records related to
Product Owner's sale of the Product to consumers, as well as Hawthorne's
activities relative to this Agreement and provide Product Owner with reasonable
and appropriate substantiation of expenditures made by Hawthorne pursuant to
this Agreement.
(r) Use its best efforts to assist Product Owner in
selling any unsold Product.
6. Product Owner Duties and Responsibilities. Product Owner shall be
responsible to:
(a) Protect and enforce the Product Intellectual Property
rights on a best efforts basis;
(b) Provide timely consultation to Hawthorne in the
creation and production of the Commercials and in Product pricing and offer
development;
(c) Provide Hawthorne in a timely manner with a list of
Product claims and substantiation of Product claims reviewed by a law firm
reasonably acceptable to Hawthorne and having a specialty in FDA and FTC
regulations and law (the "Firm");
(d) Oversee legal review of Product packaging and provide
the text of labels that may be used to provide an adequate product description
approved by the Firm;
(e) Provide Hawthorne with names of Product users for
Commercial testimonial purposes;
(f) Document Product quality and quantity requirements;
use its best efforts on a continuous basis to locate an alternative manufacturer
that is capable of manufacturing the Product at comparable costs to the present
manufacturer; insure, on a best efforts basis, that at least one Product
manufacturer is capable of meeting quality and quantity requirements; and
independently verify on a batch by batch basis that Product meets manufacturing
specifications;
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(g) Negotiate, on a best efforts basis and with
Hawthorne's joint participation, terms with Product manufacturers, including but
not limited to competitive volume pricing, 30-day net terms, and well documented
return privileges for off-specification production;
(h) Not unreasonably withhold consent of designated Media
Ratios that are required for Roll Out to occur;
(i) Pay the expenses related to (i) Hawthorne's creation
and production of the Commercials, based upon budgets set forth in Section 7
herein, (ii) execution of the Media Tests, (iii) production of Dubs for the
Media Tests at rates set forth in Attachment C to this Agreement, (iv) legal
review for Product packaging and Commercials, including the claims that can be
made, and (v) manufacture of Product and packaging for Media Tests;
(j) Accept financial responsibility for all unsold,
returned, or defective Product other than Product damaged due to the negligence
or willful misconduct of Hawthorne.
(k) Fulfill all obligations of Product consumer
warranties, including replacement costs, refunds, and product liability claims.
In this regard, Product Owner shall obtain product liability insurance covering
the sale of the Product as set forth hereinafter.
7. Financial Considerations.
(a) Product Owner's cost of the Infomercial shall not
exceed $250,000, and Product Owner's cost of the Spot shall not exceed $28,000
(collectively referred to as "Cost Estimate"). For purposes of determining
Hawthorne's costs for all purposes under this Agreement, Hawthorne's staff will
be invoiced at actual salaries, plus 25% for taxes and benefits, and
out-of-pocket expenditures will be invoiced at Hawthorne's actual cost with no
markup by Hawthorne.
(b) The terms of payment for production of the Spot are
five thousand dollars ($5,000) upon execution of this Agreement, five thousand
dollars ($5,000) one day prior to the commencement of principal photography for
the Spot, and final payment in full within 90 days from the execution of this
Agreement, with payment to be evidenced by a promissory note in the form
attached hereto as Attachment D. The payments by Product Owner for the
Infomercial shall be, as follows:
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(i) Fifteen percent (15%) of the Cost Estimate, at
the time the final Infomercial script ("Script") and Cost Estimate are presented
to Product Owner;
(ii) Fifteen percent (15%) of the Cost Estimate, plus
estimated talent fees one business day prior to commencement of principal
photography for the Infomercial;
(iii) Thirty percent (30%) of Cost Estimate one day
prior to the planned commencement of principal photography,
(iv) Final balance (based on actual costs), and Stock
Warrants (as defined in Section 7(j) herein) at the completion of editing of the
Infomercial, upon final Product Owner approval and prior to release of tape
master or release of copies of the Infomercial.
(c) The following costs are above the Cost Estimate and will
be billed to and paid by Product Owner at Hawthorne's cost:
(i) For travel approved in advance by Product Owner,
all travel and living expenses incurred by Hawthorne personnel (coach airfare,
standard hotel rates, $50 meal per diems) in connection with Hawthorne's
responsibilities under this Agreement;
(ii) All legal opinions for the Script, Commercial
off-line and Commercial on-line edits (estimated cost: $1,500 to $5,000)
rendered by attorneys with expertise in direct response television ads;
(iii) All approved by Product Owner talent related
costs related to the production and subsequent airing of the Infomercial
including, but not limited to: talent casting, travel, wardrobe, teachers,
broker fees; talent fees and royalties, payroll fees, pension and welfare fees,
taxes; AFTRA/SAG talent residuals.
(d) Subsequent to the termination of the Cost Estimate of the
Commercial, any additional production work due to Product Owner's initiated
changes in either the Product, Product offer, Script, set design, talent, music,
graphics, shooting schedule, rough edit, or final edit will be invoiced at
Hawthorne's cost as additional charges to Product Owner. Notwithstanding the
above, any additional costs directly resulting from Hawthorne's changes in
either the Product, Product offer, Script, set design, talent, music, graphics,
shooting schedule, rough edit, or final edit shall be for the account of
Hawthorne, unless otherwise agreed to in writing by Product Owner. Unanticipated
talent, crew and equipment overtime charges incurred during taping or filming
sessions will be invoiced to Product Owner, unless such overtime is due to
Hawthorne's negligence. Hawthorne reserves the right to invoice Product Owner
for additional charges incurred by Hawthorne due to unreasonable delays caused
by Product Owner. The additional charges set forth in this Section 7(d), should
they occur, will be mutually agreed upon in advance by both Product Owner and
Hawthorne.
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(e) Hawthorne shall have a lien on all tapes of the
Commercial until full payment for any due or outstanding accounts is received
from Product Owner.
(f) The Cost of the Infomercial Media Test shall not
exceed $60,000, and cost of Spot Media Test shall not exceed $7,500. The
foregoing Media Test budgets do not include the cost of Dubs.
(g) Hawthorne will receive a commission equal to fifteen
percent (15%) of the total gross media cost for media time that is purchased by
Hawthorne for the Commercial.
(h) Product Owner shall pay Hawthorne Participation Fees
at the following rates:
(i) Two and one-half percent (2.5%) of all direct
response (television, print or otherwise) Net Product Sales (as defined in
Section 7(i), below), direct response upsell Net Product Sales, and retail Net
Product Sales;
(ii) Seven percent (7%) of direct response continuity
Net Product Sales; and
(iii) Ten percent (10%) of the Net Product Sales in
all other Integrated Marketing.
(i) For purposes of this Agreement, Net Product Sales are
equal to gross Product revenues less returns, credit card chargebacks and bad
debts, and do not include sales taxes or shipping and handling fees.
(j) Product Owner will issue to Hawthorne stock options
("Stock Options") as described on Attachment E.
(k) Subsequent to the Media Test, Hawthorne will make
disbursements from the merchant account in the following priority:
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(i) Reimbursable expenses incurred by Hawthorne in
the course of fulfilling its obligations under this Agreement including, but not
limited to: media costs and commissions; telemarketing, fulfillment and merchant
account set-up and operating expenses; cost of Product and Product packaging as
determined by Hawthorne for the commencement or continuation of any Roll Out or
for marketing through Integrated Media Channels, customer refunds, Dubs and
additional pre-approved production fees, if any, retail distribution fees, if
any;
(ii) Reimbursable expenses incurred by Product Owner,
Product Owner's share of gross profits (defined as "List Profits" below)
resulting from rental of Product customer names generated pursuant to this
Agreement ("Customer List"), and Upsell Club Revenues (as defined), if any;
(iii) Hawthorne Participation Fees, calculated on an
accrual basis, and other pre-approved additional fees, if any,
(iv) Product Owner profits, if any, calculated on an
accrual basis.
(l) Provided that funds are available in merchant account,
Hawthorne shall distribute from the merchant account payments described in
Sections 7(k)(i) and 7(k)(ii) at its discretion to meet obligations to suppliers
of Product, or for other materials or services hereunder. An accounting of all
such payments will be provided to Product Owner in a form that is satisfactory
to both parties within thirty (30) days following the end of each month.
(m) Provided that funds are available in the merchant
account, Hawthorne shall distribute payments, if any, described in Sections
7(k)(iii) and 7(k)(iv) herein from the merchant account within twenty (20) days
following the end of each month, and shall accompany such payments with an
accounting in a form that is satisfactory to both parties.
(n) Hawthorne grants Product Owner the right to examine
Hawthorne's books and records related to Product sales resulting from
Hawthorne's activities pursuant to this Agreement up to two (2) times per
calendar year, such examination to take place at Hawthorne's place of business
during normal business hours upon seven (7) days' written notice. Product Owner
agrees to bear the cost of such examination except in the event that examination
discloses a discrepancy in Product Owner's favor of more than five percent (5%);
in which case Hawthorne shall bear Product Owner's reasonable costs of such
examination. Notwithstanding the above, any payment discrepancies shall be
adjusted and paid within thirty (30) days of discovery of such discrepancies,
including interest at ten percent (10%) per annum..
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8. Original Music. If Hawthorne causes the creation of original music
for the Commercial (hereinafter referred to as "Original Music"), and Hawthorne
obtains publishing rights from the author(s) of the Original Music, Hawthorne
shall share the profits from publishing rights, including all publishing
royalties in connection with Original Music, in the ratio of 50% to Hawthorne
and 50% to Product Owner. Hawthorne shall use its best efforts to obtain from
the author(s) for Product Owner the non-exclusive, perpetual right to the use of
such Original Music in, and in connection with, the Commercial. In the event
that an individual or entity other than Hawthorne purchases media time for the
Commercial at any time in the future, Product Owner agrees to provide Hawthorne
or its designated representative a monthly media buy list which shall be used
for the exclusive purpose of obtaining royalties for Original Music. Such media
buy lists shall be grouped by broadcast market or cable network and will contain
the following information: name of broadcast market, station or network call
letters, date and time of airing.
9. Product Samples. For purposes of taping the Commercial, Product
Owner will provide Hawthorne with six (6) complete Product units at no charge to
Hawthorne.
10. Ownership and Storage of Commercial. Upon Hawthorne's receipt of
final payment for the Commercial and airing of the Media Test, the Product Owner
is entitled to full ownership rights of the completed Commercial and will
receive one edit master. Additional edit masters of different lengths may be
required for airing on certain cable networks. All production work performed
after the completion of the Commercial such as additional masters, Dubs, special
edits, and shipping of Dubs are additional costs and will be invoiced at
Hawthorne's current rates. As a service to Product Owner, Hawthorne will store
edited Commercial source footage, masters, sub masters, source video and audio
tapes, film transfers, and graphics discs (hereinafter referred to as ("Source
Materials") in Hawthorne's climate controlled library. Hawthorne shall not be
liable for any damage to or loss of Source Materials by any cause including,
without limitation, fire, theft, act of God, or the negligence or other fault of
Hawthorne or its employees or agents. While Product Owner Source Materials are
stored at Hawthorne facilities, Hawthorne's liability is limited to the cost of
a like amount and type of blank stock only. This is the Product Owner's sole
remedy, and recovery for any other damages is excluded, including, without
limitation, incidental or consequential damages.
11. Ownership of Customer List and Profit Sharing. The Customer List
shall be owned by Product Owner and for purposes unrelated to the marketing of
the Product may be jointly managed by Product Owner (Hawthorne manages the
Customer List for purposes relating to the Product), however, Hawthorne and
Product Owner shall share all List Profits in the ratio of 50-50. The Customer
List, as managed by Hawthorne, may be used for marketing the Product, upsells,
backsells, cross-sells and related activities. The Customer List, as managed by
Product Owner, shall not be used to market any products competing with the
Product. Hawthorne shall be notified in writing in advance of all marketing uses
of the Customer List by Product Owner, and Product Owner shall provide Hawthorne
with reasonable information about all such uses. For purposes of this Agreement,
List Profits shall consist of gross revenues generated by the rental of the
Customer List, less broker, shipping, data processing and other direct costs
customary and necessary to generate mailing list rental income.
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12. Upsell Club Revenues. Hawthorne shall pay Product Owner twelve
dollars ($12) for each customer who agrees to the free trial of the club upsell,
and will also pay for the cost of the additional telemarketing script for the
club upsell ("Upsell Club Revenues").
13. Financial Risk. Product Owner acknowledges that it is well informed
of the financial risks associated with airing the Commercial and agrees not to
hold Hawthorne responsible for the degree of success or any lack of success
resulting from airing the Commercial. Hawthorne provides no warranty, expressed
or otherwise, as to the potential degree of success that may result from airing
the Commercial, except that it agrees to exercise its best efforts to distribute
the Product in accordance with the terms of this Agreement.
14. Confidential Information. During the course of this Agreement, each
party may provide the other with confidential, trade secret information. Each
party agrees that information that has been identified as the Confidential
Information of a party in writing shall be held in confidence by the other party
and not used (except for purposes of this Agreement) or disclosed to third
parties in perpetuity. Confidential Information shall not include information in
the public domain, information already known by a party prior to its receipt
from the other party as evidenced by written documentation in possession of the
receiving party prior to the disclosure, and information received by a party
from third parties without any breach of a confidentiality obligation.
15. Indemnification.
(a) Product Owner shall indemnify and hold Hawthorne and
its affiliates, representatives and employees free and harmless from all claims,
demands, losses, and liabilities (including, but not limited to, actual damages,
punitive damages, fines and reasonable legal fees) arising out of the airing or
other use of the Commercial, and/or the Products sold as a consequence of the
Commercial or through the Integrated Marketing Claimants, whether instituted by
any governmental body, federal, state, or local, any prosecutorial or law
enforcement agency, or any other person or organization, including, but not
limited to, any FTC, FDA, or Dept. of Agriculture proceeding or investigation,
and any suit for product liability.
11
<PAGE>
(b) Product Owner shall use its best efforts to obtain
product insurance in the amount of at least $2 million naming Hawthorne as an
additional insured, and shall provide a certificate of insurance from the
carrier to Hawthorne prior to delivery of the final tape of the Commercial. Such
insurance shall not be cancelable, except on 30 days' written notice to
Hawthorne. In the event of a termination of such insurance, Product Owner shall
be deemed to be in breach of this Agreement, and, at Hawthorne's option,
Hawthorne may terminate the Agreement on 15 days' notice to Product Owner, or
Hawthorne may suspend any media buys during the term such insurance is not
maintained. Any period of suspension shall be added to the term of this
Agreement notwithstanding anything to the contrary herein. Hawthorne shall give
Product Owner prompt written notice of all suits and claims for infringements
and an opportunity to defend the same, at its own expense, through counsel of
Product Owner that is reasonably acceptable to Hawthorne, and to control such
defense. Notwithstanding the foregoing provisions of Section 15, in the event
Product Owner cannot reasonably obtain such insurance and Hawthorne can obtain
such insurance, or it is significantly less expensive for Hawthorne to obtain
such insurance, Product Owner shall pay cost of such insurance at the time or
times payment is required by Hawthorne's insurance carrier.
(c) Hawthorne shall indemnify and hold Product Owner and
any of its affiliates, representatives and employees free and harmless from all
claims, demands, losses, and liabilities (including, but not limited to, actual
damages, punitive damages, fines and reasonable legal fees) arising out of the
production of the Commercial. Product Owner shall give Hawthorne prompt written
notice of all suits and claims for infringements and an opportunity to defend
the same, at its own expense, through counsel for Hawthorne that is reasonably
acceptable to Product Owner, and to control such defense.
16. Representations and Warranties of Product Owner. Product Owner
warrants and represents that:
(a) Product Owner is a corporation, duly organized and in
good standing under the laws of the state of Delaware;
(b) The execution and delivery of this Agreement and the
consummation of transactions contemplated hereby do not conflict with, and shall
not result in a breach of, or constitute a default under any agreement to which
Product Owner is currently a party;
12
<PAGE>
(c) Product Owner has good and marketable title to the
Product and the right to sell the Product bearing any trade names or trademarks
or Product Intellectual Property contained thereon, free and clear of all liens,
leases, pledges, claims, charges, conditions or encumbrances of any kind or
nature, except for the lien and security interest granted to Hawthorne in this
Agreement;
(d) There are no claims, lawsuits, actions or proceedings
pending, or threatened against Product Owner which could adversely affect the
Product or the rights granted to Hawthorne hereunder or the transactions
contemplated by this Agreement;
(e) The Products are merchantable, suitable and fit for
the use for which each was intended. Product Owner is not aware of any defects
or potential harm to users. Product Owner is not aware of any claims which have
been made in connection with the safety or efficacy of the Products. Product
Owner has complied with all federal, state or other laws, rules and regulations
with respect to the development, manufacture, testing and packaging of the
Product, including without limitation, consumer protection law and rules and
regulations of the Food and Drug Administration or any other agency having
jurisdiction;
(f) Product Owner has the full right and title to use and
exploit the Commercial, and neither Product Owner nor any third party will cause
any claims or litigation with respect thereto, concerning or purporting to
affect adversely the Commercial;
(g) No consent of any third party or any state or federal
government agency is required to be obtained by Product Owner in order to
consummate the transaction contemplated by this Agreement (including airing of
the Commercial and sale of the Product) or to enable Product Owner to perform
Product Owner's obligations hereunder;
(h) Product Owner will be able to manufacture or cause to
be manufactured an adequate supply of the Products to be sold pursuant to the
Commercials.
13
<PAGE>
(i) Product Owner will not receive any commissions or
other payments from Approved Suppliers, unless such payments are approved in
advance by Hawthorne.
17. Representations and Warranties of Hawthorne. Hawthorne warrants and
represents that:
(a) Hawthorne is a corporation, duly organized and in good
standing under the laws of the state of Iowa;
(b) The execution and delivery of this Agreement and the
consummation of transactions contemplated hereby do not conflict with, and shall
not result in a breach of, or constitute a default under any agreement to which
Hawthorne is currently a party,
(c) No consent of any third party or any state or federal
government agency is required to be obtained by Product Owner in order to
consummate the transaction contemplated by this Agreement or to enable Hawthorne
to perform Hawthorne's obligations hereunder.
18. Independent Parties. This Agreement is not intended to create any
partnership or joint venture arrangement. Each of the parties is independent
contractors and, except as expressly set forth in this Agreement, neither party
shall have the right to bind the other party or any other person by virtue of
the relationship created hereby.
19. Term of Agreement. The term of this Agreement shall be for one year
following the initial air date of the Media Test; provided, however, that this
Agreement shall be automatically renewed for a second year provided that an
aggregate of at least 50,000 Product units are sold during the initial year and
shall be automatically renewed for a third year provided that an aggregate of at
least 75,000 Product units are sold during the second year; and provided,
further, that this Agreement shall be renewed for year-long periods thereafter,
in the event at least 100,000 Product units are sold in the third year and in
subsequent years, pursuant to the marketing and exploitation rights granted to
Hawthorne hereunder.
20. Default. A party shall be in default hereunder in the event that it
fails to make a payment when due for a period of seven business days after
written notice of default is given to the party and, in the case of defaults
other than the payment of money, in the event a party fails to fulfill his
obligations after 30 days' written notice of default is given; provided,
however, that if the nature of the default is such that it cannot reasonably be
cured within such 30-day period, a party shall not be deemed to be in default
provided that it commences to cure the default within such 30-day period and
thereafter diligently completes the cure. In the event of a default, a party
shall have all remedies available to it at law or in equity, including the
option to terminate this Agreement within 30 days after the party's knowledge of
the default and the expiration of any cure period; provided that in the event
the non-breaching party does not elect, by notice to the defaulting party, to
terminate this Agreement during such 30-day period, the option to terminate this
Agreement on account of such default (but not future defaults) shall lapse.
14
<PAGE>
21. Rights and Duties on Termination.
(a) Upon any termination of this Agreement, and
irrespective of the reason for termination, Hawthorne shall have the right to
(i) sell any Product inventory (which shall be owned by Hawthorne until sold to
third parties or Product Owner) to Product Owner at Hawthorne's cost, and if
Hawthorne exercises such option as to some or all of the inventory of Product,
the Product Owner shall pay for the Product contemporaneously with the delivery
thereof, with title to pass at the time of shipment from Hawthorne's warehouse,
and with the Product Owner to pay all freight and insurance in connection with
the shipment, and (ii) to sell any unsold Product Inventory, through any
marketing channels Hawthorne is permitted to utilize under this Agreement, for a
period of 24 months after such termination.
(b) Upon any termination of this Agreement by Product
Owner for any reason other than a material default hereunder by Hawthorne or a
termination as a result of Hawthorne not selling the number of Product Units
necessary to extend the term of this Agreement, as, for example, a termination
on account of a breach of this Agreement by Product Owner, the Product Owner
recognizes that Hawthorne may not have had the opportunity to earn the discount
that it is providing by virtue of being paid only an amount approximating
Hawthorne's cost in connection with the production of the Commercial, and by
virtue of Hawthorne not being paid for certain other services hereunder as, for
example, services in establishing agreements and procedures with Telemarketers,
Product Suppliers, Merchant Accounts, and the like. Accordingly, the damages to
Hawthorne as the result of any such termination shall include, but not limited
to, the cost that Hawthorne would have been paid for the Commercial, but for the
discount herein, and the fair value of any other services paid for by Hawthorne
and not compensated for hereunder.
22. Notices. Any notices hereunder shall be in writing and shall be
deemed given in case of notices by mail, three business days after deposit in a
U.S. mail receptacle, properly addressed, certified mail, return receipt
requested, or upon receipt in the case of notices by telecopy, personal delivery
or email. Notices shall be given to the address set forth above, or to any other
address provided by a party hereunder in the requisite manner.
15
<PAGE>
23. Entire Agreement. This constitutes the entire Agreement of the
parties with respect to its subject matter and supersedes any and all prior
understandings. This Agreement may only be modified by an agreement in writing
signed by both parties.
24. Section Headings. The section headings or captions in this
Agreement have been set forth by the parties as a convenience, and shall not
have any bearing on the interpretation of this Agreement.
25. Waiver of Breach. The waiver of a party of any breach of this
Agreement shall not constitute a waiver of any other breach of this Agreement.
26. Assignability. This Agreement shall be binding upon the parties and
any successors to the business of the parties. In view of the personal nature of
certain of the services and the close relationship of the parties necessary in
connection with fulfilling the obligations of this Agreement, this Agreement
shall not, however, be permitted to be assigned to any third party (except in
the case of a sale of all or substantially all the assets of a party), without
the written consent of the other, which consent may be withheld for any reason
whatsoever.
27. Arbitration. Any dispute arising out of or relating to this
Agreement shall be resolved in accordance with the rules of the American
Arbitration Association. The award of the arbitrator(s) shall be final and
binding on the parties and may be enforced in any court of competent
jurisdiction. Arbitration shall be held in Des Moines, Iowa. The prevailing
party in any arbitration shall be reimbursed for all costs and expenses in
connection with the arbitration, including reasonable attorneys' fees.
16
<PAGE>
28. Applicable Law. The Agreement and all matters and/or issues
collateral thereto will be governed by the laws of the State of Iowa applicable
to contracts made and performed entirely therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
date first above mentioned.
Kid Rom, Inc. hawthorne direct inc
By:____________________________ By:__________
Print Name: Print Name:
Title: Title:
17
<PAGE>
Kid Rom, Inc. Product Description
TheraCel Line of Products
UltraDerm Advanced Pro-Cellular Formula
Day Moisturizer
Night Serum
Cleansing Bar
Pro-Cellular Moisturizer
Anti-Wrinkle Pillow (to be named)
18
<PAGE>
ATTACHMENT A
Product Intellectual Property
Theracel Trademark
Anti-Wrinkle Pillow Patent--large and small versions, including cover
19
<PAGE>
Product Marketing Materials
None
20
<PAGE>
ATTACHMENT B
Videotape Dubbing and Editing Rates
Duplication (with no editing)
Tape stock and box included
30 Minute 1 to 2 Minute
Programs Spots
1/2" VHS Demo $7 $5
3/4" Broadcast Dub $30 $25
Beta Broadcast Tape $40 $25
Beta SP Broadcast Tape $50 $30
1" Broadcast Dub $50 $15
Note: $10 additional charge per tape for 24 hour turnaround. Above rates do
not include shipping charges for tapes sent to or returned from
stations.
Commercial and Program Editing
30 Minute 1 to 2 Minute
Programs Spots
Dub Master-Custom Voice Over* $175 $36
Special Edit ** $150 $36
* Dub masters are created each time a new 800# is used.
** Special edits are required for changes in show length (as specified by
certain cable networks), product price changes, inserting special keys
and crawls into the body of the show, voice or music change, graphic
tag change, etc.
DUB RATE C
August 1998
21
<PAGE>
ATTACHMENT C
PROMISSORY NOTE
November 3, 1999
Fairfield, IA
FOR VALUE RECEIVED, the undersigned, Kid Rom, Inc. ("Maker"), whose address is
400 East 71st Street, New York, New York 10021, hereby promises to pay to the
order of hawthorne direct, inc. (the "Holder"), at Holder's offices, located at
300 North 16th Street, Fairfield, Iowa 52556, or at such place as Holder may
from time to time designate in writing to Maker, in lawful money of the United
States and in immediately available funds, the principal amount of $28,000 or
such lesser sum as Maker shall prove shall be owed to Holder on account of a one
and/or two minute television commercial (the "Spot") offering the Maker's
anti-wrinkle pillow pursuant to the Production Services Marketing Agreement
("Agreement") between the parties. The Principal shall be paid as follows:
$5,000 one day prior to the commencement of principal photography for the Spot
and final payment on the date that is 90 days after the execution of this Note.
A further $5,000 is being paid by Maker to the Holder on execution of this Note
and is not covered by the Note.
After the due date, the Principal shall bear interest at the rate of one and
one-half percent (1.5%) per month.
Upon the occurrence of any one of the following events of default, all
outstanding Principal amounts under this Note, and interest calculated thereon
at the rate set forth above, shall become immediately due and payable:
A. Failure to pay Principal or interest when it is due and payable, if not cured
within seven (7) days after notice;
B. Commencement against Maker of any proceeding under any bankruptcy,
reorganization, readjustment of debt, dissolution, or liquidation law, status,
rule or regulation of any jurisdiction, whether now or hereafter in effect which
proceeding is not dismissed within ninety (90) days of such commencement; or
C. Any assignment by Maker for the benefit of creditors; or
D. Any admission in writing by Maker of its inability to pay its debts as they
become due; or
E. The filing by Maker of a voluntary petition in bankruptcy or any petition
seeking for it any reorganization, readjustment of debt, dissolution,
liquidation, or similar relief under any law, statute, rule or regulation of any
jurisdiction, whether now or hereafter in effect.
22
<PAGE>
The Maker, and any other person or entity which is or becomes liable for the
payment or collection of this Note, hereby waives presentment, demand, protest,
and notice of dishonor and protest.
This Note shall be secured by all assets of the Maker in possession of the
Holder as of the date hereof or thereafter acquired. The Maker shall cooperate
with the Holder in taking such steps as are necessary or convenient to perfect
the Holder's security interests, including the execution of financing
statements.
Should the indebtedness represented by this Note or any part thereof be placed
in the hands of an attorney for collection after an event of default, as defined
herein, the Maker agrees to pay the principal and interest due and payable
hereon, and all costs of collection of this Note, including reasonable
attorneys' fees and expenses. Any action on or relating to this Note shall be
governed by the law of Iowa, without regard to conflicts of law rules.
KID ROM, INC.
By:________________________________
23
<PAGE>
ATTACHMENT D
STOCK OPTION AGREEMENT
Kid Rom, Inc..
THIS OPTION AGREEMENT ("Agreement"), dated as of the 3rd day of
November, 1999, between Kid Rom, Inc., a New York corporation with offices at
400 East 71st Street, New York, New York 10021 (hereinafter called the
"Company"), and hawthorne direct, inc., an Iowa corporation with offices at 300
North 16th Street, Fairfield, Iowa 52556 (hereinafter called the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is entering into a Production Services
and Marketing Agreement (the "Product Agreement") with the Company, pursuant to
which this option shall be granted to Optionee;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements hereinafter set forth, using terms as defined in the
Production Agreement, the parties hereto agree as follows:
l. Grant of Option. Subject to the remaining terms and conditions of
this Option Agreement, the Company grants to the Optionee the option (the
"Option") to purchase that number of shares s of common stock of the Company,
determined in accordance with Section 2 (c), subject, however, to adjustment as
provided in Section 2 (e) hereof ("Option Stock")
24
<PAGE>
2. Terms and Conditions of Option.
(a) Option Price. The price at which each share of Option
Stock may be purchased shall be as set forth in Section 2 (c).
(b) Option Period. The period for exercise of the Option (the
"Option Period") with respect to the Option Stock shall commence immediately
upon the execution by the Company and the Optionee of this Agreement and shall
end five years after the end of the performance year with respect to which the
options hereunder and the Option Price are determined, as set forth in Section 2
(c).
(c) Number of Options and Option Price. During the period of
one year following the initial air date of the Media Test (the "First
Performance Year"), in the event that the number of Product units sold pursuant
to the Production Agreement, is as set forth in the table below, Optionee is
granted the option to purchase the number of shares of common stock of the
Company at the price set forth in the table below. Similarly, in the event the
Product Agreement continues for a Second or Third Performance Year, Optionee is
granted the further option to purchase the number of shares of common stock of
the Company at the price set forth in the table for each such Performance Year,
with each such option as is granted hereunder to be exercisable for a period of
five years after the end of the Performance Year whose sales determined the
grant of options. By virtue of the table below, in the event 65,000 Product
Units are sold in the First Performance Year, 110,000 Product Units are sold in
the Second Performance Year, and 200,000 Product Units are sold in the Third
Performance Year, the Optionee is granted a five year option at the end of the
First Performance Year to purchase 110,000 shares of common stock of the Company
at $.85 per share, a further five year option at the end of the Second
Performance Year to purchase 200,000 shares of the Company's common stock at
$.85 per share, and a further five year option at the end of the Third
Performance Year to purchase 600,000 shares of common stock of the Company at
$.50 per share. There shall be no interpolations in the table other than as set
forth therein, such that in the event 54,000 Product units are sold in the First
Performance Year, the Optionee is, at the end of such Year, granted the option
to purchase 50,000 shares of common stock of the Company at $1.00 per share.
25
<PAGE>
First Performance Year
<TABLE>
<CAPTION>
Product Units Sold Number of Option Shares Granted Option Price per Share
- ------------------ --------------------------------- ----------------------
<S> <C> <C>
50,000 50,000 $1.00 per share
55,000 70,000 .95
60,000 90,000 .90
65,000 110,000 .85
70,000 130,000 .80
75,000 150,000 .75
80,000 180,000 .70
85,000 210,000 .65
90,000 240,000 .60
95,000 270,000 .55
</TABLE>
Second Performance Year
<TABLE>
<CAPTION>
Product Units Sold Number of Option Shares Granted Option Price per Share
<S> <C> <C>
80,000 80,000 $1.00 per share
90,000 120,000 .95
100,000 160,000 .90
110,000 200,000 .85
120,000 240,000 .80
130,000 300,000 .725
140,000 360,000 .65
150,000 420,000 .575
160,000 480,000 .50
</TABLE>
Third Performance Year
<TABLE>
<CAPTION>
Product Units Sold Number of Option Shares Granted Option Price per Share
<S> <C> <C> <C>
100,000 100,000 $1.00 per share
110,000 140,000 .95
120,000 180,000 .90
130,000 220,000 .85
140,000 260,000 .80
150,000 300,000 .75
160,000 360,000 .70
170,000 420,000 .65
180,000 480,000 .60
190,000 540,000 .55
200,000 600,000 .50
</TABLE>
(d) Exercise of Options. In order to exercise the Option, the
Optionee shall deliver to the company written notice specifying the number of
shares of Option Stock to be purchased, together with cash or a check payable to
the order of the Company in the full amount of the purchase price therefor. The
Optionee shall not have any of the rights of a stockholder until the shares of
Option Stock are issued to it.
26
<PAGE>
(e) Adjustments for Change in Stock and Other Events. In the
event of a reorganization, recapitalization, stock split, stock dividend, any
other issuance of shares for no consideration, or a combination of shares,
consolidation, merger (other than a merger or consolidation which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares), any sale or transfer by the Company of all or substantially
all of its assets, or any tender offer or exchange offer for or the acquisition,
directly or indirectly, by any person or group of all or a majority of the then
outstanding voting securities of the Company, or any other change in the
corporate structure or rights with respect to any shares of the Company, the
Company shall make such adjustments as shall be appropriate in the number and
kind of shares of Option Stock subject to the Option, and/or in the option price
per share, to provide that the Optionee shall have the right following such
event, during the period that the Option shall be exercisable, to exercise the
Option for the kind and amount of securities, cash and other property receivable
upon such event by a holder of the number and kind of shares of common stock for
which such Option might have been exercised immediately prior to such event.
27
<PAGE>
(f) Registration, Listing and Qualification of Shares of
Stock/Shareholders' Agreement. The Option shall be subject to any legal
requirements relating to the issuance of securities. For example, if it becomes
necessary to register the Option Stock with the Securities and Exchange
Commission, or if any other government approval is necessary in connection with
the issuance of the Option Stock, the Board of Directors may impose reasonably
necessary conditions upon the exercise of the Option in order to comply with
such legal requirements.
3. Modification and Waiver. Neither this Option Agreement nor any
provision hereof can be changed, modified, amended, discharged, terminated or
waived orally or by any course of dealing or purported course of dealing, but
only by an agreement in writing signed by the Optionee or his estate and the
Company. No such agreement shall extend to or affect any provision of this
Option Agreement not expressly changed, modified, amended, discharged,
terminated or waived. The waiver of or failure to enforce any breach of this
Option Agreement shall not be deemed to be a waiver or acquiescence in any other
breach thereof.
28
<PAGE>
4. Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
5. Arbitration. Any dispute hereunder shall be settled by arbitration
in Des Moines, Iowa, in accordance with the rules of the American Arbitration
Association. The award of the arbitrator in such proceeding shall be final and
binding and may be enforced in any court of competent jurisdiction. The
prevailing party in any such arbitration shall be reimbursed for all expenses of
the arbitration, including reasonable attorneys' fees.
6. Notices. Any notices or other communications hereunder shall be in
writing and sent by registered or certified mail, return receipt requested, or
hand delivered, and if to the Company to it at its principal place of business,
and if to the Optionee to him at the address set forth above. The address for
the giving of notices may be changed by notice given in the manner set forth
herein.
IN WITNESS WHEREOF, Kid Rom, Inc. has caused this Option Agreement to
be duly executed by its duly authorized officer, and the Optionee has hereunto
set his hand, on the day and year first above written.
OPTIONEE: COMPANY:
hawthorne direct inc Kid Rom, Inc.
By____________________ By________________________
29
<PAGE>
ATTACHMENT E
30
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Form 10-SB of our report dated
November 15, 1999 relating to the financial statements of Kid Rom, Inc.
VLAHAKIS & ASSOCIATES, CPA
By: /s/ Peter Vlahakis
Peter Vlahakis, CPA
Partner
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 287,754
<SECURITIES> 0
<RECEIVABLES> 269,129
<ALLOWANCES> 0
<INVENTORY> 5,260
<CURRENT-ASSETS> 562,143
<PP&E> 6,591,161
<DEPRECIATION> (593,461)
<TOTAL-ASSETS> 6,765,524
<CURRENT-LIABILITIES> 79,800
<BONDS> 0
0
0
<COMMON> 757
<OTHER-SE> 6,684,967
<TOTAL-LIABILITY-AND-EQUITY> 6,764,767
<SALES> 544,350
<TOTAL-REVENUES> 544,350
<CGS> 508,528
<TOTAL-COSTS> 639,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (603,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (603,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (603,796)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
