<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1998
REGISTRATION NO. 333-46085
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
AMENDMENT NO. 2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KAIRE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5122 84-1359178
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
380 LASHLEY STREET
LONGMONT, COLORADO 80501
(303) 682-0110
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
ROBERT L. RICHARDS
CHIEF EXECUTIVE OFFICER
KAIRE INTERNATIONAL, INC.
380 LASHLEY STREET
LONGMONT, COLORADO 80501
(303) 682-0110
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Robert Perez, Esq. Jay M. Kaplowitz, Esq.
Gusrae, Kaplan & Bruno Gersten, Savage, Kaplowitz
120 Wall Street & Fredericks, LLP
New York, New York 10005 101 East 52nd Street
Tel No. (212) 269-1400 New York, New York 10022
Fax No. (212) 809-5449 Tel No. (212) 752-9700
Fax No. (212) 752-9713
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
------------------------
CALCULATION OF REGISTRATION FEE
(SEE FOLLOWING PAGE.)
------------------------------
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- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value............................ 825,000 $ 6.00 $ 4,950,000 $1,460.25
Redeemable Common Stock Purchase Warrants............... 1,000,000 $ .10 $ 100,000 $ 29.50
Common Stock, $.01 par value(2)......................... 1,000,000 $ 6.60 $ 6,600,000 $1,947.00
Underwriter's Warrant(3)................................ -- $ -- $ 10 $ --
Common Stock, $.01 par value(4)......................... 82,500 $ 7.50 $ 618,750 $ 182.53
Common Stock Purchase Warrants(4)....................... 100,000 $ .125 $ 12,500 $ 3.69
Common Stock, $.01 par value(5)......................... 100,000 $ 6.60 $ 660,000 $ 194.70
Redeemable Common Stock Purchase
Warrants(6)........................................... 1,425,000 $ .10(7) $ 142,500 $ 42.04
Common Stock, $.01 par value(8)......................... 1,425,000 $ 6.60(7) $ 9,405,000 $2,774.48
Common Stock, $.01 par value(9)......................... 487,500 $ 6.00(7) $ 2,925,000 $ 862.88
TOTAL................................................... $7,497.07(10)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants.
(3) To be issued to the Underwriter, entitling the Underwriter to purchase up
to 82,500 shares of Common Stock and 100,000 Common Stock Purchase Warrants.
(4) Issuable upon the exercise of the Underwriter's Warrant.
(5) Issuable upon the exercise of the Underwriter's Common Stock Purchase
Warrants.
(6) To be sold by certain Selling Securityholders.
(7) Price is based upon the estimated offering/exercise prices of the
Registrant's publicly offered securities.
(8) Underlying the Redeemable Common Stock Purchase Warrants to be sold by
certain Selling Securityholders.
(9) To be sold by the Selling Securityholders.
(10) $4,728.12 paid upon initial filing on or about February 11, 1998, balance
of $2,768.95 being contemporaneously paid herewith.
ii
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
KAIRE INTERNATIONAL, INC.
825,000 SHARES OF COMMON STOCK AND
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Kaire International, Inc., a Delaware corporation (the "Company") hereby
offers 825,000 shares of common stock, $.01 par value (the "Common Stock") of
the Company and 1,000,000 Redeemable Common Stock Purchase Warrants (the "Public
Warrants"). The shares of Common Stock and Public Warrants are being offered to
the public at the initial offering prices of $6.00 per share and $0.10 per
warrant, respectively. All subscriptions from the sale of the securities offered
by the Company will be deposited in a non-interest bearing bank account until
all securities are sold or the offering period ends, whichever first occurs. The
Common Stock and the Public Warrants offered hereby (sometimes hereinafter
collectively referred to as the "Securities") will be separately tradeable
immediately upon issuance and may be purchased separately. Investors will not be
required to purchase shares of Common Stock and Public Warrants together or in
any particular ratio. Each Public Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $6.60 (the "Exercise Price"),
subject to adjustment, at any time during the period, commencing on the second
anniversary of this Prospectus (the "Effective Date") until the close of
business on the sixth anniversary of the Effective Date (such period, the
"Exercise Period"), provided, however, that prior to the Exercise Period, the
Public Warrants will be exercisable only if May Davis Group, Inc. (the
"Underwriter") has consented in writing to all of the Public Warrants being
exercisable. The Underwriter and the Company have agreed that the Underwriter
will not consent, until six months after the Effective Date, to the earlier
exercise of any of the Company's Warrants issued and outstanding on the
Effective Date.
The Public Warrants are redeemable, in whole or in part, by the Company at a
price of $.05 per Public Warrant, at any time that they are exercisable, and
prior to their expiration, provided that (i) prior written notice of not less
than thirty days is given to the Warrantholders, (ii) the average closing bid
price of the Company's Common Stock for the twenty consecutive trading days
immediately prior to the date on which the notice of redemption is given, shall
have exceeded $10.00 per share, and (iii) Warrantholders shall have exercise
rights until the close of business on the day preceding the date fixed for
redemption, if the Public Warrants are then exercisable.
Prior to this offering (the "Public Offering"), there has been no public
market for the Company's Common Stock and Public Warrants, and there can be no
assurance that such a public market will develop or be sustained after the
completion of the Public Offering. The offering price of the Common Stock and
the exercise price and other terms of the Public Warrants were established by
negotiations between the Company and the Underwriter and do not bear any direct
relationship to the Company's assets, book value, results of operations or any
other criteria of value. The Company has applied for the listing of the Common
Stock and Public Warrants on the OTC Bulletin Board ("Bulletin Board") under the
symbols " " and " ", respectively. There can be no assurance that such
listing will be obtained.
Also being offered for resale from time to time by this Prospectus are
487,500 shares of Common Stock, 1,425,000 Warrants (the "Private Warrants") and
1,425,000 shares of Common Stock underlying said Private Warrants held by
certain individuals (hereinafter the "Selling Securityholders" and "Selling
Securityholders' Offering"). The Selling Securityholders may not sell their
Private Warrants or the shares of Common Stock underlying said Private Warrants
for a period of (6) six months from the Effective Date without the Underwriter's
consent. Upon a closing of the Public Offering, the Private Warrants are
exchangeable for the Public Warrants. The Public Warrants and the Private
Warrants are from time to time herein collectively referred to as the
"Warrants". See "Description of Securities" and "Selling Securityholders."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING ON
PAGE 9, AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
Per Share.......................................... $6.00 $.60 $5.40
Per Warrant........................................ $.10 $.01 $.09
Total.............................................. $5,050,000.00 $505,000.00 $4,545,000.00
</TABLE>
(1) The Public Offering is being made on an "all or none, best efforts" basis on
behalf of the Company pending the sale of 825,000 shares and 1,000,000
Public Warrants. All subscriptions of the offering will be deposited in a
non-interest bearing escrow account at .
Unless the 825,000 shares and 1,000,000 Public Warrants are sold within a
period of 45 days from the date of this Prospectus or a 45 day extension
period thereafter, the Public Offering will terminate and all funds
theretofore received from the sale of the securities offered in the Public
Offering will be returned to the subscribers without deduction therefrom or
interest thereon. Moreover, during the period of escrow, subscribers will
not be entitled to a return of their subscriptions. The 825,000 shares and
1,000,000 Public Warrants will be offered on a "best efforts" basis until
all such securities are sold or the offering period ends, whichever occurs
first. See "Underwriting". There can be no assurance that any or all of the
securities offered in the Public Offering will be sold. In the event the
825,000 shares and 1,000,000 Public Warrants offered by the Company are
sold, the Underwriter will receive a non-accountable expense allowance of
the proceeds.
(2) Does not include additional compensation to the Underwriter consisting of
(i) a non-accountable expense allowance equal to 3% of the aggregate
purchase price of the Securities, or $151,500; (ii) warrants to purchase
82,500 shares of Common Stock at $7.50 per share and/or 100,000 warrants at
$.125 per warrant, exercisable for an additional 100,000 shares of Common
Stock at $6.60 per share; and (iii) a three-year consulting agreement
providing for fees totalling $108,000, which is payable to the Underwriter
in full on the closing of this Offering. For additional information
concerning further agreements between the Company and the Underwriter,
including an agreement to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) After deducting Underwriting discounts and commissions, but before the
payment of the Underwriter's non-accountable expense allowance in the amount
of $151,500 and other expenses of the Offering payable by the Company
(estimated at $540,500).
The Common Stock and Public Warrants are being offered subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, and subject
to certain other conditions and legal matters. The Underwriter reserves the
right to withdraw, cancel or modify the Public Offering and to reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares of Common Stock and Public Warrants will be made at the offices of
the Underwriter, in New York City, on or about , 1998.
MAY DAVIS GROUP, INC.
The date of this Prospectus is , 1998
<PAGE>
The Company intends to distribute to its stockholders annual reports
containing consolidated financial statements audited and reported upon by its
independent certified public accountants after the close of each fiscal year,
and will make such other periodic reports, containing unaudited consolidated
financial information, as the Company may determine to be appropriate or as may
be required by law. The Company's fiscal year ends on December 31st of each
year.
A logo consisting of human facial silhouettes within a heart,
Kaire-Registered Trademark-, Pro Vine-Registered Trademark-, Nature's
Shield-Registered Trademark-, Dermunol-TM- and Immunol-TM- used in this
Prospectus are trademarks or tradenames of the Company.
Pycnogenol-Registered Trademark- is a tradename/trademark of Horphag Research
Ltd. ("Horphag"). Enzogenol-TM- is a trademark/tradename of ENZO
Neutraceuticals, Ltd. ("ENZO").
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including financial statements
and notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors". Each prospective investor is urged to read this Prospectus
in its entirety. Except as otherwise noted, all information contained in this
Prospectus gives no effect to the exercise of (i) the Underwriter's warrants,
(ii) warrants offered hereby or issued to private investors, or (iii) options
granted under the Company's stock option plan.
The Company effected a one share for two shares reverse stock split on
October 1, 1998. All references to common share and per share amounts throughout
this Prospectus have been adjusted to reflect the reverse stock split.
THE COMPANY WOULD LIKE TO CAUTION READERS REGARDING CERTAIN FORWARD-LOOKING
STATEMENTS IN THE PROSPECTUS AND THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART. STATEMENTS THAT ARE BASED ON MANAGEMENT'S PROJECTIONS,
ESTIMATES AND ASSUMPTIONS ARE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVE,"
"EXPECT," "ANTICIPATE," AND SIMILAR EXPRESSIONS GENERALLY IDENTIFY
FORWARD-LOOKING STATEMENTS. WHILE THE COMPANY BELIEVES IN THE VERACITY OF ALL
STATEMENTS MADE HEREIN, FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED UPON A
NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE CONSIDERED REASONABLE BY THE
COMPANY ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE
UNCERTAINTIES AND CONTINGENCIES. MANY OF THESE UNCERTAINTIES AND CONTINGENCIES
CAN AFFECT THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE ITS ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE
BY, OR ON BEHALF OF, THE COMPANY. PLEASE SEE "RISK FACTORS" FOR A DESCRIPTION OF
SOME, BUT NOT ALL, OF THESE UNCERTAINTIES AND CONTINGENCIES.
THE COMPANY
Kaire International, Inc. (the "Company") develops and distributes, through
a network of independent associates, products that are intended to appeal to
health-conscious consumers. Current Company products include health care
supplements and personal care products. The Company offers a line of
approximately 50 products which it divides into nine categories, including
Antioxidant Protection, (Bodily) Defense, Digestion, Energy and Alertness,
Stress, Vital Nutrients, Weight Management, Anti-Aging and Personal Care.
The Company develops products that it believes will have market appeal to
its associates and their customers, and assists its associates in establishing
their own businesses. The Company believes that its associates can start a home
based business without significant normal start-up costs and other difficulties
usually associated with new ventures. The Company provides product development,
marketing aids, customer service, and essential record-keeping functions to its
associates. The Company also provides other support programs to its associates
including a 24 hour telephone assistance system, teleconferencing, optional
seminars, and business training systems with audio and video tapes.
The Company's marketing strategy revolves around associates actively
recruiting interested people to become new associates for the Company. These
recruits are placed beneath the recruiting associate in his or her "network" and
are referred to by the Company as that associate's "organization." Associates
earn commissions on sales generated by the recruited associates in their
organization as well as retail profits on the sales they generate directly.
The Company believes its marketing program is designed to provide incentives
for associates to build an organization of recruited associates in their
organization to maximize their earning potential. The Company has experienced an
increase in the number of associates sponsored from approximately 1,900 at the
end of its first fiscal period of October 20th to December 31, 1992 ("Fiscal
1992") to over 430,000 as of June 30, 1998. Approximately 60,000 of the
Company's associates have had product purchases in excess of $50 during the past
year and are considered to be "active" associates by the Company. During the
3
<PAGE>
Company's fiscal years ended December 31, 1995, 1996, and 1997 the Company paid
the sums of approximately $30,831,000, $27,965,000 and $19,968,000,
respectively, to its associates.
The Company purchases most of its products directly from manufacturers and
markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995 the Company
expanded the number of its associates located in other parts of the world,
particularly Australia and New Zealand. During 1997, the Company expanded its
operations into South Korea, Trinidad and Tobago, and the United Kingdom. On
October 1, 1998 the Company began actively trying to sell its South Korean
subsidiary. The South Korean operations have not proven to be successful as a
result of the general economic downturn in Asia. During the quarter ended June
30, 1998, the Company adjusted the value of the assets of its South Korean
subsidiary to what the Company believes would be the "Net Realizable Value",
resulting in a write-off of $471,000.
The Company's first three full fiscal years were periods of rapid growth
with net sales of approximately $2,719,000, $36,895,000 and $57,841,000,
respectively, for the Company's fiscal years ended December 31, 1993, 1994 and
1995 (hereinafter "Fiscal 1993", "Fiscal 1994" and "Fiscal 1995"). As a result,
the Company had a net loss of approximately $207,000 for Fiscal 1993, and net
income of approximately $1,091,000 and $1,186,000 for Fiscal 1994 and Fiscal
1995, respectively.
By the end of Fiscal 1995, management noted that growth in the Company's
monthly net sales had begun to level off, and there was a decrease in the number
of new associates that were joining and purchasing from the Company on a monthly
basis indicating that a decline in net sales could be anticipated due to the
Company possibly having reached the maturity level, which the Company believes
is frequently encountered by companies in the network marketing industry, beyond
which growth becomes very difficult. During the latter part of Fiscal 1995 and
continuing into the Company's fiscal year ending December 31, 1996 ("Fiscal
1996"), management formulated a three pronged approach to overcome this
maturation, consisting of: (1) attempting to attract more entrepreneurial minded
and younger persons to the Company's associate program; (2) introducing new
products, including products directed at more youthful end users (which was also
intended to aid in the attraction of younger associates); and (3) expanding
geographically. To attract a more entrepreneurial associate, the Company
modified its associate commission program, introduced new training materials and
took efforts to enhance communications with sales associates. This modified
commission program was not successful and, by the Fall of 1996, the Company
essentially restored its pre-March 1996 commission program.
During Fiscal 1996, the Company's net sales of approximately $51,499,000
represented a decline of approximately $6,342,000 from the Fiscal 1995 net sales
level of approximately $57,841,000. This decline in net sales continued during
the Company's fiscal year ended December 31, 1997 ("Fiscal 1997"), with net
sales of approximately $35,682,000, a decrease of $15,817,000. During Fiscal
1996 and Fiscal 1997, the Company incurred net losses of approximately
$1,803,000 and $6,098,000, respectively. During the six month period ended June
30, 1998 ("Six Months 1998"), the Company sustained a net loss of approximately
$1,422,000 on net sales of approximately $14,885,000. The net loss and net sales
of Six Months 1998 reveal a slowing of net losses but a continuing decline in
net sales when compared to the six month period ended June 30, 1997 ("Six Months
1997") during which the Company sustained a net loss of approximately $2,794,000
upon net sales of approximately $18,929,000. At June 30, 1998, the Company had a
working capital deficit of approximately $7,833,000. The Company's independent
certified public accountants stated in their report of May 1, 1998 on the
Company's December 31, 1997 consolidated financial statements that, due to
losses from operations and a working capital deficit, there was "substantial
doubt" about the ability of the Company to continue as a going concern.
The Company attributes this trend, from net income in Fiscal 1994 and Fiscal
1995 to net losses in Fiscal 1996 and Fiscal 1997 and Six Months 1998, to, among
other things, the unsuccessful modification of its associate commission
structure and increases in selling, general and administrative expenses. See
"Risk Factors--No Assurance of Return to Profitability." In order to return to
profitability, the Company has
4
<PAGE>
continued to pursue its three pronged approach, pursuant to which it essentially
restored its former commission structure and reduced its general and
administrative staffing levels. In addition, the Company has acquired the
exclusive rights to market a recently developed product known as Enzogenol sold
by the Company as EnzoKaire Complete.
The Company was incorporated under the laws of the state of Nevada on
October 20, 1992. In March 1997, the Company merged with a Delaware corporation
specifically established by the Company for the purpose of reorganizing itself
under the laws of that jurisdiction. Kaire New Zealand Ltd. and Kaire Australia
Pty. Ltd. were incorporated under the laws of their respective jurisdictions in
August 1995. In November 1995, these two companies purchased the operating
assets from predecessor corporations in which the Company had no interest. The
Company acquired a 51% interest in Kaire New Zealand, Ltd. and Kaire Australia
Pty. Ltd. at that time. Kaire Korea, Ltd. ("Kaire Korea") was incorporated in
March 1997 under the laws of South Korea. The Company's ownership in Kaire Korea
is 85% at June 30, 1998. In June 1997, Kaire Korea received its license to do
business as a "door to door selling company". Kaire Trinidad, Ltd. was
incorporated under the laws of Trinidad and Tobago in May 1997 and commenced
operations in June 1997. Kaire Europe Ltd. was incorporated in the United
Kingdom in July 1997 and commenced sales in November 1997. On December 9, 1997,
the Company entered into and completed an Agreement and Plan of Reorganization
(the "Agreement") with Interactive Medical Technologies, Ltd. ("IMT") whereby
IMT agreed to provide an additional $300,000 equity investment in the Company
and convert the $700,000 previously borrowed by the Company to equity in the
Company and for IMT to provide additional equity investments of $2,000,000 by
February 15, 1998. The additional equity investment of $2,000,000 from IMT was
not received by the Company. Certain of the Company's stockholders exchanged
81%, 1,786,676 shares, of the issued and outstanding shares of the Company's
Common Stock for approximately forty five percent (45%) 1,576,123 shares of
IMT's common stock as defined in the Agreement. The foregoing transaction
qualified as a tax free reorganization pursuant to Section 368(a)(1)(B) of the
Internal Revenue Code of 1986, as amended. During 1998, IMT exchanged 54%,
1,250,078 shares of the common stock of the Company to Global Marketing, LLC.
Unless otherwise specified or required by the context of the following text, all
references in this Prospectus to the "Company" include the Company and all of
the foregoing subsidiaries. The Company's executive office is located at 380
Lashley Street, Longmont, Colorado 80501 and its telephone number at that
address is (303) 682-0110. The Company's web-site is located at
http:\\www.kaireint.com.
RISK FACTORS
Certain risk factors should be considered in evaluating the Company, its
business and its proposed expansion plans. Such factors include, among others,
the Company's recent substantial losses, the going concern explanatory paragraph
in the Company's independent certified public accountant's report, losses
sustainable in entering new and overseas markets, use of a substantial portion
of the net proceeds for debt repayment, the possible need for additional
financing, the risks inherent in establishing new business operations and
expanding marketing efforts, intense competition, dependence upon vendors and
substantial dilution. For a discussion of these and certain other factors, see
"Risk Factors".
5
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Securities Offered(1)........................ 825,000 shares of Common Stock and 1,000,000
Public Warrants. Each Public Warrant entitles
the holder to purchase one share of Common
Stock at a price of $6.60 during a four year
period (the "Exercise Period") commencing two
years after the date of this Prospectus and
lasting until the date six years after the
date hereof, provided, however, that prior to
the Exercise Period, the Public Warrants may
be exercisable only if the Underwriter has
consented in writing to all of the Public
Warrants being exercisable. The Underwriter
and the Company have agreed that the
Underwriter will not consent, until six
months after the Effective Date, to the
earlier exercise of any of the Company's
Warrants issued and outstanding on the
Effective Date. The exercise price and the
number of shares issuable upon exercise of
the Public Warrants are subject to adjustment
in certain circumstances. See "Description of
Securities."
Securities offered through Selling
Securityholders' Offering.................. 487,500 shares of Common Stock and 1,425,000
Private Warrants. Each Private Warrant
entitles the holder to purchase one share of
Common Stock at a price of $6.60 during a
four-year period commencing two years after
the date of this Prospectus and lasting until
the date six years after the date hereof, and
that prior to such period, the Private
Warrants may be exercisable only with the
Underwriter's prior written consent. The
Underwriter and the Company have agreed that
the Underwriter will not consent, until six
months after the Effective Date, to the
earlier exercise of any of the Company's
Warrants issued and outstanding on the
Effective Date. The exercise price and number
of shares issuable upon exercise of the
Warrants are subject to adjustment in certain
circumstances. See "Description of
Securities."
Common Stock Outstanding Before the Public
Offering(1)(2)............................. 2,296,226 Shares.
Common Stock Outstanding After the Public
Offering(2)................................ 3,121,226 Shares.
Warrants and Options Outstanding Before the
Public Offering(3)(5)...................... 1,425,000 Warrants and Options.
Warrants and Options Outstanding After the
Public Offering(3)(4)(5)................... 2,425,000 Warrants and Options.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Warrant Expiration Date...................... , 2004 (six years after the Effective Date).
Offering period for the Public Offering...... 825,000 shares and 1,000,000 warrants are
being offered for a period of 45 days from
the date of this Prospectus, subject to a 45
day extension period therefrom by the
Underwriter and the Company. See
"Underwriting."
Warrant Redemption........................... Redeemable by the Company, in whole or in
part at a price of $.05 per Public Warrant,
at any time that they are exercisable upon
not less than 30 days prior written notice to
the holders of the Public Warrants, provided
that the average closing bid price of the
Company's Common Stock for the twenty
consecutive trading days immediately prior to
the date on which the notice of redemption is
given, shall have exceeded $10.00 per share.
Use of Proceeds.............................. Repayment of indebtedness to the private
placement investors and Horphag, inventory
and working capital. See "Use of Proceeds."
Proposed OTC Bulletin Board Symbols(6)
Common Stock...............................
Warrants...................................
</TABLE>
- ------------------------
(1) Includes 87,050 shares of common stock issued after June 30, 1998.
(2) Does not include (i) 1,425,000 shares of Common Stock issuable upon the
exercise of outstanding Warrants; (ii) 1,000,000 shares of Common Stock
issuable upon exercise of the Public Warrants sold in this Offering; (iii)
182,500 shares of Common Stock issuable upon the exercise of the
Underwriter's Warrants including the shares of Common Stock underlying the
Warrants included within the Underwriter's Warrants; and (iv) 500,000 shares
of Common Stock reserved for issuance pursuant to the Company's stock option
plan. See "Management,", "Description of Securities" and "Underwriting".
(3) Includes 1,425,000 warrants on the same terms as the Public Warrants offered
hereby.
(4) Does not include the Underwriter's Warrants.
(5) Does not include options to purchase up to 500,000 shares of Common Stock
reserved for issuance pursuant to the Company's stock option plan.
(6) The proposed trading symbols do not imply that a liquid and active market
will be developed or sustained for the securities upon completion of the
Public Offering.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial information has been derived
from the financial statements of the Company and should be read in conjunction
with the financial statements and the related notes thereto appearing elsewhere
in this Prospectus. For a description of the Financial Statements from which the
following financial data has been derived, see the introduction to "Selected
Financial Information." The summary financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this Prospectus. Information as to the
periods ended June 30, 1998 and June 30, 1997 is unaudited. All per share
amounts have been adjusted to reflect a one (1) share for two (2) shares reverse
stock split effective on October 1, 1998.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
<CAPTION>
OCTOBER 20, 1992
(INCEPTION) TO
DECEMBER 31, 1992 1993 1994 1995 1996 1997
------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales................................ $ 92 $ 2,719 $ 36,895 $ 57,841 $ 51,499 $ 35,682
Income (Loss) from Operations............ $ (162) $ (180) $ 1,462 $ 2,164 $ (2,764) $ (5,683)
Net Income (Loss)........................ $ (162) $ (207) $ 1,091 $ 1,186 $ (1,803) $ (6,098)
Net Income (Loss) Per Share--
Basic and diluted...................... $ (.12) $ (.15) $ .78 $ .81 $ (1.23) $ (3.01)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Net Sales................................................................................... $ 18,929 $ 14,885
Loss from Operations........................................................................ $ (2,839) $ (1,177)
Net Loss.................................................................................... $ (2,794) $ (1,422)
Net Loss Per Share--Basic and diluted....................................................... $ (1.46) $ (.64)
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF JUNE 30,
1998
----------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(1)
--------- -----------
Working Capital Deficiency................................................................ $ (7,833) $ (3,980)
Total Assets.............................................................................. 3,711 5,377
Long Term Obligations..................................................................... 0 0
Total Liabilities......................................................................... 10,175 7,991
Minority Interest in Consolidated Subsidiaries............................................ 43 43
Stockholders' Deficit..................................................................... (6,507) (2,654)
</TABLE>
- ------------------------
(1) Gives effect to the sale of shares of common stock and Public Warrants to
be sold by the Company in the Public Offering and the application of the
estimated net proceeds therefrom to repay debt, as if the transactions had
occurred as of June 30, 1998. See "Use of Proceeds".
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE MADE BY ANY INVESTOR WHO CANNOT
AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. EACH PROSPECTIVE PURCHASER SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FACTORS ASSOCIATED WITH
THIS OFFERING, AS WELL AS OTHER FACTORS DESCRIBED ELSEWHERE IN THIS PROSPECTUS,
BEFORE MAKING AN INVESTMENT.
NO ASSURANCE OF A RETURN TO PROFITABILITY; RECENT SUBSTANTIAL LOSSES. From
its inception in late 1992 through the end of its Fiscal 1995, the Company had
experienced a rapid expansion in its net sales, growing from net sales of
approximately $2,719,000 during its first full fiscal year, Fiscal 1993, to net
sales of approximately $36,895,000 and $57,841,000, for Fiscal 1994 and Fiscal
1995, respectively. During these three fiscal years the Company's net income
experienced corresponding increases, with the Company sustaining a net loss of
approximately $207,000 during Fiscal 1993 and net income of approximately
$1,091,000 and $1,186,000 during Fiscal 1994 and Fiscal 1995, respectively.
Fiscal 1996 and Fiscal 1997 were periods of declining revenues and net losses.
During Fiscal 1996 and Fiscal 1997, the Company sustained net losses of
approximately $1,803,000 and $6,098,000, respectively, upon net sales of
approximately $51,499,000 and $35,682,000, respectively. During Six Months 1998,
the Company sustained a net loss of approximately $1,422,000 on net sales of
approximately $14,885,000. This is in comparison to Six Months 1997 during which
the Company sustained a net loss of approximately $2,794,000 upon net sales of
approximately $18,929,000. See "Risk Factors--Going Concern Modification in
Independent Certified Public Accountants' Report." Management believes that the
foregoing net sales decreases and losses resulted from the Company maturing as a
network marketing enterprise, having reached a leveling off of its net sales
during the latter part of 1995, and the Company's own initial efforts to
overcome this maturation. In an effort to overcome this maturation, the Company
formulated several approaches. Those approaches were to: attract a younger and
more entrepreneurial minded associate than it had attracted in the past; attract
persons who had been successful network marketers with other companies; continue
to expand its line of products, including efforts to develop products directed
at a younger market; and further expand geographically outside of the United
States. Attracting new, younger and entrepreneurial minded associates was, by
its nature, the first approach undertaken. In an effort to accomplish this,
among other things, the Company changed its commission program that had been in
place since 1994. The change in commission structure was not well received by
the Company's associates and, in addition, the Company's new commission
structure attracted associates who misused the new commission program which
increased commissions on first time sales without providing for commission
recovery by the Company on product returns and refunds. Exacerbating the
Company's losses were to lesser degrees; the time and cost of personnel devoted
to promoting the new commission program, competition in recently penetrated
markets of Australia and New Zealand of "copycat" products, the introduction of
new products that were not as well received by the market as had been expected,
a new product not as consistent as the product it replaced and a corporate
infrastructure (new personnel and facilities) with related fixed costs that had
grown correspondingly with the growth in sales in prior fiscal years. The
Company, in the latter part of Fiscal 1996, reverted to essentially its former
commission program. There can be no assurance that future unforeseen
developments, such as the failure to successfully penetrate the new
geographically targeted markets, generate revenue growth as market competition
increases, create or secure new products that will be accepted in the market
place, contain its general and administrative overhead costs and other
unforeseen circumstances will not have a material adverse effect on the
Company's operations in its current or expanded market areas. The Company is
actively trying to sell its South Korean subsidiary and at June 30, 1998, the
Company recorded a $471,000 write down of its assets in its South Korean
subsidiary to what the Company believed to be their net realizable value. See
"Risk Factors--Going Concern Modification in Independent Certified Public
Accountants' Report," "--Losses Sustained in Attempting to Penetrate New
Markets; Risks Involved in Entering New Markets," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
Consolidated Financial Statements and the notes thereto.
9
<PAGE>
GOING CONCERN MODIFICATION IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
REPORT. The report dated May 1, 1998, except for the first paragraph of Note 8
which is dated October 1, 1998, from BDO Seidman, LLP, the independent certified
public accountants for the Company's December 31, 1997 consolidated financial
statements, expressed "substantial doubt" about the Company's ability to
continue as a going concern due to recurring losses and negative working
capital. There can be no assurance that the Company will again or ever achieve
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and Consolidated Financial Statements.
LOSSES SUSTAINED IN ATTEMPTING TO PENETRATE NEW MARKETS; RISKS INVOLVED IN
ENTERING NEW MARKETS. The Company has sustained substantial losses in trying to
penetrate the South Korean market. The Company is actively trying to sell its
South Korean subsidiary and during the quarter ended June 30, 1998, the Company
recorded a $471,000 writedown of its assets in its South Korean subsidiary to
what the Company believed to be their net realizable value. The Company intends
to complete its expansion efforts into the United Kingdom. Completing the
establishment of its operations in the United Kingdom will require the
recruitment and training of new personnel, paying salaries of United Kingdom
personnel and their related benefits, continuing compliance with the laws and
regulations of that country, delivering products into that country, purchasing
equipment, continuing leasehold payments and payments of other costs and
expenses until United Kingdom operations generate sufficient revenues to cover
the foregoing and other costs and expenses related to the Company's United
Kingdom operations. Until such time as United Kingdom operations generate
sufficient revenue to cover the foregoing costs and expenses, of which no
assurance can be given, the Company's United Kingdom operations will continue to
sustain losses. In addition to the foregoing, future events, including problems,
delays, expenses and complications frequently encountered by companies seeking
to penetrate new markets, foreign currency exchange fluctuations, as well as
changes in governmental policies, economic or other conditions may occur that
could cause the Company to be unsuccessful in these expansion efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
USE OF PROCEEDS TO REPAY INDEBTEDNESS. Approximately 57% of the estimated
net proceeds to be received by the Company from the Public Offering have been
allocated to repay indebtedness and will, as a result, not be used for the
Company's future operations. See "Use of Proceeds."
NEED FOR ADDITIONAL FUTURE FINANCING; POSSIBLE ADDITIONAL DILUTION. The
Company may require additional equity or debt financing in order to complete its
expansion efforts into any additional geographic areas that the Company may
target in the future or for additional working capital if it continues to
sustain losses or its expansion areas continues to suffer losses. Any additional
equity financing that may be obtained may dilute the voting power and equity
interests of the Company's stockholders. Any additional debt financing that may
be obtained may restrict or impair the Company's ability to declare dividends or
may impose financial restrictions on the Company's ability to expand. There can
be no assurance that the Company will be able to obtain additional financing on
terms acceptable to the Company or at all. In the event additional financing is
unavailable to the Company, the Company may be materially adversely affected.
See "Use of Proceeds."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately 30% of the
estimated net proceeds to be received by the Company from the Public Offering
have been allocated to working capital and the Company will have broad
discretion as to the application of such funds. See "Use of Proceeds."
NON-PAYMENT OF PAYROLL AND SALES TAXES. During Fiscal 1997 and its current
fiscal year to end December 31, 1998 ("Fiscal 1998"), the Company has not made
its payroll tax deposits with the Internal Revenue Service ("IRS") and various
state taxing authorities on a timely basis and is negotiating a payment plan
with the IRS. At December 31, 1997 and June 30, 1998, the Company owed
approximately $51,100 and $176,600, respectively, in payroll tax liabilities
including interest and penalties. As of December 31, 1997, the Company has
federal income tax refunds related to the carryback of net operating losses of
approximately $264,000. The Company has offset these income tax refunds against
the federal
10
<PAGE>
payroll tax liabilities as of December 31, 1997. Also, during Fiscal 1997 and
Six Months, 1998, the Company has not made its sales tax deposits with the
various state taxing authorities on a timely basis. At December 31, 1997 and
June 30, 1998, the Company owed approximately $268,000 and $391,000,
respectively, in current and delinquent sales tax deposits. Subsequent to June
30, 1998, the Company reached an agreement with the IRS to pay certain current
and prior payroll tax liabilities. The Company has also agreed to pay all future
payroll taxes on a current basis. Any failure to meet the terms of the agreement
with the IRS, could result in a federal tax lien being filed. In addition, the
various state taxing authorities could commence actions against the Company
including property seizure proceedings. If any such action were to be successful
the Company could be required to pay judgments entered against it which may
require the sale of assets at "distress" sale prices. In addition, the cost of
defending any such litigation could be substantial.
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING. The Company is subject to
or affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) product
formulation, labeling, packaging and importation, (ii) product claims and
advertising, whether made by the Company or its associates, (iii) fair trade and
distributor practices, and (iv) taxes, transfer pricing and similar regulations
that affect foreign taxable income and customs duties. Based on the Company's
experience and research, the nature and scope of inquiries from government
regulatory authorities, and the advice it receives from various counsel, the
Company believes that it is in material compliance with all regulations
applicable to the Company. However, there can be no assurances that the Company
will not be subject to inquiries and regulatory investigations or disputes and
the effects of any adverse publicity resulting therefrom. Any assertion or
determination that the Company is not in compliance with existing laws or
regulations could potentially have a material adverse effect on the Company's
business and results of operations. In addition, in any country or jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or have a
material adverse effect on the Company's business and results of operations. The
Company cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on the Company's business and
results of operations. Moreover, governmental regulations in countries where the
Company plans to commence or expand operations may prevent, delay or limit
market entry of certain products or require the reformulation of such products.
Regulatory action, whether or not it results in a final determination adverse to
the Company has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of associates and, consequently, on
the Company's sales and earnings. See "--Losses Sustained in Attempting to
Penetrate New Markets; Risks Involved in Entering New Markets" and "Business--
Government Regulation."
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes.
Such schemes, often referred to as "pyramid" or "chain sales" schemes, often
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. So
long as the Company is doing business in South Korea, it must comply with South
Korea's strict Door-to-Door Sales Act, which requires among other things, the
regular reporting of revenue, the registration of associates together with the
issuance of a registration card, and the maintaining of a current associate
registry. This law also limits the amount of certain bonuses that a registered
multi-level marketing company can pay to associates up to a maximum of 35% of
revenue in a given month. See "Business-- Government Regulation."
As is the case with most network marketing companies, the Company has from
time to time received inquiries from various government regulatory authorities
regarding the nature of its business and other issues such as compliance with
local business opportunity and securities laws. To date none of these inquiries
has resulted in a finding materially adverse to the Company. There can be no
assurance that the Company will not face inquiries in the future which, either
as a result of findings adverse to the Company or as a result of adverse
publicity resulting from the initiation of such inquiries, could have a material
11
<PAGE>
adverse effect on the Company's business and results of operations. See
"Business--Government Regulation."
Even though management believes that laws governing direct selling are
generally becoming more permissive in certain Asian countries, certain countries
currently have laws in place that would prohibit the Company from conducting
business in such markets. There can be no assurance that the Company will be
allowed to continue to conduct business in each of its existing markets. See
"Business--Government Regulation."
TAXATION RISKS AND TRANSFERS PRICING. The Company is subject to taxation in
the United States, where it is incorporated. In addition, each of the Company's
subsidiaries are subject to taxation in the country in which it operates,
currently ranging from a statutory tax rate of 28% in South Korea to 35% in
Trinidad and Tobago. The Company will be eligible for foreign tax credits in the
United States for the amount of foreign taxes actually paid in a given period.
In the event that the Company's operations in high tax jurisdictions such as
Trinidad and Tobago grow disproportionately to the rest of the Company's
operations, the Company will be unable to fully utilize its foreign tax credits
in the United States, which could, accordingly, result in the Company paying a
higher overall effective tax rate on its worldwide operations.
Because the Company's subsidiaries operate outside of the United States, the
Company is subject to the jurisdiction of the relevant foreign tax authorities.
In addition to closely monitoring the subsidiaries locally based income, these
tax authorities regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in South
Korea are particularly active in challenging the tax structures of foreign
corporations and their intercompany transfers. Although the Company believes
that its tax and transfer structures are in compliance in all material respects
with the laws of every jurisdiction in which it operates, no assurance can be
given that these structures will not be challenged by foreign tax authorities or
that such challenges will not have a material adverse effect on the Company's
business or results of operations.
INCREASED COMPANY EMPHASIS ON OPERATIONS OUTSIDE OF THE UNITED STATES. Less
than 18% of the Company's net sales during Fiscal 1997 were derived from
operations outside of the United States. The Company's future operations may be
materially and adversely affected by economic, political and social conditions
in the countries in which it then operates. A change in policies by any
government in the Company's markets and proposed markets, could adversely affect
the Company and its operations through, among other things, changes in laws,
rules or regulations, or the interpretation thereof, confiscatory taxation,
restrictions on currency conversion, currency repatriation or imports, or the
expropriation of private enterprises. Although the Company believes that the
general trend in Asia has been toward more open markets and trade policies and
the fostering of private business and economic activity, no assurance can be
given that this trend will continue or that such policies will not be
significantly altered in future periods. Additionally, the economic downturn in
Asia appears to have offset this trend. This could be especially true in the
event of a change in leadership, social or political disruption or upheaval, or
unforeseen circumstances affecting economic, political or social conditions or
policies. There can be no assurance that such activities, or other similar
activities in the Company's markets, will not result in passage of legislation
or the enactment of policies which could materially adversely affect the
Company's operations in the market areas where it operates. In addition, the
Company's ability to expand its operations into new markets will directly depend
on its ability to secure the requisite government approvals and comply with the
local government regulations. See "--Losses Sustained in Attempting to Penetrate
New Markets; Risks Involved in Entering New Markets."
CURRENCY RISKS. The Company's foreign-derived sales and selling, general
and administrative expenses are converted to U.S. dollars for reporting
purposes. Consequently, the Company's reported earnings are significantly
impacted by changes in currency exchange rates, generally increasing with a
weakening dollar and decreasing with a strengthening dollar. Given the
uncertainty of the extent of exchange rate fluctuations, the Company cannot
estimate the effect of these fluctuations on its future
12
<PAGE>
business, product pricing, results of operations or financial condition.
However, because the Company's revenue is realized in local currencies and the
majority of its cost of sales is denominated in U.S. dollars, the Company's
gross profits will be positively affected by a weakening in the U.S. dollar and
will be negatively affected by a strengthening in the U.S. dollar. There can be
no assurance that any of the foregoing currency risks will not have a material
adverse effect upon the Company's results from operations or financial
condition. Fluctuations in currency exchange rates, particularly those caused by
an increase in the value of the United States dollar, could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
RELIANCE UPON INDEPENDENT DISTRIBUTOR NETWORK AND HIGH TURNOVER RATE OF
DISTRIBUTORS. The Company distributes its products exclusively through
independent associates. Associate agreements with the Company are voluntarily
terminable by the associates at any time. The Company's revenue is directly
dependent upon the efforts of these independent associates, and any growth in
future sales volume will require an increase in the productivity of these
associates and/or growth in the total number of associates. As is typical in the
direct selling industry, there is turnover in associates from year to year,
which requires the sponsoring and training of new associates by existing
associates to maintain or increase the overall associate force and motivate new
and existing associates. The Company experiences seasonal decreases in associate
sponsoring and product sales in some of the countries in which the Company
operates because of local holidays and customary vacation periods. The size of
the associate force can also be particularly impacted by general economic and
business conditions and a number of intangible factors such as adverse publicity
regarding the Company, or the public's perception of the Company's products,
product ingredients, Company associates or direct selling businesses in general.
Historically, the Company has experienced periodic fluctuations in the level of
associate sponsorship (as measured by associate applications). However, because
of the number of factors that impact the sponsoring of associates, and the fact
that the Company has little control over the level of sponsorship of new
associates, the Company cannot predict the timing or degree of those
fluctuations. There can be no assurance that the number or productivity of the
Company's associates will be sustained at current levels or increased in the
future. In addition, the number of associates as a percent of the population in
a given country or market could theoretically reach levels that become difficult
to exceed due to the finite number of persons inclined to pursue a direct
selling opportunity.
POTENTIAL EFFECTS OF ADVERSE PUBLICITY. The size of the distribution force
and the results of the Company's operations can be particularly impacted by
adverse publicity regarding the Company, or its competitors, including the
legality of network marketing, the quality of the Company's products and product
ingredients or those of its competitors, regulatory investigations of the
Company or the Company's competitors and their products, associate actions and
the public's perception of the Company's associates and direct selling
businesses generally. There can be no assurance that such adverse publicity will
not have a material adverse effect on the Company's ability to attract and
retain customers or associates, or on the Company's results from operations or
financial condition generally.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
continued availability of certain key management personnel, including Robert L.
Richards, Michael Lightfoot, and J.T. Whitworth. The business of the Company
could be adversely affected by the loss of services of any of the foregoing
individuals. The Company does not have employment contracts with any of the
foregoing individuals. See "Management--Executive Compensation." The Company's
growth and ability to return to profitability may depend on its ability to
attract and retain other management personnel, of which no assurance can be
given. The Company only maintains Key Man Life Insurance on Robert L. Richards.
LACK OF WRITTEN CONTRACTS WITH SUPPLIERS OR MANUFACTURERS. With the
exception of ENZO, the Company does not have any written contracts with any of
its suppliers or manufacturers or commitments from any of its suppliers or
manufacturers to continue to sell products to the Company. Due to the absence of
any written contract with almost all of its suppliers, there is a risk that any
of the Company's suppliers or
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<PAGE>
manufacturers could discontinue selling their products to the Company for any
reason. Although the Company believes that it could establish alternate sources
for most of its products, any delay in locating and establishing relationships
with other sources could result in product shortages and back orders for the
products, with a resulting loss of revenues to the Company. In addition, the
lack of a written agreement may impair the Company's ability to enforce such
agreements or enforce its rights thereunder. There can be no assurance that the
lack of written agreements with suppliers or manufacturers will not have a
material adverse effect on the Company.
COMPETITION. The Company competes with many companies marketing products
similar to those sold and marketed by the Company. It also competes intensely
with other network marketing companies in the recruitment of associates, of
which there are many such companies. Some of the largest of these are Nutrition
for Life International, Inc., Natures Sunshine, Inc., Herbalife International,
Inc., Amway and Rexall Sundown, Inc. Each of these companies is substantially
larger than the Company and has significantly greater financial and personnel
resources than the Company.
DEPENDENCE UPON SUPPLIERS. The Company has one source of Pycnogenol, MW
International Inc. ("MWI"), and approximately two-thirds of the Company's
revenues have been derived from Pycnogenol. During Fiscal 1995, Fiscal 1996,
Fiscal 1997 and Six Months 1998, the Company purchased approximately 40%, 57%,
48% and 18% of its products, respectively, from MWI. During the same foregoing
fiscal periods, the Company purchased approximately 40%, 22%, 6% and 3% of its
products from Manhattan Drug, Inc. The Company has no written agreements with
its suppliers and although the Company believes that suitable replacement and
comparable product sources are available, there can be no assurance that the
Company would be able to obtain replacement suppliers on a timely basis, on
commercially reasonable terms or at all, in the event its suppliers discontinue
associating with the Company, go out of business or for some other reason either
of their products become unavailable to the Company. See "Business--
Manufacturing and Supplies."
PRODUCT LIABILITY EXPOSURE. Although the Company does not engage in the
manufacture of any of the products it markets and distributes, the Company could
be exposed to product liability claims for the products which it distributes.
The Company has not had, or is not aware of, any such claims to date. Although
the Company maintains product liability insurance which it believes to be
adequate for its needs, there can be no assurance that the Company will not be
subject to claims in the future or that its insurance coverage will be adequate.
CONTROL BY OUTSIDE COMPANY. After the successful completion of this Public
Offering, Global Marketing, LLC, ("Global") will beneficially own approximately
40% of the Company's issued and outstanding shares of Common Stock. Global will,
as a practical matter, be able to nominate and cause the election of all the
members of the Company's Board of Directors, control the appointment of its
officers and the day-to-day affairs and management of the Company. See
"Principal Stockholders."
INDEPENDENT DIRECTORS NOT A MAJORITY OF THE BOARD. Four of the five members
of the Company's Board of Directors are also executive officers of the Company.
All decisions affecting the day-to-day operations of the Company will be made by
the Board of Directors, of which the majority of members are not independent of
the Company. See "Management."
IMMEDIATE AND SUBSTANTIAL DILUTION. As a result of the sale of the
Securities offered in this Public Offering, there will be immediate and
substantial dilution to public investors in that the pro forma net tangible book
value per share of the Company's Common Stock after this Public Offering will be
approximately $(1.01) per share, or approximately $7.01 (or 117%) less than the
$6.00 offering price per share. See "Dilution."
ESCROW OF INVESTORS' FUNDS. Under the terms of the Public Offering, the
Underwriter is offering 825,000 shares and 1,000,000 Public Warrants on an "all
or none, best efforts" basis. No commitment exists
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<PAGE>
by anyone to purchase all or any part of the securities offered in the Public
Offering. Consequently, it is uncertain that such securities will be sold, and
subscribers' funds may be escrowed for as long as 90 days and then returned
without interest thereon in the event such securities are not sold within the
prescribed periods. Subscribers, therefore, will not have the use of any funds
paid for the subscription to such securities or the right to return of their
funds during the subscription period. In the event the Underwriter is unable to
sell such securities within such period, the Public Offering may be withdrawn.
See "Underwriting."
NO ASSURANCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING AND
EXERCISE PRICES. Prior to the Public Offering, there has been no market for any
of the Company's securities. The initial public offering price of the Securities
and the exercise price and other terms of the Warrants have been arbitrarily
determined by negotiations between the Company and the Underwriter and such
prices and terms are not necessarily related to the Company's asset value, net
worth or other established criteria of value. In addition, there can be no
assurance that a trading market will develop after the Public Offering for any
of the Company's Securities or that, if developed, it will be sustained. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE DOWNWARD PRESSURE ON SHARE
PRICE. Existing stockholders in the Company are subject to Rule 144 as
promulgated under the Securities Act ("Rule 144") and the restrictions
thereunder upon the disposition of shares. In general, under Rule 144, a person
who has satisfied a one-year holding period may, under certain circumstances,
sell within any three-month period a number of shares of common stock that does
not exceed the greater of 1% of the then outstanding shares of common stock or
the average weekly trading volume in such shares during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of shares without any quantity or other limitation by a person who is not an
affiliate of the issuer and after a two-year holding period.
All of the 2,296,226 issued and outstanding shares of the Company's Common
Stock prior to the offering are "restricted securities," as that term is defined
under Rule 144. The Company also has outstanding warrants and options to
purchase 1,425,000 shares of Common Stock. The ability of stockholders to make
Rule 144 sales may increase the supply of shares of Common Stock in the public
market, and thus may have a substantial depressive effect on the price of the
Company's securities in any market which may develop for such securities. There
can be no assurance that such Rule 144 dispositions will not occur or not
adversely affect the price of the securities offered hereby. See "--Effect of
Options, Warrants and Registration Rights", "Shares Eligible for Future Sale"
and "Selling Securityholders."
EFFECT OF OPTIONS, WARRANTS AND REGISTRATION RIGHTS. For the respective
terms of the Underwriter's Warrants, Public Warrants sold as part of the Public
Offering and the Private Warrants and any options that may be granted by the
Company under the Company's stock option plan, the holders thereof are given an
opportunity to profit from a rise in the market price of the Common Stock, with
a resulting dilution in the interests of the other stockholders. Further, the
terms on which the Company may obtain additional financing during the exercise
periods of said warrants and options may be adversely effected by the existence
of such warrants, options and plans. The holders of options or warrants to
purchase Common Stock may exercise such options or warrants at a time when the
Company might be able to obtain additional capital through offerings of
securities on terms more favorable than those provided by such options or
warrants. In addition, the holders of the Underwriter's Warrants and 22.050
shares of Common Stock have demand and "piggyback" registration rights,
respectively, with respect to their securities and/or the shares of the
Company's Common Stock underlying said securities. Exercise of such registration
rights may involve substantial expense to the Company. See "Management,"
"Certain Transactions," "Description of Securities," "Underwriting" and "Selling
Securityholders."
NO CASH DIVIDENDS. The Company has not paid any dividends to date. The
Company's Board of Directors does not presently intend to declare any dividends
in the foreseeable future, but instead intends to retain all earnings, if any,
for use in the Company's business operations. See "Description of Securities."
15
<PAGE>
LACK OF EXPERIENCE OF THE UNDERWRITER. The Underwriter was organized in
August 1993, was registered as a broker in June 1995, and became a member firm
of the National Association of Securities Dealers, Inc. (the "NASD") in June
1995. The Underwriter is principally engaged in retail brokerage and market
making activities and various corporate finance projects. The Underwriter has
acted as a placement agent in private offerings, has participated as a member of
the underwriting syndicate or as a selected dealer in one public offering, and
has acted only three times as the lead manager of public offerings of
securities. While certain of the officers of the Underwriter have significant
experience in corporate finance and the underwriting of securities, no assurance
can be given that the Underwriter's lack of experience as a lead managing
underwriter of public offerings will not adversely affect the Public Offering
and the subsequent development of a liquid public trading market in the
Company's securities. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. At any time during
their exercise period, the Warrants may be redeemed by the Company at a
redemption price of $.05 per Warrant upon 30 days prior written notice if the
average closing bid price of the Common Stock for 20 consecutive trading days
ending within 10 days of the notice exceeds $10.00. Redemption of the Warrants
could force the holders to exercise the Warrants and pay the exercise price at a
time when it may be disadvantageous for the holders to do so, to sell the
Warrants at the current market price for the Warrants when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which may be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities."
CURRENT PROSPECTUS AND BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders of the Warrants will have the right to exercise the Warrants
for the purchase of shares of Common Stock only if a current prospectus relating
to such shares is then in effect and only if the shares are qualified for sale
under the securities laws of the states in which the Warrantholders reside.
Although the Company intends to maintain such a current prospectus and to seek
to qualify the shares of Common Stock underlying the Warrants for sale in those
states where the Common Stock and Warrants are to be offered, there is no
assurance that it will be able to do so. The Warrants may be deprived of any
value if the current prospectus encompassing the shares underlying the Warrants
is not kept effective or if such underlying shares are not or cannot be
registered in the states in which the Warrantholders reside. See "Description of
Securities."
BULLETIN BOARD LISTING; POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF
SECURITIES. Securities listed on the Bulletin Board may experience reduced
liquidity as compared to the Nasdaq SmallCap market. If the securities offered
hereby are listed on the Bulletin Board, investors herein may experience reduced
liquidity in such securities and may have difficulty in obtaining a satisfactory
sale price, relative to the actual market price, as a consequence. There can be
no assurance that the failure to attain listing on the Nasdaq SmallCap market
will not adversely affect the Company's securities liquidity or investors'
ability to dispose of such securities.
RISKS OF LOW-PRICED SECURITIES. If the Company's securities are listed on
the Bulletin Board, such securities would be subject to rules under the Exchange
Act, which impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established clients and "accredited
investors" (for example, individuals with a net worth in excess of $1,000,000 or
an annual income exceeding $200,000, or $300,000 together with their spouses).
For transactions covered by such rules, a broker-dealer must make a special
suitability determination of the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. Consequently, such rules
may affect the ability of broker-dealers to sell the Company's securities and
the ability of purchasers in the Public or Selling Securityholders' Offerings to
sell any of the Company's securities acquired in the Public or Selling
Securityholders' Offerings in any secondary market that may develop for such
securities.
The Commission has enacted rules that define a "penny stock" to be any
equity security that has a price (as therein defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions, including securities listed on designated exchanges. For any
transaction
16
<PAGE>
involving a penny stock, unless exempt, the rules require the delivery, prior to
any transaction in a penny stock, of a disclosure statement prepared by the
Commission relating to the penny stock market. Disclosure also has to be made
about the risks of investing in penny stocks in both public offerings and in
secondary trading, and about commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in the account and information on the
limited market in penny stocks. In the event the Company's securities are not
otherwise exempt from the provisions of the Commission's "penny stock" rules,
such rules may also affect the ability of broker-dealers to sell the Company's
securities and the ability of purchasers in the Public Offering or the Selling
Securityholders Offering to sell any of the securities acquired hereby in any
secondary market that may develop. See "Underwriting" and "Selling
Securityholders."
"YEAR 2000" PROBLEM. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the latter
two digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. Management has assessed the Company's "Year 2000"
compliance expense to be $250,000. The Company has not yet established a
contingency plan in the event that it is unable to correct the "Year 2000"
problem and as of the date of this Prospectus has no plans to do so. There can
be no assurance that such problem can be resolved by the Company in a timely or
cost effective fashion, or at all, or that any difficulty or inability in
resolving such problem will not have a material adverse effect upon the Company.
17
<PAGE>
DILUTION
The initial offering price per share of Common Stock is substantially higher
than the average price per share paid by the Company's existing stockholders.
Based on an initial public offering price of $6.00 per share, purchasers of the
Common Stock in the Public Offering will experience an immediate and substantial
dilution in net tangible book value of approximately 117% or $7.01 per share.
For the purposes of this discussion, it is assumed that no Warrants will be
exercised, and, accordingly, no value is attributed to the Warrants.
The following table presents certain information concerning the net
consolidated tangible book value per share of the Company's Common Stock as of
June 30, 1998, as adjusted to give effect to the sale of 825,000 shares of
Common Stock by the Company in the Public Offering (at an initial public
offering price of $6.00 per share and after deducting the estimated underwriting
discounts and estimated offering expenses payable by the Company):
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $ 6.00
Consolidated Net negative tangible book value per share
before the Public Offering(1).......................... $ (3.13)
Increase per share attributable to new investors......... $ 2.12
---------
Net tangible book value per share after the Public
Offering................................................... (1.01)
---------
Total dilution per share to new investors(2)................. $ 7.01
---------
---------
</TABLE>
- ------------------------
(1) Net tangible book value per share is determined by dividing the Company's
net tangible book value (total assets less intangible assets and total
liabilities and minority interest) at June 30, 1998 by the number of shares
of Common Stock then outstanding.
(2) Dilution per share is determined by subtracting pro forma net tangible book
value per share after the Public Offering from the initial public offering
price per share. The foregoing table also assumes no exercise of the
Underwriter's Warrants.
The following table sets forth, on a pro forma basis as of the date of this
Prospectus, the respective positions of the Company's existing stockholders and
new investors with respect to the number of shares of Common Stock purchased
from the Company, the total cash consideration paid and the average price per
share paid by the existing stockholders and by the new investors with respect to
the 825,000 shares of Common Stock to be issued by the Company at an initial
public offering price of $6.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE
APPROXIMATE APPROXIMATE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (1)...................... 2,209,176 72.8% $ 1,387,409 22% $ 0.63
New Investors.................................. 825,000 27.2% 4,950,000 78% $ 6.00
---------- ------ ------------ ------
TOTAL.................................... 3,034,176 100% $ 6,337,409 100%
---------- ------ ------------ ------
---------- ------ ------------ ------
</TABLE>
The foregoing table assumes no exercise of any warrants.
- ------------------------
(1) Does not include the exercise of 87,050 of options and warrants exercised
after June 30, 1998.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 825,000 shares of Common
Stock and 1,000,000 Public Warrants offered hereby are estimated to be
approximately $3,853,000 after deducting underwriting commissions and discounts
and other expenses of the Public Offering. The Company expects to use the net
proceeds over the next twelve months approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DOLLAR AMOUNT APPROXIMATE
OF NET PERCENTAGE
APPLICATION OF NET PROCEEDS PROCEEDS OF NET PROCEEDS
- --------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Repayment of Bridge Loans(1) (Including interest of $209,000 to
November 30, 1998)............................................................. $ 1,934,000 50%
Partial repayment of Horphag loan(2)............................................. 250,000 7%
Inventory........................................................................ 500,000 13%
Working Capital(3)............................................................... 1,169,000 30%
-------------- -----
Total...................................................................... $ 3,853,000 100%
-------------- -----
-------------- -----
</TABLE>
- ------------------------
(1) Repayment of 10% promissory notes issued to private investors due upon the
earlier of eighteen months from the date of issuance or the proceeds of the
Company's initial public offering contemplated herein. The Company used the
proceeds of the promissory notes in its expansion efforts into Korea for
inventory, office equipment, security deposits and to fund operating losses
and also for debt repayment and working capital. See "Certain Transactions."
(2) Partial repayment of 9.5% promissory note due to Horphag Research Ltd. due
upon the earlier of September 15, 1998 or five days after the closing of the
Company's initial public offering contemplated herein. See "Certain
Transactions".
(3) Includes general corporate purposes such as selling, general and
administrative expenses; leasehold improvements; professional fees; and
marketing research.
The Company currently estimates that the net proceeds of the Public Offering
will be sufficient to fund its planned operations for approximately twelve
months from the date of this Prospectus. The net proceeds may be sufficient for
a greater or lesser period of time depending on the extent of the Company's
expansion efforts. In addition, the Company may require additional financing
prior to or following such period if the Company suffers losses greater than
anticipated. The Company has no commitments or arrangements for any such
additional financing and there can be no assurance that the Company will be able
to obtain additional financing on terms acceptable to the Company or at all. In
the event additional financing is unavailable to the Company, the Company may be
materially adversely affected.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Public Offering. Future events, as well as changes in
economic, regulatory or competitive conditions or the Company's business and the
results of the Company's activities may make shifts in the allocation of funds
within the described categories or to other purposes necessary or desirable. In
the event the Company suffers losses greater than anticipated, the Company may
draw upon the net proceeds of the Public Offering allocated to working capital.
Management has broad discretion as to the allocation of the net proceeds of the
Public Offering.
The Company will not receive any of the proceeds from the sale of the
Company's securities by the Selling Securityholders.
Prior to expenditure, proceeds will be invested principally in high grade,
short-term, interest-bearing investments. Any proceeds received upon exercise of
any Warrants will be used for working capital. There can be no assurance that
any Warrants will be exercised.
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1998 and as adjusted to reflect the proceeds of 825,000
shares of Common Stock and 1,000,000 Redeemable Common Stock Purchase Warrants
for sale in this Offering. The table should be read in conjunction with the
notes below and the consolidated financial statements of the Company and the
information and the related notes thereto including elsewhere herein. See "Use
of Proceeds".
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
AS
ACTUAL ADJUSTED
----------- -----------
<S> <C> <C>
SHORT TERM DEBT:
Notes payable........................................................................ $ 4,350,518 $ 2,375,518
Capitalized lease obligation......................................................... 75,646 75,646
----------- -----------
TOTAL SHORT TERM DEBT.................................................................. 4,426,164 2,451,164
----------- -----------
LONG-TERM DEBT:
Capital leases payable less current portion.......................................... 0 0
----------- -----------
TOTAL LONG-TERM DEBT................................................................... 0 0
----------- -----------
Minority interest in consolidated subsidiaries....................................... 43,024 43,024
----------- -----------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $.01 par value 5,000,000 shares authorized: none issued and
outstanding........................................................................ -- --
Common Stock, $.01 par value 25,000,000 shares authorized: 2,209,176 and 3,034,176
shares issued and outstanding, actual and adjusted, respectively(1)................ 22,092 30,342
Additional paid-in capital........................................................... 1,365,317 5,210,067
Cumulative translation adjustment.................................................... (479,536) (479,536)
Retained deficit..................................................................... (7,414,970) (7,414,970)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT............................................................ (6,507,097) (2,654,097)
----------- -----------
TOTAL CAPITALIZATION................................................................... $(2,037,909) $ (159,909)
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Does not include (i) 1,425,000 shares of Common Stock issuable upon the
exercise of outstanding warrants and options; (ii) 182,500 shares of Common
Stock issuable upon the exercise of the Underwriter's Warrants including the
shares of Common Stock underlying the warrants included within the
Underwriter's Warrants; (iii) 500,000 shares of Common Stock reserved for
issuance pursuant to the Company's stock option plan; or (iv) 87,050 shares
of Common Stock underlying options and warrants exercised after June 30,
1998. See "Management," "Underwriting," "Description of Securities" and
"Selling Securityholders."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The selected consolidated
financial data presented below for, and as of the end of each of, the five
fiscal years ended December 31, 1997 and for the period October 20, 1992
(inception) to December 31, 1992 have been derived from the Company's
consolidated financial statements. The financial statements for each of the
years in the three-year period ended December 31, 1997, have been audited by BDO
Seidman, LLP, for the periods indicated in their report, and are included
elsewhere in this Prospectus. The information for the six month periods ended
June 30, 1997 and 1998 is unaudited but gives effect to all adjustments (none of
which was other than normal recurring adjustments) necessary, in the opinion of
management of the Company, to present fairly this information. The results of
operations for the interim periods should not be taken as indicative of results
for a full fiscal year. The financial statements for the period October 20, 1992
(inception) to December 31, 1992 and for the years ended December 31, 1993 and
December 31, 1994 are not included in this Prospectus.
This data should be read in conjunction with the consolidated financial
statements and information and the related notes thereto appearing elsewhere
herein.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
-----------------------------------------------------
OCTOBER 20, 1992
(INCEPTION) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------------------------------------
1992 1993 1994 1995 1996 1997
------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales................................. $ 92 $ 2,719 $ 36,895 $ 57,841 $ 51,499 $ 35,682
Cost of Goods Sold........................ 66 839 9,368 14,476 13,321 8,388
---------- --------- --------- --------- --------- ---------
Gross Profit.......................... 26 1,880 27,527 43,365 38,178 27,294
Operating Expenses:
Associate Commissions................... 26 1,275 19,507 30,831 27,966 19,968
Selling, General & Administrative
Expenses................................ 162 785 6,558 10,370 12,976 13,009
---------- --------- --------- --------- --------- ---------
Income (Loss) from Operations............. (162) (180) 1,462 2,164 (2,764) (5,683)
Other Income (Expense)Net................. -- (27) 60 (30) (27) (562)
---------- --------- --------- --------- --------- ---------
Net Income (Loss) Before Taxes
and Minority Interest..................... (162) (207) 1,522 2,134 (2,791) (6,245)
Income Tax (Provision) Benefit.......... -- -- (431) (862) 1,103 13
Minority Interest in Subsidiaries....... -- -- -- (86) (115) 134
---------- --------- --------- --------- --------- ---------
Net Income (Loss)......................... $ (162) $ (207) $ 1,091 $ 1,186 $ (1,803) $ (6,098)
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Net Income (Loss) Per Share--Basic and
diluted................................. $ (.12) $ (.15) $ .78 $ .81 $ (1.23) $ (3.01)
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Basic and diluted Weighted Average Number
of Common Shares Outstanding............ 1,400,000 1,400,000 1,400,000 1,470,000 1,470,000 2,023,283
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Net Sales................................................................................. $ 18,929 $ 14,885
Cost of Sales............................................................................. 4,699 3,335
--------- ---------
Gross Profit............................................................................ 14,230 11,550
Operating Expenses:
Associate Commissions................................................................... 11,072 7,692
Selling, General & Administrative Expenses.............................................. 5,997 5,035
--------- ---------
Loss from Operations...................................................................... (2,839) (1,177)
Other Expense--Net........................................................................ (10) (304)
--------- ---------
Net Loss Before Income Tax Benefit and Minority Interest.................................. (2,849) (1,481)
Benefit from Income Taxes............................................................... -- --
Minority Interest in (Income)Loss of Subsidiaries....................................... 55 59
--------- ---------
Net Loss.................................................................................. $ (2,794) $ (1,422)
--------- ---------
--------- ---------
Net Loss Per Share--Basic and diluted..................................................... $ (1.46) $ (.64)
--------- ---------
--------- ---------
Weighted Average Number of Common Shares Outstanding...................................... 1,914,474 2,209,176
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (IN 000S):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Working Capital (Deficiency)............................ $ (141) $ (401) $ (176) $ 1,005 $ (1,382) (6,492)
Total Assets............................................ 129 308 5,514 6,787 6,350 4,324
Long-Term Obligations................................... -- -- -- -- 114 15
Total Liabilities....................................... 291 677 4,791 4,786 6,026 9,149
Minority Interest in Consolidated Subsidiaries.......... -- -- -- 85 200 200
Stockholders' Equity (Deficit).......................... (162) (369) 723 1,916 124 (5,025)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
<S> <C> <C>
Working Deficiency........................................................................ (7,833) (3,980)
Total Assets.............................................................................. 3,711 5,377
Long-Term Obligations..................................................................... 0 0
Total Liabilities......................................................................... 10,175 7,991
Minority Interest in Consolidated Subsidiaries............................................ 43 43
Stockholders' Deficit..................................................................... (6,507) (2,654)
</TABLE>
- ------------------------
(1) Gives effect to the sale of shares of common stock and Public Warrants to
be sold by the Company in the Public Offering and the application of the
estimated net proceeds therefrom to repay debt, as if the transactions had
occurred as of June 30, 1998. See "Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. SEE "RISK FACTORS."
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
The Company develops, purchases and distributes primarily natural source
products intended for nutritional or personal care purposes. The Company's
products are distributed through a network of over 430,000 associates, of which
approximately 15% are "active" (as defined herein) in several countries on four
continents, North America, Australia, Asia and Europe. The Company offers
approximately 50 products in nine categories, including Antioxidant Protection,
(Bodily) Defense, Digestion, Energy and Alertness, Stress, Vital Nutrients,
Weight Management, Anti-Aging and Personal Care.
The Company commenced operations in October 1992 with the introduction of
MARITIME PRIME. MARITIME PRIME features the ingredient Pycnogenol, a derivative
of Southern France's Maritinus Pinus tree. Pycnogenol was combined with a blend
of other natural ingredients developed by Horphag Research Ltd. ("Horphag"), a
European corporation which is Pycnogenol's manufacturer.
During Fiscal 1992 and Fiscal 1993, the Company's focus was on obtaining the
information on Pycnogenol and the properties associated with it from Horphag and
disseminating that information in the United States and, in Fiscal 1993, in
Canada. At inception, the Company elected to market its product by "network" as
the most effective way to disseminate product information. During these two
fiscal years, the Company also sold several complimentary products as well as an
aloe vera line of products. During 1993, the Company developed a "uni-level"
compensation plan designed to be simple and financially attractive to associates
(product distributors). By the end of Fiscal 1993, sales revenues had increased
to a rate of approximately $400,000 per month.
In Fiscal 1994, the Company experienced substantial growth in sales
revenues. By September of 1994, net sales increased to a rate of approximately
$5,000,000 per month and new associates were being sponsored at a rate exceeding
approximately 10,000 per month. New products introduced during 1994 were
nutritional and/or Pycnogenol-based. During the summer of 1994 sales volume
briefly exceeded the Company's product delivery capacity but by the fall of
1994, this was rectified and the Company was delivering product on a timely
basis. A price increase was instituted in October 1994 to offset the weakening
of the United States dollar with respect to the French franc and a price
increase from the manufacturer of Pycnogenol via the importer.
In Fiscal 1995, the Company commenced operations in New Zealand and
Australia through its subsidiaries domiciled there. Although the subsidiaries
had a brief period of rapid growth in sales revenues, the Company believes that
sales leveled off as the apparent success of these subsidiaries became known in
the network marketing industry and competitors began offering competitive
products and/or comparable commission programs. The Company believes that most
significant competition was from competitors selling grape seed and grape skin
products which have some of the same properties as Pycnogenol, but are less
expensive to produce and could be sold for substantially less than the Company's
Pycnogenol based products. In addition, a grape supplier asserted that its
product was a generic version of Pycnogenol and could be marketed as such.
Actions ranging from letters to lawsuits by the Company and
23
<PAGE>
Pycnogenol's importer and manufacturer and accompanying cease-and-desist orders
were required to end these assertions.
Based upon management's network marketing industry experience and a leveling
off of sales in the latter part of 1995, the Company anticipated that it would
reach maturity as a network marketing concern and could face the possibility of
diminishing sales unless the Company acted. In an effort to thwart the
possibility of diminishing sales, in March 1996, the Company revised its
associate commission program to include, among other things, providing the
sponsor of an associate with a substantially higher commission on the first
purchase made by the sponsored associate (in the past, the sponsor had received
no such additional compensation on a first sale). The Company's goals in
altering its associate commission program was to encourage associates to not
only sponsor new associates but have the sponsors assist the new associates in
making sales and forming their own sales organization comprised of additional
levels of associates and, ultimately, attract a more entrepreneurial younger
associate than it had attracted in the past. The nature of the Company's
products was believed by the Company to be a draw to middle aged associates
whose apparent focus was to assist friends, relatives, etc. by introducing them
to the Company's products and not necessarily having an additional focus of
earnings. Additionally, at or about the same time, the Company introduced a
weight loss program, a line of cosmetics, Kaire World Magazine, and new and
improved training materials.
The Company believes that the changes in the Company's associate commission
program were not well received by its existing associates and attracted a number
of new associates whose primary focus was apparently directed at garnering the
larger commissions on initial product sales to associates whom they had
sponsored, as opposed to developing a self-sustaining sales organization. The
Company believes that as a consequence, sales revenues declined while product
returns increased. Also, newly introduced products, such as Immunol, Synerzyme
and the Yes! Weight Management Program, did not have the revenue impact
anticipated. In the fall of 1996, the Company essentially returned to the prior
commission program, with some increase in commissions being added to the
original structure, while greater emphasis was placed on seeking professional
network marketers versed and established in the network industry. The Company
believes that its new and improved training materials have been useful to the
Company and well received by its associates.
In 1996, the Company also decided to open new markets and expand into
additional countries. By January 1997, the Company began to establish operations
in South Korea and Trinidad and Tobago. In June 1997, the Company opened an
office in Port-of-Spain, Trinidad and Tobago. Also in June 1997, the Company
received approval from the South Korean government to begin recruitment and
engage associates in that country. In July 1997, the Company completed South
Korea's product approval and quarantine procedures and the sales of selected
products commenced. Initially, only a high-end line of skin care products
(JoBelle Gold Line) was available in South Korea. Maritime Prime was approved
late in August, 1997, and additional Kaire supplements were approved in November
1997. The Company has sustained substantial losses in trying to penetrate the
South Korean market. The Company is actively trying to sell its South Korean
subsidiary and at June 30, 1998, the Company recorded a $471,000 write down of
its assets in its South Korean subsidiary to what the Company believed to be
their net realizable value. The Company incorporated Kaire Europe, Ltd. in the
United Kingdom in July 1997 and commenced sales in November 1997. Approval
efforts are being undertaken for various product lines in Canada, Trinidad and
Tobago, New Zealand, Australia, the United Kingdom and France. There can be no
assurance, however, that any of such approvals will be forthcoming in a timely
fashion, or at all, or will not be contingent on various conditions or
restrictions which may be imposed by the appropriate governmental authorities.
Also, in 1997, the Company decided to modify its commission program with the
objective of increasing the flow of funds to the Company and stabilize its
financial position. The modification consisted of the elimination of a 5% bonus,
a restructuring of supplemental bonuses for top executives, the institution of a
program to pay the car expenses of certain associates in North America, New
Zealand and Australia and a change in qualification and the number of sponsored
levels paid under the international sponsoring program. It is anticipated that
this change will lower the total bonus payout by approximately 4%.
24
<PAGE>
During 1997, the Company borrowed $700,000 from Interactive Medical
Technologies, Ltd. ("IMT"), a Delaware corporation. On December 9, 1997, the
Company and certain shareholders entered into an Agreement and Plan of
Reorganization (the "Agreement") with IMT whereby IMT agreed to convert its
$700,000 of debt previously borrowed by the Company to equity and invest an
additional $300,000 in equity in the Company at closing. Certain of the
Company's stockholders exchanged 81%, 1,786,676 shares, of the issued and
outstanding shares of the Company's Common Stock for approximately forty-five
percent (45%), 1,576,123 shares of IMT's common stock as defined in the
Agreement. IMT, as part of the Agreement, was to invest an additional $2,000,000
in equity in the Company which did not occur. During 1998, IMT exchanged 54%,
1,250,078 shares of the Company's common stock to Global Marketing, LLC. The
structure of ownership of Kaire International, Inc. as of the date of this
prospectus is depicted below:
[LOGO]
In September 1998, the Company announced that it had exclusive marketing
rights for North America for the recently discovered antioxidant Enzogenol. The
Company introduced the ingredient Enzogenol in its new product, EnzoKaire
Complete, at its annual convention held in Dallas, Texas on September 17, 1998.
The Company intends to continue its expansion into new marketplaces in the
world in upcoming years. There can be no assurance, however, that any such
expansion will ever occur on terms and conditions favorable to the Company, or
at all. See "Risk Factors" and "Business."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
consolidated statement of operations data expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold............................................ 25.0% 25.9% 23.5% 24.8% 22.4%
Gross Profit.................................................. 75.0% 74.1% 76.5% 75.2% 77.6%
Operating Expenses
Associate Commissions....................................... 53.3% 54.3% 56.0% 58.5% 51.7%
Selling, General and Administrative......................... 17.9% 25.2% 36.5% 31.7% 33.8%
Income (Loss) from Operations................................. 3.8% (5.4)% (16.0)% (15.0)% (7.9)%
Other Income (Expense) Net.................................... (0.1)% (0.0)% (1.6)% (0.1)% (2.0)%
Net Income (Loss) Before Taxes and
Minority Interest........................................... 3.7% (5.4)% (17.6)% (15.1)% (9.9)%
Income Tax (Provision) Benefit................................ (1.5)% 2.1% 0.0% 0.0% 0.0%
Minority Interest in Subsidiaries............................. (0.1)% (0.2)% 0.4% 0.3% 0.3%
Net Income (Loss)............................................. 2.1% (3.5)% (17.2)% (14.8)% (9.6)%
</TABLE>
25
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 ("SIX MONTHS 1998") COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1997 ("SIX MONTHS 1997")
NET SALES. Net sales for Six Months 1998 were approximately $14,885,000 as
compared to Six Months 1997 sales of approximately $18,929,000, a decline of
27.2%. Domestically, the Company has been experiencing declining sales since
March 1996. During Six Months 1998, sales in Australia, New Zealand, and the
United Kingdom showed an upward trend. Domestic sales in Six Months 1997
included significant sales to the South Korean community in the United States.
Some comparable sales had been reflected in South Korean sales in Six Months
1998, but the South Korean sales have not achieved their projections due to a
significant decline in all Asian economies and the fall of the South Korean Won
against the Dollar.
COST OF GOODS SOLD. Cost of goods sold for Six Months 1998 was
approximately $3,335,000 or 22.4% of net sales. Cost of goods sold for Six
Months 1997 was approximately $4,699,000 or 24.8% of net sales. The total cost
of goods sold declined by approximately $1,364,000 or 40.9% from Six Months 1997
to Six Months 1998. The primary factor affecting this category was the decline
in sales resulting in lower total cost of goods sold. Affecting the reduction in
cost of goods sold was a change in freight carrier which lowered the cost of
shipping products to customers while not affecting shipping revenue and the
introduction of several new products in the latter part of 1997 which maintained
a lower cost percentage.
GROSS PROFIT. Gross profit decreased from approximately $14,230,000 in Six
Months 1997 to approximately $11,550,000 in Six Months 1998. The decline was
approximately $2,680,000 or 23.2%. The reason for the gross decline was the
reduction in sales discussed above. The reason the percentage decline was less
than the sales decline were the factors mentioned in the Cost of Goods Sold
section regarding the change in freight carrier and the introduction of new,
higher margin products.
COMMISSIONS. Associate commissions decreased from approximately $11,072,000
or 58.5% of sales to approximately $7,692,000 or 51.7% of sales, a decline of
$3,380,000 or 43.9%. The primary reason for the decline was the decrease in
sales that the commissions are based on. There were several reasons for the
reduction in the percentage of commissions paid to associates as a percentage of
sales. The first was a "purging" of the associate genealogy which occurred in
December 1996. Under the standard compensation plan, an associate can go "deep"
into his/her organization to fill up to six levels of compensation. His/her
position, however, is determined by sales on his/her first level without this
"rollup and compression". The purge moved active associates onto the first line
of associates that they were previously rolling up to. This qualified the new
"first line sponsor" for higher, deeper paying positions in the Company,
increasing their commission without having to do any new sponsoring or selling.
This effect gradually disappears due to the maturation of the commission
structure and has been substantially diluted by Six Months 1998, but the Six
Months 1997 bonus may have been negatively affected by 1-3%. Second, was a
reduction in the bonus payout at a level available to top associates and a
reduction in a special bonus percentage from 1% to 0.5% for all countries except
South Korea. Finally, South Korean operations and sales became a factor in Six
Months 1998. There is a statutory limitation of 35% of sales for commissions in
that country. As South Korean sales rose as a percentage of total sales, this
effectively reduced the average commission payment percentage.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs decreased from approximately $5,997,000 in Six Months 1997
to approximately $5,035,000 in Six Months 1998, a decrease of $962,000 or 19.1%.
Part of the expense in Six Months 1997 was a program the Company believed would
increase the number of professional network marketers joining the Company as
opposed to grass roots and first time individuals who had made up much of the
Company's initial growth. It was hoped that the professionals would bring
stability and leadership to the associate base. The total cost of this program
was approximately $1,188,000 and was incurred from August, 1996 through August,
1997. Significant expenses were therefore incurred in Six Months 1997. No
expenses were incurred for this program in Six Months 1998. In addition to the
discontinuance of the program, the Company has embarked on a number of cost
26
<PAGE>
saving measures both domestically and abroad. The management of the marketing
department, during 1997, decreased expenses through both reduced personnel
salaries and reduced operating costs. The Company also instituted cost-cutting
measures in its domestic operations (of which the marketing department is a
part), reducing operating expenses for selling, general and administrative
expenses from a peak of approximately $1,200,000 during July 1996 to under
$500,000 during June 1998. The Company accomplished this by reducing staff,
cutting out inefficient programs and limiting optional spending. This would
represent a savings of $700,000 per month for 1996 levels or approximately
$8,400,000 on an annualized basis. Increasing sales, general and administrative
expenses for Six Months 1998 was the inclusion of operations in South Korea,
Trinidad and Tobago and the United Kingdom. South Korea and Trinidad and Tobago
began operations late in the second quarter of 1997, but did not have a
significant impact on Six Months 1997 operating expenses. Also contributing to
the operating expenses in Six Months 1998 was the reduction in the net
realizable value of South Korean assets due to the continued losses in South
Korea and the decline of the South Korean economy. This reduction totaled
approximately $471,000 which represents 9.1% of the total operating expenses for
Six Months 1998. Without this adjustment, operating expenses would have declined
23.9% which would have been more closely aligned with the decrease in sales.
LOSS FROM OPERATIONS. Operating losses decreased from approximately
$2,839,000 in Six Months 1997 to approximately $1,177,000 in Six Months 1998.
This represented a 59% decrease in the loss or approximately $1,662,000 between
the periods. This decrease was a result of improved margins in the cost of sales
and commissions areas combined with a reduction in sales, general and
administrative expenses.
OTHER EXPENSES. Other expenses increased from approximately $10,000 or 0.1%
of sales in Six Months 1997 to approximately $304,000 or 2.0% of sales in Six
Months 1998, a change of approximately $294,000. This increase is almost
exclusively attributable to the interest on the increased borrowings in 1997
needed to fund operations. These borrowings were necessitated by the inability
to achieve profitability while incurring costs associated with the above
development programs.
INCOME TAXES. Income tax benefits were not reflected in either period. The
anticipated benefits of utilizing net operating losses against future profits
was not recognized in Six Months 1998 or Six Months 1997 under the provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109 (Accounting for Income Taxes), by utilizing its loss carryforwards as a
component of income tax expense. As of June 30, 1998, the Company has a
significant amount of net operating losses available to carryforward and offset
against future earnings. As a result of the IMT Agreement and Plan of
Reorganization and subsequent changes in ownership, certain limitations will be
placed on the unrestricted loss carryforwards. A valuation allowance equal to
the net deferred tax asset has been recorded, as management of the Company has
not been able to determine that it is more likely than not that the deferred tax
assets will be realized.
MINORITY INTEREST. The offset for minority interest increased from
approximately $55,000 or 0.3% of sales in Six Months 1997 to approximately
$59,000 or 0.3% of sales in Six Months 1998, a change of approximately $4,000
reflecting losses incurred in the South Korean and Australian subsidiaries
offset by income from the New Zealand subsidiary. Losses in South Korea and
income from New Zealand both increased in Six Months 1998 offsetting each other
despite the fact the minority interest percentage in South Korea is much lower
than in New Zealand.
NET LOSS. Net loss was approximately $1,422,000 in Six Months 1998 or 9.6%
of net sales as compared to approximately $2,794,000 or 14.8% of net sales in
Six Months 1997. The reduced loss is a result of significant cost cutting
measures in sales, general and administrative expenses combined with lower cost
percentages in the cost of goods sold and commissions to associates.
27
<PAGE>
YEAR ENDED DECEMBER 31, 1997 ("FISCAL 1997") COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("FISCAL 1996")
NET SALES. Fiscal 1997 and Fiscal 1996 were periods of declining sales for
the Company. Revenues for Fiscal 1997 were approximately $35,682,000 which was a
decline of approximately $15,817,000 or approximately 30.7% from Fiscal 1996 of
$51,499,000. Fiscal 1996 was the year in which the Company hit their high water
mark for domestic sales and then saw a consistent decline from that point. The
Company had observed their sales growth slowing in the latter part of Fiscal
1995 and responded to this leveling with a new marketing and compensation
program beginning in March, 1996 in an effort to stimulate sales. While sales
did experience a temporary increase under the new program, sales soon started to
decline at approximately 4% per month. The Company believes that the new
associates attracted by the new program were focused on the large initial bonus
offered by the new program. In addition, the Company believes that many existing
associates did not accept the program and left the Company. As a result, by
October, 1996, the Company had substantially abandoned this new program and
returned to a commission program more comparable to the program used in prior
years. Despite the return to the old program, sales continued to decline through
both the end of 1996 and throughout Fiscal 1997. During Fiscal 1997, the rate of
decline had slowed substantially and there were several months with sales growth
from the prior month, but generally, the trend was downward. To combat this, the
Company took several steps to turn the situation around including a focused
effort to attract professional network marketers through several recruiting
programs and entering international markets in Korea, Trinidad and the Caribbean
and the United Kingdom and Europe. The programs to recruit the professional
marketers included a bonus program called the Eagles Nest which was a bonus pool
consisting of 1% of world-wide sales to be split among the top qualifying
associates; a support program wherein established network marketers were
subsidized while they were building their organization within the Company; and,
an aggressive recruitment, training and support program run by associates who
had been solicited by the Company specifically for that purpose.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1997 was $8,388,000 or
approximately 23.5% of net sales. Cost of goods sold for Fiscal 1996 was
approximately $13,321,000 or 25.9% of net sales. The total cost of goods sold
declined by approximately $4,933,000 or 37.0% from Fiscal 1996 to Fiscal 1997.
The primary factor affecting this category was the decline in sales resulting in
lower total dollars. Affecting the percentage was a slight price increase that
was put in place as a part of the March, 1996 compensation program change and a
change in the product sales mix due predominantly to the introduction of new,
higher margin products. In Fiscal 1997, 29.5% of total product sales were of
non-Pycnogenol related products (all but those considered Antioxidant Protection
in the table on page 38) as compared to 22.4% in Fiscal 1996. The average cost
of goods sold for products in the "Antioxidant Protection" category is
approximately 23% as opposed to approximately 13-19% in the other categories.
Therefore, as the percentage of products other than Antioxidant Protection
products increases as a percentage of total sales, the overall cost of goods
sold percentage will continue to decline. Returns for Fiscal 1997 averaged
approximately $72,000 per month or 2.36% of gross sales. Returns for Fiscal 1996
averaged approximately $64,000 per month or 1.47% of gross sales.
GROSS PROFIT. Gross profit decreased from approximately $38,178,000 in
Fiscal 1996 to approximately $27,294,000 in Fiscal 1997. The decline was
approximately $10,884,000 or 28.5%. The reason for the gross profit decline was
the reduction in sales discussed above. The reason the percentage decline was
less than the sales decline were the factors mentioned above in the Cost of
Goods Sold section that resulted in a greater gross profit on each dollar of
sales.
COMMISSIONS. Associate commissions decreased from approximately $27,966,000
or 54.3% in Fiscal 1996 of sales to approximately $19,968,000 or 56.0% in Fiscal
1997 of sales, a decline of approximately $7,998,000 or 28.6%. The primary
reason for the decline was the decrease in sales that the commissions are based
on. The commissions as a percentage of sales increased because of the
compensation program that was put in place in March, 1996 and eliminated in
September, 1996 paid an overall lower percentage of the net sales. The Quick
Start bonus which paid on only one level, 45% to the sponsor on the first
qualifying
28
<PAGE>
order, was one of the primary reasons that the program paid less to the
associates in 1996. Fiscal 1997 showed a larger percentage payout also because
of two compensation decisions made late in 1996. The first paid an additional 5%
bonus on the seventh level (originally taken from the first level, but later not
removed when the first level bonus was restored). The second was a "purging" of
the associate genealogy. Under the standard compensation plan, an associate can
go deep into his or her organization to fill up to seven levels of compensation.
This position, however, is determined by sales on his or her first level without
this "rollup and compression". The purge moved active associates onto the first
line of associates they were previously rolling up to. This qualified the new
"sponsor" for higher, deeper paying positions in the Company, increasing their
commission without having to do any new sponsoring or selling. This effect will
gradually wear away, but as the change was made in December, 1996, the Fiscal
1997 bonus may have been negatively affected by 1-3% for the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs increased from approximately $12,976,000 in Fiscal 1996 to
approximately $13,009,000 in Fiscal, 1997, an increase of $33,000 or 0.3%. This
increase is not consistent with the decline in sales and is one of the
predominant reasons for the net loss for the year. The first reason for the
overall increase was an increase in selling costs as a result of the institution
of a program the Company believed would increase the number of professional
network marketers joining the Company as opposed to grass roots and first time
individuals who had made up much of the company's initial growth. It was hoped
that the professionals would bring stability and leadership to the associate
base. The total cost of this program was approximately $1,188,000 and was
incurred from August, 1996 through August, 1997. The majority of the expenses
were therefore incurred in Fiscal 1997. In addition, development costs of
approximately $1,040,000 to commence operations in Trinidad and Tobago, South
Korea and the United Kingdom were incurred in Fiscal 1997. In addition to the
development expenses, as with most new ventures, these subsidiaries showed
losses in Fiscal 1997 as they were building their sales forces to the levels
needed to achieve profitability. Offsetting these expense increases were changes
in the management of the marketing department during Fiscal 1997 which decreased
expenses through both reduced personnel salaries and reduced operating costs.
In addition, the Company instituted cost-cutting measures in its domestic
operations (of which the marketing department is a part), reducing operating
expenses for selling, general and administrative expenses from approximately
$1,200,000 per month during July through September 1996 to approximately
$750,000 by December 1997. The Company accomplished this by reducing staff,
cutting out inefficient programs and limiting optional spending. This would
represent a savings of $450,000 per month or approximately $5,400,000 on an
annualized basis.
LOSS FROM OPERATIONS. Operating losses increased from approximately
$2,764,000 in Fiscal 1996 to approximately $5,683,000 in Fiscal 1997. This
represented a 105.6% increase in the loss or approximately $2,919,000 between
the two years. This increase was a result of the decline in sales accompanied by
the increases in selling, general and administrative expenses associated with
new foreign subsidiaries and a professional recruitment program.
OTHER EXPENSES. Other expenses increased from approximately $27,000 or .05%
of sales in Fiscal 1996 to approximately $562,000 or 1.6% of sales in Fiscal
1997, a change of approximately $535,000. This increase is almost exclusively
attributable to the interest, of approximately $600,000, on the increased
borrowings in Fiscal 1997 needed to fund operations. This borrowing was
necessitated by the inability to achieve profitability while incurring costs
associated with the above development programs.
INCOME TAXES. Income tax benefits declined from approximately $1,103,000 in
Fiscal 1996 to approximately $13,000 in Fiscal 1997 as the ability to carry net
operating losses back to prior years to claim refunds was substantially used up
in Fiscal 1996. The anticipated benefits of utilizing net operating losses
against future profits was not recognized in Fiscal 1997 under the provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109 (Accounting for Income Taxes), utilizing its loss carryforwards as a
component of income tax expense. As of December 31, 1997, the Company had
29
<PAGE>
approximately $4,700,000 in Federal net operating losses available to
carryforward and offset against future earnings. As a result of the IMT
Agreement and Plan of Reorganization and subsequent changes in ownership,
certain limitations will be placed on the unrestricted loss carryforwards. A
valuation allowance equal to the net deferred tax asset has been recorded, as
management of the Company has not been able to determine that it is more likely
than not that the deferred tax assets will be realized.
MINORITY INTEREST. The income offset for minority interest was a reduction
in the Company's income (increase in the loss) in Fiscal 1996 of approximately
$115,000 reflecting income earned in the Australia and New Zealand subsidiaries.
A reduction in the Company's loss for Fiscal 1997 in the amount of approximately
$134,000 is a reflection of the decreased revenue and/or losses recognized by
the New Zealand, Australian and Korean subsidiaries as well as the reduction in
value of the assets of the foreign entities in comparison to the United States
dollar which is presented in these statements. These factors serve to reduce the
interest attributable to the minority shareholders of the foreign subsidiaries.
NET LOSS. Net loss was approximately $6,098,000 in Fiscal 1997 or 17.1% of
net sales as compared to approximately $1,803,000 or 3.5% of net sales in Fiscal
1996. The increased losses are primarily a result of declining sales, an
unsuccessful change in the commission program and the cost of opening several
new markets.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 ("FISCAL
1995")
NET SALES. Fiscal 1995 and Fiscal 1996 represent the peak of Company
performance to date with respect to net sales. Revenues for Fiscal 1996 were
approximately $51,499,000 which was a decline of approximately $6,342,000 or
approximately 11.0% from Fiscal 1995 revenues of approximately $57,841,000.
Fiscal 1995 was a year of growth in domestic sales for the Company at a slower
rate than in Fiscal 1994. In addition, Australian and New Zealand operations
were acquired in November 1995 adding to the sales total for Fiscal 1995. The
Company recognized that sales were leveling off near the end of Fiscal 1995. In
response to this leveling off, the Company adopted a new marketing and
compensation program in March 1996 in an effort to stimulate sales. While sales
did respond with a temporary increase, they soon started to fall on a monthly
basis. The Company believes that the new associates attracted by the new program
were focused on the larger initial bonus offered by the new program and not
focused on the development of a sales organization and that many then existing
associates did not accept the new program and left the Company. As a result, by
October 1996, the Company abandoned this new program and returned to a program
more comparable to the program used in prior years. The decline in net sales in
Fiscal 1996 was not as pronounced because net sales from Australia and New
Zealand were included for a full twelve months in Fiscal 1996 as opposed to the
two post-acquisition months in Fiscal 1995.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1996 was approximately
$13,321,000 which represented 25.9% of net sales. Cost of goods sold for Fiscal
1995 was approximately $14,476,000 or 25.0% of net sales. This represented a
decrease of approximately $1,155,000 or 8.7% from Fiscal 1995 to Fiscal 1996.
The decline in total cost of goods sold was caused by the decreased sales
revenue for Fiscal 1996. The increase in the cost of goods sold percentage was
related to an increase in sales returns. Also, there was a minor price increase
in Fiscal 1996, but no other adjustments in the cost or sales price of the
products sold. The returns stemmed from the new program which encouraged larger
initial purchases as well as broadcast claims made by an unrelated third party
about the effectiveness of Pycnogenol on certain medical conditions. While these
events did generate additional sales, a higher percentage of those purchasing
under the new program returned the product for refunds under the Company's
satisfaction guaranteed policy than had made returns in the past. Sales returns
averaged approximately $27,000 per month or 0.6% of gross sales in January 1996
through April 1996. This percentage had remained consistent with Fiscal 1994 and
Fiscal 1995. For the last eight months of 1996, the returns increased to
approximately $82,000 per month or 1.9% of sales. The Company's return policy is
satisfaction guaranteed with time restrictions (90 days from the date of sale)
on most purchases. Partially used or empty bottles may be returned if the
customer was not fully satisfied. Depending on whether the purchaser was an end
user or an associate will
30
<PAGE>
affect if the refund was given as an inventory trade or a cash refund. As the
net sales are reduced by non-salable returns, the cost of goods remains the
same, therefore the cost of goods percentage of net sales will increase. The
Company is currently in the process of reviewing its refund policies.
The Company's policy is to account for refunds in the period that the refund
request is received. The policy allows 90 days from the date of purchase to
accept refunds but many are received in the month of sale. Because of the
foregoing, the Company has elected not to establish a reserve for anticipated
refunds as the effect on the statement of operations and the balance sheet would
not be material and there is no long term liability due to the 90 day return
policy.
In addition, the Company released a new, more concentrated version of its'
Maritime Prime (Super Prime) late in 1996. This product was initially not well
accepted by the associates as they indicated that the anticipated results from
its use were not achieved. While a reformulation of the Super Prime product
apparently corrected the perceived problem, the Company also replaced this
product at its cost when so requested.
GROSS PROFIT. Gross profit decreased from approximately $43,365,000 in
Fiscal 1995 to approximately $38,178,000 in Fiscal 1996, approximately 12.0%.
The primary reason for the decline in gross profit was the decline in net sales
described above. In addition, gross profit as a percentage of net sales declined
from approximately 75.0% in Fiscal 1995 to 74.1% in Fiscal 1996 due primarily to
the increase in returns.
COMMISSIONS. Associate commissions decreased from approximately $30,831,000
in Fiscal 1995 to approximately $27,966,000 in Fiscal 1996, a decline of
approximately $2,865,000 or 9.3%. As a percentage of net sales, commissions
increased from 53.3% in Fiscal 1995 to 54.3% in Fiscal 1996. Commissions were
constant in Fiscal 1995 as the program was not changed from prior years. In
March 1996 the new program commenced. The new program was not successful as it
attracted associates interested in short term gain and not long term stability,
the smaller associates (who represent a large portion of Company associate base)
were the most adversely effected in proportion to their income and sales leaders
did not support the new program. As of September 1996, the original program was
substantially restored. The Company also enhanced the original program in an
effort to stop further declines in sales raising the effective commission rate
by 10% of sales. The Company purged inactive associates which the Company
believes made a significant number of associates qualify for higher positions in
the commission structure and increased their bonus percentages without a
corresponding increase in sponsoring and sales. This change increased the
Company's effective bonus rate by an additional 3%. The net effect of these
changes in the latter part of Fiscal 1996 was to increase commissions measured
as a percentage of net sales for Fiscal 1996 by approximately 1.9% from Fiscal
1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately $12,976,000 or 25.2% of net sales in
Fiscal 1996 as compared to approximately $10,370,000 or 17.9% of net sales in
Fiscal 1995, an increase of approximately $2,606,000 or 25.1%. The largest
factor in this increase was the acquisition of the interests in the New Zealand
and Kaire Australia subsidiaries in November 1995. During Fiscal 1995, the
Company incurred approximately $250,000 in selling, general and administrative
expenses through those entities. During Fiscal 1996, the first full year of
ownership of said entities, approximately $1,800,000 of their selling, general
and administrative expenses were included within the Company's overall selling,
general and administrative expenses. Also, an increased marketing effort was
undertaken in Fiscal 1996 to promote the new (commission) program and introduce
an internet marketing opportunity for associates. An additional approximate
$478,000, in comparison to approximately $410,000 in Fiscal 1995, was spent on
these marketing efforts in Fiscal 1996. Finally, personnel costs increased
approximately $746,000 from approximately $3,621,000 in Fiscal 1995 to
approximately $4,267,000 in Fiscal 1996. This was due to the addition of several
managerial positions, the installation of a Company 401(k) plan with matching
contributions and an increase in medical insurance costs in Fiscal 1996.
31
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INCOME (LOSS) FROM OPERATIONS. Loss from operations in Fiscal 1996 was
approximately $2,764,000, a decrease of approximately $4,928,000 from Fiscal
1995's income from operations of approximately $2,164,000. The primary reasons
for this decline was the drop in net sales and corresponding decline in gross
profit. Most of the Company's selling, general and administrative expenses are
fixed and do not fluctuate with changes in net sales. These expenses did not
correspondingly decline when net sales declined resulting in a loss instead of a
profit.
OTHER INCOME (EXPENSES). There was no significant variance in other
expenses from Fiscal 1996 to Fiscal 1995. In neither year did other income or
other expense have a material effect on the overall profitability of the
Company.
INCOME TAXES. The Company's income tax provision for Fiscal 1995 was
$862,000 based on income earned during that year. In Fiscal 1996, the Company
recorded an income tax benefit of approximately $1,103,000 from utilizing net
operating losses against prior income taxes paid. No benefit, from utilizing net
operating losses against future profits, was reflected in Fiscal 1996
operations. This treatment was consistent with the provisions of the Financial
Standards Board Statement of Financial Accounting Standards No. 109 (Accounting
for Income Taxes) ("FASB 109"), utilizing its loss carryforwards as a component
of income tax expense, since management of the Company has not been able to
determine that it is more likely than not that the deferred tax assets will be
realized. As a result of the IMT Agreement and Plan of Reorganization and
subsequent changes in ownership, certain limitations will be placed on the
unrestricted loss carryforwards.
MINORITY INTEREST. The provision for Minority Interest was approximately
$86,000 in Fiscal 1995 and $115,000 in Fiscal 1996. This slight increase for
Fiscal 1996 was indicative of the increase in profitability of the foreign
subsidiaries in Fiscal 1996.
NET INCOME (LOSS). The Company's net loss was approximately $1,803,000 for
Fiscal 1996 compared to net income of approximately $1,186,000 for Fiscal 1995.
This change from profitability to a loss was primarily due to the decrease in
net sales and gross profit without a corresponding decrease in selling, general
and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements in connection with its operations,
foreign development and marketing activities have been and will continue to be
significant. As of June 30, 1998 and December 31, 1997, the Company had working
capital deficits of approximately $7,833,000 and $6,492,000, respectively. The
Company's independent certified public accountants stated in their report on the
December 31, 1997 consolidated financial statements that due to losses from
operations and a working capital deficit, there is substantial doubt about the
Company's ability to continue as a going concern. Despite the fact that the
Company has not made its payroll and sales tax deposits on a timely basis, the
Company has continued to pay its associates timely and has negotiated out of any
default situations with its creditors and debtholders. The Company believes it
is addressing the going concern issue in virtually every aspect of its
operation. The Company has cut its operating expenses and is continuing to
search for, and introduce, new products, such as EnzoKaire Complete, which the
Company believes will provide improved profit margins and anticipated high
profile end user appeal. The Company has also suspended expansion efforts into
additional foreign markets until the existing markets penetrated in 1997 achieve
a positive cash flow from operations. The Company is dependent upon the proceeds
of the Public Offering to continue its foreign development activities and
domestic operations and fund its marketing plans, as well as other working
capital requirements. The Company anticipates, based on its currently proposed
plans and assumptions relating to its operations (including assumptions
regarding the progress and timing of its foreign development efforts), that the
net proceeds of the Public Offering, together with anticipated revenues from
operations and its current cash equivalent balances, will be sufficient to fund
the Company's operations and capital requirements for at least 12 months
following the consummation of the Public Offering. In the
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event the Company's plans change or its assumptions change or prove to be
inaccurate, the Company could be required to seek additional financing sooner
than currently anticipated. The Company has no current arrangements with respect
to, or potential sources of, any additional financing, and it is not anticipated
that existing officers, directors and stockholders will provide any portion of
the Company's future financing requirements. Consequently, there can be no
assurance that any additional financing will be available to the Company when
needed on commercially reasonable terms, or at all.
Through 1995, the Company had generated cash flow from operations due to
revenue growth and minimal capital requirements. Additionally, the Company does
not extend credit to associates, but requires payment prior to shipping products
and therefore, the Company does not maintain high receivable balances. A typical
sales transaction consists of the placement of an order by an associate. At the
time the order is placed, the associate must provide a valid credit card, be
pre-approved for using autodraft (direct withdrawal from their bank account), a
check or cash. No payment terms are offered to purchasers. The order is shipped
after the payment is processed. The only receivables created are therefore those
sales accepted at month end for which the funds are not received until the
following month, those accounts where a "hard" form of payment (check or
cashier's check) was submitted by mail and the actual order was calculated to be
a different amount than the funds sent or a failure to pay due to an
insufficient funds check or autodraft or credit card dispute. As a result, the
receivable is small in relation to sales and turns over rapidly. Non-collectable
accounts are written off to Selling, General and Administrative expenses on a
regular basis. The Company's principal need for funds has been for distributor
incentives, working capital (principally inventory purchases), and the expansion
into new markets. Prior to 1997, the Company had generally relied entirely on
cash flow from operations to meet its business objectives without incurring long
term debt to unrelated third parties.
In Six Months 1998, the cash flow used in operating activities was
approximately $368,000. This was primarily because of the net loss of
approximately $851,000 (as adjusted to cash flow) which was offset by decreases
in inventories of approximately $491,000 and increases in accrued liabilities of
approximately $242,000. The decrease in inventories as well as the increase in
accrued liabilities were the result of better cash flow and asset management by
the Company. Investing activities used approximately $13,000. Cash was primarily
used for the funding of a restricted cash account in the amount of approximately
$112,000 related to a change in credit card processors and approximately $47,000
for the purchase of additional property and equipment. This was offset by a
decline in deposits of approximately $146,000. Cash was generated from financing
activities in the amount of approximately $642,000. Gross proceeds from
additional borrowing totaled approximately $1,593,000. This was reduced by
approximately $379,000 in payments on current liabilities and approximately
$245,000 paid toward deferred offering costs. The decline in the value of
foreign currencies in relation to the dollar accounted for an additional
approximately $72,000 decrease in cash. The net effect was an increase in cash
of approximately $189,000 for the Six Months 1998.
In Fiscal 1997, the cash applied to operating activities was approximately
$3,433,000. Operating cash was provided by increases in accounts payable of
approximately $1,245,000 and collections of income tax refunds of approximately
$1,025,000. Cash of approximately $107,000 was used for investing, primarily in
the purchases of property and equipment of approximately $275,000 and increasing
deposits by approximately $289,000. Both of these investments relate primarily
to the investment required to open the Korean subsidiary. Financing activities
generated approximately $3,341,000. Net borrowings from related and non-related
parties generated approximately $3,795,000. The sale of common stock generated
an additional approximately $171,000. Some of these proceeds were used to pay
for deferred offering costs and debt issue costs of approximately $331,000. The
effect of foreign exchange rate changes on cash was a reduction in cash in the
amount of approximately $79,000. For Fiscal 1997, cash decreased by
approximately $279,000.
In Fiscal 1996, cash used in operating activities was approximately
$1,622,000. Additional operating cash expenditures were approximately $725,000
for refundable income taxes and a reduction in accrued
33
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liabilities of approximately $322,000. These were offset by collections on
accounts receivable of approximately $597,000 and increases in accounts payable
of approximately $157,000. Cash used in investing totaled approximately
$891,000. The invested cash was used for property and equipment of approximately
$243,000, the purchase of stock in an unrelated company of $250,000, advances to
distributors of approximately $225,000 and investments in intangibles such as
trademarks of approximately $172,000. Financing activities generated
approximately $1,448,000. Most of this was generated by the issuance of checks
in excess of deposits of approximately $1,376,000. Additional borrowings
generated $525,000 less payments on notes and other long term debt of
approximately $453,000. Foreign currency fluctuations generated additional cash
of approximately $34,000. For Fiscal 1996, the net decrease in cash was
approximately $1,031,000.
In Fiscal 1995, cash generated by operating activities was approximately
$1,060,000. Operating cash in the amount of approximately $300,000 was applied
to an increase in refundable income taxes while approximately $169,000 was
applied to increases in receivables. Investing activities used approximately
$217,000 of which approximately $194,000 was used for the purchase of property
and equipment. Financing activities used approximately $264,000 for payments of
principal on capital lease obligations. For Fiscal 1995, approximately $578,000
of cash and cash equivalents were generated.
"Checks written in excess of deposits" represents checks either written and
held or issued in anticipation of deposits from sales. The Company has a stable
pattern of sales and issues checks in anticipation of collections based on their
analysis of this pattern. The Company has avoided an insufficient check charge
in all but an extremely limited number of situations based on the amount of
checks written on a monthly basis. It is the Company's intent to discontinue
this method of financing as a tool in generating cash once sufficient cash
balances have been attained through either operations or financing activities to
warrant this discontinuance of this practice.
The downturn in the South Korean economy has not had a significant impact on
the overall liquidity of the Company due in part to the fact that revenues from
South Korea represented less than three percent (3%) of the Company's
consolidated revenues during 1997. However, the Company has sustained
substantial losses in trying to penetrate the South Korean market. The Company
is actively trying to sell its South Korean subsidiary and at June 30, 1998 the
Company recorded a $471,000 writedown of its assets in its South Korean
subsidiary to what the Company believed to be their net realizable value.
Because of the significant losses incurred by the Company over the past two
fiscal years, it has become substantially dependent on loans from its officers,
directors, third parties and from private placements of its securities to fund
its operations. These financings are described below.
On or about January 1, 1997, the Company sold $300,000 in Agreement Notes to
three private investors. As partial consideration for their purchase of the
Agreement Notes, the Company issued warrants to the three investors to purchase
an aggregate of 22,050 shares of Common Stock of the Company at an exercise
price of approximately $.02 per share of Common Stock. The Agreement Notes and
related interest were paid in full in July 1997. The foregoing warrants were
exercised in July 1998.
During January 1997, the Company borrowed $200,000 for working capital
purposes from a corporation, not otherwise affiliated with the Company, pursuant
to demand promissory notes, bearing interest at the rate of 10% per month, and
guaranteed by certain officers and directors of the Company. An August 25, 1997
agreement modified the repayment provisions of principal and interest, and
required that the Company repay all interest and principal by December 31, 1997
and reduced the interest rate from 10% per month to 2% per month payable
monthly, retroactive to March 5, 1997. Furthermore, in the event that the
Company was unable to repay the principal and accrued interest on such notes in
full by December 31, 1997, the Company would then be required to make twelve
monthly payments, beginning January 1, 1998, in the amount of $18,911 each. In
connection with this transaction, the lending corporation was issued warrants to
purchase 12,500 shares of the Company's Common Stock at $6.60 per share. As of
June 30, 1998, such warrants had not been exercised. On January 15, 1998 the
Company
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entered into an agreement with the lender to make monthly payments of interest
only and to amend the term of the promissory note to a demand note. In
connection with the reverse stock split on October 1, 1998, the lender was
issued additional warrants to purchase 12,500 shares of the Company's common
stock at $6.60 per share.
On or about March 20, 1997, the Company completed a private placement of an
aggregate of 250,000 shares of its Common Stock and 250,000 warrants for gross
proceeds of $250,000 from five private investors (the "March 1997 Private
Placement"). Following the payment of commissions and non-accountable expenses,
an initial payment towards its non-accountable expenses for the Public Offering
and counsel fees and expenses for that private placement, the Company received
net proceeds of approximately $171,500. In connection with the reverse stock
split on October 1, 1998, the investors were issued additional warrants to
purchase 250,000 shares of the Company's common stock at a purchase price of
$6.60 per share.
In May 1997, Kaire Korea, Ltd., pursuant to a demand promissory note bearing
interest at the rate of 9.5% per year and guaranteed by the Company, borrowed
$500,000 from Horphag, the manufacturer of Pycnogenol. An option expiring in May
2000 to acquire 15% of the capital stock of Kaire Korea Ltd. at the par value of
Kaire Korea Ltd.'s capital stock was granted to Horphag as partial consideration
for the note. The note provides for additional options to be issued in the event
of late payments and/or the failure to pay the entire principal balance plus
accrued interest within six months of the origination date of the note. As of
June 30, 1998, a principal balance of $475,000 remained outstanding. The options
to acquire capital stock of Kaire Korea Ltd. were exercised on November 15, 1997
by Horphag. In an agreement executed on June 2, 1998 but effective as of January
1, 1998, Horphag agreed to waive any options it may have had in Kaire Korea Ltd
due to late payments or the failure to repay the promissory note in
consideration for the Company pledging its 85% interest in Kaire Korea, Ltd. as
security on the promissory note to Horphag. The Company and Horphag also agreed
to amend the repayment terms on the promissory note to a demand note due on
September 15, 1998 or five days after the completion of the Company's initial
public offering. The Company intends to use a portion of the proceeds of the
public offering to repay a portion of the promissory note. The remaining balance
will be repaid from cash flows provided by operations.
Between June 3, 1997 and December 8, 1997, the Company completed a private
placement of an aggregate of 172,500 shares of its Common Stock and $1,725,000
in principal amount of its promissory notes (10% Notes") to nine investors (the
"Summer 1997 Private Placement"). Following the payment of commission and
non-accountable expenses, additional payments towards its non-accountable
expenses for the Public Offering and counsel fees and expenses, the Company
received approximately $1,400,000 in net proceeds. The 10% Notes bear interest
at a rate of ten percent per year and mature and are payable in full (principal
plus accrued but unpaid interest) upon the earlier of (a) eighteen months after
issuance, (b) the completion date of an equity financing of the Company pursuant
to which it receives gross proceeds of not less than $3,000,000, or (c) the
Company's receipt of at least $1,000,000 in proceeds from the "Key Man" life
insurance policies on any of its executive officers and/or directors. The 10%
Notes are secured by the accounts and accounts receivable of the Company (as
defined in the 10% Notes) but are subordinated to the Company's banking
obligations. The Company intends to use a portion of the net proceeds of the
Public Offering to repay the 10% Notes in full.
Certain of the Selling Securityholders include the investors in the March
1997 and Summer 1997 Private Placements.
During August 1997, the Company borrowed $200,000 from two lenders, not
otherwise affiliated with the Company, pursuant to unsecured promissory notes
bearing interest at the rate of 12% per year and due in September and October
1997. These notes were paid in full in December 1997. In connection with this
borrowing, the lenders were each issued options to purchase 7,500 shares of the
Company's Common Stock at $.02 per share. As of October 1998, the options had
been exercised by the lenders.
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During August and September 1997, the Company borrowed approximately
$492,000 from a lender, not otherwise affiliated with the Company, pursuant to
two promissory notes bearing interest at a rate of .33% per day and guaranteed
by certain officers and directors of the Company. Both notes were repaid by the
Company in December 1997.
During 1997, J.T. Whitworth, Chief Operating Officer, Chief Financial
Officer and Director and Robert L. Richards, Chief Executive Officer and
Director of the Company advanced $140,071 and $118,266, respectively, for
working capital requirements. On November 28, 1997, the Company issued demand
promissory notes bearing interest at the rate of 10% per year in the amount of
$258,337 to the two officers for funds provided by those individuals to that
date.
During 1997, the Company borrowed $663,000 from William F. Woodburn and
Loren E. Bagley, two directors of the Company, pursuant to demand promissory
notes bearing interest at the rate of 10% per year and secured by the Company's
shares of Aloe Commodities International, Inc. In September 1997, the Company
sold its shares of Aloe Commodities International, Inc., at cost, and made a
partial payment on the notes. The remaining outstanding balance of approximately
$241,000 was renegotiated to two unsecured demand promissory notes bearing
interest at the rate of 10% per year.
During November 1997, the Company borrowed $700,000 from IMT. On December 9,
1997, the Company and certain of its stockholders entered into an Agreement and
Plan of Reorganization (the "Agreement") with IMT whereby IMT agreed to provide
an additional $300,000 equity investment in the Company and convert the $700,000
previously borrowed by the Company to equity in the Company and for IMT to
provide $2,000,000 additional equity investments to the Company by February 15,
1998. The additional equity investment of $2,000,000 was not made by IMT. The
Agreement restricted the payment of dividends and the purchase of treasury
shares among other things. Also, as discussed in Note 8 of the Consolidated
Financial Statements, IMT acquired approximately 81% of the Common Stock of the
Company from certain holders of common stock for approximately 45% of the common
shares of IMT, as defined in the Agreement. During late March 1998, it became
apparent that IMT was unable to provide the additional capital that was provided
for under the Agreement. IMT reached an agreement with Global Marketing, LLC
("Global") to sell 1,250,078 shares, 54%, of the Company's stock to Global in
return for Global immediately loaning $1,000,000 to the Company. These funds
were needed by the Company as the Company had issued checks in anticipation of a
receipt of funds by IMT. Such loan was evidenced by a $1,000,000 promissory note
payable to Global. The note bears interest at 10% per annum, is uncollateralized
and is payable upon demand.
During April 1998, the Company borrowed $100,000 from William F. Woodburn, a
director of the Company for a demand promissory note. The note bears interest at
10%, is collateralized by the assets of the Company and is due on demand.
During January 1998, the Company borrowed $150,000 from a corporation for a
promissory note payable at an interest rate of 2% per month or 24% annual
interest. Interest and principal are due on demand. The note is uncollateralized
and is personally guaranteed by certain officers and directors of the Company.
The long term liquidity of the Company is based on its ability to generate a
profit. The nature of the Company is that it will generate positive cash flows
during periods of growth and/or profitability. The inventory turnover is
normally approximately six times per year which does not create a significant
drain on cash. As the sales are made on a cash and credit card basis, there is
also no investment in receivables as sales grow. The primary
expenses/liabilities of the Company are the bonuses paid to associates on sales.
As these are paid between the 20th and the last day of the succeeding month,
this combined with the cash basis collections will generate a significant
positive cash flow from operations. The reduction in net loss for the Six Months
1998 as opposed to the Six Months 1997 is indicative of the movement from
operating at a loss and losing cash to generating a profit and the related cash
thereon.
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During January, 1998 the Company borrowed $103,000, for working capital,
from William F. Woodburn and Loren E. Bagley, two directors of the Company,
pursuant to demand promissory notes bearing interest at the rate 10% per year.
At the present time, the Company has no plans or commitments for capital
expenditures.
"YEAR 2000" PROBLEM. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the computer system for the Year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
by December 31, 1998, allowing adequate time for testing. Management has
assessed the Company's Year 2000 compliance expense to be $250,000. The Company
has not yet established a contingency plan in the event that it is unable to
correct the "Year 2000" problem and as of the date of this prospectus has no
plans to do so.
RECENT ACCOUNTING PRONOUNCEMENTS. During 1998, the Company implemented
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128 provides for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
All prior period earnings per share data has been restated to reflect the
requirements of SFAS No. 128. The adoption of SFAS No. 128 did not effect the
EPS calculations at June 30, 1998 and 1997, and December 31, 1997, 1996 and
1995. See Note 8 for computation of earnings per share.
In June 1997, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 130, entitled "Reporting Comprehensive
Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
entitled "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement displayed with the same prominence as other financial
statements. SFAS 131 supersedes Statement of Financial Accounting Standard No.
14, entitled "Financial Reporting for Segments of a Business Enterprise." SFAS
131 establishes standards of the way the public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact of SFAS 131, if any, on
future financial statement disclosures. The Company adopted SFAS 130 and
restated all prior periods. Results of operations and financial position,
however, will be unaffected by the implementation of these standards.
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In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information in not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
The FASB has recently issued Statement of Financial Accounting Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 established standards for recognizing all derivative
instruments including those for hedging activities as either assets or
liabilities in the statement of financial position and measuring those
instruments at fair value. This Statement is effective for fiscal years
beginning after June 30, 1999. The Company has not yet determined the effect of
SFAS No. 133 on its financial statements.
CHANGE IN ACCOUNTANTS
On or about August 1, 1996, the Company changed the independent certified
public accounting firm engaged to prepare the Company's annual audited financial
statements from Jones, Jensen and Company to BDO Seidman, LLP. The report on the
Company's financial statements as prepared by Jones, Jensen and Company did not
contain any adverse opinion, disclaimers of opinion, modifications or
qualifications or scope limitations. The decision was based on the
recommendation of counsel to a proposed underwriting. The Company's board of
directors approved the change.
There were no disputes with the dismissed firm over accounting, auditing,
financial statement disclosures or internal control issues. No discussions were
held with the newly engaged auditor with respect to specific accounting
treatments or transactions, changes in the audit opinion, scope or any
limitations on the opinion, or any other accounting, internal control or other
reporting related issues.
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BUSINESS
The Company develops and distributes, through a network of independent
associates, products that are intended to appeal to health-conscious consumers.
Current Company products include health care supplements and personal care
products. The Company offers a line of approximately 50 products which it
divides into nine categories, including Antioxidant Protection, (Bodily)
Defense, Digestion, Energy and Alertness, Stress, Vital Nutrients, Weight
Management, Anti-Aging and Personal Care.
The Company develops products that it believes will have market appeal to
its associates and their customers, and assists its associates in establishing
their own businesses. The Company associates can start a home based business
without significant start-up costs and other difficulties usually associated
with new ventures. The Company provides product development, marketing aids,
customer service, and essential record-keeping functions to its associates
without charge. The Company also provides other support programs to its
associates including 24 hour TouchTalk system (as explained below),
international teleconferencing calls, seminars and business training systems
with audio and video tapes.
It is the Company's strategy and expectation that associates actively
recruit interested people to become new associates for the Company. These
recruits are placed beneath the recruiting associate in that associate's
"network" and are referred to by the Company as that associate's "organization."
Associates earn commissions on purchases by the associates in their organization
as well as retail profits on the sales they make themselves. The Company's
marketing program is designed to provide incentives for associates to build an
organization of recruited associates to maximize their earning potential.
Approximately 60,000 of the Company's associates have had product purchases in
excess of $50 during 1997 and are considered by the Company to be "active", as
compared to approximately 108,000 and 156,000 in 1996 and 1995 respectively.
The Company purchases most of its products directly from manufacturers and
markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995, the Company
expanded the number of its associates located in other parts of the world,
particularly Australia and New Zealand. The Company expanded its operations into
South Korea, Trinidad and Tobago and the United Kingdom during 1997.
INDUSTRY OVERVIEW
According to The Direct Selling Association, network marketing is one of the
fastest growing segments for the distribution of products. The Direct Selling
Association reports that worldwide, over 30.5 million individuals are now
involved in directly selling (of which network marketing is a major segment) and
that those involved in direct selling generate $80 billion in annual retail
sales around the world. Direct marketing sales in the United States are
estimated to be approximately $22 billion annually.
BUSINESS STRATEGY
The Company intends to pursue a business strategy of increasing sales and
profitability by attracting and retaining associates to its network marketing
system; increasing product sales to existing associates; expanding its marketing
activities in new international markets and developing new products.
The Company's ability to increase sales is significantly dependent on its
ability to attract, motivate and retain associates. The Company utilizes an
innovative marketing program which it believes is superior to programs offered
by many other network marketing companies. This program provides financial
incentives, including several forms of commission (bonus), a vehicle expense
reimbursement program for associates with a very significant dollar amount of
product sales, optional associate training and support, no sign-up costs, no
inventory requirements, and low monthly purchase requirements. Management
intends to reach potential new associates through increased advertising,
teleconferencing and regional
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sales meetings. The Company has experienced an increase in the number of
associates each year since inception.
A key factor in the Company's strategy is to increase product sales to its
associates by, among other things, the timely introduction of new products. In
recent years, the Company has introduced several products that achieved consumer
acceptance and contributed to increased sales. The Company's flagship product is
Maritime Prime that was introduced in November 1992. Maritime Plus was
introduced shortly thereafter, followed by Ultra Prime in 1995 and Super Prime
(each tablet containing three times the essential product ingredient of a
Maritime Prime tablet) in 1996. The Company's Aloe Vera product was introduced
in 1993, while Colloidal Silver was introduced in 1994. In June 1996, the
Company introduced the Yes! Weight Management Program, JoBelle Face Kaire Line,
Synerzyme and Immunol. During 1997, the Company introduced a Fruit and Aloe
Drink, AloElite, ArthriKaire, MSM Complex, Kavatu, and Inner Chi. The Company's
newer products (e.g., those introduced in 1997) have higher margins of profit as
one of the Company's strategies is to increase overall profitability as the
newer products' share of overall sales increases. In September 1998, the Company
announced that it had exclusive marketing rights for North America for the
recently discovered antioxidant Enzogenol. The Company introduced the ingredient
Enzogenol in its new product, EnzoKaire Complete, at its annual convention on
September 17, 1998.
The following table indicates how many of the Company's products were
available as of June 30, 1998 in each of the Company's current markets.
<TABLE>
<CAPTION>
PRODUCTS OFFERED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL
PRODUCT PRODUCTS SOUTH
CATEGORIES/LINES OFFERED U.S. CANADA NEW ZEALAND AUSTRALIA KOREA
- -------------------------------------- ------------- --- ------------- ----------------- ------------- -----------
Antioxidant Protection................ 8 8 6 4 0 4
Defense............................... 3 3 3 2 0 0
Digestion............................. 5 5 5 5 2 2
Energy and Alertness.................. 3 3 3 1 1 0
Stress................................ 3 3 2 2 0 1
Vital Nutrients....................... 4 4 2 2 0 0
Weight Management..................... 3 3 0 0 0 0
Anti-Aging............................ 3 3 1 0 0 0
Personal Care......................... 18 18 14 12 12 14
-- -- -- -- -- --
50 50 36 28 15 21
-- -- -- -- -- --
-- -- -- -- -- --
<CAPTION>
<S> <C> <C>
TRINIDAD
PRODUCT AND
CATEGORIES/LINES TOBAGO UNITED KINGDOM
- -------------------------------------- ------------- ---------------------
Antioxidant Protection................ 8 2
Defense............................... 2 1
Digestion............................. 3 2
Energy and Alertness.................. 2 2
Stress................................ 1 1
Vital Nutrients....................... 3 2
Weight Management..................... 3 0
Anti-Aging............................ 1 0
Personal Care......................... 12 0
-- --
35 10
-- --
-- --
</TABLE>
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REVENUE BY PRODUCT CATEGORY
Presented below are the revenue amounts of each of the Company's product
categories for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
PRODUCT CATEGORY DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
- -------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Antioxidant Protection.................................. $ 37,387 $ 33,947 $ 23,560
Defense................................................. 3,463 3,000 2,740
Digestion............................................... 3,141 2,534 1,779
Energy and Alertness.................................... -- 31 1,079
Stress.................................................. 508 681 508
Vital Nutrients......................................... 957 750 975
Weight Management....................................... -- 611 328
Anti-Aging.............................................. -- 43 608
Personal Care........................................... 1,792 1,261 1,861
Other................................................... 10,593 8,641 2,244
------- ------- -------
$ 57,841 $ 51,499 $ 35,682
------- ------- -------
------- ------- -------
</TABLE>
Currently, the Company has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and
Tobago, South Korea and the United Kingdom. Management believes that significant
market potential exists for the Company's products in international markets, and
it is the Company's intention to explore expansion into Japan, Europe, Hong
Kong, Taiwan, India and the Philippines. Statistics from the World Federation of
Direct Selling Associations as reported in May 1998 indicate that the direct
sales market in the foregoing countries amounted to over $37 billion with 6.4
million individuals being involved in some form of direct marketing. This
compares to $28.6 billion in sales and 12.7 million individuals involved in the
markets currently serviced by the Company.
DISTRIBUTION AND MARKETING
The Company's products are distributed through its network marketing system
of associates. Associates are independent contractors who purchase products
directly from the Company for resale to retail consumers. Associates may elect
to work on a full-time or a part-time basis. Management believes that its
network marketing system is well suited to marketing its nutritional supplements
and other products because sales of such products are strengthened by ongoing
personal contact between retail consumers and associates, many of whom use the
Company's products.
Associates' revenues are derived from several sources. First, associates may
receive revenues by purchasing the Company's products at wholesale prices and
selling the Company's products to customers at retail prices. Second, associates
earn the right to receive bonuses (commissions) based upon purchases by members
of their organization. There are basically three types of bonuses that an
associate can earn on product purchases by their organization. The standard
bonus is available to any individual who has attained "Broker" status in the
Company. Attaining "Broker" status is done by purchasing a minimum quantity for
a month. The percentages used to determine the bonus and the number of levels in
the organization the associate receives bonuses upon is based on the
individual's status in the Company. The first status level being that of a
"Broker" and the highest being an "Executive". There are two intermediary levels
between "Broker" and "Executive." An associate achieves higher levels in the
bonus structure primarily through increased purchases by associates sponsored
directly by them (their first level) although the minimum monthly purchase as an
individual does increase between certain levels. The requirements for an
associate to reach an "Executive" level are generally monthly personal purchases
exceeding $300 and monthly volume of $900 on their first level. The program is
such that each month an associate must qualify at that
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level to be paid at that level. The advantage, for the Company, to this is that
the associate must remain active in purchasing and sponsoring to retain their
bonus, but if they miss a month, their income is only reduced that one month. A
second form of bonus is available to those having multiple "Executives" in their
first level. Based on the number of "Executives" they have at this first level,
associates will receive either 10%, 20%, or 30% of their standard bonus as an
additional bonus. Finally, for those "Executives" attaining the highest levels
in the Company, they are allowed to participate in a percentage of the
Company-wide Gross Bonusable Sales to be divided among qualifying "Executives."
Management believes that the right of associates to earn bonuses contributes
significantly to the Company's ability to retain its productive associates.
Management believes the Company's associate compensation plan is superior to
that of other network marketing organizations because the program offers an
earning opportunity without the need to finance a large inventory of products
and requires only a modest amount of sales to meet the bonus requirements.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of the Company. No investment is necessary to
become an associate. The Company considers approximately 60,000 of its
associates to be "active", that is, an individual associate who has ordered at
least $50 of the Company's products during the preceding 12 month period.
The Company regularly sponsors opportunity meetings in various key cities
and participates in motivational and training events in its market areas
designed to inform prospective and existing associates about the Company's
product line and selling techniques. Associates give presentations relating to
their experiences with the Company's products and the methods by which they have
developed their own organization of associates. Specific selling techniques are
explained, and emphasis is placed on the need for consistency in using such
techniques. Participants are encouraged to ask questions regarding selling
techniques and product developments, to share information with other associates
and to develop confidence in selling and goal-setting techniques. Motivation is
offered to participants in the form of recognition, gifts, excursions and tours,
which are intended to foster an atmosphere of excitement throughout the
associate organization. Prospective associates are educated about the structure,
dynamics and benefits of the Company's network marketing system.
The Company continues to develop marketing strategies and programs to
motivate associates. These programs are designed to increase associates' monthly
product sales and the recruiting of new associates. An example of these programs
is the Company's KAIRE SELECT PROGRAM.
Under the Kaire Select Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
autodraft. The associate also gets preferred pricing, no minimum purchase
requirement (once they have a qualifying select order set up), exclusive access
to some product introductions, and discounts on Company sponsored events.
As part of the Company's maintenance of constant communication with its
associate network, the Company offers the following support programs to its
associates:
TOUCHTALK AND FAXBACK. An automated telephone system that associates can
call 24 hours a day to place orders, receive reports on the sales activity of
their organization and listen to selected messages on special offers, marketing
program updates, product information, and similar information. Certain
information is also available via facsimile to the associate.
24 HOUR TELECONFERENCE. A weekly teleconference on various subjects such as
technical product discussions, associate organization building and management
techniques. An associate can listen to any of the last four weekly
teleconferences.
INTERNET. The Company maintains a web-site at http:\\www.kaireint.com.
There, the user can read news letters, learn more about products, place an order
or sign up to be an associate. This web-site became
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fully functional in early 1997. In addition, associates can send messages and
orders to the Company e-mail address of kaireint.com. This allows associates to
potentially be able to sponsor associates and order products 24 hours a day.
PRODUCT LITERATURE. The Company produces for its associates, color
catalogues and brochures displaying and describing the Company's products.
TOLL FREE ACCESS. A toll free number is available to place orders and
sponsor new associates. The Company believes that it was one of the initial
members in the network marketing industry to permit associates to sponsor new
associates over the telephone.
BROADCAST FAX/BROADCAST E-MAIL. Company announcements and product specials
are automatically sent via facsimile and/or e-mail to associates who have
requested this service.
MARKETS
The Company has operations in the United States, Canada, Australia, New
Zealand, Trinidad and Tobago, Korea and the United Kingdom. The Company has
sustained substantial losses in trying to penetrate the South Korean and United
Kingdom markets. The Company is actively trying to sell its South Korean
subsidiary and at June 30, 1998, the Company recorded a $471,000 write down of
its assets in its South Korean subsidiary to what the Company believed to be
their "net realizable value." See Note 12 of the Consolidated Financial
Statements for Net Sales, Income from Operations and Identifiable assets for the
related geographical areas.
Upon deciding to enter a new market, the Company hires local counsel to
assist ensuring that the Company's network marketing system and products comply
with all applicable regulations and that the Company's profits may be
expatriated. In addition, local counsel assists in establishing favorable
relations in the new market area by acting as liaison between the Company and
local regulatory authorities, public officials and business people. Local
counsel also is responsible for explaining the Company's products and product
ingredients to appropriate regulators and, when necessary, will arrange for
local technicians to conduct any required ingredient analysis tests of the
Company's products.
If regulatory approval is required in a foreign market, the Company's local
counsel interfaces with local regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify certain aspects of its network marketing system as necessary to comply
with applicable regulations.
Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. The Company then initiates plans to satisfy inventory, distribution,
personnel and transportation requirements of the new market, and modifies its
associate training materials as may be necessary to be suitable for the new
market. The Company has prepared manuals in Korean, French and Spanish.
PRODUCTS
The Company's product line consists of primarily consumable products that
are targeted to growing consumer interest in natural health alternatives for
nutrition and personal care. In developing its product line, the Company has
emphasized quality, purity, potency, and safety.
ANTIOXIDANT PROTECTION. This line is primarily nutritional supplements
based in antioxidants including Maritime Prime and EnzoKaire Complete. Most of
the products are based on exclusive formulations in several combinations
containing natural products including Pycnogenol, Enzogenol and Arctic Root.
Products containing Pycnogenol have not been approved for direct importation
into Australia. The
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Company is currently seeking approval to import its products containing
Pycnogenol into Australia in conjunction with the Therapeutic Goods Association
of Australia. Maritime Plus is not available in Canada due to Canadian
regulations on the ascorbate that is contained in this product. The Company is
also working with French authorities for approval to import the Maritime Prime
line into France.
Pycnogenol and Enzogenol has been recognized by sources not associated with
the Company as a potent antioxidant. Pycnogenol and Enzogenol, in the Company's
formulation, is believed to be highly bioavailable and retained in the body for
several days. Antioxidants have been shown to be effective in fighting the
effects of oxidation on the body. Oxidation is the same process that causes
metals to rust and apples to turn brown. Free radicals, which are molecules
damaged by oxidation, are being studied as the causes of various infirmities in
humans. A free radical is an unstable oxygen molecule seeking, at the molecular
level, to pair up with an electron. Free radicals can be created in the
atmosphere by the exposure of oxygen to sunlight and pollution. Free radicals
can also be created by natural metabolic processes. Antioxidants are molecules
which can combine with and, as a result, neutralize free radicals.
DEFENSE. The products in this category are primarily oriented towards
working with the body's natural defense systems to make them more efficient. It
consists of three of the more recent additions to the Kaire line, Colloidal
Silver Kaire, Immunol and Noni.
Colloidal Silver Kaire is a solution of silver particles
electro-magnetically suspended in deionized water and provides dietary support
for the immune system. It is used by individuals for a number of purposes
including eye drops, a topical solution, nose drops and a drink.
Immunol is a shark liver based capsule which the Company believes aids the
human immune system. This product is imported from Marine Biologics, Inc.
Noni is the most recent addition to the product line. Derived from a fruit
grown only in the Central and South Pacific, it contains high levels of
naturally occurring vitamins, minerals, trace elements, enzymes, and
phytochemicals. The processing method of flash freezing the fruit and then
processing it into capsules retains the high level of nutrients that may be lost
through the pasteurization of liquid presentations of this product.
DIGESTION. The main constituent of this group has long been the Aloe
products. Aloe has been studied for a number of years as everything from a
topical for skin irritations and sunburn to a supplement for improving the
general health of the body. The Company has recently introduced Fruit-N-Aloe
which is a more palatable form of the Aloe juice as it is mixed with fruit
juices to get the Aloe benefits without the strong taste and AloElite, a more
concentrated form of the Aloe juice.
Two other products currently round out this line, a colon-cleansing product
for periodic use in cleaning the lower digestive system and Synerzyme, a
combination of naturally occurring enzymes and trace minerals to enhance the
efficacy of the enzymes, which may assist the body with the breakdown and
assimilation of various foods and fats.
ENERGY AND ALERTNESS. AquaKaire Daytime and Night-time are two recently
introduced Company products. They are concentrated, "clustered" water products
whose purpose is to increase the metabolic efficiency of the body. Inner Chi is
another recent addition, combining raw honey with Chinese herbs and botanicals
for a balanced, energy enhancing tonic.
STRESS. Products in this category serve two primary purposes. The first is
to provide adaptogens in an efficient medium and the second is to provide a
natural relaxant for rest and sleep. Arctic Root is an adaptogen, an herb which
works with the body to allow energy to be used by the body as needed as opposed
to stimulants and depressants which affect the body's energy as a whole, over a
certain period of time. Kavatu combines the extract from the Pacific KavaKava
plant with other nutrients to form a product allowing for a more complete rest
and sleep without the "hangover" effects of many artificial relaxants and sleep
aids. The Company introduced St. John's Wort in the second quarter of 1998.
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VITAL NUTRIENTS. This category provides for many of the basic vitamins and
nutrients which are missing in the typical adult or child's diet.
WEIGHT MANAGEMENT. One of the newest members of the Company's product
"family" is a weight management program that includes a number of products
designed to work as a system to assist weight loss safely while giving the
dieter a higher level of energy while maintaining a healthy body. This system
concept is based upon a complete program including Company products, walking or
other sensible exercise available to virtually all individuals and sensible
permanent eating habits. Weight management products of the Company include LipeX
(a product designed to inhibit the absorption of fat by the body), fiber wafers
to reduce appetite, lubricate the system and inhibit fat absorption and
nutritional bars to provide both a healthy meal snack alternative and to provide
nutrients which interact with the LipeX to increase metabolism and fat burning
in the system.
The Company believes that the Weight Management Program is well designed to
promote long-term, sustained weight loss. However, the Company's experience has
been that many dieters are highly motivated to lose significant pounds quickly
and the Yes! Weight Management Program does not work quickly enough for such
persons. As a result, the Company is exploring several products which will allow
it to penetrate the rapid weight loss market.
ANTI-AGING. These products are intended to combat the effects of aging on
the human body.
DHEA. This is a hormonal product which replaces the same hormone in the
body. Research shows that as a person matures their body generates diminishing
amounts of DHEA. According to a number of research studies, DHEA is the hormone
which allows the body to know its energy level.
ARTHRIKAIRE AND OSTEO FORMULA. ArthriKaire and Osteo Formula are Company
products introduced in June 1997. Osteo Formula is a comprehensive bone
supplement that provides 18 nutrients including four different types of calcium
for maximum absorption and assimilation. ArthriKaire is designed to provide
dietary support for joints, tendons and ligaments. This proprietary formula
combines proteoglycans, vitamins and herbs that support the integrity of
connective tissue.
PERSONAL KAIRE. This includes JoBelle Gold (a skin softener containing gold
flakes), Dermakaire (the Company's original moisturizing lotion with
Pycnogenol), and the JoBelle Skin Care System consisting of shampoo, conditioner
and body lotion as well as a "top of the line" six part face care system. An
extension of the Company's Body Kaire System product line featuring tiny gold
particles is one of the principal products the Company is distributing in South
Korea. The Company is attempting to develop an upscale image for this product
line with an appeal to a younger market than the Company's current United States
associate base.
NEW PRODUCT DEVELOPMENT
Additional products being considered in these areas are additional
antioxidants, anti-aging, weight management, and energy products. In addition to
the introduction of single products, the Company is also focusing on promoting
groups of products to be taken in conjunction with each other to address
specific needs (such as weight loss, stress, daily wellness, etc.) that an
individual may have.
The Company continually seeks to identify, develop and introduce innovative,
effective and safe products. In Fiscal 1996 and Fiscal 1997, the Company
introduced over 20 new products or services. Management believes that its
ability to introduce new products increases its associates' visibility and
competitiveness in the marketplace.
New product ideas are derived from a number of sources, including trade
publications, scientific and health journals, the Company's management and
consultants, and outside parties. Prior to introducing products into the
Company's markets, the Company's scientific consultants, legal counsel and other
representatives retained by the Company investigate product formulation matters
as they relate to
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regulatory compliance and other issues. The Company's products are formulated to
suit both the regulatory and marketing requirements of particular markets.
The Company maintains its own product review and evaluation staff but relies
upon independent research, vendor research departments, research consultants and
others for product research, development and formulation services. When the
Company, one of its consultants or another party identifies a new product
concept or when an existing product must be reformulated for introduction into a
new or existing market, the new product concept or reformulation is generally
submitted to the Company's suppliers for technological development and
implementation. The Company owns the proprietary rights to a majority of its
product formulations.
The Company expended no funds on new product research and development during
Fiscal 1996 and 1997, respectively.
PRODUCT WARRANTIES AND RETURNS
The Company's product warranties and policy regarding returns of products
are similar to those of other companies in its industry. If a consumer of any of
the Company's products is not satisfied with the product, she/he may return it
to the associate from whom the purchase was made, within 90 days of purchase.
The associate is required to refund the purchase price to the consumer. The
associate may then return the unused portion of the product to the Company for
an exchange of equal value. If an associate requests a refund in lieu of an
exchange, a check or credit card credit is issued. All products are warranted
against defect by the manufacturer of those products. Most products returned to
the Company, however, are not found to be defective in manufacture.
MANAGEMENT INFORMATION SYSTEM
The Company maintains a computerized system for processing associate orders
and calculating associate commission and bonus payments enabling it to promptly
remit payments to associates. The Company believes that prompt remittance of
commissions and bonuses is vital to maintaining a motivated network of
associates and that associate loyalty has been enhanced by the Company making
commission and bonus payments as scheduled.
The Company's computer system provides each associate a detailed monthly
accounting of all sales and recruiting activity in his or her organization.
These convenient statements eliminate the need for substantial record keeping on
behalf of the associate. As a precaution, duplicate copies of the Company's
computer records are transferred daily to an off-site location for safekeeping.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the computer system for the Year 2000 compliance.
It is anticipated that all reprogramming efforts will be completed by December
31, 1998, allowing adequate time for testing. Management has assessed the
Company's Year 2000 compliance expense to be $250,000. The Company has not yet
established a contingency plan in the event that it is unable to correct the
"Year 2000" problem and as of the date of this Prospectus has no plans to do so.
MANUFACTURING AND SUPPLIES
The Company currently purchases all of its vitamins, nutritional supplements
and all other products and ingredients from parties that manufacture such
products to the Company's specifications and standards. During Fiscal 1997,
approximately one-half of the products purchased by the Company were supplied by
MWI a distribution company which purchases and imports Pycnogenol from Horphag
along with other raw materials. MWI is the Company's source of Pycnogenol. The
Company places significant emphasis on quality control. All nutritional
supplements, raw materials and finished products are subject to sample testing,
weight testing and purity testing by independent laboratories.
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The Company has no written agreements with any of its suppliers including
MWI. In the event of loss of any of its sources of supply, the Company believes
that suitable replacement sources of similar products and product ingredients
exist and are available to the Company. However, there can be no assurance that
the Company would be able to obtain replacement suppliers on a timely basis, and
on commercially reasonable terms.
TRADEMARKS AND SERVICE MARKS
Most products are packaged under the Company's "private label." The Company
has registered trademarks with the United States Patent and Trademark Office for
its name, logo and various products names. It has applied for trademark
registration in several countries outside of those it is currently operating in
for its name, logo and various product names.
COMPETITION
The Company competes with many companies marketing products similar to those
sold and marketed by the Company. It also competes intensely with other network
marketing companies in the recruitment of associates.
There are many network marketing companies with which the Company competes
for associates. Some of the largest of these are Nutrition for Life
International, Inc., Nature's Sunshine, Inc., Herbalife International, Inc.,
Amway and Rexall Sundown, Inc. Each of these companies is substantially larger
than the Company and has significantly greater financial and personnel resources
than the Company. The Company competes for associates by means of its marketing
program that includes its commission structure, training and support services,
and other benefits.
Not all competitors market all types of products marketed by the Company,
and some competitors market products and services in addition to those marketed
by the Company. For example, some competitors are known for and are identified
with sales of herbal formulations, some are known for and are identified with
sales of household cleaning and personal care products, and others are known for
and are identified with sales of nutritional and dietary supplements. The
Company's principal methods of competition for the sale of products are its
responsiveness to changes in consumer preferences and its commitment to quality,
purity, and safety.
GOVERNMENT REGULATION
Although the Company confines its activities to marketing and distribution,
the manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by federal agencies,
including the Food and Drug Administration ("FDA"), the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission, the United States Department of
Agriculture, the United States Postal Service and the United States
Environmental Protection Agency. These activities are also subject to regulation
by various agencies of the jurisdictions, states and localities in which the
Company's products are sold.
In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations. The proposed regulations met
with substantial opposition. In October 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted. Section 11 of
the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void. FDA
regulations that became effective on June 1, 1994 would require standard format
nutrition labeling on dietary supplements. However, because the new Dietary
Supplement Law also addresses labeling of dietary supplements, the FDA has
indicated that it would not enforce its labeling regulations until January 1,
1998. To the date of this Prospectus, no new regulations which affect the
Company's labeling practies have been promulgated. In the interim, new
regulations are expected to be proposed by the FDA. Because the FDA has not yet
reconciled its existing
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regulations with the new Dietary Supplement Law, the Company cannot determine to
what extent any changed or amended regulations will affect its business.
The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of
the FDA's health claims regulations. Those regulations prohibit any express or
implied health claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing regulations.
Such approvals are rarely provided by the FDA. Therefore, no claim may be made
on a dietary supplement label or in printed sales literature, "that expressly or
by implication characterizes the relationship of any substance to a disease or
health-related condition." The Company cannot determine what effect currently
proposed FDA regulations, when and if promulgated, will have on its business in
the future. Such regulations could, among other things, require expanded or
different labeling, recalling or discontinuing of certain products, additional
record keeping and expanded documentation of the properties and certain products
and scientific substantiation. In addition, the Company cannot predict whether
new legislation regulating its activities will be enacted, which new legislation
could have a material adverse effect on the Company.
The Company has an ongoing compliance program with assistance from FDA
counsel regarding the nature and scope of food and drug legal matters affecting
the Company's business and products. The Company is unaware of any legal actions
pending or threatened by the FDA or any other governmental authority against the
Company.
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products.
The Company complies with South Korea's strict Door-to-Door Sales Act, which
requires, among other things, the regular reporting of revenue, the registration
of distributors together with the issuance of a registration card, and the
maintaining of a current distributor registry. This law also limits the amount
of sponsoring bonuses that a registered multi-level marketing company can pay to
its distributors up to a maximum of 35% of revenue in a given month. As is the
case with most network marketing companies, the Company has from time to time
received inquiries from various government regulatory authorities regarding the
nature of their business and other issues such as compliance with local business
opportunity and securities laws. Although to date none of these inquiries has
resulted in a finding materially adverse to the Company, there can be no
assurance that the Company will not face inquiries in the future which, either
as a result of findings adverse to the Company or as a result of adverse
publicity resulting from the initiation of such inquiries, could have a material
adverse effect on the Company's business and results of operations.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company's history of operations in
such markets to date, the Company believes that its method of distribution is in
compliance in all material respects with the laws and regulations relating to
direct selling activities of the countries in which the Company currently
operates. Even though management believes that laws governing direct selling are
generally becoming more permissive, many countries currently have laws in place
that would prohibit the Company from conducting business in such markets. There
can be no assurance that the Company will be allowed to continue to conduct
business in each of its existing markets that it currently services or any new
market it may enter in the future.
The Company is subject to or affected by extensive governmental regulations
not specifically addressed to network marketing. Such regulations govern, among
other things, (i) product formulation, labeling, packaging and importation, (ii)
product claims and advertising, whether made by the Company, or its associates,
(iii) fair trade and distributor practices, and (iv) taxes, transfer pricing and
similar regulations that affect foreign taxable income and customers duties.
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In South Korea, the Company has obtained the mandatory certificate of
confirmation as a qualified importer of health assistance foods under the Food
Sanitation Law ("FSL") of that country, as well as additional product approvals
for each of the special nutritional food categories of products which it imports
into that country. Each new product undergoes a 60 day post-customs
quarantine/inspection on cosmetics and 18 day post-customs quarantine/inspection
on food supplements where, in addition to compliance with ingredient
requirements, each product is inspected for compliance with South Korean
labeling requirements.
Based on the Company's experience and research (including assistance from
local counsel) and the nature and scope of inquiries from government regulatory
authorities, the Company believes that it is in material compliance with all
regulations applicable to it. Despite this belief, the Company could be found
not to be in material compliance with existing regulations as a result of, among
other things, the considerable interpretative and enforcement discretion given
to regulators or misconduct by associates. There can be no assurances that the
Company will not be subject to inquiries and regulatory investigations or
disputes and the effects of any adverse publicity resulting therefrom. Any
assertion or determination that the Company or any Company associate are not in
compliance with existing laws or regulations could have a material adverse
effect on the Company's business and results of operations. In addition, in any
country or jurisdiction, the adoption of new laws or regulations or changes in
the interpretation of existing laws or regulations could generate negative
publicity and/or have a material adverse effect on the Company's business and
results of operations. The Company cannot determine the effect, if any, that
future governmental regulations or administrative orders may have on the
Company's business and results of operations. Moreover, governmental regulations
in countries where the Company may commence or expand its operations may
prevent, delay or limit market entry of certain products or require the
reformulation of such products. Regulatory action, whether or not it results in
a final determination adverse to the Company, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of associates and consequently, on the Company's sales and earnings.
PROPERTIES
The Company leases an aggregate of approximately 45,000 square feet of
office and warehouse space in four buildings in Longmont, Colorado. The lease
terms expire over a span of one month to six months, and the aggregate current
monthly rate is approximately $20,000 per month. The Australian and New Zealand
subsidiaries also lease their office and warehouse facilities of approximately
8,000 square feet for a period of approximately five years. The Company has
entered into leases at June 1, 1997 through its South Korean and Trinidad and
Tobago subsidiaries. The former is a two year lease on the second floor in one
of the office/commercial buildings in downtown Seoul. The Trinidad and Tobago
office is approximately 1,100 square feet in downtown Port-of-Spain. That lease
is for one year with two one-year renewals. In January 1998, the Company entered
into, through its United Kingdom subsidiary, a lease of approximately 4,800
square feet for 11 years in Solihull, England, with an option to review the
leases after five years, and terminate with notice. Management of the Company
believes that such properties are suitable and adequate for current operating
needs.
EMPLOYEES
At June 30, 1998, the Company had employed approximately 59 full time
persons of whom three were executive, 13 were engaged in finance and
administrative activities, 11 in order entry, one in travel services, six in
management information systems ("MIS"), three in purchasing, two in compliance,
three in data support services, one in international development, two in human
resources, one in associate services, five in customer relations, one in
marketing and seven in shipping. None of the Company's employees is represented
by a collective bargaining unit. The Company believes that its relationship with
its employees is good.
49
<PAGE>
LEGAL PROCEEDINGS
To the knowledge of the management of the Company, there is no material
litigation pending or threatened against the Company nor are there any such
proceedings to which the Company is a party.
However, the Company is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. The Company was initially contacted in January, 1997 and was advised,
in writing, that it is not a "target" of the Department's investigation, but
that it is a "subject" (meaning that its conduct is deemed to be within the
scope of the investigation) thereof. The Company has completed all obligations
and requests pertaining to this matter.
The Company has also received a voluntary request for information from the
FTC regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
50
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE COMPANY POSITIONS
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert L. Richards................................... 53 Chief Executive Officer and Director
Michael Lightfoot.................................... 45 President
Loren E. Bagley...................................... 56 Chairman of the Board
J.T. Whitworth....................................... 62 Chief Operating Officer, Chief Financial Officer and
Director
William F. Woodburn.................................. 56 Treasurer and Director
L. Charles Laursen................................... 44 Vice President of Finance
Mark D. Woodburn..................................... 28 Secretary and Director
</TABLE>
Set forth below is a brief background of the Executive Officers and
Directors of the Company, based upon information supplied by them.
ROBERT L. RICHARDS, co-founder of the Company, has been Senior Executive
Vice President (from November 1994 until August 1996), Chief Executive Officer
(since August 1996) and a Director of the Company since its inception in October
1992. Mr. Richards also served as the Company's Executive Vice President and
Chief Financial Officer from 1992 to 1994. From 1989 until joining the Company,
Mr. Richards was the vice president of Continental Tax Corporation, a property
tax consulting firm. From 1982 to 1989, Mr. Richards was the president of
RARADAN Oil Company, a company engaged in the development of oil and gas joint
ventures. Mr. Richards was a Captain in the United States Air Force and an
instructor-pilot from 1970 to 1975. He is an athlete, having been National
Champion and All American in 1966 in the 3,000 meter steeplechase. He was also
on the United States Olympic Training Team (steeplechase) in 1968 and 1972. Mr.
Richards graduated from Brigham Young University with a Bachelor of Science
degree in Geology.
MICHAEL LIGHTFOOT has been President of Kaire International, Inc. since
August 1997. Mr. Lightfoot has been involved with the Company since 1993, when
he joined the Company as an associate and formed Kaire International (Canada)
Ltd. in September 1993. Prior to 1993, Mr. Lightfoot was regional general
manager for Forever Living Products, Inc. of British Columbia, Canada, a network
marketing company selling aloe vera based products. Mr. Lightfoot has over 20
years experience in network marketing.
LOREN E. BAGLEY has been Chairman of the Company's Board of Directors since
its inception. Mr. Bagley is also president and chief executive officer of Trans
Energy, Inc. ("TEI"), a company which is involved in oil and gas exploration and
whose securities are listed on NASDAQ, having been TEI's executive vice
president from August 1991 until assuming his current responsibilities at TEI in
September 1993. From 1979 to the present, Mr. Bagley has also been self employed
in the oil and gas industry as president, chief executive officer or vice
president of various corporations which he has either started or purchased,
including Ritchie County Gathering Systems, Inc. Prior to becoming involved in
the oil and gas industry, Mr. Bagley was employed by the United States
Government with the Agriculture Department. Mr. Bagley attended Ohio University
and Salem College and received a Bachelor of Arts degree.
J.T. WHITWORTH joined the Company in 1994 as Vice President of Operations.
In 1995 he was promoted to Executive Vice President of Operations and Chief
Financial Officer. He was promoted to Chief Operating Officer and Chief
Financial Officer in 1997. He was elected a Director of the Company in 1996.
From 1983 until joining the Company, Mr. Whitworth was manager of worldwide
commerce, import, export, and corporate distribution of AGCO Corporation
("AGCO"), a major farm equipment manufacturer. During his tenure with AGCO,
which was from 1961 until 1994, he held several managerial positions.
51
<PAGE>
WILLIAM F. WOODBURN has been Treasurer and a Director of the Company since
its inception. Mr. Woodburn is also vice president in charge of TEI's operations
and has been a director of TEI since August 1991. Mr. Woodburn has been actively
engaged in the oil and gas business in various capacities for the past fourteen
years. Prior to his involvement in the oil and gas industry, Mr. Woodburn was
employed by the United States Army Corps of Engineers for twenty-four years. Mr.
Woodburn graduated from West Virginia University with a Bachelor of Science
degree in Civil Engineering.
L. CHARLES LAURSEN, a Certified Public Accountant, joined the Company in
July 1994 as its Controller. Mr. Laursen was promoted to the position of Vice
President of Finance in May 1996. From 1990 until joining the Company, Mr.
Laursen was the controller of Solid Systems Engineering, a heavy equipment
distributor. From 1985 until 1990, Mr. Laursen was the controller of Pratt
Partnership, an industrial park complex encompassing construction, maintenance,
property management, and hotel operations. Mr. Laursen graduated from Colorado
State University with a Bachelor of Science degree in Accounting.
MARK D. WOODBURN has been Secretary and a Director of the Company since its
inception. He also serves as assistant secretary of TEI, a position which he has
held for the past four years. Mark D. Woodburn is the son of William F.
Woodburn.
Directors of the Company serve until the next annual meeting of stockholders
of the Company and until their successors are elected and duly qualified.
Officers of the Company will be elected annually by the Board of Directors and
serve at the discretion of the Board of Directors.
EXECUTIVE COMPENSATION
The following table summarizes compensation with respect to Fiscal 1995,
Fiscal 1996 and Fiscal 1997 earned by the Company's President, Chief Executive
Officer and the other executive officers of the Company who earned more than
$100,000 during Fiscal 1995, Fiscal 1996 or Fiscal 1997 (the "Named Executive
Officers"). The Named Executive Officers set forth below were officers of the
Company during the years indicated and were compensated for service in such
position in the manner set forth below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
<S> <C> <C> <C> <C>
FISCAL ALL OTHER
NAME AND POSITION YEAR SALARY ($) BONUS COMPENSATION
- ---------------------------------------------------------------------- ----------- ---------- ----------- -------------
Nick A. Mangeris, former President.................................... 1997 $ 6,923 $ 0 $ 7,502(1)
1996 156,984 0 19,651(2)
1995 124,602 0 714(3)
Robert L. Richards, currently Chief Executive Officer................. 1997 167,835 0 8,733(4)
1996 178,667 0 18,876(5)
1995 118,760 0 1,064(6)
J.T. Whitworth, currently Chief Operating Officer and Chief Financial
Officer............................................................. 1997 141,266 0 6,376(7)
1996 133,700 0 11,866(8)
1995 97,069 0 1,118(9)
David Crockett, former Vice President of Sales........................ 1997 4,615 0 415(10)
1996 115,264 0 6,356(11)
1995 103,904 0 802(12)
</TABLE>
52
<PAGE>
- ------------------------
(1) Includes the value to Mr. Mangeris of medical benefits provided by the
Company ($7,173), and miscellaneous benefits provided to him.
(2) Includes the value to Mr. Mangeris of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($4,361), medical benefits
provided by the Company ($6,883), and miscellaneous benefits provided to
him.
(3) Includes the value to Mr. Mangeris of medical benefits provided by the
Company ($653), and miscellaneous benefits provided to him.
(4) Includes the value to Mr. Richards of the Company's matching contributions
in Fiscal 1997 to the Company's 401(k) plan ($4,943), medical benefits
provided by the Company ($2,773), and miscellaneous benefits provided to
him.
(5) Includes the value to Mr. Richards of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($5,317), medical benefits
provided by the Company ($3,806), and miscellaneous benefits provided to
him.
(6) Includes the value to Mr. Richards of medical benefits provided by the
Company ($1,003), and miscellaneous benefits provided to him.
(7) Includes the value to Mr. Whitworth of the Company's matching contributions
in Fiscal 1997 to the Company's 401(k) plan ($4,121), and miscellaneous
benefits provided to him.
(8) Includes the value to Mr. Whitworth of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($3,774), and miscellaneous
benefits provided to him.
(9) Includes the value to Mr. Whitworth of medical benefits provided by the
Company ($1,057), and miscellaneous benefits provided to him.
(10) Includes the value to Mr. Crockett of miscellaneous benefits provided to
him by the Company.
(11) Includes the value to Mr. Crockett of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($3,413), medical benefits
provided by the Company ($1,847), and miscellaneous benefits provided to
him.
(12) Includes the value to Mr. Crockett of medical benefits provided by the
Company ($740), and miscellaneous benefits provided to him.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
The Company does not have employment contracts with any of its executive
officers.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive compensation for their services as
directors; however, the Board of Directors may authorize the payment of
compensation to directors for their attendance at regular and special meetings
of the Board and for attendance at meetings of committees of the Board as is
customary for similar companies. Directors will be reimbursed for their
reasonable out-of-pocket expenses incurred in connection with their duties to
the Company.
LIMITATION ON LIABILITY OF DIRECTORS
The Delaware General Corporation Law permits a corporation, through its
Certificate of Incorporation, to exonerate its directors from personal liability
to the corporation or to its stockholders for monetary damages for breach of
fiduciary duty of care as a director, with certain exceptions. The exceptions
include a breach of the director's duty of loyalty, acts or omissions not in
good faith or which involve intentional
53
<PAGE>
misconduct or knowing violation of law, improper declarations of dividends, and
transactions from which the directors derived an improper personal benefit. The
Company's Certificate of Incorporation exonerates its directors from monetary
liability to the extent permitted by this statutory provision. The Company has
been advised that it is the position of the Commission that, insofar as the
foregoing provision may be invoked to disclaim liability for damages arising
under the Securities Act, that provision is against public policy as expressed
in the Securities Act and is therefore unenforceable.
STOCK OPTION PLAN
In July 1997, the Board of Directors adopted and the stockholders approved
the Company's 1997 Stock Option Plan (the "1997 Stock Option Plan"). The 1997
Stock Option Plan provides for the grant of (i) options that are intended to
qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, as amended (the "Code"),
to certain employees, directors and consultants (which directors and consultants
are also employees of the Company) and (ii) options not intended to so qualify
("Non-Qualified Stock Options"), to employees, directors and consultants,
including without limitation, employees of companies that do business with the
Company. Each director of the Company is to be automatically granted one
Non-Qualified Stock Option to purchase 5,000 shares of Common Stock, upon their
election to the Board and each anniversary thereafter. The total number of
shares of Common Stock for which options may be granted under the 1997 Stock
Option Plan is 500,000 shares. As of June 30, 1998, no options have been granted
under the plan.
The 1997 Stock Option Plan is to be administered by a committee appointed by
the Board of Directors. The Committee is to determine the terms of options
granted, including the exercise price, the number of shares subject to the
option and the terms and conditions of exercise. No option granted under the
1997 Stock Option Plan is transferable by the optionee other than by will or the
laws of descent and distribution and each option is exercisable during the
lifetime of the optionee only by such optionee.
The exercise price of all Incentive Stock Options granted under the 1997
Stock Option Plan must be at least equal to the fair market value of the
underlying Shares on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting rights of all classes of the
Company's outstanding capital stock, the exercise price of any Incentive Stock
Option must be not less than 110% of the fair market value on the date of grant.
The exercise price of all Non-Qualified Stock Options shall be not less than 85%
of the fair market value of the underlying shares on the date of the grant.
The term of each option granted pursuant to the 1997 Stock Option Plan may
be established by the Board of Directors or a committee of the Board of
Directors, in its sole discretion; provided, however, that the maximum term of
each Incentive Stock Option granted pursuant to the 1997 Stock Option Plan is
ten years. With respect to any Incentive Stock Option granted to a participant
who owns stock possessing more than 10% of the voting rights of all classes of
the Company's outstanding capital stock, the maximum term is five years. Options
shall become exercisable at such times and in such installments as the Board of
Directors or a committee of the Board of Directors shall provide in the terms of
each individual option.
The Company has agreed with the Underwriter that for a period of two years
from the date of this Prospectus, without the Underwriter's written consent, not
more than 187,500 of the options shall be granted to persons who are officers
and/or directors of the Company on the date of the Prospectus, except that the
Underwriter will not unreasonably withhold consent to the grant or vesting of
such options based on the achievement of goals established in advance and
reasonably approved by the Company's Board of Directors and the Underwriter.
OTHER COMPENSATION
The Company provides basic health and, major medical insurance for its
employees, including its executive officers. The Company has also adopted a
401(K) Profit Sharing Retirement Plan for eligible
54
<PAGE>
employees, as described below. No other retirement, pension or similar program
has been adopted by the Company. These and other benefits may be adopted by the
Company for its employees in the future.
On January 1, 1996, the Company adopted a 401(K) Profit Sharing Retirement
Plan for its employees ("401(K) Plan"). Eligible employees include all employees
of the Company who have completed one year of employment and have attained the
age of 21. The 401(K) Plan permits employees to make voluntary contributions to
the 401(K) Plan up to a dollar limit set by law. The Company may contribute in
discretionary matching contributions equal to the Company's determined
percentage of the employee's contributions. Benefits under the 401(K) Plan are
distributable upon retirement, disability, termination of employment or certain
financial hardship, subject to regulatory requirements. Each participant's share
of the Company's contributions vests at the rate of 20% per year until after 5
years of service, at which time the participant becomes fully vested.
For its fiscal year ended December 31, 1997, the Company made a contribution
to the 401(K) Plan of approximately $53,000, of which $4,900, $0, $4,100,
$1,800, $2,500, $1,100 and $14,400, were for the benefit of Robert L. Richards,
Loren E. Bagley, J.T. Whitworth, William F. Woodburn, L. Charles Laursen, Mark
D. Woodburn and all of the Company's executive officers as a group,
respectively. Amounts to be contributed in the future are at the discretion of
the Company's Board of Directors. Accordingly, it is not possible to estimate
the amount of benefits that will be payable to participants in the 401(K) Plan
upon their retirement. The trustees under the 401(K) Plan are J.T. Whitworth and
L. Charles Laursen.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information concerning beneficial ownership of shares of Common Stock with
respect to (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each executive officer and director of
the Company, and (iii) all executive officers and directors of the Company as a
group based upon information supplied to the Company by such persons:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT AND APPROXIMATE PERCENTAGE OF
NATURE OF PERCENTAGE OF COMMON COMMON STOCK OWNED
BENEFICIAL STOCK BEFORE THE PUBLIC AFTER THE PUBLIC
OWNERSHIP OFFERING OFFERING
----------- ----------------------- -----------------------
<S> <C> <C> <C>
Robert L. Richards(1)(2)................................ 0 0% 0%
Michael A. Lightfoot(1)(2).............................. 0 0% 0%
Loren E. Bagley(1)(2)................................... 0 0% 0%
J.T. Whitworth(1)(2).................................... 0 0% 0%
William F. Woodburn(1)(2)............................... 0 0% 0%
L. Charles Laursen(1)(2)................................ 0 0% 0%
Mark D. Woodburn(1)(2).................................. 0 0% 0%
Peter Benz(6)........................................... 536,598 23% 17%
2139 Pontius Avenue
Los Angeles, California 90025
L. Scott McKnight(3).................................... 1,250,078 54% 40%
12901 Nicholson Road, #370
Farmers Branch, Texas 75234
Kaire Holdings, Inc., formerly known as
Interactive Medical Technologies, Ltd.(4)(5).......... 536,598 23% 17%
2139 Pontius Avenue
Los Angeles, CA 90025
All executive officers and directors
as a group (7 persons)................................ 0 0% 0%
</TABLE>
- ------------------------
(1) The address for each of the above referenced persons or entities is c/o
Kaire International Inc., 380 Lashley Street, Longmont, Colorado 80501.
(2) Does not include options that may be granted under the Company's 1997 Stock
Option Plan. See "Management."
(3) Owned of record by Global Marketing, LLC.
(4) In September 1997, Kaire Holdings, Inc., formerly known as Interactive
Medical Technologies, Inc. ("IMT"), without admitting or denying the
allegations set forth in a civil action commenced by the Securities and
Exchange Commission ("Commission"), consented to a final judgement of
permanent injunction which in summary, provided that it was permanently
enjoined from violating the registration provisions of the federal
securities laws. The Commission's complaint alleged that IMT sold shares of
its common stock in violation of said registration provisions. In August
1992, IMT consented to be permanently enjoined from violating the
registration, the antifraud and other provisions of the federal securities
laws, in an action commenced by the Commission. In July 1997, IMT, without
admitting or denying the allegations set forth in a civil administration
proceeding commenced by the Federal Trade Commission ("FTC"), consented to
the entry of an FTC order prohibiting IMT and others, in connection with any
weight loss, fat reduction or cholesterol reduction product or program; from
representing, advertising, etc. that such product reduces the human body's
absorption of fat, is safe to use and making similar representations, unless
such representation is based upon competent and reliable scientific
evidence.
(5) The Company has been advised by IMT that Peter Benz is authorized to vote
said 536,598 shares of the Company's Common Stock and, as a consequence of
said authority, Mr. Benz is deemed a beneficial owner of said shares.
56
<PAGE>
CERTAIN TRANSACTIONS
In January 1997, the Company borrowed $102,500 from each of its Chairman,
Loren E. Bagley, and Treasurer and Director, William F. Woodburn, and delivered
one 10% unsecured promissory note each to Mr. Bagley and Mr. Woodburn. In July
1997, the Company borrowed an additional $229,000 from each of Messrs. Bagley
and Woodburn, executed and delivered 10% secured promissory notes to each said
officer, and pledged 1,400,000 shares of Aloe Commodities International, Inc.,
valued at an aggregate of $250,000, as collateral for the notes. All of the
foregoing notes were due on demand. In September 1997, each of Messrs. Bagley
and Woodburn demanded payment on all of the foregoing notes. The Company sold
its shares of Aloe Commodities International, Inc. and repaid $125,000 of the
principal amount and accrued interest to each of Messrs. Bagley and Woodburn,
and negotiated the cancellation of each of the foregoing notes in exchange for
its execution and delivery of new principal amount $120,412, 10% unsecured
promissory notes, one each in the favor of Mr. Bagley and Mr. Woodburn, also
payable upon demand. In addition, during 1997, the two directors advanced an
additional $113,000 to the Company which was repaid by the Company during 1997.
In December 1997, both Mr. Bagley and Mr. Woodburn signed agreements with the
Company not to demand repayment until and unless the Company had achieved
certain financial benchmarks.
On February 4, 1997, the Company entered into a Consulting Contract with
Magic Consulting Group, Inc. ("Consultant"). Consultant provides general
advisory and consulting to management on matters pertaining to the Company's
business. Consultant received the following compensation for its services: (i)
an option to purchase 50,000 shares of Common Stock of the Company for $.02 per
share, (ii) 50,000 warrants to purchase an aggregate of 50,000 shares of Common
Stock of the Company at $6.60 per share, such warrants to be identical to the
warrants issued by the Company in this Offering, (iii) $2,500 per month for a
period of 60 months from the date of the Consulting Contract. As of June 30,
1998, Consultant had not exercised its option or warrants to purchase shares of
the Common Stock of the Company. However, during October 1998, Consultant
exercised all of its options and purchased 50,000 shares of the Company's Common
Stock. In March 1997, the Consultant purchased 50,000 shares of the Company's
Common Stock and 50,000 warrants, exercisable at $6.60 per warrant, for $50,000
as part of a private offering of the Company's securities. In connection with
the reverse stock split on October 1, 1998, Consultant was issued additional
warrants to purchase 50,000 shares of the Company's common stock at $6.60 per
share. All such warrants are to be identical to the warrants issued by the
Company in this Offering.
On August 25, 1997, the Company renegotiated the terms of a loan to Magco,
Inc. in the principal amount of $200,000 and as part of such renegotiated terms
issued to the corporation 12,500 warrants to purchase 12,500 shares of Common
Stock of the Company at $6.60 per share. In connection with the reverse stock
split on October 1, 1998, Magco, Inc. was issued additional warrants to purchase
12,500 shares of the Company's common stock at $6.60 per share. All such
warrants are to be identical to the warrants issued by the Company in this
Offering.
On August 29, 1997, the Company borrowed $100,000 from The Bridge Fund N.V.
for a note bearing interest at the rate of 12% per year, due October 13, 1997.
The balance was paid in full by December 31, 1997. In connection with the
borrowing, the corporation was issued one year options to purchase 7,500 shares
of the Common Stock of the Company at $.02 per share, and 12,500 warrants to
purchase 12,500 shares of common stock of the Company at $6.60 per share. As of
June 30, 1998, the options had vested but had not been exercised but were
subsequently exercised in October 1998. In connection with the reverse stock
split on October 1, 1998, The Bridge Fund N.V. was issued additional warrants to
purchase 12,500 shares of the Company's common stock at $6.60 per share. All
such warrants are to be identical to the warrants issued by the Company in this
Offering.
On August 29, 1997, the Company borrowed $100,000 from Corso, Ltd. for a
note bearing interest at the rate of 12% per year, due September 27, 1997. The
balance was paid in full by December 31, 1997. In connection with this
borrowing, the corporation was issued one year options to purchase 7,500 shares
of
57
<PAGE>
the Common Stock of the Company at $.02 per share, and 12,500 warrants to
purchase 12,500 shares of common stock of the Company at $6.60 per share. As of
June 30, 1998, the options had vested but had not been exercised. However,
during October 1998, the options were exercised. In connection with the reverse
stock split on October 1, 1998, Corso, Ltd. was issued additional warrants to
purchase 12,500 shares of the Company's common stock at $6.60 per share. All
such warrants are to be identical to the warrants issued by the Company in this
Offering.
Except as noted above, Magco, Inc., The Bridge Fund N.V. and Corso, Ltd. are
not otherwise affiliated with the Company.
During 1997, the Company borrowed $140,071 from its Chief Operating Officer,
Chief Financial Officer and Director, J.T. Whitworth, and delivered a $140,071
unsecured promissory note to Mr. Whitworth bearing interest at the rate of 10%
per year. The promissory note is due upon demand. During December 1997, Mr.
Whitworth entered into an agreement with the Company that he would not seek
repayment of the note until the Company had reached certain financial goals.
During 1997, the Company borrowed $118,266 from its Chief Executive Officer
and Director, Robert L. Richards and delivered a $118,266 unsecured promissory
note bearing interest at the rate of 10% per year in the favor of Mr. Richards
at 10% interest. The promissory note is due upon demand. During December 1997,
Mr. Richards entered into an agreement with the Company that he would not seek
repayment of the note until the Company had reached certain financial goals.
In December 1997, Messrs. Bagley, Woodburn, Whitworth, and Richards entered
into an agreement with the Company pursuant to which they agreed that the
Company not make repayments on the notes issued to them until after the end of
the first calendar quarter in which the Company has achieved positive cash flow.
The agreement with Messrs. Bagley, Woodburn, Whitworth and Richards requires
payments only after calendar quarters during which the Company has received
positive cash flow and that the Company is only required to pay the foregoing
named executive officers and directors on a pro rata basis as to their
indebtedness in an aggregate amount equal to 50% of the positive net cash flow
for each such quarter.
On December 9, 1997, the Company and certain holders of common stock of the
Company then holding approximately 81%, 1,786,676 shares, of the issued and
outstanding stock of the Company entered into an "Agreement and Plan of
Reorganization" with IMT (the "Agreement"). IMT, as part of the Plan of
Reorganization, has committed to invest $3,000,000 in equity in the Company, of
which $1,000,000 has been invested in the Company as of March 31, 1998. Certain
holders of common stock of the Company exchanged their shares for approximately
45%, as defined in the Agreement, of the common shares of IMT in a transaction
which qualified as a tax free reorganization pursuant to Section 368(a)(1)(B) of
the Internal Revenue Code of 1986, as amended. The Agreement requires the
establishment of an executive committee of the Company's Board of Directors
comprised of five persons, three of whom are to be designated by the Company and
two by IMT. The executive committee is to have the same authority as the
Company's Board of Directors with respect to financing transactions (debt or
equity) and anything materially affecting the operation of the business of the
Company with the proviso that any action taken by the executive committee is to
be authorized by four of its five members. Additionally, if IMT did not provide
the additional capital called for by the Agreement, it was to return the shares
of the Company's common stock it had received in exchange for its own shares,
substantially in the proportion that its actual investment bore to its
investment required by the Agreement. However, this provision was waived by the
Company's stockholders who had exchanged their shares or by their designee,
Robert L. Richards. As part of the transaction, the Company's Board of Directors
was expanded by two new directors Messrs. Westlund and Benz. IMT did not invest
the additional $2,000,000 in equity capital in the Company. During late March
1998 it became apparent that IMT was unable to provide the additional capital
that was provided for under the Agreement. IMT reached an agreement with Global
Marketing, LLC to sell 1,250,078 shares, of the Company's stock to Global in
return for Global immediately loaning $1,000,000 to the
58
<PAGE>
Company. These funds were needed by the Company as the Company had issued checks
in anticipation of a receipt of funds by IMT. On April 16, 1998, the Company
entered into a $1,000,000 promissory note with Global. The note bears interest
at 10% per annum, is uncollateralized and is payable upon demand. Messrs.
Westlund and Benz resigned from the Company's Board of Directors on August 17,
1998.
As part of the Plan of Reorganization, the following identified current and
former executive officers and directors (or entities in which they hold a
beneficial interest) exchanged the stated number of shares of the Company's
Common Stock for the indicated number of IMT's shares of Common Stock (as
adjusted for subsequent reverse stock split of IMT's Common Stock):
<TABLE>
<CAPTION>
NUMBER OF
THE COMPANY'S NUMBER OF IMT'S
NAME AND TITLE SHARES EXCHANGED SHARES RECEIVED
- ----------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Robert L. Richards, Chief Executive Officer and Director..................... 313,600 276,641
William F. Woodburn, Treasurer and Director.................................. 154,412 136,209
Loren E. Bagley, Chairman of the Board....................................... 154,411 136,209
Mark D. Woodburn, Secretary and Director..................................... 154,412 136,209
J.T. Whitworth, Chief Operating Officer, Chief Financial Officer and
Director................................................................... 147,000 129,683
Michael Lightfoot, President................................................. 30,800 27,157
Nick A. Mangeris, former President........................................... 383,600 338,394
</TABLE>
During January 1998, the Company borrowed $103,000 from William F. Woodburn
and Loren E. Bagley, two directors of the Company, pursuant to demand promissory
notes bearing interest at the rate of 10% per year. During April 1998, the
Company borrowed an additional $100,000 from William F. Woodburn, pursuant to
demand promissory note bearing interest at the rate of 10% per year.
PRIVATE PLACEMENTS OF THE COMPANY'S SECURITIES
Pursuant to a Loan and Security Agreement (the "Loan Agreement"), by and
among the Company and three private investors, in or about January 1997, the
Company sold to such investors $300,000 of Agreement Notes. These notes were
repaid in full by July 31, 1997. In consideration for the purchase of the
Agreement Notes, the Company granted to the holders of the Agreement Notes, the
Agreement Warrants to purchase an aggregate of 22,050 shares of Common Stock of
the Company at an exercise price of approximately $.01 per share of Common Stock
(as adjusted to reflect the anti-dilution provisions in the Agreement Warrants).
The Agreement Warrants were exercised in July 1998 and include "piggyback"
registration rights relating to the shares of Common Stock issuable upon
exercise of the Agreement Warrants subject to the rights of any Underwriter of
such an offering to exclude a reasonable amount of such shares if market factors
require a limitation on the number of shares to be underwritten. The Underwriter
has advised the Company and the holders of the Agreement Warrants that market
conditions prevent the inclusion of any of the shares of the Company's Common
Stock underlying the Agreement Warrants from being included in the registration
statement of which this Prospectus forms a part.
On or about March 20, 1997, the Company completed a private placement of an
aggregate of 250,000 shares and 250,000 warrants by which it received gross
proceeds of $250,000 from five private investors (the "March 1997 Private
Placement"). Following the payment of commission and non-accountable expenses,
an initial payment towards its non-accountable expenses for the Public Offering
and counsel fees and expenses for that private placement, the Company received
net proceeds of approximately $171,500. The Underwriter for this Offering served
as the Company's Placement Agent for the March 1997 Private Placement. In
connection with the reverse stock split on October 1, 1998, the investors were
issued additional warrants to purchase 250,000 shares of the Company's common
stock at a purchase price of $6.60 per share.
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<PAGE>
As part of the March 1997 Private Placement, the Company entered into a
registration rights agreement with five private investors therein granting them
certain piggyback registration rights with respect to the securities purchased
by them. With respect to any underwritten public offering of the Company's
securities, the foregoing Registration Rights are subject to the Underwriter's
Agreement to include said securities in the registration statement for such an
offering. The Underwriter for this Offering has advised the Company that it will
not agree to include the Company's securities, sold in the March 1997 Private
Placement, in the registration statement of which this Prospectus forms a part.
The holders of a majority of the Company's securities sold in the March 1997
Private Placement have a right to demand that their securities be included, one
time, in a subsequent registration statement to be filed by the Company and
become effective as soon as practicable after the date of this Prospectus but
not later than 180 days thereafter (subject to a 90 day extension in certain
limited circumstances).
Between June 3, 1997 and December 8, 1997, the Company completed a private
placement of an aggregate of 172,500 shares and $1,725,000 in principal amount
of its ten percent promissory notes ("10% Notes") to nine private investors (the
"Summer 1997 Private Placement"). Following the payment of commission and
non-accountable expenses, additional payments towards its non-accountable
expenses for this Offering and counsel fees and expenses, the Company received
approximately $1,400,000 in net proceeds. The 10% Notes bear interest at a rate
of ten percent per annum commencing upon issuance and mature and are payable in
full (principal plus accrued but unpaid interest) upon the earlier of (a)
eighteen months after issuance, (b) the completion date of an equity financing
of the Company pursuant to which it receives gross proceeds of not less than
$3,000,000, or (c) the Company's receipt of at least $1,000,000 in proceeds from
the "Key Man" life insurance policies on any of its executive officers and/or
directors. The 10% Notes are secured by the accounts and accounts receivable of
the Company (as defined in the 10% Notes). The security interest for the 10%
Notes, however, are subordinated to the Company's banking obligations. The
Company has the right to prepay all or any of the 10% Notes at any time without
penalty but with accrued interest. The Company intends to use a portion of the
net proceeds of this Offering to repay the 10% Notes in full. See "Use of
Proceeds."
All future material transactions and loans will be made or entered into on
terms no less favorable to the Company than those that can be obtained from
unaffiliated third parties; and that any forgiveness of loans must be approved
by a majority of the Company's independent directors not having an interest in
the transaction, if any director of the Company has an interest in the
transaction.
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<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$.01 par value per share, of which 2,296,226 shares are issued and outstanding
as of the date of this Prospectus. The holders of Common Stock are entitled to
receive dividends equally when, as and if declared by the Board of Directors,
out of funds legally available therefor.
Subject to the rights that may be designated by the Board of Directors to
the holders of any shares of Preferred Stock, the holders of the Common Stock
have voting rights, one vote for each share held of record, and are entitled
upon liquidation of the Company to share ratably in the net assets of the
Company available for distribution. Shares of the Company's Common Stock do not
have cumulative voting rights. Therefore, the holders of a majority of the
shares of Common Stock may elect all of the directors of the Company and control
its affairs and day to day operations. The shares of Common Stock are not
redeemable and have no preemptive or similar rights. All 2,296,226 outstanding
shares of the Company's Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock, par
value $.01 per share ("Preferred Stock"). The Board of Directors of the Company,
without further stockholder action, may issue shares of Preferred Stock in any
number of series and may establish as to each such series the designation and
number of shares to be issued and the relative rights and preferences of the
shares of each series, including provisions regarding voting powers, redemption,
dividend rights, rights upon liquidation and conversion rights. The issuance of
shares of Preferred Stock by the Board of Directors could adversely affect the
rights of holders of Common Stock by, among other matters, establishing
preferential dividends, liquidation rights and voting power. The Company has not
issued any shares of Preferred Stock and has no present intention to issue
shares of Preferred Stock. The issuance thereof could discourage or defeat
efforts to acquire control of the Company through acquisition of shares of
Common Stock.
WARRANTS
The Company has authorized the issuance of up to 1,000,000 Redeemable Common
Stock Purchase Warrants (the "Public Warrants") to be sold in the Public
Offering. As of the date of this Prospectus, the Company had 1,425,000 Warrants
issued and outstanding, all of which are exercisable at $6.60 per share, which
may be sold by the Selling Securityholders. In March 1997, the Company issued
warrants to purchase 250,000 shares of its Common Stock at $6.60 per share
issued in connection with a private placement of the Company's securities. In
August 1997, the Company issued warrants to purchase 25,000 shares of its Common
Stock at $6.60 per share issued in connection with two private placements of
promissory notes. Also, in August 1997, the Company issued warrants to purchase
12,500 shares of its Common Stock at $6.60 per share issued in connection with
the renegotiations of an earlier loan to the Company. The Company issued to its
Consultant, warrants to purchase 50,000 shares of its Common Stock at $6.60 per
share in February 1997. The Company also issued warrants to purchase 375,000
shares of its common stock at an exercise price of $6.60 per share to three
entities for services provided by them in organizing the subsidiaries Korea,
Trinidad and Tobago, and the United Kingdom. As a result of the 1 for 2 reverse
stock split on October 1, 1998, certain warrant holders received an additional
712,500 warrants to purchase common stock of the Company at $6.60 per share. All
of said Warrants have the same terms and conditions as the Public Warrants. See
"Certain Transactions."
The following statements and summaries of the material provisions of the
Public Warrants are subject to the more detailed provisions of the Public
Warrants, a copy of which has been included as an Exhibit to the Registration
Statement of which this Prospectus forms a part.
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<PAGE>
RIGHTS TO PURCHASE SHARES OF COMMON STOCK
Each Warrant entitles the holder to purchase one share of Common Stock at a
price of $6.60, for a period of four years commencing two years after the date
of this Prospectus, provided, however, that if the Underwriter has consented in
writing to all of the Warrants being exercisable, they may be exercisable at any
time after their issuance. The Underwriter and the Company have agreed that the
Underwriter will not consent, until six months after the Effective Date, to the
earlier exercise of any of the Company's Warrants issued and outstanding on the
Effective Date.
Each holder of a Warrant may exercise such Warrant, in whole or in part, by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase attached to such certificate properly completed and executed,
together with payment of the exercise price and any required transfer taxes, to
the Company. No Warrants may be exercised unless at the time of exercise there
is a current prospectus covering the shares of Common Stock issuable upon the
exercise of such Warrants under an effective registration statement. The Company
will endeavor to obtain and maintain an effective registration statement,
including such current prospectus, so long as any of the exercisable Warrants
remain outstanding. While it is the Company's intention to comply with this
intention, there can be no assurance that it will be able to do so.
The exercise price and any required transfer taxes will be payable in cash
or by certified or official bank check payable to the Company. If fewer than all
of the Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Warrants. Certificates
evidencing the Warrants may be exchanged for new certificates of different
denominations by presenting the warrant certificate at the offices of the
Company.
ADJUSTMENTS
The exercise price and the number of shares of Common Stock purchasable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events including stock dividends, stock splits, reverse stock splits,
reclassification, reorganizations, consolidations, mergers, and certain
issuances and redemptions of Common Stock and securities convertible into or
exchangeable for Common Stock (below the lesser of the then exercise price of
the Warrants or the fair market value of the Company's Common Stock) excluding
issuances of shares of the Company's Common Stock prior to the commencement of
this Offering, any issuances of the Company's securities in connection with this
Offering and Company stock option plans. No adjustments in the exercise price
will be required to be made with respect to the Warrants until cumulative
adjustments amount to $.05. In the event of any capital reorganization, certain
reclassifications of the Common Stock, any consolidation or merger involving the
Company (other than a consolidation or merger which does not result in any
reclassification or change in the outstanding shares of Common Stock), or sale
of the properties and assets of the Company, as, or substantially as, an
entirety to any other corporation, Warrants will thereupon become exercisable
only for the number of shares of stock or other securities, assets, or cash to
which a holder of the number of shares of Common Stock of the Company
purchasable (at the time of such reorganization, reclassification,
consolidation, merger or sale) upon exercise of such Warrants would have been
entitled upon such reorganization, reclassification, consolidation, merger or
sale.
OTHER RIGHTS
In the event of an adjustment in the number of shares of Common Stock
issuable upon exercise of the Warrants, the Company will not be required to
issue fractional shares of Common Stock upon exercise of the Warrants. In lieu
of fractional shares of Common Stock, there will be paid to the holders of the
Warrants, at the time of such exercise, an amount in cash equal to the same
fraction of the current market price of a share of Common Stock of the Company.
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<PAGE>
Warrantholders do not have voting or any other rights of stockholders of the
Company and are not entitled to dividends, if any.
REDEMPTION OF WARRANTS
During any time the Warrants are exercisable, if the closing bid price of
the Common Stock for twenty consecutive trading days shall exceed $10.00 the
Company may redeem the Warrants by paying holders $.05 per Warrant, provided
that notice of such redemption is mailed not later than 10 days after the end of
such period and prescribes a redemption date at least 30 days thereafter.
Warrantholders will be entitled to exercise Warrants at any time up to the
business day next preceding the redemption date. Additionally, the Warrants may
not be redeemed unless at the time of redemption there is a current prospectus
covering the shares of Common Stock issuable upon exercise of such Warrants
under an effective registration statement. During the two year period commencing
on the Effective Date, the Warrants shall only be redeemable with the
Underwriter's express written consent.
WARRANT AGREEMENT AND EXCHANGE OF WARRANTS
Upon the closing of the Public Offering, the Company will enter into a
warrant agreement ("Warrant Agreement") with American Securities Transfer &
Trust, Inc. ("Warrant Agent"). It is anticipated that the Warrant Agreement will
contain provisions permitting the Company and the Warrant Agent, without the
consent of the Warrantholders, to supplement or amend the Warrant Agreement in
order to cure any ambiguity or defect, or to make any other provisions in regard
to matters or questions arising thereunder that the Company and the Warrant
Agent may deem necessary or desirable and that does not adversely affect the
interests of the Warrantholders. At that same time, the Company will exchange
with the Private Warrantholders, who purchased their warrants in the March 1997
Private Placement of the Company's securities, printed warrant certificates for
the typewritten format certificates delivered to said investors in this
Offering, containing terms and conditions substantially similar to the Public
Warrants.
DIVIDEND POLICY
The Company has not paid dividends to date. The payment of dividends, if
any, in the future is within the discretion of the Board of Directors. The
payment of dividends, if any, in the future will depend upon the Company's
earnings, capital requirements and financial conditions and other relevant
factors. The Company's Board of Directors does not presently intend to declare
any dividends in the foreseeable future, but instead intends to retain all
earnings, if any, for use in the Company's business operations.
TRANSFER AND WARRANT AGENT
The Transfer Agent for the Company's Common Stock and the Warrant Agent for
the Company's warrants is American Securities Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Public Offering, the Company will have 3,121,226
shares of Common Stock outstanding. All of the shares of Common Stock sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company which will be subject to certain limitations of Rule
144 adopted under the Securities Act.
The 2,296,226 presently outstanding shares of Common Stock are restricted
securities and are subject to the resale limitations provided for in Rule 144.
Under Rule 144, as currently in effect, subject to the satisfaction of certain
other conditions, a person, including an affiliate of the Company, which has
owned restricted shares of Common Stock beneficially for at least one year, is
entitled to sell, within any three month period, a number of shares that does
not exceed the greater of 1% of the total number of
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outstanding shares of the same class or, if the Common Stock is quoted on an
exchange, the average weekly trading volume during the four calendar weeks
preceding the sale. A non-affiliate which has not been an affiliate of the
Company for at least the three months immediately preceding the sale and which
has beneficially owned such shares for at least two years is entitled to sell
such shares under Rule 144 without regard to any of the limitations described
above. In meeting the one and two year holding periods described above, a holder
which has purchased shares can include the holding periods of a prior owner
which was not an affiliate of the Company. None of the shares of the Company's
Common stock have been owned by the holders thereof for greater than two years.
IMT and Global have agreed not to sell, for a period of two years from the
date of this Prospectus, any shares of the Company's Common Stock owned by them
on the date hereof without the prior written consent of the Underwriter.
Furthermore, in connection with the Public Offering, the Underwriter has
been granted warrants to purchase up to 82,500 shares of Common Stock of the
Company and/or up to 100,000 warrants to purchase up to an additional 100,000
shares of Common Stock of the Company. The holders thereof have the right to
require the Company to register said warrants, and/or the underlying securities
under certain circumstances. In addition, the holders of said warrants have the
right to "piggy-back" said warrants and/or underlying securities on registration
statements of the Company. Any exercise of such registration rights may result
in dilution in the interest of the Company's stockholders, may hinder efforts by
the Company to arrange future financing and may have an adverse effect on the
market price for the Company's securities.
Prior to the Public Offering, there has been no market for any securities of
the Company. The effect, if any, of public sales of any of the Company's
securities by present securityholders or the availability of such securities for
future sale at prevailing market prices cannot be predicted. Nevertheless, the
possibility that substantial amounts of the Company's securities may be resold
in the public market may adversely affect prevailing market prices for the
Company's securities, if any such market should develop.
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<PAGE>
UNDERWRITING
The Company has entered into an Underwriting Agreement with May Davis Group,
Inc., One World Trade Center, New York, New York 10048 (the "Underwriter").
Pursuant to the Underwriting Agreement, the Company has retained the Underwriter
as its exclusive agent, and the Underwriter has agreed to use its best efforts,
to offer 825,000 shares and 1,000,000 Warrants to the public. The 825,000 shares
and 1,000,000 Warrants are offered on a "best efforts, all or none" basis, at
purchase prices of $6.00 per share and $.10 per Warrant, respectively. The
Underwriter has made no commitment to purchase or take down all or any part of
the securities offered hereby. The Underwriter has agreed to use its best
efforts to find purchasers for the 825,000 shares and 1,000,000 Warrants offered
hereby within a period of 45 days from the date of this Prospectus subject to an
extension by the Underwriter and the Company for an additional period of 45
days.
All funds received by the Underwriter or any member of the National
Association of Securities Dealers, Inc. ("NASD") as subscriptions for the
825,000 shares and 1,000,000 Warrants will be immediately deposited in an escrow
account with by noon of the next business day after receipt. Payment for
the 825,000 shares and 1,000,000 Warrants offered by the Company are to be made
payable to . In the event 825,000 shares and 1,000,000 Warrants are not
sold within the designated offering period, the funds will be refunded to the
subscribers in full without deduction therefrom or interest thereon. Moreover,
during the period of escrow, subscribers will not be entitled to a refund of
their subscriptions. The 825,000 shares and 1,000,000 Warrants will be sold
fully paid only. Common Stock and warrant certificates will be issued to
purchasers only if the proceeds from the sale of the 825,000 shares and
1,000,000 Warrants are released to the Company. Until such time as the funds
have been released by the escrow agent, such purchasers, if any, will be deemed
subscribers and not stockholders. The funds in escrow will not bear interest,
will be held for the benefit of those subscribers until released to the Company
and will not be subject to creditors of the Company or the expenses of this
offering.
The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock and the warrants to the public at the offering prices set forth
on the cover page of this Prospectus and that the Underwriter may allow to
certain dealers who are members in good standing with the NASD concessions, not
in excess of $ per share of Common Stock and $ per warrant.
After the initial public offering, the public offering prices and concessions
may be changed by the Underwriter.
While certain of the officers of the Underwriter have significant experience
in corporate finance and the underwriting of securities, the Underwriter has
previously underwritten only three public offerings. No assurance can be given
that the Underwriter's limited public offering experience will not affect the
Company's Public Offering of the Common Stock and warrants and subsequent
development of a trading market, if any.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of the shares of Common Stock and warrants
sold in the Public Offering of which $40,000 has been paid to date.
The underwriting agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed to sell to the Underwriter or its designees, at a
price of $10, the Underwriter's Warrants, which entitle the Underwriter to
purchase up to 82,500 shares of Common Stock of the Company and/or 100,000
warrants to purchase up to an additional 100,000 shares of Common Stock of the
Company, respectively. The Underwriter's Warrants will be exercisable at a price
of $7.50 per share, $.125 per warrant and $6.60 per share for the shares of
Common Stock underlying the foregoing warrants, respectively, for a period of
four years commencing one year from the date of this Prospectus, and they will
not be transferable except to the Underwriter and selected dealers and officers
and partners thereof. Any profit realized upon any resale of the Underwriter's
Warrants or upon any sale of the shares of Common
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<PAGE>
Stock or warrants underlying same may be deemed to be additional underwriter's
compensation. The Company has agreed to register (or file a post-effective
amendment with respect to any registration statement registering), for a period
of five years from the Effective Date, the Underwriter's Warrants and the
underlying securities under the Securities Act at its expense on one occasion,
and at the expense of the holders thereof on another occasion, upon the request
of a majority of the holders thereof. The Company has also agreed to certain
"piggy-back" registration rights for the holders of the Underwriter's Warrants
and the underlying securities. Such piggy-back registration rights will expire
five years from the Effective Date.
The Company has agreed that for a period of not less than three years, the
Underwriter will have the right to designate a person to be a non-voting advisor
to the Company's Board of Directors who will receive the same compensation as a
member of the Board of Directors and who will be indemnified by the Company
against any claims arising out of his participation at meetings of the Board of
Directors. Alternatively, the Underwriter has the right, during such three year
period, to designate one person to be elected to the Company's Board of
Directors. The Company has agreed to use its best effort to obtain the election
of the Underwriter's designee and, if so elected, such person shall be entitled
to receive the same compensation, expense reimbursement and other benefits as
any other non-employee Directors of the Company, if any. The identity of such
person has not been determined as of the date hereof, and it is not expected
that such right will be exercised in the immediate future.
The Underwriter has informed the Company that it does not expect sales to be
made to discretionary accounts to exceed 1% of the shares of Common Stock and
warrants offered hereby.
The Public Offering is subject to the agreement by IMT and Global that it
will not sell any shares of Common Stock to the public for a period of two years
from the date of this Prospectus.
The Company has agreed to enter into an agreement with the Underwriter
retaining it as a financial consultant for a period of three years from the date
hereof, pursuant to which it will receive fees aggregating $108,000, which fees
will be payable in full at closing.
The Underwriting Agreement also provides that the Company, its current or
future subsidiaries, if any, will for a period of three years from the Effective
Date provide the Underwriter with a right of first refusal with respect to any
public or private offering of securities to raise capital. The Underwriter must
agree to undertake any such financing on the same or better terms as any other
financing proposal.
The Company will pay the Underwriter a commission equal to five percent of
the exercise price of the warrants, sold in the Public Offering, when exercised,
of which a portion may be reallowed to any dealer who solicited the exercise,
provided that (i) at the time of exercise the market price of the Common Stock
is greater than the exercise price of the Public Warrants, (ii) the exercise of
the Public Warrants was solicited by the Underwriter, (iii) the Public Warrants
exercised are not held in discretionary accounts, (iv) disclosure of the
compensation arrangements have been made both at the time of this Offering and
at the time of exercise, and (v) the solicitation of the exercise of the Public
Warrants is not in violation of Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The Company has agreed not to solicit
the exercise of the Public Warrants other than through the Underwriter.
SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus forms a part also covers
the offering of 487,500 shares of Common Stock, 1,425,000 Private Warrants and
1,425,000 shares of Common Stock underlying said Private Warrants owned by the
Selling Securityholders. The resale of such securities by the Selling
Securityholders is subject to prospectus delivery and other requirements of the
Securities Act.
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The Company's securities are being offered by the following Selling
Securityholders in the amounts (after giving effect to the 1:2 reverse stock
split effected on October 1, 1998) set forth below.
<TABLE>
<CAPTION>
(A) (B) (C)
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF
OF COMMON STOCK OF COMMON STOCK WARRANTS
BENEFICIALLY REGISTERED REGISTERED
SELLING SECURITYHOLDER OWNED HEREIN HEREIN
- ---------------------------------------------------------------- ----------------- ----------------- -----------
<S> <C> <C> <C>
Magco, Inc...................................................... 25,000(1) 25,000(1) 25,000
Luge Corp....................................................... 150,000(1) 150,000(1) 150,000
Dae Jung Holdings............................................... 350,000(1) 350,000(1) 350,000
Enfield Enterprises............................................. 250,000(1) 250,000(1) 250,000
Flatford Corporation, N.V....................................... 150,000(2) 150,000(2) 100,000
Green Ocean Corporation, N.V.................................... 150,000(2) 150,000(2) 100,000
Moonbridge Corporation, N.V..................................... 150,000(2) 150,000(2) 100,000
Flint Rock Corporation, N.V..................................... 150,000(2) 150,000(2) 100,000
Magic Consulting Inc............................................ 300,000(3) 300,000(3) 200,000
Bridge Fund, N.V................................................ 32,500(4) 32,500(4) 25,000
Corso, Ltd...................................................... 32,500(4) 32,500(4) 25,000
Farid K. Farida................................................. 50,000 50,000 -0-
Sol Arker....................................................... 12,500 12,500 -0-
Charles A. Sutton............................................... 12,500 12,500 -0-
Jay Levy........................................................ 12,500 12,500 -0-
John J. McCarthy................................................ 10,000 10,000 -0-
Abe Weinzimer................................................... 12,500 12,500 -0-
DG Companies, Inc............................................... 25,000 25,000 -0-
Annette Reed.................................................... 12,500 12,500 -0-
Michael E. Jessen............................................... 25,000 25,000 -0-
</TABLE>
- ------------------------
(1) The Number of Shares of Common Stock Beneficially Owned and the Number of
Shares of Common Stock Registered Herein as set forth above consist entirely
of the shares of Common Stock issuable upon the exercise of the number of
Private Warrants listed in Column C.
(2) The Number of Shares of Common Stock Beneficially Owned and the Number of
Shares of Common Stock Registered Herein as set forth above includes 50,000
shares of Common Stock and 100,000 shares of Common Stock issuable on the
exercise of the Private Warrants.
(3) The Number of Shares of Common Stock Beneficially Owned and the Number of
Shares of Common Stock Registered Herein as set forth above includes 100,000
shares of Common Stock and 200,000 shares of Common Stock issuable on the
exercise of the Private Warrants.
(4) The Number of Shares of Common Stock Beneficially Owned and the Number of
Shares of Common Stock Registered Herein as set forth above includes 7,500
shares of Common Stock and 25,000 shares of Common Stock issuable on the
exercise of the Private Warrants.
After the sale by the respective Selling Securityholders of all shares of
Common Stock and Private Warrants as set forth in Columns (B) and (C) above,
such Selling Securityholders will not own any shares of Common Stock or any
Private Warrants.
The shares of Common Stock, Private Warrants and/or the shares of Common
Stock underlying such Private Warrants may be sold from time to time directly by
the Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale. Commissions may be
paid by the Selling Securityholders in connection with such sales. The Selling
Securityholders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act
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with respect to the securities offered, and any profits realized or commissions
received may be deemed underwriting compensation. The Company will derive
proceeds from exercises of the Private Warrants but will not derive any proceeds
from the sale of the Company's securities by the Selling Securityholders. There
can be no assurance that any of the Private Warrants will be exercised.
At a time an offer of securities is made by or on behalf of a Selling
Securityholder, it is the Company's intent that a prospectus be distributed
setting forth, based upon information provided by the Selling Securityholder,
the number of securities being offered and the terms of the offering, including
the name or names of any underwriters, dealers or agents, if any, the purchase
price paid by any underwriter for securities purchased from the Selling
Securityholder and any discounts, commissions or concessions allowed or
re-allowed or paid to dealers, and the proposed selling price to the public.
Sales of securities by the Selling Securityholders could have an adverse
effect on the market prices of the securities offered pursuant to the Public
Offering.
LEGAL MATTERS
The validity of the issuances of the securities offered in this Offering
will be passed upon for the Company by Gusrae, Kaplan & Bruno, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriter by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York,
New York.
EXPERTS
The consolidated financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting. The report of BDO Seidman, LLP for the
year ended December 31, 1997 contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
ADDITIONAL INFORMATION
The Company has filed with the Washington, D.C. office of the Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act with respect to the Securities offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and this Offering, reference is made to the Registration Statement,
including the exhibits filed therewith, which may be inspected without charge or
copies made at prescribed rates from the Commission at its principal office at
450 Fifth Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material may be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission maintains a web-site that contains
reports, proxies and information statements and other information regarding
issuers that file electronically with the Commission. The Commission's web-site
is located at http://www.sec.gov.
Statements contained in the Prospectus as to the contents of any contract or
other document are not necessarily complete and reference is made to each such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Upon effectiveness of the Registration Statement, of which this Prospectus
forms a part, the Company will be subject to the reporting requirements of the
Exchange Act and in accordance therewith will file reports, proxies and other
information with the Commission.
68
<PAGE>
KAIRE INTERNATIONAL, INC.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants............................. F-2
Financial Statements:
Consolidated Balance Sheets.................................................. F-3--F-4
Consolidated Statements of Operations and Comprehensive Income............... F-5
Consolidated Statements of Stockholders' Equity (Deficit).................... F-6
Consolidated Statements of Cash Flows........................................ F-7--F-8
Summary of Accounting Policies............................................... F-9--F-13
Notes to Consolidated Financial Statements................................... F-14--F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Kaire International, Inc.
Longmont, Colorado
We have audited the accompanying consolidated balance sheets of Kaire
International, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations and comprehensive
income, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1997, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kaire
International, Inc. and subsidiaries at December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and has a
working capital deficit of $6,492,288 at December 31, 1997. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
May 1, 1998, except for the first paragraph
of Note 8 which is dated October 1, 1998
Denver, Colorado
BDO Seidman LLP
F-2
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 ---------------------------
(UNAUDITED) 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Assets (Notes 1, 5 and 6)
Current:
Cash and cash equivalents........................................... $ 649,870 $ 460,663 $ 739,267
Restricted cash..................................................... 112,124 -- --
Accounts receivable, less allowance of $0, $168,805 and $30,000 for
possible losses (Notes 5 and 6)................................... 333,223 301,135 148,406
Inventories (Note 5)................................................ 1,225,416 1,612,960 2,194,315
Refundable income taxes (Notes 7 and 9)............................. -- -- 1,025,000
Note receivable--related party (Note 2)............................. -- -- 94,670
Advances--other..................................................... -- -- 226,855
Prepaid expenses and other.......................................... 21,424 267,123 101,225
------------- ------------- ------------
Total current assets.................................................. 2,342,057 2,641,881 4,529,738
------------- ------------- ------------
Property and equipment (Note 4):
Computer equipment.................................................. 907,850 914,451 895,577
Computer software................................................... 579,955 579,955 596,178
Office equipment.................................................... 434,992 424,714 421,915
Furniture and fixtures.............................................. 266,939 322,171 153,678
Leasehold improvements and other.................................... 177,326 174,985 90,762
------------- ------------- ------------
2,367,062 2,416,276 2,158,110
Accumulated depreciation and amortization........................... (1,592,460) (1,344,463) (901,212)
------------- ------------- ------------
Net property and equipment............................................ 774,602 1,071,813 1,256,898
------------- ------------- ------------
Other assets:
Investment (Note 3)................................................. -- -- 250,000
Deposits and other.................................................. 265,670 405,638 313,483
Debt issuance costs, net of accumulated amortization of $280,115 and
$143,886 (Note 6)................................................. 68,115 204,344 --
Deferred offering costs............................................. 260,466 -- --
------------- ------------- ------------
Total other assets.................................................... 594,251 609,982 563,483
------------- ------------- ------------
$ 3,710,910 $ 4,323,676 $ 6,350,119
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-3
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 ---------------------------
(UNAUDITED) 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable (Note 6).............................................. $ 2,006,771 $ 1,787,166 $ 200,000
Note payable to bank (Note 5)....................................... 210,000 240,000 250,000
Notes payable--related parties (Notes 2 and 3)...................... 2,133,747 984,667 75,000
Current portion of capital lease obligations (Note 4)............... 75,646 116,079 258,392
Checks written in excess of deposits................................ 996,364 1,322,910 1,376,065
Accounts payable.................................................... 2,399,561 2,495,829 1,341,637
Accounts payable, related party..................................... 11,214 26,255 --
Accrued commissions payable (Note 3)................................ 1,230,308 1,369,305 1,991,476
Accrued payroll taxes payable and other (Note 7).................... 343,736 281,841 137,079
Sales taxes payable (Note 7)........................................ 390,909 268,299 --
Other accrued liabilities........................................... 376,727 241,818 282,062
------------- ------------- ------------
Total current liabilities............................................. 10,174,983 9,134,169 5,911,711
Capital lease obligation, less current maturities (Note 4)............ -- 14,713 114,010
------------- ------------- ------------
Total liabilities..................................................... 10,174,983 9,148,882 6,025,721
------------- ------------- ------------
Minority interest in consolidated subsidiaries........................ 43,024 199,636 199,907
Commitments and contingencies (Notes 4, 6 and 10)
Stockholders' equity (deficit) (Note 8):
Preferred stock: $.01 par value; 5,000,000 shares authorized; -0-
shares issued and outstanding..................................... -- -- --
Common stock: $.01 par value; 25,000,000 shares authorized;
2,209,176, 2,209,176 and 1,470,000 shares issued and
outstanding....................................................... 22,092 22,092 14,700
Additional paid-in capital.......................................... 1,365,317 1,365,317 (6,604)
Cumulative translation adjustment................................... (479,536) (418,980) 11,137
Retained earnings (deficit)......................................... (7,414,970) (5,993,271) 105,258
------------- ------------- ------------
Total stockholders' equity (deficit).................................. (6,507,097) (5,024,842) 124,491
------------- ------------- ------------
$ 3,710,910 $ 4,323,676 $ 6,350,119
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-4
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net sales (Note 12)....................... $ 14,885,355 $ 18,929,046 $ 35,681,512 $ 51,498,562 $ 57,841,350
Cost of sales
(Notes 3 and 11)........................ 3,335,253 4,698,849 8,387,963 13,321,062 14,476,630
------------- ------------- ------------ ------------ ------------
Gross profit.............................. 11,550,102 14,230,197 27,293,549 38,177,500 43,364,720
------------- ------------- ------------ ------------ ------------
Operating expenses:
Distributor commissions................. 7,691,890 11,071,907 19,968,230 27,965,416 30,830,521
Selling general and administrative
expenses.............................. 5,034,853 5,997,101 13,008,859 12,975,915 10,370,482
------------- ------------- ------------ ------------ ------------
Total operating expenses.................. 12,726,743 17,069,008 32,977,089 40,941,331 41,201,003
------------- ------------- ------------ ------------ ------------
Income (loss) from operations............. (1,176,641) (2,838,811) (5,683,540) (2,763,831) 2,163,717
------------- ------------- ------------ ------------ ------------
Other income (expenses):
Other income............................ 134,037 144,970 195,899 40,432 14,556
Interest income......................... 11,991 27,090 54,573 79,029 75,618
Interest expense........................ (471,053) (176,233) (726,392) (126,663) (85,936)
Gain (loss) on foreign exchange......... 42,925 (4,473) (29,202) (17,335) (435)
Other expense........................... (21,724) (1,207) (56,430) (2,775) (33,905)
------------- ------------- ------------ ------------ ------------
Total other income (expenses)............. (303,824) (9,853) (561,552) (27,312) (30,102)
------------- ------------- ------------ ------------ ------------
Income (loss) before income taxes and
minority interest....................... (1,480,465) (2,848,664) (6,245,092) (2,791,143) 2,133,615
Benefit from (provision for) income taxes
(Note 9)................................ -- -- 12,973 1,103,000 (862,000)
Minority interest in (income) loss of
subsidiaries............................ 58,766 54,838 133,590 (114,643) (85,264)
------------- ------------- ------------ ------------ ------------
[Net income (loss)........................ (1,421,699) (2,793,826) (6,098,529) (1,802,786) 1,186,351]
Other comprehensive income (loss):
Foreign currency translation
adjustment............................ (60,556) (10,838) (430,117) 11,137 --
------------- ------------- ------------ ------------ ------------
[Comprehensive income (loss).............. $ (1,482,255) $ (2,804,664) $ (6,528,646) $ (1,791,649) $ 1,186,351]
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Net income (loss) per share
(Note 8)
Basic and diluted....................... $ (.64) $ (1.46) $ (3.01) $ (1.23) $ .81
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Basic and diluted weighted average number
of common shares outstanding (Note 8)... 2,209,176 1,914,474 2,023,283 1,470,000 1,470,000
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements
F-5
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- ADDITIONAL ACCUMULATED RETAINED STOCKHOLDERS'
SHARES (NOTE PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE EQUITY
8) AMOUNT CAPITAL INCOME/(LOSS) (DEFICIT) INCOME/(LOSS) (DEFICIT)
-------------- ----------- ---------- -------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................. 1,400,000 $ 14,000 $ (13,000) $ -- $ 721,693 [$ 721,693] $ 722,693
--------------
--------------
Contribution to capital
by subsidiaries...... -- -- 1,396 -- -- -- 1,396
Issuance of common
stock for services... 70,000 700 5,000 -- -- -- 5,700
Comprehensive income:
Net income........... -- -- -- -- 1,186,351 [ 1,186,351] 1,186,351
-------------- ----------- ---------- -------------- ---------- -------------- --------------
Balance, December 31,
1995................. 1,470,000 14,700 (6,604) -- 1,908,044 [$ 1,186,351] 1,916,140
--------------
--------------
Comprehensive income/
(loss):
Net loss............. -- -- -- -- (1,802,786) [ (1,802,786)] (1,802,786)
Foreign currency
translation
adjustments........ -- -- -- 11,137 -- [ 11,137] 11,137
-------------- ----------- ---------- -------------- ---------- -------------- --------------
Balance, December 31,
1996................. 1,470,000 $ 14,700 $ (6,604) $ 11,137 $ 105,258 [$(1,791,649)] $ 124,491
-------------- ----------- ---------- -------------- ---------- -------------- --------------
Issuance of common
stock for services... 316,676 $ 3,167 $ 61,769 $ -- $ -- $ -- $ 64,936
Issuance of common
stock for cash net of
offering costs of
$78,543 (Note 8)..... 250,000 2,500 168,957 -- -- -- 171,457
Issuance of common
stock in connection
with debt net of
offering costs of
$29,580 (Note 6)..... 172,500 1,725 141,195 -- -- -- 142,920
Conversion of debt to
additional paid-in
capital (Note 8)..... -- -- 1,000,000 -- -- -- 1,000,000
Comprehensive income/
(loss):
Net loss............. -- -- -- -- (6,098,529) [ (6,098,529)] (6,098,529)
Foreign currency
translation
adjustment......... -- -- -- (430,117) -- [ (430,117)] (430,117)
-------------- ----------- ---------- -------------- ---------- -------------- --------------
Balance, December 31,
1997................. 2,209,176 22,092 1,365,317 (418,980) (5,993,271) [$(6,528,646)] (5,024,842)
--------------
--------------
Comprehensive income/
(loss):
Net loss
(unaudited)........ -- -- -- -- (1,421,699) [ (1,421,699)] (1,421,699)
Foreign currency
translation
adjustment
(unaudited)........ -- -- -- (60,556) -- [ (60,556)] (60,556)
-------------- ----------- ---------- -------------- ---------- -------------- --------------
Balance, June 30, 1998
(unaudited).......... 2,209,176 $ 22,092 $1,365,317 $ (479,536) $(7,414,970) [$(1,482,255)] $ (6,507,097)
-------------- ----------- ---------- -------------- ---------- -------------- --------------
-------------- ----------- ---------- -------------- ---------- -------------- --------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-6
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------- YEARS ENDED DECEMBER 31,
1998 1997 ------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)...................... $ (1,421,699) $ (2,793,826) $ (6,098,529) $ (1,802,786) $ 1,186,351
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 457,971 82,607 876,836 440,873 340,254
Minority interest.................... (58,766) (54,838) (133,590) 114,643 85,264
Loss on disposal of fixed assets..... -- 14,506 17,217 -- 34,240
Common stock issued for services..... -- 17,500 17,500 -- 5,700
Deferred income taxes................ -- -- -- (84,000) 26,366
Provision for doubtful accounts...... 171,162 11,099 259,369 41,210 118,855
Changes in operating assets and
liabilities:
Accounts receivable.................. (324,985) (105,331) (435,517) 317,451 (86,178)
Related party receivable............. -- -- -- 238,638 (202,141)
Inventories.......................... 490,991 (28,741) 293,087 123,341 (90,349)
Prepaid expenses and other........... 155,908 (30,062) (315,748) (55,909) 102,781
Refundable income taxes.............. -- 774,105 1,025,000 (725,000) (300,000)
Accounts payable..................... (66,009) 444,024 1,218,959 157,490 (79,217)
Accounts payable, related party...... (15,040) -- 26,254 -- --
Accrued liabilities and other........ 242,395 (173,140) (184,223) (322,349) (96,959)
Income taxes payable................. -- -- -- (65,755) 14,761
------------- ------------- ------------- ------------- ------------
Net cash provided by (used in)
operating activities................. (368,072) (1,842,097) (3,433,385) (1,622,153) 1,059,728
------------- ------------- ------------- ------------- ------------
Investing activities:
Restricted cash...................... (112,124) -- -- -- --
Deposits and other................... 146,456 (412,927) (289,238) -- --
Purchases of intangibles............. -- (20,106) (20,106) (172,488) (21,223)
Purchases of property and
equipment.......................... (47,285) (526) (274,679) (243,415) (193,662)
Advances--other...................... -- -- 226,855 (224,804) (2,051)
Investment........................... -- -- 250,000 (250,000) --
------------- ------------- ------------- ------------- ------------
Net cash used in investing activities.. (12,953) (433,559) (107,168) (890,707) (216,936)
------------- ------------- ------------- ------------- ------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-7
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ---------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Financing activities:
Checks written in excess of deposits....... (326,546) 537,039 (53,155) 1,376,065 --
Proceeds from note payable to bank......... -- -- -- 250,000 --
Payments on note payable to bank........... (30,000) (10,000) (10,000) -- --
Proceeds from notes payable................ 150,000 1,300,000 4,217,463 200,000 --
Payments on notes payable.................. -- (180,000) (1,017,463) -- --
Proceeds from notes payable-- related
party.................................... 1,443,000 432,451 1,165,531 75,000 --
Payments on notes payable-- related
party.................................... (293,920) -- (561,192) (228,738) --
Payments on capital lease obligations...... (55,146) (129,856) (241,610) (223,902) (265,734)
Issuance of common stock................... -- 171,457 171,457 -- 1,396
Offering costs paid........................ -- (10,147) (29,580) -- --
Payments for deferred offering costs....... (245,466) -- -- -- --
Payments for debt issue costs.............. -- (101,471) (300,794) -- --
-------------- -------------- -------------- -------------- -------------
Net cash provided by (used in) financing
activities................................. 641,922 2,009,473 3,340,657 1,448,425 (264,338)
-------------- -------------- -------------- -------------- -------------
Effect of foreign exchange rates changes on
cash....................................... (71,690) (27,805) (78,708) 33,570 --
-------------- -------------- -------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents................................ 189,207 (293,988) (278,604) (1,030,865) 578,454
Cash and cash equivalents, beginning of
period..................................... 460,663 739,267 739,267 1,770,132 1,191,678
-------------- -------------- -------------- -------------- -------------
Cash and cash equivalents, end of period..... $ 649,870 $ 445,279 $ 460,663 $ 739,267 $ 1,770,132
-------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-8
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
ORGANIZATION AND BUSINESS
Kaire International, Inc. ("the Company"), was incorporated in Nevada in
October 1992. The Company is engaged in the distribution of health and personal
care products through network marketers throughout the United States, Canada,
New Zealand, Australia, South Korea, Trinidad and Tobago, and the United
Kingdom.
As of March 18, 1997, the Company was merged into a newly formed Delaware
corporation of the same name with the Nevada corporation ceasing to exist. The
transaction was accounted for on a basis similar to a pooling of interest with
no change in the historical financial statements of the Company. The newly
formed corporation had no operations prior to the merger.
The Company expanded its markets in 1995 by entering New Zealand and
Australia with its health and personal care products. Kaire New Zealand Ltd.
("Kaire New Zealand") and Kaire Australia Pty. Ltd. ("Kaire Australia") were
incorporated in August 1995 and began operations on November 1, 1995. The
Company acquired a 51% interest in these two subsidiaries on the date of
incorporation.
During 1997, the Company expanded its markets into South Korea, Trinidad and
Tobago, and the United Kingdom. Kaire Korea, Ltd. ("Kaire Korea") was
incorporated on March 19, 1997 in South Korea as a wholly owned subsidiary of
the Company through November 15, 1997. On November 15, 1997, the Company sold
15% of Kaire Korea, in consideration of $143,375 of interest expense due on a
note payable. Operations and sales began during July 1997 (see Note 6). Kaire
Europe Limited ("Kaire Europe") was incorporated as a wholly owned subsidiary of
the Company on July 24, 1997 in the United Kingdom, commencing sales during
November 1997. Kaire Trinidad Limited ("Kaire Trinidad"), a wholly owned
subsidiary of the Company, was incorporated on May 21, 1997 in the Republic of
Trinidad and Tobago and began operations during June 1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries Kaire New Zealand, Kaire Australia
and Kaire Korea, and its wholly owned subsidiaries Kaire Europe, and Kaire
Trinidad. All significant intercompany accounts and transactions have been
eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
for the six months ended June 30, 1998 and 1997 are presented on a basis
consistent Statements with the audited consolidated financial statements and
reflect all adjustments, consisting only of normal recurring accruals, necessary
for fair presentation of the results of such periods. The results of operations
for the interim period ended June 30, 1998 are not necessarily indicative of the
results to be expected for the year ending December 31, 1998.
CONCENTRATION OF RISK
The Company maintains its cash accounts in several bank accounts. Accounts
in the United States are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. The Company's cash balance in some of its bank accounts
generally exceeds the insured limits.
F-9
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
The Company sells its products through network marketers throughout the
United States, Canada, New Zealand, Australia, South Korea, Trinidad and Tobago,
and the United Kingdom. Credit is extended for returned checks and or until
credit card purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial statements
and are based on management's expectations. The Company's accounts receivable
are subject to potential concentrations of credit risk. The Company does not
believe that it is subject to any unusual or significant risks, in the normal
course of business.
INVENTORIES
Inventories consist mainly of health and personal care products and are
stated at lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
computed, using primarily the straight-line method, over the estimated useful
and lives of the assets which range from three to seven years. Maintenance and
repair costs are expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected undiscounted future cash flow from the
use of the assets and its eventual disposition is less than the carrying amount
of the assets, an impairment loss is recognized and measured using the asset's
fair value.
RESTRICTIVE CASH
The Company has a restricted cash account with a credit card processing
company. The primary purpose of this account is to provide a reserve for
potential uncollectible amounts and chargebacks by the Company's credit card
customers.
DEFERRED OFFERING COSTS
Deferred offering costs include professional fees directly related to the
Company's proposed public offering. If the offering is successful, costs
incurred will be offset against the proceeds of the offering. If the offering is
unsuccessful, such costs will be expensed.
DEBT ISSUE COSTS
Debt issue costs are being amortized using the straight-line method over the
term of the notes payable.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales
are recorded when products are shipped.
F-10
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
Under the Kaire Direct program the Company provides a 100% refund (less
shipping and handling), to all end users, for any unopened product that is
returned within 30 days from the date of purchase in resalable condition. The
Company provides a 100% product exchange for any product that does not meet
customer satisfaction if returned within 30 days under the "Kaire Direct"
program. An Associate is allowed 90 days from order date for exchange or refund
only if product bottles (empty, partial or full) are returned. Statement of
Financial Accounting Standards No. 48 "Revenue Recognition When Right of Return
Exists" requires the Company to accrue losses that may be expected from sales
returns. Historically, the Company's sales returns are not significant. The
Company monitors its historical sales returns and will accrue a liability for
sales returns when and if sales returns become significant.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the "liability method". Accordingly, deferred tax
liabilities and assets are determined based on the temporary differences between
the financial statement and tax basis of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Fair values of accounts receivables, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair value or they are receivable or payable on demand.
NOTE RECEIVABLE AND NOTES PAYABLE TO RELATED PARTIES
Due to its related party nature and terms of the receivable and payables to
related parties, the Company cannot estimate the fair market value of such
financial instrument.
NOTES PAYABLE
Substantially all of these notes bear interest at fixed rates of interest
based upon the terms of the Agreements. The fair value of these notes are not
materially different than their reported carrying amounts at June 30, 1998 and
December 31, 1997 and 1996.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
INVESTMENT IN COMMON STOCK
The Company acquired 1,400,000 shares of common stock of Aloe Commodities
International, Inc. ("Aloe") representing a 14% interest in Aloe for $250,000 in
1996. During 1997, the Company sold its
F-11
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
investment in Aloe for $250,000 and used the proceeds as partial payment on
certain notes payable (see Note 3).
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of subsidiaries, are translated at the rate of
exchange in effect on the balance sheet date; income and expenses of
subsidiaries are translated at the average rates of exchange prevailing during
the year. The related translation adjustments are reflected as a cumulative
translation adjustment in consolidated stockholders' equity. Foreign currency
gains and losses resulting from transactions are included in results of
operations in the period in which the transactions occurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items included in the 1996 and 1995 financial statements have been
reclassified to conform to the current year presentation. Such reclassifications
have no impact on the Company's financial position or results of operations.
NET INCOME (LOSS) PER COMMON SHARE
During 1998, the Company implemented Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 provides
for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings
per share includes no dilution and is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. All prior period earnings per share data has
been restated to reflect the requirements of SFAS No. 128. The adoption of SFAS
No. 128 did not effect the EPS calculations at June 30, 1998 and 1997, and
December 31, 1997, 1996 and 1995. See Note 8 for computation of earnings per
share.
STOCK OPTIONS
The Company applies Accounting Pronouncements Bulletin Opinion 25,
"Accounting for Stock Issued to Employee", ("APB 25") and related
interpretations in accounting for all stock option plans. Under APB Opinion 25,
no compensation cost has been recognized for stock options granted as the option
price equals or exceeds the market price of the underlying common stock on the
date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the
F-12
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
Company estimates the fair value of each stock option at the grant date by using
the Black Scholes option-pricing model.
COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The implementation
of SFAS No. 130 required comparative information for earlier years to be
presented. The Company has elected to report comprehensive income on the
consolidated statements of operations and the consolidated statements of
stockholders' equity (deficit). Comprehensive income is comprised of net income
(loss) and all changes to the consolidated statements of stockholders' equity
(deficit), except those due to investments by stockholders, changes in paid in
capital and distributions to stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes
Statement of Financial Accounting Standard No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 establishes standards of the
way the public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by the implementation of this standard.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132") which standardizes
the disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established standards for
recognizing all derivative instruments including those for hedging activities as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. This Statement is effective for
fiscal years beginning after June 30, 1999. The Company has not yet determined
the effect of SFAS No. 133 on its financial statements. Management believes the
adoption of this statement will have no material impact on the Company's
financial statements.
F-13
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
1. GOING CONCERN
The Company incurred significant losses during the years ended December 31,
1997 and 1996 and, at December 31, 1997, has a negative working capital of
$6,492,288. Additionally, the Company has not made its payroll tax and sales tax
deposits on a timely basis. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has continued to pay its associates on a timely basis and has
negotiated out of any default situations with it's creditors and debtholders.
There are a number of factors which contributed to the losses for 1997 and 1996
including several marketing promotions which did not generate the anticipated
results, a decline in sales from the normal business cycle of a mature business
in the network marketing industry, the creation of a number of marketing videos,
changes in the bonus plan effecting the total payout, the start up of operations
in Korea, Europe and Trinidad and Tobago, and the implementation of an
aggressive recruitment plan. In response to those challenges, the Company has
taken significant steps including the discontinuance of the unsuccessful
marketing promotions, the elimination of videos from the marketing plan, a full
restructuring of the marketing department with significant emphasis on budgeting
and performance, changes to the compensation structure for the associates to
predominantly return to the former compensation structure, a curtailment of any
future expansion plans into foreign countries until adequate capital is
available, an overall reduction in the Company's operating expenses and the
implementation of significant controls over expenses to maintain a very
conservative operational approach.
In addition, the Company is continuing to search for, and introduce, new
products that management believes will provide improved profit margins and
anticipated high profile and user appeal. Management believes that many of the
products introduced over the past two years are excellent products but were
either not fully promoted or lacked the spotlight appeal demanded by many of the
consumers in the network marketing industry. Management's long term goal is to
improve on identifying products which have greater market appeal and then
properly introduce and promote them. The Company has also introduced new
marketing tools to promote sales to end users without the need for the associate
who introduced the product to them to stay with the Company. The Company is also
exploring several avenues of improving its gross profit margin.
During 1997, the Company actively pursued a rapid international growth
strategy. The Company obtained a "door to door" selling license in Korea through
a newly formed subsidiary, Kaire Korea, leased office space in Seoul, received
approval for a portion of their product line and started selling products in
Korea in the second half of the year. The Company has sustained losses in trying
to penetrate the South Korean market. The Company is actively trying to sell its
South Korean subsidiary, and at June 30, 1998, the Company has reflected its
assets in its South Korean subsidiary at their net realizable value. The Company
recorded a $471,000 writedown of its assets in its South Korean subsidiary. This
amount is reflected in selling, general and administrative expenses for the six
months ended June 30, 1998. In May 1997, the Company formed Kaire Trinidad,
leased office space in Port of Spain and began sales operations in Trinidad and
Tobago. During the second half of 1997, the Company formed Kaire Europe in the
United Kingdom, leased office space north of London and began operations.
These locations were strategically chosen. The Asian market, including
Japan, is the largest in network marketing. Korea was targeted for the entry
into that market as it could be done at a lower cost than Japan. The Company had
contacts with a potentially large associate base of Koreans and Korean-
Americans, and it was believed that the Company would be better accepted by the
Koreans for using it as the starting point into the Asian market as opposed to
the more traditional bases of Hong Kong,
F-14
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
1. GOING CONCERN (CONTINUED)
Singapore, Taiwan and Japan. The Company has decided to exit the Korean market
due to the recent Asian financial crisis allowing more time and capital to be
allocated to other existing markets. Trinidad was selected for the low cost of
operations as the Trinidad economy has a larger "middle class" than most of the
Caribbean islands, and as a entry into both the Caribbean and South America
markets with which it maintains strong trading ties. The United Kingdom was
selected for the entry point into the strong European direct sales market. The
United Kingdom presented an English speaking country, a member of the European
Union and regulatory and tax situations similar to several of the countries the
Company was already doing business in.
As with many new entities, the costs of operations in the first months of
operations are high while the sales force and corresponding sales are building.
Therefore, all these entities showed a loss during 1997. Management anticipates
that as these companies become more established and mature, they will be able to
both cut down on their operating expense as a percentage of sales and increase
sales to contribute to the profitability of the Company in future years.
In summary, Management believes that the Company is addressing the going
concern issue in virtually every aspect of its operations. It has cut its
domestic operating expenses. As a part of this reduction, marketing expenses
have been reduced sharply with no perceived impact on the effectiveness of the
Company's marketing strategy. The Company is continuing to pursue outside
financing options including consolidating its various debt instruments with one
lending institution and an initial public offering of stock which the Company
anticipates receiving approximately $3,853,000 in net proceeds. Management
believes that its plan will enable the Company to remain viable for at least 12
months from the date of the consolidated financial statements. There are no
assurances that any of these financing events will occur, or that the Company's
plan to achieve profitability and a positive cash flow will be successful. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
2. NOTE RECEIVABLE--RELATED PARTY
On October 18, 1994, the Company accepted a 10% promissory note receivable
from a related party in the amount of $115,549. The note was uncollateralized
and due on demand. During 1997, the Company offset the promissory note and
accrued interest against certain loans made to the Company by the related party
(See Note 3).
3. RELATED PARTY TRANSACTIONS
During 1997 and 1996, three officers of the Company advanced funds to the
Company for working capital requirements. The Company recorded these advances as
current liabilities. On November 28, 1997, the Company issued 10% promissory
notes payable to the officers. The notes are uncollateralized and due on demand.
As of June 30, 1998 and December 31, 1997 and 1996, the Company owed $258,337,
$262,037 and $75,000 to the officers.
During January 1997, the Company borrowed $205,000 from two individual
directors. The Company and the two individual directors agreed to offset the
$115,549 note receivable balance as stated in Note 2 with the advance of
$205,000. The Company then entered into a demand note payable for the balance
with the two directors for $89,451 paying 10% interest per annum. In July 1997,
the Company borrowed an
F-15
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
additional $458,000 from the same two directors for notes payable at 10%, due
and payable upon demand. The Company pledged as collateral on the July 1997
notes payable its investment in the shares of Aloe Commodities International,
Inc. The Company sold its investment in the shares of Aloe Commodities
International, Inc. to an unrelated third party, valued at $250,000, which was
the Company's cost of those shares. No public market existed for those shares.
The proceeds were used to pay down the note. The Company repaid an additional
$71,500 to the directors and issued 10% promissory notes for the remaining
balances. The remaining principal balance plus accrued but unpaid interest was
refinanced under separate note agreements. The notes are uncollateralized and
due upon demand. As of June 30, 1998 and December 31, 1997, the Company owed
$242,410 and $247,630, respectively, under these notes to the directors. In
addition, during 1997, the two directors advanced an additional $113,000 to the
Company which was repaid by the Company during 1997.
In December 1997, the directors and officers entered into an agreement with
the Company to which they agreed that the Company not make repayments on the
notes issued to them until after the end of the first calendar quarter in which
the Company has achieved positive cash flow. The agreement requires payments
only after calendar quarters during which the Company has received positive cash
flow and that the Company is only required to pay the officers and directors on
a pro rata basis as to their indebtedness in an aggregate amount equal to 50% of
the positive net cash flow for each such quarter.
Kaire Korea, pursuant to a demand promissory note guaranteed by the Company
and personally guaranteed by certain officers of the Company, borrowed $500,000
from a corporation during May 1997 pursuant to the terms of a note payable at an
annual interest rate of 9.5%. The note was due in principal installments of:
$25,000 due August 31, 1997, $125,000 due September 30, 1997, $175,000 due
October 31, 1997 and $175,000 due November 30, 1997. An option to acquire 15% of
the capital stock of Kaire Korea Ltd. at the par value of Kaire Korea's capital
stock expiring May 2000 was granted to the lender. During 1997, Kaire Korea
defaulted under the note agreement. On November 15, 1997, the Corporation
exercised its option to acquire 15% of Kaire Korea from the Company in
consideration of $143,375 in interest expense due by Kaire Korea under the note
agreement. The Company renegotiated the terms of the original note agreement on
January 1, 1998. The January 1, 1998 Agreement modifies the repayment provisions
of principal and interest, stipulating that the Company make monthly interest
only payments until the note is paid in full. The note was due on September 15,
1998. The Company is currently in default on its note payable. The Company has
classified this liability as a current liability. The Company also pledged its
stock in Kaire Korea as collateral on this note. As of June 30, 1998 and
December 31, 1997, Kaire Korea owes $475,000 to its minority stockholder.
During November 1997, Interactive Medical Technologies, Ltd. ("IMT") loaned
the Company $700,000. Pursuant to an Agreement and Plan of Reorganization, IMT
agreed to convert its $700,000 of debt to equity in the Company (see Note 8).
On January 5, 1998, the Company borrowed $103,000 from two directors of the
Company for notes payable. The notes payable bear interest at 10%, are
uncollateralized and due on demand. On April 29, 1998, the Company borrowed
$100,000 from a director of the Company for a note payable. The note payable
bears interest at 10%. The note is collaterized by all the assets of the Company
and is due on demand. As of June 30, 1998, the Company owed $158,000, under
these notes to the directors.
F-16
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
During March and April 1998, Global Marketing, LLC, a stockholder of the
Company, advanced a total of $1,000,000 to the Company for working capital
requirements. On April 16, 1998, the Company entered into a $1,000,000 note
payable with the stockholder. The note bears interest at 10% per annum, is
uncollateralized and is payable upon demand.
4. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations which are collateralized
by equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $51 to $11,349.
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of June 30, 1998
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
1998.............................................................. $ 66,259 $ 131,879
1999.............................................................. 15,347 15,347
----------- ------------
Total future minimum lease payments............................... 81,606 147,226
Less amounts representing interest................................ 5,960 16,434
----------- ------------
Present value of minimum lease payments........................... 75,646 130,792
Less current maturities........................................... 75,646 116,079
----------- ------------
Total long-term obligations....................................... $ -- $ 14,713
----------- ------------
----------- ------------
</TABLE>
At June 30, 1998, December 31, 1997 and 1996, property and equipment
includes equipment under capital lease obligations with a total cost of $757,689
and accumulated amortization of $489,056, $413,900 and $263,588.
5. NOTE PAYABLE TO BANK
The Company had a $250,000 line of credit agreement with a bank. The credit
to line bore interest at 10% per annum and was collateralized by inventories,
Bank accounts receivable, certain other assets, and the personal guarantees of
certain officers and directors of the Company. On December 26, 1997, the line of
credit was converted to a term loan. The term loan bears interest at 10.5% per
annum and is collateralized by inventories, accounts receivable, certain other
assets, and the personal guarantees of certain officers and directors of the
Company. The term loan is payable in monthly principal payments of $5,000 plus
accrued interest and is due January 1999. As of June 30, 1998, December 31, 1997
and 1996, the balance was $210,000, $240,000 and $250,000. As of June 30, 1998
and December 31, 1997, the term loan is classified as a current liability.
F-17
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
6. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 ------------------------
(UNAUDITED) 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Notes payable to individuals(1)........................... $ -- $ -- $ 200,000
Note payable to a corporation(2).......................... 200,000 200,000 --
Notes payable to individuals(3)........................... 1,656,771 1,587,166 --
Note payable to a corporation(4).......................... 150,000 -- --
------------ ------------ ----------
Total notes payable....................................... $ 2,006,771 $ 1,787,166 $ 200,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
- ------------------------
(1) At December 31, 1996, the Company had two $100,000 notes with two
individuals. The notes bore interest at 14% and matured on June 30, 1997.
The notes were collateralized by all accounts and notes receivable and
certain other assets. In connection with this borrowing, the lenders were
each issued warrants to purchase 7,350 shares of the Company's common stock
at $.02 per share. The warrants expire on December 30, 1999. As of December
31, 1997, the notes were paid in full, and the warrants had not been
exercised. The warrants were exercised in July 1998.
(2) During January 1997, the Company borrowed $200,000 from a corporation for a
note payable at an interest rate of 10% per month, with interest payments
due monthly. The note is guaranteed by certain officers and directors and is
due upon demand. The Company renegotiated the terms of the original
agreement on August 25, 1997, as the Company had not met the interest
payment requirements of the agreement. The August 25, 1997 agreement
modifies the repayment provisions of principal and interest, stipulating
that the Company repay all interest and principal due under the original
agreement by December 31, 1997. Also, the interest rate was reduced from 10%
per month to 2% per month payable monthly, retroactive to March 5, 1997. On
January 15, 1998, the note was amended and changed to a demand note as the
Company was unable to repay the note by December 31, 1997 as stated in the
August 25, 1997 amendment. The Company is required to make monthly interest
only payments of $4,000 per month. In connection with the original terms of
this borrowing, the lender was issued warrants to purchase 12,500 shares of
the Company's common stock at $6.60 per share. The warrants expire six years
after the effective date of the initial public offering. As of June 30,
1998, the warrants had not been exercised. On October 1, 1998, the lender
was issued additional warrants to purchase 12,500 shares of the Company's
common stock at $6.60 per share as a result of the reverse stock split. (See
Note 8.)
(3) During 1997, the Company borrowed $1,725,000 pursuant to a private placement
offering consisting of the issuance of promissory notes and common stock of
the Company. In connection with this private placement offering, the Company
incurred $348,230 in debt issue costs. The debt issue costs are being
amortized using the straight line method over the term of the promissory
notes. The promissory notes are due the earlier of eighteen months from the
date of issue, the completion date of an equity financing of the Company
pursuant to which it receives gross proceeds of not less than $3,000,000, or
the Company's receipt of at least $1,000,000 in proceeds from the "Key Man"
life insurance policies on any of its executive officers and/or directors.
The promissory notes bear interest at 10% per annum. In connection with the
private placement offering, debt holders were issued
F-18
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
6. NOTES PAYABLE (CONTINUED)
172,500 shares of the Company's common stock. Original issue discount of
$172,500 was recorded as part of the private offering financing and is being
charged to interest over the life of the promissory notes under the
effective interest method. The shares issued were valued based upon their
estimated fair market value at date of issuance. As of June 30, 1998 and
December 31, 1997, the notes payable are disclosed net of unamortized
original issue discount of $68,229 and $137,834.
(4) During January 1998, the Company borrowed $150,000 from a corporation for a
note payable at an interest rate of 2% per month or 24% annual interest.
Interest and principal are due on demand. The note is uncollateralized and
is personally guaranteed by certain officers and directors of the Company.
All warrants issued in connection with the above financing transactions have
been valued using the Black Scholes Model and are considered to be nominal in
value.
7. PAYROLL TAX AND SALES TAX LIABILITIES
During 1998 and 1997, the Company has not made its payroll tax deposits with
the Internal Revenue Service ("IRS") and the various state taxing authorities on
a timely basis. The Company has filed all required payroll tax returns (see Note
15). The Company has been negotiating with the IRS to work out a payment plan.
As of June 30, 1998 and December 31, 1997, the Company owes approximately
$176,642 and $51,096 of delinquent payroll tax liabilities including interest
and penalties.
During 1998 and 1997, the Company did not make its sales tax deposits with
the various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of June 30, 1998 and December 31, 1997, the
Company owed approximately $390,900 and $268,300 in current and delinquent sales
taxes.
8. STOCKHOLDERS' EQUITY
STOCK SPLIT AND AUTHORIZATION OF SHARES
On October 1, 1998 the Board of Directors authorized a 1 for 2 reverse stock
split for shareholders of record on October 1, 1998. All references to common
share and per share amounts in the accompanying financial statements have been
restated to reflect the effect of this reverse stock split. As a result of the 1
for 2 reverse stock split, certain warrant holders received an additional
712,500 warrants to purchase common stock of the Company at $6.60 per share. The
warrants expire six years after the effective date of the initial public
offering. These warrants granted on October 1, 1998 were considered nominal in
value.
On February 1, 1997, the Board of Directors authorized a stock split,
effected in the form of a dividend of 2,800 shares of common stock for each
common share held by shareholders of record on February 1, 1997. All references
to common share and per share amounts in the accompanying financial statements
have been restated to reflect the effect of this stock dividend.
During March 1997, the Board of Directors adopted certain resolutions which
were approved by the Company's stockholders to increase the number of authorized
shares of common stock from 1,000,000 to 25,000,000 shares. The stockholders
also approved the authorization of the issuance of a new class of 5,000,000
shares of preferred stock. The preferred stock of the Company can be issued in
series. With respect to each series issued, the Board of Directors of the
Company will determine, among other things, the number of shares in the series,
voting rights and terms, dividend rates and terms, liquidation
F-19
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
preferences and redemption and conversion privileges. No preferred stock has
been issued as of June 30, 1998.
ISSUANCE OF COMMON STOCK
On March 20, 1997, the Company sold 250,000 shares of common stock pursuant
to a private placement offering for $171,457, net of $78,543 in offering costs,
and warrants to purchase an additional 250,000 shares of common stock at a
purchase price of $6.60 per share. On October 1, 1998, the investors were issued
additional warrants to purchase 250,000 shares of the Company's common stock at
a purchase price of $6.60 per share as a result of the reverse stock split. The
warrants are exercisable for a period of four years commencing two years from
the date the Securities and Exchange Commission declares the Company's
registration statement effective. The effective date is the first date the
Company may offer the sale of its common stock in an initial public offering.
The Company may redeem the warrants commencing one year from the effective date
at a redemption price $.05 per warrant if: (1) the closing bid price of the
common stock for twenty (20) consecutive trading days exceeds $10.00, (2) the
redemption occurs during the first two years following the effective date and
the Company receives the prior written consent of the underwriter for such
redemption, and (3) the warrants are exercisable. The warrants issued in
connection with this transaction are considered nominal in value.
During 1997, the Company borrowed $700,000 from IMT. On December 9, 1997,
the Company entered into an Agreement and Plan of Reorganization (the
"Agreement") with IMT whereby IMT agreed to convert its $700,000 of debt
previously borrowed by the Company to equity in the Company, and invest an
additional $300,000 in equity in the Company at closing. The Agreement for
reorganization of the Company contemplated an exchange between the shareholders
of Kaire International, Inc. for IMT shares whereby IMT issued, in total, shares
equal to forty-five percent (45%) of its common stock outstanding (as defined in
the agreement) immediately prior to the closing date of the Agreement in
exchange for not less than 80% of the issued and outstanding common stock of the
Company. During March 1998, IMT exchanged 57% of the common stock of the Company
to Global Marketing, LLC. IMT's controlling interest in the Company was deemed
temporary and as such did not result in any adjustment to the Company's
consolidated financial statements as of date of the Agreement.
STOCK OPTIONS AND WARRANTS
During 1997, the Company adopted a stock option plan. No options have been
granted under this Plan as of June 30, 1998. The Company has reserved 500,000
shares of its common stock for future grants under this Plan.
SFAS No. 123 requires the Company to provide pro forma information regarding
net loss and net loss per share as if compensation costs for the Company's stock
option plans and other stock awards had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. No stock awards were issued
to employees during the periods ended 1998, 1997, 1996 and 1995. For stock
awards issued to non-employees, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996, respectively. The options and warrants granted during 1997 and 1996 to
non-employees
F-20
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
were considered nominal in value. No stock awards were issued to non-employees
during the periods ended 1998 and 1995.
<TABLE>
<CAPTION>
1997 1996
----------------- ---------
<S> <C> <C>
Dividend yield................................................. 0% 0%
Expected volatility............................................ 0% 0%
Risk-free interest rates....................................... 5.85% to 6.6% 6%
Expected lives in years........................................ 3 to 6 years 3 years
----------------- ---------
----------------- ---------
</TABLE>
A summary of the status of the Company's stock option and warrant plan as of
June 30, 1998 and December 31, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
OPTIONS WARRANTS
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1996.......................................... -- $ -- -- $ --
Granted............................................................. -- -- 14,700 0.02
--------- ----- ---------- -----
Outstanding, December 31, 1996........................................ -- -- 14,700 0.02
Granted............................................................. 65,000 0.02 719,850 6.53
--------- ----- ---------- -----
Outstanding, December 31, 1997........................................ 65,000 0.02 734,550 6.40
Granted............................................................. -- -- -- --
--------- ----- ---------- -----
Outstanding, June 30, 1998 (unaudited)................................ 65,000 $ 0.02 734,550 $ 6.40
--------- ----- ---------- -----
--------- ----- ---------- -----
Exercisable, December 31, 1996........................................ -- $ -- 14,700 $ 0.02
--------- ----- ---------- -----
--------- ----- ---------- -----
Exercisable, December 31, 1997........................................ 65,000 $ 0.02 22,050 $ 0.02
--------- ----- ---------- -----
--------- ----- ---------- -----
Exercisable, June 30, 1998 (unaudited)................................ 65,000 $ 0.02 22,050 $ 0.02
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WARRANT
---------- ----------
<S> <C> <C>
Weighted average fair value of options and warrants granted during 1996................... $ None $ 0.48
Weighted average fair value of options and warrants granted during 1997................... $ 0.49 $ None
---------- ----------
---------- ----------
</TABLE>
F-21
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about exercisable stock options
and warrants at June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------- ------------------------
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------ ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Options.......................................... $ 0.02 65,000 3.73 $ 0.02 65,000 $ 0.02
------------ ----------- --- ----------- ----------- -----
------------ ----------- --- ----------- ----------- -----
Warrants......................................... $ 0.02 22,050 1.51 $ 0.02 22,050 $ 0.02
6.60 712,500 6.00 6.60 -- --
------------ ----------- --- ----------- ----------- -----
$ 0.02-6.60 734,550 5.87 $ 6.40 22,050 $ 0.02
------------ ----------- --- ----------- ----------- -----
------------ ----------- --- ----------- ----------- -----
December 31, 1997
Options.......................................... $ 0.02 65,000 4.23 $ 0.02 65,000 $ 0.02
------------ ----------- --- ----------- ----------- -----
------------ ----------- --- ----------- ----------- -----
Warrants......................................... $ 0.02 22,050 2.00 $ 0.02 22,050 $ 0.02
6.60 712,500 6.00 6.60 -- --
------------ ----------- --- ----------- ----------- -----
$ 0.02-6.60 734,550 5.88 $ 6.50 22,050 $ 0.02
------------ ----------- --- ----------- ----------- -----
------------ ----------- --- ----------- ----------- -----
</TABLE>
NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------- YEARS ENDED DECEMBER 31,
1998 1997 ------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).................... $ (1,421,699) $ (2,793,826) $ (6,098,529) $ (1,802,786) $ 1,186,351
Denominator:
Denominator for basic and diluted
earnings per share-- weighted
average shares outstanding......... 2,209,176 1,914,474 2,023,283 1,470,000 1,470,000
------------- ------------- ------------- ------------- ------------
Basic and diluted net income (loss) per
share................................ $ (.64) $ (1.46) $ (3.01) $ (1.23) $ .81
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>
For the periods ended June 30, 1998 and 1997 and for the years ended
December 31, 1997 and 1996, total stock options and stock warrants of 799,550,
447,050, 799,550, and 14,700 were not included in the computation of diluted
earnings per share because their effect was anti-dilutive. For the year ended
December 31, 1995, the Company did not have any stock options and stock warrants
outstanding.
F-22
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
9. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ----------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current (expense) benefit:
Federal.................................... $ -- $ -- $ 12,973 $ 1,017,000 $ (763,000)
Foreign.................................... -- -- -- -- --
State...................................... -- -- -- 2,000 (130,000)
----------- ----------- ------------- ------------ -----------
-- -- 12,973 1,019,000 (893,000)
----------- ----------- ------------- ------------ -----------
Deferred benefit:
Federal.................................... 406,000 786,000 1,440,000 68,000 29,000
Foreign.................................... 87,000 56,000 205,000 -- --
State...................................... 52,000 61,000 62,000 100,000 2,000
----------- ----------- ------------- ------------ -----------
545,000 903,000 1,707,000 168,000 31,000
----------- ----------- ------------- ------------ -----------
545,000 903,000 1,719,973 1,187,000 (862,000)
Change in valuation allowance................ (545,000) (903,000) (1,707,000) (84,000) --
----------- ----------- ------------- ------------ -----------
Income tax (expense) benefit................. $ -- $ -- $ 12,973 $ 1,103,000 $ (862,000)
----------- ----------- ------------- ------------ -----------
----------- ----------- ------------- ------------ -----------
</TABLE>
At December 31, 1997, the Company had available net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRE
------------ --------------
<S> <C> <C>
Federal net operating loss carryforwards....................... $ 3,700,000 2017
State net operating loss carryforwards......................... 4,700,000 2010 to 2017
Foreign net operating loss carryforwards....................... 924,000 2003 to 2005
Foreign net operating loss carryforwards....................... 155,000 Indefinite
------------ --------------
------------ --------------
</TABLE>
The utilization of certain of the loss carryforwards are limited under
Section 382 of the Internal Revenue Code of approximately $233,000 per year. The
types of temporary differences between the tax
F-23
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
9. INCOME TAXES (CONTINUED)
basis of assets and liabilities that give rise to a significant portion of the
net deferred tax liability and their approximate tax effects are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 -------------------------
(UNAUDITED) 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Operating loss carryforwards......................... $ 1,981,000 $ 1,436,000 $ 148,000
Foreign operating loss carryforwards................. 292,000 205,000 --
Property and equipment............................... (76,000) (90,000) (125,000)
Inventories.......................................... 126,000 216,000 47,000
Accounts receivable allowance........................ -- 11,000 14,000
Contribution carryforwards........................... 13,000 13,000 --
------------ ------------ -----------
Net deferred tax assets.............................. 2,336,000 1,791,000 84,000
Less valuation allowance............................. 2,336,000 1,791,000 84,000
------------ ------------ -----------
Net deferred taxes................................... $ -- $ -- $ --
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
A valuation allowance equal to the net deferred tax assets has been
recorded, as management of the Company has not been able to determine that is
more likely than not that the net deferred tax assets will be realized.
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ----------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Federal income tax (benefit) computed at the
federal statutory rate..................... $ (406,000) $ (786,000) $ (1,452,973) $ (1,085,000) $ 734,000
State income tax (benefit), net of federal
benefit.................................... (52,000) (61,000) (62,000) (102,000) 64,000
Foreign tax (benefit) at statutory rates..... (87,000) (56,000) (205,000) -- --
Increase in valuation allowance.............. 545,000 903,000 1,707,000 84,000 --
Other........................................ -- -- -- -- 64,000
----------- ----------- ------------- ------------- ----------
Income tax expense (benefit)................. $ -- $ -- $ (12,973) $ (1,103,000) $ 862,000
----------- ----------- ------------- ------------- ----------
----------- ----------- ------------- ------------- ----------
</TABLE>
Refundable income taxes in 1996 relate to the carryback of net operating
losses.
F-24
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
10. COMMITMENTS OPERATING LEASES AND CONTINGENCIES
The Company is obligated under operating leases for office space, office
equipment and vehicles. Three leases are on a month to month basis and sixteen
require future minimum lease payments as follows:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
1998............................................................ $ 424,000
1999............................................................ 187,000
2000............................................................ 72,000
2001............................................................ 70,000
2002............................................................ 69,000
Thereafter...................................................... 342,000
---------
Total........................................................... $1,164,000
---------
---------
</TABLE>
Lease expense for all operating leases was $527,000, $250,000, $605,000,
$290,600 and $175,800 for the six months ended June 30, 1998 and 1997 and the
years ended December 31, 1997, 1996, and 1995.
COMMITMENT WITH SUPPLIER
During August 1998, the Company entered into an agreement with a supplier
where the supplier will be the exclusive manufacturer of the product for the
Company. For a period of five years, the Company must purchase no less than
$22,500 per month for the first three months, no less than $45,000 per month for
months four through six, and no less than $73,750 per month thereafter.
SELF-INSURANCE
The Company is partially self insured for employee medical liabilities which
covers risk up to $10,000 per incident, per individual covered under the plan.
The Company has purchased excess medical liability coverage for individual
claims in excess of $10,000 and aggregate claims in excess of approximately
$312,000 annually with a national medical insurance carrier. Premiums and claim
expenses associated with the medical self insurance program are included in the
accompanying statements of operations. On July 1, 1998, the Company discontinued
its self insured plan.
CONSULTING AGREEMENT
On February 4, 1997, the Company entered into a consulting agreement with
Magic Consulting Group, Inc. ("Consultant"). Consultant is to receive the
following compensation for services: (i) an option to purchase 50,000 shares of
common stock of the Company for $.02 per share; (ii) 50,000 warrants to purchase
an aggregate of 50,000 shares of common stock of the Company at $6.60 per share
and; (iii) $2,500 per month for a period of 60 months. As of June 30, 1998, no
warrants were exercised. On October 1, 1998, Consultant was issued additional
warrants to purchase 50,000 shares of the Company's common stock at $6.60 per
share as a result of the reverse stock split (see Note 8). During October 1998,
Consultant exercised its option to purchase 50,000 shares of common stock of the
Company.
F-25
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
10. COMMITMENTS OPERATING LEASES AND CONTINGENCIES (CONTINUED)
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends on the continued availability of
certain key management personnel. The Company does not have employment contracts
with any of its employees. The business of the Company could be adversely
affected by the loss of services of any of its key employees.
401(K) PROFIT SHARING PLAN
On January 1, 1996 the Company established a 401(k) profit sharing
retirement plan. The plan requires one year of service and attainment of age 21
to become eligible. Employer contributions vest over a five year period. The
Company's contributions to the plan for the three months ended June 30, 1998 and
1997 were approximately $0 and $27,000 and for the years ended December 31, 1997
and 1996 were approximately $53,000 and $67,000.
LEGAL PROCEEDINGS
The Company is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. The Company was initially contacted in January, 1997 and was advised,
in writing, that it is not a "target" of the Department's investigation, but
that it is a "subject" (meaning that its conduct is deemed to be within the
scope of the investigation) thereof. The Company has completed all obligations
and requests pertaining to this matter.
The Company has also received a voluntary request for information from the
FTC regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
11. MAJOR SUPPLIERS
During the six months ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996, and 1995, the Company purchased amounts of its products
from a limited number of vendors, including significant amounts from MW
International of 18%, 60%, 48%, 57% and 40% and from Manhattan Drug of 3%, 7%,
6%, 22% and 40%. The Company currently buys all of its Pycnogenol, an important
component of its products, from one supplier. Although there are a limited
number of manufacturers of this component, management believes that other
suppliers could provide similar components on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
F-26
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
12. FOREIGN SALES
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
UNITED AUSTRALIA OTHER
STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PERIOD ENDED JUNE 30, 1998
(unaudited)
Sales to unaffiliated
customers........................ $ 10,325,296 $2,362,051 $ 1,651,932 $ 546,076 $ -- $ 14,885,355
Transfers between geographic
areas............................ 1,248,501 -- -- (1,248,501) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 11,573,797 $2,362,051 $ 1,651,932 $ 546,076 $ (1,248,501) $ 14,885,355
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from
operations....................... $ (780,368) $ (193,946) $ (367,851) $ (82,315) $ 247,839 $ (1,176,641)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at June 30,
1998............................. $ 2,791,404 $ 737,470 $ 884,434 $ 348,846 $ (1,051,244) $ 3,710,910
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
PERIOD ENDED JUNE 30, 1997
(unaudited)
Sales to unaffiliated
customers........................ $ 16,095,244 $2,832,326 $ 1,476 $ -- $ -- $ 18,929,046
Transfers between geographic
areas............................ 694,770 -- -- -- (694,770) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 16,790,014 $2,832,326 $ 1,476 $ -- (694,770) $ 18,929,046
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from
operations....................... $ (2,559,822) $ (371,223) $ (121,834) $ -- $ 214,068 $ (2,838,811)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at June 30,
1997............................. $ 4,917,973 $ 928,430 $ 576,280 $ -- $ (764,699) $ 5,657,984
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
</TABLE>
F-27
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
12. FOREIGN SALES (CONTINUED)
<TABLE>
<CAPTION>
UNITED AUSTRALIA OTHER
STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Sales to unaffiliated
customers........................ $ 29,278,545 $5,302,119 $ 808,117 $ 292,731 $ -- $ 35,681,512
Transfers between geographic
areas............................ 2,211,101 -- -- -- (2,211,101) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 31,489,646 $5,302,119 $ 808,117 $ 292,731 $ (2,211,101) $ 35,681,512
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from
operations....................... $ (4,639,664) $ (693,875) $ (786,714) $ (155,037) $ 591,750 $ (5,683,540)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at December 31,
1997............................. $ 2,526,853 $ 702,695 $ 859,954 $ 288,282 $ (54,108) $ 4,323,676
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
YEAR ENDED DECEMBER 31, 1996
Sales to unaffiliated customers.... $ 44,122,950 $7,375,612 $ -- $ -- $ -- $ 51,498,562
Transfers between geographic
areas............................ 1,784,815 -- -- -- (1,784,815) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 45,907,765 $7,375,612 $ -- $ -- $ (1,784,815) $ 51,498,562
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from
operations....................... $ (3,034,684) $ (299,886) $ -- $ -- $ 570,739 $ (2,763,831)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at December 31,
1996............................. $ 5,153,240 $1,196,879 $ -- $ -- $ -- $ 6,350,119
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
YEAR ENDED DECEMBER 31, 1995
Sales to unaffiliated
customers........................ $ 56,718,455 $1,122,895 $ -- $ -- $ -- $ 57,841,350
Transfers between geographic
areas............................ 171,742 -- -- -- (171,742) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 56,890,197 $1,122,895 $ -- $ -- $ (171,742) $ 57,841,350
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from
perations........................ $ 2,168,623 $ (4,564) $ -- $ -- $ (342) $ 2,163,717
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at December 31,
1995............................. $ 5,752,254 $1,034,890 $ -- $ -- $ -- $ 6,787,144
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
</TABLE>
F-28
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
13. SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest..................................... $ 52,833 $ 54,317 $ 278,139 $ 120,839 $ 104,502
Income taxes................................. $ -- $ -- $ -- $ -- $ 853,582
Non-cash investing and financing transactions:
Note payable converted to capital................ $ -- $ -- $ 1,000,000 $ -- $ --
Note receivable-related party offset to notes
payable-related parties........................ $ -- $ 94,670 $ 94,670 $ -- $ --
Issuance of common stock in connection with
long-term debt................................. $ -- $ 50,000 $ 172,500 $ -- $ --
Increase in minority interest from sale of 15%
interest in subsidiary......................... $ -- $ -- $ 143,375 $ -- $ --
Equipment acquired under capital lease
obligations.................................... $ -- $ -- $ -- $ 79,374 $ 174,931
Equipment purchased from related party under
notes payable.................................. $ -- $ -- $ -- $ -- $ 66,865
Inventory purchased from related party under
notes payable.................................. $ -- $ -- $ -- $ -- $ 153,764
Common stock issued for debt issue costs......... $ -- $ 47,436 $ 47,436 $ -- $ --
Common stock issued for services................. $ -- $ 17,500 $ 17,500 $ -- $ 57,002
----------- ----------- ------------ ---------- ----------
----------- ----------- ------------ ---------- ----------
</TABLE>
14. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Period ended June 30, 1998 (unaudited).......................... $ 168,805 $ 171,162 $ 339,967 $ --
Year ended December 31, 1997.................................... $ 30,000 $ 259,369 $ 120,564 $ 168,805
Year ended December 31, 1996.................................... $ 56,000 $ 41,210 $ 67,210 $ 30,000
Year ended December 31, 1995.................................... $ 56,000 $ 118,855 $ 118,855 $ 56,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
PROPOSED PUBLIC OFFERING
The Company has entered into a letter of intent with an underwriter for a
proposed public offering of 825,000 shares of common stock and warrants to
purchase 1,000,000 shares of common stock at a price to be determined.
F-29
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
AGREEMENT WITH IRS
Subsequent to June 30, 1998, the Company reached an agreement with the IRS
to pay certain current and prior payroll tax liabilities. The Company has also
agreed to pay all future payroll taxes on a current basis. Any failure to meet
the terms of the agreement with the IRS, could result in a federal tax lien
being filed.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized in connection with
this Offering to give any information or to make any representations other than
those contained in this Prospectus. This Prospectus does not constitute an offer
or a solicitation in any jurisdiction to any person to whom it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in the circumstances of the Company or the facts
herein set forth since the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 9
Dilution........................................ 18
Use of Proceeds................................. 19
Capitalization.................................. 20
Selected Consolidated Financial Data............ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 39
Legal Proceedings............................... 50
Management...................................... 51
Principal Stockholders.......................... 56
Certain Transactions............................ 57
Description of Securities....................... 61
Shares Eligible for Future Sale................. 63
Underwriting.................................... 65
Selling Securityholders......................... 66
Legal Matters................................... 68
Experts......................................... 68
Additional Information.......................... 68
Index to Financial Statements................... F-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of the Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
KAIRE INTERNATIONAL, INC.
825,000 SHARES
OF COMMON STOCK AND
1,000,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
MAY DAVIS GROUP, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering, all of which are to be paid by the
Registrant, in connection with the issuance and distribution of the Securities
being registered, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 7,497.07
NASD Filing Fee................................................ 1,602.75
Printing and Engraving Expenses................................ 100,000.00*
Accounting Fees and Expenses................................... 100,000.00*
Legal Fees and Expenses........................................ 125,000.00
Blue Sky Fees and Expenses..................................... 50,000.00*
Transfer and Warrant Agent Fees and Expenses................... 10,000.00*
Consulting Agreement with Underwriter.......................... 108,000.00*
Miscellaneous Expenses......................................... 38,495.18*
----------
TOTAL.......................................................... $540,595.00*
----------
----------
</TABLE>
- ------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In general, Section 145 of the Delaware General Corporation Law provides
that persons who are officers or directors of a corporation may be indemnified
by the corporation for acts performed in their capacities as such. The
Registrant's By-Laws authorize indemnification in accordance with and to the
extent permitted by said statute.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification to the fullest extent permitted by law.
Reference is also made to Section 10(b) of the Underwriting Agreement filed
as Exhibit 1.1 to this Registration Statement.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold the following securities within the past three
years:
A
<TABLE>
<CAPTION>
APPROXIMATE
DATE PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- --------------- ------------------------------------- ------------------------------------- -----------------
<C> <S> <C> <C>
01/05/97 Mystic Enterprises, Inc. 88,941 shares of Securing
Common Stock financing
01/15/97 Robert J. Young 25,000 shares of Employment
Common Stock Agreement
01/15/97 CCB Investments, L.L.C. 49,412 shares of Securing
Common Stock financing and
personal
guarantees.
01/15/97 Rain Bird Enterprises, L.L.C. 49,412 shares of Securing
Common Stock financing and
personal
guarantees.
01/15/97 Zero Investments, L.L.C. 49,412 shares of Securing
Common Stock financing and
personal
guarantees.
02/04/97 Magic Consulting Group, Inc. Options to purchase 50,000 shares of Partial
Common Stock and Warrants to purchase Consideration for
50,000 shares of Common Stock, said Consulting
options were exercised in October Agreement
1998.
03/20/97 Gusrae, Kaplan & Bruno 12,500 shares of Legal Services
Common Stock
08/25/97 Magco, Inc. $200,000 24% Note and Warrants to $200,000
purchase 12,500 shares of Common
Stock
08/29/97 The Bridge Fund N.V. $100,000 18% Note and options to $100,000
purchase 7,500 shares of Common Stock
and Warrants to purchase 12,500
shares of Common Stock, said options
were exercised in October 1998.
08/29/97 Corso, Ltd. $100,000 12% Note and options to $100,000
purchase 7,500 shares of Common Stock
and Warrants to purchase 12,500
shares of Common Stock, said options
were exercised in October 1998.
</TABLE>
II-2
<PAGE>
B
<TABLE>
<CAPTION>
DATE PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- --------- ---------------------------------------- ---------------------------------------- -----------------
<C> <S> <C> <C>
12/30/96 Art Granito $100,000 14% Note (Agreement Note) and $100,000
Warrants to Purchase approximately 7,350
shares of Common Stock, said Warrants
were exercised in July 1998.
12/30/96 Roland Day $100,000 Agreement Note and Warrants to $100,000
Purchase approximately 7,350 shares of
Common Stock, said Warrants were
exercised in July 1998.
01/03/97 Long Distance Direct $100,000 Agreement Note and Warrants to $100,000
Holdings, Inc. Purchase approximately 7,350 shares of
Common Stock, said Warrants were
exercised in July 1998.
02/05/97 Luge Corp. Warrants to purchase 75,000 shares of Services
Common Stock at $6.60 per share. rendered.
07/05/97 Dae Jung Holdings Warrants to purchase 175,000 shares of Services
Common Stock at $6.60 per share. rendered.
11/05/97 Enfield Enterprises Warrants to purchase 125,000 shares of Services
Common Stock at $6.60 per share at $6.60 rendered.
per share.
10/01/98 Magco, Inc Warrants to purchase 12,500 shares of
Common Stock at $6.60 per share.
10/01/98 The Bridge Fund N.V. Warrants to purchase 12,500 shares of
Common Stock at $6.60 per share.
10/01/98 Corso, Ltd. Warrants to purchase 12,500 shares of
Common Stock at $6.60 per share.
10/01/98 Magic Consulting Group, Inc. Warrants to purchase 100,000 shares of
Common Stock at $6.60 per share.
10/01/98 Flatford Corporation, N.V. Warrants to purchase 50,000 shares of
Common Stock at $6.60 per share.
10/01/98 Green Ocean Corporation, N.V. Warrants to purchase 50,000 shares of
Common Stock at $6.60 per share.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
DATE PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- --------- ---------------------------------------- ---------------------------------------- -----------------
<C> <S> <C> <C>
10/01/98 Moonbridge Corporation, N.V. Warrants to purchase 50,000 shares of
Common Stock at $6.60 per share.
10/01/98 Flint Rock Corporation, N.V. Warrants to purchase 50,000 shares of
Common Stock at $6.60 per share.
10/01/98 Luge Corporation Warrants to purchase 75,000 shares of
Common Stock at $6.60 per share.
10/01/98 Dae Jung Holdings Warrants to purchase 175,000 shares of
Common Stock at $6.60 per share.
10/01/98 Enfield Enterprises Warrants to purchase 125,000 shares of
Common Stock at $6.60 per share.
</TABLE>
C
In March 1997, the Company sold, to the persons and entities identified
below, the securities of the Company for the consideration indicated opposite
their names:
<TABLE>
<CAPTION>
PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- ---------------------------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
Flatford Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
Magic Consulting Group, Inc. One Unit of the Company's Securities* $ 50,000.00
Green Ocean Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
Moonbridge Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
Flint Rock Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
-----------------
TOTAL $ 250,000.00
-----------------
-----------------
</TABLE>
- ------------------------
* Each Unit consisting of 50,000 shares of Common Stock and 50,000 Redeemable
Common Stock Purchase Warrants.
II-4
<PAGE>
From June 1997 through December 1997, the Company sold, to the persons and
entities identified below, the securities of the Company for the consideration
indicated opposite their names:
D
<TABLE>
<CAPTION>
PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- ------------------------------------- ------------------------------------------------------- -----------------
<S> <C> <C>
Farid K. Farida Two Units of the Company's Securities** $ 500,000.00
Sol Arker One Half of a Unit of the Company's Securities** $ 125,000.00
Charles A. Sutton One Half of a Unit of the Company's Securities** $ 125,000.00
Jay Levy One Half of a Unit of the Company's Securities** $ 125,000.00
John J. McCarthy Two Fifths of a Unit of the Company's Securities** $ 100,000.00
Abe Weinzimer One Half of a Unit of the Company's Securities** $ 125,000.00
DG Companies, Inc. One Unit of the Company's Securities** $ 250,000.00
Annette Reed One Half of a Unit of the Company's Securities** $ 125,000.00
Michael E. Jessen One Unit of the Company's Securities** $ 250,000.00
-----------------
TOTAL $ 1,725,000.00
-----------------
-----------------
</TABLE>
- ------------------------
** Each Unit consisting of 25,000 shares of Common Stock and a $250,000 10%
Promissory Note.
The foregoing numbers of shares of the Company's Common Stock have been
adjusted to give effect to the reverse stock split (1 for 2) of the Company's
Common Stock effected in October 1998.
These transactions were exempt from registration under the Securities Act of
1933, as amended (the "Act"), under Section 4(2) of that Act as not involving a
public offering, and as to those sales set forth under subsections C and D
above, reliance is placed upon Rule 506 of Regulation D and Section 4(6) of the
Act. No underwriter was engaged by the Company in connection with the issuances
described in subsections A & B. The underwriter herein acted as placement agent
for the issuances set forth in C and D above and received commission and
non-accountable expenses equal in the aggregate to 13% of the gross proceeds
derived therefrom. The recipients of all of the foregoing securities represented
that such securities were being acquired for investment and not with a view to
the distribution thereof. In addition, the certificates evidencing such
securities bear restrictive legends.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement (2)
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By-Laws (1)
3.3 Registrant's Articles of Merger dated March 11, 1997 (1)
4.1 Form of Underwriter's Warrant Certificate (3)
4.2 Form of Financial Consulting Agreement to be entered into by and between the
Registrant and the Underwriter (3)
4.3 Form of Common Stock Certificate (2)
4.4 Form of Warrants delivered to Private Investors (1)
4.5 Form of Redeemable Common Stock Purchase (Public) Warrants (2)
4.7 Form of Warrant Agency Agreement (2)
5.1 Opinion of Gusrae, Kaplan & Bruno (3)
10.1 Agreement and Plan of Reorganization with Interactive Medical Technologies, Ltd.
("IMT") (1)
10.2 Registrant's Loan Agreement dated May 19, 1997 with Star Financial Bank (1)
10.3 (Deleted)
10.4 (Deleted)
10.5 (Deleted)
10.6 Registrant's Promissory Note with Loren E. Bagley (1)
10.7 Registrant's Promissory Note with William F. Woodburn (1)
10.8 Registrant's Promissory Note with Robert L. Richards (1)
10.9 Registrant's Promissory Note with Horphag Research Ltd. (1)
10.9(A) Registrant's Agreements with Horphag Research, Ltd. including Pledge, Stock Option
and Guaranty (2)
10.10 Registrant's Promissory Notes with Marden Rehabilitation Associates, Inc. (1)
10.11 Registrant's Promissory Note with Magco, Inc. (1)
10.12 Registrant's Promissory Note with IMT dated October 27, 1997 (1)
10.13 Registrant's Promissory Note with IMT dated October 30, 1997 (1)
10.14 Forms of Promissory Notes issued to Private Investors (1)
10.15 Leases (Two) for Registrant's Denver, Colorado facilities (1)
10.16 Registrant's Stock Option Plan (1)
10.17 Registrant's Promissory Note with J.T. Whitworth (1)
10.18 Agreement with Messrs. Bagley, Woodburn, Whitworth, and Richards with the Registrant
regarding Exhibits 10.6, 10.7, 10.8 and 10.17 (2)
10.19 Registrant's Manufacturing and Distribution Agreement with ENZO Nutraceuticals, Ltd.
(3)
10.20 Registrant's Promissory Note and Agreement with Global Marketing, LLC (2)
10.21 Registrant's April 1998 Promissory Note with William F. Woodburn (2)
16. Letter Re: Change in Certifying Accountant (2)
21.1 List of Registrant's Subsidiaries (1)
23.1 Consent of Gusrae, Kaplan & Bruno (to be included in Exhibit 5.1) (3)
23.2 Consent of BDO Seidman (2)
23.3 Consent of Jones, Jensen & Company (1)
24.1 Powers of Attorney (included on Page II-8 of initial filing)
27 Financial Data Schedule (2)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith.
(3) To be Filed by Amendment.
II-6
<PAGE>
(b) Financial Statement Schedule
All other schedules are omitted, as the required information is either
inapplicable or presented in the financial statements or related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication
of such issue.
(5) The undersigned registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Longmont,
State of Colorado, on the 23rd day of October, 1998.
KAIRE INTERNATIONAL, INC.
BY: /S/ ROBERT L. RICHARDS
-----------------------------------------
Robert L. Richards,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ROBERT L. RICHARDS Chief Executive Officer and
- ------------------------------ Director (Principal October 23, 1998
Robert L. Richards Executive Officer)
Chief Operating Officer and
Chief Financial Office
/s/ J.T. WHITWORTH and a Director (Principal
- ------------------------------ Financial Officer and October 23, 1998
J.T. Whitworth Principal Accounting
Officer)
/s/ LOREN E. BAGLEY Chairman of the Board of
- ------------------------------ Directors and a Director October 23, 1998
Loren E. Bagley
/s/ WILLIAM F. WOODBURN Treasurer and Director
- ------------------------------ October 23, 1998
William F. Woodburn
/s/ MARK D. WOODBURN Secretary and Director
- ------------------------------ October 23, 1998
Mark D. Woodburn
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST
-------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (2)
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By-Laws (1)
3.3 Registrant's Articles of Merger dated March 11, 1997 (1)
4.1 Form of Underwriter's Warrant Certificate (3)
4.2 Form of Financial Consulting Agreement to be entered into by and between the
Registrant and the Underwriter (3)
4.3 Form of Common Stock Certificate (2)
4.4 Form of Warrants delivered to Private Investors (1)
4.5 Form of Redeemable Common Stock Purchase (Public) Warrants (2)
4.7 Form of Warrant Agency Agreement (2)
5.1 Opinion of Gusrae, Kaplan & Bruno (3)
10.1 Agreement and Plan of Reorganization with Interactive Medical Technologies, Ltd.
("IMT") (1)
10.2 Registrant's Loan Agreement dated May 19, 1997 with Star Financial Bank (1)
10.3 (Deleted)
10.4 (Deleted)
10.5 (Deleted)
10.6 Registrant's Promissory Note with Loren E. Bagley (1)
10.7 Registrant's Promissory Note with William F. Woodburn (1)
10.8 Registrant's Promissory Note with Robert L. Richards (1)
10.9 Registrant's Promissory Note with Horphag Research Ltd. (1)
10.9(A) Registrant's Agreements with Horphag Research, Ltd. including Pledge, Stock Option
and Guaranty (2)
10.10 Registrant's Promissory Notes with Marden Rehabilitation Associates, Inc. (1)
10.11 Registrant's Promissory Note with Magco, Inc. (1)
10.12 Registrant's Promissory Note with IMT dated October 27, 1997 (1)
10.13 Registrant's Promissory Note with IMT dated October 30, 1997 (1)
10.14 Forms of Promissory Notes issued to Private Investors (1)
10.15 Leases (Two) for Registrant's Denver, Colorado facilities (1)
10.16 Registrant's Stock Option Plan (1)
10.17 Registrant's Promissory Note with J.T. Whitworth (1)
10.18 Agreement with Messrs. Bagley, Woodburn, Whitworth, and Richards with the Registrant
regarding Exhibits 10.6, 10.7, 10.8 and 10.17 (2)
10.19 Registrant's Manufacturing and Distribution Agreement with ENZO Nutraceuticals, Ltd.
(3)
10.20 Registrant's Promissory Note and Agreement with Global Marketing, LLC (2)
10.21 Registrant's April 1998 Promissory Note with William F. Woodburn (2)
16 Letter Re: Change in Certifying Accountant (2)
21.1 List of Registrant's Subsidiaries (1)
23.1 Consent of Gusrae, Kaplan & Bruno (to be included in Exhibit 5.1) (3)
23.2 Consent of BDO Seidman (2)
23.3 Consent of Jones, Jensen & Company (1)
24.1 Powers of Attorney (included on Page II-8 of initial filing)
27 Financial Data Schedule (2)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith.
(3) To be Filed by Amendment.
<PAGE>
Exhibit 1.1
KAIRE INTERNATIONAL, INC.
825,000 Shares of Common Stock
and 1,000,000 Redeemable
Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
----------------------
_________________, 1998
May Davis Group, Inc.
One World Trade Center
New York, New York 10048
Dear Sirs:
Kaire International, Inc., a Delaware corporation (the "Company"), hereby
confirms its agreement with May Davis Group, Inc. (the "Underwriter") as
follows:
1. (a) DESCRIPTION OF OFFERING
The Company agrees to retain the Underwriter as the exclusive agent of
the Company to publicly offer and sell, pursuant to the terms of this
Underwriting Agreement, an aggregate of 825,000 shares of common stock, $.01 par
value per share ("Common Stock"), and 1,000,000 redeemable common stock purchase
warrants (the "Warrants") at a price of $6.00 per share and $.10 per warrant,
respectively. Each Warrant shall entitle the holder to purchase one share of
Common Stock at $6.60, subject to adjustment. The Common Stock and Warrants
shall be offered on a "best efforts, all or none" basis. The offering of Common
Stock and Warrants contemplated hereby may sometimes be referred to as the
"Offering."
(b) THE WARRANTS.
The Warrants are exercisable for a four year period commencing
two years after the effective date of the Registration Statement ("Exercise
Period"), as defined in Paragraph 2(a) (the "Effective Date") until their
expiration six years after the Effective Date, subject to prior redemption by
the Company, provided, however, that prior to the Exercise Period, the Warrants
will be exercisable only if the Underwriter has consented in writing to all of
the Warrants being exercisable. The Warrants will be exercisable at $6.60 per
share and expire on ___________, 200_. The shares of
<PAGE>
Common Stock issuable upon the exercise of the Warrants are hereinafter referred
to as the "Warrant Shares."
During the Exercise Period, the Warrants will be redeemable at a price
of $.05 per Warrant, upon prior written notice of not less than 30 days after 20
consecutive trading days immediately prior to the date on which the Company
gives notice of redemption on which the average closing bid price of the Common
Stock shall have exceeded $10.00 per share, and subject to the right of the
holder to exercise his purchase rights thereunder until redemption.
(c) UNDERWRITER'S WARRANTS.
At the closing of the sale referred to in Section 4, the Company will
sell to the Underwriter, for a total purchase price of $10.00, warrants to
purchase up to 82,500 shares of Common Stock at $7.50 per Share and/or 100,000
warrants at $.125 per warrant to purchase an additional 100,000 shares of Common
Stock at $6.60 per share (the "Underwriter's Warrants"). The Underwriter's
Warrants shall be non-exercisable and non-transferable other than to (i)
officers of the Underwriter, and (ii) members of the selling group and their
officers or partners, for a period of 12 months following the Effective Date.
Thereafter, they are exercisable and transferable for a period of four years. If
the Underwriter's Warrants are not exercised during their term, they shall, by
their terms, automatically expire. The Underwriter's Warrants and the Warrants
and Common Stock issuable thereunder, shall be registered for sale to the public
and shall be included in the Registration Statement filed in connection with the
Offering.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Underwriter that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission"), a registration statement on Form S-1 (File No. 333-46085),
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Common Stock and Warrants under the Securities Act of 1933
(the "Act"). The Company will file further amendments to said registration
statement in the form to be delivered to you and will not, before the
registration statement becomes effective, file any other amendment thereto to
which you shall have objected in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial statements,
exhibits and all other documents filed as a part thereof or incorporated
therein), is hereinafter called the "Registration Statement" and the prospectus,
in the form filed with the Commission pursuant to Rule 424(b) of the General
Rules and Regulations of the Commission under the Act (the "Regulations") or, if
no such filing is made, the definitive prospectus used in the Offering, is
hereinafter called the
2
<PAGE>
"Prospectus." The term "Preliminary Prospectus" shall mean any Prospectus
included in the Registration Statement prior to the time the same is declared
effective by the Commission. The Company has delivered to you copies of each
Preliminary Prospectus as filed with the Commission and has consented to the use
of such copies for purposes permitted by the Act.
(b) The Commission has not issued any orders preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects with the requirements of the Act and has not
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, subject to the provisions set forth below.
(c) When the Registration Statement becomes effective under the Act
and at all times subsequent thereto including the Closing Date (hereinafter
defined) and for such longer periods as a Prospectus is required to be delivered
in connection with the sale of the Common Stock and Warrants by the Underwriter,
the Registration Statement and Prospectus, and any amendment thereof or
supplement thereto, will contain all material statements which are required to
be stated therein in accordance with the Act and the Regulations, and will in
all material respects conform to the requirements of the Act and the Regulations
and neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
does not apply to statements or omissions made in reliance upon and in
conformity with information furnished to the Company by you, for use in
connection with the preparation of the Registration Statement or Prospectus, or
in any amendment thereof or supplement thereto. It is understood that (i) the
statements set forth under the heading "Underwriting" in the Prospectus with
respect to the amounts of the selling concession and reallowance; and (ii) the
identity of counsel to the Underwriter under the heading "Legal Matters"
constitute the only information furnished in writing by or on behalf of the
Underwriter for use in connection with the preparation of the Registration
Statement and Prospectus.
(d) The Company and each of its subsidiaries, if any, are, and at the
Closing Date will be, corporations duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation. The
Company and each of its subsidiaries are duly qualified or licensed and in good
standing as foreign corporations in each jurisdiction in which their ownership
or leasing of any properties or the character of their operations requires such
qualification or licensing, except those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the Company. The Company
and each of its subsidiaries have all requisite corporate powers and authority,
and the Company, its
3
<PAGE>
subsidiaries, and its employees have all material and necessary authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory officials and bodies to own or lease their properties
and conduct their business as is described in the Prospectus and the Company and
its subsidiaries are doing business and have been doing business during the
period described in the Registration Statement in compliance with all such
material authorizations, approvals, orders, licenses, certificates and permits
and all material federal, state and local laws, rules and regulations concerning
the business in which the Company and its subsidiaries are engaged. The
disclosures in the Registration Statement concerning the effects of federal,
state and local regulation on the Company's business and that of its
subsidiaries, as currently conducted and as contemplated are correct in all
material respects and do not omit to state a material fact. The Company and its
subsidiaries have all necessary corporate power and authority to enter into this
Agreement and carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith have been
obtained or will have been obtained prior to the Closing Date.
(e) This Agreement has been duly and validly authorized and executed
by the Company. The Common Stock and the Warrants, the shares of Common Stock
issuable upon exercise of the Warrants (the "Warrant Shares"), the Underwriter's
Warrants to be issued and sold by the Company pursuant to this Agreement, the
Common Stock and Warrants issuable upon exercise of the Underwriter's Warrants
and payment therefor, and the Warrant Shares, have been duly authorized (and, in
the case of the Common Stock and the Warrant Shares, have been duly reserved for
issuance) and, when issued and paid for in accordance with this Agreement (and,
in the case of the Warrant Shares, upon exercise of the Warrants and payment to
the Company of the exercise price therefor), the Common Stock and Warrant Shares
will be validly issued, fully paid and non-assessable; the Common Stock,
Warrants, Warrant Shares, Underwriter's Warrants are not and will not be subject
to the preemptive rights of any stockholder of the Company and conform, and at
all times up to and including their issuance will conform, in all material
respects to all statements with regard thereto contained in the Registration
Statement and Prospectus; and all corporate action required to be taken for the
authorization, issuance and sale of the Common Stock, Warrants, Warrant Shares
and Underwriter's Warrants has been taken, and this Agreement constitutes a
valid and binding obligation of the Company, enforceable in accordance with its
terms, to issue and sell, upon exercise in accordance with the terms thereof,
the number and kind of securities called for thereby.
(f) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
the Articles of Incorporation or Bylaws of the Company or of any evidence of
indebtedness, lease, contract or other agreement or instrument to which the
Company is a party or by which the Company or any of its properties is bound, or
under any applicable law, rule, regulation, judgment, order or decree of any
government, professional advisory body,
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administrative agency or court, domestic or foreign, having jurisdiction over
the Company or its properties, or result in the creation or imposition of any
lien, charge or encumbrance upon any of the properties or assets of the Company;
and no consent, approval, authorization or order of any court or governmental or
other regulatory agency or body is required for the consummation by the Company
of the transactions on its part herein contemplated, except as may be required
under the Act, the Securities Exchange Act of 1934 (the "Exchange Act") or under
state securities or blue sky laws.
(g) Subsequent to the date hereof, and prior to the Closing Date, the
Company will not issue or acquire any equity securities, except that the Company
may make short-term investments as contemplated in the "Use of Proceeds" section
of the Prospectus and except that the Company may issue Common Stock in
satisfaction of outstanding options and warrants, as described in the
Registration Statement. Except as described in the Registration Statement, the
Company does not have, and at the Closing Date will not have, outstanding any
options to purchase or rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell
shares of its Preferred Stock or Common Stock, or any such options, warrants,
convertible securities or obligations.
(h) The financial statements and notes thereto included in the
Registration Statement and the Prospectus fairly present the financial position
and the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved.
(i) Except as set forth in the Registration Statement, the Company is
not, and at the Closing Date will not be, in violation or breach of, or in
default of, the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, note, loan or credit
agreement, or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of the property or
assets of the Company is subject, which default or defaults, singularly or in
the aggregate, would have a material adverse effect on the Company. The Company
has not and will not have taken any action in material violation of the
provisions of the Articles of Incorporation or the Bylaws of the Company or any
statute or any order, rule or regulation of any court or regulatory authority or
governmental body having jurisdiction over or application to the Company, its
business or properties.
(j) The Company has, and at the Closing Date will have, good and
marketable title to all properties and assets described in the Prospectus as
owned by it, free and clear of all liens, charges, encumbrances, claims,
security interests,
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<PAGE>
restrictions and defects of any material nature whatsoever, except such as are
described or referred to in the Prospectus and liens for taxes not yet due and
payable. All of the material leases and subleases under which the Company is the
lessor or sublessor of properties or assets or under which the Company holds
properties or assets as lessee as described in the Prospectus are, and will on
the Closing Date will be in full force and effect, and except as described in
the Prospectus, the Company is not and will not be in default in respect to any
of the terms or provisions of any of such leases or subleases (which would have
a material adverse effect on the business, business prospects or operations of
the Company taken as a whole), and no claim has been asserted by anyone adverse
to rights of the Company as lessor, sublessor, lessee or sublessee under any of
the leases or subleases mentioned above, or affecting or questioning the right
of the Company to continue possession of the leased or subleased premises or
assets under any such lease or sublease except as described or referred to in
the Prospectus, and the Company owns or leases all such properties as are
necessary to its operations as now conducted and, except as otherwise stated in
the Prospectus, as proposed to be conducted set forth in the Prospectus.
(k) The authorized, issued and outstanding capital stock of the
Company as of June 30, 1998 and as of the date of the Prospectus is as set forth
in the Prospectus under "Capitalization;" the shares of issued and outstanding
capital stock of the Company set forth thereunder have been duly authorized,
validly issued and are fully paid and non-assessable; except as set forth in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue, or agreements or other rights to convert any
obligation into, any shares of capital stock of the Company have been granted or
entered into by the Company; and the Common Stock, the Warrants and all such
options and warrants conform, in all material respects, to all statements
relating thereto contained in the Registration Statement and Prospectus.
(l) Except as described in the Prospectus, the Company does not own
or control any capital stock or securities of, or have any proprietary interest
in, or otherwise participate in, any other corporation, partnership, joint
venture, firm, association or business organization; provided, however, that
this provision shall not be applicable to the investment, if any, of the net
proceeds from the sale of the Common Stock and Warrants sold by the Company in
certificates of deposits, savings deposits, short-term obligations of the United
States Government, money market instruments or other short-term investments.
(m) BDO Seidman, LLP has reported on the financial statements of the
Company for the years ended December 31, 1997, 1996 and 1995, all of which are
filed with the Commission as a part of the Registration Statement, and are
independent accountants as required by the Act and the Regulations.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may otherwise
be
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<PAGE>
indicated or contemplated herein or therein, the Company has not (i) issued any
securities or incurred any liability or obligation, direct or contingent, for
borrowed money; or (ii) entered into any transaction other than in the ordinary
course of business; or (iii) declared or paid any dividend or made any other
distribution on or in respect to its capital stock.
(o) There is no litigation or governmental proceeding pending or to
the knowledge of the Company threatened against, or involving the properties or
business of the Company which might materially and adversely affect the value,
assets or the operation of the properties or the business of the Company, except
as referred to in the Prospectus. Further, except as referred to in the
Prospectus, there are no actions, suits or proceedings related to environmental
matters or related to discrimination on the basis of age, sex, religion or race,
nor is the Company charged with or, to its knowledge, under investigation with
respect to any violation of any statutes or regulations of any regulatory
authority having jurisdiction over its business or operations, and no labor
disturbances by the employees of the Company exist or, to the knowledge of the
Company, have been threatened.
(p) The Company has, and at the Closing Date will have, filed all
necessary federal, state and foreign income and franchise tax returns or has
requested extensions thereof (except in any case where the failure to so file
would not have a material adverse effect on the Company), and has paid all taxes
which it believes in good faith were required to be paid by it, except for any
such tax that currently is being contested in good faith or as described in the
Prospectus.
(q) The Company has not at any time (i) made any contribution to any
candidate for political office, or failed to disclose fully any such
contribution, in violation of law, or (ii) made any payment to any state,
federal, foreign governmental or professional regulatory agency, officer or
official or other person charged with similar public, quasi-public or
professional regulatory duties, other than payments or contributions required or
allowed by applicable law.
(r) Except as set forth in the Registration Statement, to the
knowledge of the Company, neither the Company nor any officer, director,
employee or agent of the Company has made any payment or transfer of any funds
or assets of the Company or conferred any personal benefit by use of the
Company's assets, or received any funds, assets or personal benefit in violation
of any law, rule or regulation, which is required to be stated in the
Registration Statement or necessary to make the statements therein not
misleading.
(s) On the Closing Date all transfer or other taxes, if any (other
than income tax), which are required to be paid, and are due and payable, in
connection with the sale and transfer of the Common Stock and Warrants by the
Company to the Underwriter, will have been fully paid or provided for by the
Company as the case may be, and all laws imposing such taxes will have been
fully complied with.
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<PAGE>
(t) There are no contracts or other documents of the Company which
are of a character required to be described in the Registration Statement or
Prospectus or filed as exhibits to the Registration Statement which have not
been so described or filed.
(u) The Company intends to apply the proceeds from the sale of the
Common Stock and Warrants sold by it for the purposes and in the manner set
forth in the Registration Statement and Prospectus under the heading "Use of
Proceeds."
(v) The Company owns or possesses the requisite licenses or rights to
use all material trademarks, service marks, service names, trade names and
patents necessary to conduct its business. Except as set forth in the
Prospectus, there is no claim or action by any person pertaining to or
proceeding pending, or to the knowledge of the Company, threatened, which
challenges the exclusive right of the Company with respect to any material
trademarks, service marks, service names, trade names and patents used in the
conduct of the Company's business.
(w) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are executed in
accordance with management's general or specified authorizations; (2)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (3) access to assets is permitted only in
accordance with management's general or specific authorizations; and (4) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(x) Except as set forth in the Prospectus, no holder of any
securities of the Company has the right to require registration of any
securities because of the filing or effectiveness of the Registration Statement.
(y) The Company has not taken and at the Closing Date will not have
taken, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock or the Warrants
to facilitate the sale or resale of such securities.
(aa) There are no claims for services in the nature of a finder's
origination fee with respect to the sale of the Common Stock and Warrants
hereunder, except as set forth in the Prospectus.
(bb) No right of first refusal exists with respect to any sale of
securities by the Company, except as contained in this agreement.
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<PAGE>
(cc) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to you was, when made, or as of the Closing Date
will be, materially inaccurate, untrue or incorrect.
3. COVENANTS OF THE COMPANY.
The Company covenants and agrees that:
(a) It will deliver to the Underwriter, without charge, two fully
signed copies of the Registration Statement and of each amendment or supplement
thereto, including all financial statements and exhibits.
(b) The Company has delivered to the Underwriter, without charge, as
many copies as the Underwriter has requested of each Preliminary Prospectus
heretofore filed with the Commission in accordance with and pursuant to the
Commission's Rule 430 under the Act, and will deliver to the Underwriter and to
any Selected Dealer (as hereinafter defined), without charge, on the Effective
Date of the Registration Statement, and thereafter from time to time during such
reasonable period as the Underwriter may request if, in the opinion of counsel
for the Underwriter, the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, as many copies of the
Prospectus (and, in the event of any amendment of or supplement to the
Prospectus, of such amended or supplemented Prospectus) as the Underwriter may
request for the purposes contemplated by the Act. The Company will take all
necessary actions to furnish to whomever the Underwriter directs, when and as
requested by the Underwriter, all necessary documents, exhibits, information,
applications, instruments and papers as may be reasonably required or, in the
opinion of counsel to the Underwriter are desirable in order to permit or
facilitate the sale of the Common Stock and Warrants.
(c) The Company has authorized the Underwriter to use, and make
available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the Underwriter, all dealers selected by the Underwriter in
connection with the distribution of the Common Stock and Warrants (the "Selected
Dealers") to be purchased by the Underwriter and all dealers to whom any of such
Common Stock and Warrants may be sold by the Underwriter or by any Selected
Dealer, to use the Prospectus, as from time to time amended or supplemented, in
connection with the sale of the Common Stock and Warrants in accordance with the
applicable provisions of the Act, the applicable Regulations and applicable
state law, until completion of the distribution of the Common Stock and Warrants
and for such longer period as the Underwriter may request if the Prospectus is
required under the Act, the applicable Regulations or applicable state law to be
delivered in connection with sales of the Common Stock and Warrants by the
Underwriter or the Selected Dealers.
(d) The Company will use its best efforts to cause the Registration
Statement
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<PAGE>
to become effective and will notify the Underwriter immediately, and confirm the
notice in writing: (i) when the Registration Statement or any post-effective
amendment thereto becomes effective; (ii) of the issuance by the Commission of
any stop order or of the initiation, or the threatening, of any proceedings for
that purpose; (iii) of the suspension of the qualification of the Common Stock
and Warrants and the Underwriter's Warrants or underlying securities, for
offering or sale in any jurisdiction or of the initiating, or the threatening,
of any proceeding for that purpose; and (iv) of the receipt of any comments from
the Commission. If the Commission shall enter a stop order at any time, the
Company will make every reasonable effort to obtain the lifting of such order at
the earliest possible moment.
(e) During the time when a prospectus is required to be delivered
under the Act, the Company will comply with all requirements imposed upon it by
the Act and the Exchange Act, as now and hereafter amended and by the
Regulations, as from time to time in force, as necessary to permit the
continuance of sales of or dealings in the Common Stock and Warrants in
accordance with the provisions hereof and the Prospectus. If at any time when a
prospectus relating to the Common Stock and Warrants is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company and counsel for the Underwriter, the
Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will notify the
Underwriter promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act and will
furnish to the Underwriter copies thereof.
(f) The Company will endeavor in good faith, in cooperation with the
Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Common Stock and Warrants for offering and sale under
the securities laws or blue sky laws of such jurisdictions as the Underwriter
may reasonably designate. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, file and make such statements or reports
at such times as are or may reasonably be required by the laws of such
jurisdiction.
(g) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than the first day of the
fifteenth full calendar month following the Effective Date of the Registration
Statement, an earnings statement of the Company, which will be in reasonable
detail but which need not be audited, covering a period of at least twelve
months beginning after the Effective Date of the Registration Statement, which
earnings statements shall satisfy the requirements of Section 11(a) of the Act
and the Regulations as then in effect. The Company may discharge this obligation
in accordance with Rule 158 of the Regulations.
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<PAGE>
(h) During the five year period commencing on the Effective Date of
the Registration Statement, the Company will furnish to its stockholders an
annual report (including financial statements audited by its independent public
accountants), in reasonable detail, and, at its expense, furnish the Underwriter
if so requested (i) within 105 days after the end of each fiscal year of the
Company, a consolidated balance sheet of the Company and its then consolidated
subsidiaries and a separate balance sheet of each subsidiary of the Company the
accounts of which are not included in such consolidated balance sheet as of the
end of such fiscal year, and consolidated statements of operations,
stockholder's equity and cash flows of the Company and its consolidated
subsidiaries and separate statements of operations, stockholder's equity and
cash flows of each of the subsidiaries of the Company the accounts of which are
not included in such consolidated statements, for the fiscal year then ended,
all in reasonable detail and all certified by independent accountants (within
the meaning of the Act and the Regulations), (ii) within 50 days after the end
of each of the first three fiscal quarters of each fiscal year, similar balance
sheets as of the end of such fiscal quarter and similar statements of
operations, stockholder's equity and cash flows for the fiscal quarter then
ended, all in reasonable detail, and subject to year end adjustment, all
certified by the Company's principal financial officer or the Company's
principal accounting officer as having been prepared in accordance with
generally accepted accounting principles applied on a consistent basis, (iii) as
soon as available, each report furnished to or filed with the Commission or any
securities exchange and each report and financial statement furnished to the
Company's shareholders generally and (iv) as soon as available, such other
material as the Underwriter may from time to time reasonably request regarding
the financial condition and operations of the Company and its subsidiaries.
(i) For a period of three years from the Closing Date, the Company,
at its expense, shall cause its regularly engaged independent certified public
accountants to consult with the Company concerning the Company's financial
statements for each of the first three quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q (or 10Q-SB)
quarterly report and the mailing of quarterly financial information to
stockholders. The purpose of such consultation is to obtain the assistance and
input of such accountants so that each of such financial statements will comply
in all material respects with the applicable accounting requirements of the
Exchange Act and the regulations promulgated thereunder and will be fairly
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the then most recently audited
financial statements of the Company. It is not the intended purpose of this
provision that such accountant's audit or review such financial statements
within the meaning of the AICPA's Statement on Auditing Standards or that such
accountants issue any report to the Company or the Underwriter.
(j) Prior to the Closing Date, the Company will not issue, directly
or indirectly, without the Underwriter's prior written consent and that of
counsel for the Underwriter, which consent shall not be unreasonably withheld,
any press release or
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other public announcement or hold any press conference with respect to the
Company or its activities with respect to this Offering, other than promotion of
its products in the ordinary course of business; provided, however, that if a
press release is required as a matter of law or prudent corporate disclosure
posture, the Company may make said press release without consent.
(k) It will deliver to the Underwriter prior to filing, any amendment
or supplement to the Registration Statement or Prospectus proposed to be filed
after the Effective Date of the Registration Statement and will not file any
such amendment or supplement to which the Underwriter shall reasonably object
after being furnished such copy.
(l) During the period of 120 days commencing on the date hereof, the
Company will not at any time take, directly or indirectly, any action designed
to, or which will constitute or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Stock and
Warrants to facilitate the sale or resale of any of the Common Stock and
Warrants.
(m) The Company will not, without the Underwriter's prior written
consent, issue or sell, or contract to sell or otherwise dispose of any of its
securities, except sales of the Common Stock and Warrants (and the Common Stock
underlying the Warrants) pursuant to this Agreement and except for stock options
under the Company's stock option plan and outstanding warrants, or as otherwise
described in the Prospectus for a period of 120 days after the commencement of
the Offering.
(n) The Company will apply the net proceeds from the Offering
received by it in a manner consistent with the application described in "Use of
Proceeds" in the Prospectus.
(o) Counsel for the Company, the Company's accountants, and the
officers and directors of the Company will, respectively, furnish the opinions,
the letters and the certificates referred to in subsections of Paragraph 9
hereof, and, in the event that the Company shall file any amendment to the
Registration Statement relating to the offering of the Common Stock and Warrants
or any amendment or supplement to the Prospectus relating to the offering of the
Common Stock and Warrants subsequent to the Effective Date of the Registration
Statement, whether pursuant to subsection (j) herein or otherwise, such counsel,
such accountants, such officers and directors will, at the time of such filing
or at such subsequent time as the Underwriter shall specify, so long as
securities being registered by such amendment or supplement are being
underwritten by the Underwriter, respectively, furnish to the Underwriter such
opinions, letters and certificates, each dated the date of its delivery, of the
same nature as the opinions, the letters and the certificates referred to in
said Paragraph 9, respectively, as the Underwriter may reasonably request, or,
if any such opinion or letter or certificate cannot be furnished by reason of
the fact that such counsel or such accountants or any such officer or director
believes that the same would be inaccurate, such counsel or
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<PAGE>
such accountants or such officer or director will furnish an accurate opinion or
letter or certificate with respect to the same subject matter.
(p) The Company will comply with all of the provisions of any
undertakings contained in the Registration Statement.
(q) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued Shares which are issuable upon
exercise of the Warrants and issuable upon exercise of the Underwriter's Share
Warrants and Underwriter's Warrant Warrants (including the underlying
securities) outstanding from time to time.
(r) Following the Effective Date and from time to time thereafter, so
long as the Warrants are outstanding, the Company will timely prepare and file
at its sole cost and expense one or more post-effective amendments to the
Registration Statement or a new registration statement as required by law as
will permit Warrant holders to be furnished with a current prospectus in the
event Warrants are exercised, and to use its best efforts and due diligence to
have same be declared effective. Such post-effective amendments or new
registration statements shall also register the Underwriter's Warrants and all
the securities underlying such Underwriter's Warrants as provided in the
Underwriter's Warrants. The Company will deliver a draft of each such
post-effective amendment or new registration statement to the Underwriter at
least ten days prior to the filing of such post-effective amendment or
registration statement.
(s) Following the Effective Date and from time to time thereafter so
long as any of the Warrants remain outstanding, the Company will timely deliver
and supply to its warrant agent sufficient copies of the Company's current
Prospectus, as will enable such warrant agent to deliver a copy of such
Prospectus to any Warrant or other holder where such Prospectus delivery is by
law required to be made.
(t) So long as any of the Warrants remain outstanding, the Company
shall continue to employ the services of a firm of independent certified public
accountants acceptable to the Underwriter in connection with the preparation of
the financial statements to be included in any registration statement to be
filed by the Company hereunder, or any amendment or supplement thereto.
Notwithstanding the foregoing, BDO Seidman, LLP, or any accounting firm of
national recognition shall be acceptable to the Underwriter.
(u) So long as any of the Warrants remain outstanding, the Company
shall continue to appoint a warrant agent for the Warrants, who shall be
reasonably acceptable to the Underwriter.
(v) INTENTIONALLY LEFT BLANK.
(w) Commencing on the Effective Date, the Company shall have
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<PAGE>
entered into a financial consulting agreement with the Underwriter in form
reasonably satisfactory to the Underwriter.
(x) The Common Stock and Warrants shall be listed on the NASD's OTC
Bulletin Board not later than the Closing Date. After the Closing Date, the
Company will effect and use its best efforts to maintain such listing (unless
the Company is acquired or is listed on either the Nasdaq SmallCap Market or
National Market System New York Stock Exchange or American Stock Exchange) for
at least five years from the date of this Agreement.
(y) The Company has applied for listing in Standard and Poors
Corporation Reports and shall use its best efforts to have the Company included
in such publications for at least five years after the Effective Date.
(z) The Company agrees not to file a registration statement on Form
S-8 or any similar form currently in effect or which may be hereafter adopted
pursuant to the Act, during the twenty-four months following the Effective Date
without prior written consent of the Underwriter.
(aa) The Company agrees not to effect any sales of Common Stock at
prices below the Exercise Price of the Warrants, during the twenty-four months
following the Effective Date without prior written approval of the Underwriter,
which consent shall not be unreasonably withheld.
4. APPOINTMENT OF AGENT TO SELL THE SHARES AND WARRANTS.
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties and agreements herein contained,
the Company hereby appoints the Underwriter as its exclusive agent for a period
of 45 days from the Effective Date, subject to an extension by mutual agreement
of the Company and the Underwriter for an additional period not to exceed 45
days, to sell the Common Stock and Warrants, and the Underwriter, on the basis
of the representations and warranties of the Company herein, accepts such
appointment on a "best efforts, all or none" basis with respect to all of the
Shares and Warrants. The price at which the Underwriter shall sell the Common
Stock and Warrants to the public, as agent for the Company, shall be $6.00 per
share of Common Stock and $0.10 per Warrant, and the Company shall pay a
commission of $0.60 and $0.01 in respect of such shares of Common Stock and
Warrants, respectively, sold on behalf of the Company by the Underwriter.
(b) Provided that all of the Shares and Warrants are sold and paid
for, the Company agrees to pay the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds of the offering, subject to
Paragraph 8 herein.
(c) It is a condition of this Agreement that the Underwriter shall
use its
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<PAGE>
best efforts to sell the shares of Common Stock and Warrants on behalf of the
Company, that the Underwriter will instruct investors to make all remittances
payable to the Escrow Agent (hereinafter defined) and that any and all funds
received from such sale, without any deduction therefrom whatsoever, including,
but not limited to, any underwriting commission or any dealer concession or
otherwise, shall be forthwith deposited in a non-interest bearing escrow account
with __________________, as Escrow Agent, pursuant to the terms of an Escrow
Agreement entered into by and among the Company, the Underwriter and the Escrow
Agent, no later than 12 noon of the next business day after receipt. In the
event all of the Shares and Warrants are not sold within 45 days from the
Effective Date, or following the expiration of an additional 45 days if so
agreed in writing by the Company and the Underwriter (with an additional ten
business days to permit clearance of the funds in escrow), all funds will be
promptly refunded to the subscribers in full, without deduction therefrom or
interest thereon. During the period of escrow, subscribers will not have the
right to demand a refund of their subscriptions. Certificates will be issued to
purchasers only if proceeds from the sale of all of the Shares and Warrants are
released from escrow to the Company or as directed by the Company. Until such
time as the funds have been released, such purchasers, if any, will be deemed
subscribers and not shareholders. The funds in escrow will be held for the
benefit of those subscribers until released to the Company and will not be
subject to creditors of the Company or for the expenses of this offering.
(d) In the event of the sale of all of the Shares and Warrants such
concessions from the public offering price may be allowed to selected dealers
and members of the National Association of Securities Dealers, Inc. ("NASD") as
you determine, within the limits set forth in the Prospectus.
5. DELIVERY AND PAYMENT.
(a) Delivery of the shares of Common Stock and Warrants against
payment therefor shall take place at the offices of May Davis Group, Inc., (or
at such other place as may be designated by you) at 10:00 A.M., New York time,
on such date after the Registration Statement has become effective as the
Underwriter shall designate, such time and date of payment for and delivery of
the shares of Common Stock and Warrants being herein called the "Closing Date".
(b) The Company will make the certificates for the shares of Common
Stock and Warrants to be sold hereunder available to the Underwriter for
inspection at least two full business days prior to the Closing Date at the
offices of the Company's transfer agent. The certificates shall be in such
names and denominations as you may request, at least two full business days
prior to the Closing Date.
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6. OFFERING THE COMMON STOCK AND WARRANTS ON BEHALF
OF THE COMPANY.
It is understood that you propose to offer the Common Stock and
Warrants to the public, solely as agent for the Company, upon the terms and
conditions set forth in the Registration Statement. The Underwriter shall
commence making such offer as agent for the Company on the Effective Date or as
soon thereafter as you deem advisable.
7. SELECTED DEALERS.
The Underwriter may offer and sell the Common Stock and Warrants for
the Company's account through Selected Dealers registered with the NASD, as
selected by the Underwriter in accordance with a form of Selected Dealer
Agreement, pursuant to which the Underwriter may allow a concession (out of the
underwriting commission in the event of the sale of all of the Shares and
Warrants within the limits to be set forth in the Prospectus, but all such sales
by Selected Dealers shall be made by the Company, acting through the Underwriter
as agent, and not for the account of the Underwriter.
8. PAYMENT OF EXPENSES.
(a) Whether or not the sale of the Common Stock and Warrants is
consummated, the Company will pay and bear all costs, fees, taxes and expenses
incident to the performance of this Agreement by the Company, including but not
limited to: (i) the issuance, offer, sale and delivery of the Common Stock and
Warrants, including all expenses and fees incident to the preparation, printing,
filing and mailing (including the payment of postage with respect to such
mailing) of the Registration Statement (including all exhibits thereto), each
Preliminary Prospectus, the Prospectus, and amendments and post-effective
amendments thereof and supplements thereto, and this Agreement and related
documents, Preliminary and Final Blue Sky Memoranda, including the cost of
preparing and printing all copies thereof to be printed by a financial printer
selected by the Underwriter in quantities deemed necessary by the Underwriter;
(ii) the preparing and printing of one "Tombstone" advertisement in the Wall
Street Journal (iii) the printing, engraving, issuance and delivery of the
Common Stock, Warrants, Warrant Shares, Underwriter's Warrants and the
securities underlying the Underwriter's Warrants, including any transfer or
other taxes payable thereon in connection with the original issuance thereof;
(iv) the qualification of the Common Stock and Warrants under the state or
foreign securities or "Blue Sky" laws selected by the Underwriter and the
Company, and disbursements and reasonable fees of counsel for the Underwriter
(such counsel fees shall be $35,000, of which $10,000 shall be due and payable
upon the commencement of blue sky filing) in connection therewith plus the
filing fees for such states; (v) fees and disbursements of counsel and
accountants for the Company; (vi) the filing fees payable to the Commission and
the National Association of Securities Dealers, Inc. ("NASD"); (vii) any other
expenses incurred on behalf of the Company; (viii) any listing of the Common
Stock and Warrants on the OTC
16
<PAGE>
Bulletin Board; and (ix) the cost of preparing and delivering to the Underwriter
and its counsel three (3) bound volumes containing copies of all documents and
appropriate correspondence filed with or received from the Commission and the
NASD, and all closing documents.
(b) In addition to the expenses to be paid and borne by the Company
referred to in Paragraph 8(a) above, if all of the Shares and Warrants are sold
as provided by this Agreement, the Company shall reimburse the Underwriter at
closing for expenses incurred by the Underwriter in connection with the Offering
(for which the Underwriter need not make any accounting of), in the amount of 3%
of the price to the public of each share of Common Stock and Warrant sold in the
Offering. This 3% non-accountable expense allowance shall cover the fees of the
Underwriter's legal counsel, but shall not include any expenses for which the
Company is responsible under Paragraph 8(a) above, including the reasonable fees
and disbursements of the Underwriter's legal counsel with respect to Blue Sky
matters. As of the date hereof, $50,000 has been advanced by the Company to the
Underwriter with respect to such non-accountable expense allowance.
(c) If the transactions contemplated hereby are not consummated for
any reason whatsoever, or in the event that the Company does not or cannot, for
any reason whatsoever, expeditiously proceed with the Offering, or if any of the
representations, warranties or covenants contained in this Agreement are not
materially correct or cannot be complied with by the Company, or business
prospects or obligations of the Company are adversely affected and the Company
does not commence or continue with the Underwriting at any time or terminates
the proposed transaction prior to the closing of this Agreement, the Company
shall reimburse the Underwriter on an accountable basis for all out-of-pocket
expenses actually incurred in connection with the Underwriting, this Agreement
and all of the transactions hereby contemplated, including, without limitation,
the Underwriter's legal fees and expenses, up to an aggregate total of $50,000
less such sums which have already been paid.
(d) On the closing of the Offering the Company shall enter into a
financial consulting agreement with the Underwriter, pursuant to which the
Underwriter will provide financial consulting services to the Company for a
three-year period beginning on the Closing Date (the "Financial Consulting
Agreement"). The Company shall pay the Underwriter a consulting fee of $108,000
from the Offering proceeds, payable in full on the Closing Date.
9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS.
The Obligations of the Underwriter to consummate the transactions
contemplated by this Agreement shall be subject to the continuing accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of the Closing Date, the accuracy of the statements of the
Company and its
17
<PAGE>
officers and directors made pursuant to the provisions hereof, and to the
performance by the Company of its covenants and agreements hereunder and under
each certificate, opinion and document contemplated hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., New York time, on the date following the date of this Agreement,
or such later date and time as shall be consented to in writing by the
Underwriter and, on or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Common Stock and Warrants under the securities laws of any jurisdiction
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or to the Underwriter's knowledge or the
knowledge of the Company, shall be contemplated by the Commission or any such
authorities of any jurisdiction and any request on the part of the Commission or
any such authorities for additional information shall have been complied with to
the reasonable satisfaction of the Commission or such authorities and counsel to
the Underwriter and after the date hereof no amendment or supplement shall have
been filed to the Registration Statement or Prospectus without the Underwriter's
prior consent.
(b) The Registration Statement or the Prospectus or any amendment
thereof or supplement thereto shall not contain an untrue statement of a fact
which is material, or omit to state a fact which is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(c) Between the time of the execution and delivery of this Agreement
and the Closing Date, there shall be no litigation instituted against the
Company or any of its officers or directors and between such dates there shall
be no proceeding instituted or, to the Company's knowledge, threatened against
the Company or any of its officers or directors before or by any federal, state
or county commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, in which litigation or proceeding an
unfavorable ruling, decision or finding would have a material adverse effect on
the Company or its business, business prospects or properties, or have a
material adverse effect on the financial condition or results of operations of
the Company.
(d) Each of the representations and warranties of the Company
contained herein and each certificate and document contemplated under this
Agreement to be delivered to the Underwriter shall be true and correct at the
Closing Date as if made at the Closing Date, and all covenants and agreements
contained herein and in each such certificate and document to be performed on
the part of the Company, and all conditions contained herein and in each such
certificate and document to be fulfilled or complied with by the Company at or
prior to the Closing Date shall be fulfilled or complied with.
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<PAGE>
(e) At the Closing Date, the Underwriter shall have received the
opinion of Gusrae, Kaplan & Bruno, counsel to the Company, dated such Closing
Date, addressed to the Underwriter and in form and substance satisfactory to
counsel to the Underwriter, and such counsel may rely upon certificates given to
them from such persons that they deem appropriate, to the effect that:
(i) The Company and each of its subsidiaries are corporations
duly organized, validly existing and in good standing under the laws of their
respective jurisdictions of incorporation, with full corporate power and
authority, and all necessary and material licenses, permits, certifications,
registrations, approvals, consents and franchises of and from all government and
regulatory officials and bodies to own or lease and operate their properties and
to conduct their business as described in the Registration Statement. Such
licenses, permits, certifications, registrations, approvals, consents and
franchises are in full force and effect and the Company is in compliance
therewith in all material respects. The Company and each of its subsidiaries are
duly qualified to do business as foreign corporations and are in good standing
in all jurisdictions wherein such qualification is necessary and failure so to
qualify could have a material adverse effect on the financial condition, results
of operations, business or properties of the Company and its subsidiaries;
(ii) The Company has full corporate power and authority to
execute, deliver and perform the Underwriting Agreement, the Warrant Agreement
and the Underwriter's Warrants and to consummate the transactions contemplated
thereby. The execution, delivery and performance of the Underwriting Agreement,
the Warrant Agreement and the Underwriter's Warrants by the Company, the
consummation by the Company of the transactions therein contemplated and the
compliance by the Company with the terms of the Underwriting Agreement, the
Warrant Agreement and the Underwriter's Warrants have been duly authorized by
all necessary corporate action, and each of the Underwriting Agreement, the
Warrant Agreement and the Underwriter's Warrants has been duly executed and
delivered by the Company. Each of the Underwriting Agreement, the Warrant
Agreement and the Underwriter's Warrants is a valid and legally binding
obligation of the Company, enforceable in accordance with their respective
terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, reorganization, moratorium and other laws affecting the rights of
creditors generally and the discretion of courts in granting equitable remedies
and except that enforceability of the indemnification provisions and the
contribution provisions set forth in the Underwriting Agreement may be limited
by the federal securities laws or public policy underlying such laws;
(iii) The execution, delivery and performance of the
Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants by
the Company, the consummation by the Company of the transactions therein
contemplated and the compliance by the Company with the terms of the
Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants do
not, and will not, with or without the
19
<PAGE>
giving of notice or the lapse of time, or both, (A) result in a violation of the
certificate of incorporation or by-laws of the Company or any of its
subsidiaries, (B) to the best of such counsel's knowledge, result in a breach
of, or conflict with, any terms or provisions of or constitute a default under,
or result in the modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or any of its subsidiaries pursuant to, any
indenture, mortgage, note, contract, commitment or other material agreement or
instrument to which the Company or its subsidiaries is a party or by which the
Company or its subsidiaries or any of its properties or assets are or may be
bound or affected; (C) to the best of such counsel's knowledge violate any
existing applicable law, rule or regulation or judgment, order or decree known
to such counsel of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or its subsidiaries or any of its properties or
business; or (D) to the best of such counsel's knowledge, have any material
adverse effect on any material permit, certification, registration, approval,
consent, license or franchise necessary for the Company or its subsidiaries to
own or lease and operate its properties and to conduct its business or the
ability of the Company or its subsidiaries to make use thereof;
(iv) To the best of such counsel's knowledge, no authorization,
approval, consent, order, registration, license or permit of any court or
governmental agency or body (other than under the Act, the Regulations and
applicable state securities or Blue Sky laws) is required for the valid
authorization, issuance, sale and delivery of the Common Stock, the Warrants,
the Warrant Shares, or the Underwriter's Warrants, and the consummation by the
Company of the transactions contemplated by the Underwriting Agreement, the
Warrant Agreement or the Underwriter's Warrants;
(v) The Registration Statement was declared effective under the
Act on _____________, 1998; to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are pending,
threatened or contemplated under the Act;
(vi) The Registration Statement and the Prospectus, as of the
Effective Date (except for the financial statements and other financial data
included therein or omitted therefrom, as to which such counsel expresses no
opinion), comply as to form in all material respects with the requirements of
the Act and Regulations and the conditions for use of a registration statement
on Form SB-2 have been satisfied by the Company;
(vii) The description in the Registration Statement and the
Prospectus of statutes, regulations, contracts and other documents have been
reviewed by such counsel, and, based upon such review, are accurate in all
material respects and present fairly the information required to be disclosed,
and there are no material statutes or regulations, or, to the best of such
counsel's knowledge, material
20
<PAGE>
contracts or documents, of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not so described or filed as required.
None of the material provisions of the contracts or instruments
described above violates any existing applicable law, rule or regulation or
judgment, order or decree known to such counsel of any United States
governmental agency or court having jurisdiction over the Company or its
subsidiaries or any of its assets or businesses;
(viii) The outstanding Common Stock, Options and Warrants have
been duly authorized and validly issued. The outstanding Common stock is fully
paid and nonassessable. None of the outstanding Common Stock has been issued in
violation of the preemptive rights of any shareholder of the Company. None of
the holders of the outstanding Common Stock is subject to personal liability
solely by reason of being such a holder. The offers and sales of the outstanding
Common Stock were at all relevant times either registered under the Act and the
applicable state securities or Blue Sky laws or exempt from such registration
requirements. The authorized Common Stock conforms to the description thereof
contained in the Registration Statement and Prospectus. To the best of such
counsel's knowledge, except as set forth in the Prospectus, no holder of any of
the Company's securities has any rights, "demand," "piggyback" or otherwise, to
have such securities registered under the Act;
(ix) The issuance and sale of the Common Stock, the Warrants, the
Warrant Shares and the Underwriter's Warrants have been duly authorized and when
issued and paid for, will be validly issued, fully paid and nonassessable, and
the holders thereof will not be subject to personal liability solely by reason
of being such holders. The Common Stock is not subject to preemptive rights of
any stockholder of the Company. The certificates representing the securities are
in proper legal form;
(x) The issuance and sale of the Warrants, the Warrant Shares
and the Underwriter's Warrants have been duly authorized and, when paid for,
issued and delivered pursuant to the terms of the Warrant Agreement, the
Underwriting Agreement or the Underwriter's Warrants, as the case may be, the
Warrants, the Warrant Shares and the Underwriter's Warrants will constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms, to issue and sell the Warrants, the Warrant Shares and/or
Underwriter's Warrants. All corporate action required to be taken for the
authorization, issuance and sale of the securities has been duly, validly and
sufficiently taken. The Warrants, the Warrant Shares and the Underwriter's
Warrants conform to the descriptions thereof contained in the Registration
Statement and Prospectus;
(xi) The Underwriter will acquire good title to the Common
21
<PAGE>
Stock and Warrants, free and clear of all liens, encumbrances, equities,
security interests and claims, provided that the Underwriter is a bona fide
purchaser as defined in Section 8-302 of the Uniform Commercial Code;
(xii) INTENTIONALLY LEFT BLANK.
(xiii) To the best of such counsel's knowledge, there are no
claims, actions, suits, proceedings, arbitrations, investigations or inquiries
before any governmental agency, court or tribunal, foreign or domestic, or
before any private arbitration tribunal, pending or threatened against the
Company or its subsidiaries, or involving their properties or business, other
than as described in the Prospectus, such description being accurate, and other
than litigation incident to the kind of business conducted by the Company which,
individually and in the aggregate, is not material, and, except as otherwise
disclosed in the Prospectus and the Registration Statement, the Company and its
subsidiaries are not in violation of any applicable federal and state laws,
statutes and regulations concerning its business;
(xiv) The Company has federal registrations of the
trademarks/servicemarks as set forth in the Registration Statement. To the best
of such counsel's knowledge, the Company and its subsidiaries have not infringed
and are not infringing with the rights of others with respect to such
intangibles; and, to the best of such counsel's knowledge, except as otherwise
disclosed in the Prospectus, the Company and its subsidiaries have not received
any notice of conflict with the asserted rights of others with respect to
intangibles which might, singly or in the aggregate, materially adversely affect
their business, results of operations or financial condition;
(xv) Such counsel has participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus, and although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
otherwise set forth in the opinion), in the course of such reviews and
discussions and such other investigation as they deemed necessary, no facts came
to their attention which lead them to believe that (A) the Registration
Statement (except as to the financial statements and other financial data
contained therein, as to which such counsel expresses no opinion), on the
Effective Date, contained any untrue statement of a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that (B) the Prospectus (except as to the financial statements and other
financial data contained therein, as to which such counsel expresses no opinion)
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein not misleading;
(f) INTENTIONALLY LEFT BLANK.
(g) On or prior to the Closing Date, counsel for the Underwriter
shall
22
<PAGE>
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review the matters
referred to in subparagraph (e) of this Paragraph 9, or in order to evidence the
accuracy, completeness or satisfaction of any of the representations, warranties
or conditions herein contained.
(h) Prior to the Closing Date:
(i) There shall have been no material adverse change in the
condition or prospects or the business activities, financial or otherwise, of
the Company, other than as contemplated in the Registration Statement, from the
latest dates as of which such condition is set forth in the Registration
Statement and Prospectus;
(ii) There shall have been no transaction, outside the
ordinary course of business, entered into by the Company from the latest date as
of which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is material to the Company, which is either (x)
required to be disclosed in the Prospectus or Registration Statement and is not
so disclosed, or (y) likely to have material adverse effect on the Company's
business or financial condition;
(iii) The Company shall not be in default under any material
provision of any instrument relating to any outstanding indebtedness;
(iv) No material amount of the assets of the Company shall
have been pledged, mortgaged or otherwise encumbered, except as set forth in the
Registration Statement and Prospectus;
(v) No action, suit or proceeding, at law or in equity,
shall have been pending or to its knowledge threatened against the Company or
affecting any of its properties or businesses before or by any court or federal
or state commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
operations, prospects or financial condition or income of the Company, taken as
a whole, except as set forth in the Registration Statement and Prospectus; and
(vi) No stop order shall have been issued under the Act and
no proceedings therefor shall have been initiated or, to the Company's
knowledge, threatened by the Commission.
(vii) Each of the representations and warranties of the
Company contained in this Agreement and in each certificate and document
contemplated under this Agreement to be delivered to the Underwriter was, when
originally made and is at the time such certificate is dated, true and correct.
(i) Concurrently with the execution and delivery of this Agreement
and
23
<PAGE>
at the Closing Date, the Underwriter shall have received a certificate of the
Company signed by the Chief Executive Officer of the Company and the principal
financial officer of the Company, dated as of the Closing Date, to the effect
that the conditions set forth in subparagraph (g) above have been satisfied and
that, as of the Closing Date, the representations and warranties of the Company
set forth in Paragraph 2 herein and the statements in the Registration Statement
and Prospectus were and are true and correct. Any certificate signed by any
officer of the Company and delivered to the Underwriter or counsel for the
Underwriter shall be deemed a representation and warranty by the Company to the
Underwriter as to the statements made therein.
(j) At the time this Agreement is executed, and at the Closing Date,
the Underwriter shall have received letters, addressed to the Underwriter and in
form and substance satisfactory in all respects (including the nonmaterial
nature of the changes or decreases, if any, referred to in clause (iii) below)
to the Underwriter and counsel for the Underwriter, from BDO Seidman, LLP, dated
as of the date of this Agreement and as of the Closing Date:
(i) Confirming that they are independent public accountants
with respect to the Company and its subsidiaries, within the meaning of the Act
and applicable regulations thereunder;
(ii) Stating that in their opinion the audited consolidated
financial statements of the Company included in the Registration Statement and
Prospectus for the years ended December 31, 1997, 1996 and 1995, respectively,
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations thereunder with respect to
registration statements on Form S-1;
(iii) Stating that, with respect to the period from June 30,
1998 (Company) to a specified date (the "Specified Date") not earlier than five
days prior to the date of such letter, they have read such interim unaudited
consolidated financial data of the Company for the period from June 30, 1998,
through the Specified Date as are available on the date of such letter, read the
minutes of the stockholders and board of directors of the Company and for the
period from June 30, 1998 through the Specified Date (or, to the extent that
they are advised by the Company that final minutes of any such meeting are not
available on the date of such letter, a draft thereof furnished by the Company,
and made inquiries of officers of the Company responsible for financial and
accounting matters as to whether (I) at the specified date there was any change
in the capital stock or long-term liabilities of the Company, or any decrease in
the net current assets or net assets of the Company, as compared with the
amounts shown on the June 30, 1998 balance sheets filed with and as part of the
Prospectus, or (II) for the period from June 30, 1998 to the Specified Date,
there were any increases, as compared with the corresponding period in the
preceding year, in the total or per share amounts of net loss (or, as the case
may be, any decrease in net income), and further stating that while such
procedures and inquiries do not constitute an
24
<PAGE>
examination made in accordance with generally accepted auditing standards,
nothing came to their attention which caused them to believe that there was any
such change other than as disclosed or contemplated by the Prospectus or, if any
such change has occurred, fully explaining the nature of such change and its
effect on the financial position of the Company.
(iv) Stating that they have carried out certain specified
procedures (specifically set forth in such letter or letters) as specified by
the Underwriter not constituting an audit, with respect to certain tables,
statistics and other financial data in the Prospectus specified by the
Underwriter and compared them with, either the audited financial statements
filed with and as a part of the Prospectus and covered by their report included
therein, or other financial data, specified by the Underwriter, not included in
the Prospectus but from which information in the Prospectus is derived, and
which have been obtained directly from the general accounting records of the
Company or indirectly from such accounting records by analysis or computation,
and having compared such tables, statistics and other financial data with such
audited financial statements or the accounting records of the Company stating
that they have found such tables, statistics and other financial data to agree
therewith; and
(v) Stating such other matters incident to the transaction
contemplated hereby as the Underwriter may reasonably request.
(k) All proceedings taken in connection with the authorization,
issuance or sale of the Common Stock, Warrants, Warrant Shares, the
Underwriter's Warrants and the Underwriter's Warrant Shares as herein
contemplated shall be satisfactory in form and substance to the Underwriter and
to counsel to the Underwriter, and the Underwriter shall have received from such
counsel an opinion, dated as the Closing Date with respect to such of these
proceedings as the Underwriter may reasonably require.
(l) The Company shall have furnished to the Underwriter such
certificates, additional to those specifically mentioned herein, as the
Underwriter may have reasonably requested in a timely manner as to the accuracy
and completeness, at the Closing Date, of any statement in the Registration
Statement or the Prospectus, as to the accuracy, at the Closing Date, of the
representations and warranties of the Company herein and in each certificate and
document contemplated under this Agreement to be delivered to the Underwriter,
as to the performance by the Company of its obligations hereunder and under each
such certificate and document or as to the fulfillment of the conditions
concurrent and precedent to the Underwriter's obligations hereunder.
(m) The obligation of the Underwriter to purchase Common Stock and
Warrants hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein on and as of the Closing Date.
25
<PAGE>
(n) On the Closing Date there shall have been duly tendered to the
Underwriter for the Underwriter's account the appropriate number of shares of
Common Stock and Warrants.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Underwriter and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, liabilities, claims, damages, actions and expenses or liability, joint
or several, whatsoever (including but not limited to any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which it or such controlling persons may become subject under the
Act, the Exchange Act or under any other statute or at common law or otherwise
or under the laws of foreign countries, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any Preliminary Prospectus or the Prospectus (as from
time to time amended and supplemented); in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
the Warrant Shares of the Company issued or issuable upon exercise of the
Warrants, or Underwriter's Warrant Shares upon exercise of the Underwriter's
Warrants; or in any application or other document or written communication (in
this Paragraph 10 collectively called "application") executed by the Company or
based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Common Stock, Warrants, Warrant Shares,
Underwriter's Warrants and Underwriter's Warrant Shares (including the Shares
issuable upon exercise of the Warrants underlying the Underwriter's Warrants)
under the securities laws thereof or filed with the Commission or any securities
exchange; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (in the case of the Prospectus, in the light of the circumstances
under which they were made), unless such statement or omission was made in
reliance upon or in conformity with information furnished to the Company as
provided in Section 2(c) hereof with respect to the Underwriter by or on behalf
of the Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in application, as the case may be. Notwithstanding the foregoing, the Company
shall have no liability under this Paragraph 10(a) if any such untrue statement
or omission made in a Preliminary Prospectus, is cured in the Prospectus and the
Underwriter failed to deliver to the person or persons alleging the liability
upon which indemnification is being sought, at or prior to the written
confirmation of such sale, a copy of the Prospectus. This indemnity will be in
addition to any liability which the Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the Company
and each of the officers and directors of the Company who have signed the
26
<PAGE>
Registration Statement and each other person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company to the
Underwriter in Paragraph 10(a), but only with respect to any untrue statement or
alleged untrue statement of any material fact contained in, or any omission or
alleged omission to state a material fact required to be stated in, any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereof or necessary to make the statements therein not
misleading or in any application made solely in reliance upon, and in conformity
with, information furnished to the Company by the Underwriter as provided in
Section 2(c) hereof expressly for use in the preparation of such Preliminary
Prospectus, the Registration Statement or Prospectus. This indemnity agreement
will be in addition to any liability which the Underwriter may otherwise have.
Notwithstanding the foregoing, the Underwriter shall have no liability under
this Paragraph 10(b) if any such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus, and the Prospectus is
delivered to the person or persons alleging the liability upon which
indemnification is being sought.
(c) If any action is brought against the Underwriter or controlling
person in respect of which indemnity may be sought against the Company pursuant
to the foregoing, the Underwriter shall promptly notify the Company in writing
of the institution of such action and the Company shall assume the defense of
the action, including the employment and fees of counsel (reasonably
satisfactory to the Underwriter) and payment of expenses. The Underwriter or
controlling person shall have the right to employ its or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of the Underwriter or such controlling person unless the employment of such
counsel shall have been authorized in writing by the Company in connection with
the defense of such action. If the Company shall have employed counsel to have
charge of the defense or shall previously have assumed the defense of any such
action or claim, the Company shall not thereafter be liable to any Underwriter
or controlling person in investigating, preparing or defending any such action
or claim. Each indemnified party shall promptly notify the Underwriter of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors or controlling persons in connection with the issue and
sale of the Common Stock, Warrants, Warrants Shares, Underwriter's Warrants or
Underwriter's Warrant Shares or in connection with the Registration Statement or
Prospectus.
(d) In order to provide for just and equitable contribution under the
Act in any case in which: (i) the Underwriter makes a claim for indemnification
pursuant to Paragraph 10 hereof, but it is judicially determined (by the entry
of a final judgment or decree by a court of competent jurisdiction and the time
to appeal has expired or the last right of appeal has been denied) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Paragraph 10 provides for indemnification of such case; or (ii)
contribution under the Act may be required on the part of the Underwriter in
circumstances for which indemnification is provided under this Paragraph 10,
then, and in each such case, the Company and the Underwriter shall contribute to
27
<PAGE>
the aggregate losses, claims, damages or liabilities to which they may be
subject (after any contribution from others) in such proportion so that the
Underwriter is responsible for the portion represented by dividing the total
compensation received by the Underwriter herein by the total purchase price of
all Common Stock and Warrants sold in the public offering and the Company is
responsible for the remaining portion; provided, that in any such case, no
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Act other than the Company, and the Underwriter. As used in this Paragraph 10,
the term "Underwriter" includes any officer, director, or other person who
controls the Underwriter within the meaning of Section 15 of the Act, and the
word "Company" includes any officer, director or person who controls the Company
within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company to the full extent permitted by law. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement.
(e) Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any action,
suit or proceeding, such party will, if a claim for contribution in respect
thereof is made against another party (the "contributing party"), notify the
contributing party of the commencement thereof, but the omission so to notify
the contributing party will not relieve it from any liability it may have to any
other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought against any
party, and such party notifies a contributing party or his or its representative
of the commencement thereof within the aforesaid fifteen (15) days, the
contributing party will be entitled to participate therein with the notifying
party and any other contributing party similarly notified. Any such contributing
party shall not be liable to any party seeking contribution on account of any
settlement of any claim, action or proceeding effected by such party seeking
contribution without the written consent of such contributing party. The
indemnification provisions contained in this Paragraph 10 are in addition to any
other rights or remedies which either party hereto may have with respect to the
other or hereunder.
11. REPRESENTATIONS, WARRANTIES, AGREEMENTS TO SURVIVE DELIVERY.
The respective indemnity and contribution agreements by the
Underwriter and the Company contained in Paragraph 10 hereof, and the covenants,
representations and warranties of the Company set forth in this Agreement, shall
remain operative and in full force and effect regardless of (i) any
investigation made by
28
<PAGE>
the Underwriter or on its behalf or by or on behalf of any person who controls
the Underwriter, or by the Company or any controlling person of the Company or
any director or any officer of the Company, (ii) acceptance of any of the Common
Stock and Warrants and payment therefor, or (iii) any termination of this
Agreement, and shall survive the delivery of the Common Stock and Warrants and
any successor of the Underwriter or the Company, or of any person who controls
the Underwriter or the Company or any other indemnified party, as the case may
be, shall be entitled to the benefit of such respective indemnity and
contribution agreements. The respective indemnity and contribution agreements by
the Underwriter and the Company contained in this Paragraph 11 shall be in
addition to any liability which the Underwriter and the Company may otherwise
have.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective at 10:00 A.M., New York
time, on the first full business day following the day on which the Underwriter
and the Company receive notification that the Registration Statement became
effective.
(b) This Agreement may be terminated by the Underwriter by notifying
the Company at any time on or before the Closing Date, if in the Underwriter's
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriter for the resale of the Common Stock and Warrants agreed to be
purchased hereunder by reason of (i) the Company having sustained a material
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree, (ii) trading in securities on the New York Stock Exchange or the
American Stock Exchange having been suspended or limited, (iii) material
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date herein), (iv) a banking moratorium having
been declared by federal or New York State authorities, (v) an outbreak of major
international hostilities or other national or international calamity having
occurred, (vi) a pending or threatened legal or governmental proceeding or
action relating generally to the Company's business, or a notification having
been received by the Company of the threat of any such proceeding or action,
which could materially adversely affect the Company, (vii) the Company is merged
or consolidated into or acquired by another company or group or there exists a
binding legal commitment for the foregoing or any other material change of
ownership or control occurs, (viii) the passage by the Congress of the United
States or by any state legislative body of similar impact, or any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is reasonably believed likely by the Underwriter to have a
material impact on the business, financial condition or financial statements of
the Company, (ix) any adverse change in the financial or securities markets
beyond normal market fluctuations having occurred since the date of this
Agreement, or (x) any material adverse change having occurred, since the
respective dates of which information is given in the Registration Statement and
Prospectus, in the earnings, business prospects or general condition of
29
<PAGE>
the Company, financial or otherwise, whether or not arising in the ordinary
course of business.
(c) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Paragraph 12, the
Company shall be notified promptly by the Underwriter by telephone or facsimile,
confirmed by letter.
(d) If this Agreement shall not become effective by reason of an
election of the Underwriter pursuant to this Paragraph 12 or if this Agreement
shall not be carried out within the time specified herein by reason of any
failure on the part of the Company to perform any undertaking, or to satisfy any
condition of this Agreement by it to be performed or satisfied, the sole
liability of the Company to the Underwriter, in addition to the obligations
assumed by the Company pursuant to Paragraph 8 herein, will be to reimburse the
Underwriter for the following: (i) Blue Sky counsel fees and expenses to the
extent set forth in Paragraph 8(a)(iv); (ii) Blue Sky filing fees; and (iii)
such reasonable out-of-pocket expenses of the Underwriter (including the fees
and disbursements of their counsel), to the extent set forth in Paragraph 8(c),
in connection with this Agreement and the proposed offering of the Shares and
Warrants, but in no event to exceed the sum of $50,000 less such amounts already
paid.
Notwithstanding any contrary provision contained in this Agreement,
any election hereunder or any termination of this Agreement, and whether or not
this Agreement is otherwise carried out, the provisions of Paragraph 8 and 10
hereof shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
13. NOTICES.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Underwriter, shall be mailed,
delivered or telegraphed and confirmed to May Davis Group, Inc., One World Trade
Center, New York, New York 10048, Attention: Owen May, with a copy thereof to
Jay M. Kaplowitz, Esq., Gersten, Savage, Kaplowitz & Fredericks, LLP, 101 East
52nd Street, 9th Floor, New York, New York 10022, and, if sent to the Company,
shall be mailed, delivered or telegraphed and confirmed to the Company at 380
Lashley Street, Longmont, Colorado 80501, Attention: Robert L. Richards, with a
copy thereof to Gusrae, Kaplan & Bruno, 120 Wall Street, New York, New York
10005, Attention: Robert Perez, Esq.
14. PARTIES.
This Agreement shall inure solely to the benefit of and shall be
binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Paragraph 10 hereof, and their respective
successors, legal representatives and assigns, and no other person, shall have
or be construed to have
30
<PAGE>
any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained.
15. CONSTRUCTION.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York and shall supersede any
agreement or understanding, oral or in writing, express or implied, between the
Company and the Underwriter relating to the sale of any of the Common Stock and
Warrants.
16. JURISDICTION AND VENUE.
The Company agrees that the courts of the State of New York shall have
jurisdiction over any litigation arising from this Agreement, and venue shall be
proper in the Eastern District of New York.
17. COUNTERPARTS.
This Agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
KAIRE INTERNATIONAL, INC.
By:
---------------------------------
Robert L. Richards
President
Accepted as of the date
first above written:
MAY DAVIS GROUP, INC.
By:
-----------------------------
Owen May, President
31
<PAGE>
EXHIBIT 4.3
[FORM OF FACE OF STOCK CERTIFICATE]
KAIRE INTERNATIONAL, INC.
Number Shares
KII- See Reverse For
Certain Definitions
This certifies that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
KAIRE INTERNATIONAL, INC.
(hereinafter called the Corporation) transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate is not valid
until countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile signatures of the Corporation's duly authorized officers.
Dated: , 1998
CHIEF EXECUTIVE OFFICER SECRETARY
Countersigned and Registered:
American Securities & Trust, Inc.
By:
Authorized Signature
<PAGE>
[FORM OF REVERSE OF STOCK CERTIFICATE]
KAIRE INTERNATIONAL, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT _________ Custodian___
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act
-----------------------------
JT TEN - as joint tenants with right UNIF TRF ACT___________ Custodian (until
age__________)
of survivorship and not as (Cust)
tenants in common
_____________under Uniform Transfer to
(Minor)
Minor Acts
-------------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
Please insert social security or other
identifying number of assignee
[ ]
----------------------------------------------------------
(Please print or type name and address, including zip code of assigned)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT _______________________________ ATTORNEY
TO TRANSFER THE SAID STOCK ON THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
<PAGE>
DATED: X
------------------- ____________________________________
X
____________________________________
Notice: The signature(s) to this assignment
must correspond with the names(s) as written
upon the face of the certificate, in every
particular, without alteration or
enlargement, or any change whatsoever.
SIGNATURE GUARANTEED: ----------------------------------------------------
The signature(s) should be guaranteed by an eligible
guarantor institution (banks stockbrokers, savings and
loan associations and credit unions with membership in
an approved signature guarantee medallion program),
pursuant to S.E.C. Rule 17Ad-15
<PAGE>
EXHIBIT 4.5
[FORM OF FACE OF WARRANT CERTIFICATE]
No. W ______________ (_________) Warrants
VOID AFTER _______________, 2006
REDEEMABLE WARRANT CERTIFICATE
FOR PURCHASE OF COMMON STOCK OF
KAIRE INTERNATIONAL, INC.,
A DELAWARE CORPORATION
This certifies that FOR VALUE RECEIVED ___________________ or registered
assigns (the "Registered Holder") is the owner of the number of Redeemable
Warrants (the "Warrants") specified above. Each Warrant initially entitles
the Registered Holder to purchase, subject to the terms and conditions set
forth in this Certificate and the Warrant Agreement (as hereinafter defined),
one fully paid and nonassessable share of Common Stock, $.01 par value, of
Kaire International, Inc., a Delaware corporation, at any time between
___________, 1998 and __________, 2004, provided, however, that prior to
___________, 2000, the Warrants will be exercisable only if May Davis Group,
Inc. (the "Underwriter") has consented in writing to all of the Company's
Warrants being exercisable and the Expiration Date (as hereinafter defined),
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate
office of American Securities Transfer & Trust, Inc. as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of $6.60 per share
(the "Purchase Price") in lawful money of the United States of America in
cash or by official bank or certified check made payable to the Warrant Agent.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated as of
__________________, 1998, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
1
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 3:00 p.m. Denver time or 5:00 p.m.
New York time (the "Expiration Time") on ______________, 2004, or such earlier
date as the Warrants shall be redeemed. If such date shall in the State of
Colorado be a holiday or a day on which the banks are authorized to close, then
the Expiration Date shall be the next day which in the State of Colorado is not
a holiday nor a day in which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will use its best
efforts to cause the same to become effective and to keep such registration
statement current while any of the Warrants are outstanding. This Warrant shall
not be exercisable by a Registered Holder in any state where such exercise would
be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment together with any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
2
<PAGE>
At any time that this Warrant is exercisable, it may be redeemed at the
option of the Company, at a Redemption Price of $0.05 per Warrant, provided that
the average closing bid price of the Company's Common Stock for a period of 20
consecutive trading days immediately prior to the date on which notice of
redemption is given, shall have exceeded $10.00 per share. Notice of redemption
shall be mailed within ten (10) days after the end of such period and be given
not later than the thirtieth (30th) day before the date fixed for redemption,
all as provided in the Warrant Agreement. On and after the date fixed for
redemption, the Registered Holder shall have no rights with respect to this
Warrant except to receive the $0.05 per Warrant upon surrender of this
Certificate.
Warrantholders will be entitled to exercise Warrants at any time up to the
business day next preceding the redemption date. The Warrants may not be
redeemed unless at the time of redemption there is a current prospectus
encompassing the shares of Common Stock issuable upon exercise of such Warrants
under an effective registration statement.
WARRANT AGREEMENT AND EXCHANGE OF WARRANTS
The Warrant Agreement contains provisions permitting the Company and the
Warrant Agent, without the consent of the Warrantholders, to supplement or amend
the Warrant Agreement in order to cure any ambiguity or defect or to make any
other provisions in regard to matters or questions arising thereunder that the
Company and the Warrant Agent may deem necessary or desirable and that does not
adversely affect the interests of the Warrantholders. At that same time, the
Company will exchange with the Warrantholders, which purchased ___________
Warrants in a private placement, printed warrant certificates for the
typewritten format certificates delivered to the private placement purchasers.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Delaware.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two (2) of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ________________, 1998
KAIRE INTERNATIONAL, INC.
By:
--------------------------------
Robert L. Richards,
Chief Executive Officer
By:
--------------------------------
Mark D. Woodburn, Secretary
[seal]
Countersigned:
AMERICAN SECURITIES TRANSFER
& TRUST, INC.
By:
---------------------------
Authorized Officer
4
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
KAIRE INTERNATIONAL, INC.
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
______________ (________________) Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Warrants, and requests that certificates for such securities shall be issued in
the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
---------------------------
---------------------------
---------------------------
---------------------------
[please print or type name and address]
and be delivered to
---------------------------
---------------------------
---------------------------
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
<PAGE>
The undersigned represents that the exercise of the within Warrant was
solicited by
-------------------------------
(Indicate the name of solicit-
ing broker)
Dated: -------------------------------
--------------------- Signature
-------------------------------
Street Address
-------------------------------
City, State and Zip Code
-------------------------------
Taxpayer ID Number
Signature Guaranteed:
-------------------------------
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------------------
-------------------------------
-------------------------------
-------------------------------
[please print or type name and address]
___________________________ (________________) of the Warrants represented by
this Warrant Certificate, and hereby irrevocably constitutes and appoints
_________________ Attorney to transfer this Warrant Certificate on the books of
the Company, with full power of substitution in the premises.
Dated:
------------------- -------------------------------
Signature Guaranteed:
_______________________________
THE SIGNATURE MUST BE GUARANTEED BY A MEDALLION BANK.
<PAGE>
EXHIBIT 4.7
WARRANT AGREEMENT
Kaire International, Inc., a Delaware corporation ("Company"), and American
Securities Transfer & Trust, Inc. ("AST"), 1825 Lawrence Street, Suite 444,
Denver, Colorado 80202, a Colorado corporation ("Warrant Agent"), agree as
follows:
1. PURPOSE. The Company proposes to publicly offer and issue (the "Public
Offering") 825,000 shares of the Company's $.01 par value common stock
shares ("Shares") and 1,000,000 warrants permitting the purchase of
1,000,000 Shares ("Warrant").
2. WARRANTS. Each Warrant will entitle the registered holder of a Warrant
("Warrant Holder") to purchase from the Company one Share at $6.60 per
share ("Exercise Price"). A Warrant Holder may exercise all or any number
of Warrants resulting in the purchase of a whole number of Shares.
3. EXERCISE PERIOD. The Warrants may be exercised at any time during the
period commencing September / X /, 2000 and ending at 3:00 p.m., Denver,
Colorado (5:00 p.m., New York) time on September / X /, 2004 ("Expiration
Date") except as changed by Section 12 of this Agreement. The Warrants may
be exercised prior to September / X /, 2000, only if the underwriter of the
Public Offering has consented to all of the Warrants being exercisable (the
"Advanced Exercise Date"). After the Expiration Date, any unexercised
Warrants will be void and all rights of Warrant Holders shall cease.
4. DETACHABILITY. The Shares and Warrants are being separately sold.
5. CERTIFICATES. The Warrant Certificates shall be in registered form only
and shall be substantially in the form set forth in EXHIBIT A attached to
this Agreement. Warrant Certificates shall be signed by, or shall bear the
facsimile signature of the President or a Vice President of the Company and
the Secretary or an Assistant Secretary of the Company and shall bear a
facsimile of the Company's corporate seal. If any person, whose facsimile
signature has been placed upon any Warrant Certificate or the signature of
an officer of the Company, shall have ceased to be such officer before such
Warrant Certificate is countersigned, issued and delivered, such Warrant
Certificate shall be countersigned, issued and delivered with the same
effect as if such person had not ceased to be such officer. Any Warrant
Certificate may be signed by, or made to bear the facsimile signature of,
any
<PAGE>
person who at the actual date of the preparation of such Warrant
Certificate shall be a proper officer of the Company to sign such Warrant
Certificate even though such person was not such an officer upon the date
of the Agreement.
6. COUNTERSIGNING. Warrant Certificates shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. The Warrant Agent hereby is authorized to countersign and
deliver to, or in accordance with the instructions of, any Warrant Holder
any Warrant Certificate which is properly issued.
7. REGISTRATION OF TRANSFER AND EXCHANGES. Subject to the provisions of
Section 4, the Warrant Agent shall from time to time register the transfer
of any outstanding Warrant Certificate upon records maintained by the
Warrant Agent for such purpose upon surrender of such Warrant Certificate
to the Warrant Agent for transfer, accompanied by appropriate instruments
of transfer in form satisfactory to the Company and the Warrant Agent and
duly executed by the Warrant Holder or a duly authorized attorney. Upon
any such registration of transfer, a new Warrant Certificate shall be
issued in the name of and to the transferee and the surrendered Warrant
Certificate shall be cancelled.
8. EXERCISE OF WARRANTS; REDEMPTION
a. Any one Warrant or any multiple of one Warrant evidenced by any
Warrant Certificate may be exercised upon any single occasion on or
after the Exercise Date or the Advanced Exercise Date, as the case may
be, and on or before the Expiration Date. A Warrant shall be
exercised by the Warrant Holder by surrendering to the Warrant Agent
the Warrant Certificate evidencing such Warrant with the exercise form
on the reverse of such Warrant Certificate duly completed and executed
and delivering to the Warrant Agent, by cash or by certified or
official bank check payable to the order of the Company, the Exercise
Price for each Share to be purchased.
b. Upon receipt of a Warrant Certificate with the exercise form thereon
duly executed together with payment in full of the Exercise Price for
the Shares for which Warrants are then being exercised, the Warrant
Agent shall requisition from any transfer agent for the Shares, and
upon receipt shall make delivery of, certificates evidencing the total
number of whole Shares for which Warrants are then being exercised in
such names and denominations as are required for delivery to, or in
accordance with the instructions of, the Warrant Holder.
2
<PAGE>
Such certificates for the Shares shall be deemed to be issued, and the
person whom such Shares are issued of record shall be deemed to have
become a holder of record of such Shares, as of the date of the
surrender of such Warrant Certificate and payment of the Exercise
Price, whichever shall last occur, provided that if the books of the
Company with respect to the Shares shall be deemed to be issued, and
the person to whom such Shares are issued of record shall be deemed to
have become a record holder of such Shares, as of the date on which
such books shall next be open (whether before, on or after the
Expiration Date) but at the Exercise Price, whichever shall have last
occurred, to the Warrant Agent.
c. If less than all the Warrants evidenced by a Warrant Certificate are
exercised upon a single occasion, a new Warrant Certificate for the
balance of the Warrants not so exercised shall be issued and delivered
to, or in accordance with, transfer instructions properly given by the
Warrant Holder until the Expiration Date.
d. All Warrant Certificates surrendered upon exercise of the Warrants
shall be cancelled.
e. Upon the exercise, or conversion of any Warrant, the Warrant Agent
shall promptly deposit the payment into an escrow account established
by mutual agreement of the Company and the Warrant Agent at a
federally insured commercial bank. All funds deposited in the escrow
account will be disbursed on a weekly basis to the Company once they
have been determined by the Warrant Agent to be collected funds. Once
the funds are determined to be collected, the Warrant Agent shall
cause the share certificate(s) representing the exercised Warrants to
be issued.
f. (i) At any time that the Warrants are exercisable and on not less
than thirty (30) days notice, the Warrants may be redeemed, at the
option of the Company, at a redemption price of $.05 per Warrant,
provided the average closing bid price of the Shares receivable upon
exercise of the Warrant shall have exceeded $10.00 per share (the
"Target Price"), subject to adjustment as set forth in Section 13
hereof, for a period of twenty consecutive trading days immediately
prior to the date on which notice of redemption is given.
Warrantholders will be entitled to exercise Warrants at any time up to
the business day next preceding the redemption date.
3
<PAGE>
(ii) Providing the conditions set forth in Section 8(f) are met, and
the Company shall desire to exercise its right to redeem the Warrants,
it shall mail a notice of redemption to the holders of the Warrants to
be redeemed, first class, postage prepaid, within ten days after the
end of such foregoing period, not later than the thirtieth (30th) day
before the date fixed for redemption, at his/her last address as shall
appear on the records of the Company. Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given
whether or not the holder receives such notice.
(iii) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the
Warrant Certificates shall be delivered and the redemption price paid,
and (iv) that the right to exercise the Warrant shall terminate at
3:00 p.m. Denver, Colorado time (5:00 p.m. New York time) the
"Redemption Time") on the trading day immediately preceding the date
fixed for redemption. The date fixed for redemption of the Warrants
shall be the Redemption Date. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity of
the proceedings for such redemption except as to a holder (a) to whom
notice was mailed; or (b) whose notice was defective. An affidavit of
the Secretary or an Assistant Secretary of the Company that notice of
redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(iv) Except as provided herein, any right to exercise a Warrant shall
terminate at the Redemption Time on the trading day immediately
proceeding the Redemption Date. On and after the Redemption Date, the
holders shall have no further rights except to receive, upon surrender
of the Warrant, the redemption price.
(v) From and after the Redemption Date, the Company shall, at the
place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the holder thereof of one
or more Warrants to be redeemed, deliver or cause to be delivered to
or upon the written order of such holder a sum in cash equal to the
redemption price of each such Warrant. From and after the date fixed
for redemption and upon the deposit or setting aside by the Company of
a sum sufficient to redeem all the Warrants called for redemption,
such Warrants shall expire and become void and all rights hereunder
and under the Warrant Certificate, except the
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right to receive payment of the redemption price, shall cease.
(vi) If the Company's Shares are subdivided or combined into a
greater of smaller number of shares of Common Stock, the Target Price
shall be proportionately adjusted by the ratio which the total number
of shares of Common Stock outstanding immediately prior to such event
bears to the total number of shares to be outstanding immediately
after such event.
g. Expenses incurred by American Securities Transfer & Trust, Inc. while
acting in the capacity as Warrant Agent will be paid by the Company.
These expenses, including delivery of exercised share certificate to
the shareholder, will be deducted from the exercise fee submitted
prior to distribution of funds to the Company. A detailed accounting
statement relating to the number of shares exercised, names of
registered Warrant Holder(s) and the net amount of exercised funds
remitted will be given to the Company with the payment of each
exercise amount.
h. At the time of exercise of the Warrant(s), the transfer fee is to be
paid by ______________. In the event the shareholder must pay the fee
and fails to remit same, the fee will be deducted from the proceeds
prior to distribution to the Company.
9. TAXES. The Company will pay all taxes attributable to the initial issuance
of Shares upon exercise of Warrants. The Company shall not, however, be
required to pay any tax which may be payable in respect to any transfer
involved in any issue of Warrant Certificates or in the issue of any
certificates of Shares in the name other than that of the Warrant Holder
upon the exercise of any Warrant.
10. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant Certificate is
mutilated, lost, stolen or destroyed, the Company and the Warrant Agent
may, on such terms as to indemnify or otherwise as they may in their
discretion impose (which shall, in the case of a mutilated Warrant
Certificate, include the surrender thereof), and upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such mutilation, loss,
theft or destruction, issue a substitute Warrant Certificate of like
denomination or tenor as the Warrant Certificate so mutilated, lost, stolen
or destroyed. Applicants for substitute Warrant Certificates shall comply
with such other reasonable regulations and pay any reasonable charges as
the Company or the Warrant Agent may prescribe.
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11. RESERVATION OF SHARES. For the purpose of enabling the Company to satisfy
all obligations to issue Shares upon exercise of Warrants, the Company will
at all times reserve and keep available free from preemptive rights, out of
the aggregate of its authorized but unissued shares, the full number of
Shares which may be issued upon the exercise of the Warrants will upon
issue be fully paid and nonassessable by the Company and free from all
taxes, liens, charges and security interests with respect to the issue
thereof.
12. GOVERNMENTAL RESTRICTIONS. If any Shares issuable upon the exercise of
Warrants require registration or approval of any governmental authority,
the Company will endeavor to secure such registration or approval; provided
that in no event shall such Shares be issued, and the Company shall have
the authority to suspend the exercise of all Warrants, until such
registration or approval shall have been obtained; but all Warrants, the
exercise of which is requested during any such suspension, shall be
exercisable at the Exercise Price. If any such period of suspension
continues past the Expiration Date, all Warrants, the exercise of which
have been requested on or prior to the Expiration Date, shall be
exercisable upon the removal of such suspension until the close of business
on the business day immediately following the expiration of such
suspension.
13. ADJUSTMENTS. Subject and pursuant to the provisions of this Section 13,
the Warrant Price and number of Shares subject to this Warrant shall be
subject to adjustment from time to time as set forth hereinafter.
a. Except as hereinafter provided in the event the Company shall, at any
time or from time to time after the date hereof, sell any Shares for a
consideration per share less than the lower of (i) the closing bid price of
the Shares as reported on NASDAQ on the trading date next preceding such
sale (the "Market Price"), or (ii) the Warrant Price then in effect, or
issue any Shares as a stock dividend to the holders of the Shares or
subdivide or combine the outstanding Shares into a greater or lesser number
of Shares (any such sale, issuance, subdivision or combination being herein
called a "Change of Shares"), then, and hereafter immediately before the
date of such sale or the record date for each Change of Shares, the Warrant
Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the
nearest cent) determined by dividing (1) the product of (a) the Warrant
Price in effect immediately before such Change of Shares and (b) the sum
(i) the total number of shares of Common Stock outstanding
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immediately prior to such Change of Shares, and (ii) the number of shares
determined by dividing (A) the aggregate consideration, if any, received by
the Company upon such consideration, issuance, subdivision or combination
by (3) the lesser of (x) the Market Price, or (y) the Warrant Price, in
effect immediately prior to such Change of Shares; by (2) the total number
of shares of Common Stock outstanding immediately after such Change of
Shares.
For the purposes of any adjustment to be made in accordance with this
Section 13a. the following provisions shall be applicable: In case of the
issuance or sale of Shares (or of other securities deemed hereunder to
involve the issuance or sale of Shares) for a consideration part or all of
which shall be cash, the amount of the cash portion of the consideration
therefor deemed to have been received by the Company shall be (i) the
subscription price (before deducting any commissions or any expenses
incurred in connection therewith), if Shares of are offered by the Company
for subscription, or (ii) the public offering price (before deducting
therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection
therewith), if such securities are sold to underwriters or dealers for
public offering without a subscription offering, or (iii) the gross amount
of cash actually received by the Company for such securities, in any other
case.
b. In case of the issuance or sale (otherwise than as a dividend or other
distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of Shares (or of other securities
deemed hereunder to involve the issuance or sale of Shares) for a
consideration part or all of which shall be other than cash, the amount of
the consideration therefor other than cash deemed to have been received by
the Company shall be the value of such consideration as determined in good
faith by the Board of Directors of the Company.
c. Shares issuable by way of dividend or other distribution on any stock
of the Company shall be deemed to have been issued immediately after the
opening of business on the day following the record date for the
determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
d. The reclassification of securities of the Company other than Shares
into securities including Shares shall be deemed to involve the issuance of
such Shares of for a consideration
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other than cash immediately prior to the close of business on the date
fixed for the determination of security holders entitled to receive such
Shares, and the value of the consideration allocable to such Shares shall
be determined as provided in subsection b. of this Section 13.
e. The number of Shares at any one time outstanding shall be deemed to
include the aggregate maximum number of shares issuable (subject to
readjustment upon the actual issuance thereof) upon the exercise of
options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
f. Upon each adjustment of the Warrant Price pursuant to this Section 13,
the number of Shares purchasable upon the exercise of each Warrant shall be
the number derived by multiplying the number of Shares purchasable
immediately prior to such adjustment by the Warrant Price in effect prior
to such adjustment and dividing the product so obtained by the applicable
adjusted Warrant Price.
g. In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for Shares, or issue any
securities convertible into or exchangeable for Shares, for a consideration
per share (determined as provided in Section 13 a. and as provided below)
less than the lower of (i) the Market Price, or (ii) the Warrant Price in
effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or without
consideration (including the issuance of any such securities by way of
dividend or other distribution), the Warrant Price for the Warrants
(whether or not the same shall be issued and outstanding) in effect
immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities, as the case may be, shall be
reduced to a price determined by making the computation in accordance with
the provisions of Section 13 a. hereof, provided that:
(1) The aggregate maximum number of Shares as the case may be,
issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently
exercisable or currently exercisable in full) shall be deemed to be
issued and outstanding at the time such options, rights or warrants
were issued, for a consideration equal to the minimum purchase price
per share provided for in such options, rights or warrants at the time
of issuance, plus the consideration, if any, received by the Company
for such options, rights or warrants; provided, however, that upon
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<PAGE>
the expiration or other termination of such options, rights or
warrants, if any thereof shall not have been exercised, the number of
Shares deemed to be issued and outstanding pursuant to this subsection
(and for the purposes of subsection e. of Section 13 hereof) shall be
reduced by the number of Shares as to which options, warrants and/or
rights shall have expired, and such number of Shares shall no longer
be deemed to be issued and outstanding, and the Purchase Price then in
effect shall forthwith be readjusted and thereafter be the price that
it would have been had adjustment been made on the basis of the
issuance only of the Shares actually issued plus the Shares remaining
issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated
unexercised.
(2) The aggregate maximum number of Shares issuable or that may
become issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even
if not then currently convertible or exchangeable in full) shall be
deemed to be issued and outstanding at the time of issuance of such
securities, for a consideration equal to the consideration received by
the Company for such securities, plus the minimum consideration, if
any, receivable by the Company upon the conversion or exchange
thereof; provided, however, that upon the expiration or other
termination of the right to convert or exchange such convertible or
exchangeable securities (whether by reason of redemption or
otherwise), the number of Shares deemed to be issued and
outstanding pursuant to this subsection 13 g. (2) (and for the
purposes of subsection 13 e. hereof) shall be reduced by the number
of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall
no longer be deemed to be issued and outstanding, and the Warrant
Price then in effect shall forthwith be readjusted and thereafter
be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus
the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion
or exchange rights shall not have expired or terminated unexercised.
(3) If any change shall occur in the exercise price per share
provided for in any of the options, rights or warrants referred to in
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<PAGE>
subsection 13 b., or in the price per share or ratio at which the
securities referred to in subsection 13 g. are convertible or
exchangeable, such options, rights or warrants or conversion or
exchange rights, as the case may be, to the extent not theretofore
exercised, shall be deemed to have expired or terminated on the date
when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange
thereof, and the Company shall be deemed to have issued upon such date
new options, rights or warrants or convertible or exchangeable
securities.
h. In case of any reclassification or change of outstanding Shares
issuable upon exercise of the Warrants (other than a change in par value,
or from par value to no par value, or from no par value to par value or as
a result of subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation
and which does not result in any reclassification or change of the then
outstanding Shares or other capital stock issuable upon exercise of the
Warrants) or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate provision
whereby the registered holder of each Warrant then outstanding shall have
right thereafter to receive on exercise of such Warrant the kind and amount
of securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and
shall forthwith file at the Corporate Office of the Warrant Agent a
statement signed by its President or a Vice President and by its Treasurer
or an Assistant Treasurer or its Secretary or an Assistant Secretary
evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to
the adjustments provided for in subsection 13 a. The above provisions of
this subsection 13 h. shall similarly apply to successive reclassifications
and changes of Shares and to successive consolidations, mergers, sales or
conveyances.
i. After each adjustment of the Purchase Price pursuant to this Section
13, the Company will promptly prepare a certificate signed by the Chairman
or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant
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<PAGE>
Secretary, of the Company setting forth: (i) the Warrant Price as so
adjusted, (ii) the number of Shares purchasable upon exercise of each
Warrant, after such adjustment, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will promptly file such
certificate with the Warrant Agent and cause a brief summary thereof to be
sent by ordinary first class mail to each registered holder at his last
address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity thereof except as to the holder to whom
the Company failed to mail such notice, or except as to the holder whose
notice was defective. The affidavit of any officer of the Warrant Agent or
the Secretary or an Assistant Secretary of the Company that such notice has
been mailed, shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
j. No adjustment shall be made:
(i) upon the issuance of the Warrants (including Shares issued upon
exercise of those warrants);
(ii) upon the issuance of Shares and warrants (including Shares issued
upon exercise of those warrants) issued prior to or in connection with
the Public Offering;
(iii) upon the issuance or sale of Shares issuable upon the exercise
of any stock options granted under any stock option plan of the
Company; or
(iv) if the amount of said adjustment shall be less than five cents
($.05) per share of Common Stock, provided, however, that in such
case, any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together
with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least five cents
($.05) per Share.
k. The foregoing provisions notwithstanding on the effective date of any
new Warrant Price the number of shares as to which any Warrant may be
exercised shall be increased or decreased so that the total sum payable to
the Company on the exercise of such Warrant shall remain constant.
l. The form of Warrant need not be changed because of any change pursuant
to this Section, and Warrants issued after such change may state the same
Warrant Price and the same number of shares as is stated in the Warrants
initially issued pursuant to this Agreement. However, the Company may at
any
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time in its sole discretion (which shall be conclusive) make any change in
the form of Warrant that the Company may deem appropriate and that does not
effect the substance thereof; and any Warrant thereafter issued or
countersigned, whether in exchange or substitution for an outstanding
Warrant or otherwise, may be in the form as so changed.
14. NOTICE TO WARRANT HOLDERS. Upon any adjustment as described in Section 13,
the Company within 20 days thereafter shall (i) cause to be filed with the
Warrant Agent a certificate signed by a Company officer setting forth the
details of such adjustment, the method of calculation and the facts upon
which such calculation is based, which certificate shall be conclusive
evidence of the correctness of the matters set forth therein, and (ii)
cause written notice of such adjustments to be given to each Warrant Holder
as of the record date applicable to such adjustment. Also, if the Company
proposes to enter into any reorganization, reclassification, sale of
substantially all of its assets, consolidation, merger, dissolution,
liquidation or winding up, the Company shall give notice of such fact at
least 20 days prior to such action to all Warrant Holders which notice
shall set forth such facts as indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Exercise
Price and the kind and amount of the shares or other securities and
property deliverable upon exercise of the Warrants. Without limiting the
obligation of the Company hereunder to provide notice to each Warrant
Holder, failure of the Company to give notice shall not invalidate any
corporate action taken by the Company.
15. NO FRACTIONAL WARRANTS OR SHARES. The Company shall not be required to
issue fractions of Warrants upon the reissue of Warrants, any adjustments
as described in Section 13 or otherwise; but the Company in lieu of issuing
any such fractional interest, shall round up or down to the nearest full
Warrant. If the total Warrants surrendered by exercise would result in the
issuance of a fractional share, the Company shall not be required to issue
a fractional share but rather the aggregate number of shares issuable will
be rounded up or down to the nearest full share.
16. RIGHTS OF WARRANT HOLDERS. No Warrant Holder, as such, shall have any
rights of a shareholder of the Company, either at law or equity, and the
rights of the Warrant Holders, as such, are limited to those rights
expressly provided in this Agreement or in the Warrant Certificates. The
Company and the Warrant Agent may treat the registered Warrant Holder in
respect of any Warrant Certificates as the absolute owner thereof for all
purposes notwithstanding any notice to the contrary.
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17. WARRANT AGENT. The Company hereby appoints the Warrant Agent to act as the
agent of the Company and the Warrant Agent hereby accepts such appointment
upon the following terms and conditions by all of which the Company and
every Warrant Holder, by acceptance of his Warrants, shall be bound:
a. Statements contained in this Agreement and in the Warrant Certificates
shall be taken as statements of the Company. The Warrant Agent
assumes no responsibility for the correctness of any of the same
except such as describes the Warrant Agent or for action taken or to
be taken by the Warrant Agent.
b. The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the Company's covenants contained in
this Agreement or in the Warrant Certificates.
c. The Warrant Agent may consult at any time with counsel satisfactory to
it (who may be counsel for the Company) and the Warrant Agent shall
incur no liability or responsibility to the Company or to any Warrant
Holder in respect of any action taken, suffered or omitted by it
hereunder in good faith and in accordance with the opinion or the
advice of such counsel, provided the Warrant Agent shall have
exercised reasonable care in the selection and continued employment of
such counsel.
d. The Warrant Agent shall incur no liability or responsibility to the
Company or to any Warrant Holder for any action taken in reliance upon
any notice, resolution, waiver, consent, order, certificate or other
paper, document or instrument believed by it to be genuine or to have
been signed, sent or presented by the proper party or parties.
e. The Company agrees to pay to the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes
and governmental charges and all other charges of any kind or nature
incurred by the Warrant Agent in the execution of this Agreement and
to indemnify the Warrant Agent and save it harmless against any and
all liabilities, including judgments, costs and counsel fees, for this
Agreement except as a result of the Warrant Agent's negligence or bad
faith.
f. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take
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any other action likely to involve expense unless the Company or one
or more Warrant Holders shall furnish the expenses which may be
incurred in connection with such action, suit or legal proceeding, but
this provision shall not affect the power of the Warrant Agent to take
such action as the Warrant Agent may consider proper, whether with or
without any such security or indemnity. All rights of action under
this Agreement or under any of the Warrants may be enforced by the
Warrant Agent without the possession of any of the Warrant
Certificates or the production thereof at any trial or other
proceeding relative thereto, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgement shall be for the ratable
benefit of the Warrant Holders as their respective rights or interest
may appear.
g. The Warrant Agent and any shareholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract
with or lend money to the Company or otherwise act as fully and freely
as though it were not Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
18. SUCCESSOR WARRANT AGENT. Any corporation into which the Warrant Agent may
be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which
the Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent, shall be the successor to
the Warrant Agent hereunder without the execution or filing of any paper or
any further act of a party or the parties hereto. In any such event or if
the name of the Warrant Agent is changed, the Warrant Agent or such
successor may adopt the countersignature of the original Warrant Agent and
may countersign such Warrant Certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent.
19. CHANGE OF WARRANT AGENT. The Warrant Agent may resign or be discharged by
the Company from its duties under this Agreement by the Warrant Agent or
the Company, as the case may be, giving notice in writing to the other, and
by giving a date when such resignation or discharge shall take effect,
which notice shall be sent at least 30 days prior to the date so specified.
If the Warrant Agent shall resign, be discharged
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or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or by any Warrant Holder or after discharging the Warrant
Agent, then any Warrant Holder may apply to the District Court for Denver
County, Colorado, for the appointment of a successor to the Warrant Agent.
Pending appointment of a successor to the Warrant Agent, either by the
Company or by such Court, the duties of the Warrant Agent shall be carried
out by the Company. Any successor Warrant Agent, whether appointed by the
Company or by such Court, shall be a bank or a trust company, in good
standing, organized under the laws of the State of Colorado or of the
United States of America, having its principal office in Denver, Colorado
and having at the time of its appointment as Warrant Agent, a combined
capital and surplus of at least four million dollars. After appointment,
the successor Warrant Agent shall be vested with the same powers, rights,
duties and responsibilities as if had been originally named as Warrant
Agent without further act or deed and the former Warrant Agent shall
deliver and transfer to the successor Warrant Agent any property at the
time held by it thereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for effecting the delivery or transfer.
Failure to give any notice provided for in the section, however, or any
defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the
successor Warrant Agent, as the case may be.
20. NOTICES. Any notice or demand authorized by this Agreement to be given or
made by the Warrant Agent or by any Warrant Holder to or on the Company
shall be sufficiently given or made if sent by mail, first class, certified
or registered, postage prepaid, addressed (until another address is filed
in writing by the Company with the Warrant Agent), as follows:
Kaire International, Inc.
380 Lashley Street
Longmont, Colorado 80501
Any notice or demand authorized by this Agreement to be given or made by
any Warrant Holder or by the Company to or on the Warrant Agent shall be
sufficiently given or made if sent by mail, first class, certified or
registered, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Company), as follows:
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American Securities Transfer & Trust, Inc.
1825 Lawrence Street, Suite 444
Denver, CO 80202-1817
Any distribution, notice or demand required or authorized by this Agreement
to be given or made by the Company or the Warrant Agent to or on the
Warrant Holders shall be sufficiently given or made if sent by mail, first
class, certified or registered, postage prepaid, addressed to the Warrant
Holders at their last known addresses as they shall appear on the
registration books for the Warrant Certificates maintained by the Warrant
Agent.
21. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent may from
time to time supplement or amend this Agreement without the approval of any
Warrant Holders in order to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with
any other provisions herein, or to make any other provisions in regard to
matters or questions arising hereunder which the Company and the Warrant
Agent may deem necessary or desirable.
22. SUCCESSORS. All the covenants and provisions of this Agreement by or for
the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
23. TERMINATION. This Agreement shall terminate at the close of business on
the Expiration Date or such earlier date upon which all Warrants have been
exercised; provided, however, that if exercise of the Warrants is suspended
pursuant to Section 12 and such suspension continues past the Expiration
Date, this Agreement shall terminate at the close of business on the
business day immediately following expiration of such suspension. The
provisions of Section 17 shall survive such termination.
24. GOVERNING LAWS. This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State
of Colorado and for all purposes shall be construed in accordance with the
laws of said State.
25. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed
to give any person or corporation other than the Company, the Warrant Agent
and the Warrant Holders any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive
benefit of the Company, the Warrant Agent and the Warrant Holders.
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26. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of such counterparts shall for all purposes be deemed to
be an original and all such counterparts shall together constitute but one
and the same instrument.
Date: September , 1998
KAIRE INTERNATIONAL, INC.
A DELAWARE CORPORATION
By:
------------------------------
Robert L. Richards
Chief Executive Officer
SEAL
ATTEST:
- ----------------------------
Secretary: Mark D. Woodburn
AMERICAN SECURITIES TRANSFER & TRUST, INC., A
COLORADO CORPORATION
By:
------------------------------
Vice President:
SEAL
ATTEST:
- ----------------------------
Secretary:
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Exhibit 10.9(a)
AGREEMENT made this 30th day of May, 1997 by and between Horphag
Research Limited, having a registered office at 1 Le Marchant Street,
St-Peter Port, Guernsey, Channel Islands ("Horphag") and Kaire International,
Inc. having its principal office at 380 Lashley Street, Longmont, Colorado
("Kaire").
WHEREAS Kaire has caused to be organized Kaire Korea Ltd., a
corporation dedicated to distributing food supplement products in the
Republic of Korea according to Kaire's multi-level system; and
WHEREAS Kaire wishing to set up an office for Kaire Korea Ltd. ("Kaire
Korea") in Seoul and to begin distribution operations as rapidly as possible,
has requested a loan from Horphag; and
WHEREAS Horphag is willing to make such loan on the following terms and
conditions:.
NOW THEREFORE the parties hereto agree as follows:
1. Kaire hereby warrants and represents to Horphag:
a) Kaire is the legal and beneficial owner of all the
capital stock of Kaire Korea and any outstanding shares
of Kaire Korea are or will be upon issuance free and
clear of all liens and encumbrances.
b) The principal sales effort of Kaire Korea will be
devoted to Maritime Pine, a Kaire product containing
Pycnogenol-Registered Trademark-.
c) Kaire will use its best efforts to see that the
trademark Pycnogenol is registered in Korea as a food
supplement as promptly as possible and expects
this to be achieved by July 31, 1997. The bulk
Pycnogenol-Registered Trademark- necessary for
meeting the Korean quarantine requirements
<PAGE>
will have been imported in time to permit sales of
products containing Pycnogenol-Registered Trademark-
by July 31, 1997.
d) Any of the thirty nutritional supplements to be
distributed by Kaire in Korea, including that containing
Pycnogenol-Registered Trademark-, will be sold to associates
who will pay Kaire Korea by bank wire in advance of receiving
any products.
2. In reliance of the forgoing representations and warranties
by Kaire, Horphag agrees to lend to Kaire International $500,000 on
the following terms and conditions:
a) Kaire will issue a demand promissory note in the form
attached hereto.
b) Kaire will issue a guarantee of the note in the form
attached hereto and its officers, Messrs. Mangeris and Robert
Richards, will issue personal guarantees in the form attached
hereto.
c) Promptly upon receipt of the funds from Horphag, Kaire will
transfer them to the Korea Exchange Bank to hold the funds
temporarily in a floating account with the following
instructions:
1) Upon instructions from Jac Hong Ahn or Chae
Woo Song, attorneys-in-fact for Kaire International, Inc.,
(Company), please credit an amount equivalent to 444 million
Won to the share subscription account of Kaire Korea, Ltd.
opened at the Korea Exchange Bank, Naeja Branch, as a share
subscription payment against issuance to the Company of 88,000
shares of Kaire Korea, Ltd. at a price of 5,000 Won per share.
2
<PAGE>
2) Any excess funds are to be credited to our account.
d) Kaire International will issue to Horphag or its assignees
an option to acquire 15% of the capital stock of Kaire Korea
at the par value thereof, which option can be exercised any
time up to 36 months from the date of issuance. Kaire Korea
will be given notice fifteen days in advance of any proposed
assignment by Horphag during which Kaire will have a right,
which it will not exercise unreasonably, to object to the
proposed transferee.
e) To secure the obligations of the Guarantor under such
Option Agreement, Guarantor shall deliver, or cause to be
delivered, to lender a Pledge Agreement constituting a pledge
on 15% of the outstanding shares of Kaire Korea and shall
execute and deliver to Lender such other documents as Lender
may reasonably require from Guarantor in order for Lender to
perfect a first priority security interest in such shares.
f) Kaire Korea will pay the principal of the note plus accrued
interest in installments of $25,000 payable on August 31,
1997, $125,000 payable on September 30, 1997, $175,000 payable
on October 31, 1997, and $175,000 payable on November 30,
1997. If any of these installments is not paid to Horphag
within three days of each of the above dates, Horphag or its
assignees will accrue an option to purchase an additional 2%
of the capital stock of Kaire Korea on the same terms. If the
entire promissory note is not repaid within six (6) months of
3
<PAGE>
the date thereof Kaire will issue to Horphag or its assignees
an option to acquire the cumulative number of shares accrued
through the foregoing specified defaults and a further 5% of
capital stock of Kaire Korea on the same terms and conditions.
If the entire loan is not repaid within a period of seven (7)
months, then for each 30 day period in additional thereto that
it is outstanding, Kaire Korea will issue a further such
option on the same terms and conditions to Horphag or its
assignees for an additional 5% of Kaire Korea capital stock,
until such time as Horphag has an option on 3/4 of the capital
stock of Kaire Korea. If the loan continues to be outstanding
after such options granted to Horphag shall accumulate to 75%
of Kaire Korea's capital stock, then Kaire itself will issue
to Horphag or its assignees an option to acquire within a 36
month period 10% of the capital stock of Kaire International,
Inc. at the par value thereof; if such option cannot for any
reason be issued by Kaire, it will be issued by the personal
guarantors, Messrs. Mangeris and Richards, jointly and
severally with respect to shares of Kaire held by them.
3. On the closing date, which shall be June 1, 1997 or such
other date which is agreed upon by the parties, the parties will
perform the following actions:
a) Horphag will transfer to Kaire Korea the amount of $500,000
which Kaire Korea will transfer to the Korea Exchange Bank,
Naeja-Dong Branch in Seoul, Korea to be converted to Won and
placed in the Won Bank Account of Kaire Korea Ltd.
4
<PAGE>
b) Kaire Korea Ltd., Kaire International, Inc. and Messrs. Mangeris
and Richards will deliver to Messrs. Fox & Horan at 1 Broadway,
New York, New York the documents specified in paragraph 2 above.
4. Messrs. Kim & Chang a law firm located in the Seyang Building at
223 Naeja-Dong Chongro-Ku, Seoul, Korea will execute and deliver to Messrs.
Fox & Horan an opinion stating as follows:
(i) Kaire Korea is duly organized and existing under the laws of
Korea and has no shareholder other than Kaire.
(ii) Neither the shares nor the assets of Kaire Korea are subject
to liens or encumbrances.
(iii) the options granted by Kaire relating to its shares in Kaire
Korea in accordance with this agreement, when duly executed
and delivered will be enforceable by Horphag in Korea in
accordance with their terms.
5. All invoices issued by Kaire Korea to its associates and all monies
paid for products sold by Kaire Korea to its associates or other persons will
be paid into a bank account duly identified and disclosed to Horphag subject
to the following restrictions:
a) Kaire Korea shall submit to Horphag by the tenth day of each
month hereunder a list of fixed and estimated variable expenses,
together with a list of revenues estimated for the following
month, which lists shall be verified by Kaire.
b) Funds received in the escrow account will be retained by Kaire
Korea up to the amount of its verified expenses;
5
<PAGE>
the balance of funds in the account will be kept in escrow until
it can be remitted to Kaire International. Kaire International
will segregate the funds received from Kaire Korea until the
amounts due to Horphag have been paid in full.
c) Kaire will use its best efforts to repay the funds lent by
Horphag, together with interest thereon at the rate of 9.5%
annually, as soon as possible. In any event, Kaire obligates
itself to meet the payment schedule provided in the promissory
note.
6. This agreement is governed by the laws of the State of New York. Any
disagreement arising thereunder which cannot be settled amicably between the
parties will be submitted to arbitration in New York under the Commercial
Arbitration rules of the American Arbitration Association, whose decision
shall be binding on the parties, their successors and assignees and which may
be enforced by any court having jurisdiction over any party whom compliance
is sought thereby.
6
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused their duly authorized
officers to execute this agreement as of the 30th of May 1997.
KAIRE KOREA LTD. KAIRE INTERNATIONAL, INC.
By: By:
------------------------ ----------------------------
Robert L. Richards Robert L. Richards
HORPHAG RESEARCH LIMITED
By:
------------------------
Eric de Kerret
APPROVED AND AGREED TO
By:
------------------------
Nick A. Mangeris
By:
------------------------
Robert L. Richards
7
<PAGE>
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of May 30, 1997 between HORPHAG RESEARCH
LIMITED, having a registered office at 1 Le Marchant Street, St. Peter Port,
Guernsey, Channel Islands ("Horphag"), KAIRE INTERNATIONAL, INC., having
its principal office at 380 Lashley Street, Longmont, Colorado (the
"Shareholder"), and KAIRE KOREA LTD., having its principal office in Seoul,
Korea LTD., having its principal office in Seoul, Korea (the "Company").
W I T N E S S E T H
WHEREAS, the Shareholder is the owner of all the issued and outstanding
shares of the Company;
WHEREAS, Horphag has agreed to make a loan to the Company in the amount
of US$500,000 pursuant to the terms and conditions of that certain Agreement
between the Shareholder and Horphag dated May 30, 1997 and the promissory
note of the Company delivered in connection therewith (the "Agreement");
WHEREAS, to secure the payment and performance of the Company under the
Agreement, the Shareholder has agreed pursuant to the terms of the Agreement
to grant an option to Horphag to purchase up to a certain percentage of
shares of the Company;
WHEREAS, Shareholder has agreed to pledge fifteen percent (15%) of the
Capital Stock of the Company (the "Shares") for the benefit of Horphag until
all amounts owing the Company under the Agreement (the "Payment Obligations")
are paid in full;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. PLEDGE AND SECURITY INTERESTS. In order to secure the full and
punctual payment by the Company of the Payment Obligations in accordance with
the terms of the Agreement, and to secure the performance of obligations of
the Shareholder and the Company:
(A) Shareholder hereby assigns, transfers and pledges to Horphag, and
hereby grants to Horphag a security interest in the Shares, and the
certificates representing the Shares, and all of its rights and privileges
with respect to such Shares, except that the parties hereto acknowledge that
Shareholder's grant of such security interest in the Shares shall not be
interpreted to affect its right to vote such Shares or to receive dividends
or distributions.
(B) Shareholder hereby expressly and irrevocably instructs the Company
to register on this same date in the
<PAGE>
Company's corporate stock ledger book, the existence of this pledge of the
Shares through the insertion in such book of the legend: "These shares have
been pledged in favor of Horphag Research Limited, pursuant to a Pledge
Agreement dated as of May 30, 1997, a copy of which is available at the
offices of the Company."
(C) Upon execution of this Agreement, Shareholder shall deliver to
Horphag all stock certificates representing the Shares. Such certificates
shall be in suitable form for transfer by delivery and shall be accompanied
by duly executed instruments of transfer or assignments in blank, all in a
form and substance satisfactory to Horphag.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER.
Shareholder represents and warrants as follows:
(A) It is the sole record and beneficial owner of the Shares. All of the
Shares are fully paid and non-assessable and subject to no options to sell or
purchase or any similar rights relating to the transfer thereof, other than
Horphag's rights under this Agreement. It shall not become a party to any
agreement which restricts in any manner any of the rights of any current or
future holder of the Shares, without the express prior written agreement of
Horphag.
(B) Upon the recording of the security interest in the Shares in
accordance with Section 1(B) of this Agreement, Horphag will have a valid and
perfected security interest in the Shares. No registration, recordation or
filing with any governmental body, agency or official is required in
connection with the execution or delivery of this Agreement, or necessary for
its validity or enforceability, or for the perfection or enforcement of
Horphag's security interest in its shares pledged hereunder.
SECTION 3. FINANCING STATEMENT. The Shareholder expressly authorizes
Horphag to file one or more financing statements in the United States or in
any applicable jurisdiction naming the Company as debtor and Horphag as
secured party and indicating or describing thereon the Shares and the
Shareholder hereby agrees to execute at the request of Horphag any such
statement or statements and all other documents as Horphag may from time to
time reasonably request for the continued perfection of its respective
security interest in the Shares. To the extent permitted by applicable law,
Shareholder hereby authorizes and empowers Horphag to execute on its behalf
any financing statement and other documents evidencing this Agreement.
2
<PAGE>
SECTION 4. REMEDIES. If the Shareholder or the Company fails to comply with
the terms of the Agreement, and such non-compliance continues for thirty
(30) days, Horphag shall have all the rights and remedies with respect to the
Shares of a secured party under the Uniform Commercial Code (whether or not
said Code is in effect where such rights and remedies are asserted) in
addition to all other rights and remedies provided by law.
SECTION 5. TERMINATION. This Pledge Agreement shall terminate and the
security interest created hereby shall be released upon payment in full of
the Payment Obligations.
SECTION 6. NOTICES. Any notice, request, instruction or other documents to
be given hereunder by any party to any other party shall be in writing and
addressed to each party at the address provided herein and shall be valid
upon receipt.
SECTION 7. GOVERNING LAW. This Pledge Agreement shall be governed by and
construed in accordance with the law of New York.
SECTION 8. ENTIRE AGREEMENT. This Pledge Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof
and supersedes all previous understandings and agreements whether oral or
written, among any of the parties hereto with respect to the subject matter.
SECTION 9. AMENDMENT AND WAIVER. This Pledge Agreement may be amended,
modified and supplemented only by written agreement of the parties signed by
their authorized representatives. The failure or refusal by any of the
parties to enforce any of the terms or conditions of this Pledge Agreement or
to exercise any right hereunder shall not be construed as a waiver or
relinquishment of such provision or right presently or in the future.
SECTION 10. THIRD PARTY RIGHTS. The provisions of this Pledge Agreement are
inserted for the sole benefit of the parties hereto and shall not inure to
the benefit of any other person (other than permitted assigns of the parties)
either as a third party beneficiary or otherwise.
SECTION 11. COUNTERPARTS AND HEADINGS. This Pledge Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same
instrument. All headings in this Pledge Agreement are inserted for
convenience of reference only and shall not affect its meaning or
interpretation.
SECTION 12. SEVERABILITY. If and to the extent that any court of competent
jurisdiction holds any provision (or any part thereof) of this Pledge
Agreement to be invalid or unenforceable, such holding shall not in any way
affect the validity of this Pledge Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Pledge Agreement to be executed by their respective duly
authorized officers as of the date first above written.
HORPHAG RESEARCH LIMITED KAIRE INTERNATIONAL, INC.
By: By:
---------------------- ------------------------
Name: Eric de Kerret Name: Robert L. Richards
Title: Attorney-in-fact Title: CEO
KAIRE KOREA LTD.
By:
-----------------------
Name: Robert L. Richards
Title: President
4
<PAGE>
EXHIBIT A
Stock Certificate number __, issued to Shareholder representing 15% of
the shares of the common stock of the company.
5
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made as of this 30th day of May, 1997, by
and between HORPHAG RESEARCH LIMITED, having a registered office at 1 Le
Marchant Street, St-Peter Port, Guernsey, Channel Islands ("Horphag"), KAIRE
INTERNATIONAL, INC., having its principal office at 360 Lashley Street,
Longmont, Colorado (the "Shareholder"), KAIRE KOREA, LTD., having its
principal office in Seoul, Korea (the "Company"), and NICK A. MANGERIS and
ROBERT L. RICHARDS, both with a business address at 380 Lashley Street,
Longmont, Colorado (the "Guarantors").
WITNESSETH:
WHEREAS, the Shareholder is the owner of all the issued and outstanding
shares of the Company;
WHEREAS, Horphag has agreed to make a loan to the Company in the amount
of US$500,000 pursuant to the terms and conditions of that certain Agreement
between the Shareholder and Horphag dated May 30, 1997 and the promissory
note of the Company delivered in connection therewith (the "Agreement");
WHEREAS, the Agreement provides that the loan be repaid by the Company to
Horphag in certain installment payments (the "Installments") according to a
schedule provided therein (the "Payment Schedule");
WHEREAS, to secure the payment and performance of the Company under the
Agreement, the Shareholder has agreed pursuant to the terms of the Agreement
to grant an option to Horphag to purchase up to a certain percentage of
shares of the Company and the Shareholder;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Grant of Option. The Shareholder hereby grants to Horphag the option
to purchase fifteen percent (15%) of the capital stock of the Company (the
"Company Shares") at a price of 5,000 Won per share, subject to the terms and
conditions of this Agreement (the "Initial Option").
2. Additional Options. (a) If the Company fails to pay any Installment
within three days of its respective due date according to the Payment
Schedule, Horphag will automatically accrue an option to purchase an
additional two percent of the Company Shares on the same terms as the Initial
Option.
<PAGE>
(b) In addition to the options issued pursuant to Section 2(a), in the
event that the entire amount due under the Agreement is not repaid within six
(6) months from the date hereof, Horphag will automatically accrue an option
to purchase an additional five percent (5%) of the Company Shares on the same
terms and conditions as the Initial Option.
(c) In addition to the options issued pursuant to Section 2(a) and (b), in
the event the entire amount due under the Agreement is not repaid within
seven (7) months from the date hereof, then for each additional thirty (30)
day period for which any amount under the Agreement remains outstanding, the
Shareholder will issue an option to Horphag to purchase an additional five
(5%) of the Company Shares on the same terms and conditions as the Initial
Option, until such time as Horphag holds options to purchase a total of
seventy-five percent (75%) of all the issued and outstanding Company Shares.
(d) Any and all options issued by the Company to Horphag to purchase
Company Shares, including the Initial Option shall hereinafter be referred to
as the ("Company Option").
(e) In the event Horphag holds options to purchase seventy-five percent
(75%) of the Company Shares and the loan continues to be outstanding and
unpaid, then after thirty (30) days Shareholder shall issue to Horphag or to
its designated assignee, an option to subscribe to the number of shares of
its common stock which would constitute ten percent (10%) of the issued
outstanding shares of its capital stock (the "Kaire Shares" and together with
the Company Shares, the "Shares") for a purchase price per share equal to the
par value of such shares (the "Kaire Option" and together with the Company
Option, the "Options"). If the Shareholder is unable to issue the Kaire
Option for any reason whatsoever, an option with the same terms and
conditions as are described in this Section 2(d) shall be issued to Horphag
by the Guarantors.
3. Term. The term of the Options shall be for a period of three (3) years,
beginning on the date hereof and ending midnight on May 30, 2000, unless
terminated pursuant to the provisions of this Agreement (the "Term").
Notwithstanding any other provision of this Agreement, the Options may not be
exercised by any person or entity after the expiration of said term.
4. Exercise of Options. Subject to the provisions of this Agreement,
Horphag may exercise the Options at any time and from time to time during
the Term. Horphag may, in its sole discretion exercise the Options for all of
the relevant Shares or a portion thereof.
Horphag shall in no event be under any obligation whatsoever or at any
time to exercise either or both of the Options provided
2
<PAGE>
for hereunder, in whole or in part, and Horphag specifically
disclaims any expression regarding its intention to exercise, or
not to exercise, the Options.
5. Method of Exercise. (a) The Options may be exercised
only by delivery to Shareholder or the Guarantor, as the case may
be, of a completed Option Exercise Form, to be substantially in
the form attached hereto as Exhibit A (the ""Option Exercise
Form"). Such delivery shall be accompanied by payment in cash or
cash equivalent of the full price of the Shares being purchased.
(b) Each certificate representing the Shares for which
either of the Options is exercised shall from the date hereof
contain a legend referring to any restrictions on full rights of
ownership or disposition imposed by law and any restrictions
imposed by this Agreement.
6. Rights Prior to Exercise. Horphag shall have no rights
or privileges as a shareholder of either the Company or the
Shareholder or have any voting, dividend or liquidation or
dissolution rights with request to the Shares, unless and until
the Options have been exercised, in whole or in part, by delivery
of the completed Option Exercise Form and payment of the full
Option Price for the Shares being purchased.
7. Deposit in Escrow. Concurrently with the execution of
this Agreement, Shareholder and the Company shall execute and
deliver a Pledge Agreement with regards to the Company Shares
subject to the Initial Option.
8. Severability. If and to the extent that any court of
competent jurisdiction holds any provision (or any part thereof)
of this Stock Option to be invalid or unenforceable, such holding
shall not in any way affect the validity of this Stock Option.
9. Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns provided however, that Horphag may not
assign this Agreement without the prior written consent of
Shareholder. Horphag shall provide the Company with fifteen (15)
days notice of its intention to assign its rights under this
Agreement. The Shareholder shall have the right to reasonably
object to any such assignment. If Shareholder fails to object it
shall be deemed to have consented to such assignment. Any
purported assignment of this Agreement without compliance with
this section shall be void.
3
<PAGE>
10. Notices. Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given or
delivered when delivered personally or when mailed by registered or certified
mail, return receipt requested, with the first class postage prepaid to the
parties at the addresses provided herein.
11. Waiver of Breach. The failure of any party to insist, in any one or
more instances, upon the performance of any of the terms or conditions of
this Agreement shall not be construed as a waiver or a relinquishment of any
right granted hereunder, including but not limited to the right to insist
upon future performance of any such term, covenant or condition.
12. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York.
13. Entire Agreement and Amendment. This Agreement represents the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior understandings, written or oral, with respect thereto.
This Agreement may only be modified or amended by a writing signed by the
party against whom enforcement is sought and no oral waiver, modification or
amendment shall be effective.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto if individuals, have duly
executed, and if otherwise, have caused their respective duly authorized
officer to execute, this Stock Option Agreement as of the day and year first
above written.
---------------------------- -----------------------------
Nick A. Mangeris Robert L. Richards
HORPHAG RESEARCH LIMITED KAIRE INTERNATIONAL INC.
By:------------------------ By:--------------------------
Name: Eric de Kerret Name: Robert L. Richards
Title: Attorney-in-fact Title: CEO
KAIRE KOREA LTD.
By:-------------------------
Name: Robert L. Richards
Title: President
5
<PAGE>
EXHIBIT A to
STOCK OPTION AGREEMENT
OPTION EXERCISE FORM
(To be executed upon exercise of Options)
The undersigned hereby irrevocably elects to exercise the right,
as granted by the Stock Option Agreement by and betweeen Kaire International,
Inc. (the "Shareholder"), Kaire Korea Ltd. (the "Company"), Nick A. Mangeris,
Robert L. Richards, and the undersigned, dated as of May 30, 1997 (the "Stock
Option Agreement"), to purchase _____ Shares of the common stock, par value
[$_____] per share (the "Shares") of [the Shareholder/the Company] and
herewith tenders payment for such Shares to the order of the Shareholders in
the amount of specified in the Stock Option Agreement and in accordance with
the terms thereof. The undersigned requests that a certificate be issued in
the name of the undersigned, whose address is ____________________ and that
such certificate be delivered to ___________________ whose address is
____________________________________________________. If said number of
Shares is less than all of the Shares purchasable hereunder, the undersigned
hereby reserves the right to purchase the remaining balance of the Shares in
accordance with the Stock Option Agreement.
IN WITNESS WHEREOF, the undersigned has signed this Option
Exercise Form as of the ___ day of __________, _____.
HORPHAG RESEARCH LIMITED
By:
------------------------------------
6
<PAGE>
GUARANTY
1. FOR VALUE RECEIVED, and in consideration of any loan, credit, draft, or
other financial accommodation now or hereafter at any time made or given to
KAIRE INTERNATIONAL, INC. ("Borrower") by HORPHAG RESEARCH LIMITED
("Lender"), the undersigned (hereinafter "Guarantors") hereby jointly and
severally, absolutely and unconditionally guarantee on demand, in lawful
money of the United States the prompt and complete payment, whether at
maturity, by acceleration, demand, or otherwise, and at any and all times
thereafter, of all indebtedness and other obligations of every kind and
nature from Borrower to Lender, direct or indirect, absolute or contingent,
due or to become due, now or hereafter existing, including, but not limited
to, any amounts now or hereafter owing under that certain Agreement dated
May 30, 1997 between Lender and Borrower and the promissory note delivered
in connection therewith; and in addition, Guarantors agree to pay all
reasonable costs and expenses (including, but not limited to, court costs and
reasonable attorneys' fees) paid or incurred by the Lender in endeavoring to
collect or enforce performance of any of such obligations, or in enforcing
this Guaranty.
2. Guarantors' obligations hereunder shall be unconditional and absolute,
as principal debtors and co-obligors, and without limiting the generality of
the foregoing, shall not be released, discharged or otherwise affected by any
extension, renewal, settlement, compromise or waiver in respect of any
obligation or liability of Borrower; any modification or amendment of or
supplement to any agreement of Borrower with regard to any obligation or
liability of Borrower; any release, exchange, non-perfection or invalidity of
any direct or indirect security for any obligation or liability of Borrower;
any change in the corporate structure or ownership of Borrower, or any
insolvency, bankruptcy, reorganization or other similar proceeding affecting
Borrower or Borrower's assets; the exsitence of any claim, set-off or other
rights which the Guarnators may have at any time against Borrower, Lender or
any other corporation or person; any invalidity or unenforceability for any
reason of any agreement by Borrower relating to any obligation or liability
of Borrower or any provision of applicable law or regulation purporting to
prohibit payment by Borrower of any principal, interest or other amount
payable in regard to any obligation or liability of Borrower; or any other
act or omission to act or delay of any kind by Borrower, Lender or any other
corporation or person or any other circumstance whatsoever which might but
for the provisions of this paragraph, constitute a legal or equitable
discharge of Guarantor's obligations hereunder.
<PAGE>
3. The obligations of Guarantors hereunder are independent of any security
for or other guaranty of the indebtedness hereby guaranteed, whether executed
by the Guarantors or by any other party, and the liability of the Guarantors
is not affected by (a) any other continuing or other guaranty, undertaking or
liability of the undersigned or of any other party as to the indebtedness of
the Borrower, or (b) any payment on, or in reduction of, any such other
guaranty or undertaking; and a separate action or actions may be brought and
prosecuted against any of the Guarantors whether any action is brought
against the Borrower or whether the Borrower be joined in any such action or
actions. The Guarantors waive the benefit of any statute of limitations
affecting their liability hereunder.
4. The Guarantors hereby waive all requirements as to due diligence,
presentment, demand of payment, protest and notice of any kind with respect
to this Guaranty. If acceleration of the time for payment of any amount
payable by Borrower to Lender is stayed upon the insolvency, bankruptcy or
reorganization of Borrower, such amount otherwise subject to acceleration
shall nonetheless be payable by Guarantors hereunder on Lender's demand.
5. This Guaranty shall be binding upon the Guarantors and their heirs,
successors and personal representatives and shall inure to the benefit of the
Lender and its successors and assigns.
6. No modification or waiver of any of the provisions of this Guaranty shall
be effective unless in writing and signed by the Guarantors and an officer of
the Lender.
8. This Guaranty shall be governed by and construed in accordance with the
laws of the State of New York without regard to its conflict of laws.
Wherever possible, each provision of this Guaranty shall be interpreted in a
manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
9. THE PARTIES ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS GUARANTY OR THE RELATIONSHIP ESTABLISHED HEREBY WOULD BE BASED
UPON DIFFICULT AND COMPLEX ISSUES. ACCORDINGLY, IN AN EFFORT TO EXPEDITE THE
RESOLUTION OF ANY SUCH CONTROVERSY AND AVOID ADDITIONAL EXPENSE AND DELAY,
THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY IN ANY
JURISDICTION SHALL BE RESOLVED BY A JUDGE SITTING WITHOUT A JURY.
<PAGE>
IN WITNESS WHEREOF, the Guarantors have executed this Guaranty on the 30th
day of May, 1997.
- ----------------------------- ------------------------------
Nick A. Mangeris Robert L. Richards
STATE OF COLORADO )
)ss.:
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of
May, 1997, by Nick A. Mangeris. Wintess my hand and official seal.
-----------------------------
Title of Officer
My commission expires:
-------------------------
STATE OF COLORADO )
) ss.:
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of
May, 1997, by Robert L. Richards. Witness my hand and official seal.
-----------------------------
Title of Officer
My commission expires:
-------------------------
<PAGE>
Exhibit 10.18
AGREEMENT
This AGREEMENT made and entered into this 3rd day of December, 1997 by
Kaire International, Inc., a Delaware Corporation, party of the first part
and hereinafter "Kaire", and Loren E. Bagley, William F. Woodburn, J.T.
Whitworth, Mark D. Woodburn, and Robert L. Richards, parties of the second
part.
RECITALS
WHEREAS, Loren E. Bagley has loaned the sum of $120,411.85 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, William F. Woodburn has loaned the sum of $120,411.85 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, J.T. Whitworth has loaned the sum of $140,070.72 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, Mark D. Woodburn has loaned the sum of $3,700.26 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, Robert L. Richards has loaned the sum of $118,265.84 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
NOW, THEREFORE, for and in consideration of the sum of $10.00, cash in
hand paid, the receipt and sufficiency of which is hereby acknowledged by the
parties hereto, the parties of the second part agree to the following
repayment terms:
Kaire shall not be obligated to make any payment on the cumulative
indebtedness of the parties of the second part until after the end of the
first calendar quarter in which Kaire has achieved positive net cash flow
(the "Initial Payment Quarter"), and that within 30 days after the end of the
Initial Payment Quarter and each succeeding calendar quarter in which Kaire
has achieved positive net cash flow, Kaire shall only be obligated to make a
payment to the parties of the second part, on a prorata basis, on such
indebtedness in an aggregate amount equal to 50% of the positive net cash
flow for each such calendar quarter.
/s/ Robert L. Richards /s/ J.T. Whitworth
- ------------------------------ ------------------------------
Kaire International, Inc. J.T. Whitworth
By its Chief Executive Officer
/s/ Loren E. Bagley /s/ Robert L. Richards
- ------------------------------ ------------------------------
Loren E. Bagley Robert L. Richards
/s/ W. F. Woodburn /s/ Mark D. Woodburn
- ------------------------------ ------------------------------
William F. Woodburn Mark D. Woodburn
<PAGE>
EXHIBIT 10-20
PROMISSORY NOTE
Dallas, Texas April 16, 1998
$1,000,000.00
- -------------
MAKER: Kaire International, Inc.
PAYEE: Global Marketing L.L.C., a Nevada limited liability
corporation
PLACE FOR PAYMENT: 12901 Nicholson Road, #370, Farmers Branch, Texas 75234,
or such other place as Payee may designate.
PRINCIPAL AMOUNT: One Million Dollars ($1,000,000.00)
INTEREST RATE: Ten percent (10%) per annum
PAYMENT TERMS: The Principal Amount and interest of this note shall be
due and payable before 10:00 A.M. local time at the Place
for Payment as follows:
In full ninety (90) days from the date of this note, or
five days after the close of the Initial Public Offering
to be undertaken by Maker, whichever occurs first in
time.
For value received, Maker promises to pay to the order of Payee at the
Place for Payment and according to the Payment Terms the Principal Amount (or
so much thereof as may be advanced and outstanding) plus interest on the
balance of the Principal Amount from time to time outstanding at the Interest
Rate.
The Interest Rate on all past due principal and interest shall be the
highest rate permitted by Applicable Law; or, if no highest is provided by
Applicable Law, at the rate of 3% per month.
Interest shall be calculated at a daily rate equal to 1/365 of the
Interest Rate.
The term "Applicable Law" means (1) the law pertaining to maximum rates
of interest that are now in effect and (2) any law that comes into effect at
any time in the future allowing a higher maximum interest rate than the law
now in effect.
This note may be prepaid in part or in its entirety at any time. Partial
prepayment shall be applied first to accrue interest with the balance to
principal.
Each Maker, signer, surety, endorser and guarantor, if any, of this note
and each person, firm, corporation, or other entity that grants any lien or
security interest securing payment of this note, jointly and severally waive
grace, presentment for payment, notice of renewals and extensions, notice of
nonpayment, notice of protest, notice of and demand for payment of
installments or other amounts coming due under this note that are not paid
when due, notice of intent or election to accelerate
Page 1 of $1,000,000.00 Note
<PAGE>
maturity or the actual acceleration of maturity of the indebtedness evidenced
by this note, and diligence in the collection hereof or in filing suit hereon
and agree to one or more extensions for any period or periods of time and
partial payments before or after maturity without prejudice to the holder.
If this note is placed in the hands of an attorney for collection after
default or maturity, or is collected by legal proceedings of any kind, the
Maker agrees to pay all costs of collection, including a reasonable attorney's
fee, which shall bear interest from the date of its accrual at the highest
rate permitted by law.
In the event of default in the payment of any part of the Principal
Amount or interest on this note as and when due, or in the event of default
in the performance of any covenant, condition, or agreement contained in any
document or agreement securing the payment of this note, then the holder of
this note shall have the unconditional right without demand, notice, or other
action to declare the unpaid balance of the Principal Amount of this note,
together with interest accrued thereon at once due and payable and to
foreclose each lien securing the payment hereof, either under any power of
sale contained in such documents or agreements or by court proceedings, as
such holder may elect.
All agreements and transactions between Maker and Payee, whether now
existing or hereafter arising, whether contained herein or in any other
instrument, and whether written or oral, and hereby expressly limited so that
in no contingency or event whatsoever, whether by reason of acceleration of
the maturity hereof, prepayment, demand for payment or otherwise, shall the
amount contracted for, charged or received by Payee from Maker for the use,
forbearance, or detention of the Principal Amount or Interest thereon, which
remains unpaid from time to time, exceed the maximum amount permissible under
Applicable Law, it particularly being the intention of the parties hereto
to conform strictly to laws of the State of Texas and of the United States of
America, whichever is applicable. Any interest payable hereunder or under
any other instrumental relating to the loan evidenced hereby that is in
excess of the legal maximum under Applicable Law, shall, in the event of
acceleration of maturity, prepayment, demand for payment or otherwise, be
automatically, as of the date of such acceleration, prepayment demand or
otherwise, applied to a reduction of the Principal Amount and not to the
payment of interest, or if such excessive interest exceeds the unpaid balance
of the Principal Amount, such excess shall be refunded to Maker. To the
extent permitted by Applicable Law, determination of the legal maximum amount
of interest shall at all times be made by amortizing, prorating, allocating
and spreading in equal parts during the period of the full stated term of the
loan, all interest at any time contracted for, charged or received from Maker
in connection with the loan so that the actual rate of interest on account of
such indebtedness is uniform throughout the term thereof.
This note shall be governed by and construed in accordance with the
laws of the State of Texas and the United States of America from time to time
in effect.
Maker warrants and represents to Payee and to each present and future
owner and holder of this note that all loans evidenced by this note are for
business, commercial, investment or other similar purpose and not primarily
for personal, family, household or agricultural use, as such terms are used
in Chapter One of the Texas Credit Code.
Page 2 of $1,000,000.00 Note
<PAGE>
KAIRE INTERNATIONAL INC.
By: /s/ Illegible
------------------------------
------------------------------
Its President
------------------------------
Page 3 of $1,000,000.00 Note
<PAGE>
AGREEMENT
This AGREEMENT ("Agreement") made and entered into this 8th day of July,
1998 by Global Marketing L.L.C. of 12901 Nicholson Road, #370, Farmers
Branch, Texas 75234, party of the first part and hereinafter "Global" and
Kaire International, Inc. of 380 Lashley Street, Longmont, CO. 80501, party
of the second part and hereinafter "Kaire".
WHEREAS, Global loaned to Kaire the sum of $1,000,000 evidenced by a 90
day promissory note ("Promissory Note") date April 16, 1998 attached hereto
and incorporated herein:
WHEREAS, the repayment terms of the Promissory Note contain the following
language: "In full ninety (90) days for the date of this note, or five (5)
days after the close of the Initial Public Offering to be undertaken by
Maker, whichever occurs first in time.";
NOW THEREFORE, for and in consideration of the sum of ten dollars
($10.00), cash in hand paid, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, Global and Kaire hereby agree to amend
the "Payment Terms" paragraph of the Promissory Note to read as follows:
PAYMENT TERMS: The Principal Amount with accrued interest shall be
payable upon demand.
In Witness Whereof, the parties hereto have affixed their signatures below.
/s/ L. Scott McKnight /s/ W. F. Woodburn
- ----------------------------- ---------------------------------
Global Marketing, L.L.C. Kaire International, Inc.
By: L. Scott McKnight By: William F. Woodburn
Manager Treasurer
<PAGE>
Exhibit 10.21
PROMISSORY NOTE
$100,000.00 Longmont, CO.
April 29, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
William F. Woodburn, the sum of One Hundred Thousand Dollars ($100,000.00),
with interest at the rate of ten percent (10%) per annum on the unpaid
balance.
Said sum shall be payable in the manner following:
Due and payable on demand.
The undersigned shall have the right to prepay without penalty. In
the event any payment due hereunder is not made when due, the entire balance
shall be immediately due at the option of the holder.
In the event of default, the undersigned agrees to pay all reasonable
attorney fees and costs of collection.
This promissory note is secured by all of the assets of the
corporation.
Attest:
/s/ Mark D. Woodburn /s/ Robert L. Richards
- ---------------------------- ----------------------------
Mark D. Woodburn Robert L. Richards
Secretary Chief Executive Officer
STATE OF COLORADO
COUNTY OF BOULDER, TO-WIT:
This instrument was acknowledged before me this 29th day of April,
1998, by Robert L. Richards, C.E.O. of Kaire International, Inc., a Delaware
corporation, on behalf of said corporation.
/s/ Illegible
- -------------------------
Notary Public
My commission expires: April 5, 1999
-----------------
<PAGE>
[JONES, JENSEN & COMPANY LETTERHEAD]
EXHIBIT 16
October 16, 1998
Securities and Exchange Commission
Washington, DC
RE: Kaire International, Inc.
Dear Sir:
We are the former independent auditors for Kaire International, Inc. Under
the provisions of Regulation S-K Section229.304 we were dismissed from the
engagement in August 1996. We have reviewed the disclosures made by Kaire
International, Inc.
The statements made by the Company with respect to our firm, the reason for
our dismissal, our engagement and financial statement presentation are accurate
to the best of our knowledge.
Sincerely,
/s/ JONES, JENSEN & COMPANY
- -------------------------------------------
Jones, Jensen & Company
cc: Mark Woodburn, Kaire International, Inc.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Kaire International, Inc.
Longmont, Colorado
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated May 1, 1998, except for the first
paragraph of Note 8 which is dated October 1, 1998, relating to the consolidated
financial statements of Kaire International, Inc. which is contained in that
Prospectus. Our report contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Denver, Colorado
October 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kaire
International, Inc. Consolidated Financial Statements Years ended December 31,
1997, 1996 and 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 460,663 761,994
<SECURITIES> 0 0
<RECEIVABLES> 301,135 333,223
<ALLOWANCES> 168,805 0
<INVENTORY> 1,612,960 1,225,416
<CURRENT-ASSETS> 2,641,881 2,342,057
<PP&E> 2,416,276 2,367,062
<DEPRECIATION> 1,344,463 1,592,460
<TOTAL-ASSETS> 4,323,676 3,710,910
<CURRENT-LIABILITIES> 9,134,169 10,174,983
<BONDS> 3,026,546 4,350,518
0 0
0 0
<COMMON> 22,092<F1> 22,092
<OTHER-SE> (5,046,934)<F2> (6,529,189)
<TOTAL-LIABILITY-AND-EQUITY> 4,323,676 3,710,910
<SALES> 35,681,512 14,885,335
<TOTAL-REVENUES> 35,681,512 14,885,335
<CGS> 8,387,963 3,335,253
<TOTAL-COSTS> 32,977,089 12,726,743
<OTHER-EXPENSES> (561,552) (303,824)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (6,245,092) (1,480,465)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,098,529) (1,421,699)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,098,529) (1,421,699)
<EPS-PRIMARY> (3.01)<F3> (0.64)
<EPS-DILUTED> (3.01)<F4> (0.64)
<FN>
<F1>Restated to reflect 1 for 2 reverse stock split
<F2>Restated to reflect 1 for 2 reverse stock split
<F3>Restated to reflect 1 for 2 reverse stock split
<F4>Restated to reflect 1 for 2 reverse stock split
</FN>
</TABLE>
