<PAGE>
REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON OCTOBER 13, 1998
FILE NO. 333-52687
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
UNITED STATES FINANCIAL GROUP, INCORPORATED
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 6749 13-3922249
State of Standard Industrial IRS Employer ID
Incorporation Classification Code No. Number
</TABLE>
110 WALL STREET, NEW YORK, NY 10005
(212) 785-4545
(Address and telephone number of Registrant's principal executive offices)
MOHAMMAD ALI KAHN
110 WALL STREET
NEW YORK, NY 10005
(212) 785-4545
(Name, Address and telephone number of agent for service of process)
Copies To:
<TABLE>
<S> <C>
RONALD J. BRESCIA, ESQ. RICHARD A. FRIEDMAN, ESQ.
DOROS & BRESCIA, P.C. GREGORY SICHENZIA, ESQ.
1140 AVENUE OF THE AMERICAS SICHENZIA, ROSS & FRIEDMAN, LLP
NEW YORK, NY 10036 135 WEST 50TH STREET
212-921-0550 NEW YORK, NY 10020
212-664-1200
212-664-7329 (FAX)
</TABLE>
(Name, Address and telephone number of Agent for Service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the Securities being offered on this Form are offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [ ].
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -------------------------------- -------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Common Shares .................. 2,200,000 $15 $33,000,000 $ 9,735
Common Shares underlying
Underwriter's Warrant ......... 202,500 $18 $ 3,645,000 $ 1,075.28
Common Shares (overallotment
option) ....................... 303,750 $15 4,556,250 1,344.09
------------
Total ........................ $ 12,154.37*
============
</TABLE>
- -------------------------------------------------------------------------------
* Previously paid
THE REGISTRATION FEE FOR COMMON SHARES IS DETERMINED PURSUANT TO RULE
457(G) AND PURSUANT TO RULE 457(I) FOR THE UNDERWRITER'S WARRANT. THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE>
CROSS REFERENCE SHEET
[S-K ITEM 501(B)]
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
------------------------------------------------ --------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Cover Page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover of Inside Front Cover and Outside Back Cover
Prospectus of Prospectus
3. Summary Information; Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Risk Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Cover Page; Cover Page Notes
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Beneficial Owners and Principal and Selling Shareholders
Management
12. Description of Securities to be Registered Cover Page; Description of Securities
13. Interest of Named Experts and Counsel Experts
14. Disclosure of Commission's Position Underwriting
on Indemnification for Securities
Act Liabilities
15. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Dilution;
Management; Description of Securities;
Business; Executive Compensation
and Financial Statements
16. Management's Discussion and Analysis or Plan Management's Discussion and Analysis of
of Operation Financial Condition
and Results of Operations
17. Description of Property Property
18. Certain Relationships and Related Transactions Certain Transactions
19. Market for Common Equity and Related Outside Front Cover
Stockholder Matters
20. Executive Compensation Management--Executive Compensation
21. Financial Statements Consolidated Financial Statements
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER , 1998
UNITED STATES FINANCIAL GROUP, INCORPORATED
2,025,000 SHARES OF COMMON STOCK
United States Financial Group, Incorporated ("USFG" or the "Company") is
offering 2,025,000 shares of its common stock (the "Common Stock" or "Shares"),
par value $.0001 per share, at a price of $15.00 per Share (the "Offering").
This Prospectus also relates to the offering of 175,000 shares of Common Stock
by a selling stockholder (the "Selling Stockholder").
Based upon the number of shares of Common Stock that will be outstanding
upon completion of the Offering, officers and directors of the Company and
persons who may be deemed to be affiliates, as a group, will own beneficially
approximately 69.6 percent of the Company's outstanding Common Stock. As a
result, officers and directors of the Company and their affiliates may be able
to elect all members of the Board of Directors and may retain the voting power
to approve all matters requiring approval by the shareholders of the Company,
including a possible merger or similar transaction which, if effected, would
result in a premium to shareholders.
Prior to the Offering, there has been no public market for the Common
Stock and no assurance can be given that any such market will develop upon
completion of the Offering. The Company is applying for quotation of the Common
Stock on The Nasdaq National Market System under the symbol " ". The initial
public offering price of the Common Stock has been determined by negotiation
between the Company and the Underwriters (for which Kashner Davidson Securities
Corporation is the "Representative") and do not necessarily bear any relation
to the Company's earnings, assets, book value, net worth or any other
recognized criteria of value. See "Underwriting."
AN INVESTMENT IN THE SHARES OF COMMON STOCK AND WARRANTS OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE
"RISK FACTORS" COMMENCING ON PAGE AND DILUTION ON PAGE .
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED
BY ANYONE WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT (SEE
"INTRODUCTORY STATEMENTS" AND "RISK FACTORS").
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND THE PROCEEDS TO
PUBLIC (1) COMMISSIONS (1) COMPANY (2)
--------------- ------------------- ---------------
<S> <C> <C> <C>
Per Share (3) ......... $ 15.00 $ 1.95 $ 13.05
Offering ............. $30,375,000 $3,948,750 $26,426,250
</TABLE>
- -------------------------------------------------------------------------------
- ----------
(1) Does not include additional compensation payable to the Underwriters,
consisting of (i) a non-accountable expense allowance ("Non-Accountable
Expense Allowance") equal to 3% of the gross offering proceeds, or
$911,250 ($1,047,935.50 if the Underwriters' Over-Allotment Option is
exercised in full), of which $25,000 has been paid to date, (ii) warrants
to be sold to the Underwriters (the "Underwriters' Warrants") to purchase
up to 202,500 shares of the Common Stock upon the Closing. In addition,
the Company also agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) After deducting discounts and commissions payable to the Underwriters,
but before deducting the Underwriters' Non-Accountable Expense Allowance,
or the other expenses of the Offering, estimated at $500,000 payable by
the Company. See "Underwriting."
(3) The Company has granted the Underwriters an option, exercisable for 45
days after the date the Securities and Exchange Commission declares the
Company's registration statement effective (the "Effective Date") to
purchase up to an additional 303,750 shares of Common Stock solely for
the purpose of covering over-allotments, if any (the "Over-Allotment
Option"). If the Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $34,931,250, $3,493,125 and $31,438,125. See
"Underwriting."
The Shares are being offered by the Underwriters on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriters, subject
to prior sale, and other conditions and legal matters. The Underwriters reserve
the right to withdraw, cancel or modify the Offering and to reject orders, in
whole or in part, for the purchase of any of the securities offered
notwithstanding tender by check or otherwise. It is expected that delivery of
the certificates representing the Shares will be made against payment therefor
at the offices of Kashner Davidson Securities Corporation, 77 South Palm
Avenue, Sarasota, Florida 34236.
KASHNER DAVIDSON SECURITIES CORPORATION
The date of this Prospectus is October , 1998.
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THE COMPANY, UPON COMPLETION OF THIS OFFERING, AND AT LEAST FOR THE
CURRENT FISCAL YEAR IN WHICH THE REGISTRATION STATEMENT BECOMES EFFECTIVE, WILL
BE REQUIRED TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION QUARTERLY
REPORTS ON FORM 10-Q PROVIDING SPECIFIED COMPARATIVE FINANCIAL DATA FOR EACH OF
THE FIRST THREE FISCAL QUARTERS OF EACH FISCAL YEAR: AN ANNUAL REPORT ON FORM
10-K CONTAINING A NARRATIVE DESCRIPTION OF THE COMPANY AS WELL AS AUDITED
FINANCIAL STATEMENTS AND INFORMATION REGARDING MANAGEMENT, CERTAIN
TRANSACTIONS, AND PRINCIPAL SHAREHOLDERS: AND PERIODIC REPORTS OF CERTAIN
SPECIFIED OR OTHER MATERIAL EVENTS AS THEY OCCUR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OR SOLICITATION WITH
RESPECT TO THESE SECURITIES BY THE COMPANY TO ANY PERSON WHO MAY BE CONSIDERED
TO BE AN UNDERWRITER: OR TO ANY PERSON IN ANY STATE IN WHICH SAID OFFERING OR
SOLICITATION IS NOT AUTHORIZED BY THE LAWS THEREOF OR IN WHICH THE PERSON
MAKING SAID OFFERING OR SOLICITATION IS NOT QUALIFIED TO ACT AS DEALER OR
BROKER OR OTHERWISE TO MAKE SUCH OFFERING OR SOLICITATION.
THE SECURITIES BEING SOLD PURSUANT TO THIS PROSPECTUS ARE HIGHLY
SPECULATIVE IN NATURE AND NO GUARANTEES OR OTHER WARRANTIES TO THE CONTRARY ARE
MADE BY THE ISSUER.
THE ISSUER MAY UNDERTAKE TO MAKE POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS RELATES AND TO REFLECT THEREIN
ANY FACTS OR EVENTS ARISING AFTER THE DATE HEREOF WHICH REPRESENT A FUNDAMENTAL
OR MATERIAL CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN SAID REGISTRATION
STATEMENT. ANY SUCH AMENDMENTS, WHICH RELATE TO THIS PROSPECTUS, WILL BE
DISSEMINATED TO STOCKHOLDERS AND WARRANT HOLDERS OF THE COMPANY AFTER THE
REQUIRED FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION HAVE BEEN MADE.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the information
appearing elsewhere in this Prospectus.
THE COMPANY
United States Financial Group, Incorporated ("USFG" or the "Company") is a
diversified holding company, incorporated under the laws of the State of
Delaware. USFG's main business purpose is to acquire undervalued or reasonably
priced companies in industries well suited for roll up consolidation
transactions. These roll up or consolidation candidates operate in industry or
market niches that are well established, are served in a fragmented way and do
not compete directly with large competitors. Furthermore, these target
companies must have experienced management teams and do not require significant
expenditures for research and development. USFG has begun to implement this
strategy through the acquisition and/or establishment of four companies and has
assembled a team that is experienced in mergers and acquisitions.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS"), an investment banking firm and a
broker-dealer of securities duly registered with the Securities and Exchange
Commission (the "SEC" or "Commission") and is a member firm of the National
Association of Securities Dealers, Inc. (the "NASD"), Municipal Securities
Rulemaking Board (known as the "MSRB"), and Securities Insurance Protection
Corporation ("SIPC"). Sureal International, Inc. ("Sureal"), a sales and direct
marketing company that sells health and other consumer products in Russia and
other republics of the former Soviet Union through a network of independent
distributors was acquired in December 1997 in a purchase transaction.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated will be an asset management and international
financial consultant and advisory company and will take advantage of USFG's
international contacts. US Military Resale Group, Incorporated ("Military
Resale Group") was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
KMS is an investment bank providing full service investment banking,
trading, research and advisory services to over 3,000 high net worth
individuals and institutions around the world. The key to KMS' current and
future success is its principal client base of high net worth international
investors and institutions. KMS' access to this client base through its senior
management puts it in a strong position to expand its investment banking
activities without reliance on cold calling, high pressure marketing
activities. KMS' growth plans are based on a corporate policy emphasizing
generating revenues at a non-retail level, and maintaining a small sales force
comprised of experienced financial consultants with impeccable records. KMS is
located at 110 Wall Street in New York where it occupies two floors totaling
14,000 square feet.
KMS Asset Management Group, Incorporated was formed to serve as an advisor
to institutions, individuals and governments. Its strategy will be to expand
its money management business by increasing assets under management and by
increasing its international consultancy business by becoming advisors to
institutions and governments of developing countries. It currently acts as an
advisor to several international corporations and individuals, as well as to
quasi-public entities in Grenada, South Korea and Pakistan. It will be acting
as an advisor to Grenadine government on its tourism and infrastructure
development project and to the Board of Investments in Pakistan which is
establishing the first "Technology Science Park" in Pakistan.
Military Resale Group was established for the purpose of effecting mergers
and acquisitions of military commissaries and other suppliers of consumer
products to the Army and Air Force Exchange System. USFG perceives this
marketplace as well suited for rollup transactions. Military Resale Group's
mission will be to provide the Military Resale Market with the widest variety
of products at below market prices. Military Resale Group will introduce new
consumer products to the military resale market and
3
<PAGE>
acquire companies serving the military resale market worldwide to expand
revenues. Military Resale Group has targeted several distributors of consumer
products to the military resale market for acquisition, although no formal
discussions will take place until after the completion of this Offering.
Sureal is a direct marketing company (that sells products directly to its
independent distributors) that was acquired by USFG in a purchase transaction
completed in December 1997. Management believes that Sureal will grow through
acquisitions in addition to expanding its present revenues. Sureal is a direct
marketing company involved in the distribution and sale of high quality
nutritional and other products in Russia and other republics of the former
Soviet Union. It commenced its operations in July 1995 using a network of 333
independent distributors in Russia. The number of distributors in the network
increased to in excess of 100,000 at May 31, 1997, respectively. Monthly
commissionable sales to these distributors rose from $20,000 in July 1995 to
$5,009,000 in February 1997. Sureal is headquartered in Orem, Utah.
----------------
THE OFFERING
Securities offered by the
Company (1)................ 2,025,000 shares of Common Stock, par value
$.0001
Securities offered by the
Selling Stockholder........ 175,000 shares of Common Stock
Common Stock outstanding
prior to the Offering (1).. 11,517,636 shares.
Common Stock to be
outstanding after the
Offering (1):.............. 13,542,636
Trading symbol for Common
Shares.....................
Use of proceeds............. The net proceeds of this Offering will be used
to develop and expand Sureal's operations, open
an office for KMS in Bahrain, commence the
operations of the KMS Asset Management Group,
make acquisitions, expand KMS' proprietary
trading operations and acquire a seat for KMS on
the New York Stock Exchange
- ----------
(1) Assumes the conversion of 813,000 shares of Preferred Stock (including
the portion that was issued by KMS) into 813,000 shares of Common Stock
and includes the issuance of 750,000 shares of Common Stock to effect the
Sureal Merger and the 2 for 1 reverse stock split effected December 8,
1997. Such amount excludes the Underwriter's Overallotment Option of
303,750 shares.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial data is qualified in its entirety by, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." The summary financial data presented below as of December 31, 1997
and 1996 and for each of the three fiscal periods in the period ended December
31, 1997 are derived from the audited Consolidated Financial Statements of the
Company, which Consolidated Financial Statements have been reported upon by
independent certified public accountants, and are included elsewhere in this
Prospectus. The consolidated financial data for June 30, 1998 and 1997 and the
six month periods then ended has been extracted from the Company's unaudited
consolidated financial statements. Such amounts include all adjustments
considered necessary by management for a fair presentation. Results for interim
periods are not necessarily indicative of amounts to be realized for a full
year. All per share amounts give retroactive effect to the two for one reverse
stock split effected December 8, 1997.
The amounts for Sureal for each of the three years in the period ended
December 31, 1997 are derived from Sureal's audited financial statements
included elsewhere herein.
<TABLE>
<CAPTION>
AUGUST 10, 1995 FOR THE YEAR ENDED SIX MONTHS
(INCEPTION) DECEMBER 31, ENDED JUNE 30,
TO ----------------------------------- -----------------------------
THE COMPANY DECEMBER 31, 1995 1996 1997 1997 1998
- ----------------------------------- ------------------ ---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ........................... $ 1,032 $ 248,989 $ 2,867,851 $1,727,051 $ 2,172,021
Net Income (loss) ................. $ 502 $(1,249,484) $(1,605,007) $ (948,969) $ (451,228)
Basic Income (Loss) per share ..... $ -- $ (.13) $ (.16) $ (.10) $ (.04)
Weighted average number of
shares outstanding ............... 9,944,634 9,994,634 10,007,134 9,994,634 10,704,636
</TABLE>
<TABLE>
<CAPTION>
AS OF
6/30/98 AS OF 6/30/98
ACTUAL AS ADJUSTED (1)
-------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Total assets ................. $10,497,382 $35,178,632
Liabilities .................. 2,851,255 1,606,255
Stockholders' equity ......... 7,645,387 33,571,637
</TABLE>
- ----------
(1) Adjusted to give effect to the sale of Securities offered by the Company
hereby (assuming no exercise of the Underwriter's Overallotment Option)
and the application of the estimated net proceeds therefrom, including
the repayment of $645,153 in loans due by Sureal ($210,000 of which are
due to related parties).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
----------- -------------- --------------
<S> <C> <C> <C>
Sureal:
Commissionable Sales ......... $ 995,670 $21,594,562 $31,720,456
Net income (loss)(1) ......... (81,494) 274,920 384,447
</TABLE>
- ----------
(1) Sureal was an S corp for Federal income tax purposes until it was
acquired by the Company in December 1997. The amounts reported have been
reduced by pro forma income tax provisions of $111,000 in 1996 and
$229,000 in 1997.
5
<PAGE>
RISK FACTORS
Any person contemplating an investment in the securities offered herein
should be aware of the risk factors of the Offering and should consider those
factors set forth below. An investment in the Shares involves significant
risks.
RISKS RELATED TO THE COMPANY
Limited Operating History and Losses, Operations as a Holding Company
The Company and each of its subsidiaries have operating histories of less
than three years and has incurred operating losses. In addition, each
subsidiary intends to change and expand its operations upon the completion of
the Offering. As such, past history and performance are not necessarily an
indication of future performance.
The Company operates as a holding company and, accordingly, is dependent
on the operations of its subsidiaries to generate profits and cash flow.
Management has broad discretion with respect to allocating Company resources to
individual subsidiaries. In addition, KMS, one of the Company's subsidiaries,
is subject to rules governing its net capital requirements. Such requirements
could limit the Company's ability to receive dividends from KMS.
Broad Discretion in Application of Proceeds
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of the Offering in order to address changed
circumstances and opportunities. See "Use of Proceeds."
Substantial Control by Officers and Directors
Based upon the number of shares of Common Stock that will be outstanding
upon completion of the Offering, officers and directors of the Company and
persons who may be deemed to be affiliates, as a group, beneficially own
approximately 69.56 percent of the Company's outstanding Common Stock. As a
result, officers and directors of the Company and their affiliates may be able
to elect all members of the Board of Directors and may retain the voting power
to approve all matters requiring approval by the shareholders of the Company,
including a possible merger or similar transaction which, if effected, would
result in a premium to shareholders.
Indemnification and Limits on Director Liability
The Company has provisions in its charter, by-laws, or other contracts
providing for the maximum indemnification of its officers and directors
permitted by law and allows the Company, among other things, to pay for the
expenses of an officer or director in connection with legal proceedings brought
about because of the person's position with the Company. This could have the
effect of making it more difficult for the shareholders to recover damages
against the officers and/or directors of the Company for alleged breaches of
fiduciary duties and other matters.
Competition
The Company, through its subsidiaries, will compete with numerous
companies worldwide. There are many large and financially stable competing
companies in the United States and the world with substantially greater
resources than has the Company. See "Competition."
Arbitrary Nature of Offering Price
The offering price of the Shares being offered hereby was arbitrarily
determined by the Underwriter. In determining the offering price, the Company
and the Underwriter considered such factors as the financial resources of the
Company, the nature of the Company's assets, estimates of the business
6
<PAGE>
potential of the Company, the amount of equity or control desired to be
retained by the Company's existing stockholders, the amount of dilution to
public investors and the general conditions of the securities markets. The
offering price has no relationship to the book value of the Company or any
other accepted criteria of value.
No Public Market for Common Stock
At present, no market exists for the Company's securities, and there is no
assurance that a regular trading market will develop at the conclusion of this
Offering or, if developed, that it will be sustained. A purchaser of the Shares
may, therefore, be unable to sell the Shares should such purchaser desire to do
so. Furthermore, it is unlikely that a lending institution will accept the
Company's Common Stock as pledged collateral for loans unless a regular trading
market develops.
Dependence Upon Key Personnel
The Company is substantially dependent upon the efforts and abilities of
Mohammad Ali Khan, its President, and Asim S. Kohli, its Executive Vice
President, as well as the senior management teams of each subsidiary. The loss
of the services of any of these officers or key employees would potentially and
materially adversely affect the operations and financial condition of the
Company. At present, the Company has no keyman life insurance on the life of
any key officer or employee. See "Management."
Immediate Significant Dilution and Benefits Realized by Original Stockholders
Each purchaser of Common Stock in this Offering will suffer immediate and
substantial dilution in the book value per share of Common Stock as compared to
the purchase price thereof. If the Company's future operations are
unsuccessful, the persons who purchase the Shares offered hereby will sustain
the principal losses of cash investment. See "Dilution." The public
shareholders purchasing shares of Common Stock in connection with this Offering
will be bearing the risk for the Company. If it is successful, the original
shareholders will benefit by the investment made by the public shareholders. If
the Company is not successful, the public shareholders' investment is
principally at risk.
Possible Rule 144 Sales
A total of 11,517,636 shares (including 813,000 shares issuable upon the
assumed conversion of 813,000 shares of preferred stock) have been issued by
the Company prior to this Offering and are held by persons who are officers,
directors, founders and others. These securities may be sold in compliance with
Rule 144 adopted under the Securities Act of 1933, as amended, which provides,
in essence, that officers, directors and others holding restricted securities
(such as those described above) may each sell in brokerage transactions an
amount equal to one percent of the Company's outstanding common stock every
three months. Rule 144 provides that restricted shares must not be sold until
they have been held for a period of one year from the date they were fully paid
for and no sooner than one year from the date of incorporation. Hence, the
possible sale of these restricted shares under Rule 144 may, in the future,
have a depressive effect on the price of the Company's common stock in the
over-the-counter market, if there is a market. Furthermore, persons holding
restricted securities for one year who are or become non-affiliates of the
Company may sell their securities pursuant to Rule 144 without limitation on
the number of shares sold. Shares of the Company's stock first become eligible
for Rule 144 Sales in one year from incorporation date.
The officers and directors of the Company and its subsidiaries have agreed
to hold their restricted shares of Common Stock for periods ranging from one to
two years after the effective date.
Board Can Issue Significant Number of Additional Shares
There are enough shares of the Company's common stock authorized that the
Board of Directors will have authority to issue a number of shares in excess of
those that will be outstanding if all shares offered hereby are sold. The
issuance of any such shares to persons other than the public would reduce the
7
<PAGE>
amount of control held by the public following the Offering. There are
presently no commitments, contracts or intentions other than described herein
to issue any additional stock to any other persons, but such contracts or
commitments may occur in the future.
No Dividends
The Company has paid no dividends to date and does not intend to pay cash
dividends in the foreseeable future. Management presently intends to retain any
earnings to help finance the development of the Company's business. Future
dividend policy will depend upon earnings (if any), expansion, capital
requirements and other factors.
RISK FACTORS RELATED TO KMS
Volatile Nature of KMS' Business and Associated Market Risks
KMS' securities business by its nature is subject to various risks,
particularly in volatile markets. These include the occurrence of losses from
trading and underwriting of securities, customer inability to meet commitments
(such as margin obligations), customer default and employee misconduct and
errors.
KMS' revenues, like those of other firms in the securities industry, will
be directly related to fluctuations in trading volume and price levels of
securities. Such fluctuations are directly affected by regional, national and
international economic, regulatory and political conditions, broad trends in
business and finance and interest rates. Low trading volume and lack of
increasing securities prices generally result in reduced commissions and
investment banking revenues for firms such as KMS. In the past, heavy trading
volume has caused clearing and processing problems for the securities industry
and may do so in the future. In periods of reduced volume or decreasing
securities prices, profitability for firms such as KMS may be adversely
affected since many costs other than commission compensation are relatively
fixed.
Participation in underwriting of securities will subject KMS to a risk of
loss if it is unable to resell the securities underwritten. In addition, in
connection with underwriting activities, KMS will be subject to risk of
liability and expense resulting from possible claims against the underwriter
under Federal and state securities laws. There can be no assurance that KMS
will not experience significant losses as a result of such activities.
The Company could incur significant market risks if it were to enter into
or invest in contracts or financial instruments that are linked to or fluctuate
with interest rates or other market indices or factors. To date, it has not
entered into such agreements or contracts. In addition, the Company has reduced
its market risk by selling substantially all trading securities before the end
of each market day. No assurances can be given that the Company will continue
to avoid market risks associated with the securities industry.
Industry Is Highly Competitive
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with numerous other securities brokers and dealers, investment
banking firms, life insurance sales agencies, investment advisors, leveraged
buyout firms, venture funds and, indirectly for investment funds, with
commercial banks. Many of KMS' competitors have substantially greater capital
and other resources than does KMS. Some commercial banks and thrift
institutions also offer securities brokerage services and many commercial banks
offer a variety of investment banking services. Competition among financial
services firms also exists for investment representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than those of KMS. Furthermore, numerous commercial banks have
petitioned the Board of Governors of the Federal Reserve System for permission
to enter into
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<PAGE>
various new business activities from which they are currently barred, such as
underwriting certain mortgage-backed and municipal revenue securities and
securities backed by consumer loans. Various legislative proposals, if enacted,
would also permit commercial banks to engage in such activities. Ultimately,
these developments or other developments of a similar nature may lead to the
creation of integrated financial service firms that offer a broader range of
financial services.
The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business, including many offering deeply discounted rates on the Internet. In
addition, an increasing number of specialized firms now offer "discount"
services to individual customers. These firms generally effect transactions for
their customers on an "execution only" basis without offering other services
such as portfolio valuation, investment recommendations and research. The
continuation of such discounting and an increase in the number of new and
existing firms offering such discounts could adversely affect KMS' retail
business.
Risks of Principal Transactions
KMS' securities trading, market making and underwriting activities will
involve the purchase and sale of securities as a principal. These transactions
involve the risks of a change in the market price of such securities and of
decreases in the liquidity of markets, which can limit KMS' ability to sell
securities purchased or to purchase securities sold in such transactions.
Trading securities as a principal and underwriting corporate securities will
represent an important part of KMS' business and subject KMS' capital to
significant risk.
Industry Is Subject to Significant Regulation
KMS' business is, and the securities industry generally is, subject to
extensive regulation at both the Federal and state level by various regulatory
agencies which are charged with protecting the interests of customers.
Self-regulatory organizations such as the National Association of Securities
Dealers, Inc. (the "NASD") and state securities commissions require strict
compliance with their respective rules and regulations. Failure to comply with
any of these laws, rules and regulations could result in fines, suspension or
industry expulsion or criminal prosecution, which could have a material adverse
effect upon KMS.
Certain regulatory bodies perform audits or other procedures to ensure
compliance with their rules and regulations. The NASD completed an audit of KMS
in February 1998, at which time it issued a letter setting forth certain
alleged exceptions and areas of noncompliance noted during the performance of
its audit procedures, including alleged deficiencies in written supervisory
procedures, violations of the firm's restriction letter with respect to the
number of securities for which it can make markets, record keeping violations
with respect to new customer accounts and option agreement forms, discrepancies
on tickets relating to trades, violations of rules relating to principal
markup/markdown transactions on corporate equities and various administrative
deficiencies. Management of KMS, based on its review of the letter, discussions
with counsel and with the NASD auditors, does not believe that the ultimate
resolution of the matters set forth in the letter from the NASD will have a
material adverse effect on KMS' results of operations or financial condition,
although no assurances thereof can be given.
Effect of Net Capital Requirements
The SEC's Net Capital Rule imposes minimum financial requirements for all
registered broker-dealers doing business with the public. KMS is subject to the
requirements of this rule. The Net Capital Rule places limits on certain of
KMS' operations, such as underwriting activities and market making and other
principal trading activities. A decrease below minimum net capital in the form
of a significant operating loss or any unusually large charge against KMS' net
capital could adversely affect the ability of KMS to expand or even maintain
its present levels of business.
Dependence Upon Key Personnel
KMS is dependent, in particular, upon the services of its President,
Mohammed Ali Khan, Asim S. Kohli and other key management members. See
"Management." If Mr. Khan or any of these management members are unable to
perform their duties for whatever reason, KMS' business could be adversely
affected.
9
<PAGE>
Personnel Retention and Recruitment
A substantial portion of KMS' revenue will be generated through the
activities of its securities traders and registered representatives. The
inability to recruit and retain traders or such representatives or the
inhibition of such customer contact by regulation or otherwise could have a
material adverse impact on KMS' business and financial condition. Similarly,
implementation of KMS' overall strategy will require it to identify, recruit
and retain professionals in the areas of corporate finance, research and
similar areas. No assurance can be given that KMS will be successful in these
undertakings.
Use of Proceeds for Venture Capital Investments
KMS may use a portion of the proceeds from the Offering to invest in late
stage venture capital opportunities and/or private placements. Such investment
decisions will be in the sole discretion of Management and the Board of
Directors. Prospective shareholders of the Company will have no control over
decisions to invest in any such capital venture opportunities, and no assurance
can be given as to the likelihood of success.
RISK FACTORS OF SUREAL
Reliance Upon Independent Distributors of Sureal
Sureal distributes its products exclusively through independent
distributors who have entered into agreements with Sureal. Sureal depends
exclusively on the efforts and success of its distributors in generating
revenue and growth for the Sureal. The agreement with the distributors allows
the distributor to terminate the relationship at any time. Sureal will
experience turnover in its distributors from year to year. This dependence
requires the continued sponsoring and training of new distributors to maintain
or increase the total number of distributors of Sureal. Sureal will experience
seasonal decreases in distributor sponsoring and product sales in countries
where it operates because of holidays and vacations recognized in those
countries as well as other factors. Additionally, Sureal will experience
fluctuations in the level of distributor sponsorship. Sureal, like other direct
marketing companies, has little or no control over the level of sponsorship of
new distributors. Sureal cannot predict the timing of these fluctuations or the
degree of the fluctuations. There can be no assurance that Sureal will attract
and retain a sufficient distributors to permit profitable operations because of
the number of direct sales opportunities that exist for potential dealers.
Potential Negative Impact of Distributor Actions
Sureal and its products can be negatively impacted by actions of
distributors. The publicity resulting from distributor activities such as
inappropriate earnings claims and product representations by distributors can
make the sponsoring and retaining of distributors more difficult, thereby
negatively impacting sales. There can be no assurance that distributor actions
will not have a material adverse effect on Sureal's business or results or
operations.
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, 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.
Sureal may receive 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. Such inquiries
may result in adverse publicity for Sureal.
Government Regulation of Products and Marketing
Sureal is subject to or affected by extensive governmental regulations not
specifically addressed to network or direct marketing. Such regulations govern,
among other things, (i) product formulation,
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<PAGE>
labeling, packaging and importation, (ii) product claims and advertising,
whether made by Sureal or distributors, (iii) fair trade and distributor
practices, and (iv) taxes, transfer pricing and similar regulations that affect
foreign taxable income and customs duties.
Sureal 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
Sureal 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 Sureal, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of distributors and, consequently, on
Sureal's sales and earnings.
Reliance on Certain Distributors; Potential Divergence of Interests between
Distributors and Sureal
The Company's Global Compensation Plan allows distributors to sponsor new
distributors. The sponsoring of new distributors creates multiple distributor
levels in the network marketing structure. Sponsored distributors are referred
to as "down line" distributors within the sponsoring distributor's "down line
network". If down line distributors also sponsor new distributors, additional
levels of down line distributors are created, with the new down line
distributors also becoming part of the original sponsor's "down line network".
This structure may result in certain distributors developing large down line
organizations. The loss of such distributors and their down lines could
adversely affect sales and impair its ability to attract new distributors.
Entering New Markets
Sureal intends to sell its products in additional countries such as the
United States, Mexico, Canada and Japan, each of which represents a new market.
Each of the proposed new markets will present additional unique difficulties
and challenges. Modifications to product lines may be needed to accommodate the
market conditions in each country, while maintaining the integrity of Sureal's
products. No assurance can be given that Sureal will be able to reformulate its
product lines successfully in any of its new markets or make other adjustments
brought about by local customs or tastes to attract local consumers.
Change in Nature of Business and Current Reliance on and Concentration of
Outside Manufacturers
Until September 1997, Sureal's independent distributors were supplied with
branded products, which brands were not owned or controlled by Sureal. Until
such time, the revenue generated by the sales of those products was distributed
in an agreed upon manner among the supplier, shipper and Sureal pursuant to the
terms of a verbal agreement. In September 1997, Sureal decided to develop and
distribute its own branded products. Although the product line is similar to
that of the past, this change represents a significant change in the way in
which Sureal conducts its business and requires Sureal to increase its need for
working capital to acquire and hold inventory. Virtually all of Sureal's
branded products are sourced through and are produced by U.S. manufacturers
unaffiliated with Sureal. Sureal currently has little or no direct contact with
these manufacturers. Sureal's profit margins and its ability to deliver its
existing products on a timely basis are dependent upon the ability of outside
manufacturers to continue to supply products in a timely and cost-efficient
manner. Furthermore, Sureal's ability to enter new markets and sustain
satisfactory levels of sales in each market is dependent in part upon the
ability of suitable outside manufacturers to reformulate existing products, if
necessary, to comply with local regulations or market environments, for
introduction into such markets. Finally, the development of additional new
products in the future will likewise be dependent in part on the services of
suitable outside manufactures.
Sureal currently acquires products or ingredients from sole suppliers or
suppliers that are considered by Sureal to be the superior suppliers of such
ingredients. Sureal has not entered into any long-term supply agreements. All
purchases are made pursuant to specific purchase orders. Sureal's management
believes that, in the event that it is unable to source any products or
ingredients from its current suppliers, Sureal could produce such products or
replace such products or substitute ingredients without a significant
11
<PAGE>
disruption to its operations or prohibitive increases in the cost of goods
sold. However, there can be no assurance that the loss of such a supplier would
not have a material adverse effect on Sureal's business and results of
operations. Similarly, no assurances can be given that Sureal's branded
products will gain market acceptance.
Competition
The markets for personal care and nutritional products are large and
intensely competitive. Sureal competes directly with companies that manufacture
and market personal care and nutritional products in each of Sureal's product
lines. Sureal competes with other companies in the personal care and
nutritional products industry by emphasizing the value and premium quality of
the Company's products and the convenience of the company's distribution
system. Many of Sureal's competitors have much greater name recognition and
financial resources than does Sureal. In addition, personal care and
nutritional products can be purchased in a wide variety of channels of
distribution. While Sureal believes that consumers appreciate the convenience
of ordering products from home through a sales person or through a catalog, the
buying habits of many consumers accustomed to purchasing products through
traditional retail channels are difficult to change. Sureal's product offerings
in each product category are also relatively small compared to the wide variety
of products offered by many other personal care and nutritional product
companies. There can be no assurance that Sureal's business and results of
operations will not be affected materially by market conditions and competition
in the future.
Sureal also competes with other direct selling organizations, many of
which have longer operating histories and higher visibility name recognition
and financial resources. The leading network marketing company in Sureal's
markets is Amway Corporation and its affiliates. Sureal competes for new
distributors on the basis of its Global Compensation Plan and its premium
quality products. Management envisions the entry of many more direct selling
organizations into the marketplace as this channel of distribution expands over
the next several years. Sureal also believes that other large, well-financed
corporations may launch direct selling enterprises which will compete with
Sureal in certain of its product lines. There can be no assurance that Sureal
will be able to successfully meet the challenges posed by this increased
competition.
Sureal competes for the time, attention and commitment of its independent
distributor force. Given that the pool of individuals interested in the
business opportunities presented by direct selling tends to be limited in each
market, the potential pool of distributors for Sureal's products is reduced to
the extent other network marketing companies successfully recruit these
individuals into their businesses. Although management believes that Sureal
offers an attractive business opportunity, there can be no assurance that other
network marketing companies will not be able to recruit Sureal's existing
distributors or deplete the pool of potential distributors in a given market.
Operations Outside the United States; Currency and Political Risks
Sureal's operations are located, and most of its revenues are derived
from, operations outside the United States. Sureal's operations may be
materially and adversely affected by economic, political and social conditions
in the countries in which it operates. A material change in policies by any
government in Sureal's markets could adversely affect Sureal 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 general trend in these countries has been toward more
open markets and trade policies and the fostering of private business and
economic activity, no assurance can be given that the governments in these
countries will continue to pursue such policies or that such policies will not
be significantly altered in future periods. This could be especially true in
the event of a change of leadership, social or political disruption or
upheaval, or unforeseen circumstances affecting economic political or social
conditions or policies.
Political Risks Inherent in Russia
A favorable political climate in the Russian Market and the openness of
its markets to United States trade are important to the success of Sureal. The
Russian Federation appears to have embraced political
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<PAGE>
reforms and market economies. However, there are no local procedures for such
vast changes; the region has known only totalitarianism and a centrally-planned
economy for most of this century. Any reversal in such perceived new political
and economic trends and policies, or in international trade policy generally,
could materially adversely affect Sureal's operations. Moreover, the political
situation in the Russian Federation, where Sureal expects to generate a
substantial portion of its revenues in the near future, remains in constant
transition. Since the arrival of the Yeltsin government in December 1991, the
Russian Federation has experienced a proliferation of political parties, an
increase of nationalist sentiment, and a fragmentation of its economic and
political institutions. In addition, there has been a dramatic increase in
crime, including organized crime which may target businesses in the Russian
Federation. The viability of the Russian government has been tested by various
political factions gaining strength and unsuccessful coup d'etats; there can be
no assurance that a coup d'etat will not again be attempted or that any future
attempts will not be successful. In addition, the privatization process in
other parts of the Russian Federation has been sporadic.
Because the Russian Federation is in the early stages of development of a
market economy, its commercial framework in still developing. New
market-oriented laws are being enacted, but their application is still
uncertain. Although Sureal believes that the Russian Federation has advanced in
the area of commercial law, Russian laws and courts are not well tested in
contract enforcement. Similarly, although Russian law regarding foreign
investment provides protection against nationalization and confiscation, there
is little or no judicial precedent in this area.
The various government institutions and the relations between them, as
well as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change. The
Constitution of the Russian Federation (the "Russian Constitution") gives the
President of the Russian Federation substantial authority, and any major
changes in, or rejection of, current policies favoring political and economic
reform by the President may have a material adverse effect on Sureal.
The Russian Federation is constituted as a federation of republics,
territories, regions (one of which is an autonomous region), cities of federal
importance and autonomous areas, all of which are equal members of the Russian
Federation. The delineation of authority among the regions, the internal
republics and the federal governmental authorities is, in many instances,
uncertain, and in some instances, contested. In Chechnya, for example, regional
and local authorities openly defied the powers of the federal government,
resulting in a protracted military confrontation. Lack of consensus between
local and regional authorities and the federal government often results in the
enactment of conflicting legislation at various levels and may result in
political instability. This lack of consensus may have negative economic
effects, which could be material to Sureal.
Furthermore, the political and economic changes in Russia in recent years
have resulted in significant dislocations of authority, as previously existing
structures have collapsed and new structures are only beginning to take shape.
The local and international press have reported a significant rise in organized
criminal activity, particularly in large metropolitan centers. Moreover, the
combination of the sudden loss of the tight social control that was
characteristic of the Soviet Union, a large but poorly paid police force, an
increase in unemployment, an influx of unemployed persons from outlying areas
to metropolitan centers and a decline in real wages has led to a substantial
increase in property crime in large cities. In addition, the local and
international press have reported high levels of official corruption in the
Moscow Region, and elsewhere in the Russian Federation. In an effort to
decrease the levels of criminal activity and corruption, President Yeltsin has
issued a series of decrees granting the security forces very broad powers. It
has been acknowledged that many provisions of these anti-crime decrees violate
the Russian Constitution, as well as the Criminal Code of the Russian
Federation, and these decrees have been viewed by many as a threat to civil
rights. While the Sureal has not been adversely affected by these factors to
date, no assurance can be given that the depredations of organized or other
crime will not in the future have a material adverse effect on Sureal.
The failure of many state-controlled enterprises to pay full salaries on a
regular basis, and the failure of salaries and benefits generally to keep pace
with the rapidly increasing cost of living have led in the
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<PAGE>
past, and could lead, in the future, to labor and social unrest. Such labor and
social unrest may have political, social and economic consequences, such as
increased support for a renewal of centralized authority, increased nationalism
(with restrictions on foreign involvement in the economy of the Russian
Federation) and increased violence, any of which could have a material adverse
effect on Sureal.
The health of Russia's current president, Boris Yeltsin, has been reported
to be poor and, as a result, he could be forced to step down, could become
incapacitated or could die. In such event, under the Russian Constitution the
prime minister would become acting president and would be required to call new
presidential elections. Furthermore, Mr. Yeltsin appears to have lost a
significant amount of political support and has been unable to obtain approval
for key cabinet appointees. These situations could result in a period of
political instability and a reversal of market reforms that could have a
material adverse effect on companies operating in Russia.
Currency Risks Associated with Russia
The recent history of trading in the Russian rouble as against the U.S.
dollar has been characterized by significant declines in value and considerable
volatility. Although in recent months, the rouble has experienced relative
stability against the U.S. dollar, there is a risk of further declines in value
and continued volatility in the future. The rouble is generally not convertible
outside Russia. A market exists within Russia for the conversion of roubles
into other currencies, but it is limited in size and is subject to rules
limiting the purposes for which conversion may be effected. The limited
availability of other currencies may tend to inflate their values relative to
the rouble and there can be no assurance that such a market will continue to
exist indefinitely. Moreover, the banking system in Russia is not yet as
developed as its Western counterparts and considerable delays may occur in the
transfer of funds within, and the remittance of funds out of, Russia.
All of Sureal's invoices to its distributors are denominated in U.S.
dollars. To date, its distributors have always paid such invoices promptly.
However, any delay in these distributors' ability to (i) convert Russian
roubles into U.S. dollars or (ii) transfer such funds to the U.S. in order to
make payments could have a material adverse effect on Sureal.
Legal Risks Associated with Russia
Russia lacks a fully developed legal system. Russian law is evolving
rapidly and in ways that may not always coincide with market developments,
resulting in ambiguities, inconsistencies and anomalies, and ultimately in
investment risk that would not exist in more developed legal systems. For
example, the ability of a creditor both to obtain a lien or other similar
priority in payment and to enforce such priority is uncertain. Furthermore,
effective redress in Russian courts in respect of a breach of law and
regulation, or in an ownership dispute, may be difficult to obtain.
Risks associated with the Russian legal system include: (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influences; (ii) the relative inexperience of judges
and courts in commercial dispute resolution, and generally in interpreting
legal norms; (iii) inconsistencies among laws, presidential decrees and
governmental and ministerial orders and resolutions; (iv) oftentimes
conflicting local, regional and national laws, rules and regulations,
particularly in the Russian Federation; (v) the lack of judicial or
administrative guidance on interpreting the applicable rules; and (vi) a high
degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly
in areas such as company law, property, commercial and contract law, securities
law, foreign trade and investment law and tax law. No assurance can be given
that the uncertainties associated with the existing and future laws and
regulations of Russia will not have a material adverse effect on Sureal.
Furthermore, the relative infancy of business and legal cultures in Russia
is reflected in the inadequate commitment of local business people, government
officials and agencies, and the judicial system to honor legal rights and
agreements, and generally to uphold the rule of law. Accordingly, Sureal may,
from time to time, confront threats of, or actual, arbitrary or illegal
revision or cancellation of its
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licenses and agreements, and face uncertainty or delays in obtaining legal
redress, any of which could have a material adverse effect on the results of
Sureal's operations.
Sureal is incorporated in the State of Delaware. However, a substantial
portion of its assets will be located in the Russian Federation. By reason of
the foregoing, it may not be possible for Sureal to effect service of process
within the United States upon key distributors or warehouse operators, or to
enforce in the United States or outside of the United States judgments obtained
against such entities or individuals. No treaty exists between the United
States and the Russian Federation for the reciprocal enforcement of foreign
court judgments.
Social Risks Inherent in Russia
The political and economic changes in Russia since the breakup of the
former Soviet Union have resulted in significant social dislocations, as
existing structures of authority have collapsed and new ones are only beginning
to take shape. The resulting broad decline in the standard of living has
resulted in substantial political pressure on the government to slow or even
reverse the economic reform policies currently being pursued.
In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generated businesses, and an increased integration of
Russian organized crime with major international criminal organizations. In
addition, a substantial increase in property crime in large cities has been
reported. Finally, the local and international press have reported high levels
of official corruption in the locations where Sureal operates. No assurance can
be given that organized or other crime or claims that Sureal's independent
distributors have been involved in official corruption will not, in the future,
have a material adverse effect on Sureal.
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DILUTION
Prior to selling any shares under this Offering, based on the Company's
Consolidated Financial Statements as of June 30, 1998, the Company has
11,517,636 shares of common stock issued and outstanding (including 813,000
shares issuable upon the assumed conversion of 813,000 shares of Preferred
Stock, including those preferred shares issued by KMS) with a net tangible book
value of $355,598 (or $.03 per share).
Assuming that the 2,025,000 Shares are sold in this Offering by the
Company and no portion of the Underwriter's Overallotment Option is exercised,
there will be a total of 13,542,636 shares issued and outstanding with a total
net tangible book value of $26,281,848 or $1.94 per share. The dilution to the
public stockholders would be $13.06 per share or 87% per share based on a
purchase price of $15 per share. The public stockholders would own 14.95% of
the outstanding shares. The present stockholders would benefit by an increase
in net tangible book value of $1.91 per share.
Net tangible book value per share is obtained by subtracting the total
liabilities from total tangible assets (total assets less intangible assets).
Dilution is the difference between the public offering price and the net
tangible book value of shares immediately after the Offering.
<TABLE>
<CAPTION>
MAXIMUM
-----------
<S> <C>
Public offering price per share ................................ $ 15.00
--------
Net tangible book value per share before Offering (2) .......... .03
Increase per share attributable to public investors ............ 1.91
--------
Net tangible book value per share after Offering (2) ........... 1.94
--------
Dilution per share to public investors ......................... $ 13.06
========
</TABLE>
- ----------
(1) Before deduction of underwriting commissions and estimated expenses to be
paid by the Company.
(2) Gives effect to the issuance of 750,000 shares pursuant to the Share
Exchange Agreement associated with the acquisition of Sureal (see
"Business" and "Certain Transactions") and the two for one reverse stock
split effective December 8, 1997 and assumes the issuance of 813,000
Common Shares upon the conversion of Preferred Stock (see "Description of
Capital Stock").
The following table sets forth, after giving effect to the assumed
completion of the Offering, information relating to the number of shares
purchased from the Company, the total consideration paid and the average price
per share paid by existing shareholders and by the public participating in the
Offering.
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER (1) PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Present Shareholders ......... 11,517,636 85.05 $ 3,569,441 10.52 $ .31
Public Investors ............. 2,025,000 14.95 30,375,000 89.48 $ 15.00
---------- ------ ----------- ------
Total ....................... 13,542,636 100.00 $33,944,441 100.00
========== ====== =========== ======
</TABLE>
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<PAGE>
USE OF PROCEEDS
The allocations set forth below are the estimates of management as to how
the net proceeds of the Offering (estimated to be $25,926,250, assuming no
exercise of the Underwriter's Overallotment Option) will be allocated as set
forth below. The determination of net proceeds assumes that the Company will
pay a total of 13.0 percent of gross proceeds to the Underwriter in the form of
commissions and expenses as well as incur expenses of the offering of $500,000
This table also excludes sales by the Selling Shareholder because none of the
proceeds from such sales of 175,000 shares will go to the Company.
<TABLE>
<CAPTION>
<S> <C>
Develop Sureal's business (including repayment of $645,153 principal amount of
indebtedness) (1) ........................................................... $ 5,000,000
Purchase a seat on the New York Stock Exchange ............................... 1,500,000
Open brokerage office in Bahrain ............................................. 4,000.000
Expand KMS Asset Management Group ............................................ 6,400,000
Repay bridge loan ............................................................ 600,000
Effect other acquisitions or strategic investments ........................... 8,426,250
-------------
Total ........................................................................ $ 25,926,250
=============
</TABLE>
- ----------
(1) This indebtedness ($645,153), the proceeds of which were used for working
capital, bears interest at the rate of 8 percent per annum and is payable
on demand.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of this Offering based upon the current state of its business
operations, its current plans and current economic and business conditions and
is subject to reapportionment among categories listed above or to new
categories. Future events, including the problems, expenses, complications and
delays frequently encountered by growing businesses, as well as changing
economic, political and regulatory environments confronting the Company's
subsidiaries, may make shifts in the allocation of funds necessary or
desirable.
The Company has identified the Direct Marketing and Military Resale
industries as offering attractive rollup opportunities. However, no formal
discussions have taken place with any potential acquiree and no such
discussions are anticipated until following the completion of this Offering.
The funds from the Offering will be invested in United States Treasury
Obligations or a similar instrument until needed for the purposes set forth
above.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes",
"expects", "may", "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important
factors may affect the Company's actual results and could cause such results to
differ materially from forward-looking statements made by or on behalf of the
Company. Such factors include, but are not limited to, changing market
conditions, the impact of competitive products, pricing, acceptance of the
Company's products in development and other risks detailed herein. The Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 do
not apply to initial public offerings.
RESULTS OF OPERATION
The Company
Year Ended December 31, 1997 and 1996
The Company was organized under the laws of the State of Delaware in
December 17, 1996. It had no operating activities in 1996. In 1997, it had no
direct revenues other than those of its operating subsidiaries, KMS and Sureal,
that are described individually in the sections that follow. Its expenses in
1997 consisted of:
<TABLE>
<CAPTION>
<S> <C>
Officers' compensation ............ $342,500
Start-up costs .................... 564,335
Office and administrative ......... 36,523
--------
Total ............................. $943,358
========
</TABLE>
The start-up costs relate principally to the costs of establishing a
brokerage firm in Bahrain to take advantage of KMS' contacts in the Middle
East. The Company is optimistic that all necessary approvals and authorizations
will be obtained, but no assurances thereof can be given.
KMS
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
6/30/98 PERCENT 6/30/97 PERCENT CHANGE
------------ ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Commissions on customer trades .......... $ 85,510 3.77% $ 581,827 33.69% $-496,317
Trading income .......................... 1,699,363 74.95% 1,096,270 63.48% 603,093
Other income ............................ 142,273 6.28% 48,954 2.83% 93,319
Intercompany ............................ 340,000 15.00% 0 0.00% 340,000
2,267,146 100.00% 1,727,051 100.00% 540,095
Expenses:
Officers compensation ................... 302,781 13.36% 151,258 8.76% 151,523
Compensation and related expenses ....... 424,569 18.73% 779,702 45.15% -355,133
Clearance and floor brokerage ........... 66,491 2.93% 84,058 4.87% -17,567
Occupancy, office and administrative..... 475,720 20.98% 287,757 16.66% 187,963
Professional ............................ 234,413 10.34% 101,428 5.87% 132,985
Communications .......................... 100,779 4.45% 163,841 9.49% -63,062
Regulatory fees and expenses ............ 54,378 2.40% 67,030 3.88% -12,652
Other expenses .......................... 12,000 0.53% 271,842 15.74% -259,842
1,671,131 73.71% 1,906,916 110.41% -235,785
Income (loss) before income taxes ....... 596,015 26.29% (179,865) (10.41)% 775,880
Less intercompany revenue ............... 340,000 15.00% 340,000
Net ..................................... $ 256,015 11.29% $ (179,865) (10.41)% $ 435,880
========= ====== ========== ====== =========
</TABLE>
18
<PAGE>
The principal differences during the six months ended June 30, 1998
compared with the four months ended June 30, 1997 are:
o A significant decrease in commission income brought about by a
reduction in the number of brokers employed during the period and the
fact that the Company did not participate in public offerings during the
1998 period.
o Trading income increased because of KMS' participation in a public
offering.
o The intercompany revenue consists of the reversal of a portion of an
allowance established in 1997 that related to loans made by KMS to the
Company. A portion of such loans was repaid in 1998 from the proceeds of
bridge financing. The impact of this transaction is eliminated in
consolidation.
1997 Compared to 1996
<TABLE>
<CAPTION>
DESCRIPTION 12/31/97 PERCENT 12/31/96 PERCENT DIFFERENCE
- ----------- --------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Commissions and trading ................ $ 2,521,870 $ 243,097
Interest and other ..................... 392,327 5,892
Total .................................. 2,914,197 100.00% 248,989 100.00% $2,665,208
Expenses:
Compensation and related ............... 1,705,207 58.51% 481,678 193.45% 1,223,529
Clearance and floor brokerage .......... 158,184 5.43% 68,385 27.47% 89,799
Occupancy and administratine ........... 668,104 22.93% 525,427 211.02% 142,677
Professional services .................. 273,039 9.37% 310,032 124.52% (36,993)
Communications ......................... 317,447 10.89% 68,343 27.45% 249,104
Regulatory ............................. 93,919 3.22% 44,608 17.92% 49,311
Other .................................. 1,100,754 37.77% 1,100,754
Total .................................. 4,316,654 148.12% 1,498,473 601.82% 2,818,181
Net loss ............................... (1,402,457) (1,249,484)
Less--Intercompany expenses ............ 818,271 28.08%
Net .................................... $ (584,186) $ (1,249,484) $ 665,298
</TABLE>
The periods are not comparable because KMS activities were de minimis
prior to May 1996. Revenues increased as follows:
<TABLE>
<CAPTION>
1997 1996 DIFFERENCE
------------- ------------- -------------
<S> <C> <C> <C>
Commission income .............. $ 863,673 $ 355,795 $ 507,878
Trading income -- net .......... 1,658,197 (129,279) 1,789,476
Interest ....................... 37,656 5,892 31,674
Other .......................... 354,671 16,581 338,090
---------- ---------- ----------
Total ........................ $2,914,197 $ 248,989 $2,665,208
========== ========== ==========
</TABLE>
The increase in commission income reflects the (i) general increase in
KMS' activities during the period and (ii) the receipt in 1997 of commissions
of $333,755 associated with underwriting activities. The increase in trading
income reflects (i) the increase in resources available for trading and (ii)
the impact of net trading losses of approximately $165,000 during the last
three months of 1996. KMS' trading activities involve trading equity
securities, principally securities trading on the NASDAQ National Exchange.
KMS' policy is to sell all or substantially all of its investment positions at
the end of each trading day. Therefore, the carrying value of trading
securities is generally not material. Other revenues increased because of
significant increases in service and investment banking consulting fees.
The overall level of expenses increased in 1997 because of the increase in
sales and trading activities. Increases not related to increases in activity
included consulting and legal fee increases of approximately
19
<PAGE>
$215,000. In addition, KMS settled a dispute involving a guarantee of a
business transaction for a customer/preferred stockholder in the amount of
$282,483. The matter involved a dispute over whether a letter issued by KMS on
behalf of its customer constituted a guarantee of the customer's obligation by
KMS. The matter was litigated, and a court determined the language in such
letter to be deemed a guarantee thereby obligating KMS to pay when its customer
defaulted. Overall executive compensation also increased by approximately
$375,000.
The intercompany expense for 1997 is described in Note 4 to KMS' financial
statements.
No benefit has been recorded for KMS' net operating loss carryforwards
because of the uncertainty of utilizing such carryforwards.
SUREAL
Sureal was formed in August 1995, at which time it acted as the marketing,
sales and administrative arm for Eastern Europe for an existing direct
marketing company specializing in personal care and nutritional products. In
October 1997, it decided to change its strategic focus by developing its own
product line. These factors, taken as a whole, distort the comparability of the
data set forth below. Sureal commenced its operations in August 1995 using a
network of 333 independent distributors in Russia. The number of distributors
in the network increased to 4,972 at December 31, 1995; 94,307 at December 31,
1996; and 172,221 at May 31, 1997, Commissionable sales levels, to a large
extent, are a function of the number of distributors selling the product. On
the other hand, commissionable sales were impacted in the last quarter of 1997
while Sureal was developing its own branded product line. It lacked sufficient
inventory levels for its new products until January 1998.
The nature of Sureal's business is such that it can process significant
volumes of business without increasing administrative expenses. It has a highly
automated administrative function and receives data from the major independent
distributors in electronic form.
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
6/30/98 PERCENT 6/30/97
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue:
Commissionable sales ......................... $ 948,354 % $23,305,045
Cost of commissionable sales ................. 709,223 % 22,394,822
Net .......................................... 239,131 % 910,223
Other income ................................. 3,163 % 35,160
242,294 100.00% 945,383
Expenses:
Officers compensation ........................ 180,000 7.94% 124,708
Compensation and related expenses ............ 185,902 8.20% 97,998
Occupancy, office and administrative ......... 238,572 10.52% 103,617
604,474 26.66% 326,323
Income (loss) before income taxes ............ $ (362,180) (149.48)% $ 619,060
</TABLE>
The two periods are not comparable because during 1998 Sureal devoted the
significant portion of its time and resources to introducing its own product
line. During this period, Sureal did not have sufficient levels of inventory to
generate a significant volume of sales. Although sales levels will increase
somewhat in succeeding months, Sureal needs the proceeds from this Offering to
have sufficient working capital to generate the sales volume that its network
of distributors is capable of selling.
20
<PAGE>
1997 Compared to 1996
<TABLE>
<CAPTION>
1997 % 1996 % DIFFERENCE %
-------------- ----------- -------------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commissionable sales .................. $31,720,456 $21,594,562 $10,125,894 46.9%
Cost of commissionable sales .......... 30,459,297 20,720,459 9,738,838
Net ................................... 1,261,159 874,103 387,056
Other revenues ........................ 67,208 65,261 1,947 3.0%
Gross Margin .......................... 1,328,367 100.0% 939,364 100.0% 389,003 41.4%
Expenses:
Compensation and related .............. 463,693 34.9% 348,309 37.1% 115,384 33.1%
Occupancy and administrative .......... 251,227 18.9% 205,135 21.8% 46,092 22.5%
Total ................................. 714,920 53.8% 553,444 58.9% 161,476 29.2%
Income (loss) before taxes ............ 613,447 46.2% 385,920 41.1% 227,527 59.0%
Proforma income taxes ................. 229,000 17.2% 111,000 11.8% 118,000 106.3%
Proforma Net Income ................... 384,447 28.9% 274,920 29.3% 109,527 39.8%
</TABLE>
Commissionable sales increased because of the greater number of
independent distributors in 1997 compared with 1996. This increase was offset
because Sureal changed its focus in 1997 and decided to introduce its own
branded products. This decision offset the increase because it took several
months to begin obtaining a sufficient quantity of inventory to meet the demand
of the independent distributors and to complete the registration process for
its products. Management believes that this new strategy will result in
significantly higher margins on sales.
Administrative expenses increased principally because of increased office
salaries and related benefits. Facilities costs increased because Sureal
increased the size of its office space to accommodate the growth in office
personnel. No other expense category fluctuated significantly between periods.
Sureal was an S corporation during the periods covered. The pro forma
income tax provision reflected above represents the amounts that would have
been reported as a provision for income taxes if Sureal was filing a separate
return as a C corporation in each year.
1996 Compared to 1995
<TABLE>
<CAPTION>
1996 % 1995 % DIFFERENCE
-------------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Commissionable sales ...................... $21,594,562 $ 995,670 $20,598,892
Cost of commissionable sales .............. 20,720,459 977,173 19,743,286
Net ....................................... 874,103 93.1% 18,497 33.7% 855,606
Other revenue ............................. 65,261 6.9% 36,468 66.3% 28,793
Total ..................................... 939,364 100.0% 54,965 100.0% 884,399
Expenses:
Compensation and related expense .......... 348,309 37.1% 83,885 152.7% 264,424
Occupancy and administrative .............. 205,135 21.8% 52,574 95.6% 152,561
Total ..................................... 553,444 58.9% 136,459 248.3% 416,985
Income (loss) before taxes ................ 385,920 41.1% (81,494) (148.3)% 467,414
Proforma income taxes ..................... 111,000 11.8% -- 111,000
Proforma net income (loss) ................ 274,920 29.3% (81,494) (148.3)% 356,414
</TABLE>
Sureal began operations in August 1995 and was a start-up operation for
much of the period August 10, 1995 until December 31, 1995. Therefore, the two
periods are not comparable. Other revenues in 1995 consisted principally of
miscellaneous product sales outside the direct marketing network. The amount of
such sales decreased in each subsequent period as the direct marketing network
was put in place.
21
<PAGE>
INFLATION
The Company's business and operations have not been materially affected by
inflation during the periods ended December 31, 1997 and April 30, 1998.
However, KMS, by the nature of its business, would be impacted by a period of
inflation. Sureal could be affected to the extent that inflation in the Russian
Market causes its products to be sold at unattractive price points.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had stockholders equity of
$8,046,552, after giving effect to the merger with Sureal completed in December
1997. Management of the Company believes that the proceeds from the initial
public offering will be sufficient to meet its liquidity and capital needs for
the forseeable future. The Company has not entered into any material
commitments regarding capital expenditures or any significant supply
agreements. However, it will spend $4 million of proceeds from this Offering to
open an office for KMS in Bahrain, of which $2 million will be used as a
required cash deposit as specified by Bahraini authorities. Management
believes, based on discussions with counsel, that all necessary approvals will
be received to open the office in Bahrain within six months after the receipt
of offering proceeds provided no destabilizing political events occur in the
Middle East. No assurances can be given that such approvals will be received,
however.
SEASONALITY
The demand for the Company's products and services generally declines
during the summer months.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"; No. 129,
"Disclosure of Information about Capital Structure"; No. 130, "Reporting
Comprehensive Income"; and No. 131, "Disclosure about Segments of an Enterprise
and Related Information." These new accounting pronouncements are not expected
to have a significant impact on the Company. SFAS No. 128 requires the
presentation of Basic Earnings Per Share that the Company believes will, in its
case, approximate the amounts reported as Primary Earning Per Share. The
disclosure requirements in SFAS No. 129 and 130 are not expected to impact the
Company's financial statements. The merger with Sureal results in the Company
being required to provide segment information in its consolidated financial
statements.
YEAR 2000 AND EUROPEAN CURRENCY
Neither the Company nor any of its subsidiaries anticipates incurring any
material costs to modify computer systems or software in the year 2000.
The European Community's conversion to a common monetary unit will not
have a material impact on any of the Company's operations.
22
<PAGE>
BUSINESS
The Company
United States Financial Group, Incorporated ("USFG" or the "Company") is a
diversified holding company, incorporated under the laws of the State of
Delaware. USFG's main business purpose is to acquire undervalued or reasonably
priced companies in industries well suited for roll up consolidation
transactions. These roll up or consolidation candidates operate in industry or
market niches that are well established, are served in a fragmented way and do
not compete directly with large competitors. Furthermore, these target
companies must have experienced management teams and do not require significant
expenditures for research and development. USFG has begun to implement this
strategy through the acquisition and/or establishment of four companies and has
assembled a team that is experienced in all phases of mergers and acquisitions.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS"), an investment banking firm and a
broker-dealer of securities duly registered with the SEC and is a member firm
of the NASD, Municipal Securities Rulemaking Board (known as the "MSRB"), the
Securities Insurance Protection Corporation ("SIPC"). Sureal International,
Inc. ("Sureal"), a sales and direct marketing company that sells health and
other consumer products in Russia and other republics of the former Soviet
Union through a network of independent distributors was acquired in December
1997 in a purchase transaction.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated will be an asset management and international
financial consultant and advisory company and will take advantage of the
contacts of USFG's president. US Military Resale Group, Incorporated ("Military
Resale Group") was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
The Company acquired KMS through a share exchange effected on March 31,
1997 in which Mr. Khan exchanged 18,889,267 shares of KMS' common stock for
18,889,267 shares of the Company's common stock. On December 8, 1997, the
shares held by Mr. Khan became subject to a two for one reverse stock split,
thereby converting into 9,444,634 shares. On December 3, 1997, the Company
exchanged 750,000 shares of its common stock, subject to adjustment, for all of
the outstanding shares of common stock of Sureal. Both of these transactions
were accounted for as a purchase. KMS, as a broker-dealer and investment bank,
will be the vehicle to provide, directly or indirectly the capital necessary to
implement the overall strategy.
The Company's principal place of business is located at 110 Wall Street,
New York, New York 10005, and its telephone number is 212-785-4545.
Klein Maus & Shire, Inc.
KMS is a broker-dealer of securities duly registered with the SEC and a
member firm of the NASD, was incorporated under the laws of the State of
Indiana on August 15, 1994 under the name Comprehensive Financial Products,
Inc. It changed its name to "Khan, Edwards & Company" on December 9, 1994 and
adopted its current name on February 26, 1996.
KMS is an investment bank providing full service investment banking,
trading, research and advisory services to over 3,000 high net worth
individuals and institutions around the world. The key to KMS' current and
future success is its principal client base of high net worth international
investors and institutions. KMS' access to this client base through its senior
management puts it in a strong position to expand its investment banking
activities without reliance on cold calling, high pressure marketing
activities. KMS' growth plans are based on a corporate strategy emphasizing
generating revenues at a non-retail level, and maintaining a small sales force
comprised of experienced financial consultants with impeccable records. KMS is
located at 110 Wall Street in New York where it occupies two floors totaling
14,000 square feet.
To date, most of KMS' activities involve the retail trading and selling of
securities. KMS has also participated as a member of the selling group on seven
initial public offerings and one secondary public
23
<PAGE>
offering and has co-managed one initial public offering. Its clients are
located throughout the country and around the world and include institutional
investors.
KMS' goal is to continue providing full service investment banking
services, including research and advisory capabilities, to sophisticated high
net worth individuals and institutions. The key to building upon this goal is
the expansion of the KMS Asset Management Group, Incorporated that manages
funds for a fee (see below). KMS also intends to acquire a seat on the New York
Stock Exchange because its principal client base is and is likely to continue
being high net worth international investors and institutions. KMS access to
this client base through its senior management which puts it in a strong
position to expand its investment banking activities without reliance on cold
calling, high pressure sales activities.
KMS' principal strategy is to focus its resources on certain core
businesses where Management believes KMS can compete profitably and be among
the leading participants in each targeted market. In addition, KMS emphasizes
economic and investment research in the development of its business. Over the
next several years, KMS plans to expand significantly the scope of its business
activities and its customer base, both in the U.S. and internationally. This
strategy will allow KMS to establish strong positions in selected high-margin
activities, including equity and high-yield corporate securities underwriting.
Mr. Khan, KMS' President, currently manages investments for several
international institutional investors and has KMS poised to expand this aspect
of its business. KMS' ability to identify, recruit and retain experienced and
talented professionals is and will be the key element of its success in
implementing its expansion strategy. These professionals will augment the
capabilities of the existing officers and directors who have experience in
capital market transactions and mergers and acquisitions. No assurances can be
given that KMS will be successful in implementing its plans.
KMS conducts its business through several operating divisions, each of
which will become more distinctive as KMS expands its operations. These
divisions are (i) the Banking Group; (ii) the Capital Markets Group, which
includes the Fixed-Income, Institutional Equities, and other retail operations;
and the (iii) Money Management Group, which engages in the business of
providing fee-based advisory services to corporate and institutional customers.
The Capital Markets Group comprises substantially all of KMS' activities to
date.
THE BANKING GROUP has participated in raising capital and providing
financial and business advice to companies throughout the U.S. and anticipates
expanding its activities abroad. It also manages and underwrites public
offerings of securities, arranges private placements and provides advisory and
other services in connection with mergers, acquisitions, restructurings and
other financial transactions. In addition, it assists developing countries to
obtain project financing and the privatization of state-owned enterprises. It
was recently engaged as the investment banker by quasi-public entities in
Grenada, South Korea and Pakistan. The intermediate and long-term plans are to
invest KMS Asset Management Group funds in projects and financing arranged by
the Banking Group.
THE CAPITAL MARKETS GROUP provides a broad range of services, including
retail trading, research origination and distribution of equity and
fixed-income securities, private equity investments and late stage venture
capital. Its Fixed-Income Division will provide institutional and individual
clients with research, trading and sales services for a broad range of
fixed-income products, including high-yield corporate, investment grade, U.S.
government and asset-backed securities. The Institutional Equities Division
provides institutional clients with research, trading and sales services in
listed and over-the-counter equity securities.
The Capital Markets Group will also engage in proprietary trading. KMS
will manage its risks by limiting to nominal amounts the amount of securities
that will be held overnight in the trading portfolios.
KMS' retail customer accounts are carried on a "fully disclosed" basis by
Cowen & Co., members of the New York and other principle stock exchanges,
pursuant to a clearing agreement. This agreement provides, among other things,
that customer securities positions and credit balances are insured up to
$500,000 by the Securities Investors Protection Corp. ("SIPC") and
supplementary private insurance coverage of $49,500,000. All customer credit
balances are subject to immediate withdrawal from Cowen & Co., at the
discretion of the individual customer.
24
<PAGE>
The Company's trading and retail activities benefit from the utilization
of automated trading systems such as Selectnet, SOES and ACT. The company's
trading and retail activities will further benefit from the utilization of
other automated trading systems such as Instinet, BNET, and the automated
ticketless Brass trading program. The Brass system, which, in effect, makes
trading "paperless", enhances the ability of traders to focus on market
conditions by eliminating the prior administrative burden inherent in trading.
The Selectnet and Instinet networks link a company with trading partners
throughout the United States, including other brokerage firms, block trading
desks and specialists on the regional exchanges. These systems provide KMS with
access into every major securities exchange on a global basis. As it grows, KMS
will also employ an electronic volume monitoring system that will allow it to
determine the percentage of its relative trading volume in a specific security.
KMS is currently registered for retail distribution in the following
jurisdictions:
<TABLE>
<CAPTION>
<S> <C> <C>
Alabama Massachusetts South Dakota
Alaska Michigan Texas
Arizona Minnesota Utah
Arkansas Mississippi Vermont
California Montana Virginia
Colorado Nevada Washington, D.C.
Connecticut New Jersey Washington
Delaware New York West Virginia
Florida North Carolina Wisconsin
Georgia Ohio Wyoming
Illinois Oklahoma
Kansas Oregon Pending:
Kentucky Pennsylvania Indiana
Louisiana Rhode Island Maine
Maryland South Carolina Nebraska
</TABLE>
KMS' trading and retail operations are regulated by the NASD. The NASD
places various restrictions and limitations on the operations of member firms,
subject to revision based on the NASD's experience with each firm. KMS may make
markets in 15 NASDAQ securities and employ up to 55 registered representatives.
KMS is allowed to co-manage a best efforts or a firm commitment public offering
of securities. KMS does not and is not permitted to participate in transactions
involving penny stocks.
KMS ASSET MANAGEMENT GROUP, INCORPORATED was formed to serve as an advisor
to institutions, individuals and governments. Its strategy to expand its money
management business by increasing assets under management and increasing
international consultancy business. It currently acts as an advisor to
quasi-public entities in Grenada, South Korea and Pakistan. It will be acting
as an advisor to the Grenadine government on its tourism and infrastructure
development project and to Pakistan on establishing the first "Technology
Science Park" in Pakistan.
The minimum investment required for investors within KMS asset management
group is $250,000. Each account is insured up to $50 million by an "A" rated
insurance company, but is subject to normal market risks associated with
investing. KMS charges fees equal to one percent of the average assets under
management plus performance bonuses.
Government Regulation
The SEC is the Federal agency responsible for the administration of the
Federal securities laws. KMS is registered as a broker-dealer with the SEC.
Much of the regulation of broker-dealers has been delegated to self-regulated
organizations, principally the NASD and national securities exchanges such as
NASDAQ. These self-regulatory organizations adopt rules (subject to approval by
the SEC) that govern the industry and conduct periodic examinations of KMS'
operations. Securities firms are also subject to regulation by state securities
administrators in those states in which they conduct business. KMS is currently
registered as a broker/dealer in 47 states and the District of Columbia.
25
<PAGE>
Broker-dealers are subject to regulation covering all aspects of the
securities business, including sales method, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, record-keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and self-regulatory organizations, or changes in the interpretation or
enforcement of existing laws and rules may directly affect the mode of
operation and profitability of broker-dealers. The SEC, self-regulatory
organizations and state securities commissions may conduct administrative
proceedings which can result in censure, fine, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer, its officers or
employees. The principal purpose of regulation and discipline of broker-dealers
is the protection of customers and the securities markets, rather than
protection of creditors and stockholders of broker-dealers.
Certain regulatory bodies perform audits or other procedures to ensure
compliance with their rules and regulations. The NASD completed an audit of KMS
in February 1998, at which time it issued a letter setting forth certain
alleged exceptions and areas of noncompliance noted during the performance of
its audit procedures, including alleged deficiencies in written supervisory
procedures, violations of the firm's restriction letter with respect to the
number of securities for which it can make markets, record keeping violations
with respect to new customer accounts and option agreement forms, discrepancies
on tickets relating to trades, violations of rules relating to principal
markup/markdown transactions on corporate equities and various administrative
deficiencies. Management of KMS, based on its review of the letter, discussions
with counsel and with the NASD auditors, does not believe that the ultimate
resolution of the matters set forth in the letter from the NASD will have a
material adverse effect on KMS' results of operations or financial condition,
although no assurances thereof can be given.
The SEC's Net Capital Rule imposes minimum financial requirements for all
registered broker-dealers doing business with the public. KMS is subject to the
requirements of this rule. The Net Capital Rule places limits on certain of the
KMS' operations, such as underwriting activities, market making and other
principal trading activities. A decrease below minimum net capital in the form
of a significant operating loss or any unusually large charge against KMS' net
capital could adversely affect its ability to expand or even maintain its
present levels of business. See "Risk Factors."
Competition
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with numerous other securities brokers and dealers, investment
banking firms, life insurance sales agencies, investment advisors, leveraged
buyout firms, venture funds and, indirectly for investment funds, with
commercial banks. Many of KMS' competitors have substantially greater capital
and other resources than does KMS. Some commercial banks and thrift
institutions also offer securities brokerage services and many commercial banks
offer a variety of investment banking services. Competition among financial
services firms also exists for investment representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than those of KMS. Furthermore, numerous commercial banks have
petitioned the Board of Governors of the Federal Reserve System for permission
to enter into various new business activities from which they are currently
barred, such as underwriting certain mortgage-backed and municipal revenue
securities and securities backed by consumer loans. Various legislative
proposals, if enacted, would also permit commercial banks to engage in such
activities. Ultimately, these developments or other developments of a similar
nature may lead to the creation of integrated financial service firms that
offer a broader range of financial services.
The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business, including many offering deeply discounted commission rates on the
Internet. In addition, an increasing number of specialized firms now offer
"discount" services to individual customers. These firms generally effect
transactions for their customers on an "execution only" basis without offering
other services such as portfolio valuation, investment
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recommendations and research. The continuation of such discounting and an
increase in the number of new and existing firms offering such discounts could
adversely affect KMS' retail business.
SUREAL
Sureal is a direct marketing company involved in the distribution and sale
of high quality nutritional and air purification products. Sureal was founded
as Legacy Export, Inc. ("Legacy") in 1995 by Richard Wogksch, R. Bret Jenkins,
and Glen Jensen for the purpose of creating, developing and expanding direct
marketing businesses internationally, with an emphasis on Russia and other
republics of the former Soviet Union. The founders had experience in the direct
marketing industry, including the international aspects thereof. Legacy
commenced its operations as the marketing, sales and administrative arm for
Eastern Europe for an existing direct marketing company specializing in
personal care and nutritional products. Legacy commenced its operations in
August 1995 using a network of 333 independent distributors in Russia. The
number of distributors in the network increased to in excess of 100,000 at May
31, 1997. Monthly commissionable sales to these distributors rose from $20,000
in July 1995 to $5,009,000 in February 1997. Sureal, which changed its name in
October 1997, is headquartered in Orem, Utah.
Sureal discontinued its relationship with other product companies in
September 1997, at which time it made a decision to introduce its own branded
products to be distributed through its sales network. Through September 1997,
the revenue generated by the sales of those products was distributed in an
agreed upon manner among the supplier, shipper and Sureal pursuant to the terms
of a verbal agreement. Sureal's product philosophy is to introduce its own
branded products based on researching the best that science and nature can
offer and produce, using contract manufacturers, innovative products that are
specifically designed for a network marketing distribution channel. Sureal
presently offers nutritional products and a line of air purification products.
It plans on expanding both of these lines, as well as introducing a personal
care line and other specialty products.
Nature of Direct Marketing
Sureal distributes its products through a system of direct or network
marketing. Under most network marketing systems, independent distributors
purchase products for retail sale or personal consumption. Direct marketing
involves the sale of products through a network of independent distributors who
enter into contract agreements or licenses with the direct marketer. Pursuant
to Sureal's Global Compensation Plan, products are sold exclusively to or
through independent distributors who are not employees of Sureal.
Direct marketing sales have increased rapidly in recent years. Many
products sold by direct marketers are characterized as having high margins.
Typically, distributor incentives and commissions represent the highest cost
for a direct marketer.
Network marketing is an effective vehicle to distribute Sureal's products
because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials
is enhanced; and (iv) as compared to other distribution methods, distributors
can give customers higher levels of service and attention, by, among other
things, delivering products to a consumer's home and following up on sales to
ensure proper product usage, customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products either for resale or for personal consumption.
International direct selling as a distribution channel has been enhanced
in the past decade because of advances in communications, including
telecommunications, the Internet and World Wide Web, and the proliferation of
the use of videos, email and fax machines. Direct selling companies can now
produce or purchase high quality videos and web sites for use in product
education, demonstrations, and sponsoring sessions that project a desired image
for the company and product line. Sureal is committed to utilizing current and
future technological advances fully to enhance the effectiveness of its direct
selling program.
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Sureal's management believes that the distributor incentive program is the
most integral factor in developing a strong distributor network. Sureal's
network marketing program is specifically designed for the needs of
international distributors and differs from the compensation plans of many
other network marketing programs in several respects. First, Sureal's Global
Compensation Plan allows distributors to develop a seamless global network of
down line distributors (see below). Second, the Global Compensation Plan is
among the most financially rewarding plans offered to distributors by network
marketing companies, and can result in commissions to distributors aggregating
up to a maximum of 63% of a product's wholesale price.
Global Compensation Plan -- Sureal believes that the two principal
strengths of its Global Compensation Plan are (i) the potential level of
commissions and bonuses available to distributors and (ii) its seamless
integration across all markets in which Sureal products are sold. Sureal
believes that the Global Compensation Plan is potentially among the most
financially rewarding plans offered to distributors by network marketing
companies. There are two fundamental ways in which distributors can earn money
(i) through retail markups, for which Sureal recommends a range of
approximately 30% and (ii) through a series of commissions on each product sale
which can result in commissions to distributors aggregating up to a maximum of
63% of such product's wholesale price. However, Sureal believes the actual
commissions paid will be significantly less. Commissions have averaged from 40%
to 42% of revenue from commissionable sales since inception.
By entering into written distributor agreements with Sureal, distributors
are authorized to sponsor new distributors in each country where Sureal has
operations. This policy allows distributors to receive commissions for sales at
the same rate for sales in foreign countries as for sales in their home
country. This is a significant benefit to distributors because they are not
required to establish new distributorships or requalify for higher levels of
commissions within each new country in which they begin to operate. The
seamless integration of the Global Compensation Plan means that distributor
knowledge and experience can be used to rapidly build distributor leadership in
new markets.
Sureal's compensation plans for distributors also include:
o Permitting past ordering performance (during the period when Sureal
represented other direct marketers) to count in the new incentive
program;
o Establishing an investment program at a broker/dealer in which a
portion of bonuses may be retained and invested for the benefit of
distributors;
o Permitting distributors to represent more than one direct marketing
company;
o Providing products that management believes are needed in the
marketplace at price points that are realistic and attractive; and
o Continuing its distributor administrative program that includes timely
reporting and people who speak the local language fluently.
These programs, taken as a whole, are believed to be unique in the direct
marketing industry.
Sponsoring
Sureal relies solely on its existing distributor force to sponsor new
distributors. While Sureal provides product samples, brochures, and other sales
materials, distributors are primarily responsible for educating new
distributors with respect to products, the Global Compensation Plan, and how to
build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"down line" distributors. If down line distributors also sponsor new
distributors, they create additional levels in the structure, but their down
line distributors remain part of the same down line network as their original
sponsoring distributor.
Sponsoring activities are not required of distributors. However, because
of the financial incentives provided to those who succeed in building a
distributor network, Sureal believes that most of its
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distributors attempt, with varying degrees of effort and success, to sponsor
additional distributors. Generally, distributors invite friends, family members
and acquaintances to sales meeting where Sureal products are presented and
where the Global Compensation Plan is explained. Individuals are attracted to
become distributors after using Sureal products and becoming regular retail
customers. Once a person becomes a distributor, he or she is able to purchase
products directly from Sureal at wholesale prices for resale to consumers or
for personal consumption. The distributor is also entitled to sponsor other
distributors in order to build a network of distributors and product users.
Major distributors earn incentives or bonuses based on the sales volume of
their down lines.
A potential distributor must sign a distributor agreement with Sureal that
obligates the distributor to abide by Sureal's established policies and
procedures.
Russian Market
For the purpose of this section, the "Russian Market" incorporates the
markets of all of the republics of the former Soviet Union and several
countries in Eastern Europe. This market has a population in excess of 400
million people and is characterized by:
o Inadequate supplies of many basic consumer products at affordable
prices;
o Cumbersome and redundant government regulations and even corruption;
o Inadequate shipping services within a country; and
Many people seeking opportunities to benefit within the new capitalistic
framework.
To succeed in this environment a company, among other things, must:
o Establish an effective relationship with a reliable and influential
local business associate or "partner";
o Have a methodology for being paid in United States dollars on a timely
basis;
o Establish a system for warehousing, shipping and clearing customs in a
manner that minimizes delay and risk of loss through theft;
o Understand the needs of prospective dealers and customers; and
o Have a system in place to manage a business that is growing rapidly.
In addition, a direct marketing company, among other things, must:
o Have an effective system of accumulating information that gives rise
to distributor incentives;
o Have an effective program of distributor incentives tailored for
particular markets;
o Have key employees with knowledge of the language and culture of the
countries in which distributors operate;
o An efficient and fair means of resolving disputes and
misunderstandings on a timely basis; and
o An effective inventory control and distribution system.
Sureal believes that it has systems in place that accomplish each of the
foregoing requirements.
Sureal has developed relationships with reliable and influential local
collaberative distributors in Russia to help Sureal:
o Get products certified for sale through the appropriate governmental
authorities and required approval processes;
o Clear incoming products through customs; and
o Repatriate currency.
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Substantially all of Sureal's commissionable sales have been made in the
Russian Market. All transactions involving Sureal are denominated in United
States dollars. Sureal does not assume any risk with respect to currency
fluctuations. Typically, products are shipped and billed (in United States
dollars) to a limited number of major distributors. These distributors have the
responsibility of getting shipments through customs and into a warehouse,
redistributing the products to smaller distributors, collecting sales proceeds,
converting currencies and remitting payment to Sureal (see "Risk Factors").
Products
Substantially all of Sureal's products are manufactured from readily
available ingredients and materials. Management believes that if any source of
ingredients becomes unavailable, alternative sources of supply are available at
comparable prices and delivery schedules. In the event that Sureal were unable
to procure such alternate sources at competitive prices and on a timely basis
for its principal products, Sureal's operations would be materially adversely
affected. See "Risk Factors". Ingredients are stored by the contract
manufacturers. Finished products are shipped directly to foreign warehouses by
ship.
Sureal offers products in two distinct categories--nutritional supplement
products and air purification products. In addition to products, Sureal offers
a variety of sales aids to distributors, including starter kits, introductory
kits, brochures, and product catalogs. All sales aids and brochures are
targeted for the local markets and are written in the local language.
The following chart sets forth the Sureal branded products that are
available as of April 15, 1998.
<TABLE>
<CAPTION>
TOTAL
PRODUCTS
OFFERED
PRODUCT NAME BY SUREAL UNITED STATES RUSSIAN MARKET
- ------------ ----------- --------------- ---------------
<S> <C> <C> <C>
Classical Herbs .............. 6 6 6
Children's Nutrition ......... 1 1 1
Specialty .................... 7 4 4
Herbal Teas .................. 5 4 4
Weight Loss .................. 6 6 0
Sports Nutrition ............. 3 3 0
Preferred Pet ................ 2 2 2
Air Purification ............. 2 2 2
Total ........................ 32 32 19
</TABLE>
NUTRITIONAL SUPPLEMENTS PRODUCTS
The nutritional supplements product category is comprised of 17 products
in the following lines: classical herbs, children's nutrition, specialty,
herbal teas, and Preferred Pet. Sureal's nutritional supplements are designed
and marketed to promote a healthy, active lifestyle and general well being
through proper diet, exercise and nutrition.
Sureal believes that the nutritional supplement market is expanding in
Russia and the United States because of changing dietary patterns, a
health-conscious population and recent reports supporting the benefits of using
vitamin and mineral nutritional supplements. This product line is particularly
well suited to network marketing because the average consumer is often
uneducated regarding nutritional products. Sureal believes that network
marketing is a more efficient method than traditional retailing channels in
educating consumers regarding the benefits of nutritional products. Because of
the numerous over-the-counter vitamin and mineral supplements available in
Russia and the United States, Sureal believes that individual attention and
testimonials by distributors are effective methods of providing information to
a potential consumer.
CLASSICAL HERBS
ALFALFA -- Alfalfa is a medicinal plant known to improve general health.
This herb contains most of the necessary vitamins and minerals required by the
human body. It aids the immune system, helps the body protect itself from
disease, and cleanses the blood. Alfalfa is often used by people with
gastrointestinal problems, as well as by people seeking relief from achy
muscles and joints, coughs and colds.
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BEE POLLEN -- Bee pollen is traditionally known to provide the body with
additional energy and relief from fatigue and also helps increase the body's
ability to heal and build resistance to disease. Bee pollen is often used by
individuals and athletes seeking to increase energy or stamina. Bee pollen is
also used to improve mental activity, facilitate sleep, and strengthen the
nerves.
ECHINACEA -- Echinacea, sometimes referred to as the "King of Blood
Purifiers", and a natural infection fighter, increases the body's ability to
combat infection. Echinacea is used to ward off any infection and is especially
effective in minimizing the symptoms of the common cold.
GOTU-KOLA -- Gotu-kola is traditionally known as the "food for the brain."
Gotu-kola is used to increase mental and physical capacity, combat stress,
improve reflexes, and energize the cells of the brain. Gotu-Kola is also used
to promote relaxation and strengthen memory. This product is recommended to
relax the central nervous system or for those who may be in danger of nervous
breakdown. It is also used by individuals who are confined to a bed and by
women recovering from childbirth.
PASSIONFLOWER -- Passionflower is a naturally occurring relaxant, used to
soothe and calm muscles, nerves and joints. It also is used to relieve
headaches and calm nerves and anxiety. Passionflower is used for insomnia and
other sleep disorders; for the anxiety women experience during menses,
childbirth or menopause; and for restless children.
RED CLOVER -- Red clover is famous for its ability to purify the blood of
toxins. It is also used to relieve coughing, sore throats and skin irritations.
CHILDREN'S NUTRITION
LIL NIBBLES CHILDREN'S CHEWABLE VITAMIN AND MINERAL SUPPLEMENT -- Because
they are growing, children have unique nutritional needs for proper nutrients,
vitamins and minerals. Sureal's balanced formula features a combination of
multivitamins and minerals, including vitamin A, vitamin C, the B vitamins,
Folic and Pantothenic Acid, as well as providing anti-oxidant protection.
SPECIALTY
MIGHTY APHRODITE FEMALE FACTORS -- Mighty Aphrodite Female Factors
contains specific vitamins, minerals, and herbs that are used to resolve
typical female issues, fight fatigue and increase endurance. The principal
ingredient, Pau d'Arco Bark has been used for centuries in South America for
relief from female issues such as PMS, cramps and infections. It also includes
Siberian Ginseng, an herb that is used to relieve stress, mental fatigue and
weakness.
HERCULES MALE FACTORS -- Hercules Male Factors contains a specialized
blend of botanicals, vitamins and minerals designed for men. The principal
ingredients are Saw Palmetto powder for the prostate and Vitamin E and Garlic
for the heart. It also features one of the most advanced known anti-oxidants,
Lipoic Acid that acts as a substitute for other vitamins. Chromium is also
included to help develop lean muscle mass.
CUPIDS ARROWS APHRODISIAC -- Cupids Arrows Aphrodisiac combines
traditional folk ingredients with supplements and is used by men and women to
enhance sexual desire, function, and performance. The principal ingredient,
Siberian Ginseng, is a naturally occurring aphrodisiac. The other featured
ingredient, Yohimbe Bark, is an aphrodisiac that increases desire and
performance. The product also includes Arginine, an herb used by men, and Green
Oats extract, an herb used by women, to stimulate the sex drive.
EARTH SUPERFOODS COMPLEX -- Earth Superfoods Complex contains land and sea
greens, anti-oxidants, vitamins, minerals, probiotic cultures, herbs, digestive
plant enzymes, cruciferous vegetables and fruits, and other beneficial
cofactors. It also contains phytonutrients, digestive enzymes such as vitamins
E, A, C and B and Probiotics (known as "friendly bacteria").
ENERGY COMPLEX -- Energy Complex uses four well known energizing herbs
that give a continual boost to energy levels without making a user feel nervous
or jittery.
BODYGUARD -- BodyGuard contains the liver oil of deepwater sharks, which
is a source of Alkylglycerols. Taken as a food supplement, BodyGuard adds to a
person's own Alkylglycerol levels to provide dietary support for the immune
system.
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12-HDP ANTI-AGING COMPLEX -- 12-HDP features a blend of powerful Human
Growth Hormone Releasers, DHEA, Pregnenalone, and natural Progesterone. These
hormones are believed to be some of the most powerful anti-aging compounds
known to man.
HERBAL TEAS
PURITEA CLEANSING TEA -- PURITea contains a blend of natural herbs helpful
for regulating the bowels and urinary tract. The formula helps to cleanse and
soothe rather than irritate. This mild, yet effective, formula aids in flushing
stored waste from the body. This tea features Senna Leaf, a cathartic that
serves as a laxative to cleanse the colon and Uva Ursi, an herb used for
centuries to cleanse the bladder and kidneys.
ZESTEA ENERGY TEA -- ZESTea contains a blend of natural herbs that
stimulate the body to produce energy, overcome stress, fatigue and weakness.
The principal ingredients in this tea are Kola Nut and Yerba Mate. Kola Nut is
a natural stimulant to the body's circulatory and respiratory system. Yerba
mate has been used for centuries to eliminate fatigue and rejuvenate the body.
LESS-O-ME WEIGHT LOSS TEA -- Less-O-Me Weight Loss Tea contains a blend of
herbs that increase metabolism and burn body fat. These ingredients help block
fat and aid in appetite suppression. The principal ingredients in this tea,
gymnema sylvestra and garcinia cambogia, reduce the body's ability to absorb
fats and sugars, and help block the formation of fat cells. This tea is used as
a part of a weight management or general nutrition program.
TRANQUILITEA RELAXING TEA -- TRANQUILITea contains an assortment of
medicinal herbs used to quiet and soothe the nervous system and promote restful
sleep. The principal ingredients in this product are St. John's wart and
Chamomile. St. John's Wart is a natural anti-depressant that is used to promote
deeper, more restful sleep. Chamomile is used to relax nerves and relieve
tension.
APP-A-TAC -- App-A-Tac is a homeopathic medication which helps to suppress
appetite and balance metabolism.
BODYZONE -- BodyZone represents an easy to use weight loss plan. Each
BodyZone Metabolic Management System contains a 28-day supply of products to
control appetite, provide energy, burn fat, and detoxify the body.
ULTIMATE FAT BINDER -- The Ultimate Fat Binder binds fat to prevent the
body from absorbing it.
PERFECT BURN -- Perfect Burn helps make fat metabolism as efficient as
possible and provides necessary fatty substances in a form that the body can
readily utilize.
BIOSLIM DUTCH CHOCOLATE -- BioSlim meets the dietary requirements of a
meal and yet appeals to a consumer's sense of taste. BioSlim, which comes in
two flavors -- Chocolate Malt and Banana Creme -- has a protein base derived
from soy and the formula is entirely lactose free.
SPORTS NUTRITION
CYBERPLEX STRENGTH ENHANCER -- CyberPlex Strength Enhancer provides the
nutrients that athletes need to build strength while, at the same time,
supplying essential elements necessary for lean muscle gain.
THERAPLEX RECOVERY ENHANCER -- TheraPlex Recovery Enhancer provides
nutrients necessary for the synthesis of connective tissues, bones, muscle,
ligaments, and tendons. It also enhances the normal growth processes and
accelerates recovery from workouts.
METAPLEX METABOLIC ENHANCER -- MetaPlex Metabolic Enhancer provides
nutrients that interact with the major metabolic pathways, cycles, systems and
functions of the body to enhance the formation of lean muscle.
PREFERRED PET
DIGESTIVE AID -- Pet Digestive Aid assists pets in food digestion. Pet
Digestive Aid contains digestive enzymes that help pets digest processed food,
as well as absorb the essential vitamins, minerals, and phytonutrients they
need. The principal ingredient, Lacto Bacillius Sporogenes ("LBS"), is a
friendly bacteria that exists in the intestines and helps keep the intestinal
tract clean and free from disease.
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ESSENTIAL GREENS -- Pet Essential Greens contains an assortment of vital
greens from the land and the sea. These greens contain important Phytonutrients
that provide pets with anti-oxidant protection and help to keep them safe from
the diseases and illnesses.
AIR PURIFICATION PRODUCTS
The air purification product category is comprised of two products that
use negative ions, ozonation, and germicidal UV light to deliver cleaner,
fresher and safer air.
Sureal believes that the air purification market is expanding in Russia
and the United States because of various reports ranking indoor air pollution
at or near the top of environmental health risks in the United States, and
findings that indoor air is, on the average, more polluted than outdoor air.
This product line is particularly well suited to network marketing because the
average consumer is generally uneducated regarding methods of air purification.
Sureal believes that network marketing is a more efficient method than
traditional retailing channels in educating consumers regarding the unique
benefits of air purification.
SUREAL AIR 2700 -- The Sureal Air 2700 is an air purification system uses
ozone and negative ions and adds the germicidal effects of UV light to purify
the air. The Sureal Air 2700 is designed for use in areas of 2700 square feet
or less.
SUREAL AIR 70 -- The Sureal Air 70 is designed for use in areas of 70
square feet or less, including cars and tables at restaurants.
Sales Aids
Sureal provides an assortment of sales aids to distributors. Sales aids
include audiocassette tapes, promotional clothing, pens, and other
miscellaneous items to help create consumer awareness of Sureal and its
products. Sales aids are priced at Sureal's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on
purchases of sales aids).
Product Guarantees
Sureal believes that it is among the most consumer protective companies in
the direct selling industry. Sureal's product return policy allows a retail
purchaser to return any product to the distributor from whom the product was
purchased for a full refund for a period of 30 days from the date of purchase.
After 30 days from the date of purchase, the return privilege is at the
discretion of the distributor. Because distributors may return unused and
resalable products to Sureal for a refund of 90% of the purchase price for one
year, they are encouraged to provide consumer refunds beyond 30 days. The
product returns policy is a material aspect of the success of distributors in
developing a retail customer base.
Product Development Philosophy
Sureal is committed to building its brand name and distributor and
customer loyalty by selling premium quality, innovative personal care and
nutritional products that appeal to broad markets. Sureal's product philosophy
is to combine the best of science and nature and to include in each of its
products the highest quality ingredients. This philosophy has also led to
Sureal's commitment to avoid any ingredients in nutritional supplements that
are reported or believed to have any long-term addictive or harmful effects,
even if short-term effects may be desirable. Independent distributors need to
have confidence that they are distributing the best products available in order
to have a sense of pride in their association with the Sureal and to have
products that are distinguishable from "off the shelf" products. Sureal is
committed to developing and providing quality products that can be sold at an
attractive retail price and allow Sureal to maintain reasonable profit margins.
Sureal is also committed to constantly improving its product formulations
to incorporate innovative and proven ingredients into its product line. Whereas
many consumer product companies develop a formula and stay with that formula
for years, and sometimes decades, Sureal believes that it must stay current
with product and ingredient evolution to maintain its reputation for innovation
to retain distributor and consumer attention and enthusiasm.
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In addition, Sureal believes that timely and strategic product
introductions are critical to maintaining the growth of independent
distribution channels. Distributors become enthusiastic about new products and
are generally excited to share new products with their customer base. An
expanding product line helps to attract new distributors and generate
additional revenues.
Production
Virtually all Sureal's branded products are sourced through U.S. contract
manufacturers unaffiliated with Sureal. Sureal's profit margins and its ability
to deliver its existing products on a timely basis are dependent upon the
ability of Sureal's outside manufacturers to continue to supply products in a
timely and cost-efficient manner. Furthermore, Sureal's ability to enter new
markets and sustain satisfactory levels of sales in each market are dependent
in part upon the ability of suitable outside manufacturers to reformulate
existing products, if necessary to comply with local regulations or market
environments, for introduction into such markets. Finally, the future
development of new products will be dependent upon the services of suitable
outside manufacturers.
Sureal currently acquires products or ingredients from sole suppliers or
suppliers that are considered by Sureal to be the superior suppliers of such
ingredients. Sureal purchases its products and ingredients by placing purchase
orders pursuant to verbally negotiated agreements. No long-term contracts exist
with any supplier. All purchases are made pursuant to routine purchase orders.
Sureal believes that, in the event it is unable to source any products or
ingredients from its current suppliers, Sureal could replace such suppliers or
products or substitute ingredients without much difficulty or prohibitive
increases in the cost of goods sold. However, there can be no assurance that
the loss of such a supplier would not have a material adverse effect on
Sureal's business and results of operations.
Operating Strengths
Sureal believes that its success has been based upon its commitment to
providing high quality service and products together with a unique business
opportunity to its independent distributors. Sureal believes that it will
continue to be successful by providing high quality servicing to its
distributors and by providing premium quality, innovatively packaged products
and an appealing global business opportunity. Sureal is committed to building
its brand name and distributor and customer loyalty by selling premium quality,
innovative nutritional products that appeal to broad markets.
All products are manufactured in the United States and shipped to
warehouses in the Russian markets. Sureal consigns all shipments to
collaborative Russian distributors who are responsible for ensuring that
products are properly registered, pass through customs in a timely fashion and
are transported to warehouses safely with a minimal amount of pilferage.
Products are shipped by truck from the warehouse to distribution points. The
collaborative Russian distributors assume all responsibilities for
administrative functions and cash collections. To date, this system has been
effective although no assurances can be given that it will continue to function
effectively in light of changing circumstances in Russia.
Growth Strategy
Sureal plans to develop a disciplined approach to opening new markets.
Each market opening will be preceded by a thorough analysis of economic and
political conditions, regulatory standards and other business, tax and legal
issues. Prior to a market opening, Sureal's management team will work to obtain
all necessary regulatory approvals and establish facilities capable of meeting
distributor needs. Sureal plans to consider a variety of options in opening new
markets. Sureal may decide to open the market, or contract with a partner, or
license the market.
Sureal plans to increase its growth by introducing new products, opening
new markets, attracting new distributors and through promotions.
Introduce New Products -- Sureal plans to introduce new products on a
continuing basis. The introduction of new products has a tendency to increase
the sales of existing distributors and helps attract new distributors.
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Introduce New Markets -- Sureal will pursue attractive new market
opportunities. Japan, Mexico, Canada India and the Middle East are the next
markets Sureal plans to pursue.
Attract New Distributors -- Sureal plans to contract new distributors by
providing unique and exciting business building promotions. For example, it
offered a 10% volume incentive to distributors on each nutritional product
purchased through March 1998. Sureal intends to continue to create and maintain
a business climate to promote the growth in the number of active distributors
and to increase distributor retention, motivation and productivity. Sureal will
do this by continuing to enhance distributor recognition programs.
Competition
The markets for personal care and nutritional products are large and
highly competitive. Sureal competes directly with companies that manufacture
and market personal care and nutritional products in each of Sureal's product
lines. Sureal competes with other companies in the personal care and
nutritional products industry by emphasizing the value and premium quality of
the Company's products and the convenience of the company's distribution
system. Many of Sureal's competitors have much greater name recognition and
financial resources than does Sureal. In addition, personal care and
nutritional products can be purchased in a wide variety of channels of
distribution. While Sureal believes that consumers appreciate the convenience
of ordering products from home through a sales person or through a catalog, the
buying habits of many consumers accustomed to purchasing products through
traditional retail channels are difficult to change. Sureal's product offerings
in each product category are also relatively small compared to the wide variety
of products offered by many other personal care and nutritional product
companies. There can be no assurance that Sureal's business and results of
operations will not be affected materially by market conditions and competition
in the future.
Sureal also competes with other direct selling organizations, some of
which have longer operating histories and greater name recognition and
financial resources. The leading network marketing company in Sureal's markets
is Amway Corporation and its affiliates. Sureal competes for new distributors
on the basis of its Global Compensation Plan and premium quality products.
Management envisions the entry of more direct selling organizations into the
marketplace as this channel of distribution expands over the next several
years. Sureal also believes that other large, well-financed corporations may
launch direct selling enterprises that will compete with Sureal in certain
product lines. There can be no assurance that Sureal will be able to
successfully meet the challenges posed by this increased competition.
Sureal competes for the time, attention and commitment of its independent
distributors. Given that the pool of individuals interested the business
opportunities presented by direct selling tends to be limited in each market,
the potential pool of distributors for Sureal's products is reduced to the
extent other network marketing companies successfully recruit these individuals
into their businesses. Although management believes that Sureal offers an
attractive business opportunity, there can be no assurance that other network
marketing companies will not be able to recruit Sureal's existing distributors
or deplete the pool of potential distributors in a given market.
EMPLOYEES
At June 30, 1998, KMS had 46 employees, of which 41 were registered with
the NASD. Sureal had 11 employees at such date. None of these employees is
covered by a collective bargaining agreement.
FACILITIES
KMS leases 14,000 square feet of office space at 110 Wall Street, New
York, NY subject to an agreement expiring on August 31, 2002 with minimum
annual rent increasing from $310,000 to $315,000.
Sureal rents a 4,080 square foot facility in Orem, Utah subject to a lease
calling for minimum annual rentals of $55,000.
35
<PAGE>
LITIGATION
KMS was a co-defendant in a legal action entitled Perez vs Klein, Maus &
Shire, Mohammad Ali Khan and Asim Kohli in which the plaintiff alleged that KMS
and certain of its representatives sold securities to the plaintiff through
fraudulent sales practices, misrepresentations and omissions and that certain
trades were unauthorized. The complaint demanded compensatory damages of
$254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000, payable in
five equal monthly installments commencing April 1998. This settlement is
reflected in the accompanying unaudited consolidated financial statements for
the six months ended June 30, 1998.
36
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998 and as adjusted to reflect the sale of the 2,025,000 of Common
Stock offered by the Company hereby and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
--------------- ---------------
<S> <C> <C>
Indebtedness ......................... $ 1,161,197 --
------------
Minority interest .................... 740 --
------------
Stockholders' Equity:
Preferred stock ...................... 4 --
Common stock ......................... 1,070 $ 1,354
Additional paid-in capital ........... 10,950,165 36,876,136
Retained earnings .................... (3,305,853) (3,305,853)
------------ ------------
Total stockholders' equity .......... 7,645,387 33,571,637
------------ ------------
Total Capitalization ................. $ 8,807,324 $ 33,571,637
============ ============
</TABLE>
- ----------
(1) Assumes no portion of the Underwriter's Overallotment Option is
exercised.
37
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- ----- -------------------------
<S> <C> <C>
Mohammad Ali Khan ........... 31 Chairman of the Board, President, Chief Executive Officer
Asim S. Kohli ............... 32 Executive Vice President, Chief Operating Officer, Director
A. Rushdi Siddiqui .......... 33 Vice President of Business Development for KMS, Director
Edward A. Heil .............. 47 Consultant and Director
R. Bret Jenkins ............. 39 President of Sureal and Director
Maurice Gross ............... 62 Consultant and Director
Steven Jacobson ............. 54 Consultant and Director
William Walling ............. 65 Chief Investment Advisor
William Triebel ............. 46 Chief Financial Officer
Joseph Antonini ............. 56 Director
Jamil Asghar ................ 39 Director
Leonard Yablon .............. 68 Director
Jaffer Naqvi ................ 52 Director
</TABLE>
All Directors hold office until the next annual meeting of shareholders of
the Company or until their successors have been elected. All officers are
appointed annually by the Board of Directors and, subject to existing
employment agreements, serve at the discretion of the Board.
Outside (nonexecutive) directors shall receive $15,000 and 10,000 shares
of Common Stock per year as compensation for serving on the Board of Directors.
All Directors are reimbursed by the Company for any expenses incurred in
attending Directors' meetings and receive $500 for attending committee
meetings. The Company also intends to obtain Officers and Directors liability
insurance, although no assurances can be given that such coverage will be
obtained.
Background of Executive Officers and Directors
MOHAMMAD ALI KHAN is the founder of the Company and serves as the Chairman
of the Board, President and CEO. He has also been the President of KMS since
1995. Mr. Khan started his career in the financial industry as a financial
consultant at Prudential Securities in 1990. Mr. Khan has served in a variety
of sales management and corporate finance positions with other investment
banks. In addition, he has been a member of the New Jersey State Governor's
counsel since 1997. Mr. Khan holds a Bachelors Degree in Physics and
Mathematics from Karachi University in Pakistan and a Bachelor of Arts Degree
in Finance from Rutgers University.
ASIM S. KOHLI was Director of Operations for Hardees Corporation from July
1991 to May 1992; Regional Sales Manager for Birov, Incorporated from September
1992 to February 1993; Senior Real Estate Appraiser for Appraisal Network
Associates from September 1993 to January 1994; Senior Real Estate Appraiser
for Lin Holz Associates from January 1994 to May 1995; Director of Operations
for The Rose Group from May 1995 to August 1995; and Director of Operations for
CFS Management, Incorporated from August 1995 until December 1995. He joined
KMS in January 1996. Mr. Kohli holds a Bachelor of Business Administration
degree from Northern Illinois University.
A. RUSHDI SIDDIQUI founded and was a principal in Siddiqui Rose &
Associates, a marketing consulting firm, from 1992 to 1993. From 1993 to 1996,
he was Chief Operating Officer of Welsh Technologies, Inc., which is engaged in
the alternate fuel vehicle conversion industry. He served as a Marketing
Officer for Mashreq Bank in 1996 and became Director of Business Development
for KMS in 1997. Mr. Siddiqui holds a Bachelor of Science degree from New York
University, a Master of Business Administration degree from Baruch College and
a Juris Doctorate from Albany Law School of Union University.
38
<PAGE>
EDWARD A. HEIL is a certified public accountant and a managing director,
since January 1992, in Independent Network Group, Inc., a financial consulting
firm. From 1984 through December 1991 he was a partner in the accounting firm,
Deloitte & Touche, LLP. From 1973 to 1984 he was employed in various
professional capacities by Deloitte & Touche, LLP. Mr. Heil, who is also a
director of Thermo-Mizer Environmental Corp. (a New Jersey-based public
company), holds Bachelor of Arts and Master of Business Administration degrees
from New York University.
R. BRET JENKINS has been Chairman of Sureal since its inception. He has
also been a shareholder in the law firm Boyack, Ashton & Jenkins, P.C. since
1994 and practiced law with several law firms prior thereto. Mr. Jenkins holds
a Bachelor of Arts and Juris Doctorate degrees from the University of Utah.
MAURICE GROSS has been a principal in the consulting firm of Maurice Gross
& Co. Prior thereto he was a Senior Vice President at Gruntal & Co.
STEVEN R. JACOBSON is a founder and principal of Steven R. Jacobson & Co.,
a broker/dealer specializing in restricted security lending, venture capital
and investment banking. He is also a partner in SRJ Financial Group which is
engaged in a variety of corporate financing activities, and is a member of the
Board of Directors of Enhance Reinsurance Company. Mr. Jacobson holds a
Bachelor of Business Administration degree from Iona College.
WILLIAM WALLING became Vice President of Investments for KMS in July 1996.
Prior thereto, from 1992, he held supervisory roles with RAS Securities. Mr.
Walling, who has received numerous awards and citations for his research
reports and other writings, holds a Bachelor of Arts degree from Michigan State
University and a Master of Business Administration from New York University.
WILLIAM TRIEBEL became KMS' Chief Financial Officer in July 1997. He also
serves as Chief Financial Officer of USFG. Prior thereto, he was a senior
accountant for Gettenberg Consulting Group from June 1996 to June 1997. Mr.
Triebel was the manager for financial operations of Prime Capital Services,
which was located in Poughkeepsie, NY, from March 1984 to May 1996. Mr. Triebel
is a graduate of Marist College.
JOSEPH E. ANTONINI has more than 30 years of experience managing one of
America's largest retailing chains. He is the former Chairman, President, and
CEO of Kmart Corporation, one of the world's largest retailers. Mr. Antonini
also directed the expansion of Kmart's specialty retail group, which included
Borders Bookstores, Payless Drug Stores, Office Max, Sports Authority and
Builders Square. Since then, Mr. Antonini has served as a director and advisor
to various enterprises. He is currently the President of JEA Enterprises, an
investment firm which he founded, and serves as a director of American Speedy
Printing Centers, Inc., Ziebart, Inc., Shell Oil Company, Andretti Wine Group,
LTD., NAMS Net and numerous civic and charitable organizations. He holds a
Bachelor of Science degree from West Virginia University.
SYED JAMIL ASGHAR was President of National Telecommunication, a long
distance telephone company, from 1991 until 1993. Since then, he has been
President of Laser Dimension Graphics & Printing, Inc. Mr. Asghar holds a
Bachelor of Science degree from Southern Illinois University.
LEONARD YABLON has been employed by Forbes Company since 1963 and
currently serves as Executive Vice President and Chief Financial Officer. In
addition, he is also the President of Sangre de Cristo Ranches, Forbes
Trinchera, Fiji Forbes and Forbes Europe. He is also the Vice President of
Forbes investors Advisory Institute and Secretary and Treasurer of the Forbes
Foundation. Mr. Yablon holds a Bachelor of Science degree from Long Island
University and a Master of Business Administration in Taxation from City
College in New York.
JEFF A. NAQVI is the Founder and President of Interactive Network for
Continuing Education, which conducts educational seminars for physicians
throughout the United States on behalf of major pharmaceutical companies as
part of their effort to launch new drugs. Prior thereto, Mr. Naqvi was a
director of The Medicine Group, Ltd. of Abbington, England. Mr. Naqvi has been
in the pharmaceutical industry for over 30 years holding high level management
positions at major companies. He holds a Master of Business Administration
degree from New York University.
39
<PAGE>
Remuneration
The following officers received compensation in excess of $100,000 in 1997
or 1996. The Board of Directors intends to establish a compensation committee
comprised of outside directors to review compensation matters and any new
employment contracts. The Company will not enter into any new employment
contracts until after the Offering is completed.
The Company has or plans to adopt a health and disability plan and a
401(k) plan for its employees.
Committees
The Board of Directors will create Audit and Compensation Committees
comprised of independent members.
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ -------------------------- -----------------------
OTHER
NAME AND SALARY ANNUAL RESTRICTED ALL TIP
PRINCIPAL POSITION YEAR COMPEN. BONUS COMPEN. STOCK AWARDS OPTIONS PAYOUTS OTHER
- ------------------------- ------ ----------- ------- --------- -------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KMS:
M. Ali Khan ............. 1997 $617,839
Asim S. Kohli ........... 1997 $103,700
Sureal:
R. Bret Jenkins ......... 1997 $ 82,923 $8,000 $208,424
1996 $ 80,500 $8,000 $ 97,533
Richard Wogksch ......... 1997 $ 82,923 $8,000 $208,424
1996 $ 80,500 $8,000 $ 97,533
Glen Jensen ............. 1997 $ 82,923 $8,000 $208,424
1996 $ 80,500 $8,000 $ 97,533
</TABLE>
- ----------
Notes--The Other Payout amounts paid to Messrs. Jenkins, Wogksch and Jensen
were S corporation distribtions made to permit the recipients to pay their
personal income tax liabilities.
Other annual compensation relates to the estimated costs of health insurance
and automobiles provided by Sureal.
Employment Agreements
The Company has entered into employment agreements with Messrs. Khan and
Kohli under which it has agreed to pay them annual salaries of $350,000 and
$250,000 through 2003. The contracts, which contain two three-year renewal
clauses, provide for additional bonuses based at the discretion of the Board of
Directors.
Sureal has entered into employment agreements with Messrs. Jenkins,
Wogksch and Jensen providing that each receive annual compensation of $120,000
through 2003. These contracts provide for additional compensation linked to
Sureal's performance.
Sureal and the Company have also entered into a consulting arrangement
with a firm associated with Mr. Heil under which they have agreed to pay
minimum annual fees of $120,000, subject to upward adjustment based on work
performed. The agreement also provides for performance fees with respect to
certain types of transactions.
Indemnification
The Company has provisions in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors which allows, the
Company, among other things, to pay for the expenses of an officer of director
in connection with legal proceedings brought about because of the person's
position with the Company.
40
<PAGE>
Stock Option Plan
The United States Financial Group, Incorporated 1998 Stock Incentive Plan
(the "Plan"), which expires ten years from the date adopted, enables the
Company to grant incentive stock options, nonqualified options and stock
appreciation rights ("SARs") for up to 1,000,000 shares of the Company's Common
Stock. Incentive stock options granted under the Plan must conform to
applicable Federal income tax regulations and have an exercise price not less
than the fair market value of shares at the date of grant (110% of fair market
value for ten percent or more stockholders). Other options and SARs may be
granted on terms determined by a committee of the Board of Directors. As of
June 30, 1998, no options were outstanding under the Plan.
41
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of
this Prospectus by (i) each person known by the Company to own, directly or
beneficially, more than 5% of the Company's Common Stock, (ii) each of the
Company's directors, and (iii) all officers and directors of the Company as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws, where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
BEFORE OFFERING
----------------------------------- SHARES OF COMMON
STOCK
NAME AND ADDRESS OF NUMBER OF PERCENT OF OWNED
BENEFICIAL OWNER (1) SHARES OWNED SHARES OWNED (1) AFTER OFFERING (2)
- ---------------------------------- -------------- ------------------ -------------------
<S> <C> <C> <C>
Mohammad Ali Khan (3) ............ 9,444,634 82.00 68.45
Asim S. Kohli .................... -- -- --
A. Rushdi Siddiqui ............... -- -- --
Edward A. Heil ................... 18,750 .16 .13
R. Bret Jenkins .................. 133,333 1.16 .98
Maurice Gross .................... -- -- --
Steven Jacobson .................. -- -- --
Joseph Antonini .................. -- -- --
Leonard Yablon ................... -- -- --
Jamil Asghar ..................... -- -- --
Jaffer Naqvi .....................
Directors and Officers
as a Group (11 persons) ......... 9,596,717 83.32 69.56
</TABLE>
- ----------
(1) The address for each officer and director is c/o United States Financial
Group, Incorporated, 110 Wall Street, 24th floor, New York, NY 10005.
(2) Assumes that Mr. Khan, the Selling Stockholder, sells 175,000 shares as
part of the Maximum Offering.
(3) Mr. Khan plans on contributing 1,000,000 shares to a charitable
foundation following the closing of the Offering. He will exercise no
control over such shares after making the contribution.
PLAN OF DISTRIBUTION
The Selling Stockholder is free to offer and sell his shares of Common
Stock at such times, in such manner and at such prices as he shall determine.
Such Common Stock may be offered by Selling Stockholder in one or more types of
transactions, which may or may not involve brokers, dealers or cash
transactions. The Selling Stockholder may also use Rule 144 under the
Securities Act, to sell such securities, if he meets the criteria and conform
to the requirements of such Rule. There is no underwriter or coordinating
broker acting in connection with the proposed sale of Common Stock by the
Selling Stockholder.
The Selling Stockholder has advised the Company that sales of Common Stock
may be effected from time to time in transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Common Stock, or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Stockholder may effect such transactions by selling Common Stock directly to
purchasers or to or through broker/dealers which may act as agents or
principals. Such broker/dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholder and/or the
purchasers of Common Stock for whom such broker/dealers may act as agents or to
whom they sell as principal, or both (which compensation as to particular
broker/dealer may act as agents might be in excess of customary commissions).
The Selling Stockholder and any broker/dealers that act in connection with the
sale of the Common Stock might be deemed to be
42
<PAGE>
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the Common
Stock as principal might be deemed to be underwriting discounts and commissions
under the Securities Act. The Selling Stockholder may agree to indemnify any
agent, dealer or broker/dealer that participates in transactions involving
sales of the shares against certain liabilities, including liabilities arising
under the Securities Act.
Because the Selling Stockholder may be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities, he will be subject to
prospectus delivery requirements under the Securities Act. Furthermore, in the
event of a "distribution" of his Common Stock, the Selling Stockholder, any
selling broker/dealer and any "affiliated purchasers" may be subject to
Regulation M under the Exchange Act which prohibits any "stabilizing bid" or
"stabilizing purchase" for the purpose of pegging, fixing or stabilizing the
price of the Common Stock in connection with the Offering.
CERTAIN TRANSACTIONS
Merger with Sureal
On December 3, 1997, the Company exchanged 750,000 shares of its common
stock for all of the outstanding shares of common stock of Sureal. This
transaction was accounted for as a purchase in accordance with Opinion No. 16
of the Accounting Principles Board.
Bridge Financing
From January through March 1998, the Company sold 12 units of Bridge
Financing. Each Unit consists of (i) a 10 percent Promissory Note in the
principal amount of $50,000 due one year from the date of issuance and (ii)
1,667 shares of the Company's Common Stock. The holders of such shares have
certain registration rights. For financial reporting purposes, a portion of the
net proceeds of $575,000 was allocated to the value of the Common Stock. The
resulting debt discount of $150,030 (which was determined based on a fair value
estimate of $15 per share) is being amortized to expense over the term of the
Promissory Notes.
Other
Ronald J. Brescia, a principal in the law firm of Doros & Brescia, P.C.
("D&B"), counsel to the Company, shall receive as partial compensation for
services rendered and to be rendered by D&B to the Company as Company counsel,
10,000 shares of the Company's Common Stock per year for a minimum of three
years or as long as D&B serves as Company counsel, whichever is longer, at a
price per share of $.01.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, each of the Underwriters named below, for whom Kashner Davidson
Securities Corp. is acting as Representative, has severally agreed to purchase
from the Company, and the Company has agreed to sell to the Underwriters, on a
firm commitment basis, the respective number of shares of Common Stock set
forth below opposite each such Underwriter's name:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Kashner Davidson Securities Corp. ..........
Total ..................................... 2,025,000
=========
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Shares to the public at the public offering price set forth on the cover page
of this Prospectus and that they may allow to selected dealers who are members
of the NASD, concessions of not in excess of $ per Share, of which not more
than $ per Share may be reallowed to certain other dealers who are members
of the NASD. After the initial public offering, the public offering price,
concession and reallowance may be changed.
The Underwriting Agreement further provides that the Underwriters will
receive a non-accountable expense allowance of 3% of the aggregate public
offering price of the Shares sold hereunder (including any Shares sold pursuant
to the Over-Allotment Option), which allowance amounts to $911,250 (or
$1,047,937.50 if the Over-Allotment Option is exercised in full), of which
$25,000 has been paid to date.
The Company has granted to the Underwriters an Over-Allotment Option,
which is exercisable for a period of 45 days after the Closing, to purchase up
to an aggregate 303,750 additional shares (up to 15% of the shares being
offered by the Company hereby) at the public offering price, less underwriting
discounts and commissions, solely to cover over-allotments, if any.
The Underwriters have informed the Company that they will not make sales
of the Shares offered by this Prospectus to accounts over which they exercises
discretionary authority.
The Company has agreed to sell to the Underwriters for a nominal
consideration, an Underwriters' Warrant to purchase up to 202,500 Shares,
exclusive of the Over-Allotment Option. The Underwriters' Warrant will be
nonexercisable for one year after the date of this Prospectus. Thereafter, for
a period of four years, the Underwriters' Warrants will be exercisable to
purchase Common Stock at $18.00 per Share (120% of the initial public offering
price). The Underwriters' Warrants will be restricted from sale, transfer,
assignment, pledge or hypothecation for a period of one year from the effective
date of the Offering except to officers and partners (not directors) of the
Underwriters and members of the selling group. The Company has agreed to file,
during the four year period beginning one year from the Effective Date of this
Prospectus, on one occasion at the Company's cost, at the request of the
holders of a majority of the Underwriters' Warrants and the underlying
securities, and to use its best efforts to cause to become effective, a
post-effective amendment to the Registration Statement or a new registration
statement under the Securities Act, as required to permit the public sale of
Common Stock issued or issuable upon exercise of the Underwriters' Warrants. In
addition, the Company has agreed to give advance notice to holders of the
Underwriters' Warrants of its intention to file certain registration statements
commencing one year and ending four years after the Effective Date, and in such
case, holders of such Underwriters' Warrants or underlying shares of Common
Stock shall have the right to require the Company to include all or part of
such shares of Common Stock underlying such Underwriters' Warrants in such
registration statement at the Company's expense.
For the life of the Underwriters' Warrants, the holders thereof are given,
at nominal costs, the opportunity to profit from a rise in the market price of
the Company's securities with a resulting dilution in the interest of other
stockholders. Further, the holders may be expected to exercise the
Underwriters' Warrants at a time when the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in
the Underwriters' Warrants.
44
<PAGE>
The public offering price of the Shares offered hereby has been determined
by negotiation between the Company and the Representative. Factors considered
in determining the offering price of the Shares offered hereby included the
business in which the Company is engaged, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets and the demand for similar securities of comparable companies.
Each of the Company's officers and directors who individually hold 5% or
more of the Company's Common Stock have agreed not to publicly sell or
otherwise dispose of any of their Common Stock for a period of 18 months
following the Effective Date without the consent of the Representative, which
consent would be subject to the nature of the market for the Company's
securities, the volume and price of the Common Stock, and the operations and
financial condition of the Company.
In connection with this Offering, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing their respective market
prices. The Underwriters also may create a short position for the account of
the Underwriters by selling more shares of Common Stock in connection with the
Offering than they are committed to purchase from the Company, and in such case
may purchase shares of Common Stock in the open market following completion of
the Offering to cover all or a portion of such short position. The Underwriters
may also cover all or a portion of such short position by exercising the
Over-Allotment Option. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Stock at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken they may
be discontinued at any time.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
The foregoing is a summary of the material terms of the Underwriting
Agreement and the Underwriter's Warrant. Reference is made to the copies of the
Underwriting Agreement and the Underwriters' Warrant, both of which are filed
as exhibits to the Registration Statement of which this Prospectus forms a
part.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is presently authorized to issue 40,000,000 Shares of its
$.0001 par value common stock, of which 11,507,634 Shares are presently issued
and outstanding or subscribed. A total of 3,000,000 Shares are offered for sale
hereby.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock. Shares of preferred stock have no voting rights and are not entitled to
receive dividends unless voted by the Board of Directors. Such shares are
convertible into shares of Common Stock and receive preferences in the event of
Company liquidation.
Common Stock
All Shares of Common Stock, when issued, will be fully-paid and
non-assessable. All Shares are equal to each other with respect to voting,
liquidation and dividend rights. Holders of Shares of Common Stock are entitled
to one vote for each Share they own at any stockholders' meeting. Holders of
Shares of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor, and
upon liquidation are entitled to participate pro rata in a distribution of
assets available for such a distribution to stockholders. There are no
conversion, preemptive, redemption, or other rights or privileges with respect
to any Shares. Reference is made to the Company's Articles of Incorporation and
its by-laws as well as to the applicable status of the State of Delaware for a
more complete description of the rights and liabilities of holders of Common
Stock. The Company hereby undertakes to provide any stockholder at any time
with a copy (at a nominal charge) of its articles of incorporation and by-laws.
Also these documents are on public record as exhibits to the Registration
Statement on file with the Securities and Exchange Commission. The Common Stock
of the Company does not have cumulative voting rights which means that the
holders of more than 50% of the Shares voting for the election of directors may
elect all of the directors if they choose to do so. In such event, the holders
of the remaining Shares aggregating less than 50% will not be able to elect any
directors.
Market For Shares
Application will be made to list the Shares of Common Stock on NASDAQ's
National Market System, if it meets the applicable entry standards. There is no
assurance the Company will be accepted by NASDAQ's National Market System or
that the Company will have sufficient income, assets, shareholders publicly
held shares and market makers to meet the requisite standards for initial
inclusion. If the Company qualifies and is included on NASDAQ's National Market
System, it will use its best efforts to maintain the listing. If the Company
fails to achieve or maintain its eligibility for listing on NASDAQ's National
Market System, the liquidity of the shares purchased by investors may be
reduced.
DIVIDENDS
The Company can give no assurance that it will generate earnings from
which cash dividends can be paid. However, Management may follow a policy of
retaining all such earnings to finance the development of its business. Such a
policy could be maintained so long as necessary to provide working capital for
the Company's operations. Any dividends that may be paid in the future will be
dependent upon the financial requirements of the Company and all other relevant
factors.
REPORTS TO SHAREHOLDERS
The Company will furnish annual reports to its shareholders that will
include audited financial statements and such other interim reports as
management deems appropriate.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
Continental Stock Transfer and Trust Company, New York, New York.
46
<PAGE>
LEGAL PROCEEDINGS
Legality of the Shares of Common Stock being offered hereunder and certain
other matters have been passed upon for the Issuer by Doros & Brescia, P.C.
1140 Avenue of the Americas, New York, NY 10036. Certain legal matters will be
passed upon for the Underwriter by Sichenzia, Ross & Friedman LLP, 135 West
50th Street, New York, NY 10020.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the three fiscal periods in the period ended
December 31, 1997, included herein, have been included in this Prospectus in
reliance upon the report of Eichler Bergsman & Co., LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The financial statements of KMS as
of December 31, 1996 and 1995 and for each of the years then ended, included
herein, have been included in this Prospectus in reliance upon the separate
reports of Lilling & Company and Hagan & Burns CPAs, PC, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firms as experts in accounting and auditing.
There were no disagreements with any of the predecessor accounting firms.
FURTHER INFORMATION
The Company has filed with the Washington D.C. Office of the Securities
and Exchange Commission, a Registration Statement on form S-1 under the
Securities Act of 1933, as amended, with respect to the Common Shares to which
this Prospectus relates. As permitted by the Rules and Regulations of the SEC,
this Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Shares offered hereby, reference is made to the Registration Statement,
including exhibits thereto, which may be reviewed and copies obtained from the
Public Reference Branch, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission also maintains a site on the World
Wide Web that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The URL address of such site is http://www.sec.gov.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
AUDITED FINANCIAL STATEMENTS:
UNITED STATES FINANCIAL GROUP, INCORPORATED:
Independent Auditors' Report .......................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 ............................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 ..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 ..................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 ..................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
SUREAL INTERNATIONAL, INC.:
Independent Auditors' Report .......................................................... F-15
Balance Sheets at December 31, 1996 and 1997 .......................................... F-16
Statements of Operations for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ..................... F-17
Statements of Stockholders' Equity for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ..................... F-18
Statements of Cash Flows for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ..................... F-19
Notes to Financial Statements ......................................................... F-20
KLEIN, MAUS & SHIRE, INC.:
Independent Auditors' Reports ......................................................... F-23
Balance Sheets at December 31, 1996 and 1997 .......................................... F-26
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 ......... F-27
Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and
1997 ................................................................................. F-28
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 ......... F-29
Notes to Financial Statements ......................................................... F-30
UNAUDITED FINANCIAL STATEMENTS:
UNITED STATES FINANCIAL GROUP, INCORPORATED:
Consolidated Balance Sheet, June 30, 1998 ............................................. F-35
Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997 F-36
Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 1998 F-37
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and
1997 ................................................................................. F-38
Notes to Consolidated Financial Statements ............................................ F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
United States Financial Group, Incorporated
New York, NY
We have audited the consolidated balance sheets of United States Financial
Group, Incorporated and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the three years ended December 31, 1995, 1996, and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Klein Maus & Shire,
Inc , a wholly-owned subsidiary, which statements reflect total assets of
$1,960 and $932,837 as of December 31, 1995 and 1996, respectively, and total
revenues of $1,031 and $248,989 for the years then ended. Those statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Klein Maus & Shire,
Inc., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United States Financial Group,
Incorporated and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations, stockholders' equity, and their cash flows for the three
years ended December 31, 1995, 1996, and 1997 in conformity with generally
accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998, except for
Note 4 which is as of April 10, 1998
and Note 7 and the first paragraph of
Note 12 which are as of July 23, 1998
F-2
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2) ..................................... $ 17,461 $ 394,493
Deposit at clearing broker (Note 5) .................................... 255,651 103,285
Securities owned at market value (Notes 2f and h) ...................... 361,506 99,729
Accounts receivable .................................................... -- 4,231
Inventories (Note 2e) .................................................. -- 118,554
Fixed assets at cost, net of accumulated depreciation and amortization
(Notes 2g and 6) ...................................................... 103,122 317,457
Other assets (Note 7) .................................................. 195,098 242,462
Goodwill (Notes 2m and 3) .............................................. -- 7,413,538
------------ ------------
Total Assets ........................................................ $ 932,838 $ 8,693,749
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to clearing broker (Note 5) ....................................... $ -- $ 32,250
Accounts payable ...................................................... 69,437 93,016
Accrued expenses, and other ........................................... 144,207 263,404
Securities sold, not yet purchased at market value (Notes 2f and 8).... 1,113 1,575
Notes payable to officers/stockholders (Note 9) ....................... -- 210,000
Long-term capitalized lease obligations (Note 10) ..................... -- 46,179
------------ ------------
Total Liabilities ................................................... 214,757 646,424
------------ ------------
Minority interest (Note 11) ............................................ 504 773
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 1, 3, and 11):
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
40,000 (1997) shares issued and outstanding ......................... -- 4
Common stock, $.0001 par value; 30,000,000 shares authorized;
10,694,634 (1997) shares issued and outstanding ..................... -- 1,069
Paid-in capital ....................................................... 1,967,195 10,900,104
Deficit ............................................................... (1,249,618) (2,854,625)
------------ ------------
Total stockholders' equity .......................................... 717,577 8,046,552
------------ ------------
Total liabilities and stockholders' equity .......................... $ 932,838 $ 8,693,749
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
------------ ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Commissions on brokerage trades ....................... $ -- $ 243,097 $ 863,673
Trading income (Notes 2f and h) ....................... -- -- 1,658,197
Other income .......................................... 1,032 5,892 345,981
--------- ------------ ------------
Total revenue ....................................... 1,032 248,989 2,867,851
--------- ------------ ------------
Expenses:
Officers' compensation ................................ -- 738,986
Compensation and related expenses ..................... -- 481,678 1,355,444
Clearance and floor brokerage ......................... -- 272,035 158,184
Occupancy, office, and administrative expense ......... 530 321,777 735,367
Professional fees ..................................... -- 310,032 273,039
Communications ........................................ -- 68,343 317,447
Regulatory fees and expenses .......................... -- 44,608 93,919
Other expenses (Note 13) .............................. -- -- 800,472
--------- ------------ ------------
Total expenses ...................................... 530 1,498,473 4,472,858
--------- ------------ ------------
Net income (loss) ...................................... $ 502 $ (1,249,484) $ (1,605,007)
========= ============ ============
Basic loss per share ................................... $ -- $ (.13) $ (.16)
========= ============ ============
Weighted average number of shares outstanding .......... 9,944,634 9,944,634 10,007,134
========= ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- -----------------------
PAR VALUE NUMBER PAR VALUE
NUMBER OF $.0001 OF $.0001 PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ----------- ------------ ---------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
January 1, 1995 .............. -- $ -- -- $ $ 9,890 $ (636) $ 9,254
--
Capital contributions ......... -- -- -- -- 2,093 -- 2,093
Distributions ................. (9,890) (9,890)
Net income .................... -- -- -- -- -- 502 502
-- ---- -- -------- ----------- ------------ ------------
Balance--
December 31, 1995 ............ -- -- -- -- 2,093 (134) 1,959
Issuance of shares ............ -- -- -- -- 1,965,102 -- 1,965,102
Capital contributions ......... -- -- -- -- -- -- --
Net loss ...................... -- -- -- -- -- (1,249,484) (1,249,484)
-- ---- -- -------- ----------- ------------ ------------
Balance--
December 31, 1996 ............ -- -- -- -- 1,967,195 (1,249,618) 717,577
Issuance of shares ............ 40,000 4 9,944,634 994 1,432,909 -- 1,433,907
Acquisition of Sureal ......... -- -- 750,000 75 7,500,000 -- 7,500,075
Net loss ...................... -- -- -- -- -- (1,605,007) (1,605,007)
------ ---- --------- -------- ----------- ------------ ------------
Balance--
December 31, 1997 ............ 40,000 $ 4 10,694,634 $1,069 $10,900,104 $ (2,854,625) $ 8,046,552
====== ==== ========== ======== =========== ============ ============
</TABLE>
Note--The information above gives retroactive effect to the one for two reverse
stock split declared on December 8, 1997.
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
----------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ 502 $(1,249,484) $ (1,605,007)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................... -- 10,911 62,502
(Increase) in deposit at clearing broker .............. -- -- (103,285)
(Increase) decrease in securities owned ............... -- (361,506) 261,777
(Increase) decrease in accounts receivable ............ -- -- (4,231)
(Increase) in inventories ............................. -- -- (118,554)
(Increase) decrease in other assets ................... -- (195,097) 44,971
Increase (decrease) in due to clearing brokers,
net .................................................. -- (255,651) 287,901
Increase (decrease) in accounts payable ............... -- -- 23,579
Increase in accrued expenses .......................... -- 213,643 119,197
Increase in securities sold, not yet purchased ........ -- 1,113 462
Increase in notes payable to officers/stockholders..... -- -- 210,000
-------- ----------- ------------
Total adjustments .................................... -- (586,587) 784,319
-------- ------------- ------------
Net cash provided/(used) by operating
activities ........................................ 502 (1,836,071) (820,688)
-------- ------------- ------------
Cash flows from investing activities: ....................
Purchase of furniture, equipment, and leasehold
improvements .......................................... -- (114,033) (256,059)
-------- ------------- ------------
Cash flows from financing activities:
Increase in capitalized lease obligation, net ........... -- -- 46,179
Capital contributions, including from preferred
shareholders .......................................... 2,093 1,965,605 1,499,935
Loans to officers/stockholders .......................... (9,890) -- (92,335)
-------- ------------- ------------
Net cash used provided by financing
activities ........................................ (7,797) 1,965,605 1,453,779
-------- ------------- ------------
Net increase (decrease) in cash .......................... (7,295) 15,501 377,032
Cash--beginning of year .................................. 9,255 1,960 17,461
-------- ------------- ------------
Cash--end of year ........................................ $ 1,960 $ 17,461 $ 394,493
======== ============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ...................................... $ -- $ 4,513 $ 20,383
======== ============= ============
Income taxes .......................................... $ -- $ -- $ 2,800
======== ============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
United States Financial Group, Incorporated ("USFG or the "Company") is a
holding company, incorporated under the laws of the State of Delaware in
December 1996. USFG's main business purpose is to acquire undervalued or
reasonably priced companies in diversified, well-established industries.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS") is an investment banking firm, a member of
the National Association of Securities Dealers, Inc. (the "NASD") and
registered with the Securities and Exchange Commission (the "SEC"). Sureal
International, Inc. ("Sureal") is a direct marketing company that distributes
personal care and nutritional products in Russia and other republics of the
former Soviet Union through a network of independent distributors.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated was formed to be an asset management and
international financial consultancy company. U.S. Military Resale Group,
Incorporated was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
The Company acquired KMS through a share exchange effected on March 31,
1997 in which KMS' sole common shareholder exchanged 18,889,267 shares of KMS'
common stock (representing 100% of the total outstanding common shares of KMS)
for 18,889,267 shares of the Company's Common Stock. This merger involving two
entities under common control was accounted for as a pooling of interests. On
December 8, 1997 the Company effected a one for two reverse stock split
affecting all shares outstanding prior to December 3, 1997. Thus, 18,889,267
shares affected by the reverse split were converted into 9,444,634 shares.
On December 3, 1997 the Company entered into an exchange agreement with
Sureal and its stockholders to exchange all outstanding common shares of Sureal
for newly-issued Common Shares of USFG. The transaction was accounted for as a
purchase in accordance with the provisions set forth in Opinion No. 16 of the
Accounting Principles Board (see Note 3).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
A summary of the Company's significant accounting and reporting policies is
as follows:
a. Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
b. Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates include determining the
need for reserves and accruals for product returns, outcome of contingencies,
obsolete inventory and taxes. Actual results could differ from these estimates.
c. Credit Risks
KMS maintains its cash accounts primarily with one bank. At December 31,
1997, KMS had an amount on deposit with such bank that exceeded the balance
insured by the Federal Deposit Insurance Corporation in the amount by $257,070.
KMS executes, as agent, securities transactions on behalf of its
customers. If either a customer or a counterparty fails to perform, KMS may
sustain a loss if the market value of the security is different from
F-7
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES (CONTINUED)
the contract value of the transaction. KMS as a nonclearing broker does not
handle any customer funds or securities. The responsibility for processing
customer activities resides with KMS' clearing agent, Cowen & Company. KMS'
customers are located throughout the United States as well as in foreign
countries.
d. Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents
include cash due from banks and brokerage accounts, certificates of deposit and
highly liquid instruments with original maturities of 90 days or less.
e. Inventories
Inventories consist of merchandise purchased by Sureal for resale and are
stated at the lower of cost or market using the first-in, first-out cost flow
assumption.
f. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective fair values
because of the short maturities of these instruments. The fair values of
securities owned and securities sold, not yet purchased are recorded primarily
at quoted prices for those or similar instruments. Changes in the market value
of these securities are reflected currently in the results of operations for
the year.
g. Fixed Assets
Fixed Assets are recorded at cost less accumulated depreciation or
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of such assets. At December 31, 1997 and 1996, all
such assets had an estimated useful life of five years. Leasehold improvements
are amortized over the lesser of their estimated useful lives or the remaining
terms of their respective leases. Expenditures for maintenance and repairs are
charged to expense as incurred.
h. Revenue Recognition
Commissions on product sales are recognized when products are shipped and
title passes to independent distributors.
Securities transaction and related revenue are recorded on a trade date
basis. Managers' fees, underwriters' fees, and other underwriting revenues are
recognized at the time the related underwriting is completed.
i. Income Taxes
The Company uses the liability method in compliance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Prior to its merger with the Company, Sureal had elected to be taxed as an
S corporation whereby the Federal and state income tax effects of Sureal's
activities accrued directly to its stockholders. There are no pro forma
Federal, state and local income tax provisions for any of the three years in
the period ended December 31, 1997 because on a consolidated basis net losses
were incurred in each of those years.
F-8
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES (CONTINUED)
USFG intends to file a consolidated Federal corporation income tax return
for the year ended December 31, 1997. Net operating loss carrryforwards amount
to approximately $2,740,000 expiring in 2011 and 2012. No deferred tax assets
have been established for the potential benefits associated with these
carryforwards because of the uncertainty in utilizing net operating loss
carryforwards.
j. Basic Loss Per Share
The basic loss per share is based on the weighted average number of common
outstanding shares for each year presented which gives retroactive effect to
the (i) two-for-one reverse split effected on December 3, 1997 and (ii) the
750,000 shares of common stock issued in connection with the Sureal merger (see
Note 3). The calculation does not assume the conversion of Preferred Stock
because the impact of such conversions would be anti-dilutive.
k. Restatement and Reclassification for Reverse Stock Splits
On December 8, 1997, the Company ratified a one-for-two reverse stock
split of common stock. All share and per share amounts affecting net loss per
share, weighted average number of common and common equivalent shares
outstanding, common stock and preferred stock issued and outstanding,
additional paid-in-capital and all other stock transactions presented in these
financial statements have been restated to reflect the one-for-two-reverse
stock split.
l. Industry Segment and Geographic Area
KMS operates as a broker-dealer of securities. Its customers are located
throughout the United States as well as internationally.
Sureal operates in a single industry, which is the direct marketing of
personal care and nutritional products, and in a single geographic area, which
is Russia and the republics of the former Soviet Union. In 1998 and subsequent
years, Sureal expects to operate in additional countries, including the United
States.
m. Goodwill
The goodwill arising from the acquisition of Sureal is being amortized on
a straight-line basis over 30 years.
NOTE 3 -- ACQUISITION OF SUREAL
Sureal International, Inc. ("Sureal"), a Delaware corporation established
on August 10, 1995 as Legacy Export, Inc., changed its name in October 1997,
and is headquartered in Orem, Utah. Through December 31, 1997 Sureal's income
was primarily earned from commissions. At the end of 1997 the nature of
Sureal's business changed. Sureal beginning in November 1997 began to buy its
products directly from manufacturers and sell such products in January 1998
directly through a network of independent distributors.
On December 3, 1997 Sureal agreed to exchange all of its outstanding
shares of common stock for 750,000 shares of USFG Common Stock. The
accompanying financial statements have been prepared on the basis that the
750,000 Common Shares of USFG have been issued to the Shareholders of Sureal in
exchange for all their common shares. USFG accounted for the foregoing
transaction, which resulted in Sureal becoming a wholly-owned subsidiary of
USFG, as a purchase in conformity with Opinion Number 16 of the Accounting
Principles Board. Accordingly, the results of Sureal's operations are included
in the accompanying consolidated financial statements commencing with the date
of acquisition.
F-9
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITION OF SUREAL (CONTINUED)
The following unaudited pro forma operating data assumes that the
acquisition of Sureal had occurred as of the opening date of each period
presented.
<TABLE>
<CAPTION>
AUGUST 10, 1995
(INCEPTION) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
----------------- -----------------------------------
1995 1996 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Commissionable sales ............................ $ 995,670 $ 21,594,562 $ 31,720,456
Cost of commissionable sales .................... 977,173 20,720,459 30,459,297
---------- ------------ ------------
18,497 874,103 1,261,159
Other revenue ................................... 37,500 314,250 2,935,059
Expenses (including $249,700 per year of goodwill
amortization) .................................. 241,029 2,301,617 5,360,016
Net loss ........................................ $ (185,032) $ (1,113,264) $ (1,163,798)
</TABLE>
NOTE 4 -- REGULATORY MATTERS
KMS
KMS is subject to the Securities and Exchange Commission's uniform net
capital rule (Rule 15c3-1) which requires the maintenance of minimum net
capital, as defined, and also requires that the ratio of aggregate indebtedness
to aggregate net capital shall not exceed 15 to 1. Dividends may not be paid
nor capital withdrawn if such action results in the ratio of aggregate
indebtedness to aggregate net capital exceeding 10 to 1. At December 31, 1997,
KMS' aggregate net capital as defined was $234,481 (compared to a requirement
of $100,000) and its ratio of aggregate indebtedness to aggregate net capital
was 1.40 to 1 (compared to a requirement of not more than 15 to 1).
KMS is subject to the rules and regulations promulgated by various
Federal, state and industry regulatory and governmental agencies, including the
SEC and the NASD. Failure to comply with rules and regulations of these
organizations could result in fine, suspension or other civil or criminal
remedies. Certain of these regulatory bodies perform audits or other procedures
to ensure compliance with their rules and regulations. The NASD completed an
audit of KMS in February 1998, at which time it issued a preliminary letter of
audit findings in which it set forth certain alleged exceptions and areas of
noncompliance noted during the performance of its audit procedures, including
alleged deficiencies in written supervisory procedures, violations of the
firm's restriction letter with respect to the number of securities for which it
can make markets, record keeping violations with respect to new customer
accounts and option agreement forms, discrepancies on tickets relating to
trades, violations of rules relating to principal markup/markdown transactions
on corporate equities and various administrative deficiencies. Based on a
review of the letter and discussions with the NASD auditors, management of KMS
and its counsel do not believe that the ultimate resolution of the matters
described in such letter will have a material adverse effect on KMS' financial
position or results of operations. However, the ultimate outcome of this matter
cannot be determined at this time. As of April 10, 1998, the NASD has not
issued any further correspondence to KMS or had further discussions with KMS'
management concerning its audit.
Sureal
Sureal is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
Sureal's direct selling system. Although management believes that Sureal is in
compliance, in all material respects, with the statutes, laws, rules and
regulations
F-10
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- REGULATORY MATTERS (CONTINUED)
of every jurisdiction in which it operates, no assurance can be given that
Sureal's compliance with applicable statutes, laws, rules and regulations will
not be challenged by domestic or foreign authorities or that such challenges
will not have a material adverse effect on Sureal's future financial position
or results of operations or cash flows.
NOTE 5 -- RECEIVABLE FROM AND PAYABLE TO BROKER-DEALER AND CLEARING
ORGANIZATIONS
KMS introduces all customer transactions in securities traded on U.S.
securities markets to its clearing broker on a fully disclosed basis. The
agreement between KMS and its clearing broker provides that KMS is obligated to
assume any exposure related to nonperformance by customers or counterparties.
KMS monitors clearance and settlement of all customer transaction on a daily
basis. In accordance with the clearing agreement, KMS deposited $100,000 in a
standby money reserve fund with Cowen & Company. Such deposit earns interest at
a rate defined in the agreement.
The exposure to credit risk associated with the nonperformance of customer
and counterparties in fulfilling their contractual obligations pursuant to
these securities transactions can be directly impacted by volatile trading
markets which may impair the customers's or counterparty's ability to satisfy
their obligations to KMS. In the event of nonperformance, KMS may be required
to purchase or sell financial instruments at unfavorable market prices
resulting in a loss. Management does not anticipate material instances of
nonperformance by customers and counterparties in the above situations.
NOTE 6 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Furniture and fixtures ................................. $ 63,372 $161,335
Equipment .............................................. 71,099 191,403
Leasehold improvements ................................. -- 32,302
-------- --------
Total .................................................. 134,471 385,040
Less accumulated depreciation and amortization ......... 17,691 67,583
-------- --------
Fixed assets -- net .................................... $116,780 $317,457
======== ========
</TABLE>
NOTE 7 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ----------
<S> <C> <C>
Employee and broker receivables ........................ $106,128 $ 46,082
Prepaid expenses and miscellaneous receivables ......... 94,604 68,647
Due from officers/stockholders ......................... -- 92,335
Deposits ............................................... 1,389 35,398
-------- --------
Total .................................................. $202,121 $242,462
======== ========
</TABLE>
The employee and broker receivables relate principally to advances and
expenses in excess of commission earnings and inventory losses charged to
registered representatives. The amount due from officers/stockholders
represents the excess of cash distributions made by Sureal over its reported
earnings and has no specified terms but is expected to be repaid in periods
beyond 1998.
F-11
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by KMS.
NOTE 9 -- NOTES PAYABLE TO OFFICERS/STOCKHOLDERS
At December 31, 1997, Sureal is obligated under the term of 8% demand
notes payable in the aggregate principal amount of $210,000 due to three
officers/stockholders. The proceeds of such notes were principally used to
purchase inventory.
NOTE 10 -- CAPITALIZED LEASE OBLIGATIONS
Included in fixed assets are the following assets held under capital
leases at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Equipment ............................. $52,003
Less accumulated depreciation ......... 5,200
-------
$46,803
=======
</TABLE>
Future minimum lease payments for assets under capital leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ................................................ $16,304
1999 ................................................ 16,304
2000 ................................................ 16,304
2001 ................................................ 16,304
2002 ................................................ 3,682
-------
Total minimum lease payments ........................ 68,898
Less amount representing interest ................... 22,719
-------
Present value of net minimum lease payments ......... $46,179
=======
</TABLE>
There were no such assets at December 31, 1996.
NOTE 11 -- CAPITAL STRUCTURE
USFG is a Delaware corporation with its principal offices located at 110
Wall Street, New York, New York. It is authorized to issue up to 30,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock. Each share of
Common Stock entitles the holder thereof to one vote. There are no cumulative
voting rights or privileges. The Preferred Shares are nonvoting and do not have
a stated dividend rate. Holders of the preferred shares do receive preference
over holders of common shares in the event of liquidation. In 1997, USFG
received $200,000 from the issuance of 40,000 Preferred Shares.
KMS issued 773,275 shares of Series A convertible preferred stock and
raised an aggregate of $2,744,500 in 1996 and 1997 pursuant to a private
placement offering memorandum dated April 15, 1996. Each such share was
convertible into one share of KMS' common stock. The conversion feature remains
in effect for a period of three years from the date of issuance. The preferred
share agreement was amended to permit the holders of each preferred share to
convert such share into a Common Share of USFG. The par value of the KMS
preferred shares is shown as minority interest in the accompanying consolidated
balance sheets.
From January to March 1998, the Company sold 12 Units of Bridge Financing
for an aggregate of $600,000 resulting in net proceeds of approximately
$575,000. Each Unit consists of (i) a 10% Promissory Note in the principal
amount of $50,000 due one year from the date of issuance and (ii) 1,667 shares
of
F-12
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- CAPITAL STRUCTURE (CONTINUED)
the Company's Common Stock. The holders of such shares of Common Stock have
certain registration rights. For financial reporting purposes, a portion of the
net proceeds will be allocated to the value of the Common Stock. The resulting
debt discount will be amortized to operations over the term of the Promissory
Notes.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Litigation
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demanded compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000 payable in five
equal monthly installments commencing April 1998.
Lease Agreements
The Company leases office space under noncancelable long-term operating
leases having minimum future operating lease obligations as follows at December
31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- --------------------- -----------
<S> <C>
1998 .............. $366,000
1999 .............. 370,000
2000 .............. 348,000
2001 .............. 315,000
2002 .............. 210,000
</TABLE>
Rental expense for operating leases totaled $8,000, $146,000, and $295,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
Employment Agreements
USFG has entered into employment agreements with two officers under which
it has agreed to pay such officers annual aggregate salaries of $600,000
through 2003. Sureal has entered into employment agreements with three officers
under which it has agreed to pay such officers annual aggregate salaries of
$360,000 through 2003. Sureal has also entered into a consulting agreement with
a member of the Board of Directors calling for the annual payment of $75,000,
subject to adjustment based on actual work performed, through 2001.
NOTE 13 -- OTHER EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
<TABLE>
<CAPTION>
<S> <C>
Settlement of customer guarantee ..................... $282,483
Preoperating costs for office in Bahrain (a) ......... 517,989
--------
Total ............................................... $800,472
========
</TABLE>
- ----------
(a) The Company has incurred such costs to open an office of a
broker-dealer in Bahrain. Although the Company anticipates that all
necessary approvals for this branch will be obtained, no assurances
thereof can be given. Therefore, all such costs have been charged to
operations as incurred.
F-13
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- SEGMENT REPORTING
Until December 8, 1997, the Company operated in one segment, as a
broker-dealer of securities. In future periods, it will report its operations
in two segments. KMS is a broker-dealer of securities and Sureal is a direct
marketing company involved in the distribution of personal care and nutritional
products in Russia and other republics of the former Soviet Union.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Sureal International, Inc.
Orem, Utah
We have audited the accompanying balance sheets of Sureal International,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period August 10, 1995
(date of inception) through December 31, 1995 and for the two years ended
December 31, 1996 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sureal International, Inc.
as of December 31, 1996 and 1997, and the results of its operations,
stockholders' equity, and its cash flows for the period August 10, 1995 (date
of inception) through December 31, 1995 and for the two years ended December
31, 1996 and 1997 in conformity with generally accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998
(except for the first
paragraph of Note 5 for
which the date is July 23, 1998)
F-15
<PAGE>
SUREAL INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2b) .............................. $ 38,659 $ 29,750
Accounts receivable .............................................. 149,662 4,231
Inventories (Note 2d) ............................................ -- 118,554
Due from employees ............................................... 3,984 --
Prepaid expenses and other current assets ........................ 1,650 24,141
-------- --------
Total current assets ........................................... 193,995 176,676
Furniture and equipment, net of accumulated
depreciation (Notes 2f and 4) .................................... 13,658 50,536
Due from officers/stockholders (Note 5) ........................... -- 92,335
Deposits .......................................................... 1,389 5,289
-------- --------
$209,002 $324,836
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 8,494 $ 93,016
Accrued expenses ................................................. 21,189 12,820
Notes payable to officers/stockholders (Note 5) .................. -- 210,000
-------- --------
Total current liabilities ...................................... 29,683 315,836
-------- --------
Commitments and contingencies (Notes 1, 3, and 6)
Stockholders' equity (Note 1):
Preferred stock, 5,000 shares authorized ......................... -- --
Common stock, $1 par value; 10,000 shares authorized; 9,000 shares
issued and outstanding ......................................... 9,000 9,000
Paid-in capital .................................................. 158,492 --
(Deficit) retained earnings ...................................... 11,827 --
-------- --------
Total stockholders' equity ..................................... 179,319 9,000
-------- --------
Total liabilities and stockholders' equity ..................... $209,002 $324,836
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
SUREAL INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 10, 1995
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- -----------------------------
1995 1996 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Commissionable sales (Notes 1 and 2f) ....................... $ 995,670 $21,594,562 $31,720,456
Cost of commissionable sales ................................ 977,173 20,720,459 30,459,297
--------- ----------- -----------
18,497 874,103 1,261,159
Other income ................................................ 36,468 65,261 67,208
--------- ----------- -----------
Total revenue ............................................. 54,965 939,364 1,328,367
--------- ----------- -----------
Expenses:
Officers' compensation ...................................... 65,250 234,173 253,615
Compensation and related expenses ........................... 18,635 114,136 210,078
Occupancy, office, and administrative expense ............... 52,573 205,135 251,227
--------- ----------- -----------
Total expenses ............................................ 136,458 553,444 714,920
--------- ----------- -----------
Net income (loss) ............................................ $ (81,493) $ 385,920 $ 613,447
========= =========== ===========
Pro forma data (Note 2h):
Income (loss) before pro forma income tax provision ......... $ (81,493) $ 385,920 $ 613,447
Pro forma income tax provision .............................. -- 111,000 229,000
--------- ----------- -----------
Pro forma net income (loss) ................................. $ (81,493) $ 274,920 $ 384,447
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-17
<PAGE>
SUREAL INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIODS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER RETAINED TOTAL
OF PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- -------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance--August 10, 1995 ........... -- $ -- $ -- $ -- $ --
Issuance of shares ................. 9,000 9,000 155,714 -- 164,714
Net loss ........................... -- -- -- (81,493) (81,493)
----- ------ ---------- ---------- ----------
Balance--December 31, 1995 ......... 9,000 9,000 155,714 (81,493) 83,221
Capital contribution ............... -- -- 2,778 -- 2,778
Net income ......................... -- -- -- 385,920 385,920
Distributions ...................... -- -- -- (292,600) (292,600)
----- ------ ---------- ---------- ----------
Balance--December 31, 1996 ......... 9,000 9,000 158,492 11,827 179,319
Net income ......................... -- -- -- 613,446 613,446
Distributions ...................... -- -- (158,492) (625,273) (783,765)
----- ------ ---------- ---------- ----------
Balance--December 31, 1997 ......... 9,000 $9,000 $ -- $ -- $ 9,000
===== ====== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-18
<PAGE>
SUREAL INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 10, 1995
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- ---------------------------
1995 1996 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ (81,493) $ 385,920 $ 613,447
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ............................................ 1,780 5,000 8,700
(Increase) decrease in accounts receivable .............. -- (149,662) 145,431
(Increase) in inventories ............................... -- -- (118,554)
(Increase) decrease in other assets ..................... (12,203) 5,180 (22,408)
Increase (decrease) in accounts payable ................. 11,706 (3,212) 84,522
Increase (decrease) in accrued expenses ................. 8,305 12,884 (8,369)
Increase in notes payable to officers/stockholders ...... -- -- 210,000
--------- ---------- ----------
Total adjustments ...................................... 9,588 (129,810) 299,322
--------- ---------- ----------
Net cash used by operating activities ................ (71,905) 256,110 912,769
--------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets .................................. (7,117) (13,321) (45,578)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 164,714 2,778 --
Distributions and loans to stockholders ................... -- (292,600) (876,100)
--------- ---------- ----------
Net cash (used) provided by financing activities ..... 164,714 (289,822) (876,100)
--------- ---------- ----------
Net increase (decrease) in cash ............................ 85,692 (47,033) (8,909)
Cash--beginning of period .................................. -- 85,692 38,659
--------- ---------- ----------
Cash--end of period ........................................ $ 85,692 $ 38,659 $ 29,750
========= ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ........................................ $ -- $ 904 $ 727
========= ========== ==========
Income taxes ............................................ $ -- $ -- $ --
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE>
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Sureal International, Inc. ("Sureal" or the "Company"), a Delaware
corporation established on August 10, 1995 as Legacy Export, Inc., is a direct
marketing company involved in the distribution of personal care and nutritional
products in Russia and other republics of the former Soviet Union. Sureal
changed its name in October 1997 and is headquartered in Orem, Utah.
Through December 31, 1997 Sureal's income was primarily earned from
commissions. At the end of 1997 the nature of Sureal's business changed. Sureal
beginning in November 1997 began to buy its products directly from
manufacturers and sell such products in January 1998 directly through a network
of independent distributors.
On December 3, 1997, Sureal agreed to exchange all of its outstanding
shares of Common Stock for 750,000 shares of common stock of United States
Financial Group, Incorporated ("USFG").
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
A summary of the Company's significant financial accounting and reporting
policies is as follows.
a. Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates include reserves for product returns,
outcome of contingencies, obsolete inventory and taxes. Actual results could
differ from these estimates.
b. Cash and Cash Equivalents
For the purpose of the Statement of Cash Flows, cash equivalents are
short-term, highly liquid instruments with original maturities of 90 days or
less.
c. Inventories
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost or market using the first-in, first-out method.
d. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective values due
to the short maturities of these instruments.
e. Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation or
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of such assets. At December 31, 1996 and 1997, all
such assets had an estimated useful life of five years. Expenditure for
maintenance and repairs are charged to expense as incurred.
f. Revenue Recognition
Commissions on product sales are recognized when products are shipped and
title passes to independent distributors.
g. Income Taxes
The Company complies with Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the liability
method is used in accounting for income
F-20
<PAGE>
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING (CONTINUED)
taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Prior to its merger with USFG, Sureal elected to be taxed as an S
corporation whereby the Federal and state income tax effects of Sureal's
activities accrued directly to its stockholders. The pro forma income tax
amounts reflect the amount of income tax provisions that would have been
recorded if Sureal had been a C corporation utilizing a net operating loss
carryover during all periods presented.
NOTE 3 -- REGULATORY MATTERS
Sureal is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
Sureal's direct selling system. Although management believes that Sureal is in
compliance, in all material respects, with the statutes, laws, rules, and
regulations of every jurisdiction in which it operates, no assurance can be
given that Sureal's compliance with applicable statutes, laws, rules and
regulations will not be challenged by domestic or foreign authorities or that
such challenges will not have a material adverse effect on Sureal's future
financial position or results of operations or cash flows.
NOTE 4 -- FIXED ASSETS
Fixed assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures ................ $ 6,666 $ 7,090
Equipment ............................. 13,772 58,926
------- -------
20,438 66,016
Less accumulated depreciation ......... 6,780 15,480
------- -------
$13,658 $50,536
======= =======
</TABLE>
NOTE 5 -- NOTES RECEIVABLE FROM AND PAYABLE TO OFFICERS/STOCKHOLDERS
The amount due from officers at December 31, 1997 represents the excess of
cash distributions made over reported earnings. Such amount has no specified
maturity date but is expected to be repaid in periods beyond 1998.
At December 31, 1997, Sureal is obligated under the terms of 8% demand
notes payable in the aggregate principal amount of $210,000 due to three
officers/stockholders. The proceeds of such notes were principally used to
purchase inventory.
F-21
<PAGE>
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company leases office space, under noncancelable long-term operating
leases having minimum future operating lease obligations as follows at December
31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ----------
<S> <C>
1998 .................... $55,000
1999 .................... $55,000
2000 .................... $32,000
</TABLE>
Rental expense for operating leases totaled $8,000 for the period August
10 (inception) through December 31, 1995 and $19,000 and $36,000 for the years
ended December 31, 1996 and 1997, respectively.
Employment Agreements
Sureal has entered into employment agreements with three officers under
which it has agreed to pay such officers annual aggregate salaries of $360,000
through 2003. Sureal has also entered into a consulting agreement with a member
of the USFG Board of Directors calling for an annual payment of $75,000,
subject to adjustment based on actual work performed, through 2003.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Klein Maus & Shire, Inc.
New York, NY
We have audited the accompanying statement of financial condition of Klein
Maus & Shire, Inc. as of December 31, 1997 and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Klein Maus & Shire, Inc. as of December
31, 1995 and 1996 were audited by other auditors whose reports dated April 5,
1996 and February 5, 1997, respectively, expressed unqualified opinions on
those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Klein Maus & Shire, Inc. as
of December 31, 1997, and the results of its operations, stockholders' equity,
and cash flows for the year then ended in conformity with generally accepted
accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998, except for
Note 3 as of April 10, 1998
and the first paragraph
of Note 10 as of July 23, 1998
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Klein Maus & Shire Inc.
New York, New York
We have audited the accompanying statement of financial condition of Klein
Maus & Shire, Inc. as of December 31, 1996 and the related statements of
operations, cash flows and stockholders' equity for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Klein Maus & Shire, Inc. as
of December 31, 1996, and the results of its operations, cash flows and
stockholders' equity for the year then ended in conformity with generally
accepted accounting principles.
Lilling & Company
Great Neck, New York
February 5, 1997
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
KHAN, EDWARDS & COMPANY
New York, New York
We have audited the accompanying statement of financial condition of KHAN,
EDWARDS & COMPANY as of December 31, 1995 and the related statements of
operations, changes in shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KHAN, EDWARDS & COMPANY as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Hagan & Burns CPA's, P.C.
New York, New York
April 5, 1996
F-25
<PAGE>
KLEIN MAUS & SHIRE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash (Note 2) ........................................................ $ 17,461 $ 359,130
Deposit at clearing broker (Note 5) .................................. -- 103,285
Due from clearing broker ............................................. 255,651 --
Securities owned at market value (Note 7) ............................ 361,506 99,729
Fixed assets--at cost, less accumulated depreciation and
amortization [Notes 2(c) and 8] ..................................... 103,122 197,621
Other assets (Note 6) ................................................ 195,098 118,947
------------ ------------
Total Assets ...................................................... $ 932,838 $ 878,712
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses .................................................... $ 213,644 $ 250,584
Due to clearing broker (Note 5) ..................................... -- 32,250
Securities sold, not yet purchased at market value (Note 7) ......... 1,113 1,575
Capitalized lease obligations (Note 9) .............................. -- 46,179
------------ ------------
Total Liabilities ................................................. 214,757 330,588
------------ ------------
Commitments and cotingencies (Note 10)
Stockholders' equity:
Preferred stock, $.001 par value; 3,333,400 shares authorized;
504,009 (1996) and 773,275 (1997) shares issued and
outstanding ....................................................... 504 773
Common stock, $.001 par value; 22,222,667 shares authorized;
18,889,267 shares issued and outstanding .......................... -- 18,889
Paid-in capital ..................................................... 1,967,195 3,180,537
Deficit ............................................................. (1,249,618) (2,652,075)
------------ ------------
Total stockholders' equity ........................................ 718,081 548,124
------------ ------------
Total liabilities and stockholders' equity ........................ $ 932,838 $ 878,712
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE>
KLEIN MAUS & SHIRE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996* 1997
-------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Commissions on customer trades ........................ $ -- $ 243,097 $ 863,673
Trading income [Notes 2(a) and (b)] ................... -- 5,892 1,658,197
Other income .......................................... 1,031 -- 354,671
Interest income--net .................................. -- -- 37,656
------ ------------ ------------
Total revenue ....................................... 1,031 248,989 2,914,197
------ ------------ ------------
Expenses:
Officers' compensation ................................ -- -- 379,039
Compensation and related expenses ..................... -- 481,678 1,326,168
Clearance and floor brokerage ......................... -- 68,385 158,184
Occupancy, office, and administrative expense ......... 530 525,427 668,104
Professional fees ..................................... -- 310,032 273,039
Communications ........................................ -- 68,343 317,447
Regulatory fees and expenses .......................... -- 44,608 93,919
Other expenses (Notes 4 and 11) ....................... -- -- 1,100,754
------ ------------ ------------
Total expenses ...................................... 530 1,498,473 4,316,654
------ ------------ ------------
Net income (loss) ...................................... $ 501 $ (1,249,484) $ (1,402,457)
====== ============ ============
</TABLE>
- ----------
* Amounts from 1996 have been reclassified to conform with the 1997
presentation.
The accompanying notes are an integral part of this statement.
F-27
<PAGE>
KLEIN MAUS & SHIRE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -------------------------
NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- -------- ------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
January 1, 1995 ......... -- $ -- -- $ 9,890 $ -- $ (635) $ 9,255
Capital contribution ..... -- -- -- 2,094 -- 2,094
Distribution ............. -- -- -- (9,890) -- -- (9,890)
Net income ............... -- -- -- -- -- 501 501
-- ---- -- -------- ---------- ------------ ------------
Balance--
December 31, 1995 ....... -- -- -- -- 2,094 (134) 1,960
Issuance of shares ....... 504,009 504 -- -- 1,965,101 -- 1,965,605
Net loss ................. -- -- -- -- -- (1,249,484) (1,249,484)
------- ---- -- -------- ---------- ------------ ------------
Balance--
December 31, 1996 ....... 504,009 $504 -- $ -- $1,967,195 $ (1,249,618) $ 718,081
Issuance of shares ....... 269,266 269 18,889,267 18,889 1,213,342 -- 1,232,500
Net loss ................. -- -- -- -- -- (1,402,457) (1,402,457)
------- ---- ---------- -------- ---------- ------------ ------------
Balance--
December 31, 1997 ....... 773,275 $773 18,889,267 $ 18,889 $3,180,537 $ (2,652,075) $ 548,124
======= ==== ========== ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE>
KLEIN MAUS & SHIRE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
----------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 501 $ (1,249,484) $ (1,402,457)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .......................... -- 10,911 33,493
Increase in deposit at clearing broker ................. -- -- (103,285)
(Increase) decrease in securities owned ................ -- (361,506) 261,777
(Increase) decrease in other assets .................... -- (195,097) 76,150
(Increase) decrease in due from/to clearing
brokers, net .......................................... -- (255,651) 287,901
Increase in securities sold, not yet purchased ......... -- 1,113 462
Increase in accrued expenses ........................... -- 213,643 36,941
-------- ------------ ------------
Total adjustments ..................................... -- (586,587) 593,439
-------- ------------ ------------
Net cash used by operating activities ............... 501 (1,836,071) (809,018)
-------- ------------ ------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leasehold
improvements ........................................... -- (114,033) (127,992)
-------- ------------ ------------
Cash flows from financing activities:
Increase in capitalized lease obligation, net ............ -- -- 46,179
Proceeds from issuance of preferred and common
stock .................................................. 2,094 1,965,605 1,232,500
Distribution to stockholder .............................. (9,890) -- --
-------- ------------ ------------
Net cash (used) provided by financing
activities ......................................... (7,796) 1,965,605 1,278,679
-------- ------------ ------------
Net increase (decrease) in cash ........................... (7,295) 15,501 341,669
Cash--beginning of year ................................... 9,255 1,960 17,461
-------- ------------ ------------
Cash--end of year ......................................... $ 1,960 $ 17,461 $ 359,130
======== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ....................................... $ -- $ 4,513 $ 20,383
======== ============ ============
Income taxes ........................................... $ -- $ -- $ 2,800
======== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Klein, Maus & Shire, Inc. ("KMS") is a registered broker-dealer of
securities under the Securities and Exchange Act of 1934, as amended. It became
a subsidiary of United States Financial Group, Incorporated ("USFG") in March
1997 when its then sole stockholder exchanged all of KMS' outstanding common
stock for 18,889,267 shares of USFG's common stock. KMS services institutional,
corporate, government and individual clients and conducts business in
securities underwriting, sales and trading of securities for its own account
and that of clients. KMS has entered into a clearing arrangement with another
broker-dealer under which that broker-dealer clears KMS' securities
transactions on a fully disclosed basis.
KMS is an Indiana corporation with its principal offices located at 110
Wall Street, New York, New York. It is authorized to issue up to 22,222,667
shares of common stock and 3,333,400 shares of preferred stock. Each share of
Common Stock entitles the holder thereof to one vote. There are no cumulative
voting rights or privileges. The preferred shares are nonvoting and do not have
a stated dividend rate. Holders of the preferred shares do receive preference
over holders of common shares in the event of liquidation.
KMS issued 773,275 shares of Series A Convertible Preferred Stock in 1996
and 1997 pursuant to a Private Placement Offering memorandum dated April 15,
1996. Each such share is convertible into one share of Common Stock. The
conversion feature remains in effect for a period of three years from the date
of issuance. The preferred share agreement will be amended to permit the
holders of Preferred Shares to convert such shares into an equal number of
Common Shares of USFG.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
A summary of KMS' significant financial accounting and reporting policies
follows.
a. Revenue Recognition
Securities transactions and related revenue are recorded on a trade date
basis. Managers' fees, underwriters' fees, and other underwriting revenues are
recognized at the time the underwriting is completed.
b. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective values due
to the short maturities of these instruments. The fair values of securities
owned and securities sold, not yet purchased are recorded primarily at quoted
market prices. Changes in the market value of these securities are recorded
currently in the results of operations for the year.
c. Fixed Assets
Fixed assets are stated at cost less accumulated depreciation or
amortization. Depreciation of furniture, fixtures, and equipment is computed
generally by the straight-line method over their estimated useful lives of five
years. Leasehold improvements are amortized over the lesser of their estimated
useful life or the remaining lives of their respective leases.
d. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash due from banks and brokerage accounts, certificates of deposit and highly
liquid debt instruments purchased with a maturity of three months or less.
F-30
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING (CONTINUED)
e. Income Taxes
KMS and USFG intend to file a consolidated Federal corporation income tax
return for the year ended December 31, 1997. No deferred tax asset has been
established by KMS because of the uncertainty in utilizing net operating loss
carryforwards. Net operating loss carryforwards amount to approximately
$1,800,000 expiring in 2011 and 2012.
f. Credit Risks
KMS maintains its cash accounts primarily with one bank. KMS had on
deposit with such bank at December 31, 1997 an amount that exceeded the balance
insured by the FDIC in the amount of $257,070.
KMS executes, as agent, securities transactions on behalf of its
customers. KMS as a nonclearing broker does not handle any customer funds or
securities. The responsibility for processing customer activities resides with
KMS' clearing agent, Cowen & Company. KMS' customers are located throughout the
United States as well as in foreign countries.
g. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 3 -- REGULATORY MATTERS
KMS is subject to the Securities and Exchange Commission's uniform net
capital rule (Rule 15c3-1) which requires the maintenance of minimum net
capital, as defined, and also requires that the ratio of aggregate indebtedness
to aggregate net capital shall not exceed 15 to 1. Dividends may not be paid
nor capital withdrawn if such action results in the ratio of aggregate
indebtedness to aggregate net capital exceeds 10 to 1. At December 31, 1997,
KMS' aggregate net capital as defined was $234,481 (compared to a requirement
of $100,000) and its ratio of aggregate indebtedness to aggregate net capital
was 1.40 to 1 (compared to a requirement of 15 to 1).
KMS is subject to the rules and regulations promulgated by various
Federal, state and industry regulatory and governmental agencies, including the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. (the "NASD"). Failure to comply with rules and regulations of
these organizations could result in fine, suspension or other civil or criminal
remedies. Certain of these regulatory bodies perform audits or other procedures
to ensure compliance with their rules and regulations. The NASD completed an
audit of KMS in February 1998, at which time it issued a preliminary letter of
audit findings in which it set forth certain alleged exceptions and areas of
noncompliance noted during the performance of its audit procedures, including
alleged deficiencies in written supervisory procedures, violations of the
firm's restriction letter with respect to the number of securities for which it
can make market record keeping violations with respect to new customer accounts
and options agreement forms, discrepancies on tickets relating to trades,
violations of rules relating to principal markup/markdown transactions on
corporate equities and various administrative deficiencies. Based on the review
of the letter and on discussions with the NASD auditors, the management of KMS
and its counsel do not believe that the ultimate resolution of the matters
described in such letter will have a material adverse effect on KMS' financial
position or operations. However, the ultimate outcome of this matter cannot be
determined at this time. As of April 10, 1998, the NASD has not issued any
further correspondence to KMS or had further discussions with KMS' management
concerning its audit.
F-31
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- WRITE-OFF OF ADVANCES TO USFG
At December 31, 1997, USFG was obligated to KMS in the amount of $818,271
representing net advances made to USFG for various purposes. These advances are
unsecured, have no specified maturity dates and bear interest at 8%. Interest
income includes $46,346 of interest earned on advances to USFG.
USFG utilized the funds advanced from KMS and $200,000 it raised from
issuing its Preferred Stock principally to pay legal, travel, and related
expenses connected with filing an application for an investment banking license
in Bahrain, for compensation paid on behalf of its officer/stockholder and to
purchase fixed assets.
USFG intends to repay such advances from the proceeds of an initial public
offering of its common stock. Accordingly, it will file a Registration
Statement on Form S-1 with the Securities and Exchange Commission. However, no
assurances can be given that such public offering will be successful. An
allowance for the net advances of $818,271, including interest was recorded by
KMS at December 31, 1997 (see Note 11).
NOTE 5 -- RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
ORGANIZATIONS
KMS introduces all customer transactions in securities traded on U.S.
securities markets to its clearing broker on a fully-disclosed basis. The
agreement between KMS and its clearing broker provides that KMS is obligated to
assume any exposure related to nonperformance by customers or counterparties.
KMS monitors clearance and settlement of all customer transactions on a daily
basis. In accordance with the clearing agreement, KMS deposited with Cowen &
Company $100,000 in a standby money reserve fund which earns interest at a rate
defined in the agreement.
The exposure to credit risk associated with the nonperformance of
customers and counterparties in fulfilling their contractual obligations
pursuant to these securities transactions can be directly impacted by volatile
trading markets which may impair the customer's or counterparty's ability to
satisfy their obligations to KMS. In the event of nonperformance, KMS may be
required to purchase or sell financial instruments at unfavorable market prices
resulting in a loss. Management does not anticipate material instances of
nonperformance by customers and counterparties in the above situations.
NOTE 6 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ----------
<S> <C> <C>
Employee and broker receivables ......... $102,144 $ 44,341
Prepaid expenses ........................ 92,954 44,497
Deposits ................................ -- 30,109
-------- --------
$195,098 $118,947
======== ========
</TABLE>
The employee and broker receivables relate principally to advances and
expenses in excess of commission earnings and inventory losses charged to
registered representatives.
NOTE 7 -- TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by KMS. The cost of such
securities was $1,200 (1996) and $1,659 (1997).
F-32
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Furniture and fixtures .......... $ 56,706 $ 77,245
Equipment ....................... 57,327 132,478
Leasehold improvements .......... -- 32,302
-------- --------
114,033 242,025
Less accumulated depreciation and
amortization ........................... 10,911 44,404
-------- --------
$103,122 $197,621
======== ========
</TABLE>
NOTE 9 -- CAPITALIZED LEASE OBLIGATIONS
Included in fixed assets are the following assets held under capital
leases:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- ----------
<S> <C> <C>
Equipment ........................ $ -- $52,003
Accumulated depreciation ......... -- 5,200
----- -------
$ -- $46,803
===== =======
</TABLE>
Future minimum lease payments for assets under capital leases are as
follows:
<TABLE>
<S> <C>
1998 ............................................... $16,304
1999 ............................................... 16,304
2000 ............................................... 16,304
2001 ............................................... 16,304
2002 ............................................... 3,682
-------
Total minimum lease payments ....................... 68,898
Less amount representing interest .................. 22,719
-------
Present value of net minimum lease payments ........ $46,179
=======
</TABLE>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
a. Litigation
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demanded compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000 payable in five
equal monthly installments commencing April 1998.
F-33
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
b. Lease Agreements
KMS is obligated under certain noncancelable operating lease agreements
for office space. Future minimum cash payments, by year and in the aggregate,
required by such leases with initial or remaining terms of one year or more
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ -----------
<S> <C>
1998 .................... $310,000
1999 .................... $315,000
2000 .................... $315,000
2001 .................... $315,000
2002 .................... $210,000
</TABLE>
Rent expense charged to operations amounted to $ -0-, $127,000, and
$269,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
KMS recognizes rent expense on a straight-line basis over the lease terms
of its two operating leases for office space. During the initial six month
periods of each lease, monthly payments were substantially reduced pursuant to
each lease. Accordingly, KMS recorded an accrued liability during these periods
which is amortized in subsequent periods by the excess of the monthly payments
over the monthly expense during the remainder of the leases' terms.
NOTE 11 -- OTHER -- EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
<TABLE>
<S> <C>
Settlement of third-party guarantee ......... $ 282,483
Provision for write-off of amount due from
USFG (Note 4) ......................................... 818,271
----------
Total ..................................... $1,100,754
==========
</TABLE>
F-34
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents .............................................. $ 124,457
Deposit at clearing broker ............................................. 143,079
Due from clearing broker ............................................... 994,381
Securities owned at market value ....................................... 50,655
Accounts receivable .................................................... 573,332
Inventories ............................................................ 346,100
Fixed assets at cost, net of accumulated depreciation and amortization . 336,868
Due from officers/stockholders ......................................... 92,335
Other assets (including deferred offering costs of $279,989) ........... 546,386
Goodwill ............................................................... 7,289,789
Total Assets .......................................................... $ 10,497,382
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bridge financing payable, net of discount of $83,956................... $ 516,044
Notes payable to officers/stockholders and others ..................... 645,153
Accounts payable ...................................................... 456,692
Accrued expenses, and other ........................................... 931,600
Securities sold, not yet purchased at market value .................... 224,373
Long-term capitalized lease obligations ............................... 77,393
------------
Total Liabilities ................................................... 2,851,255
------------
Minority interest ...................................................... 740
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
40,000 shares issued and outstanding ................................ 4
Common stock, $.0001 par value; 30,000,000 shares authorized;
10,704,636 shares issued and outstanding ............................ 1,070
Paid-in capital ....................................................... 10,950,166
Deficit ............................................................... (3,305,853)
------------
Total stockholders' equity .......................................... 7,645,387
------------
Total liabilities and stockholders' equity .......................... $ 10,497,382
============
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-35
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Revenues:
Sales .................................................. $ -- $ 948,354
Cost of Sales .......................................... -- 709,223
Net ..................................................... -- 239,131
---------- -----------
Commissions on brokerage trades ........................ 581,827 85,510
Trading income ......................................... 1,096,270 1,699,363
Other income ........................................... 48,954 148,017
---------- -----------
Total revenue .......................................... 1,727,051 2,172,021
---------- -----------
Expenses:
Officers' compensation ................................. 377,258 509,781
Compensation and related expenses ...................... 779,702 610,471
Clearance and floor brokerage .......................... 84,058 66,491
Occupancy, office, and administrative expense, including
interest expense of $11,960 and $121,745.............. 312,872 828,405
Professional fees ...................................... 101,428 317,195
Communications ......................................... 163,841 100,779
Regulatory fees and expenses ........................... 67,030 54,378
Other expenses, including goodwill amortization of
$123,749 (1998)....................................... 789,831 135,749
---------- -----------
Total expenses ....................................... 2,676,020 2,623,249
---------- -----------
Net loss ................................................ $ (948,969) $ (451,228)
========== ===========
Basic Loss Per Share .................................... $ (.10) $ (.04)
========== ===========
Weighted Average Number of Shares Outstanding ........... 9,944,634 10,704,636
========== ===========
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-36
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- -----------------------
PAR VALUE NUMBER PAR VALUE
NUMBER OF $.0001 OF $.0001 PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ----------- ------------ ---------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
December 31, 1997 ......... 40,000 $4 10,694,634 $1,069 $10,900,104 $ (2,854,625) $8,046,552
Issuance of shares .......... 10,002 1 150,029 150,030
Net loss .................... (451,228) (451,228)
Retirement of subsidiary's
preferred shares ........... (99,967) (99,967)
------ -- ---------- ------ ------------ ----------
Balance--
June 30, 1998 ............. 40,000 $4 10,704,636 $1,070 $10,950,166 $ (3,305,853) $7,645,387
====== == ========== ====== =========== ============ ==========
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-37
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................. $ (948,969) $ (451,228)
---------- ------------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization .................................... 14,128 233,922
(Increase) decrease in deposit at clearing broker ................ 145,488 (39,794)
Decrease in securities owned ..................................... 132,531 49,074
(Increase) decrease in accounts receivable ....................... -- (569,101)
Increase in inventories .......................................... -- (227,546)
(Increase) in other assets ....................................... 23,709 (396,259)
Increase in notes receivable ..................................... -- --
(Increase) decrease in due from/to clearing brokers, net ......... 266,948 (1,026,631)
Increase (decrease) in accounts payable .......................... 275,098 363,676
Increase in accrued expenses ..................................... 186,484 668,196
Increase in securities sold, not yet purchased ................... (680) 222,798
Increase in notes payable ........................................ -- 435,153
---------- ------------
Total adjustments ............................................... 509,810 (286,512)
---------- ------------
Net cash (used by) provided by operating activities ........... (439,159) (737,740)
---------- ------------
Cash flows from investing activities:
Purchase of fixed assets ........................................... (141,861) (63,510)
---------- ------------
Cash flows from financing activities:
Bridge loan financing, net ......................................... -- 449,970
Increase in capitalized lease obligations, net ..................... 48,980 31,214
Capital contributions, including from minority interest ............ 1,232,500 150,030
Retirement of preferred shares of subsidiary ....................... -- (100,000)
---------- ------------
Net cash provided by financing activities ..................... 1,281,480 531,214
---------- ------------
Net increase in cash ................................................ 700,460 (270,036)
Cash--beginning of period ........................................... 17,461 394,493
---------- ------------
Cash--end of period ................................................. $ 717,921 $ 124,457
========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ................................................. $ 11,960 $ 12,451
========== ============
Income taxes ..................................................... $ 2,800 $ 5,855
========== ============
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-38
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998 (UNAUDITED)
NOTE 1 -- GENERAL
In the opinion of management of United States Financial Group,
Incorporated and subsidiaries (the "Company"), the accompanying unaudited
condensed consolidated financial statements as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998 include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation. The statements
should be read in conjunction with the consolidated financial statements and
the related notes included elsewhere in this Prospectus. The results of
operations for the six months ended June 30, 1997 and 1998 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 -- SEGMENT INFORMATION
The Company's operations are now reported in two segments. KMS is a
broker-dealer of securities and Sureal is a direct marketing company involved
in the distribution of personal care and nutritional products in Russia and
other republics of the former Soviet Union.
Identifiable assets are those assets used exclusively in the operations of
each business segment. Corporate assets are principally cash and other assets.
Corporate assets include prepaid and deferred expenses of approximately
$460,000 at June 30, 1998.
A summary of segment data for the six months ended June 30, 1997 and 1998
follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
JUNE 30, 1997 SUREAL KMS CORPORATE ELIMINATIONS TOTAL
- ------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues ....................... -- $1,727,051 $ $ $ 1,727,051
-- --
Operating (losses) ................. -- (179,865) (769,104) -- (948,969)
Identifiable assets ................ -- 2,495,356 481,832 (1,250,936) 1,726,252
JUNE 30, 1998
- -------------------------------------
Net revenues ....................... $ 242,294 $2,267,146 $ 2,581 $ 340,000 $ 2,172,021
Operating profits (losses) ......... (362,180) 596,015 (221,314) (463,749) (451,228)
Identifiable assets ................ 1,152,424 1,622,526 7,957,643 235,211 10,497,832
</TABLE>
Capital expenditures and depreciation expense were not significant during
the periods presented.
NOTE 3 -- BRIDGE FINANCING
From January through March 1998, the Company sold 12 units of Bridge
Financing. Each Unit consists of (i) a 10 percent Promissory Note in the
principal amount of $50,000 due one year from the date of issuance and (ii)
1,667 shares of the Company's Common Stock. The holders of such shares have
certain registration rights. For financial reporting purposes, a portion of the
net proceeds was allocated to the value of the Common Stock. The resulting debt
discount of $150,030 (which was determined based on fair value estimate of $15
per share) is being amortized to expense over the term of the Promissory Notes.
Such expense recognized for the six months ended June 30, 1998 amounted to
$66,084.
NOTE 4 -- LEGAL MATTERS
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demanded compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000 payable in five
equal monthly installments commencing April 1998.
F-39
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1998 (UNAUDITED)
NOTE 5 -- STOCK OPTION PLAN
The United States Financial Group, Incorporated 1998 Stock Incentive Plan
(the "Plan"), which expires ten years from the date adopted, enables the
Company to grant incentive stock options, nonqualified options and stock
appreciation rights ("SARs") for up to 1,000,000 shares of the Company's Common
Stock. Incentive stock options granted under the Plan must conform to
applicable Federal income tax regulations and have an exercise price not less
than the fair market value of shares at the date of grant (110% of fair market
value for ten percent or more stockholders). Other options and SARs may be
granted on terms determined by a committee of the Board of Directors. As of
June 30, 1998, no options were outstanding under the Plan.
F-40
<PAGE>
===============================================================================
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Cover Page .................................. 1
Prospectus Summary .......................... 3
Summary Financial Information ............... 5
Risk Factors ................................ 6
Dilution .................................... 16
Use of Proceeds ............................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 18
Business .................................... 23
Capitalization .............................. 37
Management .................................. 38
Principal and Selling Shareholders .......... 42
Certain Transactions ........................ 43
Underwriting ................................ 44
Description of Capital Stock ................ 46
Dividends ................................... 46
Reports to Shareholders ..................... 46
Transfer Agent and Registrar ................ 46
Legal Proceedings ........................... 47
Experts ..................................... 47
Indemnification ............................. 45
Further Information ......................... 47
Consolidated Financial Statements ........... F-1
</TABLE>
2,025,000 SHARES
UNITED STATES FINANCIAL GROUP, INCORPORATED
COMMON STOCK
----------------
PROSPECTUS
----------------
KASHNER DAVIDSON
SECURITIES CORP.
October , 1998
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 22. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has a provision in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors officers and controlling
persons of the Company 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 Company
of expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 23. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses payable by the Registrant other than underwriting
commissions payable to the Underwriter in connection with the registration and
distribution of the Common Stock registered hereby are as follows:
<TABLE>
<S> <C>
SEC filing fee ................................. $ 12,154.37
NASD filing fee ................................ $ 4,620.53
NASDAQ listing fee ............................. $ 87,000.00
"Blue sky" filing fees and expenses ............ $ 15,000*
Printing Expenses .............................. $ 75,000*
Transfer agent and registrar's fees ............ $ 10,000*
Legal fees and expenses ........................ $ 125,000*
Accounting and other professional fees ......... $ 125,000*
Miscellaneous .................................. $ 46,225.10*
------------
TOTAL .......................................... $ 500,000*
============
</TABLE>
- ----------
* estimated
ITEM 24. RECENT SALES OF UNREGISTERED SECURITIES.
The following common shares have been issued or are issuable pursuant to
existing agreements:
<TABLE>
<S> <C>
Shares issue to effect the merger with Klein, Maus & Share, Inc. ....... 9,444,634(1)
Shares issued to effect the merger with Sureal International, Inc. ..... 750,000(2)
Shares issued with bridge financing .................................... 10,002(3)
Shares reserved for conversion of preferred shares ..................... 813,000(3)
</TABLE>
- ----------
(1) Shares issued at inception in exchange for shares of KMS
(2) Shares issued in exchange for shares of Sureal
(3) Shares issued pursuant to exemption from registration made available
under Section 4(2) and the rules thereunder of the Securities Act of
1933, as amended
II-1
<PAGE>
ITEM 25. EXHIBITS.
The following exhibits can be found as exhibits to the filings listed.
<TABLE>
<S> <C>
1 Form of Underwriting Agreement**
1.1 Form of Underwriters' Warrant Agreement**
3.1 Articles of Incorporation*
3.2 By-Laws*
4.1 Specimen Certificate for Common Stock***
5 Opinion of Doros & Brescia, P.C.*
10.1 Employment Agreement -- Mohammad Ali Khan*
10.2 Employment Agreement -- Asim S. Kohli*
10.3 Employment Agreement -- R. Bret Jenkins*
10.4 Employment Agreement -- Richard Wogksch*
10.5 Employment Agreement -- Glen Jensen*
10.6 Consulting Agreement with EH Associates*
10.7 Stock Option Plan*
10.8 Lease Agreement -- 110 Wall Street, New York*
10.9 Lease Agreement -- Orem, Utah*
10.10 Clearing Agreement with Cowen & Company*
10.11 Share Exchange Agreement between United States Financial Group,
Incorporated and Sureal International, Inc.*
16.1 Letter from Lilling & Company**
16.2 Letter from Hagan & Burns CPAs, P.C.**
22.1 Consent of Eichler, Bergsman & Co., LLP**
22.2 Consent of Lilling & Company**
22.3 Consent of Hagan & Burns CPAs, PC**
22.4 Consent of Doros & Brescia, P.C.**
</TABLE>
- ----------
* Previously filed
** Filed herewith
*** To be filed by Amendment
ITEM 26. UNDERTAKINGS.
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission hereto before or hereafter duly adopted pursuant
to authority conferred in that section.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each Purchaser.
II-2
<PAGE>
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The Registrant further 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.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b). If, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective 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 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this S-1 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 13th day of October, 1998.
UNITED STATES FINANCIAL GROUP,
INCORPORATED
By /s/ Mohammad Ali Khan
---------------------------------------------
Mohammad Ali Khan, President
/s/ William Triebel
---------------------------------------------
William Triebel, Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Mohammad Ali Khan President and Director October 13, 1998
- ------------------------------- (Principal Executive Officer)0
Mohammad Ali Khan
/s/ William Triebel Principal Financial October 13, 1998
- ------------------------------- Officer
William Triebel
/s/ Asim S. Kohli Director October 13, 1998
- -------------------------------
Asim S. Kohli
/s/ A. Rushdi Siddiqui Director October 13, 1998
- -------------------------------
A. Rushdi Siddiqui
/s/ Edward A. Heil Director October 13, 1998
- -------------------------------
Edward A. Heil
Director October 13, 1998
- -------------------------------
R. Bret Jenkins
/s/ Maurice Gross Director October 13, 1998
- -------------------------------
Maurice Gross
/s/ Steven Jacobson Director October 13, 1998
- -------------------------------
Steven Jacobson
/s/ Joseph Antonini Director October 13, 1998
- -------------------------------
Joseph Antonini
/s/ Jamil Asghar Director October 13, 1998
- -------------------------------
Jamil Asghar
/s/ Leonard Yablon Director October 13, 1998
- -------------------------------
Leonard Yablon
/s/ Jaffer Naqvi Director October 13, 1998
- -------------------------------
Jaffer Naqvi
</TABLE>
II-4
<PAGE>
UNITED STATES FINANCIAL GROUP INCORPORATED
2,025,000 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
[______], 1998
Kashner Davidson Securities Corporation
As Representatives of the
several Underwriters named
in Schedule A
annexed hereto
c/o Kashner Davidson Securities Corporpation
77 South Palm Avenue
Sarasota, FL 34236
Dear Sirs:
United States Financial Group Incorporated, a Delaware
corporation (the "Company"), hereby confirms its agreement with Kashner
Davidson Securities Corporation (the "Underwriter") and each of the
underwriters named in Schedule A hereto for whom Kashner Davidson Securities
Corporation is acting as the representative with respect to the sale of the
Company's Common Stock (as hereinafter defined), set forth in Schedule A, as
follows:
1. Description of the Securities.
The Company proposes to issue and sell to the Underwriter
2,025,000 shares of the Company's common stock, $.0001 par value per share (the
"Common Stock" or the "Securities"). The Company proposes to grant to the
Underwriter an option to purchase up to 303,750 additional shares of Common
Stock (the "Additional Securities"). An offering of Securities and Additional
Securities contemplated hereby may sometimes be referred to as the "Offering."
The Company will sell to the Underwriter, for nominal
consideration, a warrant to purchase 202,500 shares of Common Stock at a price
of 120% the public offering price of the Common Stock, exercisable over a
period of four years commencing one year from the Effective Date (the
"Underwriter's Warrants," and collectively with the Securities underlying the
Underwriter's Warrants, the "Underwriter's Securities"). The Underwriter's
Securities shall be non-
<PAGE>
exercisable and non-transferable (other than to officers and directors of the
Underwriter and to members of the selling group) for a period of 12 months
following the Effective Date. If the Underwriter's Securities are not exercised
during their term, they shall, by their terms, automatically expire.
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 SB-2
(File No. 33- _________), including any related preliminary prospectus
("Preliminary Prospectus"), for the registration of the Securities 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 "Prospectus." 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
and to except as such omission has been cured in the a subsequent preliminary
prospectus or in the final prospectus.
(c) When the Registration Statement becomes
effective under the Act and at all times subsequent thereto including the
Closing Date (hereinafter defined) and the Option Closing Date (as hereinafter
defined in Section 5(d)) and for such longer periods as in the opinion of
counsel for the Underwriter, a Prospectus is required to be delivered in
connection with the sale of the Securities 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
2
<PAGE>
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 written
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 the statements set forth
under the heading "Underwriting" in the Prospectus with respect to (i) the
amounts of the selling concession and reallowance; (ii) the identity of counsel
to the Underwriter under the heading "Legal Matters"; and (iii) the information
concerning the NASD affiliation of the Underwriter.
(d) The Company is, and at the Closing Date and the
Option Closing Date will be, a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. The Company is duly
qualified or licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing, except
those jurisdictions in which the failure to so qualify would not have a
material adverse effect. The Company has all requisite corporate powers and
authority, and except as set forth in the Registration Statement the Company
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 the Company's properties and
conduct its business as described in the Prospectus and the Company is doing
business and has 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 is engaged. The disclosures in the Registration Statement
concerning the effects of federal, state and local regulation on the Company's
business as currently conducted and as contemplated are correct in all material
respects and do not omit to state a material fact. The Company has all
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 Securities and the Underwriter's
Warrant to be issued and sold by the Company pursuant to this Agreement, the
securities issuable upon exercise of the Underwriter's Warrant and payment
therefor, and the Common Stock underlying such Underwriter's Warrants, have
been duly authorized (and, in the case of the Common Stock, have been duly
reserved for issuance) and, when issued and paid for in accordance with this
Agreement, the Common Stock will be validly issued, fully paid and
non-assessable; the Common Stock, Underwriter's Securities and Additional
Securities and Underwriter's Securities 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
3
<PAGE>
Registration Statement and Prospectus; and all corporate action required to be
taken for the authorization, issuance and sale of the Common Stock and
Underwriter's Warrant 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, as amended, 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, 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 such as may be required under the Act or under state
securities or blue sky laws, except where a breach, violation or failure to
obtain such consent would not have a material adverse effect upon the business
or operation of the Company.
(g) Subsequent to the date hereof, and prior to the
Closing Date and the Option 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. Except as
described in the Registration Statement, the Company does not have, and at the
Closing Date and at the Option 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 preferred stock, 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 and at the Option
Closing Date will not be, in violation or breach of, or default in, 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 violations, breaches, default or defaults, singularly or in the
4
<PAGE>
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, as amended, 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 and at
the Option 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, 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 and the Option Closing Date 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 (which would have a material adverse effect on the business,
business prospects or operations of the Company taken as a whole).
(k) The authorized, issued and outstanding capital
stock of the Company as of ___________, 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, 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 Securities 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.
5
<PAGE>
(m) Eichler Bergsman & Co., LLP, who have reported
on the financial statements of the Company for the years ended December 31,
1997 and 1996, and who have reviewed the financial statements of the Company
for the periods ended September 30, 1998 and 1997 all of which are filed with
the Commission as a part of the Registration Statement, 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 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
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 pending 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 and at
the Option 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.
6
<PAGE>
(s) On the Closing Date and on the Option 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 Securities 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 in all material
respects.
(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 will apply the net proceeds from the
sale of the Securities 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 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.
(w) 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.
(x) 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,
to facilitate the sale or resale of such securities.
(y) To the Company's knowledge, there are no claims
for services in the nature of a finder's origination fee with respect to the
sale of the Securities hereunder, except as set forth in the Prospectus.
(z) No right of first refusal exists with respect to
any sale of securities by the Company.
(aa) 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 Underwriter was, when
made, or as of the Closing Date or as of the Option Closing Date will be
materially inaccurate, untrue or incorrect.
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3. Covenants of the Company.
The Company covenants and agrees that:
(a) It will deliver to the Underwriter, without
charge, two conformed copies of each Registration Statement and of each
amendment or supplement thereto, including all financial statements and
exhibits.
(b) The Company has delivered to the Underwriter,
and each of the Selected Dealers (as hereinafter defined) without charge, as
many copies as have been 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 others whose
names and addresses are furnished by the Underwriter or a Selected Dealer,
without charge, on the Effective Date of the Registration Statement, and
thereafter from time to time during such reasonable period as you 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 the 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 directed by the
Underwriter, 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 desirable,
in order to permit or facilitate the sale of the Securities.
(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 you in
connection with the distribution of the Securities (the "Selected Dealers") to
be purchased by the Underwriter and all dealers to whom any of such Securities
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 Securities in accordance with the applicable provisions of the
Act, the applicable Regulations and applicable state law, until completion of
the distribution of the Securities and for such longer period as you 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
Securities by the Underwriter or the Selected Dealers.
(d) The Company will use its best efforts to cause
the Registration Statement to become effective and will notify the
Representative 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 to the best of the Company's knowledge, the threatening, of any
proceedings for that purpose; (iii) the suspension of the qualification of the
Securities and the Underwriter's Warrants, or underlying securities, for
offering or sale in any jurisdiction or of the initiating, or to the best of
the Company's knowledge the threatening, of any proceeding for that purpose;
and (iv) of the receipt of any
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<PAGE>
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 Securities Exchange Act of 1934 (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 Securities in accordance with the provisions hereof and the
Prospectus. If at any time when a prospectus relating to the Securities 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 or 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 you 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 you copies thereof.
(f) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time the Registration Statement
becomes effective, to qualify the Securities for offering and sale under the
securities laws or blue sky laws of such jurisdictions as you may reasonably
designate. In each jurisdiction where such qualification shall be effected, the
Company will, unless you agree 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.
(h) During the period of five years 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 (i) within 90 days after the end of each fiscal year of
the Company, a consolidated balance sheet of the Company and its 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
9
<PAGE>
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 45 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.
(i) For a period of eighteen months from the Closing
Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit), 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 quarterly report and the mailing of quarterly financial
information to stockholders.
(j) Prior to the Closing Date or the Option Closing
Date, the Company will not issue, directly or indirectly, without your prior
written consent and that of counsel for the Underwriter, any press release or
other public announcement or hold any press conference with respect to the
Company or its activities with respect to this Offering.
(k) The Company will deliver to you 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 you 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 Securities to facilitate the sale or resale of any of the Securities.
(m) The Company will apply the net proceeds from the
Offering received by it in the manner set forth under "Use of Proceeds" in the
Prospectus. For a period of three years from the Closing, the Company will not
make any loans or engage in any transactions with any officer, director or
shareholder of the Company, or any person, corporation or other entity
affiliated with such persons, without the approval of the independent Audit
Committee.
(n) 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
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amendment to the Registration Statement relating to the offering of the
Securities or any amendment or supplement to the Prospectus relating to the
offering of the Securities subsequent to the Effective Date of the Registration
Statement, such counsel, such accountants, such officers and directors,
respectively, will, at the time of such filing or at such subsequent time as
you shall specify, so long as securities being registered by such amendment or
supplement are being underwritten by the Underwriter, furnish to you 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 Paragraphs 9, as you 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 such accountants or such officer or
director will furnish an accurate opinion or letter or certificate with respect
to the same subject matter.
(o) The Company will comply with all of the
provisions of any undertakings contained in the Registration Statement in all
material respects.
(p) The Company will reserve and keep available for
issuance that maximum number of its authorized but unissued shares of Common
Stock which are issuable upon exercise of the Underwriter's Warrant outstanding
from time to time.
(q) The Company's Common Stock shall be listed on
the NASDAQ National Market ("NNM"), or the Nasdaq SmallCap Market ("Nasdaq")
and the Boston Stock Exchange ("BSE"), not later than the Closing Date.
Promptly after the Closing Date, the Company will make all filings required,
including registration under the Exchange Act, to obtain the listing of the
Common Stock on the NNM, or Nasdaq and the BSE, as the case may be, and will
effect and use its best efforts to maintain such listing (unless the Company is
acquired) for at least five years from the date of this Agreement.
(r) The Company will apply for listing in Standard
and Poor's Corporation Reports or Moody's OTC Guide and shall use its best
efforts to have the Company included in such publications for at least five
years from the Closing Date.
(s) Except as contemplated in the Registration
Statement, no person who is currently an officer or director of the Company nor
any stockholder, warrant holder or option holder of the Company shall, without
your written consent, offer for sale, pledge, contract to sell, or sell or
otherwise dispose of directly or indirectly, any shares of the Common Stock of
the Company owned by such stockholder (including shares issuable upon exercise
of existing options and shares issued pursuant to Rule 144 under the Act), on
the date of this Agreement for a period of six months from the Closing Date.
The Company has caused each of its officers, directors, stockholders, warrant
holders and option holders to deliver to you, on or before the date of this
Agreement, an agreement to this effect, in form and substance reasonably
satisfactory to the Underwriter and to counsel for the Underwriter. For a
period of twelve months from the Effective Date, the Company shall not issue
any shares of Common Stock or preferred stock or any warrants, options or other
rights to purchase Common Stock or preferred stock or any other security of the
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<PAGE>
Company without the consent of the Underwriter, with the exception of shares
issued pursuant to the exercise of options, warrants or other convertible
securities outstanding prior to the Effective Date. The Company agrees not to
file any registration statement on Form S-8, during the 24 months following the
Effective Date without prior written approval of the Underwriter.
(t) The Company will use its best efforts to obtain
key person life insurance payable to the Company on the life of M. Ali Kahn in
the amount of $1,000,000; provided, however, that such insurance need not be
maintained on such person if he ceases to be employed by the Company.
(u) The Company will use its best efforts to obtain,
as soon after the Closing Date as is reasonably possible, liability insurance
covering its officers and directors.
(v) The Company agrees that any conflict of interest
arising between a member of the Company's Board of Directors and the Company in
connection with such Director's dealing with, or obligations to, the Company,
shall be resolved by a vote of the majority of the independent members of the
Board of Directors.
(w) The Company agrees that it will not amend the
terms or cancel any employment or consulting agreement without the approval of
the independent Audit Committee.
(x) The Company agrees that it will employ the
services of financial public relations firm acceptable to the Underwriter for a
period of at least twelve months following the Effective Date.
(y) Except as contemplated in the Registration
Statement, no person who is currently an officer or director of the Company or
a holder of more than 5% of the Company's outstanding Common Stock shall,
without the Underwriter's written consent, offer for sale, pledge, contract to
sell, or sell or otherwise dispose of directly or indirectly, any shares of the
Common Stock of the Company owned by such stockholder (including shares
issuable upon exercise of existing options and shares saleable pursuant to Rule
144 under the Act), on the date of this Agreement for a period of 18 months
from the Effective Date. The Company has caused its principal stockholders and
certain other presently existing stockholders to deliver to the Underwriter, on
or before the date of this Agreement, an agreement to this effect, in form and
substance reasonably satisfactory to the Underwriter and to counsel for the
Underwriter.
4. Sale, Purchase and Delivery of Securities;
Closing Date.
(a) The Company agrees to sell to the Underwriter,
and the Underwriter, on the basis of the warranties, representations and
agreements of the Company herein, and subject to the terms and conditions
herein, agrees to purchase the Securities from the Company at a price of $15
per share, less an underwriting discount of ten percent (10%) of the offering
price for each security. The Underwriter may allow a concession not exceeding
[$ ] per share to Selected Dealers
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<PAGE>
who are members of the National Association of Securities Dealers, Inc.
("NASD"), and to certain foreign dealers, and such dealers may allow to NASD
members and to certain foreign dealers a concession not exceeding $.[ ] per
share.
(b) Delivery of the Securities and payment therefor
shall be made at 10:00 A.M., New York time on the Closing Date, as hereinafter
defined, at the offices of Kashner Davidson Securities Corp., 77 South Palm
Avenue, Sarasota, FL 34236, or such other location as may be agreed upon by you
and the Company. Delivery of certificates for the Common Stock (in definitive
form and registered in such names and in such denominations as you shall
request by written notice to the Company delivered at least four business days'
prior to the Closing Date) shall be made to you for the account of the
Underwriter against payment of the purchase price therefor by certified or bank
check or wire transfer payable in New York Clearing House funds to the order of
the Company. The Company will make such certificates available for inspection
at least two business days prior to the Closing Date at such place as you shall
designate.
(c) The "Closing Date" shall be __________, 1998,
which shall be the third business day following the Effective Date of the
Registration Statement or such other date as you shall determine and advise the
Company by at least three full business days' notice.
(d) The cost of original issue tax stamps, if any,
in connection with the issuance and delivery of the Securities by the Company
to the Underwriter shall be borne by the Company. The Company will pay and hold
the Underwriter, and any subsequent holder of the Securities, harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying federal and state stamp taxes, if any, which may be payable or
determined to be payable in connection with the original issuance or sale to
the Underwriter of the Securities or any portions thereof.
5. Sale, Purchase and Delivery of Additional Securities;
Option Closing Date.
(a) The Company agrees to sell to the Underwriter,
and upon the basis of the representations, warranties and agreements of the
Company herein contained, subject to the satisfaction of all the terms and
conditions of this Agreement, the Underwriter shall have the option (the
"Option") to purchase the Additional Securities from the Company, at the same
price per Security as set forth in Paragraph 4(a) above. Additional Securities
may be purchased solely for the purpose of covering over-allotments made in
connection with the distribution and sale of the Securities.
(b) The Option to purchase all or part of the
Additional Securities covered thereby is exercisable by you at any time and
from time to time before the expiration of a period of 45 calendar days from
the date of the Effective Date of the Registration Statement (the "Option
Period") by written notice to the Company setting forth the number of
Additional Securities for which the Option is being exercised, the name or
names in which the certificates for such Additional Securities are to be
registered and the denominations of such certificates. Upon each exercise of
the
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<PAGE>
Option, the Company shall sell to the Underwriter the aggregate number of
Additional Securities specified in the notice exercising such Option.
(c) Delivery of the Additional Securities with
respect to which Options shall have been exercised and payment therefor shall
be made at 10:00 A.M., New York time on the Option Closing Date, as hereinafter
defined, at the offices of Kashner Davidson Securities Corp. or at such other
locations as may be agreed upon by you and the Company. Delivery of
certificates for Additional Securities shall be made to you for the account of
the Underwriter against payment of the purchase price therefor by certified or
bank check or wire transfer in New York Clearing House Funds to the order of
the Company. The Company will make certificates for Additional Securities to be
purchased at the Option Closing Date available for inspection at least two
business days prior to such Option Closing Date at such place as you shall
designate.
(d) The "Option Closing Date" shall be the date not
later than three business days after the end of the Option Period as you shall
determine and advise the Company by at lease three full business days' notice,
unless some other time is agreed upon between you and the Company.
(e) The obligations of the Underwriter to purchase
and pay for Additional Securities at such Option Closing Date shall be subject
to compliance as of such date with all the conditions specified in Paragraph 2
herein and the delivery to you of opinions, certificates and letters, each
dated such Option Closing Date, substantially similar in scope to those
specified in Paragraph 9 herein.
(f) The cost of original issue tax stamps, if any,
in connection with the issuance and delivery of the Additional Securities by
the Company to the Underwriter shall be borne by the Company. The Company will
pay and hold the Underwriter, and any subsequent holder of Additional
Securities, harmless from any and all liabilities with respect to or resulting
from any failure or delay in paying federal and state stamp taxes, if any,
which may be payable or determined to be payable in connection with the
original issuance or sale to the Underwriter of the Additional Securities or
any portion thereof.
6. Representations and Warranties of the Underwriter.
The Underwriter represents and warrants to the
Company that:
(a) The Underwriter is a member in good standing of
the National Association of Securities Dealers, Inc., and has complied with all
NASD requirements concerning net capital and compensation to be received in
connection with the Offering.
(b) To the Underwriter's knowledge, there are no
claims for services in the nature of a finder's origination fee with respect to
the sale of the Securities hereunder to which the Company is, or may become,
obligated to pay.
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<PAGE>
7. Payment of Expenses.
(a) The Company will pay and bear all costs, fees,
taxes and expenses incident to and in connection with: (i) the issuance, offer,
sale and delivery of the Securities, 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 copying all copies thereof in quantities
deemed necessary by the Underwriter; (ii) the costs of preparing and printing
all "Tombstone" and other appropriate advertisements; (iii) the printing,
engraving, issuance and delivery of the Common Stock, Additional Securities,
Underwriter's Warrant and the securities underlying the Underwriter's Warrant,
including any transfer or other taxes payable thereon in connection with the
original issuance thereof; (iv) the qualification of the Common Stock 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 in connection therewith plus the filing fees for such states; (v)
fees and disbursements of counsel and accountants for the Company; (vi) other
expenses and disbursements incurred on behalf of the Company (vii) the filing
fees payable to the Commission and the National Association of Securities
Dealers, Inc. ("NASD"); (viii) fees associated with the preparation of
transaction "bibles" and lucite cube momentos in such quantities as the
Underwriter may request; and (ix) any listing of the Common Stock on a
securities exchange or on NASDAQ.
(b) In addition to the expenses to be paid and borne
by the Company referred to in Paragraph 8(a) above, the Company shall reimburse
you at closing for expenses incurred by you in connection with the Offering
(for which you need not make any accounting), in the amount of 3% of the price
to the public of the Securities and Additional Securities sold in the Offering.
This 3% non-accountable expense allowance shall cover the fees of your 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 your legal counsel with respect to Blue Sky matters. As of the
date hereof, $25,000 has been advanced by the Company to the Underwriter with
respect to such non-accountable expense allowance.
(c) In the event that the Company does not or
cannot, for any reason whatsoever other than a default by the Underwriter,
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 Offering at any time or terminate the proposed transaction
prior to the first closing date 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, your legal
fees and expenses, less such sums which have already been paid.
15
<PAGE>
8. 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 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 you 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 Securities 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 your 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 your 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 operation 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 you 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
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<PAGE>
be fulfilled or complied with by the Company at or prior to the Closing Date
shall be fulfilled or complied with.
(e) At the Closing Date, you shall have received the
opinion of Doros & Brescia, P.C., counsel to the Company, dated as of such
Closing Date, addressed to the Underwriter and in form and substance
satisfactory to counsel to the Underwriter, to the effect that:
(i) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with full corporate power and authority, and all licenses, permits,
certifications, registrations, approvals, consents and franchises to own or
lease and operate its properties and to conduct its business as described in
the Registration Statement. The Company is duly qualified to do business as a
foreign corporation and is 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;
(ii) The Company has full corporate power
and authority to execute, deliver and perform the Underwriting Agreement and
the Underwriter's Warrant and to consummate the transactions contemplated
thereby. The execution, delivery and performance of the Underwriting Agreement
and the Underwriter's Warrant 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 and the Underwriter's Warrant have been
duly authorized by all necessary corporate action, and each of the Underwriting
Agreement and the Underwriter's Warrant has been duly executed and delivered by
the Company. Each of the Underwriting Agreement and the Underwriter's Warrant
are a valid and 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 and the Underwriter's Warrant 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 and the Underwriter's Warrant do not, and will not, with
or without the giving of notice or the lapse of time, or both, (A) result in a
violation of the Certificate of Incorporation, as the same may be amended, or
by-laws of the Company, (B) to the best of our 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 pursuant to, any indenture, mortgage,
note, contract, commitment or other material agreement or instrument to which
the Company is a party or by which the Company or any of its properties or
17
<PAGE>
assets are or may be bound or affected, except where any of the foregoing would
not result in a material adverse effect upon the Company's business or
operations; (C) to the best of our knowledge, violate any existing applicable
law, rule or regulation or judgment, order or decree known to us of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or any of its properties or business; or (D) to the best of our
knowledge, have any effect on any permit, certification, registration,
approval, consent, license or franchise necessary for the Company to own or
lease and operate its properties and to conduct its business or the ability of
the Company to make use thereof;
(iv) To the best of our 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 Securities, the Additional
Securities or the Underwriter's Warrants, and the consummation by the Company
of the transactions contemplated by the Underwriting Agreement or the
Underwriter's Warrants;
(v) The Registration Statement was declared
effective under the Act on [___________], 1998; to the best of our 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 or applicable state
securities laws;
(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 we
express 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 us, and, based upon such review, are accurate
in all material respects and present fairly the information required to be
disclosed, and to the best of our knowledge, there are no material statutes or
regulations, or, to the best of our knowledge, material 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.
To the best of our knowledge, 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 us of any United States governmental agency or court having jurisdiction
over the Company or any of its assets or businesses;
(viii) The outstanding Common Stock has
been duly authorized and validly issued. The outstanding Common stock is fully
paid an non-assessable. To the best of our
18
<PAGE>
knowledge, 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 are subject to personal liability solely by reason
of being such a holder. The authorized Common Stock conforms to the description
thereof contained in the Registration Statement and Prospectus. To the best of
our knowledge, except as set forth in the Prospectus, no holders 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
Securities, the Additional Securities and the Underwriter's Warrant have been
duly authorized and when issued will be validly issued, fully paid and
non-assessable, and the holders thereof will not be subject to personal
liability solely by reason of being such holders. Neither the Securities, the
Additional Securities, nor the Common Stock are 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
Underwriter's Warrant has been duly authorized and, when paid for, issued and
delivered pursuant to the terms of the Underwriter's Agreement or the
Underwriter's Warrants, as the case may be, the Underwriter's Warrant will
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, to issue and sell the 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 Common
Stock has been duly authorized by the Company to be offered in the form of the
Securities. The Underwriter's Warrant conforms to the descriptions thereof
contained in the Registration Statement and Prospectus;
(xi) The Underwriter has acquired good
title to the Securities, free and clear of all liens, encumbrances, equities,
security interests and claims, provided that the Underwriter is a bona fide
purchasers as defined in ss.8-302 of the Uniform Commercial Code;
(xii) Assuming that the Underwriter
exercises the over-allotment option to purchase the Additional Securities and
make payments therefor in accordance with the terms of the Underwriting
Agreement, upon delivery of the Additional Securities to the Underwriter
thereunder, the Underwriter will acquire good title to the Additional
Securities, free and clear of any liens, encumbrances, equities, security
interests and claims, provided that the Underwriter is a bona fide purchasers
as defined in ss.8-302 of the Uniform Commercial Code;
(xiii) To the best of our 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 involving its 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
19
<PAGE>
otherwise disclosed in the Prospectus and the Registration Statement, the
Company has complied with all federal and state laws, statutes and regulations
concerning its business;
(xiv) We have participated in reviews and
discussions in connection with the preparation of the Registration Statement
and the Prospectus. Although we are not passing upon and do not assume
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement, no facts came to our attention which
lead us to believe that (A) the Registration Statement (except as to the
financial statements and other financial data contained therein, as to which we
express 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, in light of the circumstances under which they were made, not
misleading, or that (B) the Prospectus (except as to the financial statements
and other financial data contained therein, as to which we express no opinion)
contains any untrue statement or a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
(xv) The Company is not in violation of or
in default under its Articles of Incorporation or by-laws, or to the knowledge
of such counsel, in the performance or observance of any material obligation,
agreement, covenant or condition contained in any bond, debenture, note or
other evidence of indebtedness or in any contract, indenture, mortgage, loan
agreement or instrument to which the Company is a party or by which it or any
of its properties may be bound, or in violation of any material order, rule,
regulation, writ, injunction or decree of any government or governmental
instrumentality or court.
(f) On or prior to the Closing Date, counsel for the
Underwriter shall 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.
(g) 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 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;
20
<PAGE>
(iii) The Company shall not be in default
under any material provision of any instrument relating to any outstanding
indebtedness, except as described in the Prospectus;
(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 you was, when
originally made and is at the time such certificate is dated, true and correct.
(h) Concurrently with the execution and delivery of
this Agreement and at the Closing Date, you 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 you or for
counsel for the Underwriter shall be deemed a representation and warranty by
the Company to the Underwriter as to the statements made therein.
(i) At the time this Agreement is executed, and at
the Closing Date, you shall have received a letter, addressed to the
Underwriter and in form and substance satisfactory in all respects to you and
counsel for the Underwriter, and including estimates of the Company's revenues
and results of operations for the period ending at the end of the month
immediately preceding the Effective Date and results of the comparable period
during the prior fiscal year, from Eichler Bergsman & Co., LLP, dated as of the
date of this Agreement and as of the Closing Date.
(j) All proceedings taken in connection with the
authorization, issuance or sale of the Common Stock and the Underwriter's
Securities as herein contemplated shall be
21
<PAGE>
satisfactory in form and substance to you 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 you may
reasonably require.
(k) The Company shall have furnished to you such
certificates, additional to those specifically mentioned herein, as you 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 you, 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 your obligations hereunder.
(l) The obligation of the Underwriter to purchase
Additional Securities hereunder is subject to the accuracy of the
representations and warranties of the Company contained herein on and as of the
Option Closing Date and to the satisfaction on and as of the Option Closing
Date of the conditions set forth herein.
(m) On the Closing Date there shall have been duly
tendered to you for your account the appropriate number of shares of Common
Stock.
9. 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 Underwriter's Securities upon exercise of
the Underwriter's Warrants; or in any application or other document or written
communication (in this Paragraph 9 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, Underwriter's Warrant
and Underwriter's Securities 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
22
<PAGE>
or omission was made in reliance upon or in conformity with written information
furnished to the Company 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 9(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 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 9(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, written information furnished to the Company by you
specifically expressly for use in the preparation of such Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriter in connection with this Offering. 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 9(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 any indemnified
party (the "Indemnitee") in respect of which indemnity may be sought against
another party pursuant to the foregoing (the "Indemnitor"), the Indemnitor
shall assume the defense of the action, including the employment and fees of
counsel (reasonably satisfactory to the Indemnitee) and payment of expenses.
Any Indemnitee 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
such Indemnitee unless the employment of such counsel shall have been
authorized in writing by the Indemnitor in connection with the defense of such
action. If the Indemnitor shall have employed counsel to have charge of the
defense or shall previously have assumed the defense of any such action or
claim, the Indemnitor shall not thereafter be liable to any Indemnitee in
investigating, preparing or defending any such action or claim. Each Indemnitee
shall promptly notify the Indemnitor of the commencement of any litigation or
proceedings against the Indemnitee in connection with the issue and sale of the
Common Stock, the Underwriter's Securities or in connection with the
Registration Statement or Prospectus.
23
<PAGE>
(d) In order to provide for just and equitable
contribution under the Act in any case in which: (i) the Underwriter make a
claim for indemnification pursuant to Paragraph 9 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 9 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 9, then, and in each such case, the Company and the Underwriter
shall contribute to 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 Securities 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 9, 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 9 are in
addition to any other rights or remedies which either party hereto may have
with respect to the other or hereunder.
24
<PAGE>
10. Representations, Warranties, Agreements to Survive
Delivery.
The respective indemnity and contribution agreements
by the Underwriter and the Company contained in Paragraph 9 hereof, and the
covenants, representations and warranties of the Company and the Underwriter
set forth in this Agreement, shall remain operative and in full force and
effect regardless of (i) any investigation made by the Underwriter or on their
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 Securities and payment therefor,
or (iii) any termination of this Agreement, and shall survive the delivery of
the Securities and any successor of the Underwriter or the Company, or of any
person who controls you 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 10 shall be in
addition to any liability which the Underwriter and the Company may otherwise
have.
11. 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
you 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 any domestic or international event or act or occurrence has materially
disrupted, or in your opinion will in the immediate future materially disrupt,
securities markets; or if trading on the New York Stock Exchange, the American
Stock Exchange, or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required on the over-the-counter
market by the NASD or NASDAQ or by order of the Commission or any other
governmental authority having jurisdiction; or if a moratorium in foreign
exchange trading by major international banks or persons has been declared; or
if the Company shall have sustained a loss material or substantial to the
Company taken as a whole by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in your opinion, make it inadvisable to
proceed with the delivery of the Securities; or if there shall have been a
material adverse change in the conditions of the securities market in general,
as in your reasonable judgment would make it inadvisable to proceed with the
offering, sale and delivery of the Securities; or if there shall have been a
material adverse change in the financial or securities markets, particularly in
the over-the-counter market, in the United States having occurred since the
date of this Agreement.
(c) If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Paragraph
11, the Company shall be notified promptly by you by telephone or facsimile,
confirmed by letter.
25
<PAGE>
(d) If this Agreement shall not become effective by
reason of an election of the Underwriter pursuant to this Paragraph 11 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 7 herein, will be to
reimburse the Underwriter for the following: (i) Blue Sky counsel fees and
expenses to the extent set forth in Paragraph 7(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 7(c), in connection with this Agreement and the proposed
offering of the Securities, but in no event to exceed the sum of $100,000 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 7 and 9 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.
12. 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 the Underwriter at
Kashner Davidson Securities Corp., 77 South Palm Avenue, Sarasota, FL 34236,
attention: Victor Kashner with a copy thereof to Gregory Sichenzia, Esq.,
Sichenzia, Ross & Friedman, LLP, 135 West 50th Street, 20th Floor, New York, NY
10020, and, if sent to the Company, shall be mailed, delivered or telegraphed
and confirmed to the Company at 110 Wall Street, New York, NY 10005,
attention: M. Ali Kahn, President.
13. 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 9 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
14. 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 you relating to the sale of any of the
Securities.
15. Jurisdiction and Venue.
26
<PAGE>
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 Southern District of New York.
16. Counterparts.
This agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding
between you 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,
UNITED STATES FINANCIAL GROUP INCORPORATED
By:
---------------------------------------
M. Ali Kahn, President
Accepted as of the date first
above written:
KASHNER DAVIDSON SECURITIES CORP.
By:
------------------------------
27
<PAGE>
SCHEDULE A
Shares of
Common
Stock to be
Underwriter Purchased
- ----------- -----------
Kashner Davidson Securities Corp [____]
Total: 2,025,000
----- =========
28
<PAGE>
NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES UNDERLYING THIS WARRANT
MAY BE MADE UNTIL THE EFFECTIVENESS OF A REGISTRATION STATEMENT OR OF A
POST-EFFECTIVE AMENDMENT THERETO UNDER THE SECURITIES ACT OF 1933 (THE "ACT"),
COVERING THIS WARRANT OR THE SECURITIES UNDERLYING THIS WARRANT, OR UNTIL THE
COMPANY IS IN RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THE ACT. TRANSFER OF THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW.
UNDERWRITER'S WARRANT TO PURCHASE
COMMON STOCK
UNITED STATES FINANCIAL GROUP, INCORPORATED
(AN DELAWARE CORPORATION)
Dated: [__________], 1998
<PAGE>
THIS CERTIFIES THAT, for value received, Kashner Davidson
Securities Corporation (the "Underwriter"), or its registered assigns (the
"Holder"), is the owner of options (the "Underwriter's Option") to purchase
from United States Financial Group, Inc., a Delaware corporation (the
"Company"), during the period and at the prices hereinafter specified, up to
ten percent (10%) of the total number of shares of the Company's common stock,
$.0001 par value per share (the "Common Stock" or the "Securities"), sold by
the Underwriter pursuant to the Public Offering (as hereinafter defined),
exclusive of any Common Stock sold by the Underwriter pursuant to the
Underwriter's over-allotment option.
This Underwriter's Option is issued pursuant to an
Underwriting Agreement dated [__________], 1998, between the Company and the
Underwriter in connection with a public offering through the Underwriter (the
"Public Offering"), of 2,025,000 shares of Common Stock and, pursuant to the
Underwriter's over-allotment option, an additional 303,750 shares of Common
Stock.
1. Exercise of the Underwriter's Option.
(a) The rights represented by this Underwriter's Option shall
be exercisable at the prices and during the period specified below, upon the
terms and subject to the conditions as set forth herein:
(i) During the period from [_________], 1998, the
effective date (the "Effective Date"), to [_______], 1999, inclusive, the
Holder shall have no right to purchase any Securities hereunder.
(ii) Between [_______], 1999 and [_______], 2003,
inclusive, the Holder shall have the option to purchase shares of Common Stock
hereunder at a price of $18 per share, the purchase price of the Common Stock
being 120% of the public offering price for the Common Stock set forth in the
Prospectus forming a part of the registration statement on Form SB-2 (File No.
33- [__________]) of the Company, as amended (the "Registration Statement").
(iii) After [_________], 2003, the Holder shall have
no right to purchase any Securities hereunder and this Underwriter's Option
shall expire effective at 5:00 p.m., New York time on such date.
(b) The rights represented by this Underwriter's Option may
be exercised at any time within the period above specified, in whole or in
part, by (i) the surrender of this Underwriter's Option (with the purchase form
at the end hereof properly executed) at the principal executive office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company); (ii) payment to the Company of the exercise price then
in effect for the number of shares of Common Stock specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any; and (iii) delivery to the Company of a duly executed agreement signed by
the person(s) designated in the purchase form to the effect that such person(s)
agree(s) to be bound by the
2
<PAGE>
provisions of Paragraph 5 and subparagraphs (b), (c) and (d) of Paragraph 6
hereof. This Underwriter's Option shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Underwriter's Option is surrendered and payment is
made in accordance with the foregoing provisions of this Paragraph 1, and the
person or persons in whose name or names the certificates for the Securities
shall be issuable upon such exercise shall become the holder or holders of
record of such Common Stock at that time and date. The Common Stock so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) business days, after the rights represented by this
Underwriter's Option shall have been so exercised.
(c) Notwithstanding anything to the contrary contained in
subparagraph (b) of paragraph 1, the Holder may elect to exercise this
Underwriter's Option in whole or in part by receiving Shares equal to the value
(as determined below) of this Underwriter's Option at the principal office of
the Company together with notice of such election in which event the Company
shall issue to the Holder a number of Shares computed using the following
formula:
X = Y(A-B)
----------
A
Where: X = the number of Shares to be issued to the Holder;
- ------
Y = the number of Shares to be exercised under this
Underwriter's Option;
A = the current fair market value of one share of
Common Stock (calculated as described below);
and
B = the Share Exercise Price, as the case may be.
As used herein, the current fair market value of one share of
Common Stock shall mean the greater of (x) the average of the closing prices of
the Company's Common Stock sold on all securities exchanges on which the Common
Stock may at the time be listed and the NASDAQ National Market, or, if there
have been no sales on any such exchange or the NASDAQ National Market on such
day, the average of the highest bid and lowest asked price on such day on The
Nasdaq Stock Market or otherwise in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization (the "Market Price"), on the trading day immediately
preceding the date notice of exercise of this Underwriter's Option is given or
(y) the average of the Market Price per share of Common Stock for the five
trading days immediately preceding the date notice of exercise of this
Underwriter's Option is given. If on any date for which the Market Price per
share of Common Stock is to be determined the Common Stock is not listed on any
securities exchange or quoted on the NASDAQ National Market or on The Nasdaq
Stock Market or otherwise in the over-the-counter market, the Market Price per
share of Common Stock shall be the highest price per share which the Company
could then obtain from a willing buyer (not a current employee or director) for
shares of Common Stock sold by the
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Company, from authorized but unissued shares, as determined in good faith by
the Board of Directors of the Company, unless prior to such date the Company
has become subject to a merger, acquisition or other consolidation pursuant to
which the Company is not the surviving party, in which case the Market Price
per share of Common Stock shall be deemed to be the value received by the
holders of the Company's Common Stock for each share thereof pursuant to the
Company's acquisition.
2. Restrictions on Transfer.
This Underwriter's Option shall not be transferred, sold,
assigned or hypothecated for a period of one year commencing on the Effective
Date, except that it may be transferred to successors of the Holder, and may be
assigned in whole or in part to any person who is an officer of the Underwriter
or an officer or partner of any other member of the selling group during such
period. Any such assignment shall be effected by the Holder by (i) completing
and executing the transfer form at the end hereof and (ii) surrendering this
Underwriter's Option with such duly completed and executed transfer form for
cancellation, accompanied by funds sufficient to pay any transfer tax, at the
office or agency of the Company referred to in Paragraph 1 hereof, accompanied
by a certificate (signed by a duly authorized representative of the Holder),
stating that each transferee is a permitted transferee under this Paragraph 2;
whereupon the Company shall issue, in the name or names specified by the Holder
(including the Holder), a new Underwriter's Option or Underwriter's Options of
like tenor and representing in the aggregate rights to purchase the same number
of Securities as are then purchasable hereunder. The Holder acknowledges that
this Underwriter's Option may not be offered or sold except pursuant to an
effective registration statement under the Act or an opinion of counsel
satisfactory to the Company that an exemption from registration under the Act
is available.
3. Covenants of the Company
(a) The Company covenants and agrees that all Common Stock
issuable upon the exercise of this Underwriter's Option will, upon issuance
thereof and payment therefor in accordance with the terms hereof, be duly and
validly issued, fully paid and nonassessable and no personal liability will
attach to the holder thereof by reason of being such a holder, other than as
set forth herein.
(b) The Company covenants and agrees that during the period
within which this Underwriter's Option may be exercised, the Company will at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of this Underwriter's Option.
(c) The Company covenants and agrees that for so long as the
Securities shall be outstanding (unless the Securities shall no longer be
registered under Paragraph 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended) the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Underwriter's Option, to be
quoted by the NASDAQ Stock Market or listed on a national securities exchange.
4. No Rights of Stockholder.
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This Underwriter's Option shall not entitle the Holder to any
voting rights or other rights as a stockholder of the Company, either at law or
in equity, and the rights of the Holder are limited to those expressed in this
Underwriter's Option and are not enforceable against the Company except to the
extent set forth herein.
5. Registration Rights.
(a) During the four year period following [________], 1999,
the Company shall advise the Holder, whether the Holder holds this
Underwriter's Option or has exercised this Underwriter's Option and holds
Common Stock, by written notice at least 30 days prior to the filing of any
post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Act,
covering any securities of the Company, for its own account or for the account
of others, and upon the request of the Holder made during such four-year
period, include in any such post-effective amendment or registration statement
such information as may be required to permit a public offering of any of the
Common Stock (the "Registerable Securities"); provided, that this Paragraph
5(a) shall not apply to any registration statement filed pursuant to Paragraph
5(b) hereof or to registrations of shares in connection with an employee
benefit plan or a merger, consolidation or other comparable acquisition or
solely for registration of non-convertible debt or preferred equity securities
of the Company; and provided, further, that, notwithstanding the foregoing, the
Holder shall have no right to include any Registrable Securities in any new
registration statement or post-effective amendment thereto unless as of the
effective date thereof the Registration Statement (as it may hereafter be
amended or supplemented) or any new registration statement under which the
Registrable Securities are registered shall have ceased to be effective or the
prospectus contained in such Registration Statement shall have ceased to be
current. The Company shall supply prospectuses in order to facilitate the
public sale or other disposition of the Registerable Securities, use its
reasonable efforts to register and qualify any of the Registerable Securities
for sale in such states in which the Common Stock is offered and sold in the
Public Offering as such Holder reasonably designates and do any and all other
acts and things which may be necessary to enable such Holder to consummate the
public sale of the Registerable Securities, provided that, without limiting the
foregoing, the Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign corporation to do
business under the laws of any such jurisdiction, and furnish indemnification
in the manner provided in Paragraph 6 hereof. The Holder shall furnish
information reasonably requested by the Company in accordance with such
post-effective amendments or registration statements, including its intentions
with respect thereto, and shall furnish indemnification as set forth in
Paragraph 6. The Company shall continue to advise the Holders of the
Registerable Securities of its intention to file a registration statement or
amendment pursuant to this Paragraph 5(a) until the earliest of (i) [______],
2003; or (ii) such time as all of the Registerable Securities have been
registered and sold under the Act; or (iii) all of the Registrable Securities
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration or
qualification of them under the Act, or (iv) in the opinion of legal counsel
for the Company, the Registrable Securities may be offered and sold by the
holders thereof without being registered under the Act and such securities,
upon receipt by the purchasers thereof pursuant to such sale, will not
constitute "restricted securities" as such term is defined in Rule 144 under
the Act.
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<PAGE>
(b) If any fifty-one (51%) percent holder (as defined below)
shall give notice to the Company at any time during the five (5) year period
beginning on the Effective Date to the effect that such holder desires to
register under the Act any Registerable Securities, under such circumstances
that a public distribution (within the meaning of the Act) of any such
Registerable Securities will be involved (and the Registration Statement or any
new registration statement under which such Registerable Securities are
registered shall have ceased to be effective or the Prospectus contained
therein shall have ceased to be current), then the Company will as promptly as
practicable after receipt of such notice, but not later than thirty (30) days
after receipt of such notice, at the Company's option, file a post-effective
amendment to the current Registration Statement or a new registration statement
pursuant to the Act to the end that the Registerable Securities may be publicly
sold under the Act as promptly as practicable thereafter and the Company will
use its reasonable efforts to cause such registration to become and remain
effective as provided herein (including the taking of such steps as are
reasonably necessary to obtain the removal of any stop order); provided, that
such fifty-one (51%) percent holder shall furnish the Company with appropriate
information in connection therewith as the Company may reasonably request; and
provided, further, that the Company shall not be required to file such a
post-effective amendment or registration statement pursuant to this Paragraph
5(b) on more than one occasion; and provided, further, that, the registration
rights of the 51% holder under this Paragraph 5(b) shall be subject to the
"piggyback" registration rights of other holders of securities of the Company
to include such securities in any registration statement or post-effective
amendment filed pursuant to this Paragraph 5(b). The Company will maintain such
registration statement or post-effective amendment current under the Act for a
period of at least nine months from the effective date thereof. The Company
shall supply prospectuses in order to facilitate the public sale of the
Registerable Securities, use its reasonable efforts to register and qualify any
of the Registerable Securities for sale in such states in which the Common
Stock is offered and sold in the Public Offering as such holder reasonably
designates and furnish indemnification in the manner provided in Paragraph 6
hereof, provided that, without limiting the foregoing, the Company shall not be
obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(c) The Holder may, in accordance with Paragraphs 5(a) or
(b), at his or its option, and subject to the limitations set forth in
Paragraph 1(a) hereof, request the registration of any of the Registerable
Securities in a filing made by the Company prior to the acquisition of the
Securities upon exercise of this Underwriter's Option. The Holder may
thereafter exercise this Underwriter's Option at any time or from time to time
subsequent to the effectiveness under the Act of the registration statement in
which the Common Stock underlying the Underwriter's Options were included.
(d) The term "51% holder," as used in this Paragraph 5, shall
include any owner or combination of owners of Underwriter's Options or
Registerable Securities if the aggregate number of shares of Common Stock
included in and underlying the Underwriter's Options and Registerable
Securities held of record by it or them, would constitute a majority of the
aggregate of such shares of Common Stock underlying the Underwriter's Option
and Registrable Securities as of the date of the initial issuance of the
Underwriter's Option.
(e) The following provisions of this Paragraph 5 shall also
be applicable:
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<PAGE>
(i) Within ten (10) days after receiving any notice
pursuant to Paragraph 5(b), the Company shall give notice to the other Holders
of Underwriter's Options or Registerable Securities, advising that the Company
is proceeding with such post-effective amendment or registration and offering
to include therein the Registerable Securities of such other Holders, provided
that they shall furnish the Company with all information in connection
therewith as shall be necessary or appropriate and as the Company shall
reasonably request in writing. Following the effective date of such
post-effective amendment or registration, the Company shall, upon the request
of any Holder of Registerable Securities, forthwith supply such number of
prospectuses meeting the requirements of the Act, as shall be reasonably
requested by such Holder. The Company shall use its reasonable efforts to
qualify the Registerable Securities for sale in such states in which the Common
Stock is offered and sold in the Public Offering as the 51% holder shall
reasonably designate at such times as the registration statement is effective
under the Act, provided that, without limiting the foregoing, the Company shall
not be obligated to execute or file any general consent to service of process
or to qualify as a foreign corporation to do business under the laws of any
such jurisdiction.
(ii) The Company shall bear the entire cost and
expense of any registration of securities initiated by it under Paragraph 5(a)
hereof notwithstanding that the Registerable Securities subject to this
Underwriter's Option may be included in any such registration. The Company
shall also comply with the one request for registration made by the 51% holder
pursuant to Paragraph 5(b) hereof at the Company's own expense and without
charge to any holder of the Registerable Securities. Notwithstanding the
foregoing, any Holder whose Registerable Securities are included in any such
registration statement pursuant to this Paragraph 5 shall, however, bear the
fees of any counsel retained by him and any transfer taxes or underwriting
discounts or commissions applicable to the Registerable Securities sold by him
pursuant thereto and, in the case of a registration pursuant to Paragraph 5(a)
hereof, any additional registration or "blue sky" or state securities fees
attributable to the registration or qualification of such Holder's Registerable
Securities.
(iii) If the underwriter or managing underwriter in any
underwritten offering made pursuant to Paragraph 5(a) hereof shall advise the
Company that it declines to include a portion or all of the Registerable
Securities requested by the Holders to be included in the registration
statement, then distribution of all or a specified portion of the Registerable
Securities shall be excluded from such registration statement (in case of an
exclusion as to a portion of such Registerable Securities, such portion to be
allocated among such Holders in proportion to the respective numbers of
Registerable Securities requested to be registered by each such Holder). In
such event the Company shall give the Holder prompt notice of the number of
Registerable Securities excluded. Further, in such event the Company shall,
commencing six (6) months after the completion of such underwritten offering,
file and use its best efforts to have declared effective, at its sole expense
(subject to the last sentence of Paragraph 5(a)(ii)), a registration statement
relating to such excluded securities.
(iv) Notwithstanding anything to the contrary contained
herein, the Company shall have the right at any time after it shall have given
written notice pursuant to Paragraph 5(a) or 5(b) (irrespective of whether a
written request for inclusion of any Registerable Securities shall have been
made) to elect not to file or to delay any such proposed registration statement
or post-effective
7
<PAGE>
amendment thereto, or to withdraw the same after the filing but prior to the
effective date thereof. In addition, the Company may delay the filing of any
registration statement or post-effective amendment requested pursuant to
Paragraph 5(b) hereof by not more than 120 days if the Company, prior to the
time it would otherwise have been required to file such registration statement
or post-effective amendment thereto, determines in good faith that the filing
of the registration statement would require the disclosure of non-public
material information that, in its judgment, would be detrimental to the Company
if so disclosed or would otherwise adversely affect a financing, acquisition,
disposition, merger or other material transaction.
(v) If a registration pursuant to Paragraph 5(a) hereof
involves an underwritten offering, the Company shall have the right to select
the investment banker or investment bankers and manager or managers that will
serve as underwriter with respect to the underwritten offering. No Holder of
Registerable Securities may participate in any underwritten offering under this
Agreement unless such holder completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwritten offering, in each case, in the form and
upon terms reasonably acceptable to the Company and the underwriters. The
requested registration pursuant to Paragraph 5(b) hereof shall not involve an
underwritten offering unless the Company shall first give its written approval
of each underwriter that participates in the offering, such approval not to be
unreasonably withheld.
6. Indemnification.
(a) Whenever pursuant to Paragraph 5, a registration
statement relating to any Registerable Securities is filed under the Act,
amended or supplemented, the Company will indemnify and hold harmless each
Holder of the Registerable Securities covered by such registration statement,
amendment or supplement (such holder hereinafter referred to as the
"Distributing Holder"), each person, if any, who controls (within the meaning
of the Act) the Distributing Holder, and each officer, employee, partner or
agent of the Distributing Holder, if the Distributing Holder is a broker or
dealer, and each underwriter (within the meaning of the Act) of such securities
and each person, if any, who controls (within the meaning of the Act) any such
underwriter and each officer, employee, agent or partner of such underwriter
against any losses, claims, damages or liabilities, joint or several, to which
the Distributing Holder, any such underwriter or any other person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading; and will reimburse the Distributing Holder and each such
underwriter or such other person for any legal or other expenses reasonably
incurred by the Distributing Holder, or underwriter or such other person, in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case (i) to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in said registration statement, said
preliminary prospectus, said final prospectus or said amendment or supplement
in reliance upon and in conformity with written
8
<PAGE>
information furnished by such Distributing Holder, any other Distributing
Holder or any such underwriter for use in the preparation thereof, or (ii) such
losses, claims, damages or liabilities arise out of or are based upon any
actual or alleged untrue statement or omission made in or from any preliminary
prospectus, but corrected in the final prospectus, as amended or supplemented.
(b) Whenever pursuant to Paragraph 5 a registration statement
relating to the Registerable Securities is filed under the Act, or is amended
or supplemented, the Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act)
against any losses, claims, damages or liabilities to which the Company or any
such director, officer or controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in any such
registration statement or any preliminary prospectus or final prospectus
constituting a part thereof, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in said registration statement, said preliminary
prospectus, said final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished by such Distributing
Holder for use in the preparation thereof; and will reimburse the Company or
any such director, officer or controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this
Paragraph 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 6.
(d) In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election to so assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Paragraph 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
7. Adjustments of Number of Shares of Common Stock.
(a) Computation of Adjusted Price. Except as hereinafter
provided, in case the Company shall, at any time after the date of closing of
the sale of securities pursuant to the Public Offering (the "Closing Date"),
issue or sell any shares of Common Stock (other than the issuances
9
<PAGE>
or sales referred to in Paragraph 7(f) hereof), including shares held in the
Company's treasury and shares of Common Stock issued upon the exercise of any
options, rights or warrants to subscribe for shares of Common Stock (other than
the issuances or sales of Common Stock pursuant to rights to subscribe for such
Common Stock distributed pursuant to Paragraph 7(i) hereof) and shares of
Common Stock issued upon the direct or indirect conversion or exchange of
securities for shares of Common Stock, for a consideration per share less than
both the "Market Price" (as defined in Paragraph 7(a)(vi) hereof) per share of
Common Stock on the trading day immediately preceding such issuance or sale and
the Warrant Price in effect immediately prior to such issuance or sale, or
without consideration, then forthwith upon such issuance or sale, the Warrant
Price in respect of the Common Stock issuable upon exercise of the
Underwriter's Option shall (until another such issuance or sale) be reduced to
the price (calculated to the nearest full cent) determined by multiplying the
Warrant Price in effect immediately prior to such issuance or sale by a
fraction, the numerator of which shall be the sum of (1) the number of shares
of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the Warrant Price immediately prior to such issuance or sale plus
(2) the consideration received by the Company upon such issuance or sale, and
the denominator of which shall be the product of (x) the total number of shares
of Common Stock outstanding immediately after such issuance or sale, multiplied
by (y) the Warrant Price immediately prior to such issuance or sale; provided,
however, that in no event shall the Warrant Price be adjusted pursuant to this
computation to an amount in excess of the Warrant Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock, as provided by Paragraph 7(c) hereof. For the purposes
of this Paragraph 7, the term "Warrant Price" shall mean the exercise price per
share of Common Stock issuable upon exercise of the Underwriter's Option
(initially $18 per share), as adjusted from time to time pursuant to the
provisions of this Paragraph 7.
For the purposes of any computation to be made in accordance
with this Paragraph 7(a), the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of
Common Stock for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the amount of cash
received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
securities shall be sold to underwriters or dealers for public offering without
a subscription offering, 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.
(ii) In case of the issuance or sale (otherwise than
as a dividend or other distribution on any stock of the Company) of shares of
Common Stock for a consideration part or all of which shall be other than cash,
the amount of the consideration therefor other than cash shall be deemed to be
the value of such consideration as determined in good faith by the Board of
Directors of the Company.
(iii) Shares of Common Stock 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
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<PAGE>
shareholders entitled to receive such dividend or other distribution and shall
be deemed to have been issued without consideration.
(iv) The reclassification of securities of the
Company other than shares of Common Stock into securities including shares of
Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration 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 of Common Stock shall be determined as provided in subparagraph (ii) of
this Paragraph 7(a).
(v) The number of shares of Common Stock at any one
time outstanding shall include the aggregate number of shares issued or
issuable upon the exercise of options, rights, warrants and upon the conversion
or exchange of convertible or exchangeable securities.
(vi) As used herein, the phrase "Market Price" at
any date shall be deemed to be the average of the last reported sale price, or,
in case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or as reported in the NASDAQ Stock
Market, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the NASDAQ Stock Market, the closing
bid quotation as furnished by the National Association of Securities Dealers,
Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting
such information, or if the Common Stock is not quoted on NASDAQ, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it for the day immediately preceding such
issuance or sale, the day of such issuance or sale and the day immediately
after such issuance or sale. If the Common Stock is listed or admitted to
trading on a national securities exchange and also quoted on the NASDAQ Stock
Market, the Market Price shall be determined as hereinabove provided by
reference to the prices reported in the NASDAQ Stock Market; provided that if
the Common Stock is listed or admitted to trading on the New York Stock
Exchange, the Market Price shall be determined as hereinabove provided by
reference to the prices reported by such exchange.
(b) Options, Rights, Warrants and Convertible and
Exchangeable Securities. Except in the case of the Company issuing rights to
subscribe for shares of Common Stock distributed pursuant to Paragraph 7(i)
hereof, if the Company shall at any time after the Closing Date issue options,
rights or warrants to subscribe for shares of Common Stock, or issue any
securities convertible into or exchangeable for shares of Common Stock, in each
case other than the issuances or sales referred to in Paragraph 7(f) hereof,
(i) for a consideration per share less than the lesser of (a) the Warrant Price
in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or (b) the Market
Price on the trading day immediately preceding such issuance, or (ii) without
consideration, the Warrant Price 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 a computation in accordance with the provisions of Paragraph 7(a)
hereof, provided that:
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<PAGE>
(i) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under all the outstanding options, rights
or warrants shall be deemed to be issued and outstanding at the time all the
outstanding options, rights or warrants were issued, and for a consideration
equal to the minimum purchase price per share provided for in the options,
rights or warrants at the time of issuance, plus the consideration (determined
in the same manner as consideration received on the issue or sale of shares in
accordance with the terms of Paragraph 7(a) hereof), if any, received by the
Company for the options, rights or warrants, and if no minimum price is
provided in the options, rights or warrants, then the consideration shall be
equal to zero; provided, however, that upon the expiration or other termination
of the options, rights or warrants, if any thereof shall not have been
exercised, the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subparagraph (b) (and for the purposes of
subparagraph (v) of Paragraph 7(a) hereof) shall be reduced by such number of
shares as to which options, warrants and/or 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 which it would have been had
adjustment been made on the basis of the issuance only of shares actually
issued or issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
(ii) The aggregate maximum number of shares of
Common Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the
time of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Common Stock in accordance with the terms of
Paragraph 7(a) hereof) 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
subparagraph (ii) (and for the purpose of subparagraph (v) of Paragraph 7(a)
hereof) shall be reduced by such 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 which it would have been had adjustment been made on the basis of the
issuance only of the shares actually issued or issuable upon the conversion or
exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated unexercised.
No adjustment will be made pursuant to this subparagraph (ii) upon the issuance
by the Company of any convertible or exchangeable securities pursuant to the
exercise of any option, right or warrant exercisable therefor, to the extent
that adjustments in respect of such options, rights or warrants were previously
made pursuant to the provisions of subparagraph (i) of this subparagraph 7(b).
(iii) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
subparagraph (i) of this Paragraph 7(b), or in the price per share at which the
securities referred to in subparagraph (ii) of this Paragraph 7(b) are
convertible or exchangeable, or if any such option, rights or warrants are
exercised at a price greater than the minimum purchase price provided for in
such options, rights or warrants, or any
12
<PAGE>
such securities are converted or exercised for more than the minimum
consideration receivable by the Company upon such conversion or exchange, the
options, rights or warrants or conversion or exchange rights, as the case may
be, 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 at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the
conversion or exchange of such convertible or exchangeable securities;
provided, however, that no adjustment shall be made pursuant to this
subparagraph (iii) with respect to any change in the price per share provided
for in any of the options, rights or warrants referred to in subparagraph (i)
of this Paragraph 7, or in the price per share at which the securities referred
to in subparagraph (ii) of this Paragraph 7(b) are convertible or exchangeable,
which change results from the application of the anti-dilution provisions
thereof in connection with an event for which, subject to subparagraph (iv) of
Paragraph 7(f), an adjustment to the Warrant Price will be required to be made
pursuant to this Paragraph 7.
(c) Subdivision and Combination. In case the Company shall at
any time after the Closing Date subdivide or combine the outstanding shares of
Common Stock, the Warrant Price shall forthwith be proportionately decreased in
the case of subdivision or increased in the case of combination.
(d) Adjustment in Number of Shares. Upon each adjustment of
the Warrant Price pursuant to the provisions of this Paragraph 7, the number of
shares of Common Stock issuable upon the exercise of the Underwriter's Option
shall be adjusted to the nearest full whole number by multiplying a number
equal to the Warrant Price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable upon exercise of the
Underwriter's Option immediately prior to such adjustment and dividing the
product so obtained by the adjusted Warrant Price.
(e) Reclassification, Consolidation, Merger, etc. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), or in the case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of the outstanding shares of Common Stock, except a
change as a result of a subdivision or combination of such shares or a change
in par value, as aforesaid), or in the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holder shall
thereafter have the right to purchase the kind and number of shares of stock
and other securities and property receivable upon such reclassification,
change, consolidation, merger, sale or conveyance as if the Holder were the
owner of the shares of Common Stock underlying the Underwriter's Option
immediately prior to any such events at a price equal to the product of (x) the
number of shares issuable upon exercise of the Underwriter's Option and (y) the
Warrant Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holder had exercised the Underwriter's Option.
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<PAGE>
(f) No Adjustment of Warrant Price in Certain Cases.
Notwithstanding anything herein to the contrary, no adjustment of the Warrant
Price shall be made:
(i) Upon the issuance or sale of the Underwriter's
Option, the shares of Common Stock issuable upon the exercise of the
Underwriter's Option; or
(ii) Upon the issuance or sale of the shares of
Common Stock issued by the Company in the Public Offering (including pursuant
to the Underwriter's over-allotment option) or other shares of Common Stock
issued by the Company upon consummation of the Public Offering,; or
(iii) Upon (i) the issuance of options pursuant to
the Company's employee stock option plan in effect on the date hereof or as
hereafter amended in accordance with the terms thereof or any other employee or
executive stock option plan approved by stockholders of the Company or the sale
by the Company of any shares of Common Stock pursuant to the exercise of any
such options, or (ii) the sale by the Company of any shares of Common Stock
pursuant to the exercise of any options or warrants issued and outstanding on
the date of closing of the sale of Common Stock pursuant to the Public Offering
or (iii) the issuance or sale by the Company of any shares of Common Stock
pursuant to the Company's restricted stock plan in effect on the date hereof;
or
(iv) If the amount of said adjustment shall be less
than two cents (2(cent)) per share of Common Stock.
(g) Redemption of Underwriter's Option. Notwithstanding
anything to the contrary contained in this Agreement or elsewhere, the
Underwriters Option cannot be redeemed by the Company under any circumstances.
(h) Dividends and Other Distributions with Respect to
Outstanding Securities. In the event that the Company shall at any time after
the Closing Date and prior to the exercise and expiration of the Underwriter's
Option declare a dividend (other than a dividend consisting solely of shares of
Common Stock or a cash dividend or distribution payable out of current or
retained earnings) or otherwise distribute to the holders of Common Stock any
monies, assets, property, rights, evidences of indebtedness, securities (other
than such a cash dividend or distribution or dividend consisting solely of
shares of Common Stock), whether issued by the Company or by another person or
entity, or any other thing of value, the Holders of the unexercised
Underwriter's Option shall thereafter be entitled, in addition to the shares of
Common Stock or other securities receivable upon the exercise thereof, to
receive, upon the exercise of such Underwriter's Option, the same monies,
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of
such dividend or distribution as if the Holders were the owners of the shares
of Common Stock underlying the Underwriter's Option. At the time of any such
dividend or distribution, the Company shall make appropriate reserves to ensure
the timely performance of the provisions of this Paragraph 7(h).
(i) Subscription Rights for Shares of Common Stock
or Other Securities. In case the Company or an affiliate of the Company shall
at any time after the date hereof and prior
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<PAGE>
to the exercise of the Underwriter's Option in full issue any rights to
subscribe for shares of Common Stock or any other securities of the Company or
of such affiliate to all the holders of Common Stock of the Company, the
Holders of the unexercised Underwriter's Option shall be entitled, in addition
to the shares of Common Stock or other securities receivable upon the exercise
of the Underwriter's Option, to receive such rights at the time such rights are
distributed to the other stockholders of the Company but only to the extent of
the number of shares of Common Stock, if any, for which the Underwriter's
Option remains exercisable.
(j) Notice in Event of Dissolution. In case of the
dissolution, liquidation or winding-up of the Company, all rights under the
Underwriter's Option shall terminate on a date fixed by the Company, such date
to be no earlier than ten (10) days prior to the effectiveness of such
dissolution, liquidation or winding-up and not later than five (5) days prior
to such effectiveness. Notice of such termination of purchase rights shall be
given to the last registered Holder of the Underwriter's Option, as the same
shall appear on the books and records of the Company, by registered mail at
least thirty (30) days prior to such termination date.
(k) Computations. The Company may retain a firm of
independent public accountants (who may be any such firm regularly employed by
the Company) to make any computation required under this Paragraph, and any
certificate setting forth such computation signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Paragraph 7.
8. Fractional Shares.
(a) The Company shall not be required to issue fractions of
shares of Common Stock on the exercise of this Underwriter's Option, provided,
however, that if the Holder exercises the Underwriter's Option in full, any
fractional shares of Common Stock shall be eliminated by rounding any fraction
up to the nearest whole number of shares of Common Stock.
(b) The Holder of this Underwriter's Option, by acceptance
hereof, expressly waives his right to receive any fractional share of Common
Stock upon exercise of this Underwriter's Option.
9. Miscellaneous.
(a) This Underwriter's Option shall be governed by and in
accordance with the laws of the State of New York without regard to the
conflicts of law principles thereof.
(b) All notices, requests, consents and other communications
hereunder shall be made in writing and shall be deemed to have been duly made
when delivered, or mailed by registered or certified mail, return receipt
requested: (i) if to a Holder, to the address of such Holder as shown on the
books of the Company, or (ii) if to the Company, 110 Wall Street, New York, NY
10005.
(c) The Company and the Underwriter may from time to time
supplement or amend this Underwriter's Option without the approval of any other
Holders in order to cure any
15
<PAGE>
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Underwriter may deem necessary or desirable and which the
Company and the Underwriter deem not to materially adversely affect the
interest of the Holders.
(d) All the covenants and provisions of this Underwriter's
Option by or for the benefit of the Company and the Holders shall bind and
inure to the benefit of their respective successors and assigns hereunder.
(e) Nothing in this Underwriter's Option shall be construed
to give to any person or corporation other than the Company and the Underwriter
and any other registered Holder or Holders, any legal or equitable right, and
this Underwriter's Option shall be for the sole and exclusive benefit of the
Company and the Underwriter and any other Holder or Holders.
(f) This Underwriter's Option may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, the Company has caused this Underwriter's
Warrant to be signed by its duly authorized officer and this Underwriter's
Warrant to be dated [___________],1998.
UNITED STATES FINANCIAL GROUP INCORPORATED
By:
---------------------------------------
M. Ali Kahn, President and
Chief Executive Officer
16
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of the Underwriter's Option)
The undersigned, the Holder of the foregoing Underwriter's
Option, hereby irrevocably elects to exercise the purchase rights represented
by such Underwriter's Option for, and to purchase thereunder, ______ shares of
Common Stock of United States Financial Group Incorporated and herewith makes
payment of $________ therefor, and requests that the certificates for Common
Stock be issued in the name(s) of, and delivered to ________________________
whose address(es) is (are) ___________________________________ and whose social
security or taxpayer identification number is _____________.
Dated:
--------------------
*
- --------------------------
(Signature)
- --------------------------
- --------------------------
- --------------------------
(Address)
* Signature must conform in all respects to name of registered Holder.
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<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Underwriter's Option)
For value received, the undersigned hereby sells, assigns,
and transfers unto _____________________ the right to purchase shares of Common
Stock of United States Financial Group Incorporated represented by the
foregoing Underwriter's Option to the extent of __________ shares of Common
Stock, and appoints ________________, attorney to transfer such rights on the
books of United States Financial Group Incorporated, with full power of
substitution in the premises.
Dated:
-------------------
- -------------------------
(name of holder)
- -------------------------
Address
- -------------------------
In the presence of:
- -------------------------
- -------------------------
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<PAGE>
EXHIBIT 16.1
[LILLING & COMPANY LLP LETTERHEAD]
Certified Public Accountants
October 9, 1998
Mr. Mohammad Ali Kahn
President
Klein Maus & Shire, Inc.
110 Wall Street
New York, NY 10005
Gentlemen:
This is to confirm that in connection with the financial statements of
Klein Maus and Shire, Inc. ("the Company") for the year ended December 31,
1997, there were no disagreements with the Company with respect to reporting
issues connected with the release of those statements.
LILLING & COMPANY LLP
By /s/ Mark Lilling
-----------------------
Mark Lilling, Partner
<PAGE>
[LETTERHEAD OF HAGAN & BURNS, CPA'S PC]
October 14, 1998
Mr. Lee Levinson
Klein Maus and Shire
Re: Kahn, Edwards & Co.
Dear Mr. Levinson:
Per our conversation this is to confirm that we did not have any problems with
our former client, Kahn, Edwards & Co. relating to the financial and reporting
issues with respect to our audit for the year ended 12/31/95.
Sincerely,
/s/ Rosemary A. Burns
- ---------------------
Rosemary A. Burns
Partner
<PAGE>
EXHIBIT 22.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Registration Statement on Form S-1
of our report dated March 9, 1998, on our audits of the consolidated financial
statements of United States Financial Group, Incorporated and subsidiaries as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997. We also consent to the reference to our firm under the
caption "Experts."
EICHLER BERGSMAN & CO., LLP
New York, New York
October 13, 1998
<PAGE>
EXHIBIT 22.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Registration Statement on Form S-1
of our report dated February 5, 1997, on our audit of the financial statements
of Klein, Maus & Shire, Inc, as of December 31, 1996 and for the year period
then ended. We also consent to the reference to our firm under the caption
"Experts."
LILLING AND COMPANY
Great Neck, New York
October 13, 1998
<PAGE>
EXHIBIT 22.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Registration Statement on Form S-1
of our report dated April 5, 1996, on our audit of the financial statements of
Klein, Maus & Shire, Inc (formerly Khan, Edwards & Company) as of December 31,
1995 and for year then ended. We also consent to the reference to our firm
under the caption "Experts."
HAGAN & BURNS CPAs, PC
New York, New York
October 13, 1998
