<PAGE>
REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
DECEMBER 30, 1998
FILE NO. 333-52687
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
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)
DELAWARE 6749 13-3922249
State of Standard Industrial IRS Employer ID
Incorporation Classification Code No. Number
110 WALL STREET, NEW YORK, NY 10005
(212) 785-4545
(Address and telephone number of Registrant's principal executive offices)
MOHAMMAD ALI KHAN
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 [X].
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OF DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
AN 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 SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
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 UNDERWRITERS' 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 DECEMBER , 1998
UNITED STATES FINANCIAL GROUP, INCORPORATED
2,200,000 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"). The Company will not
receive any of the proceeds from the sale of Shares by the Selling Shareholder.
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 "USFG." The initial public
offering price of the Common Stock has been determined by negotiation between
the Company and Kashner Davidson Securities Corporation (the "Underwriters") and
does 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 6 AND "DILUTION" ON PAGE 21.
----------------
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND THE PROCEEDS TO PROCEEDS TO
PUBLIC (1) COMMISSIONS (1) COMPANY (2) SELLING STOCKHOLDER (3)
--------------- ------------------- --------------- ------------------------
<S> <C> <C> <C> <C>
Per Share (4) ......... $ 15.00 $ 1.50 $ 13.50
Offering ............. $33,000,000 $3,300,000 $27,337,500 $362,500
- ----------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Includes a non-accountable expense allowance ("Non-Accountable Expense
Allowance") equal to 3% of the gross offering proceeds, or $990,000
($1,138,500 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 $800,000 payable by the
Company. See "Underwriting."
(3) After deducting Underwriting discounts and commissions and amounts
attributable to the shares sold by the Selling Stockholder, but before
deducting the Non-accountable Expense Allowance.
(4) The Company has granted the Underwriters an option, exercisable for 45
days after the date that 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 "Underwriters'
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 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 , 1999.
<PAGE>
- --------------------------------------------------------------------------------
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."
INFORMATION ON THE COMPANY'S WEBSITE SHALL NOT BE DEEMED TO BE PART OF THIS
PROSPECTUS.
----------------
The Company intends to mail an annual report containing financial
statements audited by its independent accountants for each fiscal year to all
its stockholders and shall make available to all of its shareholders quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results suggested by the forward-looking statements and from
the results historically experienced. Factors that may cause or contribute to
such differences include, but are not limited to, those discussed under "Risk
Factors" and elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes (i) no exercise of the Underwriters'
Over-Allotment Option, and (ii) no exercise of the Underwriters' Warrants.
THE COMPANY
United States Financial Group, Incorporated ("USFG" or the "Company") is
incorporated under the laws of the State of Delaware and is a holding company
for three active subsidiaries: Klein, Maus & Shire, Inc. ("KMS"); Sureal
International, Inc. ("Sureal") and KMS Asset Management Group, Incorporated
("KMS-AMG").
KMS is a securities brokerage and investment banking firm 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"). To date, KMS has
co-managed a total of three public offerings of securities, raising an aggregate
of approximately $15 million. KMS also regularly participates as a selling group
member in public offerings managed by other underwriters. KMS also provides
advisory services to over 3,000 high net worth individuals and institutions
around the world. The Company believes that KMS' current and future success is
attributable to its principal client base of high net worth international
investors and institutions. The Company believes that KMS' client base puts KMS
in a strong position to expand its investment banking activities without
reliance on cold calling or 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.
Sureal distributes and sells high quality nutritional and air purification
products in Russia and other republics of the former Soviet Union through a
network marketing organization in which independent distributors purchase
products for resale to retail customers as well as for their own personal use.
The number of the Company's active distributors has increased from 333 at July
1995 to approximately 100,000 at May 31, 1997. Sureal's growth strategy is to
expand its network of independent distributors to increase sales and to expand
through acquisitions.
In 1997, the Company formed KMS-AMG; however, to date, KMS-AMG has not
generated any revenue. KMS-AMG was formed to serve as a financial advisor and
money manager to institutions, individuals and governments. KMS-AMG currently
acts as an advisor to several international corporations and individuals, as
well as to quasi-public entities in Grenada, South Korea and Pakistan. KMS-AMG
has agreements with or issued memorandums of understanding to the Grenadine and
Pakistani governments whereby 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. KMS-AMG's growth strategy is to increase revenue by
expanding its money management business by increasing assets under management
and increasing its international consultancy business by becoming advisors to
additional institutions and governments of developing countries.
The Company intends to use a substantial portion of the proceeds of this
offering to engage in the business of acquiring undervalued or reasonably priced
companies in industries well suited for roll up consolidation transactions. The
Company's strategy is to locate acquisition candidates that operate in
3
<PAGE>
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.
The Company was incorporated under the laws of the State of Delaware on
August 10, 1995. The Company, KMS and KMS-AMG maintain offices at 110 Wall
Street, New York, New York 10005, and their telephone number is (212) 785-4545.
Sureal maintains offices in Orem, Utah.
----------------
THE OFFERING
Securities offered by the
Company (1)................ 2,025,000 shares of Common Stock
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)(2):....... 13,542,636
NASDAQ Symbol (3)........... USFG
Use of proceeds............. The net proceeds of this Offering will be used
for working capital and other general corporate
purposes, including possible acquisitions, to
develop and expand Sureal's and KMS-AMG's
operations, open an office for KMS in Bahrain,
expand KMS' proprietary trading operations and
lease a seat for KMS on the New York Stock
Exchange. See "Use of Proceeds."
- ----------
(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.
(2) Such amount excludes the Underwriters' Overallotment Option of 303,750
shares of Common Stock and 202,500 shares of Common Stock underlying the
Underwriters' Warrant.
(3) The proposed Nasdaq symbol does not imply that a liquid and active market
will develop or be sustained for the Common Stock upon completion of the
Offering.
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 in this Prospectus.
The consolidated financial data for September 30, 1998 and 1997 and the nine
month periods then ended has been extracted from the Company's unaudited
consolidated financial statements. 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 herein.
<TABLE>
<CAPTION>
AUGUST 10, 1995 FOR THE YEAR ENDED NINE MONTHS
(INCEPTION) DECEMBER 31, ENDED SEPTEMBER 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 $ 2,104,802 $ 3,789,755
Net Income (loss) ................. $ 502 $(1,249,484) $(1,646,007) $(1,286,506) $(1,554,625)
Basic Income (Loss) per share ..... $ -- $ (.13) $ (.16) $ (.13) $ (.15)
Weighted average number of
shares outstanding ............... 9,944,634 9,994,634 10,007,134 9,944,634 10,704,636
</TABLE>
<TABLE>
<CAPTION>
AS OF
9/30/98 AS OF 9/30/98
ACTUAL AS ADJUSTED (1)
------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Total assets ................. $9,604,060 $33,640,058
Liabilities .................. 3,102,330 1,758,926
Stockholders' equity ......... 6,500,990 32,127,240
</TABLE>
- ----------
(1) Adjusted to give effect to the sale of Securities offered by the Company
hereby (assuming no exercise of the Underwriters' Overallotment Option)
and the application of the estimated net proceeds therefrom, including the
repayment of $789,752 in loans due by Sureal ($210,000 of which are due to
related parties).
Sureal:
Sureal was acquired by the Company in December 1997 in a transaction accounted
for as a purchase. Accordingly, its results of operations are included in the
Company's consolidated financial results commencing on the date of acquisition.
Sureal's operating results for periods prior to December 1997 are not included
in the Company's consolidated results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- -------------- --------------
<S> <C> <C> <C>
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
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Words or phrases such as "should result, are expected to, we
anticipate, we estimate, we project" or similar expressions are intended to
identify forward-looking statements. These statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from the Company's historical experience and its present expectations or
projections. Caution should be taken not to place undue reliance on any such
forward-looking statements, since such statements speak only as of the date of
the making of such statements. Actual results could differ materially from those
discussed in the forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus. The following
risk factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered hereby.
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. An inability of KMS to continue
operations or pay dividends to the Company would materially adversely affect the
Company's financial condition.
Managing Changing Business
The Company's business strategy includes introductions of potential
acquisitions of products and businesses. The Company anticipates that the
integration of newly acquired businesses, if any, would also require significant
management time and attention. The Company's ability to manage change will
require it to continue to implement and improve its operational, financial and
management information systems and to motivate and effectively manage an
increasing number of employees. Failure to manage such change effectively would
materially adversely affect the Company's business, financial condition and
results of operations.
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.
6
<PAGE>
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. See
"Business--Klein, Maus & Shire."
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 and discussions with
counsel, 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. See "Business--Klein, Maus & Shire."
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. See "Business--Klein, Maus & Shire."
Risks Associated with Small Capitalization Companies
KMS' business is focused on the underwriting, brokerage and trading of
securities of small capitalization companies, a segment of the securities
industry which may be subject to greater risks than the securities industry as a
whole and, consequently, may be marketable to only a limited segment of the
investing public. KMS believes that certain small capitalization companies have
significant potential for growth, although such companies generally have limited
product lines, markets, market shares and financial resources and their
securities may trade less frequently and in more limited volume than those of
more established companies. Additionally, in recent years, the stock market has
experienced a high degree of price and volume volatility for the securities of
many small capitalization companies. In particular, small capitalization
companies that trade in the over-the-counter markets have experienced wide price
fluctuations not necessarily related to the operating performance of such
companies.
7
<PAGE>
Risks to the KMS' Capital in Connection with Investment Banking Activities
KMS' investment banking activities subject the Company's capital to certain
risks. Such risks include market, credit and liquidity risks, which risks arise
primarily when underwritten securities cannot be resold, for any reason, at
anticipated price levels. Further, under applicable securities laws and court
decisions with respect to underwriters' liability and limitations on
indemnification by issuers, an underwriter may be exposed to substantial
securities liability arising out of public and private offerings of equity and
debt instruments.
Risks to the KMS' Capital in Connection With Principal Transactions
As a market maker, KMS may use its capital to maintain substantial
inventories of long and/or short positions in securities in order to engage in
principal transactions with customers as well as with other broker-dealers. The
carrying values of these securities are marked to market with resulting
unrealized gains and losses reported as revenue or expense from principal
transactions. The maintenance of such positions exposes the Company to the
possibility of significant losses when market prices of the securities
comprising such positions change.
Risks relating to the KMS' Investment Account
KMS maintains an investment account in which securities are held for
potential long-term appreciation. Securities in this account consist principally
of common stock and warrants and rights to purchase same, most of which are
restricted and non-marketable for varying periods of time. As required by
generally accepted accounting principles for broker-dealers, these securities
are marked to market with resulting unrealized gains and losses being reported
as revenue from the investment account. Values of the securities in the
investment account are volatile. Fluctuations due to general market conditions,
the fundamentals of the issuer of such securities, or otherwise, may have a
material effect on the Company's consolidated earnings.
Risks Associated with Margin Credit
KMS clears all transactions for its customers on a fully disclosed basis
with its clearing agent, which carries and clears all customer securities
accounts. The clearing firm also lends funds to KMS' customers through the use
of margin credit. These loans are made to customers on a secured basis, with the
clearing firm maintaining collateral in the form of saleable securities, cash or
cash equivalents. Pursuant to the terms of the agreement between KMS and the
clearing agent, in the event that customers fail to pay for their purchases, to
supply the securities that they have sold, or to repay funds they have borrowed,
and the clearing agent satisfies any customer obligations, KMS would be
obligated to indemnify the clearing agent for any resulting losses.
See "Business--Klein, Maus & Shire."
Potential Liability Relating to Legal Proceedings
Many aspects of KMS' business involve substantial risks of potential
liability and regulatory enforcement by state and Federal regulators. In recent
years, there has been an increasing incidence of litigation involving
participants in the securities industry. Underwriters and agents are subject to
substantial potential liability for material misstatements and omissions in
prospectuses and other communications with respect to underwritten offerings of
securities. Claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty are regularly made against
broker-dealers.
Risks Relating to International Operations and Currency Fluctuations
The Company intends to use a portion of the proceeds of the Offering to
establish an office in Bahrain, to facilitate the provision of KMS' financial
services and products in the Middle East. Although the Company attempts to
structure its international transactions in United States dollars only, certain
transactions may, in the future, be denominated in the local currency. The
Company's foreign revenues may be disrupted by currency fluctuations or other
events beyond its control, including political or
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regulatory changes. KMS is also subject to local rules and regulations which
can substantially affect the profitability or ability of KMS and the Company to
operate internationally. These rules and regulations could have the effect of
delaying the introduction of new services or products to international
customers and increase the cost of KMS' operations in the Middle East. See
"Business--Government Regulation."
Industry Is Highly Competitive
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with many other securities brokers and dealers, investment
banking firms, life insurance sales agencies, investment advisors, leveraged
buyout firms, venture funds and, indirectly with regard to 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 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.
Recent and Proposed Expansion
The Company's growth strategy includes the expansion of KMS' international
operations. This includes opening an office in Bahrain to serve clients in the
Middle East more effectively. There can be no assurance that the business in
Bahrain will be successfully integrated with that of the Company. Prospects of
the success of this office must be considered in light of the risks, expenses,
delays and difficulties frequently encountered in the establishment of a new
business in an industry characterized by intense competition.
The Company intends to apply a portion of the net proceeds of this Offering
to further expand KMS' operations. There can be no assurance that KMS will be
able to expand its operations successfully. Moreover, the proposed expansion of
the Company's operations may materially increase KMS' operating expenses and
could adversely affect KMS' profits.
The Company may seek to expand its operations by acquiring suitable
broker-dealers, research and/or trading firms or other complementary businesses,
or by establishing or acquiring additional branch offices. As of the date of
this Prospectus, the Company has no agreements, understandings or commitments,
and is not engaged in any negotiations, relating to potential acquisitions.
There can be no assurance that the Company will effect any acquisitions or that
the Company will be able to integrate into its operations any acquired business
or branch office successfully.
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Dependence on Key Personnel
For the foreseeable future, the Company will place substantial reliance
upon the personal efforts and abilities of Mohammed Ali Khan, the Company's
Chairman of the Board, President and Chief Executive Officer and Asim S. Kohli,
the Company's Executive Vice-President and Chief Operating Officer. The Company
does not currently maintain key man life insurance on either of Mssrs. Khan or
Kohli. The loss of the services of either of Mssrs. Khan or Kohli would have a
material adverse effect on the business, operations, revenues and/or prospects
of the Company. See "Management."
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
sufficient distributors to permit profitable operations because of the number of
direct sales opportunities that exist for potential dealers. The loss of a
significant number of distributors, including any key distributors, for any
reason, could adversely affect Sureal's sales and operating results, and could
impair its ability to attract new distributors. There can be no assurance that
Sureal's network marketing program will continue to be successful or that Sureal
will be able to retain or expand its current network of independent
distributors.
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.
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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 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
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.
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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 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
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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 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.
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. See "Business--Government
Regulation."
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, 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.
Product Liability
Sureal, like other marketers of products that are intended to be ingested,
faces an inherent risk of exposure to product liability claims in the event that
the use of its products results in injury. Sureal
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generally does not obtain contractual indemnification from parties manufacturing
its products although it does require such suppliers to carry product liability
insurance. Historically, Sureal has relied upon its manufacturers' product
liability insurance for coverage. Sureal does not maintain product liability
insurance coverage in its own name because claims in the Russian Federation are
not considered likely. Although Sureal has never had a product liability claim,
such claims against Sureal could result in material losses to Sureal or the
Company.
Reliance on Certain Distributors; Potential Divergence of Interests between
Distributors and Sureal
Sureal'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. See
"Business--Sureal--Network Marketing."
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 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.
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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.
DEPENDENCE ON KEY PERSONNEL
Sureal's growth and future success depends in part on the continued
availability of its three senior management personnel, Richard Worsch, Glen
Jensen and R. Bret Jenkins. Neither the Company nor Sureal maintains life
insurance covering the executive officers of Sureal. Sureal's continued growth
and profitability also depends in part on its ability to attract and retain
other management personnel. Although historically Sureal has not had any
difficulty in attracting and retaining management personnel, there can be no
assurance that it will continue to be able to do so in the future.
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RISKS RELATED TO THE OFFERING
Broad Discretion in Application of Proceeds
Approximately 31% of the net proceeds of this Offering will be applied
towards unidentified acquisitions, working capital and general corporate
purposes. Accordingly, management of the Company has broad discretion over the
application and allocation of the net proceeds of the Offering. 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% 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. See "Principal and Selling 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 allow 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. These provisions 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 Common Stock being offered hereby was arbitrarily
determined by the Underwriter. In determining the offering price, the Company
and the Underwriters considered such factors as the financial resources of the
Company, the nature of the Company's assets, estimates of the business 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. See "Underwriting."
No Prior Public Market
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, there can be no assurance that an active trading market will
develop and be sustained upon the completion of this Offering. The initial
public offering price of the Common Stock has been determined by negotiations
between the Company and the Underwriters and does not necessarily bear any
relation to the Company's asset value, earnings or other objective criteria. See
"Underwriting." The stock market has, from time to time, experienced extreme
price and volume fluctuations which often have been unrelated to the operating
performance of particular companies. Although it has no obligation to do so, the
Underwriters intend to engage in market-making activities or solicited brokerage
activities with respect to the purchase or sale of the Common Stock on the
Nasdaq National Market. However, no assurance can be given that the Underwriters
will continue to participate as a market-maker in the securities of the Company
or that
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other broker-dealers will make a market in such securities which may adversely
impact the liquidity of the securities. Regulatory developments and economic
and other external factors, as well as period-to-period fluctuations in
financial results, may also have a significant impact on the market price of
such securities. See "Description of Capital Stock."
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 the Offering 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.
See "Dilution."
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. See "Description of Capital
Stock."
The officers and directors of the Company and its subsidiaries who
individually hold five percent or more of the Company's Common Stock 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
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. See "Description of Capital Stock."
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. See "Dividends."
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
17
<PAGE>
clearing broker, to recognize the Year 2000 could have a material adverse effect
on the Company's results of operations. There can be no assurance that the Year
2000 issue can be resolved by any of such third parties prior to the upcoming
change in the century. Although the Company may incur substantial costs,
particularly costs resulting from charges by its third party service providers,
in correcting Year 2000 issues, such costs are not sufficiently certain to
estimate at this time. See "Managements Discussion and Analysis of Financial
Conditions and Results of Operations."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 2,025,000
of the shares of the Common Stock offered hereby by the Company, based on an
assumed initial public offering price of $15.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, are estimated to be $25,626,250 ($29,590,188 assuming exercise
of the Underwriters' Over-Allotment Option in full). The Company will not
receive any of the proceeds from the sale of the shares of Common Stock by the
Selling Stockholder. The Company expects to apply the net proceeds of the
Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPLICATION OF PROCEEDS AMOUNT
- -------------------------------------------------------------------- --------------
<S> <C>
Acquisitions and strategic investments (1) ......................... $ 8,000,000
Expand KMS (2) (including $250,000 for lease of NYSE seat) ......... 5,750,000
Expand Sureal (3) .................................................. 5,000,000
Open brokerage office in Bahrain (4) ............................... 4,000,000
Repayment of indebtedness (5) ...................................... 1,589,752
General Corporate and Working Capital (6) .......................... 1,286,498
-----------
Total .............................................................. $25,626,250
===========
</TABLE>
(1) The Company seeks to acquire additional companies pursuant to its growth
strategy. The Company is not currently in negotiations with any
acquisition candidates; however, management of the Company has identified
the direct marketing industry as a source of potential acquisition
opportunities.
(2) Represents anticipated expenses in connection with the expansion of
KMS-AMG, including hiring of additional personnel,
.
(3) Represents expenses anticipated in connection with implementing Sureal's
growth strategy, which principally involves the purchase of inventories
and expansion of the independent distributor network,
.
(4) Represents estimated U.S. Dollars needed for expenses relating to opening
a brokerage office for KMS in Bahrain. Such expenses include the
employment of additional personnel, rental of office space and payment of
fees associated with opening a brokerage office, as well as a $2,000,000
deposit to meet capital requirements.
(5) Represents the repayment, in full, of an aggregate of approximately
$600,000 to holders of promissory notes, which bear interest at 10% per
annum, and are payable in March 1999. Such promissory notes were issued
by the Company pursuant to a private offering completed in March 1999,
the proceeds of which were used to pay expenses in connection with this
offering. Also represents the repayment, in full, of approximately
$645,153 principal amount of notes issued by Sureal throughout 1998,
which notes bear interest at 8% per annum, and are payable on demand.
(6) The net proceeds allocated to working capital include funds for general
corporate purposes including the employment of additional personnel to
support the Company's anticipated growth and strategic acquisitions in
furtherance of the Company's expansion plans. Since the Company cannot be
certain as to its growth rate and personnel needs to sustain such growth,
the Company cannot determine the exact amount of the net proceeds
allocated to working capital that it will need for such purpose.
The foregoing represents the Company's estimate of the allocation of the
net proceeds of the Offering based upon the current status of its operations and
anticipated business needs. It is possible, however, that the application of
funds will differ considerably from the estimates set forth herein due to
changes in the economic climate and/or the Company's planned business operations
or unanticipated complications, delays and expenses, as well as any potential
acquisitions that the Company may consummate, although no specific acquisition
has been identified. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Any reallocation of the net proceeds will
be at the discretion of the Board of Directors of the Company.
19
<PAGE>
Any additional net proceeds realized from the exercise of the Underwriters'
Over-Allotment Option (up to approximately $3,963,938) will be added to the
Company's working capital.
Pending application, the net proceeds will be invested principally in
short-term certificates of deposit, money market funds or other short-term
interest-bearing investments.
The Company estimates that the net proceeds from this Offering will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of at least 12 months from the completion of this Offering. In the
event that the Company or one of its subsidiaries acquires or introduces any
additional product lines or services, such funds will be derived from the funds
currently allocated to working capital or from revenues generated from the
operations of a subsidiary.
DIVIDEND POLICY
To date, the Company has paid no dividends on any shares of its Common
Stock and the Company's Board of Directors has no present intention of paying
any dividends on its Common Stock in the foreseeable future, as it intends to
use its earnings, if any, to generate increased growth. The payment by the
Company of dividends in the future, if any, rests solely within the discretion
of the Board of Directors and will depend upon, among other things, the
Company's earnings, capital requirements and financial condition, as well as
other factors deemed relevant by the Company's Board of Directors. Although
dividends are not limited currently by any agreements, it is anticipated that
future agreements, if any, with institutional lenders or others may also limit
the Company's ability to pay dividends.
20
<PAGE>
DILUTION
Dilution represents the difference between the public offering price and
the net tangible book value of shares immediately after the Offering. Net
tangible book value per share is obtained by subtracting the total liabilities
from total tangible assets (total assets less intangible assets). Prior to
selling any shares under this Offering, based on the Company's Consolidated
Financial Statements as of September 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 negative net tangible book value of
$693,561 (or $.06 per share).
Giving effect to the 2,025,000 Shares sold in this Offering by the Company
and assuming no portion of the Underwriters' Overallotment Option is exercised,
there will be a total of 13,542,636 shares issued and outstanding with a pro
forma net tangible book value of $23,723,267 or $1.75 per share. The dilution to
the public stockholders would be $13.25 per share or 88% 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 $1.81 per share. The following table illustrates this
dilution on a per-share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share ............................ $ 15.00
--------
Net tangible book value per share before Offering (1) ............ $ (.06)
Increase per share attributable to new investors ................. 1.81
------
Pro forma net tangible book value per share after Offering (1) ..... 1.75
--------
Dilution per share to public investors ............................. $ 13.25
========
</TABLE>
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 PURCHASED TOTAL CONSIDERATION
-------------------------- ----------------------------- AVERAGE PRICE
NUMBER (1) PERCENT AMOUNT (1)(2) 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>
- ----------
(1) 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 but does not assume
the exercise of the Underwriters' Overallotment Option (see "Description
of Capital Stock").
(2) Before deduction of underwriting commissions and estimated expenses to be
paid by the Company.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 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>
SEPTEMBER 30, 1998
-------------------------------
ACTUAL AS ADJUSTED(1)
--------------- ---------------
<S> <C> <C>
Total liabilities .......................................................... $ 3,102,330 $ 1,758,926
------------ ------------
Stockholders' Equity:
Preferred Stock, $.0001 par value; 10,000,000 shares authorized; 40,000
shares issued and outstanding as of September 30, 1998 (actual) ......... 4 --
Common Stock, $.0001 par value; 30,000,000 shares authorized;
10,704,636 shares issued and outstanding as of September 30, 1998
(actual); 13,542,636 shares issued and outstanding as adjusted .......... 1,070 1,354
Additional Paid-in capital ................................................ 10,950,166 36,576,136
Deficit ................................................................... (4,450,250) (4,450,250)
------------ ------------
Total stockholders' equity .............................................. 6,500,990 32,127,240
------------ ------------
Total Capitalization ....................................................... $ 9,603,320 $ 33,886,166
============ ============
</TABLE>
- ----------
(1) The adjusted column reflects the changes that will occur upon completion
of this Offering and does not assume the exercise of the Underwriters'
Overallotment Option.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements regarding the plans and
objectives of management for future operations. The forward-looking statements
included herein are based on current expectations and assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
GENERAL
RESULTS OF OPERATION
The Company
Nine Months Ended September 30, 1998
The Company incurred total expenses of $324,683 consisting of occupancy and
administrative ($185,183), professional fees ($112,500) and officer compensation
($27,000). These costs were incurred by the Company to implement the preliminary
phases of its overall Business Plan.
Year Ended December 31, 1997
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>
<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
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
9/30/98 PERCENT 9/30/97 PERCENT CHANGE
<S> <C> <C> <C> <C> <C>
Revenue:
Commissions on customer trades .......... $ 124,416 4.04% $ 616,367 29.28 $ (494,951)
Trading income .......................... 2,346,916 78.05 1,414,041 67.18 932,875
Other income ............................ 198,768 6.61 74,394 3.54 124,374
Intercompany ............................ 340,000 11.30 -- -- 340,000
3,007,100 100.00 2,104,802 100.00 902,298
Expenses:
Officers compensation ................... 704,177 23.42 211,567 10.05 492,610
Compensation and related expenses ....... 601,250 19.99 1,049,790 49.88 (448,540)
Clearance and floor brokerage ........... 215,793 7.18 113,144 5.38 102,649
Occupancy, office and administrative..... 600,561 19.97 478,184 22.72 122,377
Professional ............................ 400,130 13.30 113,442 5.39 286,688
Communications .......................... 132,307 4.40 172,573 8.20 (40,266)
Regulatory fees and expenses ............ 70,941 2.36 80,888 3.84 (9,947)
Other expenses .......................... 12,000 .40 282,483 13.41 (270,483)
2,737,159 91.02 2,502,071 118.87 235,088
Income (loss) before income taxes ....... 269,941 8.98 (397,269) (18.87) 667,210
Less intercompany revenue ............... 340,000 11.30 -- -- 340,000
Net ..................................... (70,059) ( 2.32) (397,269) (18.87) 327,210
</TABLE>
23
<PAGE>
The principal differences during the nine months ended September 30, 1998
compared with the nine months ended September 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 public offerings
and KMS' president devoted significantly more of his time to trading
activities in 1998.
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 USFG's
consolidated financial statements.
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 administrative ........ 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 (1)...... 818,271 28.08%
Net ................................. $ (584,186) $ (1,249,484) $ 665,298
</TABLE>
- ----------
(1) All intercompany expenses are eliminated in USFG's consolidated financial
statements.
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 $ 372,376 $ 491,297
Trading income--net .......... 1,658,197 (129,279) 1,787,476
Interest ..................... 37,656 5,892 31,764
Other ........................ 354,671 -- 354,671
---------- ---------- ----------
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
24
<PAGE>
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 $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 detail in Note 4 to KMS'
financial statements included elsewhere in this Prospectus. Such expense is
eliminated in the Company's consolidated 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.
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
9/30/98 9/30/97
------------- --------------
<S> <C> <C>
Revenue:
Commissionable sales ......................... $1,120,066 $32,267,456
Cost of commissionable sales ................. 840,116 31,001,418
Net .......................................... 279,950 1,266,038
Other income ................................. -- 57,875
279,950 1,323,913
Expenses:
Officers compensation ........................ 270,000 189,646
Compensation and related expenses ............ 284,094 153,886
Occupancy, office and administrative ......... 330,752 152,991
884,846 496,523
Income (loss) before income taxes ............ $ (604,896) $ 827,390
</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. To meet the challenges of the
25
<PAGE>
Russian market, Sureal has revised its pricing and commission structures and has
developed significant networks of independent distributors in Latvia, Lithuania
and Kazakstak, as well as in Japan and the United States. 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. Therefore sales will not
reach preacquisition levels until a portion of the proceeds of the Offering are
available to provide adequate levels of inventory.
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%
Pro forma income taxes ................ 229,000 17.2% 111,000 11.8% 118,000 106.3%
Pro forma 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.
26
<PAGE>
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
Pro forma income taxes .................... 111,000 11.8% -- 111,000
Pro forma 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.
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 September 30, 1998, the Company had stockholders' equity of
$6,500,990. Management of the Company believes that the proceeds from the
initial public offering will be sufficient to meet its liquidity and capital
needs for more than one year based on the current Business Plan and Strategies.
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 that no
destabilizing political events occur in the Middle East. No assurances can be
given that such approvals will be received, however. The Company believes that
the anticipated proceeds from this Offering are sufficient to finance all
current plans including the development of Sureal.
The Company and its subsidiary, Sureal, have financed certain of their
working capital needs by obtaining short-term bridge financing and loans from
private investors. All such amounts are anticipated to be repaid from a portion
of the proceeds of the Offering. The Company does not have formal credit
facilities, and no assurance can be given that additional short-term financing
can be obtained if needed.
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
27
<PAGE>
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
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including KMS' clearing
broker, to recognize the Year 2000 could have a material adverse effect on the
Company's results of operations. There can be no assurance that the Year 2000
issue can be resolved by any of such third parties prior to the upcoming change
in the century. Although the Company may incur substantial costs, particularly
costs resulting from charges by its third party service providers, in correcting
Year 2000 issues, such costs are not sufficiently certain to estimate at this
time.
The European Community's conversion to a common monetary unit will not have
a material impact on any of the Company's operations.
28
<PAGE>
BUSINESS
The Company
United States Financial Group, Incorporated ("USFG" or the "Company") is
incorporated under the laws of the State of Delaware and is a holding company
for three operating subsidiaries: Klein, Maus & Shire, Inc. ("KMS"); Sureal
International, Inc. ("Sureal") and KMS Asset Management Group, Incorporated
("KMS-AMG"). KMS is a full service securities brokerage and investment banking
firm registered with the SEC and is a member firm of the NASD. Sureal
distributes and sells high quality nutritional and air purification products in
Russia and other republics of the former Soviet Union through a network
marketing organization. KMS-AMG is a financial advisor and money manager to
institutions, individuals and governments.
The Company believes that acquisitions will be an integral part of its
future growth. The Company intends to use a substantial portion of the proceeds
of this offering to engage in the business of acquiring undervalued or
reasonably priced companies in industries well suited for rollup consolidation
transactions. The Company's strategy is to locate acquisition candidates that
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. Additionally, as part of
the Company's growth strategy, the Company intends to continue to expand the
operations of its existing subsidiaries either through internal growth or
acquisitions.
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.
A significant portion of KMS' revenues are derived from commissions,
concessions, mark-ups and mark-downs and trading (collectively "commissions").
For the year ended December 31, 1997, commissions accounted for approximately
87% of KMS' revenues. Commissions are charged to KMS' individual and
institutional clients for executing buy and sell orders of securities on
national and regional exchanges and in the over-the-counter ("OTC") markets.
When a buy or sell order for a security in which KMS makes a market or has
inventory is received, KMS may act as a principal and purchase from, or sell to,
its customers the desired security on a disclosed basis at a price set in
accordance with applicable securities regulations. As of June 30, 1998, KMS
employed an aggregate of 41 registered representatives and served more than 3000
active customer accounts.
KMS conducts its business through several operating divisions, each of
which Management believes 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 (iii) KMS-AMG, 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
29
<PAGE>
services in connection with mergers, acquisitions, restructurings and other
financial transactions. To date, KMS has co-managed a total of three public
offerings of securities, raising an aggregate of approximately $15 million. KMS
also regularly participates as a selling group member in public offerings
managed by other underwriters. 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. KMS intermediate and long-term plans are to
invest funds in projects and financing arranged by the Banking Group.
In connection with its investment banking activities, KMS usually receives
warrants which entitle it to purchase securities of the companies for which KMS
raises capital or provides advisory services. These warrants, which are placed
in KMS' investment account, vary in value based upon the market prices of the
underlying securities. Warrants are usually exercisable for four years beginning
one year after issuance and are valued by management based on a significant
discount to the current market values of the underlying securities.
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 provides 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 also engages in proprietary trading.
Historically, KMS has devoted insignificant amounts of capital and derived
insignificant revenues from taking proprietary trading positions. KMS intends to
increase its capital allocation to principal trading activities after this
Offering.
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.
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.
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<PAGE>
KMS is currently registered for retail distribution in the following
jurisdictions:
<TABLE>
<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 a financial
advisor and money manager to institutions, individuals and governments. KMS-AMG
currently acts as an advisor to several international corporations and
individuals, as well as to quasi-public entities in Grenada, South Korea and
Pakistan. KMS-AMG is engaged in agreements with Grenadine government whereby it
will be acting as an advisor to Grenadine government on its tourism and
infrastructure development project and with the Pakistani government and to the
Board of Investments in Pakistan which is establishing the first "Technology
Science Park" in Pakistan. KMS-AMG's growth strategy is to increase revenue by
expanding its money management business by increasing assets under management
and by increasing its international consultancy business by becoming advisors to
additional institutions and governments of developing countries. To date,
KMS-AMG has generated only marginal revenue.
The minimum investment that will be required for investors within KMS-AMG
group is $250,000. Each account will be insured up to $50 million by an "A"
rated insurance company, but will be subject to normal market risks associated
with investing. KMS-AMG will charge 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.
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
31
<PAGE>
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.
NET CAPITAL REQUIREMENTS
As registered broker-dealers and member firms of the NASD, KMS is subject
to the Commission's net capital rule. The net capital rule, which specifies
minimum net capital requirements for registered brokers and dealers, is designed
to measure the general financial integrity and liquidity of a broker-dealer and
requires that at least a minimum part of its assets be kept in relatively liquid
form. Net capital is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings and less certain mandatory
deductions that result from excluding assets not readily convertible into cash
and from valuing certain other assets, such as a firm's positions in securities,
conservatively. Among these deductions are adjustments in the market value of
securities to reflect the possibility of a market decline prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the commission and other regulatory bodies
and ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than specified
percentage (120%) of the minimum net capital requirement. Compliance with the
net capital rule could limit those operations of the Company's brokerage
subsidiaries that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict the Company's ability to withdraw
capital from its operating subsidiaries, which in turn, could limit the
Company's ability to pay dividends, repay debt and redeem or purchase shares of
its outstanding capital stock.
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
32
<PAGE>
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 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.
GROWTH STRATEGY
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 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 KMS--AMG that manages funds for a fee (see below). KMS also
intends to lease 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.
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 feet.
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.
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.
33
<PAGE>
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.
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
34
<PAGE>
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 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:
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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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.
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.
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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.
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
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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.
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
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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.
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.
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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.
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LEGAL PROCEEDINGS
KMS was a co-defendant in an arbitration proceeding filed with the NASD
Office of Dispute Resolution and a complaint filed with the Commissioner of
Financial Institutions of the Government of Puerto Rico, 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.
On June 5, 1998, the Securities and Exchange Commission issued an order
directing a private investigation of certain activities of KMS, including a
private placement of KMS securities in 1996 and 1997, the firm's operational
capability and the qualifications of the firm and certain of its personnel to do
business as broker-dealer, record-keeping, and transactions in penny stocks.
KMS is cooperating fully in the SEC investigation.
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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
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 has served as the Executive Vice-President and Chief
Operating Officer and a Director of the Company since January 1996. Mr. 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. Mr. Kohli holds
a Bachelor of Business Administration degree from Northern Illinois University.
A. RUSHDI SIDDIQUI has served as the Vice-President of Business Development
and Director of the Company since 1997. Mr. 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. 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.
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EDWARD A. HEIL has served as a consultant to and Director of the Company
since 1997. Mr. 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 Laminaire Corporation (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 and a
Director of the Company since 1997. 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.
STEVEN R. JACOBSON has served as a Consultant and Director of the Company
since 1997. Mr. 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 Chief Investment Advisor 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 has
served as Chief Financial Officer of USFG since 1997. 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 served as a Director since 1997. Mr. 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 has served as a Director since 1997. Mr. 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 served as a Director since 1997. Mr. 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 has served as a Director since 1997. Mr. 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.
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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>
ANNUAL COMPENSATION
-----------------------------------
OTHER
NAME AND SALARY ANNUAL OTHER LONG-TERM
PRINCIPAL POSITION YEAR COMPEN. COMPEN.(1) COMPENSATION
- ------------------------- ------ ----------- ------------ ----------------
<S> <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>
- ----------
(1) Other annual compensation relates to the estimated costs of health
insurance and automobiles provided by Sureal.
(2) The Other Long-Term Compensation amounts paid to Messrs. Jenkins, Wogksch
and Jensen were S corporation distributions made to permit the recipients
to pay their personal income tax liabilities.
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.
KMS also has informal consulting agreements with Mr. Jacobson and a former
director, Maurice Gross, under which each is entitled to receive fees linked to
business referred to KMS. The aggregate fees paid to Messrs. Gross and Jacobson
amounted to $192,000 in 1997 and $229,000 for the first nine months of 1998.
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.
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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.
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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
Steven Jacobson .................. -- -- --
Joseph Antonini .................. -- -- --
Leonard Yablon ................... -- -- --
Jamil Asghar ..................... -- -- --
Jaffer Naqvi .....................
Directors and Officers
as a Group (10 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 "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received
48
<PAGE>
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.
49
<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 acquire an aggregate of shares of
Common Stock in the amount equal to one (1) share of Common Stock for every ten
(10) shares of Common Stock sold to the public (up to 202,500 shares of Common
Stock), exclusive of securities offered by the Selling Shareholder and 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
50
<PAGE>
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.
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 Underwriters' 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.
51
<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 or the Board of Directors 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.
52
<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 between the Company and any of the predecessor
accounting firms. In each case, the Company changed accounting firms to engage
the services of a larger firm. The changes were approved by the Company's Board
of Directors.
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.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<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, September 30, 1998 ....................................... F-35
Consolidated Statements of Operations for the Nine Months Ended September 30, 1998
and 1997 ............................................................................ F-36
Consolidated Statements of Stockholders' Equity for the Nine Months Ended
September 30, 1998 .................................................................. F-37
Consolidated Statements of Cash Flows for the Nine Months Ended September 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 the second paragraph of
Note 4 which is as of April 10, 1998, the third paragraph
of Note 4 which is as of December 11, 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) .............................................. -- 7,372,538
------------ ------------
Total Assets ........................................................ $ 932,838 $ 8,652,749
============ ============
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) (2,895,625)
------------ ------------
Total stockholders' equity .......................................... 717,577 8,005,552
------------ ------------
Total liabilities and stockholders' equity .......................... $ 932,838 $ 8,652,749
============ ============
</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 ......... 530 321,777 776,367
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 4,513,858
--------- ------------ ------------
Net income (loss) ...................................... $ 502 $ (1,249,484) $ (1,646,007)
========= ============ ============
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 ...................... -- -- -- -- -- (1,646,007) (1,646,007)
------ ---- --------- -------- ----------- ------------ ------------
Balance--
December 31, 1997 ............ 40,000 $ 4 10,694,634 $1,069 $10,900,104 $ (2,895,625) $ 8,005,552
====== ==== ========== ======== =========== ============ ============
</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) $ (1,646,007)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................... -- 10,911 103,502
(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) 825,319
-------- ------------ ------------
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 10 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. 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 net assets acquired have been
recorded at their respective fair market values and the excess of the purchase
price over the aggregate fair values of the net assets acquired was recorded as
goodwill. For the purpose of valuing the transaction, the shares issued were
estimated to have a value of $10 per share at December 7, 1997. 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 $743,400 per year of goodwill
amortization) .................................. 446,739 2,795,017 5,853,716
Net loss ........................................ $ (390,742) $ (1,606,904) $ (1,657,498)
========== ============ ============
</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.
On June 5, 1998, the Securities and Exchange Commission issued an order
directing a private investigation of certain activities of KMS, including a
private placement of KMS securities in 1996 and 1997, the firm's operational
capability and the qualifications of the firm and certain of its personnel to do
business as broker-dealer, record-keeping, and transactions in penny stocks.
KMS is cooperating fully in the SEC investigation.
F-10
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- REGULATORY MATTERS (CONTINUED)
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 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>
F-11
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
<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>
<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
F-12
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- CAPITAL STRUCTURE (CONTINUED)
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 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 an arbitration proceeding filed with the NASD
Office of Dispute Resolution and a complaint filed with the Commissioner of
Financial Institutions of the Government of Puerto Rico 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.
F-13
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- OTHER EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
<TABLE>
<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.
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., LL
New York, New York
March 9, 1998, except for the second paragraph of
Note 3 which is as of April 10, 1998, the third paragraph
of Note 3 which is as of December 11, 1998
and the first paragraph
of Note 10 which are 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 an arbitration proceeding filed with the NASD
Office of Dispute Resolution and a complaint filed with the Commissioner of
Financial Institutions of the Government of Puerto Rico, 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
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents .............................................. $ 298,648
Deposit at clearing broker ............................................. 186,895
Due from clearing broker ............................................... 175,646
Accounts receivable .................................................... 581,490
Inventories ............................................................ 546,366
Fixed assets at cost, net of accumulated depreciation and amortization . 322,598
Due from officers/stockholders ......................................... 92,335
Other assets (including deferred offering costs of $380,330) ........... 585,121
Goodwill ............................................................... 6,814,961
------------
Total Assets .......................................................... $ 9,604,060
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bridge financing payable, net of discount of $46,348................... $ 553,652
Notes and loans payable to officers/stockholders and others ........... 789,752
Accounts payable ...................................................... 653,343
Accrued expenses, and other ........................................... 1,030,490
Securities sold, not yet purchased at market value .................... 1,330
Long-term capitalized lease obligations ............................... 73,763
------------
Total Liabilities ................................................... 3,102,330
------------
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 ............................................................... (4,450,250)
------------
Total stockholders' equity .......................................... 6,500,990
------------
Total liabilities and stockholders' equity .......................... $ 9,604,060
============
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Revenues:
Sale of products ....................................... $ -- $ 1,120,066
Commissions on brokerage trades ........................ 616,367 121,416
Trading income ......................................... 1,414,041 2,346,916
Other income ........................................... 74,394 201,357
------------ ------------
Total revenue .......................................... 2,104,802 3,789,755
------------ ------------
Expenses:
Cost of sales .......................................... -- 840,116
Officers' compensation ................................. 554,067 1,001,177
Compensation and related expenses ...................... 1,049,790 885,344
Clearance and floor brokerage .......................... 113,144 215,793
Occupancy, office, and administrative expense, including
interest expense of $8,893 and $204,000............... 506,932 1,116,496
Professional fees ...................................... 113,442 512,630
Communications ......................................... 172,573 132,307
Regulatory fees and expenses ........................... 80,888 70,940
Other expenses, including goodwill amortization of
$557,577 (1998)....................................... 800,472 569,577
------------ ------------
Total expenses ....................................... 3,391,308 5,344,380
------------ ------------
Net loss ................................................ $ (1,286,506) $ (1,554,625)
============ ============
Basic Loss Per Share .................................... $ (.13) $ (.15)
============ ============
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 SEPTEMBER 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 $ (2,895,625) $ 8,005,552
Issuance of shares .......... 10,002 1 150,029 150,030
Net loss .................... (1,554,625) (1,554,625)
Repayment of subsidiary's
preferred shares ........... (99,967) (99,967)
----------- ------------
Balance--
June 30, 1998 ............. 40,000 $4 10,704,636 $1,070 $10,950,166 $ (4,450,250) $ 6,500,990
====== == ========== ====== =========== ============ ============
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ......................................................... $ (1,286,506) $ (1,554,625)
------------ ------------
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization .................................... 25,404 725,699
(Increase) decrease in deposit at clearing broker ................ 138,865 (83,610)
Decrease in securities owned ..................................... 332,181 99,729
(Increase) decrease in accounts receivable ....................... -- (577,259)
Increase in inventories .......................................... -- (427,812)
(Increase) in other assets ....................................... 5,082 (434,994)
(Increase) decrease in due from/to clearing brokers, net ......... (159,913) (207,896)
Increase (decrease) in accounts payable .......................... (44,312) 560,327
Increase in accrued expenses ..................................... 122,712 767,086
Increase in securities sold, not yet purchased ................... 64,303 (245)
------------ ------------
Total adjustments ............................................... 484,322 421,025
------------ ------------
Net cash (used by) operating activities ....................... (802,184) (1,133,600)
------------ ------------
Cash flows used by investing activities:
Purchase of fixed assets ........................................... (187,122) (69,581)
------------ ------------
Cash flows from financing activities:
Bridge loan financing, net ......................................... -- 449,970
Increase in notes and loans payable ................................ -- 579,752
Increase in capitalized lease obligations, net ..................... 47,877 27,584
Capital contributions, including from minority interest ............ 1,432,500 150,030
Retirement of preferred shares of subsidiary ....................... -- (100,000)
------------ ------------
Net cash provided by financing activities ..................... 1,480,377 1,107,336
------------ ------------
Net increase (decrease) in cash ..................................... 491,071 (95,845)
Cash--beginning of period ........................................... 17,461 394,493
------------ ------------
Cash--end of period ................................................. $ 508,532 $ 298,648
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ................................................. $ 15,598 $ 25,676
============ ============
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
SEPTEMBER 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 September 30, 1998 and for
the nine months ended September 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 nine months ended September
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 principally 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
$450,000 at September 30, 1998.
A summary of segment data for the nine months ended September 30, 1997 and
1998 follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
SEPTEMBER 30, 1997 SUREAL KMS CORPORATE ELIMINATIONS TOTAL
- ----------------------------------- ------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net revenues ...................... -- $2,108,802 $ -- $ -- $ 2,104,802
Operating (losses) ................ -- (397,269) (889,237) -- (1,286,506)
Identifiable assets ............... -- 1,958,650 79,188 (768,425) 1,269,413
SEPTEMBER 30, 1998
- ------------------------------------
Net revenues ...................... $1,120,066 $3,007,100 $ 2,589 $ (340,000) $ 3,789,755
Operating profits (losses) ........ (604,895) 269,941 (322,094) (897,577) (1,554,625)
Identifiable assets ............... 1,358,735 1,045,772 7,959,592 (760,039) 9,604,060
</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 nine months ended September 30, 1998 amounted
to $103,682.
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)
SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
NOTE 4 -- LEGAL MATTERS (CONTINUED)
On June 5, 1998, the Securities and Exchange Commission issued an order
directing a private investigation of certain activities of KMS, including a
private placement of KMS securities in 1996 and 1997, the firm's operational
capability and the qualifications of the firm and certain of its personnel to
do business as broker-dealer, record-keeping, and transactions in penny stocks.
KMS is cooperating fully in the SEC investigation.
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
September 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
Use of Proceeds ............................. 19
Dividends ................................... 20
Dilution .................................... 21
Capitalization .............................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 24
Business .................................... 29
Management .................................. 44
Principal and Selling Shareholders .......... 48
Certain Transactions ........................ 49
Underwriting ................................ 50
Description of Capital Stock ................ 52
Reports to Shareholders ..................... 52
Transfer Agent and Registrar ................ 52
Legal Proceedings ........................... 53
Experts ..................................... 53
Further Information ......................... 53
Consolidated Financial Statements ........... F-1
</TABLE>
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the shares of common stock offered hereby, whether or
not participating in the distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
2,200,000 SHARES
UNITED STATES FINANCIAL GROUP, INCORPORATED
COMMON STOCK
------------------------------------------------
PROSPECTUS
------------------------------------------------
KASHNER DAVIDSON
SECURITIES CORP.
, 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
"Blue sky" filing fees and expenses ............ 15,000*
Printing Expenses .............................. 100,000*
Transfer agent and registrar's fees ............ 10,000*
Legal fees and expenses ........................ 125,000*
Accounting and other professional fees ......... 125,000*
Fairness opinion ............................... 300,000*
Miscellaneous .................................. $ 27,225.10*
------------
TOTAL .......................................... $ 800,000*
============
</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)
</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 30th day of December, 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 December 30, 1998
- ------------------------------- (Principal Executive Officer)
Mohammad Ali Khan
/s/ William Triebel Principal Financial December 30, 1998
- ------------------------------- Officer
William Triebel
/s/ Asim S. Kohli Director December 30, 1998
- -------------------------------
Asim S. Kohli
/s/ A. Rushdi Siddiqui Director December 30, 1998
- -------------------------------
A. Rushdi Siddiqui
/s/ Edward A. Heil Director December 30, 1998
- -------------------------------
Edward A. Heil
Director December 30, 1998
- -------------------------------
R. Bret Jenkins
/s/ Maurice Gross Director December 30, 1998
- -------------------------------
Maurice Gross
/s/ Steven Jacobson Director December 30, 1998
- -------------------------------
Steven Jacobson
/s/ Joseph Antonini Director December 30, 1998
- -------------------------------
Joseph Antonini
/s/ Jamil Asghar Director December 30, 1998
- -------------------------------
Jamil Asghar
/s/ Leonard Yablon Director December 30, 1998
- -------------------------------
Leonard Yablon
/s/ Jaffer Naqvi Director December 30, 1998
- -------------------------------
Jaffer Naqvi
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<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
<PAGE>
EXHIBIT 16.1
[LILLING & COMPANY LLP LETTERHEAD]
Certified Public Accountants
December 30, 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]
December 30, 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
December 30, 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
December 30, 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
December 30, 1998
