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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Gateway Distributors, Ltd.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Nevada 65-0683539
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
500 East Cheyenne Avenue 89030
North Las Vegas, Nevada
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(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER (702) 399-4328
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SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
None
........................................ ........................
........................................
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
................................................................................
(TITLE OF CLASS)
................................................................................
(TITLE OF CLASS)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development.
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Gateway Distributors, Ltd. ("Gateway" or the "Company") was
incorporated in Nevada on May 26, 1993. In March 1995, the Company purchased,
for $60,000, all of the assets, consisting of inventory, equipment, tradenames
and a distributor list, of The Right Solution, Inc., a California corporation,
which had filed for protection from its creditors under Chapter 7 of the United
States Bankruptcy Code. Richard A. Bailey, President and Chief Executive Officer
of the Company, was a distributor of The Right Solution, Inc. before it filed
for bankruptcy. The acquisition of those assets was effected as part of the
Company's long term strategic plans.
On July 9, 1996, the Company amended its Articles of Incorporation to
reclassify its authorized capital stock into two classes, voting and non-voting.
The stockholders were granted the right to cumulate votes for directors. The
directors were exempted, to the fullest extent permitted by law, from personal
liability to the corporation or its stockholders for monetary damages, except
liability for (i) the amount of a financial benefit received by a director to
which he is not entitled, (ii) an intentional infliction of harm on the
corporation or the stockholders, or (iii) an intentional violation of criminal
law. The amendment also granted preemptive right to its stockholders to purchase
or subscribe for (i) unissued shares of the Company's Common Stock, and (ii)
warrants, bonds, debentures or securities convertible into common stock.
On May 1, 1998, the Company amended its Articles of Incorporation to
increase its authorized capital stock to 21,000,000 shares, of which 20,000,000
was designated as Common Stock, and of which 1,000,000 shares were designated as
Preferred Stock. Each share of Common Stock outstanding on the effective date of
the amendment was automatically converted into 40,000 shares. The board of
directors were authorized to fix the number of shares of any series of Preferred
Stock, to determine the designation of any such series and to determine or alter
the rights, preferences, privileges, qualifications, limitations, and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock. No Preferred Stock has been issued. The amendment effectively eliminated
the class of non-voting common stock.
On May 12, 1998, the Company completed the acquisition by merger of
Hali Sales Corp., a Delaware corporation ("Hali"), with the Company as the
surviving corporation. Hali had limited assets and approximately 970
shareholders of record and was acquired by the Company in order to increase its
shareholder base. Before the merger, there were 4,000,000 shares of the
Company's common stock issued and outstanding. The Company issued 1,000,714
shares of its Common Stock in the merger, one share of its Common Stock in
exchange for each 9.804 shares of Hali common stock issued and outstanding on
the effective date of the merger. Hali had no active operations at the time of
the merger with the Company.
As of January 4, 1999, the Company acquired certain assets, consisting
of cash, accounts receivables, inventory, customer and marketing lists,
trademarks, tradenames, computer hardware, computer software and goodwill, of
NuTech International, Inc., a Texas corporation ("NuTech") in exchange for
75,000 shares of the Company's Common Stock (the "NuTech Acquisition"). NuTech
is a network marketer that sells nutritional, health and dietary supplements and
products. In connection with the NuTech Acquisition, the Company agreed to cause
an increase in the number of authorized directors of the Company, to take all
steps necessary to nominate Scott McKnight to be a director of the Company and
submit such nomination to the Company's shareholders for approval. In addition,
the Company agreed that it will engage Aloe Commodities International, Inc.
("ACI") as the exclusive manufacturer of certain product lines which the Company
purchased in the NuTech Acquisition.
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As of April 1, 1999, the Company acquired certain assets, consisting of
accounts receivables, inventory, customer and marketing lists, contract rights,
trademarks, tradenames, computer hardware, computer software and goodwill, of
American Outback, Inc., an Oklahoma corporation ("American Outback") in exchange
for 67,400 shares of the Company's Common Stock (the "American Outback
Acquisition"). American Outback is a network marketer that sells nutritional,
health and dietary supplements and products. In connection with the American
Outback Acquisition, the Company agreed that if, between April 1, 1999 and April
1, 2000, the average market price of the Common Stock does not exceed $1.00 per
share for any consecutive ten (10) day period, the Company must pay to American
Outback the difference of (a) $67,400 and (b) the product of (i) the average of
the daily closing prices of the Common Stock during the ten trading days
preceding April 1, 2000 and (ii) $67,400. In the event that the Common Stock is
not publicly trading by November 1, 1999, American Outback has the option to
require the Company to repurchase up to 67,400 shares of Common Stock issued as
consideration in the American Outback Acquisition at a price of $1.00 per share,
on terms to be determined by the parties by mutual agreement. Also in connection
with the American Outback Acquisition, the Company agreed to take all steps
necessary to appoint Jack Akers to the Company's Medical Advisory Board.
Further, the Company agreed to use Bush Recipe(R) Emu Oil in all of the
Company's products which contain Emu oil and to engage American Outback as the
exclusive manufacturer of Bush Recipe(R) Emu Oil, subject to certain terms and
conditions. American Outback also granted to the Company a license to use
certain trademarks.
On June 24, 1999, the Company amended and restated its Articles of
Incorporation to eliminate the stockholders' right to cumulate votes for
directors, to allow the number of directors of the Company to be established by
amendment of the Company's bylaws, and to eliminate the preemptive rights
previously granted to the stockholders.
As of September 21, 1999, the Company acquired substantially all of the
assets and assumed certain liabilities of TeamUp International, Inc., a Nevada
corporation ("TeamUp") pursuant to an asset purchase agreement dated as of
August 17, 1999 (the "TeamUp Acquisition"). The TeamUp Acquisition purchase
price consisted of (i) a stream of cash payments calculated on the basis of the
Company's sales of inventory acquired in the TeamUp Acquisition, which the
Company estimates will total approximately $160,000 over eighteen months, (ii) a
stream of cash payments calculated on the basis of the Company's commissionable
sales, which the Company estimates will total approximately $72,000 over twelve
months, (iii) 650,000 shares of the Company's Common Stock, and (iv) an option
to purchase 200,000 shares of the Company's Common Stock at a price of $1.00 per
share. The Company agreed that it would repurchase up to 100,000 shares of
Common Stock issued as consideration in the TeamUp Acquisition at a price of
$1.00 at any time after March 21, 2000. The Company also agreed that if it files
a registration statement under the Securities Exchange Act of 1934 for its
Common Stock with the Securities & Exchange Commission ("SEC") and the SEC has
not declared such registration statement effective on or before September 21,
2001, then the Company will pay $250,000 to TeamUp, or, if TeamUp has been
dissolved, to the stockholders of TeamUp, pro rated proportionately.
The Company's principal executive office is located at 500 East
Cheyenne Avenue, North Las Vegas, Nevada 89030, and its telephone number is
(702) 399-4328.
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Business of the Issuer.
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The Company, doing business as "The Right Solution," is a network
marketing company that sells nutritional, health and dietary supplements and
products throughout North America and Japan. The Company has experienced
substantial growth in retail sales in recent years. From 1996 to 1998, the
Company's retail sales grew from $0.92 million to $3.98 million, representing a
compound annual growth rate of 108%.
The Company's products are marketed through network marketing within
the United States and wholesale personal import sales outside the United States.
Network marketing enables the Company's independent distributors in the United
States (sometimes referred to herein as "Team Members") to earn profits by
selling Company products to retail consumers. Distributors may also develop
their own distributor downline organizations by sponsoring others to do business
in any market where the Company operates, entitling the sponsors to receive
overrides or commissions (cash incentives, including royalties and bonuses) on
product sales within their downline organizations.
Management believes that its network marketing system is ideally suited
to its products, which emphasize a healthy lifestyle, because sales of such
products are strengthened by ongoing personal contact between retail consumers
and distributors, most of whom use the Company's products themselves. The
Company's network marketing system appeals to a broad cross-section of people
throughout the world, particularly those seeking to supplement family income,
start a home-based business or pursue employment opportunities other than
conventional, full-time employment.
GROWTH STRATEGY
The Company intends to pursue a growth strategy comprised of the
following four principal elements:
EXPANSION OF PRODUCT OFFERINGS AND DEVELOPMENT OF NEW PRODUCT LINES.
The Company is committed to expanding its product line by developing and
offering new products and introducing existing products into markets where they
are not currently offered. The timely introduction of new, high quality products
creates sales opportunities for distributors, and also serves to generate
enthusiasm among distributors and provide them with additional promotional
opportunities to sell other Company products. During the past two years, the
Company has introduced 13 new products, bringing the total product line to 31 by
the close of 1998. With the additional products which the Company purchased as
part of the NuTech Acquisition, the American Outback Acquisition and the TeamUp
Acquisition, the Company now sells approximately 180 products.
MERGERS AND ACQUISITIONS. The Company's business plan includes growth
through mergers and acquisitions. The Company acquired certain assets of two
companies, NuTech and American Outback, which carry product lines using Emu Oil
and Aloe Vera as key ingredients. In January, the NuTech Acquisition brought in
approximately 300 distributors and $15,000 in monthly sales. Included in the
purchase were the rights to Aloe #9 for Japan and the United States, NuTech's
entire inventory and its distribution system. The American Outback Acquisition
brought in approximately 1,300 distributors, 450 of whom were on monthly
autoship. Monthly sales from this transaction are averaging approximately
$19,000.
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In September 1999, the Company purchased substantially all of the
assets of TeamUp, which assets included product lines such as Femme, Natural
Immunity and Trim Easy. The TeamUp Acquisition has brought in approximately
4,860 active distributors, 140 of whom are on monthly autoship. The TeamUp
Acquisition is expected to bring in approximately $200,000 in monthly sales.
These acquisitions expanded the Company's distributor base, increased
monthly sales volumes, and gave the Company a broad base of new products and
existing inventory. Throughout each of these transitions, the majority of
distributors and customers were retained. The Company intends to continue to
look for opportunities to merge or purchase smaller companies that have active
distributors and sales volumes, but are struggling with growth due to lack of
financing. The Company's strategy is to target companies that are in trouble
financially, lack product inventories, but which have active distributors and
sales. Potential companies must be compatible to the Company's marketing system
and must merge into the Company's compensation plan.
EXPANSION INTO NEW MARKETS. The opening of new markets is an important
component of the Company's business strategy. In 1997, the Company commenced
operations in Japan on a personal import basis. During 1998, Japan contributed
$2,814,240 of sales, representing 67.8% of the Company's total sales. The
Company believes there are numerous additional markets in which its network
marketing system and products may prove successful. The Company evaluates new
markets based, in part, on the Company's ability to create a distributor base in
the potential markets. In determining when and where to open new markets, the
Company will continue to seek to minimize the impact on distributor focus in
existing markets and to ensure that adequate distributor support services and
other Company systems are in place to support the growth. Although the Company
intends to expand into new markets, there can be no assurance that the Company
can open markets on a timely basis or that such new markets will prove to be
profitable. Significant regulatory and legal barriers must be overcome before
marketing can begin in any new market. In addition, expansion of the Company's
operations into new markets requires substantial working capital and capital
expenditures associated with both the regulatory compliance and operations
phases of the process. The lead-time and costs associated with opening
anticipated new markets may significantly exceed those of entering new markets
in the past due to greater regulatory barriers, the necessity of adapting to
entirely new regulatory systems and problems related to entering new markets
with different cultural bases and political systems from those encountered in
the past. The Company is informed that the lead-time necessary to open a new
market is generally up to one year, but may be more.
ENHANCEMENT OF SALES AND MOTIVATIONAL TRAINING. The Company will
continue to seek increased sales opportunities through its network marketing
system by utilizing extensive training and motivational programs. The Company
will also hold distributor seminars and conferences and other large scale events
and numerous training and motivational programs. The Company has formed an
alliance with OMC, Inc., a Japanese corporation, to act as its
communications/marketing firm for Asia. OMC, Inc. currently performs work for
companies such as Sony, Panasonic, and Honda. In addition, the Company will
continue to offer extensive training programs through various methods of
communication, including Company-sponsored conferences and seminars, live
teleconferences, prerecorded telephone message services, fax-on-demand systems,
broadcast faxes, printed materials, and the Company's Internet website,
featuring on-line ordering and volume checks.
PRODUCTS AND SERVICES
The Company markets and distributes approximately 180 different
nutritional and/or health products. The products which the Company sells are
intended to provide nutritional supplementation to the products users; the
products are not intended to diagnose, treat, cure or prevent any disease.
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The Company's core products can be divided into five categories: Health
Pack, Immune Pack, Heart Pack, Weight Loss Pack, and Specialized Products. The
following is a description of some of the Company's primary products within
those five categories:
Health Pack
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ARMOR GARD(TM). Armor Gard(TM) is a special combination of herbs,
vitamins, minerals and other nutrients designed to strengthen the body with a
focus on the immune system. Armor Gard(TM) was created to combine micronutrients
and specific herbal ingredients together to offer added health support and
enhance the body's various functions.
BODY BALANCE. Body Balance contains potassium and over 60 other
minerals in an ionic form. The ionic form is believed to increase the absorption
rate of the minerals. The product is designed to supplement diet and provide
minerals and trace minerals which are believed to be essential to the human body
but absent in normal food supplies.
BUFFERED VITAMIN C. Buffered Vitamin C is a corn-free, purely beet
derived ascorbic acid, designed especially for allergic individuals. This
product contains Calcium, Magnesium and Potassium whose carbonates and
bicarbonates are designed to cause a buffering action to help eliminate the
stomach upset which can occur from the acidity normally found in Vitamin C.
FORTRESS PLUS(TM). Fortress Plus(TM) is a formulation of antioxidants,
vitamins, minerals and herbal nutrients that are intended to help offset the
potential for premature aging. It is intended that the antioxidants neutralize
unwanted free radicals in the body.
MINERAL MAGIC IONIC MINERALS. Mineral Magic Ionic Minerals contains
CoQ10 and over 60 minerals in an ionic form. The ionic form is believed to
increase the absorption rate of the minerals. The product is designed to
supplement diet and provide minerals and trace minerals which are believed to be
essential to the human body but absent in normal food supplies.
OXYGEN PLUS. Oxygen Plus is a formula of stabilized oxygen designed to
purify water. It is manufactured from water, sodium chloride, sodium carbonate
and sodium sulfate.
RFV 29(TM). RFV 29(TM) is a combination of rain forest herbs. The
ingredients are 29 essential vitamins and minerals and other significant
botanicals, 12 of which come from the Brazilian Rain Forest. RFV 29(TM) is
designed to be a highly absorbable source of vitamins and minerals with generous
amounts of micronutrients.
VITA-GREENS. Vita-Greens is an all-natural "super-green" dietary
supplement powder designed to provide vitamins, minerals, enzymes, trace
minerals, antioxidants and essential amino acids. This dehydrated product
provides plenty of nutrients from their natural source for the body.
Immune Pack
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BODY GARD WITH LACTOFERRIN. Body Gard With Lactoferrin is a combination
of colostrum, echinacea and lactoferrin. Lactoferrin is a naturally occurring,
iron binding protein. It is the second most abundant protein in human colostrum,
the first milk secreted at the termination of pregnancy. It also is involved in
the metabolism and regulation of iron. Body Gard comes in tablet form.
CYTOLOG(TM). Cytolog(TM) is a liquid colostral derivative which
contains infopeptides. Infopeptides are chains of amino acids found in the human
body. Persons who have used Cytolog(TM) report a return to wellness from an
adverse health condition or a reduction in lapses in good health.
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MYCO-ENHANCE MUSHROOMS. Myco-Enhance Mushrooms is a combination of six
different medicinal mushrooms which are organically grown in a germ-free
environment plus a high potency Vitamin C. The mushrooms produce antiviral and
antibacterial compounds to protect themselves against invading pathogens. Here
are a few specific examples of the documented attributes of each mushroom:
o Reishi: In China, preparations made from the reishi mushroom are used on a
daily basis to promote heath, sound sleep and to increase resistance to
infections and heart disease.
o Shiitake: In Japan, preparations made from shiitake are used regularly to
treat any illness involving a depressed immune system. Shiitake is also
used to soothe bronchial inflammation, regulate incontinence and lower high
cholesterol.
o Cordyceps sinensis: This especially helpful for treating chronic cough,
asthma, and other respiratory conditions while acting as an antibacterial
agent.
o Maitake: This mushroom has the ability to lower high blood pressure,
stabilize blood sugar in diabetics, and protect against liver damage.
o Coriolus versicolor (also known as Trametes versicolor): In China, C.
versicolor is used widely to treat infection and/or inflammation of
urinary, digestive, and upper respiratory tracts, as well as liver ailments
that include chronic active hepatitis and hepatitis B.
o Schizophyllum commune: S. commune is prescribed regularly in Japan to treat
cancer patients. In addition, it's currently being studied as a treatment
for chronic fatigue syndrome and has shown significant antibacterial
activity useful in fighting Staphylococcus aureus, Escherichia coli, and
Klebsiella pneumoniae.
Heart Pack
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SMART HEART(TM). The Smart Heart(TM) Kit consists of a Smart Heart(TM)
Fiber Drink, Smart Heart(TM) Herbal Tablets, and a Smart Heart(TM) Metabolic
Formula. The Smart Heart(TM) Fiber Drink contains 3 types of soluble natural
fibers which provide benefits to cardiovascular health. The Smart Heart(TM)
herbal Tablets provide antidioxants and minerals associated with healthy hearts
and reduced risk of disease. The tablets are formulated in a base of Ayurvedic
herbs used in India to strengthen the heart and improve circulation. The Smart
Heart(TM) Metabolic Formula contains folic acid, Vitamin B12 and Vitamin B6,
demonstrated in animal and human studies to reduce homocysteine production in
the blood.
Weight Loss Pack
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BODY TRIM 1-2-3(TM). Body Trim 1-2-3(TM) is a formulation of components
which may be used individually for specific weight management purposes or
together for a complete program. Body Trim 1(TM) combines eight components,
including calcium pyruvate and chitosan, which are intended to increase strength
and training intensity, decrease body fat, enhance weight loss, increase lean
body mass, increase body protein uptake and bind fats and lipids before they are
absorbed through the digestive system. Body Trim 2(TM) is a weight management
program focused on increasing the metabolic rate of the user. Body Trim 3(TM) is
a blend of nineteen herbs with detoxifying properties that are intended to
facilitate the cleansing of toxins.
THE LITE SOLUTION(TM). The Lite Solution(TM) is an herbal formula made
up of a formulation of herbs, and it is designed to make the body's metabolism
work more efficiently, increase energy levels and satisfy feelings of hunger.
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Specialized Products
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ARTHRED(TM). Arthred(TM) is a patented, pre-digested collagen product
designed to nutritionally encourage and support healthy joint function.
Arthred(TM) is a source of collagen developed in Germany. Arthred(TM) comes in a
powder form and is taken as a dietary supplement.
CALCIUM ELENOLATE. This product is derived from olive leaf extract. A
compound from the leaf, oleuropein, and its chemical agent, elenolic acid, is
believed to have antibacterial properties and is an antioxidant.
CELLUTION(TM) BODY TONING CREAM. Cellution(TM) Body Toning Cream is a
scientific achievement in skin care which gives a silky, supple appearance to
problem areas, such as the thighs, hips, buttocks and upper arms. Beneath the
human skin lies a layer of fatty tissue. This fat can be deposited in a manner
which causes a "dimpled" appearance in the skin, known as cellulite. Women are
more susceptible to fat being deposited in this manner than men. Cellution (TM)
has been clinically tested as a contouring and body toning cream to aid in the
reduction of cellulite and to give the skin a more youthful appearance. It has
been found to be safe, effective and easy to use.
DETOX TEA(TM). Detox Tea(TM) is a blend of nineteen herbs. Users of
Detox Tea(TM) have reported increased energy, loss of fat and improved overall
health.
DHA OMEGA-3 FISH OIL. DHA (or docosahexaeonic acid) is an Omega 3 fatty
acid and is prepared from the oil of tuna. Omega 3 fatty acids are essential,
meaning that the body cannot manufacture them from other fats, and are important
for maintaining the proper function of cell membranes, particularly in the
retina and the brain.
MODIFIED CITRUS PECTIN. Modified Citrus Pectin is a form of pectin,
which is a soluble component of plant fiber derived from citrus fruits. It is
believed that Modified Citrus Pectin improves the function of natural killer
cells and other immune system compounds, and that it may act as an
"anti-adhesive agent," preventing certain cell interactions.
ORGANIC GERMANIUM. Organic Germanuim is a mineral whose atomic
structure readily accepts and transmits electrons and may have the ability to
stimulate electrical impulses. Organic Germanium may promote better circulation,
increased oxygen flow, and utilization.
PR10(TM). PR10(TM) is a formula in which capsaicin (a natural pain
relieving analgesic) is blended with seven herbs to aid in analgesia and
healing. PR10 is used to combat pain from arthritis, muscle spasm and
inflammation.
PROZAPLEX(TM). ProzaPlex(TM) is a product designed to provide those
herbal ingredients which are believed to most effectively support good emotional
and mental health. Its active ingredient is St. Johnswort, an herb which is
reported has being a safe and viable alternative to conventional antidepressant
drugs.
WILD YAM LOTION FOR MEN. Wild Yam Lotion For Men is a lotion which has
been formulated with natural ingredients to assist in the balance of hormones in
the male body.
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YMOTION - THE ORIGINAL WILD YAM CREAM. Ymotion is a moisturizing cream
containing extract from the wild yam plant. This extract contains diosgenin,
which is believed to help balance the hormonal cycles in women and may be a
factor in the bone building process. The specific herbs contained in Ymotion may
also help relieve symptoms of premenstrual syndrome and menopause.
Additional Products - NuTech and American Outback
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With the NuTech and American Outback Acquisitions, approximately 50
additional products have been added which have product formulations based on #9
Aloe Vera and Bush Recipe(R) Emu Oil.
#9 ALOE VERA. The Aloe Vera in the Company's products is organically
grown in the rich volcanic soil of Costa Rica and is processed within
twenty-four hours of harvesting. The Company believes that, due to the state of
the art processing procedures used in the Aloe Vera-based products which it
sells, the quality of its Aloe Vera products are vastly superior to those of
other sellers of Aloe Vera-based products.
BUSH RECIPE(R) EMU OIL. Emu oil is easily absorbed and transported
through the fatty tissue of the skin, making it an excellent vehicle for
delivering other therapeutic substances via topical application. Furthermore, it
is noncomedogenic, which means it doesn't clog pores. Bush Recipe(R) Emu Oil is
non-diluted and contains all of its natural properties. It is believed that the
natural form of emu oil is far superior to the pharmaceutical grade, which has
been processed so as to be clear and odorless.
The product formulations based on these two ingredients include
nutritional supplements, such as Nu-Aloe (an energy drink) and Super
Anti-oxidant (a vitamin tablet), skin care products targeting normal/dry and
oily skin types, including Non-Surgical Face Lift, and personal care products,
including shampoo and aromatherapy products.
Additional Products - TeamUp International
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With the TeamUp Acquisition, the Company added approximately 80 new
products, including Femme, Foundational Health Programs, Natural Immunity,
Superfood, Trim Easy and the Crystal Spring Counter Top Water Filtration System.
FEMME. Femme is a generic herbal tonic for women. It contains Dong
Quai, Chaste Tree, Wild Yam and other herbs. Femme is intended to relieve the
symptoms particular to women's health, such as pre-menstrual syndrome and
menopause.
FOUNDATIONAL HEALTH PROGRAMS. The TeamUp Foundational Health Programs
are a series of programs designed to improve general health. There are three
separate programs, one of which is designed to strengthen and make more
efficient the user's bowels. The second is designed to remove old waste and
fecal matter, years of accumulation from the bowel. The final program is
designed to pass more fiber to the diet for healthier bowel movements.
NATURAL IMMUNITY. Natural Immunity is a formula which contains
Echinacea, Siberian Ginseng and a variety of mushrooms. It is designed to
stimulate the immune system and promote general health.
SUPERFOOD. Superfood is a vitamin supplement containing Spirulina,
alfalfa, wheat grass, barley, beets, purple dulse seaweed and a nutritional
yeast. The ingredients are organically grown. It is designed to have a higher
absorption rates than other vitamin and mineral supplements.
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TRIM EASY. Trim Easy is a pure herbal product containing Ma Huang,
Salix Alba and kelp. It is designed to accelerate the rate at which the body
metabolizes fat by means of thermogenesis.
CRYSTAL SPRING COUNTER TOP WATER FILTRATION SYSTEM. The Crystal Spring
Counter Top Water Filtration System is a filtration system designed to reduce
lead, chlorine and other organic chemicals and to provide cleaner, more
drinkable water.
CRYSTAL SPRING SHOWER FILTRATION SYSTEM. The Crystal Spring Shower
Filtration System is a filtration system designed to reduce chlorine, enhance pH
balance and improve the water quality of shower water.
Services
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PRODUCT RETURN POLICY FOR RETAIL CUSTOMERS. The Company has a 100%
money-back guarantee on all of its products for retail customers. It is the
responsibility of each Team Member to refund the purchase price to any
unsatisfied customer. The customer's request must be made within 30 days of the
date of the product purchase to be valid. If the product was used, the empty or
partially filled container must be returned to the Company. Upon receipt of the
container and a copy of the customer's retail sales receipt with their name,
address and telephone number, the Company will promptly send a replacement to
the Team Member. The Company does not make cash refunds. The Company's product
return policy for retail customers has been approved by the Direct Selling
Association (the "DSA"), a national industry trade organization of network
marketing companies whose objective is to provide aid, support and guidance to
the network marketing industry.
PRODUCT RETURN POLICY FOR TEAM MEMBERS. A Team Member who is
dissatisfied with a product may request a refund or credit within 30 days of the
date of the product's purchase. Full, partially full and empty bottles are
eligible for refund. However, only one partially filled or empty container per
individual product will be honored. Unused products purchased during this same
period are eligible for refund if they are in the original packaging, factory
sealed and in resalable condition. Shipping expenses are not eligible for
refund. The Company's product return policy for Team Members has been approved
by the DSA.
PRODUCT MARKET. The nutritional supplement industry is growing and
management believes it is due primarily to heightened public awareness of the
positive effects of vitamins and other nutritional supplements. Many individuals
are now using nutritional supplements as a means of preventive health care.
Retail sales of nutritional supplements increased from approximately $3.5
billion in 1991 to approximately $4.2 billion in 1993, as reported by The
Overview of Nutritional Supplement Market prepared by the Council for
Responsible Nutrition, a research organization which prepares and provides
information and data regarding the nutritional supplement industry for
consumers. Furthermore, industry trade sources estimated that worldwide sales of
nutritional supplements were $4.7 billion in 1994 and $5.3 billion in 1995,
respectively.
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DISTRIBUTION AND MARKETING
The Company's products are distributed primarily through a network
marketing system, consisting of an extensive network of distributors.
Distributors are generally independent contractors who purchase products
directly from the Company for personal use or for resale to consumers within the
United States. Distributors may elect to work on a full-time or part-time basis.
The Company believes that its network marketing system appeals to a broad
cross-section of people worldwide, particularly those seeking to supplement
family income, start a home-based business or pursue employment opportunities
other than conventional, full-time employment, and that a majority of its
distributors work on a part-time basis. The Company believes that its network
marketing system is ideally suited to marketing its products because ongoing
personal contact between consumers and distributors strengthens sales of such
products.
Within the United States, distributors may earn profits by purchasing
the Company's products at wholesale prices (which are discounted 50% from
suggested retail prices) and selling the Company's products to customers at
suggested retail prices. All distributors, both inside and outside the United
States, who sponsor new distributors and establish their own downline
organizations may earn commissions on product sales on their entire downline.
There is no limit on the number of downline levels from which a distributor can
generate commissions.
To become a distributor, a person must be sponsored by an existing
distributor, pay an annual fee (which is currently $7.95), and be placed into a
Tracking Center, which is a point from which the Company "tracks" the sales
volume of the distributor and the sales volume of a distributor's downline
organization. Only two distributors (one on the "left side" and one on the
"right side") are first level to a Tracking Center. Thereafter, personally
sponsored distributors are placed in the downline on the sponsor's left or right
side, as decided by the sponsor. In order to receive any commissions or bonuses
from a Tracking Center, a distributor must make an initial purchase of $100 in
personal purchase volume. To maintain qualification for any commissions or
bonuses, a distributor must purchase a minimum of $100 or a maximum of $200 of
the Company's products every twenty-eight (28) days. All distributors are
allowed to participate in the Company's growth by sponsoring new distributors.
The Company computes the wholesale volumes purchased by the
distributors in qualified Tracking Centers at the close of each business day
during the 28-day cycle. Separate volumes are maintained for the left and right
sides of each Tracking Center. When the volumes on the lowest side of the
Tracking Center reaches $700 (the first pay step), a $100 commission will be
generated to the distributor. When the volume on the lowest side accumulates to
$2,200, an additional $250 commission will be paid. At a total volume of $3,700
on the lowest side, an additional $250 commission is generated. When the lowest
side reaches $5,500 (the last pay step in the cycle), the final $250 commission
is paid. This is a cumulative total of $850.
Upon reaching the $5,500 dollar level (or "cash out"), all of the
volume on the lowest volume side will be flushed and $5,500 will be flushed from
the strong leg. The remaining volume in the strong leg will not exceed $11,000.
The commission cycle then begins all over again. This cycle can be completed as
often as once per business day. There is no time restriction as to how long it
may take to complete this cycle. As long as qualification is maintained, the
accumulated volumes will be preserved. Product returns from the downline will be
debited against volume at the time the return is processed.
Distributors may qualify for a $150 "leadership bonus" each time one of
the distributor's Tracking Centers completes a pay cycle (cashes out) on the
same day as any personally sponsored distributor also completes a pay cycle.
This bonus applies only to those Tracking Centers of personally sponsored
distributors and is limited to $150 per day per sponsored distributor.
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A distributor may sign up for an "Autoship Program" which helps protect
distributors from losing qualification by automatically shipping them a
qualifying order within their 28-day cycle. In addition, when a distributor
signs up for the Autoship Program, the distributor becomes qualified to receive
a bonus (the "Right Start Bonus") for each new personally sponsored distributor.
The amount of the Right Start Bonus will be 25% of the new distributor's first
order. A distributor within the Autoship Program is also qualified to receive an
additional Right Start Bonus when that personally sponsored distributor signs up
for the Autoship Program. The amount of the additional Right Start Bonus will be
25% of that distributor's first Autoship order, up to a maximum bonus of $75.
When any Tracking Center progresses completely through the commission
cycle (cashes out) for the first time, the Company will authorize the
distributor to re-enter the downline with two new Tracking Centers at the
distributor's discretion which may be positioned anywhere at the bottom of the
distributor's downline. Re-entry may occur at any time. The qualification of
multiple Tracking Centers is $200 of personal purchase volume by the distributor
per each 28-day cycle.
The Company has also established the "Right Solution Rewards Program,"
which offers an increasing amount of cash bonuses and other awards based upon
the number of cycles a distributor completes.
The following table sets forth the approximate number of the Company's
distributors and the number of distributors ordering products at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Approximate Number of Total Distributors 30,624 20,484 6,064
Number of Distributors Ordering 7,814 13,714 6,064
</TABLE>
The Company maintains a computerized system for processing distributor
orders and calculating distributor commission and bonus payments which enables
it to remit such payments to distributors weekly. The Company believes that
prompt remittance of royalties is vital to maintaining a motivated network of
distributors and that its distributors' loyalty to the Company has been enhanced
by the Company's history of consistently making royalty and bonus payments on a
scheduled basis.
INTERNET. The Company maintains a site on the World Wide Web at
"www.rightsolution.com." The Company has enhanced the system to allow on-line
ordering and volume checks by the distributors.
MARKETING. Each distributor is responsible for sales of the Company's
product within his or her downline. The Company relies on word of mouth and
testimonials from previous or existing customers for its primary advertising.
The Company has developed sales materials which a graphic designer has
professionally prepared and which the Company's legal counsel has reviewed for
DSA and regulatory compliance. These sales materials include product
descriptions, written in both English and in Japanese.
SPONSORING. The Company has established a system for the sponsoring of
new distributors. The Company prepares communication and educational training
materials for distributors to assist in the sponsoring of new distributors. The
Company also engages in weekly conference calls with distributors and sends a
newsletter to its distributors. The Company has an established advisory board
for assistance and consultation in connection with sponsoring matters.
PRODUCT DISTRIBUTION. The Company's products are distributed to all
markets from the Company's warehouse located in North Las Vegas, Nevada.
11
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COMPETITION
The Company is subject to significant competition for the recruitment
of distributors from other network marketing organizations, including those that
market nutritional, health and dietary supplements, as well as those which
market other types of products. Some of the Company's competitors are
substantially larger and have available considerably greater financial resources
than the Company. The Company's ability to remain competitive depends, in
significant part, on the Company's success in sponsoring and retaining
distributors through an attractive compensation plan and other incentives. The
Company believes that its bonus availability program, recognition and rewards
program and other compensation and incentive programs provide its distributors
with significant earning potential. However, there can be no assurance that the
Company's programs for recruitment and retention of distributors will be
successful.
The market for nutritional, health and dietary supplements is
characterized by extensive competition, frequent new product introductions,
short product life cycles, rapid price declines and eroding profit margins, and
changing customer preferences. This market segment includes numerous
manufacturers, distributors, marketers, retailers and physicians that actively
compete for the business of consumers, both in the United States and Japan. The
market is highly sensitive to the introduction of new products that may rapidly
capture a significant share of the market. The Company expects to continue to
face substantial competition in its efforts to successfully capture a
significant share of the market. There are a number of companies that currently
offer competing products, and it can be expected that additional competing
products will be introduced by other companies in the future. In addition, there
are a variety of channels of distribution for nutritional supplements other than
through network marketing and distribution systems, including direct response
marketing, specialty retail health and nutrition stores, drug stores and
supermarkets. Many of the Company's existing and potential competitors have
greater financial, marketing, distribution, and research capabilities than the
Company. The performance of the Company will depend on its ability to develop
and market new products that can gain customer acceptance and loyalty, as well
as its ability to adapt its product offerings to meet changing pricing
considerations and other market factors. The Company attempts to differentiate
itself from competitors by adhering to its "mission statement" which reads as
follows:
The Right Solution will distribute the finest life-enhancing
products in the world. Through effective leadership,
management and entrepreneurial marketing, we will provide an
opportunity to our Team Members, customers and employees to
earn a fair profit on their investment of time and money.
PRODUCT MANUFACTURING AND DEVELOPMENT
The Company anticipates continuing to expand its product line through
the development of new products. New product ideas are derived from a number of
sources, including trade publications, scientific and health journals, the
Company's executives, staff, consultants, and outside parties. In advance of
introducing products into its markets, the Company consults its Medical Advisory
Board, comprised of Ken Kroll, M.D., FICS., Hiroshi Mitsuoka, M.D., Betty Kamen,
Ph.D., and Jack Akers, M.D., Ph.D., for advice. In addition, legal counsel and
other representatives retained by the Company investigate product formulation
matters as they relate to regulatory compliance and other issues.
12
<PAGE>
All of the Company's products are provided by outside companies.
NutriCology, Inc. ("NutriCology") currently manufactures most of the Company's
powder, tablet, and capsule products. The Company's agreement with NutriCology
provides, among other things, the ability for the Company to source and develop
products with other manufacturers. As a result of the NuTech Acquisition, the
Company has agreed to engage ACI as the exclusive manufacturer of certain
product lines which the Company purchased in the NuTech Acquisition. Also, as a
result of the American Outback Acquisition, agreed to engage American Outback as
the exclusive manufacturer of Bush Recipe(R) Emu Oil. The Company's ownership of
product formulations and trademarks for substantially all of the Company's
nutritional products gives the Company the option to seek additional
manufacturers, including ACI, Gourmet Mushrooms, Horizon Labs, Paragon Labs,
Protein Research, and Traco Labs.
The Company's ability to enter new markets and sustain satisfactory
levels of sales in each market has been in the past and is likely to continue to
be dependent in significant part upon its own ability and the ability of its
manufacturers to develop new products and reformulate existing products for
introduction into the Company's markets. Beginning in 1998, the Company has
significantly expanded its in-house product research and development and product
formulation staff, which now consists of several employees of the Company, its
Medical Advisory Board, and various consultants, who are increasingly involved
in such activities.
The Company owns the proprietary rights to substantially all of its
health and nutritional supplements' formulations and trademarks. The Company has
formed several alliances with its manufacturers to assure, among other things,
that products are organically grown and that inventory levels will remain
constant. However, there can be no assurance that another company will not
replicate one of the Company's products.
MANAGEMENT INFORMATION SYSTEMS
The Company has actively addressed Year 2000 compliance issues. The
Company has installed a new computer system along with a new processor software
which handles sales, inventory, and distributor records. Vertex software is
being installed to accommodate updated versions of state tax computations. Vista
Office to Office is a system that allows enhanced distributor services along
with tracking capabilities of all distributor transactions. Frame relay has been
added in order to activate our Internet ordering and application service. The
Company is now completely automated via the Internet and so can offer the all
distributors the capability to complete every transaction related to their
businesses via the Internet. The Company's website has been implemented, along
with a fax on demand system which mirrors the information available on the
website. Dedicated T-1 service has been added to the telephone system in order
to reduce long distance and local service charges. Weekly conference calls are
held which give distributors information on business opportunities, corporate
updates, etc., as well as new Team Member question sessions. The Company's new
warehouse facility now has automated shipping and tracking methods that are
connected to the main database. To ensure protection for critical systems, an
upgraded cooling system is being installed, along with upgraded backup batteries
for both general power and computer power. Accounting and customer service
computers and software have been upgraded to include Internet services at each
station dealing with customer service. All credit card terminals have been
replaced with Y2K compliant equipment. An e-mail database has been created for
ordering, internal, and external communications.
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<PAGE>
INSURANCE
Although the Company does not engage in the manufacture of any of the
products it markets and sells, the Company could be exposed to product liability
claims. The Company has not had any such claims to date. Although the Company
maintains a limited amount of product liability insurance, each of the Company's
manufacturers provides additional insurance of at least two million dollars
covering products which the Company sells. There can, however, be no assurance
that the Company will not be subject to claims in the future or that available
insurance coverage will be adequate. A partially or completely uninsured claim
against the Company, if successful and of sufficient magnitude, would have a
material adverse effect on the Company.
TRADEMARKS
The Company has received federal trademark registration for THE RIGHT
SOLUTION(R). The following products have trademark applications pending: ARMOR
GARD(TM), ARTHRED(TM), BODY TRIM 1-2-3(TM), CELLUTION(TM), CYTOLOG(TM), DETOX
TEA(TM), FORTRESS PLUS(TM), THE LITE SOLUTION(TM), PR10(TM), PROZAPLEX(TM), RFV
29(TM), SMART HEART(TM), all Bush Recipe products and all Emu Oil products which
were purchased from American Outback, and all Aloe products which were purchased
from NuTech International. The Company intends to continue to seek trademark
protection for a number of the products and brand names under which the
Company's products are marketed, where applicable. There can be no assurance
that such protection will be obtained. The Company intends to obtain
international trademarks, particularly Japanese trademarks, as the Company
enters foreign markets. Trademark registrations are either issued or pending in
the United States Patent and Trademark Office and in comparable agencies in many
other countries. The Company considers its trademarks and tradenames to be an
important factor in its business.
The Company will be required to rely upon common law concepts of
confidentiality and trade secret laws to protect its product formulations. There
can be no assurance that the foregoing will protect the formulations or provide
adequate remedies for the Company in the event of unauthorized use or disclosure
of such formulations, or that others will not be able to independently develop
such formulations. Except for ARTHRED(TM), the Company's product formulations
are not protected by patents and are generally not patentable.
GOVERNMENT REGULATION
The Company is subject to and affected by extensive laws, governmental
regulations, administrative determinations, court decisions and similar
constraints (as applicable, at the federal, state and local levels) including,
among other things, regulations pertaining to (i) the formulation,
manufacturing, packaging, labeling, distribution, importation, sale and storage
of the Company's products, (ii) product claims and advertising (including direct
claims and advertising by the Company as well as claims and advertising by
distributors, for which the Company may be held responsible), (iii) the
Company's network marketing system, (iv) transfer pricing and similar
regulations that affect the personal import laws, and (v) taxation of
distributors, which in some instances may impose an obligation on the Company to
collect the taxes and maintain appropriate records.
14
<PAGE>
PRODUCTS. The formulation, manufacturing, packaging, storing, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies, including the Food and Drug
Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission ("CPSC"), the United States Department of Agriculture
("USDA"), the Environmental Protection Agency ("EPA") and the United States
Postal Service. The Company's activities are also regulated by various agencies
of the states and localities. The FDA, in particular, regulates the formulation,
manufacture and labeling of foods and dietary supplements, such as those
distributed by the Company. FDA regulations require manufacturers and
distributors of certain products to meet relevant good manufacturing practice
("GMP") regulations for the preparation, packing and storage of these products.
GMP's for dietary supplements have yet to be promulgated, but are expected to be
proposed. The Company does not anticipate that the promulgation of any GMP's for
dietary supplements would have a material impact on the Company.
The 1994 Dietary Supplement Health and Education Act ("DSHEA") revised
the provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA") concerning
the composition and labeling of dietary supplements and, the Company believes,
is generally favorable to the dietary supplement industry. The legislation
creates a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement which contains a new dietary ingredient (i.e., one
not on the market before October 15, 1994) will require evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Manufacturers of dietary supplements that make certain types of
statements on dietary supplements, including certain product performance claims,
must have substantiation that such statements are truthful and not misleading.
The majority of the products marketed by the Company are classified as
dietary supplements under the FFDCA. In addition, the adoption of new
regulations in any of the Company's markets, or changes in the interpretation of
existing regulations, could have a material adverse effect on the Company. In
September 1997, the FDA issued regulations governing the labeling and marketing
of dietary supplement products. The regulations cover the following: (1) the
identification of dietary supplements and their nutrition and ingredient
labeling; (2) the terminology to be used for nutrient content claims, health
content claims, and statements of nutritional support; (3) labeling requirements
for dietary supplements for which "high potency" and "antioxidant" claims are
made; (4) notification procedures for statements on dietary supplements; and (5)
pre-market notification requirements for new dietary ingredients in dietary
supplements. The notification procedures became effective in November 1997,
while the new labeling requirements became effective in March 1999. The Company
was required to revise a substantial number of its product labels by the
effective date. The cost to the Company of such revisions was approximately
$30,000. In addition, the Company is required to continue its ongoing program of
securing substantiation of its product performance claims and of notifying the
FDA of certain types of performance claims made for its products.
In addition, in certain markets, including the United States, claims
made with respect to dietary supplements or other products of the Company may
change the regulatory status of the products. In the U.S., for example, it is
possible that the FDA could take the position that claims made for certain of
the Company's products place those products within the scope of an FDA
"over-the-counter" ("OTC") drug monograph. OTC monographs prescribe permissible
ingredients and appropriate labeling language, and require the marketer or
supplier of the products to register and file annual drug listing information
with the FDA. In the event that the FDA asserted that product claims for some of
the Company's products caused them to fall within the scope of OTC monographs,
the Company would be required either to comply with the applicable monographs or
change the claims made in connection with the products. There can be no
assurance that the Company could do so effectively, or that any such changes
would not adversely affect sales and marketing of an affected product. The
Company's substantiation program involves compiling and reviewing the scientific
literature pertinent to the ingredients contained in the Company's products.
15
<PAGE>
As a marketer of food and dietary supplements and other products that
are ingested by consumers, the Company is subject to the risk that one or more
of the ingredients in its products may become the subject of adverse regulatory
action. For example, on April 10, 1996, the FDA issued a statement warning
consumers not to purchase or ingest dietary supplements containing ephedrine
(found in the ingredient Ma Huang) that are claimed to produce such effects as
euphoria, heightened awareness, increased sexual sensations or increased energy,
because these products pose significant adverse health risks, including
dizziness, headache, gastrointestinal distress, irregular heartbeat, heart
palpitations, heart attack, strokes, seizures, psychosis, and death. The Company
does not market either of its products containing Ma Huang (Trim Easy and Lite
Solution) with any of these claims. On June 4, 1997, the FDA issued a proposed
regulation for dietary supplements containing ephedrine alkaloids. The proposed
regulation would prohibit dietary supplements containing eight milligrams or
more of ephedrine alkaloids per serving, and would not permit such products to
contain any other stimulant, diuretic, or laxative ingredients. In addition,
labeling of supplements would be prohibited from suggesting or recommending
conditions of use that would result in an intake of eight milligrams or more of
ephedrine alkaloids within a six-hour period, or a total daily intake of 24
milligrams or more. The FDA proposal would also require a warning not to take
the product for more than seven days, and would prohibit the supplements from
being represented, either expressly or implicitly, as being suitable for
long-term uses, such as for weight loss or body building. Similarly, claims for
increased energy, increased mental concentration, or enhanced well-being that
encourage the consumer to take more of the product to achieve more of the
purported effect would be required to be accompanied by a warning stating that
taking more than the recommended serving may cause a heart attack, stroke,
seizure, or death.
The Company is reviewing the possible impact of the FDA proposal, if it
is finalized in its current form, upon the Company's continued marketing of
either of its products containing Ma Huang. In response to the proposal, or to a
final regulation which is substantially similar to the proposal, the Company may
be required to (i) withdraw or reformulate its products with reduced ephedrine
levels, or with a substitute for Ma Huang, (ii) re-label its products with
different warnings or revised directions for use, and/or (iii) not make certain
statements, possibly including weight loss, with respect to any of its products
containing Ma Huang. Even in the absence of an FDA final regulation, the Company
may elect to reformulate and/or re-label its products containing Ma Huang. While
the Company believes that its products containing Ma Huang could be reformulated
and re-labeled, there can be no assurance in that regard or that reformulation
and/or re-labeling would not have an adverse effect on sales of such product.
Some of the products marketed by the Company are considered
conventional foods and are currently labeled as such. Both this category of
products and dietary supplements are subject to the Nutrition, Labeling and
Education Act ("NLEA"), and regulations promulgated thereunder, which regulates
health claims, ingredient labeling, and nutrient content claims characterizing
the level of a nutrient in the product.
The FTC, which exercises jurisdiction over the advertising of all the
Company's products, has in the past several years, instituted enforcement
actions against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees and monetary payments by the companies involved. In addition,
the FTC has increased its scrutiny of the use of testimonials, such as those
which are utilized by the Company. While the Company has not been the target of
FTC enforcement action for the advertising of its products, there can be no
assurance that the FTC will not question the Company's advertising or other
operations in the future. In November of 1998, the FTC issued a guide for the
dietary supplement industry, describing how the FTC applies the law which it
administers to dietary supplements advertisements. It is unclear whether the FTC
will subject such advertisements, including those of the Company, to increased
surveillance to ensure compliance with the principles set forth in the guide.
16
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Through its manuals, seminars and other training materials and
programs, the Company attempts to educate its distributors as to the scope of
permissible and impermissible activities in each market. The Company also
investigates allegations of distributor misconduct. However, the Company's
distributors are independent contractors, and the Company is not able to
directly monitor all distributor activities. As a consequence, there can be no
assurance that the Company's distributors will comply with applicable
regulations. Misconduct by distributors could have a material adverse effect on
the Company in a particular market or in general.
In markets outside the United States, including Japan, prior to
commencing operations or marketing its products, the Company may be required to
obtain approvals, licenses, or certifications from a country's ministry of
health or comparable agency. Approvals or licensing may be conditioned on
reformulation of the Company's products for the market or may be unavailable
with respect to certain products or product ingredients. The Company must also
comply with local product labeling and packaging regulations that vary from
country to country. To date, the Company has retained legal counsel in Japan to
provide opinions as to the Company's compliance laws and regulations.
The Company is unable to predict the nature of any future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products not able to be reformulated,
imposition of additional record keeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
additional scientific substantiation regarding product ingredients, safety or
usefulness. Any or all such requirements could have a material adverse effect on
the Company's results of operations and financial condition.
NETWORK MARKETING SYSTEM. The Company's network marketing system is
subject to a number of federal and state regulations administered by the FTC and
various state agencies. Regulations applicable to network marketing
organizations are generally directed at ensuring that product sales are
ultimately made to consumers and that advancement within such organizations be
based on sales of the organizations' products rather than investments in the
organizations or other non-retail sales related criteria. For instance, in
certain markets there are limits on the extent to which distributors may earn
commissions on sales generated by distributors that were not directly sponsored
by the distributor. Where required by law, the Company obtains regulatory
approval of its network marketing system or, where such approval is not
required, the favorable opinion of local counsel as to regulatory compliance.
However, the Company remains subject to the risk that, in one or more of its
markets, its marketing system could be found not to be in compliance with
applicable regulations. Failure by the Company to comply with these regulations
could have a material adverse effect on the Company in a particular market or in
general.
The Company is also subject to the risk of private party challenges to
the legality of its network marketing system. For example, in WEBSTER v.
OMNITRITION INTERNATIONAL, INC., 79 F.3d 776 (9th Cir. 1996), the "multi-level
marketing" program of Omnitrition International, Inc. ("Omnitrition") was
challenged in a class action by certain Omnitrition distributors who alleged
that Omnitrition was operating an illegal "pyramid scheme" in violation of
federal and state laws. The Company believes that its network marketing system
satisfies the standards set forth in the Omnitrition case and other applicable
statutes and case law defining a legal marketing system, in part based upon
significant differences between the Company's marketing system and that
described in the Omnitrition case. Further, it is an ongoing part of the
Company's business to monitor and respond to regulatory and legal developments,
including those that may affect its network marketing system. However, the
regulatory requirements concerning network marketing systems do not include
"bright line" rules and are inherently fact-based. An adverse judicial
determination with respect to the Company's network marketing system could have
a material adverse effect on the Company. Among other things, such a
determination could require the Company to make modifications to its network
marketing system, result in negative publicity or have a negative impact on
distributor morale. In addition, adverse rulings by courts in any proceedings
challenging the legality of multi-level marketing systems, even in those not
involving the Company, could have a material adverse effect on the Company.
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COMPLIANCE PROCEDURES. As indicated above, the Company, its products
and its network marketing system are subject, both directly and indirectly
through distributors' conduct, to numerous federal, state and local laws and
regulations in all its markets. In order to assist the Company in achieving and
maintaining compliance with these numerous laws and regulations, the Company
petitioned for membership in the DSA in 1996. The DSA is a national trade
association of direct sellers whose commitment to ethical business practices and
consumer service has resulted in its self-regulating Code of Ethics. Membership
approval in this organization takes approximately one year as the DSA evaluates
all of the petitioning company's manuals, forms, products, policies, and
procedures for compliance to existing and forthcoming laws and regulations. The
Company was accepted as a full-fledged member of the DSA in December of 1997 and
continues to uphold the guidelines set forth by the DSA.
In 1996, the Company began to institute formal regulatory compliance
measures by developing a system to identify specific complaints against
distributors and to remedy any violations by distributors through appropriate
sanctions, including warnings, suspensions and, when necessary, terminations. In
its manuals, seminars and other training programs and materials, the Company
emphasizes that distributors are prohibited from making therapeutic claims for
the Company's products.
The Company's general policy regarding acceptance of distributor
applications from individuals who do not reside in one of the Company's markets
is to refuse to accept such individual's distributor application.
In order to comply with regulations that apply to both the Company and
its distributors, the Company conducts considerable research into the applicable
regulatory framework prior to entering any new market to identify all necessary
licenses and approvals and applicable limitations on the Company's operations in
that market. The Company devotes substantial resources to obtaining such
licenses and approvals and bringing its operations into compliance with such
limitations. The Company also researches laws applicable to distributor
operations and revises or alters its distributor manuals and other training
materials and programs to provide distributors with guidelines for operating a
business, marketing and distributing the Company's products and similar matters,
as required by applicable regulations in each market. The Company, however, is
unable to monitor its supervisors and distributors effectively to ensure that
they refrain from distributing the Company's products in countries where the
Company has not commenced operations, and the Company does not devote
significant resources to such monitoring. In the event that the Company
discovers distributor misconduct, it imposes disciplinary measures against the
distributor ranging from probation to expulsion.
In addition, regulations in existing and new markets are often
ambiguous and subject to considerable interpretive and enforcement discretion by
the responsible regulators. Moreover, even when the Company believes that it and
its distributors are initially in compliance with all applicable regulations,
new regulations are regularly being added and the interpretation of existing
regulations is subject to change. Further, the content and impact of regulations
to which the Company is subject may be influenced by public attention directed
at the Company, its products or its network marketing system, so that extensive
adverse publicity about the Company, its products or its network marketing
system may result in increased regulatory scrutiny.
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It is an ongoing part of the Company's business to anticipate and
respond to such new and changing regulations and make corresponding changes in
the Company's operations to the extent practicable. However, while the Company
devotes considerable resources to maintaining its compliance with regulatory
constraints in each of its markets, there can be no assurance that the Company
would be found to be in full compliance with applicable regulations in all of
its markets at any given time or that the regulatory authorities in one or more
markets will not assert, either retroactively or prospectively or both, that the
Company's operations are not in full compliance. Such assertions or the effect
of adverse regulations in one market could negatively affect the Company in
other markets as well by causing increased regulatory scrutiny in those other
markets or as a result of the negative publicity generated in those other
markets. Such assertions could have a material adverse effect on the Company in
a particular market or in general. Furthermore, depending upon the severity of
regulatory changes in a particular market and the changes in the Company's
operations that would be necessitated to maintain compliance, such changes could
result in the Company experiencing a material reduction in sales in such market
or determining to exit such market altogether. In such event, the Company would
attempt to devote the resources previously devoted to such market to a new
market or markets or other existing markets, but there can be no assurance that
such transition would not have an adverse effect on the Company's business and
results of operations either in the short or long term.
EMPLOYEES
As of December 31, 1997 and 1998, the Company had thirty and twenty-six
full-time employees, respectively. These numbers do not include the Company's
distributors, who are independent contractors rather than employees of the
Company. The Company considers its employee relationships to be satisfactory.
None of the Company's employees is a member of any labor union, and the Company
has never experienced any business interruption as a result of any labor
disputes.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION.
THIS "MANAGEMENT DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION"
SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S AUDITED AND UNAUDITED FINANCIAL
STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE
HEREIN. THIS SECTION INCLUDES FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES WHICH ARE BASED UPON THE COMPANY'S BELIEFS, AS WELL AS ASSUMPTIONS
MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS PREDICTED BY SUCH FORWARD-LOOKING
STATEMENTS DUE TO VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RISKS
AND UNCERTAINTIES WHICH ARE DISCUSSED BELOW.
PRESENTATION OF RETAIL SALES. Throughout this report, "total sales" are
determined as the gross sales amounts, including shipping and handling,
reflected on the Company's invoices to its distributors. The Company does not
receive the amount reported as "retail sales," and the Company does not monitor
the actual retail prices charged by the distributor for the Company's products.
"Wholesale sales" represent the actual purchase prices paid to the Company by
its distributors, after giving effect to the distributor discount. The Company
receives its wholesale sales price in cash or through credit card payments upon
receipt of orders from distributors. The Company's "gross profit" consists of
wholesale sales less "cost of goods sold," consisting of the prices paid by the
Company to its manufacturers for products. Costs related to product shipments,
foreign duties and tariffs and similar expenses, as well as "commissions and
bonuses," are accounted for as selling, general and administrative expenses. The
Company's use of "total sales" in reporting financial and operating data
reflects the fundamental role of "total sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor commissions and bonuses are paid.
RESULTS OF OPERATIONS
The Company's results of operations for the periods described below are
not necessarily indicative of results of operations for future periods, which
depend upon numerous factors including the Company's ability in the future to
enter new markets and introduce additional and new products into its markets.
19
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997. Sales for the twelve months ended
December 31, 1998 increased 34.6% to $3.98 million, as compared to sales of
$2.96 million in the prior year because of new product introductions and growth
in existing markets.
Gross profit of $3.18 million for 1998, was $894,329, or 39.1% higher
than the gross profit of $2.28 million in the prior year. As a percentage of
sales, gross profit for 1998 as compared to the same period in the prior year
increased modestly from 77.1% to 79.7%. The increase in gross profit as a
percentage of sales primarily resulted from a decrease in costs of goods sold,
which decreased from 22.9% of retail sales in 1997 to 20.3% in 1998. The
decrease in costs of goods sold reflects negotiated lower shipping costs, price
reductions in manufacturing contracts, and volume purchase discounts.
Selling, general and administrative expenses, as a percentage of sales,
were 108.9% for 1998 as compared to 87% for the same period in 1997. These
expenses for the same periods increased 68.4% to $4.34 million from $2.58
million in the prior year. The increase resulted from forecasted expansion costs
for opening Japan market, excessive merchant account charges attributable to
opening of a foreign market, excessive overseas communication costs, excessive
receivable debt, excessive labor associated with Y2K compliance, and product
research and development.
No income taxes are due or refundable for 1998 or 1997 because of the
application of unused net operating loss carryforwards. In 2010, $106,500 of
unused operating loss carryforwards expire, while $286,900 and $1.16 million
expire in 2012 and 2018, respectively.
RESULTS FOR PERIODS ENDING SEPTEMBER 30, 1999 COMPARED TO PERIODS
ENDING SEPTEMBER 30, 1998. Revenue of $944,894 in the three month period ended
September 30, 1999 decreased 3.66% from the third quarter of 1998. On a year to
date basis, revenue in the nine month period ended September 30, 1999 totaled
$2.49 million, an decrease of 18.96% from the first three quarters of fiscal
1998. The Company's sales decreased because of weakened sales in Japan which
resulted from difficulties encountered in integrating into the Japanese markets
nd weakness in the Japanese economy.
Cost of revenue was $158,786 in the third quarter, or 16.8% as a
percent of revenue, as compared to $163,973 and 16.92% as a percent of revenue
in the third quarter of the prior year. On a year to date basis, cost of revenue
as $419,344, or 16.84% as a percent of revenue, as compared to $591,411, or
19.25% as a percent of revenue, through the third quarter of the prior year. The
cost of goods sold as a percentage of net sales decreased because the Company
has negotiated better prices from suppliers and because the Company has made its
shipping process more efficient.
The Company's gross profit in the three month period ended September
30, 1999 was $786,108, compared to $816,810 for the comparable quarter for 1998.
On a year to date basis, gross profit in the nine month period ended September
30, 1999 was $2.07 million, compared to $2.48 million for the first three
quarters of fiscal 1998. The decrease in gross profits is a result of lower
sales.
Selling, general and administrative costs were $1.06 million in the
third quarter, compared to $1.06 million in the third quarter of the prior year.
Year to date selling, general and administrative costs were $2.95 million, down
3.13% from $3.04 million the prior year. The decrease on a year to date basis
was due, in part, to the reduced commission costs which resulted (a) from lower
sales revenues and (b) the Company's improvement of its internal systems for
payment of commissions which created more accurate and efficient payments.
20
<PAGE>
Net loss increased by $35,889 to $299,736 for the three months ended
September 30, 1999 from a loss of $252,648 for the three months ended September
30, 1998. On a year to date basis, the Company's net loss in the nine month
period ended September 30, 1999 increased to $966,386 from $599,926 in the first
hree quarters of 1998. The increase in net loss for the current year is
primarily due to (a) reduced sales resulting from weakened sales in Japan due to
difficulties encountered in integrating into the Japanese markets and weakness
in the Japanese economy, and (b) increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital needs and capital expenditure
equirements have increased as a result of the Company's growth and expansion,
particularly in Japan. Increases in required working capital and capital
expenditure requirements are expected to be met from cash flow from operations,
potential future acquisitions and the sale of the Company's debt and equity
securities. For fiscal year 1998, the Company's working capital position
worsened to ($407,491) at December 31, 1998 from ($74,278) at December 31, 1997.
This decrease was primarily attributable to increased selling, general and
administrative expenses incurred with the expansion of the Company's business.
Accounts and other receivables decreased from $168,600 at December 31, 1997 to
$101,466 at December 31, 1998. Inventory decreased from $277,730 to $222,525 at
December 31, 1997 and 1998, respectively. Accounts payable increased from
$319,886 at December 31, 1997 to $375,950. Accrued liabilities, including
interest and taxes, increased from $78,600 to $265,647 at December 31, 1997 and
1998, respectively.
As of September 30, 1999, the Company had a working capital deficit of
($641,423), as compared with a working capital balance of ($460,745) as of
September 30, 1998. This decrease was attributable an increase in interest
accrued on the Company's 12% convertible notes (the "Notes").
For fiscal year 1998, the Company's operations used cash flow of
$846,128, compared to $57,692 for the previous fiscal year. In 1998, cash used
by operating activities has primarily resulted from the Company's net loss in
1998.
For the first three quarters of 1999, the Company's operations used
cash flow of $570,726 as compared to $865,286 for the first three quarters of
1998. For the first three quarters of 1999, cash used by operating activities
has primarily resulted from net losses and has been partially offset by
increases non-cash expenses, including accrued liabilites and accounts payable.
The Company used cash in investing activities of $79,125 in 1998, as
compared to $67,927 in 1997. Cash used in investing activities was primarily for
investments in management information systems and the expansion of existing
facilities.
For the nine months ending September 30, 1999, the Company used cash in
investing activities of $16,972, as compared to $76,302 for the comparable
period in 1998. Cash used in investing activities was primarily for the purchase
of property and equipment.
The Company generated $942,718 in cash flow from financing activities
in 1998 and $120,800 in 1997. The increase primarily resulted from the issuance
of $875,000 of Notes. The increase in net cash from financing activities was
offset by net cash outflows to operating and investing activities.
The Company generated $605,004 in cash flow from financing activities
in the first three quarters of 1999 and $941,834 in the first three quarters of
1998. In the first three quarters of 1999, the Company issued additional Notes
in the aggregate principal amount of $312,431. The Company also issued Common
Stock for an aggregate consideration of $205,000. Further, the Company borrowed
$87,573 from related parties during the first three quarters of 1999. The
increase in net cash from financing activities was offset by net cash outflows
to operating and investing activities.
Stockholders' deficit increased $1.19 million to $1.47 million in 1998.
During 1998, a net loss of $1.2 million was partially offset by $9,804 from the
issuance of common stock in connection with the merger of the Company with Hali
Sales Corp.
21
<PAGE>
In the first three quarters of 1999, stockholders' deficit decreased
$31,014 to $1.46 million. In the first three quarters of 1999, a net loss of
$966,386 was offset by the issuance of shares of the Company's Common Stock in
each of the NuTech, American Outback and TeamUp Acquisitions, and by the
issuance of shares of the Company's Common Stock in private transactions.
Cash, cash equivalents and marketable securities totaled $19,711 at
December 31, 1998 compared to $2,246 at December 31, 1997. At September 30,
1999, the Company's cash, cash equivalents and marketable securities totaled
$37,017, as compared to $2,492 at September 30, 1998.
The Company has not been subjected to material price increases by its
suppliers in recent years. The Company believes that it has the ability to
respond to a portion or possibly all of any price increases by raising the price
of its products. Purchases by the Company from its suppliers are generally made
in U.S. Dollars, while sales to distributors are generally made in local
currencies. Consequently, strengthening of the U.S. Dollar versus the Japanese
Yen can have a negative impact on operating margins and can generate transaction
losses on intercompany transactions. During 1998, the Japanese Yen weakened
against the U.S. Dollar resulting in a foreign exchange loss of $12,871.
On May 12, 1998, the Company completed the acquisition by merger of
Hali Sales Corp., a Delaware corporation ("Hali"), with the Company as the
surviving corporation. Hali had limited assets and approximately 970
shareholders of record and was acquired by the Company in order to increase its
shareholder base. The Company issued one (1) share of its Common Stock in
exchange for each nine and eight hundred four one-thousandths (9.804) shares of
Hali common stock issued and outstanding on the effective date of the merger.
Hali had no active operations at the time of the merger with the Company.
In May, 1998, the Company commenced a private placement within the
United States of twelve percent (12%) convertible notes (the "Notes"). The Notes
bear interest at the rate of twelve percent (12%) per annum and are due on the
first day the Company trades publicly. The Notes are convertible, at the option
of the holder, into shares of the Company's common stock, $0.001 par value
("Common Stock"), at an initial conversion price of $0.80 per share. The Notes
may be called for conversion when the average of the bid and asked prices of the
Common Stock exceeds $1.00 per share for ten (10) consecutive days. In 1998, the
Company issued $475,000 of Notes to United States investors. In the first three
quarters of 1999, the Company issued $187,431 of Notes to United States
investors.
In May, 1998, the Company also commenced a private placement of Notes
outside the United States. In 1998, the Company issued $400,000 of Notes to
investors outside the United States. In the three quarters of 1999, the Company
issued $125,000 of Notes to investors outside the United States.
At December 31, 1998, the Company had $370,592 of notes payable to
related parties. These notes payable have no specific term of repayment and have
been classified as long-term based upon the intent of management. At September
30, 1999, the Company had $458,165 of notes payable to related parties. These
notes payable have no specific term of repayment and have been classified as
long-term based upon the intent of management.
22
<PAGE>
Management anticipates that its expansion strategy will require
significant expenditures for furniture, fixtures and equipment, as well as
increased general and administrative expenses primarily due to the hiring of
additional personnel and advertising expenses related to operations. These
expenditures are expected to be funded by revenues from operations. The Company
may also sell equity or debt securities to fund expansion activities. Selling,
general and administrative expenses are also expected to increase in future
periods due to the increased legal and accounting expenses incurred by the
Company in order to establish and maintain its reporting status with the
Securities and Exchange Commission. In addition, the Company intends to pursue,
as part of its business strategy, future growth through acquisitions which may
involve the expenditure of significant funds. Depending upon the nature, size
and timing of future acquisitions, the Company may be required to obtain
additional debt or equity financing in connection with such future acquisitions.
There can be no assurance, however, that additional financing will be available
to the Company, when and if needed, on acceptable terms or at all.
YEAR 2000 COMPLIANCE
The Company has undertaken projects to address Year 2000 issues. The
"Year 2000 issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. If the Company's computer
programs with date-sensitive functions are not Year 2000 compliant, they may
fail or make miscalculations due to interpreting a date including "00" to mean
1900, not 2000. The result may be disruptions to operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company established a project team to identify and address the
Company's Year 2000 risks and issues in an attempt to ensure the integrity and
reliability of the Company's information systems and business processes. The
project team (i) completed a review of its computer systems relating to order
processing, distribution disbursements, and other financial systems and (ii)
developed a comprehensive project plan (the "Plan") as a means for ensuring the
Year 2000 compliance of all information technology ("IT") systems, including
applications, operating systems, mainframe, mid-range and client server
platforms and all non-information technology ("Non-IT") systems, including
embedded applications and equipment, and to seek to ensure that key third
parties are Year 2000 compliant by the end of the year. The Company identified
high risk applications that are critical to its business, recognizing the fact
that timely compliance of these systems is crucial, and, therefore, designed its
Plan to address these systems first.
The Company's Plan included remediating certain existing software and
converting to new software for certain other applications. The Plan was
completed in July 1999, as was testing and certification of the Company's
computer systems and their applications. In addition, the Company developed
contingency plans for both software that was selected for remediation and for
those applications that needed replacement. The project team also developed a
third contingency plan (applicable to both remediation and replacement efforts)
which involved the development of certain manual procedures to be utilized to
render the Company's IT and Non-IT systems Year 2000 compliant. It is believed
that the Plan together with the contingency plans has enabled the Company to
achieve Year 2000 compliance.
23
<PAGE>
The Company has also identified and contacted key third parties to
determine the status of their Year 2000 compliance and any probable impact on
the Company. If key third parties are not Year 2000 compliant and their
non-compliance causes a material disruption to any of their respective
businesses, the Company's business could be materially adversely affected.
Disruptions could also include, among other things, a financial institution's
inability to take and transfer funds, an interruption in delivery of supplies
from vendors, a loss of voice and data connections, a loss of power to the
Company's facilities, and other interruptions in the normal course of the
Company's operations, the nature and extent of which is hard to foresee. The
Company will continue to evaluate the nature of these risks, but at this time is
unable to determine the probability that any such risk will occur, or if it does
occur, what the nature, length of other effects, if any, it may have.
As of October 1, 1999, the Company had incurred approximately $100,000
for Year 2000 efforts. The financial impact of making any other required system
changes or other remediation efforts cannot be known precisely at this time, but
it is not expected to be material to the Company's financial position, results
of operations, or cash flows.
Under the current Plan, Year 2000 compliance should not pose
significant operational problems. While the Company believes it has resolved the
Year 2000 issue in a timely manner, if its Plan has not satisfactorily addressed
the Year 2000 issues in connection with either replacement systems or the
existing critical systems, or if those with whom it conducts business are
unsuccessful in implementing timely solutions, the Year 2000 issue could have a
material adverse effect on the Company's operations and results of operations,
including its ability to process and distribute orders.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases approximately 8,000 square feet of office space,
housing the executive offices, information systems department, human resources
department, accounting department, order entry department, and customer service
department, and approximately 5,000 square feet of warehouse space, also housing
the warehouse department, in North Las Vegas, Nevada, on a four acre parcel with
the ability for future expansion. The lease for such premises is a
month-to-month lease with no specific expiration date. At December 31, 1998, the
monthly base rent was $15,000. In Japan, a limited office space is rented in
anticipation of changing the Company's sales status from personal import, which
houses the general manager in Japan and a small office staff. The Company
believes that its current facilities are satisfactory for its present needs, and
it does not anticipate and need for additional space in the future.
24
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock, $.001 par value ("Common
Stock") as of October 1, 1999, (i) by each person who is known by the Company to
be the beneficial owner of more than 5% of its Common Stock; (ii) by each of the
Company's directors and officers; and (iii) by all of the Company's directors
and officers as a group:
<TABLE>
<CAPTION>
Shareholder(1) No. of Shares Percentage
- -------------- ------------- ----------
<S> <C> <C>
Richard A. Bailey 2,080,000 34.41%
Florian R. Ternes 430,882 7.13%
Matthew Swan 200,000 3.31%
Lester Moore 760,000 12.57%
Scott McKnight(2) 75,000 1.24%
Jeffrey Yarbrough 760,000 12.57%
Troy D. Wiseman(3) 369,178 6.11%
TeamUp International, Inc. 650,000 10.75%
All officers and directors as a group 3,545,882 58.66%
(5 persons)
- --------------------
</TABLE>
(1) THE ADDRESSES OF THESE SHAREHOLDERS ARE AS FOLLOWS: Richard A. Bailey: 500
East Cheyenne Avenue, North Las Vegas, Nevada 89030; Florian R. Ternes: 500
East Cheyenne Avenue, North Las Vegas, Nevada 89030; Matthew Swan: 500 East
Cheyenne Avenue, North Las Vegas, Nevada 89030; Lester Moore: 500 East
Cheyenne Avenue, North Las Vegas, Nevada 89030; Scott McKnight: 500 East
Cheyenne Avenue, North Las Vegas, Nevada 89030; Jeffrey Yarbrough: 500 East
Cheyenne Avenue, North Las Vegas, Nevada 89030; Troy D. Wiseman: 1901 N.
Roselle Road, Suite 1030, Schaumburg, IL 60195; TeamUp International, Inc.:
6700 South Paradise, Suite C, Las Vegas, NV 89119.
(2) NuTech International, Inc., which Mr. McKnight controls, owns these shares.
(3) The following entities, which Mr. Wiseman controls, own these shares:
Invest Linc Capital Corp. - 120,000; Tina Wiseman Trust - 49,178; Wiseman
Family Trust - 200,000.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Directors and Executive Officers.
- ---------------------------------
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard A. Bailey 43 Chairman of the Board of Directors, Chief
Executive Officer and President
Florian R. Ternes 50 Director, Chief Operating Officer, Secretary
Matthew H. Swan 40 Chief Financial Officer, Treasurer
Lester W. B. Moore 57 Director
Scott McKnight 58 Director
</TABLE>
All directors serve a term of one year or until their successors have
been duly elected and qualified.
RICHARD A. BAILEY has served as Chairman, Chief Executive Officer, and
President of the Company since its May 1993 inception. In 1981, Mr. Bailey
purchased a small, local mobile wash company in North Las Vegas, Nevada. He
expanded operations to include aviation services, growing the company from two
employees in 1981 to in excess of three hundred by 1988. He served as president
of the business as it grew to $7,000,000 a year in revenue, operating in
twenty-seven cities throughout the United States. In 1990, Mr. Bailey became
involved in the network marketing/direct selling business. In 1997, Mr. Bailey
elected to sell the aviation company to International Total Services in order to
devote one hundred percent of his time to the Company.
25
<PAGE>
FLORIAN R. TERNES has served as Chief Operating Officer and Secretary
of the Company since 1995. He became a director in 1999. He began his career in
the airline industry and became City Vice President of Continental Airlines,
Denver, Colorado hub in 1989, where he managed approximately 7,500 employees
with a budget of $250 million. His airline career involved running several large
hubs for various airlines which included the Northwest International Gateway in
Los Angeles, the Detroit Hub for Republic Airlines, the Denver Hub for
Continental Airlines. In 1995, he left the airline industry to join Richard A.
Bailey in several business opportunities, including the Company. As one of those
ventures, he became president of NutriCology, a nutritional company with sales
in excess of $13,000,000 a year. After assisting in completing its successful
public offering, he resigned in January 1998 to join the Company on a full-time
basis.
MATTHEW H. SWAN has served as Chief Financial Officer and Treasurer
since 1995. From 1985 through 1986, he worked for KPMG Peat Marwick LLP, and he
worked for Deloitte & Touche, LLP from 1986 through 1990. In 1990, Mr. Swan
started his own Certified Public Accounting firm. Mr. Swan spent two years
living in Japan and received his bachelor of science in accounting from Idaho
State in 1984.
LESTER W. B. MOORE has served as a Director of the Company since
December 1996. He has served as President of the Polynesian Cultural Center in
Hawaii since 1991, where he has received numerous awards for his marketing and
sales efforts. Before his tenure with the Polynesian Cultural Center, he had
been a senior executive officer of various companies from 1973 through 1991 and,
in that same time-span, has served on the board of a number of successful
companies, including Angela Marie's Food Company, which did in excess of
$75,000,000.
SCOTT MCKNIGHT became a Director of the Company in 1999, in connection
with the NuTech Acquisition. Before joining the Company, Mr. McKnight was the
President and Chief Executive Officer of NuTech International, Inc. Mr. McKnight
is also the President and Chief Executive Officer of Aloe Commodities, Inc., a
leading aloe manufacturer which supplies the Company with its aloe-based
products. He is also the founder and President of the Aloe Association of
America.
ITEM 6. EXECUTIVE COMPENSATION.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- ----------------------------------------
AWARDS PAYOUTS
------------------------------ -------
SECURITIES
NAME AND OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS(S) OPTIONS/SARS PAYOUTS COMPENSATION
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Bailey, 1998 $76,250 $0 $0 N/A N/A N/A N/A
President and Chief
Executive Officer
Florian R. Ternes, 1998 $22,000 $0 $0 N/A N/A N/A N/A
Secretary and Chief
Financial Officer
Matthew H. Swan, 1998 $0 $0 $1,000 N/A N/A N/A N/A
Treasurer, Chief
Financial Officer
</TABLE>
26
<PAGE>
As of the date hereof, the Company has not granted stock options or
stock appreciation rights to any executive officer or director of the Company.
The Company intends to adopt a 1999 Stock Option Plan (the "1999 Plan") prior to
the effective date of this registration statement. The 1999 Plan will provide
for the grant to employees, officers, directors, consultants and independent
contractors of non-qualified stock options as well as for the grant to employees
of stock options that qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986 (the "Code"). The 1999 Plan will have a 10
year term. The purpose of the 1999 Plan is to enable the Company to attract and
retain qualified persons as employees, officers and directors and others whose
services are required by the Company, and to motivate such persons by providing
them with an equity participation in the Company. Under the 1999 Plan, 750,000
shares of the Company's Common Stock will be reserved for issuance, subject to
adjustment upon occurrence of certain events affecting the capitalization of the
Company.
The 1999 Plan will be administered by a committee of the Board of
Directors, consisting of two (2) members, which will have, subject to specified
limitations, the full authority to grant options and establish the terms and
conditions under which such options may be exercised. The exercise price of
incentive stock options granted under the 1999 Plan will be required to be no
less than the fair market value of the Common Stock on the date of grant (110%
in the case of a greater than 10% shareholder). The exercise price of
non-qualified stock options will be required to be no less than 85% of the fair
market value of the Common Stock on the date of grant. Options may be granted
for terms of up to 10 years (5 years in the case of incentive stock options
granted to greater than 10% shareholders). No optionee may be granted incentive
stock options such that the fair market value of the options which first become
exercisable in any one calendar year exceeds $100,000. If an optionee ceases to
be employed by, or ceases to have a relationship with the Company, such
optionee's options expire one year after termination of the employment or
consulting relationship by reason of disability, immediately upon termination
for cause and three months after termination for any other reason.
In order to exercise an option granted under the 1999 Plan, the
optionee must pay the full exercise price of the option with respect to the
shares being purchased. Payment may be made either (i) in cash, (ii) promissory
note, (iii) at the discretion of the Committee, by delivering shares of Common
Stock already owned by the optionee and having a fair market value equal to the
applicable exercise price or (iv) in the form of such other consideration as may
be determined by the Committee and permitted by applicable law.
Subject to the foregoing, the Committee will have broad discretion to
describe the terms and conditions applicable to options granted under the 1999
Plan. The Committee may at any time discontinue granting options under the 1999
Plan or otherwise suspend, amend or terminate the 1999 Plan and may, with the
consent of an optionee, make such modification of the terms and conditions of
such optionee's option as the Committee shall deem advisable. However, the
Committee will have no authority to make any amendment or modifications to the
1999 Plan or any outstanding option which would (i) increase the maximum number
of shares which may be purchased pursuant to options granted under the 1999
Plan, either in the aggregate or by any optionee, except in connection with
certain antidilution adjustments, (ii) change the designation of the class of
employees eligible to receive qualified options, (iii) extend the term of the
1999 Plan or the maximum option period thereunder, (iv) decrease the minimum
qualified option price or permit reductions of the price at which shares may be
purchased for qualified options granted under the 1999 Plan, except in
connection with certain antidilution adjustments, or (v) cause qualified stock
options issued under the 1999 Plan to fail to meet the requirements of incentive
stock options under Section 422 of the Code. Any such amendment or modification
shall be effective immediately, subject to shareholder approval thereof within
12 months before or after the effective date. No option may be granted during
any suspension or after termination of the 1999 Plan.
27
<PAGE>
The 1999 Plan will be designed to meet the requirements of an incentive
stock option plan as defined in Code Section 422. As a result, an optionee will
realize no taxable income, for federal income tax purposes, upon either the
grant of an incentive stock option under the 1999 Plan or its exercise. If no
disposition of the shares acquired upon exercise is made by the optionee within
two years from the date of grant or within one year from the date the shares are
transferred to the optionee, any gain realized upon the subsequent sale of the
shares will be taxable as a capital gain. In such case, the Company will be
entitled to no deduction for federal income tax purposes in connection with
either the grant or the exercise of the option. If, however, the optionee
disposes of the shares within either of the periods mentioned above, the
optionee will realize earned income in an amount equal to the excess of the fair
market value of the shares on the date of exercise (or the amount realized on
disposition if less) over the exercise price, and the Company will be allowed a
deduction for a corresponding amount.
Compensation of Directors.
- --------------------------
The Company maintains officers and directors liability insurance in the
amount of $1,000,000. The Company pays traveling expenses, hotel, food, and $300
for attendance at each board meeting. Stock options to directors will be a
consideration in the future, based on profitability of the company.
Employment Contracts.
- ---------------------
The Company entered into an employment agreement (the "Bailey
Employment Agreement") with Richard A. Bailey, its President and Chief Executive
Officer, dated May 1, 1999. The Bailey Employment Agreement provides termination
of the employment at the will of either Mr. Bailey or the Company. The Bailey
Employment Agreement provides for a base salary of $100,000 annually commencing
May 1, 1999, which shall be reviewed periodically. Such review may result in an
increase or bonuses for Mr. Bailey. In the event the Company is unable to pay
the annual salary, the Company will issue to Mr. Bailey one share of its Common
Stock for each dollar owed at the end of the Company's fiscal year. In the event
that Mr. Bailey's employment is terminated as a result of (a) his retirement
under the Company's retirement program, (b) his disability resulting in absence
from his duties to the Company on a full-time basis for over one year, (c) his
death, (d) a material reduction in his responsibilities or title, or (e) a
reduction of his cash compensation by more than 10% below the highest annual
salary from time to time in effect, the Company is obligated to pay to Mr.
Bailey, as severance and/or liquidated damages, an amount equal to one and
one-half times his highest annual earnings during his employment with the
Company each year for a period of five years.
The Company entered into an employment agreement (the "Ternes
Employment Agreement") with Florian R. Ternes, its Secretary and Chief Operating
Officer, dated May 1, 1999. The Ternes Employment Agreement provides termination
of the employment at the will of either Mr. Ternes or the Company. The Ternes
Employment Agreement provides for a base salary of $85,000 annually commencing
May 1, 1999, which shall be reviewed periodically. Such review may result in an
increase or bonuses for Mr. Ternes. In the event the Company is unable to pay
the annual salary, the Company will issue to Mr. Ternes one share of its Common
Stock for each dollar owed at the end of the Company's fiscal year. In the event
that Mr. Ternes' employment is terminated as a result of (a) his retirement
under the Company's retirement program, (b) his disability resulting in absence
from his duties to the Company on a full-time basis for over one year, (c) his
death, (d) a material reduction in his responsibilities or title, or (e) a
reduction of his cash compensation by more than 10% below the highest annual
salary from time to time in effect, the Company is obligated to pay to Mr.
Ternes, as severance and/or liquidated damages, an amount equal to one and
one-half times his highest annual earnings during his employment with the
Company each year for a period of five years.
28
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 25, 1996, the Company issued a $81,600 note to Jeffrey L.
Yarbrough, a stockholder of the Company. The note currently bears interest at
the rate of six and one-half percent (6.5%) per annum. The note has no specific
term of repayment and has been classified as long-term based upon the intent of
management. Mr. Yarbrough continued to loan additional amounts to the Company on
the same terms and conditions from June 25, 1996 through June 30, 1999. On
September 30, 1999, the note, including accrued interest in 1998 at 6.5% and in
1997 at 7%, had an outstanding balance of $337,290.
On May 30, 1998, the Company issued a $120,967 note to Richard A.
Bailey, the Chief Executive Officer and President of the Company. The note
currently bears interest at the rate of six and one-half percent (6.5%) per
annum. The note has no specific term of repayment and has been classified as
long-term based upon the intent of management. On September 30, 1999, the note,
including accrued interest at 6.5%, had an outstanding balance of $120,967.
Florian R. Ternes, Chief Operating Officer and Secretary of the
Company, was the President of NutriCology, Inc. ("NutriCology") until January
1998. NutriCology is one of the Company's major suppliers, providing the Company
with approximately thirty percent of its inventory.
In connection with the NuTech Acquisition, the Company has agreed to
engage ACI as the exclusive manufacturer of certain product lines which the
Company purchased in the NuTech Acquisition, providing the Company with
approximately ten percent of its inventory. Scott McKnight, a director of the
Company, is the principal shareholder of ACI.
In connection with the American Outback Acquisition, the Company agreed
to require of its suppliers of emu oil that such suppliers engage American
Outback as the exclusive producer of Bush Recipe(R) Emu Oil. Jack Akers, a
member of the Company's Medical Advisory Board, is the sole shareholder of
American Outback.
The Company believes that all of the transactions entered into by it
were fair and reasonable, and intends that all future transactions, if any, with
affiliates will be on terms no less favorable than could be obtained from
unaffiliated parties.
ITEM 8. DESCRIPTION OF SECURITIES.
Common Stock
- ------------
The Company is authorized to issue 20,000,000 shares of common stock,
$.001 par value ("Common Stock"). As of October 1, 1999, the Company had
6,045,620 shares of Common Stock issued and outstanding and held of record by
approximately 975 persons.
Each holder of record of shares of Common Stock is entitled to receive
such dividends as may be declared by the Company's Board of Directors from funds
legally available therefore. Each holder of record of the Company's Common Stock
is entitled to one vote per share in the election of the Company's directors and
all other matters submitted to a vote of shareholders and to share ratably in
all assets available for distribution to holders of record of Common Stock upon
liquidation or dissolution. Cumulative voting is not permitted in the election
of directors.
29
<PAGE>
Preferred Stock
- ---------------
The Company is authorized to issue 1,000,000 shares of preferred stock
("Preferred Stock"). As of the date hereof, there are no shares of Preferred
Stock outstanding.
12% Convertible Notes
- ---------------------
The Notes are unsecured obligations of the Company. The principal
amount of and accrued interest on the Notes are all due and payable on the first
day the Company's Common Stock trades publicly. The Notes bear interest at the
rate of twelve percent (12%) per annum from and after the date of issuance.
Principal and interest are payable at the principal office of the holder or such
other place as may be designated by the holder in writing to the Company.
The principal amount of and interest on the Notes are convertible into
shares of the Company's Common Stock at any time prior to the payment of the
Notes at an initial conversion price of $.80 per share. The Company has the
right to call the Notes for conversion, at the conversion price of $.80 per
share, when the average of the bid and asked prices of the Common Stock shall
have exceeded $1.00 per share for any consecutive ten (10) day period. As of
October 1, 1999, there were $1,187,431 in principal amount of Notes issued and
outstanding.
Transfer Agent
- --------------
The Transfer Agent for the Company's Common Stock is Oxford Transfer &
Registrar, 317 SW Alder, Suite 1120, Portland, Oregon, 97204.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
There is currently no public market for the Company's Common Stock.
There are currently 200,000 shares of the Company's Common Stock which
are subject to a stock option agreement. In addition, the Company intends to
adopt the 1999 Stock Option Plan (the "1999 Plan") prior to the effective date
of this registration statement.
There are currently $1,187,431 in principal amount of 12% convertible
notes (the "Notes") issued and outstanding. The Notes bear interest at the rate
of 12% per annum from and after the date of issuance. The principal amount of
and interest on the Notes are convertible into shares of the Company's Common
Stock at any time prior to the payment of the Notes at an initial conversion
price of $0.80 per share. The Company has the right to call the notes for
conversion, at the conversion price of $0.80 per share, when the average of the
bid and asked prices of the Common Stock shall have exceeded $1.00 per share for
any consecutive ten (10) day period. As of October 1, 1999, the Notes were, in
the aggregate, convertible into 1,484,289 shares of the Company's Common Stock.
There are currently 4,955,882 shares of Common Stock held by
"affiliates" of the Company, as that term is defined under Rule 144 of the
Securities Act. The Company has not agreed to register any sales of Common Stock
under the Securities Act of 1933.
As of October 1, 1999, there were approximately 975 record holders of
the Company's Common Stock.
30
<PAGE>
The Company has not paid any cash dividends since its inception and
does not contemplate paying dividends in the foreseeable future. It is
anticipated that earnings, if any, will be retained for the operation of the
Company's business.
ITEM 2. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company or the
property of the Company are subject. In addition, no proceedings are known to be
contemplated by a governmental authority against the Company or any officer or
director of the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On May 12, 1998, the Company completed the acquisition by merger of
Hali Sales Corp., a Delaware corporation ("Hali"), with the Company as the
surviving corporation. Hali had limited assets and approximately 970
stockholders of record and was acquired by the Company in order to increase its
stockholder base. Before the merger, there were 4,000,000 shares of the
Company's common stock issued and outstanding. The Company issued 1,000,714
shares of its Common Stock in the merger, one share of its Common Stock in
exchange for each 9.804 shares of Hali common stock issued and outstanding on
the effective date of the merger. Hali had no active operations at the time of
the merger with the Company. The shares of Common Stock issued to the
stockholders of Hali in connection with the merger were made in reliance on the
exemptions from registration afforded by Sections 3(b) of the Securities Act of
1933 (the "1933 Act") and Rule 504 of Regulation D promulgated thereunder.
In May, 1998, the Company commenced a private placement within the
United States of 12% convertible notes (the "Notes"). The Notes bear interest at
the rate of 12% per annum and are due on the first day the Company's Common
Stock trades publicly. The Notes are convertible, at the option of the holder,
into shares of the Company's Common Stock at an initial conversion price of
$0.80 per share. The Notes may be called for conversion when the average of the
bid and asked prices of the Common Stock exceeds $1.00 per share for ten (10)
consecutive days. As of October 1, 1999, the Company issued $662,431 of Notes to
United States investors. Sales of the Notes to United States investors were made
in reliance on the exemptions from registration afforded by Section 3(b) of the
1933 Act and Rule 504 of Regulation D promulgated thereunder.
In May, 1998, the Company also commenced a private placement outside
the United States of Notes. As of October 1, 1999, the Company issued $525,000
of Notes to investors outside the United States. Sales of the Notes investors
outside the United States were made in reliance on the exemptions from
registration afforded by Regulation S promulgated under the 1933 Act.
As of January 4, 1999, the Company issued 75,000 shares of the
Company's Common Stock in connection with the NuTech Acquisition. The issuance
of the NuTech Acquisition shares were made in reliance on the exemptions from
registration afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation
D promulgated thereunder.
31
<PAGE>
In February, 1999, the Company issued 12,500 shares of the Company's
Common Stock at a price of $0.80 per share to a private investor. The issuance
of these shares were made in reliance on the exemptions from registration
afforded by Section 3(b) of the 1933 Act and Rule 504 of Regulation D
promulgated thereunder, and also on Section 4(2) of the 1933 Act.
As of April 1, 1999, the Company issued 67,400 shares of the Company's
Common Stock in connection with the American Outback Acquisition. The Company
agreed that if, between April 1, 1999 and April 1, 2000, the average market
price of the Common Stock does not exceed $1.00 per share for any consecutive
ten (10) day period, the Company must pay to American Outback the difference of
(a) $67,400 and (b) the product of (i) the average of the daily closing prices
of the Common Stock during the ten trading days preceding April 1, 2000 and (ii)
$67,400. In the event that the stock is not trading by November 1, 1999,
American Outback has the option to demand payment of $67,400 or any portion
thereof, on terms to be determined by the parties by mutual agreement. The
issuance of the American Outback shares were made in reliance on the exemptions
from registration afforded by Section 3(b) of the Securities Act of 1933 and
Rule 504 of Regulation D promulgated thereunder.
In April, 1999, the Company issued 62,500 shares of the Company's
Common Stock at a price of $0.80 per share to a private investor. The issuance
of these shares were made in reliance on the exemptions from registration
afforded by Section 3(b) of the 1933 Act and Rule 506 of Regulation D
promulgated thereunder, and also on Section 4(2) of the 1933 Act.
In May, 1999, the Company issued 25,000 shares of the Company's Common
Stock at a price of $0.80 per share to a private investor. The issuance of these
shares were made in reliance on the exemptions from registration afforded by
Section 4(2) of the 1933 Act and Rule 506 of Regulation D promulgated
thereunder.
In May, 1999, the Company issued 100,000 shares of the Company's Common
Stock at a price of $1.00 per share to a private investor. The issuance of these
shares were made in reliance on the exemptions from registration afforded by
Section 4(2) of the 1933 Act and Rule 506 of Regulation D promulgated
thereunder.
As of September 21, 1999, the Company issued 650,000 shares of the
Company's Common Stock in connection with the TeamUp Acquisition. The Company
also granted to TeamUp an option to purchase an additional 200,000 shares of the
Company's Common Stock at a price of $1.00 per share. The Company agreed that it
would repurchase up to 100,000 shares of Common Stock issued as consideration in
the TeamUp Acquisition at a price of $1.00 at any time after March 21, 2000. The
Company also agreed that if it files a registration statement under the
Securities Exchange Act of 1934 for its Common Stock with the Securities &
Exchange Commission ("SEC") and the SEC has not declared such registration
statement effective on or before September 21, 2001, then the Company will pay
$250,000 to TeamUp, or, if TeamUp has been dissolved, to the stockholders of
TeamUp, pro rated proportionately. The issuance of the TeamUp International
shares were made in reliance on the exemptions from registration afforded by
Section 4(2) of the 1933 Act and Rule 506 of Regulation D promulgated
thereunder.
32
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada Statutes.
- ----------------
Sections 78.7502 and 78.751 of the Nevada Business Corporation Act, as
amended, provide for the indemnification of the Company's officers, directors,
employees and agents under certain circumstances as follows:
"NRS 78.7502 DISCRETIONARY AND MANDATORY INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS: GENERAL PROVISIONS.
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
33
<PAGE>
"NRS 78.751 AUTHORIZATION REQUIRED FOR DISCRETIONARY INDEMNIFICATION;
ADVANCEMENT OF EXPENSES; LIMITATION ON INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES.
1. Any discretionary indemnification under NRS 78.7502 unless ordered
by a court or advanced pursuant to subsection 2, may be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the action, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding so orders, by independent
legal counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties
to the action, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
2. The articles of incorporation, the bylaws or an agreement made by
the corporation may provide that the expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
3. The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person
seeking indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the
advancement of expenses made pursuant to subsection 2, may not be made to or on
behalf of any director or officer if a final adjudication establishes that his
acts or omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person."
Articles of Incorporation.
- --------------------------
The Company's Amended and Restated Articles of Incorporation provide
that the personal liability of a director or officer of the Company to the
Company or its stockholders for monetary damages for breach of fiduciary duty,
for any action taken or for any failure to take any action, as a director or
officer, shall be eliminated to the fullest extent permissible under Nevada law,
except for (a) acts or omissions which involve intentional misconduct, fraud,
infliction of harm on the Company or its stockholders or a knowing violation of
criminal law, (b) the payment of distributions in violation of Section 78.300 of
the Nevada Revised Statutes, or (c) the amount of a financial benefit received
by a director to which he is not entitled. The Company's Bylaws also contain a
provision for the indemnification of the Company's directors (see
"Indemnification of Directors and Officers - Bylaws" below).
34
<PAGE>
Bylaws.
- -------
The Company's Bylaws provide for the indemnification of the Company's
directors, officers, employees, or agents under certain circumstances as
follows:
The Corporation shall indemnify its directors, officers and employees
as follows:
a. Every director of the Corporation shall be indemnified by the
Corporation against all expenses and liabilities, including
counsel fees, reasonably incurred by or imposed upon him in
connection with any proceeding to which he may be made a party,
or in which he may become involved, by reason of his being or
having been a director of the Corporation or is or was serving at
the request of the Corporation as a director of the corporation,
partnership, joint venture, trust or enterprise, or any
settlement thereof, whether or not he is a director at the time
such expenses are incurred, except in such cases wherein the
director is adjudged guilty of willful misfeasance or malfeasance
in the performance of his duties; provided that in the event of a
settlement the indemnification herein shall apply only when the
Board of Directors approves such settlement and reimbursement as
being for the best interest of the Corporation.
b. The Corporation shall provide to any person who is or was a
director of the Corporation or is or was serving at the request
of the Corporation as a director of the corporation, partnership,
joint venture, trust or enterprise, the indemnity against
expenses of suit, litigation or other proceedings which is
specifically permissible under applicable law.
c. The Board of Directors may, in its discretion, direct the
purchase of liability insurance by way of implementing the
provisions of Article V of the bylaws.
35
<PAGE>
PART F/S
The Financial Statements and Notes thereto can be found beginning on
page FS-1 "Index to Financial Statements" following the signature page hereof.
PART III
ITEM 1. INDEX TO EXHIBITS.
Page
----
2.1 Agreement and Plan of Merger as of April 10, 1998
2.2 Asset Purchase Agreement by and among Gateway Distributors, Ltd.,
NuTech International, Inc. and the Stockholders of NuTech
International, Inc., dated as of January 4, 1999.
2.3 Asset Purchase Agreement by and among Gateway Distributors, Ltd.,
American Outback, Inc. and the Stockholders of American Outback, Inc.,
dated as of April 1, 1999.
2.4 Asset Purchase Agreement by and among Gateway Distributors, Ltd.,
TeamUp International, Inc. and the Stockholders of TeamUp
International, Inc., dated as of August 17, 1999.
3.1 Amended and Restated Articles of Incorporation of the Company.
3.2 Bylaws of the Company, as amended.
4.1 Specimen Common Stock Certificate
4.2 Specimen 12% Convertible Note
10.1 Employment Agreement - Richard A. Bailey
10.2 Employment Agreement - Florian R. Ternes
27.1 Financial Data Schedule
ITEM 2. DESCRIPTION OF EXHIBITS.
Inapplicable.
36
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amended registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
GATEWAY DISTRIBUTORS, LTD.
Date: December 14, 1999 By: /s/ RICHARD A. BAILEY
--------------------------------
Richard A. Bailey, President
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report...............................................FS-1
Balance Sheets as of December 31, 1998 and December 31, 1997 ..............FS-2
Statements of Operations for the Years
Ended December 31, 1998 and December 31, 1997 ...........................FS-3
Statement of Changes in Stockholders' Equity (Deficit) for the Years
Ended December 31, 1998 and December 31, 1997 ...........................FS-4
Statements of Cash Flows for the Years
Ended December 31, 1998 and December 31, 1997 ...........................FS-5
Notes to Financial Statements .............................................FS-7
Unaudited Condensed Balance Sheets as of September 30, 1999
and September 30, 1998...................................................FS-12
Unaudited Condensed Statement of Operations for the Three and Nine
Month Periods Ended September 30, 1999 and September 30, 1998 ...........FS-14
Unaudited Condensed Statement of Cash Flows for the Nine Month
Periods Ended September 30, 1999 and 1999................................FS-15
Independent Auditors' Report (TeamUp)......................................FS-16
Balance Sheets (TeamUp) as of July 31, 1999 and October 31, 1998 ..........FS-17
Statements of Operations (TeamUp) for the Nine Months
Ended July 31, 1999 and the Year Ended October 31, 1998 .................FS-19
Statement of Changes in Stockholders' Deficit (TeamUp) for the
Nine Months July 31, 1999 and the Year Ended October 31, 1998 ...........FS-20
Statements of Cash Flows (TeamUp) for the Nine Months
Ended July 31, 1999 and the Year Ended October 31, 1998 .................FS-21
Notes to Financial Statements (TeamUp).....................................FS-23
Pro Forma Combined Financial Statements
of Gateway Distributors, Ltd. and TeamUp International, Inc..............FS-29
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
FINANCIAL STATEMENTS
WITH
ADDITIONAL INFORMATION
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1998
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
- CONTENTS -
PAGE NUMBER
-----------
Independent Auditors' Report 1
Financial Statements:
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Stockholders' Equity (Deficit) 4
Statement of Cash Flows 5 & 6
Notes to Financial Statements 7 - 10
Additional Information -
Schedule of Selling, General and Administrative Expenses 11
<PAGE>
Edward J. Phillps, CPA PERRIN
J. James Caton, CPA FORDREE &
Robert S. Gigliotti, CPA COMPANY P.C.
Ronald H. Frechen, CPA CERTIFIED PUBLIC ACCOUNTANTS
Robert E. Hagedorn, CPA ----------------------------
Jan F. Michalski, CPA American Institute of CPAs
Thomas W. Larson, M.A. Michigan Association of CPAs
Roger G. Zulauf, CPA Registered Investment Advisors
Judith K. Caldwell, CPA
Garrett P. Klein, CPA
Independent Auditors' Report
----------------------------
To the Board of Directors
Gateway Distributors, Ltd.
North Las Vegas, Nevada
We have audited the accompanying balance sheet of GATEWAY DISTRIBUTORS, LTD. as
of December 31, 1998 and 1997, and the related statements of operations, changes
in stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of GATEWAY
DISTRIBUTORS, LTD. at December 31, 1998 and 1997, and the results of its
operations, changes in stockholders' equity and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information listed on the foregoing
table of contents is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
PERRIN, FORDREE & COMPANY, P.C.
/s/ Perrin, Fordree & Company, P.C.
August 17, 1999
901 Wilshire Dr.
Suite 400
Troy, Michigan 48084
248/362-3600
Fax 248/362-4707
F-1
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
BALANCE SHEET
ASSETS
------
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 19,711 $ 2,246
Accounts receivable - trade 57,132 93,689
Other receivables 5,905 2,360
Credit card receivable 38,429 72,551
Inventory 222,525 277,730
------------- -------------
Total current assets 343,702 448,576
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 20,599 60,584
Computer equipment 29,521 -
Software 51,975 36,514
Leasehold improvements 29,228 -
Office equipment 80,800 35,901
------------- -------------
212,123 132,999
Less accumulated depreciation and amortization (88,361) (48,230)
------------- -------------
123,762 84,769
OTHER ASSETS:
Accounts receivable -related parties 45,000 -
Deposits 3,997 3,996
Organization costs, net of accumulated amortization 5,882 -
------------- -------------
------------- -------------
$ 522,343 $ 537,341
============= =============
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Checks drawn in excess of available bank balances $ 90,295 $ 84,953
Accounts payable 375,950 319,866
Commissions payable 19,301 39,435
Accrued liabilities:
Payroll and vacation pay 30,449 22,088
Interest 85,526 15,453
Taxes and other 149,672 41,059
------------- -------------
Total current liabilities 751,193 522,854
NOTES PAYABLE TO RELATED PARTIES 370,592 299,484
CONVERTIBLE NOTES PAYABLE - OTHER 875,000 -
------------- -------------
Total liabilities 1,996,785 822,338
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - $.001 par value at December 31, 1998
Authorized - 1,000,000 shares
No shares issued and outstanding - -
Common stock, - $.001 par value at December 31, 1998
and no par value at December 31, 1997.
Authorized - 20,000,000 shares
Issued and outstanding -
5,000,900 at December 31,1998 and
2,500 at December 31,1997. 5,001 150,000
Additional paid-in capital 203,569 48,766
Accumulated deficit (1,683,012) (483,763)
------------- -------------
Total stockholders' deficit (1,474,442) (284,997)
------------- -------------
$ 522,343 $ 537,341
============= =============
</TABLE>
F-2
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
---------------------- ----------------------
SALES $ 3,988,364 100.0% $ 2,963,789 100.0%
PRODUCT COST 803,554 20.1 670,114 22.6
------------- ------ ------------- ------
GROSS PROFIT 3,184,810 79.9 2,293,675 77.4
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,342,414 108.9 2,578,459 87.0
------------- ------ ------------- ------
LOSS FROM OPERATIONS (1,157,604) (29.0) (284,784) (9.6)
INTEREST EXPENSE (86,645) (2.2) (15,825) (.5)
RENTAL INCOME 45,000 1.1 - -
------------- ------ ------------- ------
LOSS BEFORE PROVISION
FOR INCOME TAXES (1,199,249) (30.1) (300,609) (10.1)
PROVISION FOR INCOME
TAXES - - - -
------------- ------ ------------- ------
NET LOSS $ (1,199,249) 30.1% $ (300,609) 10.1
============= ====== ============= ======
LOSS PER COMMON SHARE $ (.238) $ (120.24)
============= =============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE - December 31, 1996 $ 100,000 $ 48,766 $ (183,154) $ (34,388)
ISSUANCE OF COMMON STOCK 50,000 - - 50,000
NET LOSS - 1997 - - (300,609) (300,609)
------------- ------------- ------------- -------------
BALANCE December 31, 1997 150,000 48,766 (483,763) (284,997)
TO RECORD STOCK SPLIT
40,000 TO 1 (146,000) 146,000 - -
------------- ------------- ------------- -------------
4,000 194,766 (483,763) (284,997)
MERGER OF HALl SALES CORP. 1,000 8,804 - 9,804
MANAGER AWARD 1 (1) - -
NET LOSS 1998 - - (1,199,249) (1,199,249)
------------- ------------- ------------- -------------
BALANCE December 31, 1998 $ 5,001 $ 203,569 $ (1,683,012) $ (1,474,442)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
STATEMENT OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 4,059,043 $ 2,845,495
Cash paid to suppliers and employees (4,888,599) (2,902,815)
Interest paid (16,572) (372)
------------- -------------
Net cash to operating activities (846,128) (57,692)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (79,125) (61,820)
Increase in note receivable - related party - (2,110)
Increase in deposits - (3,997)
------------- -------------
Net cash to investing activities (79,125) (67,927)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (receipts) from note payable - related party 67,718 120,800
Proceeds from note payable - other 875,000 -
------------- -------------
Net cash from financing activities 942,718 120,800
------------- -------------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 17,465 (4,819)
CASH AND CASH EQUIVALENTS:
Balance - beginning of year 2,246 7,065
------------- -------------
Balance - end of year $ 19,711 $ 2,246
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
STATEMENT OF CASH FLOWS - CONTINUED
RECONCILIATION OF NET LOSS TO OPERATING ACTIVITIES
--------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
NET LOSS $ (1,199,249) $ (300,609)
Adjustments to reconcile net loss
to net cash to operating activities -
Depreciation and amortization 44,053 24,164
Changes in operating assets and liabilities:
which increase (decrease) cash flow:
Accounts receivable 36,557 (73,464)
Credit card receivable 34,122 (44,942)
Other receivables (45,155) (250)
Inventories 55,205 (99,099)
Accrued interest 70,073 15,453
Checks drawn in excess of available
bank balances 5,342 84,953
Accounts payable 56,084 233,520
Commissions payable (20,134) 39,435
Accrued expenses 116,974 63,147
------------- -------------
Total adjustments 353,121 242,917
------------- -------------
NET CASH TO OPERATING ACTIVITIES $ (846,128) $ (57,692)
============= =============
SCHEDULE OF NON-CASH TRANSACTIONS
MERGER OF HALl SALES, INC. ORGANIZATION COSTS $ 9,804
=========
COMMON STOCK $ 1,000
PAID-IN CAPITAL 8,804
---------
$ 9,804
=========
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of Gateway
Distributors, Ltd. is presented to assist in understanding the
Company's financial statements. The financial statements and notes are
representations of the Company's management which is responsible for
their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Business Activity
-----------------
The Company is a distributor of nutritional and health foods. The
Company's products can be divided into six categories: Health Pack,
Immune Pack, Heart Pack, Weight Loss Pack and Specialized Products.
Inventories
-----------
Inventories, consisting primarily of vitamin packs, are stated at cost
determined by the first-in, first-out (FIFO) method.
Plant and Equipment
-------------------
Leasehold improvements, computer, and office equipment are stated at
cost. Major replacements and refurbishings are charged to the equipment
accounts while replacements, maintenance and repairs which do not
improve or extend the life of the respective assets are expensed
currently.
Depreciation and Amortization
-----------------------------
The Company provides for depreciation of property, plant and equipment
principally by use of declining balance and straight-line methods for
financial reporting purposes. Plant and equipment are depreciated over
the following estimated useful lives:
Leasehold improvements 39 years
Furniture and fixtures 7 years
Automobiles - trailer 7 years
Office equipment 5 years
Computers 5 years
Computer software 3 years
F-7
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED:
Revenue Recognition
-------------------
Revenue is recognized in the period in which the products are shipped.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, cash equivalents include
cash in banks and all highly liquid debt instruments with original
maturities of three months or less.
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 may differ
from those estimates.
NOTE 2- RELATED PARTY TRANSACTIONS:
Notes receivable to related parties consists of advanced rents due from
companies owned by a major stockholder at December 31, 1998. The
following is a summary:
Rents $ 45,000
=========
Note payable to related parties consist of the following:
DECEMBER 31,
--------------------
1998 1997
-------- --------
Notes payable - stockholder interest at
10.0%. $ 25,211 $ 22,337
Note payable - individual, including accrued
interest in 1998 at 6.5%, and in 1997, 7.0%. 337,290 255,790
F-8
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 2- RELATED PARTY TRANSACTIONS - CONTINUED:
DECEMBER 31,
--------------------
1998 1997
-------- --------
Note payable - stockholder, including
accrued interest at 6.5%. 8,091 7,500
Note payable - related companies,
interest at 6.0%. - 13,857
-------- --------
Total notes payable - related parties $370,592 $299,484
======== ========
The above notes have no specific term of repayment and have been
classified as long-term based upon the intent of management.
NOTE 3- CONVERTIBLE NOTES PAYABLE - OTHER:
These notes consist of convertible notes payable to individuals which
bear interest at 12% per annum, due 12 months from the date of
issuance. These notes are convertible at the option of the holder into
shares of the Company's common stock, $0.001 par value, at an initial
conversion price of $0.80 per share. The notes may be called for
conversion when the average of the bid and asked prices of the common
stock exceeds $1.00 per share for ten consecutive days. The minimum
purchase price is $25,000 in principal amount of notes. Although the
notes issued will be "freely tradeable' under federal securities laws,
there is currently no public market for the notes or the Company's
common stock. Although the Company intends to pursue the establishment
of a regular public market for the common stock under the Securities
Exchange Act of 1934, there can be no assurance that a public market
for the common stock will develop. These notes amounted to $875,000 as
of December 31, 1998, and $-O- as of December 31, 1997.
F-9
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 4- LEASES:
Certain automotive equipment, office equipment and real estate are
leased under operating leases which expire at various dates through
December 2003. The following is a schedule, by years, of future minimum
rental payments required under these operating leases as of December
31, 1998.
Year ending December 31:
1999 $ 45,706
2000 28,802
2001 13,321
2002 4,928
2003 1,458
--------
Total minimum payments $ 94,215
========
The Company leases a building under an operating lease on a
month-to-month basis. The monthly amount at December 31, 1998 is
$15,000.
Total rent expense charged to operations for the years ended December
31, 1998 and 1997, was $207,398 and $26,523, respectively, which
includes charges for month-to-month leases expected to continue.
NOTE 5- INCOME TAXES:
No income taxes are due or refundable for 1998 or 1997 because of the
application of unused net operating loss carryforwards. Amounts
available for use in future years expire as follows:
Unused Operating
Year or Expiration Loss Carryforwards
------------------ ------------------
2010 $ 106,500
2012 286,900
2018 1,159,000
F-10
<PAGE>
GATEWAY DISTRIBUTORS, LTD.
SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
Administrative fee $ 89,162 $ 72,000
Advertising 52,860 8,219
Auto expense 6,496 6,768
Bad debt expense 13,438 76,334
Bank charges 33,472 3,529
Commissions 1,377,744 925,841
Contract labor 215,110 128,930
Contributions 4,797 12,328
Convention expense 32,087 40,962
Credit card fees 162,101 28,855
Depreciation 40,131 24,164
Dues and subscriptions 3,103 6,833
Employee benefits 10,477 1,590
Entertainment 22,797 13,967
Equipment lease 24,292 10,683
Office building lease 171,600 15,840
Insurance 56,857 12,445
Legal and accounting 49,595 75,733
Licenses and taxes 21,999 2,386
Maintenance and repairs 79,450 29,955
Miscellaneous 3,313 15,275
Office supplies and expense 87,596 75,637
Payroll taxes 92,051 54,218
Penalties 26,249 2,098
Printing expense 22,267 11,623
Rent expense - Japan 11,506 -
Salaries and wages 785,833 375,706
Sales aids, tools, forms 115,903 12,236
Sales tax 45,400 9,872
Shipping 387,090 342,688
Organization expense 3,922 -
Other taxes 515 -
Telephone 131,833 71,294
Travel 128,663 109,187
Utilities 32,705 1,263
------------- -------------
$ 4,342,414 $ 2,578,459
============= =============
F-11
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
BALANCE SHEET
(UNAUDITED)
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents 37,017 2,492
Accounts Receivable:
Trade 22,631 1,505
Credit card 35,055 54,962
Other 400 405
Current portion of notes receivable 5,200 0
Inventory 390,128 283,674
Prepaid expenses 5,500 0
------------ ------------
TOTAL CURRENT ASSETS 495,931 343,038
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 20,599 20,599
Computer equipment 30,621 29,521
Software 52,615 49,153
Leasehold improvements 43,749 29,228
Office equipment 81,511 80,800
------------ ------------
229,095 209,301
Less accumulated depreciation and amortization (114,362) (88,362)
------------ ------------
114,733 120,939
OTHER ASSETS:
Accounts receivable - related parties 47,447 45,000
Deposits 13,923 42,723
Investment in acquisition company 301,351 0
Goodwill, net of accumulated amortization 348,649 0
Organization costs, net of accumulated amortization 4,411 5,882
------------ ------------
TOTAL OTHER ASSETS 715,781 93,605
------------ ------------
1,326,445 557,582
============ ============
F-12
<PAGE>
LIABILITIES & STOCKHOLDERS EQUITY
LIABILITIES
CURRENT LIABILITIES:
Checks drawn in excess of available bank balances 72,209 90,681
Accounts Payable 574,839 428,154
Accrued liabilities:
Payroll and vacation pay 35,326 40,241
Interest 211,526 85,525
Commissions 98,973 19,300
Taxes and other 144,481 139,882
------------ ------------
TOTAL CURRENT LIABILITIES 1,137,354 803,783
NOTES PAYABLE TO RELATED PARTIES 458,165 366,318
CONVERTIBLE NOTES PAYABLE - OTHER 1,187,431 875,000
------------ ------------
TOTAL LIABILITIES 2,782,950 2,045,101
STOCKHOLDERS' EQUITY
Preferred Stock 0 0
Common stock 5,998 5,001
Additional paid-in capital 1,199,972 203,569
Accumulated deficit (2,662,475) (1,696,089)
------------ ------------
TOTAL STOCKHOLDER'S DEFICIT (1,456,505) (1,487,519)
------------ ------------
1,326,445 557,582
============ ============
</TABLE>
F-13
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
INCOME STATEMENT
<CAPTION>
THIRD JANUARY THIRD JANUARY
QUARTER 1999 September-99 QUARTER 1998 September-98
<S> <C> <C> <C> <C>
SALES 944,894 2,489,448 980,783 3,071,742
COST OF SALES 158,786 419,344 163,973 591,411
---------------------------------------------------------------------------------
GROSS PROFIT 786,108 2,070,104 816,810 2,480,331
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,056,177 2,947,863 1,060,181 3,043,208
---------------------------------------------------------------------------------
LOSS FROM OPERATIONS (270,069) (877,759) (243,371) (562,877)
INTEREST EXPENSE (42,000) (126,000) (23,358) (70,073)
RENTAL INCOME 12,333 37,373 14,081 33,024
---------------------------------------------------------------------------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (299,736) (966,386) (252,648) (599,926)
PROVISION FOR INCOME
TAXES 0 0 0 0
---------------------------------------------------------------------------------
NET LOSS (299,736) (966,386) (252,648) (599,926)
=================================================================================
</TABLE>
F-14
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
STATEMENT OF CASH FLOWS
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 2,525,607 $ 3,047,894
Cash paid to suppliers and employees (3,096,333) (3,913,180)
--------------- ---------------
Net cash to operating activities (570,726) (865,286)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,972) (76,302)
--------------- ---------------
Net cash to investing activities (16,972) (76,302)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - related party 87,573 66,834
Proceeds from note payable - other 312,431 875,000
Proceeds from stock sales 205,000
--------------- ---------------
Net cash from financing activities 605,004 941,834
--------------- ---------------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 17,306 246
CASH AND CASH EQUIVALENTS:
Balance - beginning of year 19,711 2,246
--------------- ---------------
Balance - end of third quarter $ 37,017 $ 2,492
=============== ===============
</TABLE>
F-15
<PAGE>
Independent Auditors' Report
----------------------------
To the Board of Directors
TeamUp International Inc.
Las Vegas, Nevada
We have audited the accompanying balance sheet of TEAMUP INTERNATIONAL, INC. as
of July 31, 1999 and October 31, 1998, and the related statements of operations,
changes in stockholders' deficit and cash flows for the nine months and year
then ended, respectively. 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 TEAMUP INTERNATIONAL, INC. at
July 31, 1999 and October 31, 1998 and the results of its operations and its
cash flows for the period and year, respectively, then ended, in conformity with
generally accepted accounting principles.
PERRIN, FORDREE & COMPANY, P.C.
October 14, 1999
F-16
<PAGE>
<TABLE>
TEAMUP INTERNATIONAL, INC.
BALANCE SHEET
JULY 31, 1999 AND OCTOBER 31, 1998
<CAPTION>
ASSETS
------
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 179,735 $ 252,167
Accounts receivable 10,009 9,115
Inventories 434,671 507,739
Prepaid income taxes 16,853 16,853
------------ ------------
Total current assets 641,268 785,874
PROPERTY AND EQUIPMENT:
Computers and software 185,737 185,913
Furniture and fixtures 115,078 124,630
Equipment 21,172 23,761
------------ ------------
321,987 334,304
Less accumulated depreciation and amortization 280,844 270,686
------------ ------------
41,143 63,618
OTHER ASSETS -
Deposits 5,727 5,727
------------ ------------
$ 688,138 $ 855,219
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDER'S DEFICIT
-------------------------------------
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 2,855 $ 2,402
Accounts payable:
Trade 117,924 92,345
Related party 10,894 38,933
Royalties 41,500 -
Accrued expenses:
Commissions 75,224 102,757
Other 35,725 36,168
------------ ------------
Total current liabilities 284,122 272,605
CAPITAL LEASE OBLIGATIONS 2,665 4,909
ACCRUED COMMISSIONS - RELATED PARTY 875,663 807,098
STOCKHOLDERS' DEFICIT:
Common stock - no par value
Authorized - 20,000 shares
Issued and outstanding - 20,000 shares 250,400 250,400
Accumulated deficit (724,712) (479,793)
------------ ------------
(474,312) (229,393)
------------ ------------
$ 688,138 $ 855,219
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
<TABLE>
TEAMUP INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
SALES $ 2,014,722 $ 3,673,075
COST OF SALES 1,504,920 2,571,975
------------ ------------
GROSS PROFIT 509,802 1,101,100
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 752,756 1,293,055
------------ ------------
OPERATING LOSS (242,954) (191,955)
OTHER INCOME (EXPENSE):
Interest income 2,858 11,232
Interest expense (852) (1,752)
Loss on asset disposal (3,971) -
------------ ------------
(1,965) 9,480
------------ ------------
NET LOSS $ (244,919) $ (182,475)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
<TABLE>
TEAMUP INTERNATIONAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE - OCTOBER 31, 1997 $ 250,400 $ (297,318) $ (46,918)
NET LOSS - (182,475) (182,475)
------------ ------------ ------------
BALANCE - OCTOBER 31, 1998 250,400 (479,793) (229,393)
NET LOSS - (244,919) (244,919)
------------ ------------ ------------
BALANCE - JULY 31, 1999 $ 250,400 $ (724,712) $ (474,312)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
<TABLE>
TEAMUP INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 2,013,828 $ 3,676,559
Cash paid to suppliers and employees (2,083,522) (3,726,190)
Interest received 2,858 32,261
Interest paid (852) (1,752)
------------ ------------
Net cash to operating activities (67,688) (19,122)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (2,953) (7,885)
Deposits - (226)
Principal repayments of notes receivable
from stockholder - 177,000
------------ ------------
Net cash from (to) investing activities (2,953) 168,889
CASH FLOWS FROM FINANCING ACTIVITIES -
Principal payments of capital lease obligations (1,791) (1,933)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (72,432) 147,834
CASH AND CASH EQUIVALENTS:
Balance - beginning of period 252,167 104,333
------------ ------------
Balance - end of period $ 179,735 $ 252,167
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
<TABLE>
TEAMUP INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
<CAPTION>
RECONCILIATION OF NET LOSS TO NET CASH TO OPERATING ACTIVITIES
--------------------------------------------------------------
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
NET LOSS $ (244,919) $ (182,475)
Adjustments:
Depreciation 21,457 40,849
Loss on sale of assets 3,971 -
Changes in operating assets and liabilities which
increase (decrease) cash flow:
Accounts receivable (894) 3,484
Inventory 73,068 32,740
Interest receivable - 21,029
Accounts payable 39,040 77,232
Accrued expenses 40,589 (11,981)
------------ ------------
CASH FLOWS TO OPERATING ACTIVITIES $ (67,688) $ (19,122)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
TEAMUP INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of TeamUp
International, Inc. is presented to assist in understanding the
Company's financial statements. The financial statements and notes are
representations of the Company's management which is responsible for
their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
BUSINESS ACTIVITY
-----------------
The Company is a distributor of nutritional and health foods.
CASH AND CASH EQUIVALENTS
-------------------------
For purposes of the statement of cash flows, cash equivalents include
cash in banks and all highly liquid debt instruments with original
maturities of three months or less.
ACCOUNTS RECEIVABLE
-------------------
The Company considers accounts receivable to be fully collectible,
accordingly, no allowance for doubtful accounts is required.
INVENTORIES
-----------
Inventories are stated at the lower of cost or market, determined by
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost and include expenditures that
materially extend the useful lives of these assets. Expenditures for
normal repairs and maintenance are charged to operations as incurred.
DEPRECIATION AND AMORTIZATION
-----------------------------
For financial statement purposes, depreciation is computed using the
straight-line and accelerated methods based on the estimated useful
lives of the fixed assets as follows:
F-23
<PAGE>
TEAMUP INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED:
REVENUE RECOGNITION - CONTINUED:
--------------------------------
Computers and software 5 years
Furniture and fixtures 7 years
Equipment 7 years
For income tax purposes, depreciation is computed using the modified
accelerated cost recovery method (MACRS) as prescribed by the Internal
Revenue Service.
Depreciation expense was $21,457 and $40,849 for the nine months ended
July 31, 1999 and the year ended October 31,1998, respectively.
INCOME TAXES
------------
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences between
the basis of assets and liabilities for financial statement purposes.
The deferred tax asset represents the future tax return consequences of
those differences, which will be deductible when the assets are
recovered or settled.
The primary components of the Company's deferred tax assets are
inventory valuation, net operating loss carryforwards and certain
accruals. The Company does not have any deferred tax liabilities. A
valuation allowance has been established to reduce the deferred tax
asset to net realizable value.
CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits. At
July 31, 1999 and October 31, 1998, the Company had approximately
$93,500 and $164,000 in excess of FDIC insured limits, respectively.
F-24
<PAGE>
TEAMUP INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED:
REVENUE RECOGNITION
-------------------
Revenue is recognized in the period in which the products are shipped.
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 may differ
from those estimates.
NOTE 2 - INVENTORIES:
Inventories, net of valuation reserves, consisted of the following:
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31
1999 1998
----------- -----------
Product $ 315,295 $ 340,003
Promotional and literature 90,284 128,400
Packaging 29,092 39,336
----------- -----------
$ 434,671 $ 507,739
=========== ===========
NOTE 3 - CAPITAL LEASE OBLIGATIONS:
The Company periodically acquires assets under capital lease
obligations. Interest rates on these obligations range from 15.6% to
26.6%. The cumulative capitalized cost of assets acquired under capital
lease obligations of $11,351, less accumulated amortization of $6,962
and $5,766 at July 31,1999 and October 31, 1998, respectively, is
included in furniture and fixtures and equipment in the accompanying
financial statements. Depreciation of these assets is included in
depreciation expense.
F-25
<PAGE>
TEAMUP INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
NOTE 3 - CAPITAL LEASE OBLIGATIONS - CONTINUED:
The following is a schedule of future lease payments under capital
leases:
Year ending July 31:
2000 $ 3,685
2001 1,900
2002 900
-----------
Total minimum lease payment 6,485
Less amount representing interest 965
-----------
Present value of net minimum lease payments 5,520
Less current portion 2,855
-----------
Long-term portion $ 2,665
===========
NOTE 4 - OPERATING LEASES:
The Company is obligated under a noncancelable operating lease for a
building which expires January 31, 2001. The annual minimum lease
payments under this agreement as of July 31, 1999 are as follows:
Year ending July, 31:
2000 $ 35,808
2001 17,904
----------
Total minimum payments $ 53,712
==========
Total rent expense charged to operations for the nine months ended July
31, 1999 and the year ended October 31, 1998 was $27,368 and $39,340,
respectively.
NOTE 5 - INCOME TAXES:
The Company has available at July 31, 1999, approximately $532,000 of
unused operating loss carryforwards that may be applied against future
taxable income that expire in various years from 2011 to 2018. Due to
the significant net loss and valuation allowance for the deferred tax
assets, there is no provision for federal income taxes for the period
ended July 31, 1999 and the year ended October 31, 1998.
F-26
<PAGE>
TEAMUP INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
NOTE 5 - INCOME TAXES - CONTINUED:
As of July 31, 1999 and October 31, 1998 the components of deferred
income taxes consisted of the following:
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31
1999 1998
----------- -----------
Current deferred taxes - gross assets $ 58,200 $ 31,900
Noncurrent deferred taxes - gross assets 180,900 124,400
----------- -----------
Net deferred tax assets 239,100 156,300
Valuation allowance (239,100) (156,300)
----------- -----------
Total deferred tax assets $ - $ -
=========== ===========
The tax effects of cumulative temporary differences as of July 31, 1999
and September 31, 1998 consisted of the following:
NINE MONTHS YEAR
ENDED ENDED
JULY 31, OCTOBER 31
1999 1998
----------- -----------
Operating loss carryforwards $ 180,900 $ 124,400
Inventory valuation 30,500 28,900
Other 27,700 3,000
----------- -----------
$ 239,100 $ 156,300
=========== ===========
NOTE 6 - RELATED PARTY TRANSACTIONS:
For the nine months ended July 31, 1999 and year ended October 31, 1998
the Company purchased approximately $48,500 and $129,200 from a related
party, respectively. Accounts payable resulting from these transactions
are included in the balance sheet.
F-27
<PAGE>
TEAMUP INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NINE MONTHS ENDED JULY 31, 1999
AND YEAR ENDED OCTOBER 31, 1998
NOTE 6 - RELATED PARTY TRANSACTIONS - CONTINUED:
Certain stockholders of the Company receive commissions from product
sales. These commissions are not expected to be paid within the next
year and have been classified as a long-term liability on the balance
sheet. Commissions earned for the nine months ended July 31,1999 and
October 31, 1998 were $68,565 and $32,774, respectively.
NOTE 7 - SUBSEQUENT EVENT:
In August, 1999 the Company stockholders entered into an asset purchase
agreement. Under this agreement, the buyer will purchase all of the
assets of the Company.
F-28
<PAGE>
The following unaudited pro forma combined income statements data for
the nine months ended September 30, 1999 illustrates the effect of the
acquisition of TeamUp as if the transactions had been completed on October 31,
1998. The historical balance sheet for TeamUp is as of July 31, 1999. The
historical income statement is for the nine-month period ended July 31, 1999.
Income statements of TeamUp for the period from August 1, 1999 to September 21,
1999 have been excluded from the condensed combined pro forma income statements
presented herein. Income statements for the Company for the period from November
1, 1998 to December 31, 1998 have also been excluded from the pro forma income
statements presented herein. The following unaudited pro forma combined balance
sheet as of September 30, 1999 illustrates the effect of the acquisition of
TeamUp as if the transaction had been completed on that date. The acquisition of
TeamUp is reflected using the purchase method of accounting for business
combinations. The unaudited pro forma combined financial data is provided for
comparative purposes only and does not purport to represent the results of
operations of the Company that actually would have been obtained if the
acquisition of TeamUp had been consummated on the date specified, nor is it
necessarily indicative of the results of operations that may be achieved in the
future. Adjustments to pro forma combined operating results include changes cash
and cash equivalents resulting from TeamUp's distribution of cash immediately
before the closing of the acquisition; changes in investment in acquisition
company; recordation of goodwill associated with the TeamUp acquisition;
elimination of TeamUp historical stockholders' equity; issuance of common stock
as partial consideration in the TeamUp acquisition; changes in accrued
commissions - related parties resulting from the Company's non-assumption of
this liability; changes in income and expenses resulting from the Company's
recordation of such items after the closing of the TeamUp acquisition and which
were generated by the TeamUp operations. The unaudited pro forma combined
financial data set forth below is based upon certain assumptions and adjustments
described in the notes thereto and should be read in conjunction therewith.
F-29
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
TEAMUP INTERNATIONAL, INC
COMBINED PROFORMA BALANCE SHEET
<CAPTION>
ASSETS
------
UNAUDITED AUDITED
GATEWAY TEAMUP
DISTRIBUTORS,INC. INTERNATIONAL, INC
-------------------------------------------------------------------------------
SEPTEMBER 30, 1999 JULY 31, 1999 ADJUSTMENTS COMBINED
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $37,017 $179,735 (1) ($100,000) $116,752
Accounts receivable:
Trade $22,631 $22,631
Credit card $35,055 $10,009 $45,064
Other $400 $400
Current portion of notes receivable $5,200 $0 $5,200
Inventories $390,128 $434,671 $824,799
Prepaid expense $5,500 $0 $5,500
Prepaid income taxes $0 $16,853 $16,853
-------------------------------------------------------------------------------
Total current assets $495,931 $641,268 (1) ($100,000) $1,137,199
Property and Equipment:
Computers and software $83,236 $185,737 $268,973
Furniture and fixtures $20,599 $115,078 $135,677
Equipment $81,511 $21,172 $102,683
Leasehold improvements $43,749 $0 $43,749
-------------------------------------------------------------------------------
$229,095 $321,987 $551,082
Less accumulated depreciation and amortization ($114,362) ($280,844) ($395,206)
-------------------------------------------------------------------------------
$114,733 $41,143 $155,876
OTHER ASSETS:
Accounts receivable- related party $47,447 $0 $47,447
Organization costs, net of amortization $4,411 $0 $4,411
Deposits $13,923 $5,727 $19,650
Goodwill $348,649 $348,649
Investment in acquisition company $301,351 ($301,351) $0
-------------------------------------------------------------------------------
$715,781 $5,727 ($301,351) $420,157
-------------------------------------------------------------------------------
$1,326,445 $688,138 ($401,351) $1,613,232
===============================================================================
</TABLE>
F-30
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS DEFICIT
------------------------------------
<CAPTION>
UNAUDITED AUDITED
GATEWAY TEAMUP
DISTRIBUTORS, INC. INTERNATIONAL, INC
-------------------------------------------------------------------------------
SEPTEMBER 30, 1999 JULY 31, 1999 COMBINED
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations $0 $2,855 $2,855
Checks drawn in excess of available bank balances $72,209
Accounts payable:
Trade $574,839 $117,924 $692,763
Related party $10,894 $10,894
Royalties $41,500 $41,500
Accrued expenses:
Commissions $98,973 $75,224 $174,197
Interest $211,526 $0 $211,526
Other $179,807 $35,725 $215,532
-------------------------------------------------------------------------------
Total current liabilities $1,137,354 $284,122 $1,421,476
CAPITAL LEASE OBLIGATIONS $0 $2,665 $2,665
ACCRUED COMMISSIONS- RELATED PARTIES $0 $875,663 (2) ($875,663) $0
NOTES PAYABLE- RELATED PARTIES $458,165 $0 $458,165
CONVERTIBLE NOTES PAYABLE $1,187,431 $0 $1,187,431
STOCKHOLDERS' DEFICIT
Common stock-.001 par value
Authorized- 20,000,000 shares
Issued and outstanding share 5,998,300 $5,998 $0 $5,998
$0
Common stock, no par value
Authorized, issued and outstanding-20,000 shares $250,400 ($250,400) $0
Paid in capital $1,199,972 $0 $1,199,972
$0 $0
Accumulated deficit ($2,662,475) ($724,712) $724,712 ($2,662,475)
-------------------------------------------------------------------------------
($1,456,505) ($474,312) $474,312 ($1,456,505)
-------------------------------------------------------------------------------
$1,326,445 $688,138 ($401,351) $1,613,232
===============================================================================
</TABLE>
F-31
<PAGE>
<TABLE>
GATEWAY DISTRIBUTORS, LTD.
TEAMUP INTERNATIONAL, INC
COMBINED PROFORMA STATEMENT OF OPERATIONS
<CAPTION>
UNAUDITED AUDITED
GATEWAY TEAM UP
DISTRIBUTORS, LTD. INTERNATIONAL, INC.
NINE MONTHS ENDED
-------------------------------------------------------------------------------
SEPTEMBER 30, 1999 JULY 31, 1999 ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
SALES $2,489,448 $2,014,722 (3) ($218,423) $4,285,747
PRODUCT COST $419,344 $1,504,920 (3) ($111,013) $1,813,251
-------------------------------------------------------------------------------
GROSS PROFIT $2,070,104 $509,802 (3) ($107,410) $2,472,496
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $2,947,863 $752,756 (3) ($133,474) $3,567,145
-------------------------------------------------------------------------------
OPERATING LOSS ($877,759) ($242,954) (3) $26,064 ($1,094,649)
OTHER INCOME (EXPENSE):
RENTAL INCOME $37,373 $0 $37,373
LOSS ON ASSET DISPOSAL $0 ($3,971) ($3,971)
INTEREST -NET ($126,000) $2,006 ($123,994)
-------------------------------------------------------------------------------
($88,627) ($1,965) ($90,592)
LOSS BEFORE PROVISION
FOR INCOME TAXES ($966,386) ($244,919) (3) $26,064 ($1,185,241)
PROVISION FOR INCOME
TAXES $0 $0
-------------------------------------------------------------------------------
NET LOSS ($966,386) ($244,919) (3) $26,064 ($1,185,241)
===============================================================================
</TABLE>
(1) TEAMUP WITHHELD 100,000 OF CASH AFTER SALE
(2) LIABILITY NOT ASSUMED BY PURCHASER
(3) INCOME AND EXPENSES OF TEAMUP RECORDED ON GATEWAY DISTRIBUTORS, LTD. INCOME
STATEMENT AFTER ACQUISITION
F-32
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (hereinafter called the "Merger
Agreement") is made as of April 10, 1998 by and between GATEWAY DISTRIBUTORS,
LTD., a Nevada corporation ("Gateway"), and HALI SALES CORP., a Delaware
corporation ("Hali"). Gateway and Hali are sometimes referred to as the
"Constituent Corporations," with reference to the following facts:
A. The authorized capital stock of Gateway consists of twenty million
(20,000,000) shares of common stock, $.001 par value, and one million
(1,000,000) shares of preferred stock, $.001 par value. The authorized capital
stock of Hali consists of twenty million (20,000,000) shares of common stock,
$.001 par value.
B. There are four million (4,000,000) shares of common stock of Gateway
outstanding and no shares of preferred stock outstanding.
C. The directors of the Constituent Corporations deem it advisable and
to the advantage of said corporations that Hali merge into Gateway upon the
terms and conditions herein provided.
D. Hali has no subsidiaries, and has a total of 9,804,295 shares of
common stock issued and outstanding, and no other shares of any class are
outstanding, nor are there any options to acquire, or rights outstanding which
would give any person the right to acquire any share of Hali's stock.
NOW, THEREFORE, the parties do hereby adopt the plan of merger
encompassed by this Merger Agreement and do hereby agree that Hali shall merge
with and into Gateway on the following terms, conditions, and other provisions:
1. TERMS AND CONDITIONS
1.1 MERGER. Hali shall be merged with and into Gateway (the
"Merger"), and Gateway shall be the surviving corporation (the "Surviving
Corporation") effective upon the date when this Merger Agreement or Articles of
Merger are filed with the Nevada Secretary of State (the "Effective Date").
1.2 SUCCESSION. On the Effective Date, Gateway shall continue its
corporate existence under the laws of the State of Nevada, and the separate
existence and corporate organization of Hali, except insofar as it may be
continued by operation of law, shall be terminated and cease.
-1-
<PAGE>
1.3 TRANSFER OF ASSETS AND LIABILITIES. On the Effective Date,
the rights, privileges, powers and franchises, both of a public as well as of a
private nature, of each of the Constituent Corporations shall be vested in and
possessed by the Surviving Corporation, subject to all of the liabilities,
duties and restrictions of or upon each of the Constituent Corporations; and all
singular rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, real, personal and mixed, of each of the
Constituent Corporations, and all debts due to each of the Constituent
Corporations on whatever account, and all things in action or belonging to each
of the Constituent Corporations shall be transferred to and vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest, shall be thereafter the property
of the Surviving Corporation as they were of the Constituent Corporations, and
the title to any real estate vested by deed or otherwise in either of the
Constituent Corporations shall not revert or be in any way impaired by reason of
the Merger; provided, however, that the liabilities of the Constituent
Corporations and of their stockholders, directors and officers shall not be
affected and all rights of creditors and all liens upon any property of either
of the Constituent Corporations shall be preserved or repaired, and any claim
existing or action or proceeding pending by or against either of the Constituent
Corporations may be prosecuted to judgments as if the Merger had not taken place
except as they may be modified with the consent of such creditors and all debts,
liabilities and duties of or upon each of the Constituent Corporations shall
attach to the Surviving Corporation, and may be enforced against it to the same
extent as if such debts, liabilities and duties had been incurred or contracted
by it.
1.4 MANNER OF ACCOMPLISHING MERGER. The Merger shall be
accomplished by way of the exchange of 100% of the issued and outstanding shares
of Hali for the common stock of Gateway, at the ratio of one share of Gateway
for each nine and eight hundred and four one-thousandths shares of Hali
outstanding on the effective date of the Merger (1 for 9.804). All Hali shares
of record outstanding on the date of the Merger will be deemed "cancelled," and
the transfer agent will automatically be instructed to issue new certificates of
Gateway, based on the above ratio, to each of the stockholders of Hali, at the
address listed in the register of stockholders. No fractional shares will be
issued, but each fractional share will be rounded up to the next share and a
certificate for Gateway will be issued to each record holder of Hali
accordingly. The exchange will be accomplished pursuant to an exemption from
registration provided by Regulation D, Rule 504 in each state where said
exemption or a registration of the issuance can be accomplished. In each state
where an exemption from registration is not available pursuant to Rule 504 of
Regulation D or some other available exemption from registration which can be
reasonably complied with, Gateway shall issue cash in lieu of the exchanged
securities of Hali at $.001 per share exchanged.
1.5 RIGHTS OF APPRAISAL. This Merger shall be subject to the
rights of appraisal granted to the stockholders of a Delaware corporation in
accordance with the General Corporation Law of the State of Delaware. Should
more than twenty-five percent (25%) of the stockholders of Hali, regardless of
the number of shares owned, seek to enforce their rights of appraisal, the
Merger shall be deemed cancelled and all parties relieved of any obligation
pursuant to this Agreement.
1.6 OBLIGATIONS OF HALI TO ISSUE ITS SECURITIES. As of the date
of this Merger Agreement and until the date of closing, Hali will have no
obligations to issue any additional shares of its common stock to any person or
entity whatsoever, including as a result of having previously issued any
warrants to acquire common stock, any options to acquire its securities as a
result of any employee stock option plan or otherwise, or pursuant to any
employee benefit plan. Hali further represents that the capitalization, as set
forth in paragraph D of the preamble to this Agreement, is true and accurate in
all respects.
-2-
<PAGE>
2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation, as amended, of Gateway in effect on the Effective Date shall
continue to be the Articles of Incorporation of the Surviving Corporation. The
Bylaws of Gateway, as amended, shall be the Bylaws of the Surviving Corporation,
as they may be amended from time to time.
2.2 DIRECTORS. The directors of Gateway immediately preceding the
Effective Date shall become the directors of the Surviving Corporation on and
after the Effective Date to serve until the expiration of their terms and until
their successors are elected and qualified.
2.3 OFFICERS. The officers of Gateway immediately preceding the
Effective Date shall become the officers of the Surviving Corporation on and
after the Effective Date to serve at the pleasure of its Board of Directors.
3. MISCELLANEOUS
3.1 FURTHER ASSURANCES. From time to time, and when required by
the Surviving Corporation or by its successors and assigns, there shall be
executed and delivered on behalf of Hali such deeds and other instruments, and
there shall be taken or caused to be taken by it such further and other action,
as shall be appropriate or necessary in order to vest or perfect in or to
conform of record or otherwise, in the Surviving Corporation the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Hali and otherwise to carry out
the purposes of this Merger Agreement, and the officers and directors of the
Surviving Corporation are fully authorized in the name and on behalf of Hali or
otherwise to take any and all such action and to execute and deliver any and all
such deeds and other instruments.
3.2 AMENDMENT. At any time before or after approval by the
stockholders of Hali, this Merger Agreement may be amended in any manner (except
that, after the approval of the Merger Agreement by the stockholders of Hali,
the principal terms may not be amended without the further approval of the
stockholders of Hali) as may be determined in the judgment of the respective
Board of Directors of Gateway and Hali to be necessary, desirable, or expedient
in order to clarify the intention of the parties hereto or to effect or
facilitate the purpose and intent of this Merger Agreement.
3.3 CONDITIONS TO MERGER. The obligation of the Constituent
Corporations to effect the transactions contemplated hereby is subject to
satisfaction of the following conditions (any or all of which may be waived by
either of the Constituent Corporations in its sole discretion to the extent
permitted by law):
-3-
<PAGE>
(a) the Merger shall have been approved by the stockholders
of Hali in accordance with applicable provisions of the General Corporation Law
of the State of Delaware;
(b) the Merger shall have been approved by the stockholders
of Gateway in accordance with applicable provisions of the General Corporation
Law of the State of Nevada;
(c) any and all consents, permits, authorizations, approvals,
and orders deemed in the sole discretion of Hali to be material to consummation
of the Merger shall have been obtained;
(d) the securities issued by Gateway may be issued pursuant
to an exemption from registration pursuant to the Securities Act of 1933, as
amended, Regulation D, Rule 504, and the stockholders who reside in certain
states which comport with said Regulation D, Rule 504, or other tandem
exemptions from registration, may receive unrestricted securities in exchange
for the securities of Hali; and
(e) an audit of the books and records of Hali, conducted in
accordance with generally accepted accounting practices, shall have been
delivered to Gateway.
3.4 ABANDONMENT OR DEFERRAL. At any time before the Effective
Date, this Merger Agreement may be terminated and the Merger may be abandoned by
the mutual agreement of the Boards of Directors of Hali and Gateway,
notwithstanding the approval of the Merger by the stockholders of Hali or
Gateway, or the consummation of the Merger may be deferred for a reasonable
period of time if, in the opinion of the Boards of Directors of Hali and
Gateway, such action would be in the best interest of such corporations. In the
event of termination of this Merger Agreement, this Merger Agreement shall
become void and of no effect and there shall be no liability on the part of
either Constituent Corporation or their respective Boards of Directors or
stockholders with respect thereto.
3.5 COUNTERPARTS. In order to facilitate the filing and recording
of this Merger Agreement, the same may be executed in any number of
counterparts, each of which shall be deemed to be an original.
-4-
<PAGE>
IN WITNESS WHEREOF, this Merger Agreement, having first been duly
approved by the Boards of Directors of Hali and Gateway, is hereby executed on
behalf of each said corporation and attested by their respective officers
thereunto duly authorized.
HALI SALES CORP.,
a Delaware corporation
By: /s/ Troy D. Wiseman
---------------------------
Troy D. Wiseman, President
ATTEST:
/s/ Troy D. Wiseman
- --------------------------
Troy D. Wiseman, Secretary
GATEWAY DISTRIBUTORS, LTD.,
a Nevada corporation
By: /s/ Richard A. Bailey
---------------------------
Richard A. Bailey, President
ATTEST:
/s/ Richard A. Bailey
- ----------------------------
Richard A. Bailey, Secretary
-5-
ASSET PURCHASE AGREEMENT
by and among
GATEWAY DISTRIBUTORS, LTD.
a Nevada corporation,
NUTECH INTERNATIONAL, INC.
a Texas corporation
and
THE STOCKHOLDERS OF
NUTECH INTERNATIONAL, INC.
Dated as of January 4, 1999
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made as of this 4th day
of January, 1999 among Gateway Distributors, Ltd., a Nevada corporation (the
"Buyer"), NuTech International, Inc., a Texas corporation (the "Seller") and the
stockholders of the Seller listed on the signature page of this Agreement
(individually a "Stockholder" and collectively the "Stockholders").
RECITALS
--------
A. The Buyer is in the business of network marketing of nutritional,
health and dietary supplements and products throughout North America and Japan.
B. The Buyer desires to acquire certain assets of the Seller heretofore
developed including, but not limited to, the assets listed on Schedule 1 hereto
(the "Acquired Assets").
NOW, THEREFORE, in consideration of the premises and mutual covenants,
warranties and agreements herein contained, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. PURCHASE OF ASSETS
------------------
1.1. PURCHASE. The Seller hereby agrees to transfer to the Buyer and
the Buyer agrees to accept the Acquired Assets.
1.2. PURCHASE PRICE. As consideration for the transfer of the Acquired
Assets, the Buyer shall issue and deliver to the Seller 75,000 shares of the
Buyer's common stock, par value $.001 per share (the "Shares").
1.3. COSTS AND EXPENSES. The Buyer agrees to and shall pay any and all
reasonable costs and expenses, including without limitation, reasonable legal
and accounting fees, arising out of the sale of the Acquired Assets under this
Agreement.
2. REPRESENTATIONS AND WARRANTIES
------------------------------
As a material inducement to each party to enter into this Agreement,
the Seller makes to the Buyer the following representations and warranties:
2.1. AUTHORIZATION. This Agreement is the legal, valid, binding
obligation of the Seller, enforceable in accordance with its terms, subject to
judicial discretion regarding specific performance or other equitable remedies
and except as may be limited by bankruptcy or other similar laws.
2.2. NO VIOLATIONS. Neither the sale of the Acquired Assets nor the
execution, delivery or consummation of this Agreement will violate, be in
conflict with or constitute a default by the Seller any other agreement or
instrument to which the Seller may be bound.
A-1
<PAGE>
2.3. GOOD TITLE. The Seller is the owner of, and has the right to
transfer all of the Acquired Assets to the Buyer, free and clear from any lien,
encumbrance, security agreement, title retention or other device.
3. FURTHER DELIVERIES AND ASSURANCES
---------------------------------
3.1. FURTHER DELIVERIES AND ASSURANCES. The Seller agrees to deliver or
cause to be delivered any and all assignments, documents or instruments
reasonably required to give effect to the transactions contemplated by this
Agreement, including, but not limited to, the Bill of Sale attached hereto as
Exhibit "B."
3.2. NOMINATION OF SCOTT MCKNIGHT TO THE BUYER'S BOARD. As soon as
practicable, the Buyer shall cause an increase in the number of authorized
directors of the Buyer and shall take all steps necessary to nominate Scott
McKnight to be a director of the Buyer and submit such nomination to the Buyer's
stockholders for approval.
3.3. EXCLUSIVE MANUFACTURER. The Buyer agrees that it will engage Aloe
Commodities International, Inc. ("ACI") as the exclusive manufacturer of Body
Balance, Aloe Magic, Non Surgical Face-Lift, Youth Serum, and Mineral Magic
(collectively, the "Products"), subject to the following terms and conditions:
3.3.1. The Buyer shall not have any obligation to engage ACI as
the exclusive manufacturer if the prices of manufacturing which ACI
charges for manufacture of the Products are higher than those at which
other manufacturers can competently manufacture the Products.
3.3.2. The Buyer shall not have any obligation to engage ACI as
the exclusive manufacturer if ACI is unable to manufacture the Products
in a timely manner, as determined by the Buyer's needs.
4. SECURITIES RESTRICTIONS
-----------------------
The Seller and each of the Stockholders acknowledge and represent as
follows:
4.1. The Seller and the Stockholders, personally or through advisors,
have such knowledge and experience in financial and business matters to evaluate
the merits and risk of an investment in the Shares, have the capacity to protect
their own interests in connection with an investment in the Shares and have the
net worth to undertake such risks such that they could be reasonably assumed to
have the capacity to protect their own interests in connection with a purchase
of the Shares.
4.2. The Buyer has made available to the Seller and the Stockholders or
The Seller's and the Stockholder's advisors the opportunity to obtain
information to evaluate the merits and risks of the investment in the Shares,
and the Seller and the Stockholders have received all information requested from
the Buyer. The Seller and the Stockholders have had an opportunity to ask
questions and receive answers from the Buyer regarding the terms and conditions
of the offering of the Shares and the business, properties, plans, prospects and
financial condition of the Buyer and to obtain additional information as the
Seller and the Stockholders have deemed appropriate for purposes of investing in
the Shares pursuant to the Agreement.
A-2
<PAGE>
4.3. The Seller and the Stockholders recognize that the Buyer has a
limited operating history and that the Shares as an investment involve a high
degree of risk, including, but not limited to, the risk of economic losses from
operations of the Company.
4.4. The Seller and the Stockholders realize that (i) the purchase of
the Shares is a long-term investment; (ii) the purchaser of the Shares must bear
the economic risk of investment for an indefinite period of time because the
Shares have not been registered under the Securities Act of 1933 ("1933 Act") or
under the securities laws of any other jurisdiction and, therefore, the Shares
cannot be resold unless they are subsequently registered under said laws or
exemptions from such registrations are available; and (iii) that the
transferability of the Shares is restricted and that a legend may be placed on
any certificate representing the Shares substantially to the following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "1933 ACT"). THE SHARES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF A CURRENT AND EFFECTIVE
REGISTRATION STATEMENT UNDER THE 1933 ACT WITH
RESPECT TO SUCH SHARES, OR AN OPINION OF THE
ISSUER'S COUNSEL TO THE EFFECT THAT REGISTRATION
IS NOT REQUIRED UNDER THE 1933 ACT.
4.5. The Seller and the Stockholders are purchasing the Shares in the
name of the Seller solely for the Seller's and the Stockholders' own beneficial
interest and not as nominee for, or on behalf of, or for the beneficial interest
of, or with the intention to transfer to, any other person, trust or
organization. The Seller and the Stockholders are acquiring these securities for
investment and not with a view towards resale or distribution.
4.6. The Seller and each Stockholder is an "Accredited Investor" as
defined in Rule 501(a) under the 1933 Act. The Seller and the Stockholders
acknowledge that the offering of the Shares is subject to the Federal securities
laws of the United States and state securities laws of those states in which the
Shares are offered, that the offering of the Shares is exempt from registration
and qualification under Sections 4(2) and 18 of the 1933 Act, and that, pursuant
to the U.S. Federal securities laws and state securities laws, the Shares may be
purchased only by persons who come within the definition of an "Accredited
Investor" as that term is defined in Rule 501(a) of Regulation D promulgated
under the 1933 Act.
4.7. The Seller, and each Stockholder who is not an individual, make
the following additional representations:
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4.7.1. The Seller and each such Stockholder was not organized for
the specific purpose of acquiring the Shares; and
4.7.2. This Agreement has been duly authorized by all necessary
action on the part of the Seller and each such Stockholder, has been
duly executed by an authorized representative of the Seller and each
such Stockholder, and is legal, valid and binding obligations of the
Seller and each such Stockholder enforceable in accordance with its
terms.
5. MISCELLANEOUS
-------------
5.1. EFFECT OF HEADINGS. The subject headings of the paragraphs and
subparagraphs of this Agreement are included for convenience only and shall not
affect the construction or interpretation of any of its provisions.
5.2. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement, modification,
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
5.3. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
5.4. SCHEDULES. All Schedules attached hereto or referred to herein are
hereby incorporated by reference in this Agreement and are made a part hereof.
5.5. PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
5.6. ASSIGNMENT. This Agreement shall be binding on, and shall inure to
the benefit of, the parties to it and their respective heirs, legal
representatives, successors, and assigns; provided, however, that the Buyer may
assign any of its rights under this Agreement, to an affiliate of the Buyer.
5.7. GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of Nevada.
5.8. SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of final jurisdiction, it is the intent of the
parties that all other provisions of this Agreement be construed to remain fully
valid, enforceable, and binding on the parties.
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<PAGE>
5.9. ATTORNEYS' FEES. In the event of any action arising out of or
pertaining to this Agreement or the rights and duties of any person in relation
thereto, in addition to such other relief that may be granted, the prevailing
party shall be entitled to receive a reasonable sum as and for his attorneys'
fees as the court may award.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first above written.
The "Buyer"
GATEWAY DISTRIBUTORS, LTD.
By:/s/ Richard A. Bailey
-------------------------------
Richard A. Bailey, President
The "Seller"
NUTECH INTERNATIONAL, INC.
By:/s/ Scott McKnight
-------------------------------
Scott McKnight, President
"Stockholder"
By:/s/ Scott McKnight
-------------------------------
Scott McKnight
A-5
ASSET PURCHASE AGREEMENT
by and among
GATEWAY DISTRIBUTORS, LTD.
a Nevada corporation,
AMERICAN OUTBACK, INC.
an Oklahoma corporation
and
THE STOCKHOLDERS OF
AMERICAN OUTBACK, INC.
Dated as of April 1, 1999
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made as of the 1st day
of April, 1999 among Gateway Distributors, Ltd., a Nevada corporation (the
"Buyer"), American Outback, Inc., an Oklahoma corporation (the "Seller") and the
stockholders of the Seller listed on the signature page of this Agreement
(individually a "Stockholder" and collectively the "Stockholders").
RECITALS
--------
A. The Buyer is in the business of network marketing of nutritional,
health and dietary supplements and products throughout North America and Japan
(the "Business").
B. The Buyer desires to acquire certain assets of the Seller heretofore
developed including, but not limited to, the assets listed on Schedule 1 hereto
(the "Acquired Assets").
NOW, THEREFORE, in consideration of the premises and mutual covenants,
warranties and agreements herein contained, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. PURCHASE OF ASSETS
------------------
1.1. PURCHASE. The Seller hereby agrees to transfer to the Buyer and
the Buyer agrees to accept the Acquired Assets.
1.2. PURCHASE PRICE. As consideration for the transfer of the Acquired
Assets, the Buyer shall issue and deliver to the Seller 67,400 shares (the
"Shares") of the Buyer's common stock, par value $.001 per share (the "Common
Stock").
1.3. PURCHASE PRICE ADJUSTMENT. If, between April 1, 1999 and December
31, 1999, the average market price of the Common Stock does not exceed $1.00 per
share for any consecutive ten (10) day period, then Buyer shall pay the Seller
the difference of (a) Sixty-Seven Thousand Four Hundred Dollars ($67,400) and
(b) the product of (i) the average of the daily closing prices of the Common
Stock during the ten (10) trading days preceding October 1, 1999 and (ii)
$67,400. In the event that the Common Stock is not publicly trading by November
1, 1999, Seller has the option to require the Buyer to repurchase up to 67,400
shares of Common Stock at a price of $1.00 per share, on terms to be determined
by the parties by mutual agreement; provided, however, that the Buyer must make
a minimum payment of $5,000 per month with a balloon payment on the twelfth
month, and provided, further, that any unpaid portion of the repurchase price
shall accrue interest at a rate of 10% per annum should this option be
exercised.
2. REPRESENTATIONS AND WARRANTIES
------------------------------
As a material inducement to each party to enter into this Agreement,
the Seller makes to the Buyer the following representations and warranties:
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<PAGE>
2.1. AUTHORIZATION. This Agreement is the legal, valid, binding
obligation of the Seller, enforceable in accordance with its terms, subject to
judicial discretion regarding specific performance or other equitable remedies
and except as may be limited by bankruptcy or other similar laws.
2.2. NO VIOLATIONS. Neither the sale of the Acquired Assets nor the
execution, delivery or consummation of this Agreement will violate, be in
conflict with or constitute a default by the Seller any other agreement or
instrument to which the Seller may be bound.
2.3. GOOD TITLE. The Seller is the owner of, and has the right to
transfer all of the Acquired Assets to the Buyer, free and clear from any lien,
encumbrance, security agreement, title retention or other device.
2.4. INVENTORIES. Schedule A lists all inventory of the Seller (the
"Inventory"). Except as set forth in Schedule A, the Inventory, whether
reflected in the financial statements of the Seller or otherwise, consists of a
quality and quantity usable and salable in the ordinary course of business, and
the present quantities of all inventory of the Company are reasonable in the
present circumstances of the businesses as currently conducted or as proposed to
be conducted. On or before the execution of this Agreement, the Seller shall
deliver to the Buyer (a) the Inventory and (b) a cost evaluation price list (the
"Price List"). The Price List shall be true and accurate and shall reflect the
actual manufacturing cost of the Inventory. Buyer will then be given the
opportunity to perform an audit of the Inventory to determine the Inventory's
cost basis. Schedule 2.4 lists all products and inventory being manufactured as
of the date hereof (the "Work-In-Progress"). Upon completion of the
Work-In-Progress, the Seller shall immediately deliver the Work-In-Progress to
the Buyer.
3. FURTHER DELIVERIES AND ASSURANCES
---------------------------------
3.1. FURTHER DELIVERIES AND ASSURANCES. The Seller agrees to deliver or
cause to be delivered any and all assignments, documents or instruments
reasonably required to give effect to the transactions contemplated by this
Agreement, including, but not limited to, the Bill of Sale attached hereto as
Exhibit "B" and the License Agreement attached hereto as Exhibit "C."
3.2. NOMINATION OF JACK AKERS TO THE BUYER'S MEDICAL ADVISORY BOARD. As
soon as practicable, the Buyer shall take all steps necessary to appoint Jack
Akers to the Buyer's Medical Advisory Board.
3.3. EXCLUSIVE MANUFACTURER. The Buyer agrees that it will use Bush
Recipe(R) Emu Oil ("Bush Oil") in all its products which contain Emu oil, that
it will engage the Seller as the exclusive manufacturer of Bush Oil and that it
will purchase all of its Bush Oil requirements from the Seller at a price of
$150 per gallon or less, subject to the following terms and conditions:
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<PAGE>
3.3.1. The Buyer shall not have any obligation to engage the
Seller as the exclusive manufacturer if the prices of manufacturing
which the Seller charges for manufacture of Bush Oil are higher than
those at which other manufacturers can competently manufacture Emu oil.
3.3.2. The Buyer shall not have any obligation to engage the
Seller as the exclusive manufacturer if the Seller is unable to
manufacture Bush Oil in a timely manner, as determined by the Buyer's
needs.
3.3.3. Price increase on cost per gallon will consistently be
maintained and always 25% below the average of all buyers of the Bush
Recipe. The Japanese market will be any exception to this pricing. In
Japan, all bulk will be priced jointly by Buyer and Seller. Profits
will be split 60% for Seller and 40% for Buyer after all costs are
recovered by both parties.
3.4. BUYER'S FINANCIAL STATEMENTS. The Buyer agrees to deliver or cause
to be delivered to Seller the "Financial Statements with Additional Information
and Independent Auditors' Report" of the Buyer for the year ended on December
31, 1998.
3.5. SELLER'S FINANCIAL STATEMENTS. The Seller agrees to deliver or
cause to be delivered to the Buyer unaudited balance sheets of the Seller as of
January 31, 1999, February 28, 1999 and March 31, 1999 and the related
statements of income and cash flows for the one-month periods then ended (the
"Month-End Financial Statements"). The Month-End Financial Statements were
prepared in accordance with generally accepted accounting principles
consistently applied and fairly present the financial condition and the results
of the operations of the Seller as of the relevant dates thereof and for the
periods covered thereby.
3.6. RIGHT OF FIRST REFUSAL. The Seller further grants to the Buyer a
right of first refusal to purchase any products or formulations (the "Future
Products") (including, but not limited to, any inventory of the Future Products
and any licensing rights associated with the Future Products) developed by the
Seller after the date of this Agreement. The Buyer shall have thirty (30) days
from receipt of notice from the Seller to exercise such right of first refusal.
If the Buyer exercises its right of first refusal with respect to any licensing
rights in connection with any Future Products, the Buyer shall enter into a
three year license agreement with the Seller, whereby the Buyer will pay a
royalty of $0.25 per unit sold to the Seller.
3.7. RESTRICTIVE COVENANTS. - (section 3.7 is applicable to both
parties)
3.7.1. NON-COMPETITION. The Seller and the Stockholders recognize
that the covenants of the Seller and each Stockholder contained in this
Section 3.7.1 (the "Covenant Not to Compete") are an essential part of
this Agreement and that, but for the agreement of the Seller and each
Stockholder to comply with such covenants, the Buyer would not enter
into this Agreement or the other Transaction Documents. The Seller and
the Stockholders acknowledge and agree that the Covenant Not to Compete
is necessary to protect the Acquired Assets acquired by Buyer,
including without limitation, goodwill, and that irreparable harm and
damage will be done to the Buyer if the Seller or any Stockholder
competes with the Buyer in any way prohibited by the Covenant Not to
Compete. In addition, the Seller and the Stockholders acknowledge that
the Shares are consideration for professional relationships and market
place reputation developed by the Seller and the Stockholders and the
Seller and the Covenant Not to Compete is necessary for the Buyer to
receive the full benefit of this Agreement. The Seller and each
Stockholder shall not individually, or in concert, directly or
indirectly, do any of the following:
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<PAGE>
(a) either on its, his, hers or their own account or for any
other person or entity, solicit, induce, attempt to induce,
interfere with, or endeavor to cause (in each case in such a
manner that could have a material adverse effect on the financial
condition, prospects or operation of the Acquired Assets or the
Business) any customer, which has utilized the services of the
Seller at any time during the two (2) year period preceding the
date of this Agreement or was being pursued as a prospect by the
Seller as of the date of this Agreement (each, a "Customer"), to
modify, amend, terminate or otherwise alter the terms upon which
it acquires services from the Buyer, nor to acquire from any party
other than the Buyer any services of the kind available from the
Buyer;
(b) engage or become interested in, as owner, employee,
partner, through equity ownership (not including up to a 1%
passive equity interest in a public company), investment of
capital, lending of money or property, rendering of services, or
otherwise, either alone or in association with others, any
business competitive with the Business (including within the
definition of the Business, without limitation, any business of
the type or types conducted by the Seller at any time during the
two (2) year period preceding the date of this Agreement or under
development by the Seller on the date of this Agreement);
(c) perform any material act intended to advance an interest
of any competitor of the Business, or encourage any other person
to make any such statement or to perform any such act; or
(d) perform any material act intended to cause any Customer
or prospective customer to use the services or purchase the
products of any competitor of the Business.
This Covenant Not to Compete shall be limited to any county or any
other political subdivision of any state of the United States of
America or of any other country in the world where the Seller
conducted the Business any time during the two (2) year period
preceding the date of this Agreement including, but not limited
to, Japan. This Covenant Not to Compete shall bind the Seller and
each Stockholder until the fifth anniversary of the date of this
Agreement. The parties hereto agree that the duration and area for
which the Covenant Not to Compete set forth in this Section 3.7.1
is to be effective are reasonable. Buyer agrees not to compete in
the manufacturing of Emu Oil for the same time periods required of
Seller. All conditions and terms of no compete required of the
Seller will apply to the Buyer as it relates to manufacturing of
Emu Oil.
B-4
<PAGE>
3.7.2. CONFIDENTIALITY. The Seller and each Stockholder
acknowledge their intent that the Seller shall fully and effectively
convey to the Buyer all proprietary rights to be transferred or
licensed to the Buyer pursuant hereto. Accordingly, notwithstanding the
expiration of the Covenant Not to Compete set forth in Section 3.7.1,
the Seller and each Stockholder shall at all times keep confidential
and shall not disclose to others any proprietary rights and shall not
use or permit to be used any proprietary rights for any purpose other
than performance of obligations to the Buyer.
3.7.3. NON-DIVERSION. For the period during which the Covenant Not
to Compete binds the Seller and the Stockholders pursuant to Section
3.7.1, the Seller and each of the Stockholders shall not, and shall
cause their affiliates not to, divert or attempt to divert or take
advantage of or attempt to take advantage of any actual or potential
business or opportunities of the Buyer of which Seller or any of the
Stockholders become aware as the result of their affiliation with the
Business or their relationship with the Buyer and which relate
specifically to the Business, or any part thereof. This Section 3.7.3
is an addition to and not by way of limitation of any other duties the
Stockholders may have to the Buyer.
3.7.4. NON-RECRUITMENT. For the respective periods during which
the Covenant Not to Compete binds the Seller and the Stockholders
pursuant to Section 3.7.1, neither the Seller nor the Stockholders
shall hire away, or cause any other person to hire away, any employee
of or consultant to the Buyer (including, without limitation, persons
employed or engaged by the Seller before the date of this Agreement),
or directly or indirectly entice or solicit or seek to induce or
influence any of such employees or consultants to leave their
employment or engagement with the Buyer.
3.7.5. REMEDIES. The covenants contained in this Section 3.7.5
impose a reasonable restraint on the Seller and the Stockholders in
light of the activities and business of the Seller and future plans of
the Buyer. The Seller and each Stockholder acknowledge that if they
violate any of the covenants contained in this Section 3.7
(collectively, the "Restrictive Covenants"), it will be difficult to
determine the resulting damages to the Buyer and, in addition to any
other remedies the Buyer may have, the Buyer shall be entitled to
temporary injunctive relief without being required to post a bond and
permanent injunctive relief without the necessity of proving actual
damages. The Seller and the Stockholders shall be liable to pay all
costs, including reasonable attorneys' fees and expenses, that the
Buyer may incur in enforcing or defending, to any extent, any of the
Restrictive Covenants, whether or not litigation is actually commenced
and including litigation of any appeal defended by the Buyer where such
party succeeds in enforcing any of the Restrictive Covenants. The Buyer
may elect to seek one or more remedies at its discretion on a case by
case basis. Failure to seek any or all remedies in one case shall not
restrict the Buyer from seeking any remedies in another situation. Such
action by the Buyer shall not constitute a waiver of any of its rights.
B-5
<PAGE>
3.7.6. SEVERABILITY AND MODIFICATION OF ANY UNENFORCEABLE
COVENANT. Each of the Restrictive Covenants will be read and
interpreted with every reasonable inference given to its
enforceability. However, if any term, provision or condition of the
Restrictive Covenants is held by a court or arbitrator to be invalid,
void or unenforceable, the remainder of the provisions thereof shall
remain in full force and effect and shall in no way be affected,
impaired or invalidated. If a court or arbitrator should determine any
of the Restrictive Covenants are unenforceable because of over-breadth,
then the court or arbitrator shall modify such covenant so as to make
it enforceable to the fullest extent the court or arbitrator deems
reasonable and enforceable under the prevailing circumstances. The
Covenant Not to Compete shall be deemed to be a series of separate
covenants, one for each and every county of each and every state of the
United States of America and each and every political subdivision of
each and every country outside the United States of America where the
Covenant Not to Compete is intended to be effective.
3.8. CONFIDENTIALITY. Each of the parties hereto agrees that it will
not use, or permit the use of, any of the information relating to any other
party hereto furnished to it in connection with the transactions contemplated
herein ("Information") in a manner or for a purpose detrimental to such other
party or otherwise than in connection with the transaction, and that they will
not disclose, divulge, provide or make accessible (collectively, "Disclose"), or
permit the Disclosure of, any of the Information to any person or entity, other
than their responsible directors, officers, employees, investment advisors,
accountants, counsel and other authorized representatives and agents, except as
may be required by judicial or administrative process or, in the opinion of such
party's regular counsel, by other requirements of law; PROVIDED, HOWEVER, that
prior to any Disclosure of any Information permitted hereunder, the disclosing
party shall first obtain the recipients' undertaking to comply with the
provisions of this subsection with respect to such information. The term
"Information" as used herein shall not include any information relating to a
party which the party disclosing such information can show: (i) to have been in
its possession prior to its receipt from another party hereto; (ii) to be now or
to later become generally available to the public through no fault of the
disclosing party; (iii) to have been available to the public at the time of its
receipt by the disclosing party; (iv) to have been received separately by the
disclosing party in an unrestricted manner from a person entitled to disclose
such information; or (v) to have been developed independently by the disclosing
party without regard to any information received in connection with this
transaction. Each party hereto also agrees to promptly return to the party from
whom originally received all original and duplicate copies of written materials
containing Information should the transactions contemplated herein not occur. A
party hereto shall be deemed to have satisfied its obligations to hold the
Information confidential if it exercises the same care as it takes with respect
to its own similar information.
3.9. PUBLIC ANNOUNCEMENTS. None of the parties hereto shall make any
public announcement with respect to the transactions contemplated herein without
the prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed; PROVIDED, HOWEVER, that any of the parties
hereto may at any time make any announcements which are deemed by its counsel to
be required by applicable law so long as the party so required to make an
announcement promptly upon learning of such requirement notifies the other
parties of such requirement and discusses with the other parties in good faith
the exact proposed wording of any such announcement.
B-6
<PAGE>
4. SECURITIES RESTRICTIONS
-----------------------
The Seller and each of the Stockholders acknowledge and represent as
follows:
4.1. The Seller and the Stockholders are each residents of, are
domiciled in and received the offer and made the decision to invest in the
Shares in the State of Oklahoma.
4.2. The Buyer has made available to the Seller and the Stockholders or
the Seller's and the Stockholder's advisors the opportunity to obtain
information to evaluate the merits and risks of the investment in the Shares,
and the Seller and the Stockholders have received all information requested from
the Buyer. The Seller and the Stockholders have had an opportunity to ask
questions and receive answers from the Buyer regarding the terms and conditions
of the offering of the Shares and the business, properties, plans, prospects and
financial condition of the Buyer and to obtain additional information as the
Seller and the Stockholders have deemed appropriate for purposes of investing in
the Shares pursuant to the Agreement.
4.3. The Seller and the Stockholders recognize that the Buyer has a
limited operating history and that the Shares as an investment involve a high
degree of risk, including, but not limited to, the risk of economic losses from
operations of the Company.
4.4. The Seller and the Stockholders realize that the Shares have not
been registered under the Securities Act of 1933 ("1933 Act") or under the
securities laws of any other jurisdiction and, therefore, the Shares cannot be
resold unless they are subsequently registered under said laws or exemptions
from such registrations are available.
4.5. The Seller and the Stockholders are purchasing the Shares in the
name of the Seller solely for the Seller's and the Stockholders' own beneficial
interest and not as nominee for, or on behalf of, or for the beneficial interest
of, or with the intention to transfer to, any other person, trust or
organization. The Seller and the Stockholders are acquiring these securities for
investment and not with a view towards resale or distribution.
4.6. The Seller and the Stockholders acknowledge that the offering of
the Shares is subject to the Federal securities laws of the United States and
state securities laws of those states in which the Shares are offered, that the
offering of the Shares is exempt from registration and qualification under
Section 3(b) of the 1933 Act and Rule 504 of Regulation D promulgated
thereunder.
4.7. The Seller, and each Stockholder who is not an individual, make
the following additional representations:
4.7.1. The Seller and each such Stockholder was not organized for
the specific purpose of acquiring the Shares; and
4.7.2. This Agreement has been duly authorized by all necessary
action on the part of the Seller and each such Stockholder, has been
duly executed by an authorized representative of the Seller and each
such Stockholder, and is legal, valid and binding obligations of the
Seller and each such Stockholder enforceable in accordance with its
terms.
B-7
<PAGE>
5. MISCELLANEOUS
-------------
5.1. EFFECT OF HEADINGS. The subject headings of the paragraphs and
subparagraphs of this Agreement are included for convenience only and shall not
affect the construction or interpretation of any of its provisions.
5.2. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement, modification,
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
5.3. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
5.4. SCHEDULES. All Schedules attached hereto or referred to herein are
hereby incorporated by reference in this Agreement and are made a part hereof.
5.5. PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
5.6. ASSIGNMENT. This Agreement shall be binding on, and shall inure to
the benefit of, the parties to it and their respective heirs, legal
representatives, successors, and assigns; provided, however, that the Buyer may
assign any of its rights under this Agreement, to an affiliate of the Buyer.
5.7. GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of Nevada.
5.8. SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of final jurisdiction, it is the intent of the
parties that all other provisions of this Agreement be construed to remain fully
valid, enforceable, and binding on the parties.
5.9. ATTORNEYS' FEES. In the event of any action arising out of or
pertaining to this Agreement or the rights and duties of any person in relation
thereto, in addition to such other relief that may be granted, the prevailing
party shall be entitled to receive a reasonable sum as and for his attorneys'
fees as the court may award.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first above written.
B-8
<PAGE>
The "Buyer"
GATEWAY DISTRIBUTORS, LTD.
By:/s/ Richard A. Bailey
--------------------------------
Richard A. Bailey, President
The "Seller"
AMERICAN OUTBACK, INC.
By:/s/ Jack Akers
--------------------------------
Jack Akers, President
"Stockholders"
By:/s/ Jack Akers
--------------------------------
Jack Akers
B-9
ASSET PURCHASE AGREEMENT
Dated as of August 17, 1999
Among
GATEWAY DISTRIBUTORS, LTD.
TEAMUP INTERNATIONAL, INC.
and
SHAREHOLDERS OF TEAMUP INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 - PURCHASE AND SALE OF ASSETS........................................1
1.1 Assets to be Purchased..................................................1
1.2 Assumptions of Certain Liabilities......................................2
1.3 Purchase Price..........................................................2
1.3.1 Inventory Stream...................................................2
1.3.2 Revenue Payment....................................................2
1.3.3 Common Stock.......................................................2
1.3.4 Common Stock Options...............................................3
1.4 Payment of Purchase Price...............................................3
1.5 Post Closing Adjustments................................................3
1.6 Closing.................................................................4
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF COMPANY AND SHAREHOLDERS.........4
2.1 Disclosure Schedule.....................................................4
2.2 Corporate Organization..................................................5
2.3 Capitalization..........................................................5
2.4 Non-Contravention.......................................................5
2.5 Consents and Approvals..................................................6
2.6 Financial Statements....................................................6
2.7 Loss Contingencies; Other Non-Accrued Liabilities.......................6
2.8 Absence of Certain Changes..............................................7
2.9 Real Properties.........................................................7
2.10 Machinery, Equipment, Vehicles and Personal Property...................8
2.11 Inventories............................................................9
2.12 Receivables and Payables...............................................9
2.13 Intellectual Property Rights...........................................9
2.14 Litigation............................................................10
2.15 Tax Matters...........................................................10
2.16 Insurance.............................................................11
2.17 Benefit Plans.........................................................11
2.18 Bank Accounts; Powers of Attorney.....................................14
2.19 Contracts and Commitments; No Default.................................15
2.20 Orders, Commitments and Returns.......................................16
2.21 Labor Matters.........................................................16
2.23 Dealers and Suppliers.................................................17
2.23 Permits and Other Operating Rights....................................17
2.24 Compliance with Law...................................................17
2.25 Assets of Business....................................................17
2.26 Hazardous Substances and Hazardous Wastes.............................18
2.27 Brokers...............................................................20
2.28 Customers.............................................................20
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2.29 Absence of Certain Business Practices.................................20
2.30 Securities Matters....................................................20
2.31 The Purchaser and Registration under the Securities Exchange Act......21
2.32 Disclosure............................................................21
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF PURCHASER.......................22
3.1 Corporate Organization.................................................22
3.2 Authorization..........................................................22
3.3 Non-Contravention......................................................22
3.4 Consents and Approvals.................................................23
3.5 Brokers................................................................23
3.6 Legal Proceedings......................................................23
3.7 Capitalization.........................................................23
3.8 Financial Statements...................................................23
3.9 Litigation.............................................................24
3.10 Insurance.............................................................24
3.11 Labor Matters.........................................................24
3.12 Compliance with Law...................................................24
3.13 Customers.............................................................25
3.14 Absence of Certain Business Practices.................................25
ARTICLE 4 - COVENANTS.........................................................25
4.1 The Company's Agreements as to Specified Matters.......................25
4.2 Conduct of the Company Business........................................27
4.3 No Company Solicitation of Alternate Transaction.......................27
4.4 Full Access to the Purchaser...........................................28
4.5 Confidentiality........................................................28
4.6 Filings; Consents; Removal of Objections...............................29
4.7 Further Assurances; Cooperation; Notification..........................29
4.8 Supplements to Disclosure Schedule.....................................30
4.9 Public Announcements...................................................30
4.10 Transactional Tax Undertakings........................................30
4.11 Employee Benefits.....................................................31
4.12 Bulk Sales Law Compliance.............................................31
4.13 Securities Restrictions...............................................31
4.14 Restrictive Covenants.................................................32
4.15 Repurchase Rights.....................................................33
4.16. Securities Compliance................................................34
4.17 No Effective Registration Statement; Cash Payment.....................34
ARTICLE 5 - CONDITIONS TO OBLIGATIONS OF PURCHASER............................35
5.1 Representations and Warranties True....................................35
5.2 Performance............................................................35
5.3 Required Approvals and Consents........................................35
5.4 Adverse Changes........................................................36
5.5 No Proceeding or Litigation............................................36
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5.6 Opinion of the Company Counsel.........................................36
5.7 Legislation............................................................36
5.8 Certificates...........................................................36
5.9 Due Diligence..........................................................36
5.10 Documentation for Conveyance of the Company's Assets..................36
ARTICLE 6 - CONDITIONS TO COMPANY'S OBLIGATIONS...............................36
6.1 Representations and Warranties True....................................36
6.2 Performance............................................................37
6.3 Corporate Approvals....................................................37
6.4 No Proceeding or Litigation............................................37
6.5 Certificates...........................................................37
6.6 Opinion of the Purchaser Counsel.......................................37
6.7 Payment of Consideration...............................................37
6.9 Execution and Delivery of Certain Agreements...........................37
ARTICLE 7 - TERMINATION AND ABANDONMENT.......................................37
7.1 Methods of Termination.................................................37
7.2 Procedure Upon Termination.............................................38
ARTICLE 8 - SURVIVAL AND INDEMNIFICATION......................................38
8.1 Survival...............................................................38
8.2 Indemnification by the Purchaser.......................................38
8.3 Indemnification by the Company and the Shareholders --
Untrue Representation or Breach of Warranty............................38
8.4 Indemnification by the Company and the Shareholders -- Other...........39
8.5 Basket Amount..........................................................39
8.6 Claims for Indemnification.............................................39
8.7 Certain Limitations....................................................40
8.8 Subrogation............................................................40
8.9 Tax and Insurance......................................................40
8.10 Undertakings..........................................................40
ARTICLE 9 - MISCELLANEOUS PROVISIONS..........................................41
9.1 Expenses...............................................................41
9.2 Amendment and Modification.............................................41
9.3 Waiver of Compliance; Consents.........................................41
9.4 No Third Party Beneficiaries...........................................41
9.5 Notices................................................................41
9.6 Assignment.............................................................42
9.7 Governing Law..........................................................43
9.8 Counterparts...........................................................43
9.9 Headings...............................................................43
9.10 Entire Agreement......................................................43
9.11 Injunctive Relief.....................................................43
9.12 Arbitration...........................................................43
9.13 List of Defined Terms.................................................44
9.14 Certain Definitions...................................................44
9.15 Shareholders' Agent...................................................45
iii
<PAGE>
LIST OF EXHIBITS
Exhibit 1.1(a) - Tradenames
Exhibit 1.1(b) - Bill of Sale
Exhibit 1.1(c) - Excluded Assets
Exhibit 1.1(d) - Real Property Liens
Exhibit 1.2(a) - Form of Liability Undertaking
Exhibit 1.2(b) - Excluded Liabilities
Exhibit 2 - Disclosure Schedule
Exhibit 3.10 - Purchaser Insurance
Exhibit 4.1 - Extraordinary Transactions
Exhibit 5.6 - Opinion of the Company Counsel
Exhibit 5.10 - Company Closing Documents
Exhibit 6.6 - Opinion of the Purchaser Counsel
Exhibit 6.9 - Purchaser Closing Documents
Exhibit 9.13 - Defined Terms
iv
<PAGE>
EXHIBIT 9.13
------------
LIST OF DEFINED TERMS
---------------------
TERM PAGE
- ---- ----
1933 ACT......................................................................32
1934 Act......................................................................21
1934 Act Statement............................................................34
1998 Balance Sheet............................................................44
Accounts Receivable............................................................9
Acquisition Proposals.........................................................27
affiliate.....................................................................15
Affiliated Organization.......................................................11
Agreement.....................................................................43
Antitrust Division............................................................29
Assets.........................................................................1
associate.....................................................................15
Assumed Liabilities............................................................2
Authorities....................................................................6
Authority......................................................................6
Bona Fide Unsolicited Offer...................................................28
Claimant......................................................................40
Closing........................................................................4
Closing Balance Sheet.........................................................44
Closing Date...................................................................4
Commissionable Sales...........................................................2
Company........................................................................1
Company Delivered Documents...................................................44
Company Employees.............................................................31
Compensation Plans............................................................13
Consent........................................................................6
Consents.......................................................................6
Disclose......................................................................28
Disclosure....................................................................28
Disclosure Schedule............................................................4
disqualified individual.......................................................15
Environmental and Occupational Safety and Health Law..........................19
Environmental Claim...........................................................19
Environmentally Regulated Materials...........................................19
ERISA.........................................................................11
Exception Amount..............................................................39
excess parachute payment......................................................16
FTC...........................................................................29
GAAP...........................................................................6
Indemnification Cap...........................................................40
Indemnified Party.............................................................39
Indemnifying Party............................................................39
1
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Information...............................................................28, 29
Intellectual Property Rights...................................................9
Interim Financial Statements...................................................6
Inventory......................................................................9
Inventory Schedule.............................................................3
Inventory Stream...............................................................2
Latest Balance Sheet...........................................................6
Law............................................................................6
Laws...........................................................................6
Legal Expenses................................................................44
Liabilities Undertaking........................................................2
Loss Contingency...............................................................6
Losses........................................................................38
material......................................................................39
Material Adverse Effect.......................................................44
Material Contract.............................................................16
Material Contracts............................................................16
Option Agreement...............................................................3
Options........................................................................3
PBGC..........................................................................12
Pension Plan..................................................................11
Permitted Liens...............................................................44
Properties....................................................................18
Purchase Price.................................................................2
Purchaser......................................................................1
Purchaser Delivered Documents.................................................44
Purchaser Financial Statements................................................23
Repurchase Rights.............................................................34
Required Majority of Shareholders.............................................44
Restrictive Covenants.........................................................33
Revenue Payment................................................................2
Review Period..................................................................3
S corporation.................................................................11
SEC...........................................................................34
severance pay.................................................................17
Shareholder....................................................................1
Shareholders...................................................................1
Shareholders' Agent...........................................................45
Shares.........................................................................2
Tax Returns...................................................................10
Termination Date...............................................................4
Welfare Plan..................................................................12
Year End Financial Statements..................................................6
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT ("Agreement"), dated as of August 17,
1999, is by and among Gateway Distributors, Ltd., a Nevada corporation (the
"PURCHASER"), TeamUp International, Inc., a Nevada corporation (the "COMPANY"),
and the shareholders of the Company listed on the signature page of this
Agreement (individually, a "SHAREHOLDER" and, collectively, the "SHAREHOLDERS").
R E C I T A L S
- - - - - - - -
A. The Shareholders own all of the issued and outstanding shares of
capital stock of the Company, which is in the business of the network marketing
of nutritional, health and dietary supplements and products (the "Business").
B. The parties hereto wish to provide for the terms and conditions upon
which the Purchaser will acquire substantially all of the assets and assume
specified liabilities of the Company.
C. The parties hereto wish to make certain representations, warranties,
covenants and agreements in connection with the purchase of assets and
assumption of liabilities and also to prescribe various conditions to such
transaction.
A G R E E M E N T
- - - - - - - - -
Accordingly, and in consideration of the representations, warranties,
covenants, agreements and conditions herein contained, the parties hereto agree
as follows:
ARTICLE 1
---------
PURCHASE AND SALE OF ASSETS
---------------------------
1.1 ASSETS TO BE PURCHASED. Upon satisfaction of all conditions to the
obligations of the parties contained herein (other than such conditions as shall
have been waived in accordance with the terms hereof), the Company shall sell,
transfer, convey, assign and deliver to the Purchaser, and the Purchaser shall
purchase from the Company, at the Closing (as hereinafter defined), all of the
Company's right, title and interest in and to the assets, properties, goodwill
and rights of the Company, as a going concern, of every nature, kind and
description, tangible and intangible, wherever located and whether or not
carried or reflected on the books and records of the Company (hereinafter
sometimes collectively called the "ASSETS"), including without limitation: (i)
the right to use the names and all variations thereof listed on Exhibit 1.1(a)
hereto; (ii) the assets referred to in the form of Bill of Sale listed on
Exhibit 1.1(b) hereto; and (iii) the assets reflected on the Latest Balance
Sheet (as hereinafter defined), with only such dispositions of such assets
reflected on the Latest Balance Sheet as shall have occurred in the ordinary
course of the Company's business between the date thereof and the Closing and
which are permitted by the terms hereof, and excluding only (x) the minute
books, corporate seal and stock records of the Company and (y) the assets
specifically described on Exhibit 1.1(c) hereto. All real property assets and
1
<PAGE>
fixtures included among the Assets shall be conveyed free and clear of any
mortgage, pledge, lien, security interest, encumbrance, claim, easement,
right-of-way, tenancy, covenant, encroachment, restriction or change of any kind
or nature (whether or not of record), except as described on Exhibit 1.1(d)
hereto. All machinery, equipment, vehicles and other personal property,
including without limitation inventories, accounts and notes receivable, trade
notes, trade accounts and Intellectual Property Rights (as hereinafter defined),
shall be conveyed free and clear of any mortgage, pledge, lien or security
interest of any kind or nature (whether or not of record) except as described on
Exhibit 1.1(d) hereto.
1.2 ASSUMPTIONS OF CERTAIN LIABILITIES. Upon satisfaction of all conditions to
the obligations of the parties contained herein (other than such conditions as
shall have been waived in accordance with the terms hereof), the Purchaser,
pursuant to a Liabilities Undertaking in the form of Exhibit 1.2(a) hereto
("LIABILITIES UNDERTAKING"), shall assume those certain liabilities and
obligations of the Company listed on Exhibit 1.2(b) hereto (the "ASSUMED
LIABILITIES"). The Purchaser is not assuming, and will not be obligated or
liable for, any liability of the Company not listed on Exhibit 1.2(b). The
Purchaser will be indemnified, pursuant to Section 8.4, from and against any
claims in respect of any debts, obligations or liabilities of the Company of any
nature whatsoever other than the Assumed Liabilities.
1.3 PURCHASE PRICE. The Purchaser shall pay for the Company's Assets the
following consideration (the "PURCHASE PRICE"):
1.3.1 INVENTORY STREAM. The Purchaser shall make cash payments (the
"INVENTORY STREAM"), calculated and payable as follows:
(a) Commencing on the tenth day of the first full calendar
month following the Closing, and on the tenth day of each month
thereafter, the Purchaser shall pay to the Company cash in an amount
equal to eighty percent (80%) of the original cost to the Company of
the portion of the Inventory (as defined in Section 2.12) which the
Purchaser sold in the preceding month. These payments shall terminate
on the earlier of (i) the Purchaser's sale of all of the Inventory, and
(ii) the tenth day of the eighteenth full month following the Closing.
(b) On the tenth day of the eighteenth full month following
the Closing, in addition to any payment made under Section 1.3.1(a),
the Purchaser shall pay to the Company cash in an amount equal to
eighty percent (80%) of the original cost to the Company of any portion
of the Inventory then unsold.
1.3.2 REVENUE PAYMENT. The Purchaser shall pay to the Company an amount
equal to one percent (1%) of Commissionable Sales (as hereinafter defined) of
the Purchaser for the one-year period commencing on the date of Closing and
ending on the first anniversary thereof (the "REVENUE PAYMENT"). "COMMISSIONABLE
SALES" means the total sales which the Purchaser uses to calculate commissions
to its distributors.
1.3.3 COMMON STOCK. The Purchaser shall issue to the Company six
hundred fifty thousand (650,000) shares of Common Stock (the "SHARES") of the
Purchaser.
2
<PAGE>
1.3.4 COMMON STOCK OPTIONS. Pursuant to a Stock Option Agreement in the
form of Exhibit 1.3.4 hereto ("OPTION AGREEMENT"), the Purchaser shall issue to
the Company options ("OPTIONS") to purchase two hundred thousand (200,000)
shares of Common Stock of the Purchaser.
1.4 PAYMENT OF PURCHASE PRICE.
The Purchase Price shall be payable by the Purchaser as follows:
(a) The Purchaser shall pay the Inventory Stream in accordance with
Section 1.3.1.
(b) The Purchaser shall pay the Revenue Payment in accordance with
Section 1.3.2.
(c) The Purchaser shall issue the Shares in accordance with the terms
of this Agreement and deliver them to the Company at the Closing.
(d) The Purchaser shall execute the Option Agreement and deliver it to
the Company at the Closing.
(e) The Purchaser shall execute the Liability Undertaking and deliver
it to the Company at the Closing.
1.5 CLOSING AND POST CLOSING ADJUSTMENTS. The determination of the cost of the
Inventory on the date of Closing shall be accomplished at and after the Closing
in the following manner:
(a) The Purchaser shall promptly prepare a schedule of the Company's
cost of the Inventory (the "INVENTORY SCHEDULE") within thirty (30)
days of the date of Closing. Purchaser shall deliver copies thereof to
the Company and each Shareholder. The Company and the Shareholders and
their respective representatives, agents and advisors shall have full
and complete access to the Company's former offices and premises and to
the work papers and other records for the purpose of observing all
aspects of the Purchaser's preparation of the Inventory Schedule.
(b) The Company and the Shareholders shall have ten (10) business days
after receipt of the Inventory Schedule (the "REVIEW PERIOD") to review
and verify the Inventory Schedule. If no party objects in writing to
the Inventory Schedule within the Review Period, then the Inventory
Schedule shall be final and binding on all parties, and the Purchaser
shall calculate the Inventory Stream amounts using the Inventory
Schedule in accordance with Section 1.3.1. If any party does so object
within the Review Period then the parties shall meet as soon as
practicable to attempt to resolve any such objection of the Company. If
the parties agree in writing on a final Inventory Schedule within ten
(10) days after the expiration of the Review Period, then Purchaser
shall calculate the Inventory Stream amounts using that final Inventory
Schedule in accordance with Section 1.3.1 and shall pay to the Company
the difference, if any, resulting from any adjustments made to the
Inventory Schedule. If the parties cannot agree upon a final Inventory
Schedule within ten (10) days after the Review Period, then the
provisions of Section 9.12 shall become applicable and the Purchaser
3
<PAGE>
shall calculate the amounts of the Inventory Stream using the Inventory
Schedule then in dispute until either (i) all parties mutually agree
upon a final Inventory Schedule or (ii) an arbitration award pursuant
to Section 9.12 is entered which establishes a final Inventory
Schedule. The Purchaser shall pay to the Company the difference, if
any, resulting from any adjustments made to the Inventory Schedule.
1.6 CLOSING. Unless this Agreement shall have been terminated and the
transactions contemplated herein shall have been abandoned pursuant to Article 7
hereof, a closing (the "CLOSING") will be held on or before August 18, 1999 (the
"CLOSING DATE"), provided, however, that if any of the conditions provided for
in Articles 5 and 6 hereof shall not have been satisfied or waived by such date,
then the party to this Agreement which is unable to satisfy such condition or
conditions, despite the best efforts of such party, shall be entitled to
postpone the Closing by notice to the other parties until such condition or
conditions shall have been satisfied (which such notifying party will seek to
cause to happen at the earliest practicable date) or waived, but in no event
shall the Closing occur later than the "TERMINATION DATE" which shall be August
31, 1999, unless the parties hereto shall agree in writing to extend the date of
such Closing. The Closing shall be held at the offices of Gateway Distributors,
Ltd., 500 East Cheyenne Avenue, North Las Vegas, Nevada 89030, or such other
place as the parties may agree, at 9:00 a.m., local time or such other time as
the parties may agree, at which time and place the documents and instruments
necessary or appropriate to effect the transactions contemplated herein will be
exchanged by the parties.
ARTICLE 2
---------
REPRESENTATIONS AND WARRANTIES OF COMPANY AND SHAREHOLDERS
----------------------------------------------------------
The Company and the Shareholders, jointly and severally, hereby
represent and warrant to the Purchaser as of the date hereof as follows:
2.1 DISCLOSURE SCHEDULE. The disclosure schedule to be attached prior to the
Closing as Exhibit 2 hereto (the "DISCLOSURE SCHEDULE") shall be divided into
sections which correspond to the subsections of this Article 2. The Disclosure
Schedule will be true, complete and correct as of the date hereof, and at
Closing, after any supplements pursuant to Section 4.8, shall be true, complete
and correct. Nothing in the Disclosure Schedule will be deemed adequate to
disclose an exception to a representation or warranty made herein, unless the
Disclosure Schedule identifies the exception with reasonable particularity and
describes the relevant facts in reasonable detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item will not be deemed adequate to disclose an exception to a
representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself). Each
exception and disclosure noted in the Disclosure Schedule shall be numbered to
correspond to the applicable section or paragraph of this Article 2 to which
such exception or disclosure applies, PROVIDED THAT such exceptions and
disclosures shall be deemed made with respect to any other section or paragraph
to which it is reasonably apparent such exception or disclosure applies.
4
<PAGE>
2.2 CORPORATE ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the state of Nevada, has full
corporate power and authority to carry on its business as it is now being
conducted and to own, lease and operate its properties and assets, is duly
qualified or licensed to do business as a foreign corporation in good standing
in every other jurisdiction in which the character or location of the properties
and assets owned, leased or operated by it or the conduct of its business
requires such qualification or licensing, except in such jurisdictions in which
the failure to be so qualified or licensed and in good standing would not,
individually or in the aggregate, have a Material Adverse Effect (as hereinafter
defined) on the Company. The Company has heretofore delivered to the Purchaser
complete and correct copies of its articles or certificate of incorporation and
bylaws, as presently in effect. Section 2.2 of the Disclosure Schedule contains
a list of all jurisdictions in which the Company is qualified or licensed to do
business. The Company has no subsidiaries.
2.3 CAPITALIZATION. The authorized capital stock of the Company is set forth in
Section 2.3 of the Disclosure Schedule. The number of shares of capital stock of
the Company outstanding is set forth in Section 2.3 of the Disclosure Schedule.
All issued and outstanding shares of capital stock of the Company are duly
authorized, validly issued, fully paid, nonassessable and are without, and were
not issued in violation of, preemptive rights. Except as set forth in Section
2.3 of the Disclosure Schedule: (i) there are no shares of capital stock or
other equity securities of the Company outstanding or any securities convertible
into or exchangeable for such shares, securities or rights; (ii) there are no
outstanding options, warrants, conversion privileges or other rights to purchase
or acquire any capital stock or other equity securities of the Company or any
securities convertible into or exchangeable for such shares, securities or
rights; and (iii) there are no contracts, commitments, understandings,
arrangements or restrictions by which the Company is bound to issue or acquire
any additional shares of its capital stock or other equity securities or any
options, warrants, conversion privileges or other rights to purchase or acquire
any capital stock or other equity securities of the Company or any securities
convertible into or exchangeable for such shares, securities or rights.
2.4 NON-CONTRAVENTION. Except as set forth in Section 2.4 of the Disclosure
Schedule, neither the execution, delivery and performance of this Agreement nor
the consummation of the transactions contemplated herein will: (i) violate or be
in conflict with any provision of the articles of incorporation or bylaws of the
Company; or (ii) except for such violations, conflicts, defaults, accelerations,
terminations, cancellations, impositions of fees or penalties, mortgages,
pledges, liens, security interests, encumbrances, restrictions, changes or other
events which could not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect, (A) be in conflict with, or
constitute a default, however defined (or an event which, with the giving of due
notice or lapse of time, or both, would constitute such a default), under, or
cause or permit the acceleration of the maturity of, or give rise to any right
of termination, cancellation, imposition of fees or penalties under, any debt,
note, bond, lease, mortgage, indenture, license, obligation, contract,
commitment, franchise, permit, instrument or other agreement or obligation to
which the Company or a Shareholder is a party or by which it or a Shareholder or
any of its or a Shareholder's properties or assets is or may be bound (unless
with respect to which defaults or other rights, requisite waivers or consents
shall have been obtained at or prior to the Closing) or (B) result in the
creation or imposition of any mortgage, pledge, lien, security interest,
5
<PAGE>
encumbrance, restriction, adverse claim or charge of any kind, upon any property
or assets of the Company or a Shareholder under any debt, obligation, contract,
agreement or commitment to which the Company or a Shareholder is a party or by
which the Company or a Shareholder or any of its or a Shareholder's assets or
properties is or may be bound; or (iii) violate any applicable statute, treaty,
law, judgment, writ, injunction, decision, decree, order, regulation, ordinance
or other similar authoritative matters (sometimes hereinafter separately
referred to as a "LAW" and sometimes collectively as "LAWS") of any applicable
foreign, federal, state or local governmental or quasi-governmental,
administrative, regulatory or judicial court, department, commission, agency,
board, bureau, instrumentality or other authority (hereinafter sometimes
separately referred to as an "AUTHORITY" and sometimes collectively as
"AUTHORITIES").
2.5 CONSENTS AND APPROVALS. Except as set forth in Section 2.5 of the Disclosure
Schedule, with respect to the Company and each Shareholder, no consent,
approval, order or authorization of or from, or registration, notification,
declaration or filing with (hereinafter sometimes separately referred to as a
"CONSENT" and sometimes collectively as "CONSENTS") any individual or entity,
including without limitation any Authority, is required in connection with the
execution, delivery or performance of this Agreement by the Company or any
Shareholder or the consummation by the Company or any Shareholder of the
transactions contemplated herein, except where the failure to obtain such
Consent would not prevent or delay consummation of the transactions contemplated
herein, or otherwise prevent or delay the Company or any Shareholder from
performing its obligations under this Agreement, and would not have a Material
Adverse Effect.
2.6 FINANCIAL STATEMENTS. The balance sheets of the Company as of December 31,
1998 and 1997 and related statements of operations, shareholders' equity and
cash flows for the fiscal years then ended and (the "YEAR-END FINANCIAL
STATEMENTS") and the balance sheet and related statements of operations,
shareholders equity and cash flow of the Company for the six-month period ended
June 30, 1999 (the "INTERIM FINANCIAL STATEMENTS") are set forth in Section 2.6
of the Disclosure Schedule. The most recent balance sheet so described is
referred to herein as the "LATEST BALANCE SHEET." Except as disclosed therein,
the aforesaid financial statements (i) are in accordance with the books and
records of the Company and have been prepared in conformity with generally
accepted accounting principles ("GAAP") consistently applied for all periods,
and (ii) fairly present the financial position of the Company as of the
respective dates thereof, and the results of operations, changes in
shareholders' equity and changes in cash flow for the periods then ended, all in
accordance with GAAP consistently applied for all periods.
2.7 LOSS CONTINGENCIES; OTHER NON-ACCRUED LIABILITIES. Except as described in
Section 2.7 of the Disclosure Schedule or in the notes to the Latest Balance
Sheet, the Company does not have (i) any Loss Contingencies (as hereinafter
defined) which are not required by GAAP to be accrued; (ii) any Loss
Contingencies involving an unasserted claim or assessment which are not required
by GAAP to be disclosed because the potential claimants have not manifested to
the Company an awareness of a possible claim or assessment; or (iii) any
categories of known liabilities or obligations (other than non-pension
post-retirement medical care, dental care, life insurance or other benefits)
which are not required by GAAP to be accrued. For purposes of this Agreement,
"LOSS CONTINGENCY" shall mean an existing condition, situation, or set of
circumstances involving uncertainty as to possible charges against income,
include those charges commonly referred to as "expenses," to an enterprise that
will ultimately be resolved when one or more future events occur or fail to
occur.
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2.8 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 2.8 of the
Disclosure Schedule, since the date of the Latest Balance Sheet, the Company has
owned and operated its assets, properties and businesses in the ordinary course
of business and consistent with past practice; without limiting the generality
of the foregoing, the Company has not, subject to the aforesaid exceptions:
(a) suffered any adverse change in its condition (financial or
otherwise), working capital, assets, properties, liabilities,
obligations, reserves, businesses, prospects, goodwill or going concern
value or experienced any event or failed to take any action which
reasonably could be expected to result in such an adverse change;
(b) suffered any loss, damage, destruction or other casualty (whether
or not covered by insurance) or suffered any loss of officers,
employees, dealers, distributors, independent contractors, customers,
or suppliers or other favorable business relationships;
(c) declared, set aside, made or paid any dividend or other
distribution in respect of its capital stock; or purchased or redeemed
any shares of its capital stock;
(d) issued or sold any shares of its capital stock, or any options,
warrants, conversion, exchange or other rights to purchase or acquire
any such shares or any securities convertible into or exchangeable for
such shares;
(e) incurred any indebtedness for borrowed money;
(f) mortgaged, pledged, or subjected to any lien, lease, security
interest or other charge or encumbrance any of its properties or
assets, tangible or intangible;
(g) acquired or disposed of any assets or properties, except in the
ordinary course of business;
(h) forgiven or canceled any debts or claims, or waived any rights;
(i) granted to any officer or salaried employee or any other employee
any increase in compensation in any form or paid any severance or
termination pay;
(j) entered into any commitment for capital expenditures for additions
to plant, property or equipment; or
(k) agreed, whether in writing or otherwise, to take any action
described in this subsection.
2.9 REAL PROPERTIES. Section 2.9 of the Disclosure Schedule lists all real
properties either owned or leased by the Company. With respect to real
properties owned by the Company, Section 2.9 of the Disclosure Schedule includes
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a common and legal description of each property. With respect to real properties
leased by the Company, Section 2.9 of the Disclosure Schedule includes a brief
description of the operating facilities located thereon, the annual rent payable
thereon, the length of the term, any option to renew with respect thereto and
the notice and other provisions with respect to termination of rights to the use
thereof. Except as set forth in Section 2.9 of the Disclosure Schedule, the
Company has good and marketable fee simple record title in and to, or a
leasehold interest in and to, all of its real property assets and fixtures
reflected in the Latest Balance Sheet and all of its real property assets and
fixtures purchased or otherwise acquired since the date of the Latest Balance
Sheet (except for real property assets and fixtures sold in the ordinary course
of business since the date of the Latest Balance Sheet). Except as set forth in
Section 2.9 of the Disclosure Schedule, such leasehold interests are valid and
in full force and effect and enforceable in accordance with their terms and
there does not exist any violation, breach or default thereof or thereunder.
Except as set forth in Section 2.9 of the Disclosure Schedule, none of the real
property assets or fixtures owned by the Company is subject to any mortgage,
pledge, lien, security interest, encumbrance, claim, easement, right-of-way,
tenancy, covenant, encroachment, restriction or charge of any kind or nature
(whether or not of record), except for any Permitted Liens. Except as set forth
in Section 2.9 of the Disclosure Schedule, to the knowledge of the Company,
after reasonable and diligent inquiry, all real properties owned by and leased
to the Company used in the conduct of its business are free from structural
defects, in good operating condition and repair, with no material maintenance,
repair or replacement having been deferred or neglected, suitable for the
intended use and free from other material defects. Except as set forth in
Section 2.9 of the Disclosure Schedule, each such real property and its present
use conform in all respects to all occupational, safety or health, zoning,
planning, subdivision, platting and similar Laws, and there is, to the knowledge
of the Company, no such Law contemplated that would affect adversely the right
of the Company to own or lease and operate and use such real properties. Except
as set forth in Section 2.9 of the Disclosure Schedule, all public utilities
necessary for the use and operation of any facilities on the aforesaid real
properties are available for use or access at such properties and there is no
legal or physical impairment to free ingress or egress from any of such
facilities or real properties.
2.10 MACHINERY, EQUIPMENT, VEHICLES AND PERSONAL PROPERTY. Section 2.10 of the
Disclosure Schedule lists all machinery, equipment, vehicles, furniture,
fixtures and other personal property owned or leased by the Company, other than
those items set forth on Exhibit 1.1(c). Except as set forth in Section 2.10 of
the Disclosure Schedule, the Company has good and merchantable right, title and
interest in and to, or a leasehold interest in and to, all its machinery,
equipment, vehicles and other personal property reflected in the Latest Balance
Sheet and purchased or otherwise acquired since the date of the Latest Balance
Sheet (except for such items sold or leased in the ordinary course of business
since the date of the Latest Balance Sheet). Except as set forth in Section 2.10
of the Disclosure Schedule, all of such leasehold interests relating to
machinery, equipment, vehicles and other personal property are valid and in full
force and effect and enforceable in accordance with their terms and there does
not exist any violation, breach or default thereof or thereunder. Except as set
forth in Section 2.10 of the Disclosure Schedule, none of such machinery,
equipment, vehicles or other personal property owned by the Company is subject
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to any mortgage, pledge, lien or security interest of any kind or nature
(whether or not of record) except Permitted Liens. Except as set forth in
Section 2.10 of the Disclosure Schedule, the machinery, equipment, vehicles and
other personal property of the Company which are necessary to the conduct of its
business are in good operating condition and repair and fit for the intended
purposes thereof and no material maintenance, replacement or repair has been
deferred or neglected.
2.11 INVENTORIES. Section 2.11 of the Disclosure Schedule lists all inventory of
the Company (the "INVENTORY"). Except as set forth in Section 2.11 of the
Disclosure Schedule, all inventory of the Company, whether reflected in the
Latest Balance Sheet or otherwise, consists of a quality and quantity usable and
salable in the ordinary course of business, and the present quantities of all
inventory of the Company are reasonable in the present circumstances of the
businesses as currently conducted or as proposed to be conducted. Section 2.11
of the Disclosure Schedule will be updated at or after the Closing, pursuant to
the procedures set forth in Section 1.5, to reflect all inventory as of the date
of Closing.
2.12 RECEIVABLES AND PAYABLES.
(a) Section 2.12 of the Disclosure Schedule lists all accounts
receivable, notes receivable, trade notes and trade accounts
(collectively, "ACCOUNTS RECEIVABLE") of the Company as of the date
hereof, including their aging. Section 2.12 of the Disclosure Schedule
will be updated at or after the Closing, pursuant to the procedures set
forth in Section 1.5, to reflect all Accounts Receivable as of the date
of Closing, including their aging. Except as set forth in Section 2.12
of the Disclosure Schedule, (A) the Company has good right, title and
interest in and to all its Accounts Receivable, including those
reflected in the Latest Balance Sheet and those acquired and generated
since the date of the Latest Balance Sheet (except for those paid since
the date of the Latest Balance Sheet); (B) none of such Accounts
Receivable is subject to any mortgage, pledge, lien or security
interest of any kind or nature (whether or not of record); (C) except
to the extent of applicable reserves shown in the Latest Balance Sheet,
to the knowledge of the Company, all of the Accounts Receivable owing
to the Company constitute valid and enforceable claims arising from
bona fide transactions in the ordinary course of business, and there
are no claims, refusals to pay or other rights of set-off against any
thereof; and (D) the aging schedule of the Accounts Receivable of the
Company set forth in the Disclosure Schedule is complete and accurate.
(b) All accounts payable and notes payable by the Company arose in bona
fide transactions in the ordinary course of business and no such
account payable or note payable is delinquent by more than ninety days
in its payment.
2.13 INTELLECTUAL PROPERTY RIGHTS. The Company owns the industrial and
intellectual property rights, including without limitation the patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, computer programs and
other computer software, inventions, know-how, trade secrets, technology,
proprietary processes and formulae (collectively, "INTELLECTUAL PROPERTY
RIGHTS") described in Section 2.13 of the Disclosure Schedule. Except as set
forth in Section 2.13 of the Disclosure Schedule, to the knowledge of the
Company, the use of all Intellectual Property Rights necessary or required for
the conduct of the businesses of the Company as presently conducted and as
proposed to be conducted does not and, to the knowledge of the Company, will not
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infringe or violate or allegedly infringe or violate the intellectual property
rights of any person or entity. Except as described in Section 2.13 of the
Disclosure Schedule, the Company does not own or use any Intellectual Property
Rights pursuant to any written license agreement and has not granted any person
or entity any rights, pursuant to written license agreement or otherwise, to use
the Intellectual Property Rights.
2.14 LITIGATION. Except as set forth in Section 2.14 of the Disclosure Schedule,
to the knowledge of the Company, there is no legal, administrative, arbitration,
or other proceeding, suit, claim or action of any nature or investigation,
review or audit of any kind (including without limitation a proceeding, suit,
claim or action, or an investigation, review or audit, involving any
environmental Law or matter), judgment, decree, decision, injunction, writ or
order pending, noticed, scheduled or threatened or contemplated by or against or
involving the Company, its assets, properties or businesses or its directors,
officers, agents or employees (but only in their capacity as such), whether at
law or in equity, before or by any person or entity or Authority, or which
questions or challenges the validity of this Agreement or any action taken or to
be taken by the parties hereto pursuant to this Agreement or in connection with
the transactions contemplated herein.
2.15 TAX MATTERS.
(a) TAX RETURNS. The Company has duly and timely filed all tax and
information reports, returns and related documents required to be filed
by it with respect to the income-type, sales/use-type and
employment-related taxes of the United States and the states and other
jurisdictions set forth in Section 2.15 of the Disclosure Schedule (and
the political subdivisions thereof). Except as set forth in Section
2.15 of the Disclosure Schedule, the Company has duly and timely filed
all other tax and information reports, returns and related documents
required to be filed by them with any Authority, including without
limitation all returns and reports of income, franchise, gross
receipts, sales, use, occupation, employment, withholding, excise,
transfer, real and personal property and other taxes, charges and
levies (collectively, the "TAX RETURNS") and, except as set forth in
Section 2.15 of the Disclosure Schedule, has duly paid, or made
adequate provision for the due and timely payment of all such taxes and
other charges, including without limitation interest, penalties,
assessments and deficiencies, due or claimed to be due from them by any
such Authorities; the reserves for all of such taxes and other charges
reflected in the Latest Balance Sheet are adequate; and there are no
liens for such taxes or other charges upon any property or assets of
the Company. There is no material omission, deficiency, error,
misstatement or misrepresentation, whether innocent, intentional or
fraudulent, in any Tax Return filed by the Company for any period. The
federal income tax returns of the Company have been examined by the
Internal Revenue Service for those periods expressly set forth in
Section 2.15 of the Disclosure Schedule, and, except to the extent
shown therein, all deficiencies asserted as a result of such
examinations have been paid or finally settled and no issue has been
raised by the Internal Revenue Service in any such examination which,
by application of similar principles, reasonably could be expected to
result in a proposed deficiency for any other period not so examined.
Except as set forth in Section 2.15 of the Disclosure Schedule, all
deficiencies and assessments resulting from examination of the Tax
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Returns of the Company have been paid. Except as set forth in Section
2.15 of the Disclosure Schedule, there are no outstanding agreements or
waivers extending the statutory period of limitation applicable to any
Tax Return for any period. If the Company is an "S CORPORATION" the
Company has had in effect a valid election under Code Section 1362 to
be treated as an "S corporation" for each of its taxable years ended
after the date set forth in Section 2.15 of the Disclosure Schedule,
neither the Company nor any of its shareholders have taken any action
to revoke that election, neither the Company nor any of its
shareholders are aware of any basis or the existence of any facts that
would permit the Internal Revenue Service to revoke that election for
any period prior to the date of Closing, and, except as described in
Section 2.15 of the Disclosure Schedule, since the effective date of
its election as an S corporation to and including the date of Closing,
the Company will not have incurred or become liable for the payment of
any corporate-level income tax, or any related penalties or interest.
(b) COOPERATION ON TAX MATTERS. The Purchaser, the Company and the
Shareholders shall cooperate fully, as and to the extent reasonably
requested by the other party, in connection with the filing of Tax
Returns and any audit, litigation or other proceeding with respect to
taxes. Such cooperation shall include the retention and (upon the other
party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding
and making employees available on a mutually convenient basis to
provide additional information and explanation on any material provided
hereunder.
2.16 INSURANCE. Section 2.16 of the Disclosure Schedule contains an accurate and
complete list of all policies of fire and other casualty, general liability,
theft, life, workers' compensation, health, directors and officers, business
interruption and other forms of insurance owned or held by the Company,
specifying the insurer, the policy number, the term of the coverage and, in the
case of any "claims made" coverage, the same information as to predecessor
policies for the previous five years. All present policies are in full force and
effect and all premiums with respect thereto have been paid. The Company has not
been denied any form of insurance and no policy of insurance has been revoked or
rescinded during the past five years, except as described in Section 2.16 of the
Disclosure Schedule.
2.17 BENEFIT PLANS. Except as set forth in Section 2.17 of the Disclosure
Schedule:
(a) Neither the Company nor any other "person" within the meaning of
Section 7701(a)(1) of the Code, that together with the Company is
considered a single employer pursuant to Sections 414(b), (c), (m) or
(o) of the Code or Sections 3(5) or 4001(b)(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (an
"AFFILIATED ORGANIZATION") sponsors, maintains, contributes to, is
required to contribute to or has or could have any liability of any
nature, whether fixed or contingent, with respect to, any "employee
pension benefit plan" as such term is defined in Section 3(2) of ERISA,
including without limitation, any such plan that is excluded from
coverage by Section 4(b)(5) of ERISA or is a "Multi-employer Plan"
within the meaning of Section 3(37) or 4001(a)(3) of ERISA (a "PENSION
Plan"). To the best knowledge of the Company, each such Pension Plan
has been operated in accordance with its terms and in compliance with
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the applicable provisions of ERISA, the Code and all other applicable
Law. All Pension Plans which the Company operates as plans that are
qualified under the provisions of Section 401(a) of the Code satisfy in
form and operation the requirements of Section 401(a) and all other
sections of the Code incorporated therein, except that such Pension
Plans have not been amended to comply with any changes in the law for
which the Section 401(b) remedial amendment period expires as of the
end of the plan year beginning in 1999 pursuant to IRS Rev. Proc.
98-14.
(b) Neither the Company, nor any Affiliated Organization, has or could
have any liability of any nature, whether fixed or contingent, to any
Pension Plan, the Pension Benefit Guaranty Corporation ("PBGC") or any
other person, arising directly or indirectly under Title IV of ERISA.
No "reportable event," within the meaning of Section 4043(b) of ERISA,
has occurred with respect to any Pension Plan. Neither the Company nor
any Affiliated Organization has been a party to a sale of assets to
which Section 4204 of ERISA applied with respect to which it could
incur any withdrawal liability (including any contingent or secondary
withdrawal liability) to any Multi-employer Plan. Neither the Company
nor any Affiliated Organization has incurred any withdrawal liability
within the meaning of Section 4201 of ERISA or suffered or otherwise
caused a "complete withdrawal" or "partial withdrawal," as such terms
are defined respectively in Sections 4203 and 4205 of ERISA, with
respect to a Multi-employer Plan, and nothing has occurred that is
reasonably likely to result in such a complete or partial withdrawal.
(c) Neither the Company, nor any Affiliated Organization, sponsors,
maintains, contributes to, is required to contribute to or has or could
have any liability of any nature, whether fixed or contingent, with
respect to, any "employee welfare benefit plan" ("WELFARE PLAN") as
such term is defined in Section 3(1) of ERISA, whether insured or
otherwise. To the best knowledge of the Company, each Welfare Plan has
been operated in accordance with its terms and in compliance with the
applicable provisions of ERISA, the Code and all other applicable Law.
Neither the Company nor any Affiliated Organization has established or
contributed to, is required to contribute to or has or could have any
liability of any nature, whether fixed or contingent, with respect to
any "voluntary employees' beneficiary association" within the meaning
of Section 501(c)(9) of the Code, "welfare benefit fund" within the
meaning of Section 419 of the Code, "qualified asset account" within
the meaning of Section 419 of the Code, "qualified asset account"
within the meaning of Section 419A of the Code or "multiple employer
welfare arrangement" within the meaning of Section 3(40) or ERISA.
Neither the Company nor any Affiliated Organization maintains,
contributes to or has or could have any liability of any nature,
whether fixed or contingent, with respect to medical, health, life or
other welfare benefits for present or future terminated employees or
their spouses or dependents other than as required by Part 6 of
Subtitle B of Title I of ERISA or any comparable state law.
(d) Neither the Company nor any Affiliated Organization is a party to,
maintains, contributes to, is required to contribute to or has or could
have any liability of any nature, whether fixed or contingent, with
respect to, any bonus plan, incentive plan, stock plan or any other
current or deferred compensation, separation, retention, severance or
similar agreement, arrangement or policy ("COMPENSATION PLANS").
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(e) There are no facts or circumstances which could, directly or
indirectly, subject the Company or any Affiliated Organization to any
(1) excise tax or other liability under Chapters 43, 46 or 47 of
Subtitle D of the Code, (2) penalty tax or other liability under
Chapter 68 of Subtitle F of the Code or (3) civil penalty arising under
Section 502 of ERISA. The Company does not and could not have any
liability arising directly or indirectly in connection with any failure
of the Company or any Affiliated Organization to comply with Section
4980B of the Code or Part 6 of Subtitle B of Title I of ERISA.
(f) The Company and each Affiliated Organization has made adequate
provisions for reserves or accruals in accordance with generally
accepted accounting principles to meet contribution benefit or funding
obligations arising under applicable Law or the terms of any Pension
Plan or Welfare Plan or Compensation Plan or related agreement. There
will be no change on or before Closing in the operation of any Pension
Plan, Welfare Plan or Compensation Plan or any documents with respect
thereto which will result in an increase in the benefit liabilities
under such plans, except as may be required by law.
(g) The Company and each Affiliated Organization has timely complied
with all reporting and disclosure obligations with respect to the
Pension Plans, Welfare Plans and Compensation Plans imposed by Title I
of ERISA or other applicable Law.
(h) There are no pending or, to the Company's knowledge, threatened
audits, investigations, claims, suits, grievances or other proceedings,
and there are no facts that could give rise thereto, involving,
directly or indirectly, any Pension Plan, Welfare Plan, or Compensation
Plan, or any rights or benefits thereunder, other than the ordinary and
usual claims for benefits by participants, dependents or beneficiaries.
(i) The transactions contemplated herein will not and do not result in
the acceleration of accrual, vesting, funding or payment of any
contribution or benefit under any Pension Plan, Welfare Plan or
Compensation Plan.
(j) The Company has delivered to Purchaser, true and complete copies
of: (i) all Pension, Welfare and Compensation Plans and related trust
agreements or other agreements or contracts evidencing any funding
vehicle with respect thereto; (ii) the three most recent annual reports
on Treasury Form 5500, including all schedules and attachments thereto,
with respect to any Plan for which such a report is required; (iii) the
three most recent actuarial reports with respect to any Pension Plan
that is a "defined benefit plan" within the meaning of Section 414(j)
of the Code; (iv) the form of summary plan description, including any
summary of material modifications thereto or other modifications
communicated to participants, currently in effect with respect to each
Pension, Welfare or Compensation Plan for which such is required; (v)
the most recent determination letter with respect to each Pension Plan
intended to qualify under Section 401(a) of the Code; (vi) a copy of
the notice required under ERISA Section 204(h) for any Pension Plan for
which benefit accruals have been frozen; (vii) all professional
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opinions, material internal memoranda, material correspondence with
regulatory authorities and administrative policies, manual,
interpretations and the like with respect to each Pension Plan, Welfare
Plan or Compensation Plan; and (viii) complete and accurate employment
records showing for each Transferred Employee (as defined herein), the
following: name, address, Social Security number, date of birth, date
of hire, rate of pay, marital status, and citizenship or immigration
status.
(k) In connection with the termination of any Pension Plan and without
limiting the applicability of the foregoing representations to such
Pension Plan: (i) nothing done or omitted to be done has or could
subject the Company or any Affiliated Organization to any liability,
loss, cost, charge, expense or expenditure of any nature or result in
the imposition of any Lien in favor of the PBGC or any other person;
(ii) the Company has received a determination letter from the Internal
Revenue Service, based on complete and accurate disclosure by the
Company, that such termination did not adversely affect the qualified
status of such Pension Plan under Section 401(a) of the Code or the tax
exempt status of its related trust under Section 501(a) of the Code;
(iii) all notices and other filings required to be submitted to the
PBGC were submitted in a timely manner and were complete and accurate
and no distributions were made until receipt of PBGC approval in the
form of a notice of sufficiency or by lapse of any applicable time
period without notice of PBGC objection, as the case may be; (iv) all
participants, beneficiaries of deceased participants, alternate payees
and other interested Parties received all notices and disclosures
required by applicable Law in a timely manner and all such notices and
disclosures were complete and accurate and satisfied the requirements
imposed by all applicable Laws; (v) no portion of the assets of the
Plan reverted to the Company or any Affiliated Organization; (vi) the
selection of annuity contracts and the process employed in connection
therewith satisfied all applicable Laws, including without limitation
ERISA, and each and all of the issuers of such contracts have fully
satisfied all of its or their obligations thereunder and (vii) the
termination in all respects satisfied all applicable Laws.
(l) No action or omission of the Company or any director, officer,
employee or agent thereof in any way restricts, impairs or prohibits
the Purchaser or any successor of the Purchaser from amending or
terminating any Pension Plan, Welfare Plan or Compensation Plan in
accordance with the express terms of any such plan and applicable law.
(m) Nothing has occurred or failed to occur with respect to any Pension
Plan, Welfare Plan or Compensation Plan which could result in any
liability to the Purchaser or any successor of the Purchaser other than
a liability expressly assumed pursuant to this Agreement.
2.18 BANK ACCOUNTS; POWERS OF ATTORNEY. Section 2.18 of the Disclosure Schedule
sets forth the following: (i) the names of all financial institutions,
investment banking and brokerage houses, and other similar institutions at which
the Company maintain accounts, deposits, safe deposit boxes of any nature, and
the names of all persons authorized to draw thereon or make withdrawals
therefrom; (ii) the terms and conditions thereof and any limitations or
restrictions as to use, withdrawal or otherwise; and (iii) the names of all
persons or entities holding general or special powers of attorney from the
Company and a summary of the terms thereof.
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2.19 CONTRACTS AND COMMITMENTS; NO DEFAULT.
(a) Except as set forth in Section 2.19 of the Disclosure Schedule, the
Company:
(i) has no written contract, commitment, agreement or
arrangement with any person or, to the Company's knowledge,
any oral contract, commitment, agreement or arrangement which
(1) requires payments individually in excess of $10,000
annually or in excess of $50,000 over its term (including
without limitation periods covered by any option to extend or
renew by either party) and (2) is not terminable on thirty
(30) days' or less notice without cost or other liability;
(ii) does not pay any person or entity cash remuneration at
the annual rate (including without limitation guaranteed
bonuses) of more than $50,000 for services rendered;
(iii) is not restricted by agreement from carrying on its
businesses or any part thereof anywhere in the world or from
competing in any line of business with any person or entity;
(iv) is not subject to any obligation or requirement to
provide funds to or make any investment (in the form of a
loan, capital contribution or otherwise) in any person or
entity;
(v) is not party to any agreement, contract, commitment or
loan to which any of its directors, officers or shareholders
or any "AFFILIATE" or "ASSOCIATE" (as defined in Rule 405 as
promulgated under the Securities Act of 1933) (or former
affiliate or associate) thereof is a party; (vi) is not
subject to any outstanding sales or purchase contracts,
commitments or proposals which will result in any loss upon
completion or performance thereof;
(vii) is not party to any purchase or sale contract or
agreement that calls for aggregate purchases or sales in
excess over the course of such contract or agreement of
$25,000 or which continues for a period of more than twelve
months (including without limitation periods covered by any
option to renew or extend by either party) which is not
terminable on sixty (60) days' or less notice without cost or
other liability at or any time after the Closing;
(viii) is not subject to any contract, commitment, agreement
or arrangement with any "DISQUALIFIED INDIVIDUAL" (as defined
in Section 280G(c) of the Code) which contains any severance
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or termination pay liabilities which would result in a
disallowance of the deduction for any "EXCESS PARACHUTE
PAYMENT" (as defined in Section 280G(b)(1) of the Code) under
Section 280G of the Code; and
(ix) has no distributorship, dealer, manufacturer's
representative, franchise or similar sales contract relating
to the payment of a commission.
Notwithstanding the foregoing, with respect to the Company's contracts with its
distributors, Schedule 2.19 discloses only the following: (i) the Company's
standard form of distributor contract; (ii) the number of distributors with whom
the Company has entered into distributor contracts; (iii) the number of the
Company's distributors which the Company classifies as "active"; (iv) the number
of the Company's distributors which the Company classifies as "inactive"; and
(v) with respect to the Company's distributors who participate in the Company's
"autoship program", the dates of the month on which the Company collects its
"autoship fees."
Each contract, agreement, instrument, license, commitment, loan, restriction and
other arrangement set forth on Schedule 2.19 shall be referred to as a "MATERIAL
CONTRACT" and shall be collectively referred to as the "MATERIAL CONTRACTS"
(b) True and complete copies (or summaries, in the case of oral items)
of all Material Contracts have been made available to the Purchaser for
review. Except as set forth in Section 2.19 of the Disclosure Schedule,
all Material Contracts are valid and enforceable by and against the
Company in accordance with their respective terms; the Company is not
in material breach, violation or default, however defined, in the
performance of any of its obligations thereunder, and, to the knowledge
of the Company, no facts and circumstances exist which, whether with
the giving of due notice, lapse of time, or both, would constitute such
a material breach, violation or default thereunder or thereof; and, to
the Company's knowledge, no other parties thereto are in a breach,
violation or default, however defined, thereunder or thereof, and no
facts or circumstances exist which, whether with the giving of due
notice, lapse of time, or both, would constitute such a breach,
violation or default thereunder or thereof.
2.20 ORDERS, COMMITMENTS AND RETURNS. Except as set forth in Section 2.20 of the
Disclosure Schedule, all accepted and unfulfilled orders for the sale of
products and the performance of services entered into by the Company and all
outstanding contracts or commitments for the purchase of supplies, materials and
services were made in bona fide transactions in the ordinary course of business.
Except as set forth in Section 2.20 of the Disclosure Schedule, to the knowledge
of the Company, there are no claims against the Company to return products by
reason of alleged over-shipments, defective products or otherwise, or of
products in the hands of customers, retailers or distributors under an
understanding that such products would be returnable.
2.21 LABOR MATTERS. Except as set forth in Section 2.21 of the Disclosure
Schedule: (i) the Company is and has been in material compliance with all
applicable Laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including without limitation any
such Laws respecting employment discrimination and occupational safety and
health requirements, and has not and is not engaged in any unfair labor
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practice; (ii) to the knowledge of the Company, there is no unfair labor
practice complaint against the Company pending or threatened before the National
Labor Relations Board or any other comparable Authority; (iii) there is no labor
strike, dispute, slowdown or stoppage actually pending or, to the Company's
knowledge, threatened against or directly affecting the Company; (iv) to the
knowledge of the Company, no labor representation question exists respecting the
employees of the Company and there is not pending or threatened any activity
intended or likely to result in a labor representation vote respecting the
employees of the Company; (v) no grievance or any arbitration proceeding arising
out of or under collective bargaining agreements is pending and no claims
therefor exist or, to the Company's knowledge, have been threatened; (vi) no
collective bargaining agreement is binding and in force against the Company or
currently being negotiated by the Company; (vii) to the knowledge of the
Company, the Company has not experienced any significant work stoppage or other
significant labor difficulty; (viii) the Company is not delinquent in payments
to any persons for any wages, salaries, commissions, bonuses or other direct or
indirect compensation for any services performed by them or amounts required to
be reimbursed to such persons, including without limitation any amounts due
under any Pension Plan, Welfare Plan or Compensation Plan; (ix) except as upon
termination of the employment of any person, neither the Purchaser nor any
subsidiary of the Purchaser will, by reason of anything done by the Company or
the Shareholders at or prior to or as of the date of Closing, be liable to any
of such persons for so-called "SEVERANCE PAY" or any other payments; and (x)
within the twelve month period prior to the date hereof there has not been any
expression of intention to the Company by any officer or key employee to
terminate such employment.
2.22 DEALERS AND SUPPLIERS. Except as set forth in Section 2.22 of the
Disclosure Schedule, there has not been in the twelve month period prior to the
date hereof any adverse change in the business relationship of the Company with
any dealer or supplier to the Company.
2.23 PERMITS AND OTHER OPERATING RIGHTS. Except as set forth in Section 2.23 of
the Disclosure Schedule, the Company does not require the Consent of any
Authority to permit it to operate in the manner in which it presently is being
operated, and possesses all permits and other authorizations from all
Authorities presently required necessary to permit it to operate it businesses
in the manner in which they presently are conducted.
2.24 COMPLIANCE WITH LAW. Except as set forth in Section 2.24 of the Disclosure
Schedule, and without limiting the scope of any other representations or
warranties contained in this Agreement, but without intending to duplicate the
scope of such other representations and warranties, the assets, properties,
businesses and operations of the Company are and have been in compliance with
all Laws applicable to the ownership and conduct of their assets, properties,
businesses and operations. To the knowledge of the Company, there are no
outstanding and unsatisfied deficiency reports, plans of correction, notices of
noncompliance or work orders relating to any such Authorities, and no such
discussions with any such Authorities are scheduled or pending.
2.25 ASSETS OF BUSINESS. The assets owned or leased by the Company constitute
all of the assets held for use or used primarily in connection with its
businesses and are adequate to carry on such businesses as presently conducted
and as contemplated by the Company to be conducted.
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2.26 HAZARDOUS SUBSTANCES AND HAZARDOUS WASTES. Except as set forth in
Section 2.26 of the Disclosure Schedule:
(a) To the best knowledge of the Company, neither the Company, any
former subsidiary of the Company, nor any previous owner, tenant,
occupant or user of any property owned or leased by or to the Company
or by or to any former subsidiary as of the date hereof and which
property is included in the Assets (the "PROPERTIES") engaged in or
permitted, direct or indirect operations or activities upon, or any use
or occupancy of the Properties, or any portion thereof, for the purpose
of or in any way involving the handling, manufacture, treatment,
storage, use, generation, emission, release, discharge, refining,
dumping or disposal of any Environmentally Regulated Materials (as
hereinafter defined) (whether accidental or intentional, direct or
indirect) on, under, in or about the Properties in violation of
Environmental Laws, or transported any Environmentally Regulated
Materials to, from or across the Properties in violation of
Environmental Laws, nor are any Environmentally Regulated Materials
presently constructed, deposited, stored, placed or otherwise located
on, under, in or about the Properties in violation of Environmental
Laws, nor have any Environmentally Regulated Materials migrated from
the Properties upon or beneath other properties, nor have any
Environmentally Regulated Materials migrated or threatened to migrate
from other properties upon, about or beneath the Properties. To the
best knowledge of the Company, the Properties do not contain in
violation of Environmental Laws, any: (i) underground or aboveground
storage tanks; (ii) asbestos; (iii) equipment using PCBs; (iv)
underground injection wells; or (v) septic tanks in which process waste
water or any Environmentally Regulated Materials have been disposed.
(b) To the best knowledge of the Company:
(i) no violation or noncompliance with Environmental and
Occupational Safety and Health Laws has occurred with respect
to the Properties or operations conducted thereon; the Company
has obtained all permits, licenses and authorizations required
by, and the Company and the Properties are in compliance, in
all material respects, with all Environmental and Occupational
Safety and Health Laws including, without limitation, all
applicable restrictions, conditions, standards, limitations,
prohibitions, requirements and obligations contained in the
Environmental and Occupational Safety and Health Laws or
contained in any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder;
(ii) no enforcement, investigation, cleanup, removal,
remediation or response or other governmental or regulatory
actions have been, or could have been at any time in the past,
asserted or threatened with respect to operations conducted on
the Properties or the Properties themselves or against the
Company or any subsidiary or former subsidiary with respect to
or in any way regarding the Properties pursuant to any
Environmental and Occupational Safety and Health Laws; and
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(iii) no claims or settlements with respect to the Properties
or the operations thereon, or against the Company or any
subsidiary or former subsidiaries with respect to the
Properties or operations conducted thereon, relating to or
arising out of Environmental and Occupational Safety and
Health Laws or Environmentally Regulated Materials, have been
made or been threatened by any third party, including any
Authority, nor to the best knowledge of the Company, does
there exist any reasonable basis for any such claim (any such
enforcement, investigation, cleanup, removal, remediation or
response, other governmental or regulatory action, claim or
settlement is herein referred to as an "ENVIRONMENTAL CLAIM").
(c) To the best knowledge of the Company, with regard to the Company
and the Properties, there are no past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans which
may interfere with or prevent compliance or continued compliance with
Environmental and Occupational Health and Safety Laws, as in effect on
the date of Closing.
(d) The term "ENVIRONMENTAL AND OCCUPATIONAL SAFETY AND HEALTH LAW" as
used in this Agreement means any Law, that (i) regulates, creates
standards for or imposes liability or standards of conduct concerning
any element, compound, pollutant, contaminant, or toxic or hazardous
substance, material or waste, or any mixture thereof, or relates in any
way to emissions or releases into the environment or ambient
environmental conditions, or conduct affecting such matters, or (ii) is
designed to provide safe and healthful working conditions or reduce
occupational safety and health hazards. Such laws shall include, but
not be limited to, the National Environmental Policy Act, 42 U.S.C. ss.
ss. 4321 et seq., the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. ss. ss. 9601 et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. ss. ss. 6901 et seq.,
the Federal Water Pollution Control Act, 33 U.S.C. ss. ss. 1251 et
seq., the Federal Clean Air Act, 42 U.S.C. ss. ss. 7401 et seq., the
Toxic Substances Control Act, 15 U.S.C. ss. ss. 2601 et seq., the
Emergency Planning and Community Right to Know Act, 42 U.S.C. ss.
11011, the Hazard Communication Act, 29 U.S.C. ss. ss. 651 et seq., the
Occupational Safety and Health Act, 29 U.S.C. ss. ss. 651 et seq., the
Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss. 136,
and any caselaw interpretations, amendments or restatements thereof, or
similar enactments thereto, as is now or at any time hereafter may be
in effect, as well as their international, state and local
counterparts.
(e) The term "ENVIRONMENTALLY REGULATED MATERIALS" as used in this
Agreement means any element, compound, pollutant, contaminant,
substance, material or waste, or any mixture thereof, designated,
listed, referenced, regulated or identified pursuant to any
Environmental and Occupational Safety and Health Law.
(f) Notwithstanding any provision in this Agreement to the contrary,
all representations and warranties of the Company pertaining or related
to Environmental Law, Environmentally Regulated Materials,
Environmental Claims, pollution, contamination or other environmental
matters are contained solely and exclusively in this Section 2.26.
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2.27 BROKERS. Except as set forth in Section 2.27 of the Disclosure Schedule,
neither the Company nor any of its directors, officers or employees has employed
any broker, finder, or financial advisor or incurred any liability for any
brokerage fee or commission, finder's fee or financial advisory fee, in
connection with the transactions contemplated hereby, nor is there any basis
known to the Company for any such fee or commission to be claimed by any person
or entity.
2.28 CUSTOMERS. Except as set forth in Section 2.28 of the Disclosure Schedule,
there has not been in the 12-month period prior to the date hereof any
significant dispute with any customer of the Company nor any set of
circumstances which is reasonably anticipated to have a material adverse effect
on the relationship between the Company and such customer.
2.29 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Company, nor any
officer, director, shareholder, employee or agent of the Company, nor any other
person acting on their behalf, has, directly or indirectly, within the past
three years given or agreed to give any gift or similar benefit to any customer,
supplier, governmental employee or other person who is or may be in a position
to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (i) might subject the
Company or Purchaser to any damage or penalty in any civil, criminal or
governmental litigation or administrative proceeding, (ii) if not given in the
past, might have had a Material Adverse Effect on the assets, business or
operations of the Company as reflected in the financial statements set forth in
Section 2.5 of the Disclosure Schedule, or (iii) if not continued in the future,
might have a Material Adverse Effect on the Company's assets, business,
operations or prospects or which might subject the Company or Purchaser to suit
or penalty in any private or governmental litigation or proceeding.
2.30 SECURITIES MATTERS.
(a) The Company and the Shareholders understand that (i) the Shares
have not been registered or qualified under the Securities Act of 1933,
as amended (the "1933 Act") or any state securities or "blue sky" laws,
on the ground that the sale provided for in this Agreement and the
issuance of the securities hereunder is exempt from registration and
qualification under Sections 4(2) and 18 of the 1933 Act, and (ii) the
Purchaser's reliance on such exemptions is predicated on the Company's
and the Shareholders' representations set forth herein.
(b) The Company and the Shareholders acknowledge that an investment in
the Purchaser involves an EXTREMELY HIGH DEGREE OF RISK, lack of
liquidity and substantial restrictions on transferability and that the
Company and the Shareholders may lose their entire investment in the
Shares.
(c) The Purchaser has made available to the Company and the
Shareholders or the Company's and the Shareholders' advisors the
opportunity to obtain information to evaluate the merits and risks of
the investment in the Shares, and the Company and the Shareholders have
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received all information requested from the Purchaser. The Company and
the Shareholders have had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the
offering of the Shares and the business, properties, plans, prospects,
and financial condition of the Purchaser and to obtain additional
information as the Company and the Shareholders have deemed appropriate
for purposes of investing in the Shares pursuant to this Agreement.
(d) The Company and the Shareholders, personally or through advisors,
have expertise in evaluating and investing in private placement
transactions of securities of companies in a similar stage of
development to the Purchaser and have sufficient knowledge and
experience in financial and business matters to assess the relative
merits and risks of an investment in the Purchaser. In connection with
the purchase of the Shares, the Company and the Shareholders have
relied solely upon independent investigations made by the Company and
the Shareholders, and have consulted their own investment advisors,
counsel and accountants. The Company and the Shareholders have adequate
means of providing for current needs and personal contingencies, and
have no need for liquidity and can sustain a complete loss of the
investment in the Shares.
(e) The Shares which the Purchaser is to issue hereunder will be
acquired for the recipient's own account, for investment purposes, not
as a nominee or agent, and not with a view to or for sale in connection
with any distribution of the Shares in violation of applicable
securities laws.
(f) The Company and the Shareholders understand that no federal or
state agency has passed upon the Shares or made any finding or
determination as to the fairness of the investment in the Shares.
(g) The Company and each Shareholder is an "Accredited Investor" as
defined in Rule 501(a) of Regulation D promulgated under the 1933 Act.
The Company and the Shareholders acknowledge that the Shares may be
purchased only by persons who come within the definition of an
"Accredited Investor" as that term is defined in Rule 501(a) of
Regulation D promulgated under the 1933 Act.
(h) Neither the Company nor any Shareholder has received any general
solicitation or general advertising concerning the Shares, nor is the
Company nor any Shareholders aware of any such solicitation or
advertising.
2.31 THE PURCHASER AND REGISTRATION UNDER THE SECURITIES EXCHANGE ACT. The
Company and the Shareholders are aware that there can be no assurance that the
Purchaser will register under the Securities Exchange Act of 1934 (the "1934
ACT") and become a reporting company under the 1934 Act. Furthermore, if the
Purchaser does become a reporting company under the 1934 Act, the Company and
the Shareholders acknowledge that there can be no assurance given as to the
ultimate value of the Shares or the liquidity thereof.
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2.32 DISCLOSURE. No representation or warranty by the Company in this Agreement
and no statement contained in any document (including, without limitation, the
financial statements referred to herein and the Disclosure Schedule),
certificate, exhibit or other writing furnished or to be furnished to Purchaser
pursuant to the provisions of this Agreement, contains or will contain, any
untrue statement of material fact or omits or will omit to state any material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading, and all of the
foregoing completely and correctly present the information required or purported
to be set forth herein or therein. The representations and warranties contained
in this Article 2 or elsewhere in this Agreement or any document delivered
pursuant hereto will not be affected or deemed waived by reason of the fact that
the Purchaser or its representatives knew (other than as a result of the
Disclosure Schedule or other writing delivered to the Purchasers on the date of
Closing) or should have known that any such representation or warranty is or
might be inaccurate in any respect.
ARTICLE 3
---------
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
The Purchaser, jointly and severally, represents and warrants to the
Company and the Shareholders as of the date hereof as follows:
3.1. CORPORATE ORGANIZATION. The Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada. The
Purchaser is qualified to do business and is in good standing as a foreign
corporation in each jurisdiction where the nature of the activities conducted by
it or the character of the property owned, leased or operated by it make such
qualification necessary or appropriate, except for those jurisdictions where the
failure to be so qualified has not and could not reasonably be expected to have
a Material Adverse Effect on the ability of the Purchaser to fulfill its
obligations under this Agreement.
3.2. AUTHORIZATION. The Purchaser has full corporate power and authority to
enter into this Agreement and the Purchaser Delivered Documents and to carry out
the transactions contemplated herein and therein. The Boards of Directors of the
Purchaser have taken all action required by law, their respective articles of
incorporation and bylaws or otherwise to authorize the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein. This Agreement is the valid and binding legal obligation of
the Purchaser enforceable against it in accordance with its terms.
3.3. NON-CONTRAVENTION. Neither the execution, delivery and performance of this
Agreement nor the consummation of the transactions contemplated herein will: (i)
violate any provision of the articles of incorporation or bylaws of the
Purchaser; or (ii) except for such violations, conflicts, defaults,
accelerations, terminations, cancellations, impositions of fees or penalties,
mortgages, pledges, liens, security interests, encumbrances, restrictions and
charges which would not, individually or in the aggregate, have a Material
Adverse Effect on the Purchaser, (A) violate, be in conflict with, or constitute
a default, however defined (or an event which, with the giving of due notice or
lapse of time, or both, would constitute such a default), under, or cause or
permit the acceleration of the maturity of, or give rise to, any right of
termination, cancellation, imposition of fees or penalties under, any debt,
note, bond, lease, mortgage, indenture, license, obligation, contract,
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commitment, franchise, permit, instrument or other agreement or obligation to
which the Purchaser is a party or by which they or any of its properties or
assets is or may be bound (unless with respect to which defaults or other
rights, requisite waivers or consents will have been obtained at or prior to the
Closing) or (B) result in the creation or imposition of any mortgage, pledge,
lien, security interest, encumbrance, restriction, adverse claim or charge of
any kind, upon any property or assets of the Purchaser under any debt,
obligation, contract, agreement or commitment to which the Purchaser is a party
or by which the Purchaser or any of its assets or properties is or may be bound;
or (iii) violate any Law.
3.4. CONSENTS AND APPROVALS. No Consent is required by any person or entity,
including without limitation any Authority, in connection with the execution,
delivery and performance by the Purchaser of this Agreement, or the consummation
of the transactions contemplated herein, other than any Consent which, if not
made or obtained, will not, individually or in the aggregate, have a Material
Adverse Effect on the business of the Purchaser.
3.5. BROKERS. Neither the Purchaser nor any of its directors, officers or key
employees have employed any broker, finder or financial advisor, or incurred any
liability for any brokerage fee or commission, finder's fee or financial
advisory fee, in connection with the transactions contemplated hereby, nor is
there any basis known to the Purchaser for any such fee or commission to be
claimed by any person or entity.
3.6. LEGAL PROCEEDINGS. There are no actions, suits or proceedings instituted,
pending or, to the knowledge of the Purchaser, threatened, against the
Purchaser, or against any of its affiliates or against any property, asset,
interest or right of any of them, either individually or in the aggregate, that
would prevent or delay consummation of the transactions contemplated by this
Agreement or otherwise prevent the Purchaser from performing its obligations
under this Agreement. The Purchaser is not subject to any judgment, order, writ,
injunction or decree that would prevent or delay consummation of the
transactions contemplated by this Agreement or otherwise prevent the Purchaser
from performing its obligations under this Agreement.
3.7 CAPITALIZATION. The authorized capital stock of the Purchaser consists of
20,000,000 shares of common stock, par value $0.001 per share (the "Common
Stock") and 1,000,000 shares of undesignated preferred stock. The Shares, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully paid,
and nonassessable.
3.8 FINANCIAL STATEMENTS. The Purchaser has retained an independent accounting
firm to prepare audited balance sheets of the Purchaser as of December 31, 1998
and 1997 and related statements of operations, shareholders' equity and cash
flows for the fiscal years then ended (the "PURCHASER FINANCIAL STATEMENTS").
The Purchaser believes that, once completed, the Purchaser Financial Statements
(i) will be in accordance with the books and records of the Purchaser and have
been prepared in conformity with generally accepted accounting principles
("GAAP") consistently applied for all periods, and (ii) will fairly present the
financial position of the Purchaser as of the respective dates thereof, and the
results of operations, changes in shareholders' equity and changes in cash flow
for the periods then ended, all in accordance with GAAP consistently applied for
all periods.
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3.9 LITIGATION. To the knowledge of the Purchaser, there is no legal,
administrative, arbitration, or other proceeding, suit, claim or action of any
nature or investigation, review or audit of any kind (including without
limitation a proceeding, suit, claim or action, or an investigation, review or
audit, involving any environmental Law or matter), judgment, decree, decision,
injunction, writ or order pending, noticed, scheduled or threatened or
contemplated by or against or involving the Purchaser, its assets, properties or
businesses or its directors, officers, agents or employees (but only in their
capacity as such), whether at law or in equity, before or by any person or
entity or Authority, or which questions or challenges the validity of this
Agreement or any action taken or to be taken by the parties hereto pursuant to
this Agreement or in connection with the transactions contemplated herein.
3.10 INSURANCE. Exhibit 3.10 contains an accurate and complete list of all
policies of fire and other casualty, general liability, theft, life, workers'
compensation, health, directors and officers, business interruption and other
forms of insurance owned or held by the Purchaser, specifying the insurer, the
policy number, the term of the coverage and, in the case of any "claims made"
coverage, the same information as to predecessor policies for the previous five
years. All present policies are in full force and effect and all premiums with
respect thereto have been paid. The Purchaser has not been denied any form of
insurance and no policy of insurance has been revoked or rescinded during the
past five years, except as described in Exhibit 3.10.
3.11 LABOR MATTERS. Except as set forth in Exhibit 3.11: (i) the Purchaser is
and has been in material compliance with all applicable Laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, including without limitation any such Laws respecting
employment discrimination and occupational safety and health requirements, and
has not and is not engaged in any unfair labor practice; (ii) to the knowledge
of the Purchaser, there is no unfair labor practice complaint against the
Purchaser pending or threatened before the National Labor Relations Board or any
other comparable Authority; (iii) there is no labor strike, dispute, slowdown or
stoppage actually pending or, to the Purchaser's knowledge, threatened against
or directly affecting the Purchaser; (iv) to the knowledge of the Purchaser, no
labor representation question exists respecting the employees of the Purchaser
and there is not pending or threatened any activity intended or likely to result
in a labor representation vote respecting the employees of the Purchaser; (v) no
grievance or any arbitration proceeding arising out of or under collective
bargaining agreements is pending and no claims therefor exist or, to the
Purchaser's knowledge, have been threatened; (vi) no collective bargaining
agreement is binding and in force against the Purchaser or currently being
negotiated by the Purchaser; and (vii) to the knowledge of the Purchaser, the
Purchaser has not experienced any significant work stoppage or other significant
labor difficulty.
3.12 COMPLIANCE WITH LAW. Except as set forth in Exhibit 3.12, and without
limiting the scope of any other representations or warranties contained in this
Agreement, but without intending to duplicate the scope of such other
representations and warranties, the assets, properties, businesses and
operations of the Purchaser are and have been in compliance with all Laws
applicable to the ownership and conduct of their assets, properties, businesses
and operations. To the knowledge of the Purchaser, there are no outstanding and
unsatisfied deficiency reports, plans of correction, notices of noncompliance or
work orders relating to any such Authorities, and no such discussions with any
such Authorities are scheduled or pending.
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3.13 CUSTOMERS. Except as set forth in Exhibit 3.13, there has not been in the
12-month period prior to the date hereof any significant dispute with any
customer of the Purchaser nor any set of circumstances which is reasonably
anticipated to have a material adverse effect on the relationship between the
Purchaser and such customer.
3.14 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Purchaser, nor any
officer, director, shareholder, employee or agent of the Purchaser, nor any
other person acting on their behalf, has, directly or indirectly, within the
past three years given or agreed to give any gift or similar benefit to any
customer, supplier, governmental employee or other person who is or may be in a
position to help or hinder the business of the Purchaser (or assist the
Purchaser in connection with any actual or proposed transaction) which (i) might
subject the Purchaser or Purchaser to any damage or penalty in any civil,
criminal or governmental litigation or administrative proceeding, (ii) if not
given in the past, might have had a Material Adverse Effect on the assets,
business or operations of the Purchaser, or (iii) if not continued in the
future, might have a Material Adverse Effect on the Purchaser's assets,
business, operations or prospects or which might subject the Purchaser to suit
or penalty in any private or governmental litigation or proceeding.
ARTICLE 4
---------
COVENANTS
---------
4.1 THE COMPANY'S AGREEMENTS AS TO SPECIFIED MATTERS. Except as specifically set
forth in Exhibit 4.1 hereto, except in the ordinary course of business and
consistent with past practice, and except upon the written consent of the
Purchaser (which consent shall not be unreasonably withheld), from the date
hereof until the Closing, the Company shall not do any of the following:
(a) Amend its articles of incorporation or bylaws;
(b) Borrow or agree to borrow any funds;
(c) Incur, assume, suffer or become subject to, whether directly or by
way of guarantee or otherwise, any claims, obligations, liabilities or
loss contingencies which, individually or in the aggregate, are
material to the conduct of the businesses of the Company or have or
would have a material adverse effect on the financial condition of the
Company;
(d) Pay, discharge or satisfy any claims, liabilities or obligations;
(e) Permit or allow any of its properties or assets material to the
operation of its businesses to be subjected to any mortgage, pledge,
lien, security interest, encumbrance, restriction or charge of any
kind, except Permitted Liens;
(f) Write down the value of any inventory or write off as uncollectible
any notes or accounts receivable or any trade accounts or trade notes;
(g) Cancel or amend any debts, waive any claims or rights or sell,
transfer or otherwise dispose of any properties or assets, other than
for such debts, claims, rights, properties or assets which,
individually or in the aggregate, are not material to the conduct of
its businesses;
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(h) License, sell, transfer, pledge, modify, disclose, dispose of or
permit to lapse any right to the use of any Intellectual Property
Rights other than for such Intellectual Property Rights which,
individually or in the aggregate, are not material to the conduct of
its businesses;
(i) (i) Terminate, enter into, adopt, institute or otherwise become
subject to or amend in any material respect any collective bargaining
agreement or employment or similar agreement or arrangement with any of
its directors, officers or employees; (ii) terminate, enter into,
adopt, institute or otherwise become subject to or amend in any
material respect any Compensation Plan; (iii) contribute, set aside for
contribution or authorize the contribution of any amounts for any such
Compensation Plan except as required (and not discretionary) by the
terms of such Compensation Plan; or (iv) grant or become obligated to
grant any general increase in the compensation of any directors,
officers or employees (including without limitation any such increase
pursuant to any Compensation Plan);
(j) Make or enter into any commitment for capital expenditures for
additions to property, plant or equipment individually in excess of
$25,000, or in excess of $100,000 in the aggregate;
(k) (i) Declare, pay or set aside for payment any dividend or other
distribution in respect of its capital stock or other securities
(including without limitation distributions in redemption or
liquidation) or redeem, purchase or otherwise acquire any shares of its
capital stock or other securities; (ii) issue, grant or sell any shares
of its capital stock or equity securities of any class, or any options,
warrants, conversion or other rights to purchase or acquire any such
shares or equity securities or any securities convertible into or
exchangeable for such shares or equity securities, except issuance of
the Company Common Stock pursuant to the exercise of stock options
outstanding on the date hereof; (iii) become a party to any merger,
exchange, reorganization, recapitalization, liquidation, dissolution or
other similar corporate transaction; or (iv) organize any new
subsidiary, acquire any capital stock or other equity securities or
other ownership interest in, or assets of, any person or entity or
otherwise make any investment by purchase of stock or securities,
contributions to capital, property transfer or purchase of any
properties or assets of any person or entity;
(l) Pay, lend or advance any amounts to, or sell, transfer or lease any
properties or assets to, or enter into any agreement or arrangement
with, any director, officer, employee or shareholder;
(m) Terminate, enter into or amend in any material respect any Material
Contract identified in Section 2.19 of the Disclosure Schedule, or take
any action or omit to take any action which will cause a breach,
violation or default (however defined) under any such Material
Contract;
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(n) Take any action that can be reasonably anticipated to have a
Material Adverse Effect on Company (PROVIDED that any actions taken in
connection with the Closing or the performances of the Company's
obligations under this Agreement shall not be covered by this
subsection (n)) or cause any representation or warranty set forth in
Section 2 hereof to be untrue or any condition to the Closing not to be
satisfied;
(o) Accelerate billings, shipments to customers, payments from
customers, orders from suppliers or payment of accounts payable or
adjust the level of inventory, except in the ordinary course of
business consistent with past practices;
(p) Acquire any of the business or assets of any other person, firm,
association or corporation;
(q) Do any act or omit to do any act, or permit any act or omission to
act, which could cause a breach or default by Company under any of
Company's contracts, agreements, commitments or obligations;
(r) Enter into or amend any other agreements, commitments or contracts
which, individually or in the aggregate, are material to Company,
except agreements for the purchase and sale of goods or services in the
ordinary course of business, consistent with past practice and not in
excess of current requirements; or
(s) Agree, whether in writing or otherwise, to take any action
described in this subsection.
4.2 CONDUCT OF THE COMPANY BUSINESS. The Company shall maintain its assets and
properties and carry on its businesses and operations only in ordinary course in
substantially the same manner as planned and previously operated; and the
Company shall use its best commercially reasonable efforts to preserve intact
its business organizations, existing business relationships (including without
limitation its relationships with officers, employees, dealers, distributors,
independent contractors, customers and suppliers), good will and going concern
value; PROVIDED THAT in no event shall any of the foregoing prohibit the Company
from taking any action set forth on Exhibit 4.1.
4.3 NO COMPANY SOLICITATION OF ALTERNATE TRANSACTION. The Company shall not, and
will use its best efforts to ensure that its directors, officers and employees,
independent contractors, consultants, counsel, accountants, investment advisors
and other representatives and agents shall not, directly or indirectly, solicit,
initiate or encourage discussions or negotiations with, provide any nonpublic
information to, or enter into any agreement with, any third party concerning (or
concerning the business of the Company in connection with) any tender offer
(including a self tender offer), exchange offer, merger, consolidation, sale of
substantial assets or of a significant amount of assets (except in the ordinary
course of business), sale of securities, acquisition of beneficial ownership of
or the right to vote securities representing more than five percent (5%) of the
total voting power of the Company, liquidation, dissolution or similar
transactions involving the Company or any division of the Company (such
proposals, announcements or transactions being called herein "ACQUISITION
PROPOSALS"). Notwithstanding the foregoing, (a) it is permissible to communicate
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with (but not solicit, initiate, encourage or negotiate with, other than
pursuant to clause (b) of this sentence) any third party; (b) if any third party
makes a Bona Fide Unsolicited Offer, it is permissible to furnish information
concerning the Company or its businesses to, and negotiate with, such third
party (for the purposes of this subsection, a "BONA FIDE UNSOLICITED OFFER"
shall mean any unsolicited written inquiry, proposal or offer respecting a
potential Acquisition Proposal, other than any such inquiry, proposal or offer
that, after due consideration thereof by the Board of Directors of the Company,
is expressly determined by such Board of Directors not to be reasonably likely
to result in the receipt of a consideration superior to the consideration to be
paid by the Purchaser as described herein); and (c) it is permissible to furnish
information concerning the Company or its businesses to a third party making a
Bona Fide Unsolicited Offer, or from taking any other action, if the Board of
Directors of the Company concludes, after due consideration which shall include
consultation with legal counsel, that there is a fiduciary duty to furnish such
information or take such other action. The Company shall promptly inform the
Purchaser of any Bona Fide Unsolicited Offer, including the terms thereof and
the identity of the person or entity making such offer.
4.4 FULL ACCESS TO THE PURCHASER; AUDIT. The Company shall afford to the
Purchaser and its directors, officers, employees, counsel, accountants,
investment advisors and other authorized representatives and agents full and
complete access to the facilities, properties, books and records of the Company
in order that the Purchaser may have full opportunity to make such
investigations as it shall desire to make of the affairs of the Company,
PROVIDED THAT any such investigation shall be conducted in such a manner as not
to interfere unreasonably with business operations, and PROVIDED FURTHER THAT
neither the Purchaser nor any of its directors, officers, employees, counsel,
accountants, investment advisors or other authorized representatives or agents
shall have access to the facilities, properties, employees, customers or
suppliers except upon the written consent of the Company, which consent shall
not be unreasonably withheld. In addition, the Company shall furnish such
additional financial and operating data and other information as the Purchaser
shall, from time to time, reasonably request, including without limitation
access to the working papers of its independent certified public accountants. No
such investigation shall affect or otherwise diminish or obviate in any respect
any of the representations and warranties of the Company or the Shareholders
herein. The Company shall specifically afford the Purchaser and/or its
accountants to conduct an audit of the Company's financial statements, books and
records, and the Company and the Shareholders shall reasonably cooperate with
the Purchaser in the performance of such audit.
4.5 CONFIDENTIALITY. Each of the parties hereto agrees that it will not use, or
permit the use of, any of the information relating to any other party hereto
furnished to it in connection with the transactions contemplated herein
("INFORMATION") in a manner or for a purpose detrimental to such other party or
otherwise than in connection with the transaction, and that they will not
disclose, divulge, provide or make accessible, or permit the Disclosure of
(collectively, "DISCLOSE" or "DISCLOSURE" as the case may be), any of the
Information to any person or entity, other than their responsible directors,
officers, employees, investment advisors, accountants, counsel and other
authorized representatives and agents, except as may be required by judicial or
administrative process or, in the opinion of such party's regular counsel, by
other requirements of Law; PROVIDED, HOWEVER, that prior to any Disclosure of
any Information permitted hereunder, the disclosing party shall first obtain the
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recipients' undertaking to comply with the provisions of this subsection with
respect to such information. The term "INFORMATION" as used herein shall not
include any information relating to a party which the party disclosing such
information can show: (i) to have been in its possession prior to its receipt
from another party hereto; (ii) to be now or to later become generally available
to the public through no fault of the disclosing party; (iii) to have been
available to the public at the time of its receipt by the disclosing party; (iv)
to have been received separately by the disclosing party in an unrestricted
manner from a person entitled to disclose such information; or (v) to have been
developed independently by the disclosing party without regard to any
information received in connection with this transaction. Each party hereto also
agrees to promptly return to the party from whom originally received all
original and duplicate copies of written materials containing Information should
the transactions contemplated herein not occur. A party hereto shall be deemed
to have satisfied its obligations to hold the Information confidential if it
exercises the same care as it takes with respect to its own similar information.
4.6 FILINGS; CONSENTS; REMOVAL OF OBJECTIONS. Subject to the terms and
conditions herein provided, the parties hereto shall use their best efforts to
take or cause to be taken all actions and do or cause to be done all things
necessary, proper or advisable under applicable Laws to consummate and make
effective, as soon as reasonably practicable, the transactions contemplated
hereby, including without limitation obtaining all Consents of any person or
entity, whether private or governmental, required in connection with the
consummation of the transactions contemplated herein. In furtherance, and not in
limitation of the foregoing, it is the intent of the parties to consummate the
transactions contemplated herein at the earliest practicable time, and they
respectively agree to exert their best efforts to that end, including without
limitation: (i) if applicable, the filing with the Federal Trade Commission
("FTC") and the Antitrust Division of the Department of Justice (the "ANTITRUST
DIVISION") all requisite documents and notifications in connection with the
transactions contemplated hereby pursuant to the HSR Act as soon as practicable
following the date hereof, and to respond as promptly as practicable to all
inquiries from the FTC or the Antitrust Division in connection therewith; (ii)
the removal or satisfaction, if possible, of any objections to the validity or
legality of the transactions contemplated herein; and (iii) the satisfaction of
the conditions to consummation of the transactions contemplated hereby.
4.7 FURTHER ASSURANCES; COOPERATION; NOTIFICATION.
(a) Each party hereto will, before, at and after the Closing, execute
and deliver such instruments and take such other actions as the other
party or parties, as the case may be, may reasonably require in order
to carry out the express intent of this Agreement. Without limiting the
generality of the foregoing, at any time after the Closing, at the
request of the Purchaser and without further consideration, the Company
will execute and deliver such instruments of sale, transfer,
conveyance, assignment and confirmation and take such action as the
Purchaser may reasonably deem necessary or desirable in order to more
effectively transfer, convey and assign to the Purchaser, and to
confirm the Purchaser's title to, all of the Assets, to put the
Purchaser in actual possession and operating control thereof and to
assist the Purchaser in exercising all rights with respect thereto.
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<PAGE>
(b) Between the date hereof and the Closing, the Company shall
cooperate with the Purchaser to promptly develop plans for the
management of the businesses after the Closing, including without
limitation plans relating to productivity, marketing, operations and
improvements, and the Company shall further cooperate with the
Purchaser to provide for the implementation of such plans as soon as
practicable after the Closing. Between the date hereof and the Closing,
and subject to applicable Law, the Company shall confer on a regular
and reasonable basis with one or more representatives of the Purchaser
to report on material operational matters and the general status of
ongoing operations.
(c) At all times from the date hereof until the Closing, each party
shall promptly notify the other in writing of the occurrence of any
event which it reasonably believes will or may result in a failure by
such party to satisfy the conditions specified in Article 5 and Article
6 hereof.
4.8 SUPPLEMENTS TO DISCLOSURE SCHEDULE. Prior to the Closing, the Company and
the Shareholders will supplement or amend the Disclosure Schedule with respect
to any event or development which, if existing or occurring at or prior to the
date of this Agreement, would have been required to be set forth or described in
the Disclosure Schedule or which is necessary to correct any information in the
Disclosure Schedule or in any representation and warranty of the Company or the
Shareholders which has been rendered inaccurate by reason of such event or
development. For purposes of determining the accuracy as of the date hereof of
the representations and warranties of the Company and the Shareholders contained
in Article 2 hereof in order to determine the fulfillment of the conditions set
forth in Section 5.1, the Disclosure Schedule shall be deemed to exclude any
information contained in any supplement or amendment hereto delivered after the
delivery of the Disclosure Schedule.
4.9 PUBLIC ANNOUNCEMENTS. None of the parties hereto shall make any public
announcement with respect to the transactions contemplated herein without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed; PROVIDED, HOWEVER, that any of the parties
hereto may at any time make any announcements which are deemed by its counsel to
be required by applicable Law so long as the party so required to make an
announcement promptly upon learning of such requirement notifies the other
parties of such requirement and discusses with the other parties in good faith
the exact proposed wording of any such announcement.
4.10 TRANSACTIONAL TAX UNDERTAKINGS.
(a) The parties hereto shall cooperate to make any necessary filings
with state and local taxing authorities and to furnish any required
supplemental information to any state and local tax liabilities
resulting from the consummation of the transactions contemplated
herein.
(b) In the event that any sales or use tax, or any tax in the nature of
a sales or use tax, or any transactional tax is payable or assessed
relative to the transactions contemplated herein, the Company shall pay
all such taxes and shall not collect any part thereof from the
Purchaser.
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4.11 EMPLOYEE BENEFITS.
(a) EMPLOYEES. After the date of Closing, the Purchaser may offer to
some or all employees employed by the Company immediately prior to the
date of Closing with respect to the businesses relating to the
Company's Assets (the "COMPANY EMPLOYEES") the opportunity to maintain
such employee's current employment; provided, that the Purchaser may
terminate the employment of any employees who accept such offer at any
time after such date of Closing. During the first six (6) months after
the date of Closing, the compensation and benefits provided by the
Purchaser shall be reasonably comparable on an overall basis (including
without limitation all compensation and benefits accrued by such
employees as of the date of Closing under all Pension Plans, Welfare
Plans and Compensation Plans irrespective of whether such accrued
benefits are actually received by such employees) to those provided to
such employees prior to the date of Closing with credit given for the
length of actual service with the Company prior to the date of Closing.
The Purchaser has not agreed to assume any obligation or liability
under any Pension Plans, Welfare Plans or Compensation Plans unless
specifically required pursuant to Section 1.2.
(b) RETENTION OF EMPLOYEES. The Company shall not, for a period of
three (3) years after the date of Closing, take any action, other than
with the written consent of the Purchaser, to induce any employee who
accepts an offer pursuant to Section 4.11(a) above, while still
employed by the Purchaser or any subsidiary of the Purchaser, to enter
into the employ of the Company or any affiliate of the Company.
4.12 BULK SALES LAW COMPLIANCE. The Purchaser hereby waives compliance by the
parties with the provisions of any applicable bulk sales laws to the
transactions contemplated by this Agreement and the Company and the Shareholders
warrant and agree to pay and discharge when due all claims of creditors which
could be asserted against the Purchaser by reason of such noncompliance to the
extent that such liabilities are not specifically assumed by the Purchaser under
this Agreement. The Company and the Shareholders hereby indemnify and agree to
hold the Purchaser harmless from, against and in respect of (and shall on demand
reimburse the Purchaser for) any loss, liability, cost, or expense, including,
without limitation, attorney's fees incurred by the Purchaser, by reason of any
failure of the Company or the Shareholders to pay or discharge such claims.
4.13 SECURITIES RESTRICTIONS.
(a) NATURE OF RESTRICTIONS. The Shares have not been registered under
the 1933 Act or under the securities laws of any other jurisdiction
and, therefore, the Shares cannot be resold unless they are
subsequently registered under said laws or exemptions from such
registrations are available. The transferability of the Shares is
restricted and that a legend may be placed on any certificate
representing the Shares substantially to the following effect:
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THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "1933 ACT").
THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF A CURRENT AND EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT WITH RESPECT TO SUCH SHARES, OR AN OPINION
OF THE ISSUER'S COUNSEL TO THE EFFECT THAT REGISTRATION IS NOT
REQUIRED UNDER THE 1933 ACT.
(b) COVENANTS OF THE COMPANY AND THE SHAREHOLDERS. The Company shall
not offer, sell or otherwise transfer any Shares unless such Shares are
registered and qualified under the 1933 Act and applicable state
securities laws or exemptions from such registration and qualification
requirements are available, or unless such offer, sale or transfer is
exempt from such registration or qualification. The Company may, in its
discretion, transfer the Shares to the Shareholders, provided that (i)
such transfer is exempt from registration under the 1933 Act and
qualification under applicable state securities, and (ii) the
representations and warranties of the Shareholders contained in Section
2.30 shall be true, complete and accurate as of the date when made and
at and as of the date of the transfer as though such representations
and warranties were made at and as of such time. The Shareholders shall
not offer, sell or otherwise transfer any Shares unless such Shares are
registered and qualified under the 1933 Act and applicable state
securities laws or exemptions from such registration and qualification
requirements are available, or unless such offer, sale or transfer is
exempt from such registration or qualification, as reflected in an
opinion of counsel to the Shareholder seeking to transfer Shares in a
form and substance reasonably satisfactory to the Purchaser.
4.14 Restrictive Covenants.
(a) POST-CLOSING CONFIDENTIALITY. The Company and each Shareholder
acknowledge their intent that the Company shall fully and effectively
convey to the Purchaser all proprietary rights, including the
Intellectual Property Rights, to be transferred to the Purchaser
pursuant hereto. Accordingly, the Company and each Shareholder shall at
all times keep confidential and shall not disclose to others any
proprietary rights, including the Intellectual Property Rights, and
shall not use or permit to be used any proprietary rights or any
Intellectual Property Rights for any purpose other than performance of
obligations to the Purchaser.
(b) NON-DIVERSION. Until the fifth anniversary of the date of Closing,
the Company and each of the Shareholders shall not, and shall cause
their affiliates not to, divert or attempt to divert or take advantage
of or attempt to take advantage of any actual or potential business or
opportunities of the Purchaser of which Company or any of the
Shareholders become aware as the result of their affiliation with the
Business or their relationship with the Purchaser and which relate
specifically to the Business, or any part thereof. This Section 4.14(b)
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is an addition to and not by way of limitation of any other duties the
Shareholders may have to the Purchaser.
(c) NON-RECRUITMENT. Until the fifth anniversary of the date of
Closing, neither the Company nor the Shareholders shall hire away, or
cause any other person to hire away, any employee of or consultant to
the Purchaser (including, without limitation, persons employed or
engaged by the Company before the date of this Agreement, and further
including, without limitation, any current, former or then-existing
"team leader" or distributor of either the Company or the Purchaser),
or directly or indirectly entice or solicit or seek to induce or
influence any of such employees or consultants to leave their
employment or engagement with the Purchaser, without out the prior
written consent of the Purchaser, which may be withheld in the sole
discretion of the Purchaser.
(d) REMEDIES. The covenants contained in this Section 4.14 impose a
reasonable restraint on the Company and the Shareholders in light of
the activities and business of the Company and future plans of the
Purchaser. The Company and each Shareholder acknowledge that if they
violate any of the covenants contained in this Section 4.14
(collectively, the "Restrictive Covenants"), it will be difficult to
determine the resulting damages to the Purchaser and, in addition to
any other remedies the Purchaser may have, the Purchaser shall be
entitled to temporary injunctive relief without being required to post
a bond and permanent injunctive relief without the necessity of proving
actual damages. The Company and the Shareholders shall be liable to pay
all costs, including reasonable attorneys' fees and expenses, that the
Purchaser may incur in enforcing or defending, to any extent, any of
the Restrictive Covenants, whether or not litigation is actually
commenced and including litigation of any appeal defended by the
Purchaser where such party succeeds in enforcing any of the Restrictive
Covenants. The Purchaser may elect to seek one or more remedies at its
discretion on a case by case basis. Failure to seek any or all remedies
in one case shall not restrict the Purchaser from seeking any remedies
in another situation. Such action by the Purchaser shall not constitute
a waiver of any of its rights.
(f) SEVERABILITY AND MODIFICATION OF ANY UNENFORCEABLE COVENANT. Each
of the Restrictive Covenants will be read and interpreted with every
reasonable inference given to its enforceability. However, if any term,
provision or condition of the Restrictive Covenants is held by a court
or arbitrator to be invalid, void or unenforceable, the remainder of
the provisions thereof shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If a court or
arbitrator should determine any of the Restrictive Covenants are
unenforceable because of over-breadth, then the court or arbitrator
shall modify such covenant so as to make it enforceable to the fullest
extent the court or arbitrator deems reasonable and enforceable under
the prevailing circumstances.
4.15 REPURCHASE RIGHTS. The Company, or if the Company has been dissolved, any
Shareholder, at any time commencing the six-month anniversary of the date of
Closing, and from time to time thereafter, may, in the Company's or such
Shareholder's discretion, as the case may be, resell to the Purchaser at a price
of $1.00 per Share, and the Purchaser shall repurchase from the Company or such
Shareholder, as the case may be, up to 100,000 Shares (or, in the case of a
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Shareholder, the pro rata proportion of 100,000 Shares to such Shareholders'
percentage ownership of the Company as of the date of Closing) issued pursuant
to Section 1.3.3 (the "REPURCHASE RIGHTS"). The repurchase price for any
repurchase pursuant to this Section 4.15 in cash or by a promissory note bearing
interest at 12% [or the legal maximum in the State of Nevada, if less] and
payable in up to 12 equal monthly amortizing installments of principal and
accrued interest, or any combination of cash and such a promissory note, in the
Purchaser's discretion.
4.16. SECURITIES COMPLIANCE.
(a) EXEMPTION FROM REGISTRATION AND QUALIFICATION. Promptly following
the date of Closing, the Purchaser shall file a Form D with the
Securities & Exchange Commission ("SEC") in connection with the
issuance of the Shares and make all other necessary or advisable
filings under Nevada and other applicable state securities laws, as
necessary or advisable to obtain appropriate exemptions from
registration or qualification under federal and applicable state
securities laws. Except as expressly disclosed on Exhibit 4.16 hereto,
the Purchaser shall understand that the Shareholders are residents of
Nevada.
(b) RULE 144 COMPLIANCE. If the Purchaser files a registration
statement under the 1934 Act for its Common Stock with the SEC (the
"1934 ACT STATEMENT"), and the SEC declares the 1934 Act Statement
effective, the Purchaser shall file reports with the SEC as required
under Rule 144(c)(1) under the 1933 Act, or any successor rule, for a
period of at least twenty-four (24) months immediately following the
date on which the SEC declares the 1934 Act Statement effective, or
such longer period as any Shareholder shall be deemed an affiliate of
the Purchaser on account of being an officer or director of the
Purchaser or its receipt and holding of the Shares, or such shorter
time as any of the Purchaser's Common Stock is outstanding, and the
Purchaser shall take all other actions as may reasonably be required of
the Purchaser in order that Rule 144, or any successor rule, may be
available to the Shareholders who satisfy the provisions of the rule
applicable to the holder or its offer or sale of securities.
4.17 NO EFFECTIVE REGISTRATION STATEMENT; CASH PAYMENT. If the SEC has not
declared the 1934 Act Statement effective on or before the second anniversary of
the date of Closing, then the Purchaser shall pay $250,000 to the Company, or if
the Company has been dissolved, to the Shareholders, pro rated in proportion to
each Shareholders' percentage ownership of the Company as of the date of
Closing.
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ARTICLE 5
---------
CONDITIONS TO OBLIGATIONS OF PURCHASER
--------------------------------------
Notwithstanding any other provision of this Agreement to the contrary,
the obligation of the Purchaser to effect the transactions contemplated herein
shall be subject to the satisfaction at or prior to the Closing of each of the
following conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The Disclosure Schedule shall be
delivered to the Purchaser prior to the Closing and shall be fully satisfied
with the disclosures contained therein. The representations and warranties of
the Company and the Shareholders contained in this Agreement, including without
limitation in the Disclosure Schedule delivered to the Purchaser (and not
including any changes or additions delivered to the Purchaser pursuant to
Section 4.8), shall be true, complete and accurate as of the date hereof and at
and as of the Closing as though such representations and warranties were made at
and as of such time, except for changes specifically permitted or contemplated
by this Agreement, and except insofar as the representations and warranties
relate expressly and solely to a particular date or period, in which case they
shall be true and correct at the Closing with respect to such date or period;
PROVIDED THAT a breach of any representation or warranty shall not constitute a
failure of the condition contained in this Section 5.1 if such breach, either
alone, or in conjunction with all other breaches, has not had, or will not have,
a Material Adverse Effect.
5.2 PERFORMANCE. The Company and the Shareholders shall have performed and
complied in all material respects with all agreements, covenants, obligations
and conditions required by this Agreement to be performed or complied with by
the Company and the Shareholders on or prior to the Closing.
5.3 REQUIRED APPROVALS AND CONSENTS.
(a) At and as of the Closing, the Company shall have full corporate
power and authority to enter into this Agreement and the Company
Delivered Documents and to carry out the transactions contemplated
herein and therein. At and as of the Closing, the Shareholders, and
each of them, shall have the legal capacity to enter into this
Agreement and to carry out the transactions contemplated herein,
including without limitation the legal capacity to execute, deliver and
perform the agreements or contracts required by this Article 5 to be
executed and delivered by any of them as a condition to the Closing. At
and as of the Closing, the Board of Directors of the Company shall have
taken all action required by law, its articles of incorporation and
bylaws and otherwise to authorize the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein. At and as of the Closing, this Agreement shall
have been duly and validly executed and delivered by the Company and no
other corporate action shall be necessary. At and as of the Closing,
this Agreement shall have been duly and validly executed by the
Shareholders. At and as of the Closing, this Agreement shall be the
valid and binding legal obligation of the Company, and this Agreement
shall be the valid and binding legal obligation of the Shareholders,
enforceable against the Company and the Shareholders in accordance with
its terms.
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(b) All Consents of or from all Authorities required hereunder to
consummate the transactions contemplated herein, and all Consents of
from all persons and entities other than Authorities that are
identified in the Disclosure Schedule shall have been delivered, made
or obtained, and the Purchaser shall have received copies thereof.
5.4 ADVERSE CHANGES. No change, circumstance or event which constitutes or has
resulted in, or that is reasonably likely to result in, a Material Adverse
Effect relative to the Company since the date of the Latest Balance Sheet.
5.5 NO PROCEEDING OR LITIGATION. No suit, action, investigation, inquiry or
other proceeding by any Authority or other person or entity shall have been
instituted or threatened which questions the validity or legality of the
transactions contemplated hereby or which, if successfully asserted, would
individually or in the aggregate, otherwise have a Material Adverse Effect on
the business, financial condition, prospects, or operations of the Company.
5.6 OPINION OF THE COMPANY COUNSEL. The Purchaser shall have received an opinion
of Company counsel, Ruyle, Catron & Lauer, LLP, dated the date of Closing,
substantially in the form and substance set forth as Exhibit 5.6 hereto.
5.7 LEGISLATION. No Law shall have been enacted which prohibits, restricts or
materially delays the consummation of the transactions contemplated hereby or
any of the conditions to the consummation of such transaction.
5.8 CERTIFICATES. The Purchaser shall have received such certificates of the
Company's officers and of the Shareholders, in a form and substance reasonably
satisfactory to the Purchaser, dated the date of Closing, to evidence compliance
with the conditions set forth in Sections 5.1, 5.2 and 5.3.
5.9 DUE DILIGENCE. The Purchaser shall have received all information requested
by it pursuant to Section 4.4.
5.10 DOCUMENTATION FOR CONVEYANCE OF THE COMPANY'S ASSETS. The Purchaser shall
have received, in a form and substance reasonably satisfactory to the Purchaser,
dated the date of Closing, all of the Bills of Sale, deeds, assignments and
other conveyance and transfer documentation listed on Exhibit 5.10.
ARTICLE 6
---------
CONDITIONS TO COMPANY'S OBLIGATIONS
-----------------------------------
Notwithstanding anything in this Agreement to the contrary, the
obligation of the Company and the Shareholders to effect the transactions
contemplated herein shall be subject to the satisfaction at or prior to the
Closing of each of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of
the Purchaser contained in this Agreement shall be in all material respects
true, complete and accurate as of the date when made and at and as of the
Closing, as though such representations and warranties were made at and as of
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such time, except for changes permitted or contemplated in this Agreement, and
except insofar as the representations and warranties relate expressly and solely
to a particular date or period, in which case they shall be true and correct in
all material respects at the Closing with respect to such date or period.
6.2 PERFORMANCE. The Purchaser shall have performed and complied in all material
respects with all agreements, covenants, obligations and conditions required by
this Agreement to be performed or complied with by the Purchaser at or prior to
the Closing.
6.3 CORPORATE APPROVALS. All Consents listed on Exhibit 3.5 hereto shall have
been delivered, made or obtained. All action required to be taken by the
Purchaser to authorize the execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby
shall have been duly and validly taken.
6.4 NO PROCEEDING OR LITIGATION. No suit, action, investigation, inquiry or
other proceeding by any Authority or other person or entity shall have been
instituted or threatened which questions the validity or legality of the
transactions contemplated hereby.
6.5 CERTIFICATES. The Purchaser shall have furnished the Company and the
Shareholders with such certificates of the Purchaser's officers, in a form and
substance reasonably acceptable to the Company and the Shareholders, dated the
date of Closing, to evidence compliance with the conditions set forth in
Sections 6.1 and 6.2.
6.6 OPINION OF THE PURCHASER COUNSEL. The Purchaser shall have delivered to the
Company an opinion from Oppenheimer Wolff & Donnelly LLP, counsel to the
Purchaser, dated the date of Closing, in the form and substance set forth as
Exhibit 6.6 hereto.
6.7 PAYMENT OF CONSIDERATION. The Company shall have received (a) the Shares
required by Section 1.4(c) has been completed, and (b) the executed Liabilities
Undertaking required by Section 1.4(d).
6.8 EXECUTION AND DELIVERY OF CERTAIN AGREEMENTS. The Company and the
Shareholders shall have received satisfactory evidence that the agreements
identified in Exhibit 6.8 hereto have been executed and delivered by the parties
thereto.
ARTICLE 7
---------
TERMINATION AND ABANDONMENT
---------------------------
7.1 METHODS OF TERMINATION. This Agreement may be terminated and the
transactions contemplated herein may be abandoned at any time notwithstanding
approval thereof by the shareholders of the Company, but not later than the
Closing:
(a) By mutual written consent of the Purchaser and the Company; or
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(b) By the Purchaser on or after the Termination Date or such later
date as may be established pursuant to Article 1 hereof, if any of the
conditions provided for in Article 5 of this Agreement shall not have
been satisfied or waived in writing by the Purchaser prior to such
date; or
(c) By the Company on or after the Termination Date or such later date
as may be established pursuant to Article 1 hereof, if any of the
conditions provided for in Article 6 of this Agreement shall not have
been satisfied or waived in writing by the Company prior to such date;
or
(d) By any party if the Closing shall not have occurred on or before
August 31, 1999.
7.2 PROCEDURE UPON TERMINATION. In the event of termination and abandonment
pursuant to Section 7.1, written notice thereof shall forthwith be given to the
other party or parties, and the provisions of this Agreement (except to the
extent provided in Section 9.1) shall terminate, and the transactions
contemplated herein shall be abandoned, without further action by any party
hereto. If this Agreement is terminated as provided herein: (a) each party will,
upon request, redeliver all documents, work papers and other material of any
other party (and all copies thereof) relating to the transactions contemplated
herein, whether so obtained before or after the execution hereof, to the party
furnishing the same; (b) the confidentiality obligations of Section 4.5 shall
continue to be applicable; and (c) except as provided in this subsection, no
party shall have any liability for a breach of any representation, warranty,
agreement, covenant or other provision of this Agreement, unless such breach was
due to a willful or bad faith action or omission of such party or any
representative, agent, employee or independent contractor thereof.
ARTICLE 8
---------
SURVIVAL AND INDEMNIFICATION
----------------------------
8.1 SURVIVAL. The representations and warranties of each of the parties hereto
shall survive the Closing.
8.2 INDEMNIFICATION BY THE PURCHASER. The Purchaser agrees to indemnify the
Company and the Shareholders from and against any and all loss, liability, claim
or damage ("LOSSES") suffered or incurred by it by reason of (a) any untrue
representation of, or breach of warranty by, the Purchaser in any part of this
Agreement, provided, however, that no claim for indemnity may be made pursuant
to this subsection after the third anniversary of the date of Closing; (b) any
Assumed Liabilities; and (c) any nonfulfillment of any covenant, agreement or
undertaking of the Purchaser in any part of this Agreement which by its terms is
to remain in effect after the Closing and has not been specifically waived in
writing at the Closing by the party or parties hereof entitled to the benefits
thereof. The Purchaser shall reimburse the Company and the Shareholders for any
and all fees, costs and expenses of any kind arising out of or relating to
enforcement of the indemnification rights pursuant to this Section 8.2
(including, without limitation, any and all Legal Expenses) and, for purposes
hereof, such fees, costs and expenses shall be deemed to be Losses.
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<PAGE>
8.3 INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDERS -- UNTRUE REPRESENTATION
OR BREACH OF WARRANTY. The Company and each Shareholder, jointly and severally,
agree to indemnify the Purchaser from and against any and all Losses suffered or
incurred by it by reason of any untrue representation of, or breach of warranty
by the Company or any Shareholder in this Agreement, PROVIDED, HOWEVER, that no
claim for indemnity may be made pursuant to this subsection after the third
anniversary of the date of Closing. Notwithstanding anything to the contrary in
this subsection, no claim may be made under this subsection if it (or the
principal facts with respect to it) were known or reasonably should have been
known and the claim could have been asserted at a time when it would have
resulted in a required adjustment which would be reflected in the Closing
Balance Sheet. The Company and the Shareholders, jointly and severally, shall
reimburse the Purchaser for any and all fees, costs and expenses of any kind
arising out of or relating to enforcement of the indemnification rights pursuant
to this Section 8.3 (including, without limitation, any and all Legal Expenses)
and, for purposes hereof, such fees, costs and expenses shall be deemed to be
Losses.
8.4 INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDERS -- OTHER. The Company
and each Shareholder, jointly and severally, agree to indemnify the Purchaser
from and against all of the following: (a) any and Losses suffered or incurred
by it by reason of any nonfulfillment of any covenant, agreement or undertaking
of the Company or any Shareholder in this Agreement which by its terms is to
remain in effect after the Closing and has not been specifically waived in
writing at the Closing by the party or parties hereto entitled to the benefits
thereof; and (b) any obligations of the Company not specifically assumed by the
Purchaser in the Liabilities Undertaking. The Company and the Shareholders,
jointly and severally, shall reimburse the Purchaser for any and all fees, costs
and expenses of any kind arising out of or relating to enforcement of the
indemnification rights pursuant to this Section 8.4 (including, without
limitation, any and all Legal Expenses) and, for purposes hereof, such fees,
costs and expenses shall be deemed to be Losses.
8.5 BASKET AMOUNT. Notwithstanding anything in Sections 8.3 and 8.4 to the
contrary, the Purchaser shall not be entitled to any indemnification under such
sections if the aggregate amount of all damages thereunder is less than $25,000
(the "EXCEPTION AMOUNT"), but if the aggregate amount of all claims exceeds the
Exception Amount, then the Purchaser shall be entitled to full indemnification
of for only those damages exceeding the Exception Amount. The parties hereto do
not intend that the Exception Amount be deemed to be a definition of what is
"material" for any purpose in this Agreement.
8.6 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise for
indemnification hereunder, the party seeking indemnification (the "INDEMNIFIED
PARTY") shall promptly notify the party from whom indemnification is sought (the
"INDEMNIFYING PARTY") of the claim and, when known, the facts constituting the
basis for such claim. With respect to claims against the Shareholders, such
notice shall be to the Shareholders' Agent identified in Section 9.16 hereof and
such agent shall be treated as the agent for each Shareholder and is hereby
appointed as such by each Shareholder, with full power and authority to take all
action required or permitted by each Shareholder as an Indemnifying Party under
this subparagraph. In the case of any such claim for indemnification hereunder
resulting from or in connection with any claim or legal proceedings of a third
party, the notice to the Indemnifying Party shall specify, if known, the amount
or an estimate of the amount of the liability arising therefrom. The Indemnified
Party shall not settle or compromise any claim by a third party for which it is
39
<PAGE>
entitled to indemnification hereunder without the prior written consent of the
Indemnifying Party, which shall not be unreasonably withheld. If the
Indemnifying Party is of the opinion that the Indemnified Party is not entitled
to indemnification, or is not entitled to indemnification in the amount claimed
in such notice, it shall deliver, within twenty (20) days after the receipt of
such notice, a written objection to such claim and written specifications in
reasonable detail of the aspects or details objected to, and the grounds for
such objection. If the Indemnifying Party shall file timely written notice of
objection to any claim for indemnification, the validity and amount of such
claim shall be determined by arbitration pursuant to Section 9.12 hereof. If
timely notice of objection is not delivered or if a claim by an Indemnified
Party is admitted in writing by an Indemnifying Party or if an arbitration award
is made in favor of an Indemnified Party, the Indemnified Party, as a
non-exclusive remedy, shall have the right to set-off the amount of such claim
or award against any amount yet owed, whether due or to become due, by the
Indemnified Party or any subsidiary thereof to any Indemnifying Party by reason
of this Agreement or any agreement or arrangement or contract to be entered into
at the Closing.
8.7 CERTAIN LIMITATIONS. Notwithstanding anything to the contrary in this
Agreement, the aggregate amount of damages recoverable pursuant to the
provisions of this Article 8 by the Purchaser shall be limited to the aggregate
amount equal to one-hundred percent (100%) of the Purchase Price, as finally
adjusted hereunder (the "INDEMNIFICATION CAP").
8.8 SUBROGATION. In the event that the Indemnifying Party shall be obligated to
provide indemnification hereunder to a claimant (the "CLAIMANT"), the
Indemnifying Party shall, upon payment of such indemnity in full, be subrogated
to all rights of the Claimant with respect to the Losses to which such
indemnification relates.
8.9 TAX AND INSURANCE. All indemnification or reimbursement payments required
pursuant to this Agreement shall be made net of all tax and insurance benefits
actually received by the Indemnified Party. In the event that any claim for
indemnification asserted hereunder is, or may be, the subject of any insurance
coverage or other right to indemnification or contribution from any third
person, the Indemnified Party(ies) expressly agree that he (they) shall promptly
notify the applicable insurance carrier of any such claim or loss and tender
defense thereof to such carrier, and shall also promptly notify any potential
third party indemnitor or contributor which may be liable for any portion of
such losses or claims. The Indemnified Party(ies) agree to pursue, at the cost
and expense of the Indemnified Party, such claims diligently and to reasonably
cooperate, at the cost and expense of the Indemnified Party, with each
applicable insurance carrier and third party indemnitor or contributor.
8.10 UNDERTAKINGS. Prior to the assertion of any claims for indemnification
under this Agreement, the Indemnified Party shall utilize all reasonable
efforts, consistent with normal practices and policies and good commercial
practice, to mitigate any losses or damages subject to indemnification
hereunder.
40
<PAGE>
ARTICLE 9
---------
MISCELLANEOUS PROVISIONS
------------------------
9.1 EXPENSES. Each of the parties hereto shall bear its own costs, fees and
expenses in connection with the negotiation, preparation, execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby, including without limitation fees, commissions and expenses
payable to brokers, finders, investment bankers, consultants, exchange or
transfer agents, attorneys, accountants and other professionals, whether or not
the transactions contemplated herein is consummated.
9.2 AMENDMENT AND MODIFICATION. Subject to applicable Law, this Agreement may be
amended or modified by the parties hereto at any time prior to the Closing with
respect to any of the terms contained herein; provided, however, that all such
amendments and modifications must be in writing duly executed by all of the
parties hereto.
9.3 WAIVER OF COMPLIANCE; CONSENTS. Any failure of a party to comply with any
obligation, covenant, agreement or condition herein may be expressly waived in
writing by the party entitled hereby to such compliance, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. No single or partial exercise of a
right or remedy shall preclude any other or further exercise thereof or of any
other right or remedy hereunder. Whenever this Agreement requires or permits the
consent by or on behalf of a party, such consent shall be given in writing in
the same manner as for waivers of compliance.
9.4 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall entitle any
person or entity (other than a party hereto and his, her or its respective
successors and assigns permitted hereby) to any claim, cause of action, remedy
or right of any kind.
9.5 NOTICES. All notices, requests, demands and other communications required or
permitted hereunder shall be made in writing and shall be deemed to have been
duly given and effective:
(a) on the date of delivery, if delivered personally;
(b) on the earlier of the fourth (4th) day after mailing or the date of
the return receipt acknowledgment, if mailed, postage prepaid, by
certified or registered mail, return receipt requested;
(c) on the first business day after having been transmitted to a third
party providing delivery services in the ordinary course of business
which guarantees delivery on the next business day after such
transmittal (E.G., via Federal Express); or
(d) on the date of transmission, if sent by facsimile, telecopy,
telegraph, telex, e-mail or other similar telegraphic or electronic
communications equipment, PROVIDED THAT such transmission is confirmed
by prompt mailing (postage prepaid, by certified or registered mail,
return receipt requested) or by guaranteed overnight delivery:
41
<PAGE>
If to the Company or the Shareholders:
To: Leonard K. Olson
6700 South Paradise, Suite C
Las Vegas, NV 89119
Fax: (702) 263-4859
With a copy to: Ruyle, Catron & Lauer, LLP
8880 Rio San Diego Drive, Suite 1000
San Diego, CA 92108
Attn: Jon R. Lauer, Esq.
Fax: (619) 260-3595
E-mail: [email protected]
or to such other person or address as the Company or the Shareholders shall
furnish to the other parties hereto in writing in accordance with this
subsection.
If to the Purchaser:
To: Gateway Distributors, Ltd.
500 East Cheyenne Avenue
North Las Vegas, NV 89030
Attn: Richard A. Bailey
Chief Executive Officer
Fax: (702) 642-4491
With a copy to: Oppenheimer Wolff & Donnelly LLP
500 Newport Center Drive
Suite 700
Newport Beach, CA 92660
Attn: Marc A. Indeglia, Esq.
Fax: (949) 719-6020
or to such other person or address as the Purchaser shall furnish to the other
parties hereto in writing in accordance with this subsection.
If to any Shareholder or to the Shareholders' Representative, to the
address set forth for such Shareholder or the Shareholders' Representative on
the signature page hereof or to such other address as such Shareholder or the
Shareholders' Representative shall furnish to the other parties hereto in
writing in accordance with this subsection.
9.6 ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned (whether
voluntarily, involuntarily, by operation of law or otherwise) by any of the
parties hereto without the prior written consent of the other parties, PROVIDED
THAT the Company may assign this Agreement, and any of its rights and/or
obligations arising hereunder, in whole or in part, and from time to time,
42
<PAGE>
either (a) to the Shareholders in proportion with their ownership interest in
the Company, or (b) in connection with any dissolution and/or winding up of its
business and affairs after the Closing.
9.7 GOVERNING LAW. This Agreement and the legal relations among the parties
hereto shall be governed by and construed in accordance with the internal
substantive laws of the State of Nevada (without regard to the laws of conflict
that might otherwise apply) as to all matters, including without limitation
matters of validity, construction, effect, performance and remedies.
9.8 COUNTERPARTS. This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.9 HEADINGS. The table of contents and the headings of the sections and
subsections of this Agreement are inserted for convenience only and shall not
constitute a part hereof.
9.10 ENTIRE AGREEMENT. This Agreement, the Disclosure Schedule and the exhibits
and other writings referred to in this Agreement or in the Disclosure Schedule
or any such exhibit or other writing are part of this Agreement, together they
embody the entire agreement and understanding of the parties hereto in respect
of the transactions contemplated by this Agreement and together they are
referred to as "this Agreement" or the "AGREEMENT". There are no restrictions,
promises, warranties, agreements, covenants or undertakings, other than those
expressly set forth or referred to in this Agreement. This Agreement supersedes
all prior agreements and understandings between the parties with respect to the
transaction or transactions contemplated by this Agreement. Provisions of this
Agreement shall be interpreted to be valid and enforceable under applicable Law
to the extent that such interpretation does not materially alter this Agreement;
PROVIDED, HOWEVER, that if any such provision shall become invalid or
unenforceable under applicable Law such provision shall be stricken to the
extent necessary and the remainder of such provisions and the remainder of this
Agreement shall continue in full force and effect.
9.11 INJUNCTIVE RELIEF. It is expressly agreed among the parties hereto that
monetary damages would be inadequate to compensate a party hereto for any breach
by any other party of its covenants and agreements in Sections 4.3 and 4.5
hereof. Accordingly, the parties agree and acknowledge that any such violation
or threatened violation will cause irreparable injury to the other and that, in
addition to any other remedies which may be available, such party shall be
entitled to injunctive relief against the threatened breach of Sections 4.3 and
4.5 hereof or the continuation of any such breach without the necessity or
proving actual damages and may seek to specifically enforce the terms thereof.
9.12 ARBITRATION. With the sole exception of the injunctive relief contemplated
by Section 9.11, any controversy or claim arising out of or relating to this
Agreement, or the making, performance or interpretation thereof, including
without limitation alleged fraudulent inducement thereof, shall be settled by
binding arbitration in Las Vegas, Nevada by a panel of three arbitrators in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. Judgment upon any arbitration award may be entered in any court
having jurisdiction thereof and the parties consent to the jurisdiction of the
courts of the State of Nevada for this purpose.
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<PAGE>
9.13 LIST OF DEFINED TERMS. Reference is made to Exhibit 9.13 for a listing and
location of terms defined in this Agreement.
9.14 CERTAIN DEFINITIONS. For purposes of this Agreement,
"CLOSING BALANCE SHEET" shall mean the balance sheet of the Company as
of the Closing Date prepared in accordance with GAAP.
"COMPANY DELIVERED DOCUMENTS" shall mean all of the agreements,
certificates, instruments and other documents to be delivered by the
Company or the Shareholders pursuant to or in connection with this
Agreement.
"LEGAL EXPENSES" of a person shall mean any and all fees, costs and
expenses of any kind reasonably incurred by such person and its counsel
in investigating, preparing for, defending against or providing
evidence, producing documents or taking other action with respect to,
any threatened or asserted claim.
"MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence
which has a material negative impact on the condition (financial or
otherwise), businesses, results of operations or prospects of the
Company or the Purchaser, taken as a whole, as the case may be (and
going concern value, in the case of the Company), or the ability of the
Company or the Purchaser, as the case may be, to consummate the
transactions contemplated hereby, other than any such event, change or
occurrence resulting or arising from (i) general economic conditions;
or (ii) the loss of any customer as a result of the announcement or
consummation of the transactions contemplated hereby.
"PERMITTED LIENS" shall mean: (i) liens securing specified liabilities
or obligations shown on the Latest Balance Sheet with respect to which
no breach, violation or default exists; (ii) mechanics', carriers',
workers' and other similar liens arising in the ordinary course of
business; (iii) minor imperfections of title which do not impair the
existing use of the Assets; and (iv) liens for current taxes not yet
due and payable or being contested in good faith by appropriate
proceedings.
"PURCHASER DELIVERED DOCUMENTS" shall mean all of the agreements,
certificates, instruments and other documents to be delivered by the
Purchaser pursuant to or in connection with this Agreement.
"REQUIRED MAJORITY OF SHAREHOLDERS" shall mean the affirmative vote of
a majority of the Shareholders (regardless of the number of shares held
by any such Shareholder).
"1998 BALANCE SHEET" shall mean the balance sheet of the Company as of
December 31, 1998, a copy of which is attached hereto as part of
Section 2.7 of the Disclosure Schedule.
44
<PAGE>
9.15 SHAREHOLDERS' AGENT.
(a) APPOINTMENT AND AUTHORITY. The Shareholders, for themselves and
their personal representatives and other successors, hereby constitute
and appoint Leonard K. Olson (the "SHAREHOLDERS' AGENT"), with full
power and authority (including power of substitution), except as
otherwise expressly provided in this Agreement, in the name of and for
and on behalf of the Shareholders or in his own name as Shareholders'
Agent to take all actions required or permitted to be taken by the
Shareholders, or any of them, under this Agreement (including the
actions described in Section 8.6 relative to indemnification matters
and the giving and receiving of all reports, notices and consents, but
excluding any modification or amendment of this Agreement). The
authority conferred under this Section 9.15 is an agency coupled with
an interest, and all authority conferred hereby is irrevocable and not
subject to termination by the Shareholders or by any of them, or by
operation of law, whether by the death or incapacity of any
Shareholder, the termination of any trust or estate or the occurrence
of any other event. If any Shareholder should die or become
incapacitated, if any trust or estate should terminate or if any other
such event should occur, any action taken by the Shareholders' Agent
pursuant to this Section 9.15 shall be as valid as if such death or
incapacity, termination or other event had not occurred, regardless of
whether or not the Shareholders' Agent or the Purchaser shall have
received notice of such death, incapacity, termination or other event.
Any notice given to the Shareholders' Agent pursuant to Section 9.5
shall constitute effective notice to all Shareholders and the Purchaser
or any other person may rely on any notice, consent, election or other
communication received from the Shareholders' Agent as if it had been
received from all Shareholders on whose behalf it was given.
(b) SUCCESSORS. The Shareholders' Agent may resign upon 20 days' prior
written notice to the Purchaser and each other Shareholder. Upon the
death, resignation, removal or incapacity of the Shareholders' Agent,
the Shareholders shall appoint a successor Shareholders' Agent, by
written consent of the Required Majority of Shareholders, and any
successor Shareholders' Agent so appointed shall constitute the
Shareholders' Agent to the same effect as if originally named in this
Section 9.15. The Shareholders may remove the Shareholders' Agent at
any time upon the written consent of the Required Majority of
Shareholders. The Shareholders shall give the Purchaser written notice
of the appointment or removal of the Shareholders' Agent pursuant to
this Section 9.15, including a copy of the written consent of the
Required Majority of Shareholders relating thereto, as soon as
practicable after any such appointment or removal, and such appointment
or removal shall not be effective as against the Purchaser until such
notice shall have been given, unless the Purchaser shall have actual
knowledge of such appointment or removal.
45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
"PURCHASER" "COMPANY"
GATEWAY DISTRIBUTORS, LTD. TEAMUP INTERNATIONAL, INC.
BY: /s/ Richard A. Bailey BY: /s/ Leonard K. Olson
----------------------------- ----------------------------
Richard A. Bailey, Leonard K. Olson
President and President
Chief Executive Officer
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
"SHAREHOLDERS"
/s/ Leonard K. Olson
-------------------------------
Leonard K. Olson
/s/ William N. Goins, Jr.
-------------------------------
William N. Goins, Jr.
/s/ James L. Menning
-------------------------------
James L. Menning
/s/ Alan Lau
-------------------------------
Alan Lau
46
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
GATEWAY DISTRIBUTORS, LTD.
A NEVADA CORPORATION
Richard A. Bailey and Florian R. Ternes certify the following:
1. They are the President and Secretary, respectively, of Gateway
Distributors, Ltd., a Nevada corporation (the "Corporation").
2. The Articles of Incorporation of the Corporation shall be amended and
restated to read in full as follows:
FIRST: The name of the corporation is Gateway Distributors, Ltd.
SECOND: The name and street address of the corporation's resident agent
is Matthew Swan, 500 E. Cheyenne Avenue, North Las Vegas, Nevada, 89030.
THIRD: The nature of the business, or objects or purposes to be
transacted, promoted or carried on by the corporation is to engage in any lawful
activity under Nevada law.
FOURTH: The total number of shares that may be issued by the
corporation is Twenty-One Million (21,000,000) shares, of which Twenty Million
(20,000,000) shares with a par value of $.001 per share, amounting in the
aggregate to Twenty Thousand Dollars ($20,000) shall be designated "Common
Stock," and of which One Million (1,000,000) shares with a par value of $.001
per share, amounting in the aggregate to One Thousand Dollars ($1,000) shall be
designated "Preferred Stock." The Preferred Stock may be issued from time to
time in one or more series. The board of directors is authorized to fix the
number of shares of any series of Preferred Stock, to determine the designation
of any such series and to determine or alter the rights, preferences,
privileges, qualifications, limitations and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the board of directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
FIFTH: The governing board of this corporation shall be known as
directors, and the number of directors may from time to time be increased or
decreased in such manner as shall be provided by the bylaws of this corporation,
provided that the number of directors shall not be reduced to less than two (2).
Until otherwise changed pursuant to the bylaws of this corporation, the
authorized number of directors shall be two (2).
SIXTH: Cumulative voting shall not be permitted by the corporation.
<PAGE>
SEVENTH: The name and post office box or street address of the
incorporator who signed the articles of incorporation is as follows:
Sherry A. Craig
1013 Centre Road
Wilmington, Delaware 19805
EIGHTH: The corporation shall have perpetual existence.
NINTH: In furtherance, and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized as follows:
(i) Subject to the bylaws, if any, adopted by the stockholders, to
make, alter or amend the bylaws of the corporation.
(ii) To fix the amount to be reserved as working capital over and above
its capital stock paid in, to authorize and cause to be executed mortgages and
liens upon the real and personal property of this corporation.
(iii) By resolution passed by a majority of the whole board, to
designate one or more committees, each committee to consist of one or more of
the directors of the corporation, which, to the extent provided in the
resolution or in the bylaws of the corporation, shall have and may exercise the
powers of the board of directors in the management of the business and affairs
of the corporation, and may authorize the seal of the corporation to be affixed
to all papers which may require it. Such committee or committees shall have such
name and names as may be stated in the bylaws of the corporation or as may be
determined from time to time by resolution adopted by the board of directors.
(iv) When and as authorized by the affirmative vote of stockholders
holding stock entitling them to exercise at least a majority of the voting power
given at a stockholders' meeting called for that purpose, or when authorized by
the written consent of the holders of at least a majority of the voting stock
issued and outstanding, the board of directors shall have power and authority at
any meeting to sell, lease or exchange all of the property and assets of the
corporation, including its good will and its corporate franchises, upon such
terms and conditions as its board of directors deem expedient and for the best
interest of the corporation.
TENTH: Meetings of stockholders may be held outside the State of
Nevada, if the bylaws so provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of Nevada
at such place or places as may be designated from time to time by the board of
directors or in the bylaws of the corporation.
ELEVENTH: The personal liability of a director or officer to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty, for any action taken or for any failure to take any action, as a director
or officer, shall be eliminated to the fullest extent permissible under Nevada
law except for: (a) acts or omissions which involve intentional misconduct,
fraud, infliction of harm on the corporation or its stockholders or a knowing
violation of criminal law; (b) the payment of distributions in violation of
Section 78.300 of the Nevada Revised Statutes; or (c) the amount of a financial
benefit received by a director to which he is not entitled.
<PAGE>
If the Nevada Revised Statutes are hereinafter amended to authorize the
further elimination or limitation of the liability of a director or officer,
then the liability of a director or officer of the corporation shall be
eliminated or limited to the fullest extent permitted by the Nevada Revised
Statutes, as so amended.
Any repeal or modification of the foregoing provisions of Article
ELEVENTH by the stockholders of the corporation shall not adversely affect any
right or protection of a director or officer of the corporation existing prior
to the date when such repeal or modification becomes effective.
TWELFTH: This corporation reserves the right to amend, alter, change or
repeal any provision contained in the articles of incorporation, in the manner
now or hereafter prescribed by statute, or by the articles of incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
4. These Amended and Restated Articles of Incorporation have been duly
approved by a Unanimous Written Consent of the Board of Directors of
the Corporation effective June 16, 1999.
5. The number of shares of the Corporation outstanding and entitled to
vote on the these Amended and Restated Articles of Incorporation is
5,142,714. These amendments have been duly approved by a majority vote
of the Corporation's stockholders holding at least a majority of the
issued and outstanding shares of capital stock of the Corporation
entitled to vote, by resolutions duly adopted by Joint Written Consent
of the Board of Directors and a Majority of Stockholders effective June
16, 1999.
THE UNDERSIGNED, hereby declare and certify that the matters set forth
in the foregoing Certificate are true and correct to their knowledge and that
this Certificate was executed on June __, 1999, at North Las Vegas, Nevada.
/s/ Richard A. Bailey
------------------------------
Richard A. Bailey, President
/s/ Florian R. Ternes
------------------------------
Florian R. Ternes, Secretary
<PAGE>
STATE OF NEVADA )
) ss.
COUNTY OF CLARK )
On June __, 1999, before me, _______________, personally appeared
Richard A. Bailey and Florian R. Ternes, personally known to me (or proved to me
on the basis of satisfactory evidence) to be the persons whose names are
subscribed to the within instrument and acknowledged to me that they executed
the same in their respective authorized capacity, and that by their respective
signatures on the instrument the person or the entity upon behalf of which the
persons acted, executed the instrument.
WITNESS my hand and official seal.
-------------------------
Notary Public
(Seal)
BYLAWS
OF
GATEWAY DISTRIBUTORS, LTD.
ARTICLE I
OFFICES
The principal office of the Corporation in the State of Nevada shall be
located in the City of North Las Vegas, County of Clark. The Corporation may
have such other offices, either within or without the State of Nevada as the
Board of Directors may designate or as the business of the Corporation may
require from time to time.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be
held on the 30th day in the month of July in each year, beginning with the year
1993 at the hour of 12 o'clock p.m., for the purpose of electing Directors and
for the transaction of such other business as may come before the meeting. If
the day fixed for the annual meeting shall be a legal holiday in the State of
Nevada, such meeting shall be held on the next succeeding business day. If the
election of Directors shall not be held on the day designated herein for any
annual meeting of the shareholders, or at any adjournment thereof, the Board of
Directors shall cause the election to be held at a special meeting of the
shareholders entitled to vote as soon thereafter as conveniently may be.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the President or by the Board of Directors, and shall be called by the President
at the request of the holders of not less than ten percent (10%) of all the
outstanding shares of the Corporation entitled to vote at the meeting.
SECTION 3. PLACE OF MEETING. The Board of Directors may designate any
place, either within or without the State of Nevada, unless otherwise prescribed
by statute, as the place of meeting for any annual meeting or for any special
meeting. A waiver of notice signed by all shareholders entitled to vote at a
meeting may designate any place, either within or without the State of Nevada,
unless otherwise prescribed by statute, as the place for the holding of such
meeting. If no designation is made, the place of meeting shall be the principal
office of the Corporation.
SECTION 4. NOTICE OF MEETING. Written notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall unless otherwise prescribed by statute,
be delivered not less than two (2) nor more than ten (10) days before the date
-1-
<PAGE>
of the meeting, to each shareholder of record entitled to vote at such meeting.
If mailed, such notice shall be deemed to be delivered when deposited in the
United States Mail, addressed to the shareholder at his address as it appears on
the stock transfer books of the Corporation, with postage thereon prepaid.
SECTION 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORDS. For the purpose
of determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors of the Corporation may provide
that the stock transfer books shall be closed for a stated period, but not to
exceed in any case fifty (50) days. If the stock transfer books shall be closed
for the purpose of determining shareholders entitled to notice of or to vote at
a meeting of shareholders, such books shall be closed for at least thirty (30)
days immediately preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than thirty (30) days and, in case of a meeting of shareholders, not less than
sixty (60) days, prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this section, such determination shall apply to any adjournment thereof.
SECTION 6. VOTING LISTS. The officer or agent having charge of the stock
transfer books for shares of the corporation shall make a complete list of the,
shareholders entitled to vote at each meeting of shareholders or any adjournment
thereof arranged in alphabetical order, with the address of and the number of
shares held by each. Such list shall be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any shareholder
during the whole time of the meeting for the purposes thereof.
SECTION 7. QUORUM. A majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. The shareholders present at a duly organized meeting may continue to
transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum. No action by the shareholders shall be
valid unless a majority of all the outstanding shares entitled to vote have
consented to the action.
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<PAGE>
SECTION 8. PROXIES. At all meetings of shareholders, a shareholder may vote
in person or by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Such proxy shall be filed with the secretary of the
Corporation before or at the time of the meeting. A meeting of the Board of
Directors may be had by means of a telephone conference or similar
communications equipment by which all persons participating in the meeting can
hear each other, and participation in a meeting under such circumstances shall
constitute presence at the meeting.
SECTION 9. VOTING OF SHARES. Each outstanding share entitled to vote shall
be entitled to one vote upon each matter submitted to a vote at a meeting of
shareholders.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by such officer, agent or proxy as the
Bylaws of such corporation may prescribe or, in the absence of such provision,
as the Board of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof into his name, if authority so to so be
contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledges, and
thereafter the pledges shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the Corporation shall not be voted,
directly or indirectly, at any meeting, and shall not be counted in determining
the total number of outstanding shares at any given time.
SECTION 11. INFORMAL ACTION BY SHAREHOLDERS. Unless otherwise provided by
law, any action required to be taken at a meeting of the shareholders, or any
other action which may be taken at a meeting of the shareholders, may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof.
-3-
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors.
SECTION 2. NUMBER TENURE AND QUALIFICATIONS. The number of directors of the
Corporation shall be fixed as set forth in the Articles of Incorporation. Each
director shall hold office until the next annual meeting of shareholders and
until his successor shall have been elected and qualified or until his early
resignation or death.
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw immediately after, and at the
same place as the annual meeting of shareholders. The Board of Directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without notice other than such resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by or at the request of the President or any one director. The person
or persons authorized to call special meetings of the Board of Directors may fix
the place for holding any special meeting of the Board of Directors called by
them.
SECTION 5. NOTICE. Notice of any special meeting shall be given at least
two (2) days previous thereto by written notice delivered personally or mailed
to each director at his business address, or by confirmed air courier. If
mailed, such notice shall be deemed to be delivered three (3) days after being
deposited in the United States Mail so addressed, with postage thereon prepaid.
If notice be given by confirmed air courier, such notice shall be deemed to be
delivered upon the earlier to occur of the date upon which it is actually
received by the addressee or the business day upon which made at such address,
as confirmed by the air courier (or, if the date of such delivery is not a
business day, the next succeeding business day). Any directors may waive notice
of any meeting. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 6. QUORUM. A majority of the number of directors fixed by the
Articles of Incorporation shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice.
SECTION 7. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
-4-
<PAGE>
SECTION 8. ACTION WITHOUT A MEETING. Any action that may be taken by the
Board of Directors at a meeting may be taken without a meeting if a consent in
writing, setting forth the action so to be taken, shall be signed before such
action by all of the directors.
SECTION 9. VACANCIES. Vacancies, including those resulting from an increase
in the number of directors, shall be filled as set forth in the Articles of
Incorporation.
SECTION 10. COMPENSATION. By resolution of the Board of Directors, each
director may be paid his expenses, if any, of attendance at each meeting of the
Board of Directors, and may be paid a stated salary as director or a fixed sum
for attendance at each meeting of the Board of Directors or both. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
SECTION 11. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the Secretary
of the meeting before the adjournment thereof, or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The officers of the Corporation shall be a President,
one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall be
elected by the Board of Directors. Such other officers and assistant officers as
may be deemed necessary may be elected or appointed by the Board of Directors,
including a Chairman of the Board. In its discretion, the Board of Directors may
leave unfilled for any such period as it may determine any office except those
of President and Secretary. Any two or more offices may be held by the same
person. Officers may be directors or shareholders of the Corporation.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation to
be elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after each annual
meeting of the shareholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as conveniently may
be. Each officer shall hold office until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall resign
or shall have been removed in the manner hereinafter provided.
SECTION 3. REMOVAL. Any officer or agent may be removed by the Board of
Directors whenever, in its judgment, the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
-5-
<PAGE>
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights, and such appointment shall
be terminable at will.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 5. PRESIDENT. The President shall be the principal executive
officer of the Corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the Corporation. He shall, when present, preside at all meetings of
the shareholders and of the Board of Directors, unless there is a Chairman of
the Board, in which case the Chairman shall preside. He may sign, with the
Secretary or any other proper officer of the Corporation thereunto authorized by
the Board of Directors, certificates for shares of the Corporation, any deeds,
mortgages, bonds, contracts, or other instruments which the Board of Directors
has authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 6. VICE PRESIDENT. In the absence of the President or in event of
his death, inability or refusal to act, the Vice President shall perform the
duties of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Vice President shall
perform such other duties as from time to time may be assigned to him by the
President or by the Board of Directors. If there is more than one Vice
President, each Vice President shall succeed to the duties of the President in
order of rank as determined by the Board of Directors. If no such rank has been
determined, then each Vice President shall succeed to the duties of the
President in order of date of election, the earliest date having the first rank.
SECTION 7. SECRETARY. The Secretary shall: (a) keep the minutes of the
proceedings of the shareholders and of the Board of Directors in one or more
minute books provided for that purpose; (b) see that all notices are duly given
in accordance with the provisions of these Bylaws or as required by law; (c) be
custodian of the corporate records and of the seal of the Corporation and see
that the seal of the Corporation is affixed to all documents, the execution of
which on behalf of the Corporation under its seal is duly authorized; (d) keep a
register of the post office address of each shareholder which shall be finished
to the Secretary by such shareholder; (e) sign with the President certificates
for shares of the Corporation, the issuance of which shall have been authorized
by resolution of the Board of Directors; (f) have general charge of the stock
transfer books of the Corporation; and (g) in general perform all duties
incident to the office of the Secretary and such other duties as from time to
time may be assigned to him by the President or by the Board of Directors.
-6-
<PAGE>
SECTION 8. TREASURER. The Treasurer shall: (a) have charge and custody of
and be responsible for all funds and securities of the Corporation; (b) receive
and give receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with the provisions of Article VI of these Bylaws; and (c) in general perform
all of the duties incident to the office of Treasurer and such other duties as
from time to time may be assigned to him by the President or by the Board of
Directors. If required by the Board of Directors, the Treasurer shall give a
bond for the faithful discharge of his duties in such sum and with such sureties
as the Board of Directors shall determine.
SECTION 9. SALARIES. Salaries of the officers shall be fixed from time to
time by the Board of Directors, and no officer shall be prevented from receiving
such salary by reason of the fact that he is also a director of the Corporation.
ARTICLE V
INDEMNITY
The Corporation shall indemnify its directors, officers and employees as
follows:
(a) Every director of the Corporation shall be indemnified by the
Corporation against all expenses and liabilities, including counsel
fees, reasonably incurred by or imposed upon him in connection with
any proceeding to which he may be made a party, or in which he may
become involved, by reason of his being or having been a director of
the Corporation or is or was serving at the request of the Corporation
as a director of the corporation, partnership, joint venture, trust or
enterprise, or any settlement thereof, whether or not he is a director
at the time such expenses are incurred, except in such cases wherein
the director is adjudged guilty of willful misfeasance or malfeasance
in the performance of his duties; provided that in the event of a
settlement the indemnification herein shall apply only when the Board
of Directors approves such settlement and reimbursement as being for
the best interests of the Corporation.
(b) The Corporation shall provide to any person who is or was a
director of the Corporation or is or was serving at the request of the
Corporation as a director of the corporation, partnership, joint
venture, trust or enterprise, the indemnity against expenses of suit,
litigation or other proceedings which is specifically permissible
under applicable law.
-7-
<PAGE>
(c) The Board of Directors may, in its discretion, direct the purchase
of liability insurance by way of implementing the provisions of this
Article V.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the Corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution of the Board of Directors. Such authority may be general or
confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation, shall be signed by such officer or officers, agent or agents of
the Corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of the
Corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the President and by the
Secretary or by such other officers authorized by law and by the Board of
Directors so to do, and sealed with the corporate seal. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the person to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered on the stock transfer
books of the Corporation. All certificates surrendered to the Corporation for
transfer shall be canceled and no new certificate shall be issued until the
former certificate for a like number of shares shall have been surrendered and
canceled, except that in case of a lost, destroyed or mutilated certificate, a
new one may be issued therefor upon such terms and indemnity to the Corporation
as the Board of Directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of the Corporation shall
be made only on the stock transfer books of the Corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
-8-
<PAGE>
attorney duly executed and filed with the Secretary of the Corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes. Provided, however, that
upon any action undertaken by the shareholders to elect S Corporation status
pursuant to Section 1362 of the Internal Revenue Code and upon any shareholders
agreement thereto restricting the transfer of said shares so as to disqualify
said S Corporation status, said restriction on transfer shall be made a part of
the bylaws so long as said agreement is in force and effect.
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the 1st day of January
and end on the 31st day of December of each year.
ARTICLE IX
DIVIDENDS
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends on its outstanding shares in the manner and upon the terms
and conditions provided by law and its Articles of Incorporation.
ARTICLE X
CORPORATE SEAL
The Board of Directors shall provide a corporate seal which shall be
circular in form and shall have inscribed thereon the name of the Corporation
and the state of incorporation and the words, "Corporate Seal".
ARTICLE XI
WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is required to be
given to any shareholder or director of the Corporation under the provisions of
these Bylaws or under the provisions of the Articles of Incorporation or under
the provisions of the applicable Business Corporation Act, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice.
-9-
<PAGE>
ARTICLE XII
AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board of Directors at any regular or special meeting of the Board
of Directors.
The above Bylaws are certified to have been adopted by the Board of
Directors of the Corporation on the 24th day of June, 1996.
/S/ Matthew Swan
------------------------------
Secretary
-10-
AMENDMENT
TO
BYLAWS
OF
GATEWAY DISTRIBUTORS, LTD.
A NEVADA CORPORATION
Pursuant to Joint Unanimous Written Consent of the Board of Directors
of Gateway Distributors, Ltd., a Nevada corporation (the "Corporation"), dated
as of May 27, 1999, and in accordance with the authority provided to Board of
Directors in ARTICLE XII of the Corporation's Bylaws, Section 11 of ARTICLE II
of the Bylaws of the Corporation is amended in its entirety to read as follows:
"Section 8. Informal Action by Stockholders. Unless otherwise provided
by law, any action required or permitted to be taken at a meeting of the
stockholders may be taken without a meeting if a written consent thereto is
signed by stockholders holding at least a majority of the voting power, except
that if a different proportion of voting power is required for such an action at
a meeting, then that proportion of written consents is required."
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
+--------+ +--------+
| NUMBER | | SHARES |
| | | |
+--------+ +--------+
GATEWAY DISTRIBUTORS, LTD.
COMMON STOCK
21,000,000 AUTHORIZED SHARES $.001 PAR VALUE NON-ASSESSABLE
This Certifies That CUSIP 367597 1 01
[name]
is the Registered Owner of
[# of shares]
Fully Paid and Non-Assessable Shares of Common Stock of $.001 Par Value Each of
GATEWAY DISTRIBUTORS, LTD.
Transferable on the books of the Corporation in person or by attorney upon
surrender of this Certificate duly endorsed or assigned. This Certificate and
the shares represented hereby are subject to the laws of the State of Nevada,
and to the Certificate of Incorporation and Bylaws of the Corporation, as now or
hereafter amended. This Certificate is not valid until countersigned by the
Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[GATEWAY DISTRIBUTORS, LTD
/a/ Florian R. Ternes CORPORATE SEAL /s/ Richard A. Bailey
- ---------------------- HERE] ---------------------
Secretary President
EXHIBIT A
$__________ ____________, 1998
GATEWAY DISTRIBUTORS, LTD.
[FORM OF] 12% CONVERTIBLE NOTE ("Note")
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REQUIREMENTS FOR SUCH REGISTRATION
FOR NONPUBLIC OFFERINGS. ACCORDINGLY, THE SALE, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES EVIDENCED HEREBY
OR ANY PORTION THEREOF OR INTEREST THEREIN MAY NOT BE ACCOMPLISHED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT OR AN
OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY TO
THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
1. OBLIGATION. For value received, GATEWAY DISTRIBUTORS, LTD., a Nevada
corporation ("Company"), promises to pay to ______________________ or order
("Holder") the Principal Amount and Interest (both as defined below) in the
manner and upon the terms and conditions set forth herein (the "Obligation").
2. AMOUNT AND PAYMENT OF PRINCIPAL AMOUNT. The principal amount
("Principal Amount") of this Note is _____________ Dollars ($____________). The
entire unpaid Principal Amount shall be due and payable on on on the first day
the Company's Common Stock trades publicly or earlier in accordance with Section
7 hereof.
3. AMOUNT AND PAYMENT OF INTEREST. This Note shall bear interest
("Interest") on the unpaid Principal Amount at the rate of twelve percent (12%)
per annum from and after the date hereof. Interest shall accrue and be ALL due
and payable on on the first day the Company's Common Stock trades publicly or
earlier in accordance with Section 7 hereof.
4. MANNER AND PLACE OF PAYMENT. Payments of the Principal Amount and
Interest shall be made in lawful money of the United States of America.
Principal and Interest are payable at the principal office of the Holder or at
such other place as the Holder hereof shall have designated to the Company in
writing. At the option of the Company, payments may be made by check mailed to
Holder. The Note may be prepaid only upon thirty (30) days prior written notice
to the Holder.
<PAGE>
5. CONVERSION.
(a) IN GENERAL. The Principal Amount of and Interest on this
Note shall be convertible, at the option of the Holder, into shares of the
Company's common stock, $.001 par value ("Common Stock"), subject to and upon
the terms and conditions of this Note. The Note shall be convertible into Common
Stock of the Company at $.80 per share. The Holder shall have the right to elect
to convert the Principal Amount and Interest into shares of Common Stock at any
time prior to payment of this Note.
(b) CONVERSION RATIO. Subject to the adjustment provisions of
Section 7, upon conversion the Holder shall be entitled to convert the Principal
Amount and Interest into shares of Common Stock ("Conversion Shares") at the
rate of one Conversion Share for each $.80 of Principal Amount and Interest
converted. Thus, the initial conversion price ("Conversion Price") will be $.80
per Conversion Share.
(c) PROCEDURE FOR CONVERSION. In order to convert pursuant to
Section 5(a) above, the Holder shall surrender this Note and execute and deliver
to the Company a Notice of Election to Convert ("Election Notice") in the form
attached as Schedule 1 hereto. Within fifteen (15) days after the receipt of the
Election Notice, the Company shall issue and shall deliver to the Holder
certificates for the number of Conversion Shares issuable upon such conversion.
All Conversion Shares issued shall be imprinted with the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REQUIREMENTS FOR SUCH REGISTRATION
FOR NONPUBLIC OFFERINGS. ACCORDINGLY, THE SALE, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES EVIDENCED HEREBY OR
ANY PORTION THEREOF OR INTEREST THEREIN MAY NOT BE ACCOMPLISHED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT OR AN
OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY TO
THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED."
(d) EFFECTIVE DATE OF CONVERSION. Such conversion shall be
deemed to have been effected on the date the Conversion Shares are actually
issued ("Effective Date of Conversion"). The person(s) in whose name(s) any
certificate for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder(s) of record as of the Effective Date
of Conversion. The Company shall issue a new Note evidencing the Principal
Amount which has not been converted in the event of a partial conversion.
<PAGE>
6. CALL OF NOTE FOR MANDATORY CONVERSION.
(a) IN GENERAL. The Company shall have the right to call the
Note for conversion, as a whole, or in part substantially pro rata, at the
Conversion Price of $.80 per Conversion Share when the average market price of
the Common Stock shall have exceeded $1.00 per share for any consecutive ten
(10) day period.
(b) PROCEDURE FOR CALL OF NOTE. Notice of the call shall be
mailed to the Holder by first-class mail, postage prepaid not less than thirty
(30) nor more than ninety (90) days prior to the date set by the Company's Board
of Directors for call. Within fifteen (15) days of the call date, the Holder
shall surrender this Note and as promptly thereafter as practicable the Company
shall issue and deliver to the Holder certificates for the number of Conversion
Shares issuable upon such conversion.
(c) DETERMINATION OF MARKET PRICE. For these purposes, the
market price of the Common Stock shall be determined as the average of the
reported closing bid and asked price, as reported by NASDAQ, the "pink sheets"
or other equivalent reporting service, so long as the Common Stock is quoted on
NASDAQ, the "pink sheets" or other equivalent reporting service, and, if the
Common Stock is traded on a national securities exchange (the New York or
American Stock Exchanges), shall be determined as the last reported sale price
on the primary exchange on which the Common Stock is traded.
7. ADJUSTMENTS TO CONVERSION PRICE AND NUMBER OF CONVERSION SHARES. The
Conversion Price and the number of Conversion Shares issuable upon conversion
shall be subject to adjustment from time to time as follows:
(a) In case the shares of Common Stock at any time outstanding
shall be subdivided into a greater or combined into a lesser number of shares of
Common Stock or in case shares of Common Stock shall be issued as a stock
dividend, the Conversion Price and the number of Conversion Shares shall be
decreased or increased, as the case may be, to an amount which shall bear the
same relation to the Conversion Price and the number of Conversion Shares,
respectively, in effect immediately prior to such subdivision or combination or
stock dividend as the total number of shares of Common Stock outstanding
immediately prior to such subdivision or combination or stock dividend shall
bear to the total number of shares of Common Stock outstanding immediately after
such subdivision or combination or stock dividend. For example, if the
Conversion Price currently in effect is $.80 per share and the Common Stock
outstanding is split on a two for one basis, the Conversion Price is decreased
to $.40 per share and the number of Conversion Shares is doubled.
(b) In case of any capital reorganization, or of any
reclassification of the Common Stock, of the Company or in case of the
consolidation of the Company with or the merger of the Company into any other
corporation (other than a consolidation or merger in which the Company is the
continuing corporation) or of the sale of the properties and assets of the
Company as, or substantially as, an entirety to any other corporation, this Note
shall after such capital reorganization, reclassification of Common Stock,
consolidation, merger or sale be exercisable, upon the terms and conditions
specified herein, for the number of shares of stock and warrants or other
<PAGE>
securities or property of the Company, or of the corporation resulting from such
consolidation or surviving such merger or to which such sale shall be made, as
the case may be, to which the Conversion Shares issuable (at the time of such
capital reorganization, reclassification of Common Stock, consolidation, merger
or sale) upon exercise of this Note would have been entitled upon such capital
reorganization, reclassification of Common Stock, consolidation, merger or sale
if such exercise had taken place; and in any such case, if necessary, the
provisions set forth in this Section 7 with respect to the rights and interests
thereafter of the Holder shall be appropriately adjusted so as to be applicable,
as nearly as may reasonably be, to any shares of stock or warrants or other
securities or property thereafter deliverable on the conversion of this Note.
The subdivision or combination of shares of Common Stock at any time outstanding
into a greater or lesser number of shares of Common Stock shall not be deemed to
be a reclassification of the Common Stock of the Company for the purposes of
this Section 7(b).
(c) In case after the date hereof, the Company shall declare a
dividend upon shares of Common Stock payable otherwise than out of retained
earnings or otherwise than in shares of Common Stock or in stock or obligations
directly or indirectly convertible into or exchangeable for Common Stock, the
Holder, upon conversion of this Note in whole or in part, shall be entitled to
purchase, in addition to the Conversion Shares deliverable upon such conversion
against payment of the Conversion Price therefor, but without further
consideration, the cash, stock or other securities or property which the Holder
of this Note would have received as dividends (otherwise than out of such
retained earnings and otherwise than in shares of Common Stock or in such
convertible or exchangeable stock or obligations), if continuously since the
date of this Note such Holder (i) had been the holder of record of the number of
Conversion Shares deliverable upon such conversion and (ii) had retained all
dividends in stock or other securities (other than shares of Common Stock or
such convertible or exchangeable stock or obligations) paid or payable in
respect of said number of Conversion Shares or in respect of any such stock or
other securities so paid or payable as such dividends. For purposes of this
Section 7(c), a dividend payable otherwise than in cash shall be considered to
be payable out of retained earnings only to the extent that such retained
earnings shall be charged in an amount equal to the fair value of such dividend
as determined by the Board of Directors.
(d) Anything in this Section 7 to the contrary notwithstanding,
the Company shall not be required, except as hereinafter provided in this
Section 7(d), to make any adjustment of the Conversion Price in any case in
which the amount by which such Conversion Price would be reduced in accordance
with the foregoing provisions of Section 7 would be less than five cents ($.05)
per Conversion Share, but in such case any adjustment that would otherwise be
required then to be made will be carried forward and made at the time of and
together with the next subsequent adjustment which, together with any and all
such adjustments so carried forward, shall amount to five cents ($.05) or more
per Conversion Share. In the event of any subdivision or combination of shares
of Common Stock said amount of five cents ($.05) (as theretofore decreased or
increased by any previous subdivision or combination) shall be proportionately
decreased or increased.
<PAGE>
(e) Whenever there is an adjustment in the Conversion Price as
provided herein, the Company shall promptly cause a notice stating that such
adjustment has been effected and stating the Conversion Price then in effect and
the number of Conversion Shares issuable upon conversion as a result of such
adjustment to be sent by first-class mail, postage prepaid, to each Holder.
(f) Irrespective of any adjustments or changes in the number of
Conversion Shares actually issuable upon conversion of this Note, this Note
shall continue to express the number of Conversion Shares issuable thereunder as
expressed in this Note when initially issued.
8. EVENTS OF DEFAULT. The following shall each constitute an "Event of
Default" under this Note: (i) default in the payment when due of an installment
of Principal Amount or Interest under this Note and such default shall continue
for a period of ten (10) days; and (ii) any of the following events of
bankruptcy or insolvency: (A) the Company shall file a voluntary bankruptcy or
reorganization petition under the provisions of the Federal Bankruptcy Act, any
other bankruptcy or insolvency law or any other similar statute applicable to
the Company ("Bankruptcy Laws"), (B) the Company shall consent to the filing of
any bankruptcy or reorganization petition against it under any Bankruptcy Law,
(C) the Company shall file a petition or answer or consent seeking relief or
assisting in seeking relief for the Company in a proceeding under any Bankruptcy
Law or any answer admitting the material allegations of a petition filed against
it in such a proceeding, (D) the Company or its directors or shareholders shall
take action looking to the dissolution or liquidation of the Company, (E) the
Company shall make an assignment for the benefit of its creditors, (F) the
Company shall admit in writing its inability to pay its debts generally as they
become due, (G) the Company shall consent to the appointment of a receiver,
trustee, or liquidator of it or of any substantial part of its property, (H) by
the order of a court of competent jurisdiction, a receiver, liquidator or
trustee of the Company or of any substantial part of its property shall be
appointed and such receiver, liquidator or trustee shall not have been
discharged within a period of thirty (30) days, (I) by decree of such a court,
the Company shall be adjudicated bankrupt or insolvent or any substantial part
of the property of the Company shall have been sequestered and such decree shall
have continued undischarged and unstayed for a period of thirty (30) days after
the entry thereof, or (J) an involuntary bankruptcy reorganization petition
pursuant to any Bankruptcy Law shall be filed against the Company (and, in the
case of any such petition filed pursuant to any provision of a statute which
requires the approval of such petition by a court, shall be approved by such a
court) and shall not be dismissed within thirty (30) days after such filing.
9. DEMAND UPON EVENT OF DEFAULT. Upon the occurrence of an Event of
Default specified in Section 8 above, all the Principal Amount and Interest of
this Note shall become immediately due and payable, without further presentment,
notice or demand for payment.
10. EXPENSES OF ENFORCEMENT. The Company agrees to pay all reasonable
costs and expenses, including without limitation reasonable attorneys' fees, as
a court of competent jurisdiction shall award, which Holder shall incur in
connection with any legal action or legal proceeding commenced for the
collection of this Note or the exercise, preservation or enforcement of Holder's
rights and remedies thereunder.
11. CUMULATIVE RIGHTS AND REMEDIES. All rights and remedies of Holder
under this Note shall be cumulative and not alternative and shall be in addition
to all rights and remedies available to Holder under applicable law.
<PAGE>
12. GOVERNING LAW. This Note shall be governed by and interpreted and
construed in accordance with the laws of the State of Nevada.
13. LIMITATIONS. No holder of this Note shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the conversion
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Holder of this Note, as such, any of the rights of a shareholder
of the Company or any right to vote for the election of directors or upon any
matters submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance, or otherwise) or to receive
dividends or subscription rights or otherwise until this Note shall have been
converted and the Common Stock issuable upon the conversion hereof shall have
become deliverable as provided herein. This limitation does not apply to or in
any way restrict the Holder's rights as a shareholder in connection with any
shares of Common Stock otherwise held by the Holder.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
delivered at North Las Vegas, Nevada, by its duly authorized officer as of the
day and year first above written.
GATEWAY DISTRIBUTORS, LTD.,
a Nevada corporation
By:
---------------------------------
Richard A. Bailey, President
<PAGE>
[SCHEDULE 1 TO CONVERTIBLE NOTE]
NOTICE OF ELECTION TO CONVERT
TO: GATEWAY DISTRIBUTORS, LTD. DATE:__________
The Undersigned hereby elects irrevocably to convert $__________ of
principal and interest due and payable on the 12% Convertible Note dated
____________, 1998 ("Note") into Share(s) of the Company (at the rate of $.80
per Share). Please issue the Share(s) issuable as a result thereof in the name
of:
____________________________________
(Name)
____________________________________
(Address)
____________________________________
(Taxpayer Number)
and if said amount shall not be all the principal and interest due under the
Note, issue a new Note for the balance to the undersigned at the address stated
below.
Name of Holder:______________________________________
(Please Print)
Signature:___________________________________________
(Address)
NOTICE: The signature to the form to exercise must correspond with the
name of the holder as written upon the face of the Note in every particular
without alteration or enlargement or any change whatsoever.
EMPLOYMENT AGREEMENT
This Employment Agreement dated May 1, 1999 is entered into by and between
Gateway Distributors LTD dab The Right Solution. (the "Company") a Nevada
Corporation, and Richard A. Bailey (the "Executive" and, individually a "Party"
and, collectively, the "Parties").
The Company wishes to assure itself of the continued services of the Executive,
and the Executive is willing to continue employment with the Company on a
full-basis, and upon the other terms and conditions herein provided.
In consideration of the mutual covenants contained herein, the Parties agree as
follows:
1. Employment - The Company agrees to employee the executive, and the Executive
agrees to remain in the employ of the Company under the terms and conditions
herein provided.
2. Position - During his employment hereunder, the Executive agrees to serve the
Company and the Company shall employ the Executive in such capacity may be
specified from time to time by the Board of Directors or the Chief Executive
Officer of the Company.
3. Term - The Executive's employment shall be one at will, to-wit: either the
Executive or the Company shall have the right to Terminate it at any time, with
or without cause, and without any liability or obligation of either Party to the
other except as may be expressly specified in this Agreement.
4. Compensation - The Company will pay the Executive a base salary agreed to by
the Board of $100,000 annually, payable in substantially equal semi-monthly
installments. During his employment with the Company, the Executive's salary
shall be reviewed periodically in accordance with Company policy and such review
may result in an increase or bonuses in said salary agreement. In the event the
Company does not have the ability to pay the annual salary the difference will
be made up with stock at one share for each dollar owed annually in the amount
of one share for each dollar owed the Executive. This stock will be issued by
January 31, 2000 of the following year. The Company will pay officers insurance
with coverage in the amount of $1,000,000 or more. In addition, all other
insurance and benefits offered to any of the Officers will be granted to the
Executive.
5. Termination of Employment
(a) A "Termination of Employment" shall be defined as any one of the
following: (A) retirement under the ordinary retirement program of the Company,
(B) disability of the Executive resulting in absence from his duties to the
Company on a full-time basis for over one year or (C) death of the Executive;
(ii) a material reduction in the responsibilities or title of the Executive or
the corporate amenities to which he is entitled or (iii) a reduction of the
Executive's cash compensation by more than 10% below the highest annual salary
from time to time in effect for the Executive.
(b) Following a Termination of Employment, the Company will pay the
Executive, subject to the provisions of Section 8 hereof and as severance pay or
liquidated damages, or both, for the "Severance Period" (as hereafter defined) a
supplemental monthly amount that, when combined with the Executive's earnings
from other employment will result in the Executive realizing gross aggregate
monthly earnings equal to one and a half times his highest annual earnings
during entire employment at the company. The "Severance Period" shall be a
period of consecutive months immediately subsequent to such termination by the
Company for sixty months. The Company has an option pay out of 85% of gross
earnings over the sixty month period with the concurrence of the Executive. In
the event of death of the Executive the surviving widow and/or family will
inherit all rights of this agreement.
<PAGE>
Page 2
(c) During the Severance Period, the Executive shall continue in the
Company's insurance program, including long-term disability insurance, provided
he has not accepted other employment that provides comparable benefits. The
Executive's entitlement to benefit continuation pursuant to the Consolidated
Pmnibus Budget Reconciliation Act shall commence at the end of the Severance
Period.
6. Stock Options - All options to acquire the stock of the Company that were
granted to the Executive shall become immediately available for option upon
Termination of Employment and shall be optional for five years thereafter.
7. Identification - The Company shall continue to indemnify the Executive
against all losses, including legal fees and expenses, arising from claims
against the Executive in connection with the Executive's good-faith execution of
his employment hereunder, to the fullest extent permitted by the Corporation
Code of the State of Nevada.
8. Post-Termination Obligations - All payments and benefits to the Executive
hereunder shall be subject to the Executive's compliance with the following
provisions during the applicability of this agreement and for one full year
after the expiration or termination hereof:
(a) The Executive shall, upon reasonable notice, furnish such
information and proper assistance to the Company or its affiliates the formation
or operations of any business intended to compete with the Company or its
affiliates, or the possible future employment of such other employee by any
business.
(b) The Executive will not discuss with any other employee of the
Company or its affiliates the formation or operations of any business intended
to compete with the Company or its affiliates, or the possible future employment
of such other employee by any business.
(c) The Company will pay for job search assistance not to exceed a
maximum of $15,000.
(d) Any public statements made by the Executive concerning the Company
or its affiliates, officers, directors, or employees shall be submitted for
approval in writing from the Company's public relations and legal staff.
9. Consolidation, Merger, Sale of Assets - This Agreement shall be binding upon
and inure to the benefits of the Executive and the Company and its successors
and assigns, including without limitation any corporation with or into which the
company may be consolidated, merged or to which the Company sells or transfers
all or substantially all of its assets.
10. Notices - Written notices required or furnished under this Agreement shall
be sent to the last know address of the Executive and Company. Notices shall be
effective on the first business day following receipt thereof. Notices sent by
mail shall be deemed received on the date of delivery shown on the return
receipt.
<PAGE>
Page 3
11. Amendments - This Agreement may not be amended or changed, orally or in
writing except by the written agreement of the Parties.
12. Governing Law - This Agreement, and any disputes arising under or relating
to any provision of this Agreement shall be governed by and construed in
accordance with the laws of the State of Nevada.
13. Confidentiality - All information provided by either Party to the other
hereunder, including the terms and conditions of the Agreement, shall be treated
by the Party receiving such information as confidential, and shall not be
disclosed by such Party to any party without the prior written consent of the
Party form which the information was obtained. This obligation of
confidentiality shall survive termination of this Agreement.
14. Severalbility - IF any one or more of the provisions contained in this
Agreement are held to be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
15. Previous Agreements - This agreement, once executed by the parties, will
replace and supersede any and all previous employment agreement, either written
or verbal, between the parties.
16. Captions - All Section titles or captions contained in this Agreement are
for convenience only and shall not be deemed as part of this Agreement.
The parties hereto have executed this Agreement as of May 1, 1999.
Gateway Distributors LTD d.b.a. The Right Solution.
/s/ Richard A. Bailey
-------------------------------------
By: Richard A. Bailey - Chairman
Executive Committee
/s/ Richard A. Bailey
- ----------------------------------
Executive: Richard A. Bailey
EMPLOYMENT AGREEMENT
This Employment Agreement dated May 1, 1999 is entered into by and between
Gateway Distributors LTD dab The Right Solution. (the "Company") a Nevada
Corporation, and Florian R. Ternes (the "Executive" and, individually a "Party"
and, collectively, the "Parties").
The Company wishes to assure itself of the continued services of the Executive,
and the Executive is willing to continue employment with the Company on a
full-basis, and upon the other terms and conditions herein provided.
In consideration of the mutual covenants contained herein, the Parties agree as
follows:
1. Employment - The Company agrees to employee the executive, and the Executive
agrees to remain in the employ of the Company under the terms and conditions
herein provided.
2. Position - During his employment hereunder, the Executive agrees to serve the
Company and the Company shall employ the Executive in such capacity may be
specified from time to time by the Board of Directors or the Chief Executive
Officer of the Company.
3. Term - The Executive's employment shall be one at will, to-wit: either the
Executive or the Company shall have the right to Terminate it at any time, with
or without cause, and without any liability or obligation of either Party to the
other except as may be expressly specified in this Agreement.
4. Compensation - The Company will pay the Executive a base salary agreed to by
the Board of $85,000 annually, payable in substantially equal semi-monthly
installments. During his employment with the Company, the Executive's salary
shall be reviewed periodically in accordance with Company policy and such review
may result in an increase or bonuses in said salary agreement. In the event the
Company does not have the ability to pay the annual salary the difference will
be made up with stock at one share for each dollar owed annually in the amount
of one share for each dollar owed the Executive. This stock will be issued by
January 31, 2000 of the following year. The Company will pay officers insurance
with coverage in the amount of $1,000,000 or more. In addition, all other
insurance and benefits offered to any of the Officers will be granted to the
Executive.
5. Termination of Employment
(a) A "Termination of Employment" shall be defined as any one of the
following: (A) retirement under the ordinary retirement program of the Company,
(B) disability of the Executive resulting in absence from his duties to the
Company on a full-time basis for over one year or (C) death of the Executive;
(ii) a material reduction in the responsibilities or title of the Executive or
the corporate amenities to which he is entitled or (iii) a reduction of the
Executive's cash compensation by more than 10% below the highest annual salary
from time to time in effect for the Executive.
(b) Following a Termination of Employment, the Company will pay the
Executive, subject to the provisions of Section 8 hereof and as severance pay or
liquidated damages, or both, for the "Severance Period" (as hereafter defined) a
supplemental monthly amount that, when combined with the Executive's earnings
from other employment will result in the Executive realizing gross aggregate
monthly earnings equal to one and a half times his highest annual earnings
during entire employment at the company. The "Severance Period" shall be a
period of consecutive months immediately subsequent to such termination by the
Company for sixty months. The Company has an option pay out of 85% of gross
earnings over the sixty month period with the concurrence of the Executive. In
the event of death of the Executive the surviving widow and/or family will
inherit all rights of this agreement.
<PAGE>
Page 2
(c) During the Severance Period, the Executive shall continue in the
Company's insurance program, including long-term disability insurance, provided
he has not accepted other employment that provides comparable benefits. The
Executive's entitlement to benefit continuation pursuant to the Consolidated
Pmnibus Budget Reconciliation Act shall commence at the end of the Severance
Period.
6. Identification - The Company shall continue to indemnify the Executive
against all losses, including legal fees and expenses, arising from claims
against the Executive in connection with the Executive's good-faith execution of
his employment hereunder, to the fullest extent permitted by the Corporation
Code of the State of Nevada.
7. Post-Termination Obligations - All payments and benefits to the Executive
hereunder shall be subject to the Executive's compliance with the following
provisions during the applicability of this agreement and for one full year
after the expiration or termination hereof:
(a) The Executive shall, upon reasonable notice, furnish such
information and proper assistance to the Company or its affiliates the formation
or operations of any business intended to compete with the Company or its
affiliates, or the possible future employment of such other employee by any
business.
(b) The Executive will not discuss with any other employee of the
Company or its affiliates the formation or operations of any business intended
to compete with the Company or its affiliates, or the possible future employment
of such other employee by any business.
(c) The Company will pay for job search assistance not to exceed a
maximum of $15,000.
(d) Any public statements made by the Executive concerning the Company
or its affiliates, officers, directors, or employees shall be submitted for
approval in writing from the Company's public relations and legal staff.
8. Consolidation, Merger, Sale of Assets - This Agreement shall be binding upon
and inure to the benefits of the Executive and the Company and its successors
and assigns, including without limitation any corporation with or into which the
company may be consolidated, merged or to which the Company sells or transfers
all or substantially all of its assets.
9. Notices - Written notices required or furnished under this Agreement shall be
sent to the last know address of the Executive and Company. Notices shall be
effective on the first business day following receipt thereof. Notices sent by
mail shall be deemed received on the date of delivery shown on the return
receipt.
<PAGE>
Page 3
11. Amendments - This Agreement may not be amended or changed, orally or in
writing except by the written agreement of the Parties.
12. Governing Law - This Agreement, and any disputes arising under or relating
to any provision of this Agreement shall be governed by and construed in
accordance with the laws of the State of Nevada.
13. Confidentiality - All information provided by either Party to the other
hereunder, including the terms and conditions of the Agreement, shall be treated
by the Party receiving such information as confidential, and shall not be
disclosed by such Party to any party without the prior written consent of the
Party form which the information was obtained. This obligation of
confidentiality shall survive termination of this Agreement.
14. Severalbility - IF any one or more of the provisions contained in this
Agreement are held to be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
15. Previous Agreements - This agreement, once executed by the parties, will
replace and supersede any and all previous employment agreement, either written
or verbal, between the parties.
16. Captions - All Section titles or captions contained in this Agreement are
for convenience only and shall not be deemed as part of this Agreement.
The parties hereto have executed this Agreement as of May 1, 1999.
Gateway Distributors LTD d.b.a. The Right Solution.
/s/ Richard Bailey
- -----------------------------
By: Richard Bailey
President/CEO
/s/ Florian R. Ternes
- -----------------------------
Executive: Florian R. Ternes
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 27,443
<SECURITIES> 0
<RECEIVABLES> 11,915
<ALLOWANCES> 0
<INVENTORY> 331,555
<CURRENT-ASSETS> 396,746
<PP&E> 228,296
<DEPRECIATION> 106,123
<TOTAL-ASSETS> 695,574
<CURRENT-LIABILITIES> 799,655
<BONDS> 0
0
0
<COMMON> 152,465
<OTHER-SE> (2,067,867)
<TOTAL-LIABILITY-AND-EQUITY> 695,574
<SALES> 1,564,563
<TOTAL-REVENUES> 1,564,563
<CGS> 260,557
<TOTAL-COSTS> 2,164,161
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (575,348)
<INCOME-TAX> 0
<INCOME-CONTINUING> (575,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (575,348)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
