<PAGE>
Page 1
As filed with the Securities and Exchange Commission on December 22, 1999
SEC Registration No. 333-87535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-1/A-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
IMAGENETIX, INC.
(Name of small business issuer in its charter)
COLORADO 2834 84-1352444
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Number) Identification No.)
incorporation or
organization)
11777 BERNARDO PLAZA CT., SUITE 206, SAN DIEGO, CA 92128; (619) 674-8455
(Address and Telephone Number of Principal Executive Offices)
11777 BERNARDO PLAZA CT., SUITE 206, SAN DIEGO, CA 92128
(Address of Principal Place of Business)
WILLIAM SPENCER, PRESIDENT, IMAGENETIX, INC.
11777 BERNARDO PLAZA CT., SUITE 206, SAN DIEGO, CA 92128; (619) 674-8455
(Name, Address and Telephone number of agent for service)
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Copies to:
Ronald N. Vance, Esq. Jon D. Sawyer, Esq.
57 West 200 South Krys Boyle Freedman & Sawyer, P.C.
Suite 310 600 17th Street, Suite 2700 South Tower
Salt Lake City, UT 84101 Denver, CO 80202-5427
(801) 359-9300 (303) 893-2300
(801) 359-9310 - FAX (303) 893-2882 - FAX
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit(1) Price(1) Fee
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common
Stock, $.001
par value 383,334 Shares(2) $3.00 $1,150,002 $320
Per Share
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Class A Warrants, each
entitling the holder to
purchase one share of
Common Stock, issuable upon
exercise of the Class A
Warrants 300,000 $3.00(3) $900,000 $251
Common Stock, $.001 par
value, issuable upon
exercise of the Class A
Warrants 300,000 Shares(4) --
Class B Warrants, each
entitling the holder to
purchase one share of
Common Stock, issuable upon
exercise of the Class B
Warrants 300,000 $3.05(3) $915,000 $255
Common Stock, $.001 par
value, issuable upon
exercise of the Class B
Warrants 300,000 Shares(4) --
Underwriter's Warrants (5) --
Common Stock $.001 par
value (6) 33,333 Shares $3.60(3) $119,999 $34
----
TOTAL $860
====
</TABLE>
<PAGE>
Page 4
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Includes 50,000 Shares subject to the Underwriter's
over-allotment option.
(3) Estimated based upon the price upon which the warrants may be
exercised.
(4) Includes, pursuant to Rule 416, an additional indeterminate
number of securities as may be issuable upon the exercise of the Warrants by
reason of the anti-dilution provisions to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(5) To be issued to the Underwriter.
(6) Issuable upon exercise of Underwriter's Warrants.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Disclosure alternative used (check one): Alternative 1 _____
Alternative 2 X
-----
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
IMAGENETIX, INC.
233,334 Shares of Common Stock
$3.00 Per Share
This is our initial public offering, and no public market currently
exists for our shares. The underwriter may purchase up to an additional
35,000 shares at the public offering price, less the underwriting discount of
10%, within 35 days from the date of this prospectus to cover over-allotments.
We are offering through our underwriter 233,334 of the shares for cash,
and are exchanging 100,000 shares for outstanding promissory notes in the
aggregate principal amount of $300,000.
The Offering:
<TABLE>
<CAPTION>
Per Share Total
---------- -----
<S> <C> <C>
Public Price $3.00 $700,002
Underwriting Discounts $0.30 $70,000
Cash Proceeds to Imagenetix $2.70 $630,002
Note Exchange $3.00 $300,000
</TABLE>
Concurrently with this offering, we are registering for resale 300,000
Class A and 300,000 Class B Warrants, and the 600,000 shares underlying such
warrants, and the 100,000 shares to be issued to the note holders, to be
offered by selling security holders. The warrants are exercisable until
December 31, 2004. We will not receive any of the proceeds from the sale of
the shares by the note holders, or the warrants or the shares underlying the
warrants, except for the exercise price of up to $1,815,000 which would be
paid to us upon exercise of the warrants.
THIS OFFERING IS HIGHLY SPECULATIVE AND INVOLVES SPECIAL RISKS CONCERNING
THE COMPANY AND ITS BUSINESS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is
a criminal offense.
SPENCER EDWARDS, INC.
________, 1999
<PAGE>
[INSIDE FRONT COVER]
IMAGENETIX, INC.
[PICTURE OF GLOBE AND SAMPLE PRODUCT LABELS]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Plan of Operation
Business
Management
Certain Transactions
Concurrent Offering
Principal Shareholders
Description of Securities
Dividend Policy
Underwriting
Shares Eligible For Future Sale
Legal Matters
Experts
</TABLE>
TO RESIDENTS OF CALIFORNIA: Offers and/or sales of the securities described
herein may be made solely to persons who qualify as "Accredited Investors," as
that term is defined in Regulation D promulgated under the Securities Act of
1933, as amended.
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PROSPECTUS SUMMARY
OUR COMPANY
We develop, formulate, and market nutritional supplements and skin care
products. These products are sold primarily to network marketing companies
which in turn place their own labels on the products and offer them to their
customers or members. We also offer various marketing services to our network
marketing customers. Management and key personnel carry over twenty-five (25)
years of experience in successfully developing and selling nutritional
systems and programs in this channel of distribution including health food
stores and mass market. With the proceeds of this offering, we intend to
market some of our proprietary products through our E-Commerce web site,
which is currently in development. Our strategy is to build a loyal base of
E-Commerce customers under the Imagenetix brand of speciality products that
are not competitive with our primary client base.
Our principal executive offices are located at 11777 Bernardo Plaza
Court, Suite 206, San Diego, CA 92128, and our telephone number at these
offices is (619) 674-8455.
THE OFFERING
<TABLE>
<S> <C>
Securities offered 233,334 shares
Promissory Notes Converted $300,000
Resale Shares from Converted Notes 100,000
Shares outstanding at November 1, 1999 1,725,000 shares
Shares outstanding after the offering 2,058,334 shares
Total public price $700,002
Underwriter's discount $70,000
Net proceeds $630,002
Estimated offering expenses $71,000 (including the Underwriter's
expense allowance)
Over-allotment Up to 35,000 shares. If the full
over-allotment is purchased by the
underwriter, the total public
offering price, underwriting
discount, and net proceeds will be
$850,002, $85,000, and $715,002,
respectively.
Warrants outstanding at November 1, 1999 300,000 Class A warrants
300,000 Class B warrants
</TABLE>
We intend to use the net offering proceeds to:
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- Provide working capital, including the purchase of raw
materials and the financing of receivables;
- Develop and market our E-commerce web site; and
- Expand our Globestar System.
The following summary financial information has been derived from our
consolidated financial statements which appear later in this prospectus and
should be read in conjunction with those consolidated financial statements
and related notes.
<TABLE>
<CAPTION>
For the Period
For the Six From January 7,
Months Ended 1999 to March
Sept. 30, 1999 31, 1999
-------------- ---------------
<S> <C> <C>
Consolidated Statement of Operations Data:
Net sales $ 781,138 $ 84,986
Gross profit 251,864 16,390
Operating loss (8,612) (20,096)
Net loss (22,649) (20,151)
Loss per share (.01) (.01)
Shares used in per share computations 1,761,885 1,800,000
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 183,318 $ 141,154
Working capital (2,882) 35,342
Total assets 1,033,922 150,434
Total stockholders' equity (deficit) 28,800 42,791
</TABLE>
RISK FACTORS
WE HAVE HAD LOSSES OF $42,800 SINCE BEGINNING OPERATIONS IN FEBRUARY 1999.
Imagenetix' operating subsidiary was organized in January 1999 and began
principal operations in February 1999. Since beginning operations, and
through September 30, 1999, we generated $866,124 in net sales and incurred
losses of $42,800, or $0.02 per share. For the quarter ending September 30,
1999, we earned $24,088, or $0.01 per share on net sales of $615,676 for the
same period. Our ability to operate profitably depends on increasing our
sales and distribution outlets, achieving sufficient gross profit margins,
and a continuing demand for the nutritional supplements and skin care
products offered. We cannot assure you that the company will operate
profitably. See "Financial Statements."
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WE ARE RELYING UPON A LIMITED NUMBER OF CLIENTS AND NON-PAYMENT OR LATE
PAYMENT BY THEM WOULD MAKE IT DIFFICULT TO MEET OUR OWN FINANCIAL OBLIGATIONS
As of September 30, 1999, we had taken orders from eleven clients. Since
then we have increased our client base to a total of seventeen clients. Our
success depends upon expanding the number of clients and retaining our
present limited client base. With such a few number of customers, if any
major one was late in payment to us, or failed to pay for the products, it is
likely that our company's growth would be substantially delayed or that we
would be unable to continue operations since we would be unable to continue
to purchase raw materials or pay manufacturers. There are also a number of
factors which would inhibit our ability to expand our client base, including
acceptance of our limited line of products.
OUR E-COMMERCE SITE IS NOT FULLY OPERATIONAL AND WE GIVE NO ASSURANCE THAT IT
WILL BECOME OPERATIONAL. FAILURE TO MAKE THE SITE OPERATIONAL MAY HAVE AN
ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are currently generating revenue and orders from multiple channels of
distribution. To achieve higher margins and awareness of our own company
brand, we are planning to implement an E-Commerce site to launch our
speciality branded products. We have not fully implemented our E-Commerce
site, but anticipate being able to do so with the funds from this offering.
We plan to drive potential customers to our site through articles written on
the products, one of which is a nutritional product to assist in the area of
men's sexual health called ViGro. This product is currently undergoing
clinical testing. There is, however, no assurance that the results of the
clinical studies will be positive or satisfactory enough to warrant active
marketing of the product.
WE RELY EXCLUSIVELY ON OUTSIDE MANUFACTURERS FOR OUR PRODUCTS. THE FAILURE OF
ANY MANUFACTURER TO SUPPLY PRODUCTS AS REQUIRED BY US COULD HAVE A MATERIAL
ADVERSE EFFECT UPON OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL
CONDITION.
All of our products are manufactured by outside manufacturers with whom we
have contracts. Our profit margins and our ability to deliver our existing
products on a timely basis are dependent upon the ability of the outside
manufacturers to continue to quickly supply products as ordered by us. Our
ability to grow is dependent upon these manufacturers to reformulate existing
and additional future products. Also, if we lose any of the present
manufacturers, we would be forced to locate new manufacturers and establish
operating relationships with them. While we believe there are other
manufacturers available, the loss of an existing manufacturer could cause
delays in delivery and could effect our ability to fill orders.
WE CURRENTLY USE ONE PROVIDER FOR CETYL MYRISTOLEATE WHICH IS USED IN
APPROXIMATELY 20% OF OUR PRODUCTS. THE LOSS OF THIS PROVIDER WOULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS SINCE WE WOULD BE UNABLE TO PROVIDE
THESE PRODUCTS.
We currently obtain ingredients for our products from suppliers with whom
we have an existing business relationship and binding contracts. We believe
we have dependable alternative sources for all of our product's ingredients,
except Cetyl Myristoleate which is used in seven
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existing formulas. The Cetyl Myristoleate ingredient is a blend which we
co-developed with the supplier. We expect to rely upon this ingredient to
expand our client base and increase the number of formulas. We have a binding
purchase agreement to acquire an amount which management believes represents
a dominant position of the current supply of Cetyl Myristoleate. These
products presently constitute approximately 60% of our total revenue. We
believe that in the event adequate supplies of this ingredient become
unavailable through our current source, this would have a material adverse
effect on our business since we would be unable to provide these products.
WE DO NOT CARRY OUR OWN LIABILITY INSURANCE. OUR INVOLVEMENT IN DEFENDING
PRODUCT LIABILITY CLAIMS COULD HAVE A DETRIMENTAL EFFECT ON OUR OPERATIONS.
We require our suppliers and manufacturers to add us as additional insured
parties on their product liability insurance policies. Nevertheless, this
coverage may not be adequate to protect us from potential product liability
claims. These claims, and the legal defense of them, would have a material
drain on the revenues of the company and would have a detrimental effect on
our continued operations.
WE ARE DEPENDENT ON THE CONTINUED SERVICES OF OUR PRESIDENT, BUT WE DO NOT
HAVE ANY EMPLOYMENT CONTRACT WITH HIM.
Our business is largely dependent on our ability to hire and retain
quality personnel, especially William P. Spencer, our president. We have no
written employment or non-competition agreements with our officers and
directors, and we do not maintain any key-man insurance on any of them. Any
officer or director may terminate his position with no prior notice. We do
have an initial written agreement with Dr. Charles Cochran, although it does
not prohibit Dr. Cochran from terminating his employment and subsequently
competing with us. The loss of Messrs. Spencer or Cochran could have an
adverse effect on our business and prospects.
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MR. SPENCER WILL CONTINUE TO CONTROL IMAGENETIX AFTER THE OFFERING. THIS MEANS
THAT WE WILL LIKELY CONTINUE TO BE ABLE TO ELECT MANAGEMENT PERSONNEL AND
CONTROL OUR BUSINESS DIRECTION.
Upon completion of this offering, not giving effect to the issuance of any
over-allotment shares or shares issuable pursuant to the warrants, William
and Debra Spencer will continue to own 48.58% of the outstanding stock of the
company. Thus, they will likely continue to be able to control the company
and to elect all of the directors.
THE NAMES OF OUR PRODUCTS COULD BE VERY IMPORTANT TO OUR SUCCESS. ALTHOUGH WE
HAVE APPLIED FOR TRADE MARKS ON THESE PRODUCTS, NO TRADE MARKS HAVE BEEN
ISSUED. EVEN IF TRADEMARKS ARE ISSUED, IT MAY NOT REASONABLY PROHIBIT OTHERS
FROM USING SIMILAR NAMES OR CHALLENGING THE TRADEMARKS. PROTECTING OUR
TRADEMARKS HERE AND ABROAD MAY BE EXPENSIVE AND COULD HAVE AN ADVERSE EFFECT
ON OUR FINANCES.
A portion of our proposed business involves supplying exclusive Company
labeled products on an E-Commerce basis. The brand names used for these
company labeled products could eventually be important, and we intend to
apply for federal trademark and trade name protection when appropriate,
relying primarily on trademark law to protect brand names. The Globestar and
ViGro trademarks have been applied for and registration has been mailed to
the Patent and Trademark Office. We cannot assure you that any pending
trademark application will result in a registered trademark, or that any
trademark granted will be effective in thwarting competition or be held valid
if subsequently challenged. Our failure to obtain trademark protection, or
illegal use by others of any trademarks we may obtain, may have an adverse
effect on our business, financial condition and operating results. In
addition, the laws of certain foreign countries do not protect proprietary
rights to the same extent as the laws of the United States or Canada.
THE DESIGNATION OF OUR STOCK AS "PENNY STOCK" WILL MEAN THAT IT WILL BE MORE
DIFFICULT TO SELL YOUR SHARES.
Initially our shares will be subject to Rule 15g-9 under the Exchange Act.
That rule imposes additional sales practice requirements on broker-dealers
that sell low-priced securities designated as "penny stocks" to persons other
than established customers and institutional accredited investors. The SEC's
regulations define a "penny stock" to be any equity security that has a
market price less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. Initially our stock will be
penny stock. We cannot assure you that our shares will ever qualify for
exemption from these restrictions. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
our shares and may affect the ability of holders to sell their shares in the
secondary market.
YOUR STOCK WILL BE DILUTED 86.33% FROM THE OFFERING PRICE.
Purchasers of shares will experience immediate and substantial dilution of
$2.59 in net tangible book value per share, or approximately 86.33% of the
offering price of $3.00 per share. In contrast, existing shareholders paid an
average price of $.042 per share.
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FORWARD LOOKING STATEMENTS
This prospectus contains statements that plan for or anticipate the
future. Forward- looking statements include statements about the future of
personal care and nutritional products, statements about our future business
plans and strategies, and most other statements that are not historical in
nature. In this prospectus forward-looking statements are generally
identified by the words "anticipate," "plan," "believe," "expect,"
"estimate," and the like. Although we believe that any forward-looking
statements we make in this prospectus are reasonable, because forward-
looking statements involve future risks and uncertainties, there are factors
that could cause actual results to differ materially from those expressed or
implied. For example, a few of the uncertainties that could affect the
accuracy of forward-looking statements, besides the specific factors
identified in the Risk Factors section of this prospectus, include the
following:
- changes in general economic and business conditions affecting
the personal care and nutrition industry;
- changes in our business strategies; and
- market acceptance of the products in the United States and
foreign markets.
In light of the significant uncertainties inherent in the
forward-looking statements made in this prospectus, particularly in view of
our early stage of operations, the inclusion of this information should not
be regarded as a representation by us or any other person that our objectives
and plans will be achieved.
The Private Securities Litigation Reform Act of 1995, which provides
a "safe harbor" for similar statements by existing public companies, does not
apply to our offerings.
USE OF PROCEEDS
The following table sets forth the use of proceeds and our present
estimate of the allocation of net proceeds of this offering. Our actual
receipts and expenditures may vary from these estimates. Pending use of the
funds, we will invest the net proceeds in investment-grade, short-term,
interest bearing securities.
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<TABLE>
<CAPTION>
Offering
Proceeds Percentage
---------- ----------
<S> <C> <C>
Gross Proceeds $700,002
Underwriting discounts 70,000 10%
Underwriter's expense allowance 21,000 3%
Other offering expenses 50,000 7.14%
--------
NET OFFERING PROCEEDS $559,002
Use of Net Proceeds
Working capital(1) 341,450 48.78%
Development and marketing of E-Commerce web site 130,350 18.62%
Expansion of Globestar System 87,200 12.46%
--------
TOTAL $559,002
</TABLE>
- -------------------
(1) We will use these funds to purchase raw materials to produce our
products and to finance receivables from our customers. The amounts to be
allocated between these two items will vary depending upon the amount of back
orders at the completion of this offering.
DILUTION
Since our inception, we have issued a total of 1,725,000 shares to
existing shareholders, at an average price of $.042 per share. The following
table summarizes, as of September 30, 1999, the relative investments of all
existing shareholders and the new investors, after giving pro forma effect to
the sale of the shares in this offering (excluding the over-allotment
shares):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing shareholders 1,725,000 83.81% $71,600 6.68% $0.042
New investors 333,334 16.19% $1,000,002 93.32% $3.00
--------- ----- ---------- ----
Total 2,058,334 100% $1,071,600 100%
========= ===== ========== ====
</TABLE>
Our financial statements at September 30, 1999, show a net tangible book
value of $27,802 or $0.0161 per share. Net tangible book value per share
represents the amount of our tangible assets (total assets less intangible
assets), less total liabilities, divided by the number of shares of common
stock outstanding. Without taking into account any further adjustments in net
tangible book value after September 30, 1999, other than to give effect to
the sale of the 333,334 shares, including 100,000 shares for conversion of
$300,000 of Notes Payable, offered hereby (after deduction of underwriting
discount and other offering expenses) the pro forma net tangible book value
of the Company at September 30, 1999, would have been $886,804 or
approximately $0.43 per share of common stock, representing an increase in
net tangible book value of
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approximately $0.43 to existing shareholders and a dilution of approximately
$2.57 per share to new investors.
PLAN OF OPERATIONS
General
We started our principal activities in January 1999. From the date of
beginning our business until March 1999, we developed our business plan,
located our principal facilities, developed our initial products, and secured
sources for our products. In accordance with the terms of a funding
agreement, we borrowed $100,000 in March 1999 for operating expenses and
another $200,000 in September 1999 for additional operating expenses. We
borrowed these funds from certain of our shareholders. In addition, Mr. and
Mrs. Spencer, our President and Secretary, have loaned a total of $288,500 to
us since our inception to pay for the startup costs and expenses of starting
and continuing operations. These loans are evidenced by one-year promissory
notes. No proceeds of this offering will be used to repay the amounts owed to
Mr. and Mrs. Spencer. The other note holders intend to convert the principal
amount of their notes into 100,000 shares of our stock; the interest will be
paid from operating revenues.
At November 9, 1999, we had a backlog of orders in the amount of
$236,460. We intend to use approximately $341,450 of the offering proceeds to
acquire the raw materials and pay for the production costs to satisfy a
portion of the backlog orders. The balance of the funds from the offering
will be used to expand the Globestar System and to develop and market our E-
Commerce site. We believe that the equity funding received through this
offering will satisfy our cash requirements for twelve months or longer
without the need to raise additional funds.
Year 2000 Issue
We do not believe that the Year 2000 Issue will have a significant impact
on our business. The "Year 2000 Issue" involves the potential for system and
processing failures of date-related data resulting from computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that contain time-sensitive software may recognize
a date using two digits of "00" as the year 1900 rather than the year 2000.
This could result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar ordinary business
activities.
We believe that our internal software and hardware systems will function
properly with respect to dates in the Year 2000 and thereafter, especially
since our web site and related activities have occurred in 1999 and are
sensitive to the Year 2000 Issue. In particular, our computer manufacturer
has disclosed that our system has successfully completed testing by the
<PAGE>
Page 17
National Software Laboratories and is Year 2000 compliant. Any failure due to
the Year 2000 problem is also covered by the manufacturer's warrant.
In addition to reviewing our own internal Year 2000 readiness, we have
contacted our suppliers, manufacturers, and principal clients. We have also
either contacted directly, or reviewed disclosures prepared by, our utility
and telecommunications companies and other companies which provide key
services or equipment to our business. Of our suppliers, manufacturers, and
principal clients, we asked whether or not they had made an assessment of
their readiness for the Year 2000 problem, and if so, whether they believed
the Year 2000 problem would have a material effect on their business, results
of operations, or financial condition. We also asked them to describe any
material issues regarding the Year 2000 problem which might affect, either
directly or indirectly, their ability to continue to conduct business with us
after December 31, 1999, in the same manner as prior to January 1, 2000. Of
those suppliers, manufacturers, or clients which did respond, only one had
not made a Year 2000 readiness assessment; the others, including our supplier
of Cetyl Myristoleate, believed they were Year 2000 compliant. As a
contingency plan, we believe that if for any reason the particular
manufacturer who had not yet completed its readiness assessment is not Year
2000 compliant by December 31, 1999, alternative manufacturers would be
available. Of the utility and telecommunications companies, and others who
provide key equipment or services to us, each has disclosed that it is
presently Year 2000 compliant.
BUSINESS
Our Organization and History
Imagenetix, Inc. was incorporated in the State of Colorado on July 26,
1996, under the name "Internet International Business Management, Inc." We
changed our name to "Imagenetix, Inc." on April 27, 1999.
From our inception in 1996 until March 1999, we had no significant
business operations. In March 1999 we entered into a reverse acquisition
agreement with Imagenetix, a California corporation, incorporated in January
1999 and organized for the purpose of providing nutritional supplement and
skin care products for specific health applications. Mr. and Mrs. Spencer,
current officers and directors of the Colorado corporation, were the only
shareholders of the California corporation at the time of the reorganization.
The agreement provided that we would acquire all of the outstanding stock of
the California corporation and that Mr. and Mrs. Spencer would receive
1,300,000 shares of common stock representing approximately 72% of our
outstanding stock. In connection with the transaction, existing management of
the Colorado company agreed to resign and to appoint the present directors.
In addition, certain shareholders of the Colorado company entered into a
funding agreement to provide $100,000 to the Company at the closing of the
transaction and $200,000 at the time of filing this registration statement.
The closing of the transaction was held on March 26, 1999, and all of the
foregoing terms were implemented. The California corporation is now a
<PAGE>
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wholly owned subsidiary of the Colorado corporation and conducts all of our
business. Unless otherwise indicated in this section, all references to our
business refers to the business operations of the California corporation.
In June 1999 we adopted a 1999 Stock Bonus Plan which authorizes the
Board of Directors to issue up to 211,500 shares to our officers, directors,
employees and consultants. The Plan is intended to aid us in maintaining and
developing a management team, attracting qualified directors, officers, and
employees capable of assisting in our future success, and rewarding those
individuals who have contributed to the success of the Company. In June 1999
we issued 166,500 shares under the Plan to our directors, employees, and
consultants. In order to avoid further dilution of the outstanding shares,
Mr. and Mrs. Spencer canceled 241,500 of the shares received in the
reorganization between the Colorado and the California corporations. This
allowed us to use 211,500 shares for the Stock Bonus Plan and to reserve
30,000 shares for future issuance to Mr. Cochran after this offering.
Industry Overview
The dietary supplement industry is highly diversified and intensely
competitive. It includes companies that manufacture, distribute, and sell
products that are generally intended to supplement the daily diet with
nutrients that may enhance the body's performance and well being. Dietary
supplements include vitamins, minerals, herbs, botanicals, amino acids, and
compounds derived therefrom. Specific statutory provisions governing the
dietary supplements industry were codified in the Dietary Supplement Health
and Education Act of 1994 ("DSHEA"). DSHEA provides new statutory protections
for dietary supplements. It codifies and strengthens legal protection for
statements of nutritional support that apprise consumers of the effect
dietary supplements have upon the structure or functions of the body.
Dietary supplements are sold primarily through (i) mass market retailers,
including mass merchandisers, drug stores, supermarkets and discount stores,
(ii) health food stores, (iii) mail order companies, and (iv) direct sales
organizations. Our primary marketing thrust is targeted at direct selling, of
which network marketing is a significant segment.
Operations
Our management and key personnel carry over twenty-five (25) years of
experience in developing nutritional systems and marketing programs for the
network marketing channel of distribution. The management team has been
responsible for generating sales from a number of the world's largest direct
selling and network marketing companies. Currently, we have generated sales
and orders from multiple network marketing companies, one of which is Nikken,
a global network marketing company.
Our strategy also includes targeting large companies who sell primarily
through mass market retailers. Two notable companies who specialize in mass
market retailing, from which we
<PAGE>
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have generated purchase orders or sales, are Natrol and Pharmavite.
Additionally, we have built relationships with companies that sell primarily
through health food stores. One of these companies is Nature's Way. We have
generated significant sales to this company as well as others in this channel
of distribution.
We offer a variety of specialized nutraceutical formulations and
compounds along with proprietary skin care products which are designed to be
sold to network marketing companies. Since beginning operations in February,
we have generated approximately fifteen customers for which we prepare
nutritional supplements to be sold by the customer under its own label. Once
initial funding from this offering has taken place, we intend to embark on a
more aggressive marketing campaign of capturing orders, diversifying the
client base, and expanding sales.
Through March 31, 1999, our primary focus was to establish suppliers,
manufacturing agreements, and develop business systems. During this period we
were able to successfully implement our business system by generating and
collecting on sales of approximately $80,000. Since this quarter end, we have
added eleven additional clients. Three of these customers represent in excess
of 10% of our total orders and sales to date. The loss of any of these
customers could have a material detrimental effect on our business. Also, the
failure of any of these customers to pay for the products in a timely manner,
could have a negative impact on us since we do not have significant financial
reserves to supplement such a loss.
Products
We offer a number of products, also known in the industry as
nutraceutical formulas or formulations, to our clients. These formulations
are, in some cases, developed by our clients, codeveloped by us and the
client, or developed exclusively by us for the client. We also have developed
formulations which we intend to offer directly to consumers through the
Internet. We categorize our current revenue producing products as those which
include Cetyl Myristoleate in the formulation and those that do not. Since
our inception through September 30, 1999, approximately 66% of our revenues
were generated from the sale of formulations without Cetyl Myristoleate and
approximately 34% were generated from formulations which contained this
compound. We provide over thirty (30) formulations on behalf of our clients
under the client trade names.
We use Cetyl Myristoleate to produce a number of dietary supplement
formulations for our clients. Ongoing research may determine the extent of
its effects on the body, including the role it may play in providing support
for the normal functioning of muscles and joints. We can produce a wide range
of formulas using this compound and then market these formulas through
multiple distribution channels. Currently we have sold formulas using this
compound primarily to network marketing companies. These companies are
reselling the compounds under their own label and tradename. We do not own or
have any interest in the trade marks or names under which these products are
sold. Using multiple processes to produce this compound, we are able
<PAGE>
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to offer formulas to our clients in three forms of delivery: soft gel,
hard-shell capsule, and tablet. Each process employed, from producing the
compound to manufacturing the product, has been co-developed and
co-engineered by our staff in collaboration with the supplier and
manufacturer. We believe Cetyl Myristoleate will be our principal compound in
the foreseeable future, particularly if clinical research provides a clearer
indication of the role the compound plays in the area of joint health. We
intend to expand the number of clients who use this compound in formulas and
to develop a unique formula for each specific client.
We have also developed a natural compound extracted from artichoke and
sarsaparilla which has demonstrated in a medical double-blind placebo study
to assist the human body in improving the functions of the liver. This
product is proprietary to us and was specifically developed by Dr. Charles
Cochran, one of our directors. We currently have received orders for this
product from two network marketing companies.
We also have developed proprietary skin care products for the face, which
we believe contain unique ingredients designed to be beneficial to the skin.
The skin care products were designed and developed to be sold to network
marketing companies seeking unique skin and beauty care products. The
products consist of exfoliants, moisturizers, and masks. Full product
development has been completed and we are beginning to market the products to
targeted network marketing companies which would offer these products under
their own private labels.
We have also developed a dietary supplement known as ViGro which is
designed to assist the human body in the area of men's sexual health.
Compounds in this formula have been found to increase blood testosterone
levels, increase formation and development of sperm and their mobility,
decrease blood lipids, and increase serum nitric oxide levels, which relaxes
smooth muscle and increases blood supply to penile tissues. We developed this
product for the purpose of selling it through our E-Commerce site. We intend
to conduct a medically supervised study to determine the efficacy of this
formula. We intend to sell our ViGro product under our own brand exclusively
on an E-Commerce basis. We do not intend to market ViGro until clinical
evidence demonstrates the effectiveness of the formula. We have contacted a
physician who has expressed interest in conducting clinical trials, but no
firm agreement has been reached. We cannot predict how long the clinical
trials will take.
Raw Materials and Manufacturing
We develop, formulate and design nutritional and skin care systems, but
do not manufacture any of our own products. We currently purchase ingredients
from suppliers that we consider to be the superior suppliers of these
ingredients. We currently have a single source supplier of Cetyl Myristoleate
and an agreement is in place to protect our right to purchase sufficient
quantities of this material to meet our estimated needs through at least
April 2000. Products using Cetyl Myristoleate represent approximately 34% of
our sales from inception through September 30, 1999. With the exception of
Cetyl Myristoleate, we believe that, in the
<PAGE>
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event we are unable to obtain any ingredients from our current suppliers, we
could obtain substitute ingredients without great difficulty or prohibitive
increases in the cost of goods sold. However, there can be no assurance that
the loss of such a supplier would not have a material adverse effect on our
business and results of operations.
We rely on a number of manufacturers to produce our personal care and
nutritional products. We have written confidentiality and client exclusivity
agreements with those key manufacturers. However, we believe that in the
event our relationship with any of our key manufacturers is terminated, we
would be able to find suitable replacement manufacturers. However, there can
be no assurance that the loss of a manufacturer would not have a material
adverse effect on our business and results of operations.
Marketing
Since inception we have marketed our products and custom formulations to
clients in multiple channels of distribution. Using part of the funds from
this offering, we plan to more aggressively implement the following
three-phase marketing strategy:
The first phase is to continue to offer our proprietary products to
existing clients and seek new customers, primarily those engaged in the
network marketing and mass marketing of nutraceutical products. We would
assist these clients in designing nutritional and skin care systems using our
formulations. We would also prepare and design marketing materials, provide
spokespersons to help market the product, and provide an array of other value
added services to assist each client in enhancing and expanding its
business.
The second phase of the marketing program would be to offer additional
products to those network and mass marketing companies. The additional
products would include items which they would be currently offering, but
which would be presently furnished through another supplier or manufacturer.
We believe we could furnish these additional products at competitive prices
coupled with providing added services to assist the client in marketing their
nutraceutical and skin care products.
The third phase would be to establish our E-Commerce channel of
distribution. Initially we would offer our ViGro product only through our own
Internet site. Upon successfully implementing our E-Commerce business with
our offering of ViGro, we could add other products to expand this form of
product distribution. We anticipate that potential customers would be driven
to our web site, in part, through articles written on our products in various
publications. According to the research firm, Cyber Dialogue, Inc.,
approximately 40% of American adults online used the Internet to obtain
health information and treatments in 1998.
We anticipate being able to more actively and fully implement and expand
the first two phases of the marketing plan as soon as this offering is
completed. We also intend to begin
<PAGE>
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implementation of the E-Commerce strategy in part with the funds from this
offering and open the E-Commerce site within three months following
completion of this offering.
Globestar
We propose to implement an online intranet computer system known as
"Globestar" which will be a proprietary, interactive, multimedia, global
inter-linking system which we could use in marketing to all of our clients.
We have designed and begun the engineering phase of the system. A primary
function of the system will be to instantaneously monitor and update the
real-time status of all of our products and client orders, from inception, to
development, and to delivery.
A preassigned access code will enable clients and manufacturers to enter
into select regions of the Globestar system. This will allow clients and
manufacturers to have real time information on product progress through an
automatically updated sales order system. Through the extensive use of
multi-media and intra-linking programs, Globestar is being designed to
provide for clients hard to find or breakthrough ingredients in the
nutraceutical and skin care industry. In addition to providing clients with
real-time product order updates, Globestar also will provide them the story
behind the development of particular products or compounds that assist in the
marketing of the product. Certain features of the system are in the
development stage and we anticipate that activation of Globestar could take
place by the first quarter of next year.
When fully functional, Globestar will also permit and extend to
authorized manufacturers and scientists around the world to inflow product
information directly into the Globestar system. This will enable us to
quickly evaluate and determine the market potential of any product or
compound. Globestar will also permit authorized clients to input requests for
new products or compounds to be reviewed by us. Additional features of
Globestar will be engineered to include: (i) access to the lowest raw
material pricing through linkage of direct suppliers and manufacturers; (ii)
world-wide online access for our key clients; (iii) product delivery
schedule; and, (iv) rapid registration or certification of products destined
for foreign markets.
Competition
The nutraceutical products industry is large and intensely competitive.
We compete directly with companies that manufacture and market nutritional
products in each of our product lines, including companies such as Twin Labs
Corporation, Weider Nutrition International, Inc., IVC Industries, and
Perrigo Company. Most of our competitors in the nutritional supplements
market have longer operating histories, greater name recognition and
financial resources than do we. In addition, nutritional supplements can be
purchased in a wide variety of distribution channels. While we believe that
consumers appreciate the convenience of ordering products from home through
the Internet or a sales person, the buying habits of many consumers
accustomed to purchasing products through traditional retail channels are
difficult to change. Our offerings in
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each product category are also relatively small compared to the wide variety
of products offered by many other nutritional product companies.
Government Regulation
In both the United States and foreign markets, we are or will be subject
to and affected by extensive laws, governmental regulations, and similar
constraints at the federal, state and local levels. For example, we will be
subject, directly or indirectly, to regulations pertaining to the following:
- dietary ingredients;
- the manufacturing, packaging, labeling, promotion,
distribution, importation, sale and storage of our products;
- product claims, labeling, and advertising (including direct
claims and advertising by us as well as claims in labeling and
advertising by associates, for which we may be held
responsible);
- transfer pricing and similar regulations that affect the level
of foreign taxable income and customs duties; and
- taxation, which in some instances may impose an obligation on
us to collect the taxes and maintain appropriate records.
The dietary ingredients, manufacturing, packaging, storing, labeling,
advertising, promotion, distribution and sale of our 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, the Department of Agriculture, the Department of
Customs, the Patent and Trademark Office, and the Environmental Protection
Agency. Our activities are, or may be, also regulated by various agencies of
the states, localities and foreign countries in which our products are
manufactured, distributed, and/or sold. The FDA, in particular, regulates the
ingredients, manufacture, packaging, storage, labeling, promotion,
distribution and sale of foods, dietary supplements and OTC drugs, such as
those we distribute. We and our suppliers are required by FDA regulations to
meet relevant current good manufacturing practice ("GMP") guidelines for the
preparation, packing and storage of foods and drugs. The FDA has published an
Advance Notice of Proposed Rule Making, 62 Fed. Reg. 5700 (Feb. 6, 1997) for
the establishment of GMPs for dietary supplements, but it has not yet issued
a proposal rule. FDA conducts unannounced inspections of companies that
manufacture, distribute and sell dietary supplements, issues warning letters
for rule violations found during these inspections and refers matters to the
U.S. Attorneys and Justice Department for prosecution under the Federal Food,
Drug, and Cosmetic Act ("FFDCA"). There can be no assurance that FDA will not
question our labeling or other operations in the future.
<PAGE>
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The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised
the provisions of the FFDCA governing dietary ingredients and labeling of
dietary supplements. The legislation creates a new statutory class of
"dietary supplements." This new class includes vitamins, minerals, herbs,
botanicals, other dietary substances to supplement the daily diet, and
concentrates, metabolites, constituents, extracts, and combinations thereof.
The legislation requires no federal premarket approval for the sale of
dietary ingredients that were on the market before October 15, 1994. Dietary
ingredients first marketed on or after October 15, 1994, may not be
distributed or marketed in interstate commerce unless, (i) the manufacturer
has proof that the dietary ingredient has been present in the food supply as
an article used for food in a form in which the food has not been chemically
altered, or (ii) the manufacturer supplies FDA with proof to the agency's
satisfaction of the dietary ingredient's safety. Manufacturers and
distributors of dietary supplements may include statements of nutritional
support, including structure and function claims, on labels, in labeling, and
in advertising if (a) the claims are corroborated by "competent and reliable
scientific evidence" consistent with FTC standards for advertising review;
(b) the claims for labels and labeling are filed in a certified notice with
the FDA no later than 30 days after first market use of the claims; (c) the
manufacturer retains substantiation that the claims are truthful and
nonmisleading; (d) each claim on labels and in labeling is cross- referenced
by an asterisk to a mandatory FDA disclaimer.
The majority of the products marketed, or proposed to be marketed, by us
are classified as dietary supplements under the FFDCA. In September 1997, the
FDA issued regulations governing the labeling and marketing of dietary
supplement products. The regulations cover: (i) the identification of dietary
supplements and their nutrition and ingredient labeling; (ii) the terminology
to be used for nutrient content claims, health claims, and statements of
nutritional support, including structure and function claims; (iii) labeling
requirements for dietary supplements for which "high potency" and
"antioxidant" claims are made; (iv) notification procedures for statements of
nutritional support, including structure and function claims, on dietary
supplement labels and in their labeling; and (v) premarket notification
procedures for new dietary ingredients in dietary supplements. The
notification procedures became effective in October 1997, while the new
labeling requirements did not become effective until March 23, 1999.
Dietary supplements are subject to the FFDCA as amended by the Nutrition,
Labeling and Education Act ("NLEA") and DSHEA and are subject to the
regulations of the FDA. Those laws regulate, among other things, health
claims, ingredient labeling, and nutrition content claims characterizing the
level of nutrient in the product. NLEA prohibits the use of any health claim
for dietary supplements, unless the health claim is supported by significant
scientific agreement and is pre-approved by the FDA. In Pearson v. Shalala,
64 F3d 650 (D.C. Cir 1999), the United States Court of Appeals for the D.C.
Circuit ruled that the FDA must authorize health claims presented to the
agency in health claims petitions unless they are inherently misleading and
must rely on disclaimers to eliminate any potentially misleading connotation
conveyed by a claim. The court held that even claims not found supported by
significant scientific agreement must be allowed if disclaimers can correct
misleading connotations. The court ruled that the FDA violated the
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Administrative Procedure Act by not defining its significant scientific
agreement standard of review and ordered the FDA to define the standard in a
way that would enable regulatees to perceive the principles which guide
agency action.
In foreign markets, prior to starting operations and prior to making or
permitting sales of our products in the market, we may be required to obtain
an approval, license or certification from the country's ministry of health
or comparable agency. Prior to entering a new market in which a formal
approval, license or certificate is required, we may be required to work with
local authorities in order to obtain the requisite approvals, license or
certification. The approval process generally would require us to present
each product and product ingredient to appropriate regulators and, in some
instances, arrange for testing of products by local technicians for
ingredient analysis. These approvals may be conditioned on reformulation of
our products or may be unavailable with respect to certain products or
certain ingredients. We must also comply with product labeling and packaging
regulations that vary from country to country.
The FTC, which exercises jurisdiction over the marketing practices and
advertising of all products similar to those we offer, has in the past
several years instituted enforcement actions against several dietary
supplement companies for deceptive marketing and advertising practices. These
enforcement actions have frequently resulted in consent orders and
agreements. In certain instances, these actions have resulted in the
imposition of monetary redress requirements. Importantly, the FTC requires
that "competent and reliable scientific evidence" corroborate each claim of
health benefit made in advertising before the advertising is first made. A
failure to have that evidence on hand at the time an advertisement is first
made violates the Federal Trade Commission Act. While we have not been the
subject to FTC enforcement action for the advertising of its products, there
can be no assurance that the FTC will not question our advertising or other
operations in the future.
We believe we are in compliance with all material government regulations
which apply to our products. However, we are unable to predict the nature of
any future laws, regulations, interpretations or applications, nor can we
predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on our business in the future.
These future changes could, however, require the reformulation or elimination
of certain products; imposition of additional record keeping and
documentation requirements; imposition of new federal reporting and
application requirements; modified methods of importing, manufacturing,
storing, or distributing certain products; and expanded or different labeling
and substantiation requirements for certain products and ingredients. Any or
all of these requirements could have a material adverse effect on our
business, results of operations and financial condition.
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Trademarks
We have applied for trademarks for the names "Globestar" and "ViGro." The
application for the "Globestar" trademark was filed in May of 1999, and the
application for the "ViGro" trademark was filed in June of 1999.
Employees
At November 1, 1999, we had eight full-time employees, one of whom is
also an executive officer of the Company.
Facilities
We currently rent on a month-to-month basis approximately 1,151 square
feet of office space for $1,710 per month. Effective December 31, 1999, we
will terminate this arrangement and effective January 1, 2000, we will occupy
approximately 5,768 square feet of office space located at 16935 West
Bernardo Drive, Suites 101 and 101A, San Diego, California 92127. We have
entered into a three year lease for this space and will pay approximately
$13,635 for the monthly lease payments. Effective January 1, 2000, our
principal executive offices will change to this new location; our telephone
number will not change
Reports to Our Security Holders
Our fiscal year ends on March 31st. We intend to furnish our shareholders
annual reports containing audited financial statements and other appropriate
reports. In addition, we intend to become a reporting company and file
annual, quarterly and current reports, and other information with the SEC.
You may read and copy any reports, statements or other information we file at
the SEC's public reference room at 450 fifth Street, N.W., Washington D.C.
20549. You can request copies of these documents, upon payment of a
duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference rooms. Our
SEC filings are also available to the public on the SEC Internet site at
http\\www.sec.gov.
MANAGEMENT
General
The following table sets forth the current officers, directors, and
significant employees of Imagenetix:
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Page 27
<TABLE>
<CAPTION>
Director
Name Age Position(s) Since
<S> <C> <C> <C>
William P. Spencer 47 Director, President, & CEO 1999
Debra L. Spencer 47 Director, Secretary, & Treasurer 1999
Dr. Charles L. Cochran 51 Director 1999
Dr. Peter H. Antoniou 39 Director 1999
Patrick S. Millsap 46 -- --
</TABLE>
Set forth below is the business experience and biographical information
on each of the officers, directors, and significant employees of Imagenetix:
WILLIAM P. SPENCER has served as the president of Imagenetix since March
1999 and has served as a director and president of the Subsidiary since
January 1999. From January 1986 until December 1996, he served as chief
operating officer, chief financial officer, and executive vice-president of
Natural Alternatives International, Inc., a company engaged in the
formulation and production of encapsulated vitamins and nutrients. He served
as president of this entity from December 1996 until October 1998, and as a
director from January 1986 until October 1998. Mr. Spencer received a
Bachelor of Science in Finance in 1974, and a Masters in Business
Administration, also in the area of Finance, in 1979 from San Diego State
University.
DEBRA L. SPENCER has served as Secretary and Treasurer of Imagenetix
since March of 1999. Her responsibilities with Imagenetix also include
graphics layout and development of marketing material for the Company's
private label products. From 1994 to February 1999 she was a homemaker. From
1987 to 1993 she served as Vice President, Secretary and Treasurer for a
consumer mail order vitamin company, Vitamin Direct, Inc. She was responsible
for developing marketing material, generating leads as well as maintaining a
high consumer satisfaction ratio for their over 25,000 customers.
DR. CHARLES L. COCHRAN has been employed full-time by the Company as the
director of product research and development since September 27, 1999. He was
the owner/operator of a chiropractic clinic from 1984 until 1996. From 1970
to 1999 he worked as a health care and nutritional consultant. Dr. Cochran
received his Doctorate of Chiropractic in 1984 from Palmer College of
Chiropractic, Davenport, Iowa.
DR. PETER H. ANTONIOU founded Pomegranate International in 1986 as an
international consulting firm specializing in educational programs, trade
matching activities, and consulting assistance. Since 1994 he has been an
adjunct professor at the Graduate College of Business for U.S. International
University, San Diego, CA; from 1993 to the present he has been an adjunct
professor at the Executive MBA and the Undergraduate College of Business at
CSU San Marcos; and from 1991 to the present he has been an adjunct professor
at the School of Business Administration at Mount St. Mary's College, Los
Angeles, CA. Dr. Antoniou received
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his Bachelor of Science degree in 1981 in Business Administration, and his
Masters in International Business Administration in 1982, from the
International University Europe, London, England. He received his Doctorate
in Business Administration in 1986 from the U.S. International University.
PATRICK S. MILLSAP, has been the vice-president of marketing for the
Subsidiary since May 1999. From April 1991 until May 1999 he was employed by
Natural Alternatives International, Inc. as a senior account manager. Mr.
Millsap graduated in 1990 from San Diego State University with a bachelor's
degree in history. He received a certificate of international business from
the University of San Diego in 1996, and is currently studying international
trade and finance at the University of California, San Diego.
Each of our directors is elected to hold office for one year and until
his or her successor is elected and duly qualified. Each of our officers is
appointed to hold office until the first meeting of the Board of Directors
immediately following the annual meeting of shareholders. William P. Spencer
and Debra L. Spencer are husband and wife.
Executive Compensation
Neither Imagenetix nor its subsidiary has a written employment contract
with any of its officers, although we have entered into a preliminary written
agreement with Dr. Cochran concerning his employment. We pay Mr. Spencer an
annual salary of $100,000 and provide health care insurance for him and his
wife. Dr. Cochran received $20,375 in royalty payments from us pursuant to an
Alliance Agreement which terminated on September 27, 1999, when he became a
full-time employee for us. Dr. Cochran will receive an annual salary of
$100,000 and health insurance benefits for himself only. Following this
offering, we will furnish him with a company-leased automobile. After this
offering, we have agreed to issue 30,000 shares to Dr. Cochran for his
interest in all of the company products developed by him, and an additional
10,000 shares for accepting employment with us. We have also agreed with him
to establish a bonus pool based upon the company's performance. If we decide
to terminate Dr. Cochran's employment, the Alliance Agreement will be
reinstated effective on the date of severance.
As consideration for accepting positions as directors, Dr. Cochran and
Dr. Antoniou each received 5,000 shares of Common stock under our 1999 Stock
Bonus Plan.
Indemnification of Directors, Officers, and Others
Article 109 of the Colorado Business Corporation Act expressly authorizes
a Colorado corporation to indemnify its directors, officers, employees,
fiduciaries, and agents against claims or liabilities arising out of a
persons' conduct in these capacities if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests
of the Company. In general, these provisions provide for indemnification in
instances when a
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person acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the Company. A corporation may also
purchase and maintain liability insurance on behalf of these persons.
Article VIII of our Bylaws provides for the indemnification of the
Company's officers, directors, and employees. We do not maintain any
liability insurance on behalf of any director, officer, or other person
affiliated with us.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to our officers and directors pursuant to the
foregoing provisions, or otherwise, we are aware that in the opinion of the
Securities and Exchange Commission this indemnification is against public
policy as expressed in the Act and is therefore, unenforceable.
CERTAIN TRANSACTIONS
During 1999 the following persons loaned us $300,000 pursuant to the
terms of a Funding Agreement entered into in connection with the reverse
acquisition of the Colorado company by the California corporation in March
1999:
<TABLE>
<CAPTION>
Name Amount Loaned
<S> <C>
Claudia A. McAdam $50,000
Great Expectations Family Limited Partnership $50,000
David N. Nemelka $50,000
1st Zamora Corp. $75,000
Greg Puesy $26,250
Barry C. Loder $11,250
Gulfstream 1998 Irrevocable Trust $37,500
</TABLE>
These persons were issued convertible promissory notes which are
convertible into common stock at the rate of one share for each $3.00 of
principal debt. These note holders have agreed to convert the principal
amount of their notes into a total of 100,000 shares. The notes bear interest
at the rate of 10% per annum, which will be paid at the time of conversion.
Each of these persons was also granted warrants at the rate of one A Warrant
and one B Warrant for each $1.00 loaned to us. Prior to the date of this
offering, Great Expectations Family Limited Partnership sold and transferred
$25,000 of the promissory note, and the accompanying A and B warrants, issued
to it to David N. Nemelka.
Claudia A. McAdam is the spouse of Gary J. McAdam, the founder of the
Colorado corporation. Mr. McAdam is also the general partner of Great
Expectations Family Limited Partnership. 1st Zamora Corp. is a Colorado
corporation controlled by Laura Lee Madsen. Gulfstream 1998 Irrevocable Trust
is a trust created by Henry Fong for his children.
<PAGE>
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Mr. and Mrs. Spencer, officers, directors, and principal shareholders of
the our company, have loaned $288,500 to us for operating expenses. This loan
is evidenced by promissory notes dated May 25, 1999, for $100,000, July 20,
1999, for $90,000, July 28, 1999, for $75,000, September 10, 1999, for
$19,500, and September 20, 1999, for $4,000. The promissory notes provide for
interest at the rate of 10% per annum. The notes are due and payable not
later than May 25, 2000, through September 20, 2000, respectively. Repayment
of the loans will not be made from the selling proceeds of this offering, but
will be made from our profits, if any, or from the exercise of our
outstanding warrants.
Mr. Spencer owns 15% of the outstanding stock of Integris International,
one of our significant clients.
Dr. Cochran, one of our directors, entered into an Alliance Agreement
dated June 16, 1999, with us. This ten-year agreement granted to us the right
to market the products developed by Dr. Cochran, including those products
using Cetyl Myristoleate and ViGro. We agreed to pay Dr. Cochran a royalty of
10% of the actual payments received by us from all of these products sold by
us. This agreement terminated upon Dr. Cochran becoming a full-time employee
for us on September 27, 1999. Upon completion of this offering, he has agreed
to transfer all of his interest in these products to us for 30,000 shares of
our common stock.
CONCURRENT OFFERING
The registration statement of which this prospectus forms a part also
includes a prospectus with respect to an offering by certain selling security
holders of 100,000 shares received in the exchange of $300,000 in outstanding
promissory notes, 300,000 Class A and 300,000 Class B Warrants, and the
shares of common stock underlying the warrants, which warrants were issued in
connection with funds loaned to us by certain of the selling security
holders. These shares may be sold in the open market, in privately negotiated
transactions, or otherwise directly by the holders thereof.
We will not receive any proceeds from the sale of any of the selling
security holders' securities, except possibly in connection with the exercise
of the warrants. Sales of this stock or the potential of these sales may have
an adverse effect on the market price of the shares of common stock offered
hereby.
PRINCIPAL SHAREHOLDERS
Voting Securities
The following table sets forth certain information furnished by the
following persons concerning the common stock ownership as of August 30,
1999, of (i) each person who is known to us to be the beneficial owner of
more than five percent of the common stock; (ii) all directors and executive
officers; and (iii) our directors and executive officers as a group:
<PAGE>
Page 31
<TABLE>
<CAPTION>
Amount and Nature Percent of Class
Name and Address of Beneficial ----------------
of Beneficial Owner Ownership(1) Before Offering After Offering(2)
- ------------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
Management:
William & Debra Spencer 1,000,000(3) 57.97% 48.58%
11777 Bernardo Plaza Court
Suite 206
San Diego, CA 92128
Dr. Charles L. Cochran 5,000 *
226 Lake Court
Aptos, CA 95003
Dr. Peter H. Antoniou 5,000 *
2166 Lemon Ave.
Escondido, CA 92029
Officers and Directors
as a Group (4 Persons) 1,010,000 58.55% 49.07%
Others:
Gary J. McAdam 187,500(4) 10.71% 9%
14 Red Tail Drive
Highlands, CO 80126
1st Zamora Corp. 137,500(5) 7.86% 6.6%
9025 Oakwood Pl.
West Jordan, UT 84088
David N. Nemelka(6) 137,500(6) 7.86% 6.6%
55 West 200 North
Provo, UT 84601
</TABLE>
- -------------------
*Represents less than 1%.
(1) Unless otherwise indicated, this column reflects amounts as to which
the beneficial owner has sole voting power and sole investment power.
(2) Does not include shares to be issued, if any, pursuant to the
Underwriter's over-allotment option.
<PAGE>
Page 32
(3) William and Debra Spencer are husband and wife and are therefore
deemed to share beneficial ownership of these shares.
(4) All of these shares are held indirectly by Mr. McAdam. Of these
shares 162,500 are held directly by GM/CM Family Partnership, Ltd., a family
limited partnership controlled by Mr. McAdam. Claudia A. McAdam, the wife of
Mr. McAdam holds a promissory note from us convertible into approximately
16,667 shares of common stock and Great Expectations Family LP, a family
limited partnership controlled by Mr. McAdam, also holds a promissory note
from us convertible into approximately 8,333 shares of common stock. Mr.
McAdam is deemed to share beneficial ownership of the foregoing shares by
reason of his relationship to the direct owners of the shares.
(5) Of the shares listed, 112,500 are currently outstanding and held in
the name of 1st Zamora Corp. and 25,000 represent the approximate number of
shares which could be issued if the corporation converts its note in the
amount of $75,000. 1st Zamora Corp. is a Colorado corporation controlled by
Laura Lee Madsen, who is deemed to share beneficial ownership of these shares
with the corporation.
(6) Mr. Nemelka is holding 50,000 of these shares for the benefit of his
family limited partnership, Boulder Family Partnership Ltd, for which he is
the general partner, and 25,000 are held for the benefit of McKinley
Enterprises Profit Sharing Plan, of which he is the beneficiary. Of the
shares listed, 112,500 are currently outstanding and held in the name of Mr.
Nemelka and 25,000 represent the approximate number of shares which could be
issued if he converts his notes in the aggregate amount of $75,000.
DESCRIPTION OF SECURITIES
Equity Securities
We have two classes of stock, namely common stock, par value $.001 and
preferred stock, par value $001. There are 50,000,000 shares of common stock
authorized, of which 1,725,000 shares are outstanding. The holders of the
common stock have equal ratable rights to dividends from funds legally
available therefor, when, as, and if declared by the Board of Directors and
are entitled to share ratably in all of our assets available for distribution
to holders of common stock upon our liquidation, dissolution, or winding up.
Holders of the common stock are entitled to one vote per share on all matters
on which shareholders may vote at all meetings of shareholders. There are no
conversion rights, subscription rights, preemptive rights, cumulative voting
rights, or redemptive rights with respect to the common stock. There are no
sinking fund provisions relating to the common stock. The presently issued
and outstanding shares of common stock are, and upon sale and issuance as set
forth in this prospectus, the shares will be, validly issued, fully paid, and
non-assessable.
We have authorized 5,000,000 shares of preferred stock, none of which
shares is outstanding. Neither the Articles of Incorporation nor the Board of
Directors has determined the preferences, limitations, and relative rights of
the preferred stock. The issuance of any preferred stock may have the effect
of delaying, deferring, or preventing a change in control without further
<PAGE>
Page 33
action by the shareholders and may adversely affect the voting and other
rights of the holders of the common stock. At present we have no plans to
issue any shares of preferred stock.
Warrants
We have issued two classes of warrants, namely the A Warrants and the B
Warrants. The rights and terms of each class of warrants are the same, except
for the exercise price. The exercise price of the A Warrants is $3.00 per
share, and the exercise price of the B Warrants is $3.05 per share, subject
to adjustment under certain circumstances. We have outstanding 300,000 A
Warrants and 300,000 B Warrants, each warrant entitling the holder to
purchase one share of common stock at the exercise price at any time
beginning one year from the date of issuance, but not earlier than ninety
days from the date of this prospectus, and ending five years from the date of
this prospectus.
The warrants also provide for a cashless exercise. In a cashless
acquisition of shares pursuant to the provisions of the warrants, the warrant
holders have the right to convert the warrants, in whole or in part, into the
number of shares determined by dividing (a) the aggregate fair market value
of the shares of the common stock issuable upon exercise of the warrants
minus the aggregate warrant price of these shares by (b) the fair market
value of one share. The formula for computing the number of shares to be
issued in this type of exercise is set forth below:
Aggregate fair market value of shares
issuable upon exercise of the warrants
less the aggregate warrant price for
that number of shares
= Number of shares received in
------------------------------------- conversion
The fair market value of one share
For example, if a warrant holder wanted to exercise 1,000 warrants
exercisable at $3.00 per share, and if the fair market value of the shares on
the date of exercise were $10.00, the aggregate fair value of the shares to
be issued upon conversion would be $10,000, less the aggregate warrant price
for the shares which would be $3,000, divided by $10.00. Thus, the warrant
holder would receive 700 shares and the warrants to purchase the 1,000 shares
would be canceled as part of the cashless exercise.
We cannot call or redeem the warrants.
The warrants do not confer upon the holder any voting or preemptive
rights, or any other rights of a stockholder.
The warrant exercise price and the number and kind of shares of common
stock to be obtained upon exercise of the warrants are subject to adjustment
only in the event of a stock split
<PAGE>
Page 34
of, dividend on, or a subdivision, combination , or recapitalization of the
common stock or the sale of substantially all of our assets, or a merger or
consolidation into another corporation or other business entity where we are
not the surviving corporation.
The warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at our offices, with the form
of "Subscription Form" furnished with the warrant certificate filled out and
executed as indicated, accompanied by payment of the full exercise price for
the number of warrants being exercised.
Transfer Agent
The Transfer Agent for the shares of common stock is Interwest Transfer
Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117;
telephone number (801) 272-9294. Initially we will act as our own agent for
the transfer and exercise of the warrants.
DIVIDEND POLICY
We have not declared or paid any cash dividends as yet on the common
stock and the Board of Directors has not yet decided on a dividend policy.
Whether dividends will be paid will be determined by the Board of Directors
and will necessarily depend on our earnings, financial condition, capital
requirements and other factors. The Board of Directors has no current plans
to declare any dividends in the foreseeable future.
UNDERWRITING
We have agreed to sell to the Underwriting Group, for which Spencer
Edwards, Inc. is acting as the representative, and the underwriting group has
agreed to purchase from us, 333,334 shares of our common stock. The
underwriting group is obligated to purchase all of the shares, if any of the
shares are purchased.
Discounts and Costs
We will sell the shares to the underwriting group for $2.70 per share and
the underwriting group will offer the shares directly to the public at $3.00
per share. This offering price may not be changed until after the completion
of the public distribution. The Underwriter may also offer the shares to
certain securities dealers who may reoffer the shares on the same terms and
conditions of the offering set forth in this prospectus. The members of the
underwriting group may allow these discounts and concessions upon sales to
selected dealers as may be determined from time to time by Spencer Edwards.
The underwriter has advised us that it does not intend to sell any shares to
accounts for which it has discretionary authority.
If all of the shares are sold, we have also agreed to reimburse Spencer
Edwards on a nonaccountable basis for the Underwriter's expenses in the
amount of 3% of the gross proceeds
<PAGE>
Page 35
of the shares, including the proceeds from the over-allotment shares. We paid
$10,000 to Spencer Edwards toward these expenses when we entered into our
letter of intent with them and an additional $10,000 when we filed this
registration statement.
Over-allotment Option
The Underwriter has an option to purchase up to 35,000 additional shares
at the public offering price to cover over-allotments. The Underwriter can
exercise this option for a period of 30 days after the date of this
prospectus. If the Underwriter exercises this option, it will have a firm
commitment, subject to some conditions, to purchase the 35,000 shares.
Underwriter's Warrants
At the closing of the underwriting, we have agreed to sell to the
Underwriter for $100 warrants to purchase 33,333 shares at $3.60 per share.
These warrants cannot be transferred by the Underwriter for one year after
the date of this prospectus. They will be exercisable at any time after one
year from the date of this prospectus until six years from the date of the
prospectus. The warrants will contain anti-dilution provisions, a cashless
exercise provision, and piggyback registration rights.
Future Financings
We have agreed with Spencer Edwards on a non-exclusive basis that if they
arrange for equity, debt, or other financing for us over the next five years,
we will pay a commission to them ranging from 10% for equity financings to 5%
or less for debt financings, increase in lines of credit, sales of assets,
mergers, acquisitions, or joint ventures.
Lock-up of Shares
The Underwriting Agreement provides that we will cause all of our
officers and directors and certain others to enter into an agreement not to
sell, pledge, hypothecate, transfer, or otherwise dispose of any shares of
common stock owned by them for a period of 24 months from the date of this
prospectus without the prior written consent of the Underwriter. The shares
subject to the lock-up consist of the 1,010,000 owned by management, 215,000
shares issued to employees, consultants, and others, 45,000 shares reserved
for future issuance under our Stock Bonus Plan and 30,000 shares reserved for
issuance to Dr. Cochran.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common
stock. We cannot predict the effect, if any, that future market sales of our
shares, or the availability of these shares for sale, will have on the
prevailing market price of the common stock following this
<PAGE>
Page 36
offering. Nevertheless, sales of substantial amounts of our stock in the open
market following this offering could adversely affect the prevailing market
price of the stock.
Upon completion of this offering, and assuming no exercise of outstanding
warrants to purchase shares of the common stock, we will have 2,088,334
outstanding shares. Of those, only the 333,334 shares being offered in this
offering, will, subject to any applicable state law restrictions on secondary
trading, be freely tradeable without restriction under the Securities Act,
except that any shares purchased by "affiliates" (as that term is defined in
Rule 144 under the Securities Act) will be subject to the resale limitations
of Rule 144.
The remaining 1,725,000 shares are "restricted" within the meaning of
Rule 144 under the Securities Act. Of this number, 500,000 shares will be
eligible for immediate sale in the public market without restriction under
Rule 144(k). The remaining shares are subject to a twenty-four month lock-up
agreement with the underwriter.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of our
then outstanding shares (approximately 20,883 shares immediately after the
offering), or (ii) the average weekly trading volume of our stock during the
four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Commission. Sales pursuant to Rule 144 are also
subject to certain requirements relating to manner of sale, notice and
availability of current public information about Imagenetix. A person who is
not deemed to have been an affiliate of Imagenetix at any time during the 90
days immediately preceding the sale and whose restricted shares have been
fully-paid for two years since the later of the date they were acquired from
us, or the date they were acquired from one of our affiliates, may sell these
restricted shares under Rule 144(k) without regard to the limitations and
requirements described above. Under Rule 701, shares privately issued under
certain compensatory stock-based plans, such as our Stock Bonus Plan, may be
resold under Rule 144 within ninety days from the date of this prospectus. Of
the current outstanding shares, 141,500 were issued prior to this offering
under Rule 701.
Prior to the offering, there has been no public market for our stock. We
cannot predict the effect, if any, that sales of shares under Rule 144 or the
availability of shares for sale will have on the market price of our stock
prevailing from time to time after the offering. We are unable to estimate
the number of shares that may be sold in the public market under Rule 144,
because the amount will depend on the trading volume in, and market price
for, our stock and other factors. Nevertheless, sales of substantial amounts
of shares in the public market, or the perception that sales of these shares
could occur, could adversely affect the market price of our stock.
<PAGE>
Page 37
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
Imagenetix by Ronald N. Vance, Attorney at Law, Salt Lake City, Utah. The
firm of Krys Boyle Freedman & Sawyer, P.C. has acted as counsel for the
Underwriter in this offering.
EXPERTS
Our financial statements for the year ended March 31, 1999, included in
this prospectus have been examined by Pritchett, Siler & Hardy, P.C.,
Certified Public Accountants. The financial statements examined by the
Certified Public Accountants have been included in reliance upon their audit
report.
FINANCIAL STATEMENTS
We have attached to this prospectus copies of our audited financial
statements as of March 31, 1999, consisting of a consolidated balance sheet
at March 31, 1999 and the related statements of operations, stockholders'
equity and cash flows from inception on January 7, 1999, through March 31,
1999. We have also included unaudited financial statements for September 30,
1999, consisting of a balance sheet as of September 30, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the six
months ended September 30, 1999, and from inception on January 7, 1999,
through September 30, 1999.
<PAGE>
Page 38
IMAGENETIX, INC. AND SUBSIDIARY
CONTENTS
PAGE
----
- -- Independent Auditors Report 1
- -- Consolidated Balance Sheets, September 30, 1999
(Unaudited) and March 31, 1999 2
- -- Consolidated Statements of Operations, for the six
months ended September 30, 1999 (Unaudited)
and from inception on January 7, 1999 through
March 31, 1999 and September 30, 1999 (Unaudited) 3
- -- Consolidated Statement of Stockholders' Equity,
from inception on January 7, 1999 through March 31,
1999 and September 30, 1999 (Unaudited) 4
- -- Consolidated Statements of Cash Flows, for the six
months ended September 30, 1999 (Unaudited) and from
inception on January 7, 1999 through
March 31, 1999 and September 30, 1999 (Unaudited) 5-6
- -- Notes to Consolidated Financial Statements 7-14
<PAGE>
Page 39
INDEPENDENT AUDITORS' REPORT
Board of Directors
IMAGENETIX, INC. AND SUBSIDIARY
San Diego, California
We have audited the accompanying consolidated balance sheet of Imagenetix,
Inc. and Subsidiary at March 31, 1999, and the related statements of
operations, stockholders' equity and cash flows from inception on January 7,
1999 through March 31, 1999. 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 consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of
Imagenetix, Inc. and Subsidiary as of March 31, 1999, and the results of its
operations and its cash flows for the period from inception through March 31,
1999, in conformity with generally accepted accounting principles.
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.
May 10, 1999
Salt Lake City, Utah
<PAGE>
Page 40
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
1999 March 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash in bank $ 183,318 $ 141,154
Accounts receivable 413,038 -
Inventory 362,058 1,831
Prepaid assets 30,000 -
------------ ------------
Total Current Assets 988,414 142,985
------------ ------------
PROPERTY AND EQUIPMENT, net 31,332 6,594
------------ ------------
OTHER ASSETS:
Deferred stock offering costs 12,323 -
Refundable deposits 855 855
Trademark, net 998 -
------------ ------------
Total Other Assets 14,176 855
------------ ------------
$ 1,033,922 $ 150,434
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 274,140 $ 3,014
Accrued liabilities 21,619 4,629
Customer deposits 83,025 -
Notes payable - related parties 607,250 100,000
Current portion of capital lease obligation 5,262 -
------------ ------------
Total Current Liabilities 991,296 107,643
CAPITAL LEASE OBLIGATION, less current portion 13,826 -
------------ ------------
Total Liabilities 1,005,122 107,643
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued and
outstanding - -
Common stock, $.001 par value, 50,000,000
shares authorized, 1,725,000 and 1,800,000
shares issued and outstanding, respectively 1,725 1,800
Capital in excess of par value 69,875 61,142
Accumulated deficit (42,800) (20,151)
------------ ------------
Total Stockholders' Equity 28,800 42,791
------------ ------------
$ 1,033,922 $ 150,434
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
Page 41
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From Inception on
For the Six January 7, 1999 Through
Months Ended -------------------------------------
September 30, September 30,
1999 March 31, 1999
(Unaudited) 1999 (Unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 781,138 $ 84,986 $ 866,124
COST OF GOODS SOLD 529,274 68,596 597,870
------------ ------------ ------------
GROSS PROFIT 251,864 16,390 268,254
------------ ------------ ------------
EXPENSES:
Selling expense 38,317 20,023 58,340
General and administrative 219,594 15,963 235,557
Research and development 2,565 500 3,065
------------ ------------ ------------
Total Expenses 260,476 36,486 296,962
------------ ------------ ------------
LOSS FROM OPERATIONS (8,612) (20,096) (28,708)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense - related party (12,250) (55) (12,305)
Interest expense (2,249) - (2,249)
Other Income 462 - 462
------------ ------------ ------------
Total Other (Expense) (14,037) (55) (14,092)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (22,649) (20,151) (42,800)
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
------------ ------------ ------------
NET LOSS $ (22,649) $ (20,151) $ (42,800)
------------ ------------ ------------
LOSS PER COMMON SHARE $ (.01) $ (.01) $ (.02)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
Page 42
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON JANUARY 7, 1999
THROUGH MARCH 31, 1999 AND SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in
------------------------- ------------------------- Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit
---------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
January 7, 1999 - $ - - $ - $ - $ -
Issuance of 1,300,000 shares of
common stock for cash,
January 1999 at $.052,
net of $5,000 stock offering
costs - - 1,300,000 1,300 61,642 -
Effect of recapitalization
of subsidiary, March
1999 - - 500,000 500 (500) -
Net loss for the period
ended March 31, 1999 - - - - - (20,151)
---------- --------- ----------- --------- ---------- -----------
BALANCE,
March 31, 1999 - - 1,800,000 1,800 61,142 (20,151)
Issuance of 166,500
shares of common
stock for services
rendered, June, 1999
at $.052 per share
(unaudited) - - 166,500 167 8,491 -
Cancellation of 241,500
shares of common
stock, June, 1999
at $.052 per share. The
shares were contributed
back to the Company by an
officer.
(unaudited) - - (241,500) (242) 242 -
Net loss for the six
months ended
September 30, 1999
(unaudited) - - - - - (22,649)
---------- --------- ----------- --------- ---------- -----------
BALANCE,
September 30, 1999
(unaudited) - $ - 1,725,000 $ 1,725 $ 69,875 $ (42,800)
---------- --------- ----------- --------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
-4-
<PAGE>
Page 43
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
From Inception on
For the Six January 7, 1999 Through
Months Ended ----------------------------------
September 30, September 30,
1999 March 31, 1999
(Unaudited) 1999 (Unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22,649) $ (20,151) $ (42,800)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Non-cash expense 8,658 - 8,658
Depreciation expense 3,660 138 3,798
Changes in assets and liabilities:
(Increase) in accounts receivable (413,038) - (413,038)
(Increase) in inventory (360,227) (1,831) (362,058)
(Increase) in prepaid assets (30,000) - (30,000)
(Increase) in other assets - (855) (855)
Increase in accounts payable 271,126 3,014 274,140
Increase in accrued liabilities 16,989 4,629 21,618
Increase in customer deposits 83,025 - 83,025
------------ ------------ ------------
Net Cash (Used) by Operating
Activities (442,456) (15,056) (457,512)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of office equipment (7,039) (6,732) (13,771)
Purchase of trademark (1,015) - (1,015)
------------ ------------ ------------
Net Cash (Used) by Investing
Activities (8,054) (6,732) (14,786)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock
issuance - 67,942 67,942
Proceeds from notes payable
- related party 507,250 100,000 607,250
Payments for stock offering costs (12,323) (5,000) (17,323)
Payments for capital leases (2,253) - (2,253)
------------ ------------ ------------
Net Cash Provided by Financing
Activities 492,674 162,942 655,616
------------ ------------ ------------
NET INCREASE IN CASH 42,164 141,154 183,318
CASH AT BEGINNING OF PERIOD 141,154 - -
------------ ------------ ------------
CASH AT END OF PERIOD $ 183,318 $ 141,154 $ 183,318
------------ ------------ ------------
[CONTINUED]
</TABLE>
-5-
<PAGE>
Page 44
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
From Inception on
For the Six January 7, 1999 Through
Months Ended ----------------------------------
September 30, September 30,
1999 March 31, 1999
(Unaudited) 1999 (Unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,057 $ - $ 1,057
Income taxes $ - $ - $ -
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For the Period Ended September 30, 1999 (unaudited)
The Company entered into various capital leases for equipment valued at
$21,341.
The Company issued 166,500 shares of common stock for services
rendered. The shares were valued at $.052 per share or $8,658. An
officer of the Company also contributed 241,500 shares of common
stock back to the company for cancellation.
For the Period Ended March 31, 1999
During March 1999, the Company effected a recapitalization wherein
Parent issued 1,300,000 shares of common stock to acquire all the
outstanding stock of Subsidiary. Parent had 500,000 shares of common
stock outstanding at the time of the recapitalization.
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE>
Page 45
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements represent
the accounts of Imagenetix, Inc. ["Parent"] organized under the laws of the
State of Colorado on July 26, 1996 (formerly Internet International
Business Management, Inc.) and Imagenetix ["Subsidiary"] organized under
the laws of the State of California on January 7, 1999 ["The Company"]. The
Company is engaged in the business of setting up alliances between various
people and companies in order to market and distribute health care
products. For the past few months, the Company has been selecting
suppliers, finding customers, developing its own method of business
operations, and many other activities necessary to form a viable business.
On March 23, 1999, Parent completed an exchange agreement with Subsidiary
wherein Parent issued 1,300,000 shares of its common stock in exchange for
all of the outstanding common stock of the Subsidiary. The Acquisition was
accounted for as a recapitalization of the Subsidiary as the shareholders
of the Subsidiary controlled the combined Company after the acquisition.
There was no adjustment to the carrying values of the assets or liabilities
of the Parent or Subsidiary as a result of the recapitalization [SEE NOTE
6].
The Company has, at the present time, not paid any dividends and any
dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
INTERIM FINANCIAL STATEMENTS - The accompanying interim financial
statements have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 1999 and for all the periods
presented have been made. The results of operations for the periods ended
September 30, 1999 are not necessarily indicative of the operating results
for the full year.
CONSOLIDATION - All significant intercompany transactions between the
Parent and Subsidiary have been eliminated in consolidations.
CASH AND CASH EQUIVALENTS - For purposes of the financial statements, the
Company considers all highly liquid debt investments purchased with a
maturity of three months or less to be cash equivalents.
ORGANIZATION COSTS - Costs of approximately $2,000 that were incurred to
organize the Company have been expensed.
TRADEMARKS - Costs of purchasing trademarks are amortized on a
straight-line basis over 17 years.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized, upon being placed in
service. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is computed for financial statement purposes using
the straight-line method over the estimated useful lives of the assets.
- 7 -
<PAGE>
Page 46
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INVENTORY - Inventory is carried at the lower of cost or market using the
First In, First Out method [SEE NOTE 2].
REVENUE RECOGNITION - Revenue is recognized when the product is shipped
to the customer.
LOSS PER SHARE - The computation of loss per share is based on the weighted
average number of shares outstanding during the period presented in
accordance with Statement of Financial Accounting Standards ["SFAS"] No.
128, "Earnings Per Share" [SEE NOTE 12].
ADVERTISING COSTS - Costs incurred in connection with advertising and
promotion of the Company's products are expensed as incurred. Such costs
amounted to approximately $38,317 for the six months ended September 30,
1999 (unaudited) and $13,000 for the period ended March 31, 1999.
PRODUCT RETURNS - The Company has not had significant returns of product
and, accordingly, has not accrued an allowance for product returns.
Management estimates that future product returns will also be
insignificant.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities, the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimated by management.
RECENTLY ENACTED ACCOUNTING STANDARDS - Statement of Financial Accounting
Standards ["SFAS"] No 130, "Reporting Comprehensive Income", SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", No.
132, "Employer's Disclosure about Pensions and Other Postretirement
Benefits", SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", SFAS No. 134, "Accounting for Mortgage-Backed Securities..."
and SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections" were recently issued. SFAS No. 130, 131, 132, 133, 134 and 135
have no current applicability to the Company or their effect on the
financial statements would not have been significant.
NOTE 2 - INVENTORIES
Inventory is carried at the lower of cost or market value and consists of
the following:
<TABLE>
<CAPTION>
September 30,
1999 March 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Raw Materials $ 362,058 $ 1,831
---------------- ------------
$ 362,058 $ 1,831
---------------- -------------
</TABLE>
- 8 -
<PAGE>
Page 47
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TRADEMARKS
During the six months ended September 30, 1999 (unaudited) the Company
recorded $1,015 to register trademarks name for their products. The
trademarks are being amortized on a straight-line basis over 17 years. For
the six months ended September 30, 1999 (unaudited) amortization expense
was $18.
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of equipment, at cost, less accumulated
depreciation:
<TABLE>
<CAPTION>
September 30,
1999 March 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Office Equipment $ 35,112 $ 6,732
Less accumulated depreciation (3,780) (138)
------------ ------------
$ 31,332 $ 6,594
------------- ------------
</TABLE>
Depreciation expense for the six months ended September 30, 1999
(unaudited) was $3,641 and for the period ended March 31, 1999 was $138.
NOTE 5 - NOTES PAYABLE - RELATED PARTY
During the six months ended September 30, 1999 (unaudited) the President of
the Company loaned the Company $288,500. The loans are due at dates varying
from May 2000 to September 2000, are unsecured, and have an interest rate
of 10%. Accrued interest as of September 30, 1999 (unaudited) was $6,715.
During September 1999 (unaudited) a relative of the President loaned the
Company $30,000. The loan is due at September 2000 and bears an interest
rate of 10%. Accrued interest as of September 30, 1999 (unaudited) was
$115.
At September 30, 1999 (unaudited) and March 31, 1999, the Company had
convertible notes payable outstanding totaling $288,750 (unaudited) and
$100,000, respectively, to individuals who are shareholders of the Company
or to entities related to shareholders of the Company. The notes bear
interest at 10% per annum. The notes are due upon the receipt of proceeds
from a proposed public stock offering [SEE NOTE 13] or on March 29, 2000
whichever is earlier. At September 30, 1999 (unaudited) and March 31, 1999,
the Company accrued $5,400 (unaudited) and $55, respectively, in interest
expense on the notes. The notes and any unpaid interest thereon are
convertible into common stock of the Company at $3.00 per share. The
Company also issued 288,750 "A" warrants and 288,750 "B" warrants to the
holders of the notes payable [SEE NOTE 6]. The "A" warrants allow the
holder to acquire one share of common stock per warrant at $3 per share.
The "B" warrants allow the holder to acquire one share of common stock per
warrant at $3.05 per share. The convertible notes were issued as part of a
funding agreement [SEE NOTE 11].
- 9 -
<PAGE>
Page 48
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL STOCK AND RECAPITALIZATION
STOCK BONUS PLAN - During June 1999 (unaudited), the Board of Directors of
the Company adopted a stock bonus plan. The plan provides for the granting
of awards of up to 211,500 shares of common stock to officers, directors,
consultants and employees. Awards under the plan will be granted as
determined by the board of directors. An officer and majority shareholder
has agreed to return and cancel 241,500 shares of common stock so that the
common shares issued through the stock bonus plan will not further dilute
the public shareholders of the company. During June 1999 (unaudited),
166,500 shares valued at $.052 per share were issued under the plan to
certain employees, consultants and directors.
PREFERRED STOCK - The Company has authorized 5,000,000 shares of preferred
stock, $.001 par value, with such rights, preferences and designations and
to be issued in such series as determined by the Board of Directors. No
shares are issued and outstanding at September 30, 1999 (unaudited) or
March 31, 1999.
WARRANTS - As of September 30, 1999 (unaudited) and March 31, 1999, the
Company issued 288,750 (unaudited) and 100,000 "A" warrants, respectively,
and 288,750 (unaudited) and 100,000 "B" warrants, respectively, to the
holders of convertible notes payable [SEE NOTE 5]. The "A" warrants allow
the holder to acquire one share of common stock per warrant at $3 per
share. The "B" warrants allow the holder to acquire one share of common
stock per warrant at $3.05 per share. The warrants are exercisable for a
period of five years from the filing of the proposed registration statement
or through December 31, 2005 if a registration statement is not filed by
December 31, 1999.
EFFECT OF RECAPITALIZATION OF SUBSIDIARY - During January 1999, in
connection with its organization, the Subsidiary issued 1,300,000 shares of
its previously authorized, but unissued common stock. Total proceeds from
the sale of stock amounted to $67,942 (or $.052 per share). During March
1999, in connection with its Exchange Agreement with the Subsidiary, the
Parent issued 1,300,000 shares of its previously authorized, but unissued
common stock in exchange for previously issued Subsidiary stock. The
operations of Parent are included only from the date of recapitalization.
Accordingly, the previous operations and retained deficits of Parent prior
to the date of recapitalization have been eliminated. In connection with
the recapitalization, Parent effected a forward stock split on the basis of
100 shares issued for each 1 share previously outstanding. The former
shareholders of Parent retained 500,000 shares of common stock immediately
after the exchange of stock.
- 10 -
<PAGE>
Page 49
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL STOCK AND RECAPITALIZATION [CONTINUED]
The financial statements of Parent prior to the recapitalization of the
Company have not been included because the Parent's operations have been
eliminated in the recapitalization. However, the following information
summarizes the Stockholders' equity of the Parent prior to the
recapitalization of Subsidiary:
IMAGENETIX
(Formerly Internet International Business Management, Inc.)
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON JULY 26, 1996 THROUGH MARCH 23, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Capital in During the
_____________________ _____________________ Excess of Development
Shares Amount Shares Amount Par Value Stage
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 26, 1996 - $ - - $ - $ - $ -
Issuance of 5,000 shares of
common stock for cash,
July, 1996 at $.01
per share - - 5,000 5 45 -
Net loss for the period
ended December 31, 1996 - - - - - (4)
--------- --------- --------- --------- --------- -----------
BALANCE, December 31, 1996 - - 5,000 5 45 (4)
Net loss for the period
ended December 31, 1997 - - - - - (10)
--------- --------- --------- --------- --------- -----------
BALANCE, December 31, 1997 - - 5,000 5 45 (14)
Net loss for the period
ended December 31, 1998 - - - - - (10)
--------- --------- --------- --------- --------- -----------
BALANCE, December 31, 1998 - - 5,000 5 45 (24)
Capital contribution, March 1999 - - - - 5,000 -
100 for 1 forward stock split
March 1999 - - 495,000 495 (495) -
Net loss for the period
ended March 23, 1999 - - - - - (5,026)
--------- --------- --------- --------- --------- -----------
BALANCE, March 23, 1999 - $ - 500,000 $ 500 $ 4,550 $ (5,050)
--------- --------- --------- --------- --------- -----------
</TABLE>
- 11 -
<PAGE>
Page 50
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". SFAS
No. 109 requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting
differences between book and tax accounting methods and any available
operating loss or tax credit carryforwards. At September 30, 1999
(unaudited) and March 31, 1999, the Company has available unused operating
loss carryforwards of approximately $40,700 (unaudited) and $20,000,
respectively, which may be applied against future taxable income and which
expire in 2019.
The amount of and ultimate realization of the benefits from the operating
loss carryforwards for income tax purposes is dependent, in part, upon the
tax laws in effect, the future earnings of the Company, and other future
events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards the
Company has established a valuation allowance equal to the tax effect of
the loss carryforwards and, therefore, no deferred tax asset has been
recognized for the loss carryforwards. The net deferred tax assets are
approximately $13,800 (unaudited) and $6,800 as of September 30, 1999
(unaudited) and March 31, 1999, respectively, with an offsetting valuation
allowance of the same amount.
NOTE 8 - CONCENTRATION OF CREDIT RISK
For the period March 31, 1999, all of the Company's sales were from one
significant customer. Further, the Company maintains all its cash balances
in one bank. At March 31, 1999, the Company had cash balances in excess of
federally insured amount of approximately $41,000. An officer of the
Company is a 15% shareholder in the significant customer.
At September 30, 1999 (unaudited), the Company maintained its cash balances
primarily at one bank. The Company's cash balances are insured by the
Federal Deposit Insurance Corporation up to a maximum of $100,000. At
September 30, 1999, (unaudited) the Company had cash balances in excess of
federally insured amount of approximately $83,000.
NOTE 9 - ALLIANCE AGREEMENT
Subsequent to March 31, 1999, the Company entered into an Alliance
Agreement with an individual who has developed nutritional and skin care
products and innovations. The Company will pay the developer a 10%
commission based on sales of the developer's products or innovations. The
developer has been appointed as a member of the board of directors of the
Company. The agreement provides for a ten-year term but the agreement will
terminate when the developer becomes a full time employee of the Company.
The Company anticipates entering into an employment agreement with the
developer upon successful completion of its proposed public stock offering.
During the six months ended September 30, 1999 (unaudited), the developer
became a full-time employee of the Company and, thus, the alliance
agreement was terminated. No sales commission was paid to the developer.
Upon completion of the proposed offering, the developer has agreed to
transfer all of his interest in his products to the Company for 30,000
shares of the Company's common stock.
- 12 -
<PAGE>
Page 51
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LEASES
OPERATING LEASE - The Subsidiary entered into a month to month operating
lease for office space beginning March 22, 1999. The monthly rent is $1,710
per month. Rent expense for the six months ended September 30, 1999
(unaudited) totaled $10,810. Rent expense for the period ended March 31,
1999 totaled $570. As of March 31, 1999 and September 30, 1999 (unaudited),
a security deposit of $855 was included in other assets.
CAPITAL LEASES - During the six months ended September 30, 1999 (unaudited)
the Company entered into three capital leases for office equipment valued
at $21,341. The assets and liabilities under the capital leases were
recorded at the lower of the present value of the minimum lease payments or
the fair value of the assets at the time of purchase. The assets are
amortized over their related lease terms. Amortization expense of $2,583,
for the assets under the capital leases, has been included in depreciation
expense for the period ended September 30, 1999 (unaudited).
Total future minimum lease payments, executory costs and current portion of
capital lease obligations as of September 30, 1999 (unaudited) are as
follows:
<TABLE>
<CAPTION>
Lease Payments
--------------
<S> <C>
For the period ended March 31, 2000 $ 3,500
For the year ended March 31, 2001 7,947
For the year ended March 31, 2002 7,009
For the year ended March 31, 2003 2,637
For the year ended March 31, 2004 2,268
Thereafter 189
--------------
Total future minimum lease payments $ 23,550
Less: amounts representing interest and executory costs (4,462)
--------------
Present value of the future minimum lease payments 19,088
Less: current portion (5,262)
--------------
Capital lease obligations - long-term $ 13,826
--------------
</TABLE>
NOTE 11 - COMMITMENTS AND AGREEMENTS
FUNDING AGREEMENT - In connection with the recapitalization of the Company
[SEE NOTE 6], a funding agreement was negotiated wherein the shareholders
and officers of Parent (prior to the recapitalization) would provide
$300,000 of funding for the combined company. As of September 1999
(unaudited), $288,750 was received [SEE NOTE 5]. The remaining $11,250 was
received in October 1999 (unaudited). The funding agreement also provided
for 300,000 "A" warrants and 300,000 "B" warrants to be issued. All
warrants issued are subject to "Piggy-Back" registration rights should the
Company file a registration statement.
- 13 -
<PAGE>
Page 52
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - LOSS PER SHARE
The following data show the amounts used in computing loss per share and
the effect on income and the weighted-average number of shares of dilutive
potential common stock for the period presented:
<TABLE>
<CAPTION>
From Inception on
For the Six January 7, 1999 Through
Months Ended _______________________________
September 30, September 30,
1999 March 31, 1999
(Unaudited) 1999 (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
Loss from continuing operations available
to common shareholders (Numerator) $ (22,649) $ (20,151) $ (42,800)
------------- ------------- ------------
Weighted average number of common
shares outstanding used in loss per
share during the period (Denominator) 1,761,885 1,800,000 1,773,778
-------------- ------------- -------------
</TABLE>
Dilutive loss per share was not presented, as its effect is anti-dilutive.
At September 30, 1999 (unaudited) and March 31, 1999 the Company had
warrants outstanding to purchase 577,500 (unaudited) and 200,000 shares of
common stock, respectively, at prices of $3.00 and $3.05, per share that
were not included in the computation of diluted loss per share because
their effect was anti-dilutive. In October 1999, the Company issued 22,500
additional warrants in connection with the funding agreement [SEE NOTE 11].
NOTE 13 - SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING OF COMMON STOCK - The Company plans to file a
registration statement with the United States Securities and Exchange
Commission on Form SB-1 under the Securities Act of 1933. The Company
proposes to sell 333,334 (which includes 100,000 shares for the conversion
of $300,000 of notes payable) common shares at a price of $3 per share,
which price has been arbitrarily determined by the Company. The shares will
be offered and sold by an underwriter, who will receive 10% of the offering
price of each share sold. The underwriter will also receive a 3%
non-accountable allowance for offering expenses. Other direct offering
expenses are expected to approximate $50,000. Underwriter warrants and
sales over-allotments are also provided for in the proposed offering. The
Company has incurred stock offering costs of $12,323 (unaudited) and $0 as
of September 30, 1999 (unaudited) and March 31, 1999, respectively. These
costs will be netted against the proceeds of the proposed public offering.
In accordance with the terms of a funding agreement [SEE NOTE 11], the
Company will also register the shares of common stock related to 300,000
Class "A" warrants and 300,000 Class "B" warrants. The Class "A" warrants
allow the holder to purchase shares of common stock at $3 per share. The
Class "B" warrants allow the holder to purchase shares of common stock at
$3.05 per share.
- 14 -
<PAGE>
Page 53
[INSIDE BACK COVER]
GLOBESTAR
[PICTURE OF GLOBE]
<PAGE>
Page 54
[OUTSIDE BACK COVER]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Plan of Operation
Business
Management
Certain Transactions
Concurrent Offering
Principal Shareholders
Description of Securities
Dividend Policy
Underwriting
Shares Eligible For Future Sale
Legal Matters
Experts
</TABLE>
Until _____, 1999, (ninety days after the date of this prospectus) all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IMAGENETIX
JUST IMAGINE IT!
<PAGE>
Page 55
[ALTERNATIVE PAGE]
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or shale is not permitted.
IMAGENETIX, INC.
300,000 Class A Warrants
300,000 Class B Warrants
700,000 Shares of Common Stock
This Prospectus relates to 300,000 Class A Warrants and 300,000
Class B Warrants held by six selling warrant holders. This Prospectus also
relates to the 300,000 shares of common stock issuable upon exercise of the
Class A Warrants and the 300,000 shares of common stock issuable upon exercise
of the Class B Warrants, as well as 100,000 shares issued to certain note
holders.
The warrants and the shares may be sold from time to time by the
selling security holders. The distribution of these securities may be effected
in one or more transactions that may take place on the over-the-counter market
(if the common stock is ever quoted on an over-the-counter market), including
ordinary brokers' transactions, privately negotiated transactions, or through
sales to one or more dealers for resale of the securities as principals, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices, or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the selling persons.
We will not receive any of the proceeds from the sale of these shares
or warrants, except the exercise price of the warrants.
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company of
233,334 shares of common stock was declared effective by the Securities and
Exchange Commission. The Company will receive approximately $630,002 in net
proceeds from this offering (assuming no exercise of the Underwriter's
over-allotment option) after payment of underwriting discounts and estimated
expenses of this offering.
<PAGE>
Page 56
THIS OFFERING IS HIGHLY SPECULATIVE AND INVOLVES SPECIAL RISKS
CONCERNING THE COMPANY AND ITS BUSINESS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is _______, 1999.
<PAGE>
Page 57
[ALTERNATE PAGE]
SELLING SECURITY HOLDERS
An aggregate of up to 100,000 shares issued in the conversion of
outstanding notes in the principal amount of $300,000 and 300,000 A Warrants and
300,000 Class B Warrants, as well as the shares underlying these Warrants, may
be offered for resale by the investors listed below.
The following table sets forth certain information with
respect to each selling security holder. The Company will not receive any of
the proceeds from the sale of these securities, except for the exercise price
of the Warrants. There are no material relationships between any of the
selling security holders and us, or any of our predecessors or affiliates,
nor have any such material relationships existed within the past three years,
except as footnoted below. Except as described below, no selling security
holder will beneficially own any of our securities if the selling security
holders' shares and warrants are sold. Each of the selling security holders
intends to offer and sell all of the securities listed below.
<TABLE>
<CAPTION>
Number of
Securities to % of
Number of Number of be Beneficially Class
Name of Selling Securities Securities Owned on Comple- After
Shareholder Beneficially Owned Being Offered tion of Offering Offering
- ----------- ------------------ ------------------------------------- ---------------- ---------
<S> <C> <C> <C> <C>
Claudia A. McAdam(1) 187,500(2) 16,667 Shares 162,500 7.9%
50,000 A Warrants and 50,000 shares -0-
underlying the warrants
50,000 B Warrants and 50,000 shares -0-
underlying the warrants
Great Expectations Family 187,500(3) 8,333 Shares 162,500 7.9%
Limited Partnership(1)
25,000 A Warrants and 25,000 shares -0-
underlying the warrants
25,000 B Warrants and 25,000 shares -0-
underlying the warrants
Gregory Pusey 48,125 8,750 Shares 39,375 1.9%
26,250 A Warrants and 26,250 shares
underlying the warrants
<PAGE>
Page 58
26,250 B Warrants and 26,250 shares
underlying the warrants
1st Zamora Corp.(4) 137,500 25,000 Shares 112,500 5.4%
75,000 A Warrants and 75,000 shares -0-
underlying the warrants
75,000 B Warrants and 75,000 shares -0-
underlying the warrants
Barry C. Loder 20,625 3,750 Shares 16,875 *
11,250 A Warrants and 11,250 shares
underlying the warrants
11,250 B Warrants and 11,250 shares
underlying the warrants
Gulfstream 1998 Irrevocable
Trust(5) -0- 12,500 Shares -0- *
37,500 A Warrants and 37,500 shares
underlying the warrants
37,500 B Warrants and 37,500 shares
underlying the warrants
David N. Nemelka 137,500
25,000 Shares 112,500 5.4%
75,000 A Warrants and 75,000 shares
underlying the warrants
75,000 B Warrants and 75,000 shares
underlying the warrants
</TABLE>
- -----------------
* Represent less than 1%
(1) Claudia A. McAdam and Gary J. McAdam are husband and wife. Mr.
McAdam is a general partner of Great Expectations Family Limited Partnership.
Mr. McAdam was a founder of the Company, was instrumental in introducing
management of the Company to the Underwriter, and in negotiating the terms of
the underwriting for the Company. Mrs. McAdam and Great Expectations Family
Limited Partnership each loaned $50,000 to the Company, the principal and
accrued interest of which amounts may be converted into Shares.
(2) Mrs. McAdam shares beneficial ownership of these shares with her
husband, Gary J. McAdam, and certain entities. Of these shares 162,500 are
held directly by GM/CM Family Partnership, Ltd., a family limited partnership
controlled by Mr. McAdam. Also, Mrs. McAdam holds a promissory note from us
convertible into approximately 16,667 shares of common stock and Great
Expectations Family LP, a family limited partnership controlled by Mr. McAdam,
also holds a promissory note from us convertible into approximately 8,333
shares of common stock.
(3) This entity is controlled by Mr. McAdam who is deemed to share
beneficial ownership of these shares with his wife, Claudia A. McAdam.
(4) 1st Zamora Corp. is a Colorado corporation controlled by Laura Lee
Madsen.
<PAGE>
Page 59
(5) This trust was created by Henry Fong for the benefit of his children.
<PAGE>
Page 60
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
The sale of the warrants or shares by the selling security holders
may be effected from time to time in transactions (which may include block
transactions by or for the account of the selling security holders) in the
over-the-counter market (if a market should develop) or in negotiated
transactions or otherwise. Sales may be made at fixed prices which may be
changed, at market prices, if any, prevailing at the time of sale, or at
negotiated prices.
The selling security holders may effect these transactions by
selling their warrants or shares directly to purchasers, through broker-dealers
acting as agents for the selling security holders or to broker-dealers who may
purchase the securities as principals and thereafter sell the securities from
time to time in the over-the-counter market, if any, in negotiated transactions
or otherwise. These broker-dealers, if any, may receive compensation in the form
of discounts, concessions or commissions from the selling security holders or
the purchasers for whom the broker dealers may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Securities Exchange
Act, any person engaged in the distribution of the selling security holders'
warrants or shares may not simultaneously engage in market making activities
with respect to any of our securities for a period of at least two (and possibly
nine) business days prior to the start of any distribution. Accordingly, in the
event that the Underwriter of our public offering is engaged in a distribution
of the selling security holders' securities, it will not be able to make a
market in our shares during the applicable restrictive period. However, the
Underwriter has not agreed, nor is it obliged, to act as broker-dealer in the
sale of the selling security holders' securities. The selling security holders
may be required, and in the event the Underwriter is a market maker, will likely
be required, to sell their securities through another broker-dealer.
The selling security holders and broker-dealers, if any, acting in
connection with these sales might be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
<PAGE>
Page 61
[ALTERNATE PAGE]
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was
declared effective under the Securities Act with respect to an underwritten
offering of 233,334 shares by us and up to 35,000 additional shares of common
stock to cover over-allotments, if any.
<PAGE>
Page 62
[ALTERNATE PAGE]
[OUTSIDE BACK COVER]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Plan of Operation
Business
Management
Certain Transactions
Concurrent Offering
Principal Shareholders
Selling Security Holders
Concurrent Public Offering
Description of Securities
Dividend Policy
Plan of Distribution
Shares Eligible For Future Sale
Legal Matters
Experts
</TABLE>
Until _____, 1999, (ninety days after the date of this prospectus) all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IMAGENETIX
JUST IMAGINE IT!
<PAGE>
Page 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. Indemnification of Directors and Officers
Article 109 of the Colorado Business Corporation Act expressly
authorizes a Colorado corporation to indemnify its directors, officers,
employees, fiduciaries, and agents against claims or liabilities arising out of
such persons' conduct in such capacities if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company. In general, these provisions provide for indemnification in
instances when such persons acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the Company. A
corporation may also purchase and maintain liability insurance on behalf of such
persons.
Article VIII of the Company's Bylaws provides for the indemnification
of the Company's officers, directors, and employees. The Company does not
maintain any liability insurance on behalf of any director, officer, or other
person affiliated with the Company.
Item 2. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the offering described in the registration statement:
<TABLE>
<CAPTION>
<S> <C>
Registration Fee $860
Blue Sky Fees $10,000
Accounting Fees and Expenses $8,000
Legal Fees and Expenses $25,000
Printing and Engraving $3,000
Transfer Agent Fees $1,000
Miscellaneous $2,140
------
Total Expenses $50,000
</TABLE>
Item 3. Undertakings
(a) The Company hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement;
and (iii) include any material information with respect to the plan of
distribution not
<PAGE>
Page 64
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) For the purpose of determining liability under the Securities Act
of 1933, treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time shall be
the initial BONA FIDE offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) The Company will provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The Company will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in the form of a prospectus filed by
the Company under Rule 424(b) (1) or (4) or 497(h) under the Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For any liability under the 1933 Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that the offering of
the securities at that time as the initial bona fide offering of those
securities.
(e) The Company will use a sticker amendment if between 5% and 10% of the
shares subject to the lock-up agreement attached as an exhibit to this
registration statement are released from
<PAGE>
Page 65
this agreement. If greater than 10% of such shares are released, the
Company will file a post-effective amendment to this registration statement.
Item 4. Unregistered Securities Issued or Sold Within One Year
In March 1999 the Company issued 1,300,000 shares of Common Stock of
the Company to William P. Spencer, a director, president, and principal
shareholder of the Company. The shares were issued in a merger transaction
between the Company and Imagenetix, the wholly owned subsidiary of the Company.
Such securities were issued without registration under the Act by reason of the
exemption from registration afforded by the provisions of Section 4(2) thereof,
and Rule 506 promulgated thereunder, as transactions by an issuer not involving
any public offering. Mr. Spencer delivered appropriate investment
representations to the Company with respect to such transaction and consented to
the imposition of restrictive legends upon the certificates evidencing such
securities. No underwriting discounts or commissions were paid in connection
with such issuance.
Also in March 1999 the Company issued promissory notes to Claudia A.
McAdam in the amount of $50,000 and to Great Expectations Family Limited
Partnership, a Colorado limited partnership, in the amount of $50,000. The
Company also granted 50,000 A Warrants and 50,000 B Warrants to each such party.
Such securities were issued without registration under the Act by reason of the
exemption from registration afforded by the provisions of Section 4(2) thereof
as transactions by an issuer not involving any public offering. The parties
delivered appropriate investment representations to the Company with respect to
such issuances and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
In September 1999 the Company issued promissory notes to David N.
Nemelka in the amount of $50,000; to 1st Zamora in the amount of $75,000; to
Greg Pusey in the amount of $26,250; to Barry C. Loder in the amount of $11,250;
and to Gulfstream 1998 Irrevocable Trust in the amount of $37,500. The Company
also granted 200,000 A Warrants and 200,000 B Warrants pro rata to such parties.
Such securities were issued without registration under the Act by reason of the
exemption from registration afforded by the provisions of Section 4(2) thereof
as transactions by an issuer not involving any public offering. The parties
delivered appropriate investment representations to the Company with respect to
such issuances and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
In June 1999 the Company issued 5,000 shares each to Dr. Charles L.
Cochran and Dr. Peter H. Antoniou, directors of the Company, for accepting such
positions with the Company. Such securities were issued without registration
under the Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof as transactions by an issuer not involving
any public offering. The party delivered appropriate investment representations
to the Company with respect to such issuances and consented to the imposition of
restrictive legends
<PAGE>
Page 66
upon the certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
In June 1999 the Company issued 85,000 shares to Patrick Millsap for
employment services provided to the Subsidiary; 15,000 shares to Jules Kozuki
for consulting services connected with the development of the Company's
products; 25,000 shares to Judy White for employment services rendered for the
Company; 6,500 shares to Dr. Paul Dragul for consulting services connected with
the development of new products for the Company; 10,000 shares to Maurile C.
Tremblay for legal services provided to the Company; and 15,000 shares to J.
Larry Cantrell as a bonus for assisting with business advice to the Company,
especially in connection with the testing of the Globestar system. Such
securities were issued without registration under the Act by reason of the
exemption from registration afforded by the provisions of Section 28 thereof,
and Rule 701 promulgated thereunder. Each party delivered appropriate investment
representations to the Company with respect to such issuances and consented to
the imposition of restrictive legends upon the certificates evidencing such
securities. No underwriting discounts or commissions were paid in connection
with such issuance.
Item 5. Exhibits
The exhibits set forth in the following index of exhibits are filed as
a part of this registration statement.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Location
<S> <C> <C>
1.1 Form of Underwriting Agreement *
1.2 Form of Underwriter's Warrant *
1.3 Form of Underwriter's Lock-up Agreement *
2.1 Articles of Incorporation, as amended *
2.2 By-Laws of the Company currently in effect *
3.1 Form of certificate evidencing shares of Common Stock *
3.2 Substituted Form of A Warrant Certificate
3.3 Substituted Form of B Warrant Certificate
6.1 Substituted Funding Agreement
6.2 Substituted Form of Convertible Promissory Note **
6.3 Alliance Agreement with Dr. Cochran *
6.4 Promissory Notes to Mr. and Mrs. Spencer *
6.5 1999 Stock Bonus Plan *
6.6 Exchange Agreement dated March 23, 1999 *
6.7 Cetyl Myristoleate Agreement **
6.8 Agreement with Dr. Cochran **
10.1 Consent of Pritchett, Siler & Hardy, P.C.
10.2 Consent of Ronald N. Vance (contained in
Exhibit 11 below.)
11 Opinion re Legality **
--
</TABLE>
<PAGE>
Page 67
*Filed with the original filing of the registration statement of the
Company on Form SB-1 on September 22, 1999 (SEC File No. 333-87535).
**Filed with the first amended filing of the registration statement of
the Company on Form SB-1 on November 24, 1999 (SEC File No. 333-87535).
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-1 and authorized this
second amended registration statement to be signed on its behalf by the
undersigned in the city of San Diego, State of California, on the 17th day of
December 1999.
IMAGENETIX, INC.
By: /s/ William Spencer, President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Date: December 21, 1999 /s/ William Spencer, Director and Principal
Accounting Officer
Date: December 21, 1999 /s/ Debra L. Spencer, Director and Chief
Financial Officer
Date: December 21, 1999 /s/ Dr. Charles L. Cochran, Director
Date: December 21, 1999 /s/ Dr. Peter H. Antoniou, Director
<PAGE>
EXHIBIT 1.1
IMAGENETIX, INC.
UNDERWRITING AGREEMENT
September ___, 1999
Spencer Edwards, Inc.
As Representative of the Several
Underwriters Named in Schedule I Hereto
6120 Greenwood Plaza
Englewood, Colorado 80111
Gentlemen:
Imagenetix, Inc., a Colorado corporation (the "Company"), hereby confirms
its agreement with you (the "Representative") and with the other Members of the
Underwriting Group, including the Representative, named in Schedule I hereto
(hereinafter "the Underwriting Group") as follows:
SECTION 1
DESCRIPTION OF SECURITIES
The Company's authorized and outstanding capitalization when the offering
of the securities contemplated hereby is permitted to commence and at the
Closing Date (hereinafter defined), will be as set forth in the Registration
Statement and Prospectus (hereinafter defined) included therein. The Company
proposes to issue and sell to the Underwriting Group an aggregate of 333,334
shares ("Shares") at a price of $3.00 per Share.
The Representative shall also have an over-allotment option to purchase all
or part of 35,000 additional Shares (the "Over-Allotment") for a period of
thirty (30) days from the Closing Date, as provided in Section 3.1 hereof. The
Over-Allotment shall be exercisable by the Underwriter, in whole or in part,
from time to time during the aforementioned thirty (30) day period.
The Company proposes to issue and sell to the Representative on the Closing
Date, for a total purchase price of $100, warrants to purchase 33,333 shares of
common stock (the "Underwriter's Warrant") at $3.60 per Share, as provided in
Section 3.3 hereof.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Underwriting Group to enter into this Agreement, the
Company hereby represents and warrants to and agrees with each member of the
Underwriting Group that:
2.1 Registration Statement and Prospectus. A Registration Statement on
Form SB-1
<PAGE>
(File No. ____________) with respect to the Shares, including the related
Prospectus, copies of which have heretofore been delivered by the Company to
the Representative, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations ("Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and said Registration
Statement has been filed with the Commission under the Act; one or more
amendments to said Registration Statement, copies of which have heretofore
been delivered to the Representative, has or have heretofore been filed; and
the Company may file on or prior to the Effective Date of the Registration
Statement additional amendments to said Registration Statement, including the
final Prospectus. Included in such Registration Statement are a sufficient
number of additional shares of the Company's Common Stock which are reserved
against exercise of the over-allotment option.
As of the Effective Date, the capitalization of the Company shall
consist of no more than 1,800,000 shares of capital stock outstanding and
700,000 subject to issuance upon the exercise of outstanding A Warrants
(300,000) and B Warrants (300,000) and note conversions (100,000). Any
changes in the number of shares of Common Stock issued and outstanding at or
prior to the Effective Date of the Registration Statement must be approved by
the Representative. Without the Representative's prior consent, there shall
be no other warrants, options or rights outstanding as of the Effective Date
of the Registration Statement to purchase Common Stock other than as stated
above.
As used in this Agreement, the term "Registration Statement" refers to
and means said Registration Statement on Form SB-1 and all amendments
thereto, including the Prospectus, the information incorporated therein by
reference, all exhibits and financial statements, as it becomes effective;
the term "Prospectus" refers to and means the Prospectus included in the
Registration Statement when it becomes effective or as filed in final form in
accordance with the requirements of Rule 424(b) of the Rules and Regulations;
and the term "Preliminary Prospectus" refers to and means any prospectus
included in said Registration Statement before it becomes effective. The
term "Effective Date" throughout this Agreement refers to the date the
Commission declares the Registration Statement effective pursuant to Section
8 of the Act.
2.2 Accuracy of Registration Statement and Prospectus. The Commission
has not issued any order preventing or suspending the use of any Preliminary
Prospectus with respect to the Shares, and each Preliminary Prospectus has
conformed in all material respects with the requirements of the Act and the
applicable Rules and Regulations of the Commission thereunder and to the best
of the Company's knowledge has not included at the time of filing any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein not misleading, except with respect to matters
subsequently amended prior to the Effective Date. On the Effective Date and
on the Closing Date, the Registration Statement and Prospectus will contain
all statements which are required to be stated therein in accordance with the
Act and the Rules and Regulations for the purposes of the public offering of
the Shares, and all statements of material fact contained in the Registration
Statement and Prospectus will be true and correct, and neither the
Registration Statement nor the Prospectus will include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make
<PAGE>
the statements therein not misleading; provided, however, the Company does
not make any representations or warranties as to information contained in or
omitted from the Registration Statement or the Prospectus in reliance upon
written information furnished on behalf of the Underwriting Group
specifically for use therein. The Company will not at any time hereafter
file any amendments to the Registration Statement or in accordance with Rule
424(b) of the Rules and Regulations of which the Representative shall not
have been previously advised in advance of filing or to which the
Representative shall reasonably object in writing.
2.3 Financial Statements. The financial statements of the Company
together with related schedules and notes as set forth in the Registration
Statement and Prospectus will present fairly the financial position of the
Company and the results of its operations and the changes in its financial
position at the respective dates and for the respective periods for which
they apply; such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods concerned except as otherwise stated therein.
2.4 Independent Public Accountant. Pritchett, Siler and Hardy, P.C.
have certified or shall certify certain of the fiscal year end financial
statements filed or to be filed with the Commission as part of the
Registration Statement and Prospectus and are independent certified public
accountants within the meaning of the Act and the Rules and Regulations.
2.5 No Material Adverse Change. Except as may be reflected in or
contemplated by the Registration Statement or the Prospectus, subsequent to
the dates as of which information is given in the Registration Statement and
Prospectus, and prior to the Closing Date, (i) there shall not be any
material adverse change in the condition, financial or otherwise, of the
Company or in its business taken as a whole; (ii) there shall not have been
any material transaction entered into by the Company other than transactions
in the ordinary course of business; (iii) the Company shall not have incurred
any material liabilities, obligations or claims, contingent or otherwise,
which are not disclosed in the Prospectus; (iv) except in the ordinary course
of business and with the consent of the Representative, there shall not have
been nor will there be any change in the capital stock or long-term debt
(except current payments) of the Company; and (v) the Company has not and
will not have paid or declared any dividends or other distributions on its
capital stock.
2.6 No Defaults. Other than as disclosed in the Registration Statement
or Prospectus, the Company is not in any material default which has not been
waived in the performance of any obligation, agreement or condition contained
in any debenture, note or other evidence of indebtedness or any indenture or
loan agreement of the Company. The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated, and compliance
with the terms of this Agreement will not conflict with or result in a breach
of any of the terms, conditions or provisions of, or constitute a default
under, the articles of incorporation, as amended, or by-laws of the Company,
any note, indenture, mortgage, deed of trust, or other agreement or
instrument to which the Company is a party or by which it or any of its
property is bound, or any existing law, order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality, agency
or body, arbitration tribunal or court, domestic or foreign, having
jurisdiction over the Company or its property. The consent, approval,
authorization, or
<PAGE>
order of any court or governmental instrumentality, agency or body is not
required for the consummation of the transactions herein contemplated except
such as may be required under the Act or under the securities laws of any
state or jurisdiction.
2.7 Incorporation and Standing. The Company is and at the Closing Date
and the Over-Allotment Closing Date will be duly incorporated and validly
existing in good standing as a corporation under the laws of the State of
Colorado with authorized and outstanding capital stock as set forth in the
Registration Statement and the Prospectus, and with full power and authority
(corporate and other) to own its property and conduct its business, present
and proposed, as described in the Registration Statement and Prospectus; the
Company has full power and authority to enter into this Agreement; and the
Company is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned
or leased) or the nature of its business makes such qualification necessary.
2.8 Legality of Outstanding Stock. The outstanding capital stock of
the Company has been duly and validly authorized, issued and is fully paid
and nonassessable and will conform to all statements with regard thereto
contained in the Registration Statement and Prospectus. No sales of
securities have been made by the Company in violation of the registration or
anti-fraud provisions of the Act or in violation of any other federal law or
laws of any state or jurisdiction.
2.9 Legality of Securities. The Common Stock, Underwriter's Warrants,
and the Common Stock issuable upon the exercise of the Underwriter's Warrants
have been duly and validly authorized and, when issued and delivered against
payment therefor as provided in this Agreement, will be validly issued, fully
paid and nonassessable. The Common Stock and the Common Stock underlying the
Underwriter's Warrants, upon issuance, will not be subject to the preemptive
rights of any shareholders of the Company. The Underwriter's Warrants, when
sold and delivered, will constitute valid and binding obligations of the
Company enforceable in accordance with the terms thereof. A sufficient
number of shares of Common Stock of the Company has been reserved for
issuance upon exercise of the Underwriter's Warrants. The Common Stock, the
Underwriter's Warrants and the Common Stock issuable upon the exercise of the
Underwriter's Warrants will conform to all statements with regard thereto in
the Registration Statement and Prospectus.
2.10 Prior Sales. No unregistered securities of the Company, or an
affiliate or of a predecessor of the Company have been sold within one year
prior to the date hereof, except as set forth in the Registration or
otherwise disclosed to the Representative in writing.
2.11 Litigation. Except as set forth in the Registration Statement and
Prospectus, there is and at the Closing Date there will be no action, suit or
proceeding before any court, arbitration tribunal or governmental agency,
authority or body pending or to the knowledge of the Company threatened which
might result in judgments against the Company not adequately covered by
insurance or which collectively might result in any material adverse change
in the condition (financial or otherwise), the business or the prospects of
the Company, or would materially affect the properties or assets of the
Company.
<PAGE>
2.12 Underwriter's Warrants. Upon delivery of and payment for the
Underwriter's Warrants to be sold by the Company as set forth in Section 3.3
of this Agreement, the Representative and designees of the Representative
will receive good and marketable title thereto, free and clear of all liens,
encumbrances, charges and claims whatsoever; and the Company will have on the
Effective Date and at the time of delivery of such Underwriter's Warrants
full legal right and power and all authorization and approval required by law
to sell, transfer and deliver such Underwriter's Warrants in the manner
provided hereunder.
2.13 Finder. The Company knows of no outstanding claims against it for
compensation for services in the nature of a finder's fee, origination fee or
financial consulting fee with respect to the offer and sale of the Shares
hereunder except as previously disclosed in writing to the Representative.
2.14 Exhibits. There are no contracts or other documents which are
required to be filed as exhibits to the Registration Statement by the Act or
by the Rules and Regulations which have not been so filed and each contract
to which the Company is a party and to which reference is made in the
Prospectus has been duly and validly executed, is in full force and effect in
all material respects in accordance with their respective terms, and none of
such contracts have been assigned by the Company; and the Company knows of no
present situation or condition or fact which would prevent compliance with
the terms of such contracts, as amended to date. Except for amendments or
modifications of such contracts in the ordinary course of business, the
Company has no intention of exercising any right which it may have to cancel
any of its obligations under any of such contracts, and has no knowledge that
any other party to any of such contracts has any intention not to render full
performance under such contracts.
2.15 Tax Returns. The Company has filed all federal and state tax
returns which are required to be filed by it and has paid all taxes shown on
such returns and on all assessments received by it to the extent such taxes
have become due. All taxes with respect to which the Company is obligated
have been paid or adequate accruals have been set up to cover any such unpaid
taxes.
2.16 Property. Except as otherwise set forth in or contemplated by the
Registration Statement and Prospectus, the Company has good title, free and
clear of all liens, encumbrances and defects, except liens for current taxes
not due and payable, to all property and assets which are described in the
Registration Statement and the Prospectus as being owned by the Company,
subject only to such exceptions as are not material and do not adversely
affect the present or prospective business of the Company.
2.17 Authority. The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action and this
Agreement is the valid, binding and legally enforceable obligation of the
Company.
2.18 Use of Form SB-1. The Company is eligible to use Form SB-1 for
the offer and sale of the Common Stock, the Underwriter's Warrants and the
Common Stock underlying such Underwriter's Warrants.
<PAGE>
2.19 Transfer Agent, Daily Transfer Sheets and DTC Position Listing
Report. The Company shall designate Interwest Transfer Company, Inc., Salt
Lake City, Utah, as transfer agent for the Company's securities.
All of the above representations and warranties shall survive the
performance or termination of this Agreement.
SECTION 3
PURCHASE AND SALE OF THE SHARES
3.1 Purchase of Shares and Over-Allotment Option. The Company hereby
agrees to sell to members of the Underwriting Group named in Schedule I hereto
(individually referred to as "Member" and collectively referred to as "Members")
(for all of whom the Representative is acting), severally and not jointly, and
each Member of the Underwriting Group, upon the basis of the representations and
warranties herein obtained, but subject to the conditions hereinafter stated,
agrees to purchase from the Company, severally and not jointly, the number of
Shares set forth opposite their respective names in Schedule I hereto at a
purchase price of $2.70 per Share.
The Company hereby grants to the Representative an over-allotment option
for a period of thirty (30) days after the Closing Date to purchase at a
purchase price of $2.70 per Share up to 35,000 additional Shares, each such
Share to be identical in all respects to the Shares as described in Section 1
hereof, solely to cover over-allotments, if any.
3.1.1 Default by a Member. If for any reason one or more Members of
the Underwriting Group shall fail or refuse (otherwise than for a reason
sufficient to justify the termination of this Agreement under the
provisions of Section 9 hereof) to purchase and pay for the number of
Shares agreed to be purchased by such Member, the Company shall immediately
give notice thereof to the Representative, and the non-defaulting Members
shall have the right within 24 hours after the receipt by the
Representative of such notice, to purchase or procure one or more other
Members to purchase, in such proportions as may be agreed upon among the
Representative and such purchasing Member or Members and upon the terms
herein set forth, the Shares which such defaulting Member or Members agreed
to purchase. If the non-defaulting Members fail so to make such
arrangements with respect to all such Shares, the number of Shares which
each non-defaulting Member is otherwise obligated to purchase under the
Agreement shall be automatically increased pro rata to absorb the remaining
Shares which the defaulting Member or Members agreed to purchase; provided,
however, that the non-defaulting Members shall not be obligated to purchase
the Shares which the defaulting Member or Members agreed to purchase in
excess of 10% of the total number of Shares which such non-defaulting
Member agreed to purchase hereunder, and provided further that the
non-defaulting Members shall not be obligated to purchase any Shares which
the defaulting Member or Members agreed to purchase if such additional
purchase would cause the Member to be in violation of the net capital rule
of the Commission or other applicable law. If the total number of Shares
which the defaulting Member or Members agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding
<PAGE>
sentences, the Company shall have the right, within 24 hours next
succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to the Representative
for the purchase of such Shares on the terms herein set forth. In any such
case, either the Representative or the Company shall have the right to
postpone the Closing determined as provided in Section 3.2.2 hereof for not
more than seven business days after the date originally fixed as the
Closing pursuant to said Subsection 3.2.2 in order that any necessary
changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made. If neither the non-defaulting
Members nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the Shares which the defaulting Member
or Members agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the
Company to any non-defaulting Member.
3.1.2 Liability of Defaulting Member. Nothing contained in this
Section 3.1 shall relieve any defaulting Member of its liability, if any,
to the Company or to the remaining Members of the Underwriting Group for
damages occasioned by its default hereunder.
3.2 Public Offering Price. After the Commission notifies the Company that
the Registration Statement has become effective, the Members of the Underwriting
Group propose to offer the Shares to the public at an initial public offering
price of $3.00 per Share as set forth in the Prospectus. The Members of the
Underwriting Group may allow such discounts and concessions upon sales to
selected dealers as may be determined from time to time by the Representative.
3.2.1 Payment For Shares. Payment for the Shares (including Shares
included in the over-allotment option which the Representative agrees to
purchase) shall be made to the Company or its order by certified or
official bank check or checks, in the amount of the purchase price by or on
behalf of the Representative at the offices of the Representative in
Englewood, Colorado, upon delivery to the Representative or its designee of
certificates for the Common Stock in definitive form in such numbers and
registered in such names as the Representative requests in writing at least
three full business days prior to such delivery. At the request of the
Representative, the Company shall deliver the Shares to the Members of the
Underwriting Group through the facilities of The Depository Trust Company
or as otherwise directed.
3.2.2 Closing. The time and date of delivery and payment hereunder
is herein called the "Closing Date" and shall take place at the office of
the Representative in Englewood, Colorado, or at such other location as may
be specified by the Representative, at 10:00 a.m. on the fifth business day
following the date of the Prospectus; provided, however, that such date may
be extended for not more than an additional seven business days by the
Representative. Should the Representative elect to exercise any part of
the over-allotment option pursuant to Section 3.1 hereinabove, the time and
date of delivery and payment for said over-allotment Shares shall be as
mutually agreed, but not later than the thirtieth (30th) calendar day after
the Closing Date or the date of the Prospectus, whichever is later. Said
date is referred to as the "Over-Allotment Closing Date."
<PAGE>
3.2.3 Inspection of Certificates. For the purpose of expediting the
checking and packaging of the certificates for the securities comprising
the Shares and the Underwriter's Warrants, the Company agrees to make the
certificates available for inspection by the Representative at the main
office of the Representative in Englewood, Colorado, at least two full
business days prior to the proposed delivery date.
3.3 Sale of Underwriter's Warrants. On the Closing Date, the Company will
sell to the Underwriter for a total purchase price of $100, warrants to purchase
common stock substantially identical to the Common Stock at $3.60 per Share.
The Company shall not be obligated to sell and deliver the Underwriter's
Warrants, and the Representative will not be obligated to purchase and pay for
the Underwriter's Warrants, except upon payment for the Shares pursuant to
Subsection 3.2.1 hereof.
The total number of securities which may be purchased upon exercise of the
Unit Common Stock Warrant will be 10% of the number of shares of Common Stock
which are sold in the offering (33,333), excluding such Shares as may be sold
upon exercise of the Underwriter's over-allotment option. The Underwriter's
Warrants shall be non-transferable for a period of one (1) year following the
Effective Date except to the Underwriters and selected dealers and their
respective officers or partners. The Underwriter's Warrant shall contain
anti-dilution provisions, a cashless exercise provision, piggyback registration
rights and shall otherwise be in form and substance satisfactory to the
Underwriter.
3.4 Representative's Expense Allowance. It is understood that the
Company shall reimburse the Representative, for itself alone and not on
behalf of the other Members of the Underwriting Group, for its expenses on a
nonaccountable basis in the amount of 3% of the gross proceeds from the sale
of the Shares ($.09 per Share) excluding proceeds from the sale of the Shares
included in the over-allotment option. The Representative acknowledges
receipt of $10,000 of said non-accountable expense allowance. By the Closing
Date and, if applicable, on the Over-Allotment Closing Date, the
Representative shall be entitled to withhold the unpaid balance of such
nonaccountable expense allowance. The Representative shall be solely
responsible for all expenses incurred by it in connection with the offering
including, but not limited to, the expenses of its own counsel except as set
forth in Section 5.7 hereof. Notwithstanding the foregoing, if the
Registration Statement does not become effective, or the offering is never
commenced after it becomes effective, or if this Agreement is terminated as
provided herein, the Representative will retain so much of the
non-accountable expense allowance which has been or should have been received
by the Representative from the Company as is equal to its actual accountable
out-of-pocket expenses and reimburse the remainder, if any to the Company,
provided that the amount to be reimbursed will not exceed the amount of the
non-accountable expense allowance. The Representative's expenses shall
include, but are not to be limited to, a fee to compensate the Representative
for the services and time of Representative's counsel, plus any additional
expenses and fees, including but not limited to, travel expenses, postage
expenses, duplication expenses, confirmation and other record preparation
expenses, long-distance telephone expenses, consultant and investigator
expenses and other expenses incurred by the Representative in connection with
the proposed offering.
<PAGE>
3.5 Additional Financing. The Company agrees that if the
Representative arranges for equity financing accepted by and closed with the
Company other than as contemplated herein during a period of five (5) years
from the date of this Agreement, the Company will pay a ten percent (10%)
commission to the Representative based on the amount of equity financing.
"Arranges," as used in this section, means locating the financing,
introducing the Company to the source of the financing, and assisting the
Company, in all reasonable ways as the Company may request, to negotiate and
complete the financing.
If the Underwriter arranges for debt financing accepted by and closed
with the Company during a period of five (5) years from the date hereof, the
Company will pay a five percent (5%) commission to the Underwriter based on
the amount of debt financing.
If the Underwriter obtains an increase in the Company's line of credit,
which is accepted by and closed with the Company, the Company will pay a fee
equal to 1% of the amount of increase.
If the Underwriter arranges for the purchase or sale of assets, for a
merger, acquisition or joint venture accepted by and closed with the Company,
during a period of five (5) years from the date hereof, the Company will pay
a fee to the Underwriter for its services calculated as follows:
<TABLE>
<S> <C>
5% of the value of the transaction to the Company up to and
including $1,000,000,
4% of the value of the transaction to the Company greater than
$1,000,000 and up to and including $2,000,000,
3% of the value of the transaction to the Company greater than
$2,000,000 and up to and including $3,000,000,
2% of the value of the transaction to the Company greater than
$3,000,000 and up to and including $4,000,000, and
1% of the value of the transaction to the Company in excess of
$4,000,000, all from such income as received.
</TABLE>
In addition, the Company shall reimburse the Representative for any
reasonable expenses that it incurs in arranging and closing such funding or
transactions, including fees of its counsel after receiving written approval
from the Company.
The provisions of this Section 3.5 shall survive the performance or
termination of this Agreement in accordance with Section 12.2 of this Agreement.
3.6 Representations of the Parties. The parties hereto respectively
represent that as of the Closing Date the representations herein contained and
the statements contained in all the certificates theretofore or simultaneously
delivered by any party to another, pursuant to this
<PAGE>
Agreement, shall in all material respects be true and correct.
3.7 Post-Closing Information. The Representative covenants that
reasonably promptly after the Closing Date, it will supply the Company with
all information required from the Representative which must be supplied to
the Commission, if any, and such additional information as the Company may
reasonably request to be supplied to the securities authorities for such
states in which the Shares have been qualified for sale.
3.8 Re-Offers By Selected Dealers. On each sale by the Representative
of any of the Shares to selected dealers, the Representative shall require
the selected dealer purchasing any such Shares to agree to re-offer the same
on the terms and conditions of the offering set forth in the Registration
Statement and Prospectus.
SECTION 4
REGISTRATION STATEMENT AND PROSPECTUS
4.1 Delivery of Registration Statements. The Company shall deliver to
the Representative without charge two (2) manually signed copies of the
Registration Statement, including all financial statements and exhibits filed
therewith and any amendments or supplements thereto. The signed copies of
the Registration Statement so furnished to the Representative will include
manually signed copies of any and all consents and certificates of the
independent public accountant certifying to the financial statements included
in the Registration Statement and Prospectus and signed copies of any and all
opinions, consents and certificates of any other persons whose profession
gives authority to statements made by them and who are named in the
Registration Statement or Prospectus as having prepared, certified, or
reviewed any part thereof.
4.2 Delivery of Preliminary Prospectus. The Company will cause to be
delivered to Members of the Underwriting Group and to other broker-dealers,
without charge, prior to the Effective Date as many copies of each
Preliminary Prospectus filed with the Commission bearing in red ink the
statement required by Item 501(c)(7) of Regulation S-B as may be required by
the Representative. The Company consents to the use of such documents by
Members of the Underwriting Group and by selected dealers prior to the
Effective Date of the Registration Statement.
4.3 Delivery of Prospectus. The Company will deliver, without charge,
copies of the Prospectus at such addresses and in such quantities as may be
required by the Representative for the purposes contemplated by this
Agreement and shall deliver said printed copies of the Prospectus to Members
of the Underwriting Group and to selected dealers within one business day
after the Effective Date.
4.4 Further Amendments and Supplements. If during such period of time
as in the opinion of the Representative or its counsel the Prospectus is
required to be delivered under the Act, any event occurs or any event known
to the Company relating to or affecting the Company shall occur as a result
of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the
<PAGE>
statements therein, in light of the circumstances under which they were made,
not misleading, or if it is necessary at any time after the Effective Date to
amend or supplement the Prospectus to comply with the Act, the Company will
forthwith notify the Representative thereof and prepare and file with the
Commission such further amendment to the Registration Statement or
supplemental or amended Prospectus as may be required and furnish and deliver
to the Representative and to others whose names and addresses are designated
by the Representative, all at the cost of the Company, a reasonable number of
copies of the amended or supplemented Prospectus which as so amended or
supplemented will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the Prospectus not
misleading in the light of the circumstances as of the date of such
Prospectus, amendment, or supplement, and which will comply in all respects
with the Act; and in the event the Representative is required to deliver a
Prospectus beyond completion of its participation in the public offering,
upon request will prepare promptly such Prospectus or Prospectuses as may be
necessary to permit continued compliance with the requirements of the Act.
4.5 Use of Prospectus. The Company authorizes the Members of the
Underwriting Group in connection with the distribution of the Shares and all
selected dealers to whom any of the Shares may be sold to use the Prospectus
as from time to time amended or supplemented, in connection with the offer
and sale of the Shares and in accordance with the applicable provisions of
the Act, the Rules and Regulations and state Blue Sky or securities laws.
SECTION 5
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Representative and other
Members of the Underwriting Group that:
5.1 Objection of Representative to Amendments or Supplements. After
the date hereof, the Company will not at any time, whether before or after
the Effective Date, file any amendment or supplement to the Registration
Statement or Prospectus unless and until a copy of such amendment or
supplement has been previously furnished to the Representative a reasonable
period prior to the proposed filing thereof, or to which the Representative
or counsel for the Representative have reasonably objected, in writing, on
the ground that such amendment or supplement is not in compliance with the
Act or the Rules and Regulations.
5.2 Company's Best Efforts to Cause Registration Statement to Become
Effective. The Company will use its best efforts to cause the Registration
Statement and any post-effective amendment subsequently filed, to become
effective as promptly as reasonably practicable and will promptly advise the
Representative, and will confirm such advice in writing (i) when the
Registration Statement shall become effective and when any amendment thereto
shall have become effective and when any amendment of or supplement to the
Prospectus shall be filed with the Commission, (ii) when the Commission shall
make a request or suggestion for any amendment to the Registration Statement
or the Prospectus or for additional information and the nature and substance
thereof, (iii) of the issuance by the Commission of an order suspending the
effectiveness of the Registration Statement pursuant to Section 8 of the Act
or of the initiation of any
<PAGE>
proceedings for that purpose, (iv) of the happening of any event which in the
judgment of the Company makes any material statement in the Registration
Statement or Prospectus untrue or which requires the making of any changes in
the Registration Statement or Prospectus in order to make the statements
therein not misleading, and (v) of the refusal to qualify or the suspension
of the qualification of the Shares for offer or sale in any jurisdiction, or
of the institution of any proceedings for any of such purposes. The Company
will use every reasonable effort to prevent the issuance of any such order or
of any order preventing or suspending such use, to prevent any such refusal
to qualify or any such suspension, and to obtain as soon as possible a
lifting of any such order, the reversal of any such refusal and the
termination of any such suspension.
5.3 Preparation and Filing of Amendments and Supplements. The Company
agrees to prepare and file promptly with the Commission, upon request of the
Representative, such amendments or supplements to the Registration Statement
or Prospectus, in form satisfactory to counsel to the Company, as in the
opinion of counsel to the Representative and of counsel to the Company may be
necessary in connection with the offer and sale of the Shares and will use
its best efforts to cause the same to become effective as promptly as
possible.
5.4 Blue Sky Qualification. It is understood and agreed by the Company
and the Representative that it shall be a condition of the Offering that the
sale of the Shares be registered or otherwise qualified for offer and sale in
those states as may be reasonably requested by the Representative. The
Company specifically agrees to attempt to register or qualify the Offering in
Colorado, New York, __________, __________, __________ and such other states
as reasonably requested by Representative. Copies of all applications for
the registration or qualification of the Shares and other securities
referenced herein and related documents (except for the Registration
Statement and Prospectus) will be filed by the Representative's Counsel with
the various states and shall be supplied to the Company's legal counsel,
concurrently with their transmission to the various states. The expense of
such filings, including legal fees of the Company's Counsel, shall be
promptly paid by the Company. Copies of all comments and orders received
from the various states shall be immediately supplied to the Company's legal
counsel. Immediately prior to the distribution of the preliminary
Prospectuses to potential investors, and prior to the Effective Date,
Representative's Counsel shall provide a written memorandum of all states
wherein the preliminary Prospectus may be distributed and wherein the
Offering has been registered or qualified for sale, canceled, withdrawn,
denied or exempt, the date of such event(s) and the number of Shares
registered or qualified for sale in each such state. After settlement and
closing, the Representative may confirm the qualification of the Company's
securities in writing to the Company and the Company's counsel. Failure by
the Company or Company's counsel to refute such confirmation shall constitute
an affirmative statement by the same advising the Representative that such
qualification in fact has taken place.
5.5 Financial Statements. The Company at its own expense will prepare
and give and will continue to give such financial statements and other
information to and as may be required by the Commission, or the proper public
bodies of the states in which the Shares may be registered or qualified.
5.6 Reports and Financial Statements to the Representative. During the
period of three
<PAGE>
years from the Closing Date, the Company will file with the Commission within
the prescribed period the annual report of the Company on Form 10-K, which
includes a financial report of the Company and its subsidiaries, if any, on a
consolidated basis, and a similar financial report of all unconsolidated
subsidiaries, if any, all such reports to include a balance sheet as of the
end of the preceding fiscal year, a statement of operations, a statement of
cash flows and an analysis of shareholders' equity covering such fiscal year,
and all to be in reasonable detail and certified by independent public
accountants for the Company.
If the Company shall fail to file with the Commission the financial
statements as herein provided, within the times specified herein, the
Representative, after giving reasonable notice of not less than 30 days,
shall have the right to have such financial statements prepared by
independent public accountants of its own choosing and the Company agrees to
furnish such independent public accountants such data and assistance and
access to such records as they may reasonably require to enable them to
prepare such statements and to pay their reasonable fees and expenses in
preparing the same.
5.7 Expenses Paid by the Company. The Company shall bear, whether or
not the transactions contemplated hereunder are consummated or the
Registration Statement is prevented from becoming effective or this Agreement
is terminated, all costs and expenses incident to the filing of the
Registration Statement with the NASD, the cost and legal counsel fees of
qualification under state securities laws, the fees and disbursements of
legal counsel and accountants for the Company, the cost of preparing and
printing the Registration Statement, the cost of printing as many preliminary
and final Prospectuses as the Representative may deem necessary, the cost of
providing the Representative's Counsel with two signed copies of each
Registration Statement and as amended, including all exhibits, correspondence
and other documentation relating thereto, and all expenses incurred in
connection with the holding of due diligence meetings, including the cost of
the meeting room, food and beverage, and expenses incurred by Company
representatives in attending a reasonable number of such due diligence
meetings with the Representatives' representatives, prospective dealers and
(which shall include all expenses of presentations as reasonably requested by
the Representative) their representatives and others, the expenses of
delivery of preliminary and final Prospectuses to the Representatives and
dealers (the final Prospectus shall be delivered no later than the day
following the Effective Date), and any other expenses customarily paid by an
issuer; provided, however, that any amounts paid to the Representative as an
expense allowance shall not exceed the amounts provided in Section 3.4.
Except as specified above, the Company shall not be required to pay any fees
or charges for attending, or any travel or lodging expenses incurred in
attending, due diligence meetings by representatives of the Representatives
or dealers.
5.8 Reports to Shareholders. The Company agrees that for so long as
the Company's Common Stock is registered under the 1934 Act, the Company will
hold an annual meeting of shareholders for the election of directors within
one hundred eighty (180) days after the end of each of the Company's fiscal
years. The Company shall provide the Company's shareholders with the audited
financial statements of the Company as of the end of the fiscal year just
completed prior thereto, such financial statements will be those required by
the 1934 Act and will be included in an annual report meeting the
requirements of Rule 14c-3 under the 1934 Act.
<PAGE>
5.9 Section 11(a) Financials. The Company will make generally
available to its security holders and will deliver to the Representative, as
soon as practicable, an earnings statement (as to which no opinion need be
rendered but which will satisfy the provisions of Section 11(a) of the Act)
covering a period of at least 12 months beginning after the Effective Date.
Compliance by the Company with Rule 158 promulgated under the Act shall
satisfy the requirements of this Section 5.9.
5.10 Post-Effective Availability of Prospectus. Within the time during
which the Prospectus is required to be delivered under the Act, the Company
will comply, at its own expense, with all requirements imposed upon it by the
Act, as now or hereafter amended, by the Rules and Regulations, as from time
to time may be in force, and by any order of the Commission, so far as
necessary to permit the continuance of sales or dealings in the Shares and
the exercise of the Warrants.
5.11 Application of Proceeds. The Company will adopt procedures for
the stewardship of the net proceeds it receives from the sale of the Shares
and will apply the net proceeds from the sale of the Shares substantially in
the manner specifically set forth in the Registration Statement and
Prospectus unless any deviation from such application is in accordance with
the Registration Statement and occurs only after approval by the Board of
Directors of the Company and then only after the Board of Directors has
obtained the written opinion of recognized legal counsel well versed in the
federal and state securities laws as to the propriety of any such deviation.
5.12 Delivery of Documents. At the Closing, the Company will deliver
to the Representative true and correct copies of the articles of
incorporation of the Company and all amendments thereto, all such copies to
be certified by the Secretary of the Company; true and correct copies of the
by-laws of the Company and of the minutes of all meetings of the directors
and shareholders of the Company held prior to the Closing Date which in any
way relate to the subject matter of this Agreement.
5.13 Cooperation With Representative's Due Diligence. At all times
prior to the Closing Date, the Company will cooperate with the Representative
in such investigation as the Representative may make or cause to be made of
all the properties, management, business and operations of the Company in
connection with the purchase and public offering of the Shares, and the
Company will make available to the Representative in connection therewith
such information in its possession as the Representative may reasonably
request.
5.14 Appointment of Transfer Agent and Warrant Agent. The Company has
appointed Intra West Transfer Company, Inc., Salt Lake City, Utah, as
Transfer Agent for the Shares subject to the Closing. The Company will not
change or terminate such appointment for a period of three years from the
Effective Date without first obtaining the written consent of the
Representative, which consent shall not be unreasonably withheld.
5.15 Compliance With Conditions Precedent. The Company will use all
reasonable efforts to comply or cause to be complied with the conditions
precedent to the several obligations of the Members of the Underwriting Group
in Section 8 hereof.
<PAGE>
5.16 Reporting of Use of Proceeds. The Company agrees to file with the
Commission all required information in accordance with the provisions of Item
701 of Regulation S-B promulgated under the Act.
5.17 Bound Volume. The Company shall supply to the Representative and
the Representative's counsel, at the Company's cost, two bound volumes each
of all of the public offering materials within a reasonable time after the
closing, not to exceed three months.
5.18 Listing in Moody's and Standard & Poor's. As soon as possible
following the Effective Date, the Company agrees to use its best efforts to
have the Company listed in Moody's Over-The-Counter Manual or Standard &
Poor's Standard Corporation Records, or if already listed, the Company agrees
to use its best efforts to maintain such listings.
5.19 Secondary Trading Qualification. The Company agrees to qualify
the Shares for secondary trading, as soon as legally possible, in such states
as are requested by the Representative from time to time.
5.20 Right of Inspection. The Company agrees that for a period of
three (3) years after the Effective Date, the Representative, at the
Representative's expense, will have the right to have a person or persons
selected by the Representative review the books and records of the Company
upon seven (7) days' written notice and at reasonable times. Such person or
persons will be required to execute a confidentiality agreement which will,
in part, prohibit disclosure of information to any party except the
Representative, which information shall be held in confidence unless
otherwise specifically agreed to by the Company in writing.
SECTION 6
INDEMNIFICATION AND CONTRIBUTION
6.1 Indemnification By Company. The Company agrees to indemnify and
hold harmless the Representative and the other Members of the Underwriting
Group (for the purposes of this Section 6 collectively the "Underwriters")
and each officer, director, employee, representative, agent, surety,
guarantor, and each person who controls each of the Underwriters within the
meaning of Section 15 of the Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, any other statute, at common law, NASD requirements or
otherwise and to reimburse the persons indemnified above for any legal or
other expenses (including the cost of any investigation and preparation)
incurred by them in connection with any litigation, arbitration or any other
proceeding (hereinafter referred to as "litigation" in this Section 6),
whether or not resulting in any liability, but only insofar as such losses,
claims, damages, liabilities and litigation arise out of or are based upon
this Agreement or any matter relating to the offer or sale of the Shares,
including, but not limited to, any violation of any registration
requirements, any improper use of sales literature or any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereto or any application or other document filed
in order to qualify the Shares under the securities laws of the states where
filings were made, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
<PAGE>
statements therein not misleading, all as of the date when the Registration
Statement or such amendment, as the case may be, becomes effective, or any
untrue statement or alleged untrue statement of a material fact contained in
the Prospectus (as amended or supplemented if the Company shall have filed
with the Commission any amendments thereof or supplements thereto), or the
omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading as of the date of the Prospectus or such
amendment or supplement; provided, however, that the indemnity agreement
contained in this Section 6.1 shall not apply to amounts paid in settlement
of any such litigation if such settlements are effected without the consent
of the Company, nor shall it apply to the Underwriters or any other person
indemnified as provided above in respect of any such losses, claims, damages,
liabilities or actions arising out of or based upon any such untrue
statements or alleged untrue statement, or any such omission or alleged
omission, if such statement or omission was made in reliance upon information
peculiarly within the knowledge of the Underwriters and furnished in writing
to the Company by the Underwriters specifically for use in connection with
the preparation of the Registration Statement and Prospectus or any such
amendment or supplement thereto. This indemnity agreement is in addition to
any other liability which the Company may otherwise have to the Underwriters
or any other person indemnified as provided above. The Underwriters or any
other person indemnified as provided above agree within twenty days after the
receipt by them of written notice of the commencement of any action against
them in respect of which indemnity may be sought from the Company on account
of the indemnity agreement contained in this Section 6.1 to notify the
Company in writing of the commencement thereof. The failure of the
Underwriters or any other person indemnified as provided above so to notify
the Company of any such action shall relieve the Company from any liability
which it may have to such person on account of the indemnity agreement
contained in this Section 6.1, but shall not relieve the Company from any
other liability which it may have to the Underwriters or any person
identified above. In case any such action shall be brought against the
Underwriters or any other person indemnified as provided above and the
Underwriters shall notify the Company of the commencement thereof, the
Company shall be entitled to participate in (and, to the extent that it shall
wish, to direct) the defense thereof at its own expense, but such defense
shall be conducted by counsel of recognized standing and reasonably
satisfactory to the Underwriters or any other person indemnified as provided
above, defendant or defendants in such litigation. The Company agrees to
notify the Underwriters promptly of commencement of any litigation against it
or any of its officers or directors, of which it may be advised, in
connection with the issue and sale of any of the Shares or any securities
included therein and to furnish to the Underwriters, at their request, copies
of all pleadings therein and permit the Underwriters to be observers therein
and apprise the Underwriters of all developments therein, all at the
Company's expense.
6.2 Indemnification By Underwriters. The Underwriters agree to
indemnify and hold harmless the Company, and each director, officer, employee
and agent of the Company and each person who controls the Company within the
meaning of Section 15 of the Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act or any other statute or at common law and to reimburse
persons indemnified as above for any legal or other expenses (including the
cost of any investigation and preparation) incurred by them in connection
with any litigation, whether or not resulting in any
<PAGE>
liability, but only insofar as such losses, claims, damages, liabilities and
litigation arise out of or are based upon any statement in or omission from
the Registration Statement or any amendment thereto, or the Prospectus (as
amended or as supplemented, if amended or supplemented as aforesaid) or any
application or other document filed in any state or jurisdiction in order to
qualify the Shares under the securities laws thereof, if such statement or
omission was made in reliance upon information peculiarly within its
knowledge and furnished in writing to the Company by the Underwriters on
their behalf specifically for use in connection with the preparation thereof
or supplement thereto. This indemnity agreement is in addition to any other
liability which the Underwriters may otherwise have to the Company and any
other person indemnified as provided above. The Underwriters shall not be
liable for amounts paid in settlement of any such litigation if such
settlement was effected without the consent of the Underwriters. In case of
commencement of any action in respect of which indemnity may be sought from
the Underwriters on account of the indemnity agreement contained in this
Section 6.2, each person agreed to be indemnified by the Underwriters shall
have the same obligation to notify the Underwriters as the Underwriters have
toward the Company in Section 6.1 above, subject to the same loss of
indemnity in the event such notice is not given, and the Underwriters shall
have the same right to participate in (and, to the extent that they shall
wish, to direct) the defense of such action at their own expense, but such
defense shall be conducted by counsel of recognized standing and satisfactory
to the Company or any other person indemnified as provided above. The
Underwriters agree to notify the Company promptly of the commencement of any
litigation against the Underwriters (and any other person indemnified as
provided above), of which it may be advised, in connection with the issue and
sale of any of the securities of the Company, and to furnish to the Company
at its request copies of all pleadings therein and apprise it of all the
developments therein, all at the Underwriters' expense, and permit the
Company to be an observer therein.
6.3 Contribution. If the indemnification provided for in Sections 6.1
and 6.2 of this Agreement are, for any reason other than as specified in such
Sections, held by a court to be unavailable and the Company or any Member of
the Underwriting Group has been required to pay damages as a result of a
determination by a court, arbitration tribunal or any other person having
jurisdiction over any Member of the Underwriting Group that the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto contains an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, then the Company shall contribute to
the damage paid by the Member of the Underwriting Group and the Member of the
Underwriting Group shall contribute to the damages paid by the Company, but
in each case only to the extent that such damages arise out of or are based
upon such untrue statement or omission, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Member of the Underwriting Group on the other from the
offering of the Shares or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Member of the Underwriting Group in
connection with the statements or omissions which resulted in such damages,
as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Member of the Underwriting Group
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bear to the
total underwriting
<PAGE>
discounts and unitemized expenses received by the Member of the Underwriting
Group. The relative fault shall be determined by reference to, among other
things, whether the untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the Company or the
Member of the Underwriting Group and the parties' relative intent, knowledge,
access to information, and opportunity to correct or prevent such untrue
statement or omission. For purposes of this Section 6.3, the term "damages"
shall include any counsel fees or other expenses reasonably incurred by the
Company or the Member of the Underwriting Group in connection with
investigating or defending any action or claim which is the subject of the
contribution provisions of this Section 6.3. Notwithstanding the provisions
of this Section 6.3, no Member of the Underwriting Group shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Member of
the Underwriting Group has otherwise been required to pay by reason of any
such untrue statements or omissions. No person adjudged guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Under this Section 6.3, each Member of the
Underwriting Group's obligations to contribute are several in proportion to
their respective underwriting obligations and not joint.
The agreements contained in this Section 6 and the representations and
warranties of the Company set forth in this Underwriting Agreement shall
remain operative and in full force and effect, regardless of (a) any
investigation made by or on behalf of any Member of the Underwriting Group or
any person controlling any Member of the Underwriting Group or by or on
behalf of the Company, or any person controlling the Company, (b) acceptance
of any Shares and payment therefor hereunder, and (c) any termination of any
other provision of this Underwriting Agreement. A successor of any Member of
the Underwriting Group or of the Company, or any director or officer thereof
or any person controlling any Member of the Underwriting Group or the
Company, as the case may be, shall be entitled to the benefits of the
agreements contained in this Section 6.
SECTION 7
EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective (i) at 10:00 a.m., Denver time, on
the first full business day after the Effective Date, or (ii) upon release by
the Representative of the Shares for sale after the Effective Date, whichever
shall first occur. The Representative agrees to notify the Company
immediately after the Representative shall have taken any action, by release
or otherwise, whereby this Agreement shall have become effective. This
Agreement shall, nevertheless, become effective at such time earlier than the
time specified above, after the Effective Date, as the Representative may
determine by notice to the Company.
SECTION 8
CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of the Underwriting Group hereunder to purchase the
Shares and to make
<PAGE>
payment to the Company hereunder on the Closing Date and on the
Over-Allotment Closing Date, if any, shall be subject to the accuracy, as of
the Closing Date and the Over-Allotment Closing Date, of each of the
representations and warranties on the part of the Company herein contained,
to the performance by the Company of all its agreements herein contained, to
the fulfillment of or compliance by the Company with all covenants and
conditions hereof, and to the following additional conditions:
8.1 Effectiveness of Registration Statement. The Registration
Statement shall have become effective and no order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission or be pending; any request for additional information on the part
of the Commission (to be included in the Registration Statement or Prospectus
or otherwise) shall have been complied with to the satisfaction of the
Commission; and neither the Registration Statement or the Prospectus nor any
amendment thereto shall have been filed to which counsel to the
Representative shall have reasonably objected in writing or have not given
their consent.
8.2 Accuracy of Registration Statement. The Representative shall not
have disclosed in writing to the Company that the Registration Statement or
the Prospectus or any amendment thereof or supplement thereto contains an
untrue statement of a fact which, in the opinion of counsel to the
Representative, is material or omits to state a fact which, in the opinion of
such counsel, is material and is required to be stated therein, or is
necessary to make the statements therein not misleading.
8.3 Casualty and Other Calamity. The Company shall not have sustained
any loss on account of fire, explosion, flood, accident, calamity or any
other cause, of such character as materially adversely affects its business
or property considered as an entire entity, whether or not such loss is
covered by insurance, and no officer or director of the Company shall have
suffered any injury, sickness or disability of a nature which would
materially adversely affect his or her ability to properly function as an
officer or director of the Company.
8.4 Litigation and Other Proceedings. Other than as disclosed in the
Registration Statement or Prospectus, there shall be no litigation instituted
or threatened against the Company and there shall be no proceeding instituted
or threatened against the Company before or by any federal or state
commission, regulatory body or administrative agency or other governmental
body, domestic or foreign, wherein an unfavorable ruling, decision or finding
would materially adversely affect the business, management, licenses,
operations or financial condition or income of the Company considered as an
entity.
8.5 Lack of Material Change. Except as contemplated herein or as set
forth in the Registration Statement and Prospectus, during the period
subsequent to the date of the last audited balance sheet included in the
Registration Statement, the Company (a) shall have conducted its business in
the usual and ordinary manner as the same was being conducted on the date of
the last audited balance sheet included in the Registration Statement, and
(b) except in the ordinary course of its business, the Company shall not have
incurred any liabilities, claims or obligations (direct or contingent) or
disposed of any of its assets, or entered into any material
<PAGE>
transaction or suffered or experienced any substantially adverse change in
its condition, financial or otherwise. The capital stock and surplus
accounts of the Company shall be substantially the same as at the date of the
last audited balance sheet included in the Registration Statement, without
considering the proceeds from the sale of the Shares, other than as may be
set forth in the Prospectus, and except as the surplus reflects the result of
continued losses from operations consistent with the trend established by
prior periods.
8.6 Review By and Opinion of Representative's Counsel. The
authorization of the Shares, the Underwriter's Purchase Warrants and the
Common Stock and Warrants issuable upon the exercise of the Underwriter's
Purchase Warrants, the Registration Statement, the Prospectus and all
corporate proceedings and other legal matters incident thereto and to this
Agreement shall be reasonably satisfactory in all respects to counsel to the
Representative.
8.7 Opinion of Counsel. The Company shall have furnished to the
Representative an opinion, dated the Effective Date, the Closing Date and, if
applicable, the Over-Allotment Closing Date, addressed to the Representative,
from Ronald N. Vance, P.C., 57 West 200 South, Salt Lake City, Utah 84101,
counsel to the Company, to the effect that based upon a review by them of the
Registration Statement, Prospectus, the Company's certificate of
incorporation, by-laws, and relevant corporate proceedings and contracts, and
examination of such laws they deem necessary and such other investigation by
such counsel as they deem necessary to express such opinion:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Colorado, and
has the corporate power and authority to own its properties and to carry on
its business as described in the Registration Statement and Prospectus.
(ii) The Company is duly qualified and in good standing as a foreign
corporation authorized to do business in all jurisdictions in which the
character of the properties owned or held under lease or the nature of the
business conducted requires such qualification and in which the failure to
qualify would have a materially adverse effect on the business of the
Company.
(iii) The authorized and outstanding capital stock of the Company is
as set forth in the Registration Statement and Prospectus; the outstanding
common stock of the Company, the Shares and the Underwriter's Purchase
Warrants conform to the statements concerning them in the Registration
Statement and Prospectus; the outstanding common stock of the Company
contains no preemptive rights; the Shares and Underwriter's Purchase
Warrants have been, and the securities issuable upon exercise of the
Underwriter's Purchase Warrants will be, duly and validly authorized and,
upon issuance thereof and payment therefor in accordance with this
Agreement, validly issued, fully paid and nonassessable, and will not be
subject to the preemptive rights of any shareholder of the Company.
(iv) The Underwriter's Purchase Warrants have been duly and validly
authorized
<PAGE>
and are valid and binding obligations of the Company enforceable in
accordance with their respective terms.
(v) A sufficient number of shares of common stock has been duly
reserved for issuance upon the exercise of the Underwriter's Purchase
Warrants.
(vi) To such counsel's knowledge, no consents, approvals,
authorizations or orders of agencies, officers or other regulatory
authorities are required for the valid authorization, issuance or sale of
the Shares and the Underwriter's Purchase Warrants contemplated by this
Agreement, except as such have been obtained and are in full force and
effect under the Act and such as may be required under applicable state
securities laws in connection with the purchase and distribution of such
securities by the Representative and the Underwriting Group and the
approval of the underwriting terms and compensation by the NASD.
(vii) The issuance and sale of the Shares, the Underwriter's Purchase
Warrants, and the consummation of the transactions herein contemplated and
compliance with the terms of this Agreement will not conflict with or
result in a breach of any of the terms, conditions, or provisions of or
constitute a default under the certificate of incorporation, or by-laws of
the Company, or, to their knowledge, any note, indenture, mortgage, deed of
trust, or other agreement or instrument known to such counsel without any
specific investigation to which the Company is a party or by which the
Company or any of its property is bound or any existing law (provided this
paragraph shall not relate to federal or state securities laws), order,
rule, regulation, writ, injunction, or decree known to such counsel of any
government, governmental instrumentality, agency, body, arbitration
tribunal, or court, domestic or foreign, having jurisdiction over the
Company or its property.
(viii) On the basis of a reasonable inquiry by such counsel,
including his participation in conferences with representatives of the
Company and its accountants at which the contents of the Registration
Statement and the Prospectus and related matters were discussed, and
without expressing any opinion as to the financial statements or other
financial data contained therein: (A) nothing has come to such counsel's
attention which leads them to believe that the Registration Statement and
the Prospectus, as amended or supplemented by any amendments or supplements
thereto made by the Company prior to the Closing Date, do not comply as to
form in all material respects with the requirements of the Act; (B) nothing
has come to their attention which leads them to believe that the
Registration Statement or the Prospectus, as amended or supplemented by any
such amendments or supplements thereto, contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; (C)
they do not know of any contract or other document required to be described
in or filed as an exhibit to the Registration Statement which is not so
described or filed; and (D) the Registration Statement has become effective
under the Act, and, to the best of their knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that
<PAGE>
purpose have been instituted or are pending or contemplated by the
Commission.
(ix) This Agreement has been duly authorized and executed by the
Company and is a valid and binding agreement of the Company.
(x) Based upon representations of management, the Company is not in
default of any of the contracts, licenses, leases or agreements to which it
is a party, and the offering of the Shares and the Underwriter's Purchase
Warrants will not cause the Company to become in default of any of its
contracts, licenses, leases or agreements.
(xi) The Company is not currently offering any securities for sale
except as described in the Registration Statement.
(xii) Counsel has no knowledge of any promoter, affiliate, parent or
subsidiaries of the Company except as are described in the Registration
Statement and Prospectus.
(xiii) To the knowledge of counsel, and without making any statement
as to title, the Company owns all properties described in the Registration
Statement as being owned by it; the properties are free and clear of all
liens, charges, encumbrances or restrictions except as described in the
Registration Statement; all of the leases, subleases and other agreements
under which the Company holds its properties are in full force and effect;
the Company is not in default under any of the material terms or provisions
of any of the leases, subleases or other agreements; and there are no
claims against the Company concerning its rights under the leases,
subleases and other agreements and concerning its right to continued
possession of its properties.
(xiv) To the knowledge of counsel, the Company possesses the required
licenses, certificates, authorizations or permits issued by the appropriate
federal, state and local regulatory authorities necessary to conduct its
business as described in the Registration Statement and to retain
possession of its properties. Counsel is unaware of any notice of any
proceeding relating to the revocation or modification of any of these
licenses, certificates, authorizations or permits having been received by
the Company.
(xv) To the knowledge of counsel, the Company has paid all taxes
which are shown as due and owing on the financial statements included in
the Registration Statement and Prospectus.
As to all factual matters including without limitation the issuance of
stock and warrant certificates and receipt of payment therefor, the states in
which the Company transacts business, the adoption of resolutions reflected
by the Company's minute book and the like, such counsel may rely on the
certificate of an appropriate officer of the Company. Counsel's opinion as
to the validity and enforceability of any and all contracts and agreements
referenced herein may exclude any opinion as to the validity or
enforceability of any indemnification or contribution provisions thereof, or
as the validity or enforceability of any such contract or agreement may be
limited by bankruptcy or other laws relating to or affecting creditors'
rights generally and by equitable
<PAGE>
principles.
8.8.1 Accountant's Letter. The Representative shall have received
letters addressed to it dated the Effective Date, the Closing Date and, if
applicable, the Over-Allotment Closing Date, respectively, and a draft of
such letter at least five days prior to the Effective Date, the Closing
Date and, if applicable, the Over-Allotment Closing Date, from Pritchett,
Siler, Hardy, P.C., independent public accountants for the Company, stating
that (i) with respect to the Company they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and the response to Item 509 of Regulation
S-B as reflected by the Registration Statement is correct insofar as it
relates to them; (ii) in their opinion, the financial statements examined
by them of the Company at all dates and for all periods referred to in
their opinion and included in the Registration Statement and Prospectus,
comply in all material respects with the applicable accounting requirements
of the Act and the published Rules and Regulations thereunder with respect
to registration statements on Form SB-1; (iii) on the basis of certain
indicated procedures (but not an examination in accordance with generally
accepted accounting principles), including a reading of the latest
available interim unaudited financial statements of the Company, whether or
not appearing in the Prospectus, inquiries of the officers of the Company
or other persons responsible for its financial and accounting matters
regarding the specific items for which representations are requested below
and a reading of the minute books of the Company, nothing has come to their
attention which would cause them to believe that during the period from the
last audited balance sheet included in the Registration Statement to a
specified date not more than five days prior to the date of such letter (a)
there has been any change in the capital stock or other securities of the
Company or any payment or declaration of any dividend or other distribution
in respect thereof or exchange therefor other than as set forth in or
contemplated by the Registration Statement or Prospectus; (b) there have
been any material decreases in net current assets or net assets as compared
with amounts shown in the last audited balance sheet included in the
Prospectus so as to make said financial statements misleading other than as
set forth in or contemplated by the Registration Statement or Prospectus;
and (c) on the basis of the indicated procedures and discussions referred
to in clause (iii) above, nothing has come to their attention which, in
their judgment, would cause them to believe or indicate that (1) the
unaudited financial statements and schedules set forth in the Registration
Statement and Prospectus do not present fairly the financial position and
results of the Company, for the periods indicated, in conformity with the
generally accepted accounting principles applied on a consistent basis with
the audited financial statements, and (2) the dollar amounts, percentages
and other financial information set forth in the Registration Statement and
Prospectus under the captions "Summary", "Risk Factors", and "Dilution",
are not in agreement with the Company's general ledger, financial records
or computations made by the Company therefrom.
8.8.2 Conformed Copies of Accountant's Letter. The Representative
shall be furnished without charge, in addition to the original signed
copies, such number of signed or photostatic or conformed copies of such
letters as the Representative shall reasonably
<PAGE>
request.
8.9 Officer's Certificate. The Company shall have furnished to the
Representative certificates, each signed by the President and Chief Financial
Officer of the Company, one dated as of the Effective Date, one dated as of
the Closing Date, and, if applicable, one dated as of the Over-Allotment
Closing Date, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct at and as of the date of the certificate,
and the Company has complied with all the agreements and has satisfied all
the conditions on its part to be performed or satisfied at or prior to the
date of the certificate.
(ii) The Registration Statement has become effective and no order
suspending the effectiveness of the Registration Statement has been issued
and to the best of the knowledge of the respective signers, no proceeding
for that purpose has been initiated or is threatened by the Commission.
(iii) The respective signers have each carefully examined the
Registration Statement and Prospectus and any amendments and supplements
thereto, and to the best of their knowledge the Registration Statement and
the Prospectus and any amendments and supplements thereto contain all
statements required to be stated therein, and all statements contained
therein are true and correct, and neither the Registration Statement nor
Prospectus nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading and, since the Effective Date of the Registration Statement,
there has occurred no event required to be set forth in an amended or a
supplemented Prospectus which has not been so set forth.
(iv) Except as set forth in the Registration Statement and Prospectus
since the respective dates of the periods for which information is given in
the Registration Statement and Prospectus and prior to the date of the
certificate, (a) there has not been any substantially adverse change,
financial or otherwise, in the affairs or condition of the Company, and (b)
the Company has not incurred any material liabilities, direct or
contingent, or entered into any material transactions, otherwise than in
the ordinary course of business.
(v) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, no dividends or
distribution whatever have been declared and/or paid on or with respect to
the common stock of the Company.
8.10 Tender of Delivery of Securities. All of the Shares being offered
by the Company and the Underwriter's Purchase Warrants being purchased from
the Company shall be tendered for delivery in accordance with the terms and
provisions of this Agreement.
8.11 Blue-Sky Registration or Qualification. The Shares shall be
registered or qualified in
<PAGE>
such states as the Representative and the Company may agree pursuant to
Section 5.4, and each such registration or qualification shall be in effect
and not subject to any stop order or other proceeding on the Closing Date or
the Over-Allotment Closing Date. On the Effective Date of the Registration
Statement, on the Closing Date and, if applicable, the Over-Allotment Closing
Date, the Representative shall receive from counsel for the Company, written
information which contains the following:
(i) the names of the states in which applications to register or
qualify the Shares and the Underwriter's Warrants and the Warrant Shares
have been filed;
(ii) the status of such registrations or qualifications in such
states as of the date of such letter;
(iii) a list containing the name of each such state in which the
Shares and the Underwriter's Warrants and the Warrant Shares may be legally
offered and sold by a dealer licensed in such state and the number of each
which may be legally offered and sold in each such state as of the date of
such letter.
(iv) with respect to the written information dated on the Effective
Date, a representation that such counsel will continuously update such
written opinion if any material changes occur, of which counsel received
actual notice, in the information provided therein between the Effective
Date and the Closing Date and, if applicable, Over-Allotment Closing Date;
(v) the names of the states in which the offer and sale of the Shares
is exempt from registration or qualification; and
(vi) a statement that the Members of the Underwriting Group and
selected dealers in the offering may rely upon the information contained
therein.
8.12 Approval of Representative's Counsel. All opinions, letters,
certificates and evidence mentioned above or elsewhere in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in
form and substance satisfactory to counsel to the Representative, whose approval
shall not be unreasonably withheld. The suggested form of such documents shall
be provided to the counsel for the Representative at least three business days
before the Closing Date. The Representative's counsel will provide a written
memorandum stating such closing documents which it deems necessary for its
review.
8.13 Officers' Certificate as a Company Representative. Any certificate
signed by an officer of the Company and delivered to the Representative or
counsel for the Representative shall be deemed a representation and warranty by
the Company to the Representative as to the statements made therein.
SECTION 9
TERMINATION
<PAGE>
9.1 Termination Because of Noncompliance. This Agreement may be
terminated in its entirety by the Representative by notice to the Company prior
to its effectiveness or in the event that the Company shall have failed or been
unable to comply with any of the terms, conditions or provisions of this
Agreement on the part of the Company to be performed, complied with or fulfilled
(including but not limited to those specified in Sections 2, 3, 4, 5, and 8
hereof) within the respective times herein provided for, unless compliance
therewith or performance or satisfaction thereof shall have been expressly
waived by the Representative in writing.
9.2 Other Grounds for Termination by Representative. This Agreement may
be terminated by the Representative by notice to the Company at any time if, in
the sole judgment of the Representative, payment for and delivery of the Shares
is rendered impracticable or inadvisable because of:
(a) Material adverse changes in the Company's business, business
prospects, licenses, management, earnings, properties or conditions,
financial or otherwise;
(b) Any action, suit or proceedings, threatened or pending, at law or
equity against the Company, or by any federal, state or other commissions,
board or agency wherein any unfavorable result or decision could materially
adversely affect the business, business prospects, licenses, properties,
financial condition or income or earnings of the Company;
(c) Additional material governmental restrictions not in force and
effect on the date hereof shall have been imposed upon the trading in
securities generally, or new offering or trading restrictions shall have
been generally established by a registered securities exchange, Commission,
NASD or other applicable regulatory authority, or trading in securities
generally on any such exchange, NASDAQ or otherwise, shall have been
suspended, or a general moratorium shall have been established by federal
or state authorities;
(d) Substantial and material changes in the condition of the market
beyond normal fluctuations such that it would be undesirable, impracticable
or inadvisable in the judgment of the Representative to proceed with this
Agreement or with the public offering of the Shares;
(e) Any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
judgment of the Representative, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the sale of and payment for the
Shares; or
(f) Any suspension of trading in the securities of the Company in the
over-the-counter market or the interruption or termination of quotations of
any security of the Company on the NASDAQ System.
<PAGE>
9.3 Effect of Termination Hereunder. Any termination of this Agreement
pursuant to this Section 9 shall be without liability of any character
(including, but not limited to, loss of anticipated profits or consequential
damages) on the part of any party hereto, except that the Company shall remain
obligated to pay the costs and expenses provided to be paid by it specified in
Sections 3.4 and 5.7; and the Company and the Underwriting Group shall be
obligated to pay, respectively, all losses, claims, damages or liabilities,
joint or several, under Section 6.1 in the case of the Company and Section 6.2
in the case of the Underwriting Group.
SECTION 10
REPRESENTATIVE'S REPRESENTATIONS AND WARRANTIES
The Representative represents and warrants to and agrees with the Company
that:
10.1 Registration as Broker-Dealer and Member of NASD. The Representative
is registered as a broker-dealer with the Securities and Exchange Commission and
is registered as a securities broker-dealer in all states in which it will sell
Shares and is a member in good standing of the National Association of
Securities Dealers, Inc.
10.2 Representative's Covenants. The Representative covenants and agrees
with the Company that (i) it will not offer or sell the Shares in any state or
other jurisdiction where it has not been advised in writing that the Shares are
qualified for the offer and sale therein or exempt from such requirements; (ii)
it will not make any representation to any person in connection with the offer
and sale of the Shares covered hereby except as set forth in the Registration
Statement or as authorized in writing by the Company; and (iii) it will comply
in good faith with all laws, rules and regulations applicable to the
distribution of the securities, including the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
SECTION 11
NOTICE
Except as otherwise expressly provided in this Agreement:
11.1 Notice to the Company. Whenever notice is required by the provisions
of this Underwriting Agreement to be given to the Company, such notice shall be
in writing addressed to the Company as follows:
Imagenetix, Inc.
11777 Bernardo Plaza Court, Suite 206
San Diego, California 92128
with a copy to:
Ronald N. Vance, P.C.
57 West 200 South, Suite 310
Salt Lake City, Utah 84101
<PAGE>
11.2 Notice to the Representative. Whenever notice is required by the
provisions of this Agreement to be given to the Representative, such notice
shall be given in writing addressed to the Representative as follows:
Spencer Edwards, Inc.
6120 Greenwood Plaza
Englewood, Colorado 80111
with a copy to:
Krys Boyle Freedman & Sawyer, P.C.
Attn: Jon D. Sawyer, Esq.
600 17th Street, Suite 2700-S
Denver, Colorado 80202-5427
11.3 Effective Date of Notices. Such notices shall be effective the date
actually received, three days from the day of mailing, or on the date of
delivery set forth on the receipt if the notice is sent by registered mail or
any expedited delivery service.
SECTION 12
MISCELLANEOUS
12.1 Benefit. This Agreement is made solely for the benefit of the
Representative, the other Members of the Underwriting Group, the Company, their
respective officers, directors and controlling persons referred to in Section 15
of the Act and such other persons as are identified in this Agreement, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successor" or the term
"successors and assigns" as used in this Agreement shall not include any
purchasers, as such, of any of the Shares.
12.2 Survival. The respective indemnities, agreements, representations,
warranties, covenants and other statements of the Company or its officers and
the Representative or the Members of the Underwriting Group as set forth in or
made pursuant to this Agreement and the indemnity agreements contained in
Section 6 hereof of the Company and the Underwriters (as defined in Section 6)
shall survive and remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or the Underwriters or any
such officer or director thereof or any controlling person of the Company or of
the Underwriters, (ii) delivery of or payment for the Shares, and (iii) the
Closing Date and Over-Allotment Closing Date, and any successor of the Company
and the Underwriters or any controlling person, officer or director thereof, as
the case may be, shall be entitled to the benefits hereof.
12.3 Governing Law. The validity, interpretation and construction of this
Agreement and of each part hereof will be governed by the laws of the State of
Colorado.
12.4 Entire Agreement. This Agreement contains the entire agreement and
understanding between the parties hereto, and supersedes all agreements and
understandings including, but not limited to, the Letter of Intent dated June
17, 1999 which was understood and accepted by the
<PAGE>
Company on June 17, 1999.
12.5 Representative's Information. The statements with respect to the
public offering of the Shares on the inside and outside of both the front and
back cover pages of the Prospectus and under the caption "Underwriting" in the
Prospectus constitute the written information furnished by or on behalf of the
Representative referred to in Section 2.2 hereof, in Section 6.1 hereof and
Section 6.2 hereof.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the Agreement
between you and the Company.
Very truly yours,
IMAGENETIX, INC.
ATTEST:
By:
--------------------------------------- --------------------------------
Debra L. Spencer, Secretary William P. Spencer, President
WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE SETS FORTH THE
AGREEMENT BETWEEN THE COMPANY AND US.
SPENCER EDWARDS, INC.
(for itself and as Representative of
the several Underwriters names in
Schedule I hereto)
By:
---------------------------------
, President
IMAGENETIX, INC.
(A Colorado Corporation)
SCHEDULE I
This Schedule sets forth the name of each Underwriter referred to in the
Underwriting Agreement and the number of Shares to be purchased by each
Underwriter.
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Total
</TABLE>
<PAGE>
EXHIBIT 3.2
IMAGENETIX, INC.
(A Colorado Corporation)
WARRANT CERTIFICATE
WARRANT NUMBER A-_____ NUMBER OF WARRANTS:_________
CLASS "A" WARRANT CERTIFICATE FOR THE PURCHASE OF SHARES
OF THE $.001 PAR VALUE COMMON STOCK OF
IMAGENETIX, INC.
FOR VALUE RECEIVED, Imagenetix, Inc. (the "Company"), a Colorado
corporation, hereby certifies that, _________________________, the registered
holder hereof, or registered assigns, (the "Holder") subject to the terms
and conditions herein after set forth and at any time during the period
beginning one year from the date hereof and ending December 31, 2004 is
entitled to:
1. Purchase shares of the Common Stock of the Company for each of the
within Warrants exercised at a price of $3.00 per shares of such Common Stock
(the "Warrant Price") or
2. Convert these Warrants, in whole or in part, into that number of
shares of Common Stock of the Company determined by dividing (a) the aggregate
fair market value, as of the date of conversion, of the shares of Common Stock
of the Company which would be issuable upon exercise of the Warrants to be
converted minus the aggregate Warrant Price of the shares of Common Stock of the
Company which would be issuable upon exercise of the Warrants by (b) the said
fair market value of one share of the Common Stock of the Company.
For the purposes of conversion of these Warrants, fair market value shall
be the value determined in accordance with the following provisions:
a. If the Common Stock of the Company is not at the time listed or
admitted on any stock exchange but is traded on the Nasdaq National Market
System or SmallCap Market or is quoted on the OTC Bulletin Board, the fair
market value shall be the closing selling price per share of such common stock
on the date in question, as such price is reported by the National Association
of Securities Dealers through, in order of preference, the Nasdaq National
Market System, the SmallCap Market, or the OTC Bulletin Board, or any successor
system. If there is not closing selling price for such common stock on the date
in question, then the fair market value shall be the closing selling price on
the last preceding date for which such a quotation exists.
b. If the common stock is at the time listed or admitted to trading
on any stock exchange, the fair market value shall be the closing selling price
per share of such common stock on the date in question on the stock exchange
determined by the Board of Directors of The Company to be the primary market for
such common stock, as such price is officially quoted in the composite tape of
transaction on the exchange. If there is no closing selling price for such
<PAGE>
common stock on the date in questions then the fair market value shall be the
closing selling price on the last preceding date for which such a quotation
exists.
c. If the common stock is at the time neither listed nor admitted to
trading on any exchange nor traded on the Nasdaq National Market System nor the
SmallCap Market, nor traded on the OTC Bulletin board, then such fair market
value shall be determined by the Board of Directors of the Company after taking
into account such factors as the Board of Directors of the Company shall deem
appropriate.
3. Upon exercise or conversion of these Warrants, the registered Holder
hereof shall surrender to the stock transfer agent of the Company this Warrant
Certificate together with the form of subscription attached hereto and, in the
case of exercise of the Warrants, a certified check or bank draft payable to the
order of the Company, or in the case of a conversion of the Warrants, written
confirmation by a broker/dealer member of the National Association of Securities
Dealers, Inc. of the fair market value of the shares of Common Stock of the
Company determined in accordance with paragraph 2. above, on a date within three
days prior to surrender of this Warrant Certificate to the stock transfer agent
for conversion and the Conversion Form attached hereto specifying the number of
shares of Common Stock of the Company the registered Holder claims to be
entitled to be issued upon the conversion requested.
4. In neither the case of exercise nor of conversion of the Warrants
shall fractional shares of the Common Stock of the Company be issued.
5. The Company covenants and agrees that all shares of Common Stock which
may be delivered upon the exercise or conversion of this Warrant will, upon
delivery, be free from all taxes, liens and charges with respect to the purchase
thereof hereunder. This Warrant shall not be exercised nor converted by Holder
in any state where such exercise would be unlawful such as a state in which the
Company's Common Stock is not registered or qualified as the case requires.
6. The Company agrees at all times to reserve or hold available a
sufficient number of shares of its Common Stock to cover the number of shares
issuable upon the exercise or conversion of this and all other Warrants of like
tenor then outstanding.
7. This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company, or to any other rights whatsoever except
the rights herein set forth, and no dividend shall be payable to accrue in
respect to this Warrant or the interest represented hereby, or the shares which
may be acquired hereunder, until or unless, and except to the extent that this
Warrant shall be exercised or converted, and the Common Stock which may be
acquired upon exercise thereof shall become deliverable.
8. The Warrants are not redeemable nor cancellable by the Company.
9. This Warrant is exchangeable upon the surrender hereof by the Holder
to the Company for new Warrants of like tenor and date representing in the
aggregate the right to acquire the number of shares which may be acquired
hereunder, each of such new Warrants to
<PAGE>
represent the right to acquire such number of shares as many be designated by
the registered Holder at the time of such surrender.
10. The Company may deem and treat the Holder at any time as the absolute
owner hereof for all purposes and shall not be affected by any notice to the
contrary.
11. The number of shares of Common Stock which may be acquired upon
exercise or conversion of these Warrants and the Warrant Price shall be subject
to adjustment from time to time as follows:
a. If the Company shall at any time subdivide its outstanding shares
of Common Stock by recapitalization, reclassification or split-up thereof, or if
the Company shall declare a stock dividend or distribute shares of Common Stock
to its stockholders, the number of shares of Common Stock which may be acquired
upon exercise or conversion of this Warrant immediately prior to such
subdivision shall be proportionately increased in each instance, and if the
Company shall at any time combine the outstanding shares of Common Stock by
recapitalization, reclassification or combination thereof, the number of shares
of Common Stock which may be acquired upon exercise or conversion of this
Warrant immediately prior to such combination shall be proportionately decreased
in each instance.
b. If the Company shall distribute to all of the holders of its
shares of Common Stock any security (except as provided in the preceding
paragraph) or other assets (other than a distribution made as a dividend payable
out of earnings or out of any earned surplus legally available for dividends
under the laws of the jurisdiction of incorporation of the Company), the Board
of Directors shall be required to make such equitable adjustment in the Warrant
Price in effect immediately prior to the record date of such distribution as may
be necessary to preserve to the Holder of this Warrant rights substantially
proportionate to those enjoyed hereunder by such Holder immediately prior to the
happening of such distribution. Any such adjustment shall become effective as
of the day following the record date for such distribution.
c. Whenever the number of shares of Common Stock which may be
acquired upon the exercise or conversion of this Warrant is required to be
adjusted as provided herein, the Warrant Price shall be adjusted (to the nearest
cent) in each instance by multiplying such Warrant Price immediately prior to
such adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock which may be acquired hereunder upon the exercise or
conversion of the Warrants immediately prior to such adjustment, and (y) the
denominator of which shall be the number of shares of Common Stock which may be
acquired hereunder immediately thereafter.
d. In case of any reclassification of the outstanding shares of
Common Stock, other that a change covered by paragraph (1) above or which solely
affects the par value of such shares of Common Stock, or in the case of any
merger or consolidation of the Company with or into another corporation (other
that a consolidation merger in which the Company is the continuing corporation
and which does not result in any reclassification or capital reorganization of
the outstanding shares of Common Stock), or in the case of any sale or
conveyance to another
<PAGE>
corporation of the property of the Company as an entirety or substantially as
an entirety in connection with which the Company is dissolved, the Holder of
this Warrant shall have the right thereafter (until the expirations of the
respective rights of exercise or conversion of the Warrant) to receive upon
the exercise or conversion thereof, using the same aggregate Warrant Price
applicable hereunder immediately prior to such event, the kind and amount of
shares of stock or other securities or property receivable upon such
reclassification, capital reorganization, merger or consolidation, or upon
the dissolution following any sale or other transfer, which a holder of the
number of shares of Common Stock of the Company would obtain upon exercise or
conversion of the Warrants immediately prior to such event; and if any
classification also results in a change in shares of Common Stock covered by
paragraph (1) above, then such adjustment shall be made pursuant to both
paragraph (1) above and this paragraph (4). The provisions of this paragraph
(4) shall similarly apply to successive reclassifications, or capital
reorganizations, mergers or consolidations, sales or other transfers.
e. In case of the dissolution, liquidation or winding-up of the
Company, all rights under any of the Warrants not theretofore exercised nor
expired by their terms shall terminate on a date fixed by the Company, such date
so fixed to be not earlier than the date of the commencement of the proceedings
for such dissolution, liquidation or winding-up and not later than thirty (30)
days after such commencement date. Notice of the termination of purchase or
conversion rights shall be given to the registered Holder of this Warrant as the
same shall appear on the books of the Company, by certified or registered mail
at least thirty (30) days prior to such termination date.
f. In case the Company shall, at any time prior to the Expiration
Date of the Warrants, and prior to the exercise thereof, offer to the holders of
its Common Stock any right to subscribe for additional shares of any class of
the Company, then the Company shall give written notice thereof to the
registered Holder of this Warrant not less than thirty (30) days prior to the
date on which the books of the Company are closed or a record date fixed for
the determination of stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date be fixed with respect to such offer or subscription, and the right of the
registered Holders hereof to participate in such offer or subscription shall
terminate if this Warrant shall not be exercised nor converted on before the
date of such closing of the books or such record date.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer this _____ day of ________ 1999.
Imagenetix, Inc.
By
President
ATTEST:
Secretary
<PAGE>
ASSIGNMENT FORM
(To be executed by the registered Holder to effect a
Transfer of the Within Warrant)
For Value Received ____________________________ hereby sells, assigns, and
transfer unto
(Please print or typewrite name and address, including postal zip code of
assignee)
this Warrant and the rights represented thereby to purchase Common Stock of
Imagenetix, Inc. in accordance with the terms and conditions thereof, and does
hereby irrevocable constitute and appoint ________________ attorney to transfer
this Warrant on the books of the Company with full power of substitution.
Date: ___________________ Signed _____________________________
SUBSCRIPTION FORM
(To Be Executed by the Registered Holder to Exercise The Rights
To Purchase Common Stock Evidenced By The Within Warrant)
The undersigned Registered Holder hereby irrevocably subscribes for
_____________ shares of the Common Stock of Imagenetix, Inc., pursuant and in
accordance with the terms and conditions of the Warrant Certificate attached
hereto and hereby makes payment of $ _______________ therefor, and requests
that certificate(s) for such shares be issued in the name of the undersigned and
be delivered to the address stated below, and if such number of shares shall not
be all of the shares purchasable hereunder, that a new Warrant of like tenor for
the balance of the remaining shares purchasable hereunder be delivered to the
undersigned at the address stated below:
Date: ___________________ Signed _____________________________
SIGNATURE(S) MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF A REGISTERED
NATIONAL STOCK EXCHANGE, OR BY A BANK (OTHER THAN A SAVINGS BANK), OR A TRUST
COMPANY. THE SIGNATURE TO THE ABOVE SUBSCRIPTION FORM AND, IF APPLICABLE,
CONVERSION FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE
WARRANT. IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATSOEVER.
CONVERSION FORM
The undersigned registered Holder hereby exercises the Holder's right to
convert ______________ of the Warrants evidenced by the Warrant Certificate
attached hereto into ______________ shares of Common Stock of Imagenetix, Inc.
based upon the fair market value of $ ____________ per share of Common Stock of
Imagenetix, Inc. on ______________, as stated in the written confirmation of
said fair market value by _______________________, a broker/dealer member of the
National Association of Securities Dealers, Inc.
<PAGE>
Date: ___________________ Signed _____________________________
Schedule of Warrant "A" Holders
<TABLE>
<CAPTION>
Number of Warrant
Name Warrants Certificate No. Date
<S> <C> <C> <C>
Claudia McAdam 50,000 A-1 3/29/99
David N. Nemelka 75,000 A-3 and A-9 9/22/99
1st Zamora Corporation 75,000 A-4 9/22/99
Greg Pusey 26,250 A-5 9/22/99
Barry C. Loder 11,250 A-6 9/22/99
Gulfstream 1998 Irrevocable Trust 37,500 A-7 9/22/99
Great Expectations Family
Limited Partnership 25,000 A-8 9/22/99
-------
Total 300,000
</TABLE>
<PAGE>
EXHIBIT 3.3
IMAGENETIX, INC.
(A Colorado Corporation)
WARRANT CERTIFICATE
WARRANT NUMBER B-_____ NUMBER OF WARRANTS:_________
CLASS "B" WARRANT CERTIFICATE FOR THE PURCHASE OF SHARES
OF THE $.001 PAR VALUE COMMON STOCK OF
IMAGENETIX, INC.
FOR VALUE RECEIVED, Imagenetix, Inc. (the "Company"), a Colorado
corporation, hereby certifies that, _________________________, the registered
holder hereof, or registered assigns, (the "Holder") subject to the terms and
conditions herein after set forth and at any time during the period beginning
one year from the date hereof and ending December 31, 2004, is entitled to:
1. Purchase shares of the Common Stock of the Company for each of the
within Warrants exercised at a price of $3.05 per shares of such Common Stock
(the "Warrant Price") or
2. Convert these Warrants, in whole or in part, into that number of
shares of Common Stock of the Company determined by dividing (a) the
aggregate fair market value, as of the date of conversion, of the shares of
Common Stock of the Company which would be issuable upon exercise of the
Warrants to be converted minus the aggregate Warrant Price of the shares of
Common Stock of the Company which would be issuable upon exercise of the
Warrants by (b) the said fair market value of one share of the Common Stock
of the Company.
For the purposes of conversion of these Warrants, fair market value
shall be the value determined in accordance with the following provisions:
<PAGE>
a. If the Common Stock of the Company is not at the time listed
or admitted on any stock exchange but is traded on the Nasdaq National Market
System or SmallCap Market or is quoted on the OTC Bulletin Board, the fair
market value shall be the closing selling price per share of such common
stock on the date in question, as such price is reported by the National
Association of Securities Dealers through, in order of preference, the Nasdaq
National Market System, the SmallCap Market, or the OTC Bulletin Board, or
any successor system. If there is not closing selling price for such common
stock on the date in question, then the fair market value shall be the
closing selling price on the last preceding date for which such a quotation
exists.
b. If the common stock is at the time listed or admitted to
trading on any stock exchange, the fair market value shall be the closing
selling price per share of such common stock on the date in question on the
stock exchange determined by the Board of Directors of The Company to be the
primary market for such common stock, as such price is officially quoted in
the composite tape of transaction on the exchange. If there is no closing
selling price for such common stock on the date in questions then the fair
market value shall be the closing selling price on the last preceding date
for which such a quotation exists.
c. If the common stock is at the time neither listed nor admitted
to trading on any exchange nor traded on the Nasdaq National Market System
nor the SmallCap Market, nor traded on the OTC Bulletin board, then such fair
market value shall be determined by the Board of Directors of the Company
after taking into account such factors as the Board of Directors of the
Company shall deem appropriate.
3. Upon exercise or conversion of these Warrants, the registered
Holder hereof shall surrender to the stock transfer agent of the Company this
Warrant Certificate together with the form of subscription attached hereto
and, in the case of exercise of the Warrants, a certified check or bank draft
payable to the order of the Company, or in the case of a conversion of the
Warrants, written confirmation by a broker/dealer member of the National
Association of Securities Dealers, Inc. of the fair market value of the
shares of Common Stock of the Company determined in accordance with paragraph
2. above, on a date within three days prior to surrender of this Warrant
Certificate to the stock transfer agent for conversion and the Conversion
Form attached hereto specifying the number of shares of Common Stock of the
Company the registered Holder claims to be entitled to be issued upon the
conversion requested.
4. In neither the case of exercise nor of conversion of the Warrants
shall fractional shares of the Common Stock of the Company be issued.
5. The Company covenants and agrees that all shares of Common Stock
which may be delivered upon the exercise or conversion of this Warrant will,
upon delivery, be free from all taxes, liens and charges with respect to the
purchase thereof hereunder. This Warrant shall not be exercised nor
converted by Holder in any state where such exercise would be unlawful such
as a state in which the Company's Common Stock is not registered or qualified
as the case requires.
<PAGE>
6. The Company agrees at all times to reserve or hold available a
sufficient number of shares of its Common Stock to cover the number of shares
issuable upon the exercise or conversion of this and all other Warrants of
like tenor then outstanding.
7. This Warrant does not entitle the Holder to any voting rights or
other rights as a shareholder of the Company, or to any other rights
whatsoever except the rights herein set forth, and no dividend shall be
payable to accrue in respect to this Warrant or the interest represented
hereby, or the shares which may be acquired hereunder, until or unless, and
except to the extent that this Warrant shall be exercised or converted, and
the Common Stock which may be acquired upon exercise thereof shall become
deliverable.
8. The Warrants are not redeemable nor cancellable by the Company.
9. This Warrant is exchangeable upon the surrender hereof by the
Holder to the Company for new Warrants of like tenor and date representing in
the aggregate the right to acquire the number of shares which may be acquired
hereunder, each of such new Warrants to represent the right to acquire such
number of shares as many be designated by the registered Holder at the time
of such surrender.
10. The Company may deem and treat the Holder at any time as the
absolute owner hereof for all purposes and shall not be affected by any
notice to the contrary.
11. The number of shares of Common Stock which may be acquired upon
exercise or conversion of these Warrants and the Warrant Price shall be
subject to adjustment from time to time as follows:
a. If the Company shall at any time subdivide its outstanding
shares of Common Stock by recapitalization, reclassification or split-up
thereof, or if the Company shall declare a stock dividend or distribute
shares of Common Stock to its stockholders, the number of shares of Common
Stock which may be acquired upon exercise or conversion of this Warrant
immediately prior to such subdivision shall be proportionately increased in
each instance, and if the Company shall at any time combine the outstanding
shares of Common Stock by recapitalization, reclassification or combination
thereof, the number of shares of Common Stock which may be acquired upon
exercise or conversion of this Warrant immediately prior to such combination
shall be proportionately decreased in each instance.
b. If the Company shall distribute to all of the holders of its
shares of Common Stock any security (except as provided in the preceding
paragraph) or other assets (other than a distribution made as a dividend
payable out of earnings or out of any earned surplus legally available for
dividends under the laws of the jurisdiction of incorporation of the
Company), the Board of Directors shall be required to make such equitable
adjustment in the Warrant Price in effect immediately prior to the record
date of such distribution as may be necessary to preserve to the Holder of
this Warrant rights substantially proportionate to those enjoyed hereunder by
such Holder immediately prior to the happening of such distribution. Any
such adjustment shall become effective as of the day following the record
date for such distribution.
<PAGE>
c. Whenever the number of shares of Common Stock which may be
acquired upon the exercise or conversion of this Warrant is required to be
adjusted as provided herein, the Warrant Price shall be adjusted (to the
nearest cent) in each instance by multiplying such Warrant Price immediately
prior to such adjustment by a fraction (x) the numerator of which shall be
the number of shares of Common Stock which may be acquired hereunder upon the
exercise or conversion of the Warrants immediately prior to such adjustment,
and (y) the denominator of which shall be the number of shares of Common
Stock which may be acquired hereunder immediately thereafter.
d. In case of any reclassification of the outstanding shares of
Common Stock, other that a change covered by paragraph (1) above or which
solely affects the par value of such shares of Common Stock, or in the case
of any merger or consolidation of the Company with or into another
corporation (other that a consolidation merger in which the Company is the
continuing corporation and which does not result in any reclassification or
capital reorganization of the outstanding shares of Common Stock), or in the
case of any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety in connection with
which the Company is dissolved, the Holder of this Warrant shall have the
right thereafter (until the expirations of the respective rights of exercise
or conversion of the Warrant) to receive upon the exercise or conversion
thereof, using the same aggregate Warrant Price applicable hereunder
immediately prior to such event, the kind and amount of shares of stock or
other securities or property receivable upon such reclassification, capital
reorganization, merger or consolidation, or upon the dissolution following
any sale or other transfer, which a holder of the number of shares of Common
Stock of the Company would obtain upon exercise or conversion of the Warrants
immediately prior to such event; and if any classification also results in a
change in shares of Common Stock covered by paragraph (1) above, then such
adjustment shall be made pursuant to both paragraph (1) above and this
paragraph (4). The provisions of this paragraph (4) shall similarly apply to
successive reclassifications, or capital reorganizations, mergers or
consolidations, sales or other transfers.
e. In case of the dissolution, liquidation or winding-up of the
Company, all rights under any of the Warrants not theretofore exercised nor
expired by their terms shall terminate on a date fixed by the Company, such
date so fixed to be not earlier than the date of the commencement of the
proceedings for such dissolution, liquidation or winding-up and not later
than thirty (30) days after such commencement date. Notice of the
termination of purchase or conversion rights shall be given to the registered
Holder of this Warrant as the same shall appear on the books of the Company,
by certified or registered mail at least thirty (30) days prior to such
termination date.
f. In case the Company shall, at any time prior to the Expiration
Date of the Warrants, and prior to the exercise thereof, offer to the holders
of its Common Stock any right to subscribe for additional shares of any class
of the Company, then the Company shall give written notice thereof to the
registered Holder of this Warrant not less than thirty (30) days prior to the
date on which the books of the Company are closed or a record date fixed for
the determination of stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date be fixed with respect to such offer or subscription, and
<PAGE>
the right of the registered Holders hereof to participate in such offer or
subscription shall terminate if this Warrant shall not be exercised nor
converted on before the date of such closing of the books or such record date.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer this _____ day of ________ 1999.
Imagenetix, Inc.
By
President
ATTEST:
Secretary
ASSIGNMENT FORM
(To be executed by the registered Holder to effect a
Transfer of the Within Warrant)
For Value Received ____________________________ hereby sells, assigns, and
transfer unto
(Please print or typewrite name and address, including postal zip code
of assignee)
this Warrant and the rights represented thereby to purchase Common Stock of
Imagenetix, Inc. in accordance with the terms and conditions thereof, and
does hereby irrevocable constitute and appoint ________________ attorney to
transfer this Warrant on the books of the Company with full power of
substitution.
Date: ___________________ Signed _____________________________
SUBSCRIPTION FORM
(To Be Executed by the Registered Holder to Exercise The Rights
To Purchase Common Stock Evidenced By The Within Warrant)
The undersigned Registered Holder hereby irrevocably subscribes for
_____________ shares of the Common Stock of Imagenetix, Inc., pursuant and in
accordance with the terms and conditions of the Warrant Certificate attached
hereto and hereby makes payment of $ _______________ therefor, and requests
that certificate(s) for such shares be issued in the name of the undersigned
and be delivered to the address stated below, and if such number of shares
shall not be all of the shares purchasable hereunder, that a new Warrant of
like tenor for the balance of the remaining shares purchasable hereunder be
delivered to the undersigned at the address stated below:
Date: ___________________ Signed _____________________________
SIGNATURE(S) MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF A REGISTERED
NATIONAL STOCK EXCHANGE, OR BY A BANK (OTHER THAN A
<PAGE>
SAVINGS BANK), OR A TRUST COMPANY. THE SIGNATURE TO THE ABOVE SUBSCRIPTION
FORM AND, IF APPLICABLE, CONVERSION FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WARRANT. IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
CONVERSION FORM
The undersigned registered Holder hereby exercises the Holder's right to
convert ______________ of the Warrants evidenced by the Warrant Certificate
attached hereto into ______________ shares of Common Stock of Imagenetix,
Inc. based upon the fair market value of $ ____________ per share of Common
Stock of Imagenetix, Inc. on ______________, as stated in the written
confirmation of said fair market value by _______________________, a
broker/dealer member of the National Association of Securities Dealers, Inc.
Date: ___________________ Signed _____________________________
Schedule of Warrant "B" Holders
Number of Warrant
Name Warrants Certificate No. Date
Claudia McAdam 50,000 B-1 3/29/99
David N. Nemelka 75,000 B-3 and B-9 9/22/99
1st Zamora Corporation 75,000 B-4 9/22/99
Greg Pusey 26,250 B-5 9/22/99
Barry C. Loder 11,250 B-6 9/22/99
Gulfstream 1998 Irrevocable Trust 37,500 B-7 9/22/99
Great Expectations Family
Limited Partnership 25,000 B-8 9/22/99
-------
Total 300,000
<PAGE>
EXHIBIT 6.1
FUNDING AGREEMENT
This Agreement, entered into this 23rd day of March 1999, is by, between,
and among Claudia A. McAdam, an individual ("McAdam"), Great Expectations Family
Limited Partnership, a Colorado limited partnership ("GEFLP"), Growth Ventures,
Inc., a Colorado corporation ("GVI"), Imagenetix, a California corporation
("Imagenetix"), Internet International Business Management, Inc., a Colorado
corporation ("IIBM").
RECITALS:
WHEREAS, Imagenetix has entered into an Exchange Agreement dated of even
date herewith by, between, and among IIBM, Imagenetix, and the shareholders of
Imagenetix (hereinafter the "Exchange Agreement") whereby Imagenetix shall
become a wholly owned subsidiary of IIBM;
<PAGE>
WHEREAS, subsection 1.3 of the Exchange Agreement requires IIBM to furnish
a $300,000 line of credit to Imagenetix;
WHEREAS, McAdam, GEFLP, and GVI, or its assigns, (hereinafter collectively
the "Funding Parties" or individually a "Funding Party") have agreed with IIBM
to provide the $300,000 line of credit to satisfy the requirements of subsection
1.3 of the Exchange Agreement, and Imagenetix is willing to accept funding from
IIBM as set forth herein in satisfaction of the requirements of such subsection
1.3;
WHEREAS, the provisions of subsection 5.15 of the Exchange Agreement
requiring the filing and processing of a registration statement (the
"Registration Statement") with the Securities and Exchange Commission ("SEC"),
are hereby adopted and incorporated herein;
WHEREAS, the parties hereto have agreed to the funding provisions as set
forth herein;
NOW, THEREFORE, in consideration of the mutual terms and conditions set
forth herein, and other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Line of Credit. The Funding Parties, severally and not jointly, each
hereby agrees to loan to IIBM, and IIBM hereby agrees to loan to Imagenetix,
upon reasonable request, up to the following maximum amount of funds which shall
be made available to IIBM, and IIBM shall make available to Imagenetix, in the
following order:
<TABLE>
<CAPTION>
Amount
Name of Loan Payment Date
<S> <C> <C>
McAdam $50,000 As of the date of this Agreement
GEFLP $50,000 As of the date of this Agreement
GVI, or its assigns $200,000 As of the Closing of the Exchange
Agreement, as provided therein
</TABLE>
The terms and conditions of the loans to IIBM are set forth in the form of a
Promissory Note, a copy of which is attached hereto as Exhibit "B-1" and
incorporated herein (the "IIBM Note" or "IIBM Notes"). The terms and conditions
of the loans from IIBM to Imagenetix are set forth in the form of a Promissory
Note, a copy of which is attached hereto as Exhibit "B-2" and incorporated
herein (the "Imagenetix Note"). Simultaneous with the furnishing of funds by
one of the Funding Parties to IIBM, IIBM shall execute and deliver an IIBM Note
to that Funding Party. Simultaneous with the furnishing of funds by IIBM to
Imagenetix, Imagenetix shall execute and deliver an Imagenetix Note to IIBM. The
principal and interest due under the IIBM Notes are convertible into shares of
Common Stock of IIBM, at the option of the Funding Party holding the IIBM Note,
as set forth in the IIBM Notes.
2. Draws of Funds. Each request for funds pursuant to this Agreement
shall be accompanied by a reasonable description of the use of such funds, which
funds shall be used for
<PAGE>
the business of Imagenetix. Each such request shall be subject to the
approval of Gary J. McAdam, which approval shall not be unreasonably withheld.
3. Issuance of Warrants. As partial consideration for the Funding
Parties providing the funding to IIBM, IIBM shall issue to the members of the
Funding Parties one "A" warrant and one "B" warrant to purchase common shares of
IIBM for each $1.00 loaned by the particular member of the Funding Parties,
which warrants shall be subject to the terms and conditions set forth in the
forms attached hereto as Exhibits "B-3" and "B-4" and incorporated herein (the
"Warrants"). The Warrants shall be issued, and Warrant certificates delivered,
not later than the Closing of the Exchange Agreement separately to each member
of the Funding Parties as follows:
<TABLE>
<CAPTION>
Number of Warrants
Funding Party Class "A" Class "B"
<S> <C> <C>
McAdam 50,000 50,000
GEFLP 50,000 50,000
GVI, or its assigns 200,000 200,000
</TABLE>
4. Registration Rights. IIBM hereby grants the following registration
rights in connection with the shares of Common Stock issued upon conversion of
the IIBM Notes, if any, the Warrants, the shares of Common Stock underlying the
Warrants and the shares of Common Stock issued upon conversion of the Warrants,
if any.
a. Registration Statement. IIBM shall include in the Registration
Statement filed by IIBM pursuant to subsection 5.15 of the Exchange
Agreement, the Warrants, the shares of Common Stock of IIBM underlying the
Warrants, the shares of Common Stock issued upon conversion of the Warrants,
if any and the shares of Common Stock issued upon conversion of the IIBM
Notes, if any.
b. Piggyback Rights. If and when IIBM shall file a registration
statement with the SEC under the Securities Act of 1933 (the "Act") for the sale
of any of the securities of IIBM, prior to five years from the date hereof, on a
form prescribed by the Act which is appropriate for registration for sale of any
of the following securities of IIBM (the "Registerable Securities") held by a
Funding Party who is the registered holder of such securities as of the date for
the proposed filing of the registration statement by IIBM to wit:
Class "A" Warrants and the shares of Common Stock underlying the Warrants
Class "B" Warrants and the shares of Common Stock underlying the Warrants
Shares of Common Stock acquired by a Funding Party on exercise of
Class "A" and/or Class "B" Warrants
Shares of Common Stock acquired by a Funding Party on conversion of
Class "A" and/or Class "B" Warrants
Shares of Common Stock acquired by a Funding Party on conversion of an
IIBM Note
<PAGE>
then IIBM shall give written notice thereof to the holders of the Registerable
Securities prior to such filing, and the holders of the Registerable Securities
shall have the right to request to have included therein such number of the
Registerable Securities as shall be specified in such request, provided,
however, that the inclusion of such shares shall not unreasonably interfere with
IIBM's registration of its shares and that in no event shall IIBM be obligated
(i) to file such registration statement at any time other than during the period
ending five years following the date of this Agreement, or (ii) to keep the
prospectus with respect to the Registerable Securities current for any period
extending beyond five years from the date of this agreement. If a Funding Party
does not make a request for such registration within twenty days after receipt
of notice from IIBM, IIBM shall have no obligation to include any such
Registerable Securities in such registration statement, or in any future
registration statement.
c. Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by IIBM under subparagraph (b)
above, IIBM shall not be required under subparagraph (b) to include any of the
Registerable Securities in such underwriting unless the holders of the
Registerable Securities accept the terms of the underwriting as agreed upon
between IIBM and the underwriters selected by it, and then only in such quantity
as will not, in the opinion of the underwriters, jeopardize the success of the
offering by IIBM. If the total amount of securities, including the Registerable
Securities, requested to be included in such offering exceeds the amount of
securities to be sold, other than by the Company, that the underwriters
reasonably believe compatible with the success of the offering, only the number
of such securities, including the Registerable Securities, which the
underwriters believe will not jeopardize the success of the offering, but in no
event shall (i) the number of Registerable Securities included in the offering
be reduced below ten percent (10%) of the total number of shares included in
such offering.
d. State Registrations. At the written request of Funding Parties
who are the registered holders of a majority in number of the Registerable
Securities, IIBM shall file a registration statement with one state in which the
Funding Parties intend to sell the Registerable Securities, provided that such
filing can be made without unreasonable expense to IIBM and without materially
affecting the registration statement filed with the SEC. IIBM shall cooperate
with the holders of the Registerable Securities in the filing of a registration
statement in one or more additional states, provided that the holders of such
Registerable Securities shall reimburse IIBM for its time, effort, and costs
reasonably associated with such filings.
e. Payment of Expenses. IIBM shall bear all expenses incurred by it
in registering the Registerable Securities hereunder, including without
limitation, all filing, registration and qualification fees of the SEC or any
state agency (except for fees incurred in states expressly designated by the
holders of the Registerable Securities in subparagraph (d) above), printing
expenses, fees and disbursements of legal counsel and all accounting expenses
including expenses of the year-end audits. The holders of the Registerable
Securities shall bear the fees and disbursements of their own legal counsel,
underwriting or brokerage discounts and commissions, expenses of the brokers or
underwriters of the Funding Parties, and fees of the National Association of
Securities Dealers, Inc.
<PAGE>
f. Cooperation of the Holders of the Registerable Securities. It
shall be a condition of the obligations of IIBM to take action in response to
any request for registration by a holder of Registerable Securities that such
request include or be accompanied by all of the following: (i) the holder's
confirmation that such person then has a present intention of selling or
distributing the Registerable Securities which are the subject of such request;
(ii) information with respect to the holder and the number of Registerable
Securities proposed to be sold and a description of such Registerable
Securities, or, to the extent that such information is not then available, the
holder's undertaking to furnish the same; (iii) the indemnity agreement
specified in subparagraph (g) below; (iv) the holder's agreement to refrain, in
connection with such registration, offering and sale, from taking any action
violative of the anti-manipulative rules promulgated under the Securities
Exchange Act of 1934, as amended; and (v) the holder's agreement to cooperate
with IIBM generally in connection with such registration, and the undertaking to
execute such further documents relating to formal matters in connection with
such registration, offering and sale as may be necessary, appropriate and proper
to effectuate the transactions contemplated by such request.
g. Indemnification. Any registration hereunder shall be accompanied
by an agreement of the holder of the Registerable Securities to be registered to
indemnify IIBM, each of its directors, each of its officers who sign the
registration statement, and each person who controls IIBM against any loss,
claim, liability, damage or action arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in the
registration statement when the same becomes effective or in any final
prospectus or amendment or supplement thereto, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and to reimburse the
indemnified persons for any legal or other expenses reasonably incurred in
investigating or defending any such action or claim, but only to the extent that
the untrue statement (or alleged untrue statement) or omission (or alleged
omission) was made in reliance upon and in conformity with written information
furnished to IIBM by or on behalf of the holder for use in the registration
statement, final prospectus, or amendment or supplement thereto, as the case may
be.
5. The securities acquired and to be acquired and which may be acquired
pursuant to this Funding Agreement have not been registered under the Securities
Act of 1933 (the "Act"), or under the securities laws of any state. The
securities have been and will be acquired for investment any may not be
transferred or sold in the absence of an effective registration statement or
other compliance under the Act and the laws of the applicable state or a "no
action" or interpretive letter from the Securities and Exchange Commission or an
opinion of counsel reasonably satisfactory to the MBSI, and its legal counsel,
to the effect that the sale or transfer is exempt from registration under the
act and such state statutes.
a. Each of the Funding Parties, severally, represents and warrants:
i. The securities acquired and to be acquired and which may be
acquired pursuant to this Funding Agreement are being acquired for the Funding
Party's own account to be held for investment purposes only and not with a view
to, or for, resale in connection with any distribution of such securities or any
interest therein without registration, or
<PAGE>
an applicable exemption from registration, or other compliance under the Act,
or any state securities law, and the Funding Party has no direct or indirect
participation in any such undertaking or in underwriting such an undertaking.
ii. The Funding Party has been advised and understands that the
securities have not been registered under the Act, or any state securities laws,
and MBSI is under no obligation to register the securities under the Act or such
state securities laws, except as specifically provided herein.
6. Miscellaneous.
a. Notices. All communications provided for herein shall be in
writing and shall be deemed to be given or made when served personally or when
deposited in the United States mail, certified return receipt requested,
addressed as follows, or at such other address as shall be designated by any
party hereto in written notice to the other party hereto delivered pursuant to
this subsection:
McAdam: 14 Red Tail Drive
Highlands Ranch, CO 80126
GEFLP, IIBM and GVI: 14 Red Tail Drive
Highlands Ranch, CO 80126
Attn: Gary J. McAdam
With Copy to: Ronald N. Vance
Attorney at Law
57 West 200 South
Suite 310
Salt Lake City, UT 84101
Imagenetix
and Shareholders: 1702 Macero Street
Escondido, CA 92029
Attn: William P. Spencer
With Copy to: Louis K. Bruno
Attorney at Law
135 West Mission Avenue
Suite 105
Escondido, CA 92025
b. Default. Should any party to this Agreement default in any of
the covenants, conditions, or promises contained herein, the defaulting party
shall pay all costs and expenses, including a reasonable attorney's fee, which
may arise or accrue from enforcing this Agreement, or in pursuing any remedy
provided hereunder or by the statutes of the State of Utah.
<PAGE>
c. Assignment. This Agreement is not assignable in whole or in part
by any Funding Party without the prior written consent of IIBM.
d. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, their heirs, executors,
administrators, successors and approved assigns.
e. Partial Invalidity. If any term, covenant, condition, or
provision of this Agreement or the application thereof to any person or
circumstance shall to any extent be invalid or unenforceable, the remainder of
this Agreement or application of such term or provision to persons or
circumstances other than those as to which it is held to be invalid or
unenforceable shall not be affected thereby and each term, covenant, condition,
or provision of this Agreement shall be valid and shall be enforceable to the
fullest extent permitted by law.
f. Entire Agreement. This Agreement constitutes the entire
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all negotiations, representations, prior discussions,
letters of intent, and preliminary agreements between the parties hereto
relating to the subject matter of this Agreement.
g. Interpretation of Agreement. This Agreement shall be interpreted
and construed as if equally drafted by all parties hereto.
h. Survival of Covenants, Etc. All covenants, representations, and
warranties made herein to any party, or in any statement or document delivered
to any party hereto, shall survive the making of this Agreement and shall remain
in full force and effect until the obligations of such party hereunder have been
fully satisfied.
i. Further Action. The parties hereto agree to execute and deliver
such additional documents and to take such other and further action as may be
required to carry out fully the transactions contemplated herein.
j. Amendment. This Agreement or any provision hereof may not be
changed, waived, terminated, or discharged except by means of a written
supplemental instrument signed by the party or parties against whom enforcement
of the change, waiver, termination, or discharge is sought.
k. Full Knowledge. By their signatures, the parties acknowledge
that they have carefully read and fully understand the terms and conditions of
this Agreement, that each party has had the benefit of counsel, or has been
advised to obtain counsel, and that each party has freely agreed to be bound by
the terms and conditions of this Agreement.
l. Headings. The descriptive headings of the various sections or
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
<PAGE>
m. Counterparts. This Agreement may be executed in two or more
partially or fully executed counterparts, each of which shall be deemed an
original and shall bind the signatory, but all of which together shall
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto executed the foregoing Funding
Agreement as of the day and year first above written.
McAdam: /s/ Claudia A. McAdam, Individually
GEFLP: Great Expectations Family Limited Partnership
By /s/ Gary J. McAdam
Its General Partner
IIBM: Internet International Business Management,
Inc.
By /s/ Gary J. McAdam, President
Imagenetix: Imagenetix
By /s/ William P. Spencer, President
GVI: Growth Ventures, Inc.
By /s/ Gary J. McAdam, President
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and delivers unto
__________________________________ all right, title and interest of the
undersigned in and to that certain Funding Agreement by, between and among
Claudia A. McAdam, Great Expectations Family Limited Partnership, a Colorado
Limited Partnership, Growth Ventures, Inc., a Colorado corporation, Imagenetix,
a California corporation, and Internet International Business Management, Inc.,
a Colorado corporation, dated the 23rd day of March 1999.
Dated this __________ day of _______________ 1999.
_______________________________
Print Name_____________________
ACCEPTANCE OF ASSIGNMENT
__________________________________ hereby accepts the foregoing assignment
of all right, title and interest of __________________________________ in and to
the Funding
<PAGE>
Agreement identified above and in consideration therefore agrees to
be bound by the terms and conditions of said Funding Agreement as it applied to
the Funding Parties therein.
Dated this __________ day of _______________ 1999.
_______________________________
Print Name_____________________
CONSENT TO ASSIGNMENT
Internet International Business Management, Inc., a Colorado corporation, a
party to that certain Funding Agreement identified above, by and through its
undersigned duly authorized officer hereby consents to the foregoing assignment
and acceptance thereof.
Dated this __________ day of _______________ 1999.
Internet International Business Management,
Inc.
By_____________________________
It_____________________________
Print Name_____________________
<PAGE>
EXHIBIT 10.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment Number 2 to the Registration Statement on Form SB-1 for Imagenetix,
Inc., of our report dated May 10, 1999, relating to the March 31, 1999
financial statements of Imagenetix, Inc., which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts".
/s/ Pritchett, Siler & Hardy, P.C.
Salt Lake City, Utah
December 22, 1999
