<PAGE>
Page 1
As filed with the Securities and Exchange Commission on January 13, 2000
SEC Registration No. 333-87535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-1/A-3
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 268,334 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 35,000 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 JANUARY 13, 2000
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 (499,454) (519,550)
Net loss (513,491) (533,642)
Loss per share (.29) (.30)
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 $533,642 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 $533,642, or $0.30 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 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 our success. 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. This act 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
- mass market retailers, including mass merchandisers, drug stores,
supermarkets and discount stores;
- health food stores;
- mail order companies; and
- 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 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 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:
- access to the lowest raw material pricing through linkage of direct
suppliers and manufacturers;
- world-wide online access for our key clients;
- product delivery schedule; and
- 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
<PAGE>
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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, the Federal Trade Commission, 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 guidelines for the preparation, packing and
storage of foods and drugs. The FDA has published proposed rules for the
establishment of good manufacturing practices 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. There can be no assurance that FDA will
not question our labeling or other operations in the future.
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The Dietary Supplement Health and Education Act revised the provisions
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,
- 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
- 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
- the claims are corraborated by "competent and reliable scientific
evidence" consistent with FTC standards for advertising review;
- 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;
- the manufacturer retains substantiation that the claims are truthful
and nonmisleading;
- 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:
- the identification of dietary supplements and their nutrition and
ingredient labeling;
- the terminology to be used for nutrient content claims, health claims,
and statements of nutritional support, including structure and function
claims;
- labeling requirements for dietary supplements for which "high potency"
and "antioxidant" claims are made;
- notification procedures for statements of nutritional supprt,
including structure and function claims, on dietary supplement labels
and in their labeling; and
- 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 federal laws dealing with drugs
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. Those laws
prohibit 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. A federal court has 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
<PAGE>
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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 Federal Trade Commission, 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 commission
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 federal law. While we have not been the subject to
enforcement action for the advertising of its products, there can be no
assurance that this agency 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 560,717 61,142
Accumulated deficit (533,642) (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 710,436 15,963 726,399
Research and development 2,565 500 3,065
------------ ------------ ------------
Total Expenses 751,318 36,486 787,804
------------ ------------ ------------
LOSS FROM OPERATIONS (499,454) (20,096) (519,550)
------------ ------------ ------------
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 (513,491) (20,151) (533,642)
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
------------ ------------ ------------
NET LOSS $ (513,491) $ (20,151) $ (533,642)
------------ ------------ ------------
LOSS PER COMMON SHARE $ (.29) $ (.01) $ (.30)
------------ ------------ ------------
</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 $3.00 per share
(unaudited) - - 166,500 167 499,333 -
Cancellation of 241,500
shares of common
stock, June, 1999
at $3.00 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) - - - - - (513,491)
---------- --------- ----------- --------- ---------- -----------
BALANCE,
September 30, 1999
(unaudited) - $ - 1,725,000 $ 1,725 $ 560,717 $ (533,642)
---------- --------- ----------- --------- ---------- -----------
</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 $ (513,491) $ (20,151) $ (533,642)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Non-cash expense 499,500 - 499,500
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 recorded for book purposes at $3.00 per share
or $499,500. 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 were issued under the plan to certain employees, consultants
and directors. The shares were recorded, for book purposes at $3.00 per
share to conform with the offering price of the subsequently proposed stock
offering [SEE NOTE 13].
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) $ (513,491) $ (20,151) $ (533,642)
------------- ------------- ------------
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 JANUARY 13, 2000
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.
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[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!
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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
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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
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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
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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>
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*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).
***Filed with the second amended filing of the registration statement
of the Company on Form SB-1 on December 22, 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
third amended registration statement to be signed on its behalf by the
undersigned in the city of San Diego, State of California, on the 13th day of
January 2000.
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: January 13, 2000 /s/ William Spencer, Director and Principal
Accounting Officer
Date: January 13, 2000 /s/ Debra L. Spencer, Director and Chief
Financial Officer
Date: January 13, 2000 /s/ Dr. Charles L. Cochran, Director
Date: January 13, 2000 /s/ Dr. Peter H. Antoniou, Director
<PAGE>
EXHIBIT 10.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment Number 3 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
January 13, 2000
