U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Kushi Natural Foods Corp.
(Name of Small Business Issuer in its charter)
Delaware 13-3912047
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
c/o Madison Venture Capital II, Inc.
150 East 58th Street, New York, NY 10022 10022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 583-1363
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Not Applicable Not Applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of class)
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FORWARD LOOKING STATEMENTS
THIS FORM 10-SB12G AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
KUSHI NATURAL FOODS CORP. (HEREINAFTER REFERRED TO AS "KUSHI AND/OR THE
"COMPANY") OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z-2 AND 78U-5 (SUPP.
1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF KUSHI AND MEMBERS OF ITS MANAGEMENT TEAM AS WELL AS THE
ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN
THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS
EXHIBIT 99.1 TO THIS FORM 10-SB12G, AND ARE HEREBY INCORPORATED HEREIN BY
REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE
FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF
UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.
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RISK FACTORS
1. Control by Principal Shareholders, Officers and Directors.
The Company's principal shareholders, officers and directors will
beneficially own approximately ninety percent (90%) of the Company's Common
Stock. As a result, such persons may have the ability to control the Company and
direct its affairs and business. Such concentration of ownership may also have
the effect of delaying, deferring or preventing change in control of the
Company. See "Principal Stockholders."
2. Conflicts of Interest.
None of the Company's management is engaged by the Company on a full time
basis. In addition, both Dr. Eugene Stricker and Mark Schindler are engaged in
the venture capital business through entities other than the Company.
Accordingly, certain conflicts of interest exist between the Company and its
officers and directors. They have other business interests to which they devote
their attention, and they may be expected to continue to do so. As a result,
conflicts of interest may arise that can be resolved only through their exercise
of such judgment as is consistent with each officer's understanding of his
fiduciary duties to the Company. See "Management," and "Conflicts of Interest."
3. Possible Need for Additional Financing.
The Company has very limited funds, and such funds may not be adequate to
take advantage of any available business opportunities. Even if the Company's
funds prove to be sufficient to acquire an interest in, or complete a
transaction with, a business opportunity, the Company may not have enough
capital to exploit the opportunity. The ultimate success of the Company may
depend upon its ability to raise additional capital. The Company has not
investigated the availability, source, or terms that might govern the
acquisition of additional capital and will not do so until it determines a need
for additional financing. If additional capital is needed, there is no assurance
that funds will be available from any source or, if available, that they can be
obtained on terms acceptable to the Company. If not available, the Company's
operations will be limited to those that can be financed with its modest
capital.
4. Regulation of Penny Stocks.
The Company's securities, if and when available for trading, will be
subject to a Securities and Exchange Commission rule that imposes special sales
practice requirements upon broker-dealers who sell such securities to persons
other than established customers or accredited investors. For purposes of the
rule, the phrase "accredited investors" means, in general terms, institutions
with assets in excess of $5,000,000, or individuals having a net worth in excess
of $1,000,000 or having an annual income that exceeds $200,000 (or that, when
combined with a spouse's income, exceeds $300,000). For transactions covered by
the rule, the broker-dealer must make a special suitability
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determination for the purchaser and receive the purchaser's written agreement to
the transaction prior to the sale. Consequently, the rule may affect the ability
of broker- dealers to sell the Company's securities and also may affect the
ability of purchasers in this offering to sell their securities in any market
that might develop therefor.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, and 15g-7 under the Securities Exchange Act of 1934,
as amended. Because the securities of the Company may constitute "penny stocks"
within the meaning of the rules, the rules would apply to the Company and to its
securities. The rules may further affect the ability of owners of Shares to sell
the securities of the Company in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differentials and markups by selling broker- dealers;
and (v) the wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the resulting inevitable collapse of those prices and with consequent investor
losses. The Company's management is aware of the abuses that have occurred
historically in the penny stock market. Although the Company does not expect to
be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to the Company's securities.
5. No Operating History.
The Company was formed in August of 1996 in connection with the merger of
Kushi Macrobiotics Corp. and American Phoenix Group, Inc. Pursuant to the terms
of the merger agreement between Kushi Macrobiotics Corp. and American Phoenix
Group, Inc., the Company's shares were spun off to the Kushi Macrobiotics Corp.
holders on a three for one basis and all of Kushi Macrobiotics Corp.'s assets
related to its Kushi Cuisine business and approximately $115,000 in cash were
transferred to the Company. The Company entered into a joint venture to continue
to promote the Kushi Cuisine business, but the joint venture failed and the
Company lost its investment therein of approximately $48,000. The Company was
inactive for several years and is now registering its common stock under the
1934 Act in order to better pursue its purpose of acquiring a business
opportunity. The Company has no operating history, revenues from operations, or
assets other than cash transferred to the Company at the time of its formation
(of which approximately $50,000 remains on hand). The Company faces all of the
risks of a new business and the special risks inherent in the investigation,
acquisition, or involvement in a new business
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opportunity. The Company must be regarded as a new or "start-up" venture with
all of the unforeseen costs, expenses, problems, and difficulties to which such
ventures are subject.
6. No Assurance of Success or Profitability.
There is no assurance that the Company will acquire a favorable business
opportunity. Even if the Company should become involved in a business
opportunity, there is no assurance that it will generate revenues or profits, or
that the market price of the Company's Common Stock will be increased thereby.
7. Reporting Requirements May Delay Or Preclude Acquisition.
Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires companies subject thereto to provide certain information about
significant acquisitions, including certified financial statements for the
company acquired, covering one or two years, depending on the relative size of
the acquisition. The time and additional costs that may be incurred by some
target entities to prepare such statements may significantly delay or
essentially preclude consummation of an otherwise desirable acquisition by the
Company. Acquisition prospects that do not have or are unable to obtain the
required audited statements may not be appropriate for acquisition so long as
the reporting requirements of the 1934 Act are applicable.
8. Lack of Market Research or Marketing Organization.
The Company has neither conducted, nor have others made available to it,
results of market research indicating that market demand exists for the
transactions contemplated by the Company. Moreover, the Company does not have,
and does not plan to establish, a marketing organization. Even in the event
demand is identified for a merger or acquisition contemplated by the Company,
there is no assurance the Company will be successful in completing any such
business combination.
9. Possible Business - Not Identified and Highly Risky.
The Company has not identified and has no commitments to enter into or
acquire a specific business opportunity and therefore can disclose the risks and
hazards of a business or opportunity that it may enter into except in a general
manner, and cannot disclose the risks and hazards of any specific business or
opportunity that it may enter into. An investor can expect a potential business
opportunity to be quite risky. The Company's acquisition of or participation in
a business opportunity will likely be highly illiquid and could result in a
total loss to the Company and its stockholders if the business or opportunity
proves to be unsuccessful. See Item 1 "Description of Business."
10. Type of Business Acquired.
The type of business to be acquired may be one that desires to avoid
effecting its own public
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offering and the accompanying expense, delays, uncertainties, and federal and
state requirements which purport to protect investors. Because of the Company's
limited capital, it is more likely than not that any acquisition by the Company
will involve other parties whose primary interest is the acquisition of control
of a publicly traded reporting company. Moreover, any business opportunity
acquired may be currently unprofitable or present other negative factors.
11. Impracticability of Exhaustive Investigation.
The Company's limited funds and the lack of full-time management will
likely make it impracticable to conduct a complete and exhaustive investigation
and analysis of a business opportunity before the Company commits its capital or
other resources thereto. Management decisions, therefore, will likely be made
without detailed feasibility studies, independent analysis, market surveys and
the like which, if the Company had more funds available to it, would be
desirable. The Company will be particularly dependent in making decisions upon
information provided by the promoter, owner, sponsor, or others associated with
the business opportunity seeking the Company's participation. A significant
portion of the Company's available funds may be expended for investigative
expenses and other expenses related to preliminary aspects of completing an
acquisition transaction, whether or not any business opportunity investigated is
eventually acquired.
12. Lack of Diversification.
Because of the limited financial resources that the Company has, it is
unlikely that the Company will be able to diversify its acquisitions or
operations. The Company's probable inability to diversify its activities into
more than one area will subject the Company to economic fluctuations within a
particular business or industry and therefore increase the risks associated with
the Company's operations.
13. Possible Reliance upon Unaudited Financial Statements.
The Company generally will require audited financial statements from
companies that it proposes to acquire. No assurance can be given, however, that
audited financials will be available to the Company. In cases where audited
financials are unavailable, the Company will have to rely upon unaudited
information received from target companies' management that has not been
verified by outside auditors. The lack of the type of independent verification
which audited financial statements would provide, increases the risk that the
Company, in evaluating an acquisition with such a target company, will not have
the benefit of full and accurate information about the financial condition and
operating history of the target company. This risk increases the prospect that
the acquisition of such a company might prove to be an unfavorable one for the
Company or the holders of the Company's securities. Moreover, the Company will
be subject to the reporting provisions of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and thus will be required to furnish certain
information about significant acquisitions, including audited financial
statements for any business that it acquires. Consequently, acquisition
prospects that do not have, or are unable
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to provide reasonable assurances that they will be able to obtain, the required
audited statements would not be considered by the Company to be appropriate for
acquisition so long as the reporting requirements of the Exchange Act are
applicable. Should the Company, during the time it remains subject to the
reporting provisions of the Exchange Act, complete an acquisition of an entity
for which audited financial statements prove to be unobtainable, the Company
would be exposed to enforcement actions by the Securities and Exchange
Commission (the "Commission") and to corresponding administrative sanctions,
including permanent injunctions against the Company and its management. The
legal and other costs of defending a Commission enforcement action are likely to
have material, adverse consequences for the Company and its business. The
imposition of administrative sanctions would subject the Company to further
adverse consequences.
In addition, the lack of audited financial statements would prevent the
securities of the Company from becoming eligible for listing on NASDAQ, the
automated quotation system sponsored by the National Association of Securities
Dealers, Inc., the Over the Counter Bulletin Board, or on any existing stock
exchange. Moreover, the lack of such financial statements is likely to
discourage broker-dealers from becoming or continuing to serve as market makers
in the securities of the Company. Without audited financial statements, the
Company would almost certainly be unable to offer securities under a
registration statement pursuant to the Securities Act of 1933, and the ability
of the Company to raise capital would be significantly limited until such
financial statements were to become available.
14. Other Regulation.
An acquisition made by the Company may be of a business that is subject to
regulation or licensing by federal, state, or local authorities. Compliance with
such regulations and licensing can be expected to be a time-consuming, expensive
process and may limit other investment opportunities of the Company.
15. Dependence upon Management; Limited Participation of Management.
The Company currently has four individuals who are serving as its officers
and directors. The Company will be heavily dependent upon their skills, talents,
and abilities to implement its business plan, and may, from time to time, find
that the inability of the sole officers and directors to devote their full time
attention to the business of the Company results in a delay in progress toward
implementing its business plan. Furthermore, since only four individuals are
serving as the officers and directors of the Company, it will be entirely
dependent upon their experience in seeking, investigating, and acquiring a
business and in making decisions regarding the Company's operations. See
"Management." Because investors will not be able to evaluate the merits of
possible business acquisitions by the Company, they should critically assess the
information concerning the Company's three officers and directors.
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16. Lack of Continuity in Management.
The Company does not have an employment agreement with any of its officers
and directors, and as a result, there is no assurance that they will continue to
manage the Company in the future. In connection with acquisition of a business
opportunity, it is likely the current officers and directors of the Company may
resign. A decision to resign will be based upon the identity of the business
opportunity and the nature of the transaction, and is likely to occur without
the vote or consent of the stockholders of the Company.
17. Indemnification of Officers and Directors.
The Company's Articles of Incorporation and applicable Delaware Law provide
for the indemnification of its directors, officers, employees, and agents, under
certain circumstances, against attorney's fees and other expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on behalf of the Company. The Company will also
bear the expenses of such litigation for any of its directors, officers,
employees, or agents, upon such person's promise to repay the Company therefor
if it is ultimately determined that any such person shall not have been entitled
to indemnification. This indemnification policy could result in substantial
expenditures by the Company which it will be unable to recoup.
18. Director's Liability Limited.
The Company's Articles of Incorporation exclude personal liability of its
directors to the Company and its stockholders for monetary damages for breach of
fiduciary duty except in certain specified circumstances. Accordingly, the
Company will have a much more limited right of action against its directors than
otherwise would be the case. This provision does not affect the liability of any
director under federal or applicable state securities laws.
19. Dependence upon Outside Advisors.
To supplement the business experience of its officers and directors, the
Company may be required to employ accountants, technical experts, appraisers,
attorneys, or other consultants or advisors. The selection of any such advisors
will be made by the Company's officers and directors without any input from
stockholders. Furthermore, it is anticipated that such persons may be engaged on
an "as needed" basis without a continuing fiduciary or other obligation to the
Company. In the event the President of the Company considers it necessary to
hire outside advisors, he may elect to hire persons who are affiliates, if they
are able to provide the required services.
20. Leveraged Transactions.
There is a possibility that any acquisition of a business opportunity by
the Company may be leveraged, i.e., the Company may finance the acquisition of
the business opportunity by borrowing against the assets of the business
opportunity to be acquired, or against the projected future revenues
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or profits of the business opportunity. This could increase the Company's
exposure to larger losses. A business opportunity acquired through a leveraged
transaction is profitable only if it generates enough revenues to cover the
related debt and expenses. Failure to make payments on the debt incurred to
purchase the business opportunity could result in the loss of a portion or all
of the assets acquired. There is no assurance that any business opportunity
acquired through a leveraged transaction will generate sufficient revenues to
cover the related debt and expenses.
21. Competition.
The search for potentially profitable business opportunities is intensely
competitive. The Company expects to be at a disadvantage when competing with
many firms that have substantially greater financial and management resources
and capabilities than the Company. These competitive conditions will exist in
any industry in which the Company may become interested. In addition, some
acquisition candidates may negatively regard the transaction in which the
Company was formed as no registration statement under the Securities Act of
1933, as amended, was filed at that time.
22. No Foreseeable Dividends.
The Company has not paid dividends on its Common Stock and does not
anticipate paying such dividends in the foreseeable future.
23. Loss of Control by Present Management and Stockholders.
The Company may consider an acquisition in which the Company would issue as
consideration for the business opportunity to be acquired an amount of the
Company's authorized but unissued Common Stock that would, upon issuance,
represent the great majority of the voting power and equity of the Company. The
result of such an acquisition would be that the acquired company's stockholders
and management would control the Company, and the Company's management could be
replaced by persons unknown at this time. Such a merger would result in a
greatly reduced percentage of ownership of the Company by its current
shareholders. In addition, the Company's officers could sell their control block
of stock at a premium price to the acquired company's stockholders.
24. No Public Market Exists.
There is no public market for the Company's common stock, and no assurance
can be given that a market will develop or that a shareholder ever will be able
to liquidate his investment without considerable delay, if at all. If a market
should develop, the price may be highly volatile. Factors such as those
discussed in this "Risk Factors" section may have a significant impact upon the
market price of the securities offered hereby. Owing to the low price of the
securities, many brokerage firms may not be willing to effect transactions in
the securities. Even if a purchaser finds a broker willing to effect a
transaction in these securities, the combination of brokerage commissions, state
transfer
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taxes, if any, and any other selling costs may exceed the selling price.
Further, many lending institutions will not permit the use of such securities as
collateral for any loans.
25. Rule 144 Sales.
All of the outstanding shares of Common Stock held by present stockholders
are "restricted securities" within the meaning of Rule 144 under the Securities
Act of 1933, as amended.
As restricted shares, these shares may be resold only pursuant to an
effective registration statement or under the requirements of Rule 144 or other
applicable exemptions from registration under the Act and as required under
applicable state securities laws. Rule 144 provides in essence that a person who
has held restricted securities for a prescribed period may, under certain
conditions, sell every three months, in brokerage transactions, a number of
shares that does not exceed the greater of 1.0% of a company's outstanding
common stock or the average weekly trading volume during the four calendar weeks
prior to the sale. As a result of revisions to Rule 144 which became effective
on or about April 29, 1997, there will be no limit on the amount of restricted
securities that may be sold by a non-affiliate after the restricted securities
have been held by the owner for a period of two years. A sale under Rule 144 or
under any other exemption from the Act, if available, or pursuant to subsequent
registrations of shares of Common Stock of present stockholders, may have a
depressive effect upon the price of the Common Stock in any market that may
develop. Of the total 10,588,718 shares of common stock held by present
stockholders of the Company, 8,603,718 shares which were issued more than three
years ago and are presently available for resales under Rule 144, and the
remaining 1,985,000 shares will become available for resale starting in December
2000.
26. Blue Sky Considerations.
Because the securities registered hereunder have not been registered for
resale under the blue sky laws of any state, the holders of such shares and
persons who desire to purchase them in any trading market that might develop in
the future, should be aware that there may be significant state blue-sky law
restrictions upon the ability of investors to sell the securities and of
purchasers to purchase the securities. Some jurisdictions may not under any
circumstances allow the trading or resale of blind-pool or "blank-check"
securities. Accordingly, investors should consider the secondary market for the
Company's securities to be a limited one.
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PART I
ITEM I. DESCRIPTION OF BUSINESS.
General
The Company was incorporated under the laws of the State of Delaware on
August 1, 1996, and is in the early developmental and promotional stages. To
date the Company's only activities have been acquiring the "Kushi Assets", as
defined below, liquidating the same and activities directed at developing its
present business plan and raising its initial capital. The Company has not
commenced any commercial operations. The Company has no full-time employees and
neither owns nor leases any real estate. The Company was formed in connection
with the merger acquisition of Kushi Macrobiotics Corp. ("KMC") with American
Phoenix Group, Inc. (APGI") in 1996. Prior to such acquisition, KMC had operated
a business of marketing a line of natural foods (the "Kushi Cuisine"). This
business was not successful and management determined that it would be in the
shareholder's interest for KMC to operate a different business. In the APGI
reverse merger, the shareholders of APGI became the owners of 85% of the shares
of KMC, which changed its name to American Phoenix Group, Inc. As a condition to
the merger, KMC was required to divest itself of all assets related to the Kushi
Cuisine business. This divestiture was effected by transferring all of the
assets related to the Kushi Cuisine business, principally inventory and
receivables, and approximately $115,000 to a newly formed entity, the Company,
and spinning off the shares of the Company to the KMC shareholders on a three
for one basis simultaneously with the consummation of the KMC merger with APGI.
The Kushi Cuisine assets and a portion of the cash were contributed to a joint
venture which failed and the Company lost its investment therein of
approximately $48,000. See. "Notes to Financial Statements- Note 4." To the best
of the Company's knowledge, the Company's shares have never traded, nor have any
such shares been transferred from their original holders except by the laws of
descent and distribution.
The proposed business activities described herein classify the Company as a
"blank check" or "shell company" whose sole purpose at this time is to locate
and consummate a merger or acquisition with a private entity. Many states have
enacted statutes, rules and regulations limiting the sale of securities of
"blank check" companies in their respective jurisdictions. Management does not
believe it will undertake any efforts to cause a market to develop in the
Company's securities until such time as the Company has successfully implemented
its business plan described herein. However, if the Company intends to
facilitate the eventual creation of a public trading market in its outstanding
securities, it must consider that the Company's securities, when available for
trading, will be subject to a Securities and Exchange Commission rule that
imposes special sales practice requirements upon broker-dealers who sell such
securities to persons other than established customers or accredited investors.
For purposes of the rule, the phrase "accredited investors" means, in general
terms, institutions with assets in excess of $5,000,000, or individuals having a
net worth in excess of $1,000,000 or having an annual income that exceeds
$200,000 (or that, when combined with a spouse's income, exceeds $300,000). For
transactions covered by the rule, the broker- dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
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agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
may affect the ability of purchasers in this offering to sell their securities
in any market that might develop therefor.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, and 15g-7 under the Securities Exchange Act of 1934,
as amended. Because the securities of the Company may constitute "penny stocks"
within the meaning of the rules, the rules would apply to the Company and to its
securities. The rules may further affect the ability of owners of Shares to sell
the securities of the Company in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differentials and markups by selling broker- dealers;
and (v) the wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the resulting inevitable collapse of those prices and with consequent investor
losses. The Company's management is aware of the abuses that have occurred
historically in the penny stock market. Although the Company does not expect to
be in a position to dictate the behavior of the market or of broker- dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to the Company's securities.
As part of its business plan, this Company is filing this registration
statement on Form 10-SB on a voluntary basis in order to become a "public"
company by virtue of being subject to the reporting requirements of the
Securities Exchange Act of 1934.
The Company's business plan is to seek, investigate, and, if warranted,
acquire one or more properties or businesses, and to pursue other related
activities intended to enhance shareholder value. The acquisition of a business
opportunity may be made by purchase, merger, exchange of stock, or otherwise,
and may encompass assets or a business entity, such as a corporation, joint
venture, or partnership. The Company has limited capital, and it is unlikely
that the Company will be able to take advantage of more than one such business
opportunity. The Company intends to seek opportunities demonstrating the
potential of long-term growth as opposed to short-term earnings.
At the present time the Company has not identified any business opportunity
that it plans to pursue, nor has the Company reached any agreement or definitive
understanding with any person concerning an acquisition. The Company's officers
and directors have previously been in discussions involving a possible merger
between an established company and a shell entity, and have
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a number of contacts within the field of corporate finance. As a result, they
have had preliminary contacts with representatives of several companies
concerning the general possibility of a merger or acquisition by a shell
company. However, none of these preliminary contacts or discussions have
developed into a possible merger or acquisition transaction with the Company.
It is anticipated that the Company's officers and directors may in the
future contact broker-dealers and other persons with whom they are acquainted
who are involved in corporate finance matters to advise them of the Company's
existence and to determine if any companies or businesses they represent have an
interest in considering a merger or acquisition with the Company. In connection
with any transaction which may occur, the Company may be required to pay finders
fees in stock, cash or a combination thereof. No assurance can be given that the
Company will be successful in finding or acquiring a desirable business
opportunity, given the limited funds that are expected to be available for
acquisitions, or that any acquisition that occurs will be on terms that are
favorable to the Company or its stockholders.
The Company's search will be directed toward small and medium-sized
enterprises which have a desire to become public corporations and which are able
to satisfy, or anticipate in the reasonably near future being able to satisfy,
the minimum asset requirements in order to qualify shares for trading on NASDAQ
or on a stock exchange (See "Investigation and Selection of Business
Opportunities"). The Company anticipates that the business opportunities
presented to it will (i) be recently organized with no operating history, or a
history of losses attributable to under-capitalization or other factors; (ii) be
experiencing financial or operating difficulties; (iii) be in need of funds to
develop a new product or service or to expand into a new market; (iv) be relying
upon an untested product or marketing concept; or (v) have a combination of the
characteristics mentioned in (i) through (iv). The Company intends to
concentrate its acquisition efforts on properties or businesses that it believes
to be undervalued. Given the above factors, investors should expect that any
acquisition candidate may have a history of losses or low profitability.
The Company does not propose to restrict its search for investment
opportunities to any particular geographical area or industry, and may,
therefore, engage in essentially any business, to the extent of its limited
resources. This includes industries such as service, finance, natural resources,
manufacturing, high technology, product development, medical, communications and
others. The Company's discretion in the selection of business opportunities is
unrestricted, subject to the availability of such opportunities, economic
conditions, and other factors.
As a consequence of this registration of its securities, any entity which
has an interest in being acquired by, or merging into the Company, is expected
to be an entity that desires to become a public company and establish a public
trading market for its securities. In connection with such a merger or
acquisition, it is highly likely that an amount of stock constituting control of
the Company would be issued by the Company or purchased from the current
principal shareholders of the Company by the acquiring entity or its affiliates.
Depending upon the nature of the transaction, the current officers and
directors of the
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Company may resign their management positions with the Company in connection
with the Company's acquisition of a business opportunity. See "Form of
Acquisition," below, and "Risk Factors - The Company - Lack of Continuity in
Management." In the event of such a resignation, the Company's current
management would not have any control over the conduct of the Company's business
following the Company's combination with a business opportunity.
It is anticipated that business opportunities will come to the Company's
attention from various sources, including its officers and directors, its other
stockholders, professional advisors such as attorneys and accountants,
securities broker-dealers, venture capitalists, members of the financial
community, and others who may present unsolicited proposals. The Company has no
plans, understandings, agreements, or commitments with any individual for such
person to act as a finder of opportunities for the Company.
The Company does not foresee that it would enter into a merger or
acquisition transaction with any business with which its officers or directors
are currently affiliated. Should the Company determine in the future, contrary
to the foregoing expectations, that a transaction with an affiliate would be in
the best interests of the Company and its stockholders, the Company is in
general permitted by Delaware law to enter into such a transaction if:
1. The material facts as to the relationship or interest of the affiliate and as
to the contract or transaction are disclosed or are known to the Board of
Directors, and the Board in good faith authorizes the contract or transaction by
the affirmative vote of a majority of the disinterested directors, even though
the disinterested directors constitute less than a quorum; or
2. The material facts as to the relationship or interest of the affiliate and as
to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
3. The contract or transaction is fair as to the Company as of the time it is
authorized, approved or ratified, by the Board of Directors or the stockholders.
Investigation and Selection of Business Opportunities
To a large extent, a decision to participate in a specific business
opportunity may be made upon management's analysis of the quality of the other
company's management and personnel, the anticipated acceptability of new
products or marketing concepts, the merit of technological changes, the
perceived benefit the company will derive from becoming a publicly held entity,
and numerous other factors which are difficult, if not impossible, to analyze
through the application of any objective criteria. In many instances, it is
anticipated that the historical operations of a specific business opportunity
may not necessarily be indicative of the potential for the future because of the
possible need to shift marketing approaches substantially, expand significantly,
change product emphasis, change or substantially augment management, or make
other changes. The Company will be dependent upon the owners of a business
opportunity to identify any such problems which may
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exist and to implement, or be primarily responsible for the implementation of,
required changes. Because the Company may participate in a business opportunity
with a newly organized firm or with a firm which is entering a new phase of
growth, it should be emphasized that the Company will incur further risks,
because management in many instances will not have proved its abilities or
effectiveness, the eventual market for such company's products or services will
likely not be established, and such company may not be profitable when acquired.
It is anticipated that the Company will not be able to diversify, but will
essentially be limited to one such venture because of the Company's limited
financing. This lack of diversification will not permit the Company to offset
potential losses from one business opportunity against profits from another, and
should be considered an adverse factor affecting any decision to purchase the
Company's securities.
It is emphasized that management of the Company may effect transactions
having a potentially adverse impact upon the Company's shareholders pursuant to
the authority and discretion of the Company's management to complete
acquisitions without submitting any proposal to the stockholders for their
consideration. Holders of the Company's securities should not anticipate that
the Company necessarily will furnish such holders, prior to any merger or
acquisition, with financial statements, or any other documentation, concerning a
target company or its business. In some instances, however, the proposed
participation in a business opportunity may be submitted to the stockholders for
their consideration, either voluntarily by such directors to seek the
stockholders' advice and consent or because state law so requires.
The analysis of business opportunities will be undertaken by or under the
supervision of the Company's President, who is not a professional business
analyst. See "Management." Since Company management has no current plans to use
any outside consultants or advisors to assist in the investigation and selection
of business opportunities, no policies have been adopted regarding use of such
consultants or advisors, the criteria to be used in selecting such consultants
or advisors, the services to be provided, the term of service, or regarding the
total amount of fees that may be paid.
The Company anticipates that it will consider, among other things, the
following factors:
1. Potential for growth and profitability, indicated by new technology,
anticipated market expansion, or new products;
2. The Company's perception of how any particular business opportunity will be
received by the investment community and by the Company's stockholders;
3. Whether, following the business combination, the financial condition of the
business opportunity would be, or would have a significant prospect in the
foreseeable future of becoming sufficient to enable the securities of the
Company to qualify for listing on an exchange or on a national automated
securities quotation system, such as NASDAQ, so as
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to permit the trading of such securities to be exempt from the requirements
of Rule 15c2-6 recently adopted by the Securities and Exchange Commission.
See "Risk Factors - The Company - Regulation of Penny Stocks."
4. Capital requirements and anticipated availability of required funds, to be
provided by the Company or from operations, through the sale of additional
securities, through joint ventures or similar arrangements, or from other
sources;
5. The extent to which the business opportunity can be advanced;
6. Competitive position as compared to other companies of similar size and
experience within the industry segment as well as within the industry as a
whole;
7. Strength and diversity of existing management, or management prospects that
are scheduled for recruitment;
8. The cost of participation by the Company as compared to the perceived
tangible and intangible values and potential; and
9. The accessibility of required management expertise, personnel, raw
materials, services, professional assistance, and other required items.
In regard to the possibility that the shares of the Company would qualify
for listing on NASDAQ, the current standards include the requirements that the
issuer of the securities that are sought to be listed have total assets of at
least $4,000,000 and total capital and surplus of at least $2,000,000, and
proposals have recently been made to increase these qualifying amounts. Many,
and perhaps most, of the business opportunities that might be potential
candidates for a combination with the Company would not satisfy the NASDAQ
listing criteria.
No one of the factors described above will be controlling in the selection
of a business opportunity, and management will attempt to analyze all factors
appropriate to each opportunity and make a determination based upon reasonable
investigative measures and available data. Potentially available business
opportunities may occur in many different industries and at various stages of
development, all of which will make the task of comparative investigation and
analysis of such business opportunities extremely difficult and complex.
Potential investors must recognize that, because of the Company's limited
capital available for investigation and management's limited experience in
business analysis, the Company may not discover or adequately evaluate adverse
facts about the opportunity to be acquired.
The Company is unable to predict when it may participate in a business
opportunity. It expects, however, that the analysis of specific proposals and
the selection of a business opportunity may take several months or more.
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Prior to making a decision to participate in a business opportunity, the
Company will generally request that it be provided with written materials
regarding the business opportunity containing such items as a description of
products, services and company history; management resumes; financial
information; available projections, with related assumptions upon which they are
based; an explanation of proprietary products and services; evidence of existing
patents, trademarks, or services marks, or rights thereto; present and proposed
forms of compensation to management; a description of transactions between such
company and its affiliates during relevant periods; a description of present and
required facilities; an analysis of risks and competitive conditions; a
financial plan of operation and estimated capital requirements; audited
financial statements, or if they are not available, unaudited financial
statements, together with reasonable assurances that audited financial
statements would be able to be produced within a reasonable period of time not
to exceed 60 days following completion of a merger transaction; and other
information deemed relevant.
As part of the Company's investigation, the Company's executive officers and
directors may meet personally with management and key personnel, may visit and
inspect material facilities, obtain independent analysis or verification of
certain information provided, check references of management and key personnel,
and take other reasonable investigative measures, to the extent of the Company's
limited financial resources and management expertise. There will be no loan
agreements or understandings between the Company and third parties, nor does the
Company intend to raise any operating capital by implementing private placements
of restricted stock and/or public offerings of its common stock.
It is possible that the range of business opportunities that might be
available for consideration by the Company could be limited by the impact of
Securities and Exchange Commission regulations regarding purchase and sale of
"penny stocks." The regulations would affect, and possibly impair, any market
that might develop in the Company's securities until such time as they qualify
for listing on NASDAQ or on another exchange which would make them exempt from
applicability of the "penny stock" regulations. See "Risk Factors - - Regulation
of Penny Stocks."
Company management believes that various types of potential merger or
acquisition candidates might find a business combination with the Company to be
attractive. These include acquisition candidates desiring to create a public
market for their shares in order to enhance liquidity for current shareholders,
acquisition candidates which have long-term plans for raising capital through
the public sale of securities and believe that the possible prior existence of a
public market for their securities would be beneficial, and acquisition
candidates which plan to acquire additional assets through issuance of
securities rather than for cash, and believe that the possibility of development
of a public market for their securities will be of assistance in that process.
Acquisition candidates which have a need for an immediate cash infusion are not
likely to find a potential business combination with the Company to be an
attractive alternative.
Form of Acquisition
It is impossible to predict the manner in which the Company may participate
in a business
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opportunity. Specific business opportunities will be reviewed as well as the
respective needs and desires of the Company and the promoters of the opportunity
and, upon the basis of that review and the relative negotiating strength of the
Company and such promoters, the legal structure or method deemed by management
to be suitable will be selected. Such structure may include, but is not limited
to leases, purchase and sale agreements, licenses, joint ventures and other
contractual arrangements. The Company may act directly or indirectly through an
interest in a partnership, corporation or other form of organization.
Implementing such structure may require the merger, consolidation or
reorganization of the Company with other corporations or forms of business
organization, and although it is likely, there is no assurance that the Company
would be the surviving entity. In addition, the present management and
stockholders of the Company most likely will not have control of a majority of
the voting shares of the Company following a reorganization transaction. As part
of such a transaction, the Company's existing directors may resign and new
directors may be appointed without any vote by stockholders.
Management may actively negotiate or otherwise consent to the purchase of
any portion of their common shares as a condition to or in connection with a
proposed merger or acquisition transaction. It is emphasized that management of
the Company may effect transactions having a potentially adverse impact upon the
Company's shareholders pursuant to the authority and discretion of the Company's
management to complete acquisitions without submitting any proposal to the
stockholders for their consideration. Holders of the Company's securities should
not anticipate that the Company necessarily will furnish such holders, prior to
any merger or acquisition, with financial statements, or any other
documentation, concerning a target company or its business. In some instances,
however, the proposed participation in a business opportunity may be submitted
to the stockholders for their consideration, either voluntarily by such
directors to seek the stockholders' advice and consent or because state law so
requires.
It is likely that the Company will acquire its participation in a business
opportunity through the issuance of Common Stock or other securities of the
Company. Although the terms of any such transaction cannot be predicted, it
should be noted that in certain circumstances the criteria for determining
whether or not an acquisition is a so-called "tax free" reorganization under the
Internal Revenue Code of 1986, depends upon the issuance to the stockholders of
the acquired company of a controlling interest (i.e. 80% or more) of the common
stock of the combined entities immediately following the reorganization. If a
transaction were structured to take advantage of these provisions rather than
other "tax free" provisions provided under the Internal Revenue Code, the
Company's current stockholders would retain in the aggregate 20% or less of the
total issued and outstanding shares. This could result in substantial additional
dilution in the equity of those who were stockholders of the Company prior to
such reorganization. (See "Description of Business - General").
It is anticipated that any new securities issued in any reorganization
would be issued in reliance upon exemptions, if any are available, from
registration under applicable federal and state securities laws. In some
circumstances, however, as a negotiated element of the transaction, the Company
may agree to register such securities either at the time the transaction is
consummated, or under certain conditions or at specified times thereafter. The
issuance of substantial additional
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securities and their potential sale into any trading market that might develop
in the Company's securities may have a depressive effect upon such market.
The Company will participate in a business opportunity only after the
negotiation and execution of a written agreement. Although the terms of such
agreement cannot be predicted, generally such an agreement would require
specific representations and warranties by all of the parties thereto, specify
certain events of default, detail the terms of closing and the conditions which
must be satisfied by each of the parties thereto prior to such closing, outline
the manner of bearing costs if the transaction is not closed, set forth remedies
upon default, and include miscellaneous other terms.
As a general matter, the Company anticipates that it, and/or its officers
and principal shareholders will enter into a letter of intent with the
management, principals or owners of a prospective business opportunity prior to
signing a binding agreement. Such a letter of intent will set forth the terms of
the proposed acquisition but will not bind any of the parties to consummate the
transaction. Execution of a letter of intent will by no means indicate that
consummation of an acquisition is probable. Neither the Company nor any of the
other parties to the letter of intent will be bound to consummate the
acquisition unless and until a definitive agreement concerning the acquisition
as described in the preceding paragraph is executed. Even after a definitive
agreement is executed, it is possible that the acquisition would not be
consummated should any party elect to exercise any right provided in the
agreement to terminate it on specified grounds.
It is anticipated that the investigation of specific business opportunities
and the negotiation, drafting and execution of relevant agreements, disclosure
documents and other instruments will require substantial management time and
attention and substantial costs for accountants, attorneys and others. If a
decision is made not to participate in a specific business opportunity, the
costs theretofore incurred in the related investigation would not be
recoverable. Moreover, because many providers of goods and services require
compensation at the time or soon after the goods and services are provided, the
inability of the Company to pay until an indeterminate future time may make it
impossible to procure goods and services.
Investment Company Act and Other Regulation
The Company may participate in a business opportunity by purchasing,
trading or selling the securities of such business. The Company does not,
however, intend to engage primarily in such activities. Specifically, the
Company intends to conduct its activities so as to avoid being classified as an
"investment company" under the Investment Company Act of 1940 (the "Investment
Act"), and therefore to avoid application of the costly and restrictive
registration and other provisions of the Investment Act, and the regulations
promulgated thereunder.
Section 3(a) of the Investment Act contains the definition of an
"investment company," and it excludes any entity that does not engage primarily
in the business of investing, reinvesting or trading in securities, or that does
not engage in the business of investing, owning, holding or trading
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"investment securities" (defined as "all securities other than government
securities or securities of majority-owned subsidiaries") the value of which
exceeds 40% of the value of its total assets (excluding government securities,
cash or cash items). The Company intends to implement its business plan in a
manner which will result in the availability of this exception from the
definition of "investment company." Consequently, the Company's participation in
a business or opportunity through the purchase and sale of investment securities
will be limited.
The Company's plan of business may involve changes in its capital
structure, management, control and business, especially if it consummates a
reorganization as discussed above. Each of these areas is regulated by the
Investment Act, in order to protect purchasers of investment company securities.
Since the Company will not register as an investment company, stockholders will
not be afforded these protections.
Any securities which the Company might acquire in exchange for its Common
Stock will be "restricted securities" within the meaning of the Securities Act
of 1933, as amended (the "Act"). If the Company elects to resell such
securities, such sale cannot proceed unless a registration statement has been
declared effective by the Securities and Exchange Commission or an exemption
from registration is available. Section 4(1) of the Act, which exempts sales of
securities not involving a distribution, would in all likelihood be available to
permit a private sale. Although the plan of operation does not contemplate
resale of securities acquired, if such a sale were to be necessary, the Company
would be required to comply with the provisions of the Act to effect such
resale.
An acquisition made by the Company may be in an industry which is regulated
or licensed by federal, state or local authorities. Compliance with such
regulations can be expected to be a time-consuming and expensive process.
Competition
The Company expects to encounter substantial competition in its efforts to
locate attractive opportunities, primarily from business development companies,
venture capital partnerships and corporations, venture capital affiliates of
large industrial and financial companies, small investment companies, and
wealthy individuals. Many of these entities will have significantly greater
experience, resources and managerial capabilities than the Company and will
therefore be in a better position than the Company to obtain access to
attractive business opportunities. The Company also will experience competition
from other public "blind pool" companies, many of which may have more funds
available than does the Company.
Offices
The Company currently maintains a mailing address at 150 East 58th Street -
24th Floor, New York, New York 10022, which is the office address of Madison
Venture Capital II, Inc., a company owned by Messrs. Stricker and Schindler. The
Company's telephone number is (212) 583-1363 which is the telephone number of
Madison Venture Capital II, Inc. which is used without expense
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to the Company. Other than this mailing address, the Company does not currently
maintain any other office facilities, and does not anticipate the need for
maintaining office facilities at any time in the foreseeable future. The Company
pays no rent or other fees for the use of this mailing address and facilities.
Employees
The Company is a development stage company and currently has no employees.
Management of the Company expects to use consultants, attorneys and accountants
as necessary, and does not anticipate a need to engage any full-time employees
so long as it is seeking and evaluating business opportunities. The need for
employees and their availability will be addressed in connection with the
decision whether or not to acquire or participate in specific business
opportunities. Although there is no current plan with respect to its nature or
amount, remuneration may be paid to or accrued for the benefit of, the Company's
officers prior to, or in conjunction with, the completion of a business
acquisition. The Company's officers have accepted common stock for services
rendered for consulting, organizing the corporation, seeking merger candidates
and evaluating these candidates. See "Executive Compensation" and under "Certain
Relationships and Related Transactions."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Plan of Operations
The Registrant intends to seek to acquire assets or shares of an entity
actively engaged in business which generates revenues, in exchange for its
securities. The Registrant has no particular acquisitions in mind and has not
entered into any negotiations regarding such an acquisition. None of the
Company's officers, directors, promoters or affiliates have engaged in any
preliminary contact or discussions with any representative of any other company
regarding the possibility of an acquisition or merger between the Company and
such other company as of the date of this registration statement.
While the Company will attempt to obtain audited financial statements of a
target entity, there is no assurance that such audited financial statements will
be available. The Board of Directors does intend to obtain certain assurances of
value of the target entity's assets prior to consummating such a transaction,
with further assurances that an audited statement would be provided within
seventy-five days after closing of such a transaction. Closing documents
relative thereto will include representations that the value of the assets
conveyed to or otherwise so transferred will not materially differ from the
representations included in such closing documents.
The Company is filing this registration statement on a voluntary basis
because a significant attraction of the Registrant as a merger partner or
acquisition vehicle will be its status as an SEC reporting company. Any business
combination or transaction will likely result in a significant issuance of
shares and substantial dilution to present stockholders of the Registrant.
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The Company has, and will continue to have, no capital with which to
provide the owners of business opportunities with any significant cash or other
assets. However, management believes the Company will be able to offer owners of
acquisition candidates the opportunity to acquire a controlling ownership
interest in a publicly registered company without incurring the cost and time
required to conduct an initial public offering. The owners of the business
opportunities will, however, incur significant legal and accounting costs in
connection with the acquisition of a business opportunity, including the costs
of preparing Form 8-K's, 10-K's or 10-KSB's, agreements and related reports and
documents. The Securities Exchange Act of 1934 (the "34 Act"), specifically
requires that any merger or acquisition candidate comply with all applicable
reporting requirements, which include providing audited financial statements to
be included within the numerous filings relevant to complying with the 34 Act.
Nevertheless, the officers and directors of the Company have not conducted
market research and are not aware of statistical data which would support the
perceived benefits of a merger or acquisition transaction for the owners of a
business opportunity.
As stated hereinabove, the Company will not acquire or merge with any
entity which cannot provide independent audited financial statements within a
reasonable period of time after closing of the proposed transaction. The Company
intends to become subject to all of the reporting requirements included in the
34 Act. Included in these requirements is the affirmative duty of the Company to
file independent audited financial statements as part of its Form 8-K to be
filed with the Securities and Exchange Commission upon consummation of a merger
or acquisition, as well as the Company's audited financial statements included
in its annual report on Form 10-K (or 10-KSB, as applicable). If such audited
financial statements are not available at closing, or within time parameters
necessary to insure the Company's compliance with the requirements of the 34
Act, or if the audited financial statements provided do not conform to the
representations made by the candidate to be acquired in the closing documents,
the closing documents may provide that the proposed transaction will be
voidable, at the discretion of the present management of the Company.
Liquidity and Capital Resources
The Company has on hand approximately $50,000 which represents the net
remaining of the $115,000 cash that it received in the spin off. Such assets are
maintained in a checking account and a money market account and earn nominal
interest. In the opinion of Management, these assets should be sufficient to
enable the Company to effect this registration under the Exchange Act and file
periodic reports until such time as it is able to locate an acquisition partner
and complete its business plan.
The Company will carry out its plan of business as discussed above. The
Company cannot predict to what extent its liquidity and capital resources will
be diminished prior to the consummation of a business combination or whether its
capital will be further depleted by the operating losses (if any) of the
business entity which the Company may eventually acquire.
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Results of Operations
The Company has not conducted any operations in the last year and, other
than activities incident to locating an acquisition partner and effecting an
acquisition, does not expect to conduct substantial operations in the current
year.
Need for Additional Financing
The Company believes that its existing capital will be sufficient to meet
the Company's cash needs, including the costs of compliance with the continuing
reporting requirements of the Securities Exchange Act of 1934, as amended, for a
period of more than two years. Accordingly, in the event the Company is able to
complete a business combination during this period, it anticipates that its
existing capital will be sufficient to allow it to accomplish the goal of
completing a business combination. There is no assurance, however, that the
available funds will ultimately prove to be adequate to allow it to complete a
business combination, and once a business combination is completed, the
Company's needs for additional financing are likely to increase substantially.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") issued by the Financial Accounting Standards Board ("FASB"), under which
deferred tax assets and liabilities are provided on differences between the
carrying amounts for financial reporting and the tax basis of assets and
liabilities for income tax purposes using the enacted tax rates.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized, if on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
Federal Income Tax Aspects of Investment in the Company
The discussion contained herein has been prepared by the Company and is
based on existing law as contained in the Code, amended United States Treasury
Regulations ("Treasury Regulations"), administrative rulings and court decisions
as of the date of this Registration Statement. No assurance can be given that
future legislative enactments, administrative rulings or court decisions will
not modify the legal basis for statements contained in this discussion. Any such
development may be applied retroactively to transactions completed prior to the
date thereof, and could contain provisions having an adverse affect upon the
Company and the holders of the Common Stock. In addition, several of the issues
dealt with in this summary are the subject of proposed and temporary Treasury
Regulations. No assurance can be given that these regulations will be finally
adopted in their present form.
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Basis in Common Stock
The tax basis that a Shareholder will have in his Common Stock will equal
his cost in acquiring his Common Stock. If a Shareholder acquires Common Stock
at different times or at different prices, he must maintain records of those
transactions so that he can accurately report gain or loss realized upon
disposition of the Common Stock.
Dividends on Common Stock
Distributions made by the Company with respect to the Common Stock will be
characterized as dividends that are taxable as ordinary income to the extent of
the Company's current or accumulated earnings and profits ("earnings and
profits"), if any, as determined for U.S. federal income tax purposes. To the
extent that a distribution on the Common Stock exceeds the holder's allocable
share of the Company's earnings and profits, such distribution will be treated
first as a return of capital that will reduce the holder's adjusted tax basis in
such Common Stock, and then as taxable gain to the extent the distribution
exceeds the holder's adjusted tax basis in such Common Stock. The gain will
generally be taxed as a long-term capital gain if the holder's holding period
for the Common Stock is more than one year.
The availability of earnings and profits in future years will depend on
future profits and losses which cannot be accurately predicted. Thus, there can
be no assurance that all or any portion of a distribution on the Common Stock
will be characterized as a dividend for general income tax purposes. Corporate
shareholders will not be entitled to claim the dividends received deduction with
respect to distributions that do not qualify as dividends. See the discussion
regarding the dividends received deduction below.
Redemption of Common Stock
The Company does not have the right to redeem any Common Stock. However,
any redemption of Common Stock, with the consent of the holder, will be a
taxable event to the redeemed holder.
The Company does not believe that the Common Stock will be treated as debt
for federal income tax purposes. However, in the event that the Common Stock is
treated as debt for federal tax purposes, a holder generally will recognize gain
or loss upon the redemption of the Common Stock measured by the difference
between the amount of cash or the fair market value of property received and the
holder's tax basis in the redeemed Common Stock. To the extent the cash or
property received are attributable to accrued interest, the holder may recognize
ordinary income rather than capital gain. Characterization of the Common Stock
as debt would also cause a variety of other tax implications, some of which may
be detrimental to either the holders, the Company, or both (including, for
example, original issue discount treatment to the Investors). Potential
Investors should consult their tax advisors as to the various ramifications of
debt characterization for federal income tax purposes.
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Other Disposition of the Common Stock
Upon the sale or exchange of shares of Common Stock, to or with a person
other than the Company, a holder will recognize capital gain or loss equal to
the difference between the amount realized on such sale or exchange and the
holder's adjusted basis in such stock. Any capital gain or loss recognized will
generally be treated as a long-term capital gain or loss if the holder held such
stock for more than one year. For this purpose, the period for which the Common
Stock was held would be included in the holding period of the Common Stock
received upon a conversion.
State, Local and Foreign Taxes
In addition to the federal income tax consequences described above,
prospective investors should consider potential state, local and foreign tax
consequences of an investment in the Common Stock.
ERISA Considerations for Tax-Exempt Investors/Shareholders
General Fiduciary Requirements
Title I of ERISA includes provisions governing the responsibility of
fiduciaries to their Qualified Plans. Qualified Plans must be administered
according to these rules. Keogh plans that cover only partners of a partnership
or self-employed owners of a business are not subject to the fiduciary duty
rules of ERISA, but are subject to the prohibited transaction rules of the Code.
Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Qualified Plan is considered to
be a fiduciary of such Qualified Plan (subject to certain exceptions not here
relevant).
ERISA Section 404(a)(1) requires a fiduciary of a Qualified Plan to
"discharge his duties with respect to a plan solely in the interest of the
participants and beneficiaries and (A) for the exclusive purpose of: (i)
providing benefits to participants and their beneficiaries, and (ii) defraying
reasonable expenses of administering the plan; (B) with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims; (C) by
diversifying the investments of a plan so as to minimize the risk of large
losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan."
Fiduciaries who breach the duties that ERISA imposes may suffer a wide variety
of legal and equitable remedies, including (i) the requirement to restore
qualified plan losses and to pay over any fiduciary's profits to the qualified
plan; (ii) removal as fiduciary of the qualified plan; and (iii) liability for
excise taxes that Section 4975 of the Code imposes
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ITEM III. DESCRIPTION OF PROPERTY.
The Company does not currently maintain an office or any other facilities.
It does currently maintain a mailing address at c/o Madison Venture Capital II,
Inc., 150 East 58th Street - 24th Floor, New York, New York 10022. Madison
Venture Capital II, Inc. is owned by Dr. Eugene Stricker and Mark Schindler. The
Company pays no rent for the use of this mailing address. The Company does not
believe that it will need to maintain an office at any time in the foreseeable
future in order to carry out its plan of operations described herein. The
Company's telephone number is (212) 583- 1363, which is also the telephone
number of Madison Venture Capital II, Inc. The Company does not pay any separate
charges for the use of this telephone number.
ITEM IV. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of December 31, 1999, information with
respect to the beneficial ownership of the Company's outstanding Common Stock by
(i) each director and executive officer of the Company, (ii) all directors and
executive officers of the Company as a group, and (iii) each shareholder who was
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
NUMBER PERCENTAGE
NAME OF SHARES OF CLASS
---- --------- --------
Dr. Eugene Stricker 1,052,127(1) 9.9%
Mark Schindler 827,695(2) 7.8%
Daniel A. France 253,113 2.4%
Frank J. Hariton 162,000 1.5%
Michio Kushi
62 Buckminster Road
Brookline, MA 02146 1,570,257(3) 14.9%
Fred Sternau
36 Schoolhouse Road
Cross River, New York 10518 651,444 6.1%
All officers and
directors as a group (4 persons) 2,294,935(1)(2) 21.7%
(1) Does not include 70,044 shares owned by the Eugene Stricker Irrevocable
Trust. Dr. Stricker disclaims beneficial ownership of such shares.
(2) Does not includes: (i) 140,088 shares owned by the Mark Schindler
Irrevocable Trust; and (ii) 140,088 shares owned by Mr. Schindler's fiance,
Ms. Barbara Serota. Mr. Schindler disclaims beneficial ownership of these
shares. Includes 565,000 shares owned by The SBS
(3) Includes an aggregate of 858,750 shares owned by Mr. Kushi's four adult
children. Mr. Kushi disclaims beneficial ownership of such shares. Does not
include 280,179 shares owned by T. Aveline Kushi, Mr. Kushi's wife.
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Limited Partnership, a limited partnership where Mr. Schindler is the
general partner.
Management has no plans to issue any additional securities to management,
promoters or their affiliates or associates and will do so only if such issuance
is in the best interests of shareholders of the Company and complies with all
applicable federal and state securities rules and regulations.
Although the Company has a very large amount of authorized but unissued
common and preferred stock that may be issued without further shareholder
approval or notice, it is the intention of the Company to avoid inhibiting
certain transactions with prospective acquisition or merger candidates, based
upon the perception by such candidate that they may be engaged in a rapidly
expanding industry (i.e. Internet) and cannot afford to proxy shareholders each
time their management needs to authorize additional shares.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The directors and executive officers currently serving the Company are as
follows:
Name Age Positions Held and Tenure
Dr. Eugene Stricker 62 President and a Director since inception
Mark Schindler 78 Vice President, Secretary and a Director since
inception
Daniel A. France 51 Treasurer a Director since February 1999
Frank J. Hariton 51 Assistant Secretary since December 1999
The directors named above will serve until the first annual meeting of the
Company's stockholders. Thereafter, directors will be elected for one-year terms
at the annual stockholders' meeting. Officers will hold their positions at the
pleasure of the board of directors, absent any employment agreement, of which
none currently exists or is contemplated. There is no arrangement or
understanding between the sole directors and officers of the Company and any
other person pursuant to which any director or officer was or is to be selected
as a director or officer.
The sole directors and officers of the Company will devote their time to
the Company's affairs on an "as needed" basis. As a result, the actual amount of
time which they will devote to the Company's affairs is unknown and is likely to
vary substantially from month to month.
Biographical Information
Dr. Eugene Stricker was elected a Director upon the organization of the
Company and has served the Company as President and Director since inception. He
has been a partner with Mr.
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Schindler in Madison Venture Capital II, Inc., a venture capital firm, for more
than the past five years. From 1968 until 1991, he held various administrative
positions within the New York State Department of Health, including serving as
special assistant to the Commissioner. Dr. Stricker is a graduate of the
University of Maryland, received his Doctor of Dentistry from Howard University,
Washington, D.C., and received a Masters in Public Health from the University of
Michigan at Ann Arbor. He was a Director of Servtex International, Inc. from
September 1991 until its merger with Hymedix, Inc. (HYMX:OTCBB) in February
1994. From December 1991 to November 1994 he was a Director of Natural Child
Care, Inc. which merged into Winners All International, Inc. in September 1992
and which later became Erecotes Industries, Inc. (UREC:OTCBB). In July 1993, he
became a Director of Light Savers USA, Inc. and served until February 1995 when
that company was merged into Hospitality World Wide, Inc. (HWS:AMEX) which later
became Hotel Works.com. Dr. Stricker was a Director and Secretary of Kushi
Macrobiotics Corp ("KMC") from May 1994 to October 1996 when it merged with
American Phoenix Group, Inc. ("APGI") which later merged with Tal Wireless
Networks, Inc. (TALW:OTCBB) .
Mark Schindler has been a Director, Vice President and Secretary of the
Company since inception. He has been a partner with Dr. Stricker in Madison
Venture Capital II, Inc., a venture capital firm, for more than the past five
years. He was the owner, until 1984, of his own business engaged in electronics
distribution. Mr. Schindler was a founder of Astrex, Inc. and its Chairman from
September 1960 to August 1984. While he remains a Director of that entity, he
devotes no time to it other than attending Board Meetings. He was a Director of
Servtex International, Inc. from September 1991 until its merger with Hymedix,
Inc. (HYMX: OTCBB) in February 1994. From December 1991 to November 1994 he was
a Director of Natural Child Care, Inc. which merged into Winners All
International, Inc. in September 1992 and which later became Erecotes
Industries, Inc. (UREC:OTCBB). In July 1993, he became a Director of Light
Savers USA, Inc. and served until February 1995 when that company was merged
into Hospitality World Wide, Inc. (HWS:AMEX) which became Hotel Works.com. Mr.
Schindler was a Director and Treasurer of KMC from May 1994 to October 1996 when
it merged with APGI which later merged with Tal Wireless Networks, Inc.
(TALW:OTCBB) .
Daniel A. France, was a co-founder of KMC and became Vice President/Finance
and Chief Financial Officer of KMC on July 6, 1994 and Assistant Secretary on
December 15, 1994. Mr. France was the Chief Financial Officer of Natural Child
Care, Inc. from May 1992 until September 1993. Following its merger with Winners
All International, Inc. ("WAI"), he maintained the accounting records of WAI and
Light Savers USA, Inc. until December 1994 when he resigned from both to devote
full time to KMC. Mr. France served as KMC's Vice President/Finance and Chief
Financial Officer from July 1994 until shortly after KMC's merger with APGI in
September 1996. Since such time Mr. France has be self employed as a financial
and business consultant. Mr. France was elected treasurer and a director of the
Company in February 1999. Mr. France is a CPA.
Frank J. Hariton is an attorney in private practice with offices in White
Plains, New York and New York City. He has been engaged in the private practice
of law for more than the last five years. He received a B.A. in 1971 and a J.D.
in 1974 from Case Western Reserve University. He
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is also assistant secretary of Vitafort International Corporation (VRFT:OTCBB),
a company engaged in developing, marketing and distributing snack foods and low
fat and fat free snacks.
Indemnification of Officers and Directors
Article Seventh of the Company's Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted under the General Corporation Law of the State of Delaware ("DGCL").
SECTION 145 of the DGCL, as amended, applies to the Company and the
relevant portion of the DGCL provides as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the
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corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2)
if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be
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determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys' fees)
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officer and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, shall stand in the same position under this section
with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
(i) For purpose of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with
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respect to any employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries;
and a person who acted in good faith and in a manner he reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
Conflicts of Interest
The officers and directors of the Company will devote only a small portion
of their time to the affairs of the Company, estimated to be no more than
approximately 10 hours per month, except at times when a business combination
may be imminent. There will be occasions when the time requirements of the
Company's business conflict with the demands of their other business and
investment activities. Such conflicts may require that the Company attempt to
employ additional personnel. There is no assurance that the services of such
persons will be available or that they can be obtained upon terms favorable to
the Company. Messrs Stricker and Schindler will devote most of their time to the
affairs of Madison Venture Capital II, Inc., and this may result in conflicts
with the Company. In addition, in the future, one or more members of management
may become involved in the management of other "blank check" companies. Messrs.
Schindler and Stricker, or Madison Venture Capital II, Inc. may receive
consulting fees for investment banking or business consulting services which
they may offer to a party to a business combination with the Company. While,
Messrs. Stricker and Schindler believe that any such fees will be consistent
with fees that they or Madison Venture Capital II, Inc. may charge to entities
in similar circumstances, the presence of such fees may impact upon the number
of shares received by the Company's shareholders in the business combination.
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There is no procedure in place which would allow the Company's management
to resolve potential conflicts in an arms-length fashion. Accordingly, they will
be required to use their discretion to resolve them in a manner which they
consider appropriate.
ITEM VI. EXECUTIVE COMPENSATION
No officer or director has received any remuneration from the Company. The
Company's officers and directors have purchased the Company's stock in the
December 1999 Private Placement. See "Certain Relationships and Related
Transactions." The Company has no stock option, retirement, pension, or
profit-sharing programs for the benefit of directors, officers or other
employees, but the Board of Directors may recommend adoption of one or more such
programs in the future.
It is possible that, after the Company successfully consummates a merger or
acquisition with an unaffiliated entity, that entity may desire to employ or
retain one or more members of the Company's management for the purposes of
providing services to the surviving entity, or otherwise provide other
compensation to such persons. However, the Company has adopted a policy whereby
the offer of any post-transaction remuneration to members of management will not
be a consideration in the Company's decision to undertake any proposed
transaction. Each member of management has agreed to disclose to the Company's
Board of Directors any discussions concerning possible compensation to be paid
to them by any entity which proposes to undertake a transaction with the Company
and further, to abstain from voting on such transaction. Therefore, as a
practical matter, if each member of the Company's Board of Directors is offered
compensation in any form from any prospective merger or acquisition candidate,
the proposed transaction will not be approved by the Company's Board of
Directors as a result of the inability of the Board to affirmatively approve
such a transaction.
No member of management of the Company will receive any finders fee, either
directly or indirectly, as a result of their respective efforts to implement the
Company's business plan outlined herein. Also, there are no plans, proposals,
arrangements or understandings with respect to the sale or issuance of
additional securities by the Company prior to the location of an acquisition or
merger candidate. Please also see "Item I, Description of Business-General" for
information regarding the seeking out and selection of a target company,
addressing matters such as the manner of solicitation of potential investors,
the approximate number of persons who will be contacted or solicited, their
relationships to the Company's management, etc.
ITEM VII. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was formed in August, 1996 . Each of the then shareholders of
KMC received three shares of the Company's common stock for each share of KMC
that they owned in connection with the spin off of the Company by KMC. See. Item
1. Description of Business - General. Included in such shareholders were the
then officers and directors of KMC.
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During December 1999, the Company sold 1,985,000 shares of its common stock
to eleven investors in a private placement for $1,985 or $.001 per share. Among
the Purchasers in such private placement were: Dr. Eugene Stricker, an officer
and director of the Company, who purchased 580,000 shares for $580; The SBS
Limited Partnership, a New York limited partnership of which Mark Schindler, an
officer and director of the Company is the general partner, purchased 565,000
shares for $565; Daniel A. France, on officer and director of the Company,
purchased 78,000 shares for $78; and Frank J. Hariton, an officer of the
Company, purchased 162,000 shares for $162. The purchase was at par value and
therefor below book value.
ITEM VIII. DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company currently consists of (i)
35,000,000 shares of Common Stock, par value $.0001 per share, of which
10,588,718 were issued and outstanding on December 31, 1999, and (ii) 5,000,000
shares of Preferred Stock, par value $.0001 per share, none of which have ben
designated or issued.
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders generally, including the election of directors.
Holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors if they chose to do so, and in such event, the
holders of the remaining shares will not be able to elect any persons to the
Board of Directors. The holders of Common Stock have no preemptive or other
subscription or conversion rights with respect to any stock issued by the
Company, The Common Stock is not subject to redemption, and the holders thereof
are not liable for further calls or assessments. Holders of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefore and to share pro-rata in any
distributions to the holders of Common Stock.
Preferred Stock
The Preferred Stock is issuable with such rights, preferences, privileges
and such number of shares constituting each series to be fixed by the Board of
Directors without further action by the holders of Common Stock or Preferred
Stock. The Board of Directors could, without stockholder approval, issue
Preferred Stock with voting and conversion rights, which could dilute the voting
power of the holders of the Common Stock. The issuance of shares of Preferred
Stock by the Board of Directors could be utilized, under certain circumstances,
as a method of preventing a takeover of the Company. As of the date hereof, the
Board of Directors as not authorized any series of Preferred Stock and has no
plans to do so.
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Transfer Agent
Continental Stock Transfer & Trust Company, Two Broadway, New York, NY
10004 is Transfer Agent for the Common Stock.
Reports to Stockholders
The Company plans to furnish its stockholders with an annual report for
each fiscal year containing financial statements audited by its independent
certified public accountants. In the event the Company enters into a business
combination with another company, it is the present intention of management to
continue furnishing annual reports to stockholders. Additionally, the Company
may, in its sole discretion, issue unaudited quarterly or other interim reports
to its stockholders when it deems appropriate. The Company intends to comply
with the periodic reporting requirements of the Securities Exchange Act of 1934
for so long as it is subject to those requirements.
PART II
ITEM I. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
No public trading market exists for the Company's securities and all of its
outstanding securities are restricted securities as defined in Rule 144. There
were approximately 200 holders of record of the Company's common stock on
December 31, 1999. No dividends have been paid to date and the Company's Board
of Directors does not anticipate paying dividends in the foreseeable future.
The Company does not plan to take affirmative steps to request or encourage
any broker-dealer to act as a market maker for the Company's securities. There
are to date no understandings, agreements or discussions in place with any such
broker-dealer. Although management has set forth disclosure throughout this
registration statement indicating it would consider the public "trading" of its
securities if such activity was in the best interests of its shareholders, it
presently has no plans to do so.
(a) MARKET PRICE. The Registrant's Common Stock is not quoted at the
present time.
Effective August 11, 1993, the Securities and Exchange Commission adopted
Rule 15g-9, which established the definition of a "penny stock," for purposes
relevant to the Company, as any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require: (i) that a broker or dealer approve a person's
account for transactions in penny stocks; and (ii) the broker or dealer receive
from the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be purchased. In order to approve a
person's account for transactions in penny stocks, the broker or dealer must (i)
obtain financial information and investment experience and objectives of the
person;
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and (ii) make a reasonable determination that the transactions in penny stocks
are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prepared by the Commission relating to the penny
stock market, which, in highlight form, (i) sets forth the basis on which the
broker or dealer made the suitability determination; and (ii) that the broker or
dealer received a signed, written agreement from the investor prior to the
transaction. Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading, and about
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers NASDAQ, has recently made changes in the criteria for initial
listing on the NASDAQ Small Cap market and for continued listing. For initial
listing, a company must have net tangible assets of $4 million, market
capitalization of $50 million or net income of $750,000 in the most recently
completed fiscal year or in two of the last three fiscal years. For initial
listing, the common stock must also have a minimum bid price of $4 per share. In
order to continue to be included on NASDAQ, a company must maintain $1,000,000
in net tangible assets and a $1,000,000 market value of its publicly-traded
securities. In addition, continued inclusion requires two market-makers and a
minimum bid price of $1.00 per share.
Management intends to strongly consider undertaking a transaction with any
merger or acquisition candidate which will allow the Company's securities to be
traded without the aforesaid limitations. However, there can be no assurances
that, upon a successful merger or acquisition, the Company will qualify its
securities for listing on NASDAQ or some other national exchange, or be able to
maintain the maintenance criteria necessary to insure continued listing. The
failure of the Company to qualify its securities or to meet the relevant
maintenance criteria after such qualification in the future may result in the
discontinuance of the inclusion of the Company's securities on a national
exchange. In such events, trading, if any, in the Company's securities may then
continue in the non-NASDAQ over-the-counter market. As a result, a shareholder
may find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Company's securities.
(b) HOLDERS. There are approximately 200 holders of record the Company's Common
Stock , inclusive of the purchasers in the December 1999 private placement.
Certificates evidencing the Common Stock issued by the Company to these
persons have all been stamped with a restrictive legend, and are subject to stop
transfer orders by the Company. For additional information concerning
restrictions that are imposed upon the securities held by current stockholders,
and the responsibilities of such stockholders to comply with federal securities
laws in
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the disposition of such Common Stock.
The Company has taken the following action to ensure that a public
re-distribution of the Shares does not take place:
(i) a "restrictive" legend has been and will be placed on each stock certificate
issued to the present shareholders of the Company and their permitted
transferees;
(ii) "stop transfer" order instructions have or will be placed with respect to
each such certificate;
(iii) all shareholders have or will be placed on notice that their securities
will need to be sold in compliance with Rule 144 of the Act, and may not be
transferred otherwise;
(iv) disclosure has been set forth throughout this Form 10SB describing the
above restrictions.
Redistribution - Rule 144
Rule 144 of the Securities Act lists criteria under which restricted
securities and securities held by affiliates or control persons may be resold
without registration. The rule prevents the creation of public markets in
securities when the issuers have not made adequate current information available
to the public. Preliminary Note to Securities Act Rule 144. The requirements of
Rule 144(b) through (i) include provisions that: 1) current public information
be available regarding the issuer of the securities; 2) at least one year elapse
between the time the securities are acquired from an issuer or affiliate and the
date the securities are resold under the rule; 3) the amount of securities able
to be sold is limited, depending on whether the sale is by an affiliate or not;
4) the securities be sold in brokers' transactions or with a market maker; 5)
Commission Form 144 be filed depending on the size of the transaction; and 6)
the person filing the form has a bona fide intention to sell the securities
within a reasonable time following the filing of the form.
For non affiliated seller under Rule 144 there are exceptions to certain of
the requirements listed above for shares held for over two years.
(c) DIVIDENDS. The Company has not paid any dividends to date, and has no plans
to do so in the immediate future.
ITEM II. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings, and no such
proceedings are known to be contemplated.
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No director, officer or affiliate of the Company, and no owner of record or
beneficial owner of more than 5.0% of the securities of the Company, or any
associate of any such director, officer or security holder is a party adverse to
the Company or has a material interest adverse to the Company in reference to
pending litigation.
ITEM III. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM IV. RECENT SALES OF UNREGISTERED SECURITIES
During December 1999, the Company sold 1,985,000 shares of its common stock
for $1,985, $.001 per share, to eleven investors in a private placement
conducted pursuant to Rule 506 under the Securities Act of 1933, as amended.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seventh of the Company's Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted under the General Corporation Law of the State of Delaware ("DGCL").
SECTION 145 of the DGCL, as amended, applies to the Company and the
relevant portion of the DGCL provides as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its
38
<PAGE>
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who
39
<PAGE>
were not parties to such action, suit or proceeding, or (2) if such a
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officer and
employees or agents, so that any person who is or was a director, officer,
employee or agent
40
<PAGE>
of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purpose of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
41
<PAGE>
FINANCIAL STATEMENTS
See Financial Statement Pages
42
<PAGE>
PART III
ITEM I. INDEX TO EXHIBITS
(b) Exhibits
3(a) Articles of Incorporation of the Registrant - PREVIOUSLY FILED
3(b) Bylaws of the Registrant - PREVIOUSLY FILED
3(c) Certificate of Renewal and Revival of the Registrant - PREVIOUSLY FILED
4 Specimen Stock Certificate - PREVIOUSLY FILED
5 Opinion of Frank J. Hariton, Esq. - PREVIOUSLY FILED
10.1 Spin - Off Agreement, dated September 19, 1996, between the Registrant
and Kushi Macrobiotics Corp. - PREVIOUSLY FILED
10.2. Amended and Restated Agreement and Plan of Merger by and among Kushi
Macrobiotics Corp. and American Phoenix Group, Inc. and the
Registrant, dated August 12, 1996
21 Subsidiaries of the Registrant - None
99.1 Other Exhibits. - Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward Looking Statements - PREVIOUSLY
FILED
ITEM 2. DESCRIPTION OF EXHIBITS
See Item I above.
43
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
KUSHI NATURAL FOODS CORP.
By: /s/ Dr. Eugene Stricker
- --------------------------------
Dr. Eugene Stricker, President
Date: April 19, 2000
44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kushi Natural Foods Corp.
We have audited the accompanying balance sheet of Kushi Natural Foods Corp. (a
development stage enterprise) as of December 31, 1999, and the related
statements of operations, changes in stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999, and for the period
August 1, 1996 (inception) through December 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kushi Natural Foods Corp. at
December 31, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1999, and for the period
August 1, 1996 (inception) through December 31, 1999, in conformity with
generally accepted accounting principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
January 28, 2000
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Current Assets:
Cash and Cash Equivalents $ 50,647
Stock Subscriptions Receivable 1,985
---------
Total Assets $ 52,632
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 25,633
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.0001 par value; 5,000,000 shares
Authorized, none issued and outstanding $ --
Common Stock, $.0001 par value; 35,000,000 shares
Authorized, 10,588,718 shares issued and outstanding 1,059
Additional Paid-In Capital 213,494
Deficit Accumulated in the Development Stage (187,554)
---------
Total Stockholders' Equity 26,999
---------
Total Liabilities and Stockholders' Equity $ 52,632
=========
The accompanying notes are an integral part of the financial statements.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
From
Year Ended August 1, 1996
December 31, (Inception)
-------------------------- To December 31,
1999 1998 1999
-------------------------- -----------
<S> <C> <C> <C>
Revenues $ -- $ -- $ --
Costs and Expenses:
Selling, General and Administrative Expenses 5,160 30,000 47,181
----------- ----------- -----------
Loss from Operations (5,160) (30,000) (47,181)
Other Income:
Interest Income 912 -- 912
----------- ----------- -----------
Loss from Continuing Operations (4,248) (30,000) (46,269)
----------- ----------- -----------
Discontinued Operations:
Loss from Operations of Discontinued Joint Venture -- -- (99,143)
Loss on Write-Off of Investment in Discontinued
Joint Venture -- -- (42,142)
----------- ----------- -----------
-- -- (141,285)
----------- ----------- -----------
Net Loss $ (4,248) $ (30,000) $ (187,554)
=========== =========== ===========
Earnings Per Common Share - Basic
Weighted Average Common Shares Outstanding 8,652,663 8,603,718
=========== ===========
Net Loss Per Common Share - Basic $ (.00) $ (.00)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 1, 1996 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional In The
Preferred Common Paid-In Development
Stock Stock Capital Stage Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1996 $ -- $ -- $ -- $ -- $ --
Issuance of 8,603,718 Shares of
Common Stock as Consideration
for the Net Assets of Kushi
Macrobiotics Corp. -- 860 129,488 -- 130,348
Contributed Capital by Officers
Pursuant to Debt Cancellation -- -- 78,250 -- 78,250
Net Loss for the Period Ended
December 31, 1996 -- -- -- (41,190) (41,190)
--------- --------- --------- --------- ---------
Balance at December 31, 1996 -- 860 207,738 (41,190) 167,408
Net Loss for the Year Ended
December 31, 1997 -- -- -- (112,116) (112,116)
--------- --------- --------- --------- ---------
Balance at December 31, 1997 -- 860 207,738 (153,306) 55,292
Net Loss for the Year Ended
December 31, 1998 -- -- -- (30,000) (30,000)
--------- --------- --------- --------- ---------
Balance at December 31, 1998 -- 860 207,738 (183,306) 25,292
Sale of 1,985,000 Shares of
Common Stock -- 199 5,756 -- 5,955
Net Loss for the Year Ended
December 31, 1999 -- -- -- (4,248) (4,248)
--------- --------- --------- --------- ---------
Balance at December 31, 1999 $ -- $ 1,059 $ 213,494 $(187,554) $ 26,999
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
From
Year Ended August 1, 1996
December 31, (Inception)
------------------------ To December 31,
1999 1998 1999
------------------------ ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (4,248) $ (30,000) $(187,554)
Adjustments to Reconcile Net Loss to Net Cash
(Used) by Operating Activities:
Stock Compensation 3,970 -- 3,970
Loss from Operations of Discontinued Joint Venture -- -- 99,143
Loss on Write-Off of Investment in Discontinued Joint
Venture -- -- 42,142
Changes in Operating Assets and Liabilities:
Increase (Decrease) in Accounts Payable (9,867) 30,000 25,633
--------- ----------- ---------
Net Cash (Used) by Operating Activities (10,145) -- (16,666)
--------- ----------- ---------
Cash Flows from Investing Activities:
Investment in Joint Venture -- -- (47,854)
Cash Acquired Pursuant to Spin-Off -- -- 115,167
--------- ----------- ---------
Net Cash Provided by Investing Activities -- -- 67,313
--------- ----------- ---------
Cash Flows from Financing Activities -- -- --
--------- ----------- ---------
Increase (Decrease) in Cash and Cash Equivalents (10,145) -- 50,647
Cash and Cash Equivalents - Beginning 60,792 60,792 --
--------- ----------- ---------
Cash and Cash Equivalents - Ending $ 50,647 $ 60,792 $ 50,647
========= =========== =========
Supplemental Disclosure of Cash Information:
Cash Paid for Income Taxes $ -- $ -- $ --
========= =========== =========
Cash Paid for Interest $ -- $ -- $ --
========= =========== =========
Non-Cash Investing and Financing Activities:
Contributed Capital by Former Officers Pursuant
to Debt Cancellation $ -- $ -- $ 78,250
========= =========== =========
Issuance of Common Stock as Consideration for
the Net Assets of Kushi Macrobiotics Corp.
Increase in Stock Subscriptions Receivable Upon Sale of
Common Stock $ 1,985 $ -- $ 1,985
========= =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - Organization and Basis of Presentation
Kushi Natural Foods Corp. (the "Company") was incorporated on August 1,
1996 under the laws of the State of Delaware as a wholly-owned subsidiary of
Kushi Macrobiotics Corp., a Delaware Corporation ("KMC").
On September 19, 1996 the Company was assigned certain assets and assumed
certain liabilities of KMC. The Company was thereafter spun-off to the
shareholders of KMC immediately prior to KMC's merger with another corporation.
The assets and liabilities transferred to the Company by KMC were for the
purpose of the Company to develop, produce and/or market a full line of high
quality macrobiotic natural foods. The Company has not generated any revenues
from the natural foods business and has incurred losses to date. Consequently,
the Company has abandoned the natural foods business and is currently seeking to
obtain capital in order to take advantage of business opportunities which may
have profit potential. Accordingly, the Company's financial statements are
presented as statements of a development stage enterprise.
NOTE 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers those short-term, highly liquid investments with
original maturities of three months or less as cash equivalents.
Joint Venture
The Company accounted for its investment in the Joint Venture under the
equity method.
Income Taxes
The Company records deferred income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and income tax bases of the Company's assets and liabilities. An
allowance is recorded, based upon currently available information, when it is
more likely than not that any or all of the deferred tax asset will not be
realized. The provision for income taxes includes taxes currently payable, if
any, plus the net change during the year in deferred tax assets and liabilities
recorded by the Company.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Net Loss Per Common Share
Net loss per common share is based upon the weighted average number of
common shares outstanding during the periods reported.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents and accounts payable approximated fair value because of the
short maturity of these instruments.
NOTE 3 - Stock Subscriptions Receivable
Stock subscriptions receivable represents amounts owed from the December
1999 sale of 1,985,000 shares of the Company's common stock pursuant to a
private offering (see Note 5). The total amount receivable of $1,985 was paid in
January 2000.
NOTE 4 - Joint Venture
In October 1996 the Company and EnerVite Corp ("EVC") agreed to enter into
a joint venture in which the Company and EVC would each own 50% of a new
corporation called EVC/Kushi, Inc. ("EVCK").
The Company invested approximately $141,000 for a 50% ownership interest in
EVCK. In September 1997 EVCK discontinued operations. During the period October
1996 to September 1997 EVCK incurred a net loss of approximately $198,000. Upon
discontinuance of operations of EVCK, the Company wrote off the remaining
balance of its investment in EVCK.
NOTE 5 - Stockholders' Equity
Spin-Off Agreement
On September 19, 1996 the Company was assigned certain assets and assumed
certain liabilities of KMC. In connection therewith the Company issued 8,603,718
shares of common stock as consideration for net assets in the amount of
$130,348. The Company was thereafter spun-off to the shareholders of KMC
immediately prior to KMC's merger with another corporation.
Conversion of Debt to Equity
In 1996 four officers of the Company converted indebtedness of the Company
to them in the amount of $78,250 into additional paid-in capital.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - Stockholders' Equity (Continued)
Sale of Common Stock
During December 1999 the Company sold 1,985,000 shares of its common stock
to eleven investors in a private placement for $1,985, or $.001 per share.
Although the sales price represented management's best estimate of fair value at
date of sale the Company has taken a charge to operations in the amount of
$3,970, representing the difference between the sales price and book value per
share. Among the purchasers in such private placement were four directors and
affiliates of the Company, of whom purchased 1,385,000 shares in the aggregate.
Preferred Stock
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of any authorized
but unissued or unreserved shares of Preferred Stock in series and may, at the
time of issuance, determine the rights, preferences and limitations of each
series. The holders of Preferred Stock may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of the Common Stock. The Board
of Directors could issue Preferred Stock with voting and other rights that could
adversely affect the voting power of the holders of Common Stock and could have
certain anti-takeover effects.
NOTE 6 - Income Taxes
The Company is subject to federal and state income taxes but has not
incurred a liability for such taxes due to losses incurred. As of December 31,
1999 the Company had a net operating loss carryforward ("NOLC") for federal
income tax purposes of approximately $188,000. This NOLC is available to offset
future federal taxable income, if any, through 2019. Limitations on the
utilization of the Company's net operating tax loss carryforward could result in
the event of certain changes in the Company's ownership.
Income tax benefit attributable to net loss differed from the amounts
computed by applying the statutory Federal Income tax rate applicable for each
period as a result of the following:
Year Ended December 31,
1999 1998
-----------------
Computed "expected" tax benefit $ -- $10,000
Decreased in tax benefit resulting from net
operating loss for which no benefit is
currently available -- (10,000)
------- -------
$ -- $ --
======= =======
The Company had deferred tax assets of approximately $64,000 at December
31, 1999, resulting primarily from net operating loss carryforwards. Th deferred
tax assets have been fully offset by a valuation allowance resulting from the
uncertainty surrounding the future realization of the net operating loss
carryforwards.
<PAGE>
KUSHI NATURAL FOODS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - Commitments and Contingencies
Legal
The Company may be subject to legal proceedings and claims which may arise
in the ordinary course of its business. Currently, the Company is not a party to
any known legal proceedings.
