SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
1MAGE SOFTWARE, INC.
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(Name of Registrant as Specified in Its Charter)
Gorsuch Kirgis LLP
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
1MAGE SOFTWARE, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 30, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of 1MAGE
SOFTWARE, INC. (the "Company" or "1mage") will be held at the Sheraton
Denver Tech Center Hotel, 7007 S. Clinton Street, Englewood, Colorado
on October 30, 1998 at 10:00 a.m. Mountain Standard Time for the
following purposes:
1) to consider and vote upon a proposal to approve and adopt a
Merger Agreement and the actions contemplated therein by and among the
Company, SupraLife International ("SupraLife"), a California
corporation, and SL Merger Corp. ("SLM"), a wholly-owned subsidiary of
the Company, dated July 10, 1998, as amended (the "Merger Agreement"),
pursuant to which, among other things, (a) SLM shall be merged into
SupraLife, which shall be the surviving corporation and which shall
become a wholly owned subsidiary of the Company (the "Merger"), (b) the
stockholders of SupraLife shall receive an aggregate of 6,609,057
shares, subject to adjustment (the "Merger Shares"), of common stock of
the Company ("Common Stock"), and (c) 1mage will receive all of the
outstanding shares of SupraLife;
2) to consider and vote upon a proposal to amend the Company's
Articles of Incorporation to increase the authorized number of shares
from 10,000,000 to 50,000,000 shares of Common Stock;
3) If Proposal No. 1 is approved and adopted, to consider and vote
upon a proposal to amend the Company's Articles of Incorporation to
change the name of the Company to SupraLife International, Inc.;
4) If Proposal No. 1 is approved and adopted, to consider and vote
upon a proposal to amend the Company's 1996 Equity Incentive Plan to
accommodate the exchange of the currently outstanding stock options of
SupraLife International by increasing the number of shares authorized
under the Plan to 2,500,000 shares and changing the class of persons
eligible to receive grants under the Plan;
5) to consider and vote upon a proposal to grant authorization to
the Board of Directors in its discretion to declare a reverse stock
split of the Company's Common Stock of as much as 1 for 5 if required
to meet Nasdaq listing requirements; and
6) to transact such other business as may properly come before
the meeting and at any postponements or adjournments thereof.
APPROVAL OF THE MERGER AGREEMENT SHALL ALSO CONSTITUTE APPROVAL OF
THE APPOINTMENT OF THREE PERSONS DESIGNATED BY SUPRALIFE TO THE BOARD
OF DIRECTORS OF THE COMPANY.
Pursuant to the Bylaws of the Company, the Board of Directors has fixed
the close of business on August 24, 1998 as the record date for the
determination of shareholders entitled to notice of and to vote at the
meeting and at any postponements or adjournments thereof.
If you cannot be present in person please complete, date, sign, and
return the accompanying Proxy without delay. A business reply envelope
which does not require any postage, if mailed in the United States, is
enclosed for your convenience.
Dated: September 30, 1998
By Order of the Board of Directors
1MAGE SOFTWARE, INC.
Robert Wiegand II
Secretary
1MAGE SOFTWARE, INC.
6486 S. QUEBEC STREET
ENGLEWOOD, COLORADO 80111
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PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 30, 1998
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This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of 1mage Software, Inc., a
Colorado corporation (the "Company" or "1mage") for use at a Special
Meeting (the "Meeting") of the Company's shareholders (the
"Shareholders") to be held on October 30, 1998 at 10:00 a.m. Mountain
Standard Time at the Sheraton Denver Tech Center Hotel, 7007 S. Clinton
Street, Englewood, Colorado 80111, and at any postponements or
adjournments thereof. The approximate date on which a definitive Proxy
Statement and the accompanying Proxy will first be mailed to
Shareholders is September 30, 1998.
Only Shareholders of record at the close of business on August 24,
1998 (the "Record Date"), will be entitled to vote at the Meeting. On
that date, there were 2,203,019 shares of the common stock of the
Company, par value $.004 (the "Common Stock") outstanding and entitled
to vote at the Meeting. The presence at the Meeting, in person or by
Proxy, of a majority of the outstanding shares of Common Stock entitled
to vote shall constitute a quorum for the meeting.
Common Stock represented by properly executed proxies, unless
previously revoked, will be voted at the Meeting in accordance with the
instructions thereon. Each Proxy granted may be revoked by a
Shareholder giving such Proxy at any time before it is exercised by
filing with the Secretary of the Company a revoking instrument or a
duly executed Proxy bearing a later date. The powers of any Proxy
holder will be suspended if the person who executed the Proxy held by
such Proxy holder attends the Meeting in person and so requests.
Attendance at the Meeting will not in itself constitute revocation of
the Proxy.
The Company will bear the cost of soliciting proxies in the form
enclosed. In addition to solicitation by mail, proxies may be
solicited personally, or by telephone, or by employees of the Company,
without additional compensation for such services. The Company may
reimburse brokers holding Common Stock in their names or in the names
of their nominees for their expenses in sending Proxy material to the
beneficial owners of such Common Stock. The Company may hire an
outside proxy solicitation firm to solicit proxies if it is deemed
necessary by management. Management estimates that the cost for an
outside solicitor would not exceed $10,000.
All information contained in this Proxy Statement with respect to
1mage, New 1mage Software LLC ("New 1mage") and SLM has been provided
by the Company, and all information provided with respect to SupraLife
has been provided by SupraLife.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED.
SUMMARY
THE FOLLOWING SUMMARY OF THE MATERIAL TERMS OF THE MERGER
AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SPECIFIC
PROVISIONS OF THE MERGER AGREEMENT, A COPY OF WHICH WILL BE PROVIDED
WITHOUT CHARGE TO ANY SHAREHOLDER UPON REQUEST DIRECTED TO ROBERT
WIEGAND II, SECRETARY, 1MAGE SOFTWARE, INC., 6486 S. QUEBEC STREET,
ENGLEWOOD, COLORADO 80111, (303) 694-9180.
On September 24, 1998, the Board of Directors of the Company
approved, subject to shareholder approval and the satisfaction of
certain enumerated conditions, the execution of the Merger Agreement
and the performance of the actions contemplated thereby, including,
among other things, the issuance of 6,609,057 shares of 1mage Common
Stock, as such number may be adjusted as described below (the "Merger
Shares"), pursuant to the Merger. THE BOARD OF DIRECTORS OF THE
COMPANY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE ISSUANCE OF THE MERGER SHARES.
PARTIES TO THE MERGER
1MAGE. 1mage, a Colorado corporation, develops and markets a
software product called 1MAGE (R), a UNIX-based electronic document
image management and retrieval system. 1mage is incorporated in the
State of Colorado. 1mage's Common Stock is quoted on the Nasdaq
SmallCap Market under the symbol "ISOL". The principal executive
offices of the Company are located at 6486 S. Quebec Street, Englewood,
Colorado 80111, and its telephone number is (303) 694-9180.
NEW 1MAGE. New 1mage was formed in Colorado on July 9, 1998, as a
wholly owned limited liability company of 1mage. Subject to approval
of the Merger, immediately prior to the Effective Time all of the
assets and liabilities of 1mage other than the SupraLife stock would be
contributed to New 1mage in exchange for 100% of the membership
interests therein. New 1mage would then continue the electronic
imaging business presently being conducted by the Company. After the
Merger, 1mage (the "Reorganized Parent") will own and operate, as
wholly owned subsidiaries, New 1mage and SupraLife. New 1mage's
address and telephone number are now and would continue to be the same
as the Company's.
SUPRALIFE. SupraLife, a California corporation, and its wholly
owned domestic and international subsidiaries are primarily engaged in
the business of developing, manufacturing and selling preventive
health, personal care and sports & fitness products through its direct
marketing network. SupraLife is incorporated in the State of
California. The principal executive offices of SupraLife are located
at 9820 Willow Creek Road, Suite 450, San Diego, California 92131, and
its telephone number is (619) 653-6510.
SLM. SL Merger Corp. was formed in Colorado on July 9, 1998, as a
wholly owned subsidiary of 1mage for the purpose of effecting the
Merger. SL Merger Corp.'s address and telephone number are the same as
the Company's.
THE MERGER
GENERAL. At the Effective Time of the Merger, SLM will be merged
into SupraLife. SupraLife will be the surviving corporation in the
Merger and will become a wholly owned subsidiary of 1mage. The
Articles of Incorporation and the Bylaws of SupraLife will be the
Articles of Incorporation and the Bylaws of the surviving corporation.
CONVERSION OF SHARES OF SLM COMMON STOCK. At the Effective Time
of the Merger, the shares of SLM's common stock issued and outstanding
immediately before the Effective Time will be converted into all of the
capital stock of SupraLife, so that 1mage becomes the sole shareholder
of SupraLife.
CONVERSION OF SHARES OF SUPRALIFE COMMON STOCK, OPTIONS, WARRANTS
AND OTHER CONVERTIBLE SECURITIES. At the Effective Time of the Merger,
each outstanding share of SupraLife common stock immediately before the
Effective Time other than dissenting shares ("Dissenting Shares") as
defined in California Corporations Code sections 1300-1312 (the
"California Dissenter's Rights Statute") will by virtue of the Merger
be converted into .68804 shares of 1mage Common Stock issuable in
connection with the Merger (the "Conversion Ratio"), or an aggregate of
6,609,057 authorized but unissued shares of Common Stock. The number
of Merger Shares will be adjusted in the event 1mage issues additional
shares of Common Stock prior to the Merger, such as upon the exercise
of outstanding options. The number of Merger Shares will equal three
times the issued and outstanding shares of Common Stock immediately
prior to the Effective Time. The Conversion Ratio will also be
adjusted accordingly. In addition, all options, warrants and other
convertible securities of SupraLife (the "Old Options") will be
canceled and options, warrants and other convertible securities of
1mage with substantially identical terms, conditions and exercise
prices ("New Options"), as adjusted for the Merger, will be issued to
the holders thereof at the Effective Time. The Shareholders are being
asked to approve an amendment to the Company's 1996 Equity Incentive
Plan which will increase the number of shares authorized under that
Plan in order to have a sufficient number of 1mage shares to issue for
the New Options and will change the class of persons eligible to
receive options under that plan to include all of the persons who have
Old Options. See "Proposal to Amend the Equity Incentive Plan."
DISSENTERS' RIGHTS FOR HOLDERS OF 1MAGE COMMON STOCK. Holders of
1mage Common Stock may be entitled to assert dissenter's rights and
obtain payment of the fair value of their shares, under Article 113 of
the Colorado Business Corporation Act, Colo. Rev. Stat. Section 7-113-
101 et seq., a copy of which is attached hereto as Appendix I (the
"Colorado Dissenter's Rights Statute"), if the Merger is effectuated.
To exercise the right to dissent, (1) a shareholder ("Dissenting
Shareholder") must provide written notice to the Company of his or her
intent to demand payment for his or her shares if the Merger is
effectuated, (2) the Dissenting Shareholder must not vote in favor of
proposal No. 1 at the Meeting, and (3) the Dissenting Shareholder must
comply with the other provisions of the Colorado Dissenter's Rights
Statute. If the Merger is effectuated, the Company will provide
written notice of the Merger to the Dissenting Shareholder along with
an explanation of the procedures for the Dissenting Shareholder to
demand payment and deliver his or her stock to the Company. If a
Dissenting Shareholder is dissatisfied with the payment or offer, the
Dissenting Shareholder is entitled to follow the procedures outlined in
the Colorado Dissenter's Rights Statute. The foregoing discussion of
the law relating to dissenters' rights is not a complete statement of
such rights and is qualified in its entirety by reference to Appendix
I. THIS DISCUSSION AND APPENDIX I SHOULD BE REVIEWED CAREFULLY BY ANY
HOLDER OF 1MAGE STOCK WHO WISHES TO EXERCISE STATUTORY DISSENTERS
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE TO
STRICTLY COMPLY WITH SUCH PROCEDURES WILL RESULT IN THE LOSS OF
DISSENTERS RIGHTS. 1mage considers it unlikely that there would be a
significant number of Dissenting Shareholders.
EXCHANGE OF SUPRALIFE COMMON STOCK CERTIFICATES. Certificates for
the 1mage Shares, and documents evidencing the New Options, will be
delivered by the Reorganized Parent to the respective SupraLife
stockholders upon the later of (i) the Closing Date or (ii) the
delivery to SupraLife by the respective SupraLife stockholders of their
certificates for SupraLife Common Stock and/or the execution of
documents evidencing the surrender of the Old Options (to the extent
such documents are deemed necessary by counsel for the Reorganized
Parent), or in the case of lost, stolen or destroyed certificates, such
documents, including indemnifications and surety bonds, as shall be
reasonably required by counsel for Reorganized Parent.
STATUS OF 1MAGE COMMON STOCK. Following the Merger, the
Shareholders of 1mage will continue to hold their shares of capital
stock of 1mage without any change in number, designation, terms or
rights, except for the proposed name change. However, the Shareholders
of 1mage will experience a substantial amount of dilution upon the
issuance of the shares of Common Stock to the stockholders of
SupraLife. Currently there are 2,203,019 shares of Common Stock
outstanding, and after the issuance of the Merger Shares there will be
8,812,076 shares outstanding (assuming no adjustment in Merger Shares).
As a result of the Merger, SupraLife stockholders will own
approximately 75% (86% on a fully diluted basis) of the total 1mage
Common Stock to be outstanding immediately subsequent to the Merger.
NOTIFICATION OF MERGER. Following the Effective Time, the
Company's transfer agent, American Securities Transfer & Trust, Inc.,
will mail to each Shareholder of the Company, a notice of the
effectiveness of the Merger and instructions on how to exchange
certificates representing shares of 1mage Common Stock for certificates
which give effect to the corporate name change (if approved).
DISSENTERS RIGHTS OF APPRAISAL OF SUPRALIFE SHAREHOLDERS.
SupraLife stockholders may have the right under California law to
dissent from the Merger and obtain payment of fair value for their
SupraLife shares. Under the Merger Agreement, if shares representing
more than ten percent (10%) of the outstanding SupraLife shares are
dissenting shares under the California Dissenter's Rights Statute and
sufficient funds cannot be raised on commercially reasonable terms to
fund the payment for dissenting shares, SupraLife may elect not to
proceed with the Merger.
AUTHORIZED INCREASE IN NUMBER OF 1MAGE COMMON SHARES. Subject to
approval of the Shareholders, the Articles of Incorporation of 1mage
will be amended to increase the authorized number of shares of Common
Stock from 10,000,000 to 50,000,000 shares of Common Stock. Because of
the number of shares required to be issued to the stockholders of
SupraLife pursuant to the Merger, this amendment must be approved in
order to effectuate the Merger.
PROPOSED NAME CHANGE. Subject to approval of the Shareholders,
the corporate name of 1mage will be changed to SupraLife International,
Inc. if the Merger Agreement is approved and adopted.
INTEREST OF CERTAIN PERSONS IN THE MERGER. As a condition to the
Merger, the Reorganized Parent will enter into five-year employment
agreements with David R. DeYoung and Mary Anne DeYoung. Mr. DeYoung is
President, Chief Executive Officer and a Director of 1mage. Ms.
DeYoung is Chief Financial Officer of 1mage. The Reorganized Parent
will also enter into a consulting agreement with Mr. DeYoung applicable
to a potential sale of the business of New 1mage after the Merger. See
"Employment and Consulting Agreements with the Company."
MERGER CONSIDERATION. The aggregate amount of the Merger
Consideration is 6,609,057 shares of Common Stock to be issued to the
stockholders of SupraLife in the Merger, as such amount may be
adjusted. The Merger Consideration would have an aggregate market
value of $13,218,114 based on the closing price of the Common Stock on
Nasdaq on September 24, 1998 of $2.00 per share.
EFFECTIVE TIME OF THE MERGER. Subject to the terms and conditions
of the Merger Agreement, the Merger is expected to become effective
upon the filing of the Articles of Merger with the Secretary of State
of Colorado and the Secretary of State of California as soon as
practicable after the Meeting (the "Effective Time").
CONDITIONS OF THE MERGER. The respective obligations of 1mage and
SupraLife to consummate the Merger are subject to the satisfaction or
waiver at or prior to the Effective Time of the following conditions,
among others: (i) the Merger Agreement will have been approved and
adopted by the holders of a majority of the outstanding shares of each
of the Company and SupraLife,(ii) the amendment to the Articles of
Incorporation to increase the authorized shares from 10,000,000 to
50,000,000 shares of Common Stock will have been approved by the
Shareholders, (iii) the absence of any statute, rule, injunction or
order that would prevent consummation of the Merger; (iv) the receipt
of all required authorizations, consents and approvals; (v) no more
than ten percent (10%) of the outstanding shares of SupraLife are
dissenting shares under the California Dissenter's Rights Statute or
sufficient funds have been raised on commercially reasonable terms to
fund the payments to dissenting shareholders of SupraLife; and (vi) the
performance of and compliance with all agreements and obligations of
the parties under the Merger Agreement.
REGULATORY APPROVALS The Company does not believe that any
federal or state requirements must be complied with or that approval
must be obtained in connection with the Merger, other than filings
required pursuant to federal and state securities laws, the filing of
the Articles of Merger with the Secretary of State of Colorado and the
Secretary of State of California and compliance with the Dissenter's
Rights Statutes applicable to each company.
FINDER'S FEES. By agreement dated June 16, 1998, the Company and
SupraLife agreed that at such time as the Merger is effected or if a
substantial portion of the assets of SupraLife are otherwise acquired
by the Company (the "Closing Date"), then First Fidelity Capital, Inc.
or its designee ("First Fidelity") will receive the following
consideration for its services in connection with the introduction of
the parties to the Merger Agreement: (a) 107,142 shares of 1mage
Common Stock and (b) one-year common stock purchase warrants to
purchase 321,427 shares of Common Stock exercisable at $.8648 per share
(the "One-Year Warrants"). The One-Year Warrants are exercisable for
one year from their issuance. Beginning six months after their
issuance, the One-Year Warrants are redeemable by the Reorganized
Parent upon sixty (60) days notice, for a price of $.01 per warrant
share, so long as (i) the closing price of the Common Stock for each of
the ten (10) trading days preceding the notice of redemption is greater
than the One-Year Warrant exercise price and (ii) the Common Stock
underlying the One-Year Warrants to be redeemed has been registered for
sale under the Securities Act of 1933, as amended (the "Securities
Act") with the Securities and Exchange Commission (the "Commission").
Also, on the Closing Date, (i) First Fidelity may purchase up to
440,604 shares of Common Stock for cash at the average of the closing
prices quoted by Nasdaq for the ten trading days preceding the Closing
Date (the "Closing Price"), and (ii) for every five shares of Common
Stock actually purchased by First Fidelity on the Closing Date, the
Company will issue to First Fidelity a warrant to purchase one share of
Common Stock at the greater of the Closing Price or $3.04 per share.
These warrants (the "Thirty-Month Warrants") will be exercisable six
months after their issuance and remain exercisable for a period of two
years thereafter. The Thirty-Month Warrants are redeemable by the
Reorganized Parent beginning twelve (12) months after they have become
exercisable, upon sixty (60) days notice, at a price of $.01 per
warrant share, so long as (a) the closing price of the Common Stock for
each of the ten (10) days preceding the notice of redemption is greater
than the Thirty-Month Warrant exercise price and (b) the Common Stock
underlying the Thirty-Month Warrants has been registered with the
Commission. The Company and SupraLife have agreed to make their best
efforts to register all of the shares issued to First Fidelity and the
shares issuable upon exercise of the One-Year Warrants and the Thirty-
Month Warrants (the "FFC Shares") with the Commission under the Act
promptly after the Closing Date at the Reorganized Parent's expense.
The Company and SupraLife agreed that none of the shares of Common
Stock issued to SupraLife or its shareholders will be registered under
the Act without concurrent registration of the FFC Shares. The
Reorganized Parent must file an appropriate registration statement as
to the FFC Shares within thirty (30) days after the Effective Time.
FEES AND EXPENSES. All fees and expenses incurred in connection
with the Merger or any transaction contemplated thereby will be paid by
the party incurring such fees or expenses except that, if the Merger is
not consummated SupraLife has agreed to pay one half of the aggregate
legal fees and related expenses incurred by both parties in connection
with the Merger, plus the fees and expenses associated with the
agreement with First Fidelity. The Reorganized Parent has agreed to
pay all expenses in connection with the registration, qualification,
and/or exemptions of the Merger Shares and FFC Shares, including any
SEC and state securities law registration and filing fees and other
expenses, but the Company will not pay for broker's or underwriter's
commissions or discounts upon sale by any holder of the Merger or FFC
Shares. See "Finder's Fees."
RESALE OF 1MAGE COMMON STOCK TO BE ISSUED IN THE MERGER. The
Merger Shares and the FFC Shares will be "restricted securities" and
may only be transferred in accordance with the provisions of Rule 144
under the Securities Act, pursuant to an effective registration
statement, or in transactions exempt from registration. Merger Shares
received by persons who are affiliates of SupraLife may be sold by them
only in accordance with Rule 145 under the Securities Act. As
described above, the Company and SupraLife have agreed to utilize their
best efforts to register the FFC Shares for resale. The Company and
SupraLife have not yet determined whether and to what extent the Merger
Shares will be registered for resale. Rule 144 generally provides that
beneficial owners of Common Stock who have held such Common Stock for
one year may sell within a three-month period a number of shares not
exceeding the greater of 1% of the total outstanding shares or the
average weekly trading volume of the shares during the four calendar
weeks preceding such sale. Such sales must be made through a broker
without solicitation of a buyer. Persons who are not affiliates of the
issuer may resell shares without restriction pursuant to Rule 144(k)
after they have held their shares for two years.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER OF CONDITIONS The
respective Boards of Directors or Manager of 1mage, New 1mage,
SupraLife and SLM may, by written agreement, at any time before or
after the approval and adoption of the Merger Agreement by the 1mage or
SupraLife Shareholders, amend the Merger Agreement, provided, however,
that after such approvals, no amendment or modification may be made
that would materially adversely affect the rights of the 1mage or
SupraLife shareholders without the further approval of such
shareholders. Each party to the Merger Agreement may, to the extent
legally permitted, extend the time for performance of any obligations
of any other party to the Merger Agreement, or waive compliance of any
party with any of the terms or conditions in the Agreement.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be
terminated and the Merger abandoned at any time prior to the Effective
Time by notice from the Company or SupraLife of a material breach by
the other party of any provision of the Agreement or if the Merger has
not been consummated by March 31, 1999.
FEDERAL INCOME TAX CONSEQUENCES The parties have agreed that the
Merger is intended to be treated for tax purposes as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS
OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
BUSINESS AND MANAGEMENT AFTER THE MERGER
1mage develops and markets a software product called 1MAGE(R), a
UNIX-based electronic document image management and retrieval system.
After the Effective Time, the assets and liabilities of 1mage will be
transferred to New Image Software LLC, a wholly owned subsidiary of
1mage, in exchange for 100% of the membership interests of New 1mage.
Thereafter, the Reorganized Parent will be a holding company for its
two subsidiaries, New 1mage Software LLC and SupraLife. If approved by
the Shareholders, the corporate name of 1mage will be changed to
SupraLife International, Inc.
After the Effective Time, SupraLife and its wholly owned domestic
and international subsidiaries will continue to develop, manufacture
and sell preventive health, personal care and sports & fitness products
through its direct marketing network as a wholly owned subsidiary of
1mage. See "Description of SupraLife International."
After the Effective Time, SLM will be merged out of existence.
MARKET PRICE AND DIVIDENDS OF 1MAGE COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq SmallCap Market
("Nasdaq") under the symbol ISOL. The following table sets forth, for
the fiscal quarters indicated, the high and low bid prices per share
for the Common Stock as reported on Nasdaq.
1996 High Low
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First Quarter $1.31 $0.63
Second Quarter 1.88 0.75
Third Quarter 1.63 1.13
Fourth Quarter 1.25 0.75
1997 High Low
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First Quarter $1.31 $0.75
Second Quarter 1.19 0.63
Third Quarter 1.81 0.75
Fourth Quarter 1.56 0.50
1998 High Low
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First Quarter $0.63 $0.25
Second Quarter 2.31 0.28
These quotations reflect interdealer prices, without retail mark-
up, mark-down or commission and may not necessarily represent actual
transactions.
On September 24, 1998, the closing high and low sale prices per
share for the Common Stock was $2.0939 and $1.8125, respectively, as
reported on Nasdaq.
The last reported sale price of the Common Stock prior to the
announcement of the Merger took place on June 14, 1998 at a price of
$0.719.
The Board of Directors has never declared a dividend and does not
plan to declare dividends on 1mage Common Stock in the future.
PROPOSAL TO APPROVE AND ADOPT MERGER AGREEMENT
On September 24, 1998, the 1mage Board of Directors unanimously
approved the proposed Merger Agreement, subject to shareholder approval
and the satisfaction of certain enumerated conditions including the
final negotiation and execution of mutually satisfactory employment
agreements between the Reorganized Parent and the executive officers of
1mage. The 1mage Board of Directors believes that the Merger is in the
best interests of the Company and its Shareholders. The Board
considered the position, prospects and future of the Company generally
and the effect of the Merger on the public shareholders specifically
and discussed such matters with representatives of SupraLife. For the
reasons discussed below, the Board of Directors concluded that the
Merger is fair and in the best interests of the Company and its
Shareholders. Accordingly, the Board of Directors unanimously approved
the non-binding letter of intent to effect the Merger on June 5, 1998.
In approving the proposed Merger Agreement and reaching its conclusions
as to the fairness of Merger, the Board of Directors considered the
following factors in particular:
(i) 1mage as a combined company would meet the quantitative
maintenance standards of Nasdaq required for continued listing as well
as the higher, initial listing standards which will, by virtue of
Nasdaq Rule 4330(f), be deemed to apply upon consummation of the
Merger, based on the pro forma combined earnings of 1mage and SupraLife
in 1996 and 1997; (ii) the ongoing business and assets being
contributed by SupraLife are believed to have a value at least as great
as the pre-announcement value of the 1mage Shares to be exchanged for
those assets; (iii) although the number of shares being issued to the
shareholders of SupraLife would be highly dilutive to the Company's
Shareholders, the Board believes that the long term effect would be
improved value for the Shareholders; and (iv) SupraLife's extensive
knowledge in establishing and managing a world-wide distributor network
would aid the Company's marketing efforts as it faces similar
challenges and opportunities in domestic and international sales
markets for its imaging software products.
The number of Merger Shares to be issued was negotiated on an arms-
length basis after giving effect to the trading range for the Common
Stock and the Company's financial position and prospects during the
negotiations. In determining the number of shares to be issued for the
Merger, the Board of Directors considered a number of factors.
While no single factor was determinative, the Board considered the
price to earnings ratio of publicly held direct sales companies, the
perceived market value of the assets being contributed by SupraLife as
compared to the market value of the assets owned by the Company, the
value at which the assets of SupraLife and the assets of the Company
could be sold as an ongoing business for cash or other consideration,
and the liquidation value of the respective assets of the Company and
SupraLife. Many of the calculations also considered the Company's book
value and the $.438 price share of Common Stock quoted on Nasdaq for
most of the time that price negotiations were ongoing.
The Board also considered a number of risks associated with the
Merger including: (i) the potential decline in 1mage's and SupraLife's
revenues and profitability, (ii) the uncertainty of new and existing
product development by 1mage and SupraLife, (iii) the risks of
litigation, including but not limited to the litigation between
SupraLife and certain of its former distributors and shareholders (the
"Distributor Litigation"), (iv) the dilution to existing 1mage
shareholders, and (v) the impact of the Distributor Litigation on
SupraLife's results of operations. See "Risk Factors."
The foregoing discussion of information and factors considered by
the Company's Board of Directors is not intended to be exclusive but is
intended to highlight some of the most material of the factors
considered. In view of the large number of factors considered, the
1mage Board did not find it practical to quantify or otherwise assign
relative weights to the specific factors considered and did not do so.
Individual directors may have nonetheless attributed different weights
to various factors.
FORWARD LOOKING STATEMENTS
This Proxy Statement contains certain statements, including
statements regarding the combined operations of 1mage and SupraLife and
statements concerning the future plans of management for 1mage and
SupraLife, which are forward looking statements within the meaning of
the safe harbor provisions of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward looking statements are subject to risks
and uncertainties identified along with such statements and all of the
risks, including but not limited to the discussion under the headings
"Risks Associated with the Merger and the Reorganized Parent,"
"Description of Merger," "Legal Proceedings," and "Risk Factors of
SupraLife."
DESCRIPTION OF SUPRALIFE INTERNATIONAL
GENERAL
SupraLife International was incorporated in California in May,
1991 under the name Eagle Investments, Inc. It changed its name to
Soaring Eagle Ventures, Inc. in January, 1995. In March, 1996, the
company changed its name to Eagle Lifestyle Nutrition, Inc. and also
transferred the Soaring Eagle Ventures, Inc. name to its wholly owned
subsidiary. In August, 1997, the company changed its name to SupraLife
International. The Soaring Eagle Ventures, Inc. subsidiary changed its
name to "SupraLife" in June, 1998. The address of the principal
executive offices of SupraLife International (hereafter, "SupraLife")
is 9820 Willow Creek Road, Suite 450, San Diego, California 92131.
SupraLife is a privately-held company with 36 stockholders.
SupraLife and its wholly owned U.S. and international subsidiaries
primarily develop, manufacture and market preventative health, sports &
fitness and personal care products that are designed for health-
conscious consumers. SupraLife develops products that it believes will
have widespread consumer appeal and strong network marketing sales
potential. These products are sold to consumers through a network of
independent distributors. SupraLife has developed a worldwide network
of approximately 37,000 active distributors and preferred customers.
The substantial majority of these persons are preferred customers who
typically order products only for personal use. SupraLife offers a
product line of nearly 40 products in three major categories:
preventive health, personal care, and sports & fitness. SupraLife,
through its wholly owned subsidiary, Proven Results, Inc. ("PRI"), also
develops and markets health related seminars directly to individuals as
well as to corporations. SupraLife's initial seminar products relate
to nutrition and weight loss and were launched in January, 1998. In
September, 1998, SupraLife formed FrontRunner Nutrition ("FrontRunner")
to market nutritional supplements through alternate distribution
channels.
SupraLife has a number of programs designed to assist its
distributors in building their businesses. SupraLife provides product
development, sales and marketing aids, customer service, and essential
record-keeping functions for its distributors. SupraLife also provides
support programs to the distributors, which include regional training
seminars, a quarterly newsletter, monthly updates and business training
systems.
In 1997, SupraLife formed Natureceutical International, Inc.
("NI") as a wholly-owned subsidiary to manufacture SupraLife's top
selling liquid products. Prior to formation of NI, SupraLife used
outside manufacturers for these products. NI is licensed to
manufacture food grade nutritional products. SupraLife's products are
produced using Good Manufacturing Processes. See "Regulation."
FINANCIAL INFORMATION BY BUSINESS SEGMENT
SupraLife is primarily engaged in one line of business: the sale
of nutritional and personal care products. Information for each of
SupraLife's last three fiscal years, with respect to the amounts of
revenue from sales to unaffiliated customers, operating profit and
identifiable assets of this segment, is set forth in the financial
statements of SupraLife included elsewhere in this Proxy Statement.
GROWTH
SupraLife's net sales to its independent distributors and
customers over the last five full years of operations were $1.3 million
in 1993, $3.5 million in 1994, $10.5 million in 1995, $33 million in
1996 and $29 million in 1997. Through the first six months of this
year, sales have been $7.9 million. See "Selected Financial Data of
SupraLife."
SupraLife's growth through 1996 was primarily due to expansion of
its distributor network. In 1997, SupraLife severed its relationships
with several of its largest distributors who had failed to adhere to
SupraLife policies and procedures. See "Legal Proceedings." These
terminations led to a decrease in net sales in 1997 and through the
first six months of 1998. See "Management Discussion and Analysis of
Financial Condition and Results of Operations."
SupraLife implemented a number of strategic plans in 1997 and 1998
designed to offset the effects of the distributor terminations. These
have included:
- Expansion of distribution channels.
- Restructure of senior management to provide emphasis on marketing
and distributor support.
- Implementation of new company policies and procedures.
- Installation of a new, state of the art, management
information system.
- Creation of NI to control the manufacture of top selling
liquid products.
- Expansion into the United Kingdom and the Netherlands.
- Greater emphasis on full spectrum nutrition for preventative
health products, including reformulation of two of the top selling full
spectrum liquid products.
- Introduction of new products, including Multi-E.F.A., Kids
Toddy, the Slim Slim line of weight management products, a line of
colostrum-based immune system support and colon care products, and
three FrontRunner private label products.
- Introduction of a new distributor compensation plan providing
.greater rewards for individual efforts
- Cost reductions, including staffing cuts and curtailment of
investments in PRI and international operations.
COMPETITION
SupraLife's products are sold in domestic and foreign markets in
competition with other companies. Many of these competitors have
substantially greater sales volumes and financial resources than
SupraLife, and many of these competitors sell brands that are, through
advertising and promotions, better known to consumers. SupraLife
competes in the nutritional supplement and personal care industry
against companies which sell heavily advertised and promoted products
through retail stores, as well as against other network marketing
companies. For example, SupraLife competes against numerous
manufacturers and retailers of products which are distributed through
supermarkets, drug stores, health food stores, department stores and
other retail outlets. In addition to its competition with these
manufacturers and retailers, SupraLife competes for product sales and
independent distributors with many other network marketing companies,
including New Vision International, Nutrition for Life, Shaklee, NuSkin
and Amway. SupraLife believes that the principal competition factors
in its industry are quality, price, distribution and brand name. In
addition, recruitment, training, and financial incentives for the
independent sales force are important factors.
SupraLife's principal methods of competition for the sale of
products is its emphasis on development of high quality preventive
health, personal care and sports & fitness products, its responsiveness
to changes in consumer preferences and its commitment to quality,
purity, safety, education and service. Further, SupraLife believes
that its uniquely formulated full-spectrum nutritional liquids, all of
which use as their base an organic trace mineral product mined from
prehistoric plant deposits, result in a flagship product line that is
unique to SupraLife. SupraLife's principal methods of competition for
recruiting distributors are its marketing program, compensation plan
and support services.
MARKETING STRATEGY
Network Marketing
Currently, SupraLife has distributors throughout the United
States, and a small distributor network in Europe. Management intends
to expand its marketing activities in the U.S., and to continue with
its expansion into the European market, albeit at a slower pace than in
recent quarters. See "International Expansion."
SupraLife's products are distributed through a network marketing
system consisting of approximately 37,000 active distributors and
preferred customers. SupraLife regularly evaluates the total numbers
of its distributors and preferred customers and deletes from its system
those that have not been active in 12 or more months. Distributors are
independent contractors who purchase products directly from SupraLife
for resale to retail customers and/or for personal consumption. The
substantial majority of SupraLife's distributors and preferred
customers join SupraLife primarily to buy SupraLife products solely for
themselves at wholesale prices. Approximately 10,000 persons are
active distributors who have the opportunity to earn commissions on
individual sales and on sales to other distributors and preferred
customers recruited by the distributors. Management believes that its
network marketing system is well suited to marketing its nutritional
supplements and other products because sales of such products are
strengthened by ongoing personal contact and education between retail
consumers and distributors, virtually all of whom use SupraLife's
products themselves.
To become a distributor, a person must be sponsored by an existing
distributor. The distributor applicant then completes an application
form and pays a small fee. The distributor then receives a Welcome
Pack and can begin placing orders at wholesale prices. Consumers who
want to purchase products at wholesale prices but do not want to be
distributors may become preferred customers ("PC") for a small
membership fee. Sponsors of preferred customers receive commissions on
each purchase by a PC.
SupraLife plans to make increased use of conventional mass
marketing programs to raise consumer visibility for SupraLife's
products and to promote its corporate image and mission. Planned
programs include trade booths (to be staffed by distributors), athletic
promotions, print advertising, press releases, radio and television
advertising (particularly infomercials), direct mail and the Internet.
In addition, management hopes that conventional marketing will expose
SupraLife to distributors and customers in geographical areas that were
previously unsupported.
Compensation Plan
Distributors who purchase certain amounts of product receive
volume discounts in the form of personal purchase rebates. The
requirements for this rebate start at a level low enough that most
distributors are able to receive them.
Distributors who meet higher although still modest purchase
requirements qualify to earn commission overrides of varying
percentages on the sales of product by distributors in the first five
levels of their organization. Upon meeting certain additional
productivity requirements, distributors can earn "executive" and
"leadership" bonuses payable as a percentage of sales of downline
distributors. SupraLife also has an additional bonus program for
distributors who maintain high levels of productivity, and career
bonuses for high levels of productivity over the distributor's career.
FrontRunner Nutrition
In September, 1998, SupraLife formed FrontRunner Nutrition
("FrontRunner") to target alternate distribution channels within the
nutritional supplement market. FrontRunner has entered into a two-year
contract to supply specifically formulated sports nutrition products to
Curves International, Incorporated, d/b/a Curves for Women, "30 Minute
Fitness and Weight Loss Centers," a nationwide franchise chain of gyms
for women. Curves International currently has approximately 650
franchise outlets nationwide, and projects substantial growth over the
next two years. The contract calls for FrontRunner initially to supply
Curves International with three private label products. One of these
products will be manufactured by SupraLife's NI manufacturing facility,
and the other two will be manufactured by a third party. SupraLife and
Curves International may amend the contract in the future to add
additional products in their discretion.
FrontRunner intends to seek additional distribution opportunities,
although there can be no assurance that any such opportunities will be
available on terms acceptable to management. Management intends to
design FrontRunner marketing plans, including the plan for Curves
International, so as to avoid as much as possible any encroachment upon
the direct marketing of SupraLife's own branded products through
network distributors.
International Expansion
SupraLife initiated expansion into international markets in 1997
through its acquisition of Vitall International, Inc. ("Vitall").
Vitall specialized in herbal nutritional and personal care products and
was operating in four European countries. SupraLife now operates in
Europe with two subsidiaries, SupraLife International, Ltd. in the
United Kingdom and SupraLife International, B.V. in the Netherlands.
The European expansion strategy is to introduce SupraLife's products
while maintaining the Vitall herbal and personal care products.
SupraLife is considering expansion into other European countries and
into countries in the Asia Pacific region, although any such expansion
is dependent on improvement in SupraLife's operating results or the
availability of capital for international expansion. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
PRODUCTS
Current Product Lines
SupraLife sells preventive health, personal care and sports &
fitness products that are manufactured with proprietary formulations.
SupraLife offers a product line of about 40 high quality products
including unique full spectrum mineral based nutritional and sports
drinks, immune system support products, weight management programs,
specialized vitamin/mineral tablets, oral and personal hygiene
products, personal care formulations and nutritional snack bars.
DESCRIPTION OF SELECT SUPRALIFE PRODUCTS
Preventative Health
SupraLife's preventative health products have been developed to
provide the body with the full spectrum of essential nutrients for
optimal health. At the core of the preventive care line are the Toddy
full spectrum liquid vitamin, mineral and herbal products, Multi-
E.F.A., an essential fatty acid gel cap, and NK Daily, a daily immune
system support capsule. The remainder of the preventive health line
are the Super Nutrient products, which round out full spectrum
nutrition by addressing specific nutrient deficiencies.
The Toddy products are based on a liquid mineral preparation mined
from a prehistoric plant deposit in Southern Utah. The various Toddy
formulations include Ultra Body Toddy, Total Toddy, Rainforest Toddy,
Disiac Toddy and Kid's Toddy, each of which supplement the liquid
mineral base with various vitamins, amino acids and herbs to provide
full spectrum nutrition. There are currently 15 Super Nutrient
products, including Bio-Calcium, Flex Flow and two BioCleanse
formulations. SupraLife also markets NK 911 and Allerforce colostrum-
based immune system support products to supplement NK Daily.
Sports & Fitness
SupraLife's sports & fitness products include Sports Toddy and the
Slim Slim line of weight loss and weight management products. Sports
Toddy is a concentrated mineral and electrolyte replacement drink.
Slim Slim products include meal replacement protein powder and a
metabolic accelerator product. FrontRunner's products include a liquid
full spectrum nutritional supplement, a joint and connective tissue
support capsule and an essential bio-available calcium supplement.
Personal Care
SupraLife's personal care products include Longevity Rich
Moisturizer, a skin moisturizer which includes trace minerals, and
Oxyrich Periodontal toothpaste and mouthwash, which each include trace
minerals.
Product Development and New Products
SupraLife regularly expands its product line through the
development of new products. For example, SupraLife introduced Kid's
Toddy and the BioCleanse line of colon care products and three
FrontRunner products in 1998. New product ideas are derived from a
number of sources, including trade publications, scientific and health
journals, and company funded research. Prior to introducing products,
legal counsel and other representatives retained by SupraLife
investigate product formulations for regulatory compliance and other
issues. To the extent possible, SupraLife's products are formulated to
suit both the regulatory and marketing requirements of the particular
market.
SupraLife's research, development and formulation is conducted by
independent researchers, vendor research departments, research
consultants and others. SupraLife does not have an in-house research
staff. When SupraLife identifies a new product concept or when an
existing product needs to be reformulated for introduction into a new
or existing market, the new product concept or reformulation is
generally submitted to SupraLife's consultants for technological
development and implementation. SupraLife claims proprietary rights to
a majority of its product formulations. See "Other Proprietary
Rights."
SupraLife uses various consultants to perform research and
development activities and to speak on behalf of SupraLife concerning
existing and future products and nutrition. The expenses for these
consultants have been $444,000, $230,000 and $82,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Product Warranties and Returns
SupraLife's product warranty and return policies are similar to
other network marketers of nutritional supplements and personal care
products. If a retail purchaser of any of SupraLife's products is not
satisfied with the product, he or she may return it to the distributor
from whom it was purchased at any time within 30 days of the purchase.
The distributor is required to refund the purchase price to the retail
purchaser. The distributor may then return the unused portion of the
product to SupraLife for a refund or an exchange of equal value. Most
products returned to SupraLife are replaced at cost. The cost of
products returned to SupraLife has been insignificant during all
reported fiscal periods.
Trademarks and Service Marks
SupraLife owns trademarks registered with the United States Patent
and Trademark Office for the following: Ultra Body Toddy, Super Daily,
Rain Forest Toddy, Super Nutrient, Longevity Rich, Life-Trans, Disiac
Toddy and Mineral Munch. Fifteen additional applications for
registration are pending; thirteen of which are "intent to use"
applications, and two of which are "in use in commerce" applications.
Of the fifteen pending applications, SupraLife has received "Notices of
Allowance" from the United States Patent and Trademark Office for an
additional two trademarks. Federally registered trademarks have
perpetual life, as long as they are renewed on a timely basis and used
properly as trademarks, subject to the rights of third parties to seek
cancellation of the marks. SupraLife regards its trademarks as
valuable assets and believes they have significant value in the
marketing of its products. SupraLife vigorously protects its
trademarks against infringement. However, there can be no assurance
that SupraLife's trademarks will not be challenged by third parties
seeking cancellation of the marks.
Other Proprietary Rights
SupraLife claims proprietary rights in most of its products and
formulations. SupraLife's products and formulations are not
patentable, and SupraLife instead relies on a combination of trade
secret laws and nondisclosure and other contractual provisions to
protect its various proprietary rights. These safeguards may not
prevent competitors from imitating SupraLife's products and
formulations or from independently developing similar products and
formulations.
SupraLife believes that its proprietary rights do not infringe the
proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert such infringement by
SupraLife with respect to current or future products or formulations.
Any such claim, with or without merit, could be time consuming, result
in costly litigation and cause product release delays and might require
SupraLife to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms
acceptable to SupraLife.
MANUFACTURING AND SUPPLIERS
SupraLife currently manufactures substantially all of its liquid
nutritional products. SupraLife purchases the remainder of its
products from third party vendors that mine, manufacture and package
products to meet SupraLife's specifications and standards. SupraLife
places particular emphasis on quality control.
SupraLife formed Natureceutical International in 1997. NI has a
manufacturing facility which allows SupraLife to formulate and bottle
liquid nutritional supplements in one location. Subject to
availability of capital, SupraLife plans to expand its manufacturing
capabilities in those areas where cost and quality advantages can be
realized. SupraLife's manufacturing facility also offers a lab for
conducting quality control tests on all products. SupraLife maintains
the ongoing consulting and management services of two chemists and also
employs a Quality Control and Production Manager.
SupraLife has a variety of suppliers which provide containers,
screening services, printing services, raw materials, formulating,
bottling and other products and services. In most situations SupraLife
has no ongoing contractual commitments to its vendors and is not
substantially dependent upon any single vendor.
Minerals used in SupraLife's liquid products are mined from a
prehistoric plant deposit located in Southern Utah. SupraLife has a
ten-year contract with T.J. Clark & Company, the supplier of these
minerals, that ends on December 31, 2005. SupraLife is required by the
supply contract to purchase at least 200,000 gallons of minerals during
each of the calendar years of the agreement from and including 1997.
SupraLife did not purchase the contractual minimum in 1997 and will not
likely purchase the minimum in 1998. See "Risk Factors of SupraLife."
Termination of supply by one or more of SupraLife's vendors could
have a temporary adverse effect; however, SupraLife believes that
alternative sources are readily available for the supply, manufacture
and packaging of each of its products.
REGULATION
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of each of SupraLife's major product groups are
subject to regulation by one or more governmental agencies, the most
active of which is the Food and Drug Administration ("FDA"), which
regulates SupraLife's products under the Federal Food, Drug and
Cosmetic Act ("FDCA") and regulations promulgated thereunder. The FDCA
defines the terms "food" and "dietary supplement" and sets forth
various conditions that constitute adulteration or misbranding of such
articles. The FDCA has been amended several times with respect to
dietary supplements, most recently by the Nutrition Labeling and
Education Act of 1990 (the "NLEA") and the Dietary Supplement Health
and Education Act of 1994 (the "DSHEA"). FDA regulations relating
specifically to foods for human use are set forth in Title 21 of the
Code of Federal Regulations. These regulations include basic food
labeling requirements and Good Manufacturing Practices ("GMPs") for
foods. Detailed dietary supplement GMPs have been proposed; however,
no regulations establishing such GMPs have been adopted. Additional
regulations to implement the specific DSHEA requirements for dietary
supplement labeling have also been proposed and final regulations are
expected to be implemented over a period of time following final
publication. SupraLife's products are also subject to regulation by
the Federal Trade Commission ("FTC"), the Consumer Product Safety
Commission ("CPSC"), the United States Department of Agriculture
("USDA") and the Environmental Protection Agency ("EPA"). SupraLife's
activities are also regulated by various agencies of the states,
localities and foreign countries to which SupraLife distributes its
products and in which SupraLife's products are sold.
SupraLife's distribution and sales program is, like that of other
companies operating in interstate commerce, subject to the jurisdiction
of the FTC and a number of other federal and state agencies. Various
state agencies regulate multi-level distribution activities. SupraLife
may be subject to additional laws or regulations administered by the
FDA or other federal, state or foreign regulatory authorities, the
repeal or amendment of laws or regulations which SupraLife considers
favorable, or more stringent interpretations of current laws or
regulations, from time to time in the future. SupraLife is unable to
predict the nature of such future laws, regulations, interpretations or
applications, or what effect additional governmental regulations or
administrative orders, when and if promulgated, would have on its
business in the future. They could, however, require reformulation of
certain products to meet new standards, recall or discontinuance of
certain products not able to be reformulated, imposition of additional
record-keeping requirements, expanded documentation of the properties
of certain products, or expanded or different labeling and scientific
substantiation. Any or all such requirements could have a material
adverse effect on results of operations and financial position.
PRODUCT LIABILITY INSURANCE
SupraLife, like other wholesalers, distributors and retailers of
products that are ingested, faces an inherent risk of exposure to
product liability claims if, among other things, the use of its
products result in injury. SupraLife currently has a product liability
insurance policy which provides $10 million of coverage per occurrence
and in the aggregate. SupraLife believes such level of coverage is
adequate and has experienced no product liability claims in the past.
However there can be no assurance that such insurance will continue to
be available at a reasonable costs, or, if available, will be adequate
to cover liabilities.
EMPLOYEES
SupraLife and its subsidiaries currently have 59 full time
employees. SupraLife's domestic network marketing subsidiary has 49
full time employees, of whom 5 are executive, 13 are engaged in
finance, information systems and other administrative activities, 17
are in marketing and customer services and 14 are engaged in
manufacturing, warehouse and shipping. PRI currently has 4 full time
employees and the European entities have 6 full time employees.
FACILITIES
SupraLife's executive and marketing offices are located at Willow
Creek Plaza, 9820 Willow Creek Road, San Diego, California. The
domestic customer service center is at 9815 Carroll Canyon Road, San
Diego, California, and the warehouse distribution center and accounting
offices are located at 10031 Old Grove Road, San Diego, California.
SupraLife leases approximately 30,000 square feet of warehouse and
office space in the United States from unrelated third-parties for
approximately $18,000 per month. SupraLife believes these facilities
are adequate for its needs for at least the next twelve months.
PRI currently leases 1,400 square feet for its offices and 1,800
square feet for its training and seminar center. Both are located at
8885 Rio San Diego Drive, San Diego, California.
SupraLife's European operations lease approximately 2,000 square
feet of office space in the United Kingdom and 2,500 square feet in
Amsterdam.
MARKET PRICE, OTHER SHAREHOLDER RELATED MATTERS AND DIVIDENDS
There has been no public market for SupraLife's common stock. As
of August 14, 1998, SupraLife has 30 shareholders of record who own a
total of 9,605,565 shares. During the calendar year ended December 31,
1997, the Board of Directors of SupraLife declared a dividend of $0.08
per share payable on February 11, 1997 for shareholders of record on
February 4, 1997, a dividend of $.05 per share payable on May 8, 1997
for shareholders of record on May 7, 1997, and a dividend of $.05
payable on August 5, 1997 for shareholders of record on July 31, 1997.
During the calendar year ended December 31, 1996, the Board of
Directors of SupraLife declared a dividend of $.05 (after giving effect
on March 29, 1996 and December 20, 1996, of 15 for 1 and 3 for 1 stock
splits, respectively) per share payable on November 19, 1996 for
shareholders of record on November 5, 1996.
LEGAL PROCEEDINGS
The following is a description of the material litigation and
arbitration matters pending against SupraLife.
Joel Wallach, et al. v. Eagle Lifestyle Nutrition, Inc., et al.
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United States District Court of California, Southern District, Case No.
97CV1091R (CGA).
This action was filed by Joel Wallach and Wellness Lifestyles,
Inc., a California corporation, doing business as American Longevity,
on June 6, 1997 against SupraLife and various present or past officers,
directors and shareholders. Dr. Wallach was formerly a major
distributor and spokesman for SupraLife, and was terminated by
SupraLife in early 1997. Dr. Wallach, who is still a minority
shareholder of SupraLife, formed a competing company called American
Longevity.
The main thrust of plaintiffs' allegations is that the enforcement
by SupraLife of a provision in its policies and procedures manual which
prohibits its distributors from engaging in a competitive business
violates federal and state antitrust laws. In addition, plaintiffs
allege that certain shareholders and officers of SupraLife engaged in
transactions which negatively impacted Dr. Wallach as a minority
shareholder. The complaint also alleges that SupraLife and past or
former officers and directors undertook actions which harmed Dr.
Wallach.
SupraLife and some of the individual defendants filed an answer on
July 3, 1997. In the fall of 1997, plaintiffs sought a preliminary
injunction to prevent SupraLife from restricting its distributors from
selling competitive products. The Court denied the motion, finding
that there was not a likelihood that plaintiffs would prevail on the
merits of their antitrust claims.
On July 13, 1998, SupraLife and certain of its directors brought a
motion for judgment on the pleadings and/or to stay the corporate
causes of action, specifically those claiming breach of fiduciary
duties and those seeking to remove SupraLife's directors. On August
18, 1998, the Court granted the motion and dismissed the corporate
causes of action, but allowed plaintiffs an opportunity to amend the
corporate causes of action. Plaintiff amended, and SupraLife will move
to dismiss the corporate causes from the amended complaint. SupraLife
anticipates bringing other motions in this action, including a motion
for partial summary judgment, in a further effort to eliminate certain
of the causes of action.
Presently, SupraLife is unable to evaluate the likelihood of an
unfavorable outcome or provide an estimate of potential loss. However,
SupraLife believes it has meritorious defenses to the claims asserted
against it.
Joel Wallach v. SupraLife International and Soaring Eagle Ventures,
Inc.
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American Arbitration Association No. 73 199 00090 97
On March 20, 1997, Joel Wallach served a Demand for Arbitration on
SupraLife and its operating subsidiary. The Demand identifies the
nature of the dispute as conversion, fraud, breach of contract,
securities fraud and breach of fiduciary duty, and seeks an unspecified
amount of damages. Although not stated, SupraLife believes that the
demand concerns SupraLife's termination of Joel Wallach's Distributor
Agreement and Independent Speakers Agreement in February, 1997.
SupraLife answered the demand and an arbitration panel was
selected. The parties are presently completing discovery. It is
anticipated that the arbitration hearing will be scheduled in the early
part of November, 1998.
Presently, SupraLife is unable to evaluate the likelihood of an
unfavorable outcome or provide an estimate of potential loss. However,
based on its assessment to date, SupraLife believes it has meritorious
defenses to the claims presently asserted.
Steve Wallach, et al. v. SupraLife International and Soaring Eagle
Ventures, Inc.
- -----------------------------------------------------------------------
American Arbitration Association No. 73 181 00237 97
On June 6, 1997, Michelle Wallach and Steve Wallach served a
Demand for Arbitration on SupraLife. The demand seeks declaratory
relief and an unspecified amount of damages based on SupraLife's
policies concerning the rights of distributors to transfer their
distributorships and to participate in competing businesses. The
demand was amended to add Ma Lan Wallach, Richard Renton, Roxanne
Renton, John Taylor, Johnnie Trager Taylor, Thomas Adcock, Tom Berner,
Inez Berner and 5 Star Enterprises as claimants, and to assert claims
based on the termination of the claimants' distributorships, the
alleged failure of SupraLife to reimburse claimants for returned
product, and the alleged failure of SupraLife to perform an annual
compression of distributor downlines.
SupraLife has answered the demand. An arbitration panel was
selected, and the arbitration hearing has been scheduled for November
18, 1998. The parties are in the process of completing discovery.
Presently, SupraLife is unable to evaluate the likelihood of an
unfavorable outcome or provide an estimate of potential loss. However,
based on its assessment to date, SupraLife believes it has meritorious
defenses to the claims presently asserted.
William Randoll, et al. v. SupraLife International, et al.
- ----------------------------------------------------------
San Diego Superior Court Case No. SB006644.
This is a derivative action filed on behalf of SupraLife by
minority shareholders William Randoll, Mary Wallace, Larry Wallace,
Robert Snook, Sharon Snook, Ronald Snook, Jacqueline Dreher, Steven M.
Scott, Dr. Joel Wallach, Ma Lan Wallach, Mollie Wallach and Diana Lee
Wallach. The complaint names as defendants SupraLife, and various
present and former officers and directors of SupraLife.
The complaint alleges that SupraLife's Board of Directors and
Management engaged in certain wrongful acts to the detriment of
SupraLife and the minority shareholders. In addition to the cause of
action for derivative relief, the complaint states causes of action for
breach of fiduciary duty, removal of directors, unjust
enrichment/constructive trust, involuntary dissolution and injunctive
relief.
Presently, SupraLife is unable to evaluate the likelihood of an
unfavorable outcome or provide an estimate of potential loss. However,
based on its initial assessment, SupraLife believes it has meritorious
defenses to the claims presently asserted.
RISK FACTORS OF SUPRALIFE
RECENT OPERATING LOSSES. SupraLife's net income for the years
ended December 31, 1997, 1996 and 1995 was $2.3 million, $3.1 million
and $411,000, respectively. During the six months ended June 30, 1998,
SupraLife has experienced a net loss of $977,000. The losses during
1998 are the result of the adverse impact on net sales of the
terminations in 1997 of certain key distributors, the costs of
litigation arising from these terminations, the settlement of
litigation commenced by the former executive vice-president of
SupraLife, and start-up losses from PRI and SupraLife's European
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." SupraLife has implemented an
aggressive plan to improve operating results in future periods and to
reduce costs (see "Growth") but there can be no assurance that
SupraLife will return to profitability in future periods.
DISTRIBUTOR LITIGATION. In February, 1997, SupraLife terminated
its distributorship and speaker agreements with Joel Wallach, who was a
significant spokesperson and distributor for SupraLife. Joel Wallach
is also a shareholder of SupraLife. SupraLife is currently involved in
legal proceedings with Mr. Wallach arising from the termination of
these agreements. See "Legal Proceedings." In addition, management is
aware that Joel Wallach has formed a company that has products which
are competitive with SupraLife's products. SupraLife is also aware
that Mr. Wallach has been attempting to recruit certain of SupraLife's
distributors for his new company. The termination of Mr. Wallach and
his subsequent activities have had a significant adverse impact on
results of operations for the year ended December 31, 1997 and the six
months ended June 30, 1998, through a reduction in net sales,
significant litigation costs and diversion of management resources.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Management is unable to determine whether and
to what extent these terminations or future terminations, if any, will
have an impact on SupraLife's operations beyond 1998. Management has
taken steps which are designed to mitigate the adverse effects of these
terminations (see "Growth") but there can be no assurance that these
terminations will not continue to have a material adverse effect on
results of operations.
CAPITAL REQUIREMENTS. SupraLife anticipates seeking approximately
$1,500,000 in debt or equity financing during the next six to twelve
months. SupraLife intends for the Reorganized Parent to raise the
majority of this financing after consummation of the Merger. If equity
financing is raised after the Merger, it may involve substantial
dilution to the Reorganized Parent's then-existing shareholders.
SupraLife has no current commitments or arrangements with respect to,
or readily available sources of, financing. There can be no assurance
that financing will be available to SupraLife when needed, or if
available, that it can be obtained on commercially reasonable terms.
Any inability to obtain financing when needed would require SupraLife
to curtail expansion of operations and possibly reduce current
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHORTFALL UNDER SUPPLY CONTRACT. SupraLife has entered into a ten-
year supply contract with T.J. Clark & Company ("Clark"), the supplier
of SupraLife's liquid mineral ingredients. The contract requires
SupraLife to purchase a minimum of 200,000 gallons of liquid minerals
from Clark for each of the years between 1997 and 2005 inclusive.
However, SupraLife has fallen short of such minimum quantities to date.
Specifically, SupraLife ordered approximately 97,000 gallons in 1997,
and has purchased approximately 30,000 gallons through June 30, 1998.
Management of Clark has indicated in oral discussions with management
of SupraLife that at this time Clark expects SupraLife to order based
on actual need. However, these discussions have not been reflected in
a written contract amendment, and the existing contract requires that
amendments be expressed in writing. As a result, Clark could assert a
claim for the shortfall. It is also possible that Clark would seek an
adjustment in the terms of the contract related to pricing or supply.
In light of SupraLife's discussions with Clark and the cooperative
relationship that SupraLife has had with Clark to date, SupraLife does
not believe that it will incur a loss resulting from the shortfall. If
Clark did assert a claim SupraLife cannot at this time estimate the
amount that Clark may be damaged by the shortfall. As a result,
SupraLife has not accrued a charge to income for the shortfall on its
financial statements. It remains possible, however, that the shortfall
would result in liability, and the liability, while uncertain, could be
material. Further, if a renegotiation of the contract were to occur as
a result of the shortfall, there may be a material adverse effect on
future profit margins through the imposition of a higher contract price
for the liquid minerals.
RELIANCE UPON DISTRIBUTORS; NEED FOR NEW PRODUCTS. SupraLife's
products are sold principally through a direct marketing network of
distributors. Distributors are independent contractors who purchase
products directly from SupraLife for their own use or for resale.
Distributors typically work on a part-time basis, and may engage in
other business activities not involving the sale of products offered by
SupraLife. SupraLife has a large number of distributors, and a
relatively small corporate staff to implement its marketing programs
and provide support. SupraLife's ability to retain existing
distributors and attract new distributors is critical to its continued
growth. SupraLife, like most network marketing companies, experiences
turnover in its distributors over time. Turnover is principally
through attrition, but may also occur through termination of
distributors who do not follow SupraLife's rules and procedures.
SupraLife seeks to replace inactive or terminated distributors with new
distributors, and seeks to keep existing distributors active through
new product introductions and new marketing tools for distributors.
There can be no assurance that distributors will continue to purchase
products at historical levels or that SupraLife will be able to recruit
new distributors.
RISKS ASSOCIATED WITH ALTERNATE DISTRIBUTION. SupraLife formed
FrontRunner in September, 1998, to develop and market nutritional
supplements through non-network distribution channels. SupraLife has
only limited prior experience with non-network distribution channels.
The ability of FrontRunner to become a significant revenue source for
SupraLife will depend on a number of factors, including the growth of
Curves International health club outlets and membership, the acceptance
of FrontRunner products by Curves International franchisees and members
and the ability of FrontRunner to exploit additional distribution
opportunities. There can be no assurance of a positive resolution of
any of these uncertainties. SupraLife has carefully designed its
marketing plan for FrontRunner so as to avoid as much as possible any
encroachment upon the direct marketing of SupraLife's own branded
products through network distributors. Nonetheless, some distributors
may negatively perceive FrontRunner's efforts, and any such negative
perception could lead to a reduction in the efforts of some
distributors and possible attrition of these distributors, either or
both of which could have a material adverse effect on SupraLife's
results of operations.
EXTENSIVE GOVERNMENT REGULATION. The manufacturing, processing,
formulating, packaging, labeling and advertising of SupraLife's
products are subject to regulation by one or more federal agencies,
including the United States Food and Drug Administration, the Federal
Trade Commission and the Consumer Product Safety Commission.
SupraLife's activities are also regulated by various state and local
agencies. In addition, SupraLife's direct marketing distribution
system is subject to governmental regulations generally directed at
ensuring that product sales are made to consumers of the products and
that advancement within the marketing organization is based on sales of
products rather than investments in the organization. Although
SupraLife believes that it is in substantial compliance with all such
regulations, SupraLife remains subject to the risk that, in one or more
of its present or future markets, it could be found not to be in such
compliance. Failure by SupraLife to comply with these laws or
regulations could have a material adverse effect on SupraLife.
SupraLife is unable to predict whether it will be able to comply
with any new or revised regulations or with any new legislation
relating to its activities that may be enacted. New laws or
regulations could require the reformulation of certain products to meet
new standards, the recall or discontinuance of certain products not
capable of reformulation, additional record-keeping, expanded
documentation of the properties of certain products, expanded or
different labeling, or new levels of scientific substantiation.
Failure by SupraLife to comply with all laws and regulations applicable
to its products in a timely manner could have a material adverse effect
on its business, operations and financial condition.
ABSENCE OF COMPLETED CLINICAL STUDIES AND SCIENTIFIC REVIEW;
EFFECT OF ADVERSE PUBLICITY. SupraLife has not conducted or sponsored
clinical studies on its products. SupraLife's products consist of
vitamins, minerals, herbs, lotions and other ingredients that SupraLife
regards as safe when taken or used as suggested by SupraLife. However,
because SupraLife is highly dependent upon consumers' perception of the
safety and quality of its products as well as similar products
distributed by other companies (which may not adhere to the same
quality standards as SupraLife), SupraLife could be adversely affected
in the event any of SupraLife's products, or any similar products
distributed by other companies, should prove or be asserted to be
harmful to consumers. In addition, because of SupraLife's dependence
upon consumer perceptions, adverse publicity associated with illness or
other adverse effects resulting from consumers' failure to consume
SupraLife's products as suggested by SupraLife or other misuse or abuse
of SupraLife's products or any similar products distributed by other
companies could have a material adverse effect on SupraLife's results
of operations and financial condition. Furthermore, SupraLife believes
the recent growth experienced by the nutritional supplement market is
based in part on national media attention regarding recent scientific
research suggesting potential health benefits from regular consumption
of certain minerals, vitamins and other nutritional products. Such
research has been described in major medical journals, magazines,
newspapers and television programs. The scientific research to date is
preliminary, and there can be no assurance of future favorable
scientific results and media attention, or of the absence of
unfavorable or inconsistent findings.
PRODUCT LIABILITIES. SupraLife, like other retailers,
distributors and manufacturers of products that are ingested, faces the
inherent risk of exposure to product liability claims in the event that
the use of its products results or is believed to result in injury.
SupraLife currently has $10,000,000 of product liability insurance with
a $5,000 self-insurance retention per occurrence and $50,000 self-
insurance retention in the aggregate. However, there can be no
assurance that the such insurance will continue to be available at a
reasonable cost, or if available, will be adequate to cover
liabilities.
EXPANSION INTO FOREIGN MARKETS. With the acquisition of Vitall in
1997, SupraLife has begun to expand into foreign markets including the
United Kingdom and the Netherlands. Such expansion has resulted in
substantial losses to date. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." There can be no
assurance that SupraLife will be able to operate profitably in the
United Kingdom or the Netherlands, or that it will be able to open
additional foreign markets on a timely basis or that such additional
markets will prove to be profitable. Expansion of SupraLife's
operations into new markets entails substantial working capital
requirements. SupraLife must overcome significant regulatory and legal
barriers before marketing can begin in any foreign market. It is
difficult to assess the extent to which SupraLife's products and sales
techniques will be successful in any given country. In addition to
significant regulatory barriers, SupraLife may also experience problems
related to entering new markets with different cultural bases and legal
systems from those encountered in the past.
COMPETITION. The business of designing, marketing and selling
nutritional supplements and personal care items and other products like
those offered by SupraLife is highly competitive. Numerous
manufacturers, distributors and retailers compete actively for
customers. Many of SupraLife's competitors are substantially larger
than SupraLife and have greater name recognition and financial and
marketing resources. The market is highly sensitive to the
introduction of new products that may rapidly capture a significant
share of the market. As a result, SupraLife's ability to remain
competitive depends in part upon the successful introduction of new
products. To a lesser degree, SupraLife is also subject to significant
competition from other marketing organizations for the recruitment of
distributors. SupraLife's ability to remain competitive depends, in
significant part, on SupraLife's success in recruiting and retaining
distributors. There can be no assurance that SupraLife's programs for
recruitment and retention of distributors will continue to be
successful. See "Competition."
MARKET ACCEPTANCE OF FUTURE PRODUCTS. A substantial part of
SupraLife's future growth strategy depends upon the development of new
products. However, there can be no assurance that such new products
will be developed on a timely basis and within budget, or if developed,
will meet with market acceptance or be profitable. Any new products
developed by SupraLife will likely face competition from numerous
larger health food and nutritional supplement manufacturers whose
resources are substantially greater than those of SupraLife and whose
market presence may make it difficult or uneconomic for SupraLife to
introduce new products against such competition.
DEPENDENCE ON KEY PERSONNEL. SupraLife is dependent on Peter J.
Holliday, SupraLife's Chairman of the Board and Chief Executive
Officer. The loss of the service of Mr. Holliday could have a material
adverse effect on SupraLife. SupraLife has two-year consulting
agreements with an entity affiliated with Mr. Holliday which commenced
on February 1, 1998, and a two-year director compensation agreement
with Mr. Holliday which commenced on February 1, 1998. See "Employment
and Consulting Agreements of SupraLife." The continued success of
SupraLife is also dependent upon its ability to attract and retain
other highly qualified executive personnel. There can be no assurance
that SupraLife will be able to recruit and retain such personnel.
DEPENDENCE ON KEY MANUFACTURERS AND SUPPLIERS AND AVAILABILITY OF
RAW MATERIALS. While SupraLife currently manufactures most of its core
products, it purchases some of its other products from several contract
manufacturers to which SupraLife has outsourced the products'
manufacture. SupraLife currently obtains the minerals used in its
products from T.J. Clark & Company pursuant to a ten-year agreement
that expires on December 31, 2005. See Risk Factor entitled "Shortfall
Under Supply Contract." Although SupraLife believes that alternative
sources of manufacture and supply for its products are available, an
unexpected or prolonged interruption in the supply of one or more
products from its key manufacturers and suppliers could be disruptive
to SupraLife's operations and have a material adverse effect on
SupraLife.
INTELLECTUAL PROPERTY PROTECTION. SupraLife's trademarks are
valuable assets which are very important to the marketing of its
products. SupraLife's policy is to pursue federal registrations for
all of the trademarks associated with its key products. SupraLife does
not, however, have federal trademark registrations for a number of its
trademarks. See "Trademarks and Service Marks" above. SupraLife
relies on common law trademark rights to protect its unregistered
trademarks. Common law trademark rights do not provide SupraLife with
the same level of protection as would U.S. federally registered
trademarks. In addition, common law trademark rights may extend only
to the geographic area in which the trademark is actually used, while
U.S. federal registration prohibits the use of the trademark by any
third party anywhere in the United States. There can be no assurance
that SupraLife's trademarks will not be challenged by third parties
seeking cancellation of registered marks or seeking to prevent the use
of common law marks.
OTHER PROPRIETARY RIGHTS. SupraLife claims proprietary rights in
most of its products and formulations. SupraLife's products or
formulations are not patentable, and SupraLife instead relies on a
combination of trade secret laws and nondisclosure and other
contractual provisions to protect its various proprietary rights.
These safeguards may not prevent competitors from imitating SupraLife's
products and formulations or from independently developing similar
products and formulations. SupraLife believes that its proprietary
rights do not infringe the proprietary rights of third parties. There
can be no assurance, however, that third parties will not assert such
infringement by SupraLife with respect to current or future products or
formulations. Any such claim, with or without merit, could be time
consuming, result in costly litigation, cause product release delays or
require SupraLife to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on
terms acceptable to SupraLife.
FLUCTUATIONS IN MARGINS. Under SupraLife's distribution
compensation plan, a distributor who fails to maintain requisite
minimum monthly purchases loses its right to participate in commissions
from sales made by other distributors sponsored by that distributor.
Such a failure to maintain distributor status would result in SupraLife
temporarily achieving a greater profit margin on products sold by the
sponsored distributors. Conversely, a distributor who reinstates its
status by purchasing the minimum required products would resume
receiving its commissions, thus adversely affecting SupraLife's profit
margins by increasing SupraLife's commission expense. These effects
could result in periodic and unpredictable fluctuations in SupraLife's
profit margins.
EFFECT OF EXCHANGE RATE FLUCTUATIONS. Because SupraLife's
international sales have to be denominated in the local currency,
exchange rate fluctuations may have a significant effect on its sales
and gross margins. Further, if exchange rates fluctuate dramatically,
it may become uneconomical for SupraLife to establish or continue
activities in certain countries.
CONTROL BY MANAGEMENT. SupraLife's officers and directors as a
group beneficially own approximately 35% of the outstanding shares of
SupraLife Common Stock (excluding options) and, after the Merger, will
own 26% of the Reorganized Parent. These stockholders may under
certain circumstances possess the ability to elect all of the directors
of the Reorganized Parent and generally will be able to exert
substantial control over the business and operations of SupraLife. See
"Stock Ownership of Certain Principal Shareholders and Management."
SELECTED FINANCIAL DATA OF SUPRALIFE
The following table sets forth selected financial data of
SupraLife for the periods indicated. This table should be read in
conjunction with the financial statements and notes appearing elsewhere
in this Proxy Statement.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1998 1997 1997 1996 1995 1994 1993
------------ ----------------------------------
(Unaudited) (Unaudited for 1993)
In thousands, except
per share data
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $7,950 $18,813$29,113 $33,331 $10,478 $3,457 $1,316
Cost of sales 1,893 4,380 6,408 6,889 1,999 See(3) 253
Commissions
and incentives 2,528 6,292 9,309 14,137 4,322 See(3) 417
Selling, general and
administrative 4,660 4,606 9,587 7,180 4,026 1,647 614
Income (loss) from
operations (1,451) 3,535 3,809 5,126 131 (33) (23)
Net income
(loss) (1) $(978) $2,194 $2,315 $3,130 $411 $(70) $(49)
Basic earnings
(loss) per
share (2) $(0.10) $0.22 $0.23 $0.31 $0.05 $0.10 $(0.01)
</TABLE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1998 1997 1996 1995 1994 1993
------------ ----------------------------------
In thousands (Unaudited) (Unaudited for 1993)
<S> <C> <C> <C> <C> <C> <C>
Total assets $4,665 $5,146 $6,376 $1,800 $647 $617
Long term
obligations 733 547 49 39 52 167
Total shareholder's
equity (deficit) 801 2,079 1,406 (556) (211) 164
Dividends per
share (2) $0 $0.18 $0.05 $0.04 $0 $0
</TABLE>
(1) SupraLife was a Subchapter S corporation until August 1995.
Accordingly, provisions for income tax are not included in net loss for
1993 and 1994, and the tax benefit for 1995 included in net income for
that year is for the last five months of that year.
(2) On March 29, 1996 and December 20, 1996, SupraLife declared a 15
for 1 and a 3 for 1 stock split, respectively. All per share data shown
in this table gives effect to these stock splits. In 1997, SupraLife
adopted SFAS No. 128 concerning the calculation of basic earnings per
share. All earnings per share for prior years have been restated to
conform to these new standards.
(3) For the year ended December 31, 1994, cost of sales was
$1,844,000, which included commissions and incentives. Commission and
incentives were not reported separately.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
SupraLife International and its subsidiaries develop, manufacture
and distribute preventive health, personal care and sports & fitness
products. SupraLife International and its subsidiaries market products
in the United States and Europe principally through a network of
independent distributors who use the products themselves or resell them
to other distributors or consumers. SupraLife International's active
operating subsidiaries consist of SupraLife (the "Operating
Subsidiary," formerly known as Soaring Eagle Ventures, Inc.), which
conducts substantially all U.S. marketing network sales and
distribution operations; FrontRunner Nutrition ("FrontRunner") formed
in September, 1998, which develops and markets products for alternate
distribution markets; SupraLife International, Ltd. and SupraLife
International B.V., European network marketing companies which began
operations in June, 1997; Proven Results, Inc., which specializes in
weight loss seminars; and Natureceutical International, Inc., which
manufactures SupraLife's top selling liquid products. The
contributions to net sales from subsidiaries other than the Operating
Subsidiary have not been significant to date.
Most of SupraLife's revenues are derived from the sale of consumer
products to distributors and preferred customers. SupraLife also
receives revenues from the sale of business support materials to
existing distributors and from distributor and preferred customer sign-
up and renewal fees. These fees entitle distributors to participate in
SupraLife's commission program and entitle preferred customers to
purchase products at wholesale prices. SupraLife recognizes revenues
for products and support materials when shipped and for renewal fees
when received.
SupraLife's net sales are directly dependent upon the efforts of
distributors and the personal consumption of SupraLife products by
distributors and preferred customers. Net sales are also affected by
product mix, pricing, product improvements, quality and competition.
Cost of sales for SupraLife's liquid products manufactured at the
Natureceutical facility include labor, materials and overhead cost
incurred to produce the products. The remainder of SupraLife's
products are purchased directly from contract manufacturers and
accordingly, the purchase price is recorded as cost of sales when the
product is sold. In addition, cost of sales includes costs incurred at
SupraLife's distribution center. The most significant costs for the
distribution center are labor, rent, shipping materials and shipping
charges. Shipping costs are only partially offset by shipping charges
to distributors and customers, and represent a high cost in the
aggregate due to the relatively small amount of the average order.
SupraLife's most significant expense is commissions and
incentives, which are paid to a distributor based on the purchase
volume of that distributor and of other "downline" distributors
recruited by that distributor.
Selling, general and administrative ("SG&A") expense includes
marketing costs as well as corporate staff, customer service and
support staff costs. SupraLife's marketing efforts on behalf of its
distributors include providing educational and recruiting materials,
providing experts in nutrition and network marketing, an annual
convention, special travel rewards for top distributors and promotional
advertising. Other significant SG&A costs include legal and accounting
fees, other professional and consulting fees, insurance, credit card
processing fees, utilities and occupancy costs.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the relative
percentages that certain income and expense items bear to net sales:
<TABLE>
<CAPTION
Six Months Ended
June 30, Years Ended
1998 1997 1997 1996 1995
---- ---- ----------------------
<S> <C> <C> <C> <C> <C>
Net sales 100% 100% 100% 100% 100%
Cost of sales 24 23 22 21 19
Commissions &
Incentives 32 33 32 42 41
Selling, general
& administrative 59 24 33 22 38
Income (loss) from
operations (18) 19 13 15 1
Net income (loss) (12) 12 8 9 4
</TABLE>
Net sales
SupraLife reported net sales of $29,112,646 and $33,331,020 for
the years ended December 31, 1997 and 1996, respectively, and
$7,949,828 and $18,813,390 for the six months ended June 30, 1998 and
1997, respectively. The respective decreases in net sales over each
comparative period are primarily the result of management's decision to
terminate the distribution agreements of certain of SupraLife's largest
distributors. Concurrently, SupraLife terminated the speaking
agreement of one of these distributors. This distributor's efforts
under the speaking agreement had been a significant recruiting and
motivational vehicle for many of SupraLife's distributors. The
terminations occurred primarily in the first and second quarters of
1997 and accordingly have impacted net sales in the last six months of
1997 and the first six months of 1998. Management's decision was based
on the belief that these distributors represented a significant
business risk due to their lack of compliance with company policies and
procedures.
Net sales for the years ended December 31, 1996 and 1995 were
$33,331,020 and $10,477,803, respectively. The increase in net sales
was a result of significant distributor recruiting brought about by the
introduction of distributor training programs, motivational speakers
and new marketing tools, and the introduction of the Ultra Body Toddy
product in mid-1995, which became SupraLife's top selling product in
1996. Finally, SupraLife significantly upgraded its customer service
by, among other things, increasing staff to handle phone calls and
reducing the time required to ship orders.
Cost of sales
Cost of sales was $6,407,504 and $6,888,508 for the years ended
December 31, 1997 and 1996, respectively. For the six months ended
June 30, 1998 and 1997, cost of sales was $1,893,043 and $4,380,247,
respectively. Cost of sales for the year ended December 31, 1996
represented an increase of $4,889,964 over the $1,988,544 cost of sales
reported for the year ended December 31, 1995. In each case, the
changes in cost of sales were proportional to the changes in net sales
over the respective periods.
Commissions and incentives
Commissions and incentives were $9,308,846 and $14,136,553, or 32%
and 42% of net sales, respectively, for the years ended December 31,
1997 and 1996. For the six month periods ended June 30, 1998 and 1997,
commissions and incentives were $2,528,033 and $6,292,244, or 32% and
33% of net sales, respectively. The absolute decreases were primarily
a result of the reductions in net sales. The decreases as a percentage
of net sales were related to the refinement of SupraLife's commission
structure and due to fewer distributors meeting the volume requirements
necessary to qualify for upper level incentives and bonuses of
SupraLife's compensation plan.
Commissions and incentives were $14,136,553 and $4,322,270, or 42%
and 41% of net sales, for the years ended December 31, 1996 and 1995,
respectively. The absolute increase was a result of higher net sales,
and the slight increase as a percentage of net sales was a result of
certain individual distributor volumes increasing to levels that
allowed distributors to earn upper level bonuses.
Selling, general and administrative
For the years ended December 31, 1997 and 1996, selling, general
and administrative expense was $9,587,137 and $7,179,742, which
represented 33% and 22% of net sales, respectively. The increase was
primarily a result of approximately $575,000 in expenses incurred in
start up operations for SupraLife's European subsidiaries and
approximately $290,000 in expenses for PRI. Because European
operations began in June, 1997 and PRI began operations in July, 1997,
there were no expenses incurred for these operations in 1996.
SupraLife also incurred significant legal costs in 1997 in defense of
litigation resulting from the termination of distributor agreements and
for legal compliance with industry regulations. Additionally,
SupraLife significantly increased marketing expenses by adding
marketing staff, initiating customer mailings and adding new marketing
tools. These expenditures were part of SupraLife's ongoing effort to
counteract the effects of the distributor terminations. Finally, the
upgrade of the customer service and computer systems resulted in
increased staffing, depreciation and support costs.
For the six months ended June 30, 1998, selling, general and
administrative expense was $4,660,113, which represented 59% of net
sales. For the corresponding period in 1997, selling, general and
administrative expense was $4,605,621, which represented 24% of net
sales. SG&A for the 1998 period reflected expenses incurred in the
European operations of approximately $620,000 and expenses incurred by
PRI of approximately $310,000. These operations had no significant
impact during the first six months of 1997. Litigation costs also
increased during the 1998 period as compared to the 1997 period due to
additional legal actions filed against SupraLife and increased usage of
outside counsel as certain matters neared trial or arbitration dates.
SupraLife also continued its investment in marketing and distributor
support through additional mailings, the creation of new packaging and
promotional literature, the release of new audio and video tapes, its
first distributor cruise and other promotional activities. In
addition, staffing levels for the first six months of 1998 remained at
1997 levels despite decreased sales. The increases in SG&A expense
during the 1998 period were only partially offset by reductions in
bonuses, credit card processing fees, and other expenses closely tied
to the level of net sales. The combination of these effects caused
SG&A expense to represent a significantly greater percentage of net
sales for the six months ended June 30, 1998 as compared with the six
months ended June 30, 1997.
For the years ended December 31, 1996 and 1995, selling, general
and administrative expense was $7,179,742 and $4,025,502, which
represented 22% and 38% of net sales, respectively. The absolute
increase was primarily a result of stepped up operations to support
rapidly increasing sales, while the decrease as a percentage of net
sales reflected greater economies of scale from increased sales.
Net income (loss)
Net income for the year ended December 31, 1997 was $2,314,624
compared to $3,130,419 for the year ended December 31, 1996. The 26%
decrease was due primarily to the operational factors discussed above.
Net loss for the six months ended June 30, 1998 was $977,674, compared
with net income of $2,194,093 during the six months ended June 30,
1997. The change was primarily a result of (i) the operational factors
discussed above, (ii) the effect of a one-time charge for a legal
settlement of litigation with the former Executive Vice-President of
SupraLife in the amount of $320,000, and (iii) a net interest expense
resulting primarily from capital lease interest and a reduction in
interest income due to a decrease in cash on hand. The change was
partially offset by a $505,000 benefit booked for income taxes in the
1998 period, as a carry-back claim, compared with a $1,463,000
provision for income taxes booked in the 1997 period.
Net income for the years ended December 31, 1996 and 1995 was
$3,130,419 and $411,002. The increase was due to greatly increased net
sales and a substantial decrease of SG&A expense as a percentage of net
sales, partially offset by a $2,193,000 provision for income tax
including in the 1996 period. SupraLife was a Subchapter S corporation
until August 1995, and the benefit for income tax of $179,141 booked
for the 1995 period reflects only the last five months of that year.
MANAGEMENT'S STRATEGY TO IMPROVE RESULTS OF OPERATIONS
Cost reductions
During the last six months of 1997 and the first six months of
1998, SupraLife invested heavily in promotion and other expenses for
its newly acquired operations in the United Kingdom and the
Netherlands. In addition, PRI began operations in July, 1997. PRI has
required a significant investment of funds, but has not generated
significant revenues to date. Additionally, the continuing effects of
the termination of distributors has both decreased net sales and
increased litigation costs.
With a view toward improving the results of operations during
future periods, management has determined to slow the investment in
international expansion and in PRI until either these operations can be
funded from revenue generated by them, or until investment capital is
available to help grow these operations. Additionally, PRI has
significantly reduced its cost structure and will begin coordinating
its marketing efforts with the Operating Subsidiary's network marketing
operations to provide products and services that benefit both companies
while reducing duplicative costs. In addition to reducing costs in its
start up operations, management has reduced its number of employees by
approximately 20%.
SupraLife management expects that the foregoing cost reduction
measures will significantly reduce losses during the last six months of
1998, and is hopeful that, if net sales increase, SupraLife operations
will be profitable beginning in the second quarter of 1999.
Changes in management
In August, 1998, Peter J. Holliday, who was serving as Chairman of
the Board, agreed to reassume the position of Chief Executive Officer
of SupraLife. Mr. Holiday served as Chief Executive Officer of
SupraLife from 1992 through 1996, during which time SupraLife grew from
annual revenues of approximately $1.3 million in 1993 to annual
revenues of $33.3 million in 1996. SupraLife also appointed Bryan
Noar, an experienced multi-level marketing executive, as President of
the Operating Subsidiary. Mr. Noar was previously Vice President:
Training and Development of the Operating Subsidiary. SupraLife also
reassigned several other persons to marketing and distributor support
positions. In connection with these changes, SupraLife restructured
the compensation packages for its senior executives to include
increased bonuses based upon sales or operating income.
SupraLife hopes that these changes in management and executive
compensation will lead to increased sales through improved focus on
domestic distributors and better incentives for management performance.
The restructured executive compensation packages are estimated to
result in increased compensation expense in future periods of
approximately $206,000 per year based upon sales levels for the first
six months of 1998. Net compensation expense for the last six months
of 1998 is nonetheless expected to decrease as a result of the staffing
cuts discussed above. Because several senior executives earn bonuses
based on sales or operating income, compensation expense may increase
in future periods if net sales increase or SupraLife has positive
income from operations. See "Employment and Consulting Agreements of
SupraLife."
Expansion of distribution channels
In September, 1998, SupraLife formed FrontRunner to develop and
market nutritional supplements for alternate distribution channels
within the nutritional supplement market. FrontRunner currently has a
two-year contract to supply three sports nutrition products to Curves
International. See "Marketing Strategy." Although Curves
International is not required to purchase a minimum quantity of
products under the agreement, SupraLife expects this supply contract to
result in significant net sales.
FrontRunner intends to seek additional distribution opportunities,
although no such opportunities have been identified, and no new
FrontRunner products are under development at this time.
Litigation
Unless out of court settlements are reached, the litigation facing
SupraLife is expected to continue until at least the first quarter of
1999. Accordingly, the current level of legal expenses for litigation
will continue and most likely increase until these matters are settled
or resolved.
Forward looking statements
Much of the discussion in this section consists of forward looking
statements. These statements are subject to a number of risks and
uncertainties, including those discussed elsewhere in this Proxy
Statement. In particular, there can be no assurance that SupraLife
will be successful in improving sales through its distributor network
or in expanding into new marketing and distribution channels. The
amount of net sales generated from FrontRunner's supply contract with
Curves International will depend on the growth of Curves International
outlets and membership, and the acceptance of FrontRunner's products by
Curves International franchisees and members. There can be no
assurance that new management will be successful in its attempts to
increase the involvement and interest of distributors. Moreover, there
can be no assurance that the ongoing litigation matters will not
further depress net sales, that such matters will reach trial or
arbitration according to schedule, or that such litigation will not
result in adverse determinations against SupraLife which would have a
material adverse impact on future results of operations. SupraLife's
ability to reduce losses and to become profitable in future periods
will depend not only on new management's efforts, but also on the
actions of competitors, on the continuing viability of network
marketing as a distribution channel, and on market conditions for
nutritional and personal care products. Accordingly, there can be no
assurance that losses will in fact be reduced or that SupraLife will
return to profitability in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
SupraLife had cash of $506,970 and $1,444,471 as of June 30, 1998
and 1997, respectively. The decrease in cash was primarily a result of
losses from operations as well as principal payments made on capital
leases. Similarly, cash for the years ended December 31, 1997 and 1996
was $1,444,471 and $3,423,361, respectively. The decrease was
primarily a result of $1,787,053 paid in dividends to SupraLife's
shareholders and $376,882 of cash used in investing activities such as
the purchase of Vitall, partially offset by cash generated by operating
activities of $206,174.
Cash at December 31, 1995 was $691,358 compared with $3,423,361 at
December 31, 1996. The increase was primarily due to cash generated by
operating activities partially offset by cash used for purchase of
fixed assets and cash used for payment of dividends and the repurchase
of common stock.
SupraLife is actively pursuing investment capital, and hopes to
receive approximately $1.5 million during the next twelve months. If
SupraLife is successful in raising financing, it plans to use such
funds for marketing activities to grow the domestic sales network, to
explore new marketing and distribution opportunities, for general
working capital, and for the continued funding of PRI and international
operations. SupraLife currently has no firm commitments for financing,
and such financing may not be available on terms acceptable to
management, or available at all.
In the event cash flows from operations are not sufficient to
cover operating expenses, or in the event financing is unavailable on
terms acceptable to management, management plans to further reduce
costs, including international operations and PRI and, if necessary,
salary expense and other selling, general and administrative costs.
Management believes that these actions would result in sufficient
liquidity to continue operating for at least the next twelve months.
However, these cost reduction measures, if implemented, could adversely
affect future growth opportunities.
SupraLife expects from time to time to evaluate strategic
acquisitions which may complement its business. Depending on the
particular opportunities and SupraLife's liquidity and capital
position, SupraLife may finance such acquisitions with cash flow from
operations, by issuing securities to the acquisition targets or their
shareholders, or through outside financings such as bank loans or the
public or private sales of securities. SupraLife, however, has no
present understanding, commitment or agreement with respect to any
acquisition other than the Merger. There can be no assurance that, if
another merger or acquisition opportunity is presented, the Reorganized
Parent will have access to the necessary funds or otherwise be in a
position to effect such a transaction.
YEAR 2000 ISSUES
SupraLife installed a new management information system in 1998
which is year 2000 compliant. This system is currently integrated with
an accounting package which has been in use for several years and which
may not be year 2000 compliant. SupraLife plans to upgrade the
accounting software in late 1998 or early 1999 to a system which will
be year 2000 compliant. Management estimates the cost of the new
system will be between $80,000 and $100,000. Management cannot
presently estimate to what extent, if any, year 2000 problems may
indirectly affect the company, such as through interruption of
supplies, credit card billing errors, or the effect on the economy as a
whole as a result of year 2000 problems.
BUSINESS OF REORGANIZED PARENT
THE FOLLOWING DISCUSSION OF THE PRINCIPAL BENEFITS AND RISKS
ANTICIPATED TO RESULT FROM THE MERGER INCLUDES CERTAIN FORWARD LOOKING
STATEMENTS. WHEN USED IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN
THIS PROXY STATEMENT, THE WORDS "ESTIMATE," "ANTICIPATE," "INTEND,"
"EXPECT," AND SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD LOOKING
STATEMENTS THAT RELATE TO THE FUTURE PERFORMANCE OF THE REORGANIZED
PARENT AND ITS SUBSIDIARIES, NEW 1MAGE SOFTWARE LLC AND SUPRALIFE
INTERNATIONAL, AND SHOULD NOT BE TAKEN AS FACT. READERS ARE STRONGLY
URGED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD LOOKING STATEMENTS.
NEITHER IMAGE NOR SUPRALIFE UNDERTAKES ANY OBLIGATION TO PUBLICLY
UPDATE OR REVISE ANY OF THE FORWARD LOOKING STATEMENTS CONTAINED IN
THIS PROXY STATEMENT.
The primary purpose of this Merger is to enable the shareholders
of the Reorganized Parent to realize greater value from their current
investments in 1mage and SupraLife, respectively. 1mage Shareholders
will be provided with the benefits of economics of scale that will
result from being part of a larger company. The Merger is also
expected to provide 1mage with the financial resources necessary to
satisfy Nasdaq's quantitative listing standards, and thereby facilitate
the liquidity and related benefits of having its shares listed on
Nasdaq. The Reorganized Parent will also continue 1mage's existing
line of business and supplement it with the marketing expertise of
SupraLife. 1mage believes that its underlying technology and business
model is sound and will ultimately serve its Shareholders well. Other
benefits of the Merger to Shareholders could include additional
marketing opportunities for 1mage resulting in access to the broader
marketing resources of SupraLife, better access to capital and greater
growth potential. It is anticipated that the respective technology,
distribution channels, facilities, industry contacts and personnel of
1mage and SupraLife may in the future be utilized in a complementary
manner so as to maximize the respective strengths of each organization.
Although the Company believes that the Merger is in the best interests
of the Company and its Shareholders, there can be no assurance that all
or any of the anticipated benefits of the Merger will be realized when
and as contemplated, if at all.
Following the Merger, the business and operations of the
Reorganized Parent will be significantly different from those of 1mage
presently as a result of the addition of SupraLife. The Reorganized
Parent and its subsidiaries intend to target their products to a
variety of market segments, such as mass distribution to consumers, and
direct marketing to affinity groups and commercial entities, using the
respective experience of SupraLife and 1mage to support and enhance
these separate initiatives. Specifically, the Reorganized Parent
intends to utilize SupraLife's existing marketing resources to
increase, subject to customer demand, the sales contacts domestically
and internationally for New 1mage. However, the Reorganized Parent's
ability to implement its operating and growth strategies is subject to
a number of factors, many of which are beyond its control, and there
can be no assurance that the Reorganized Parent will be able to
successfully implement such strategies.
The Executive Officers of the Reorganized Parent will be as
follows: Peter J. Holliday, Chief Executive Officer, David R. DeYoung,
President of New 1mage, Bryan Noar, President of the Operating
Subsidiary, and R. Stephen Leisenring, Chief Financial Officer and Vice
President: Operations & Finance. The directors of the Reorganized
Parent will be as follows: Peter J. Holliday, Dann V. Angeloff and
William T. Walker, Jr. (the nominees for appointment as Directors by
SupraLife), and David R. DeYoung and Robert Wiegand II, two of the five
current Directors of 1mage. See "Directors, Director Nominees and
Executive Officers of the Company."
A vote for approval and adoption of the Merger Agreement will be
deemed to constitute a vote FOR appointment in favor of each of the
persons designated by SupraLife to serve as a director of Reorganized
Parent.
RISK FACTORS
Ownership of 1mage Common Stock and the business to be conducted
by the Reorganized Parent after the Merger involve certain risks,
including, but not limited to, risks associated with combining the two
companies. See "Risk Factors of SupraLife" above and "Risk Factors of
1mage" below.
COMPARATIVE RIGHTS OF 1MAGE SHAREHOLDERS AND SHAREHOLDERS OF THE
REORGANIZED PARENT
At the Effective Time, SLM will be merged into SupraLife which
will, as a result thereof, become a wholly owned subsidiary of the
Reorganized Parent. The Articles of Incorporation and Bylaws of
SupraLife will be the same as those currently in effect for SupraLife.
With the exception of (i) a corporate name change from "1mage Software,
Inc." to "SupraLife International, Inc.", and (ii) the proposed
increase in the number of authorized shares from 10,000,000 to
50,000,000 shares of Common Stock, the Articles of Incorporation and
Bylaws of the Reorganized Parent will be the same as those currently in
effect. As such, the rights of 1mage Shareholders as provided by
applicable state laws and the Reorganized Parent's Articles of
Incorporation and Bylaws will be virtually unchanged as a result of the
Merger. Notwithstanding the foregoing, the Merger will result in a
change of control of the Company and, as such, 1mage Shareholders will,
in the aggregate, hold a minority position and will generally not be
able to control the election of directors or other significant
corporate actions.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Balance
Sheet has been prepared based on the unaudited historical condensed
consolidated balance sheets of SupraLife and 1mage as of June 30, 1998,
and gives effect to the Merger as if it had occurred as of June 30,
1998. The following Unaudited Pro Forma Condensed Consolidated
Statements of Operations for the six months ended June 30, 1998 and for
the year ended December 31, 1997, give effect to the Merger as if it
had occurred as of January 1, 1997. Pro Forma adjustments are
described in the accompanying notes. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations are not necessarily indicative of
the actual results of operations that would have been reported had the
Merger been consummated as of January 1, 1997, nor do they purport to
indicate the results of future operations of the combined companies.
Furthermore, the pro forma results do not give effect to any cost
savings or incremental costs which may occur as a result of the Merger.
In the opinion of management, all adjustments necessary to present
fairly such pro forma financial statements have been made. The Merger
has been accounted for using the purchase method of accounting.
PRO FORMA CONDENSED
CONSOLIDATING BALANCE SHEET
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS: Pro Forma Pro Forma
1mage SupraLife Adjustment Consolidated
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and short-term
investments $ 125,375 $ 506,970 $ - $ 632,345
Accounts receivable 345,588 345,588
Inventory 94,122 443,397 537,519
Prepaid and deferred
taxes - 1,035,128 1,035,128
Prepaid expenses
and other 8,951 481,477 490,428
---------- ---------- -------- ----------
Total current
assets 574,036 2,466,972 - 3,041,008
Related party notes
receivable - 495,832 495,832
Property & equipment 120,331 1,306,252 1,426,583
Software development
costs 793,791 793,791
Goodwill 80,678 218,303(3) 298,981
Other assets 70,089 315,241 385,330
---------- ---------- -------- ----------
TOTAL ASSETS $1,558,247 $4,664,975 $218,303 $6,441,525
========== ========== ======== ==========
LIABILITIES & SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Line of credit $ 131,483 $ - $ - $ 131,483
Accounts payable 259,059 747,976 - 1,007,035
Accrued expenses 219,041 1,111,475 125,000(3) 1,455,516
Commissions and
incentives payable - 1,034,889 - 1,034,889
Other 21,325 235,458 - 256,783
---------- ---------- -------- ----------
Total current
liabilities 630,908 3,129,798 125,000 3,885,706
Obligations under
capital lease
& other 7,317 733,764 - 741,081
Convertible notes
payable to related
parties 150,000 - - 150,000
SHAREHOLDERS' EQUITY
Common stock 8,599 1,226,450 (1,199,801)(2) 35,248
Paid in capital 6,852,435 - (4,797,908)(1,2) 2,054,527
Stock subscription
notes receivable (970,713) - (970,713)
Retained earnings (6,091,012) 545,676 6,091,012(1) 545,676
---------- ---------- --------- ----------
Total shareholders'
equity 770,022 801,413 93,303 1,664,738
---------- ---------- -------- ----------
$1,558,247 $4,664,975 $218,303 $6,441,525
========== ========== ======== ==========
</TABLE>
PRO FORMA CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
For the Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
1mage SupraLife Adjustments Consolidated
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $825,740 $7,949,828 $8,775,568
OPERATING EXPENSES:
Cost of sales 396,297 1,893,043 2,289,340
Commissions and
incentives - 2,528,033 2,528,033
Selling, general &
administrative 559,247 4,660,113 10,913(3) 5,230,273
Legal settlement 320,000 320,000
---------- ---------- -------- ----------
Total operating
expenses 955,544 9,401,189 10,913 10,367,646
---------- ---------- ---------- ----------
(Loss) from
operations (129,804 )(1,451,361) (10,913) (1,592,078)
INTEREST INCOME
(EXPENSE) AND
OTHER, NET (15,006) (31,313) (46,319)
---------- ---------- ---------- ----------
(LOSS) BEFORE
PROVISION FOR
INCOME TAXES (144,810)(1,482,674) (10,913) (1,638,397)
(BENEFIT) FOR INCOME
TAXES - (505,000) (505,000)
---------- ---------- ---------- ----------
Net Income (Loss) $(144,810) (977,674) (10,913) $(1,133,397)
========== ========== ========== ==========
EARNINGS PER SHARE:
Net Income (Loss) $(0.07) $(0.10) $ - $(0.13)
====== ====== ======= ======
Weighted avg # of
common shares 2,142,414 9,821,746 (3,212,689) 8,751,471
========== ========== ========== ===========
</TABLE>
PRO FORMA CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
December 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
1mage SupraLife Adjustments Consolidated
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $1,808,791 $29,112,646 $30,921,437
OPERATING EXPENSES:
Cost of sales 917,988 6,407,504 7,325,492
Commissions and
incentives - 9,308,846 9,308,846
Selling, general &
administrative 1,354,469 9,587,137 21,830(3) 10,963,436
---------- ---------- -------- -----------
Total operating
expenses 2,272,457 25,303,487 21,830 27,597,774
---------- ---------- -------- -----------
Income (loss)
from operations (463,666) 3,809,159 (21,830) 3,323,663
INTEREST INCOME
(EXPENSE) AND
OTHER, NET (6,593) 72,122 65,529
---------- ---------- -------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR
INCOME TAXES (470,259) 3,881,281 (21,830) 3,389,192
PROVISION FOR
INCOME TAXES 5,000 1,566,657 1,571,657
---------- ---------- -------- -----------
Net Income
(Loss) $ (475,259) $2,314,624 (21,830) $1,817,535
========== ========== ========= ===========
EARNINGS PER SHARE:
Net Income
(Loss) $(0.22) $0.23 $ - $0.21
====== ===== ===== =====
Weighted avg #
of common
shares 2,146,331 9,928,065 (3,319,008) 8,755,388
========== ========== ========= ==========
</TABLE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(1) To eliminate the results of operations of 1mage prior to the
acquisition
(2) To reflect the exchange of SupraLife common stock for 1mage common
stock
(3) The Merger will result in $218,000 in goodwill, representing the
difference between the acquisition price for 1mage (including
acquisition cost) of approximately $796,000 and the net assets
acquired of $578,000. The goodwill recorded will be amortized
over a ten-year period.
RISK FACTORS OF 1MAGE
UNCERTAINTY OF FUTURE REVENUES. One of the primary benefits 1mage
anticipates to result from the Merger is an increase in total revenues.
However, recent decreases in revenues at SupraLife raise questions
about the ability of the Reorganized Parent to sustain the existing
revenues of the two entities before the Merger and provide the
anticipated level of financial strength.
RELIANCE ON TRADE SECRET AND COPYRIGHT LAWS. 1mage regards its
software as proprietary and relies for protection upon trade secret and
copyright laws and non-disclosure agreements with its employees as well
as restrictions on disclosure and transferability contained in its
software license agreements with its customers. Despite these
restrictions, it may be possible for competitors or customers to copy
aspects of 1mage's products or obtain information that 1mage regards as
proprietary. Furthermore, there can be no assurance that others will
not independently develop software products similar to those developed
or planned by the Company. Although 1mage believes its software does
not infringe on the proprietary rights of others and has not received
any notice of claimed infringement, it is possible that portions of the
software marketed by 1mage could be claimed to infringe on existing
proprietary rights. In the unlikely event that any such infringements
are found to exist, there can be no assurance that any necessary
licenses or rights could be obtained, or could be obtained on terms
satisfactory to 1mage. Further, in such event, 1mage could be required
to modify the infringing software. There can be no assurance that the
Company would be able to do so in a timely manner, upon acceptable
terms and conditions, or at all. The failure to do so could have a
material adverse effect on the Company.
DEPENDENCE ON SUPPLIERS. The success of 1mage's business may
depend in part upon the reliability of the Company's suppliers of
subcomponents and raw materials. The Company is subject to the risks
of shortages and delays in delivery of subcomponents and such
materials. There can be no assurance that the Company will continue to
be able to locate reliable secondary sources of these subcomponents and
materials.
DEPENDENCE ON KEY MANAGEMENT AND EMPLOYEES. Like SupraLife, 1mage
is highly dependent upon the efforts of its management for its success.
The loss of the services of one or more of its key officers,
particularly David R. DeYoung, President and Chief Executive Officer,
could have a material adverse effect on the Company's business. After
the Merger, Mr. DeYoung will be employed pursuant to an employment
agreement which will expire in August of 2003. The Company maintains
"key man" life insurance on the life of Mr. DeYoung in the amount of
$1,000,000. The success of the Company also depends upon the Company's
ability to attract and retain other qualified personnel. The
competition for qualified personnel in the computer software industry
is intense. Accordingly, there can be no assurance that the Company
will be able to continue to hire or retain such personnel.
TECHNOLOGICAL OBSOLESCENCE. The computer software industry has
been characterized by significant and rapid technological changes. The
ability of 1mage to compete successfully in the future will depend in
large part on its ability to adapt to technological changes in the
industry and develop products that meet the changing needs of its
customers. While 1mage believes that its software products are
currently competitive, future demand for 1mage's software products will
depend on its ability to enhance and improve existing products and
successfully develop and market new products. There can be no
assurance that competitors will not develop technology or introduce
software or systems that render 1mage's systems and software products
obsolete or less marketable or that 1mage will be able to successfully
enhance its existing products or develop new products.
COMPETITION. 1mage experiences competition in its business from
competitors who target one or more of the same markets or market
segments. Software and systems that perform many of the same functions
as 1mage's systems and software are readily available from a number of
competitors of 1mage, some of which are larger and have greater
financial, technical, marketing and other resources than 1mage. 1mage
believes that the principal factors affecting a prospective customer's
choice of a system are the database it uses, performance, service and
price. 1mage believes that usage of the popular UNIX based operating
system and the Multi-Value RDBMS has strengthened 1mage's competitive
position by making 1mage's software compatible with more types of
hardware and Multi-Value application software offered by Multi-Value
software developers and system integrators. 1mage further believes
that its principal advantage over its competitors is its utilization of
a UNIX based open systems architecture and the Multi-Value RDBMS which
can be offered at lower prices. Nevertheless, 1mage's estimation of
its own technical and marketing advantages over its competitors may
prove inaccurate and its efforts to compete in the computer software
industry may ultimately be unsuccessful.
LIMITED MARKETS. 1mage's reseller program targets complementary
markets and allows 1mage to draw from a much larger market with respect
to its imaging software products than its traditional markets of the
trucking and transportation industries. As noted above, 1mage's
strategy has been to expand the domestic and international markets for
its imaging software by engaging VARs for various industries and
markets. 1mage's experience has been that economic downturns or
increased competitive pressures in its niche markets sometimes result
in reduction or deferral of capital expenditures by potential
customers. While such adverse conditions can sometimes lead to
opportunities as potential customers downsize to smaller, more cost-
efficient computer systems or replace custom designed systems that
require higher levels of support and maintenance, 1mage believes that a
strong national economy is important to the success of its sales
efforts. Accordingly, Shareholders need to be cognizant of 1mage's
potential dependence on such general economic conditions.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS. 1mage's sales cycle,
which generally commences at the time a prospective customer issues a
request for proposal or otherwise demonstrates to 1mage a serious
interest in purchasing a system, and ends upon execution of a sales
contract, typically ranges from two to six months. 1mage's operating
results could vary from period to period as a result of the length of
its sales cycle, the timing of individual systems sales and conditions
in its target markets and the economy in general.
NASDAQ STANDARDS. In 1997, the Nasdaq Stock Market, Inc.
("Nasdaq") increased its standards for companies to remain listed on
the Nasdaq SmallCap Market. In order to remain listed on Nasdaq, the
Company is required to maintain, at a minimum: (i) net tangible assets
greater than $2,000,000, market capitalization greater than $35,000,000
or net income for the most recent fiscal year or for two of the last
three fiscal years of greater than $500,000; (ii) a public float of at
least 500,000 shares; (iii) a market value of the public float of at
least $1,000,000; (iv) a minimum bid price of $1.00 per share; (v) at
least two market makers in the Company's Common Stock; (vi) at least
300 shareholders; and (vii) certain corporate governance standards.
The Company does not meet these maintenance standards and, in the
absence of the Merger or a large infusion of capital, which is not
presently anticipated, will not do so prior to being delisted by
Nasdaq. The Company had a hearing on July 31, 1998, at which Nasdaq
considered its request for temporary exception from the maintenance
standards until the Merger is consummated. No decision has been
rendered by Nasdaq yet but the Company expects a decision shortly.
Because of the change of control of the Reorganized Parent after the
Merger, 1mage believes that Nasdaq will apply the higher initial
listing standards to the Company after the Merger. The initial listing
standards are: (i) 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 most
recently completed fiscal years; (ii) a public float of at least
1,000,000 shares; (iii) a market value of the public float of at least
$5,000,000; (iv) a minimum bid price of $4.00 per share; (v) at least
three market makers in the Company's Common Stock; (vi) at least 300
shareholders; and (vii) certain corporate governance standards. 1mage
and SupraLife believe that the Reorganized Parent will meet these
quantitative standards after the Merger. However, Nasdaq may also
apply non-quantitative requirements to the Reorganized Parent, and such
requirements could delay a favorable listing decision or even cause a
denial of listing. In addition, a failure by the Reorganized Parent to
meet the maintenance standards during the period following the Merger
could result in delisting from the Nasdaq system and adversely affect
the liquidity and value of the Company's Common Stock. There can be no
assurance, however, that the Company will be able to meet the Nasdaq
maintenance or initial listing standards after the Merger or at any
time thereafter.
DILUTION OF THE SHARES OF 1MAGE SHAREHOLDERS. After the Merger,
the present 1mage Shareholders will own approximately 25% of the
Reorganized Parent, while the SupraLife stockholders will own
approximately 75% (excluding the effect of outstanding options to
purchase shares of the Company's Common Stock, and options to purchase
shares of SupraLife common stock which will be converted to
substantially identical options to purchase shares of the Company's
Common Stock after the Merger). Because SupraLife's majority
stockholders could, acting together, control the Reorganized Parent, it
was important for the Board of Directors of 1mage to ensure that the
present 1mage Shareholders received a fair consideration as a result of
the Merger. While the Board of Directors of 1mage believes that the
25% of the Reorganized Parent to be owned by 1mage Shareholders after
the Merger is equal to or greater than 100% of the value of 1mage prior
to the Merger, there can be no assurance that the Board's estimation is
correct. No third party appraisal or opinion on fairness has been
solicited or obtained by 1mage or its Board of Directors.
EFFECT OF PRINCIPAL SHAREHOLDERS' AND MANAGEMENT'S VOTE. If the
Merger is effected, the beneficial owners of five percent or more of
the Company's Common Stock, together with the Reorganized Parent's
Executive Officers and Directors in office after the Merger, would have
voting control over 4,798,133 shares of record (not including options
or warrants exercisable within 60 days of the record date), or 54%, of
the outstanding Common Stock. Accordingly, these principal
shareholders and management could exercise voting control of future
actions of the Reorganized Parent which may be effected by a
shareholder vote. After the Merger, Peter J. Holliday, Chairman of the
Board and Chief Executive Officer of SupraLife, would hold 2,087,176
shares of record (not including options exercisable within 60 days of
the record date), or 24%, of the outstanding Common Stock.
DIRECTORS, DIRECTOR NOMINEES AND
EXECUTIVE OFFICERS OF THE REORGANIZED PARENT
All directors hold office until the next annual meeting of
Shareholders of the Company and thereafter until their successors are
elected and qualified. All Executive Officers hold office at the
selection and choice of the Board of Directors.
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
The directors, director nominees and Executive Officers of the
Company are as follows:
NAME AGE POSITION WITH THE COMPANY
David R. DeYoung 53 President, Chief Executive Officer and
Chairman of the Board
Mary Anne DeYoung 44 Vice President Finance,
Chief Financial Officer,
Treasurer and Director
Charles E. Burns 67 Director
Robert Wiegand II 51 Director
Richard A. Knapp 52 Director
SUPRALIFE DESIGNEES
Peter J. Holliday 59 Director Nominee
Dann V. Angeloff 62 Director Nominee
William T. Walker, Jr. 66 Director Nominee
I. 1MAGE DIRECTORS
The persons named below are the current members of the Board of
Directors of 1mage.
DAVID R. DEYOUNG - Mr. DeYoung has been President, Chief Executive
Officer and a Director of the Company since its formation in 1981. He
served in similar capacities with the Company's predecessor corporation
from 1979 to 1981. During 1979, Mr. DeYoung was employed by
ESCOM/Mountain States, a Prime dealer, as Vice President of Sales.
From 1972 to 1979, Mr. DeYoung was employed by NCR Corporation and,
during part of that time, was a District Manager in the division of
Commercial, Industrial, Medical, Educational and Governmental systems.
He holds a Bachelor of Science Degree in Business Administration and
Computer Science from California State Polytechnic University. Mr.
DeYoung is the spouse of Mary Anne DeYoung.
MARY ANNE DEYOUNG - Ms. DeYoung was elected to the Board of Directors
in April 1996. Ms. DeYoung was elected Treasurer, Chief Financial
Officer and Assistant Secretary on December 15, 1994. Ms. DeYoung has
served as Vice President, Finance and Administration since July 1986.
Ms. DeYoung joined the Company as Controller in April 1981. From 1975
to 1981, Ms. DeYoung was a systems analyst with Arthur Andersen LLP, a
financial analyst, and an independent financial consultant. Ms.
DeYoung holds a Bachelor of Science Degree in Accounting from the
University of Santa Clara. Ms. DeYoung is the spouse of David R.
DeYoung. If the Merger is approved, Ms. DeYoung will resign from the
Board of Directors.
CHARLES E. BURNS - Mr. Burns has served on the Board of Directors since
1981. He served as Treasurer of the Company from March 1, 1994 until
December 15, 1994. In March 1994, Mr. Burns resigned his position as
Executive Vice President and Chief Operating and Financial Officer and
retired from full time employment with the Company. Mr. Burns had
served as Executive Vice President and Chief Operating Officer since
December 1, 1988 and as Chief Financial Officer since March 31, 1989.
He joined the Company in November 1986 as Director of Transportation
and was promoted to Vice President in April 1988. From January 1979
until October 1985, Mr. Burns was employed by Ringsby Truck Lines.
From 1979 to 1983, Mr. Burns was Vice President of Administration with
that firm, and from 1983 to 1985 he was President and Chief Operating
Officer. He holds a Bachelor of Science Degree in Accounting from
Stanford University. If the Merger is approved, Mr. Burns will resign
from the Board of Directors.
ROBERT WIEGAND II - Mr. Wiegand was elected to the Board of Directors
in July 1992. Mr. Wiegand was appointed to the office of Secretary of
the Company on March 1, 1994. Mr. Wiegand is presently a lawyer in
private practice. From January 15, 1992 to December 26, 1992, he was
Vice-President of Administration for Rose Manufacturing Co., a
privately held manufacturer of safety equipment based in Englewood,
Colorado. Mr. Wiegand has practiced law for 23 years, and prior to
joining Rose Manufacturing, was special counsel with Pendleton &
Sabian, P.C., a law firm in Denver. Mr. Wiegand graduated Phi Beta
Kappa from the Tulane University of Louisiana in 1970 and went on to
receive a law degree and was admitted to practice in Louisiana in 1972
and Colorado in 1977. Since 1976, Mr. Wiegand's practice has been
limited to securities offerings, estate planning, business
organizations and tax law. In addition to membership in six bar
Associations, Mr. Wiegand has been admitted to practice before the U.S.
District Court (Colorado and ED-Louisiana) and before the U.S. Court of
Appeals (5th Circuit), and the U.S. Supreme Court.
RICHARD A. KNAPP - Mr. Knapp was elected as a Director in May 1997.
Mr. Knapp is currently the President and CEO of Lease Capital
Corporation and has served in that capacity since 1990. From 1984 until
1990, Mr. Knapp was a regional manager for both Paccom Leasing
Corporation and Security Pacific Business Finance. In total, Mr.
Knapp has been associated with the banking/finance industry for nearly
thirty years. He holds a Bachelor of Science degree in Finance from
the University of Arizona. If the Merger is approved, Mr. Knapp will
resign from the Board of Directors.
II. SUPRALIFE DESIGNEES
The following persons have been designated by SupraLife to serve
as Directors of the Reorganized Parent at the Effective Time, along
with current 1mage directors, David R. DeYoung and Robert Wiegand II,
if the Merger Agreement is approved and adopted. At the Effective
Time, Ms. DeYoung, Mr. Burns and Mr. Knapp would resign as Directors if
the Merger Agreement is approved and adopted. Mr. DeYoung will also
continue to serve as the President of New 1mage. In addition,
information is provided for Bryan Noar who would become the President
of the Operating Subsidiary, and R. Stephen Leisenring who would become
the Company's Chief Financial Officer and Vice-President: Operations &
Finance, at the Effective Time. A VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT AND ISSUANCE OF THE MERGER SHARES WILL ALSO BE DEEMED TO BE A
VOTE FOR EACH OF THE DIRECTOR NOMINEES TO BE APPOINTED AS A DIRECTOR OF
THE REORGANIZED PARENT.
PETER J. HOLLIDAY - Mr. Holliday served as the Chairman of the Board of
Directors of SupraLife from May, 1991 to August, 1996. He served as
Chief Executive Officer from February, 1992 to October, 1996. He
resumed the position of Chairman in February, 1998 and the position of
Chief Executive Officer in August, 1998. He has been the Chairman of
Eagle Investments Limited, and a Director of Eagle International
Holdings Limited, since 1991. Both companies are based in New Zealand
and engage in the health, personal care and sports & fitness
businesses. Both of these companies are owned by Mr. Holliday and his
wife. Mr. Holliday received a B.A. in law and economics from the
University of Cape Town in South Africa, an M.B.A. from the London
School of Economics and has attended Executive Development Programs at
Columbia University and Stanford University. Mr. Holliday will be
Chief Executive Officer of the Reorganized Parent if the Merger is
approved, and he is expected to be named Chairman of the Board of the
Reorganized Parent at the Effective Time.
DANN V. ANGELOFF - Mr. Angeloff is President of The Angeloff Company, a
corporate financial advisory firm he founded in May, 1976. He serves
on the Boards of Directors of Balboa Capital Corporation, Compensation
Resource Group, Nicholas-Applegate Growth Equity Fund Nicholas-
Applegate, Nicholas-Applegate Investment Trust, Public Storage, Inc., a
publicly held company, Ready Pac Produce, Inc., Royce Medical Company,
SupraLife International and WorldxChange Communications. He is a
former Trustee of the University of Southern California and is a
University Counselor. He received his B.S. and M.B.A. degrees from the
University of Southern California.
WILLIAM T. WALKER, JR. - Mr. Walker became a Director of SupraLife in
July, 1998. He founded Walker Associates, a corporate finance
consulting firm for investment banking in 1985 and has participated in
or been instrumental in completing over $250,000,000 in public and
private offerings since its inception. Prior to forming Walker &
Associates, Mr. Walker served as Executive Vice President, Manager of
Investment Banking, Member of the Board and Executive Committee and
Chairman of the Underwriting committee for Bateman Eichler Hill
Richards, a New York Stock Exchange Member firm from 1969 to 1985, when
Bateman Eichler Hill Richards was purchased by Kemper Group. Prior to
joining Bateman Eichler Hill Richards, Mr. Walker served in various
executive capacities and was a partner with the investment banking firm
of Glore Forgan, William R. Staats & Co. in New York. Mr. Walker also
serves on the Board of Directors of Go Video, Inc., Avinton
Distributors, Inc., and Fortune Natural Resource Corporation, which are
publicly held companies. He has served as Governor of the Pacific
Coast Stock Exchange, President of the Board Club of Los Angeles and on
the American Stock Exchange Advisory Committee. Mr. Walker was
educated at Stanford University.
BRYAN NOAR - Mr. Noar, age 38, became President of SupraLife's domestic
operating subsidiary in August, 1998. He joined SupraLife in June,
1995, and prior to assuming his current position, was Vice President:
Training & Development of the domestic operating subsidiary. From
April, 1992 through May, 1995, Mr. Noar was Vice President of Marketing
of Vaxa International, a nutritional supplement and personal care
direct marketing company. Mr. Noar received a Bachelor of Commerce
degree from the University of Cape Town.
R. STEPHEN LEISENRING - Mr. Leisenring, age 36, joined SupraLife in
December, 1996 as Vice President of Finance & Operations after spending
the previous eleven years with Arthur Andersen LLP as a certified
public accountant. Mr. Leisenring is a member of the California
Society of Public Accountants and the American Institute of Certified
Public Accountants and California Society of CPAs. He holds a B.S. in
accounting from United States International University.
Except as set forth above, none of the nominees are directors of
any other company having a class of securities registered under the
Securities Exchange Act of 1934, or any company registered under the
Investment Company Act of 1940. There is no arrangement or
understanding between any of the Directors or Executive Officers and
any other person or persons pursuant to which he or she was or is to be
elected as a Director or Executive Officer, except that the Merger
Agreement requires the nomination or appointment of persons indicated
above as Directors and Executive Officers of the Reorganized Parent
following the Merger.
MEETING OF THE BOARD OF DIRECTORS
The Board of Directors of 1mage met in person four times during
the last calendar year.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee which was established in March,
1984. This committee meets with the auditors and reviews the plans for
the audit, reviews the auditor's management letter and recommends to
management changes that it believes necessary as a result of such
review. This committee met twice during 1997. The current members of
the Audit Committee are Messrs. Knapp and Wiegand.
The Company has a Compensation Committee established in December,
1994 which reviews appropriate compensation levels for Executive
Officers and senior management of the Company, and makes
recommendations to the Board of Directors. In addition, this committee
administers the 1993, 1994 and 1996 stock option plans. The committee
met twice during the year. The current members of the Compensation
Committee are Messrs. Wiegand and Burns.
Both the Audit Committee and the Compensation Committee are
expected to be reconstituted after the Merger.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth the executive compensation of the
Company's Chief Executive Officer for each of the Company's last three
fiscal years. There were no other Executive Officers serving at the
end of the last fiscal year whose compensation was greater than
$100,000.
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION* COMPENSATION**
------------- --------------
NAME AND SALARY BONUS
PRINCIPAL POSITION YEAR($) ($)
- ------------------ ------ -------
<S> <C> <C>
D. R. DeYoung 1997 129,820
CEO 1996 93,188
1995 86,043
</TABLE>
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION* COMPENSATION**
------------- --------------
NAME AND AWARDS ALL OTHER
PRINCIPAL POSITION OPTIONS(#) COMPENSATION***($)
- ------------------ ---------- ------------------
<S> <C> <C> <C>
D. R. DeYoung 0 8,000 7,982
CEO 0 94,000 7,244
0 150,000 7,959
</TABLE>
* Mr. DeYoung did not receive additional compensation other than noted
above the aggregate amount of which was the lesser of either $50,000 or
10% of the total of his annual salary and bonus.
** Mr. DeYoung was not awarded restricted stock nor was there any LTIP
payout to him.
*** Includes insurance premiums paid by the Company for term life and
disability insurance, as well as premiums paid for a key-man life
insurance policy which has the death benefit assigned to the Company
and the cash value of the policy intended to accrue for the benefit of
Mr. DeYoung.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the information concerning
individual grants of nonqualified stock options during the last fiscal
year to the named Executive Officer:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
NAME OPTIONS IN FISCAL BASE PRICE EXPIRATION
GRANTED (#) YEAR ($/SHARE) DATE
- ------------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
D. R. DeYoung 8,000 2.0% $0.4375 6/26/07
D. R. DeYoung 80,000 17.5% 0.4375 11/26/07
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
The following table sets forth information concerning each
exercise of stock options during the last fiscal year by the named
Executive Officer and the fiscal year-end value of unexercised options:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
SHARES UNDERLYING IN-THE
ACQUIRED ON VALUE UNEXERCISED MONEY OPTIONS
EXERCISE REALIZED OPTIONS AT FISCAL AT FISCAL
NAME (#) ($) YEAR-END-(#) YEAR-END ($)
- ---- ----------- -------- ----------------- -------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
----------------- -------------
<S> <C> <C> <C> <C>
D. R. DeYoung 0 $0 317,375/20,000 $0/$0
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS WITH THE COMPANY
Mr. DeYoung, the Company's President and Chief Executive Officer,
is currently employed pursuant to a three-year employment contract
between the Company and Mr. DeYoung, which expires on October 31, 1999.
Since November 1, 1996, the compensation of Mr. DeYoung has been
established under the terms of this employment contract. The contract
calls for an annual base salary, in an amount determined annually by
the Board of Directors, payable semi-monthly, plus expenses and normal
fringe benefits. Mr. DeYoung earns a bonus of 5% of the Company's
pretax earnings, calculated on a quarterly basis. An annual bonus may
be paid to Mr. DeYoung based on the performance of the Company and at
the discretion of the Board of Directors. Mr. DeYoung's employment
contract provides that should his employment be terminated for any
reason other than for cause, he is entitled to a cash severance package
equal to one year's cash compensation. In addition, Mr. DeYoung is
entitled to receive a grant of a sufficient number of ten year options
as are necessary to permit him to retain the same percentage of
beneficial ownership interest in the Company as he held on December 16,
1996. These grants would be made from the Company's Equity Incentive
Plan at the fair market value of the Common Stock on the date of grant.
Ms. DeYoung, the Company's Vice President of Finance and Chief
Financial Officer, is employed pursuant to a three-year employment
contract between the Company and Ms. DeYoung which was effective
September 1, 1996. Her compensation is established under the terms of
this employment contract. The contract calls for an annual base
salary, expenses, normal fringe benefits, as well as a bonus equal to
4% of the Company's pretax earnings, calculated on a quarterly basis.
In addition, Ms. DeYoung's employment contract provides that should her
employment be terminated for any reason other than for cause, she is
entitled to a cash severance package equal to one year's cash
compensation.
If the Merger is effected, Mr. DeYoung and Ms. DeYoung would enter
into new five-year employment agreements with the Reorganized Parent
under which they will retain their current base salaries ($125,000 and
$90,000, respectively), with increases based on increases for
executives in the software industry generally or on increases in the
cost of living, whichever are greater, and a minimum annual cash bonus
equal to ten percent (10%) of such base salary for the term of the
employment agreements. Under the agreements, both executives would be
subject to non-compete and non-solicitation of employees covenants
during the term of their employment by the Reorganized Parent and for a
period of one year thereafter. Mr. DeYoung would also retain his right
to a cash bonus equal to 5% of pre-tax earnings of the 1mage business.
Salary, benefits and bonuses will be payable for the lesser of the
remaining term of the employment agreements or a period of three years
after any involuntary termination (defined to include voluntary
resignation after a significant change in duties, responsibilities,
benefits or place of work and excluding a termination "for cause" by
the Reorganized Parent) but in no event less than one year. "For
cause" is defined as conviction of a felony, fraud, embezzlement,
breach of trust or gross misconduct, a determination by the Board of
Directors that the executive has misused or misappropriated proprietary
information, willfully breached the non-compete or non-solicitation
covenants or abandoned the executive's duties and obligations under the
employment agreement.
During the first two years of the new employment agreements, which
will be effective November 1, 1998, Mr. and Ms. DeYoung may be
terminated by the Company only upon twelve (12) months prior written
notice. Mr. and Ms. DeYoung must be included in all employee benefit
programs of the Reorganized Parent, which may not be less than the
benefits currently provided to any of them and may not be subsequently
reduced. In his new employment agreement, Mr. DeYoung will waive his
existing right to a proportionate match, via the mandatory grant of
additional stock options to him, of any third party acquisition of the
Company's stock. In addition, Mr. DeYoung will be entitled to a
consulting fee equal to 20% of the net proceeds of any sale or other
disposition by the Reorganized Parent of all or a substantial portion
of the assets currently held by the Company, i.e., the assets of New
1mage. He will also have the right of first refusal to purchase those
assets on the same terms and conditions as offered by a third party.
This right could adversely affect the ability of the Reorganized Parent
to sell the New 1mage assets.
COMPENSATION OF DIRECTORS OF THE COMPANY
The Company currently pays non-employee Directors $1,000 per
quarter plus specific hourly fees for special meetings or additional
participation. Pursuant to the 1996 Equity Incentive Plan (the "1996
Plan"), members of the Compensation Committee of the Board of Directors
will automatically be granted an option on the last trading day in June
to purchase 4,000 shares of Common Stock at 100% of the fair market
value on such date. On June 30, 1997 each member of the Compensation
Committee received an automatic grant to purchase 4,000 shares of
Common Stock at $.8938, the fair market value on that date. In
addition to the automatic grants, the Company granted each member of
the Compensation Committee stock options to purchase 12,000 shares of
common stock at $0.625 per share, the fair market value on November 26,
1997. On that date, one non-employee director was granted options to
purchase 2,000 shares at $1.469 per share and an option to purchase
6,000 shares at $.625 per share; such exercise prices were equal to the
fair market value at the dates of grant.
CERTAIN TRANSACTIONS WITH RELATED PARTIES OF THE COMPANY
The Company leased its executive offices from a general
partnership, Comlease. Mr. DeYoung, an Executive Officer and Director
of the Company owns a partnership interest in Comlease of 11.75%.
Lease payments to the partnership were $85,200 for the year ended
December 31, 1997. This lease expired on March 31, 1998. The shares
of the Company held by Comlease were distributed to the partners on
August 3, 1998. Management of the Company believes that the terms of
the lease were as favorable to the Company as could have been obtained
from third parties at the time the lease was signed.
SELECTED FINANCIAL DATA OF THE COMPANY
The following table sets forth, for the periods indicated,
selected financial data of the Company. This table should be read in
conjunction with the financial statements and notes included in the
Form 10-K for the year ended December 31, 1997 provided with this Proxy
Statement and the section entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition" included in
such Form 10-K.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1998 1997 1997 1996 1995 1994 1993
------------ ----------------------------------
(Unaudited)
In thousands, except
per share data
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 826 $1,174 $1,809 $2,005 $2,908 $4,633 $3,622
Cost of sales 396 559 918 905 2,149 2,114 1,862
Selling, general &
administrative
expenses 559 672 1,354 1,273 1,992 1,833 1,741
Income (loss) from
operations (129) (57) (463) (173)(1,233) 686 19
Net income
(loss) $(144) $(65) $ (475) $(89)$(1,314) $601 $75
Basic earnings
(loss) per
share $(0.07)$(0.03) $(0.22) $(0.04)$(0.69) $0.34 $0.05
</TABLE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1998 1997 1996 1995 1994 1993
------------ ----------------------------------
In thousands (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total assets $1,558 $1,650 $2,018 $2,004$3,578 $2,461
Total long term
obligations 157 159 8 171 33 156
Total shareholders'
equity 770 908 1,239 1,301 2,494 1,256
</TABLE>
STOCK OWNERSHIP OF CERTAIN
PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following sets forth the number of shares of Common Stock
owned by each Executive Officer and Director of the Company, by all
persons known to the Company to be the beneficial owner of more than 5%
of any class of the Company's voting securities, and by all Executive
Officers and Directors as a group. Unless otherwise noted, the share
ownership specified in the following table represents both record and
beneficial ownership as of September 21, 1998.
<TABLE>
<CAPTION>
BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) % OF CLASS
- ------------------------------------ ------------- -----------
<S> <C> <C>
David R. DeYoung 642,406(2) 24.3%
6486 South Quebec Street,
Englewood, Colorado 80111
Charles E. Burns 24,500(3) 1.1%
1013 Figueroa Street,
Folsom, California 95630
Robert Wiegand II 46,500(4) 2.1%
5261 South Quebec Street,
Greenwood Village, Colorado 80111
Mary Anne DeYoung 128,825(5) 5.5%
6486 South Quebec Street,
Englewood, Colorado 80111
Richard A. Knapp 8,000(6) 0.4%
19590 E. Main Street, Suite 207,
Parker, Colorado 80134
Spencer D. Lehman 238,437(7) 10.2%
1250 4th Street,
Santa Monica, California 90401
John G. Mazza 260,868(8) 11.1%
6613 Zumirez Drive,
Malibu, California 90265
All Executive Officers and
Directors as a Group - 5 Persons 850,231(9) 30.1%
</TABLE>
(1) Beneficial owners are believed to have sole voting and investment
power with respect to the shares shown unless otherwise indicated.
(2) Includes 337,375 options to purchase Common Stock and 100,000
warrants to purchase Common Stock and excludes any shares
attributable to Mr. DeYoung's right under his employment contract
to maintain his proportional ownership of the Company under
certain circumstances. See "Employment Contracts of the Company."
(3) Consists of 24,500 options to purchase Common Stock.
(4) Includes 24,500 options to purchase Common Stock.
(5) Includes 124,800 options to purchase Common Stock and 3,900 shares
held in a custodial account for her daughter.
(6) Consists of 8,000 options to purchase Common Stock
(7) Includes a convertible promissory note plus accrued interest which
is convertible into 138,868 shares of Common Stock.
(8) Includes a convertible promissory note plus accrued interest which
is convertible into 138,868 shares of Common Stock.
(9) Includes 519,175 options to purchase Common Stock and 100,000
warrants to purchase Common Stock.
The following sets forth the approximate number of post-Merger
shares of Common Stock owned by the Executive Officers and Directors of
the Company which would be owned if the Merger is effected (assuming
that Messrs. Holliday, Angeloff and Walker are elected as Directors of
the Company after the resignations of Ms. DeYoung, Mr. Burns and Mr.
Knapp, and Messrs. Noar and Leisenring are elected as Executive
Officers of the Company), by all persons known to the Company to be the
beneficial owner of more than 5% of any class of the Company's voting
securities, and by all such Executive Officers and Directors as a
group. Unless otherwise noted, the share ownership specified in the
following table represents both record and beneficial ownership as of
September 21, 1998. Shares shown for Messrs. Holliday, Noar,
Leisenring, Angeloff and Walker, and Mr. and Mrs. Wilson and Mr. and
Mrs. Wallach, give effect to the conversion of these persons' shares,
options and warrants of SupraLife to shares, options and warrants of
the Reorganized Parent.
<TABLE>
<CAPTION>
BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) % OF CLASS
- ------------------------------------ ------------- -----------
<S> <C> <C>
David R. DeYoung 642,406(2) 6.9%
6486 South Quebec Street
Englewood, Colorado 80111
Robert Wiegand II 46,500(3) 0.5%
5261 South Quebec Street
Greenwood Village, Colorado 80111
Peter J. Holliday 2,155,980(4) 24.3%
Grove House
11 Francis Bell Grove
Lowry Bay
Wellington 6008, New Zealand
Eagle Investments Limited 2,087,176(5) 23.7%
Grove House
11 Francis Bell Grove
Lowry Bay
Wellington 6008, New Zealand
R. Stephen Leisenring 29,127(6) 0.3%
9820 Willow Creek Road, Suite 450
San Diego, California 92131
Dann V. Angeloff 137,608(7) 1.5%
The Angeloff Company
727 West 7th Street, Suite 331
Los Angeles, California 90017
William T. Walker, Jr. -0- -0-
P.O. Box 10684
Beverly Hills, California 90213
Joel and Ma Lan Wallach 926,718 10.5%
P.O. Box 1823
Bonita, California 91908
Bryan Noar 161,689(8) 1.8%
9820 Willow Creek Road, Suite 450
San Diego, California 92131
John F. Wilson II and Julie Wilson 1,135,564(9) 12.4%
9820 Willow Creek Road, Suite 450
San Diego, California 92131
First Fidelity Capital, Inc. 964,280(10) 10.0%
9100 Wilshire Boulevard
437 West Tower
Beverly Hills, California 90212
Larry and Mary Wallace 476,192 5.4%
P.O. Box 1146
Aspen, Colorado 81612
All Officers and
Directors as a Group - (7) Persons 3,173,310(11) 35.5%
</TABLE>
(1) Beneficial owners are believed to have sole voting and investment
power with respect to the shares shown unless otherwise indicated.
(2) Includes 337,375 options to purchase Common Stock and 100,000
warrants to purchase Common Stock and excludes any shares
attributable to Mr. DeYoung's right under his employment contract
to maintain his proportional ownership of the Company under
certain circumstances. "See Employment Contracts of the Company."
(3) Includes 24,500 options to purchase Common Stock.
(4) Includes 2,087,176 shares owned by Eagle Investments Limited which
may be deemed beneficially owned by Mr. Holliday. Also includes
68,804 options to purchase Common Stock and excludes 137,608
options to purchase Common Stock which are not yet vested.
(5) This company may be deemed to be beneficially owned by Peter J.
Holliday.
(6) Consists of 29,127 options to purchase Common Stock and excludes
64,446 options to purchase Common Stock which are not yet vested.
(7) Includes 75,684 options to purchase Common Stock and excludes
27,522 options to purchase Common Stock which are not yet vested.
(8) Includes 6,880 options to purchase Common Stock and excludes
13,761 options to purchase Common Stock which are not yet vested.
(9) Includes 60,807 shares owned by LifeStyle Investments, Inc. which
may be deemed beneficially owned by Mr. Wilson. Also includes
options to acquire 378,422 shares, but excludes options to acquire
137,608 shares which have not yet vested.
(10) Includes 321,427 warrants to purchase Common Stock and the right
to purchase 535,711 shares of Common Stock if the Merger is effected.
(11) Includes 542,371 options to purchase Common Stock and 100,000
warrants to purchase Common Stock.
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors appointed Cribari & Gustafson, LLP (the
"Cribari") as the Company's independent public accountants in 1997.
The Board of Directors has appointed Cribari to audit the financial
statements of the Company for the calendar year ending December 31,
1998 if the Merger Agreement is not approved by the Shareholders. It
is expected that a representative of Cribari will be present at the
Meeting and will have the opportunity to make a statement if he or she
desires to do so and is expected to be available to respond to
appropriate questions. It is not expected that a representative of
Arthur Andersen LLP will be present at the Meeting.
It is anticipated that if the Merger Agreement is adopted, the
Board of Directors of the Reorganized Parent will appoint an
independent public accounting firm other than Cribari, such as Arthur
Andersen LLP, to audit the consolidated financial statements of the
Reorganized Parent for the 1998 calendar year.
EMPLOYMENT AND CONSULTING AGREEMENTS OF SUPRALIFE
The following is a summary of certain provisions of the employment,
consulting and similar agreements between SupraLife and its
subsidiaries, and executive officers of SupraLife. In addition, a
summary is provided of certain provisions of the employment agreement
between SupraLife and its former President and Chief Executive Officer,
who now serves as Mergers and Acquisitions Specialist.
Peter J. Holliday
Mr. Holliday, through his company, Eagle International Holdings
Limited, a New Zealand corporation ("EIH"), has a two year director
compensation agreement with SupraLife's wholly-owned operating
subsidiary (the "Operating Subsidiary") to compensate Mr. Holliday for
his services as Chairman of the Board of SupraLife. This agreement,
which commenced on February 1, 1998, provides that Mr. Holliday will be
available for all Board meetings, committee meetings and related
services to be performed by him as typically performed by a chairman of
the board of directors of companies of a size and nature similar to
SupraLife. As compensation for his services, Mr. Holliday is paid a
monthly retainer of $3,500. The Operating Subsidiary is also
responsible for all reasonable expenses incurred by Mr. Holliday in the
performance of his duties as Chairman of the Board.
SupraLife management anticipates that Mr. Holliday's director
compensation agreement will be replaced with an employment agreement
for Mr. Holliday's services as Chief Executive Officer. The terms of
the employment agreement are still under negotiation, but management
anticipates that Mr. Holliday will be paid a base salary equal to the
monthly payments he is currently receiving under his director
compensation agreement, plus a bonus equal to 0.7% of net sales
receipts and 2% of the operating income of SupraLife, its parent
company (which after the Merger will be the Reorganized Parent), and
subsidiaries of the parent.
Mr. Holliday entered into a non-competition agreement with
SupraLife on October 1, 1996, by which Mr. Holliday agreed not to
compete with the business of SupraLife. Mr. Holliday may however
associate with an established business which sells nutritional
products, so long as that business (i) does not sell liquid mineral
products or products which contain more than 25 minerals and (ii) does
not conduct business with certain of SupraLife's suppliers, including
T.J. Clark & Co. The non-competition agreement terminates October 1,
2001.
Mr. Holliday also has three management services agreements with
SupraLife and its subsidiaries through his company, EIH. The two year
domestic agreement (the "Domestic Agreement") commenced on February 1,
1998 and is between EIH and the Operating Subsidiary. The Domestic
Agreement provides for retention of Mr. Holliday's services as
principal of EIH with respect to the operations of the Operating
Subsidiary. His services include advice and assistance in connection
with the marketing and sales of the Operating Subsidiary's products in
the U.S. As compensation for services rendered by EIH, the Operating
Subsidiary pays EIH a monthly fee of $5,000 through January, 2000. The
Operating Subsidiary paid EIH a retainer of $27,000 in February, 1998
to be applied against the final payments due under the agreement. See
"Certain Transactions with Related Parties of SupraLife." In the event
the Domestic Agreement is terminated before the end of its term, EIH is
obligated to repay the Operating Subsidiary the then unapplied balance
of the retainer. EIH is also entitled to costs and expenses incurred
in performing services on behalf of the Operating Subsidiary.
The Operating Subsidiary may terminate the Domestic Agreement for
cause effective immediately upon notice to EIH. The Operating
Subsidiary may also terminate the agreement without cause upon 90 days
written notice to EIH. EIH may terminate the agreement on 30 days'
notice. The Domestic Agreement will also immediately terminate upon
the death of Mr. Holliday.
EIH has agreed that, during the term of the Domestic Agreement and
for the period during which any covenant not to compete is in effect as
to EIH or Mr. Holliday, neither it nor Mr. Holliday will solicit any
person or entity whose account has been directly solicited twice by
SupraLife or by any distributor of SupraLife within the 18 month period
prior to termination of the agreement. During the term of the
agreement and the three year period following the termination of the
agreement, neither EIH nor Mr. Holliday may solicit for competing
employment the employees, sales representatives or distributors of
SupraLife.
Mr. Holliday's agreement for Europe (the "Europe Agreement") is
similar to the Domestic Agreement and is between EIH and SupraLife
International Ltd., a wholly owned subsidiary of SupraLife, formed
under the laws of the United Kingdom of Great Britain ("SIL").
Pursuant to the Europe Agreement, for a two year period commencing
February 1, 1998, EIH and Mr. Holliday are to provide SIL with advice
and assistance in connection with the research, planning, establishment
and development of the international marketing of SupraLife's products
in all countries of the European Union. As compensation for services
rendered by EIH, SIL pays EIH a monthly fee of $9,000 through January,
2000. SIL paid EIH a retainer of $63,000 ($50,000 paid in November,
1997 and $13,000 paid in February, 1998) to be applied against the
final payment due under the agreement as an advance of the monthly
fees. In the event the Europe Agreement is terminated before the end
of the term, EIH is obligated to repay SIL the then unapplied balance
of the retainer. EIH is also entitled to costs and expenses incurred
in performing services on behalf of SIL.
The Europe Agreement has the same provisions as the Domestic
Agreement for termination of the agreement and for prohibition of
solicitation of customers, employees, sales representatives and
distributors of SupraLife.
The third agreement (the "Pacific Agreement"), which is similar to
the Domestic and the Europe Agreements, is between EIH and SupraLife
International (Australasia) Limited, a New Zealand corporation which is
a wholly owned subsidiary of SupraLife ("SIAL"). The Pacific Agreement
was originally for a two year period commencing on October 1, 1996. It
was amended on February 1, 1998 to provide for a two year period
commencing on February 1, 1998. Pursuant to the Pacific Agreement, EIH
and Mr. Holliday are to provide advice and assistance in connection
with the research, planning, establishment and development of the
international marketing of SupraLife's products in Australia, New
Zealand and Asia, including without limitation Japan, China, Korea,
Malaysia and Singapore. As compensation for services rendered by EIH,
SIAL pays EIH a monthly fee of $7,500 through January, 2000. EIH is
also entitled to costs and expenses in performing services on behalf of
SIAL.
The Pacific Agreement has the same provisions as the Domestic and
the Europe Agreements for termination of the agreement and for
prohibition of solicitation of customers, employees, sales
representatives and distributors of SupraLife.
Bryan Noar
The terms of Mr. Noar's employment with the Operating Subsidiary
are set forth in an Employment Agreement dated March 1, 1997, as
amended. Pursuant to the agreement, Mr. Noar is paid a base salary of
$100,000 per year. He is also entitled to a bonus equal to 0.25% of
the net network distribution sales of SupraLife. Mr. Noar has agreed
that, during his employment and for a period of three years after
termination of employment, he will not solicit for competing employment
the employees, sales representatives or distributors of SupraLife. The
agreement is terminable by either party with or without cause.
R. Stephen Leisenring
The terms of Mr. Leisenring's employment with SupraLife are set
forth in an Employment Agreement dated December 1, 1996, as amended.
Pursuant to the agreement, Mr. Leisenring is paid a base salary of
$115,000 per year. He is also entitled to a bonus equal to 1.5% of the
operating income (as defined in the agreement) of SupraLife, its parent
company (which after the merger will be the Reorganized Parent), and
subsidiaries of the parent. If the Merger is consummated, Mr.
Leisenring will be entitled to a bonus representing the same percentage
of operating income of the Reorganized Parent and all of its
subsidiaries. The agreement is terminable by either party with or
without cause.
John F. Wilson II
John F. Wilson was SupraLife's President and Chief Executive
Officer until August, 1998. SupraLife entered into an employment
agreement with Mr. Wilson in his former capacity on August 1, 1996,
which agreement was subsequently amended in July, 1996 and July, 1998.
In September, 1998, Wilson became SupraLife's Mergers and Acquisitions
Specialist, and his employment agreement was amended to reflect his
change in position. The term of the agreement is for a five year
period ending July, 2003. On each August 1 beginning in 2003, the term
will automatically extend for an additional year unless SupraLife or
Mr. Wilson gives notice of non-renewal at least sixty days prior to
July 31 of each such year. Pursuant to the agreement, as amended, the
minimum base salary for Mr. Wilson is $150,000. Mr. Wilson is entitled
to annual inflationary increases beginning on July 1, 1999, and the
Board of Directors may also award annual discretionary increases. Mr.
Wilson is also entitled to annual incentive compensation bonuses equal
to 0.25% of net sales receipts (as defined in the agreement) of
SupraLife plus 2.5% of operating income (as defined in the agreement)
of SupraLife. Mr. Wilson is paid a monthly advance against any annual
incentive compensation in the amount of 50% of the incentive
compensation accrued with respect to net sales receipts received and
operating income earned in the previous month.
The agreement further provides for severance pay for each year or
prorated partial year of the unexpired term of the agreement following
termination with or without cause in amounts equal to, for each such
year, the greater of $150,000 or one half of the total compensation,
including any incentive compensation, which would have been payable to
him during that year based on the actual performance of SupraLife in
that year. In the event of voluntary resignation or disability, Mr.
Wilson is entitled to receive his then current base salary and
incentive compensation accrued through the effective date of the
termination. In the event Mr. Wilson is terminated for misconduct, he
will not be entitled to any compensation other than his base salary
accrued through the date of termination.
Mr. Wilson has agreed that during his employment and for a period
of three years after termination of his employment he will not solicit
for competing employment the employees, sales representatives or
distributors of SupraLife.
CERTAIN TRANSACTIONS WITH RELATED PARTIES OF SUPRALIFE
SupraLife holds an interest bearing (6.5%) note receivable of
$330,278, due October, 1999, from Peter J. Holliday, who is the
Chairman of the Board and Chief Executive Officer of SupraLife. As of
June 30, 1998, accrued interest on the note was approximately $40,000.
This note represented a consolidation of advances by SupraLife to Mr.
Holliday for personal expenses.
SupraLife entered into three consulting agreements with Eagle
International Holdings Limited, an entity affiliated with Mr. Holliday,
effective February 1, 1998. Two of these agreements required retainers
of $63,000 and $27,000, respectively. $50,000 of the $63,000 retainer
was paid to Mr. Holliday in November, 1997, during negotiations with
Mr. Holliday which led to the consulting agreement for European
operations. The remaining $13,000 retainer for the European agreement,
and the $27,000 retainer for the domestic agreement, were paid in
February, 1998. These consulting agreements are described in more
detail in "Employment and Consulting Agreements of SupraLife." During
1998, SupraLife also paid an aggregate of $75,412 to Mr. Holliday as an
advance on travel and other reimbursable expenses. As of July 22,
1998, this advance has been offset by an aggregate of $24,011 in actual
expenses incurred by Mr. Holliday. SupraLife also advanced $43,195 to
Mr. Holliday in May, 1998 in anticipation of a dividend which the Board
of Directors ultimately did not declare.
In September, 1998, SupraLife credited $85,000 to the amounts
advanced to Mr. Holliday in 1998, in recognition of the transfer by
Eagle Investments Limited ("EIL"), an affiliate of Mr. Holliday, of an
aggregate of 85,000 shares of SupraLife common stock to certain persons
to whom SupraLife has present and future obligations. Each of the
persons receiving the EIL shares agreed to offset $1.00 for each share
received against present and future obligations of SupraLife to those
persons. To the extent the obligees received shares as payment for
future services to SupraLife, those shares were pledged back to EIL,
and Mr. Holliday agreed that his debt to SupraLife would be reinstated
to the extent that future services are not performed.
The $85,000 credit was applied first against the May, 1998 advance
of $43,195 plus accrued interest at 6.5%. The balance of $40,635 was
applied against unused travel and reimbursable expenses.
All of the foregoing amounts due the Company from Mr. Holliday are
secured by a pledge of 253,250 shares of SupraLife common stock held by
EIL.
SupraLife holds an interest bearing (6.5%) note receivable in the
original principal amount of $137,250, due March, 2001, from Bryan
Noar. As of June 30, 1998, the outstanding balance on the note,
including accrued interest, was approximately $102,000. The note
represented the exercise price for 225,000 shares of SupraLife common
stock purchased by Mr. Noar pursuant to the terms of a stock option
agreement. The note is secured by a pledge of the 225,000 shares.
SupraLife holds an interest bearing (6.5%) note receivable of
$375,000, due November, 2001, from John F. Wilson II. As of June 30,
1998, accrued interest on the note was approximately $40,000. The note
represented the exercise price for 225,000 shares of SupraLife common
stock purchased by Mr. Wilson pursuant to the terms of a stock option
agreement. The note is secured by a pledge of the 225,000 shares. For
the term of Mr. Wilson's employment agreement with SupraLife, he has
the option to return these 225,000 shares to SupraLife in full
satisfaction of the amount due under the note.
Lifestyle Investments, Inc., an entity affiliated with Mr. Wilson,
holds 88,377 shares of SupraLife which are pledged to SupraLife to
secure the note of the former owner of these shares in favor of
SupraLife. The former owner gave the note as payment for shares
acquired from SupraLife upon the exercise of options. In the event of
a default by the former owner under the note, SupraLife may foreclose
on the 88,377 shares held by Lifestyle Investments, Inc.
EXPENSES
It is estimated that the following expenses will be incurred in
connection with the Merger, all of which have been or will be paid by
the Company and the Reorganized Parent:
SEC Filing Fee............................. $ 1,817
Legal Fees and Expenses.................... 150,000
Accounting Fees and Expenses............... 26,000
Printing Expenses.......................... 6,000
Miscellaneous.............................. 1,183
--------
Total $185,000
========
In connection with the Merger, neither the Company nor SupraLife
anticipate incurring any appraisal, fairness opinion or solicitation
fees or expenses. Proxies may be solicited by employees of the Company
without additional compensation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE ISSUANCE OF THE MERGER SHARES
OF 1MAGE COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
PROPOSAL TO INCREASE AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors adopted a resolution on September 24, 1998,
asking the Shareholders to amend Article IV of the Company's Restated
Articles of Incorporation to increase the number of authorized shares
to 50,000,000. As of August 14, 1998, there are currently 10,000,000
authorized shares of Common Stock, and 2,203,019 of those shares (22%)
are issued and outstanding (not including 1,170,412 shares reserved for
exercises of outstanding options, warrants and convertible securities).
Pursuant to the proposal, the amendment would result in approximately
47,796,982 authorized but unissued shares (96%). The Board believes
that these shares will be sufficient for issuance from time to time as
may be required for various purposes, including the issuance of Common
Stock in connection with the Merger, any proposed financing
transactions and the issuance of or reservation of Common Stock for
employee or Director stock options or stock bonuses. Shareholders
should note, however, that notwithstanding the increase in authorized
shares, the potential dilutive effect from issuance of authorized
shares by the Board of Directors would be significantly greater since
up to 96% of the voting power and economic value of the Common Stock
could be issued without further Shareholder approval as opposed to only
78% at this time. Naturally, if the Merger takes effect, the number of
issued and outstanding shares would increase to approximately 8,919,218
shares (18%). However, the Merger will only take effect if the
Shareholders approve and adopt the Merger Agreement and this proposal
for an increase in the number of authorized shares of Common Stock. In
addition, if the Board of Directors subsequently declares a stock
dividend or stock split, the Company's capital will be greater and the
number of authorized and unissued shares will be less than as indicated
above. While the Company has no plans to effect any stock split or
stock dividend at this time, it may declare a stock split if required
by Nasdaq as a condition to continued listing of the Common Stock on
Nasdaq. See "Proposal to Grant Authorization for Reverse Stock Split."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" INCREASING THE NUMBER OF
AUTHORIZED SHARES FROM 10,000,000 TO 50,000,000 SHARES OF COMMON STOCK.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
PROPOSAL TO CHANGE NAME
The Company has formed two wholly-owned subsidiaries, SL Merger
Corp. ("SLM") and New 1mage Software LLC ("New 1mage"). If the Merger
is effected, SLM will merge into SupraLife International ("SupraLife").
SupraLife is in the business of manufacturing and marketing nutritional
supplements and personal care products. If the Merger is effected, the
electronic imaging business presently being conducted by the Company
would be transferred to New 1mage. The Company would continue to be a
publicly traded company. Pursuant to the Merger Agreement, the
Shareholders are being asked to approve an amendment to the Company's
Articles of Incorporation to change the name of the Company to
SupraLife International, Inc. Both the Company's Board of Directors
and that of SupraLife believe that a change to the Company's corporate
name should be made to SupraLife International, Inc. as representative
of the Company's new combined company and its international sales
efforts. In addition, they believe that the name change will permit
the Company's current focus to fit with its new business strategies.
For an indefinite time after the Merger, the Company's Common Stock
will continue to trade on the Nasdaq SmallCap Market under the symbol
"ISOL" in order to avoid confusion. When the information concerning
the Merger has been broadly disseminated and it is otherwise deemed
appropriate by the Reorganized Parent, the symbol may be changed to a
new symbol more representative of the new corporate name. The Company
does not plan to issue new stock certificates to its Shareholders
reflecting the new name change, except upon presentation of stock
certificates by Shareholders for transfer or reissuance and payment by
the Shareholder or transferee of the customary fee to the Company's
transfer agent.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" AN AMENDMENT TO THE
ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY FROM 1MAGE
SOFTWARE, INC. TO SUPRALIFE INTERNATIONAL, INC. IF PROPOSAL NO. 1 IS
APPROVED AND ADOPTED.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
PROPOSAL TO AMEND THE EQUITY INCENTIVE PLAN
1mage's 1996 Equity Incentive Plan (the "1996 Plan") was adopted
by the Board of Directors on December 16, 1996 and approved by the
Shareholders on May 12, 1997. The maximum number of shares reserved
under the 1996 Plan was 1,000,000 shares which the Board of Directors
believed was sufficient for future grants at the time the 1996 Plan was
approved by the Shareholders. There are currently 717,000 shares
available for grant under the 1996 Plan. The purpose of the 1996 Plan,
as amended, is to advance the interests of the Company and its
stockholders by providing a means by which the Company shall be able to
attract and retain competent employees, officers, directors,
consultants and independent contractors by providing them with an
opportunity to participate in the increased value of the Company which
their effort, initiative, and skill have helped produce.
The Merger Agreement provides that all of the options, warrants
and other convertible securities of SupraLife (the "Old Options") will
be canceled and options, warrants and other convertible securities of
1mage with substantially identical terms, conditions and exercise
prices ("New Options"), as adjusted for the Merger, will be issued to
the holders thereof at the Effective Time. There were 1,510,000 Old
Options which were granted under SupraLife's 1996 Omnibus Plan. As
adjusted for the Merger, there would be a total of 1,038,940 New
Options to be issued after the Merger. Therefore, in order for the
Company to have sufficient shares authorized for issuance under the
1996 Plan if the Merger Agreement is approved, an amendment must be
made to the 1996 Plan to increase the authorized shares for which
options can be granted under that plan. In addition, the 1996 Plan
provides that the only persons eligible to participate in that plan are
officers and directors of the Company. In order to replace the Old
Options which were previously granted by SupraLife under its stock
option plans to persons other than officers and directors of the
Reorganized Parent with New Options under the 1996 Plan, the 1996 Plan
must be amended to expand the class of persons eligible to participate
to include employees, consultants and independent contractors of the
Reorganized Parent or its subsidiaries. On September 24, 1998, the
Board of Directors approved both amendments and directed that they be
submitted to the Shareholders for approval along with the Merger.
Management of the Company, together with the Board of Directors
and the Compensation Committee (presently consisting of Messrs. Wiegand
and Burns), believe that the amendment to the Plan is important to
provide incentives to present and future officers and directors,
including the SupraLife designees for directors and officers. In
addition, the shares reserved under the Company's 1993 Stock Option
Plan have been granted and therefore are not available to provide such
incentives. Although the Company's 1994 Stock Option Plan has 298,848
shares reserved for grants, it is not qualified under Section 16b-3 of
the Securities Exchange Act of 1934, as amended, and therefore it is
not advantageous to make grants to officers and directors under this
plan.
DESCRIPTION OF THE 1996 PLAN
Administration
- --------------
The 1996 Plan is administered by the Compensation Committee of the
Company's Board of Directors (the "Committee"). The 1996 Plan provides
it could in the future be administered by the Board of Directors if and
to the extent such administration is consistent with applicable law.
The Committee presently consists of Robert Wiegand II and Charles E.
Burns. Subject to the terms of the 1996 Plan, the Committee has the
authority to determine to whom restricted stock, stock options and
stock appreciation rights may be granted, the time or times at which
stock, options and rights are granted, the number of shares covered by
each such grant, the duration of any options and rights, and any other
terms and conditions relating to restricted stock, options and rights.
All decisions and interpretations made by the Committee are binding and
conclusive on all participants in the 1996 Plan.
Notwithstanding the foregoing, the Board of Directors (with
members of the Committee abstaining) has the authority to make grants
under the 1996 Plan to members of the Committee. On May 12, 1997, the
Board of Directors amended the 1996 Plan to provide for formula grants
as a substitute for the formula grants in the 1993 Plan which no longer
has any shares available for grant. See "Automatic Grants to Committee
Members."
Securities
- ----------
The securities to be issued as restricted stock or upon the
exercise of stock options and stock appreciation rights under the 1996
Plan are shares of the Company's $.004 par value Common Stock.
Pursuant to the 1996 Plan, the maximum number of shares of Common Stock
that may be issued to participants will not exceed 2,500,000 shares, as
amended. If any options granted under the 1996 Plan are surrendered,
or for any other reason cease to be exercisable in whole or in part,
the shares as to which the option ceases to be exercisable are
available for options to be granted to the same or other participants
under the 1996 Plan, except to the extent that an option is deemed
surrendered by the exercise of a tandem stock appreciation right and
that right is paid by the Company in stock in which event the shares
issued in satisfaction of the right are not available for new options
or stock appreciation rights under the 1996 Plan.
The market value of the total shares authorized as of September
22, 1998 was $5,468,750.
Eligible Employees and Others
- -----------------------------
Employees, officers, directors, consultants and independent
contractors of the Company are eligible to receive restricted stock,
options and rights under the 1996 Plan, as amended, provided that
incentive stock options ("ISOs") intended to qualify under Section 422
of the Internal Revenue Code (the "Code") may only be granted to
officers and directors who are employees of the Company or its
subsidiaries. No participant may be granted more than 500,000 options
under the 1996 Plan.
As of September 23, 1998, the Company has approximately 21
employees and other persons eligible to receive grants under the 1996
Plan. As of the same date, SupraLife has approximately 62 employees
and other persons eligible to receive grants under the 1996 Plan.
Automatic Grants to Committee Members
- -------------------------------------
The Compensation Committee has no discretion in granting stock
options or stock grants to members of the Committee. Grants are made
once each calendar year on the last trading day in June for options to
purchase 4,000 shares of Common Stock. The exercise price of such
options is the fair market value of the shares on the date of grant.
Plan Benefits
- -------------
Set forth below in tabular form are the benefits or amounts
received or to be received by or allocated to each of the named persons
or groups under the 1996 Plan during fiscal 1998. The Committee or the
Board of Directors determines the number of shares of restricted stock,
stock options and stock appreciation rights which may be granted to
employees, officers, directors, consultants and independent contractors
of the Company (the "eligible persons") under the 1996 Plan. The
number of shares of restricted stock, stock options and stock
appreciation rights to be granted is entirely in the discretion of the
Committee or the Board of Directors. The benefits or amounts to be
received by or allocated to the eligible persons in fiscal 1998 and
future years are not determinable, except for the automatic grants made
to members of the Compensation Committee. See "Automatic Grants to
Committee Members." The shares shown give effect to the conversion of
the Old Options for New Options for the holders thereof pursuant to the
Merger.
<TABLE>
<CAPTION>
1996 PLAN
NAME AND POSITION DOLLAR VALUE ($)(1) NUMBER OF SHARES
- ----------------- -------------------- ----------------
<S> <C> <C>
David R. DeYoung, President and
Chief Executive Officer(2) -0- 0
Peter J. Holliday, Chief Executive
Officer(3) -0- 206,412
John F. Wilson II, Former President
and Chief Executive Officer(4) -0- 206,412
Executive Officer Group
(5 persons)(5) -0- 295,857
Non-Executive Officer Director
Group (5 persons)(6) -0- 46,787
Nominee for Director Group
(5 persons)(7) -0- 250,447
Associate of Director,
Executive Officer
or Nominee Group (0 persons) -0- -0-
5% or More Recipient
Group (0 persons) -0- -0-
Non-Executive Officer Employee
Group (74 persons) -0- -0-
</TABLE>
(1) Options granted by the Company were granted at not less than the
fair market value on the date of grant. The SupraLife options
that are being reissued by the Company were also granted at the
fair market value at the time of their original grant by
SupraLife. The dollar value to the grantee is solely dependent on
the increase in the stock price subsequent to the date of grant.
(2) Mr. DeYoung is the President and Chief Executive Officer of the
Company.
(3) Mr. Holliday is the Chief Executive Officer of SupraLife.
(4) Mr. Wilson is the former President and Chief Executive Officer of
SupraLife.
(5) Includes Messrs. Holliday and DeYoung. Also includes Mary Anne
DeYoung who is an Executive Officer of the Company and R. Stephen
Leisenring and Bryan Noar who will be Executive Officers of the
Reorganized Parent or of a wholly owned subsidiary thereof.
(6) Includes Robert Wiegand II, Charles E. Burns and Richard A. Knapp
who are Directors of the Company. Also includes Dann V. Angeloff
and William T. Walker, Jr. who are nominees of SupraLife to be
Directors of the Reorganized Parent.
(7) Includes Messrs. Holliday, DeYoung, Wiegand, Angeloff and Walker
who are the proposed Directors of the Reorganized Parent.
Stock Options
- -------------
Options granted under the 1996 Plan may be either ISOs or
nonqualified stock options as determined by the Committee (or the Board
of Directors with respect to options granted to Committee members) in
its sole discretion in accordance with the 1996 Plan. See "Eligible
Employees and Others."
Option Price and Duration
- -------------------------
For ISOs, the option price is equal to 100% of the fair market
value of the stock on the date the option is granted; provided,
however, in the case of ISOs granted to employees holding more than 10%
of the total combined voting power of all classes of stock of the
Company, the option price is 110% of the fair market value of the
Common Stock on the date of grant.
The option price for nonqualified stock options may be less than
the fair market value of the stock on the date of grant, but in no
event will the option price be less than 50% of the fair market value
of the stock on the date of the grant.
"Fair market value" means (a) if there is an established market
for the Company's Common Stock on a stock exchange, in an over-the-
counter market or otherwise, the mean of the highest and lowest quoted
selling prices on the valuation date, or (b) if there were no such
sales on the valuation date, then in accordance with Treas. Reg. Sec.
20.2031-2 or successor regulations. Unless otherwise specified by the
Committee (or the Board of Directors with respect to grants to members
of the Committee) at the time of grant, the valuation date for purposes
of determining fair market value is the date of grant. The Committee
(or the Board of Directors) may, however, specify in any grant of an
Option or Stock Appreciation Right (including any designation of a
formula pursuant to which options or right will be automatically
granted) that, instead of the date of the grant, the valuation date
shall be a valuation period of up to ninety (90) days preceding the
date of grant, and fair market value for purposes of such grant shall
be the average over the valuation period of the mean of the highest and
lowest quoted selling prices on each date on which sales were made in
the valuation period.
Unless otherwise prescribed by the Committee or the 1996 Plan,
options expire ten (10) years from the date of grant, or in the case of
ISOs granted to employees holding more than 10% of the total combined
voting power of all classes of stock of the Company, five (5) years
from the date of grant.
Exercise of Options and Payment for Stock
- -----------------------------------------
Options are exercisable in accordance with the terms and
conditions of the grant to the participant. The exercise price of
options may be paid in cash or in shares of the Company's Common Stock
(valued at the fair market value of the shares on the date of exercise)
or by a combination thereof. The Committee may agree to a loan by the
Company to one or more participants of a portion of the exercise price
(not to exceed the exercise price minus the par value of the shares to
be acquired, if any) for up to three (3) years with interest payable at
the prime rate quoted in the Wall Street Journal on the date of
exercise. Members of the Committee may receive such loans without
further approval. The Committee or the Board of Directors may elect to
permit a participant to effect a net exercise of an option without
tendering shares of the Company's stock as payment for the option. In
such an event, the participant would be deemed to have paid for the
exercise of the option with shares of the Company's stock and would
receive from the Company a number of shares equal to the difference
between the shares that would have been tendered and the number of
options exercised. On May 12, 1997, the Board of Directors amended the
1996 Plan to permit the members of the Compensation Committee to effect
a net exercise of any formula option without tendering any shares as
payment for the option. In addition, the Company may also enter into
"cashless exercise" arrangements with one or more licensed stock
brokerage firms whereby members of the Compensation Committee may
exercise options without payment therefor but with irrevocable orders
to such brokerage firm to immediately sell the number of shares
necessary to pay the exercise price for the option and the withholding
taxes, if any, and then to transmit the proceeds from such sales
directly to the Company in satisfaction of such obligations.
Stock Appreciation Rights
- -------------------------
Stock appreciation rights may be granted by the Committee on such
terms and conditions as it may prescribe, whether in connection with an
option granted under the 1996 Plan or by itself. Any right related to
an option will be alternative to the related option. A stock
appreciation right entitles its holder to receive the excess of the
fair market value (at the date of exercise) of a share of Common Stock
over the price specified in the grant of the right which will be the
same as the exercise price of the related option, if any.
Exercise of Stock Appreciation Rights
- -------------------------------------
A stock appreciation right is exercisable at the time or times
specified in the grant which will be the same time or times that the
related option is exercisable, if any. Exercise of a stock
appreciation right is effected by written notice to the Company. The
Company may pay the stock appreciation right in cash or shares of
Common Stock or any combination thereof in its sole discretion. The
exercise of a stock appreciation right automatically results in the
cancellation of the related option, if any, on a share-for-share basis.
The Committee may from time to time specify a limit on the maximum
amount of cash or stock which may be given upon exercise of any stock
appreciation right in any year.
Nontransferability of Options and Rights
- ----------------------------------------
During a participant's lifetime, an option or right may be
exercisable only by the participant and options granted under the 1996
Plan may not be transferred except by will or the applicable laws of
descent and distribution, provided that, to the extent permitted by
applicable law, the Committee may permit transferability of
nonqualified stock options to the immediate family or a family trust of
the participant.
Stock Grants
- ------------
The Committee may grant shares of the Company's Common Stock
subject to such restrictions, if any, as may be determined by the
Committee, including but not limited to, that person's continuous
employment by, or service to, the Company for a specified period of
time, or the attainment of specified performance goals or objectives.
The participant has the right to sell, encumber or otherwise transfer
stock so granted only to the extent that vesting and performance
criteria, if any, have been satisfied.
Tax Withholding
- ---------------
The Company may withhold, or require the payment by any
participant of, any state, federal or local taxes resulting from the
grant of any restricted stock or the exercise of any option or stock
appreciation right, provided that, to the extent permitted by law, the
Committee may in its discretion, permit some or all of such withholding
obligation to be satisfied by the delivery by the participant of, or
the retention by the Company of, shares of its Common Stock.
Amendment, Suspension and Termination
- -------------------------------------
The Committee may at any time amend, suspend or terminate the 1996
Plan, except that any such amendment cannot impair any rights or
obligations under any restricted stock, option or stock appreciation
right previously granted under the 1996 Plan. Stockholder approval is
required for any amendment which (i) increases the number of shares
reserved to the 1996 Plan or (ii) is required to be approved by
stockholders under applicable law.
Federal Income Tax Consequences
- -------------------------------
a. INCENTIVE STOCK OPTIONS. The following general rules
are applicable for Federal income tax purposes under existing
law to employees of the Company who receive and exercise ISOs
granted under the 1996 Plan:
i. Generally, no taxable income results to the
optionee upon the grant of an ISO or upon the issuance
of shares to him or her upon exercise of the ISO.
ii. No tax deduction is allowed to the Company
upon either grant or exercise of an ISO under the 1996
Plan.
iii. If shares acquired upon exercise of an ISO are
not disposed of prior to the later of two years
following the date the option was granted or one year
following the date the shares are transferred to the
optionee pursuant to the exercise of the Option, the
difference between the amount realized on any subsequent
disposition of the shares and the exercise price will
generally be treated as long-term gain or loss to the
optionee.
iv. If shares acquired upon exercise of an ISO are
disposed of before the expiration of one or both of the
requisite holding periods (a "disqualifying
disposition"), then in most cases the lesser of any
excess of the fair market value of the shares at the
time of exercise of the option over the exercise price
or the actual gain on disposition, will be treated as
compensation to the optionee and will be taxed as
ordinary income in the year of such disposition.
v. In any year that an optionee recognizes
compensation income on a disqualifying disposition of
shares acquired by exercising an ISO, the Company will
generally be entitled to a corresponding deduction for
income tax purposes.
vi. Any excess of the amount realized by the
optionee as the result of a disqualifying disposition
over the sum of the exercise price and the amount of
ordinary income recognized under the above rules will be
treated as either long-term or short-term capital gain,
depending upon the time elapsed between receipt and
disposition of such shares.
vii. The bargain element at the time of exercise of
an ISO, i.e., the amount by which the fair market value
of the Common Stock acquired upon exercise of the ISO
exceeds the exercise price, may be taxable to the
optionee under the "alternative minimum tax" provisions
of the Code.
b. NONQUALIFIED OPTIONS. Nonqualified Options are taxed in
accordance with Section 83 of the Code and the Regulations
thereunder. The following general rules are applicable to
United States holders of such options and to the Company for
Federal income tax purposes under existing law:
i. The optionee does not realize any taxable
income upon the grant of a Nonqualified Option, and the
Company is not allowed a business expense deduction by
reason of such grant.
ii. The optionee will recognize ordinary
compensation income at the time of exercise of a
Nonqualified Option in an amount equal to the excess, if
any, of the fair market value of the shares on the date
of exercise over the exercise price. The Company will
require employees to make appropriate arrangements for
the withholding of taxes on this amount.
iii. When the optionee sells the shares, he or she
will recognize a capital gain or loss in an amount equal
to the difference between the amount realized upon the
sale of the shares and his or her basis in the shares
(i.e., the exercise price plus the amount taxed to the
optionee as compensation income). If the optionee holds
the shares for longer than one year, this gain or loss
will be a long-term capital gain or loss.
iv. In general, the Company will be entitled to a
tax deduction in the year in which compensation income
is recognized by the optionee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENTS TO THE EQUITY INCENTIVE PLAN IF PROPOSAL NO. 1 IS APPROVED
AND ADOPTED.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
PROPOSAL TO GRANT AUTHORITY FOR REVERSE STOCK SPLIT
By a letter dated February 22, 1998, the Company was notified by
The Nasdaq Stock Market ("Nasdaq") of its concern regarding the
continued listing of the Company's Common Stock on The Nasdaq SmallCap
Market ("SmallCap Market") pursuant to the recently amended SmallCap
Market's continued listing rules (the "Maintenance Rules") because of
the Company's failure, among other things, to maintain a minimum bid
price of $1.00 per share for the ten consecutive trading dates prior to
the notice. The Board believes that retaining the Company's listing on
Nasdaq is important to the short-term liquidity of its Shareholders'
Common Stock and may affect the Company's long term business prospects
and shareholder value.
On September 24, 1998, the Board of Directors agreed to recommend
to the Shareholders that they grant to the Company's Board of Directors
the authority to effect a reverse stock split of the Company's Common
Stock in an amount of as much as 1-for-5, if in its judgment, such
action is necessary to satisfy the Maintenance Rules. Assuming that a
1-for-5 reverse stock split would cause the trading price of the
Company's Common Stock to increase in the same proportion as the amount
of the split, a reverse stock split of 1-for-5 would result in an
increase in the quoted bid price of the Common Stock to approximately
$9.25 (based on the average of the closing prices for the three month
period ended September 24, 1998) and thereby keep the Common Stock in
compliance with the Maintenance Rules and eligible to continue to be
quoted on Nasdaq. As noted above, Nasdaq may elect to apply the higher
initial listing standards to the Common Stock after the Merger because
of the change of control. Accordingly, the Reorganized Parent may have
to effect a reverse stock split even if it otherwise meets the $1 per
share standard of the Maintenance Rules. While it is the intent of the
Company and SupraLife to avoid any reverse stock split to preserve the
public float of the Common Stock and to avoid the erosion of
stockholder value which sometimes accompanies reverse stock splits, the
Board of Directors believes it to be in the best interests of the
Company to grant the authority to the Board of Directors of the
Reorganized Parent to effect a reverse stock split only if and to the
extent that the Board deems necessary under the circumstances.
If a reverse stock split is effected, issued shares of the
Company's Common Stock held on the record date would automatically be
converted into a reduced number of shares in accordance with the
reverse split ratio. No fractional shares would be issued and no cash
would be paid for fractional shares. Instead, each fractional share
would be rounded up to a whole share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
GRANTING THE AUTHORITY TO EFFECT A REVERSE STOCK SPLIT OF UP TO 1 FOR 5
IF REQUIRED TO MEET NASDAQ LISTING REQUIREMENTS.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
VOTE FOR APPROVAL
The Company's Restated Articles of Incorporation provide that with
respect to any action to be taken by shareholders of the Company, a
vote or concurrence of the holders of a simple majority of the
outstanding shares entitled to vote thereon, or of any class or series,
is required. Under the Company's listing agreement with Nasdaq, which
requires shareholder approval for issuance of stock which will result
in a change of control of the Company, approval and adoption of the
Merger Agreement requires the affirmative vote of the holders of a
majority of the shares of Common Stock, present in person or by proxy,
and entitled to vote at the Meeting. Only those votes cast FOR the
proposals will be counted as affirmative votes. Abstentions and broker
non-votes will be counted for purposes of establishing a quorum only.
OTHER BUSINESS
The Board of Directors knows of no other matters which will be
presented for consideration at the Meeting. However, if any other
matter is properly brought before the Meeting, it is the intention of
the persons named in the Proxy forms to vote the Proxies in accordance
with their best judgment.
SHAREHOLDER PROPOSALS
Stockholders are entitled to submit proposals on matters
appropriate for stockholder action in accordance with regulations of
the Securities and Exchange Commission. Should a stockholder intend to
present a proposal at next year's Annual Meeting of Stockholders, it
must be received by the Secretary of the Company at the Company's
principal executive offices at 6486 South Quebec, Englewood, Colorado,
80111, by no later than December 11, 1998, in order to be included in
the Company's Proxy Statement and form of Proxy relating to that
meeting.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of
the common stock of the Company, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and
the exchange on which the common stock is listed for trading. Those
persons are required by regulations promulgated under the Exchange Act
to furnish the Company with copies of all reports filed pursuant to
Section 16(a). One of the Company's directors, Richard A. Knapp, did
not file his initial statement of beneficial ownership on Form 3 after
being elected as a director in May, 1997, until June, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy
statements and other information with the SEC. Such reports and other
information may be inspected and copied or obtained by mail upon
payment of the SEC's prescribed rates at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the New York Regional Office of the SEC,
7 World Trade Center, New York, New York 10048 and may also be obtained
at the SEC's web site, www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions thereof filed by the Company
with the SEC are incorporated herein by reference and are made a part
hereof:
(a) Annual Report on Form 10-K and Amendment No. 1 to Form 10-K
on Form 10-K/A for the year ended December 31, 1997;
(b) Quarterly Reports on Form 10-Q for the quarterly periods
ended June 30, 1998 and March 31, 1998;
(c) Current Reports on Form 8-K dated June 15, 1998 and August
31, 1998; and
(d) Form 8-A, File No. 0-12535 filed on October 7, 1983.
All documents filed by the Company pursuant to Sections 13, 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy
Statement and prior to the date of the Meeting shall be deemed to be
incorporated by reference in this Proxy Statement and to be a part
hereof from the respective dates of filing of such documents with the
SEC. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a
statement contained herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute part of this Proxy Statement.
The Company undertakes to provide without charge to each person to
whom a copy of the Proxy Statement has been delivered, upon request, a
copy of any or all of the documents incorporated by reference herein
not already enclosed, other than the exhibits to such documents, unless
such exhibits are specifically incorporated by reference into the
information that this Proxy Statement incorporated. Requests for
copies should be directed to 1mage Software, Inc., 6486 S. Quebec
Street, Englewood, Colorado 80111, Attention: David R. DeYoung,
President (telephone number: 303/694-9180).
ACCOMPANYING DOCUMENTS
Accompanying this Proxy Statement is the Company's Annual Report
on Form 10-K (the "Annual Report") for the year ended December 31,
1997, as amended, which contains the following information which is
specifically incorporated by reference in this Proxy Statement:
(i) Item 7 of the Annual Report - Management's Discussion and
Analysis of Financial Conditions and Results of Operations
(ii) Item 8 of the Annual Report - Financial Statements and
Supplementary Data
(iii) Item 9 of the Annual Report - Changes in and Disagreements
with Accountants on Accounting and Financial Disclosures.
In addition, the Company's Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1998 and June 30, 1998 accompany this
Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON TO WHOM THIS
PROXY STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST TO THE COMPANY
AT 6486 SOUTH QUEBEC STREET, ENGLEWOOD, COLORADO 80111, ATTENTION:
DAVID R. DEYOUNG, PRESIDENT. IN ORDER TO ENSURE DELIVERY OF THE
DOCUMENTS PRIOR TO THE MEETING, REQUESTS MUST BE RECEIVED BY OCTOBER
15, 1998.
By order of the Board of Directors
1MAGE SOFTWARE, INC.
<PAGE>
[FORM OF PROXY]
- -----------------------------------------------------------------------
1MAGE SOFTWARE, INC.
6486 South Quebec Street, Englewood, Colorado 80111
Proxy Solicited on Behalf of the Board of Directors of the Company
The undersigned hereby constitutes and appoints Robert Wiegand II
and Mary Anne DeYoung, and each of them, as true and lawful agents and
proxies with full power of substitution in each, to represent the
undersigned at the Special Meeting of Shareholders of 1mage Software,
Inc. to be held at the Sheraton Denver Tech Center Hotel, 7007 S.
Clinton Street, Englewood, Colorado, on October 30, 1998 at 10:00 a.m.
Mountain Standard Time and at any postponements and adjournments
thereof, on all matters coming before said meeting and to vote all
shares of common stock held by the undersigned as follows:
1. Adoption of the Merger Agreement and the actions contemplated by
the Merger Agreement.
/ / FOR / / AGAINST / / ABSTAIN
2. Amendment of the Company's Articles of Incorporation to increase
the authorized number of shares from 10,000,000 to 50,000,000 shares of
Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
3. If Proposal No. 1 is approved and adopted, amendment of the
Company's Articles of Incorporation to change the name of the Company
to SupraLife International, Inc.
/ / FOR / / AGAINST / / ABSTAIN
4. If Proposal No. 1 is approved and adopted, amendment of the
Company's 1996 Equity Incentive Plan to accommodate the exchange of the
currently outstanding stock options of SupraLife International by
increasing the number of shares authorized under the Plan to 2,500,000
shares and changing the class of persons eligible to receive grants
under the Plan.
/ / FOR / / AGAINST / / ABSTAIN
5. Authorization to the Board of Directors to declare a reverse stock
split of the Company's Common Stock of as much as 1 for 5 if required
to meet Nasdaq listing requirements.
/ / FOR / / AGAINST
(Continued and to be signed on the other side.)
- -----------------------------------------------------------------------
You are encouraged to specify your choices by marking the
appropriate box, see reverse side, but you need not mark any boxes if
you wish to vote in accordance with the Board of Directors'
recommendations. The persons named on the reverse side as agents and
proxies cannot vote your shares unless you sign and return this card.
This proxy when properly executed will be voted in the manner
directed herein by the undersigned. If no direction is made, this proxy
will be voted FOR Proposals 1, 2, 3, 4 and 5. If any matters properly
come before the meeting other than those specified above, this proxy
will be voted in the discretion of the proxy holders.
Dated -----------------, 1998
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Signature(s)
Please mark, sign and return
promptly using the enclosed
envelope. Executors, administrators,
trustees, etc. should give a title
as such. If the signer is a
corporation, please sign full
corporate name by duly authorized
officer.
- -----------------------------------------------------------------------
<PAGE>
ATTACHMENT 1
COLORADO DISSENTER RIGHTS
A holder of 1mage Common Stock is or may be entitled to assert
dissenter's rights ("Dissenting Shareholder") and obtain payment of the
fair value of their shares, under Article 113 of the Colorado Business
Corporation Act, Colo. Rev. Stat. Section 7-113-101 et seq., a copy of
which is attached hereto as Appendix I (the "Colorado Dissenter's
Rights Statute"), if the Merger is effectuated. To exercise the right
to dissent, (1) the Dissenting Shareholder must provide written notice
to the Company of his or her intent to demand payment for his or her
shares if the Merger is effectuated, (2) the Dissenting Shareholder
must not vote in favor of proposal No. 1 at the Meeting, and (3) the
Dissenting Shareholder must comply with the other provisions of the
Colorado Dissenter's Rights Statute. If the Merger is effectuated, the
Company will notify the Dissenting Shareholder with written notice of
the Merger and the procedures for the Dissenting Shareholder to demand
payment and deliver their stock to the Company. If a Dissenting
Shareholder is dissatisfied with the payment or offer, the Dissenting
Shareholder is entitled to follow the procedures as outlined in the
Colorado Dissenter's Rights Statute. The foregoing discussion of the
law relating to dissenters rights is not a complete statement of such
rights and is qualified in its entirety by reference to Appendix I.
THIS DISCUSSION AND APPENDIX I SHOULD BE REVIEWED CAREFULLY BY ANY
HOLDER OF 1MAGE STOCK WHO WISHES TO EXERCISE STATUTORY DISSENTERS
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE TO
STRICTLY TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN
WILL RESULT IN THE LOSS OF DISSENTERS RIGHTS. 1mage considers it
unlikely that there would be a significant number of Dissenting
Shareholders.
The notice will (i) state the effective date of the Merger, (ii)
state an address at which the Company will receive payment demands and
the address of a place where certificates must be deposited, (iii)
supply a form for demanding payment, which form will request a
dissenter to state an address to which payment is to be made, (iv) set
the date by which the Company must receive the payment demand and
certificates, which date will not be less than 30 days after the date
the notice is given, and (v) provide a copy of the Colorado Dissenter's
Right Statute. Upon receipt by the Company of the demand for payment
and the certificates, the Company will within 30 days send payment with
(i) the Company's balance sheet as of the end of December 31, 1997, and
income statement, statement of changes in shareholders' equity and
statement of cash flow for December 31, 1997, (ii) a statement of the
Company's estimate of the fair market value of the shares, (iii) an
explanation of how the interest was calculated, (iii) a statement of
the dissenter's right to demand payment, and (iv) a copy of the
Colorado Dissenter's Right Statute. If a dissenter is dissatisfied
with the payment or offer, the dissenter is entitled to follow the
procedures as outlined in the Statute. The foregoing discussion of the
law relating to dissenters rights is not a complete statement of such
rights and is qualified in its entirety by reference to Appendix I.
THIS DISCUSSION AND APPENDIX I SHOULD BE REVIEWED CAREFULLY BY ANY
HOLDER OF 1MAGE STOCK WHO WISHES TO EXERCISE STATUTORY DISSENTERS
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE
STRICTLY TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN
WILL RESULT IN THE LOSS OF DISSENTERS RIGHTS. Unless any Shareholder
shall have properly submitted a demand for payment and their
certificates prior to the 30 day deadline, any such Shareholder will
not be entitled to payment for their shares of the Company's Common
Stock.
A record owner, such as a broker, who holds shares of 1mage stock
as nominee for others, may exercise the demand for payment rights with
respect to the shares of 1mage Stock held for all or less than all
beneficial owners of shares of 1mage stock as to which such person is
the record owner. In such case the written demand must set forth the
number of shares of 1mage Stock covered by such demand. Where the
number of shares of 1mage Stock is not expressly stated, the demand
will be presumed to cover all shares of 1mage outstanding in the name
of such record owner. Beneficial owners who are not record owners and
who intend to exercise demand rights should instruct the record owner
to comply strictly with the statutory requirements with respect to the
exercise of demand rights within 30 days after the date of the written
notice by the Company.
INDEX TO FINANCIAL STATEMENTS
SupraLife International and Subsidiaries
Report of Independent Public Accountants
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flow for the years ended December
31, 1997, 1996 and 1995
Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997
Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997
Unaudited Pro Forma Condensed Consolidated Financial Statements for
SupraLife International and 1mage Software, Inc.
Pro Forma Condensed Consolidating Balance Sheet June 30, 1998
Pro Forma Condensed Consolidating Statement of Operations for the
six months ended June 30, 1998
Pro Forma Condensed Consolidating Statement of Operations December
31, 1997
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH AUDITORS' REPORT
Report of Independent Public Accountants
----------------------------------------
To the Shareholders' of
SupraLife International:
We have audited the accompanying consolidated balance sheets of
SUPRALIFE INTERNATIONAL (formerly Eagle Lifestyle Nutrition, Inc.) (a
California corporation) and subsidiaries, as of December 31, 1997 and
1996 and the related consolidated statements of income, shareholders'
equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our 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.
As discussed in Note 9 to the consolidated financial statements, the
Company is a defendant in various litigation with certain former
distributors.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
SupraLife International and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Diego, California
April 2, 1998
H&B Harlan & Boettger, LLP
Certified Public Accountants
James C. Harlan II
William C. Boettger
P. Robert Wilkinson
Marshall J. Varano
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
of Eagle Lifestyle Nutrition, Inc.
We have audited the accompanying statements of income, shareholders'
equity (deficit) and cash flows of Eagle Lifestyle Nutrition, Inc. for
the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statement of income,
shareholders' equity (deficit) and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of income,
shareholders' equity (deficit) and cash flows. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the
statement of income, shareholders' equity (deficit) and cash flows. We
believe that our audit of the statements of income, shareholders'
equity (deficit) and cash flows provides a reasonable basis for our
opinion.
In our opinion, the statements of income, shareholders' equity
(deficit) and cash flows referred to above presents fairly, in all
material respects, the results of the operations of Eagle Lifestyle
Nutrition, Inc. for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/Harlan & Boettger
San Diego, California
December 1, 1996
5415 Oberlin Drive San Diego, California 92121
Telephone (619) 535-2000 Facsimile (619) 535-2015
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
------------------------------------------
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1997 AND 1996
---------------------------------
<TABLE>
<CAPTION>
ASSETS
-------
1997 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash $1,444,471 $3,423,361
Inventory 510,931 794,323
Prepaid and deferred
taxes 771,275 245,075
Prepaid expenses and other 238,819 323,491
---------- ----------
Total current assets 2,965,496 4,786,250
RELATED PARTY NOTES RECEIVABLE 442,365 388,624
PROPERTY AND EQUIPMENT, net 1,539,269 916,380
OTHER ASSETS:
Deposits and other 56,271 83,599
Deferred tax asset 59,177 201,173
Goodwill, net 83,678 -
---------- ----------
$5,146,256 $6,376,026
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
------------------------------------------
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1997 AND 1996
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 556,497 $1,303,293
Accrued liabilities 720,727 767,076
Commissions and incentives payable 1,000,384 2,731,618
Current portion of capital lease
obligations 198,420 33,839
Customer advances 44,623 85,648
---------- ----------
Total current liabilities 2,520,651 4,921,474
---------- ----------
Capital Lease Obligations, net of current
portion 546,518 48,637
---------- ----------
Commitments and contingencies (Notes 8 and 9)
Shareholders' equity:
Preferred stock, no par value, 5,000,000
shares authorized, no shares issued or
outstanding - -
Common stock, no par value, 20,000,000
shares authorized, 9,928,065 shares
issued and outstanding, at December 31,
1997 and 1996 1,526,450 1,526,450
Stock subscription notes receivable (970,713) (1,116,314)
Retained earnings 1,523,350 995,779
---------- ----------
Total shareholders' equity 2,079,087 1,405,915
---------- ----------
$5,146,256 $6,376,026
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
------------------------------------------
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $29,112,646 $33,331,020 $10,477,803
----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 6,407,504 6,888,508 1,998,544
Commissions and incentives 9,308,846 14,136,553 4,322,270
Selling, general and
administrative 9,587,137 7,179,742 4,025,502
----------- ----------- -----------
Total operating expenses 25,303,487 28,204,803 10,346,316
----------- ----------- -----------
Income from operations 3,809,159 5,126,217 131,487
INTEREST INCOME AND OTHER, net 72,122 197,202 100,374
----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,881,281 5,323,419 231,861
PROVISION (BENEFIT) FOR
INCOME TAXES 1,566,657 2,193,000 (179,141)
----------- ----------- -----------
Net income $ 2,314,624 $ 3,130,419 $ 411,002
=========== =========== ===========
Basic earnings per share:
Net income $ .23 $ .31 $ .05
=========== =========== ===========
Weighted average number
of common shares 9,928,065 9,983,176 8,167,124
=========== =========== ===========
Diluted earnings per share:
Net income $ .23 $ .30 $ .04
=========== =========== ===========
Weighted average number of
common shares and common
stock equivalents 9,928,065 10,402,924 10,015,799
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
------------------------------------------
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
Stock
Subscription
Common Stock Notes
Shares Amounts Receivable
--------- ---------- ------------
<S> <C> <C> <C>
Balances, December 31, 1994 5,008,500 $ 611,705 $ -
Issuance of common stock 315,000 74,761 -
Exercise of common stock
options 2,969,190 721,002 (452,876)
Payments on stock
subscriptions receivable - - 167,512
Dividends on common stock - - -
Shareholder borrowings - - -
Net income - - -
--------- ---------- ----------
Balances, December 31, 1995 8,292,690 1,407,468 (285,364)
Exercise of common stock
options 2,770,305 1,454,311 (1,454,311)
Shareholder borrowings
Payments on stock
subscriptions receivable - - 40,137
Stock repurchase and
retirement (1,134,930) (1,705,329) 583,224
Conversion of notes receivable - - -
Dividends on common stock - - -
Income tax benefit from employee
stock transaction - 370,000 -
Net income - - -
--------- ---------- ----------
Balances, December 31, 1996 9,928,065 1,526,450 (1,116,314)
Dividends on common stock - - -
Payments on stock subscription
notes receivable - - 145,601
Net income - - -
--------- ---------- ----------
Balances, December 31, 1997 9,928,065 $ 1,526,450 $ (970,713)
========= =========== ==========
Total
Receivable Retained Shareholders'
From Earnings Equity
Shareholder (Deficit) (Deficit)
----------- ---------- -------------
Balances, December 31, 1994 $(410,988) $(411,803) $(211,086)
Issuance of common stock - - 74,761
Exercise of common stock
options - - 268,126
Payments on stock
subscriptions receivable - - 167,512
Dividends on common stock - (342,765) (342,765)
Shareholder borrowings (923,315) - (923,315)
Net income - 411,002 411,002
---------- ---------- ----------
Balances, December 31, 1995 (1,334,303) (343,566) (555,765)
Exercise of common stock
options - - -
Shareholder borrowings (92,258) (92,258)
Payments on stock
subscriptions receivable - - 40,137
Stock repurchase and
retirement 1,166,776 (1,294,671) (1,250,000)
Conversion of notes
receivable 259,785 - 259,785
Dividends on common stock - (496,403) (496,403)
Income tax benefit from
employee stock transaction - - 370,000
Net income - 3,130,419 3,130,419
---------- ---------- ----------
Balances, December 31, 1996 - 995,779 1,405,915
Dividends on common stock - (1,787,053) (1,787,053)
Payments on stock
subscription notes
receivable - - 145,601
Net income - 2,314,624 2,314,624
---------- ---------- ----------
Balances, December 31, 1997 $ - $1,523,350 $2,079,087
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
------------------------------------------
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities
Net income $2,314,624 $3,130,419 $ 411,002
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 369,909 162,438 104,118
Loss on impairment of property
and equipment - 368,000 7,215
Interest capitalized into loans (21,923) (70,493) (66,690)
Exercise of stock options for
less than fair market value - - 268,127
Deferred tax asset 41,996 (185,400) (215,773)
Changes in assets and
liabilities:
Inventory 351,156 (500,372) (145,792)
Prepaids and other (306,107) (239,118) 67,535
Accounts payable and accrued
liabilities (793,145) 1,727,986 1,204,025
Commissions and incentives
payable (1,731,234) 1,716,634 -
Customer advances (41,025) (464,223) 461,974
---------- ---------- ----------
Net cash provided by
operating activities 184,251 5,645,871 1,960,676
---------- ---------- ----------
Cash flows from investing
activities:
Capitalized product formulation
costs - - - (17,785)
Acquisition of subsidiaries (180,000) - -
Purchases of property and
equipment (143,141) (918,387) (262,343)
Notes receivable (31,818) (58,346) -
---------- ---------- ----------
Net cash used in
investing activities (354,959) (976,733) (280,128)
---------- ---------- ----------
Cash flows from financing
activities:
Payments on notes payable - - (172,022)
Collections on stock
subscription notes
receivable 145,601 40,137 167,512
Dividends paid on common stock (1,787,053) (496,403) (342,765)
Payments under capital lease
obligations (166,730) (138,611) (34,074)
Stock repurchase - (1,250,000) -
Loans made to shareholders - (92,258) (856,625)
Proceeds from private placement - - 74,761
---------- ---------- ----------
Net cash used in
financing activities (1,808,182) (1,937,135) (1,163,213)
---------- ---------- ----------
Net increase (decrease) in cash (1,978,890) 2,732,003 517,335
CASH, beginning of the year 3,423,361 691,358 174,023
---------- ---------- ----------
CASH, end of the year $1,444,471 $3,423,361 $ 691,358
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
------------------------------------------
(Formerly Eagle Lifestyle Nutrition, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BUSINESS DESCRIPTION
SupraLife International (formerly Eagle Lifestyle Nutrition, Inc.)
and subsidiaries (the "Company") develops, manufactures and
distributes preventive health and nutritional products that
contain a full spectrum of minerals, vitamins and other nutrients.
The Company markets its products in the United States and Europe
through a network of independent distributors who use the products
themselves or resell them to other distributors or consumers. The
Company's active operating subsidiaries consist of Soaring Eagle
Ventures, Inc., a California corporation in which most U.S.
domestic sales and distribution operations are conducted;
SupraLife International, Ltd. and SupraLife International B.V.,
European corporations in which all European sales and distribution
operations are conducted (see Note 3); Proven Results, Inc. (PRI)
a California corporation formed in 1997 that specializes in weight
loss seminars and has not yet generated significant revenues; and
Naturecuetical International, Inc., a California corporation
formed in 1997 to manufacture the Company's core products (see
Note 9 - Major Suppliers).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
INVENTORY
Inventory consists primarily of preventive health and nutritional
products, and is stated at the lower of cost (using the first-in,
first-out method) or market. At December 31, 1996, substantially
all inventory consists of finished goods. During 1997, the
Company began in-house manufacturing of certain of its products
(see Note 9 - Major Suppliers) and accordingly, had approximately
$75,000 in raw materials as of December 31, 1997.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciated using
the straight-line method over the estimated useful lives of the
assets, which range from five to ten years. Assets under capital
leases are depreciated by the straight-line method over the
shorter of the lease term or the useful lives of the assets.
Maintenance, repairs and minor renewals are charged to operations
as incurred. Major replacements or betterments are capitalized.
When property and equipment is retired or otherwise disposed of,
the related cost and accumulated depreciation are eliminated from
the respective accounts and any gain or loss on disposition is
reflected in operations.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over the fair value of net assets acquired
(goodwill) is amortized using the straight-line method over 15
years. The Company periodically re-evaluates the original
assumptions and rationale utilized in the establishment of the
carrying value and estimated life of the asset. The determinants
used for this evaluation include management's estimate of the
asset's continuing ability to generate positive income from
operations and positive cash flow in future periods as well as the
strategic significance of the intangible asset to the Company's
business objectives. Management believes that there has been no
impairment of the goodwill as reflected in the Company's
consolidated financial statements as of December 31, 1997.
PRODUCT DEVELOPMENT AND CONSULTING
The Company uses various consultants (see Note 7) to perform
research and development activities and to consult and speak, on
behalf of the Company and its distributors, related to existing
and future products and nutrition. These costs are expensed as
incurred. During 1997, 1996 and 1995, the Company incurred
approximately $440,000, $230,000 and $82,000, respectively, on
these activities.
REVENUE RECOGNITION
The Company generally receives payment for product sales at the
time orders are placed by independent distributors. Sales are
recorded when products are shipped to the customer. Customer
advances represent cash received for unshipped merchandise.
Net sales represent orders shipped, less returns and allowances.
Provisions are made for estimated returns and allowances at the
time of sale.
COMMISSIONS AND OTHER INCENTIVES
The Company compensates its distributors through commissions and
other incentives which reward the distributors for sales, the sign-
up of new distributors and achievement of certain milestones.
Commissions are recorded when the merchandise is shipped.
Payments of commissions are generally paid within the two month
period following the sale.
CREDIT CARD POLICY
The Company receives a significant percentage of its sales
proceeds through credit card purchases by its distributors.
Credit under these accounts is extended by third parties, and
accordingly, the Company bears minimal financial risk under these
agreements. The Company's agreements with third-party credit
companies provide for the electronic processing of credit
approvals and electronic submission of transactions. The Company
is required to maintain certain cash balances which guarantee
credit card chargebacks. The balance of such restricted cash was
approximately $142,000 and $220,000 at December 31, 1997 and 1996,
respectively. Fees incurred on credit card sales are included in
selling, general and administrative expenses and were
approximately $851,000, $861,000 and $350,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
INCOME TAXES
In accordance with SFAS No. 109 "Accounting for Income Taxes," the
Company recognizes an asset or liability for the deferred tax
consequences of temporary differences between tax bases of assets
and liabilities and their reported amounts in the financial
statements. Deferred tax expense (benefit) results from the net
change during the year of deferred tax assets and liabilities.
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 in
the financial statements and disclosures in the accompanying
notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company currently accounts for its stock-based compensation
plans using the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25).
In 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Under the provisions of
SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value-based method or continue
measuring compensation expense for those plans using the intrinsic
value method prescribed in APB 25. SFAS 123 requires that
companies electing to continue using the intrinsic value method
must make pro forma disclosures of net income and earnings per
share as if the fair-value-based method of accounting has been
applied.
The Company has elected to continue to account for stock-based
compensation using the intrinsic value method, but has complied
with the pro forma disclosure requirements (see Note 6).
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at the exchange rate in effect at the
balance sheet date, and revenue and expenses are translated at the
average exchange rate for the period. Translation gains or losses
of the Company's foreign subsidiaries are not included in net
income but are reported as a separate component of stockholders'
equity. The functional currency of those subsidiaries is the
primary currency in which the subsidiary operates. Gains and
losses on transactions in denominations other than the functional
currency of the Company's foreign operations, while not material
in amount, are included in the result of operations. Most of the
Company's worldwide sales and inventory and equipment purchases
are denominated in U.S. dollars, and most of the Company's cash is
invested in U.S. dollars. As a result, the Company typically does
not enter into foreign exchange transactions to hedge balance
sheet and intercompany balances against movements in foreign
exchange rates.
Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share," (EPS) which
sets forth the basis for the computation of "basic" EPS and
"diluted" EPS. Basic EPS excludes dilution and is computed by
dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that
would then share in the earnings of the entity. Diluted EPS is
computed on the basis of the weighted average shares of common
stock outstanding plus common equivalent shares arising from the
effect of dilutive stock options, using the treasury-stock method.
All EPS amounts for prior years have been restated to conform to
these new standards, and the effect of the restatement was not
significant. For the year ended December 31, 1997, the effect of
common equivalent shares was antidilutive and therefore, they were
not included in the calculation of dilutive EPS.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The statement requires
that an enterprise classify items of other comprehensive income by
their nature in a financial statement and to display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
3. ACQUISITIONS
Effective June 1, 1997, the Company acquired all of the
outstanding stock of Vitall International Ltd., Vitall
International B.V., and Vitall France S.A.R.L. (together Vitall).
Vitall was a small network marketing company with operations
primarily in the United Kingdom and the Netherlands. The purchase
price, including acquisition costs, was approximately $180,000 in
cash. The acquisition was accounted for using the purchase method
of accounting. Accordingly, the results of operations of Vitall
have been included in these consolidated financial statements from
June 1, 1997. All acquired assets and liabilities of Vitall have
been recorded at estimated fair market values on May 31, 1997,
with the excess of the cost over the net assets acquired of
approximately $90,000 allocated to goodwill. Subsequent to the
acquisition, the Vitall subsidiaries' names were changed to
SupraLife International Ltd., SupraLife International B.V. and
SupraLife International S.A.R.L.
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1996 consists
of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Computer equipment $1,381,255 $ 685,358
Equipment 524,011 310,794
Furniture and fixtures 267,823 196,461
Leasehold improvements 104,354 98,470
---------- ----------
2,277,443 1,291,083
Less: accumulated depreciation
and amortization (738,174) (374,703)
---------- ----------
Property and equipment, net $1,539,269 $ 916,380
========== ==========
</TABLE>
5. INCOME TAXES
The components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $1,151,961 $1,852,400 $ -
State 372,700 526,000 36,632
---------- ---------- ---------
1,524,661 2,378,400 36,632
Deferred provision
(benefit) 41,996 (185,400) (215,773)
---------- ---------- ---------
Provision for income
taxes $1,566,657 $2,193,000 $(179,141)
========== ========== =========
</TABLE>
The Company's deferred net tax assets as of December 31, 1997 and
1996, relates to the following temporary differences:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Nondeductible accruals 191,298 33,200
Depreciation and amortization 1,163 42,240
Impairment of fixed assets 40,000 147,200
State taxes 126,716 178,533
---------- ----------
$ 359,177 $ 401,173
========== ==========
</TABLE>
The effective tax rate reflected in the accompanying statements of
income differs from the Federal statutory rate primarily as a
result of state taxes and permanent differences.
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK
On March 28, 1996, the Board of Directors and shareholders voted
to authorize 5,000,000 shares of preferred stock, no par value.
The Board of Directors has the right to establish any right and
preferences of any series of preferred stock it so authorizes. At
December 31, 1997 and 1996, no preferred stock was issued or
outstanding.
Stock Split
On March 29, 1996 and December 20, 1996, the Company's Board of
Directors authorized fifteen-for-one and three-for-one stock
splits, respectively, effective for each shareholder of record as
of those dates. Accordingly, all share, per share and stock
option data have been restated to reflect the splits for all
periods presented.
Purchase of Common Stock
In October 1996, approximately 4.6 million shares of the Company's
then outstanding capital stock was purchased by certain officers
and directors from other officers and a director of the Company
for approximately $10.6 million. To finance the majority of the
purchases, the new shareholders issued notes payable to the former
shareholders, which are collateralized by the purchased shares of
common stock. Future payments by the new shareholders on the
notes payable might be dependent upon cash received from the
Company in the form of dividends or compensation. The Company has
not guaranteed the payment of these notes and none of the
Company's assets have been pledged as collateral on the notes. As
of April 1, 1998, certain of the new shareholders were in default
on payments due under the notes payable. The parties are
currently in discussions to negotiate resolution of this condition
which might include foreclosure on the notes.
Concurrent with the above transaction, in 1996 the Company
purchased and retired approximately 1.1 million shares of its
capital stock in exchange for $1,250,000 in cash and retirement of
$1,750,000 of notes receivable from one of the former
shareholders.
STOCK SUBSCRIPTION NOTES RECEIVABLE
During the years ended December 31, 1996 and 1995, stock options
were exercised by certain members of management and Company
employees to purchase 5,739,495 shares of common stock. The
shares were sold in exchange for $1,907,186 of five year notes
bearing interest at six and one-half percent per annum.
Accordingly, these stock subscription notes receivable are
reflected in the accompanying consolidated financial statements as
a separate component of shareholders' equity. The Company holds
the related stock certificates as collateral for the notes.
STOCK OPTION PLANS
In 1996, the Company adopted an omnibus stock plan for the
granting of incentive stock options, as well as non qualified
stock options. The plan provides for the grant of options to
purchase shares of common stock to key employees and other persons
affiliated with the Company. The right to exercise such options
is subject to vesting as defined by the Board of Directors, and
terminates 10 years from the date of grant.
At December 31, 1997, 492,000 options were exercisable under the
option plan. Shares available to be granted at December 31, 1997
were 993,000.
Activity under the option plan is summarized as follows:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price
---------- -----------
<S> <C> <C>
Options outstanding at
January 1, 1995 2,574,495 $1.67-$5.00
Granted 4,095,000 .25- .61
Exercised (2,969,190) .12- .28
---------- -----------
Options outstanding at
January 1, 1996 3,700,305 $.25- $.61
Granted 1,440,000 .61- 3.17
Exercised (2,770,305) .61- 1.67
Terminated (1,395,000) .26- .28
---------- -----------
Options outstanding at
December 31, 1996 975,000 $1.67-$3.17
Granted 45,000 5.00
---------- -----------
Options outstanding at
December 31, 1997 1,020,000 $1.67-$5.00
========== ===========
</TABLE>
The outstanding options expire at various dates through 2007.
Subsequent to year end, the Board of Directors voted to reprice
720,000 of the outstanding options to more closely approximate the
fair market value. The options are now exercisable at $.60 per
share.
The Company has adopted Statement of Financial Accounting
Standards 123 "Accounting For Stock-Based Compensation" (SFAS 123)
and has elected to continue to account for stock options granted
under APB 25, which recognizes compensation cost based upon the
intrinsic value of the equity award. No compensation expense has
been recognized in the consolidated statements of income for any
equity awards granted during 1995, 1996 and 1997.
Under the minimum value pricing model, the options granted to date
were determined to have no value. As a result had compensation
cost for stock options granted during the years ended December 31,
1997, 1996 and 1995 been determined consistent with SFAS 123, the
Company's net income and related per share amounts on a pro forma
basis would be the same as reported in the accompanying
consolidated statement of income.
7. RELATED PARTY TRANSACTIONS
As of December 31, 1997 and 1996, the Company held an interest
bearing (6.5%) note receivable of $330,278, due October 1998, from
the former majority shareholder of the Company, who continues to
serve on the Company's Board of Directors. As of December 31,
1997, accrued interest on the note was approximately $39,000. The
Company expects to renegotiate the due date of this note
receivable to a period beyond October 1998 and, accordingly, has
recorded the asset as long-term. This director also has
consulting agreements with the Company for management advisory
services. During 1997, payments made under a consulting agreement
were $7,500 per month. Effective in February 1998, additional
consulting agreements were entered into under which aggregate
monthly payments will be $25,000. These agreements expire on
January 31, 2000.
The Company had a consulting agreement with a shareholder who was
also a distributor of the Company's products. Under the
consulting agreement the shareholder/distributor served as a
speaker at distributor recruiting meetings and other promotional
events. In 1996 and 1995, payments of approximately $100,000 and
$65,000, respectively, were made to the shareholder/distributor
under this agreement. On February 22, 1997, the distributor and
consulting agreements with this individual were terminated (see
also Note 9 - Litigation).
The Company has a service agreement with an entity owned by a
shareholder of the Company. Under the agreement, the related
entity conducts new product development and formulation activities
and provides educational and promotional services at distributor
meetings. In 1997, 1996 and 1995, the Company made payments of
approximately $260,000, $124,000 and $90,000, respectively, under
this agreement. Additionally, included in notes receivable in the
accompanying 1997 and 1996 balance sheets is approximately $70,000
and $58,000, respectively, due from this entity.
8. LEASES
OPERATING LEASES
The Company leases certain facilities and equipment used in its
operations under non-cancelable operating leases. Future minimum
lease payments for operating leases at December 31, 1997, were as
follows:
Year Ending December 31, Amount
----------------------- ----------
1998 $ 306,000
1999 270,000
2000 245,000
2001 194,000
2002 135,000
Thereafter 40,000
----------
$1,190,000
==========
Rent expense for such leases was approximately $275,000,$189,000
and $140,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
CAPITAL LEASES
The Company leases computers and other equipment under capital
lease agreements. These agreements provides for interest rates
ranging from 9.5% to 15.6% and expire at various dates through
February 2002.
Future minimum lease payments under capitalized leases and the
present value of the minimum lease payments as of December 31,
1997 are as follows:
Year Ending December 31, Amount
----------------------- ----------
1998 $ 278,892
1999 279,322
2000 216,931
2001 151,803
2002 22,114
---------
Total payments 949,062
Less: Amount representing interest (204,124)
---------
Present value of minimum capital
lease payments 744,938
Less: Current portion of capital leases (198,420)
---------
Capital lease obligations, noncurrent $ 546,518
=========
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
Certain officers of the Company have written employment agreements
which provide for annual salaries and bonuses based on percentages
of net sales and operating profit, as defined. These agreements
expire in 1999 to 2001.
DISTRIBUTION AGREEMENTS
The Company has entered into distribution agreements with each of
its independent distributors. Among other things, these
agreements require compliance with the Company's policies and
procedures. Violations of the Company's stated policies and
procedures by a distributor may ultimately result in termination
of the related distributorship agreement.
Litigation
The Company is involved in certain arbitration matters, which are
primarily related to the Company's enforcement of its policies in
its distributor agreements.
In addition, a former distributor who is also a shareholder of the
Company, has filed a lawsuit against the Company and certain
current and former officers, directors and shareholders. The
primary claim in this matter alleges violation of federal and
state antitrust laws as they relate to a Company policy which
prohibits distributors from engaging in a competitive business.
In addition, the plaintiff alleges that certain shareholders and
officers and directors of the Company engaged in transactions or
undertook actions which negatively impacted the former distributor
as a minority shareholder.
The Company believes that all of the legal matters brought against
the Company by these distributors are without merit. Legal
counsel has advised the Company that it has meritorious defenses
to all claims asserted against it and the Company has filed a
separate lawsuit against one of the distributors. The Company
also intends to vigorously defend itself and strictly enforce
contractual compliance with and by its distributors. However, the
Company is currently unable to determine the likelihood of a
favorable or unfavorable outcome or determine an estimate of
potential loss, if any, related to the matters discussed above.
OTHER
The Company is subject to numerous federal, state and local laws
and regulations which effect its activities and operations.
Management believes that the Company is in material compliance
with such laws and regulations and that potential liabilities, if
any, are not material to the Company's financial position or
results of operations.
MAJOR SUPPLIERS
Although there are various other sources of supply available, in
1997 and 1996 the Company acquired 100% of its liquid mineral raw
material from one vendor, located in Utah. The Company has a
purchase commitment with this supplier to purchase annual amounts
of raw material of approximately $1.3-$1.9 million through 2005.
During 1997, the Company purchased approximately 103,000 gallons
below the minimum level required. Although the supplier has the
ability to require the Company to purchase up to the minimum
level, the supplier has verbally communicated to the Company that
it may purchase on an as needed basis. Until the contract is
modified in writing, there can be no assurance that the supplier
will not assert a claim.
In December 1997, the Company entered into agreements with
consultants to oversee production of certain of the Company's
products and provide research and development services. Under the
agreements, the Company also purchased production equipment for
$100,000 in cash and agreed to pay a minimum of $37,000 a month
for production management and research and development services.
These agreements expire in 1999. Concurrently, the Company formed
a new wholly-owned subsidiary, Natureceutical International, Inc.,
in which the Company's core products will be manufactured.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years
ended December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for income
taxes $2,042,494 $2,022,000 $ 11,750
========== ========== ==========
Noncash investing and
financing activities:
Capital lease
obligations
incurred $ 829,192 $ 142,000 $ 50,132
========== ========== ==========
Repurchase of stock in
exchange for notes
receivable $ - $1,750,000 $ -
========== ========== ==========
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
During the six months ended June 30, 1998, the Company incurred a
net loss of approximately $977,000 (see unaudited Consolidated
Statements of Operations for the six months ended June 30, 1998).
The losses during 1998 are primarily the result of the adverse
impact on net sales of the terminations in 1997 of certain
distributors, the costs of litigation arising from these
terminations, the settlement in late April 1998 of litigation by a
former vice-president, and start-up losses from PRI and the
Company's European operations. These operating losses were funded
using cash on hand, resulting in a reduction in cash from
approximately $1,444,000 on December 31, 1997 to approximately
$507,000 at June 30, 1998, and current liabilities exceeding
current assets by approximately $663,000 at June 30, 1998.
Subsequent to June 30, 1998, the Company reduced headcount,
implemented policies to reduce certain other types of
expenditures, and is actively pursuing new marketing and
distribution opportunities with the goal of increasing sales.
Additionally, the Company is seeking new financing which would be
used to accelerate growth in the domestic sales network, explore
new marketing and distribution opportunities, general working
capital, as well as for continued funding of PRI and international
operations. The Company currently has no firm commitments for
financing, and there can be no assurance that such financing will
be available on terms acceptable to management, or available at
all. In the event financing is not available on acceptable terms,
management plans to further reduce costs, including international
operations and PRI and, if necessary, salary expense and other
selling, general and administrative costs. Management believes
these actions would result in sufficient liquidity to continue
operating for at least the next twelve months.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
----------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 506,970 $1,444,471
Inventory 443,397 510,931
Prepaid and deferred taxes 1,035,128 771,275
Prepaid expenses and other 481,477 238,819
---------- ----------
Total current assets 2,466,972 2,965,496
RELATED PARTY NOTES RECEIVABLE 495,832 442,365
PROPERTY AND EQUIPMENT, net 1,306,252 1,539,269
OTHER ASSETS:
Deposits and other 256,064 56,271
Deferred tax asset 59,177 59,177
Goodwill, net 80,678 83,678
---------- ----------
TOTAL ASSETS $4,664,975 $5,146,256
========== ==========
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,1998 AND DECEMBER 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1998 1997
----------- ----------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 747,976 $ 556,497
Accrued liabilities 1,111,475 720,727
Commissions and incentives payable 1,034,889 1,000,384
Current portion of capital lease
obligations 198,420 198,420
Customer advances 37,038 44,623
---------- ----------
Total current liabilities 3,129,798 2,520,651
---------- ----------
CAPITAL LEASE AND OTHER LONG-TERM
OBLIGATIONS, net of current portion 733,764 546,518
---------- ----------
COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
5,000,000 shares authorized, no
shares issued or outstanding - -
Common stock, no par value,
20,000,000 shares authorized,
9,605,565 shares issued and
outstanding, at June 30, 1998
and 9,928,065 at December 31, 1997 1,226,450 1,526,450
Stock subscription notes receivable (970,713) (970,713)
Retained earnings 545,676 1,523,350
---------- ----------
Total shareholders' equity 801,413 2,079,087
---------- ----------
$4,664,975 $5,146,256
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(unaudited) (unaudited)
<S> <C> <C>
NET SALES $7,949,828 $18,813,390
---------- -----------
OPERATING EXPENSES:
Cost of sales 1,893,043 4,380,247
Commissions and incentives 2,528,033 6,292,244
Selling, general and administrative 4,660,113 4,605,621
Legal settlement 320,000 -
---------- -----------
Total operating expenses 9,401,189 15,278,112
---------- -----------
Income (loss) from operations (1,451,361) 3,535,278
INTEREST INCOME (EXPENSE) AND
OTHER, net (31,313) 121,815
---------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,482,674) 3,657,093
PROVISION (BENEFIT) FOR INCOME TAXES (505,000) 1,463,000
---------- -----------
Net income (loss) $ (977,674) $ 2,194,093
========== ===========
BASIC EARNINGS PER SHARE:
Net income (loss) $ (.10) $ .22
========== ===========
Weighted average number of common
shares 9,821,746 9,928,065
========== ===========
DILUTED EARNINGS PER SHARE:
Net income (loss) $ (.10) $ .21
========== ===========
Weighted average number of common
shares and common stock
equivalents 9,821,746 10,311,488
========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(unaudited) (unaudited)
<S> <C> <C>
NET SALES $3,750,087 $ 7,474,968
---------- -----------
OPERATING EXPENSES:
Cost of sales 867,876 1,756,991
Commissions and incentives 1,200,564 2,743,522
Selling, general and administrative 2,276,748 2,620,866
---------- -----------
Total operating expenses 4,345,188 7,121,379
---------- -----------
Income (loss) from operations (595,101) 353,589
INTEREST INCOME (EXPENSE) AND OTHER, net (6,540) 74,136
---------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (601,641) 427,725
PROVISION (BENEFIT) FOR INCOME TAXES (205,000) 171,090
---------- -----------
Net income (loss) $ (396,641) $ 256,635
========== ===========
BASIC EARNINGS PER SHARE:
Net income (loss) $ (.04) $ .03
========== ===========
Weighted average number of common
shares 9,715,428 9,928,065
========== ===========
DILUTED EARNINGS PER SHARE:
Net income (loss) $ (.04) $ .02
========== ===========
Weighted average number of common
shares and common stock
equivalents 9,715,428 10,311,488
========== ===========
</TABLE>
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (977,674) $2,194,093
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 236,016 155,672
Deferred tax asset
Changes in assets and liabilities:
Inventory 67,534 11,783
Prepaids and other (706,303) (828,158)
Accounts payable and accrued
liabilities 582,227 97,703
Commissions and incentives payable 34,505 (1,322,368)
Customer advances (7,585) 164,352
---------- ----------
Net cash provided by (used in)
operating activities (771,280) 473,077
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable (53,467) (38,275)
---------- ----------
Net cash used in investing
activities (53,467) (38,275)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collections on stock subscription notes
receivable - 110,931
Dividends paid on common stock - (1,290,648)
Payments under capital lease
obligations (112,754) (6,738)
---------- ----------
Net cash used in financing
activities (112,754) (1,186,455)
---------- ----------
NET DECREASE IN CASH (937,501) (751,653)
CASH, beginning of the period 1,444,471 3,423,361
---------- ----------
CASH, end of the period $ 506,970 $ 2,671,708
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
Management has elected to omit substantially all notes to the
unaudited interim financial statements. Reference should be made to
the Company's annual report for the year ended December 31, 1997 as
this report incorporates the Notes to the Company's year-end financial
statements.
2. Unaudited Interim Information
The unaudited interim financial statements contain all necessary
adjustments (consisting of only normal recurring adjustments) which, in
the opinion of management, are necessary for a fair statement of the
results for the interim periods presented. The results of operations
for the interim periods presented are not necessarily indicative of
those expected for the year.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Inventory
Inventory consists primarily of preventive health and nutritional
products and related raw materials. Inventory is stated at the lower
of cost (using the first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost, and depreciated using
the straight-line method over the estimated useful lives of the assets,
which range from five to ten years. Assets under capital leases are
depreciated by the straight-line method over the shorter of the lease
term or the useful lives of the assets. Maintenance, repairs and minor
renewals are charged to operations as incurred. Major replacements or
betterments are capitalized. When property and equipment is retired or
otherwise disposed of, the related cost and accumulated depreciation
are eliminated from the respective accounts and any gain or loss on
disposition is reflected in operations.
Revenue Recognition
The Company generally receives payment for product sales at the
time orders are placed by independent distributors. Sales are recorded
when products are shipped to the customer. Customer advances represent
cash received for unshipped merchandise.
Net sales represent orders shipped, less returns and allowances.
Provisions are made for estimated returns and allowances at the time of
sale.
Commissions and Other Incentives
The Company compensates its distributors through commissions and
other incentives which reward the distributors for sales, the sign-up
of new distributors and achievement of certain milestones. Commissions
are recorded when the merchandise is shipped. Payments of commissions
are generally paid within the two month period following the sale.
Income Taxes
In accordance with SFAS No. 109 "Accounting for Income Taxes," the
Company recognizes an asset or liability for the deferred tax
consequences of temporary differences between tax bases of assets and
liabilities and their reported amounts in the financial statements.
Deferred tax expense (benefit) results from the net change during the
year of deferred tax assets and liabilities.
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 in the
financial statements and disclosures in the accompanying notes. Actual
results could differ from those estimates.
Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share," (EPS) which sets
forth the basis for the computation of "basic" EPS and "diluted" EPS.
Basic EPS excludes dilution and is computed by dividing net income by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common
stock that would then share in the earnings of the entity. Diluted EPS
is computed on the basis of the weighted average shares of common stock
outstanding plus common equivalent shares arising from the effect of
dilutive stock options, using the treasury-stock method. All EPS
amounts for prior years have been restated to conform to these new
standards, and the effect of the restatement was not significant. For
the year ended December 31, 1997, the effect of common equivalent
shares was antidilutive and therefore, they were not included in the
calculation of dilutive EPS.
3. Legal Settlement
In February 1998, the Company terminated the employment of a
certain executive who had a guaranteed employment contract. This
executive is also associated with a group of investors who owned
322,500 shares of the Company's common stock. In April 1998, the
Company signed a settlement agreement with the former executive that
provides for payments of $320,000 to the former executive and his
attorney over the next 24 months. In addition, the agreement provides
for the repurchase of the shares owned by the investment group for $
.93 a share. The payments to repurchase the stock will also be made
over a 24 month period. This settlement has been reflected in the June
30, 1998 financial statements.
4. Purchase of Common Stock
In October 1996, approximately 4.6 million shares of the Company's
then outstanding stock was purchased by certain officers and directors
from other officers and a director of the Company. To finance the
majority of the purchase, the new shareholders issued notes payable to
the former shareholders. As of April 1, 1998 certain of the new
shareholders were in default on payments due under the notes payable
and on May 1, 1998 the former shareholders foreclosed and received
approximately 4 million shares. The remainder of the shares purchased
remained with the new shareholders.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Balance
Sheet has been prepared based on the unaudited historical condensed
consolidated balance sheets of SupraLife and 1mage as of June 30, 1998,
and gives effect to the Merger as if it had occurred as of June 30,
1998. The following Unaudited Pro Forma Condensed Consolidated
Statements of Operations for the six months ended June 30, 1998 and for
the year ended December 31, 1997, give effect to the Merger as if it
had occurred as of January 1, 1997. Pro Forma adjustments are
described in the accompanying notes. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations are not necessarily indicative of
the actual results of operations that would have been reported had the
Merger been consummated as of January 1, 1997, nor do they purport to
indicate the results of future operations of the combined companies.
Furthermore, the pro forma results do not give effect to any cost
savings or incremental costs which may occur as a result of the Merger.
In the opinion of management, all adjustments necessary to present
fairly such pro forma financial statements have been made. The Merger
has been accounted for using the purchase method of accounting.
PRO FORMA CONDENSED
CONSOLIDATING BALANCE SHEET
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS: Pro Forma Pro Forma
1MAGE SupraLife Adjustment Consolidated
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and short-term
investments $ 125,375 $ 506,970 $ - $ 632,345
Accounts receivable 345,588 345,588
Inventory 94,122 443,397 537,519
Prepaid and deferred
taxes - 1,035,128 1,035,128
Prepaid expenses
and other 8,951 481,477 490,428
---------- ---------- -------- ----------
Total current
assets 574,036 2,466,972 - 3,041,008
Related party notes
receivable - 495,832 495,832
Property & equipment 120,331 1,306,252 1,426,583
Software development
costs 793,791 793,791
Goodwill 80,678 218,303(3) 298,981
Other assets 70,089 315,241 385,330
---------- ---------- -------- ----------
TOTAL ASSETS $1,558,247 $4,664,975 $218,303 $6,441,525
========== ========== ======== ==========
LIABILITIES & SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Line of credit $ 131,483 $ - $ - $ 131,483
Accounts payable 259,059 747,976 - 1,007,035
Accrued expenses 219,041 1,111,475 125,000(3) 1,455,516
Commissions and
incentives payable - 1,034,889 - 1,034,889
Other 21,325 235,458 - 256,783
---------- ---------- -------- ----------
Total current
liabilities 630,908 3,129,798 125,000 3,885,706
Obligations under
capital lease
& other 7,317 733,764 - 741,081
Convertible notes
payable to related
parties 150,000 - - 150,000
SHAREHOLDERS' EQUITY
Common stock 8,599 1,226,450 (1,199,801)(2) 35,248
Paid in capital 6,852,435 - (4,797,908)(1,2) 2,054,527
Stock subscription
notes receivable (970,713) - (970,713)
Retained earnings (6,091,012) 545,676 6,091,012(1) 545,676
---------- ---------- --------- ----------
Total shareholders'
equity 770,022 801,413 93,303 1,664,738
---------- ---------- -------- ----------
$1,558,247 $4,664,975 $218,303 $6,441,525
========== ========== ======== ==========
</TABLE>
PRO FORMA CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
For the Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
1MAGE SupraLife Adjustments Consolidated
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $825,740 $7,949,828 $8,775,568
OPERATING EXPENSES:
Cost of sales 396,297 1,893,043 2,289,340
Commissions and
incentives - 2,528,033 2,528,033
Selling, general &
administrative 559,247 4,660,113 10,913(3) 5,220,273
Legal settlement 320,000 320,000
---------- ---------- -------- ----------
Total operating
expenses 955,544 9,401,189 10,913 10,367,646
---------- ---------- ---------- ----------
(Loss) from
operations (129,804)(1,451,361) (10,913) (1,592,078)
INTEREST INCOME
(EXPENSE) AND
OTHER, NET (15,006) (31,313) (46,319)
---------- ---------- ---------- ----------
(LOSS) BEFORE
PROVISION
FOR INCOME TAXES (144,810)(1,482,674) (10,913) (1,638,397)
(BENEFIT) FOR INCOME
TAXES - (505,000) (505,000)
---------- ---------- ---------- ----------
Net Income (Loss) $(144,810) (977,674) (10,913) $(1,133,397)
========== ========== ========== ==========
EARNINGS PER SHARE:
Net Income (Loss) $(0.07) $(0.10) $ - $(0.13)
====== ====== ======= ======
Weighted avg # of
common shares 2,142,414 9,821,746 (3,212,689) 8,751,471
========== ========== ========== ===========
</TABLE>
PRO FORMA CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
December 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
1MAGE SupraLife Adjustments Consolidated
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $1,808,791 $29,112,646 $30,921,437
OPERATING EXPENSES:
Cost of sales 917,988 6,407,504 7,325,492
Commissions and
incentives - 9,308,846 9,308,846
Selling, general &
administrative 1,354,469 9,587,137 21,830(3) 10,963,436
---------- ---------- -------- -----------
Total operating
expenses 2,272,457 25,303,487 21,830 27,597,774
---------- ---------- -------- -----------
Income (loss)
from operations (463,666) 3,809,159 (21,830) 3,323,663
INTEREST INCOME
(EXPENSE) AND
OTHER, NET (6,593) 72,122 65,529
---------- ---------- -------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR
INCOME TAXES (470,259) 3,881,281 (21,830) 3,389,192
PROVISION FOR
INCOME TAXES 5,000 1,566,657 1,571,657
---------- ---------- -------- -----------
Net Income
(Loss) $(475,259) $2,314,624 (21,830) $1,817,535
========== ========== ========= ===========
EARNINGS PER SHARE:
Net Income
(Loss) $(0.22) $0.23 $ - $0.21
====== ===== ==== ====
Weighted avg #
of common
shares 2,146,331 9,928,065(3,319,008) 8,755,388
========== ========== ========= ==========
</TABLE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(1) To eliminate the results of operations of 1MAGE prior to the
acquisition
(2) To reflect the exchange of SupraLife common stock for 1MAGE common
stock
(3) The merger will result in $218,000 in goodwill, representing the
difference between the acquisition price for 1MAGE (including
acquisition cost) of approximately $796,000 and the net assets
acquired of $578,000. The goodwill recorded will be amortized
over a ten-year period.
APPENDICES A
SUPRALIFE INTERNATIONAL, INC.
EQUITY INCENTIVE PLAN
AS ADOPTED SEPTEMBER 24, 1996
1. PURPOSE. SupraLife International, Inc. (the "Company")
hereby establishes its Equity Incentive Plan (the "Plan"). The purpose
of the Plan is to advance the interests of the Company and its
stockholders by providing a means by which the Company shall be able to
attract and retain competent employees, officers, directors,
consultants and independent contractors by providing them with an
opportunity to participate in the increased value of the Company which
their effort, initiative, and skill have helped produce.
2. GENERAL PROVISIONS.
(a) The Plan will be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee").
The Committee shall be comprised of two or more directors designated by
the Board of Directors (the "Board") and the Committee members shall
qualify as "Non- Employee Directors" within the meaning of Securities
Exchange Act Rule 16b-3. (In the event Rule 16b-3 is amended, modified
or repealed, the requirements for being a member of the Committee shall
reflect the then current requirements of Rule 16b-3 or successor rule,
if any.) Committee members are not required to be "outside directors"
within the meaning of Treasury Regulation Section 1.162-27(e)(3).
Accordingly, options granted under the Plan may not qualify for the
"qualified performance based compensation" exception to Internal
Revenue Code Section 162(m). Notwithstanding the foregoing, if it would
be consistent with all applicable laws, including without limitation
Rule 16b-3, then the Plan may be administered by the Board of
Directors, and if so administered all subsequent references to the
Committee shall be read as referring to the Board of Directors.
(b) The Committee shall have full power to construe and
interpret the Plan and to establish and amend rules and regulations for
its administration. Any action of the Committee with respect to the
Plan shall be taken by majority vote or by the unanimous written
consent of the Committee members.
(c) The Committee shall determine, in its sole discretion,
which participants under the Plan shall be granted restricted stock,
stock options or stock appreciation rights, the time or times at which
stock, options and rights are granted, as well as the number of shares
and the duration of the options or rights which are granted to
participants; provided, however, that no participant may be granted
more than 500,000 options under the Plan.
(d) The Committee shall also determine any other terms and
conditions relating to restricted stock, options and rights granted
under the Plan as the Committee may prescribe, in its sole discretion.
(e) The Committee may, in its discretion, delegate its
administrative duties with respect to the Plan to an officer or
employees, or to a committee composed of officers or employees, of the
Company.
(f) The Committee shall make all other determinations and
take all other actions which it deems necessary or advisable for the
administration of the Plan.
(g) All decisions, determinations and interpretations made
by the Committee shall be binding and conclusive on all participants in
the Plan and on their legal representatives, heirs and beneficiaries.
(h) The Board of Directors (with members of the Committee
abstaining) shall have the authority to make grants under this Plan to
members of the Committee or the Board may create a formula by which
grants will automatically be made to members of the Committee. The
Committee shall have the authority to make grants hereunder to members
of the Board other than Committee members and may also establish a
formula by which grants will automatically be made to Board members.
3. ELIGIBILITY. Employees, officers, directors, consultants and
independent contractors of the Company shall be eligible to participate
in the Plan and to receive restricted stock, options and rights
hereunder, provided, however, that Incentive Stock Options may only be
granted to officers and directors who are employees of the Company or
its subsidiaries at all times during the period beginning on the date
of granting of the option and ending on the day three months before the
date of exercise.
4. NUMBER OF SHARES SUBJECT TO PLAN. The aggregate number of
shares of the Company's no par value Common Stock which may be granted
to participants shall be 2,500,000 shares, subject to adjustment only
as provided in Sections 5(h) and 8 hereof. These shares may consist of
shares of the Company's authorized but unissued Common Stock or shares
of the Company's authorized and issued Common Stock reacquired by the
Company and held in its treasury or any combination thereof. If an
option granted under this Plan is surrendered, or for any other reason
ceases to be exercisable in whole or in part, the shares as to which
the option ceases to be exercisable shall be available for options to
be granted to the same or other participants under the Plan, except to
the extent that an option is deemed surrendered by the exercise of a
tandem stock appreciation right and that right is paid by the Company
in stock, in which event the shares issued in satisfaction of the right
shall not be available for new options or rights under the Plan.
5. STOCK OPTIONS.
(a) TYPE OF OPTIONS. Options granted may be either
Nonqualified Stock Options or Incentive Stock Options as determined by
the Committee in its sole discretion and as reflected in the Notice of
Grant issued by the Committee. "Incentive Stock Option" means an
option intended to qualify as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986 (the
"Code"). "Nonqualified Stock Option" means an option not intended to
qualify as an Incentive Stock Option or an Incentive Stock Option which
is converted to a Nonqualified Stock Option under Section 5(f) hereof.
(b) OPTION PRICE. The price at which options may be granted
under the Plan shall be determined by the Committee at the time of
grant as follows:
(i) For Incentive Stock Options the option price shall
be equal to 100% of the Fair Market Value of the stock on the date the
option is granted; provided, however, that for Incentive Stock Options
granted to any person who, at the time such option is granted, owns (as
defined in Section 422 of the Code) shares possessing more than 10% of
the total combined voting power of all classes of shares of the Company
or its parent or subsidiary corporation, the Option Price shall be 110%
of the Fair Market Value.
(ii) For Nonqualified Stock Options the option price may
be less than the Fair Market Value of the stock on the date of grant,
but in no event shall the option price be less than fifty percent (50%)
of the Fair Market Value of the stock on the date of the grant.
(iii) For purposes of this Plan, and except as otherwise
set forth herein, "Fair Market Value" shall mean: (a) if there is an
established market for the Company's Common Stock on a stock exchange,
in an over-the-counter market or otherwise, the mean of the highest and
lowest quoted selling prices on the valuation date, or (b) if there
were no such sales on the valuation date, then in accordance with
Treas. Reg. Section 20.2031-2 or successor regulations. Unless
otherwise specified by the Committee at the time or grant (or in the
formula proposed for such grant, if applicable), the valuation date for
purposes of determining Fair Market Value shall be the date of grant.
The Committee (or the Board of Directors with respect to grants to
Committee members pursuant to Section 5(g) hereof) may specify in any
grant of an Option or Stock Appreciation Right that, instead of the
date of grant, the valuation date shall be a valuation period of up to
ninety (90) days prior to the date of grant, and Fair Market Value for
purposes of such grant shall be the average over the valuation period
of the mean of the highest and lowest quoted selling prices on each
date on which sales were made in the valuation period, provided,
however, that if the Committee (or the Board of Directors) fails to
specify a valuation period and there were no sales on the date of grant
then Fair Market Value shall be determined as if the Committee had
specified a thirty (30) day valuation period for such determination,
unless there is no established market for the Company's Common Stock in
which case the determination of Fair Market Value shall be in
accordance with clause (b) above.
(c) EXERCISE OF OPTION. The right to purchase shares
covered by any option or options under this Plan shall be exercisable
only in accordance with the terms and conditions of the grant to the
participant. Such terms and conditions may include a time period or
schedule whereby some of the options granted may become exercisable, or
"vested", over time and certain conditions, such as continuous service
or specified performance criteria or goals, must be satisfied for such
vesting. The determination as to whether to impose any such vesting
schedule or performance criteria, and the terms of such schedule or
criteria, shall be within the sole discretion of the Committee. These
terms and conditions may be different for different participants so
long as all options satisfy the requirements of the Plan.
The exercise of options shall be paid for in cash or in
shares of the Company's Common Stock, or any combination thereof.
Shares tendered as payment for option exercises shall be valued at the
Fair Market Value of the shares on the date of exercise. The Committee
may, in its discretion, agree to a loan by the Company to one or more
participants of a portion of the exercise price (not to exceed the
exercise price minus the par value of the shares to be acquired, if
any) for up to three (3) years with interest payable at the prime rate
quoted in the Wall Street Journal on the date of exercise. Members of
the Committee may receive such loans from the Company for the exercise
of their options, if any, without Committee or Board approval or
ratification.
The Committee may also permit a participant to effect a
net exercise of an option without tendering any shares of the Company's
stock as payment for the option. In such an event, the participant
will be deemed to have paid for the exercise of the option with shares
of the Company's stock and shall receive from the Company a number of
shares equal to the difference between the shares that would have been
tendered and the number of options exercised.
The Committee may also cause the Company to enter into
arrangements with one or more licensed stock brokerage firms whereby
participants may exercise options without payment therefor but with
irrevocable orders to such brokerage firm to immediately sell the
number of shares necessary to pay the exercise price for the option and
the withholding taxes, if any, and then to transmit the proceeds from
such sales directly to the Company in satisfaction of such obligations.
(d) DURATION OF OPTIONS. Unless otherwise prescribed by the
Committee or this Plan, options granted hereunder shall expire ten (10)
years from the date of grant, subject to early termination as provided
in Section 5(f) hereof.
(e) INCENTIVE STOCK OPTIONS LIMITATIONS. In no event shall
an Incentive Stock Option be granted to any person who, at the time
such option is granted, owns (as defined in Section 422 of the Code)
shares possessing more than 10% of the total combined voting power of
all classes of shares of the Company or of its parent or subsidiary
corporation, unless the option price is at least 110% of the Fair
Market Value of the stock subject to the Option, and such Option is by
its terms not exercisable after the expiration of five (5) years from
the date such Option is granted. Moreover, the aggregate Fair Market
Value (determined as of the time that option is granted) of the shares
with respect to which Incentive Stock Options are exercisable for the
first time by any individual employee during any single calendar year
under the Plan shall not exceed $100,000. In addition, in order to
receive the full tax benefits of an Incentive Stock Option, the
employee must not resell or otherwise dispose of the stock acquired
upon exercise of the Incentive Stock Option until two (2) years after
the date the option was granted and one (1) year after it was
exercised.
(f) EARLY TERMINATION OF OPTIONS. In the event a
participant's employment with or service to the Company shall terminate
as the result of total disability, as defined below, or the result of
retirement at 65 years of age or later, then any options granted to
such participant shall expire and may no longer be exercised three (3)
months after such termination. If the participant dies while employed
or engaged by the Company, to the extent that the option was
exercisable at the time of the participant's death, such option may,
within one year after the participant's death, be exercised by the
person or persons to whom the participant's rights under the option
shall pass by will or by the applicable laws of descent and
distribution; provided, however, that an option may not be exercised to
any extent after the expiration of the option as originally granted.
In the event a participant's employment or engagement by the Company
shall terminate as the result of any circumstances other than those
referred to above, whether terminated by the participant or the
Company, with or without cause, then all options granted to such
participant under this Plan shall terminate and no longer be
exercisable as of the date of such termination, provided, however, that
if an employee with an Incentive Stock Option terminates employment
prior to its exercise, but notwithstanding such termination becomes or
remains a non-employee officer or director eligible for Nonqualified
Stock Options hereunder, then the Incentive Stock Option shall be
converted to a Nonqualified Stock Option on the date the Incentive
Stock Option would otherwise have terminated.
An employee who is absent from work with the Company
because of total disability, as defined below, shall not by virtue of
such absence alone be deemed to have terminated such participant's
employment with the Company. All rights which such participant would
have had to exercise options granted hereunder will be suspended during
the period of such absence and may be exercised cumulatively by such
participant upon his return to the Company so long as such rights are
exercised prior to the expiration of the option as originally granted.
For purposes of this Plan, "total disability" shall mean disability, as
a result of sickness or injury, to the extent that the participant is
prevented from engaging in any substantial gainful activity and is
eligible for and receives a disability benefit under Title II of the
Federal Social Security Act.
(g) GRANTS TO COMMITTEE MEMBERS. In accordance with Section
2(g) hereof, the Committee shall have no authority to make grants to
its members hereunder, rather the Board of Directors (with members of
the Committee abstaining) shall have the authority to make grants under
this Plan to members of the Committee. Each Committee member shall be
granted a stock option once in each calendar year. Each such option
shall be for Four Thousand (4,000) shares of Common Stock. The option
price of any such option shall be calculated based on the Fair Market
Value (determined in accordance with Section 3(b) above) on the
valuation date which shall be based on a valuation period of ninety
(90) days prior to the date of grant, and the duration of each such
option shall be ten years. Nothing in this Section 5(g) shall be
interpreted to prohibit the Board of Directors from granting restricted
stock, options or rights to its members if the Board of Directors is
administering the Plan in accordance with Section 2(a) above.
(h) RELOAD BY PAYMENT IN SHARES. To the extent that a
participant pays for the exercise of an option with shares of the
Company's stock rather than cash, the tendered shares shall be deemed
to be added back to the Plan, increasing the total number of shares
subject to and reserved for the Plan by that amount.
6. STOCK APPRECIATION RIGHTS.
(a) GRANT. Stock appreciation rights may be granted by the
Committee under this Plan upon such terms and conditions as it may
prescribe. A stock appreciation right may be granted in connection
with an option previously granted to or to be granted under this Plan
or may be granted by itself. Each stock appreciation right related to
an option (a "Tandem Right") shall become nonexercisable and be
forfeited if the option to which it relates (the "Related Option") is
exercised. "Stock appreciation right" as used in this Plan means a
right to receive the excess of Fair Market Value, on the date of
exercise, of a share of the Company's Common Stock on which an
appreciation right is exercised over the option price provided for in
the related option and is issued in consideration of services performed
for the Company or for its benefit by the participant. Such excess is
hereafter called "the differential."
(b) EXERCISE OF STOCK APPRECIATION RIGHTS. Stock
appreciation rights shall be exercisable and be payable in the
following manner:
(i) A stock appreciation right not issued with a
Related Option (a "Separate Right") shall be exercisable at the time or
times prescribed by the Committee. A Tandem Right shall be exercisable
by the participant at the same time or times that the Related Option
could be exercised. A participant wishing to exercise a stock
appreciation right shall give written notice of such exercise to the
Company. Upon receipt of such notice, the Company shall determine, in
its sole discretion, whether the participant's stock appreciation
rights shall be paid in cash or in shares of the Company's Common Stock
or any combination of cash and shares and thereupon shall, without
deducting any transfer or issue tax, deliver to the person exercising
such right an amount of cash or shares of the Company's Common Stock or
a combination thereof with a value equal to the differential. The date
the Company receives the written notice of exercise hereunder is the
exercise date. The shares issued upon the exercise of a stock
appreciation right may consist of shares of the Company's authorized
but unissued Common Stock or of its authorized and issued Common Stock
reacquired by the Company and held in its treasury or any combination
thereof. No fractional share of Common Stock shall be issued; rather,
the Committee shall determine whether cash shall be given in lieu of
such fractional share or whether such fractional share shall be
eliminated.
(ii) The exercise of a Tandem Right shall automatically
result in the surrender of the Related Option by the participant on a
share for share basis. Likewise, the exercise of a stock option shall
automatically result in the surrender of the related Tandem Right.
Shares covered by surrendered options shall be available for granting
further options under this Plan except to the extent and in the amount
that such rights are paid by the Company with shares of stock, as more
fully discussed in Section 4 hereof.
(iii) The Committee may impose any other terms and
conditions it prescribes upon the exercise of a stock appreciation
right, which conditions may include a condition that the stock
appreciation right may only be exercised in accordance with rules and
regulations adopted by the Committee from time to time.
(c) LIMITATION ON PAYMENTS. Notwithstanding any other
provision of this Plan, the Committee may from time to time determine,
including at the time of exercise, the maximum amount of cash or stock
which may be given upon exercise of any stock appreciation right in any
year; provided, however, that all such amounts shall be paid in full no
later than the end of the year immediately following the year in which
the participant exercised such stock appreciation rights. Any
determination under this paragraph may be changed by the Committee from
time to time provided that no such change shall require the participant
to return to the Company any amount theretofore received or to extend
the period within which the Company is required to make full payment of
the amount due as the result of the exercise of the participant's stock
appreciation rights.
(d) EXPIRATION OR TERMINATION OF STOCK APPRECIATION RIGHTS.
(i) Each Tandem Right and all rights and obligations
thereunder shall expire on the date on which the Related Option expires
or terminates. Each Separate Right shall expire on the date prescribed
by the Committee.
7. RESTRICTED STOCK.
(a) The Committee may grant shares of the Company's Common
Stock to persons eligible for grants under this Plan, subject to such
restrictions, if any, as may be determined by the Committee, including
but not limited to that person's continuous employment by or service to
the Company for a specified period of time or the attainment of
specified performance goals or objectives by that person, a group of
persons or the Company as a whole. The determination as to whether to
impose any such vesting schedule or performance criteria, and the terms
of such schedule or criteria, shall be within the sole discretion of
the Committee. These terms and conditions may be different for
different participants so long as all options satisfy the requirements
of the Plan.
(b) VOTING RIGHTS. A participant will have all voting,
dividend, liquidation and other rights with respect to the shares of
restricted stock in accordance with its terms upon becoming the holder
of record of such stock; provided, however, that the participant shall
have the right to sell, encumber or otherwise transfer such stock only
to the extent that vesting and performance criteria have been
satisfied. Such limitations may be enforced, in the sole discretion of
the Committee, by placing of a restrictive legend on the stock
certificates, or making certain custodial arrangements for the stock
certificates.
(c) EARLY TERMINATION. In the event of the death or total
disability of a participant, or the retirement of a participant at age
65 or later, all employment period and other restrictions applicable to
restricted stock then held by him will lapse, and such stock will
become fully nonforfeitable. Subject to provisions in the Plan
concerning reorganization, liquidation or change in control of the
Company, in the event of a participant's termination of employment for
any other reason, any restricted stock as to which the employment
period or other restrictions have not been satisfied will be forfeited.
8. CAPITAL ADJUSTMENTS. The aggregate number of shares of the
Company's Common Stock subject to this Plan, the maximum number of
shares as to which options may be granted to any one participant
hereunder, and the number of shares and the price per share subject to
outstanding options, shall be appropriately adjusted by the Committee
for any increase or decrease in the number of shares of Common Stock
which the Company has issued resulting from any stock split, reverse
stock split, stock dividend, combination of shares or any other change,
or any exchange for other securities or any reclassification, merger,
reorganization, consolidation, redesignation, recapitalization, or
otherwise. Similar adjustments shall be made to the terms of stock
appreciation rights.
9. NONTRANSFERABILITY. During a participant's lifetime, a right
or an option may be exercisable only by the participant. Options and
rights granted under the Plan and the rights and privileges conferred
thereby shall not be subject to execution, attachment or similar
process and may not be transferred, assigned, pledged or hypothecated
in any manner (whether by operation of law or otherwise) other than by
will or by the applicable laws of descent and distribution.
Notwithstanding the foregoing, to the extent permitted by applicable
law and, if the Company has a class of securities registered under the
Exchange Act, by Exchange Act Rule 16b-3, the Committee may, in its
sole discretion, (i) permit a recipient of a Nonqualified Stock Option
to designate in writing during the participant's lifetime a beneficiary
to receive and exercise the participant's Nonqualified Stock Options in
the event of such participant's death (as provided in Section 5(f)),
(ii) grant Nonqualified Stock Options that are transferable to the
immediate family or a family trust of the participant, and (iii) modify
existing Nonqualified Stock Options to be transferable to the immediate
family or a family trust of the participant. Any other attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of any
option or right under the Plan, or of any right or privilege conferred
thereby, contrary to the provisions of the Plan shall be null and void.
10. AMENDMENT, SUSPENSION, OR TERMINATION OF PLAN. The Committee
may at any time suspend or terminate the Plan and may amend it from
time to time in such respects as the Committee may deem advisable in
order that options and rights granted hereunder shall conform to any
change in the law, or in any other respect which the Committee may deem
to be in the best interests of the Company; provided, however, that no
such amendment shall, without the participant's consent, alter or
impair any of the rights or obligations under any option or stock
appreciation rights theretofore granted to him under the Plan; and
provided further that no such amendment shall, without shareholder
approval: (a) increase the total number of shares available for grants
of options or rights under the Plan (except as provided by Section 8
hereof); or (b) effect any change to the Plan which is required by law,
including without limitation the regulations promulgated under Section
422 of the Code, to be approved by shareholders.
11. EFFECTIVE DATE. The effective date of the Plan shall be
December 16, 1996.
12. TERMINATION DATE. Unless this Plan shall have been
previously terminated by the Committee, this Plan shall terminate on
December 15, 2016, except as to stock, options and rights theretofore
granted and outstanding under the Plan at that date, and no stock,
option or right shall be granted after that date.
13. RESALE OF SHARES PURCHASED. Except as provided in Section 7
with respect to restricted stock, all shares of stock acquired under
this Plan may be freely resold, subject to applicable state and federal
securities laws restricting their transfer. As a condition to exercise
of an option, however, the Company may impose various conditions,
including a requirement that the person exercising such option
represent and warrant that, at the time of such exercise, the shares of
Common Stock being purchased are being purchased for investment and not
with a view to resale or distribution thereof. In addition, the resale
of shares purchased upon the exercise of Incentive Stock Options may
cause the employee to lose certain tax benefits if the employee fails
to comply with the holding period requirements described in Section
5(e) hereof.
14. ACCELERATION OF RIGHTS AND OPTIONS. If the Company or its
shareholders enter into an agreement to dispose of all or substantially
all of the assets or stock of the Company by means of a sale, merger or
other reorganization, liquidation, or otherwise, any right or option
granted pursuant to the Plan shall become immediately and fully
exercisable during the period commencing as of the date of the
agreement to dispose of all or substantially all of the assets or stock
of the Company and ending when the disposition of assets or stock
contemplated by that agreement is consummated or the option is
otherwise terminated in accordance with its provisions or the
provisions of the Plan, whichever occurs first; provided that no option
or right shall be immediately exercisable under this Section on account
of any agreement of merger or other reorganization where the
shareholders of the Company immediately before the consummation of the
transaction will own 50% or more of the total combined voting power of
all classes of stock entitled to vote of the surviving entity (whether
the Company or some other entity) immediately after the consummation of
the transaction. In the event the transaction contemplated by the
agreement referred to in this section is not consummated, but rather is
terminated, canceled or expires, the options and rights granted
pursuant to the Plan shall thereafter be treated as if that agreement
had never been entered into.
15. WRITTEN NOTICE REQUIRED; TAX WITHHOLDING. Any option or
right granted pursuant to the Plan shall be exercised when written
notice of that exercise by the participant has been received by the
Company at its principal office and, with respect to options, when full
payment for the shares with respect to which the option is exercised
has been received by the Company. Participant agrees that, if and to
the extent required by law, the Company shall withhold or require the
payment by participant of any state, federal or local taxes resulting
from the exercise of an option or right; provided, however, that to the
extent permitted by law, the Committee may in its discretion, permit
some or all of such withholding obligation to be satisfied by the
delivery by the participant of, or the retention by the Company of,
shares of its Common Stock.
16. COMPLIANCE WITH SECURITIES LAWS. Shares shall not be issued
with respect to any option or right granted under the Plan unless the
exercise of that option and the issuance and delivery of the shares
pursuant thereto shall comply with all relevant provisions of state and
federal law, including without limitation the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder and the
requirements of any stock exchange or automated quotation system upon
which shares of the Company's stock may then be listed or traded, and
shall be further subject to the approval of counsel for the Company
with respect to such compliance. Further, each participant must
consent to the imposition of a legend on the certificate representing
the shares of Common Stock issued upon the exercise of the option or
right restricting their transferability as may be required by law, the
option or right, or the Plan.
17. WAIVER OF VESTING RESTRICTIONS BY COMMITTEE. Notwithstanding
any provision of the Plan, in the event a participant dies, becomes
totally or partially disabled, retires (before or after the age of 65)
as an employee, officer or director of the Company, the Committee shall
have the discretion to waive any vesting restrictions on the retiree's
restricted stock, options or rights, or the early termination thereof.
18. REPORTS TO PARTICIPANTS. The Company shall furnish to each
participant a copy of the annual report, if any, sent to the Company's
shareholders. Upon written request, the Company shall furnish to each
participant a copy of its most recent annual report and each quarterly
report to shareholders issued since the end of the Company's most
recent fiscal year.
19. NO EMPLOYEE CONTRACT. The grant of restricted stock or an
option or right under the Plan shall not confer upon any participant
any right with respect to continuation of employment by, or the
rendition of advisory or consulting services to, the Company, nor shall
it interfere in any way with the Company's right to terminate the
participant's employment or services at any time.
APPENDICES B
SUPRALIFE INTERNATIONAL AND SUBSIDIARIES
(Formerly Eagle Lifestyle Nutrition, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH AUDITORS' REPORT
Report of Independent Public Accountants
----------------------------------------
To the Shareholders' of
SupraLife International:
We have audited the accompanying consolidated balance sheets of
SUPRALIFE INTERNATIONAL (formerly Eagle Lifestyle Nutrition, Inc.) (a
California corporation) and subsidiaries, as of December 31, 1997 and
1996 and the related consolidated statements of income, shareholders'
equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our 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.
As discussed in Note 9 to the consolidated financial statements, the
Company is a defendant in various litigation with certain former
distributors.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
SupraLife International and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Diego, California
April 2, 1998
H&B Harlan & Boettger, LLP
Certified Public Accountants
James C. Harlan II
William C. Boettger
P. Robert Wilkinson
Marshall J. Varano
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
of Eagle Lifestyle Nutrition, Inc.
We have audited the accompanying statements of income, shareholders'
equity (deficit) and cash flows of Eagle Lifestyle Nutrition, Inc. for
the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statement of income,
shareholders' equity (deficit) and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of income,
shareholders' equity (deficit) and cash flows. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the
statement of income, shareholders' equity (deficit) and cash flows. We
believe that our audit of the statements of income, shareholders'
equity (deficit) and cash flows provides a reasonable basis for our
opinion.
In our opinion, the statements of income, shareholders' equity
(deficit) and cash flows referred to above presents fairly, in all
material respects, the results of the operations of Eagle Lifestyle
Nutrition, Inc. for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/Harlan & Boettger
San Diego, California
December 1, 1996
5415 Oberlin Drive San Diego, California 92121
Telephone (619) 535-2000 Facsimile (619) 535-2015
<PAGE>
CG Cribari &
Gustafson, LLP
Certified Public Accountants
410 LaPlada Center/ 3650 South Yosemite/ Denver, Colorado
80237/ 303-773-2233/ FAX 303-779-6983
INDEPENDENT AUDITORS' REPORT
-----------------------------
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheet of 1MAGE Software,
Inc. as of December 31, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
1MAGE Software, Inc as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
CRIBARI & GUSTAFSON, LLP
CERTIFIED PUBLIC ACCOUNTANTS
/s/Cribari & Gustafson, LLP.
Denver, Colorado
February 6, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheet of 1MAGE Software,
Inc. as of December 31, 1996, and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31,
1996 and 1995. 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 audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
1MAGE Software, Inc. as of December 31, 1996, and the results of its
operations and its cash flows for the years ended December 31, 1996
and 1995, in conformity with generally accepted accounting principles.
KARSH & COMPANY, P.C.
/s/Karsh & Company, P.C.
Denver, Colorado
February 11, 1997
