SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): August 31, 1998
----------
1MAGE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
----------
Colorado 0-12535 84-0866294
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
6486 South Quebec Street
Englewood, Colorado 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 694-9180
ITEM 5 - OTHER EVENTS
See the Registrant's press release, labeled Attachment A, attached
hereto and incorporated by reference to this report. Also attached,
labeled Attachment B, are financial statements of SupraLife International
for the years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1998 and 1997, as well as Unaudited Pro Forma
Condensed Consolidated Financial Statements for SupraLife International
and the Registrant for the year ended December 31, 1997 and the six months
ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on September 3, 1998.
1MAGE SOFTWARE, INC.
By:/s/David R. DeYoung
David R. DeYoung
President
ATTACHMENT A PRESS RELEASE
1MAGE Announces Amendment to Merger Agreement with SupraLife International
- -- SupraLife Announces Return of Peter Holliday as CEO
- -- SupraLife Reports Historical Financial Results
- -- 1MAGE and SupraLife Report Pro Forma Financial Results
ENGLEWOOD, CO -- August 31, 1998 -- 1MAGE Software, Inc. (NASDAQ: ISOL)
announced today that the terms of its merger agreement with SupraLife
International have been amended so that 1MAGE's shareholders will own 25%
of the outstanding shares of the combined company rather than 20% as was
previously announced.
SupraLife reported its historical financial results for the first six
months of 1998 and for the years ended December 31, 1997, 1996 and 1995.
SupraLife also announced that Peter Holliday, the Chairman of SupraLife's
Board of Directors, has agreed to reassume the position of Chief Executive
Officer of SupraLife, effective immediately. 1MAGE and SupraLife also
announced their pro forma condensed consolidated results of operations for
the first six months of 1998 and for the year ended December 31, 1997, and
their pro forma combined condensed balance sheet information as of June
30, 1998.
1MAGE and SupraLife have entered into an agreement to merge, whereby
SupraLife, a privately-held company which develops, manufactures and
distributes preventative health, personal care, sports & fitness and
weight management products, will become a wholly-owned subsidiary of
1MAGE. The merger still must be approved by the shareholders of each
company. 1MAGE anticipates scheduling a meeting of its shareholders in
October 1998 to approve the merger.
Peter Holliday previously served as President and Chairman of the
Board of SupraLife, when he led the private company's growth from annual
sales of around $3 million in 1991 to revenues of $33.3 million in 1996.
Holliday, who resumed the position of Chairman of SupraLife's Board of
Directors in February 1998, is returning to the CEO position at the
request of the Board in response to the trend of declining sales that
began in the second half of 1997 and led to losses in the first six months
of 1998.
SupraLife reported net sales of $7,950,000 for the first six months
of 1998, compared to $18,813,000 for the first six months of 1997. Net
sales for the full years of 1997, 1996 and 1995 were $29,113,000,
$33,331,000 and $10,478,000, respectively. SupraLife's net loss for the
first six months of 1998 was $978,000, or $0.10 per basic share, compared
to net income of $2,194,000, or $0.22 per share, for the first six months
of 1997. Net income for the full years of 1997, 1996 and 1995 was
$2,315,000, $3,130,000 and $411,000, respectively, or $0.23, $0.31 and
$0.05 per share, respectively.
Peter Holliday stated "Net sales decreased during the second half of
1997 and during 1998 for a number of reasons, including SupraLife
management's decision during the first half of 1997 to terminate several
major distributors who had violated SupraLife policies and procedures,
creating a significant business risk to the company.
"The terminations of these distributors significantly reduced sales
and led to expensive and distracting litigation. Management focus was
also diverted to costly start-up operations in Europe and the company's
new weight management seminar services company, Proven Results, Inc.,
which together lost approximately $900,000 in the first half of 1998 and
$800,000 in the second half of 1997."
Mr. Holliday added, "In addition to the change in top management,
SupraLife's Board of Directors has implemented an aggressive program to
improve results of operations in future periods. We have drastically cut
the expenses of our international operations and have taken steps to
reduce losses at Proven Results. We have reduced our employee headcount
by around 20%. Most importantly, we have renewed our focus on our
domestic distributors, implementing new programs designed to increase
their interest in and involvement with our company, including a revised
compensation plan which better rewards individual efforts.
"We are also exploring the possibility of using our recently acquired
manufacturing facility to develop and produce new products. We will
investigate alternative product lines and distribution channels that could
provide opportunities for the company but our primary concern will be to
ensure the continuing strength of our current distribution network."
David R. DeYoung, president and chief executive officer for 1MAGE,
commented, "Because SupraLife's financial results for the first half of
1998 were not as strong as in prior periods, we felt it was reasonable
for 1MAGE shareholders to retain a larger percentage of the combined
company. We are very pleased that Peter Holliday has agreed to return to
the role in which he built the company up to more than $33 million in
sales and more than $3 million in annual earnings." Mr. DeYoung added,
"1MAGE management is encouraged by the other steps taken to address
SupraLife's recent problems and continues to believe that the merger
represents an outstanding opportunity for 1MAGE and its shareholders."
On a pro forma combined basis, 1MAGE and SupraLife had net sales of
$8,776,000 for the first six months of 1998, and net sales of $30,921,000
for the year ended December 31, 1997. Pro forma combined net loss for the
first six months of 1998 was $1,133,000, or $0.13 per share (based on a
weighted average number of shares outstanding after the merger of
8,751,471). Pro forma combined net income for the full year ended
December 31, 1997 was $1,818,000, or $0.21 per share (based on a weighted
average of 8,755,388 shares). The combined companies would have pro forma
combined total assets of $6,442,000, and pro forma combined shareholders'
equity of $1,665,000, as of June 30, 1998.
1MAGE Software, Inc. is the leading provider of electronic imaging
systems to end users of Ardent Software, Inc. 1MAGE (R) is marketed
through a direct sales force and through an international network of Value
Added Resellers (VARs). For additional information contact 1MAGE at
303/773-1424 or visit its website at www.1mage.com.
SupraLife International was founded in 1991 and develops,
manufactures and distributes preventative health, personal care, sports &
fitness and weight management products designed to promote a healthy
lifestyle. SupraLife distributes its products in all 50 states and in the
United Kingdom and the Netherlands through a network of approximately
37,000 independent distributors and preferred customers. SupraLife is a
privately-held company based in San Diego. For more information contact
SupraLife at 619/653-6510, or visit its website at www.toddy.com.
Statements expressing the beliefs and expectations of 1MAGE and
SupraLife management regarding future performance are forward-looking and
involve risks and uncertainties, including but not limited to: market
demand for products, the overall market demand for imaging software,
nutritional supplements and personal care products, the success of new
SupraLife management in improving near term financial results, the actual
effect of changes in policies or strategies at 1MAGE and SupraLife,
uncertainties as to the outcome and ultimate financial impact of
SupraLife's distributor litigation, maintenance of adequate cash flow to
sustain operations at both companies, quarterly fluctuations in financial
results, and other risk factors identified from time to time in 1MAGE's
reports filed with the Securities and Exchange Commission, copies of which
may be obtained at www.sec.gov or by written request submitted to 1MAGE.
SUMMARY OF SUPRALIFE HISTORICAL FINANCIAL STATEMENTS
The following tables summarize selected financial data of SupraLife
for the periods indicated.
CONSOLIDATED BALANCE SHEETS OF SUPRALIFE INTERNATIONAL
<TABLE>
<CAPTION>
In thousands, December 31,
except per share data June 30, 1998 1997 1996
------------- ---- ----
<S> <C> <C> <C>
Current assets $2,467 $2,965 $4,786
Total assets 4,665 5,146 6,376
Current liabilities 3,130 2,521 4,921
Long-term obligations 734 547 49
Total shareholders' equity 801 2,079 1,406
Dividends per share 0 0.18 0.05
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS OF SUPRALIFE INTERNATIONAL
<TABLE>
<CAPTION>
Six Months Ended
In thousands, June 30, Years Ended Dec. 31
except per share data 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $7,950 $18,813 $29,113 $33,331 $10,478
Income (loss)
from operations (1,451) 3,535 3,809 5,126 131
Net income (loss) (978) 2,194 2,315 3,130 411
Basic earnings
(loss) per share (0.10) 0.22 0.23 0.31 0.05
</TABLE>
SUMMARY PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Summary 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 Summary 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. These summary 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.
SUMMARY PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
- -------------------
Pro Forma Pro Forma
1MAGE SupraLife AdjustmentConsolidated
----- --------- ---------------------
In thousands
<S> <C> <C> <C> <C>
Current assets $574 $2,467 -- $3,041
Total assets 1,558 4,665 218 6,442
Current liabilities 631 3,130 125 3,886
Long-term obligations 157 734 -- 891
Total shareholders' equity 770 801 93 1,665
</TABLE>
SUMMARY PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
- ------------------------------
Pro Forma Pro Forma
1MAGE SupraLife AdjustmentConsolidated
----- --------- ---------------------
In thousands, except per share data
<S> <C> <C> <C> <C>
Net sales $ 826 $ 7,950 --- $ 8,776
Income (loss)
from operations (130) (1,451) (11) (1,592)
Net income (loss) (145) (978) (11) (1,133)
Net earnings (loss)
per share $(0.07) $(0.10) --- $(0.13)
Weighted avg. #
of common shares 2,142 9,822 (3,212) 8,751
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Pro Forma Pro Forma
1MAGE SupraLife AdjustmentConsolidated
----- --------- ---------------------
In thousands, except per share data
<S> <C> <C> <C> <C>
Net sales $ 1,809 $ 29,113 --- $ 30,921
Income (loss)
from operations (464) 3,809 (22) 3,324
Net income (loss) (475) 2,315 (22) 1,818
Net earnings (loss)
per share $(0.22) $0.23 --- $0.21
Weighted avg. #
of common shares 2,146 9,928 (3,319) 8,755
</TABLE>
ATTACHMENT 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.
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 2,274,498 2,620,866
---------- -----------
Total operating expenses 4,342,938 7,121,379
---------- -----------
Income (loss) from operations (592,850) 353,589
INTEREST INCOME (EXPENSE) AND OTHER, net (6,540) 74,136
---------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (599,390) 427,725
PROVISION (BENEFIT) FOR INCOME TAXES (205,000) 171,090
---------- -----------
Net income (loss) $ (395,890) $ 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) 545,6766,091,012(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
(loss) 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
(loss) 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 (BENEFIT)
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.
