SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 8-KA No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
March 6, 1998
Date of Report
(Date of Earliest Event Reported)
INTERNATIONAL HERITAGE, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Nevada 002-97690-D 84-1398635
(State or other juris- (Commission File No.) (IRS Employer
diction of incorporation) I.D. No.)
Carolina Place
2626 Glenwood Avenue, Suite 200
Raleigh, North Carolina 27608
(Address of Principal Executive Offices)
(919)571-4646
Registrant's Telephone Number
Item 1. Changes in Control of Registrant.
None; not applicable.
Item 2. Acquisition or Disposition of Assets.
None; not applicable.
Item 3. Bankruptcy or Receivership.
None; not applicable.
Item 4. Changes in Registrant's Certifying Accountant.
None; not applicable.
Item 5. Other Events.
None; not applicable.
Item 6. Resignations of Registrant's Directors.
Effective March 17, 1998, Franco P. Merlo of Zurich Switzerland
resigned from the Registrant's Board of Directors.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
<PAGE>
INTERNATIONAL HERITAGE, INC.
Raleigh, North Carolina
Consolidated Financial Statements
Years Ended December 31, 1997 and 1996 and
Period Ended December 31, 1995
EILERS, JONES, BROWN & McLEOD, CPAs, PA
(letterhead)
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
International Heritage, Inc.
Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of International
Heritage, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
the years ended December 31, 1997 and 1996 and the period from April 28, 1995
(date of inception) to December 31, 1995. These consolidated financial
statements are the responsibility of the management of International Heritage,
Inc. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Heritage, Inc. as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997 and
1996 and the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 11 to the financial statements, on March 6, 1998 Kara
International, Inc., a public company, acquired the majority of the
outstanding common stock of the Company in a transaction viewed as a reverse
acquisition. Subsequently the Securities and Exchange Commission alleged
certain illegal acts and violations of securities laws not specifically
related to the merger itself, but rather to the Company's marketing and
compensation plan and certain disclosures in its private placement of
securities. Several class action lawsuits alleging similar matters have since
been filed. The consolidated financial statements do not include any
adjustments that might result from the outcome of these events.
EILERS, JONES, BROWN & McLEOD, CPAs, PA
February 13, 1998,
Except for Note 11, as to which the date is May 1, 1998
<TABLE>
INTERNATIONAL HERITAGE, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash $409,710 $ 38,004
Certificates of deposit 1,079,053 91,734
Inventory 1,280,902 664,632
Employee and stockholder advances 59,220 11,734
Due from representatives, less allowance for doubtful
accounts of $76,000 in 1997 and $455,000 in 1996 686,365 1,933,086
Sales tax refunds due - 36,796
Due from placement agent 346,000 -
Due from credit card merchants 1,170,573 -
Other receivables 301,798 22,603
Deposit on promotional inventory 19,796 146,316
Other deposits 175,189 54,721
Prepaid commissions - 411,136
Other prepaid expenses 239,196 26,021
Total Current Assets 5,767,802 3,436,783
PROPERTY AND EQUIPMENT - AT COST
Assets not in service 103,166 -
Computer software 873,725 251,035
Computer hardware 810,288 462,383
Office furniture and equipment 413,937 180,517
Leasehold improvements 257,900 117,004
2,459,016 1,010,939
Less accumulated depreciation and amortization 392,610 125,841
Net Property and Equipment 2,066,406 885,098
OTHER ASSETS
Deferred registration costs 1,673,401 568,850
Organization costs, net 131,989 184,230
Start-up costs, net 9,859 12,461
Acquisition costs, net 620,933 319,578
Total Other Assets 2,436,182 1,085,119
$10,270,390$5,407,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1997 1996
CURRENT LIABILITIES
Trade accounts payable $ 2,828,513$1,580,725
Product ordered payable to IRSRs 510,940 440,994
Other payables to IRSRs 243,117 155,485
Cash overdrafts 321,304 95,708
Deferred revenue 2,473,780 1,682,827
Income taxes payable - 7,000
Sales tax payable 21,845 157,396
Accrued payroll and payroll taxes 831,955 387,085
Accrued commissions 1,751,632 593,953
Accrued interest 161,660 -
Total Current Liabilities 9,144,746 5,101,173
CONVERTIBLE DEBENTURES
10% Convertible notes 4,335,662 -
8.5% Subordinated convertible debentures 8,750,000 -
Total Long-Term Liabilities 13,085,662 -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value:
authorized - 50,000,000 shares;
issued and outstanding - 7,550,756
and 7,273,246 shares 9,959 9,693
Additional paid-in capital 1,186,650 910,903
Equity adjustment for foreign currency translation 21,766 2,803
Accumulated deficit (13,178,393) (617,572)
Total Stockholders' Equity (Deficit) (11,960,018) 305,827
$10,270,390$5,407,000
</TABLE>
<TABLE>
INTERNATIONAL HERITAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUE
Sales - product and nonrefundable
product deposits $100,596,088 $41,261,709 $4,254,278
Sales - business kits 6,974,720 3,316,576 312,110
Sales - administrative fees 1,556,229 3,126,917 285,854
Total Revenue 109,127,037 47,705,202 4,852,242
COST OF SALES
Commissions 65,924,218 19,631,091 2,580,177
Product 25,841,542 13,534,224 1,912,157
Business kits 6,975,353 3,223,348 358,549
Other 2,977,425 1,451,126 67,454
Total Cost of Sales 101,718,538 37,839,789 4,918,337
GROSS INCOME (LOSS) 7,408,499 9,865,413 (66,095)
SELLING AND ADMINISTRATIVE EXPENSES 19,969,320 8,553,162 1,863,728
INCOME (LOSS) BEFORE INCOME TAXES (12,560,821) 1,312,251 (1,929,823)
PROVISION FOR INCOME TAXES - - -
NET INCOME (LOSS) $(12,560,821) $1,312,251$(1,929,823)
Earnings per common share $(1.70) $0.18 $(0.30)
Weighted average number of common
shares outstanding 7,385,191 7,273,246 6,441,241
</TABLE>
<TABLE>
INTERNATIONAL HERITAGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
Common Stock; $.001 par value, Adjustment
50,000,000 shares authorized for Foreign
Total
Additional Currency
Accumulated Stockholders'
Shares Amount Paid-in Capital Translation
Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
<C>
Issuance of common
stock for cash
consideration 6,605,348 $ 8,802 $ 382,364 $ - $
- - $ 391,166
Conversion of notes
payable to common
stock 575,250 767 340,727 -
- - 341,494
Issuance of common
stock for services
rendered 92,648 124 123,406 -
- - 123,530
Adjustment for foreign
currency translation - - - 156
- - 156
Net loss - - - -
(1,929,823) (1,929,823)
Balance -
December 31, 1995 7,273,246 9,693 846,497 156
(1,929,823) (1,073,477)
Value attributed to
options granted for
services - - 64,406 -
- - 64,406
Adjustment for foreign
currency translation - - - 2,647
- - 2,647
Net income - - - -
1,312,251 1,312,251
Balance -
December 31, 1996 7,273,246 9,693 910,903 2,803
(617,572) 305,827
Exercise of option 10 - 13 -
- - 13
Issuance of common
stock for services
rendered and
acquisition costs 277,500 266 265,734 -
- - 266,000
Value attributed to
options granted for
services - - 10,000 -
- - 10,000
Adjustment for foreign
currency translation - - - 18,963
- - 18,963
Net loss - - - -
(12,560,821) (12,560,821)
Balance -
December 31, 1997 7,550,756 $9,959 $1,186,650 $ 21,766
$(13,178,393)$(11,960,018)
</TABLE>
<TABLE>
INTERNATIONAL HERITAGE, INC.
STATEMENT OF CASH FLOWS
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(12,560,821) $1,312,251 $(1,929,823)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 267,680 109,039 21,832
Amortization 306,772 112,513 47,511
Loss from cancellation of IPO 871,197 - -
Common stock issued for services 199,500 - -
Common stock options granted for services 10,000 64,406 -
Other 3,938 52,789 -
Changes in Assets and Liabilities:
Inventory (616,270) (381,261) (283,371)
Receivables, net (559,737) (1,799,637) (204,582)
Deposits and prepaid expenses 204,013 (557,337) (80,857)
Payables 1,405,366 1,225,109 952,095
Deferred revenue 790,953 1,274,452 408,375
Accrued expenses and taxes payable 1,621,658 78,210 1,067,224
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (8,055,751) 1,490,534 (1,596)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment - 795 -
Purchases of property and equipment (1,452,926) (731,061) (314,183)
Purchases of certificates of deposit (1,090,239) (81,734) (10,000)
Proceeds from redemptions of
certificates of deposit 102,920 - -
NET CASH USED IN INVESTING ACTIVITIES (2,440,245) (812,000) (324,183)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of stock 13 - 391,166
Payments for deferred registration
costs (2,013,032) (452,307) (116,543)
Proceeds from convertible notes and
debentures 13,085,662 - -
Proceeds from notes payable - 222,775 511,539
Payments on notes payable - (388,320) (4,500)
Deposits from potential investors - - 120,650
Refunds to investors - (115,650) (5,000)
Payments for organization and start-up costs - (1,627) (184,136)
Payments for acquisition costs (449,500) (215,821) (175,488)
Cash overdraft 225,596 1,674 94,034
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 10,848,739 (949,276) 631,722
EFFECT OF EXCHANGE RATE CHANGES ON CASH 18,963 2,647 156
NET INCREASE (DECREASE) IN CASH
AT END OF PERIOD 371,706 (268,095) 306,099
Cash at beginning of period 38,004 306,099 -
CASH AT END OF PERIOD $409,710 $38,004 $306,099
</TABLE>
<PAGE>
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - International Heritage, Inc. (the "Company") was incorporated in
North Carolina on April 28, 1995. It is principally engaged in the direct
sale of fine jewelry, collectibles, pro-line golf products and accessories,
premium incentive products and telecommunications products and services in
forty-eight states. The Company recruits Independent Retail Sales
Representatives ("IRSRs") who build retail sales organizations. IRSRs
purchase products from the Company and retail them to the public.
The Company has a wholly owned subsidiary, International Heritage of Canada,
Inc., that was incorporated in Ontario, Canada on July 26, 1995, and is
engaged in the same direct sales business in Canada as the parent Company.
The accounts of the Canadian Company have been consolidated with the Company
and all significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
As of December 31, 1996, the Company recorded a receivable of $2,163,000 for a
$50 technology maintenance fee charged to IRSRs. During 1997, management of
the Company determined that the balance was uncollectible, and $1,832,000 was
charged against earnings, with no restatement of prior year amounts.
CASH - For purposes of reporting cash flows, cash includes cash on hand and
amounts due from banks. As of December 31, 1997, the Company had U.S. bank
balances of $1,483,579 of which $1,149,447 was in excess of the insured limits
prescribed by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSIT - The Company was required to deposit $1,410,000 in
1997 and $90,000 in 1996 into certificates of deposit or separate bank
accounts in order to obtain merchant credit card accounts with financial
institutions. The certificates of deposit and bank accounts are required to
be maintained with the financial institutions until they mature on various
dates in 1998 and 2000.
ACCOUNTS RECEIVABLE - The Company records its receivables at amounts
ultimately expected to be collected. Bad debt expense was $1,453,000 in 1997,
$455,000 in 1996 and $0 in 1995.
INVENTORY - Inventory, is stated at the lower of cost or market, with cost
determined under the first-in first-out (FIFO) method, and consists of the
following:
<TABLE>
<S> <C> <C>
1997 1996
Retail business career kits $ 608,483 $ 538,032
Promotional items 550,977 69,638
Display jewelry and collectibles 121,442 56,962
$ 1,280,902 $664,632
</TABLE>
PROPERTY AND EQUIPMENT - Depreciation expense is calculated on the straight-
line method over useful lives as follows:
<TABLE>
<S> <C>
Estimated Useful Life
Computer software 5 years
Computer hardware 5 years
Office furniture and equipment 7 years
Leasehold improvements 7 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as incurred.
The cost of major renewals and betterments are capitalized and depreciated
over their estimated useful lives. Upon disposition of equipment, the
respective assets and accumulated depreciation accounts are relieved and any
related gain or loss is reflected in operations.
DEFERRED REGISTRATION COSTS - Deferred registration costs consist of direct
costs associated with stock and convertible debt security offerings. Deferred
costs from the convertible debt security offerings are being amortized over
the life of the notes and debentures, which is two years. See Note 3 for
additional information regarding the notes and debentures. Deferred
registration costs consist of the following:
<TABLE>
1997 1996
<S> <C> <C>
10% Convertible notes $553,120 $ -
8.5% Subordinated convertible debentures 1,224,065 -
Initial public offering - 568,850
1,777,185 568,850
Less accumulated amortization 103,784 -
$ 1,673,401 $ 568,850
</TABLE>
During 1997, the Company deferred an additional $302,347 in registration costs
associated with an initial public offering. The Company canceled the offering
in June 1997 and recorded a loss for the entire $871,197 previously deferred.
ORGANIZATION AND START-UP COSTS - Organization costs consist primarily of
legal, consulting and accounting fees associated with the organization of the
Company and are being amortized on a straight-line basis over 5 years
(accumulated amortization was $129,218 as of December 31, 1997 and $76,977 as
of December 31, 1996). During 1996, the Company wrote off $24,309 (net book
value) in organization costs for the development of a training video which has
been updated and replaced to reflect the fact that the underlying asset no
longer had value. Start-up costs consist of legal and consulting fees
associated with the start-up of the Canadian operations and are being
amortized on a straight-line basis over 5 years (accumulated amortization was
$5,815 as of December 31, 1997 and $3,213 as of December 31, 1996).
ACQUISITION COSTS - In order to facilitate a larger retail sales organization
in a short time period, the Company acquired sales organizations from third
parties and paid for these acquisitions through direct product cost to the new
representatives. More than 75% of these representatives acquired have
remained active with the Company through December 31, 1997. Accordingly, the
direct costs associated with these acquisitions (exclusive of any overhead or
management costs) have been capitalized and are being amortized on a straight-
line basis over 5 years (accumulated amortization was $219,875 as of December
31, 1997 and $71,730 as of December 31, 1996).
REVENUE RECOGNITION AND DEFERRED REVENUE - IRSRs may join the Company and
retail product at no cost other than to purchase a $100 professional retail
business career kit. When IRSRs sell a product, the sale is recognized when
the product is shipped.
The Company allows IRSRs to stop selling the Company's products without
penalty or obligation within 60 days (or up to one year as required by certain
state statutes) and receive a complete refund. The Company records revenues
for down payments made on product sales under a Retail Business Agreement
("RBA") and provides allowances for sales returns and allowances based on past
experience. After a 60 day period has elapsed, all such revenue is
recognized. In November 1997, the directors of the Company resolved to revise
its IRSR compensation plan and specifically to eliminate the RBA. See Note 11
regarding the subsequent elimination of the RBA. Effective July 1996, IRSRs
who enter with more than one RBA or have earned a commission check are not
eligible for a refund.
In addition, the Company provides a 100% satisfaction guarantee on all
product and sales aids purchased by IRSRs or customers within 30 days of
purchase. Products earned as commissions under an RBA are not eligible for
refund, but may be exchanged for another product. See Note 11 regarding
subsequent changes to the refund policy.
Commissions are earned by the IRSRs based on sales volume levels. The Company
periodically conducts sales contests and various incentive plans to enhance
revenue growth. The Company recognized revenue on an annual $25 optional
administration fee when an IRSRs or customer first joins the Company and every
year thereafter.
INVESTOR DEPOSITS - Subsequent to the initial issuance of common stock for
$111,491 in cash and services, the Company received $809,105 of funds and
services from potential investors. The Company sold these securities under an
exemption from registration; however, it was later determined that the
exemption may have been technically deficient in some states. Thus, the
Company voluntarily (under no regulatory directive) offered to rescind such
prior sales to all investors who deposited monies during the period
from May to December 1995 by refunding the price paid for the securities
plus interest (the "Rescission Offer"). The Company has recorded deposits
made by investors who rejected the Rescission Offer as equity. Four investors,
for a total of $20,000, accepted the Rescission Offer and received a refund.
In addition, the Company refunded $100,650 plus interest to potential
investors from the state of Washington, since the Company withdrew its
offering in that state. All other investors rejected the Rescission Offer.
Any investor who rejected the Rescission Offer received shares of the
Company's stock at the rate of 7.5 shares for each $10 investment.
ADVERTISING COSTS - Advertising costs are expensed the first time the
advertising takes place.
PER SHARE AMOUNTS - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share. This Statement specifies the computation, presentation and disclosure
requirements for earnings per share. The Company retroactively adopted this
statement in 1997 and all prior periods have been restated accordingly.
Earnings per common share were computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
period. The Company has common stock options outstanding as of December 31,
1995, 1996 and 1997, and has convertible debt outstanding as of December 31,
1997. No adjustment has been made to earnings per share to reflect the
potential dilutive effect of these items since to do so would result in anti-
dilution in years in which the Company incurred a net loss and since the
average market price of the common stock in 1996 did not exceed the exercise
price of the options and thus would have no dilutive effect. Thus basic and
diluted earnings per share are the same amount for all periods presented. See
Notes 3 and 5 for additional information on these potentially dilutive
securities. See also Note 11 for information regarding events occurring
subsequent to December 31, 1997 which would have materially changed the number
of common shares and potential common shares outstanding at December 31, 1997
if the transaction had occurred before December 31, 1997.
STOCK OPTIONS - The Company recognizes compensation cost for nonvariable
employee stock options at the differences between what the stock has last sold
for to outside investors ($1.33 per share) less the amount, if any, the
employee is required to pay. The method used is the intrinsic value based
method and is expensed over the estimated period of service. As of December
31, 1996 and 1997, there are no outstanding employee stock options requiring
the recognition of compensation expense.
The Company recognizes compensation cost for all non-employee stock options at
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. There were 466,250
non-employee stock options outstanding at December 31, 1997 and 286,250 at
December 31, 1996. The Company has recorded $10,000 in related compensation
expense in 1997 and $64,406 in 1996.
INCOME TAXES - Temporary differences in the basis of assets and liabilities
for financial statement and income tax reporting arise from using different
methods and periods to calculate depreciation, allowances for bad debt and
various accrued liabilities. Provision has been made for income taxes due on
taxable income and for the deferred taxes on the temporary differences.
International Heritage of Canada, Inc. files their tax returns separately from
the Company.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. This Statement establishes standards of
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. In December 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information.
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements. These Statements will be effective for the Company's fiscal year
ended December 31, 1998, and the Company does not intend to adopt early.
Adoption of these Statements is not expected to have a significant effect on
the Company's financial statements.
NOTE 2 - OPERATING STATUS
As noted in the accompanying consolidated financial statements, the Company
incurred a net loss of $12,560,821 for the year ended December 31, 1997 and
has an accumulated deficit of $13,178,393 as of December 31, 1997. In
addition, current liabilities exceed current assets by $3,376,944 as of
December 31, 1997. This situation has been caused by the high initial costs
of building and developing an international direct sales company and the
decline in margins from the Company's commission payout structure. The
Company modified its commission payout structure in November 1997 in order to
generated better margins. These modifications include a 65% cap on future
commission payouts. In March 1998, the Company introduced a new line of
consumable products and a new IRSR compensation plan which management of the
Company believes will lead to improved profit margins and further limit
commission payout exposure. In December 1997 through March 1998 the Company
raised approximately $10,537,000 through the private placement of convertible
debentures (see Note 3). Management of the Company intends to convert these
debentures to stock in 1998. In addition, the Company has obtained a signed
affidavit from a principal with the placement agent for the offering to invest
another $50 million in the Company in 1998. In March 1998 the Company entered
into a reverse reorganization with Kara International, Inc. which allowed the
Company to publicly trade its stock (see Note 11). The Company's ability to
continue as a going concern is dependent on its ability to maintain future
profitability and/or to successfully obtain additional capital. The
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
NOTE 3 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
In August 1996, Mayflower Holdings, Inc., a stockholder which is principally
owned by the President of the Company, loaned the company $200,000 with
interest at 12%. The note is payable in monthly installments of $50,000
beginning in October 1996 with a final payment including interest due in
January 1997. The note is secured by the assets of the Company.
During 1996, the Company offset $58,172 in receivables from Mayflower
Holdings, Inc. against the note principal. The note was repaid on November
1, 1996. Interest expense was $4,100 in 1996.
In January 1996, the Company borrowed $22,775 under a note payable to a
finance company, bearing interest at 12.5%. The note was secured by a vehicle
and was scheduled to mature January 4, 1999. In October 1996, the Company
repaid the note balance. Interest expense was $1,168 in 1996.
During 1997, the Company issued $4,335,662 in convertible notes under Rule 506
of Regulation D of the Securities Act of 1933. The notes bear interest at ten
percent per annum. Principal and interest are due August 1, 1999. The notes
are convertible into one share of common stock for each $2.00 principal amount
of the notes. The notes automatically convert under the same terms upon (1)
an initial public offering providing gross proceeds of a minimum of
$10,000,000 at a per share price of no less than $4.00, (2) a sale of all or
substantially all of the assets of the Company to a public company and the per
share price of the common stock of such Company remains over $4.00 for any
thirty-day period thereafter, or (3) any recapitalization, reconsolidation,
merger or acquisition of or by the Company that results in the existing
shareholders of the Company owning less than 51% of the Company and the per
share price of the common stock of the Company remains over $4.00 for any 30-
day period thereafter. The notes contain covenants restricting dividends
payments and executive compensation. The Company capitalized $553,120 in
deferred registration costs, of which $90,379 has been amortized as of
December 31, 1997. Interest expense was $126,243 in 1997, all of which is
payable at December 31, 1997.
During 1997, the Company issued $8,750,000 in subordinated convertible
debentures under Regulation S of the Securities Act. The notes bear interest
at 8.5% per annum and mature December 15, 1999. Interest is payable in semi-
annual payments on June 15 and December 15 of each year, commencing June 15,
1998. The notes are subordinate to the Regulation D convertible notes. The
debentures are convertible into 5,000 shares of common stock and warrants to
purchase 3,000 shares of common stock at $4.00 per share for each $10,000
debenture. The notes automatically convert under the same terms upon the same
conditions for the Regulation D convertible notes described above. Upon
automatic conversion, the debenture holder shall receive a premium of 500
additional shares of common stock. The debenture holders shall receive a
premium for voluntary conversion as follows: 500 additional shares of common
stock if redemption occurs prior to June 15, 1998; 400 additional shares if
prior to December 15, 1998; 300 additional shares if prior to June 15, 1999;
and 100 additional shares if prior to December 15, 1999. The warrants are
exercisable by the holder at an exercise price of $4.00 per share on or before
December 15, 1999. The Company capitalized $1,224,065 in deferred
registration costs, of which $13,405 has been amortized as of December
31,1997. Interest expense was $35,417 in 1997, all of which is payable as of
December 31, 1997. The offering has been extended to March 31, 1998.
Total interest expense was $274,872 in 1997, $23,828 in 1996 and $8,062 in
1995.
NOTE 4 - PROVISION FOR INCOME TAXES
No income tax provision was calculated for 1997 or 1995 since the Company had
net losses. No deferred tax asset has been recorded since realization cannot
be assured with more than fifty percent likelihood.
The 1996 provision for income taxes consisted of:
<TABLE>
1996
<S> <C>
Current taxes payable
Federal $ 594,000
State 147,000
741,000
Deferred taxes
Federal (181,500)
State (27,500)
(209,000)
Less NOL Carryforward (532,000)
$ -
</TABLE>
Deferred taxes result from timing differences in the recognition of revenue
and expense for tax and financial reporting purposes. The source of these
differences and the tax effect of each is as follows:
<TABLE>
1996
<S> <C>
Excess of tax over book
depreciation and amortization $ 49,000
Nondeductible bad debt expense (177,000)
Nondeductible expenses related to
certain book liabilities (81,000)
$ (209,000)
</TABLE>
The Company's total deferred tax assets, deferred tax liabilities, and
deferred tax asset valuation allowances at December 31, 1996 are as follows:
<TABLE>
1996
<S> <C>
Total deferred tax assets $ 258,000
Less valuation allowance -
258,000
Total deferred tax liabilities (49,000)
Net deferred tax asset $ 209,000
</TABLE>
The following table reconciles the tax provision with the expected provision
obtained by applying statutory rates to pretax income:
<TABLE>
1996
<S> <C>
Expected tax provision $ 446,000
State income taxes, net of federal
income tax benefit 67,000
Canadian income tax effect (5,000)
Non-deductible expenses 24,000
$ 532,000
</TABLE>
For financial statement purposes, the Company has approximately $13,300,000 of
net operating loss carryforwards as of December 31, 1997, which expire in
2012.
NOTE 5 - COMMON STOCK AND STOCK OPTIONS
On July 1, 1996, the shareholders approved an increase in authorized shares of
common stock to 25,000,000 shares and a ten for one common stock split.
Concurrent with this amendment, the par value of common stock changed from
$0.01 to $0.001 per share. Effective October 31, 1996, the Board of Directors
approved a three for four reverse common stock split. Concurrent with this
amendment, the par value of common stock changed from $0.001 to $0.00133 per
share (rounded to $0.001 for financial statement reporting purposes).
Effective December 31, 1997, the shareholders approved an increase in
authorized shares of common stock to 50,000,000 shares. During 1995, the
Company granted the initial Board of Directors and founders options for 15% of
the issued and outstanding shares at $.02 per share. Effective October 31,
1996, the Board of Directors approved and the original founders accepted the
cancellation of these options and the grant of new options for 1,350,000
shares in exchange for the canceled options. These new options are
exercisable at $1.33 per share and expire October 31, 1999. These options
remain outstanding at December 31, 1997 and are not subject to the option plan
noted below.
In 1996, the Company issued Mayflower Holdings, Inc. 187,500 shares of common
stock (valued at $250,000) in exchange for consulting fees. The shares were
then canceled and options were granted for 375,000 shares effective October
31, 1996, at an exercise price of $1.33 per share. The options expire on
October 31, 1999, and are outstanding as of December 31, 1997. During 1997
all shares and options issued to Mayflower Holdings, Inc. were reissued in the
President's name. These options are not subject to the option plan noted
below.
Under a 1995 employment contract and based on the Company's achievement of
certain revenue goals, the President of the Company is entitled to receive
stock incentives in the amount of 1% of issued and outstanding shares as of
December 31, 1995, 2% as of December 31, 1996, and 3% as of each year ended
December 31, 1997 through 2000. These stock incentives were granted to the
President as additional compensation and were at no cost to the President. In
1995, the Company did not meet the sales level noted in the President's
contract, but in March 1996, the Board granted the incentive stock to the
President based on accrued sales and deferred revenue combined. Effective
October 31, 1996, the President gave back the incentive stock and the Company
granted additional stock options of 151,300 shares of common stock at an
exercise price of $1.33 per share. Effective October 31, 1996, the President
voluntarily agreed to accept grants of stock options for 2,295,000 shares,
exercisable at $1.33 per share in exchange for the 1996, 1997, 1998, 1999 and
2000 incentive stock referred to above in order to eliminate the contingent
stock issuances. As a result of having been granted these options, the
President is no longer entitled to receive the stock incentives referred to
above and the options are not contingent on the Company's achievement of the
specified revenue goals. These options are outstanding as of December 31,
1997, expire on October 31, 2001, and are not subject to the option plan noted
below. No compensation expense has been recorded since the options granted
have exercise prices that approximate fair market value.
In 1996, the Company formalized and consolidated all previously existing
options into a single option plan effective October 31, 1996, and reissued
options for 3,579,250 shares (previously 3,175,000 shares) to its Board of
Directors, management, advisory board members, consultants, named experts and
counsel, IRSRs and others. These options are exercisable at $1.33 per share
and expire on October 31, 1999. 3,495,000 of these options are outstanding as
of December 31, 1997.
In 1997, the Company granted the three Company founders options for 2,700,000
shares. These options are exercisable at $2.00 per share and expire October
31, 1999. The Company also granted the President options for 1,085,500
shares. These options are exercisable at $2.00 per share and expire December
19, 2000. The Company also granted options for 384,628 shares to others
during 1997. These options are exercisable at $2.00 per share and expire
December 19, 2000. All of these options are outstanding at December 31, 1997
and are not subject to the option plan noted above.
In 1997, the Company granted options to its Board of Directors, management,
advisory board members, consultants, named experts and counsel, IRSRs and
others in the amount of 3,330,000 shares. 1,038,000 of these options are
exercisable at $1.33 per share and expire on various dates in 2000. 2,292,000
of these options are exercisable at $2.00 per share and expire on various
dates in 2000. 3,329,990 of these options are outstanding at December 31,
1997 and are subject to the option plan noted above. During 1997, the Board
of Directors approved the number of shares authorized for grant as options
under the option plan as 25% of authorized common stock. As of December 31,
1997, the Company had issued 574,990 more options than was authorized under
the option plan, and the Plan was closed. On February 27, 1998, but with a
record date of December 31, 1997, the shareholders approved an increase in
authorized shares of common stock to 50,000,000 shares. As a result of this
increase, the number of options granted under the option plan no longer
exceeded the maximum authorized.
The weighted average exercise price for all outstanding options is $1.62 per
share. If all of the above options were exercised as of December 31, 1997,
this would result in 15,166,418 shares of additional outstanding common stock.
The following table summarizes information about fixed stock options both
outstanding and exercisable at December 31, 1997:
<TABLE>
Number Weighted-average
Range of Outstanding remaining Weighted average
exercise prices at 12/31/97 contractual exercise price
<S> <C> <C> <C>
$1.33 - $2.00 7,940,000 2.00 years $1.56
1.33 1,040,118 2.25 1.33
2.00 550,000 2.65 2.00
1.33 - 2.00 3,190,000 3.00 1.97
1.33 2,446,300 4.00 1.33
1.33 - 2.00 15,166,418 2.57 1.62
</TABLE>
A summary of the status of the Company's stock options as of December 31, 1997
and 1996, and changes during the years then ended are as follows:
<TABLE>
1997 Weighted 1996 Weighted
Avergage Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding -
beginning of year 7,750,550 $1.33 1,501,300 $1.33
Granted 7,500,128 $1.91 6,249,250 $1.33
Canceled (84,250) $1.33 - -
Exercised (10) $1.33 - -
Outstanding -
end of year 15,166,418 $1.62 7,750,550 $1.33
Options exercisable
at end of year 15,166,418 7,750,550
Weighted average
fair value of
options granted
during the year $0.08 $0.28
</TABLE>
The Company has recognized no compensation cost for its stock options issued
to employees under the intrinsic-value based method. If the Company had
applied the provisions of Statement of Financial Accounting Standards No. 123
requiring the fair-value based method for these employee stock options, the
Company would have reported a net loss of $13,043,415 in 1997 and $123,619 in
1996, and earnings per share would have been $(1.77) in 1997 and $(0.02) in
1996.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1997: dividend yield of zero percent;
expected volatility of 30%; risk-free interest rates of 6.38% for options
granted to the President under his employment contract and 6.25% for all
other options granted; and expected lives of 2.5 years for options granted to
the President under his employment contract and 1.5 years for all other
options granted.
NOTE 6 - LEASE COMMITMENTS
On November 11, 1995, the Company entered into a lease for its U.S. office
space under an operating lease agreement expiring on November 30, 2002.
During 1997 the Company assumed two additional leases in the same building
expiring on February 1 and September 30, 1999. The rental rates will escalate
annually based on changes in the consumer price index, not to exceed a five
percent annual increase. On September 1, 1995, the Company entered into a
lease for its Canadian operations under an operating lease which automatically
renews for six month terms. This lease was terminated in January 1998. On
June 16, 1997, the Company entered into a lease for additional U.S. office
space under an operating lease expiring September 30, 2002. The rental rate
increases on a fixed schedule each September 30.
Certain office equipment is being leased under operating leases expiring in
1999 and 2001. Certain other office equipment is being leased on a month-to-
month basis.
During 1997, the Company entered into a software licensing maintenance
agreement with no set expiration date. Annual maintenance fees are $60,000.
The combined future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year Ending December 31, Amount
1998 $363,758
1999 331,371
2000 301,930
2001 287,669
2002 241,821
$1,526,549
</TABLE>
Rent expense was $356,561 in 1997 and $192,477 in 1996.
In January 1998, the Company entered into a lease agreement for its Canadian
office space. The lease expires January 31, 2008 and includes a schedule of
fixed annual rental rate increases. Minimum annual lease payments range from
$35,995 in year one to $64,413 in year ten.
NOTE 7 - ECONOMIC DEPENDENCY
A material amount of the Company's retail products are acquired from two
suppliers, the loss of which may have an adverse effect on the Company in the
near term. These suppliers accounted for approximately 49% of the retail
products purchased in 1997. The Company has made arrangements with other
suppliers in order to mitigate this dependency. Based on these arrangements
and due to the nature of the Company's products, management does not believe
that the loss of these suppliers would adversely affect the Company in the
long term.
A material amount of the Company's retail business career kits are acquired
from three principal suppliers, the loss of which may have an adverse effect
on the Company. These suppliers accounted for approximately 93% of the retail
business career kits purchased in 1997.
NOTE 8 - CONTINGENCIES
As a result of the transactions leading to the Rescission Offer referred to in
Note 1 under investor deposits, the Company may be liable for administrative
penalties and sanctions. The Company knows of no administrative proceedings
or regulatory investigations related to the Rescission Offer that are
currently pending or proposed. The amount of any such penalties and sanctions
cannot be estimated.
On June 3, 1997, the Company entered into an agreement with the North Carolina
Attorney General ("NCAG") ending the NCAG's threat to bring action against the
Company for alleged violation of the North Carolina Pyramid Schemes Act and
the North Carolina Unfair and Deceptive Trade Practices Act. The agreement
resulted in the payment of $100,000 and the imposition of certain remedial
measures including ongoing reporting by the Company and monitoring of the
Company's activities by the NCAG. The violation of the agreement will likely
result in injunctive action by the NCAG.
On February 6, 1998, an Assurance of Voluntary Compliance (the "Assurance")
was accepted by the Georgia Office of Consumer Affairs. The Assurance was
entered into by the Company without admission to alleged violation of the Fair
Business Act of 1995, as amended, in order to resolve the matter without the
necessity of formal legal action. The Assurance resulted in the Company
paying $70,000 and the imposition of certain remedial measures including the
modification of the Company's marketing plan in Georgia and the provision of
refunds.
The Company periodically receives inquiries and/or investigative demand
letters from various state agencies. The Company is not currently aware of
any pending or threatened litigation pursuant to which fines may be imposed,
except as disclosed in Note 11. Regulations regarding network marketing
companies vary from jurisdiction to jurisdiction. Failure to comply with the
laws of any jurisdiction can result in the inability to operate therein for
indefinite periods of time. The Company may also become involved in other
matters of litigation in the normal course of business. The Company is not
aware of any pending or threatened proceeding, except as disclosed herein and
in Note 11.
On October 23, 1997, in the General Court of Justice, Superior Court Division,
Wake County, North Carolina, an action was filed by Eric S. Block and Tina
Block against the Company. The plaintiffs allege fraud, breach of contract,
unfair and deceptive trade practices in violation of North Carolina law, and
punitive damages. Plaintiffs seek relief in the form of actual and
compensatory damages, consequential damages, punitive damages, treble damages
(all in excess of $10,000), attorney's fees and other relief. The ultimate
outcome of this matter cannot presently be determined and management of the
Company intends to vigorously defend this action. No adjustments have been
made to the accompanying consolidated financial statements.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company incurred costs totaling approximately $60,667 in 1996 from
Mayflower Holdings, Inc., a company which is principally owned by the
President of the Company, related to the organization, start-up and other
operating expenses of the Company. Of these costs, $48,138 was capitalized as
deferred registration costs in 1996. The remaining amounts were expensed as
incurred. The Company capitalized $94,225 in charges from Mayflower Holdings,
Inc. as deferred registration costs in 1997. All of these amounts capitalized
as deferred registration costs were related to the initial public offering
which was canceled in 1997. The amount due from Mayflower Holdings, Inc. was
$32,943 at December 31, 1997 and $2,163 at December 31, 1996.
The Company subleases office space to Mayflower Holdings, Inc. on a month-to-
month basis. Rental income was $24,000 in 1997 and $6,000 in 1996. The
sublease arrangement was subsequently terminated in 1998.
In 1996, the Company issued Mayflower Holdings, Inc. 187,500 shares of common
stock (valued at $250,000) in exchange for consulting fees. The shares were
then canceled and options were granted for 375,000 shares effective October
31, 1996, at an exercise price of $1.33 per share. The options expire on
October 31, 1999, and are outstanding as of December 31, 1997. These options
are not subject to the option plan noted in Note 5 above.
Under a 1995 employment contract and based on the Company's achievement of
certain revenue goals, the President of the Company is entitled to receive
stock incentives which have since been replaced with stock options. See Note
5 for additional information.
The Company entered into an agreement with the President and a relative to
create a sales training handbook for its IRSRs. The agreement calls for a
lump sum payment of $10,000 to the authors as well as a $4 per book royalty
for all books sold to the Company. Payments to these individuals were
$316,504 in 1997 and $132,000 in 1996. $85,436 was due at December 31, 1997
and no amounts were due at December 31, 1996. Effective in the fourth quarter
of 1997, the agreement was changed such that the Company purchases the
handbooks from Mayflower Holdings, Inc. and is no longer responsible for the
payment of royalties. The Company paid $103,850 to Mayflower Holdings, Inc.
for the purchase of handbooks in 1997.
The Company acquires its jewelry and collectibles from three suppliers, one of
whom is a stockholder of the Company. 11% of the Company's products were
acquired from this stockholder in 1997.
The Company entered into an agreement with a member of the Board of Directors
to create a business presentation video. The agreement calls for a $0.50 per
video royalty for each video sold. Payments to this individual were $30,815 in
1997 and $1,942 in 1996.
The Company entered into an agreement with a stockholder to create a retail
sales video. The agreement calls for a $0.50 per video royalty for each video
sold. Payments to this individual were $30,793 in 1997 and $982 in 1996.
In 1996, the Company had an agreement with a stockholder to provide the
Company with a promotional line of merchandise. $13,926 was paid to this
individual in 1996.
During 1996, two stockholders received employee advances for a combined total
of $60,876 at their highest. These balances were repaid prior to December 31,
1996.
The Company owed $131,812 to Mayflower Holdings, Inc. as of December 31,
1995. This note bears interest at 8% per annum and was paid off in February
1996.
During 1996, the Company awarded a stockholder the use of a company-owned
vehicle for the calendar year 1996 in recognition of his achievements as the
top sales representative.
In October 1996, the Company gave title to the vehicle to the stockholder and
recognized $27,859 as additional commission expense.
In August 1996, Mayflower Holdings, Inc. loaned the Company $200,000, with
interest at 12%. The note was repaid on November 1, 1996. See Note 3 for
additional information. In May 1997, Mayflower Holdings, Inc. advanced the
Company $500,000. The advance was repaid in the same month.
In 1996, the Company began renting use of an airplane on a per-use basis from
Mayflower Aviation, LLC, which is owned by the President of the Company and
his wife. Payments to this Company were $328,691 in 1997 and $34,416 in 1996.
In December 1997, the Company paid a referral fee of $150,000 to a law firm in
which a member of the Board of Directors is a partner. The fee was for
services rendered in connection with the Regulation S convertible debenture
offering referred to in Note 3.
The Company acquires certain computer equipment and services from an entity
which is principally owned by a shareholder and employee of the Company. The
Company paid $404,814 to this entity in 1997. No amounts were owed at
December 31, 1997 and the individual was not a shareholder or employed by the
Company in 1996.
During 1997, Mayflower Holdings, Inc. received management/referral fees of
approximately $258,000 from one of the Company's vendors related to the
Company's purchases from this vendor.
During 1997, the Company received commissions totaling $254,000 from
International Communications Corporation, an entity owned in part by the
President of the Company, related to the Company's sales of telecommunications
products and services. International Communications Corporation earned
commissions totaling $107,000 from the Company's telecommunications supplier
related to the Company's sales of these products and services. $176,000 was
due from International Communications Corporation as of December 31, 1997.
NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments during the periods were as follows:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Interest $8,075 $26,661 $2,833
Income taxes - - -
</TABLE>
Non-cash investing and financing activities during the periods were as
follows:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Conversion of notes payable to stock $- $- $341,494
Stock issued for services provided in
the organization of the Company - - 123,530
Common stock options granted 10,000 64,406 -
Stock issued for deferred registration costs 66,500 - -
</TABLE>
As indicated in Note 1, the Company has valued services provided in exchange
for stock at the fair market value of the stock issued. The fair market value
was determined as the price the stock last sold to outside investors at the
time the services were performed.
NOTE 11 - SUBSEQUENT EVENTS
On March 6, 1998, the Company entered into a share-for-share exchange with
Kara International, Inc. ("Kara"), a Nevada corporation whose common stock is
quoted and publicly traded on the NASDAQ Over-The-Counter Electronic Bulletin
Board. The transaction is viewed as a reverse acquisition and is treated as a
recapitalization of the Company for accounting purposes. Each outstanding
share of the Company was exchanged for three shares of Kara and each
outstanding option outside of the option plan described in Note 5 of the
Company was exchanged for one option to acquire one share of Kara on like
terms and conditions. Options subject to option plan described in Note 5
shall be exchanged for similar options, as not yet determined. 7,379,493
shares (97.73%) of the Company were exchanged for 22,138,479 shares of Kara,
and 8,341,428 options of the Company were exchanged for 8,341,428 options of
Kara. Effective March 3, 1998, Kara amended its articles of incorporation to
change its name to International Heritage, Incorporated and increase its
authorized capital from 50,000,000 shares to 100,000,000 shares of common
stock at $0.001 par value. The shares of Kara received in exchange by the
Company's stockholders are restricted and subject to Rule 144 of the
Securities Act of 1933, as amended, and must be held for a period of one year.
Following is a summary of Kara's selected financial data as of and for the
year ended December 31, 1997 and 1996:
<TABLE>
1997 1996
<S> <C> <C>
Total current assets $491 $163
Total current liabilities 3,804 5,472
Common stock 4,560 410
Capital in excess of par value 1,141,367 1,121,767
Accumulated deficit (1,149,240) (1,127,486)
Total stockholders' deficit (3,313) (5,309)
Net loss (21,754) (5,841)
</TABLE>
On March 16, 1998 the Company implemented a new IRSR compensation plan which
eliminated the RBA. Product sales revenue is recognized when the product has
been ordered and shipped. The plan allows a 90% refund to all IRSRs for a
period of one year if the product is returned in new, unused condition. The
plan allows a refund to all outside customers for a period of thirty days
after purchase if the customer is dissatisfied with a product.
On March 13, 1998, the Securities and Exchange Commission ("SEC") suspended
trading of International Heritage, Incorporated ("Incorporated") until March
26, 1998, because of questions regarding the accuracy of statements
concerning, among other things, the return investors could expect to make on
their investment and the regulatory background of the Company and its
President. On March 16, 1998, the SEC filed a Complaint for Injunctive and
Other Relief against the Company, the Company's three founders individually,
and Incorporated (the "Defendants"). The SEC alleges that the Defendants
engaged in the sale of unregistered securities; made misrepresentations and
material omissions in connection with the sale of securities; and, knowingly
misrepresented the Company's financial condition and concealed that it was
operating a pyramid scheme. The Court entered, ex parte, an Order Appointing
a Receiver for the Company. On March 17, 1998 the Court amended the above
Orders to allow the Company to accept new product sales orders from existing
IRSRs only for the Company's new nutritional and skin care products and
telecommunication services. On March 24, 1998, the Defendants filed a
Memorandum in Opposition to the SEC's Motion for Preliminary Injunction and
Other Equitable Relief. On April 3, 1998, the Court entered a Memorandum
Opinion and Order setting forth that the Company, its officers, agents,
servants, employees, attorneys and persons in active concert or participation
with them be restrained from, among other things, securities law violations;
appointing a Monitor; requiring the posting of a $5 million bond upon which
the receivership would be dissolved and management reinstated; a reduction in
the President's compensation; and certain other things. On April 9, 1998, the
$5 million bond was posted by the President and the Receiver was relieved of
his responsibilities. On April 22, 1998, the Court reviewed the Company's
revised IRSR compensation plan and authorized the Company to conduct business
consistent with the revised plan and under the scrutiny of the Monitor.
Management of the Company intends to vigorously defend this action. The
ultimate outcome of this matter cannot presently be determined and no
adjustments have been made to the consolidated financial statements.
On April 3, 1998, the Montana Securities Commissioner issued a Cease and
Desist Order in the matter of the Defendants. The Order concludes that the
Company's marketing program is a security within the meaning of the Montana
Securities Act and that such has been and is offered and sold in violation of
the Montana securities laws. On April 20, 1998, the Montana Securities
Commissioner amended the Order, finding among other things, that the President
made inaccurate statements to Montana IRSRs regarding the terms and status of
the original Order. Under both Orders, the Montana Securities Commissioner
has ordered the Defendants to cease and desist violations of the Montana
securities laws and seeks fines up to $250,000 and restitution to Montana
residents. A hearing was set for May 26, 1998.
On May 1, 1998, the Company signed a consent agreement with the Montana
Securities Commissioner allowing the Company to do business in the State under
its new compensation plan. In accordance with the consent agreement, the
Company must pay $21,000 to reimburse the State's investigative costs; must
allow refunds to any Montana resident IRSR who executed an RBA with the
Company and requests a refund within 45 days of written notice from the
Company (refunds shall be less any commissions or refunds previously paid, as
well as the retail value of any products received); must offer the right to
rescind the sale of any notes purchased by citizens of the State of Montana
between July 17, 1997 and October 31, 1997 ; must contribute to youth
activities and consumer protection efforts in the State of Montana; and must
provide documents upon the reasonable request of the Commissioner to monitor
compliance with the order. No adjustments have been made to the consolidated
financial statements as a result of this matter.
On March 24, 1998, a class action complaint was filed in the U.S. District
Court for the Eastern District of North Carolina on behalf of Sharon A.
Meckenstock , Dan H. Meckenstock, Custodian FBO Jean Carol Meckenstock and
Wilber E. Meckenstock, on their own behalf and on behalf of a class of all
persons similarly situated. On March 27, 1998, a class action complaint was
filed in the District Court of Dallas County, Texas, 101st Judicial District,
by Denise March, Felix Glen Ortega, Lupe Ortega, individually and on behalf of
all others similarly situated. On March 18, 1998, a class action complaint
was filed in the Circuit Court of Dallas County, Texas, F-116th Judicial
District by Craig T. Liebendorfer, individually, and on behalf of all others
similarly situated. On April 1, 1998, a class action complaint was filed in
the Circuit Court of Barbour County, Alabama, by Randall L. Greene, Andy
Clark, Jackson Wayne Murphy, Donnie Kenneth Broderway, James H. Thomas,
individually and on behalf of all others similarly situated. On April 7,
1998, a class action complaint was filed in the General Court of Justice,
Superior Court Division, Wake County, North Carolina, by William Swinney and
Marshall Reddy, individually and as representatives of a class of all
similarly situated sales representatives in the Company. All five of these
class action lawsuits allege the Defendants defrauded investors in the form of
notes, common stock and other securities and that the Defendants used
misrepresentations and omissions of material facts in an unlawful and
fraudulent scheme to offer and sell securities of the Company through
recruiting people to buy interests in business centers, among other things.
Plaintiffs seek relief through class action status, actual damages, and
punitive damages up to $300 million. In addition, there are an unidentifiable
number of potential unasserted claims in the form of class actions and
otherwise growing out of the civil action filed by the Securities and Exchange
Commission. The ultimate outcome of these actions and unasserted claims
cannot be presently determined; however, given the Court's April 22, 1998
authorization for the Company to conduct business under its revised
compensation plan as referred to above, the Defendants intend to vigorously
defend these actions.
(b) Pro Forma Financial Information.
Pursuant to an Agreement and Plan of Reorganization (the "Plan") dated March
6, 1998, between the Registrant; International Heritage, Inc., a North
Carolina corporation ("IHI"), certain stockholders and option holders of IHI,
the IHI stockholders became the controlling stockholders of the Registrant in
a transaction viewed as a reverse acquisition, and IHI became the majority-
owned subsidiary of the Registrant. The Plan was treated as a
recapitalization of IHI for accounting purposes. The source of the
consideration used by the IHI stockholders to acquire their controlling
interest in the Registrant was the exchange of 97.73% (7,379,493 shares
equaling 22,138,479 shares of the Registrant under the Plan) of the
outstanding common stock of IHI pursuant to the Plan. Certain IHI option
holders have also agreed to exchange 8,341,428 options to acquire shares of
common stock of IHI for similar options to acquire "unregistered" and
"restricted" shares of common stock of the Registrant, on like terms, on a one
for one basis. The directors and executive officers of the Registrant have
resigned and the directors and executive officers of IHI have been designated
and elected as new directors and executive officers of the Registrant. The
name of the Registrant was changed to "International Heritage, Incorporated"
and the authorized capital of the Registrant was increased to 100,000,000
shares of common stock with a par value of $0.001 per share.
The following Pro Forma Combined Balance Sheet as of December 31, 1997 and the
Pro Forma Combined Statement of Loss for the year then ended give effect to
the reverse acquisition of IHI by the Registrant as if the transaction had
occurred on December 31, 1997 for the Pro Forma Combined Balance Sheet and
January 1, 1997 for the Pro Forma Combined Statement of Loss.
The historical financial statements of IHI as of and for the year ended
December 31, 1997 were audited by IHI's independent auditors and are included
above in Item 7 (a) Financial Statements of Business Acquired. The historical
financial statements of the Registrant as of and for the year ended December
31, 1997 were audited and are herein incorporated by reference from the
Registrant's Form 10-KSB for the year ended December 31, 1997. These
historical financial statements serve as the basis for the pro forma combined
financial statements.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management believes are reasonable. The
adjustments included in the Pro Forma Combined Financial Statements represent
the Registrant's preliminary determination of these adjustments based upon
available information. There can be no assurance that the actual adjustments
will not differ significantly from the pro forma adjustments reflected in the
Pro Forma Combined Financial Statements.
The Pro Forma Combined Financial Statements are not necessarily indicative of
the financial position or either future results of operations or results that
might have been achieved if the foregoing transaction had been consummated as
of the indicated dates. The Pro Forma Combined Financial Statements should be
read in conjunction with the historical consolidated financial statements of
both the Registrant and IHI, together with the related notes thereto.
<PAGE>
INTERNATIONAL HERITAGE, INC.
Raleigh, North Carolina
Pro Forma Combined Financial Statements
Year Ended December 31, 1997
EILERS, JONES, BROWN & McLEOD, CPAs, PA
(letterhead)
ACCOUNTANTS' REVIEW REPORT
To the Shareholders of
International Heritage, Incorporated
Raleigh, North Carolina
We have reviewed the pro forma adjustments which reflect the reverse
acquisition of International Heritage, Inc. and subsidiary by Kara
International, Inc. as described in Note 11 to the pro forma combined
financial statements and the application of those adjustments to the
historical amounts in the accompanying pro forma combined balance sheet of
International Heritage, Incorporated as of December 31, 1997, and the pro
forma statement of loss for the year then ended. The historical condensed
financial statements are derived from the consolidated financial statements of
International Heritage, Inc. and subsidiary, which we audited, and which
appear elsewhere herein, and the financial statements of Kara International,
Inc., which were audited by other accountants. Such pro forma adjustments are
based on management's assumptions as described in Note 11. Our review was
conducted in accordance with standards established by the American Institute
of Certified Public Accountants.
A review is substantially less in scope than an examination, the objective of
which is the expression of an opinion on management's assumptions, the pro
forma adjustments, and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.
The objective of this pro forma information is to show what the significant
effects on the historical financial information might have been had the
acquisition occurred at an earlier date. However, the pro forma combined
financial statements are not necessarily indicative of the results of
operations or related effects on financial position that would have been
attained had the above-mentioned acquisition actually occurred earlier on
our review, nothing came to our attention that caused us to believe that
management's assumptions do not provide a reasonable basis for presenting the
significant effects directly attributable to the above-mentioned acquisition
described in Note 11, that the related pro forma adjustments do not give
appropriate effect to those assumptions, or that the pro forma column does not
reflect the proper application of those adjustments to the historical
financial statement amounts in the pro forma combined balance sheet as of
December 31, 1997 and the pro forma combined statement of loss for the year
then ended.
EILERS, JONES, BROWN & McLEOD, CPAs, PA
May 8, 1998
<PAGE>
<TABLE>
INTERNATIONAL HERITAGE, INC.
PRO FORMA COMBINED BALANCE SHEET
<CAPTION>
ASSETS
HISTORICAL PRO FORMA
ADJUSTMENTS PRO FORMA
KARA IHI (SEE NOTE 11 ) COMBINED
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $491 $409,710 $ - $410,201
Certificates of deposit - 1,079,053 - 1,079,053
Inventory - 1,280,902 - 1,280,902
Due from representatives,
less allowance for
doubtful accounts of $76,000 - 686,365 - 686,365
Due from credit card merchants - 1,170,573 - 1,170,573
Other receivables - 707,018 - 707,018
Other current assets - 434,181 - 434,181
Total Current Assets 491 5,767,802 - 5,768,293
PROPERTY AND EQUIPMENT - AT COST
Assets not in service - 103,166 - 103,166
Computer software - 873,725 - 873,725
Computer hardware - 810,288 - 810,288
Office furniture and equipment - 413,937 - 413,937
Leasehold improvements - 257,900 - 257,900
- 2,459,016 - 2,459,016
Less accumulated depreciation
and amortization - 392,610 - 392,610
Net Property and Equipment - 2,066,406 - 2,066,406
OTHER ASSETS
Deferred registration costs - 1,673,401 - 1,673,401
Other assets, net - 762,781 - 762,781
Total Other Assets - 2,436,182 - 2,436,182
$491 $10,270,390 $- $10,270,881
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Trade accounts payable $3,804 $2,828,513 $ - $2,832,317
Payables to IRSRs - 754,057 - 754,057
Cash overdrafts - 321,304 - 321,304
Deferred revenue - 2,473,780 - 2,473,780
Accrued commissions - 1,751,632 - 1,751,632
Other accrued liabilities - 1,015,460 - 1,105,460
Total Current Liabilities 3,804 9,144,746 - 9,148,550
CONVERTIBLE DEBENTURES
10% Convertible notes - 4,335,662 - 4,335,662
8.5% Subordinated convertible
debentures - 8,750,000 - 8,750,000
Total Long-Term Liabilities - 13,085,662 - 13,085,662
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value:
authorized - 100,000,000 shares
issued and outstanding -
26,698,240 shares 4,560 9,959 12,179 26,698
Additional paid-in capital 1,141,367 1,186,650 (1,161,419) 1,166,598
Equity adjustment for
foreign currency
translation - 21,766 - 21,766
Accumulated deficit (1,149,240)(13,178,393) 1,149,240 (13,178,393)
Total Stockholders'
Deficit (3,313)(11,960,018) - (11,963,331)
$491 $10,270,390 $ - $10,270,881
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
REVENUE
Sales - product and nonrefundable
product deposits $- $100,596,088 $- $100,596,088
Sales - business kits - 6,974,720 - 6,974,720
Sales - administrative fees - 1,556,229 - 1,556,229
Total Revenue - 109,127,037 - 109,127,037
COST OF SALES
Commissions - 65,924,218 - 65,924,218
Product - 25,841,542 - 25,841,542
Business kits - 6,975,353 - 6,975,353
Other - 2,977,425 - 2,977,425
Total Cost of Sales - 101,718,538 - 101,718,538
GROSS INCOME - 7,408,499 - 7,408,499
SELLING AND ADMINISTRATIVE
EXPENSES 21,754 19,969,320 - 19,991,074
LOSS BEFORE INCOME TAXES (21,754) (12,560,821) - (12,582,575)
PROVISION FOR INCOME TAXES - - - -
NET LOSS $(21,754) $(12,560,821) $- $(12,582,575)
Earnings per common share $(0.01) $(1.70) $(0.58)
Weighted average number of common
shares outstanding 3,374,344 7,385,191 21,652,641
</TABLE>
NOTE 1 - THE COMPANIES AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANIES - International Heritage, Inc. (the "Company") was incorporated
in North Carolina on April 28, 1995. It is principally engaged in the direct
sale of fine jewelry, collectibles, pro-line golf products and accessories,
premium incentive products and telecommunications products and services in
forty-eight states. The Company recruits Independent Retail Sales
Representatives ("IRSRs") who build retail sales organizations. IRSRs
purchase products from the Company and retail them to the public.
The Company has a wholly owned subsidiary, International Heritage of Canada,
Inc., that was incorporated in Ontario, Canada on July 26, 1995, and is
engaged in the same direct sales business in Canada as the parent Company.
The accounts of the Canadian Company have been consolidated with the Company
and all significant intercompany accounts and transactions have been
eliminated ("IHI").
Kara International, Inc. ("Kara") was incorporated in the State of Nevada
under the name of R & D Connections on April 22, 1985. Kara completed a
public offering of common stock during 1986. On September 22, 1986, Kara
acquired all of the outstanding shares of Kara Incorporated, a Utah
corporation, that manufactured and marketed candy, and changed its name to
Kara International, Inc. From September 1986, Kara commenced operating the
business of marketing and developing confectionary products. Kara abandoned
its subsidiary operation during the last quarter of 1988. The Company is not
currently engaged in any business activity.
On March 6, 1998, the Company entered into a share-for-share exchange with
Kara, as described further in Note 10. The combined Companies are herein
referred to as International Heritage, Incorporated.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
As of December 31, 1996, the Company recorded a receivable of $2,163,000 for a
$50 technology maintenance fee charged to IRSRs. During 1997, management of
the Company determined that the balance was uncollectible, and $1,832,000 was
charged against earnings, with no restatement of prior year amounts.
CASH - For purposes of reporting cash flows, cash includes cash on hand and
amounts due from banks. As of December 31, 1997, the Company had U.S. bank
balances of $1,483,579 of which $1,149,447 was in excess of the insured limits
prescribed by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSIT - The Company was required to deposit $1,410,000 in
1997 into certificates of deposit or separate bank accounts in order to obtain
merchant credit card accounts with financial institutions. The certificates
of deposit and bank accounts are required to be maintained with the financial
institutions until they mature on various dates in 1998 and 2000.
ACCOUNTS RECEIVABLE - The Company records its receivables at amounts
ultimately expected to be collected. Bad debt expense was $1,453,000 in 1997.
INVENTORY - Inventory, is stated at the lower of cost or market, with cost
determined under the first-in first-out (FIFO) method, and consists of the
following:
<TABLE>
<S> <C>
Retail business career kits $ 608,483
Promotional items 550,977
Display jewelry and collectibles 121,442
$ 1,280,902
</TABLE>
PROPERTY AND EQUIPMENT - Depreciation expense is calculated on the straight-
line method over useful lives as follows:
<TABLE>
<S> <C>
Estimated Useful Life
Computer software 5 years
Computer hardware 5 years
Office furniture and equipment 7 years
Leasehold improvements 7 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as incurred.
The cost of major renewals and betterments are capitalized and depreciated
over their estimated useful lives. Upon disposition of equipment, the
respective assets and accumulated depreciation accounts are relieved and any
related gain or loss is reflected in operations.
DEFERRED REGISTRATION COSTS - Deferred registration costs consist of direct
costs associated with stock and convertible debt security offerings. Deferred
costs from the convertible debt security offerings are being amortized over
the life of the notes and debentures, which is two years. See Note 3 for
additional information regarding the notes and debentures. Deferred
registration costs consist of the following:
<TABLE>
<S> <C>
10% Convertible debentures $ 553,120
8.5% Subordinated convertible debentures 1,224,065
Initial public offering -
1,777,185
Less accumulated amortization 103,784
$ 1,673,401
</TABLE>
During 1997, the Company deferred an additional $302,347 in registration costs
associated with an initial public offering. The Company canceled the offering
in June 1997 and recorded a loss for the entire $871,197 previously deferred.
ORGANIZATION AND START-UP COSTS - Organization costs consist primarily of
legal, consulting and accounting fees associated with the organization of the
Company and are being amortized on a straight-line basis over 5 years
(accumulated amortization was $129,218 as of December 31, 1997). Start-up
costs consist of legal and consulting fees associated with the start-up of the
Canadian operations and are being amortized on a straight-line basis over 5
years (accumulated amortization was $5,815 as of December 31, 1997).
ACQUISITION COSTS - In order to facilitate a larger retail sales organization
in a short time period, the Company acquired sales organizations from third
parties and paid for these acquisitions through direct product cost to the new
representatives. More than 75% of these representatives acquired have
remained active with the Company through December 31, 1997. Accordingly, the
direct costs associated with these acquisitions (exclusive of any overhead or
management costs) have been capitalized and are being amortized on a straight-
line basis over 5 years (accumulated amortization was $219,875 as of December
31, 1997).
REVENUE RECOGNITION AND DEFERRED REVENUE - IRSRs may join the Company and
retail product at no cost other than to purchase a $100 professional retail
business career kit. When IRSRs sell a product, the sale is recognized when
the product is shipped.
The Company allows IRSRs to stop selling the Company's products without
penalty or obligation within 60 days (or up to one year as required by certain
state statutes) and receive a complete refund. The Company records revenues
for down payments made on product sales under a Retail Business Agreement
("RBA") and provides allowances for sales returns and allowances based on past
experience. After a 60 day period has elapsed, all such revenue is
recognized. In November 1997, the directors of the Company resolved to revise
its IRSR compensation plan and specifically to eliminate the RBA. See Note 11
regarding the subsequent elimination of the RBA. Effective July 1996, IRSRs
who enter with more than one RBA or have earned a commission check are not
eligible for a refund.
In addition, the Company provides a 100% satisfaction guarantee on all
product and sales aids purchased by IRSRs or customers within 30 days of
purchase. Products earned as commissions under an RBA are not eligible for
refund, but may be exchanged for another product. See Note 10 regarding
subsequent changes to the refund policy.
Commissions are earned by the IRSRs based on sales volume levels. The Company
periodically conducts sales contests and various incentive plans to enhance
revenue growth. The Company recognized revenue on an annual $25 optional
administration fee when an IRSRs or customer first joins the Company and every
year thereafter.
ADVERTISING COSTS - Advertising costs are expensed the first time the
advertising takes place.
PER SHARE AMOUNTS - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share. This Statement specifies the computation, presentation and disclosure
requirements for earnings per share. The Company retroactively adopted this
statement in 1997 and all prior periods have been restated accordingly.
Earnings per common share were computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
period. The Company has common stock options and convertible debt outstanding
as of December 31, 1997. No adjustment has been made to earnings per share to
reflect the potential dilutive effect of these items since to do so would
result in anti-dilution in years in which the Company incurred a net loss.
Thus basic and diluted earnings per share are the same amount. See Notes 3
and 5 for additional information on these potentially dilutive securities.
See also Note 10 for information regarding events occurring subsequent to
December 31, 1997 which would have materially changed the number of common
shares and potential common shares outstanding at December 31, 1997 if the
transaction had occurred before December 31, 1997.
STOCK OPTIONS - The Company recognizes compensation cost for nonvariable
employee stock options at the differences between what the stock has last sold
for to outside investors ($1.33 per share) less the amount, if any, the
employee is required to pay. The method used is the intrinsic value based
method and is expensed over the estimated period of service. As of December
31, 1997, there are no outstanding employee stock options requiring the
recognition of compensation expense.
The Company recognizes compensation cost for all non-employee stock options at
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. There were 466,250
non-employee stock options outstanding at December 31, 1997. The Company has
recorded $10,000 in related compensation expense in 1997.
INCOME TAXES - Temporary differences in the basis of assets and liabilities
for financial statement and income tax reporting arise from using different
methods and periods to calculate depreciation, allowances for bad debt and
various accrued liabilities. Provision has been made for income taxes due on
taxable income and for the deferred taxes on the temporary differences.
International Heritage of Canada, Inc. files their tax returns separately from
the Company.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. This Statement establishes standards of
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. In December 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information.
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements. These Statements will be effective for the Company's fiscal year
ended December 31, 1998, and the Company does not intend to adopt early.
Adoption of these Statements is not expected to have a significant effect on
the Company's financial statements.
NOTE 2 - OPERATING STATUS
As noted in the accompanying pro forma combined financial statements,
International Heritage, Incorporated incurred a net loss of $12,582,575 for
the year ended December 31, 1997 and has an accumulated deficit of $13,178,393
as of December 31, 1997. In addition, current liabilities exceed current
assets by $3,380,257 as of December 31, 1997. This situation has been caused
by the high initial costs of building and developing an international direct
sales company and the decline in margins from the Company's commission payout
structure. The Company modified its commission payout structure in November
1997 in order to generate better margins. These modifications include a 65%
cap on future commission payouts. In March 1998, the Company introduced a new
line of consumable products and a new IRSR compensation plan which management
of the Company believes will lead to improved profit margins and further limit
commission payout exposure. December 1997 through March 1998 the Company
raised approximately $10,537,000 through the private placement of convertible
debentures (see Note 3). Management of the Company intends to convert these
debentures to stock in 1998. In addition, the Company has obtained a signed
affidavit from a principal with the placement agent for the offering to invest
another $50 million in the Company in 1998. In March 1998 the Company entered
into a reverse reorganization with Kara International, Inc. which allowed the
Company to publicly trade its stock (see Note 10). International Heritage,
Incorporated's ability to continue as a going concern is dependent on its
ability to maintain future profitability and/or to successfully obtain
additional capital. The pro forma combined financial statements do not
include any adjustments that might be necessary should International Heritage,
Incorporated be unable to continue as a going concern.
NOTE 3 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
During 1997, the Company issued $4,335,662 in convertible notes under Rule 506
of Regulation D of the Securities Act of 1933. The notes bear interest at ten
percent per annum. Principal and interest are due August 1, 1999. The notes
are convertible into one share of common stock for each $2.00 principal amount
of the notes. The notes automatically convert under the same terms upon (1)
an initial public offering providing gross proceeds of a minimum of
$10,000,000 at a per share price of no less than $4.00, (2) a sale of all or
substantially all of the assets of the Company to a public company and the per
share price of the common stock of such Company remains over $4.00 for any
thirty-day period thereafter, or (3) any recapitalization, reconsolidation,
merger or acquisition of or by the Company that results in the existing
shareholders of the Company owning less than 51% of the Company and the per
share price of the common stock of the Company remains over $4.00 for any 30-
day period thereafter. The notes contain covenants restricting dividends
payments and executive compensation. The Company capitalized $553,120 in
deferred registration costs, of which $90,379 has been amortized as of
December 31, 1997. Interest expense was $126,243 in 1997, all of which is
payable at December 31, 1997.
During 1997, the Company issued $8,750,000 in subordinated convertible
debentures under Regulation S of the Securities Act. The notes bear interest
at 8.5% per annum and mature December 15, 1999. Interest is payable in semi-
annual payments on June 15 and December 15 of each year, commencing June 15,
1998. The notes are subordinate to the Regulation D convertible notes. The
debentures are convertible into 5,000 shares of common stock and warrants to
purchase 3,000 shares of common stock at $4.00 per share for each $10,000
debenture. The notes automatically convert under the same terms upon the same
conditions for the Regulation D convertible notes described above. Upon
automatic conversion, the debenture holder shall receive a premium of 500
additional shares of common stock. The debenture holders shall receive a
premium for voluntary conversion as follows: 500 additional shares of common
stock if redemption occurs prior to June 15, 1998; 400 additional shares if
prior to December 15, 1998; 300 additional shares if prior to June 15, 1999;
and 100 additional shares if prior to December 15, 1999. The warrants are
exercisable by the holder at an exercise price of $4.00 per share on or before
December 15, 1999. The Company capitalized $1,224,065 in deferred
registration costs, of which $13,405 has been amortized as of December
31,1997. Interest expense was $35,417 in 1997, all of which is payable as of
December 31, 1997. The offering has been extended to March 31, 1998.
Total interest expense was $274,872 in 1997.
NOTE 4 - PROVISION FOR INCOME TAXES
No income tax provision was calculated for 1997 since the Company had net
losses. No deferred tax asset has been recorded since realization cannot be
assured with more than fifty percent likelihood.
For financial statement purposes, the Company has approximately $13,300,000 of
net operating loss carryforwards as of December 31, 1997, which expire in
2012.
NOTE 5 - COMMON STOCK AND STOCK OPTIONS
International Heritage, Inc.
On July 1, 1996, the shareholders approved an increase in authorized shares of
common stock to 25,000,000 shares and a ten for one common stock split.
Concurrent with this amendment, the par value of common stock changed from
$0.01 to $0.001 per share. Effective October 31, 1996, the Board of Directors
approved a three for four reverse common stock split. Concurrent with this
amendment, the par value of common stock changed from $0.001 to $0.00133 per
share (rounded to $0.001 for financial statement reporting purposes).
Effective December 31, 1997, the shareholders approved an increase in
authorized shares of common stock to 50,000,000 shares.
During 1995, the Company granted the initial Board of Directors and founders
options for 15% of the issued and outstanding shares at $.02 per share.
Effective October 31, 1996, the Board of Directors approved and the original
founders accepted the cancellation of these options and the grant of new
options for 1,350,000 shares in exchange for the canceled options. These new
options are exercisable at $1.33 per share and expire October 31, 1999. These
options remain outstanding at December 31, 1997 and are not subject to the
option plan noted below.
In 1996, the Company issued Mayflower Holdings, Inc. 187,500 shares of common
stock (valued at $250,000) in exchange for consulting fees. The shares were
then canceled and options were granted for 375,000 shares effective October
31, 1996, at an exercise price of $1.33 per share. The options expire on
October 31, 1999, and are outstanding as of December 31, 1997. During 1997
all shares and options issued to Mayflower Holdings, Inc. were reissued in the
President's name. These options are not subject to the option plan noted
below.
Under a 1995 employment contract and based on the Company's achievement of
certain revenue goals, the President of the Company is entitled to receive
stock incentives in the amount of 1% of issued and outstanding shares as of
December 31, 1995, 2% as of December 31, 1996, and 3% as of each year ended
December 31, 1997 through 2000. These stock incentives were granted to the
President as additional compensation and were at no cost to the President. In
1995, the Company did not meet the sales level noted in the President's
contract, but in March 1996, the Board granted the incentive stock to the
President based on accrued sales and deferred revenue combined. Effective
October 31, 1996, the President gave back the incentive stock and the Company
granted additional stock options of 151,300 shares of common stock at an
exercise price of $1.33 per share. Effective October 31, 1996, the President
voluntarily agreed to accept grants of stock options for 2,295,000 shares,
exercisable at $1.33 per share in exchange for the 1996, 1997, 1998, 1999 and
2000 incentive stock referred to above in order to eliminate the contingent
stock issuances. As a result of having been granted these options, the
President is no longer entitled to receive the stock incentives referred to
above and the options are not contingent on the Company's achievement of the
specified revenue goals. These options are outstanding as of December 31,
1997, expire on October 31, 2001, and are not subject to the option plan noted
below. No compensation expense has been recorded since the options granted
have exercise prices that approximate fair market value.
In 1996, the Company formalized and consolidated all previously existing
options into a single option plan effective October 31, 1996, and reissued
options for 3,579,250 shares (previously 3,175,000 shares) to its Board of
Directors, management, advisory board members, consultants, named experts and
counsel, IRSRs and others. These options are exercisable at $1.33 per share
and expire on October 31, 1999. 3,495,000 of these options are outstanding as
of December 31, 1997.
In 1997, the Company granted the three Company founders options for 2,700,000
shares. These options are exercisable at $2.00 per share and expire October
31, 1999. The Company also granted the President options for 1,085,500
shares. These options are exercisable at $2.00 per share and expire December
19, 2000. The Company also granted options for 384,628 shares to others
during 1997. These options are exercisable at $2.00 per share and expire
December 19, 2000. All of these options are outstanding at December 31, 1997
and are not subject to the option plan noted above.
In 1997, the Company granted options to its Board of Directors, management,
advisory board members, consultants, named experts and counsel, IRSRs and
others in the amount of 3,330,000 shares. 1,038,000 of these options are
exercisable at $1.33 per share and expire on various dates in 2000. 2,292,000
of these options are exercisable at $2.00 per share and expire on various
dates in 2000. 3,329,990 of these options are outstanding at December 31,
1997 and are subject to the option plan noted above. During 1997, the Board
of Directors approved the number of shares authorized for grant as options
under the option plan as 25% of authorized common stock. As of December 31,
1997, the Company had issued 574,990 more options than was authorized under
the option plan, and the Plan was closed. On February 27, 1998, but with a
record date of December 31, 1997, the shareholders approved an increase in
authorized shares of common stock to 50,000,000 shares. As a result of this
increase, the number of options granted under the option plan no longer
exceeded the maximum authorized.
The weighted average exercise price for all outstanding options is $1.62 per
share. If all of the above options were exercised as of December 31, 1997,
this would result in 15,166,418 shares of additional outstanding common stock.
The following table summarizes information about fixed stock options both
outstanding and exercisable at December 31, 1997:
<TABLE>
Number Weighted Average
Range of Outstanding remaining Weighted Average
Exercise Prices At 12/31/97 Contractual life Exercise price
<S> <C> <C> <C>
$1.33 - $2.00 7,940,000 2.00 years $1.56
1.33 1,040,118 2.25 1.33
2.00 550,000 2.65 2.00
1.33 - 2.00 3,190,000 3.00 1.97
1.33 2,446,300 4.00 1.33
1.33 - 2.00 15,166,418 2.57 1.62
</TABLE>
A summary of the status of the Company's stock options as of December 31, 1997
and changes during the year then ended are as follows:
<TABLE>
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding -
beginning of year 7,750,550 $1.33
Granted 7,500,128 $1.91
Canceled (84,250) $1.33
Exercised (10) $1.33
Outstanding -
end of year 15,166,418 $1.62
Options exercisable
at end of year 15,166,418
Weighted average
fair value of options
granted during the year $ 0.08
</TABLE>
The Company has recognized no compensation cost for its stock options issued
to employees under the intrinsic-value based method. If the Company had
applied the provisions of Statement of Financial Accounting Standards No. 123
requiring the fair-value based method for these employee stock options, the
Company would have reported a net loss of $13,043,415 in 1997, and earnings
per share would have been $(1.77) in 1997.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of zero percent; expected
volatility of 30%; risk-free interest rates of 6.38% for options granted to
the President under his employment contract and 6.25% for all other options
granted; and expected lives of 2.5 years for options granted to the President
under his employment contract and 1.5 years for all other options granted.
Kara International, Inc.
During April, 1997, Kara issued 4,000,000 shares of common stock to an
officer/director of Kara for $20,000 cash or $.005 per share. During
February, 1997, Kara issued 50,000 shares of common stock to consultants of
Kara for compensation, valued at $1,250 or $.005 per share. During February,
1997, Kara issued 100,000 shares of common stock to former officers/directors
of Kara for compensation, valued at $2,500 or $.005 per share.
On April 9, 1997, the Board of Directors authorized a 1 for 5 reverse stock
split of the issued and outstanding common shares of Kara. Kara retained the
authorized shares at 50,000,000 share with the par value at $.001 per share.
The financial statements have been restated to reflect the reverse split.
NOTE 6 - LEASE COMMITMENTS
On November 11, 1995, the Company entered into a lease for its U.S. office
space under an operating lease agreement expiring on November 30, 2002.
During 1997 the Company assumed two additional leases in the same building
expiring on February 1 and September 30, 1999. The rental rates will escalate
annually based on changes in the consumer price index, not to exceed a five
percent annual increase. On September 1, 1995, the Company entered into a
lease for its Canadian operations under an operating lease which automatically
renews for six month terms. This lease was terminated in January 1998. On
June 16, 1997, the Company entered into a lease for additional U.S. office
space under an operating lease expiring September 30, 2002. The rental rate
increases on a fixed schedule each September 30.
Certain office equipment is being leased under operating leases expiring in
1999 and 2001. Certain other office equipment is being leased on a
month-to-month basis.
During 1997, the Company entered into a software licensing maintenance
agreement with no set expiration date. Annual maintenance fees are $60,000.
The combined future minimum lease payments are as follows:
<TABLE>
Year Ending December 31, Amount
<S> <C>
1998 $363,758
1999 331,371
2000 301,930
2001 287,669
2002 241,821
$ 1,526,549
</TABLE>
Rent expense was $356,561 in 1997.
In January 1998, the Company entered into a lease agreement for its Canadian
office space. The lease expires January 31, 2008 and includes a schedule of
fixed annual rental rate increases. Minimum annual lease payments range from
$35,995 in year one to $64,413 in year ten.
NOTE 7 - ECONOMIC DEPENDENCY
A material amount of the Company's retail products are acquired from two
suppliers, the loss of which may have an adverse effect on the Company in the
near term. These suppliers accounted for approximately 49% of the retail
products purchased in 1997. The Company has made arrangements with other
suppliers in order to mitigate this dependency. Based on these arrangements
and due to the nature of the Company's products, management does not believe
that the loss of these suppliers would adversely affect the Company in the
long term.
A material amount of the Company's retail business career kits are acquired
from three principal suppliers, the loss of which may have an adverse effect
on the Company. These suppliers accounted for approximately 93% of the retail
business career kits purchased in 1997.
NOTE 8 - CONTINGENCIES
Subsequent to the initial issuance of common stock for $111,491 in cash and
services, the Company received $809,105 of funds and services from potential
investors. The Company sold these securities under an exemption from
registration; however, it was later determined that the exemption may have
been technically deficient in some states. Thus, the Company voluntarily
(under no regulatory directive) offered to rescind such prior sales to all
investors who deposited monies during the period from May to December 1995 by
refunding the price paid for the securities plus interest (the "Rescission
Offer"). The Company has recorded deposits made by investors who rejected the
Rescission Offer as equity. Four investors, for a total of $20,000, accepted
the Rescission Offer and received a refund. In addition, the Company refunded
$100,650 plus interest to potential investors from the state of Washington,
since the Company withdrew its offering in that state. All other investors
rejected the Rescission Offer. Any investor who rejected the Rescission Offer
received shares of the Company's stock at the rate of 7.5 shares for
each $10 investment. As a result of these transactions leading to the
Recission Offer, the Company may be liable for administrative penalties and
sanctions. The Company knows of no administrative proceedings or regulatory
investigations related to the Recission Offer that are currently pending or
proposed. The amount of any such penalties and sanctions cannot be estimated.
On June 3, 1997, the Company entered into an agreement with the North Carolina
Attorney General ("NCAG") ending the NCAG's threat to bring action against the
Company for alleged violation of the North Carolina Pyramid Schemes Act and
the North Carolina Unfair and Deceptive Trade Practices Act. The agreement
resulted in the payment of $100,000 and the imposition of certain remedial
measures including ongoing reporting by the Company andmonitoring of the
Company's activities by the NCAG. The violation of the agreement will likely
result in injunctive action by the NCAG.
On February 6, 1998, an Assurance of Voluntary Compliance (the "Assurance")
was accepted by the Georgia Office of Consumer Affairs. The Assurance was
entered into by the Company without admission to alleged violation of the Fair
Business Act of 1995, as amended, in order to resolve the matter without the
necessity of formal legal action. The Assurance resulted in the Company
paying $70,000 and the imposition of certain remedial measures including the
modification of the Company's marketing plan in Georgia and the provision of
refunds.
The Company periodically receives inquiries and/or investigative demand
letters from various state agencies. The Company is not currently aware of
any pending or threatened litigation pursuant to which fines may be imposed,
except as disclosed in Note 10. Regulations regarding network marketing
companies vary from jurisdiction to jurisdiction. Failure to comply with the
laws of any jurisdiction can result in the inability to operate therein for
indefinite periods of time. The Company may also become involved in other
matters of litigation in the normal course of business. The Company is not
aware of any pending or threatened proceeding, except as disclosed herein and
in Note 10.
On October 23, 1997, in the General Court of Justice, Superior Court Division,
Wake County, North Carolina, an action was filed by Eric S. Block and Tina
Block against the Company. The plaintiffs allege fraud, breach of contract,
unfair and deceptive trade practices in violation of North Carolina law, and
punitive damages. Plaintiffs seek relief in the form of actual and
compensatory damages, consequential damages, punitive damages, treble damages
(all in excess of $10,000), attorney's fees and other relief. The ultimate
outcome of this matter cannot presently be determined and management of the
Company intends to vigorously defend this action. No adjustments have been
made to the accompanying consolidated financial statements.
NOTE 9 - RELATED PARTY TRANSACTIONS
International Heritage, Inc.
The Company capitalized $94,225 in charges from Mayflower Holdings, Inc., a
company which is principally owned by the President of the Company, as
deferred registration costs in 1997. These amounts were related to the
initial public offering which was canceled in 1997. The amount due from
Mayflower Holdings, Inc. was $32,943 at December 31, 1997.
The Company subleases office space to Mayflower Holdings, Inc. on a
month-to-month basis. Rental income was $24,000 in 1997. The sublease
arrangement was subsequently terminated in 1998.
In 1996, the Company issued Mayflower Holdings, Inc. 187,500 shares of common
stock (valued at $250,000) in exchange for consulting fees. The shares were
then canceled and options were granted for 375,000 shares effective October
31, 1996, at an exercise price of $1.33 per share. The options expire on
October 31, 1999, and are outstanding as of December 31, 1997. These options
are not subject to the option plan noted in Note 5 above.
Under a 1995 employment contract and based on the Company's achievement of
certain revenue goals, the President of the Company is entitled to receive
stock incentives which have since been replaced with stock options. See Note
5 for additional information.
The Company entered into an agreement with the President and a relative to
create a sales training handbook for its IRSRs. The agreement calls for a
lump sum payment of $10,000 to the authors as well as a $4 per book royalty
for all books sold to the Company. Payments to these individuals were
$316,504 in 1997. $85,436 was due at December 31, 1997. Effective in the
fourth quarter of 1997, the agreement was changed such that the Company
purchases the handbooks from Mayflower Holdings, Inc. and is no longer
responsible for the payment of royalties. The Company paid $103,850 to
Mayflower Holdings, Inc. for the purchase of handbooks in 1997.
The Company acquires its jewelry and collectibles from three suppliers, one of
whom is a stockholder of the Company. 11% of the Company's products were
acquired from this stockholder in 1997.
The Company entered into an agreement with a member of the Board of Directors
to create a business presentation video. The agreement calls for a $0.50 per
video royalty for each video sold. Payments to this individual were $30,815 in
1997.
The Company entered into an agreement with a stockholder to create a retail
sales video. The agreement calls for a $0.50 per video royalty for each video
sold. Payments to this individual were $30,793 in 1997.
In May 1997, Mayflower Holdings, Inc. advanced the Company $500,000. The
advance was repaid in the same month.
In 1996, the Company began renting use of an airplane on a per-use basis from
Mayflower Aviation, LLC, which is owned by the President of the Company and
his wife. Payments to this Company were $328,691 in 1997.
In December 1997, the Company paid a referral fee of $150,000 to a law firm in
which a member of the Board of Directors is a partner. The fee was for
services rendered in connection with the Regulation S convertible debenture
offering referred to in Note 3.
The Company acquires certain computer equipment and services from an entity
which is principally owned by a shareholder and employee of the Company. The
Company paid $404,814 to this entity in 1997. No amounts were owed at
December 31, 1997.
During 1997, Mayflower Holdings, Inc. received management/referral fees of
approximately $258,000 from one of the Company's vendors related to the
Company's purchases from this vendor.
During 1997, the Company received commissions totaling $254,000 from
International Communications Corporation, an entity owned in part by the
President of the Company, related to the Company's sales of telecommunications
products and services. International Communications Corporation earned
commissions totaling $107,000 from the Company's telecommunications supplier
related to the Company's sales of these products and services. $176,000 was
due from International Communications Corporation as of December 31, 1997.
Kara International, Inc.
Kara has not had a need to rent office space. An officer of Kara is allowing
Kara to use his address, as needed, at no expense to Kara.
During 1997, Kara did not pay any compensation to its officers and directors.
However, 50,000 shares each were issued to two former officers and directors
as compensation during February, 1997, valued at $1,250 each or $.005 per
share.
During 1997, Kara repaid advances totaling $4,749 to an officer/shareholder.
At December 31, 1997 the advances owing a shareholder/officer amounted to $0.
NOTE 10 - SUBSEQUENT EVENTS
On March 6, 1998, the Company entered into a share-for-share exchange with
Kara, a Nevada corporation whose common stock is quoted on the NASDAQ
Over-the-Counter Electronic Bulletin Board. The transaction is viewed as a
reverse acquisition and is treated as a recapitalization of the Company for
accounting purposes. Each outstanding share of the Company was exchanged for
three shares of Kara and each outstanding option outside of the option plan
described in Note 5 of the Company was exchanged for one option to
acquire one share of Kara on like terms and conditions. Options subject to
the option plan described in Note 5 shall be exchanged for similar options, as
not yet determined 7,379,493 shares (97.73%) of the Company were exchanged for
22,138,479 shares of Kara, and 8,341,428 options of the Company were exchanged
for 8,341,428 options of Kara. Effective March 3, 1998, Kara amended its
articles of incorporation to change its name to International Heritage,
Incorporated and increase its authorized capital from 50,000,000 shares to
100,000,000 shares of common stock at $0.001 par value. The shares
of Kara received in exchange by the Company's stockholders are restricted and
subject to Rule 144 of the Security and Exchange Commission and must be held
for a period of one year. Following is a summary of Kara's selected financial
data as of and for the year ended December 31, 1997:
Total current assets $ 491
Total current liabilities 3,804
Common stock 4,560
Capital in excess of par value 1,141,367
Accumulated deficit (1,149,240)
Total stockholders' deficit (3,313)
Net loss (21,754)
On March 16, 1998 the Company implemented a new IRSR compensation plan which
eliminated the RBA. Product sales revenue is recognized when the product has
been ordered and shipped. The plan allows a 90% refund to all IRSRs for a
period of one year if the product is returned in new, unused condition. The
plan allows a refund to all outside customers for a period of thirty days
after purchase if the customer is dissatisfied with a product.
On March 13, 1998, the Securities and Exchange Commission ("SEC") suspended
trading of International Heritage, Incorporated ("Incorporated") until March
26, 1998 because of questions regarding the accuracy of statements concerning,
among other things, the return investors could expect to make on their
investment and the regulatory background of the Company and its President. On
March 16, 1998, the SEC filed a Complaint for Injunctive and Other Relief
against the Company, the Company's three founders individually, and
Incorporated (the "Defendants"). The SEC alleges that the Defendants engaged
in the sale of unregistered securities; made misrepresentations and material
omissions in connection with the sale of securities; and, knowingly
misrepresented the Company's financial condition and concealed that it was
operating a pyramid scheme. The Court entered, ex parte, an Order to Show
Cause, Temporary Restraining Order, Order Freezing Assets, Order Prohibiting
Destruction of Documents and Order Expediting Discovery as well as an Order
Appointing a Receiver for the Company. On March 17, 1998 the Court amended
the above Orders to allow the Company to accept new product sales orders from
existing IRSRs only for the Company's new nutritional and skin care products
and telecommunication services.
On March 24, 1998, the Defendants filed a Memorandum in Opposition to the
SEC's Motion for Preliminary Injunction and Other Equitable Relief. On April
3, 1998, the Court entered a Memorandum Opinion and Order setting forth that
the Company, its officers, agents, servants, employees, attorneys and persons
in active concert or participation with them be restrained from, among other
things, securities law violations; appointing a Monitor; requiring the posting
of a $5 million bond upon which the receivership would be dissolved and
management reinstated; a reduction in the President's compensation; and
certain other things. On April 9, 1998, the $5 million bond was posted by the
President and the Receiver was relieved of his responsibilities. On April 22,
1998, the Court reviewed the Company's revised IRSR compensation plan and
authorized the Company to conduct business consistent with the revised
plan and under the scrutiny of the Monitor. Management of the Company
intends to vigorously defend this action. The ultimate outcome of this
matter cannot presently be determined and no adjustments have been made
to the consolidated financial statements.
On April 3, 1998, the Montana Securities Commissioner issued a Cease and
Desist Order in the matter of the Defendants. The Order concludes that
the Company's marketing program is a security within the meaning of the
Montana Securities Act and that such has been and is offered and sold in
violation of the Montana securities laws. On April 20, 1998, the
Montana Securities Commissioner amended the Order, finding among other
things, that the President made inaccurate statements to Montana IRSRs
regarding the terms and status of the original Order. Under both
Orders, the Montana Securities Commissioner has ordered the Defendants
to cease and desist violations of the Montana securities laws and seeks
fines up to $250,000 and restitution to Montana residents. A hearing
was set for May 26, 1998. On May 1, 1998, the Company signed a consent
agreement with the Montana Securities Commissioner allowing the Company
to do business in the State under its new compensation plan. In
accordance with the consent agreement, the Company must pay $21,000 to
reimburse the State's investigative costs; must allow refunds to any
Montana resident IRSR who executed an RBA with the Company and requests
a refund within 45 days of written notice from the Company (refunds shall be
less any commissions or refunds previously paid, as well as the
retail value of any products received); must offer the right to rescind
the sale of any notes purchased by citizens of the State of Montana
between July 17, 1997 and October 31, 1997 ; must contribute to youth
activities and consumer protection efforts in the State of Montana; and
must provide documents upon the reasonable request of the Commissioner
to monitor compliance with the order. No adjustments have been made to
the consolidated financial statements as a result of this matter.
On March 24, 1998, a class action complaint was filed in the U.S.
District Court for the Eastern District of North Carolina on behalf of
Sharon A. Meckenstock , Dan H. Meckenstock, Custodian FBO Jean Carol
Meckenstock and Wilber E. Meckenstock, on their own behalf and
on behalf of a class of all persons similarly situated. On March 27,
1998, a class action complaint was filed in the District Court of Dallas
County, Texas, 101st Judicial District, by Denise March, Felix Glen
Ortega, Lupe Ortega, individually and on behalf of all others similarly
situated. On March 18, 1998, a class action complaint was filed in
the Circuit Court of Dallas County, Texas, F-116th Judicial District by
Craig T. Liebendorfer, individually, and on behalf of all others
similarly situated. On April 1, 1998, a class action complaint was
filed in the Circuit Court of Barbour County, Alabama, by Randall L.
Greene, Andy Clark, Jackson Wayne Murphy, Donnie Kenneth Broderway,
James H. Thomas, individually and on behalf of all others similarly
situated. On April 7, 1998, a class action complaint was filed in the
General Court of Justice, Superior Court Division, Wake County, North
Carolina, by William Swinney and Marshall Reddy, individually and as
representatives of a class of all similarly situated sales
representatives in the Company. All five of these class action lawsuits
allege the Defendants defrauded investors in the form of notes, common
stock and other securities and that the Defendants used misrepresentations and
omissions of material facts in an unlawful and fraudulent scheme to offer and
sell securities of the Company through recruiting people to buy interests in
business centers, among other things. Plaintiffs seek relief through class
action status, actual damages, and punitive damages up to $300 million.
In addition, there are an unidentifiable number of potential unasserted
claims in the form of class actions and otherwise growing out of
the civil action filed by the Securities and Exchange Commission. The
ultimate outcome of these actions and unasserted claims cannot be
presently determined; however, given the Court's April 22, 1998
authorization for the Company to conduct business under its revised
compensation plan as referred to above, the Defendants intend to
vigorously defend these actions.
NOTE 11 - PRO FORMA ADJUSTMENTS
As discussed in Note 10 above, Kara acquired the majority of the outstanding
common stock of the Company on March 6, 1998 in a transaction viewed as a
reverse acquisition. The pro forma adjustments in the accompanying pro forma
combined balance sheet and statement of loss give effect to this transaction
as if it had occurred on December 31, 1997 and January 1, 1997, respectively.
The pro forma adjustments are not necessarily indicative of that which would
have been attained had the transaction occurred at the earlier dates.
The pro forma adjustments are comprised of the following:
<TABLE>
Additional
Common Paid In Accumulated
Stock Capital Deficit
<S> <C> <C> <C>
Elimination of Kara's
equity balances $ (4,560) $ (1,141,367) $ 1,149,240
Negative fair value of
net tangible assets
acquired - (3,313) -
Restatement
(recapitalization)
of the Company's
equity 16,739 (16,739) -
Net pro forma adjustments $ 12,179 $ (1,161,419) $ 1,149,240
</TABLE>
Although the Company is legally a majority-owned subsidiary of Kara, the
Company is considered the acquirer of Kara for accounting purposes. The cost
of the acquisition is determined to equal the value of Kara's net tangible
assets, or negative $3,313, as of December 31, 1997. Since Kara is
non-operating, no goodwill has been recorded and additional paid-in capital
has been adjusted accordingly. The Company's historical stockholders' equity
has been adjusted for the equivalent number of shares received in the
transaction. The number of shares outstanding is thus recapitalized as
follows:
Previously outstanding Kara shares 4,559,761
Kara shares issued in conjunction
with the reverse acquisition 22,138,479
Adjusted number of shares issued and
outstanding at December 31, 1997 26,698,240
Earnings per share has also been adjusted to reflect the number of
equivalent shares received by the Company.
(C) Exhibits.
None; not applicable.
Item 8. Change in Fiscal Year.
None; not applicable.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned hereunto duly authorized.
INTERNATIONAL HERITAGE, INCORPORATED
Date: 05/20/1998. By /s/ Stanley H. Van Etten
_______________________________________
President, CEO and Chairman of the Board
