As filed with the Securities and Exchange Commission on July 11, 2002.
Registration No. 333-71756
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST EFFECTIVE
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IMAGENETIX, INC.
(Name of small business issuer in its charter)
Nevada 2833 87-0463772
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) I.D. Number)
16935 West Bernardo Drive
San Diego, California 92127
(858) 674-8455
(Address and telephone number of principal executive offices)
16935 West Bernardo Drive
San Diego, California 92127
(858) 674-8455
(Address of principal place of business or intended principal place of business)
William P. Spencer, Chief Executive Officer
16935 West Bernardo Drive
San Diego, California 92127
(858) 674-8455
(Name, address and telephone number of agent for service)
Copies to:
Gary A. Agron, Esquire
5445 DTC Parkway, Suite 520
Greenwood Village, CO 80111
(303) 770-7254
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to Offering Price Aggregate Registration
Securities to be Registered Be Registered Per Share Offering Price Fee
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Common Stock Purchase
Warrants 393,750 Warrants -0- -0- -0-
Common Stock, $.001 par value,
underlying Common Stock
Purchase Warrants and Stock
Options 4,228,750 Shares $2.00 $8,457,500 $2,115
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This registration statement registers the sale of 4,228,750 shares of
common stock by security holders of the Registrant underlying common stock
purchase warrants and stock options issued by the Registrant and 393,750 common
stock purchase warrants for distribution to the Registrant's current
stockholders on a pro rata basis following the effective date of the offering.
In addition to the number of shares set forth above, the amount to be
registered includes any shares of our common stock issued as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) promulgated under
the Securities Act of 1933. The warrants which we intend to issue constitute a
dividend to our stockholders and have only a nominal value. The per share
offering price was calculated at $2.00 per share, which is the maximum exercise
price for any of the common stock purchase warrants and stock options.
We hereby amend this registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to change Dated July 11, 2002
4,228,750 shares of common stock
underlying common stock purchase warrants and stock options
IMAGENETIX, INC.
This prospectus updates our definitive prospectus dated March 4, 2002 and
covers the exercise and resale of 4,228,750 shares of our common stock
underlying common stock purchase warrants and stock options.The shares
underlying all 4,228,750 common stock purchase warrants and stock options will
be offered by our selling stockholders from time to time in open market
transactions at prevailing market prices.
Our common stock trades on the Electronic Bulletin Board under the symbol
"IAGX." On July 10, 2002 the closing price of the common stock was $.81 per
share.
Investing in our common stock involves substantial risks. See "Risk
Factors" beginning on page 7.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is _______________, 2002.
TABLE OF CONTENTS
About this Prospectus..........................................................3
Summary........................................................................3
Risk Factors...................................................................7
Forward-Looking Statements....................................................11
Price Range of Common Stock...................................................11
Use of Proceeds...............................................................12
Dilution......................................................................12
Capitalization................................................................13
Selected Financial Data.......................................................14
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................15
Business......................................................................18
Management....................................................................28
Security Ownership of Executive Officers, Directors and
Beneficial Owners of Greater than 5% of Our Common Stock..................32
Selling Stockholders..........................................................33
Related Party and Other Material Transactions.................................39
Description of Capital Stock..................................................40
Shares Eligible for Future Sale...............................................42
Experts.......................................................................42
Legal Matters.................................................................43
Where You Can Find More Information...........................................43
2
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus as
we have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where such an offer or sale is not permitted.
SUMMARY
This summary highlights material information regarding our company and
the offering contained in this prospectus. However, you should read the entire
prospectus carefully, including the financial information and related notes,
before making an investment decision.
Business
We develop, formulate and market on a private label basis innovative,
natural-based nutritional supplements and skin care products. Our products are
proprietary, often supported by scientific studies which we conduct and are
offered primarily through multi-level marketing companies which we refer to as
network marketing companies. Network marketing companies, such as Amway, recruit
self-employed people to sell their products and to find other self-employed
people interested in also selling their products. The self-employed people earn
commissions for selling products and also earn commissions on products sold by
the people they recruited.
A key part of our marketing strategy is our ability to provide these
network marketing companies and companies that distribute products to retail
store chains, which we refer to as mass market distributors, with a "turnkey"
approach to the retail marketing of our products. This turnkey approach means
that we will provide all the services necessary for our customers to market
their products, including developing specific product formulations, providing
supporting scientific studies regarding the effectiveness of the product and
arranging for the manufacture and marketing of the product.
We currently sell over 60 products to network marketing companies including
Nikken, Rexall Showcase International, American Longevity, Heritage
International, Integris, 4 Life Research, Nuskin, Noevir, Neways and Unicity
Network. We also sell to mass market distributors, such as Natrol, that sell to
retail mass merchandisers, including Walgreen's, WalMart, CVC and Eckerd's and
to other distributors, such as Nature's Way, that sell directly to health food
stores throughout the United States. Our primary products is Celadrin(TM), a
nutritional supplement which we believe plays a role in human and animal joint
health.
Our management and key personnel have many years experience in developing
and selling nutritional products to network marketers as well as to other direct
marketers, distributors, health food stores and mass market merchandisers.
3
Our Strategy
We intend to become a leading international supplier of nutritional
supplements and skin care products primarily to network marketing companies, as
well as to other direct marketing companies, national distributors, health food
stores and mass merchandisers. In order to do so, we will continue to offer our
"turnkey" services for existing products while developing new, innovative and
proprietary nutritional and skin care products for sale in the U.S. and
internationally.
Our Market Opportunity
The nutritional supplement industry has experienced consistent growth since
the adoption of the Dietary Supplement Health and Education Act of 1994, which
allows vendors of dietary supplements to educate consumers regarding the effects
of certain dietary ingredients. According to the National Marketing Institute,
the U.S. nutrition industry reached approximately $32.7 billion in retail sales
in 2000, a 6% increase in sales compared to 1999. These sales included vitamin,
mineral and herbal supplements sales of approximately $17.9 billion in 2000.
History
We were organized as a Nevada corporation in March 1988 under the name
Capital Growth, Inc. and completed an initial public offering of our securities
in 1989. In August 2000 we declared a pro rata warrant dividend of 393,750
warrants to our stockholders of record as of September 14, 2000, subject to
completion of a registration statement covering the issuance of the warrants.
One warrant was issued for each four shares owned as of the September 14, 2000
record date. Our registration statement, of which this prospectus is a part, was
declared effective by the Securities and Exchange Commission on March 4, 2002.
Imagenetix, Inc. was incorporated in Colorado in July 1996 under the name
Internet International Business Management, Inc. and changed its name to
Imagenetix, Inc. in April 1999. In October 2000 we merged with Imagenetix, Inc.
Under the terms of the merger, we issued 6,550,000 shares of our common stock
and 3,315,000 common stock purchase warrants and stock options to the Imagenetix
security holders to acquire all 6,550,000 shares of Imagenetix Inc.'s
outstanding common stock, along with all of its stock options and common stock
purchase warrants.
Our principal executive offices are located at 16935 West Bernardo Drive,
No. 101, San Diego, California 92127, and our telephone number is (858)
323-1688.
4
The Offering
Securities offered by our
selling stockholders: 4,228,750 shares of common stock underlying
common stock purchase warrants and stock
options.
Securities outstanding
prior to and after the offering: 8,550,000 shares of common stock, which does
not include shares issuable upon exercise of
outstanding common stock purchase warrants
and stock options.
Use of proceeds: We will not receive any proceeds from the
sale of the common stock. Any proceeds we
receive from the exercise of common stock
purchase warrants or stock options will be
added to our working capital.
Electronic Bulletin Board symbol: "IAGX"
Description of Selling Stockholders
Through this prospectus, we are registering the exercise and resale of up
to 4,228,750 shares of common stock underlying common stock purchase warrants
and stock options.
5
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements and related notes included
elsewhere in this prospectus.
Statement of Operations Data
Years Ended March 31
--------------------
2001 2002
---- ----
Net sales $ 4,639,425 $ 4,443,742
Net profit (loss) $ (360,235) $ (256,037)
Net profit (loss) per share $ (.05) $ (.03)
Balance Sheet Data
March 31, 2002
--------------
Working capital $1,119,595
Total assets $2,124,270
Total liabilities $ 802,824
Stockholders' equity $1,321,446
6
RISK FACTORS
The shares of common stock offered by this prospectus involve a high degree
of risk and represent a highly speculative investment. You should not purchase
these shares if you cannot afford the loss of your entire investment. In
addition to the other information contained in this prospectus, you should
carefully consider the following risk factors in evaluating our company, our
business prospects and an investment in our shares of common stock.
In Order to Remain Profitable, We Must Increase Our Revenue.
For the years ended March 31, 2001 and 2002 we reported $4,639,425 and
$4,443,742, respectively, of revenue and realized net losses of $360,235 and
$256,037, respectively. Our ability to remain profitable depends on increasing
our revenue levels and maintaining our gross profit margins.
There is Only One Supplier for Celadrin(TM). If We Are Unable to Purchase
Celadrin(TM)from This Supplier, Our Business Would Be Harmed.
There is only one supplier for Celadrin(TM), which we use in approximately
67% of our products and which represented approximately 65% and 80%,
respectively, of our sales for the years ended March 31, 2001 and 2002,
respecively. We rely upon Celadrin(TM) to expand our product lines and revenue
in the future. If our Celadrin(TM) supplier goes out of business or elects for
any reason not to supply us with Celadrin(TM), we would have to find another
Celadrin(TM) supplier or suffer a significant reduction in our revenue.
We Rely upon a Limited Number of Customers the Loss of Which Would Reduce Our
Revenue and Profitability.
For the year ended March 31, 2002, our four largest customers accounted for
57%, 9%, 9% and 6%, respectively, of our revenue. The loss of any of these
customers would significantly reduce our revenue and adversely affect our cash
flow and profitability.
We Rely upon Other Outside Suppliers and Manufacturers to Produce Our Products
Which Could Delay Our Product Deliveries.
All of our products are produced by outside manufacturers who process
ingredients provided to them by our suppliers and with whom we have contracts.
Our profit margins and our ability to deliver products on a timely basis are
dependent upon these manufacturers and suppliers. Should any of these
manufacturers or suppliers fail to provide us with product, we would be required
to obtain new manufacturers and suppliers, which would be costly and time
consuming and could delay our product deliveries.
7
Product Liability Claims Against Us Could Be Costly.
Some of our nutritional supplements contain newly-introduced ingredients or
combinations of ingredients, and we have little long-term health information
about individuals consuming those ingredients. If any of these products were
thought or proved to be harmful, we could be subject to litigation. Although we
carry product liability insurance in the face amount of $1,000,000 per
occurrence and $2,000,000 in the aggregate and require our suppliers and
manufacturers to include us as insured parties on their product liability
insurance policies, our coverage may not be adequate to protect us from
potential product liability claims and costs of defense.
We Are Subject to Intense Competition from Other Nutritional Supplement
Marketers Which Could Reduce Our Revenue and Profit Margins.
Competition in the nutritional supplement market is intense. We compete
with numerous companies that have longer operating histories, more products and
greater name recognition and financial resources than we do. In order to
compete, we could be forced to lower our product prices, which would reduce our
revenue and profit margins.
We Are Highly Regulated, Which Increases Our Costs of Doing Business.
We are subject to laws and regulations which cover:
o the formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of our products;
o the health and safety of food and drugs;
o trade practice and direct selling laws; and
o product claims and advertising by us; or for which we may be held
responsible.
Compliance with these laws and regulations is time consuming and expensive.
Moreover, new regulations could be adopted that would severely restrict the
products we sell or our ability to continue our business.
We Are Dependent upon the Continued Services of Our Executive Officers, the Loss
of Whom Would Significantly Impair Our Operations.
Our business is largely dependent upon our ability to hire and retain
quality personnel, including our executive officers. We have no written
employment or non-competition agreements with any of our executive officers, and
we do not maintain key man insurance on any of their lives. The loss of any of
our executive officers would significantly impair our operations.
8
Our Trademarks May Not Prohibit Others from Using Similar Product Names or
Challenging the Trademarks.
We have a trademark on "Globestar" and have applied for trademarks on
"Celadrin" and "Flash Glancing." Any future product names we develop could
eventually be important to us, and we intend to continue to apply for federal
trademark and trade name protection to protect these product names. We cannot
assure that any trademark granted will be effective in limiting competition or
will be held valid if subsequently challenged. Our failure to obtain trademark
protection, or illegal use by others of our trademarks, may have an adverse
effect on our business. In addition, the laws of certain foreign countries do
not protect trademarks to the same extent as the laws of the United States or
Canada.
We Can Give No Assurance that Our Forward-Looking Statements Will Prove to be
Accurate.
This prospectus contains statements that plan for or anticipate the future.
These forward-looking statements include statements about the future of
nutritional products, statements about our future business plans and strategies,
and other statements that are not historical in nature. In this prospectus
forward-looking statements are generally identified by the words "anticipate",
"plan," "believe," "expect," "estimate," and the like. Although we believe that
the forward-looking statements made in this prospectus are reasonable, because
forward-looking statements involve future risks and uncertainties, there are
factors that could cause actual results to differ materially from those
expressed or implied. For example, uncertainties that could affect the accuracy
of forward-looking statements, besides the specific factors identified in the
"Risk Factors" section of this prospectus, including the following:
o Changes in general economic and business conditions affecting the
nutritional supplement and personal care industries;
o Changes in our business strategies; and
o Market acceptance of our products.
Our Officers and Directors Will Continue to Elect All Our Directors.
Our officers and directors own an aggregate of 3,615,000 shares of our
common stock, or 40.8% of our outstanding common stock. As a practical matter,
control of 40.8% of our outstanding common stock is likely to allow these
individuals to continue to elect all of our directors and control our affairs.
9
There Are Limitations on the Liability of Our Officers and Directors Which May
Restrict Our Stockholders from Bringing Claims.
Our Bylaws substantially limit the liability of our officers and directors
to us and our stockholders for negligence and breach of fiduciary or other
duties to us. This limitation may prevent stockholders from bringing claims
against our officers and directors in the future.
Shares of Our Common Stock Which Are Eligible for Sale by Our Stockholders May
Decrease the Price of Our Common Stock.
We have 8,550,000 common shares outstanding, comprised of 2,000,000 shares
which are freely tradeable and 6,550,000 shares which are restricted shares but
may be sold at any time under Rule 144. We also may have outstanding up to
4,228,750 free trading shares which we are registering by this prospectus for
resale following exercise of warrants and stock options. If our stockholders
sell substantial amounts of our common stock, the market price of our common
stock could decrease.
There is a Limited but Potentially Volatile Trading Market in Our Common Stock.
Our common stock trades on the Electronic Bulletin Board. The Bulletin
Board tends to be highly illiquid, in part because there is no national
quotation system by which potential investors can track the market price of
shares except through information received or generated by a limited number of
broker-dealers that make a market in particular stocks. There is a greater
chance of market volatility for securities that trade on the Bulletin Board as
opposed to a national exchange or quotation system. This volatility may be
caused by a variety of factors, including:
o The lack of readily available price quotations;
o The absence of consistent administrative supervision of "bid" and
"ask" quotations;
o Lower trading volume; and
o Market conditions.
Although our common stock price has not been volatile in the past, there
could be wide fluctuations in the market price of our common stock. These
fluctuations may have an extremely negative effect on the market price of our
securities and may prevent you from obtaining a market price equal to your
purchase price when you attempt to sell our securities in the open market. In
these situations, you may be required to either sell our securities at a market
price which is lower than your purchase price, or to hold our securities for a
longer period of time than you planned.
Because Our Common Stock is Classified as "Penny Stock," Trading in it is
Limited, and Our Stock Price Could Decline.
Because our common stock falls under the definition of "penny stock,"
trading in our common stock is limited because broker-dealers are required to
provide their customers with disclosure documents prior to allowing them to
10
participate in transactions involving our common stock. These disclosure
requirements are burdensome to broker-dealers and may discourage them from
allowing their customers to participate in transactions involving our common
stock.
"Penny stocks" are equity securities with a market price below $5.00 per
share other than a security that is registered on a national exchange; included
for quotation on the Nasdaq system; or whose issuer has net tangible assets of
more than $2,000,000 and has been in continuous operation for greater than three
years. Issuers who have been in operation for less than three years must have
net tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under Section
15(g) of the Exchange Act require broker-dealers engaging in transactions in
penny stocks, to first provide to their customers a series of disclosures and
documents, including:
o A standardized risk disclosure document identifying the risks inherent
in investment in penny stocks;
o All compensation received by the broker-dealer in connection with the
transaction;
o Current quotation prices and other relevant market data; and
o Monthly account statements reflecting the fair market value of the
securities. In addition, these rules require that a broker-dealer
obtain financial and other information from a customer, determine that
transactions in penny stocks are suitable for such customer and
deliver a written statement to such customer setting forth the basis
for this determination.
In addition, under the Exchange Act and its regulations, any person engaged
in a distribution of shares of our common stock offered by this prospectus may
not simultaneously engage in market making activities with respect to the common
stock during the applicable "cooling off" periods prior to the commencement of
this distribution.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us which are discussed in the Risk Factors section above as
well as throughout this prospectus. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
PRICE RANGE OF COMMON STOCK
Our common stock trades on the Electronic Bulletin Board under the symbol
"IAGX." The range of high and low bid quotations for our common stock during the
quarters indicated is shown below. Prices are inter-dealer quotations as
reported by the NASD and do not necessarily reflect transactions, retail
markups, mark downs or commissions.
11
BID
Quarter ended: High Low
- -------------- ---- ---
March 31, 2002 $1.28 $ .69
December 31, 2001 $1.19 $ .55
September 30, 2001 $ .75 $ .53
June 30, 2001 $1.25 $ .75
March 31, 2001 $1.59 $1.00
December 31, 2000 $2.22 $1.06
September 30, 2000 $2.31 $1.25
June 30, 2000 $2.38 $1.25
As of March 31, 2002, we had approximately 375 stockholders of record.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of our common
stock being offered by the selling stockholders. Any proceeds we receive from
the exercise of the 4,228,750 common stock purchase warrants and stock options
will be added to our working capital.
DILUTION
At March 31, 2002, the net tangible book value of our outstanding shares of
common stock was $1,235,560, or $.14 per share, which is considerably less
than our current market price. "Net tangible book value" per share represents
the total amount of our tangible assets, less the amount of our liabilities,
divided by the number of shares of common stock outstanding. "Dilution" is the
difference between the price paid by a stockholder for our shares and the net
tangible book value per share of our common stock at the time of purchase. This
dilution could be substantial depending upon the price new investors pay for
their shares after the date of this prospectus. In addition, our existing
investors paid an aggregate of $1,870,763 for their 8,550,000 shares, or $.22
per share, which is also considerably less than our current market price.
12
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002.
March 31, 2002
--------------
Common Stock, no par value,
50,000,000 shares authorized,
8,550,000 shares outstanding $ 8,550
Preferred stock, no par value,
5,000,000 shares authorized,
no shares outstanding $ -0-
Additional paid-in-capital $ 1,862,213
Accumulated deficit $ (549,317)
Total stockholders' equity $ 1,321,446
===========
13
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
Statement of Operations Data
Years Ended March 31
--------------------
2001 2002
---- ----
Net sales $ 4,639,425 $ 4,443,742
Net profit (loss) $ (360,235) $ (256,037)
Net profit (loss) per share $ (.05) $ (.03)
Balance Sheet Data
March 31, 2002
--------------
Working capital $ 1,119,595
Total assets $ 2,124,270
Total liabilities $ 802,824
Stockholders' equity $ 1,321,446
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus. This
discussion should be read in conjunction with our audited financial statements
and footnotes included elsewhere in this prospectus.
We develop, formulate and market on a private label basis innovative,
natural-based nutritional supplements and skin care products. Our products are
proprietary, often supported by scientific studies which we conduct and are
offered through multiple levels of distribution including through network
marketing companies. A key part of our marketing strategy is our ability to
provide network marketing companies and other mass market distributors with a
"turn key" approach to the retail marketing of our products. This turnkey
approach includes developing specific product formulations, providing supporting
scientific studies and arranging for the manufacture and marketing of the
product.
Results of Operations.
Year Ended March 31, 2002 compared to March 31, 2001.
For the fiscal year ended March 31, 2002, net sales of $4,443,742 decreased
$195,683, or 4%, compared to net sales of $4,639,425 for fiscal year period
ended March 31, 2001. The decrease was primarily due to the timing of product
launches by new and existing clients.
Our strategy for future growth is to continue to focus on adding additional
network marketing clients, expanding revenue with existing clients and expanding
into foreign countries through existing clients.
During fiscal year period ended March 31, 2002, we experienced a decrease
in the cost of good sold as a percentage of sales, to 70% compared to 73% for
the fiscal year ended March 31, 2001. The moderate decrease reflects a higher
sales mix in the category of Celadrin(TM) related products.
Selling, general, and administrative expenses for the fiscal year ending
March 31, 2002, were $1,544,591, compared to $1,601,806 for fiscal year ending
March 31, 2001. The expense decrease was due to decreased legal expenses and
product development costs.
We had a net loss for the fiscal year ended March 31, 2002 of $256,037
compared to a net loss of $360,235 for the same year ended March 31, 2001. Net
loss per common share was $(.03) for fiscal 2002 compared to a net loss per
common share of $(.05) for 2001. The net loss included the costs associated with
the issuance of warrants and stock options which accounted for $203,656.
Years Ended March 31, 2001 and March 31, 2000.
For the fiscal year ended March 31, 2001, our net sales increased by
$1,724,448 to $4,639,425, a 59% increase compared to net sales of $2,914,977 for
fiscal year period ended March 31, 2000. The increase was primarily due to the
addition of new customers and the introduction of new products for existing
clients.
Our strategy for future growth is to continue to focus on adding additional
network marketing clients, expanding revenue with existing clients and selling
additional product into foreign countries through existing clients.
15
During fiscal year period ended March 31, 2001, we had an increase in the
cost of goods sold as a percentage of sales to 73% from 66% for the fiscal year
ended March 31, 2000. The increase reflects a higher sales mix in the category
of ingredient sales, which has lower profit margins coupled with an increase in
raw materials utilized to develop new products, such as our Celedrin(TM) cream.
Selling, general and administrative expenses for the fiscal year ending
March 31, 2001 were $1,601,806, or 34% of sales, which represented an increase
from 26% for the fiscal year ended March 31, 2000. The expense increase was due
to increased legal, research and development-related consulting costs and
non-recurring expenses associated with our private placement of securities and
the implementation of our Globestar(TM) system.
We had a net loss for fiscal 2001 of $(360,235) compared to a net profit of
$87,106 for fiscal 2000. This net loss did not take into consideration the tax
benefit of $129,009 resulting from our net operating loss carryover as we offset
the $129,009 tax asset with a $129,009 valuation allowance due to the
realization of the tax assets being dependent upon our future earnings, which
cannot be reasonably estimated. The net loss was due to the reasons discussed
above. Net loss per common share was $(0.05) for fiscal 2001 compared to a net
profit per common share of $0.01 for 2000.
Liquidity and Capital Resources.
For the fiscal year ended March 31, 2002, net sales of $4,443,742 decreased
$195,683, or 4%, compared to net sales of $4,639,425 for fiscal year period
ended March 31, 2001. The decrease was primarily due to the timing of product
launches by new and existing clients.
Our strategy for future growth is to continue to focus on adding additional
network marketing clients, expanding revenue with existing clients and expanding
into foreign countries through existing clients.
During fiscal year period ended March 31, 2002, we experienced a decrease
in the cost of good sold as a percentage of sales, to 70% compared to 73% for
the fiscal year ended March 31, 2001. The moderate decrease reflects a higher
sales mix in the category of Celadrin(TM) related products.
Selling, general, and administrative expenses for the fiscal year ending
March 31, 2002, were $1,544,591, compared to $1,601,806 for fiscal year ending
March 31, 2001. The expense decrease was due to decreased legal expenses and
product development costs.
We had a net loss for the fiscal year ended March 31, 2002 of $256,037
compared to a net loss of $360,235 for the same year ended March 31, 2001. Net
loss per common share was $(.03) for fiscal 2002 compared to a net loss per
common share of $(.05) for 2001. The net loss included the costs associated with
the issuance of warrants and stock options which accounted for $203,656.
We believe that our cash position is sufficient to fund our operating
activities for at least the next 12 months.
16
BUSINESS
Our Business
We develop, formulate and market on a private label basis innovative,
natural-based nutritional supplements and skin care products. Our products are
proprietary, often supported by scientific studies conducted at our request and
are offered primarily to network marketing companies and mass market
distributors that sell to the large retail chains as well as to the retail
chains themselves. A key part of our marketing strategy is our ability to
provide our customers with what we refer to as a "turnkey" approach to retail
marketing of our products. Our "turnkey" approach provides:
o Specific product formulations requested by our customers;
o Scientific studies to support claims made for our products;
o Assistance in complying with U.S. laws and regulations;
o Assistance in obtaining foreign country regulatory approval for sale
of our products;
o Marketing materials and marketing assistance to support product sales;
and
o Manufacture of products with delivery directly to the customer.
Following development of a new nutritional or skin care product, we:
o Conduct and complete any scientific studies necessary for regulatory
compliance;
o Arrange for the manufacture of finished products to our specifications
on behalf of our customers; and
o Develop marketing tools and plans to promote product sales, including
labels and graphic designs, promotional brochures and providing
speakers to promote our customers' products.
We currently sell over 60 products to network marketing companies including
Nikken, Rexall Showcase International, American Longevity, Heritage
International, Integris, 4 Life Reserach, Nuskin, Noevir, Neways and Unicity
Network. We also sell to mass market distributors, such as Natrol, which sell to
retail mass merchandisers, including Walgreen's, WalMart, CVC and Eckerd's and
to other distributors, such as Nature's Way, that sell directly to health food
stores throughout the United States. Our four largest customers, Nikken, Neways
Integris and Health Products International, accounted for 57%, 9%, 9% and 6%,
respectively, of our net sales for the year ended March 31, 2002. We do not sell
any products under our own label.
Our management and key personnel have many years experience in developing
and selling nutritional products to network marketers as well as to other direct
marketers, distributors, health food stores and mass market merchandisers.
17
Our Strategy
We intend to become a leading international supplier of nutritional
supplements and skin care products primarily to network marketing companies, as
well as to other direct marketing companies, national distributors, health food
stores and mass merchandisers. In order to achieve our goal, we intend to:
o Continue to develop innovative and proprietary nutritional and skin
care products;
o Continue to offer "turn key" services , including product development,
regulatory compliance and manufacturing and marketing services, to
assist our customers in quickly bringing new products to market; and
o Market our products internationally, with emphasis on Japan, by
assisting our customers in registering their products for sale in
foreign countries.
To date, we have completed the registration of over 25 products in foreign
countries, including Japan, Australia, South Korea and Canada. Most of the
products registered contain our proprietary Celadrin(TM) compound.
Industry Overview
The nutritional supplement industry has experienced consistent growth since
the adoption of the Dietary Supplement Health and Education Act of 1994, which
allows vendors of dietary supplements to educate consumers regarding the effects
of certain dietary ingredients. According to the National Marketing Institute,
the U.S. nutrition industry reached approximately $32.7 billion in retail sales
in 2000, or a 16% increase in sales compared to 1999. These sales included
vitamin, mineral and herbal supplement sales of approximately $17.9 billion in
2000. According to the Direct Selling Guide & Outlook Survey, U.S. sales of
nutritional supplements by network marketing companies alone totaled
approximately $4.1 billion in 1999, and worldwide network marketing sales
totaled approximately $17.0 billion in 2000.
The dietary supplement industry is highly diversified and intensely
competitive. It includes companies that manufacture, distribute and sell
products that are generally intended to supplement our daily diets with
nutrients that may enhance the body's performance and well-being. Dietary
supplements include vitamins, minerals, herbs, botanicals, amino acids and
compounds. Specific statutory provisions governing the dietary supplement
industry were codified in the Dietary Supplement Health and Education Act. This
act provides new statutory protections for dietary supplements and allows for
statements that inform consumers of the effect dietary supplements have upon the
structure or functions of the body.
The following factors are expected to contribute to the ongoing growth of
the domestic nutritional supplement industry:
18
o The aging of the American population, which is likely to cause
increased consumption of nutritional supplements;
o New product introductions in response to new research supporting the
positive health effects of certain nutrients;
o The nationwide trend toward preventative medicine resulting from
rising health care costs;
o Increased consumer interest in alternative health products such as
herb-based nutritional supplements;
o A heightened awareness of the connection between diet and health.
Nutritional supplements are sold primarily through:
o Mass market retailers, including mass merchandisers, drug stores,
supermarkets and discount stores;
o Health food stores;
o Mail order companies; and
o Direct sales organizations, including network marketing companies.
Our marketing is primarily targeted at network marketing companies, which
are also known as multilevel marketing companies, although we market through a
number of other channels. In the past decade, direct selling has grown as a
means to distribute products due to advancements in technology and
communications. Network marketing is a type of direct selling and represents the
business operations of most of our customers. The distribution of products
through network marketing has grown significantly in recent years. According to
the 1998 "Survey of Attitudes toward Direct Selling," prepared by Wirthlin
Worldwide, food, nutrition and wellness products are among the three categories
which experienced the greatest gains in the direct selling industry since 1976.
According to this survey, approximately 51% of the American public has purchased
products or services from a direct selling company at some point in the past,
with 29% of those having made such a purchase in the last 12 months. Further,
four in ten adult Americans have expressed an interest in direct selling as a
method of buying products and services and 23% of those who have never purchased
products and services from direct selling companies are interested in direct
selling. We believe we can take advantage of the growth in direct sales and the
demand for nutritional supplement products. In 2000 Burke Marketing Research
updated the Wirthlin study indicating that 55% of the American public had
purchased products or services from a direct selling company.
Products
We offer a variety of specialized nutritional formulations and compounds
and proprietary personal skin care products. Since beginning operations in
February 1999, we have developed and sold over 60 products to network marketing
companies, other direct marketers, distributors and mass market merchandisers.
Our product formulations may be developed by our customers, co-developed by us
and the customer, or developed exclusively by us for the customer.
19
Our leading product is Celadrin(TM), a nutritional supplement compound
comprised of a complex of fatty acid esters which we believe plays a role in
human and animal joint health. We developed the product with our supplier in
March 1999, but there is no patent on the product. For the years ended March 31,
2001 and 2002, approximately 65% and 82%, respectively, of our revenue was
generated from the sale of various formulations containing Celadrin(TM).
To date, four studies have been conducted on Celadrin(TM)'s principal
ingredient, cetylated fatty acids. Two animal studies conducted in 2001
demonstrated no toxicity in mice to the Celadrin(TM) product. Both of these
studies were sponsored by us, but were conducted by an independent laboratory.
The third study, a 2001 University of Minnesota study, showed resistance of rats
to arthritis following doses of cetylated fatty acids. A fourth study, conducted
in 2000 by Clincyte, an independent investigator, showed that following a double
blind study involving 93 patients with osteoarthritis, approximately 96% of the
patients receiving the cetylated fatty acids showed improved joint mobility or
pain reduction.
We are conducting ongoing research to determine Celadrin(TM)'s effects on
the body, including any role it may play in providing support for the normal
functioning of muscles and joints. We produce a wide range of formulas using
cetylated fatty acid compounds under the Celadrin(TM) name and market these
formulations through multiple distribution channels. To date, we have sold
Celadrin(TM) formulations primarily to network marketing companies and to
Natrol, a national distributor which sells to mass merchandisers. Many of our
customers resell Celadrin(TM) and other of our products under their own labels
and trade names. We do not own or have any interest in the labels or trade names
under which these products are sold. Using multiple manufacturing processes to
produce Celadrin(TM), we offer the product to our customers in soft gel capsule,
tablet, two-piece capsules and cream forms.
Each process employed by us, from producing the compound to manufacturing
the product, has been co-developed and co-engineered by our staff in
collaboration with our supplier and manufacturers. Although our management does
not have scientific or medical backgrounds, we use paid consultants who are
medical doctors, scientific research consultants, independent scientific
researchers or laboratories to assist us in the development and testing of our
products. We also have a clinical research consultant, Robert L. Hesslink, who
offices with us. Dr. Hesslink's background may be found under
"Management-Consultants" below. We believe Celadrin(TM) will be our principal
compound in the near future. We intend to expand the number of customers who use
this compound in formulas and to develop other formulas for new customers.
In addition to Celadrin(TM), which we sell in many formulations including a
creme and as a pet product, we have developed other natural based products
designed to address specific health issues, including unique and scientifically
tested compounds and formulations in the following areas: 1) promoting
cardiovascular health which represented approximately 1% of our sales for the
nine months ended March 31, 2002; 2) improving liver function which represented
approximately 9% of our sales for the same period; 3) fruit and vegetable
extracts which represented approximately 9% of our sales and 4) promoting fat
loss and a trim physique which represented approximately 1% of our sales for the
same period.
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Raw Materials and Manufacturing
We develop, formulate and design nutritional and skin care products on a
private-label basis but do not manufacture any of these products. We currently
purchase ingredients from suppliers for delivery to manufacturers chosen by us.
We have an agreement with our sole supplier of Celadrin(TM) to purchase
sufficient quantities of the compound to meet our anticipated needs through
January 2007. All other ingredients can be obtained from a number of suppliers,
although the loss of any supplier could adversely affect our business.
We use a number of manufacturers to combine ingredients furnished by our
suppliers into our nutritional and skin care products. By outsourcing product
manufacture, we eliminate the capital required to manufacture our own products
and increase the flexibility of our manufacturing resources. We have written
confidentiality and exclusivity agreements with key manufacturers and believe
suitable replacement manufacturers are available. However, the loss of a
manufacturer could adversely affect our business.
Marketing
Since inception, we have marketed our products to clients in multiple
channels of distribution with emphasis upon network marketers. Our marketing
strategy consists of:
o Continuing to offer our proprietary products to existing customers
while seeking new customers, emphasizing those engaged in the network
marketing and mass marketing of nutraceutical supplements and other
nutraceutical products;
o Continuing to assist our customers in designing new nutritional and
skin care products using our formulations;
o Continuing to design marketing materials, provide marketing
spokespersons and offering other value added services to assist
customers in expanding their sales of our product;
o Developing and offering new products to network and mass marketing
companies.
We will continue to offer our network marketing companies a turnkey
approach to their new product needs. This approach emphasizes providing the
customer with the support necessary to allow it to sell our products, including
providing the scientific studies required by U.S. and foreign regulators,
tailoring our product formulations specifically for each customer, obtaining
approvals in foreign countries for our customers to market there, providing full
marketing support for the products, including product information, product
descriptions and speakers to discuss products at customer conventions and
seminars and arranging for manufacture and shipment of the products according to
customer instructions. We currently sell to eight network marketing companies
and national distributors. We will continue to market to the largest network
marketers through direct solicitation by our management and from time to time
through telemarketing.
21
In April 2001 we entered into a spokesperson agreement with Tony and Alicia
Gwynn under which the Gwynns agreed to endorse our products through personal
appearances and advertisements for two years. Under the agreement we made an
initial payment of $28,000 for the Gwynns' services and have agreed to pay them
$6,000 per month for 24 months. We also issued to the Gwynns options to purchase
100,000 shares of our common stock exercisable at $.86 per share.
Globestar(TM)
We have developed Globestar(TM), a proprietary online computer system which
provides our customers with online status reports on previously placed orders. A
pre-assigned access code enables customers, manufacturers and suppliers to enter
into selected areas of the Globestar(TM) system. Entry allows our corporate
customers to order products from us and to access real-time information on
product progress through an automatically updated sales order system. Customers
are able to click on and obtain an instantaneous update on the progress of their
orders using a personalized combination of voice, data and multimedia.
Through the use of multi-media and linking programs, Globestar(TM) also
provides customers with information concerning new nutritional and skin care
products and backgrounds on the development of products or compounds that assist
our customers in the marketing of their products. Globestar(TM) also enables us
to better manage the foreign registration process of our products and provide to
our customers with real time updates on the status of this registration process.
Additional features of Globestar(TM) will include:
o Access to better prices for raw materials through linkage of suppliers
and manufacturers;
o Online access by scientists and others allowing the input of
information regarding new compounds and products.
Competition
The nutritional supplement and skin care industries are large and intensely
competitive. We compete generally with companies that manufacture and market
competitive nutritional products in each of our product lines, including
companies such as Twin Labs, Weider Nutrition, IVC Industries and Perrigo. We
compete with companies who also supply nutritional products to network marketing
companies, such as DNF, Leiner Health, Natural Alternatives, Vitatech and
Chemins. We also compete with companies that develop and sell skin care
products, such as West Coast Cosmetics, CA Botana and Cosmetic Products
International.
Competitive factors in the nutritional supplement and skin care markets
include price, quality of products, reliability of product delivery and
marketing services offered to customers. We believe we compete favorably with
respect to each of these factors. Nevertheless, most of our competitors have
longer operating histories, wider product offerings, greater name recognition
22
and financial resources than do we. However, in marketing to network marketing
companies, we believe our turnkey approach of offering our customers significant
regulatory, marketing and manufacturing assistance provides us with a
competitive advantage. While we believe that consumers appreciate the
convenience of ordering products from home through a sales person, the buying
habits of many consumers accustomed to purchasing products through traditional
retail channels are difficult to change.
Government Regulation
In both the United States and foreign markets, we are subject to extensive
laws and governmental regulations at the federal, state and local levels. For
example, we are subject, directly or indirectly, to regulations pertaining to:
o Dietary ingredients;
o The manufacturing, packaging, labeling, promotion, distribution,
importation, sale and storage of our products;
o Product claims, labeling and advertising (including direct claims and
advertising by us as well as claims in labeling and advertising by
others, for which we may be held responsible);
o Transfer pricing and similar regulations that affect the level of
foreign taxable income and customs duties; and
o Taxation, which in some instances may impose an obligation on us to
collect taxes and maintain appropriate records.
The dietary ingredients, manufacturing, packaging, storing, labeling,
advertising, promotion, distribution and sale of our products are subject to
regulation by one or more governmental agencies, including the Food and Drug
Administration, the Federal Trade Commission, the Consumer Product Safety
Commission, the Department of Agriculture, the Department of Customs, the Patent
and Trademark Office, and the Environmental Protection Agency. Our activities
are, or may be, regulated by various agencies of the states, localities and
foreign countries in which our products are manufactured, distributed and/or
sold. The FDA, in particular, regulates the ingredients, manufacture, packaging,
storage, labeling, promotion, distribution and sale of foods, dietary
supplements and over-the-counter drugs, such as those we distribute. We and our
suppliers are required by FDA regulations to meet relevant current good
manufacturing practice guidelines for the preparation, packing and storage of
foods and drugs. The FDA has also published proposed rules for the establishment
of good manufacturing practices for dietary supplements, but it has not yet
issued a proposal rule. The FDA conducts unannounced inspections of companies
that manufacture, distribute and sell dietary supplements, issues warning
letters for rule violations found during these inspections and refers matters to
the U.S. Attorney and Justice Department for prosecution under the Federal Food,
Drug and Cosmetic Act. There can be no assurance that the FDA will not question
our labeling or other operations in the future.
23
The Dietary Supplement Health and Education Act revised the provisions
governing dietary ingredients and labeling of dietary supplements. The
legislation created a new statutory class of "dietary supplements." This new
class includes vitamins, minerals, herbs, botanicals, other dietary substances
to supplement the daily diet, and concentrates, metabolites, constituents,
extracts, and combinations thereof. The legislation requires no federal
pre-market approval for the sale of dietary ingredients that were on the market
before October 15, 1994. Since cetylated fatty acids, the primary ingredient in
Celadrin(TM), was on the market prior to October 15, 1994, we have not been
required to provide the FDA with any proof as to safety or efficacy of
Celadrin(TM). Dietary ingredients first marketed after October 15, 1994 may not
be distributed or marketed in interstate commerce unless:
o The manufacturer has proof that the dietary ingredient has been
present in the food supply as an article used for food and in a form
in which the food has not been chemically altered, or
o The manufacturer supplies the FDA with proof to the FDA's satisfaction
of the dietary ingredient's safety.
Manufacturers and distributors of dietary supplements may include
statements of nutritional support, including structure and function claims, on
labels and in advertising if:
o The claims are corroborated by "competent and reliable scientific
evidence" consistent with FTC standards for advertising review;
o The claims for labels and labeling are filed in a certified notice
with the FDA no later than 30 days after first market use of the
claims;
o The manufacturer retains substantiation that the claims are truthful
and non-misleading;
o Each claim on labels and in labeling is cross-referenced by an
asterisk to a mandatory FDA disclaimer.
The majority of the products marketed, or proposed to be marketed, by us
are classified as dietary supplements. In September 1997, the FDA issued
regulations governing the labeling and marketing of dietary supplement products.
The regulations cover:
o The identification of dietary supplements and their nutrition and
ingredient labeling;
o The terminology to be used for nutrient content claims, health claims
and statements of nutritional support, including structure and
function claims;
o Labeling requirements for dietary supplements for which "high potency"
and "antioxidant" claims are made;
o Notification procedures for statements of nutritional support,
including structure and function claims, on dietary supplement labels
and in their labeling;
o Pre-market notification procedures for new dietary ingredients in
dietary supplements.
24
Dietary supplements are subject to federal laws dealing with drugs and
regulations of the FDA. Those laws regulate, among other things, health claims,
ingredient labeling and nutrition content claims characterizing the level of
nutrient in the product. Those laws prohibit the use of any health claim for
dietary supplements, unless the health claim is supported by significant
scientific agreement and is pre-approved by the FDA. A federal court has ruled
that the FDA must authorize health claims presented to the agency in health
claims petitions unless they are inherently misleading and must rely on
disclaimers to eliminate any potentially misleading connotation conveyed by a
claim. The court also held that even claims not supported by significant
scientific agreement must be allowed if disclaimers can correct misleading
connotations.
Prior to permitting sales of our products in foreign markets, we may be
required to obtain an approval, license or certification from the country's
ministry of health or comparable agency. The approval process generally would
require us to present each product and product ingredient to appropriate
regulators and, in some instances, arrange for testing of products by local
technicians for ingredient analysis. These approvals may be conditioned on
reformulation of our products or may be unavailable with respect to certain
products or certain ingredients. We must also comply with product labeling and
packaging regulations that vary from country to country.
The Federal Trade Commission, which exercises jurisdiction over the
marketing practices and advertising of products similar to those we offer, has
in the past several years instituted enforcement actions against several dietary
supplement companies for deceptive marketing and advertising practices. These
enforcement actions have frequently resulted in consent orders and agreements.
In certain instances, these actions have resulted in the imposition of monetary
redress requirements. Importantly, the commission requires that "competent and
reliable scientific evidence" corroborate each claim of health benefit made in
advertising before the advertising is first made. A failure to have that
evidence on hand at the time an advertisement is first made violates federal
law. While we have not been the subject to enforcement action for the
advertising of its products, there can be no assurance that this agency will not
question our advertising or other operations in the future.
We believe we are in compliance with all material government regulations
which apply to our products. However, we are unable to predict the nature of any
future laws, regulations, interpretations or applications, nor can we predict
what effect additional governmental regulations or administrative orders, when
and if promulgated, would have on our business in the future. These future
changes could, however, require the reformulation or elimination of certain
products; imposition of additional record keeping and documentation
requirements; imposition of new federal reporting and application requirements;
modified methods of importing, manufacturing, storing or distributing certain
products; and expanded or different labeling and substantiation requirements for
certain products and ingredients. Any or all of these requirements could harm
our business.
Trademarks
We received a trademark for "Globestar" in April 2000 and applied for
trademarks on Celadrin and Flash Glancing in December 2000 and September 2000,
respectively.
25
Employees
At March 31, 2002, we had eight full-time employees, including our
executive officers.
Facilities
We rent 5,768 square feet of office space at 16935 West Bernardo Drive,
Suite 101, San Diego, California 92127 on a three-year lease ending January 2003
for $13,635 per month.
Litigation
In April 2000, we were named in a cross-complaint filed in response to
litigation initiated by our President against his former employer, captioned
William Spencer v. Natural Alternatives International, Inc., civil action no.
GIN 002671, filed in the Superior Court of the state of California for the
county of San Diego. The cross-complaint did not demand any specific monetary
damages. Our initial civil action and the cross-complaint were settled in
November 2001 with no negative material effect upon our financial condition or
results of operations.
26
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
William P. Spencer 49 Chief Executive Officer, President
and Director
Debra L. Spencer 50 Secretary, Treasurer and Director
Patrick S. Millsap, Ph.D. 48 Vice President-Marketing
Derek C. Boosey 59 Vice President-International
Peter H. Antoniou, Ph.D. 41 Director
The business experience of each of our executive officers and directors is
set forth below.
William P. Spencer has served as our president since January 1999. From
January 1986 until December 1996, he served as chief operating officer, chief
financial officer, and executive vice- president of Natural Alternatives
International, Inc., a company engaged in the formulation and production of
encapsulated vitamins and nutrients. He was president of NAI from December 1996
until October 1998 and was a director from January 1986 until October 1998. From
1976 to 1988, he was a regional vice president for San Diego Trust and Savings
Bank. Mr. Spencer owns approximately 15% of the outstanding common stock of
Integris, one of our larger customers. Integris is a network marketing company
offering a variety of health oriented and other products and has been a customer
of ours since early 1999. Mr. Spencer earned a B.S. degree in finance and an MBA
degree from San Diego State University.
Debra L. Spencer has served as our secretary and treasurer since March of
1999. Her responsibilities also include graphics layout and development of
marketing material for our private label products. From 1994 to February 1999,
she was a homemaker. From 1987 to 1993, she served as vice president, secretary
and treasurer for Vitamin Direct, Inc., a consumer mail order vitamin company.
At Vitamin Direct, she was responsible for developing marketing material,
generating leads, and customer relations for over 25,000 Vitamin Direct
customers.
Patrick S. Millsap has served as vice-president of marketing since May
1999. From January 1990 until May 1999, he was employed by Natural Alternatives
International, Inc. as a senior account manager. From 1988 to 1990, Dr. Millsap
was director of marketing for Sonergy, Inc., a vitamin distributor. Dr. Millsap
graduated in 1990 from San Diego State University with a B.A. degree in history.
He received a certificate of international business from the University of San
Diego in 1996 and earned a Ph.D. degree in philosophy from the University of
Palmer Green, London, England in 2000.
27
Derek C. Boosey has served as our vice-president-international since
September 1999. From 1994 to September 1999, he was new business manager for
National Alternatives International, Inc., and from 1990 to 1994 was director of
marketing for Atheletics Canada. From 1984 to 1990, Mr. Boosey was a technical
advisor to the Korean Ministry of Sports and a sports and marketing consultant
for MKC International. He earned degrees in physical education from Keele
University (England) and Opu University (England) and is the Senior Olympics
world record holder in the triple jump in the age 55 to 60 class.
Dr. Peter H. Antoniou joined our board in April 1999. He has been chief
executive officer of Pomegranate International since he founded the company in
1986 as an international consulting firm specializing in educational programs,
trade matching activities, and consulting assistance. Since 1994, he has also
been an adjunct professor at the Graduate College of Business for U.S.
International University, San Diego, California. From 1993 to the present, he
has been an adjunct professor at the Executive MBA and the Undergraduate College
of Business at CSU San Marcos, and from 1991 to the present, he has been an
adjunct professor at the School of Business Administration at Mount St. Mary's
College, Los Angeles, California. Dr. Antoniou earned a B.S. degree in 1981 in
business administration and a Master's degree in international business
administration in 1982 from the International University Europe, London,
England. He received a Ph.D. degree in business administration in 1986 from the
U.S. International University.
Directors hold office for one year and until their successors are elected
and duly qualified. William P. Spencer and Debra L. Spencer are married to each
other.
Consultants
Robert L. Hesslink, Jr. Sc.D., consults on and evaluates clinical research
on our products. Dr. Hesslink received his Doctorate of Science from the
Department of Health Sciences at Boston University in 1987. Following his 1986
commission into the U.S. Navy Medical Services Corp., he was stationed at the
Naval Medical Research Institute, Bethesda, MD from 1986 to 1990. During his
tenure, Dr. Hesslink published research pertaining to cold water immersion and
cold habituation in the Journal of Applied Physiology and the American Journal
of Physiology. Dr. Hesslink has consulted for national and international
companies on research projects directed at applied nutrition and physiology
since 1990. He has coordinated over 20 studies in the last three years for
academic institutions, including the University of Maryland School of Medicine,
University of California, San Diego, Department of Animal Sciences, Ball State
University, Human Performance Laboratory, University of Utah, Division of Food
Sciences and Nutrition and the Uniform Services University of Health Sciences,
Department of Military Medicine.
Tony Gwynn, a professional baseball player, and his wife Alicia Gwynn,
entered into a spokesperson agreement with us in April 2001. Under the
agreement, the Gwynns have agreed to endorse our products through personal,
television, video and print appearances for two years. We paid the Gwynns
$28,000 upon signing the agreement and have agreed to pay them $6,000 per month
for the 24-month period following the signing of the agreement. We also issued
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them options to purchase 100,000 shares of our common stock at $.86 per share,
exercisable 50,000 shares on April 15, 2001 and 50,000 shares on April 15, 2003.
Jeffrey Ploen, through his company, J Paul Consulting Corp., has provided
financial consulting services to us since March 2000. We currently pay J Paul
Consulting $2,500 per month for those services.
Executive Compensation
We do not have employment agreements with any of our officers. We currently
pay Mr. Spencer an annual salary of $60,000 and provide him with health
insurance benefits. For the years ended March 31, 2002 and 2001, we paid Mr.
Spencer total compensation of $60,000 and $54,000, respectively, all of which
was salary. No bonuses, stock options or other forms of compensation were paid
to him.
Stock Option Plan
In August 2000 we adopted a Stock Option Plan (the "Plan") which provides
for the grant of stock options intended to qualify as "incentive stock options"
and "nonqualified stock options" (collectively "stock options") within the
meaning of Section 422 of the United States Internal Revenue Code of 1986 (the
"Code"). Stock options may be issued to any of our officers, directors, key
employees or consultants.
We have reserved 800,000 shares of common stock for issuance under the
Plan, of which 650,000 options have been granted to executive officers,
employees and consultants at prices ranging from $.86 to $2.00 per share. We
intend to increase the number of shares reserved under the Plan to 1,200,000
shares in the near future. The Plan is administered by the full Board of
Directors, who determine which individuals shall received stock options, the
time period during which the stock options may be exercised, the number of
shares of common stock that may be purchased under each stock option and the
stock option price.
The per share exercise price of incentive stock options may not be less
than the fair market value of the common stock on the date the option is
granted. The aggregate fair market value (determined as of the date the stock
option is granted) of the common stock that any person may purchase under an
incentive stock option in any calendar year pursuant to the exercise of
incentive stock options will not exceed $100,000. No person who owns, directly
or indirectly, at the time of the granting of an incentive stock option, more
than 10% of the total combined voting power of all classes of our stock is
eligible to receive incentive stock options under the Plan unless the stock
option price is at least 110% of the fair market value of the common stock
subject to the stock option on the date of grant.
No incentive stock options may be transferred by an optionee other than by
will or the laws of descent and distribution, and, during the lifetime of an
optionee, the stock option may only be exercisable by the optionee. Except as
29
otherwise determined by the Board of Directors, stock options may be exercised
only if the stock option holder remains continuously associated with us from the
date of grant to the date of exercise. The exercise date of a stock option
granted under the Plan may not be later than ten years from the date of grant.
Any stock options that expire unexercised or that terminate upon an optionee's
ceasing to be employed by us will become available once again for issuance.
Shares issued upon exercise of a stock option will rank equally with other
shares then outstanding. No stock options will be granted by us at an exercise
price less than 85% of the fair market value of the stock underlying the option
on the date the option is granted.
Liability and Indemnification of Officers and Directors
Our Articles of Incorporation provides that our directors will not be
liable for monetary damages for breach of their fiduciary duty as directors,
other than the liability of a director for:
o A breach of the director's duty of loyalty to our company or our
stockholders;
o Acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law;
o Willful or negligent declaration of an unlawful dividend, stock
purchase or redemption; or
o Transactions from which the director derived an improper personal
benefit.
Our Articles of Incorporation require us to indemnify all persons whom we
may indemnify pursuant to Nevada law to the full extent permitted by Nevada law.
Our bylaws require us to indemnify our officers and directors and other
persons against expenses, judgments, fines and amounts incurred or paid in
settlement in connection with civil or criminal claims, actions, suits or
proceedings against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to our
best interests and, in a criminal action or proceeding, if he had no reasonable
cause to believe that his/her conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of no contest or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to our best interests or that he or
she had reasonable cause to believe his or her conduct was unlawful.
Indemnification as provided in our bylaws shall be made only as authorized in a
specific case and upon a determination that the person met the applicable
standards of conduct. Insofar as the limitation of, or indemnification for,
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling us pursuant to the foregoing, or
otherwise, we have been advised that, in the opinion of the Securities and
Exchange Commission, such limitation or indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
30
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS AND
BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK
The following table sets forth certain information concerning our common
stock ownership as of this date, by (1) each person who is known by us to be the
beneficial owner of more than five percent of our common stock; (2) each of our
directors; and (3) all of our directors and executive officers as a group. The
address of each such stockholder is in care of us at 16935 West Bernardo Drive,
Suite 101, San Diego, California 92127.
Name Amount of Percent of Ownership
of Beneficial Owner Beneficial Ownership(1)(2) Before Offering
- ------------------- -------------------------- ---------------
William P. and Debra L. Spencer (3) 3,175,000 36.4%
Dr. Peter H. Antoniou 40,000 *
Gary J. McAdam (4) 2,721,856 27.5%
James Scibelli (5) 893,000 9.8%
Thomas Weinberger (6) 600,000 6.6%
All officers and directors
as a group (5 persons) 3,615,000 40.8%
*Represents less than 1%
(1) Reflects amounts as to which the beneficial owner has sole voting power and
sole investment power.
(2) Includes stock options and common stock purchase warrants exercisable
within 60 days from the date hereof.
(3) Comprised of 3,000,000 shares and 175,000 stock options. William P. and
Debra Spencer are husband and wife and are deemed to share beneficial
ownership of these shares and options.
(4) Comprised of 1,373,112 shares and 1,348,714 common stock purchase warrants,
all of which are owned by entities controlled by Mr. McAdam.
(5) Includes 325,000 shares and 568,000 common stock purchase warrants, all of
which are owned by entities controlled by Mr. Scibelli.
(6) Comprised of 600,000 stock options.
31
SELLING STOCKHOLDERS
We have outstanding and are updating the information contained in our March
4, 2002 prospectus which covers an aggregate of 4,228,750 common stock purchase
warrants and stock options outstanding, comprised of the following:
o 1,090,000 Class A warrants exercisable at $1.00 per share issued as
consideration for loans advanced to us in 2000;
o 970,000 Class B warrants exercisable at $1.10 per share issued as
consideration for loans advanced to us in 2000;
o 750,000 Class C warrants exercisable at $2.00 per share, issued as a
part of a private placement of our securities in October 2000;
o 125,000 Class D warrants exercisable at $1.75 per share issued for
consulting services;
o 250,000 Class E warrants exercisable at $.70 per share issued as
additional consideration for a $1,000,000 credit facility;
o 650,000 stock options issued to employees, executive officers and
consultants; and
o 393,750 warrants exercisable at $1.00 per share to be issued to our
over 100 stockholders of record as of September 14, 2000.
We are registering for exercise and resale the common stock underlying all
of the above warrants and options. The Class A, Class B, Class C and Class D
warrants expire in September 2005, and the Class E warrants expire in October
2006. The 393,750 warrants expire in September 2005. The Class A warrants may be
called upon 30 days' notice to the warrant holders if our common stock trades at
$3.00 per share or more for ten consecutive trading days. The Class B and Class
E warrants may be exercised on a cashless basis but may not be called. The Class
C and Class D warrants may be called on 30 days' notice to the warrant holders
if our common stock trades at $6.00 per share or more for ten consecutive
trading days. In order to call any of the warrants, we must have a current
registration statement on file with the SEC covering the shares underlying the
warrants.
The following table sets forth the names of the selling stockholders and
the number of shares of our common stock underlying the common stock purchase
warrants and stock options held by each selling stockholder. We have not listed
the names of our over 100 holders who were issued the 393,750 warrants pursuant
to our March 4, 2002 prospectus as a pro rata dividend to our stockholders of
record on September 14, 2000. Each named selling stockholder below is offering
for sale all shares underlying the 4,228,750 warrants and options. We are
registering only the 4,228,750 shares underlying the warrants and options but
not the warrants and options themselves.
32
The following shares underlying the warrants and stock options may be
offered from time to time by the selling stockholders named below. The selling
stockholders are under no obligation to sell all or any portion of these shares
of our common stock. Since the selling stockholders may sell all or part of the
shares of common stock offered in this prospectus, we cannot estimate the number
of shares of our common stock that will be held by the selling stockholders upon
termination of this offering.
Only five of our selling stockholders are officers, directors or 5% or
greater stockholders of our company. The position over the last three years of
each such stockholder is footnoted below along with any material relationship
between the stockholder and us over such three year period. The address of each
selling stockholder is in care of our company at 16935 West Bernardo Drive, No.
101, San Diego, California 92127. Asterisks (*) indicate ownership of less than
1%.
Class A Warrantholders
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
Great Expectations Family
Limited Partnership(1) 25,000 275,000 250,000 250,000 2.3%
1st Zamora Corporation 25,000 31,000 25,000 6,000 *
Barry C. Loder 11,250 73,125 11,250 61,875 *
David Nemelka(2) 25,000 62,500 25,000 37,500 *
Greg Pusey 26,250 170,625 26,250 144,375 1.7%
Gulfstream 1998 Irrevocable Trust 37,500 75,000 37,500 37,500 *
GJM Trading Partners, LTD(1) 380,000 1,440,000 380,000 1,000,000 12.5%
Mathis Family Partners, Ltd. 40,000 280,000 40,000 240,000 2.8%
Jeffrey B. McAdam 20,000 20,000 20,000 0 *
Patricia West Willox 10,000 15,000 10,000 5,000 *
James W. Toot 75,000 125,000 75,000 50,000 *
GM/CM Family Partners, Ltd.(1) 75,000 518,987 75,000 0 *
J Paul Consulting Corp.(3) 100,000 100,000 100,000 0 *
R.G. Securities LLC 15,500 15,500 15,500 0 *
MDB Capital 2,500 2,500 2,500 0 *
Pan American Capital Group 5,000 5,000 5,000 0 *
Edward H. Price 29,250 29,250 29,250 0 *
CKC Partners LTD 43,875 43,875 43,875 0 *
Michael J. Kirby 43,875 43,875 43,875 0 *
Lisa Kirby 100,000 100,000 100,000 0 *
Total Class A Warrants 1,090,000
33
Class B Warrantholders
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
GJM Trading Partners, LTD(1) 520,000 1,440,000 520,000 920,000 10.8%
James Scibelli(1) 150,000 893,000 150,000 743,000 8.7%
USA Ventures 20,000 20,000 20,000 0 *
Patricia West Willox 10,000 15,000 10,000 5,000 *
Robert McAdam 90,000 90,000 90,000 0 *
Milagro Investments, Inc. 5,000 5,000 5,000 0 *
J Paul Consulting Corp.(3) 155,000 155,000 155,000 0 *
Laurie Roop 10,000 10,000 10,000 0 *
John LeFebvre 10,000 10,000 10,000 0 *
Total Class B Warrants 970,000
Class C Warrantholders
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
Gary A. Agron(4) 50,000 150,000 50,000 100,000 1.2%
Zahra Abdollahi 10,000 30,000 10,000 20,000 *
Multi-National Consultants Grp-
C/P Pan American Cap Grp., Inc. 25,000 75,000 25,000 50,000 *
Brasel Family Partners, Ltd. 22,500 67,500 22,500 45,000 *
Business Development Corp. 12,500 37,500 12,500 25,000 *
Benedetto Casale 15,000 45,000 15,000 30,000 *
Paul Dragul 10,000 30,000 10,000 20,000 *
Clifford Enten 5,000 15,000 5,000 10,000 *
Paul Ernst 5,000 15,000 5,000 10,000 *
Heather M. Evans 7,500 22,500 7,500 15,000 *
Fairway Capital Partners, LLC 10,000 10,000 10,000 0 *
Jeffrey W. Felton 7,500 22,500 7,500 15,000 *
Thomas A. Forti 10,000 10,000 10,000 0 *
Robert A. Germiquet 5,000 15,000 5,000 10,000 *
Great Expectations Family Ltd. Partnership(1) 75,000 275,000 75,000 200,000 2.3%
Aaron A. Grunfeld 10,000 30,000 10,000 20,000 *
Heritage Oil Company 5,000 5,000 5,000 0 *
Arthur Kassoff Rev. Trust 10,000 30,000 10,000 20,000 *
Charles F. Kirby 10,000 10,000 10,000 0 *
Cynthia and Michael Kirby 5,000 5,000 5,000 0 *
Lisa Kirby 10,000 110,000 10,000 100,000 1.2%
Mark E. or Constance Massa 2,500 7,500 2,500 5,000 *
Mathis Family Partners, Ltd. 50,000 280,000 50,000 230,000 2.7%
Sharon McDonald 5,000 5,000 5,000 0 *
Michael O'Hare 10,000 10,000 10,000 0 *
J. J. Peirce 12,500 12,500 12,500 0 *
LTC David R. Plaza 2,500 2,500 2,500 0 *
34
Class C Warrantholders (Continued)
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
Jeff P. Ploen(3) 25,000 75,000 25,000 50,000 *
Carol and Paul Rivello 22,500 22,500 22,500 0 *
Len H. Rothstein 12,500 37,500 12,500 25,000 *
Steven Schultz 10,000 30,000 10,000 20,000 *
R.A. Strahl 5,000 13,000 5,000 8,000 *
James W. Toot 25,000 75,000 25,000 50,000 *
Bonnie and Len Turano 7,500 7,500 7,500 0 *
Lawrence Underwood 12,500 37,500 12,500 25,000 *
James Scibelli(1) 77,500 893,000 77,500 815,500 9.5%
Andrew Benavides 2,500 7,500 2,500 5,000 *
GJM Trading Partners, LTD(1) 90,000 1,440,000 90,000 1,350,000 15.8%
USA Ventures 20,000 20,000 20,000 0 *
Patricia West Willox 10,000 15,000 5,000 10,000 *
Susan Santage 5,000 25,000 5,000 20,000 *
The Bailey Family Trust 12,500 37,500 12,500 25,000 *
David W. Mork 7,500 7,500 7,500 0 *
Nana B. Schov C/F Andreas B.
Mork UTMA Co 7,500 7,500 7,500 0 *
Total Class C Warrants 750,000
Class D Warrantholders
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
James Scibelli(1) 100,000 893,000 100,000 793,000 9.3%
The Kabot Group, LLC 25,000 25,000 25,000 0 *
Total Class D Warrants 125,000
Class E Warrantholders
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
GJM Trading Partners, Ltd.(1) 125,000 1,440,000 125,000 1,315,000 15.4%
Roberts & Green, Inc.(1) 125,000 125,000 125,000 0 *
Total Class E Warrants 250,000
Stock Option Holders
Number of Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
William and Debra Spencer(5)(6) 175,000 3,175,000 175,000 3,000,000 35.1%
Derek Boosey(5) 115,000 165,000 115,000 50,000 *
Patrick Millsap(5) 30,000 285,000 30,000 255,000 3.0%
35
Stock Option Holders (Continued)
Percentage
Total Number Number of Shares To Be To Be
Number of Shares of Shares Owned Following Owned Following
Name Underlying Warrants Shares Owned Offered for Sale The Offering The Offering
---- ------------------- ------------ ---------------- ------------ ------------
Yue Ling Chen 25,000 25,000 25,000 0 *
Jandra Thomas 40,000 65,000 40,000 25,000 *
Robert Hesslink 25,000 50,000 25,000 25,000 *
Michelle Posey 15,000 20,000 15,000 5,000 *
James Scibelli(1) 100,000 893,000 100,000 793,000 9.3%
Tony and Alicia Gwynn(7) 100,000 100,000 100,000 0 *
Maurile C. Tremblay 25,000 55,000 25,000 30,000 *
Total Stock Options 650,000
- -------------------
(1) 5% or greater stockholder
(2) Former 5% stockholder
(3) Provides consulting services to us
(4) Our securities counsel
(5) Executive officers and directors
(6) Directors
(7) Spokespersons for us
Plan of Distribution
The shares of our common stock which the selling stockholders or their
pledgees, donees, transferees or other successors in interest may offer for
resale will be sold from time to time in one or more of the following
transactions:
o Block transactions;
o Transactions on the Bulletin Board or on such other market on which
our common stock may from time to time be trading;
o Privately negotiated transactions;
o Through the writing of options on the shares;
o Short sales; or
o Any combination of these transactions.
The sale price to the public in these transactions may be:
o The market price prevailing at the time of sale;
o A price related to the prevailing market price;
o Negotiated prices; or
o Such other price as the selling stockholders determine from time to
time.
In the event that we permit or cause this prospectus to lapse, the selling
stockholders may only sell shares of our common stock pursuant to Rule 144 under
the Securities Act of 1933. The selling stockholders will have the sole and
absolute discretion not to accept any purchase offer or make any sale of these
shares of our common stock if they deem the purchase price to be unsatisfactory
at any particular time.
The selling stockholders or their pledges, donees, transferees or other
successors in interest, may also sell these shares of our common stock directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of these shares of our common stock for whom such
broker-dealers may act as agents or to whom they sell as principal, or both. As
to a particular broker-dealer, this compensation might be in excess of customary
commissions. Market makers and block purchasers purchasing these shares of our
common stock will do so for their own account and at their own risk. It is
36
possible that a selling stockholder will attempt to sell shares of our common
stock in block transactions to market makers or other purchasers at a price per
share which may be below the prevailing market price of our common stock. There
can be no assurance that all or any of these shares of our common stock offered
hereby will be issued to, or sold by, the selling stockholders. Upon effecting
the sale of any of these shares of our common stock offered under this
prospectus, the selling stockholders and any brokers, dealers or agents, hereby,
may be deemed "underwriters" as that term is defined under the Securities Act of
1933 or the Securities Exchange Act of 1934, or the rules and regulations
thereunder.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters into an agreement or agreements with an underwriter, then the
relevant details will be set forth in a post effective amendment to the
registration statement of which this prospectus is a part. A post effective
amendment is a supplement or revision to this prospectus.
The selling stockholders and any other persons participating in the sale or
distribution of these shares of our common stock will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder including, without limitation, Regulation M. These provisions may
restrict activities of, and limit the timing of purchases and sales of any of
these shares of our common stock by, the selling stockholders. Furthermore,
pursuant to Regulation M, a person engaged in a distribution of securities is
prohibited from bidding for, purchasing or attempting to induce any person to
bid for or purchase our securities for a period beginning five business days
prior to the date of this prospectus until such person is no longer a selling
stockholder. These regulations may affect the marketability of these shares of
our common stock.
We will pay substantially all of the expenses incident to the registration
and offering of our common stock, other than commissions or discounts of
underwriters, broker-dealers or agents.
37
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS
Between March and November 1999, we sold an aggregate of $300,000 of
convertible promissory notes to seven investors, four of whom were principal
stockholders at the time of sale. In August 2000 the promissory notes were
exchanged for 300,000 shares of our common stock and options to purchase an
additional 300,000 shares at $1.00 per share.
In 1999 William P. and Debra Spencer, officers, directors and principal
shareholders of our company, loaned us $288,500 for operating expenses,
evidenced by promissory notes bearing interest at 10% per annum. In 2000 the
Spencers agreed to extend the notes until July 2002. In consideration of the
extension of the notes, we issued to the Spencers in May 2001 options to
purchase 225,000 shares of our common stock for $1.00 per share until September
2005. In March 2001 the Spencers reduced the amount due on the notes by $150,000
to reimburse us for expenses we advanced on their behalf. At March 31 2002, we
owed them $20,610 on the notes.
In March 2000 J Paul Consulting Corp., one of our security holders, loaned
us $125,000 evidenced by a promissory note bearing interest at 10% per annum due
on demand. As additional consideration for the loan, we issued to J Paul
Consulting Corp. warrants to purchase 250,000 shares at $1.00 per share and
250,000 shares at $1.10 per share. We also retained J Paul Consulting to provide
certain consulting services to us for which we paid $30,000 during the year
ended March 31, 2002 and currently pay $2,500 per month. We repaid the
promissory note in September 2000.
In August 2000 GJM Trading Partners, Ltd., an entity controlled by Gary J.
McAdam, a principal stockholder, loaned us $400,000, evidenced by a promissory
note bearing interest at 8% per annum, due on demand. As additional
consideration for the loan, we issued to GJM warrants to purchase 400,000 shares
at $1.00 per share and 700,000 shares at $1.10 per share. As further
consideration, we provided certain exclusive product sales rights to GJM in
connection with the loan. We repaid the loan in October 2000.
In October 2001 we entered into a line of credit agreement with Messrs.
McAdam and Scibelli, two of our principal stockholders, under which they agreed
to advance us up to $1,000,000 for working capital secured by our accounts
receivables and bearing interest at 12% per annum. As additional consideration
for the line of credit, we issued to them a total of 250,000 Class E warrants
exercisable at $.70 each until October 2006. At March 31, 2002 we owed $175,000
under the line of credit.
William P. Spencer owns 15% of the outstanding stock of Integris, one of
our larger customers. For the nine months ended December 31, 2001, Integris
accounted for 9% of our sales.
We believe that the above transactions were fair, reasonable and upon terms
at least as favorable to us as those we might have obtained from unaffiliated
third parties. In order to avoid potential conflicts of interest, all related
party transactions must be approved by a majority of the disinterested members
of our Board of Directors. With respect to Mr. Spencer's minority ownership of
Integris, all contract negotiations and product pricing decisions are made by
our Vice President of Marketing and approved by the disinterested members of our
Board of Directors.
38
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 25,000,000 shares of common stock, no par value
per share, and 5,000,000 shares of preferred stock, $.001 par value per share.
Common Stock
At March 31, 2002, there were 8,550,000 shares of common stock outstanding.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders, including the election of directors. There
is no right to cumulate votes in the election of directors. The holders of
common stock are entitled to any dividends that may be declared by the Board of
Directors out of funds legally available therefor subject to the prior rights of
holders of preferred stock and any contractual restrictions we have against the
payment of dividends on common stock. In the event of our liquidation or
dissolution, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any
outstanding shares of preferred stock.
Holders of common stock have no preemptive rights and have no right to
convert their common stock into any other securities. All of the outstanding
shares of common stock are fully paid and nonassessable.
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock in one or
more series with such designations, voting powers, if any, preferences and
relative, participating, optional or other special rights, and such
qualifications, limitations and restrictions, as are determined by resolution of
our Board of Directors. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of our company without
further action by stockholders and could adversely affect the rights and powers,
including voting rights, of the holders of common stock. In certain
circumstances, the issuance of preferred stock could depress the market price of
the common stock. There are no shares of Preferred Stock outstanding.
Warrants and Stock Options
We have an aggregate of 4,228,750 common stock purchase warrants and stock
options outstanding, comprised of the following:
o 1,090,000 Class A warrants exercisable at $1.00 per share issued as
consideration for loans advanced to us in 2000;
o 970,000 Class B warrants exercisable at $1.10 per share issued as
consideration for loans advanced to us in 2000;
o 750,000 Class C warrants exercisable at $2.00 per share, issued as a
part of a private placement of our securities in October 2000;
o 125,000 Class D warrants exercisable at $1.75 per share issued for
consulting services;
39
o 250,000 Class E warrants exercisable at $.70 per share issued as
additional consideration for a $1,000,000 credit facility;
o 650,000 stock options issued to employees, executive officers and
consultants; and
o 393,750 warrants exercisable at $1.00 per share to be issued to our
over 100 stockholders of record as of September 14, 2000.
We are registering for resale the common stock underlying all of the above
warrants and options. The Class A, Class B, Class C and Class D warrants expire
in September 2005, and the Class E warrants expire in October 2006. The 393,750
warrants expire in September 2005. The Class A warrants may be called upon 30
days' notice to the warrant holders if our common stock trades at $3.00 per
share or more for ten consecutive trading days. The Class B and Class E warrants
may be exercised on a cashless basis but may not be called. The Class C and
Class D warrants may be called on 30 days' notice to the warrant holders if our
common stock trades at $6.00 per share or more for ten consecutive trading days.
In order to call any of the warrants, we must have a current registration
statement on file with the SEC covering the shares underlying the warrants.
Limitation on Liability
Our certificate of incorporation and bylaws provide that a director shall
not be personally liable to us or our stockholders for any action taken or any
failure to act to the full extent permitted under Nevada law. The effect of this
provision is to eliminate our rights and the rights of our stockholders, through
stockholders' derivative suits on our behalf, to recover monetary damages from a
director for breach of the fiduciary duty of care as a director, including
breaches resulting from negligent or grossly negligent behavior. This provision
does not limit or eliminate any stockholder or us from seeking non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care or to seek monetary damages for (i) a violation of
criminal law, (ii) unlawful payment of dividends or other distribution under
Nevada law, (iii) a transaction in which a director derived an improper personal
benefit, (iv) willful misconduct, or (v) reckless, malicious or wanton acts.
Dividends
We do not intend to pay dividends on our capital stock in the foreseeable
future.
Transfer Agent
Interwest Securities, Inc., Salt Lake City, Utah, is our transfer agent.
40
SHARES ELIGIBLE FOR FUTURE SALE
We have 8,550,000 common shares outstanding, comprised of 2,000,000 shares
which are freely tradable shares and 6,550,000 shares which are restricted
shares but may be sold under Rule 144 at any time. We also may have up to
4,228,750 shares outstanding which have been registered by this prospectus and
may be issued upon exercise of our common stock purchase warrants and stock
options.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who owns shares that were purchased from us, or any
affiliate, at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three month period, a number of
shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or
o The average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the 90
days preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us,
or any affiliate, at least two years previously, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Future sales of restricted common stock under Rule 144 or otherwise or of
the shares which we are registering under this prospectus could negatively
impact the market price of our common stock. We are unable to estimate the
number of shares that may be sold in the future by our existing stockholders or
the effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock by existing stockholders could adversely
affect prevailing market prices.
EXPERTS
Our financial statements included in this prospectus as of and for the
years ended March 31, 2001 and 2002 have been included in reliance on the
reports of Pritchett, Siler & Hardy,P.C., independent certified public
accountants, given on the authority of this firm as experts in accounting and
auditing.
41
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by the Law Office of Gary A. Agron, Englewood, Colorado. Mr. Agron owns 100,000
shares of our common stock and 50,000 Class C warrants.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933
with respect to our common stock offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits to the registration statement. For further information with
respect to Imagenetix, Inc., and our common stock offered hereby, reference is
made to the registration statement and the exhibits filed as part of the
registration statement. Following the effective date of the prospectus, we will
be required to file periodic reports with the Securities and Exchange
Commission, including quarterly reports, annual reports which include our
audited financial statements and proxy statements. The registration statement,
including exhibits thereto, and all of our periodic reports may be inspected
without charge at the Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048, after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain additional information
regarding the operation of the Public Reference Section by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address: http://www.sec.gov.
42
IMAGENETIX, INC. AND SUBSIDIARY
CONTENTS
PAGE
----
-- Independent Auditors' Report F-1
-- Consolidated Balance Sheet, March 31, 2002 F-2
-- Consolidated Statements of Operations, for the
years ended March 31, 2002 and 2001 F-3
-- Consolidated Statement of Stockholders' Equity,
for the years ended March 31, 2002 and 2001 F-4
-- Consolidated Statements of Cash Flows, for the
years ended March 31, 2002 and 2001 F-5 - F-6
-- Notes to Consolidated Financial Statements F-7 - F-19
INDEPENDENT AUDITORS' REPORT
Board of Directors
IMAGENETIX, INC. AND SUBSIDIARY
San Diego, California
We have audited the accompanying consolidated balance sheet of Imagenetix, Inc.
and Subsidiary at March 31, 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended March 31,
2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of
Imagenetix, Inc. and Subsidiary as of March 31, 2002, and the results of their
operations and their cash flows for the years ended March 31, 2002 and 2001, in
conformity with generally accepted accounting principles in the United States of
America.
/s/ PRITCHETT, SILER & HARDY, P.C.
- -----------------------------------
PRITCHETT, SILER & HARDY, P.C.
May 28, 2002
Salt Lake City, Utah
F-1
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
March 31,
2002
-----------
CURRENT ASSETS:
Cash in bank $ 303,986
Accounts receivable, net 569,739
Inventory, net 1,040,609
Prepaid expenses 5,000
-----------
Total Current Assets 1,919,334
PROPERTY AND EQUIPMENT, net 119,050
OTHER ASSETS 85,886
-----------
$ 2,124,270
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 512,992
Accrued liabilities 20,809
Customer deposits 43,153
Income tax payable 22,130
Notes payable - related party 20,436
Line of credit - related party 177,585
Current portion of capital leases 2,634
-----------
Total Current Liabilities 799,739
CAPITAL LEASE LIABILITIES, less current portion 3,085
-----------
Total Liabilities 802,824
-----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding --
Common stock, $.001 par value, 50,000,000 shares
authorized, 8,550,000 shares issued and outstanding 8,550
Capital in excess of par value 1,862,213
Retained earnings (deficit) (549,317)
-----------
Total Stockholders' Equity 1,321,446
-----------
$ 2,124,270
===========
The accompanying notes are an integral part of this
consolidated financial statement.
F-2
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Year Ended
March 31,
---------------------------
2002 2001
----------- -----------
NET SALES $ 4,443,742 $ 4,639,425
COST OF GOODS SOLD 3,089,661 3,375,043
----------- -----------
GROSS PROFIT 1,354,081 1,264,382
----------- -----------
EXPENSES:
General and administrative 1,544,591 1,393,130
Selling expense -- 208,676
----------- -----------
Total Expenses 1,544,591 1,601,806
----------- -----------
INCOME (LOSS) FROM OPERATIONS (190,510) (337,424)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense - related party (66,479) (55,419)
Interest expense (1,374) (2,000)
Other income 2,326 16,482
----------- -----------
Total Other Income (Expense) (65,527) (40,937)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (256,037) (378,361)
CURRENT TAX EXPENSE (BENEFIT) -- (21,876)
DEFERRED TAX EXPENSE (BENEFIT) -- 3,750
----------- -----------
NET INCOME (LOSS) $ (256,037) $ (360,235)
=========== ===========
BASIC AND DILUTED (LOSS) PER SHARE $ (.03) $ (.05)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2002 AND 2001
Common Stock Capital in
-------------------------- Excess of Retained
Shares Amount Par Value Earnings
----------- ----------- ----------- -----------
BALANCE, March 31, 2000 5,175,000 $ 5,175 $ 66,425 $ 66,955
Issuance of warrants to purchase
140,000 shares of common stock
at $1.00 per share September 2000 -- -- 35,155 --
Issuance of common stock for cash at
$1.00 per share less $263,155 stock
offering costs, September 2000 1,400,000 1,400 1,135,445 --
Effect of recapitalization of
Subsidiary in a manner similar to a
reverse purchase, September 2000 2,000,000 2,000 (14,000) --
Cancellation of common stock,
September 2000 (425,000) (425) 425 --
Issuance of common stock for
debt relief at $1.12 per share,
September 2000 300,000 300 335,207 --
Issuance of common stock for
services rendered at $1.00
per share, September 2000 100,000 100 99,900 --
Net (loss) for the year ended
March 31, 2001 -- -- -- (360,235)
----------- ----------- ----------- -----------
BALANCE, March 31, 2001 8,550,000 8,550 1,658,557 (293,280)
Issuance of warrants to purchase
250,000 shares of common stock,
related to obtaining a line of credit,
valued at $97,896 -- -- 97,896 --
Issuance of warrants to purchase
20,000 shares of common stock, for
services rendered valued at $5,556 -- -- 5,556 --
Issuance of options to purchase
25,000 shares of common stock, for
legal services valued at $22,570 -- -- 22,570 --
Issuance of options to purchase
100,000 shares of common stock, for
services rendered valued at $77,634 -- -- 77,634 --
Net (loss) for the year ended
March 31, 2002 -- -- -- (256,037)
----------- ----------- ----------- -----------
BALANCE, March 31, 2002 8,550,000 $ 8,550 $ 1,862,213 $ (549,317)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of this
consolidated financial statement.
F-4
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
For the
Years Ended
March 31,
--------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $ (256,037) $ (360,235)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation & amortization expense 27,851 19,204
Non cash expense 154,708 100,000
Deferred taxes -- 3,750
Changes in assets and liabilities:
(Increase) decrease in account receivable (93,751) 234,119
(Increase) decrease in employee receivable 37,388 (37,388)
(Increase) in inventory (407,868) (246,001)
(Increase) decrease in prepaid expenses 39,430 (44,430)
Decrease in other assets 26,534 --
Increase (decrease) in accounts payable 234,299 (76,258)
Increase (decrease) in accrued liabilities 7,632 (10,720)
Increase in customer prepayments 11,283 31,870
Increase (decrease) in income tax payable -- (10,876)
----------- -----------
Net Cash (Used) by Operating Activities (218,531) (396,965)
----------- -----------
Cash Flows from Investing Activities:
Acquisition of office equipment (23,926) (73,971)
Acquisition of other assets (750) (5,973)
----------- -----------
Net Cash (Used) by Investing Activities (24,676) (79,944)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from line of credit - related party 177,585 --
Payments on notes payable - related party (113,134) (317,930)
Payments on lease liabilities (6,299) (6,065)
Proceeds from common stock issuance -- 1,400,000
Payment of stock offering costs -- (228,000)
----------- -----------
Net Cash Provided by Financing Activities 58,152 848,005
----------- -----------
Net Increase (Decrease) in Cash (185,055) 371,096
Cash at Beginning of Period 489,041 117,945
----------- -----------
Cash at End of Period $ 303,986 $ 489,041
----------- -----------
[Continued]
F-5
IMAGENETIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the
Year Ended
March 31,
-----------------
2002 2001
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $18,498 $63,513
Income taxes $ -- $ --
Supplemental Schedule of Noncash Investing and Financing Activities:
For the year ended March 31, 2002:
In October 2001, the Company issued warrants to purchase 250,000 shares
of common stock at $.70 per share to shareholders of the Company who
provided a line of credit to the Company. Of the $97,896 fair value
recorded for these warrants, $48,948 was recorded as interest expense
and $48,948 as deferred expenses.
In September 2001, the Company issued warrants to purchase 20,000
shares of common stock at $.70 per share. The Company recorded expense
of $5,556 related to the granting of these warrants.
In April 2001, the Company issued options to purchase 25,000 shares of
common stock at $1.00 per share. The Company recorded legal expense of
$22,570 related to the granting of these options.
In April 2001, the Company issued options to purchase 100,000 shares of
common stock at $.86 per share. The Company recorded expense of $77,634
related to the granting of these options.
For the year ended March 31, 2001:
The Company issued 100,000 shares of common stock for services rendered
valued at $100,000 or $1.00 per share.
The Company issued 300,000 shares of common stock in payment of
$300,000 notes payable and $35,507 in related accrued interest or $1.12
per share.
The Company cancelled 425,000 shares of common stock as part of a
merger agreement.
The Company effectively issued 2,000,000 shares of common stock as a
result of the recapitalization of Subsidiary in a manner similar to a
reverse purchase. The Company also assumed a $12,000 note payable as
part of the merger agreement.
The Company entered into a lease agreement for equipment valued at
$1,193.
In September 2000, the Company issued warrants to purchase 140,000
shares of common stock at $1.00 to underwriters of the Company's
private placement. The warrants were valued at $35,155 and were
recorded as a expense of the stock offering.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The accompanying consolidated financial statements represent
the accounts of Imagenetix, Inc. ["Parent"] organized under the laws of the
State of Nevada on March 28, 1988; and its subsidiary Imagenetix, Inc
["Subsidiary"] organized under the laws of the state of Colorado on July
26, 1996 and its subsidiary Imagenetix ["Imagenetix CA"] organized under
the laws of the State of California on January 7, 1999, ["The Company"].
The Company is engaged in the business of developing and marketing
nutritional supplements and skin care products.
During October 2000, the Subsidiary entered into a definitive merger
agreement and plan of reorganization with Parent. In connection with the
agreement shareholders of the Subsidiary contributed and cancelled 425,000
shares of common stock. The Subsidiary issued 100,000 shares of common
stock for legal fees. The agreement required the Subsidiary shareholders to
exchange 6,550,000 shares of common stock for a like number of common
shares of the Parent and the Parent's shareholders to cancel 22,500,018 of
the 24,500,018 shares of common stock outstanding. The Parent also
cancelled 5,731,250 of the 6,125,000 outstanding warrants. These
transactions were accounted for as a recapitalization of the Subsidiary,
wherein the Subsidiary became a wholly owned subsidiary of the Parent.
After giving effect to the preceding transaction, the parent had 8,550,000
shares of common stock, 3,183,750 warrants, and 525,000 options
outstanding. In connection with the reverse acquisition, the parent changed
its name to Imagenetix, Inc. The only asset or liability of Parent which
remained on the consolidated balances of the Company after the reverse
acquisition was an $12,000 note payable to a related party.
On March 23, 1999, Subsidiary completed an exchange agreement with
Imagenetix CA wherein Subsidiary issued 3,900,000 shares of its common
stock in exchange for all of the outstanding common stock of Imagenetix CA.
The Acquisition was accounted for as a recapitalization of Imagenetix CA as
the shareholders of the Imagenetix CA controlled the combined entity after
the acquisition. There was no adjustment to the carrying values of the
assets or liabilities of the Subsidiary or Imagenetix CA as a result of the
recapitalization.
The Company has, at the present time, not paid any dividends, and any
dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
Consolidation - All significant intercompany transactions between the
Parent and Subsidiary, and Subsidiary and Imagenetix CA have been
eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the financial statements, the
Company considers all highly liquid debt investments purchased with a
maturity of three months or less to be cash equivalents. At March 31, 2002,
the Company had $203,986 cash balances in excess of federally insured
limits.
Trademarks - Costs of purchasing trademarks are amortized on a
straight-line basis over 17 years.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires an asset and liability approach for
accounting for income taxes (See Note 11).
F-7
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Inventory - Inventory is carried at the lower of cost or market method of
valuation.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized, upon being placed in
service. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is computed for financial statement purposes using
the straight-line method over the estimated useful lives of the assets
ranging from 5 to 7 years.
Impairment of Long-Lived and Certain Intangible Assets - The Company has
adopted the Statement of Financial Accounting Standards "SFAS" No. 121 for
purposes of determining and measuring impairment of certain long-lived and
certain intangible assets to be held and used in the business. The Company
deems an asset to be impaired if a forecast of undiscounted future
operating cash flows directly related to the asset, including disposal
value if any, is less than the carrying amount. No impairment losses have
been recorded in the accompanying financial statements.
Earnings (Loss) Per Share - The computation of earnings (loss) per share is
based on the weighted average number of shares outstanding during the
period presented in accordance with Statement of Financial Accounting
Standards ["SFAS"] No. 128, "Earnings (Loss) Per Share" [See Note 12].
Revenue Recognition - Revenue is recognized when the product is shipped.
The Company evaluates whether an allowance for estimated returns is
required based on historical returns. The Company has not had significant
returns and accordingly, has not established an estimated allowance for
returns at March 31, 2002.
Advertising Costs - Costs incurred in connection with advertising and
promotion of the Company's products are expensed as incurred. Such costs
amounted to approximately $141,634 and $0 for the year ended March 31, 2002
and 2001, respectively.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities, the disclosures
of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimated by
management.
Stock Based Compensation - The Company accounts for its stock based
compensation in accordance with Statement of Financial Accounting Standard
No. 123 "Accounting for Stock-Based Compensation." This statement
establishes an accounting method based on the fair value of equity
instruments awarded to employees as compensation. However, companies are
permitted to continue applying previous accounting standards in the
determination of net income with disclosure in the notes to the financial
statements of the differences between previous accounting measurements and
those formulated by the new accounting standard. The Company has adopted
the disclosure only provisions of SFAS No. 123, and accordingly, the
Company has elected to determine net income using previous accounting
standards. Equity instruments issued to non-employees are valued based on
the fair value of the services received or the fair value of the equity
instruments given up which ever is more reliably measurable.
F-8
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Reclassification - The financial statements for periods prior to March 31,
2002 have been reclassified to conform to the headings and classifications
used in the March 31, 2002 financial statements.
Recently Enacted Accounting Standards - Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations", SFAS No. 142,
"Goodwill and Other Intangible Assets", SFAS No. 143, "Accounting for Asset
Retirement Obligations", and SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", were recently issued. SFAS No. 141, 142,
143 and 144 have no current applicability to the Company or their effect on
the financial statements would not have been significant.
NOTE 2 - INVENTORY
Inventory is carried at the lower of cost or market value. Inventory
consists of the following:
March 31,
2002
-----------
Raw Materials $ 1,036,827
Boxes, labels, & bottles 28,782
Reserve for obsolete inventory (25,000)
-----------
Total Inventory $ 1,040,609
===========
The Company has pledged its inventory as collateral against a line of
credit. [See Note 7]
NOTE 3 - PROPERTY AND EQUIPMENT
The following is a summary of equipment, at cost, less accumulated
depreciation:
March 31,
2002
-----------
Lease-hold improvements $ 107,572
Office equipment 44,202
Leased equipment 21,341
Less accumulated depreciation (54,065)
-----------
$ 119,050
===========
Depreciation expense for the years ended March 31, 2002 and 2001 was
$22,738 and $20,678, respectively.
The Company has pledged its property and equipment as collateral against a
line of credit. [See Note 7]
F-9
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable is carried at the expected realizable value. At March
31, 2002 accounts receivable consisted of the following:
Accounts receivable - trade $ 625,063
Allowance for doubtful accounts (55,324)
----------
Accounts receivable, net $ 569,739
----------
The Company has pledged its accounts receivable as collateral against a
line of credit. [See Note 7]
NOTE 5 - OTHER ASSETS
The following is a summary of intangible assets which is included in "Other
Assets" on the face of the balance sheet:
March 31,
2002
----------
Trademarks $ 8,016
Globestar 3,675
Less Amoritization (1,285)
----------
$ 10,406
==========
For the years ended March 31, 2002 and 2001 amortization expense was $815
and $361, respectively.
Deposits - The Company has also made a deposit of $26,533 as prepaid rent
for its corporate offices. This amount is included in "Other Assets" on the
face of the balance sheet at March 31, 2002.
Deferred expenses - Line of credit - Two shareholders of the Company agreed
to provide the Company with a $1,000,000 line of credit. The balance of the
line of credit accrues interest at a rate of 12% per annum and expires in
September 2002. The Company granted warrants to purchase 250,000 shares of
common stock to these shareholders as an incentive for the line of credit.
The fair value of the warrants was $97,896, of which $48,948 was expensed
as interest expense and $48,948 was recorded as deferred expense, which is
included in "Other Assets" on the face of the balance sheet.
F-10
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE - RELATED PARTY
The following is a summary of notes payable to related parties, as of:
March 31,
2002
----------
10% unsecured note payable to an
officer/shareholder, due July 20, 2002 $ 20,436
----------
20,436
Less current portion (20,436)
----------
Long-term portion $ --
==========
During the year ended March 31, 2002, the Company negotiated to combine the
balances of three notes, which were in default, into one note. The Company
paid $48,461 of the principal balance on the note payable to related party.
During the years ended March 31, 2002 and 2001 the Company recorded $9,766
and $55,419, respectively, for interest on notes payable.
NOTE 7 - LINE OF CREDIT
In October 2001, the Company entered into an line of credit agreement with
two principal shareholders. The shareholders agreed to provide a line of
credit in the amount of $1,000,000. The balance on the line of credit
accrues interest at a rate of 12% per annum. The line of credit is for
working capital needs and is secured with the Company's assets. The line of
credit expires on September 30, 2002. The Company issued warrants to
purchase 250,000 shares of common stock at $.70 per share to the
shareholders as an incentive for the line of credit agreement. The warrants
have a five- year life and vested immediately. The warrants were valued at
$97,896 and are being amortized over the life of the line of credit. At
March 31, 2002, the balance owing on the line of credit was $177,585.
NOTE 8 - LEASES OBLIGATIONS
Capital Lease - The following schedule details equipment purchased under
capital leases as of:
March 31,
2002
----------
Leased equipment $ 21,341
Less accumulated depreciation (12,429)
----------
$ 8,912
==========
Depreciation expense on capital leases for the years ended March 31, 2002
and 2001 amounted to $4,268 and $4,268, respectively.
F-11
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LEASES OBLIGATIONS [Continued]
Total future minimum lease payments and current portion of capital lease
obligations are as follows:
March 31, Principal Payments
-------------- ------------------
2003 $ 2,634
2004 3,085
2005 --
2006 --
2007 --
----------
5,719
Less: current portion 2,634
----------
Capital lease obligations - long-term $ 3,085
-----------
Operating Lease - The Company has entered into a building lease for its
office. The lease on the facility expires on December 31, 2002, and may be
extended by mutual agreement on a year-to-year basis. Lease expense for the
years ended March 31, 2002 and 2001 amounted to $175,472 and $169,415,
respectively. The following is a schedule of minimum annual rental payments
for the next five years.
Minimum Annual
March 31, Rental Payments
---------- ---------------
2003 $ 137,007
2004 --
2005 --
2006 --
2007 --
----------
$ 137,007
----------
Sublease - In August 2001, the Company verbally entered into a building
sublease agreement with a legal consultant of the Company, wherein the
consultant would share some of the Company's office space. The agreement is
for $1,300 per month on a month to month basis. For the year ended March
31, 2002, the Company recorded $6,500 as legal expense and as an offset to
rent expense.
F-12
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGINCIES
Consulting agreement - The Company entered into a spokesperson agreement
with Tony and Alicia Gwynn on April 16, 2001. Under the agreement Tony and
Alicia Gwynn agreed to endorse the Company's products through personal
appearances, video, television, and print ads for a period of two years.
The agreement calls for payment of $28,000 in April 2001 and payments of
$6,000 per month for twenty-four months for a total of $172,000 over the
two-year period. The Company also issued options to purchase 100,000 shares
of common stock exercisable at $.86 per share. The options vest immediately
and are scheduled to be exercisable at 50,000 on April 15, 2002 and 50,000
on April 15, 2003. The Company recorded the fair value of $77,634 for the
options as marketing expense. The Company also issued options to purchase
25,000 shares of common stock at $1.00 per share, to an attorney, which
vest immediately and expire after a five-year period. The fair value of
$22,570 has been recorded as legal expense.
During the year ended March 31, 2002, the Company has expensed $200,204
related to this agreement.
Contingencies - The Company is involved in litigation from time to time in
the normal course of business. Management believes there are no such
claims, which would have a material effect on the financial position of the
Company.
On or about April 6, 2000, the Company was named in a cross-complaint, in
response to a suit filed by the President of the Company against his former
employer. In October 2001, the Company settled the lawsuit and
cross-complaint with the Company. The Company has also maintained an
insurance policy which will reimburse the Company for expenses related to
the litigation.
Other agreements - The Company routinely enters into contracts and
agreements with suppliers, manufacturers, consultants, product marketing,
and sales representatives in the normal course of doing business. These
agreements are generally short term and are normally limited to specific
products and marketing opportunities.
NOTE 10 - CAPITAL STOCK
Preferred Stock - The Company has authorized 5,000,000 shares of preferred
stock, $.001 par value, with such rights, preferences and designations and
to be issued in such series as determined by the Board of Directors. No
shares are issued and outstanding at March 31, 2002.
Common Stock - The Company has authorized 50,000,000 shares of common stock
at $.001 par value. At March 31, 2002, the Company had 8,550,000 shares of
common stock issued and outstanding.
Stock Bonus Plan - During the year ended March 31, 2000 the Board of
Directors of the Company adopted a stock bonus plan. The plan provides for
the granting of awards of up to 724,500 shares of common stock to officers,
directors, consultants and employees. Awards under the plan will be granted
as determined by the board of directors. At present, 499,500 shares have
been granted under the plan. During June 1999 an officer and majority
shareholder returned and canceled 724,500 shares of common stock so that
the common shares issued through the stock bonus plan will not further
dilute the public shareholders of the company.
F-13
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK [Continued]
Warrants - The Company had warrants outstanding prior to its
recapitalization with Subsidiary. These warrants retained their
characteristics as part of the acquisition agreement. The various types of
warrants are explained in the following detail.
The Company's Class A warrants have an exercise price of $1.00 per share of
common stock. At March 31, 2002, 1,483,750 Class A warrants were
outstanding.
The Company's Class B warrants have an exercise price of $1.10 per share of
common stock. During the year ended March 31, 2002, the Company granted
warrants to purchase 20,000 shares of common stock to consultants for
services valued at $5,556. At March 31, 2002, 970,000 Class B warrants were
outstanding.
The Company's Class C warrants have an exercise price of $2.00 per share of
common stock. At March 31, 2002, 750,000 Class C warrants were outstanding.
The Company's Class D warrants have an exercise price of $1.75 per share of
common stock. During the year ended March 31, 2002, the Company granted
warrants to purchase 25,000 shares of common stock to a consultant for
services. The fair value of these warrants is nominal and has not been
expensed. At March 31, 2002, 125,000 Class D warrants were outstanding.
The Company's Class E warrants have an exercise price of $.70 per share of
common stock. During the year ended March 31, 2002, the Company issued
Class E warrants to purchase 250,000 shares of common stock at $.70 per
share. The fair value of $97,896 is being amortized over the life of a
one-year $1,000,000 line of credit with two principal shareholders. These
warrants expire in October 2006.
The Company's Class AA warrants have an exercise price of $2.25 per share
of common stock. During the year ended March 31, 2002, the Company granted
warrants to purchase 25,000 shares of common stock, but later cancelled the
warrants. As of March 31, 2002, no Class AA warrants were issued and
outstanding.
The Class A, C and D warrants are redeemable at $.01 per warrant at the
option of the Company if there is an effective registration of the
securities and the closing bid or selling price of the Company's common
stock for 10 consecutive trading days equal or exceeds $3.00 per share for
Class A warrants and $6.00 per share for Class C and D warrants. The Class
A, C, and D Warrants expire September 30, 2005. The Class B warrants may be
exercised from December 19, 2001 through December 19, 2005. As of March 31,
2002 none of the warrants had been exercised.
Stock Option Plan - In October 2000, the Company adopted a Stock Option
Plan which provides for the granting of stock options intended to qualify
as "incentive stock option" and "nonqualified stock options" within the
meaning of Section 422 of the United States Internal Revenue Code of 1986.
Under the Plan, stock options may be issued to any officer, director, key
employees, or consultants.
F-14
IMAGENETIX, INC. AND SUBSIDIARY
(Formerly Capital Growth, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK [Continued]
During the year ended March 31, 2002 the Company issued options to purchase
100,000 shares of common stock at $.86 per share to a consultant. The fair
value of $77,634 has been recorded as marketing expense. The options vest
immediately, become exercisable over a two-year period and have a five-year
life. The Company also issued options to purchase 25,000 shares of common
stock at $1.00 per share, to an attorney, which vest immediately and expire
after a five-year period. The fair value of $22,570 has been recorded as
legal expense.
A summary of the status of the options granted under the stock option plan
and other agreements at March 31, 2002, and changes during the year then
ended are presented in the table below:
Weighted Average
Shares Exercise Price
------------ --------------
Outstanding at beginning of period 525,000 $ 1.57
Granted 125,000 .89
Exercised - -
Forfeited - -
Expired - -
------------ ------------
Outstanding at end of period 650,000 $ 1.44
------------ ------------
Exercisable at end of period 378,335 $ 1.34
------------ ------------
Weighted average fair value
of options granted 125,000 $ .06
------------ ------------
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- --------------- ----------- ----------------
$ .86 - 1.00 350,000 4.00 years $ .96 250,000 $ 1.00
$ 2.00 300,000 8.75 years $ 2.00 128,335 $ 2.00
Stock Options - During the period presented in the accompanying financial
statements, the Company has granted options under the 2000 Stock Option
Plan (the Plan), executive, and other agreements. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123. "Accounting for Stock-Based Compensation." Accordingly,
no compensation cost has been recognized for the stock option plan or other
agreements.
F-15
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK [Continued]
Had compensation cost for the Company's stock option plan and other options
issued to employees been determined on the fair value at the grant date
during the period ended December 31, 2002 consistent with the provisions of
SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per
share would have been reduced as reflected in the proforma amounts below:
For the
Year Ended
March 31,
------------------------
2002 2001
---------- ----------
NET INCOME (LOSS)
as reported $ (256,037) $ (360,235)
Proforma $ (256,037) $ (360,418)
EARNINGS (LOSS) PER COMMON SHARE
as reported $ (.03) $ (.05)
Proforma $ (.03) $ (.05)
DILUTED EARNINGS (LOSS) PER COMMON SHARE
as reported $ (.03) $ (.05)
Proforma $ (.03) $ (.05)
NOTE 11 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109. SFAS No. 109 requires the Company
to provide a net deferred tax asset or liability equal to the expected
future tax benefit or expense of temporary reporting differences between
book and tax accounting and any available operating loss or tax credit
carryforwards. The Company has a federal net operating loss carryover of
approximately $241,000 and a state net operating loss carryover of
approximately $342,000 at March 31, 2002.
At 2002 and 2001, the total of all deferred tax assets was approximately
$139,000 and $110,000, respectively. The total of all deferred tax
liabilities was $0 and $1,200, respectively. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined. Because of the uncertainty surrounding the realization of the
loss carryforwards the Company has established a valuation allowance of
approximately $139,000. The net change in the valuation allowance for the
year ended March 31, 2002 was a increase of approximately $30,000.
F-16
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES [Continued]
The temporary differences gave rise to the following deferred tax asset
(liability):
March 31,
2002
--------
Excess of tax over financial
accounting depreciation $ 3,495
Allowance for obsolete inventory 9,959
Allowance for bad debt 22,038
Net operating loss carryover - state 19,953
Net operating loss carryover - federal 81,835
Contribution carryover 1,480
The components of federal income tax expense from continuing operations
consisted of the following:
Year Ended
March 31,
2002
--------
Current income tax expense:
Federal $ --
State --
--------
Net current tax expense $ --
--------
Deferred tax expense (benefit) resulted from:
Excess of tax over financial accounting
depreciation $ (4,689)
Contribution carryover (962)
Net operating loss (19,906)
Valuation allowance (29,669)
Allowance for bad debts (4,112)
--------
Net deferred tax expense $ --
--------
Deferred income tax expense results primarily from the reversal of temporary
timing differences between tax and financial statement income.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective rate is as follows:
Year Ended
March 31,
2002
--------
Computed tax at the expected
federal statutory rate 34.00%
State income taxes, net of federal benefit 5.83
Compensation due to options/warrants (26.86)
Valuation allowance (12.93)
Other (.04)
--------
Effective income tax rates 0.00%
--------
F-17
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EARNINGS (LOSS) PER SHARE
The following data show the amounts used in computing earnings (loss) per
share common stock for the period presented:
For the Year Ended
March 31,
-----------------------
2002 2001
---------- ----------
Income (loss) available to common
shareholders (Numerator) $ (256,037) $ (360,235)
---------- ----------
Weighted average number of common
shares outstanding used in earnings (loss)
per share during the period (Denominator) 8,550,000 6,953,151
---------- ----------
Weighted average number of common
shares outstanding used in diluted earnings (loss)
per share during the period (Denominator) 8,550,000 6,953,151
---------- ----------
At March 31, 2002, the Company had options to purchase 650,000 shares of
common stock at prices ranging from $.86 - $2.00 per share and warrants to
purchase 3,578,750 shares of common stock at prices ranging from $.70 -
$2.00 per share that were not included in the computation of earnings per
share because their effects are anti-dilutive.
Subsequent to March 31, 2002, the Company granted Class B warrants to
purchase 600,000 shares of common stock at $1.10 per share to a consultant
for services to be rendered. The warrants vest immediately and have a three
year life. The fair value of these options is $405,060. These warrants were
not included in the calculations of earnings (loss) per share as of March
31, 2002.
NOTE 13 - RELATED PARTY TRANSACTIONS
Sales - During the year ended March 31, 2002, a company in which the
President of the Company owns approximately 15%, accounted for
approximately 7% of the Company's total sales.
Warrants - The Company issued warrants to purchase 250,000 shares of common
stock at $.70 per share to shareholders of the Company as an incentive to
the shareholders to provide a $1,000,000 line of credit to the Company. The
Company expensed $48,948 as interest expense and recorded $48,948 as
deferred expenses related to the granting of these warrants.
Notes payable - The Company made principal payments of $113,134 and
interest payments of $9,592 to an officer of the Company. The officer had
provided a loan to the Company, which has a principal balance of $20,436
and accrued interest of $174 at March 31, 2002. During the year ended March
31, 2002, the Company expensed $9,766 in interest expenses related to the
note payable.
F-18
IMAGENETIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - RELATED PARTY TRANSACTIONS [Continued]
Line of credit - Two shareholders of the Company agreed to provide the
Company with a $1,000,000 line of credit. The balance of the line of credit
accrues interest at a rate of 12% per annum and expires in September 2002.
At March 31, 2002, the line of credit had a balance of $177,585. During the
year ended March 31, 2002, the Company expensed $7,765 in interest related
to the line of credit in addition to the $48,948 mentioned above.
NOTE 14 - CONCENTRATIONS
Sales - During the year ended March 31, 2002, the Company had one
significant customer who accounted for 57% of sales. The Company also has a
single source and exclusive supplier arrangement with the supplier of a
specific raw material, which is used in product accounting for
approximately 80% of the Company's sales. The interruption of raw materials
or the loss of this significant customer would adversely affect the
Company's business and financial condition.
Accounts Receivable - At March 31, 2002, the Company had two customers
which accounted for 55% and 18% of the Company's accounts receivables-trade
balance.
NOTE 14 - SUBSEQUENT EVENTS
Warrants - Subsequent to March 31, 2002, the Company granted Class B
warrants to purchase 600,000 shares of common stock at $1.10 per share to a
consultant for services to be rendered. The warrants vest immediately and
have a three year life. The fair value of these warrants is $405,060.
Consulting agreement - In June 2002, the Company entered into a consulting
agreement. The terms of the agreement provide for payments of $7,500 per
month, plus $2,500 in travel related expenses, plus an auto lease payment
up to $900 per month to the consultants.
F-19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our bylaws require us to indemnify our officers and directors and other
persons against expenses, judgments, fines and amounts incurred or paid in
settlement in connection with civil or criminal claims, actions, suits or
proceedings against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to our
best interests and, in a criminal action or proceeding, if he had no reasonable
cause to believe that his/her conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of no contest or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to our best interests or that he or
she had reasonable cause to believe his or her conduct was unlawful.
Indemnification as provided in our bylaws shall be made only as authorized in a
specific case and upon a determination that the person met the applicable
standards of conduct. Insofar as the limitation of, or indemnification for,
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling us pursuant to the foregoing, or
otherwise, we have been advised that, in the opinion of the Securities and
Exchange Commission, such limitation or indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. (1)
SEC Registration Fees............................... $ 2,115
Blue Sky Filing Fees................................ $ 5,000
Blue Sky Legal Fees................................. $ 5,000
Printing Expenses................................... $ 15,000
Legal Fees.......................................... $ 80,000
Accounting Fees..................................... $ 10,000
Transfer Agent Fees................................. $ 2,000
Miscellaneous Expenses.............................. $ 5,885
Total.......................................... $125,000
========
(1) All expenses, except the SEC registration fee, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, we sold the following securities which were
not registered under the Securities Act, as amended:
II-1
(i) In October 2000, we exchanged an aggregate of 6,550,000 shares and
393,750 common stock purchase warrants to the security holders of Imagenetix,
Inc. to acquire all of the outstanding securities of Imagenetix, Inc., a
Colorado corporation. See "Prospectus Summary-History."
(ii) Between October 2000 and April 2001, we issued an aggregate of
1,090,000 Class A warrants to the following accredited investors as additional
consideration for loans they advanced to us.
Number of Shares
Name Underlying Warrants
---- -------------------
Great Expectations Family Limited Partnership 25,000
1st Zamora Corporation 25,000
Barry C. Loder 11,250
David Nemelka 25,000
Greg Pusey 26,250
Gulfstream 1998 Irrevocable Trust 37,500
GJM Trading Partners, LTD 380,000
Mathis Family Partners, Ltd. 40,000
Jeffrey B. McAdam 20,000
Patricia West Willox 10,000
James W. Toot 75,000
GM/CM Family Partners, Ltd. 75,000
J Paul Consulting Corp. 100,000
R.G. Securities LLC 15,500
MDB Capital 2,500
Pan American Capital Group 5,000
Edward H. Price 29,250
CKC Partners LTD 43,875
Michael J. Kirby 43,875
Lisa Kirby 100,000
Total Class A Warrants 1,090,000
(iii) Between October 2000 and January 2001, we issued an aggregate of
970,000 Class B warrants to the following accredited investors as additional
consideration for loans advanced to us.
Number of Shares
Name Underlying Warrants
---- -------------------
GJM Trading Partners, LTD 520,000
James Scibelli 150,000
USA Ventures 20,000
Patricia West Willox 10,000
II-2
Robert McAdam 90,000
Milagro Investments, Inc. 5,000
J Paul Consulting Corp. 155,000
Laurie Roop 10,000
John LeFebvre 10,000
Total Class B Warrants 970,000
(iv) In October 2000 we sold 1,500,000 units of our securities, comprised
of one share of common stock and one half Class C warrant at $1.00 per unit, to
the following accredited investors.
Name Number of Units
---- ---------------
Gary A. Agron 100,000
Zahra Abdollahi 20,000
Multi-National Consultants Grp-
C/P Pan American Cap Grp., Inc. 50,000
Brasel Family Partners, Ltd. 45,000
Business Development Corp. 25,000
Benedetto Casale 30,000
Paul Dragul 20,000
Clifford Enten 10,000
Paul Ernst 10,000
Heather M. Evans 15,000
Fairway Capital Partners, LLC 20,000
Jeffrey W. Felton 15,000
Thomas A. Forti 20,000
Robert A. Germiquet 10,000
Great Expectations Family Ltd. Partnership 150,000
Aaron A. Grunfeld 20,000
Heritage Oil Company 10,000
Arthur Kassoff Rev. Trust 20,000
Charles F. Kirby 20,000
Cynthia and Michael Kirby 10,000
Lisa Kirby 20,000
Mark E. or Constance Mass 5,000
Mathis Family Partners, Ltd. 100,000
Sharon McDonald 10,000
Michael O'Hare 20,000
J. J. Peirce 25,000
LTC David R. Plaza 5,000
Jeff P. Ploen 50,000
Carol and Paul Rivello 45,000
Len H. Rothstein 25,000
II-3
Steven Schultz 20,000
R.A. Strahl 10,000
James W. Toot 50,000
Bonnie and Len Turano 15,000
Lawrence Underwood 25,000
James Scibelli 155,000
Andrew Benavides 5,000
GJM Trading Partners, LTD 180,000
USA Ventures 40,000
Patricia West Willox 20,000
Susan Santage 10,000
The Bailey Family Trust 25,000
David W. Mork 5,000
Nana B. Schov C/F Andreas B.
Mork UTMA Co 15,000
Total Units 1,500,000
(v) In June 2001 we issued an aggregate of 125,000 Class D warrants for
consulting services to two accredited investors, James Scibelli (100,000
warrants) and The Kabot Group, LLC (25,000 warrants). We valued the warrants at
$.10 each.
(vi) In October 2001 we issued 250,000 Class E warrants to two accredited
investors, GJM Trading Partners, Ltd. (125,000 warrants) and Roberts & Green,
Inc. (125,000 warrants), as additional consideration for a $1,000,000 credit
facility. We valued the warrants at $.10 each.
(vii) In 2000 and 2001 we issued an aggregate of 650,000 stock options
under our 2000 Stock Option Plan to the following executive officers, employees
and consultants.
Number of Shares
Name Underlying Options
---- ------------------
William and Debra Spencer 50,000
Derek Boosey 115,000
Patrick Millsap 30,000
Yue Ling Chen 25,000
Jandra Thomas 40,000
Robert Hesslink 25,000
Michelle Posey 15,000
James Scibelli 100,000
William and Debra Spencer 125,000
Tony and Alicia Gwynn 100,000
Maurile C. Tremblay 25,000
Total Stock Options 650,000
(viii) In April 2002 we issued stock options to purchase 600,000 shares of
our common stock exercisable at $1.10 per share to Thomas Weinberger for
consulting services involving the marketing of our Celedrin products.
II-4
With respect to the above securities issuances, the Registrant relied on
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") in
connection with the exchange of securities described in (i) above and upon Rule
506 under the Securities Act in connection with securities issued under (ii),
(iii), (iv), (v) and (vi) above.
No advertising or general solicitation was employed in offering the
securities. The securities were issued to a limited number of persons all of
whom were either stockholders of Imagenetix, Inc. in connection with our
acquisition of Imagenetix, Inc or were accredited investors as that term is
defined in Rule 501 of Regulation D under the Securities Act. All were capable
of analyzing the merits and risks of their investment, acknowledged in writing
that they were acquiring the securities for investment and not with a view
toward distribution or resale, and understood the speculative nature of their
investment. All securities issued contained a restrictive legend prohibiting
transfer of the shares except in accordance with federal securities laws.
ITEM 27. EXHIBIT INDEX.
Exhibit No. Title
----------- -----
3.01 Articles of Incorporation of the Registrant (1)
3.02 Bylaws of the Registrant (1)
3.03 Amendment to Articles of Incorporation (Name change) (2)
5.01 Opinion of Gary A. Agron regarding legality (2)
10.01 Celadrin(TM)Supply Agreement with Organic Technologies (2)
10.02 Agreement with Natrol (2)
10.03 Supply and Distribution Agreement with The Enrich
Corporation (Unicity) (2)
10.04 Office Lease (2)
10.05 Security Agreement (2)
10.06 Exchange Agreement dated March 23, 1999 (1)
10.07 Agreement with Tony and Alicia Gwynn (2)
10.08 Agreement with J Paul Consulting Corp. (2)
10.09 Line of Credit Agreement (2)
10.10 Modification to Enrich (Unicity) Agreement (2)
23.01 Consent of Gary A. Agron (see 5.01 above) (2)
23.02 Consent of Pritchett Siler Hardy (2)
23.03 Consent of Pritchett Siler Hardy (2)
23.04 Consent of Pritchett Siler Hardy (2)
23.05 Consent of Pritchett Siler Hardy (2)
23.06 Consent of Pritchett Siler Hardy (2)
23.07 Consent of Pritchett Siler Hardy (2)
23.08 Consent of Pritchett, Siler & Hardy, P.C.
(1) Incorporated by reference to our Registration Statement on Form SB-1, file
number 333-87535, filed on September 22, 1999.
(2) Previously Filed.
II-5
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registration of expenses incurred or paid by a director, officer
or controlling person to the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof), which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in San Diego, California, on July 8, 2002.
Imagenetix, Inc.
By: /s/ William P. Spencer
--------------------------
William P. Spencer, Chief Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William P. Spencer Chief Executive Officer, July 8, 2002
- ---------------------- President and Director
William P. Spencer
/s/ Debra L. Spencer Secretary, Treasurer July 8, 2002
- ---------------------- (Chief Financial Officer and
Debra L. Spencer Principal Accounting Officer)
and Director
/s/ Peter H. Antoniou Director July 8, 2002
- ----------------------
Peter H. Antoniou
II-7
EXHIBIT INDEX
Exhibit No. Title
----------- -----
3.01 Articles of Incorporation of the Registrant (1)
3.02 Bylaws of the Registrant (1)
3.03 Amendment to Articles of Incorporation (Name change) (2)
5.01 Opinion of Gary A. Agron regarding legality (2)
10.01 Celadrin(TM)Supply Agreement with Organic Technologies (2)
10.02 Agreement with Natrol (2)
10.03 Supply and Distribution Agreement with The Enrich
Corporation (Unicity) (2)
10.04 Office Lease (2)
10.05 Security Agreement (2)
10.06 Exchange Agreement dated March 23, 1999 (1)
10.07 Agreement with Tony and Alicia Gwynn (2)
10.08 Agreement with J Paul Consulting Corp. (2)
10.09 Line of Credit Agreement (2)
10.10 Modification to Enrich (Unicity) Agreement (2)
23.01 Consent of Gary A. Agron (see 5.01 above) (2)
23.02 Consent of Pritchett Siler Hardy (2)
23.03 Consent of Pritchett Siler Hardy (2)
24.04 Consent of Pritchett Siler Hardy (2)
24.05 Consent of Pritchett Siler Hardy (2)
24.06 Consent of Pritchett Siler Hardy (2)
24.07 Consent of Pritchett Siler Hardy (2)
24.08 Consent of Pritchett, Siler & Hardy, P.C.
(1) Incorporated by reference to our Registration Statement on Form SB-1, file
number 333-87535, filed on September 22, 1999.
(2) Previously Filed.