As filed with the Securities and Exchange Commission on November _, 1999
Registration No. __________
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROEX, INC.
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(Name of Small Business Issuer in its charter)
California 2833 86-0888532
- ----------------------------- ---------------------------- ----------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Code Number)
2801 BUSINESS CENTER DRIVE, SUITE 185
IRVINE, CA 92612
(949) 476-8675
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(Address and telephone number of Registrant's principal
executive offices and principal place of business)
Rodney H. Burreson, President
Roex, Inc.
2081 Business Center Drive, Suite 185
Irvine, CA 92612
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Name, address, and telephone number of agent for service)
Copies to:
William B. Barnett, Esq.
Law Offices of William B. Barnett
15233 Ventura Boulevard, Suite 1110
Sherman Oaks, CA 91403
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
2
If this Form is filed to register additional securities for an offeringpursuant
to Rule 462(b) under the Securities Act, please check the following boxand list
the Securities Act registration number of the earlier effectiveregistration
statement for the same offering. / /
If this Form is a post-effective amendment
filed pursuant to Rule 462(c) underthe Securities Act, check the following box
and list the Securities Actregistration statement number of the earlier
effective registration statementfor the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
underthe Securities Act, check the following box and list the Securities
Actregistration statement number of the earlier effective Registration
statementfor the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434,check the following box. / /
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 of 1933, check
the following box. / /
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum
Securities to be Amount to be Offering Price Proposed Maximum Amount of
Registered Registered Per Share Aggregate Offering Registration Fee
- ----------------------- -------------- ------------------ -------------------- -----------------
Common Stock 1,000,000 $ 5.00 $5,000,000 $1,475 #
Total 1,000,000 $5,000,000 $1,475
- ----------------
# Estimated solely for purposes of calculating the registration fee.
We may amend this registration statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this registration statement shall later become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement becomes effective on a date that the Securities and
Exchange Commission, acting under Section 8(a), may determine.
3
SUBJECT TO COMPLETION. DATED NOVEMBER ___, 1999
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE'RE NOT ALLOWED TO SELL THE COMMON STOCK OFFERED BY THIS PROSPECTUS
UNTIL THE REGISTRATION STATEMENT THAT WE HAVE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") BECOMES EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS
NOT AN OFFER TO SELL OUR STOCK NOR DOES IT SOLICIT OFFERS TO BUY OUR STOCK IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
1,000,000 Shares
ROEX, INC.
Common Stock
This is an initial public offering of shares of ROEX, Inc. All of the 1,000,000
shares of common stock are being sold by ROEX directly to the investors. No
underwriter or broker/dealer has been retained by ROEX to assist in the sale of
the shares.
There is no public market for the shares covered by this offering. Upon the
close of this offering, application will be made for quotation of the common
stock on the NASD's OTC Bulletin Board under the symbol "ROEX." The initial
offering price of $5.00 per share may not reflect the market price after the
initial offering.
The shares offered in this Offering are highly speculative and involve a high
degree of risk to public investors and should be purchased only by persons who
can afford to lose their entire investment. SEE "RISK FACTORS" BEGINNING ON PAGE
7 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF OUR SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS ILLEGAL.
Underwiting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
- ---------------------- ------------ ------------------- ----------------
Per Share $ 5.00 -- $ --
- ---------------------- ------------ ------------------- ----------------
Total - Minimum $2,500,000 -- $2,500,000
- ---------------------- ------------ ------------------- ----------------
Total - Maximum $5,000,000 -- $5,000,000
- ---------------------- ------------ ------------------- ----------------
See Notes on following page.
The Offering is being made on a "best efforts, all-or-none" basis as to the
first 500,000 shares, and on a "best efforts" basis as to the remaining shares.
This means that Roex must sell the minimum number of shares (500,000) if any are
sold. If 500,000 shares are not sold within 90 days from the date of this
prospectus (which period can be extended for an additional 90 days by Roex), all
funds received will be promptly refunded to investors in full, without interest,
or deduction, in accordance with an escrow agreement with (Bank). If 500,000
shares are sold, the Offering will continue without any provision for refund:
(1) until all of the remaining 500,000 shares are sold; (2) until 90 days (up to
180 days if so extended) from the date of this prospectus, or (3) upon the prior
termination of the Offering by Roex, whichever occurs first
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Notes to Table
(1) Although there are currently no placement agents or NASD broker/dealers
associated with our offering, we may retain them to assist us in selling
the shares. We may pay selling commissions to such placement agents and/or
broker/dealers of up to 13% of the gross offering proceeds.
(2) The Proceeds will be reduced by other expenses of the Offering, such as
legal, accounting and printing, payable by Roex estimated to be $200,000.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from or
additional to that contained in this prospectus. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of time of delivery of this prospectus or of any sale of our common stock.
ADDITIONAL INFORMATION IS AVAILABLE
This prospectus is part of a registration statement on Form SB-2 filed under the
Securities Act of 1933, as amended (which is referred to later as the
"Securities Act"). This prospectus does not contain all of the information in
the Registration Statement and its exhibits. Statements in this prospectus about
any contract or other document are just summaries. You may be able to read the
complete document as an exhibit to the Registration Statement.
Roex will have to file reports under the Securities Exchange Act of 1934, as
amended (which is referred to later as the "Exchange Act"). You may read and
copy the Registration Statement and our report at the Securities and Exchange
Commission's (which is referred to later as the "Commission") public reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, Seven World Trade
Center, 13th Floor, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. (You may telephone the Commission's Public
Reference Branch at 800-SEC-0330.) Our Registration Statement and reports are
also available on the Commission's Internet site at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing financial
statements audited by an independent public accounting firm after the end of
each fiscal year.
PROSPECTUS SUMMARY
The following summary does not contain all the information that may be important
to you. You should read this entire prospectus carefully, especially "Risk
Factors" and the financial statements and related notes included elsewhere in
this prospectus, before deciding to invest in shares of our common stock. This
prospectus contains forward-looking statements that are based upon the beliefs
of our management, but involve risks and uncertainties. Our actual results or
experience could differ significantly from the results discussed in the
forward-looking statements.
5
ROEX
Our company, Roex, Inc. ("the Company" or "Roex"), was incorporated in
California on October 5, 1994 to develop and market its own line of dietary
supplement products using scientifically based branded ingredients. Our founder
and President, Rodney H. Burreson, has been an athlete and body builder for a
number of years and has experienced a myriad of ailments and injuries resulting
from these activities. He became committed to finding and developing
non-pharmaceutical solutions to improve his own quality of life. Not content
with the then current products and formulas on the market, Mr. Burreson, through
education and research, began to develop his own formulas that combined the
highest quality and best ingredients to form more comprehensive products that
would meet his own specific health needs. The Company's first product was the
super antioxidant, called Procyanidin or PC-95, a grape seed extract, which was
first sold in April 1995. Since introducing PC-95, the Company has added twelve
more dietary supplement products to its product line and is committed to
providing only the highest quality products to meet its customers' specific
health needs. The Company, has grown from under a million dollars of annual
sales to approximately $4 million for the year ended December 31, 1998, and in
excess of $4 million for the first nine months of 1999. The Company currently
markets its products primarily through radio programming. Mr. Burreson appears
live on local talk radio shows in New York, Los Angeles and Southern Florida.
The format is one-half and one-hour radio infomercials, with interactive
customer call-ins. We have recently added the Internet as a vehicle for
marketing the Roex products.
Our Address/How to Contact Us
Our principal executive office is located at 2081 Business Center Drive, Suite
185, Irvine, California 92612 and our telephone number is (949) 476-8675, our
FAX number is (949) 476-8682. Our main website address is www.roex.com.
THE OFFERING
Common Stock offered
by the Company(1). . . . . . . . . 1,000,000 Shares (maximum offering)
. . . . . . . . . 500,000 Shares (minimum offering)
Common Stock to be outstanding
after this Offering . . . . . . . 6,288,584 Shares (maximum offering)
. . . . . . . 5,788,584 Shares (minimum offering)
Use of Proceeds . . . . . . . . . . . We will use the proceeds to,
increase our inventory of
products, add new radio markets,
reduce our debt and for working
capital and other general corporate
purposes.
Proposed NASD's OTC
Bulletin Board Symbol . . . . . . . ROEX
HOW TO PURCHASE SHARES
Included as the final page of this prospectus is a subscription agreement which
must be completed by the potential investors in order to purchase the Common
Stock offered hereby. The page containing the subscription agreement is
perforated to enable it to be detached. In order to subscribe to purchase the
Common Stock, please detach, complete and execute the subscription agreement,
include a check made payable to "Roex Subscription Account" and return the
executed subscription agreement and payment to the Roex Subscription Account,
2081 Business Center Drive, Suite 185, Irvine, CA 92612 as soon as possible. The
minimum amount that may be subscribed for is 100 shares. There is no maximum.
Subscriptions will be given priority based upon their date of receipt. In the
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event that the minimum number of 500,000 shares is not subscribed, all amounts
received will be returned without interest or deduction. In the event that the
Company terminates this offering after the Initial Closing, all amounts received
shall be returned without interest or deduction.
SUMMARY OF FINANCIAL INFORMATION
The following table summarizes the financial data of our business. You should
read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and notes to those statements included elsewhere in this prospectus.
Nine Year
Months Ended Ended
September 30 December 31
1999 1998 1998 1997
----------- ----------- ------------ -----------
(Unaudited) (Audited)
Operating Data
Net Sales $ 4,115,068 $ 3,002,565 $ 3,934,910 $ 3,023,518
Net Income (Loss) $ 417,212 $ (437,327) $ (463,264) $ (511,847)
Net Income (Loss)
Per Share:
Basic and Diluted $ 0.08 $ (0.09) $ (0.10) $ (0.11)
Weighted Average
Common Equivalent
Shares Outstanding:
Basic and Diluted 5,288,201 4,686,059 4,826,870 4,536,233
September 30 December 31
1999 1998
------------ -------------
(Unaudited) (Audited)
Balance Sheet Data
Working Capital(Deficit) $ (312,448) $ (267,223)
Total Assets 628,623 383,182
Net Stockholders'
Equity(Deficit) (512,079) (940,541)
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RISK FACTORS
An investment in our Common Stock offered hereby is speculative in nature and
involves a high degree of risk. In addition to the other information contained
in this prospectus, the following factors should be considered carefully before
making any investment decisions with respect to purchasing our Common Stock.
This prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Roex's actual results may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause or contribute to such difference include, but are not
limited to, those discussed below, as well as those discussed elsewhere in this
prospectus.
Risks Associated With Our Financial Position.
Our business has only recently shown a profit. Since we commenced operations in
October 1994, we have accumulated net losses through September 30, 1999 of
$1,144,766 and a stockholders' deficit of $512,079. Although we operated
profitably for the nine months ended September 30, 1999, we still had a net
working capital deficit of $312,448. Although we expect to be profitable for the
year ending December 31, 1999, we cannot assure that a year-end profit will be
realized or that profitability will continue in the future.
We have a high level of debt. As of September 30, 1999, our debt, including
short term and long term, was approximately $1,140,000, of which, $100,000 was
obtained as a bridge finance for this offering, while our total assets were only
$628,623. We intend to use approximately $800,000 of the proceeds from this
offering to reduce debt substantially.
Best Efforts Offering; Minimum Number of Shares to be Sold. Roex is offering its
Common Stock on a "best efforts" basis. There can be no assurance that all of
the 1,000,000 shares of Common Stock will be sold. If we are unable to sell at
least 500,000 shares of our Common Stock, this offering will be cancelled and
all monies collected from subscribers and held in escrow will be returned to
such subscribers without interest or deduction. Furthermore, if all of the
1,000,000 shares of Common Stock being offered are not sold, we may be unable to
fund all the intended uses described herein. If net proceeds from this offering
are less than anticipated, funds from alternative sources or working capital
generated by us may not be sufficient to fund any uses not financed by the
proceeds of the offering. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" and "Plan of Distribution."
Offering Price has been arbitrarily determined by management. The initial public
offering price of the Common Stock has been arbitrarily determined by us and may
not be indicative of the price at which shares of Common Stock will sell after
this offering. In determining the offering price, our Board of Directors
considered, among other things, our earnings, its view of our prospects, the
earnings of comparable publicly traded nutritional supplement companies and the
trading price of the stock of those companies. We make no representations as to
any objectively reasonable value of the Common Stock. Since we have not retained
an underwriter for purposes of this offering, the offering price has not been
subject to evaluation by any third party as would be the case in an underwritten
offering. Prices for the shares of our Common Stock after this offering will be
determined in the available market and may be influenced by many factors,
including the depth and liquidity of the market for our Common Stock, the
perception of Roex by other investors, the nutritional supplement industry as a
whole, and general economic and market conditions.
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The Effect of Unfavorable Publicity. We believe that the dietary supplement
market is affected by national media attention regarding the consumption of
dietary supplements. Future scientific research or publicity may not be
favorable to the dietary supplement industry or to any particular product, and
may not be consistent with earlier favorable research or publicity. Because we
are dependent on consumers' perceptions, any adverse publicity associated with
illness or other adverse effects resulting from the consumption of our products,
or any similar products distributed by other companies, and future reports of
research that are perceived as less favorable or that question earlier research,
could have a material adverse effect on our business, financial condition and
results of operations. Thus, the mere publication of reports asserting that such
products may be harmful, or questioning their efficacy could have a material
adverse effect on our business, regardless of whether such reports are
scientifically supported or whether the claimed harmful effects would be present
at the dosages recommended for such products. See "--Absence of Conclusive
Clinical Studies."
We Are Dependent On New Radio Markets for Future Growth. We believe the growth
of our net sales is substantially dependent upon our ability to open up new
radio markets. Currently, 90% of our sales are generated from our radio health
shows in New York City, Los Angeles, Miami and Tampa. Our business plan is to
expand our radio health show to between four and eight additional cities in the
next twelve months. The success of these radio shows depend on a number of facts
including the following:
. selection of radio stations and time slots that appeal to the demographics
of our customers (e.g. individuals over 45 years of age)
. consumer acceptance (ratings) of the show
. consumer acceptance of our products advertised on the show
. competition from other health and talk shows on the same or other stations
. changes in radio station policy which removes the program from their
schedule
We can't guarantee that we will be successful in new radio markets. In addition,
even if we are successful in some new radio markets, we may not maintain that
success over time.
Our Business is subject to compliance with Various Government Regulations. We
are subject to regulation by numerous governmental agencies, the most active of
which is the U.S. Food and Drug Administration (the "FDA"), which regulates our
products under the Federal Food, Drug and Cosmetic Act (the "FDCA"). In
addition, the Federal Communications Commission ("FCC") regulates "on air"
content of radio shows. These regulations involve, among other things:
- - the formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of our products;
- - health and safety;
- - product claims and advertising by us.
If we fail to comply with applicable FDA or FCC regulatory requirements, it may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines and criminal prosecution.
If We Lose Our Key Personnel, Especially Our Founder and Spokesperson, Rodney
Burreson, Our Business May Suffer. We depend substantially on the continued
services and performance of our senior management and, in particular, Mr.
Burreson. Our business may be hurt if he or one or more of our senior management
or key employees leave Roex. Although we have an employment agreement with Mr.
Burreson for an initial term of five years, this does not guarantee that he will
remain with us for the entire term. If we lose the services of Mr. Burreson or
any of these executive officers or other key employees, we may not be able to
attract and retain additional qualified personnel to fill their positions in the
future. We have recently obtained a $1,000,000 key man life insurance policy, of
9
which we will be the beneficiary, on the life of Mr. Burreson.
Failure Of Our Outside Suppliers To Provide Our Products In Sufficient
Quantities and In a Timely Fashion May Cause Our Business To Suffer. All of our
products are provided by outside suppliers. Our profit margins and ability to
deliver our products on a timely basis are dependent upon the ability of our
outside suppliers to provide quality products in a timely and
cost-efficient manner. Three large companies provide 60% of our products. Our
ability to enter new markets and sustain satisfactory levels of sales in each
market is dependent upon the ability of these or other suitable outside
suppliers to respond to our needs. Further, the development of new products in
the future will depend in part on these outside suppliers. The failure of any
supplier to provide the products or ingredients of products that we require
could have an adverse effect on our business, profitability and growth
prospects.
We believe we have dependable alternative suppliers for all our ingredients. We
believe that we can produce or replace any of our ingredients if our current
suppliers are unable to supply our ingredients. However, any delay in replacing
or substituting such ingredients could also hurt our business.
If Our Current Or New Products and Ingredients Have Harmful Side Effects or Do
Not Have the Healthful Effects Intended, Our Business May Suffer. Although many
of the ingredients in our products are vitamins, minerals, herbs and other
substances that have been consumed by individuals for many years, some of our
products contain newly-introduced ingredients or combinations of ingredients. We
believe all of our products are safe when taken as directed by Roex, but there
is a lack of long-term experience with individuals consuming our
newly-introduced product ingredients or combinations of ingredients. Even though
we perform research and tests when we formulate and produce our products, we
cannot guarantee that our products, even when used as directed, will have the
healthful effects intended or will not have harmful effects on our customers. If
any of our products were shown to be harmful or negative publicity resulted from
an individual who was allegedly harmed by one of our products, it could hurt our
business, profitability and growth prospects.
We are smaller than most of our national competitors and, consequently, we may
lack the financial resources to enter new markets or increase existing market
share. We compete with many companies marketing products similar to the ones we
sell. Most of these companies have longer histories, more products and greater
name recognition and financial resources than we do. Many of our competitors
have thousands of distributors operating under network marketing systems and
others are selling products through the traditional retail stores. Our primary
competitors include Metagenics, Twin Labs, Enzymatic Therapy, Country Life,
Natreol and Now Foods. Our business, profitability and growth prospects could be
hurt if we are unable to compete successfully against our competitors.
If The Board of Directors Issues Preferred Stock, The Rights and Market Price of
Our Common Stock May Be Adversely Affected. The board of directors has the
authority to issue one or more classes or series of preferred stock without
shareholder approval. The board of directors may also change the number of
shares constituting any series of preferred stock and may fix and determine the
designation and preferences, limitations and relative rights, including voting
rights, of these shares of preferred stock, in each case without shareholder
approval. Accordingly, preferred stock may be given preference over the common
stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of common stock.
Undesignated preferred stock may enable the board of directors to discourage a
change in control by means of a tender offer, proxy contest, merger or
otherwise, and thereby protect our management, which may adversely affect the
market price and rights of holders of our common stock.
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If Our Information Technology Systems Fail, Our Operations Could Suffer. Our
business is very dependent upon information technology and its related systems
to manage and operate many of our key business functions, including:
. order processing;
. customer service;
. distribution of products;
. commission processing; and
. cash receipts and payments
. marketing inventory
. ordering ingredients and product.
If our information technology systems fail, we would not be able to conduct our
day-to-day business. Depending upon the severity and duration of the failure and
our ability to remedy the cause, our business could be hurt.
If We Do Not Adequately Address Year 2000 Issues, Our Business May Suffer. The
risks posed by Year 2000 issues could hurt our business in a number of
significant ways. Our information technology system is designed to comply with
Year 2000 considerations, however, unforeseen or unpreventable circumstances
could cause our information technology system could be substantially impaired or
cease to operate. We have not made any material expenditures to address the Year
2000 problem and we do not anticipate that we will be required to make any such
material expenditure in the future. Additionally, we rely on the information
technology of our vendors, associates and other third parties, which may not be
Year 2000 compliant. Year 2000 problems experienced by us, our associates, our
vendors or other third parties could hurt our business. If any or all of our
applications fail to perform on January 1, 2000, we will resort to temporary
manual processing which would slow our operations and decrease our efficiency.
We have begun contacting our vendors and other third parties to ascertain their
Year 2000 status. Failure to achieve Year 2000 readiness by any of our vendors
or other third parties could disrupt our operations and hurt our business. We
intend to continue to make efforts to ensure that third parties with whom we
have relationships are Year 2000 compliant.
Factors that May Adversely Affect Our Common Stock.
- - There may be no active public market for our common stock after this
offering. Because this is the initial public offering of our common stock,
we can't assure you that there will be an active public market for our
shares. And the stock market -- especially the market for our shares -- may
be highly volatile because of general market conditions, as well as factors
relating to our own performance and our ability to meet market
expectations.
- - There may be price volatility. Upon completion of this offering, it is
expected that the Common Stock will be quoted on the Nasdaq Small Cap
Market, which has experienced and is likely to experience in the future
significant price and volume fluctuations which could adversely affect the
market price of the Common Stock without regard to the operating
performance of the Company. In addition, the Company believes that factors
such as quarterly fluctuations in the financial results of the Company, the
Company's earnings, changes in earnings estimates by analysts, financial
and business announcements by the Company or its competitors, the overall
economy and the condition of the financial markets could cause the market
price of the Common Stock to fluctuate substantially. There can be no
assurance that the market price of the Common Stock will not decline below
the initial public offering price.
- - We don't plan to pay dividends. We don't expect to pay dividends on common
stock anytime soon. We expect to use all earnings, and the proceeds from
this offering, to pay outstanding debt and to develop our business. Our
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board will decide on any future payment of dividends, depending on our
results of operations, financial condition, capital requirements, and any
other relevant factors.
- - Shares Eligible For Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price for the Common Stock. Upon completion of this
offering, there is expected to be a minimum of 5,788,584 shares and a
maximum of 6,288,584 shares of Common Stock outstanding. All of the shares
offered hereby will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Rule 144") described below.
The remaining 5,288,584 shares of Common Stock outstanding upon completion
of this offering are "restricted securities," as that term is defined in
Rule 144 (the "Restricted Shares"). All of the Restricted Shares will be
eligible for sale in the open market after the effective date of the
Registration Statement, all under and subject to the restrictions contained
in Rule 144 and Rule 701.
Prior to the completion of this offering, the Company intends to enter into
lock-up agreements (the "Lock-up Agreements") with each of the Company's
officers, directors and shareholders owning 5% or more of the Company's
Common Stock. Pursuant to the Lock-up Agreements, each such shareholder
will agree, subject to certain exceptions, not to sell or otherwise dispose
of any of its shares of Common Stock until 180 days after the completion of
this offering (the "Lock-up Expiration Date").
Under the Company's 1999 Stock Incentive Plan (the "1999 Stock Incentive
Plan"), as of September 30, 1999, options to purchase 220,000 shares of
Common Stock were outstanding, none of which will become exercisable until
90 days after the completion of this offering and 135,833 of which will be
exercisable on September 30, 2000, assuming completion of this offering. An
additional 780,000 remain available for future option grants. The Company
intends to register on Form S-8 under the Securities Act the offering and
sale of Common Stock issuable under the 1999 Stock Incentive Plan as soon
as practicable after the date of this Prospectus.
In addition, 496,350 shares of Common Stock are issuable upon the exercise
of outstanding non-qualified stock options at an exercise price of $.50 to
$1.65 per share, which are currently exercisable.
- - You will experience dilution. You'll experience immediate and substantial
dilution in negative net tangible book value. Our net tangible book value
as of September 30, 1999 was a negative $512,079, or a negative $0.10 per
share. After giving effect to the maximum offering at an assumed offering
price to the public of $5.00 per share, and our planned use of the offering
proceeds as though both had occurred on September 30, 1999, our tangible
book value at that date would have been $4,787,921. This results in an
immediate increase in net tangible book value to our existing stockholders
of $0.68 per share and an immediate dilution to you of $4.32 per share.
FORWARD-LOOKING STATEMENTS
In General
This prospectus contains statements that plan for or anticipate the future.
Forward-looking statements include statements about the future of the vitamin
supplement industry, statements about our future business plans and strategies,
and most 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. 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
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example, a few of the uncertainties that could affect the accuracy of
forward-looking statements include:
(A) changes in general economic and business conditions affecting the vitamin
supplement industry;
(B) our ability to design, order and stock merchandise that appeals to our
customers;
(C) technical developments that make our products or services obsolete;
(D) our costs in the pricing of our products;
(E) the level of demand for our products; and
(F) changes in our business strategies.
DILUTION
At September 30, 1999, we had a negative net tangible book value of $512,079, or
approximately $(.10) per share of outstanding Common Stock. "Net tangible book
value" per share represents the amount of our total tangible assets less our
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the receipt of the estimated net proceeds from our sale
of the 500,000 shares and 1,000,000 shares of Common Stock offered hereby, at an
assumed initial public offering price of $5.00 per share of Common Stock (after
deducting Offering expenses payable by us), the net tangible book value of Roex
at September 30, 1999, would have been approximately $1,787,921 and $4,287,921
or $.31 and $.68 per share of Common Stock, respectively. This would represent
an immediate increase in the net tangible book value per share of Common Stock
of $.41 (if 500,000 shares are sold) and $.78 (if 1,000,000 shares are sold) to
existing shareholders and an immediate dilution of $4.69, or $4.32,
respectively, per share to new investors purchasing shares of Common Stock in
the Offering. "Dilution" is determined by subtracting net tangible book value
per share after the Offering from the offering price to investors.
The following table illustrates this per share dilution:
If 500,000 If 1,000,000
Shares are Shares are
Sold Sold
-------------- -------------
Initial offering price per share of Common Stock $ 5.00 $ 5.00
Net tangible book value per share of Common Stock
Before the Offering $ (.10) $ (.10)
Increase attributable to new investors $ 0.41 $ 0.78
Proforma net tangible book value after Offering $ .31 $ .68
Dilution to new investors $ 4.69 $ 4.32
Percentage of dilution to new investors 94% 86%
The following table summarizes the number of shares of Common Stock purchased
from the Company (assuming the sale of the minimum offering of 500,000 shares),
the total consideration paid and the average price per share paid by (i)
existing shareholders of the Company at September 30, 1999, and (ii) new
13
investors purchasing shares of Common Stock in this Offering, before deducting
the underwriting discounts and estimated offering expenses payable by us.
Shares Purchased Consideration Paid
---------------------- -----------------------
Number Percentage Amount Percentage
----------- ----------- ---------- -----------
Existing Shareholders 5,288,584 92% $ 632,687 20%
New Investors 500,000 8% $2,500,000 80%
----------- ---------- ---------- ---------
Total 5,788,584 100% $3,132,687 100%
The following table summarizes the number of shares of Common Stock purchased
from Roex (assuming the sale of the maximum offering of 1,000,000 shares), the
total consideration paid and the average price per share paid by (i) existing
shareholders of Roex at September 30, 1999, and (ii) new investors purchasing
shares of Common Stock in this Offering, before deducting commissions and
estimated offering expenses payable by us.
Shares Purchased Consideration Paid
----------------------- ---------------------------
Number Percentage Amount Percentage
----------- ----------- ------------- -----------
Existing Shareholders 5,288,584 84% $ 632,687 11%
New Investors 1,000,000 16% $5,000,000 89%
----------- ----------- ------------- -----------
Total 6,288,564 100% $5,632,687 100%
USE OF PROCEEDS
The net proceeds to Roex from the sale of the 500,000 shares and 1,000,000
shares of Common Stock offered hereby at an offering price of $5.00 per share,
after deducting offering expenses payable by us, estimated to total
approximately $200,000, are $2,300,000 and $4,800,000, respectively.
The following table sets forth our anticipated use of the net offering proceeds,
assuming the sale, respectively, of the minimum of 500,000 shares and the
maximum of 1,000,000 shares of Common Stock offered hereby.
Minimum Maximum
500,000 1,000,000
Shares Sold Shares Sold
------------- -------------
Sources of Funds:
Offering Proceeds $ 2,500,000 $ 5,000,000
Offering Expenses (1) 200,000 200,000
------------- ------------
Net Proceeds $ 2,300,000 $ 4,800,000
------------- ------------
Use of Net Proceeds:
Expand Radio Markets (2) $ 650,000 $ 770,000
Marketing and Advertising (3) 200,000 880,000
Debt Reduction (4) 800,000 800,000
New Product Development (5) 400,000
Inventory (6) 150,000 200,000
Video Production (7) 200,000 300,000
Developing Internet e-commerce(8) 150,000 350,000
Working Capital (9) 150,000 $ 1,100,000
------------- ------------
Total Uses $ 2,300,000 $ 4,800,000
------------- ------------
14
- -------------------------------------
(1) Legal, accounting and Placement Agent and printing.
(2) Adding radio broadcasts in four to five cities.
(3) Marketing and advertising to support our base and our growth.
(4) Reduction of a portion of our long term and short term debt due to Bison
Development and others. The interest rates for these long and short term
debts range from 12% to 16%. As of September 30, 1999, $878,226 was
outstanding under these debt obligations. See "Note 6 to Notes to the
Financial Statements."
(5) New product development is expected to result in the introduction of three
or four new products per year.
(6) Inventory needs to increase to accommodate a higher sales level.
(7) The Company is planning an exercise video to complement its nutritional
supplements.
(8) This is for expansion of Roex's e-commerce on the Internet.
(9) Includes overhead and administrative expenses.
The foregoing represents our best estimate of the allocation of the net proceeds
of the Offering, based upon our current status of operations and anticipated
business plans. It is possible that the application of funds may vary depending
on numerous factors including, but not limited to, changes in the economic
climate or unanticipated complications, delay and expenses. We currently
estimate that the net proceeds from this Offering will be sufficient to meet our
liquidity and working capital requirements for the next 12 months. However,
there can be no assurance that the net proceeds of this Offering will satisfy
our requirements for any particular period of time. Additional financing may be
required to implement our long-term business plan. There can be no assurance
that any such additional financing will be available when needed on terms
acceptable to us, if at all. Pending use of the proceeds of this Offering, we
may make temporary investments in bank certificates of deposit, interest bearing
savings accounts, prime commercial paper, U.S. Government obligations and money
market funds. Any income derived from these short term investments will be used
for working capital. Because we anticipate selling the shares through the
efforts of our officers and directors, the numbers above do not include any
deductions for selling commissions. If broker/dealers are used in the sale of
the shares, up to 13% of any gross proceeds raised in this offering will
probably be payable to one or more NASD registered broker/dealers. In such
event, net proceeds to us will be decreased and the use of proceeds may be
proportionately reallocated in management's sole discretion. There are no
current agreements, arrangements or other understandings in connection with any
of the foregoing.
DIVIDEND POLICY
We have never paid dividends and do not anticipate paying dividends in the
foreseeable future.
15
CAPITALIZATION
The following table sets forth, as of September 30, 1999, the capitalization of
Roex, actual and as adjusted for the issuance and sale of 500,000 and 1,000,000
shares of Common Stock offered hereby at $5.00 per share, after deducting
estimated Offering expenses and underwriting discounts and the initial
application of the proceeds therefrom.
As As
Actual Adjusted(2) Adjusted(3)
---------- ----------- -----------
Long-term Debt . . . . . . . . . . . . . $ 358,115 $ -0- $ -0-
Stockholders' equity Common Stock(no
par value) 15,000,000 shares authorized;
5,288,584 shares issued and outstanding
(actual)(1); 5,788,584 as
adjusted (minimum)(2) and 6,288,584
as adjusted (maximum)(3) . . . . . . . $ 677,687 $ 2,977,687 $5,477,687
Preferred Stock, $.01 par value;
5,000,000 Shares authorized; no
shares issued and outstanding
(actual) as adjusted (3). . . . . . . . 0 0 0
Additional paid-in capital. . . . . . . . $ 35,000 $ 35,000 $ 35,000
Accumulated Deficit . . . . . . . . . . (1,144,766) (1,144,766) (1,144,766)
Stock Receivable. . . . . . . . . . . . (80,000) (80,000) (80,000)
------------ ----------- ----------
Total stockholders' equity (deficit). . (512,009) 1,787,921 4,287,921
Total capitalization (deficit). . . . . $ (153,964) $ 1,787,921 $4,287,921
============ =========== ===========
(1) Excludes the issuance of (i) up to 100,000 shares of Common Stock
issuable pursuant to the Placement Agent's Warrants; and (ii) up to 903,850
shares of Common Stock reserved for issuance under outstanding stock options.
(2) As adjusted to give effect to the issuance of 500,000 shares of Common
Stock offered by the Company hereby at an assumed offering price of $5.00 per
share and the application of the estimated net proceeds therefrom.
(3) As adjusted to give effect to the sale of 1,000,000 shares of Common
Stock offered by the Company hereby at an assumed offering price of $5.00 per
share and the application of the estimated net proceeds therefrom.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
for the nine months ended September 30, 1999 and 1998 and the years ended
December 31, 1998 and 1997 should be read in conjunction with our financial
statements and related notes thereto, and other financial data included
elsewhere in this prospectus.
Results of Operations
Nine month periods ended September 30 1999 and 1998.
Components of revenue and expenses as a percentage of revenue are given in the
following table.
16
Nine Months Ended Fiscal Year Ended
September 30 December 31
1999 1998 1998 1997
----- ----- ----- ----
Revenues 100% 100% 100% 100%
Cogs 23% 28% 27% 28%
Gross Profit 77% 72% 73% 72%
Operating Expenses
Payroll 27% 32% 32% 36%
Sales & Marketing 20% 24% 24% 26%
General & Admin. 18% 21% 20% 23%
Other 2% 10% 9% 4%
Net Income (Loss) 10% -15% -12% 17%
Sales are recognized when products are shipped. For the nine months ended
September 30, 1999, net sales increased to $4,115,068 which is 37% greater than
the same period in 1998. The increase was due to an improved marketing effort to
better establish our brand name, the introduction of new products and an
increase in our loyal steady reordering from our existing customer base.
During the same period our operating margin increased to 77% from 72% because of
greater buying economies, and our operating expenses were reduced to 67% of
sales from 87%, because of greater internal efficiencies. Net income before
taxes rose to $417,212 (10%) from a loss of $437,327 (15%) because of a
combination of increased sales, improved profit margins and operating
efficiencies. This resulted in a profit of $.08 per share compared to a loss of
$.09 for the same period of the prior year.
Monthly sales for the first nine months of 1999 and 1998 are as follows.
1999 1998
---- ----
(In Thousands)
January $ 380 $ 332
February 354 311
March 516 347
April 460 325
May 472 300
June 480 418
July 458 300
August 485 330
September 510 340
------- -------
$4,115 $3,003
Years ended December 31, 1998 and 1997.
For the year ended December 31, 1998, our net sales showed a 30% increase over
1997. Profit margins increased slightly to 73% compared to 72%. Operating
expenses decrease to 85% of sales from 89%. The result was a pretax loss of 12%
of sales compared to 17% the prior year. The per share loss was slightly reduced
to $.10 from $.11.
In summary, our sales and profits have been increasing each period and we have
transitioned from heavy losses to light losses to profits.
17
Current Revenue by Market is as shown below. Total revenues are expected to
increase if the radio shows in Los Angeles and Florida increase in popularity
and as additional cities are added.
New York 70%
Los Angeles 20%
Florida 8%
Other 2%
----
100%
Liquidity and Capital Resources
Nine month period ended September 30 1999
As of September 30, 1999 our current liabilities exceeded our current assets by
$312,448, which was a 17% improvement from December 31, 1998. This improvement
occurred even with an increase of current maturities of notes and loans payable
of $361,473 due to a shift into expiration of the notes in les than 12 months.
The long term portion of notes and loans payable, less current maturities, was
reduced by $392,758, even though $100,000 was borrowed in the last quarter to
help fund this public stock offering. As of September 30, 1999 the total
stockholders' deficit was reduced by 46% to $512,079 compared to December 31,
1998. This reduction was due primarily to net income of $417,212 for the nine
month period.
Our cash as of September 30, 1999 was $151,287, a 180% increase from December
31, 1998. This was due to a $417,212 profit for the nine months, adjusted for
cash used in operations and financing. $231,512 cash was provided by operations,
including depreciation and changes in receivables, inventory and payables, with
the largest single factor being a pay down of $188,595 of trade payables.
$120,748 was used for financing activities (net of $100,000 obtained from
bridge financing agreements), with the major contributors being payments on
loans and capital leases and deferred offering costs.
Year ended December 31, 1998
At December 31, 1998 our current liabilities exceeded our current assets by
$267,223, our accumulated deficit was $1,561,978 and our stockholders' deficit
was $940,541. These negative results were primarily due to the low revenues and
high costs of building revenues to a level where we could achieve the
profitability and growth potential, which was shown for the first nine months of
1999.
For 1998 an operating loss of $463,264 was reduced to a negative $107,434 cash
provided by operations, due mainly to adjustments provided by depreciation, loan
fees and an increase in trade payables. After investing activities, including a
$59,162 private placement, cash was reduced by $85,288 for the year, leaving
$54,307.
We expect to have adequate working capital for the next 12 months, without
proceeds from this offering, mainly from cash flow from operations. Proceeds
from this offering will provide funds for growth and to pay down existing loans.
Year 2000 Compliance
Roex expects to be fully compliant by the end of the year. We are currently in
Y2K compliance with our merchant card processing center. Should any or all of
the applications currently in use fail to perform properly, Roex can switch
temporarily to a manual system without substantial losses in the operation
although our efficiency would be decreased.
18
BUSINESS
Introduction
Our company, Roex, Inc. ("us", "the Company" or "Roex"), was incorporated in
California on October 5, 1994 to develop and market its own line of dietary
supplement products using scientifically based branded ingredients. Our founder
and President, Rodney H. Burreson, has been an athlete and body builder for a
number of years and has experienced a myriad of ailments and injuries resulting
from these activities. He became committed to finding and developing
non-pharmaceutical solutions to improve his own quality of life. Not content
with the then current products and formulas on the market, Mr. Burreson, through
education and research, began to develop his own formulas that combined the
highest quality and best ingredients to form more comprehensive products that
would meet his own specific health needs. The Company's first product was the
super antioxidant, called Procyanidin or PC-95, a grape seed extract, which was
first sold in April 1995. Since introducing PC-95, the Company has added
thirteen more dietary supplement products to its product line and is committed
to providing only the highest quality products to meet its customers' specific
health needs. The Company, has grown from under a million dollars of annual
sales to approximately $4 million for the year ended December 31, 1998 and in
excess of $4 million for the first nine months of 1999. Roex remains committed
to providing the highest quality products that will continue to meet its
customers' specific health needs, now and into the next millennium. The Company
currently markets its products primarily through radio programming. Mr. Burreson
appears live on local talk radio shows in New York, Los Angeles and Southern
Florida. The format is half hour and one-hour radio infomercials, with
interactive customer call-ins. We have recently added the Internet as a vehicle
for marketing the Roex products.
Our Industry
The Dietary Supplement Industry has formally been in existence for approximately
80 years. In the 1920's, supplement pioneers began encapsulating whole foods,
specifically vegetables, for the purpose of concentrating their nutrients as
adjuncts to the daily diet. Research had just been completed showing that
vitamins, metabolic components of foods, were key constituents of the healthy
body. Many developing nations used herbs and herbal formulations as standard
recognized "medicines" for treating disease. With the advent of antibiotic
therapy in the 1930's, many of the herbs were removed from the U.S.
Pharmacopoeia and fell into disuse in this country. Vitamin research continued
at a very slow pace due to lack of funding by pharmaceutical companies to
underwrite research as synthesized chemical constituents dominated U.S.
scientific research at that time.
Over time, select health care practitioners began to notice severe problems with
the prescription medications of pharmaceutical manufacturers. Chief among these
problems were (and still are today), toxic levels and methods by which most
synthesized drugs work within the body. Further, astute clinicians began to
notice that while pharmaceuticals were "treating" a disease state, they were
doing nothing to prevent these diseases. Whole food therapy began to be
practiced, based upon many epidemiological studies that illustrated the direct
connection between diet, nutrients and health. Dietary supplement manufacturers
began to concentrate the active ingredients in the whole foods, and thus the
dietary supplement industry was born.
Today, the industry is thriving as never before in its history. According to the
January/February 1997 edition of the Nutrition Business Journal, the dietary
supplement industry is a $46 billion (U.S. dollars) global market. The industry
product is comprised of food supplements which may be broken down into a variety
of categories based on botanical and/or chemical classification of ingredients
or raw materials, such as vitamins, herbs, amino acids, botanicals, metabolites,
etc.
19
This classification brings with it a broad use of ingredients and as such, today
dietary supplements may be found in tablet, capsules, liquid or powdered form
among others, as long as the product meets the definition cited below. This
broadly based interpretation leaves room for a multiplicity of products.
Throughout this document, the term "dietary supplement" will refer to raw
material ingredients classified according to the FDA definition and made
available to the public in the form of tablets and/or capsules.
Because the original purpose of this industry was to focus on prevention of
disease as opposed to therapeutic "cure", and due to the U.S. government
creation of narrowly defined descriptions of "drugs", the benefits of dietary
supplementation in health care has frequently been overlooked in U.S. scientific
research. Only recently has any research been documented in the United States in
contrast to the European community which has long recognized nutritional
therapy, in disease prevention and cure; in fact, today the majority of clinical
research demonstrating the efficacy of nutritional and herbal therapy has come
from Europe, with Germany being the leader in herbal efficacy and scientific
documentation.
Hundreds of companies, big and small, cater to the nutritional supplement
market. Most of them manufacture and distribute using conventional distribution
channels of retail nutritional stores, drug stores or discount stores. Some sell
on the Internet. Some sell via TV or radio infomercials. Some sell through
multilevel marketing. To the best of our knowledge,Roex is the only company that
sells through talk radio with interactive listener phone calls. This method is
very effective in educating our customers and thus building a loyal following
that develops the customer confidence in Roex products because they know that
they can trust the quality and efficacy of our products. This loyalty translates
into greater repeat purchases.
Our Company
Roex products are promoted on radio shows in which health related questions of
the listening audience are answered. Roex maintains a full time telemarketing
department to expedite direct radio induced orders via a toll free "800" number
given out during the radio program. At present, Roex does 29 radio shows per
week broadcasting on 4 radio stations in New York City, Los Angeles, California,
Miami and Tampa, Florida. Roex recently entered multiple managed markets
utilizing third party sales and marketing organizations to sell Roex products to
their established customer bases. To date, these markets include independent
pharmacies, chiropractors and retail food chains. We have recently added the
Internet as a supplemental means of marketing our products.
Our Market
As a result of the Company's advertising methodology, the Company's existing
target market has become the senior citizen group, those individuals from the
age of approximately 55+ years old. Demographics testify to the strength of this
customer base, as at least half of all shoppers over the age of 50 "strongly
agree" that it is important to take a vitamin or mineral supplement every day.
According to Nielsen surveys, seniors spend more on multi-vitamins than any
other demographic group. Demographic data and forecasts anticipate an increasing
number of senior citizens in the immediate future. Roex products address health
concerns for seniors such as osteoporosis, free-radical damage, hypertension,
sleeplessness and suppressed immune function resulting in slowed or impaired
immune response throughout the body. Roex products, while not intended to
diagnose, treat, cure or prevent any disease, are used by our customers to
provide optimal bodily functions, providing incentive for use today and
tomorrow.
The Company's future market will focus on the largest purchasing population of
individuals the United States has ever known: "Baby Boomers". This is a large
new market for Roex to pursue as it has by its very nature, built-in motivators
for enhancing and maintaining health and longevity. The baby boomers not only
20
add to the number of customers, but will add "quality customers" who are capable
and willing to pay for high quality products.
Our Marketing Strategy
Our marketing strategy is built upon creating brand identity with customer
loyalty. Our customers listen to us on the radio and ask questions, hear the
questions of others and the answers of our CEO, Rod Burreson, or one of the
other two experts on our radio shows. We believe customers will continue to buy
our products because of confidence in the product, its effectiveness and its
quality. These loyal customers will accept no substitutes, because of fear of
compromise in these qualities. We now have talk radio shows in four cities and,
as we expand, we will selectively add cites and develop customer bases that are
as loyal as our present customers. To further increase revenues, we will
selectively add products for our existing customers as a result of research and
development. Our radio stations and time slots are carefully chosen because they
appeal to our demographic base, currently affluent senior citizens. When we
expand to the baby boomers we will choose appropriate radio stations and time
slots for their appeal to this group. Expansion of Internet sales will be based
upon continuing to build brand identity and providing quality information on our
web site, as well as quality products.
Roex products are currently available for purchase by consumers directly from
Roex via a toll free "800" line. Calls are handled by Roex's in-house
telemarketing department with computer access to prior ordering patterns. The
telemarketers are assigned specific customers for continuity. They are primarily
compensated by commission. We intend to build further sales by having
telemarketing personnel do outbound calling. We are also adding a web site
ordering capability. Also, we currently have limited direct sales through third
party distributors resale to their established customer bases of retail stores.
Future plans call for television "infomercials" and sales to specialty grocery
and similar stores for resale. The Company has not yet conducted any formal or
scientific marketing studies in the development of these strategies, but will do
so before committing any substantial investment. The marketing strategies
presented here are based upon consumer demand, past success of existing
marketing programs and common industry wide practices, all specialized by the
unique Roex marketing and design approach.
Radio. Roex has a unique way of marketing in that the majority of its sales are
generated by direct sales through radio programming. The Company currently
markets its products almost exclusively through radio programming. The Company's
president and founder, Rodney H. Burreson, appears live on local talk radio
shows in New York, Los Angeles, Miami and Tampa in half-hour and one-hour
infomercial formats. The shows promote Roex's products and listening audiences'
health related questions are answered. We have recently added a second radio
host to help with the heavy load of live programming, and plan to recruit
additional live radio hosts, such as nutritionists or influential health
specialists. All shows are broadcast from the Company's facilities in Irvine,
California live through ISDN telephone lines to the stations. The Company
maintains a full-time telemarketing department to expedite direct radio induced
orders via a toll free "800" number given out during the radio program. At
present, Roex presents 29 radio shows per week, broadcasting on 4 radio stations
in New York, Los Angeles, Miami and Tampa. We plan to add up to 8 selected new
cities and radio stations with proceeds of this offering, which should
substantially increase revenue. Later we plan syndicate the program so as to
reach up to 200 stations via satellite. We are also currently testing 30 and
60-second radio spots in the New York market.
Telemarketing. Roex's database of customers is currently about 30,000 and
growing at the rate of 1,500 per month. Each telemarketer is responsible for his
or her customer list within the database. Telemarketers are frequently able to
up-sell and promote the Company's other products when a customer places an
order. Soon they will also routinely make outbound calls during non-peak hours
and send out newsletters, promotional flyers, gift certificates and new product
information. ACT Software is used to keep track of each telemarketer's calls to
and from new and existing customers. We estimate that approximately 60% of our
21
orders come from reorders from existing customers.
Direct Sales. To supplement its radio and telemarketing sales, the Company
recently started using established distributors to sell Roex products to their
established customer bases of retail stores. This approach requires a much
smaller direct sales organization and serves to create for greater market
exposure in targeted areas.
Television. We believe that a direct response television campaign could be a
cost/effective means of increasing sales. With cable TV we can target well
defined markets whose demographics correspond to our established customer base.
With proceeds from this offering we will engage an experienced TV production
company specializing in direct response television to design and coordinate the
campaign.
Internet Marketing. We have an extensive web site that provides product
information to prospective customers and is being augmented with a library of
pertinent articles about nutritional supplements. It also provides archives of
Roex's radio broadcasts so that customers may listen to broadcasts that they may
have missed. This site also features articles authored by experts within or
associated with the Company. Roex has significant linking arrangements with
other web sites. Roex authors articles for this web site and in return receives
cross link traffic. Roex will soon set up e-commerce on its web site to take
orders and reorders directly for customers. It is expected that the wealth of
nutritional supplement information available at the site will be a confidence
builder to attract some customers who become loyal to the Roex products in a
similar manner to how their loyalty is built through Roex's radio shows. Plans
are also being made to use Extractor-Pro to obtain lists of people sending
e-mails to other nutritional supplement sites and send them Roex invitational
e-mails.
Promotions and newsletters. Roex sends periodic newsletters to its customers
featuring special promotions to educate and to stimulate phone-in orders. It
also features special promotions from time to time, such as awards for free
trips for large orders.
Customer referral program. Customers participate in a referral program where
they earn credits toward their own future nutritional supplement orders based
upon how much product is ordered by new customers who they refer.
Seminars. Part of the Roex marketing strategy is to hold seminars in each city
covered by our radio broadcasts. One of these seminars was held in May 1999 in
New York City. A crowd of over 800 people attended to hear Roex's President, Rod
Burreson, speak about nutritional supplements and answer questions from the
audience. Roex's products are also sold at the seminars. The seminar was
publicized on Roex's local New York radio show. Additional seminars are have
been or will be held in September, October and November, 1999 in Los Angeles,
Miami, Tampa and New York.
Competition
Competitors abound in this industry due to its perceived unregulated status by
the Food and Drug Administration, making it possible for someone to
"manufacture" supplements in their home and market them for sale to the public
through whatever means they may find. While the playing field may be large,
those who are self-regulating and adhere to FDA manufacturing standards referred
to as "Good Manufacturing Practices" or "GMP's" dominate it. To this end, the
mainstream competitors to Roex products primarily consist of Metagenics,
Anabolic Laboratories, Twin Labs, Standard Process, Enzymatic Therapy, Nature's
Plus, Bodyonics, Ltd., Country Life, Nature's Way, PharmaNutrients, Irwin
Naturals, Natrol, Now Foods, Nature's Herbs, Solaray, Solgar, Douglas
Laboratories, Da Vinci Laboratories and Weider Laboratories. All of these major
competitors carry products similar to Roex products in form, function and
manufacturing efficacy.
22
The Company has a unique advantage in competing with this pool of manufacturers
due to its brand identification with a loyal customer base. These customers
continue to buy our products because of confidence in the product, its
effectiveness and its quality. These loyal customers will accept no substitutes,
because of fear of compromise in these qualities.
Our Products
Roex currently has fourteen products, which are classified as "dietary
supplements" by the U.S. Food and Drug Administration, and two other products.
Dietary supplements are defined as "a product intended to supplement the diet
that contains one or more of the following ingredients: a vitamin; a mineral; an
herb or other botanical; an amino acid; a dietary substance for use to
supplement the diet by increasing the total dietary intake; or a concentrate,
metabolite, constituent, extract or combination of any of the previously
mentioned ingredients ... the term dietary supplement means a product that is
labeled as a dietary supplement'. Vitamins and minerals are essential nutrients
that, in general, our bodies cannot manufacture. They are needed for good health
and many vital functions. More than 40 different nutrients are required for
normal growth and maintenance of body tissues. In addition, scientific research
is showing that generous intakes of vitamins, minerals and other nutrients may
play an important role in reducing the risk of various common, chronic disease
conditions such as osteoporosis, cataracts, cancer and heart disease.
Our Current Products:
Procyanidin 95 - (PC-95 A Grape Seed Extract). PC-95 grape seed extract is a
rich source of one of the most beneficial groups of plant phytochemicals
(fi-to-chemicals), and procyanidins (pro-cy-an-i-dins), which exert many health
promoting effects. Studies show the procyanidins found in PC-95 are more potent
in their antioxidant abilities of vitamins C and E, yet these same
phytochernicals provide antioxidant protection for both these vitamins in the
body. Procyanidins were first isolated by Jacques Masquelier, a Ph.D. candidate
at the University of Bordeaux in France in 1950. Research indicates that on a
cellular level, procyanidins are incorporated within the cell membrane,
protecting against both water and fat-soluble free radicals. Free radicals have
been implicated in as many as 60 degenerative diseases. PC- 95, imported
directly from France, can assist in maintaining optimum health without adverse
side effects. Roex Procyanidin 95 pharmaceutical grade, grape seed extract is
patented under US Patent #4,698,360 by Dr. Masquelier.
B-Complex. According to the 15th annual consumer survey published in August of
1997, sponsored by Whole Foods, Inc. (an industry manufacturer) and conducted
through Energy Times Magazine (the largest health food store supported magazine
in the industry), over 88% of respondents purchased a B-complex formula in 1996.
The inclusion of a high-quality vitamin B complex greatly enhances Roex's
product line, as B vitamins are vital to almost every metabolic function within
the body. Management believes this product is essential for Roex to include in
its product line to maintain a competitive edge in the marketplace.
Calcium & Mineral Formula, The Ultimate. The Ultimate Calcium & Mineral Formula
is one of the most comprehensive calcium product on the market today containing
five different forms of absorbable calcium, including high collagen
microcrystalline hydroxyapatite calcium, chelated and transporter-bound minerals
to encourage maximum absorption, trace minerals, silica and vitamin D3 for
absorption and utilization. Clinical studies have shown calcium to be helpful in
building and maintaining healthy bones, hair, skin and nails as well as
assisting with regulation of heartbeat. Regular use of this product may be
helpful in reducing the risk of bone loss in women from puberty to middle age,
in elderly men and women and in those with a family history of bone loss.
Colostrum, Mother's Gift Colostrum contains all four of the key Immunoglobulins:
23
IgM, IgG, IgA and secretary IgA These Immunoglobulins all neutralize bacteria,
viruses, and yeasts. Colostrum contains natural growth factors that are very
important to promote wound healing and tissue repair, increase the breakdown of
fat, and to balance the blood sugar. Studies show bovine Colostrum contains up
to 100 times the mitogenic potency of human Colostrum. Lactoferron also found in
Colostrum has been shown to reduce the damaging effects of free radicals, which
are known to be cancer risk factors. Colostrum may also have certain healing
properties. Capsules can be opened and applied directly to cuts, abrasions, or
irritable skin conditions; and/or applied directly to gums in cases of sensitive
teeth and mouth sores. Roex Mother's Gift comes from New Zealand pasture fed
cows certified to be free of antibiotics and hormones
Ester-C. Ester-C is a superior quality vitamin C, made as the only patented
non-acidic vitamin C available today. This unique product is manufactured under
a natural process that neutralizes the PH making it the same as distilled water
and non-acidic, producing a gentle effect in the system. Clinical studies show
this non-acidic Vitamin C is absorbed into the bloodstream faster, in larger
amounts, and penetrates the white blood cells more efficiently than other types
of vitamin C. Low blood levels of vitamin C have been linked to immune
suppression and bone fragility. Known for its antioxidant and immune stimulating
properties, vitamin C has also been shown to be beneficial in promoting collagen
formation, an essential component of skin and connective tissue as well as
assisting in maintaining the integrity of capillary walls. Ester-C is a
registered trademark of Inter-Cal Corporation, U.S. Patent No. -4,833,816.
Immortale for Men & Immortale For Women. Immortale is a specially designed
formulation of herb and plant extracts, phytochernicals that promote hormonal
balance, lean muscle mass, and enhance sexuality and vitality. The main
ingredient Tribulus terristris, has been used by athletes in Eastern European
countries for its positive effect on the immune system and for assistance in
improving stamina and muscle strength without harmful side effects.
Advanced Men's Formula (Prostate Formula). The Roex Prostate Formula for Men
ingredients are chosen due to there documented nutritional support for a healthy
prostate. Key to this formula is the herb Saw Palmetto, which has been shown to
provide nutritional support for a healthy prostate. To this formula Roex adds
additional supportive ingredients such as Zinc chelate, Pumpkin seed, Pygeum
Africanum extract, Cranberry extract, Stinging Nettle, Echinacea Purpurea,
Lysine HCI (hydrochloride), and Glutamic Acid, as well as Vitamins B6, D and E.
Roex Advanced Prostate Formula for Men is based on the latest scientific
research for optimal prostate health.
Melatonin. Melatonin is a synthetically produced, pharmaceutical grade dietary
supplement formulated to compliment the naturally occurring master Melatonin
hormone secreted from the pineal gland (located in the center of the brain),
which has been shown to assist the body's natural circadian rhythms, or
sleep/wake cycles. Current research indicates that natural melatonin levels peak
in puberty and continue to drop as we age. Roex Melatonin, imported from
Switzerland, supplements the body's natural melatonin and is enhanced with
vitamin B6 to encourage the body's natural production of melatonin. People whose
schedules require re-setting their internal time clocks and those on shift work
may find this product a helpful adjunct to regulating their natural circadian
rhythms in addition to many other health benefits.
MSM (Methylsoulfonylmethane; Natural Dietary Sulphur). Roex MSM, is a dietary
supplement and the fourth most prominent mineral in the body. Studies show that
sulfur is an integral part of many proteins (constituting hair, nails and skin),
hormones and other substances critical to healthy body metabolism. Sulfur is a
vital nutrient in human nutrition, is often overlooked in nutritional therapy.
Sulfur can be found in many fresh fruits, vegetables, grains and dairy products.
Modern food processing and cooking destroy the viability of the sulfur naturally
occurring in foods due to its organically unstable nature.
24
Oleuropein (Olive Leaf Extract). Oleuropein is a natural plant extract, obtained
from specially selected olive tree leaves, imported from the western
Mediterranean. Clinical studies have shown Oleuropein may enhance the body's
immune system and assist the body in enhancing immunity. The most recent
published material on Olive Leaf Extract is a book by Dr. Morton Walker called
"Natures Antibiotic Olive Leaf Extract. With the dawn of exotic new viruses, and
microbes resistant to drugs that have been developed over the past 50 years,
there has been more of a need for alternative therapy. Antibiotics are failing.
With this in mind the excitement of Olive Leaf Extract, (the active ingredient
Oleuropein) is becoming one of the most talked about alternative therapies of
our time.
"WOW"TM is designed to cleanse, purify, strengthen, and tone the entire
gastrointestinal tract. It serves as a natural laxative and bowel toning agent.
The inclusion of Barberry root, Dandelion root and Red Clover has been shown to
be very supportive in cleansing the blood as well as detoxifying and supporting
the function of the liver. Good health begins in the colon. Many times the real
cause of sickness and disease is the retention and reabsorbtion of years of
toxic fecal matter build up.
The Advanced Weight Loss Formulas
CitriGenics l With the recent negative media attention to prescription weight
loss, particularly the negative findings and side affects of the Pharmaceutical
drug combination Phen-Fen, pharmacists, healthcare providers and individuals all
are looking for safe and effective alternatives for weight loss. Roex,
CitriGenics I is an answer. CitriGenics I works as a fat inhibitor and energy
promoter by working at the biochemical level to promote a feeling of satiety
more rapidly. It is formulated with CitriMaxTm (hydroxycitric acid (HCA) from
the Garcina Cambogia fruit), L-Camitine and ChromeMateTm, with a total of 24
different nutrients that hinder fat absorption and stimulate fat burning into
the body. CitriGenics I includes vitaniins A, B, C and E, chromium and mineral
cofactors and enzymes, which work as catalysts assisting with chemical changes
in the body to promote and maintain optimum health and a healthy inunune system.
Thermogenic herbs function at a cellular level to aid the body in utilizing body
fat reserves. Only the highest potency materials are used in the CitriGenicsTm
Formulas. (CitimaxTm and ChromeMateTm are the registered trademarks of
InterHealth Company.)
CitriGenics ll (93% Deacetylated Chitosan). Roex CitriGenics 2 provides dietary
fiber, which assists in inhibiting lipid (fat) absorption. Chitosan, a powdered
granulation of the exoskeleton of marine shellfish (such as crab) has been found
to attract fat molecules prior to digestion and to dispose of them through the
body's waste removal process. Studies indicate 1 mg of Chitosan is able to
absorb 5mg of dietary lipids (fat). CitriGenicsTm 2 is a unique fiber since it
absorbs both fat and water and is completely safe and non-toxic. Fiber is a
necessary dietary ingredient; its most documented metabolic function is to
assist with elimination of waste from the body. Current research has indicated
that most Americans do not consume adequate quantities in their daily diets.
Roex CitriGenics 2 - Chitosan provides a nutritional adjunct to weight loss
programs, when combined with a healthy diet and physical exercise. Only the
highest potency materials are used in the CitriGenices Formulas.
Other Products
VitaMinder. Roex recently became a distributor for The VitaMinder Company
whereby Roex will sell VitaMinder's entire product line. VitaMinder is a
manufacturer of a complete line of tablet cases, stackers, splatters, cutters
and airlock tablet dispensers. VitaMinder has agreed to supply Roex with 25,000
single sheet product descriptions at no charge to Roex to insert into its
January Newsletter to be sent to its entire database list of tablet using
customers. We also plan to promote the sale of these products along with its
supplement products in our radio programming. VitaMinder has agreed to supply us
with an inventory of their entire product line on consignment. Roex will supply
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VitaMinder with an inventory count every thirty days and will pay for only
actual product shipped at wholesale prices.
Water Distiller. Roex is also a distributor for West Bend Water Systems, an
affiliate of The West Bend Company of West Bend, Wisconsin, to sell through our
marketing channels the entire West Bend Water Systems product line of water
distillers and related products. Distillation of water has proven to be far
superior to any filtration system available on the market today. Distillation is
a natural process. Health advocates prefer distilled water because it is free of
minerals, bacteria and virtually all contaminants. It has also proven to be far
more economical than any filtration system currently available. West Bend's
product line consists of a counter top distiller that will produce one gallon of
pure distilled water every four hours. This unit is designed for family use. In
addition there is a line of three automatic distillers available in three
different sizes, three- gallon, seven-gallon and twelve-gallon.
Future Products
Roex currently plans to add several new products into its line during the next
calendar year. These new products will include a memory enhancement formula, a
digestive enzyme, and a multivitamin. A description of each of these new
products follows:
Memory Mind Formula Roex intends on shortly launching "For Your Mind Only", a
mind/memory enhancement formula providing Ginkgo Biloba for improved vascular
circulation in the brain along with Phosphatidyal Serine, an amino acid
necessary for neuron firing in processing and recognition tasks performed by the
brain. This product directly impacts Roex existing customer base of senior
citizens as both a therapeutic adjunct as well as a preventative supplement, and
assists all other market groups in enhancing mental performance and processing
systems. Current clinical studies have shown the efficacy of treating
memory-loss patients with Ginkgo Biloba and the positive outcomes of said
clinical trials. According to the previously referenced Whole Foods survey, 85%
of respondents purchased Ginkgo Biloba in 1996.
Multivitamin. The final scheduled new product to be introduced to the Roex
product line is the Roex Multivitamin. According to the 1994 Health Focus Trend
Report, 50% of senior shoppers surveyed believe the American diet alone is
inadequate to provide necessary nutrition to prevent degenerative disease and
therefore strongly agree that taking a daily multi-vitamin and mineral
supplement is important. The report further states that according to Nielsen
surveys, " seniors spend more on ... multivitamins than any other demographic
group." By developing a multivitamin, Roex keeps its competitive edge by
continuing to expand the product line with popular industry standard products,
pre-programmed for success by market demand via all sales avenues, and therefore
guaranteed to stimulate sales. Most importantly, this product is purchased by
senior citizens at least 50% of the time they make vitamin purchases, generating
guaranteed launch success for Roex, as the majority of the Company's existing
customer base at this time are what would be considered senior citizens.
Book. The new product arena will include a book on Health, Life Style and
Exercise, authored by our CEO, Rod Burreson. Timing for the book is the second
quarter, year 2000. Much of the content of the Book is already assembled. The
title is "Yesterday, Today and Tomorrow." The theme of the book suggests that
what a person did yesterday in terms of decisions, health, abuse and thought
plays a very significant role in how one feels and looks today. The decisions,
attitude and effort one puts forth today influences how one feels, looks and
functions tomorrow. It will also include a step by step exercise program and
nutritional instruction for people of all capabilities.
Exercise Video. The exercise video, "Staying Alive at 55," will be an action
video with our CEO, Rod Burreson, illustrating the different exercises that he
26
does to maintain his health, physique and peace of mind. The exercise program is
used in conjunction with a nutrition program to help people understand their
body as well as listen to it. The video will indicate that no matter where you
start in terms of health, peace of mind and dexterity, you must start and
continue; then the benefits will be yours. The video will precede the Book and
is scheduled for release during the first quarter of year 2000. Much of the
video has already been completed.
Our Operations
Most orders are received when customers call our "800" number during or after a
radio show. The Telemarketing agent receiving the call has computer access to
our data base by the customer's name, so that he can view the customer's
previous buying pattern. For new customers, the salesperson takes all of their
identification, shipping and billing information, to add the new customer to the
data base. Established customers are assigned to specific sales people for
continuity.
Orders entered into the computer are then checked to verify payment with either
credit charge approval or check clearance. As payments are verified the order is
sent to fulfillment and shipping, electronically. There they are filled by a
product picker and boxed for shipment. The shipping label is automatically
prepared and shipping charge is calculated. This shipping charge is then
verified by scale. When shipping is verified, in whole or in part, appropriate
credit card charges are put through.
The single entry computer system keeps a running inventory and generates
suggested purchase orders at inventory break points. Actual inventory levels
vary with product based upon rate of consumption, order lead times for
ingredients and quantity price break points for new orders. The computer
generated purchase orders are reviewed before the orders are placed. Roex orders
the ingredients and has them delivered to the Food and Drug Administration (FDA)
Good Manufacturing Process (GMP) approved fulfillment house to make the pills or
capsules, bottle them and affix the Roex labels. Finished product is then
shipped to Roex for storage and filling customer orders.
We have a full refund policy, but have experienced less than 1% returns.
Returned items are examined for seal integrity and expiration date before being
returned to inventory.
Our Research and Product Development
We believe that a well-developed and dynamic research and development structure
is an essential component of a company in the nutritional supplement area. Of
vital necessity is the maintenance of a well-developed research library, which
is the backbone of the research and development effort and is required by the
Dietary Supplement Health Education Act ("DSHEA"). To maintain our
competitiveness in the marketplace as well as to stay current with new
scientific research on nutrient therapies and phytomedicine advances, we have
developed and maintain a research library consisting of published research
works, biochemical and botanical research, marketing and competitive analyses,
clinical and scientific research, pharmacopoeias, and regulatory treatises. The
research library also serves as a reference source for the purpose of
formulations, drug and ingredient interaction and perhaps most importantly, as
validation of the efficacy and function of all existing and future Roex
formulations and raw materials. In order to successfully market and sell our
products, it is essential to continually develop and update the research and
product development library.
We do not conduct primary research for the development of new ingredients.
Instead, our research efforts are focused on developing new products in response
to market trends and consumer demands. Our staff also continually reformulates
existing Roex products in response to changes in nationally advertised brand
formulas in order to maintain product comparability. We are, however,
responsible for the formulation and development of each Roex product. Each
27
product that is formulated is researched intensively. In the beginning stages,
research begins with how the raw materials) work biochemically and where the
very best source in the world is for this product, how the product(s) are
marketed and a competitive analysis is done (if possible). Often, our products
are new to the nutritional supplement marketplace, and no competitive analysis
is available. The next stage is to formulate the product. This step is done by
one of our laboratories' biochemists and our staff. We currently use several
pharmaceutical laboratories all of which are high quality laboratories with
excellent reputations in the dietary supplement industry. At the laboratory, the
tablet's exact formulation, size, shape, color, coating, compression, etc. is
decided. Comparative analysis is then done regarding the industry standards (if
any), or possible changes to the industry standards for formulation, size,
shape, color, coating, compression, etc. Lastly, the product formulation is
finalized and the manufacturing phase begins. In the final stage of the
manufacturing process, the tablets are bottled by the laboratory and labeled.
Samples of each product are archived for every batch that is run for quality
control purposes. Throughout the manufacturing process, the product is inspected
to pharmaceutical standards to ensure quality control.
Government Regulation
On January 4, 1994, President Clinton signed into law on behalf of the U.S. Food
& Drug Administration, the "Dietary Supplement Health Education Act' ("DSHEA"),
concerning among other things, the nutritional labeling of dietary supplements.
One of the things that this law has done is to determine exactly what a dietary
supplement is, which is defined as: "A product intended to supplement the diet
by providing a dietary ingredient intended for ingestion in a supplement form
not represented as a sole item of a meal or the diet which is labeled as a
dietary supplement and if it is an approved new drug, it was marketed as a
dietary supplement prior to such approval. If it is an approved new drug or a
drug authorized for investigation for which substantial clinical investigations
have been instituted and the existence of which has been made public, and it was
not marketed as a dietary supplement prior to the approval, it does not qualify
for the definition of nutritional supplement. Also included in the definition of
dietary supplements are vitamins, minerals, herbs, botanicals, amino acids,
dietary substances used by man to supplement the diet by increasing total
dietary intake and concentrates, metabolites, constituents, extracts, or
combination of any of these substances."
"DSHEA" requires that all claims made by a manufacturer in the marketing of
these products conform to language composed in "structure/function" phraseology.
This structure is somewhat limited due to the requirement that no verbiage,
claim or act may suggest the product(s)/ingredient(s) act in any way as to:
diagnose, treat, cure or prevent any disease. All materials including but not
limited to labeling, product literature, oral and verbal sales materials and
presentations etc., are required to conform to these restrictions.
According to DSHEA a "statement of dietary support" may be made about a product
and/or ingredients if:
o the statement claims a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States,
and/or
o describes the role of the nutrient or dietary ingredient intended to affect
the structure or function in humans o documents the mechanism by which the
nutrient or dietary ingredient acts to maintain such structure or function,
and/or
o describes general well-being from consumption of a nutrient or dietary
ingredient
o the manufacturer of the supplement has substantiation that such statement
is truthful and not misleading
28
o the statement contains prominently displayed and in boldface the following:
"This statement has not been evaluated by the Food and Drug Administration.
This product is not intended to diagnose, treat, cure or prevent any
disease."
DSHEA requires that manufacturers notify the FDA of a nutritional support
statement within 30 days after the first marketing of a supplement with the
dietary support statement. This reporting provision does not permit FDA Premark
approval or require FDA Premark review of the claim(s). At present time, there
is no working definition of "substantiation" for a statement. Once the FDA is
notified that the statement is being made, it can request the substantiation,
and if it disagrees, take legal action where the adequacy of the substantiation
would be determined in court. The industry and FDA interpretation of this rating
is that making such statements without FDA notification is a violation of this
portion of the law.
Further, DSHEA establishes mandatory labeling requirements for dietary
supplements. A supplement will be deemed misbranded:
o if the label or labeling fails to list the name of each ingredient of the
supplement that qualifies as a dietary supplement and the quantity of each
such ingredient; if the product is a proprietary blend it is misbranded if
the total quantity of all ingredients in the blend is not listed;
o the product does not bear a product identity as a "dietary supplement';
o it contains an herb or other botanical as a supplement and fails to
disclose the part of the plant from which the ingredient is derived; and
o if a supplement is covered by compendium (e.g. United States Pharmacopoeia)
specifications and is represented to conform to such specifications, but
fails to do so or; the supplement is not in a compendium and fails to have
the identity and strength it is represented to possess or fails to meet
specifications based on valid assays or other appropriate methods that it
is represented to meet.
Dietary supplement labels must also conform to the requirements that nutrition
information shall:
o first list those dietary ingredients present in the product in a
significant amount and for which an RDI (Recommended Daily Intake) has been
established, followed by other dietary ingredients for which no RDI has
been established and a listing of the quantity per serving of the dietary
supplement (with a statement of source being optional).
The nutrition information must immediately precede ingredient-listing
information, but no ingredient need be listed twice. The law also provides that
a statement of the level of a dietary ingredient in a product for which there is
not an RDI does not result in the product being misbranded.
o Finally, DSHEA addresses new dietary ingredients, i.e. a dietary ingredient
that was not marketed in the United States prior to October 15, 1994. The
law specifically states that a dietary ingredient marketed prior to October
15, 1994 is not a new dietary ingredient. In order to market a new dietary
ingredient without the product being adulterated, the product must:
o contain only dietary ingredients that have been present in the food supply
as an article used for food in a form in which the food has not been
chemically altered (i.e. an ingredient in a "food" that has not previously
been sold as a dietary supplement) or
o there is a history of use or other evidence of safety for the ingredient
when used as recommended and the manufacturer or distributor provides all
relevant information to the FDA 75 days before introducing the product into
interstate commerce. The information is to be kept confidential by the FDA
for a period of 90 days after its receipt, after which time, the
information will be made available to the public. This law also provides a
mechanism for petitioning.
29
Trademarks. Roex is a registered trademark of the Company. In addition, the
names "PC-95", "WOW", "Incite", and "Advanced Men's Formula" are all pending,
with applications having been filed in the U.S. Patent and Trademark Office.
These registrations are being monitored by our regulatory and trademark
attorney.
Licensing Agreements. Roex maintains licensing agreements with a number of raw
material suppliers which allows inclusion of that supplier's trademarked logos
on all marketing materials containing these ingredients. These agreements allow
use of camera ready logos to be displayed on packaging, labels, and collateral
materials, providing instant national recognition to the consumer of high-
quality ingredients within Roex formulations. As an added benefit to Roex,
several of these licensing agreements also provide a financial discount off the
bulk purchase price of raw materials from these suppliers. These agreements are
effective at the time of contract signing and remain in effect throughout the
life of each product.
Our Employees
We currently employ 32 full time employees of whom seven are in management and
administration, 22 sales and marketing and three in warehousing and
distribution. Our employees are not unionized, and we believe our relationship
with our employees is good.
Our Facilities
Our principal offices are located at 2081 Business Center Drive, Suite 185,
Irvine, California 92612, telephone number (714) 476-8675. We lease
approximately 7,400 square feet of space under an operating lease, which
encompasses most operations: administration telemarketing, shipping/receiving,
and inventory control. The annual rent is approximatley $120,000 and the lease
expires February 28, 2001. Shipping and receiving operate in a separate 2,000
square foot facility with lease expiring on the same date as the main facility.
We anticipate that we will require additional office space of approximately
5,000 square feet within the next six months. Office space of this size is
readily available in the proximity of our location.
Legal Proceedings
We are not a party to any legal proceedings.
MANAGEMENT
Executive Officers and Directors
Our officers and directors and their ages are as follows:
First Year
Position Elected
Nominees with Company Director Age
- -------- ----------------------- -------- ---
Rodney H. Burreson Chairman of the Board, 1994 66
President and Chief
Executive Officer
Derek Burreson Director, Chief Operating 1999 31
Officer and Secretary
William B. Barnett Director 1998 58
Robert Stuckelman Director 1998 67
Shri K. Mishra, M.D., M.S. Director 1999 57
30
BUSINESS EXPERIENCE OF DIRECTORS
Rodney H. Burreson is the Founder, Chairman of the Board of Directors, Chief
Executive Officer and President of the Company and has served in those
capacities since its inception in July 1994. Since earning his degree in
business in 1960 from the University of Minnesota, Mr. Burreson has spent his
entire career in sales and marketing in a myriad of industries, including, but
not limited to, insurance, real estate, and financial services. Always
interested in the nutrition/fitness industry, Mr. Burreson, through his radio
talk shows and seminars, has become a recognized name in nutrition and dietary
supplement industries.
Derek Burreson is the Chief Operating Officer and Secretary of Roex and was
elected a director in July 1999. His primary responsibilities include
telemarketing,management information systems, shipping and customer services.
Other responsibilities include media manager (radio and TV) as well as hosting
daily live radio programs. Prior to joining the Company in January 1996, Mr.
Burreson was a registered cta (commodities trading advisor) and broker whose
responsibilities included publishing a monthly newsletter (trend watch),
customer account executive, head of market analysis and daily market
recommendations. Mr. Burreson graduated in 1992 from Cal State San Bernardino
University with a degree in marketing and finance.
William B. Barnett has served as a Director of the Company since September 1998.
Mr. Barnett has been an attorney for over 25 years, specializing in corporate
and securities law and is in private practice in Sherman Oaks, California. Mr.
Barnett formerly taught corporate and securities law in the paralegal program at
California State University at Los Angeles. Mr. Barnett received his L.L.B. from
De Paul University Law School in Chicago, Illinois.
Robert Stuckelman has served as a director of the Company since September 1998.
He founded and served as President of CompuMed, Inc. (a manufacturer and
distributor of medical products), from 1973 to 1982 and from 1989 to 1994. He
has been a director of CompuMed since its inception to the present. From 1982 to
1989 and from 1994 until the present he has been a business consultant to small
companies and large corporations. He has been on the Board of Directors of the
Board of Medical Resources Management, Inc. since 1996 to the present. He holds
a Master's degree in Electrical Engineering from USC and a Bachelor's degree in
Electrical Engineering from Cornell University.
Shri K. Mishra, M.D., M.S. (Administrative Medicine), was appointed a director
in 1999. He has been a practicing neurologist, a teaching professor and a
researcher and administrator as Associate Dean at the USC School of Medicine
since 1987. He is also the coordinator of the Integrative (alternative and
conventional) Medicine program at USC and is a staff neurologist at the
Sepulveda VA Hospital. He has been Medical Director of the VA out patient clinic
in Los Angeles. He is involved at USC on the World Bank AIDS prevention program
in India. He previously served as the Chief of Neurology at the University of
Mississippi Medical Center. He lectures extensively at medical conferences in
the United States, India, and other foreign countries. He received his initial
medical degree from BHU Varanasi, India, in 1964. He subsequently received M.D.
medical degree from the University of Toronto in 1971. He was board certified in
Neurology in 1976, and received his M.S. in Administrative Medicine from the
University of Wisconsin, in Madison, in 1990. He also has a Doctor of Ayurvedic
Medicine from BHU Varanasi, India. He is Chair of Study Section of National
Center for Complementary Alternative Medicine of the National Institute of
Health. He has been involved as a health care consultant for profit and
non-profit organizations.
Election of Directors
Each Director of Roex is elected at the annual meeting of shareholders and holds
office until the next annual meeting of shareholders, or until his or her
successor is elected and qualified. The Bylaws permit the Board of Directors to
31
fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his or her successor is elected or qualified.
Directors' Compensation
Directors who are not employees of Roex are paid $500 per meeting and are
reimbursed for reasonable out-of-pocket expenses incurred in attending meetings.
Directors are also eligible to participate in Roex's 1999 Stock Incentive Plan.
Committees of the Board of Directors
The Board of Directors has appointed a Compensation Committee consisting of
Messrs. Mishra, Barnett and Stuckelman. The Compensation Committee reviews and
evaluates the compensation and benefits of all of Roex's officers, reviews
general policy matters relating to compensation and benefits of Roex's employees
and makes recommendations concerning these matters to the Board of Directors.
The Compensation Committee also administers Roex's stock option plan.
The Board of Directors has also appointed an Audit Committee consisting of
Messrs. R. Burreson, Barnett and Stuckelman. The Audit Committee reviews, with
Roex's independent auditors, the scope and timing of the auditors' services, the
auditors' report on Roex's financial statements following completion of the
auditors' audit, and Roex's internal accounting and financial control policies
and procedures. In addition, the Audit Committee will make annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Articles of Incorporation, as amended, limit the liability of directors to
the maximum extent permitted by California law. California law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (a) any
breach of their duty of loyalty to the corporation or its stockholders, (b) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) unlawful payments of dividends or unlawful stock
repurchases or redemptions or (d) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Our Articles of Incorporation and Bylaws provide that we will indemnify our
directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of the indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether or not California law would permit indemnification.
32
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Roex pursuant to
the provisions of our charter documents or California law, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Executive Compensation
The following table sets forth the compensation earned by Rodney H. Burreson,
Roex's founder and Chief Executive Officer, during the fiscal year ended
December 31, 1998. Mr. Burreson is the only officer of Roex whose salary
exceeded $100,000 for such fiscal year. No bonuses have ever been paid to Mr.
Burreson. Mr. Burreson receives as a salary 6% of the gross sales of Roex, plus
$750/month car allowance.
Long-Term Compensation
Name and Awards All Other
Principal Annual Compensation Securities Underlying Compen-
Position Year Salary($) Bonus($) Other($) Options ation($)
- ------------ ------- ----------- --------- --------- ----------------------- -----------
Rodney H.
Burreson, 1998 $218,168 -0- * -0- ** -0-
Pres. & CEO 1997 207,554 -0- * -0- -0-
1996 61,193 -0- -0- -0- -0-
- --------------------
* Mr. Burreson receives a car allowance of $750.00 per month.
** No options were granted to Mr. Burreson in 1998. Mr. Burreson did receive
options in 1999. See "1999 Stock Incentive Plan."
1999 Stock Incentive Plan
On May 12, 1999, our Board of Directors approved a 1999 Stock Incentive Plan
(the "1999 Plan"). The purpose of the 1999 Plan is to enable us to recruit and
retain selected officers and other employees by providing equity participation
in Roex to such individuals. Under the 1999 Plan, regular salaried employees,
including directors who are full time employees, may be granted options
exercisable at not less than 100% of the fair value of the share at the date of
grant. The exercise price of any option granted to an optionee who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company must be 110% of the fair market value of the Common Stock on the date of
grant and the duration may not exceed five years. Since there is no public
market for our shares, the fair market value has been determined from time to
time by the Board of Directors. Options generally become exercisable at a rate
of 33% of the shares subject to option one year after grant. The remaining
shares generally become exercisable ratably over an additional 24 months. The
duration of options may not exceed ten years. Options under the Plan are
nonassignable, except in the case of death and may be exercised only while the
optionee is employed by Roex or, in certain cases, within a specified period
after termination of employment (within three months) or death (within twelve
months). The purchase price and number of shares that may be purchased upon
exercise of options are subject to adjustment in certain cases, including stock
splits, recapitalizations and reorganizations.
The amount of options granted and to whom, are determined by the Compensation
Committee of the Board of Directors at their discretion. There are no specific
criteria, performance formulas or measures.
Under the 1999 Plan, there are 1,000,000 common shares available for grant.
33
The following table sets forth certain information with respect to all qualified
and non-qualified stock options held as of September 30, 1999 by our executive
officers under the 1999 Plan. All options are exercisable at a price equal to
fair market value on date of grant and terminate ten years from date of grant,
or such shorter period as is determined by the Board of Directors.
Number of
Shares
Date of Amount of Exercise Expiration Currently
Name Grant Shares Price Date Exercisable
- ------------------- ----------- ------------- ---------- ------------ -------------
Rodney H. Burreson 7/14/99 60,000 $1.65 7/13/04 -0-
7/14/99 90,000 (1) 1.50 7/13/09 90,000
Derek Burreson 7/14/99 60,000 1.50 7/13/09 -0-
7/14/99 40,000 (1) 1.50 7/13/09 40,000
Peter Weber 7/14/99 50,000 1.50 7/13/09 -0-
Dennis M. Watson 7/14/99 50,000 1.50 7/13/09 -0-
William B. Barnett 7/14/99 75,000 (1) 1.50 7/13/09 75,000
8/19/98 25,000 (1) .50 8/18/08 25,000
Robert Stuckelman 7/14/99 75,000 (1) 1.50 7/13/09 75,000
8/19/98 25,000 (1) .50 8/18/08 25,000
Shri K. Mishra 7/14/99 50,000 (1) 1.50 7/13/09 50,000
(1) Non-qualified stock options.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT(1)
The following table sets forth certain information known to Roex regarding
beneficial ownership of Roex's common stock at October 31, 1999 and as adjusted
to reflect the sale of the shares of common stock in this offering by:
- - each person known by Roex to be the beneficial owner of more than 5% of
Roex's common stock;
- - Roex's Chief Executive Officer, the only executive officer whose salary and
bonus during the fiscal year ended December 31, 1998 exceeded $100,000 for
such fiscal year;
- - each of Roex's directors and executive officers; and
- - all executive officers and directors as a group.
34
Percentage of Outstanding
Common Stock
Shares Prior to Offering After Offering
Name and Address Beneficially ------------------ -----------------
of Beneficial Owner Owned (1) Minimum Maximum
- ------------------- --------------- -------- --------
Rodney H. Burreson 2,890,000 54.7 46.8 42.6
2081 Business Center Drive
Suite 185
Irvine, CA 92612
Derek Burreson 90,000 * * *
2081 Business Center Drive
Suite 185
Irvine, CA 92612
Peter Weber -0- * * *
2081 Business Center Drive
Suite 185
Irvine, CA 92612
William B. Barnett 115,000(2) * * *
15233 Ventura Boulevard
Suite 1110
Sherman Oaks, CA 91403
Robert Stuckelman 115,000(3) * * *
2081 Business Center Drive
Suite 185
Irvine, CA 92612
Shri M. Mishra, M.D., M.S 50,000(4) * * *
2081 Business Center Drive
Suite 185
Irvine, CA 92612
Bison Group 698,100 13.2 11.3 10.3
315 Arden Drive
Glendale, CA 91206
All Officers and Directors
as a group (6 in number) 3,260,000 61.7 52.7 48.1
* Represents less than 1% of issued and outstanding shares.
(1) The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3 under
the Exchange Act. All information with respect to the beneficial ownership
of any shareholder has been furnished by such shareholder and, except as
otherwise indicated or pursuant to community property laws, each
shareholder has sole voting and investment power with respect to shares
listed as beneficially owned by such shareholder. Pursuant to the rules of
the Commission, in calculating percentage ownership, each person is deemed
to beneficially own shares subject to options or warrants exercisable
within 60 days of the date of this Prospectus, but shares subject to
options or warrants owned by others (even if exercisable within 60 days)
are deemed not to be outstanding.
(2) Does not include $25,000 of debentures which may be converted into 36,333
shares of common stock.
(3) Does not include $25,000 of debentures which may be converted into 36,333
shares of common stock .
35
(4) Does not include $4,000 of debentures which may be converted into 2,667
shares of common stock.
METHOD OF DISTRIBUTION
We are offering to sell up to 1,000,000 shares of our Common Stock. The Common
Stock will be offered by our officers and directors on a "mini-max basis. If we
are unable to sell at least 500,000 shares of the Common Stock offered hereby,
we will cancel this offering and return all monies collected from subscribers
and held in escrow without interest or deduction. We may retain a Placement
Agent and/or use the services of NASD member broker/dealers to assist us in the
sale of the shares. There are currently no placement agents or brokier/dealers
involved in this offering. We may pay broker/dealers or placement agents fees of
up to 13% of the gross offering proceeds.
The Common Stock will be sold at the price of $5.00 per share. The minimum
number of shares a subscriber is required to purchase in order to subscribe to
the offering hereby will be 100 shares. We reserve the right to withdraw, cancel
or modify the offering hereby and to reject subscriptions, in whole or in part,
for any reason.
DETERMINATION OF OFFERING PRICE
Prior to the offering hereby, there has been no public market for the Common
Stock. The offering price has been arbitrarily determined by the Company and may
not be indicative of the market price for the Common Stock after this offering.
In determining the offering price, the Company considered, among other things,
the earnings of comparable publicly traded nutritional supplement companies and
the trading price of the stock of those companies. The Company makes no
representations as to any objectively determinable value of the Common Stock.
SUBSCRIPTION PROCEDURES
After the registration statement has been declared effective, the Company will
provide to each prospective investor a copy of the final Prospectus relating to
this offering which includes an agreement to purchase shares of the Common Stock
(the "Subscription Agreement"). Completed Subscription Agreements, together with
the appropriate payment for the Common Stock, must be mailed to the Escrow
Agent. See "Summary - How to Purchase Shares." The Company's acceptance of a
subscription shall be evidenced solely by the delivery to the Subscriber of a
written confirmation of sale. Receipt of a Subscription Agreement and/or deposit
with the Escrow Agent for the subscribed shares as described herein shall not
constitute acceptance of a subscription. All subscription payments and executed
Subscription Agreements will be delivered to[BANK], the Escrow Agent. Until the
Initial Closing, the subscription payments will be deposited into an escrow
account established with the Escrow Agent, subject to the Initial Closing on
such escrowed funds once the Company has accepted subscriptions for at least
500,000 shares. After the Initial Closing, subscription proceeds shall be
deposited by the Escrow Agent in a segregated account, subject to subsequent
closings on additional subscriptions received from time to time as determined by
Roex. Roex Agent will process and consider for acceptance all qualified
subscriptions in the order received. Stock certificates will not be issued to
subscribers until such time as good funds related to the purchase of Common
Stock by such subscribers are released from the escrow account to Roex by the
Escrow Agent with respect to the initial closing, or from the segregated
subscription account to Roex, with respect to subsequent closings. Until such
time as stock certificates are issued to the subscribers, the subscribers will
not be considered shareholders of Roex.
36
Subscribers will have no right to a return of their subscription payment held in
the escrow account or the segregated subscription account until Roex decides not
to accept such payment; all interest earned on such funds will belong to Roex.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding a total of 6,288,584
shares of Common Stock, assuming the sale of all of the shares covered by this
offering. Of these shares, the 1,000,000 shares offered hereby will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Act"), unless held by "affiliates" of Roex, as that term
is defined in Rule 144 under the Act ("Rule 144"). The remaining 5,281,084
shares of Common Stock outstanding upon completion of the offering are
"restricted securities" as that term is defined in Rule 144. All of these shares
will be eligible for sale in the public market after the date of this
Prospectus, all under and subject to the restrictions contained in Rule 144.
In addition, we have reserved a total of 220,000 shares of Common Stock for
issuance upon conversion of the outstanding Convertible Notes and 496,350 for
issuance upon exercise of the outstanding Warrants and options. The shares of
Common Stock issuable upon such conversion and exercise will be "restricted
securities" and may be resold upon compliance with the holding period, volume
limitations, manner of sale and other provisions of Rule 144. Generally, the
holding period for the shares issuable on such conversion of Notes will begin
upon purchase of the Notes and the holding period for shares relating to the
Warrants will not begin until the effective date of such exercise.
In general, under Rule 144 as currently in effect, a person (or persons whose
stock is aggregated) who has beneficially owned the stock for at least one year
(including the holding period of any prior owner except an affiliate from whom
such stock was purchased) is entitled to sell in "broker's transactions" or to
market makers, within any three-month period commencing 90 days after the date
of this Prospectus, a number of shares of stock that does not exceed the greater
of (a) one percent of the number of shares of Common Stock then outstanding, or
(b) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are generally subject to the availability of current
public information about Roex. Persons other than affiliates who have
beneficially owned such stock for at least two years are not subject to the
notice, manner of sale, volume or public information requirements and may sell
such shares immediately following the Offering.
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair our ability to
raise capital through the sale of equity securities.
DESCRIPTION OF CAPITAL STOCK
The Amended Articles of Incorporation authorize capital stock consisting of
50,000,000 shares of common stock, no par value, and 5,000,000 shares of
preferred stock, $.01 par value.
Common Stock
As of September 30, 1999, there were 5,288,584 shares of common stock
outstanding that were held of record by approximately 40 shareholders.
Each outstanding share of common stock is entitled to one vote on all matters to
be submitted to a vote of shareholders, except that, upon giving the notice
required by law, shareholders may cumulate their votes in the election of
directors. Holders do not have preemptive rights, so we may issue additional
37
shares that may reduce each holder's voting and financial interest in our
company. The right of holders of our common stock to receive dividends may be
restricted by the terms of any shares of our preferred stock issued in the
future. If we were to liquidate, dissolve, or wind up our affairs, holders of
common stock would share proportionately in our assets that remain after payment
of all of our debts and obligations and after any liquidation payments with
respect to preferred stock.
Preferred Stock
Our board has authority, without further action by the shareholders, to issue up
to 5,000,000 of preferred stock, par value $.01. We can issue shares of
preferred stock in series with such preferences and designations as our board of
directors may determine. Our board can, without shareholder approval, issue
preferred stock with voting, dividend, liquidation, and conversion rights. This
could dilute the voting strength of the holders of common stock and may help our
management impede a takeover or attempted change in control.
Convertible Notes
We have issued in two private placements Convertible Promissory Notes in the
aggregate principal amount of $145,000. All of the Notes have an interest rate
of 12% per annum. $30,000 of the Notes are due and payable on October 4, 2000,
and $115,000 are due and payable on June 30, 2002. Each of the Notes was issued
in exchange for cash.
The Notes issued under both placements may be converted into shares of common
stock at any time prior to maturity. For the Notes issued under the placement
commenced September 1998, the holder may convert the Note into that number of
shares of common stock determined by dividing the face amount of the Note by
$.50. For the Notes issued under the placement commenced June 1999, the holder
may convert the Note into that number of shares of common stock determined by
dividing the face amount of the Note by $1.50. We have reserved for issuance on
conversion of the Notes a total of 220,000 shares of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, 2nd Floor, Glendale, CA 91204; telephone:
(818) 502-1404.
LEGAL MATTERS
The legality of our securities offered will be passed on for Roex by the Law
Offices of William B. Barnett, 15233 Ventura Boulevard, Suite 1110, Sherman
Oaks, California 91403. Mr. Barnett is a Director of the Company and owns 15,000
shares of the Company's common stock. He is also owed $25,000 by the Company and
holds a convertible debenture for this amount.
EXPERTS
The audited financial statements of Roex included in this Prospectus and
elsewhere in the Registration Statement have been audited by Stonefield,
Josephson, Inc., independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance given upon their
authority of said firm as experts in accounting and auditing.
38
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form SB-2 relating to the shares covered by this offering. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect to
Roex and the shares offered hereby, reference is made to such Registration
Statement and such exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information with respect to Roex and the shares, reference is made to
the Registration Statement and the exhibits and schedules thereto. You may read
any document we file with the Commission at its public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information about the public reference
rooms. Our filings with the Commission also are available to the public from the
Commission's Web site at http://www.sec.gov.
After the completion of this Offering, we will be subject to the information and
periodic reporting requirements of the Securities Exchange Act of 1934, and in
accordance therewith will file periodic reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected or copied at the Commission's public reference
rooms and through the Commission's Web site (http://www.sec.gov).
39
ROEX, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
CONTENTS
Page
------
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Deficit 4
Statements of Cash Flows 5-6
Notes to Financial Statements 7-14
1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Roex, Inc.
Irvine, California
We have audited the accompanying balance sheet of Roex, Inc. as of December 31,
1998, and the related statements of operations, stockholders' deficit and cash
flows for the years ended December 31, 1998 and 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Roex, Inc. as of December 31,
1998, and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
CERTIFIED PUBLIC ACCOUNTANTS
Newport Beach, California
April 27, 1999, except for Note 6 as to which
the date is August 31, 1999
2
ROEX, INC.
BALANCE SHEETS
ASSETS September 30, December 31,
1999 1998
--------------- --------------
(unaudited)
Current assets:
Cash $ 151,287 $ 54,307
Accounts receivable, net 5,827 3,737
Loans to officer-stockholder 29,152 29,152
Inventory 224,035 200,576
Prepaid expense 11,778 3,114
--------------- --------------
Total current assets 422,079 290,886
--------------- --------------
Property and equipment, net of
accumulated depreciation and amortization 100,544 80,945
--------------- --------------
Other assets:
Deposits 14,623 11,351
Deferred offering costs 91,377 -
Total other assets 106,000 11,351
--------------- --------------
$ 628,623 $ 383,182
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 191,626 $ 380,221
Current maturities of obligations under capitalized leases 22,790 19,250
Current maturities of notes and loans payable 520,111 158,638
--------------- --------------
Total current liabilities 734,527 558,109
--------------- --------------
Obligations under capitalized leases,
less current maturities 48,060 14,741
--------------- --------------
Notes and loan payable, less current maturities 358,115 750,873
--------------- --------------
Stockholders' deficit:
Common stock; no par value, 15,000,000 shares
authorized, 5,281,084 shares issued and outstanding 677,687 666,437
Additional paid-in capital 35,000 35,000
Stock receivable (80,000) (80,000)
Accumulated deficit (1,144,766) (1,561,978)
--------------- --------------
Total stockholders' deficit (512,079) (940,541)
--------------- --------------
$ 628,623 $ 383,182
=============== ==============
See accompanying independent auditors' report and notes to financial statements.
3
ROEX, INC.
STATEMENTS OF OPERATIONS
Nine months ended Nine months ended
September 30, 1999 September 30, 1998 Year ended Year ended
(unaudited) (unaudited) December 31, 1998 December 31, 1997
Amount Percent Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- ------- ------------ -------
Net sales $ 4,115,068 100.0% $ 3,002,886 100.0% $ 3,934,910 100.0% $ 3,023,518 100.0%
Cost of sales 939,962 22.8 851,546 28.4 1,070,590 27.2 839,474 27.8
----------- ------- ----------- ------- ----------- ------- ------------ -------
Gross profit 3,175,106 77.2 2,151,340 71.6 2,864,320 72.8 2,184,044 72.2
----------- ------- ----------- ------- ----------- ------- ------------ -------
Operating expenses:
Payroll expenses,
including payroll
taxes 1,121,457 27.3 966,576 32.2 1,273,716 32.4 1,080,212 35.7
Sales and marketing 827,007 20.1 714,317 23.8 936,764 23.8 804,490 26.6
General and
administrative 717,791 17.4 608,323 20.2 772,901 19.7 692,905 22.9
Debt restructuring
and loan fees - 220,775 7.4 229,775 5.8 -
Interest 90,839 2.2 77,876 2.6 113,628 2.9 117,484 3.9
----------- ------- ----------- ------- ----------- ------- ------------ -------
2,757,094 67.0 2,587,867 86.2 3,326,784 84.6 2,695,091 89.1
----------- ------- ----------- ------- ----------- ------- ------------ -------
Net income (loss)
before provision
for income taxes 418,012 10.2 (436,527) (14.6) (462,464) (11.8) (511,047) (16.9)
Provision for income
taxes 800 800 800 800
----------- ------- ----------- ------- ----------- ------- ------------ -------
Net income (loss) $ 417,212 10.2% $ (437,327) (14.6)% $ (463,264) (11.8)% $ (511,847) (16.9)%
=========== ======= =========== ======= =========== ======== ============ =======
Net income (loss) per
share -
Basic and diluted $ 0.08 $ (0.09) $ (0.10) $ (0.11)
=========== =========== =========== ============
Weighted average common
equivalent shares
outstanding -
Basic and diluted 5,288,201 4,686,059 4,826,870 4,536,233
=========== =========== =========== ============
See accompanying independent auditors' report and notes to financial statements.
4
ROEX, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
Common stock Additional Total
--------------------------- Stock paid-in Accumulated stockholders'
Shares Amount receivable capital deficit deficit
---------- ---------- ------------ ----------- -------------- ---------------
Balance at January 1, 1997 4,475,000 $ 393,750 $ (50,000) $ $ (586,867) $ (243,117)
Issuance of common stock 200,000 40,000 (40,000)
Net loss for the year ended
December 31, 1997 (511,847) (511,847)
---------- ---------- ------------ ----------- -------------- ---------------
Balance at December 31, 1997 4,675,000 433,750 (90,000) (1,098,714) (754,964)
Common stock surrendered (50,000) (10,000) 10,000
Issuance of common stock from
private placement offering 44,334 59,162 59,162
Issuance of common stock related
to debt restructuring and loan
fees 611,750 183,525 183,525
Issuance of common stock options
related to debt restructuring 35,000 35,000
Net loss for the year ended
December 31, 1998 (463,264) (463,264)
---------- ---------- ------------ ----------- -------------- ---------------
Balance at December 31, 1998 5,281,084 666,437 (80,000) 35,000 (1,561,978) (940,541)
Issuance of common stock from
private placement offering 7,500 11,250 11,250
Net income for the nine months
ended September 30, 1999
(unaudited) 417,212 417,212
---------- ---------- ------------ ----------- -------------- ---------------
Balance at September 30, 1999
(unaudited) 5,288,584 $ 677,687 $ (80,000) $ 35,000 $(1,144,766) $ (512,079)
=========== =========== =========== ============ ============ ===============
See accompanying independent auditors' report and notes to financial statements.
5
ROEX, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Nine months ended Year ended
----------------------------- ------------------------------
September 30, September 30, December December
1999 1998 1998 1997
-------------- ------------- -------------- -------------
(unaudited) (unaudited)
Cash flows provided by (used for)
operating activities:
Net income (loss) $ 417,212 $ (437,326) $ (463,264) $ (511,847)
-------------- ------------- --------------- ------------
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Allowance for doubtful accounts - - 4,950 -
Depreciation and amortization 40,400 41,169 62,187 48,263
Loan fees related to debt restructuring - 220,775 218,525 -
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,089) (20,468) (3,548) (5,139)
Inventory (23,459) (4,989) 11,206 (76,566)
Prepaid expenses (8,665) 9,092 6,770 (9,884)
Other assets (3,272) (10,197) (10,473) 16,237
Increase (decrease) in liabilities -
accounts payable and accrued expenses (188,595) 157,965 66,213 240,653
-------------- ------------- --------------- ------------
Total adjustments (185,680) 393,347 355,830 213,564
-------------- ------------- --------------- ------------
Net cash provided by (used for)
operating activities 231,532 (43,979) (107,434) (298,283)
-------------- ------------- --------------- ------------
Cash flows used for investing activities -
payments to acquire property and equipment (13,804) (5,931) (5,352) (27,170)
-------------- ------------- --------------- ------------
Cash flows provided by (used for)
financing activities:
Advances to officer-stockholder - (1,892) (1,892) (31,667)
Payments on notes and loan payable, other (131,286) (131,169) (14,580) -
Proceeds from notes and loan payable, other 100,000 100,000 - 501,530
Deferred offering costs (91,377) - - -
Payments on obligation under capital leases (9,335) (13,045) (15,192) (39,093)
Proceeds from private placement, net of
offering costs 11,250 - 59,162 -
-------------- ------------- --------------- ------------
Net cash provided by (used for)
financing activities (120,748) (46,106) 27,498 430,770
-------------- ------------- --------------- ------------
Net increase (decrease) in cash 96,980 (96,016) (85,288) 105,317
Cash and cash equivalents, beginning of year 54,307 139,595 139,595 34,278
-------------- ------------- --------------- ------------
Cash and cash equivalents,
end of year and/or period $ 151,287 $ 43,579 $ 54,307 $ 139,595
============== ============= ============== ============
See accompanying independent auditors' report and notes to financial statements.
6
ROEX, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Nine months ended Year ended
------------------------------ ----------------------------
September 30, September 30, December December
1999 1998 1998 1997
-------------- ------------- ------------- -------------
(unaudited) (unaudited)
Supplemental disclosure of cash flow
information:
Interest paid $ 90,839 $ 77,876 $ 113,628 $ 117,484
============== ============ ============== ============
Income taxes paid $ 800 $ 800 $ 800 $ 800
============== ============ ============== ============
Supplemental disclosure of non-cash
investing and financing activities:
Issuance of common stock related to
debt restructure $ - $ 174,525 $ 183,525 $ -
============== ============ ============== ============
Issuance of common stock options
related to debt restructure $ - $ 35,000 $ 35,000 $ -
============== ============ ============== ============
Cancellation of stocks in exchange for
elimination of receivable $ - $ 10,000 $ 10,000 $ -
============== ============ ============== ============
Property and equipment acquired under
capital lease $ 46,194 $ - $ - $ -
============== ============ ============== ============
See accompanying independent auditors' report and notes to financial statements.
7
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) Summary of Significant Accounting Policies:
General:
Roex, Inc. ("the Company") was incorporated in the State of
California on October 5, 1994 as a C corporation.
Business Activity:
The Company retails nutritional supplements to the general
public through radio advertising and telemarketing.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Cash:
Equivalents
For purposes of the statement of cash flows, cash
equivalents include all highly liquid debt instruments with
original maturities of three months or less which are not
securing any corporate obligations.
Concentration
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Income Taxes:
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which adopts the asset and liability approach
to measurement of temporary differences between financial
reporting and income tax return reporting. The principal
temporary difference is the net operating loss carryforward
of approximately $1,400,000 at December 31, 1998. A deferred
asset has been provided and completely offset by a valuation
allowance, because its utilization does not appear to be
reasonably assured.
The Company is liable for and has provided for corporate
state taxes.
See accompanying independent auditors' report.
8
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) Summary of Significant Accounting Policies, Continued:
Net Loss Per Share:
The Company has adopted Statement of Financial Accounting
Standard No. 128, Earnings per Share, which is effective for
amended and interim periods beginning after December 15,
1997.
Basic and diluted net loss per share have been calculated
based upon the weighted average number of common shares
outstanding during the period. Common stock equivalents,
consisting of outstanding common stock options, are not
included since they either reduce loss per share, or for the
period ended September 30, 1999 (unaudited) are immaterial.
New Accounting Pronouncements:
The Company has adopted Statements of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" and No.
133 "Accounting for Derivative Instruments and Hedging
Activities." The Company also adopted Statement of Position
No. 98-5 "Reporting on the Costs of Start-up Activities."
Adoption of these activities did not materially affect the
financial statements.
Interim Financial Statements (Unaudited):
The accompanying unaudited condensed financial statements
for the interim periods ended September 30, 1999 and 1998
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 1999.
(2) Loans to Officer-Stockholder:
Loans to officer-stockholder are due on demand, non-interest bearing
and unsecured.
See accompanying independent auditors' report.
9
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(3) Inventory:
Inventory is comprised of the following:
September 30, December 31,
1999 1998
(unaudited)
Finished goods $ 192,175 $ 175,890
Labels and packaging 31,860 24,686
-------------- --------------
$ 224,035 $ 200,576
============== ==============
(4) Property and Equipment:
Property and equipment is comprised of the following:
Computer equipment and software $ 165,972
Office furniture and equipment 35,786
Vehicle 24,778
Leasehold improvements 4,003
--------------
230,539
Less accumulated depreciation and amortization 149,594
--------------
$ 80,945
==============
Total depreciation and amortization expense for the years ended
December 31, 1998 and 1997 amounted to $62,187 and $48,263,
respectively.
(5) Major Vendor:
Purchases from three vendors amounted to approximately $648,000 for
the year ended December 31, 1998 representing approximately 60% of
total purchases. Included in accounts payable and accrued expenses at
December 31, 1998 is approximately $98,000 due to these vendors.
Purchases from four vendors amounted to approximately $614,000 for the
year ended December 31, 1997 representing approximately 76% of total
purchases.
See accompanying independent auditors' report.
10
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(6) Notes and Loans Payable:
Notes and loans payable is comprised of the following:
Note payable to stockholder, secured by all assets of the
Company and the personal guarantee of the principal- stockholder,
with monthly payments of $16,697 including principal and interest at
13.25% per annum through November 1, 2001. $ 482,550
Notes payable, unsecured, principal originally due at various times
starting December 1, 1999 through January 27, 2000, bearing interest
at 12.0% per annum and payable monthly. As of August 31, 1999, the
due dates were extended to September 30, 2000. 200,000
Notes payable unsecured, payable on demand with interest ranging from
12.0% to 16.0% per annum, payable monthly, convertible
into 437,500 shares of common stock. 87,500
Note payable, bank, secured by all assets of the Company, with annual
principal payments of $20,000 through August 5, 2001,
interest due monthly at 13.25% per annum. 60,000
Notes payable to stockholders/directors, unsecured, due on October 14,
2000 with interest at 12.0% per annum, convertible
into 60,000 shares of common stock. 30,000
Note payable, related party, unsecured, payable on demand with
interest at 12.0%. 30,000
Loan payable, other, secured by related vehicle, bearing interest at
9.0% per annum, payable in monthly installments of $635, including
interest, due November 27, 2001. 19,461
---------------
909,511
Less current maturities 158,638
---------------
$ 750,873
===============
The note payable, related party in the amount of $30,000 requires the
Company to pay $0.50 per bottle of a certain product sold or $300 per
month (interest at 12%), whichever is greater through December 2000.
See accompanying independent auditors' report.
11
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(6) Notes and Loans Payable, Continued:
In September 1998, the Company restructured its debt obligation to a
current stockholder. Pursuant to this debt restructuring agreement, an
additional $100,000 was loaned to the Company for working capital. The
payment terms were extended through November 1, 2001 and the interest
rate was increased from 12.5% to 13.25%. In addition, the Company
issued 581,750 shares of its common stock valued at $0.30 per share,
paid a $11,250 loan fee and granted 116,350 common stock options with
an exercise price of $0.50 per share (see Note 9). These options may
be exercised at anytime during the period which expires on the fourth
anniversary from the date the Company becomes a publicly traded
company. The Company has recorded $229,775 in debt restructuring and
loan fees in the accompanying statement of operations related to this
transaction.
In October 1998, two directors loaned the Company $30,000 ($15,000
each) for working capital. These notes bear interest at 12.0% per
annum and are due on October 14, 2000. As part of this transaction,
the Company issued these directors a total of 30,000 shares valued at
$0.30 per share, which is recorded as debt restructuring and loan fees
in the accompanying statement of operations.
The following table summarizes the aggregate maturities of the notes
and loan payable as of December 31, 1998:
Year ending December 31,
1999 $ 158,638
2000 552,138
2001 198,735
--------------
$ 909,511
==============
Total interest expense for the years ended December 31, 1998 and 1997,
including interest on obligations under capital leases, amounted to
$113,628 and $117,484, respectively.
Bridge Financing (Unaudited)
During July 1999, the Company issued 12% subordinated convertible notes
in the amount of $100,000, which are included in notes and loans
payable as non-current. These notes are due on June 30, 2002, are
unsecured, and interest is payable at the end of each quarter. These
notes may be converted at any time prior to the due date into common
stock shares of the Company at the conversion rate of $1.50 of debt for
one common stock share.
See accompanying independent auditors' report.
12
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(7) Obligations Under Capitalized Leases:
The Company leases office and computer equipment from unrelated parties
under capital leases which are secured by related assets costing
$143,117. The following is a schedule by year of future minimum lease
payments required under capital leases together with the present value
of the net minimum lease payments as of December 31, 1998:
Year ending December 31,
1999 $ 23,903
2000 12,225
2001 8,499
--------------
Total minimum lease payments 44,627
Less amounts representing interest 10,636
Present value of net minimum lease payments 33,991
Less current maturities 19,250
--------------
$ 14,741
==============
(8) Commitments, Contingencies and Other:
Lease Proceedings
The Company is involved in various routine legal proceedings incidental
to the conduct of its normal business operations. The Company's
management believes that none of these legal proceedings will have a
material adverse impact on the financial condition or results of
operations of the Company.
Operating Leases
The Company leases its warehouse and office space under two
non-renewable operating leases, which expire on February 28, 2001.
Pursuant to these lease agreements, the Company is also responsible for
maintaining certain minimum insurance requirements and for its
proportionate share (approximately 15%) of common area expenses.
The following is a schedule by years of future minimum rental payments
required under operating leases that have noncancellable lease terms in
excess of one year as of December 31, 1998:
Warehouse and
office space Equipment Total
--------------- ------------- ---------------
Year ending December 31,
1999 $ 120,833 $ 23,980 $ 144,813
2000 120,833 23,980 144,813
2001 20,139 11,990 32,129
--------------- ------------- ---------------
$ 261,805 $ 59,950 $ 321,755
=============== ============= ===============
See accompanying independent auditors' report.
13
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(8) Commitments, Contingencies and Other, Continued:
Operating Leases, Continued
Total rent expense amounted to $127,841 and $75,697 for the years ended
December 31, 1998 and 1997.
Royalty Agreement, Related Party
The Company is party to a royalty agreement with a minority
stockholder, which requires the payment of a minimum royalty of $0.50
per bottle of a particular product sold. The agreement expires in
November 2003. Total royalty expense for the years ended December 31,
1998 and 1997 paid to this stockholder amounted to $19,027 and $15,238,
respectively.
Advertising
Advertising costs, consisting primarily of radio advertising, are
expensed when incurred, which amounted to approximately $794,000 and
$641,000 for the years ended December 31, 1998 and 1997, respectively.
Principal Stockholder-Officer Compensation
Effective November 1998, the Board of Directors of the Company approved
the compensation of the principal stockholder-officer at 6% of net
sales payable monthly.
(9) Common Stock:
On November 18, 1998, the Company initiated a private placement
offering (the "Private Placement") of 666,667 shares of the Company's
common stock at an offering price of $1.50 per share. The Private
Placement was exempt from the registration provisions of the Securities
and Exchange Commission Act of 1933 and Rule 504 of Regulation D. As of
December 31, 1998, net proceeds amounted to $59,162, which is net of
related offering costs of $7,339, from the issuance of 44,334 shares of
its common stock.
The Company has adopted an incentive Stock Option Plan (the "1999
Plan") that provides for granting of options to acquire common stock
of the Company ("Options"). Options under the Plan may be issued to
directors, executives, key employees and consultants providing
valuable services to the Company. A maximum of 1,000,000 shares of the
Company's common stock maybe issued under the Plan. The Board of
Directors administers the Plan, selects recipients to whom options are
granted and determines the number of shares to be granted. Options
granted under the Plan are exercisable at a price determined by the
Board of Directors at the time of grant, but in no event less than
fair market value. As of December 31, 1998, no options had been
granted under this Plan (see Note 6).
See accompanying independent auditors' report.
14
ROEX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(9) Common Stock, Continued:
Pursuant to a debt and debt-restructuring agreement with a current
stockholder (See Note 6), the Company granted 116,350 common stock
options with an average exercise price of $0.50 per option as an
incentive to re-negotiate. The Company also granted 50,000 common
stock options to two of its directors at an exercise price of $0.50
per share.
The number and weighted average exercise prices of options granted for
the years ended December 31, 1998 and 1997 are as follows:
1998 1997
------------------------------- ---------------------------
Average Average
Exercise Exercise
Number Price Number Price
--------- ----------- --------- ----------
Outstanding at beginning of the year 581,750 $ 0.50 - $ -
Outstanding at end of the year 166,350 0.50 581,750 0.50
Exercisable at end of the year 166,350 0.50 - -
Granted during the year 166,350 0.50 581,750 0.50
Exercised during the year - - - -
Cancelled during the year 581,750 0.50 - -
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the fair market value of the
underlying stock on the date of grant, no compensation expense is
recognized.
Proforma information regarding net income and earnings per share, if
the Company had accounted for its employee stock options under the fair
value method of FASB Statement No. 123 has not been presented as the
amounts are immaterial.
See accompanying independent auditors' report.
ii-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 204(a)(10) of the California General Corporation Law (the "GCL")
permits corporations to eliminate the liability of a Director to the corporation
or its stockholders for monetary damages for breach of the Director's fiduciary
duty of care. Our Articles of Incorporation include such a provision eliminating
the liability of Directors to the fullest extent permissible under California
law. Under the GCL directors will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (a) any
breach of their duty of loyalty to the corporation or its stockholders, (b) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) unlawful payments of dividends or unlawful stock
repurchases or redemptions or (d) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Our Articles of Incorporation and Bylaws provide that we will indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether or not California law would permit indemnification.
We are not obligated to indemnify the indemnitee with respect to (a) acts,
omissions or transactions from which the indemnitee may not be relieved of
liability under applicable law, (b) claims initiated or brought voluntarily by
the indemnitee and not by way of defense, except in certain situations, (c)
proceedings instituted by the indemnitee to enforce the Indemnification
Agreements which are not made in good faith or are frivolous, or (d) violations
of Section 16(b) of the Securities Exchange Act of 1934 or any similar statute.
ii-2
While not requiring the maintenance of directors' and officers' liability
insurance, if there is such insurance, the indemnitee must be provided with the
maximum coverage afforded to Directors, officers, key employees, agents or
fiduciaries if indemnitee is a Director, officer, key employee, agent or
fiduciary, respectively. Any award of indemnification to an agent would come
directly from our assets, thereby affecting a stockholder's investment.
These indemnification provisions may be broad enough to permit indemnification
of our officers and Directors for liabilities (including reimbursement of
expenses) arising under the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by the
Registrant, are as follows:
SEC Filing Fee $ 1,475
Nasdaq Listing Fees
NASD Filing Fee
Printing Expenses
Accounting Fees and Expenses
Legal Fees and Expenses
Blue Sky Fees and Expenses
Registrar and Transfer Agent Fees
Miscellaneous
Total
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
NOTES AND LOANS PAYABLE. On December 31, 1996, Roex issued promissory notes
("Notes") in the amount of $100,000 each to two non-related parties. The Notes
were due December 31, 1999 and carried interest of 12% per annum. On August 31,
1999, the two holders of the Notes agreed to extend the due date of the Notes to
September 30, 2000.
In January 1998, Roex borrowed $30,000 from Prostate, Ltd., a limited
partnership comprised of three non-affiliated limited partners. The borrowing is
evidenced by a demand promissory note with interest at 12% per annum.
In September 1998, we restructured our debt obligation to a current stockholder.
Pursuant to this debt restructuring agreement, an additional $100,000 was loaned
to us for working capital. The payment terms were extended through November 1,
2001, and the interest rate was increased from 12.5% to 13.25%. In addition, we
issued 581,750 shares of our Common Stock, valued at $0.30 per share, paid an
$11,250 loan fee and granted 116,350 Common Stock options with an exercise price
of $0.50 per share to the lender. These options may be exercised at any time
during the period which expires on the fourth anniversary from the date we
become a publicly traded company.
ii-3
In October 1998, two of our directors loaned us an aggregate of $30,000,
evidenced by convertible subordinated promissory notes with interest at 12% per
annum (the "Notes"). The Notes are due on October 4, 2000. The holders of the
Notes may convert the Notes into 60,000 shares of Roex Common Stock at any time
prior to October 4, 2000. In connection with this loan, Roex issued 30,000
shares valued at $0.30 per share to the two directors.
Between December 1998 and January 1999, we sold 51,834 shares of our Common
Stock at $1.50 per share (or an aggregate of $86,751) to 27 persons. The sales
were made pursuant to a private placement and were sold by the officers and
directors of Roex. No commissions were paid for sales of stock.
Between July and November 1999, pursuant to a private placement, we issued
Convertible Promissory Notes (the "Notes") to 11 people in the aggregate amount
of $165,000. The notes have interest rates of 12% per annum and are convertible
into shares of Common Stock at $1.50 per share at any time prior to the due date
of June 30, 2002.
No commissions were paid for the sale of the Notes.
Roex's issuance of all of the foregoing securities were effected in transactions
exempt from registration under section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder.
ITEM 27. EXHIBITS.
The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
Charter Documents
3 3.1 Articles of Incorporation
3.2 Bylaws
4 Instruments defining rights of holders
4.1 Form of Convertible Promissory Note issued October 1998
4.2 Form of Convertible Promissory Note issued between
July and October, 1999
4.3 Subscription Agreement for this Offering
5 Opinion of Law Offices of William B. Barnett*
10 Material Contracts
10.1 Escrow Agreement with _________________ applicable
to this Offering*
10.2 1999 Stock Incentive Plan
10.3 Loan Restructure Agreement with Bison Development Fund,
L.P.
10.4 Stock Option granted to Bison Development Fund, L.P.
ii-4
23 Consents of Experts and Counsel
23.1 Consent of Law Offices of William B. Barnett (filed as
part of Exhibit 5 hereto)*
23.2 Consent of Stonefield, Josephson, Inc.
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
The undersigned registrant undertakes:
(1) To provide at the initial closing and each subsequent interim
closing of this offering stock certificates in such denominations and registered
in such names so as to permit our prompt delivery of the certificates to the
investors participating in such closing.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
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.
(3) 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 of 1933;
(ii) to reflect in the prospectusany 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
information 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;
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
(5) 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-5
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, 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 Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer 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 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.
ii-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on November ___, 1999.
ROEX, INC.
By: /s/ RODNEY H. BURRESON
------------------------------------------
Rodney H. Burreson, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Rodney H. Burreson, Derek Burreson and each of
them, such person's true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments, exhibits thereto, and other documents in
connection therewith to this Registration Statement and any subsequent
registration statement filed by the Registrant pursuant to Rule 462(b) of the
Securities Act, which relates to this Registration Statement) and to file the
same with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or any of them,
or their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
ii-7
NAME TITLE
DATE
/s/ RODNEY H. BURRESON Chairman of the Board and Chief Executive Officer
- ----------------------
Rodney H. Burreson
November ___, 1999
/s/ DEREK BURRESON Chief Operating Officer, Secretary and Director
- ----------------------
Derek Burreson
November ___, 1999
/s/ PETER WEBER Chief Financial Officer (Principal Financial and
- --------------------- Accounting Officer)
Peter Weber
November ___, 1999
/s/ ROBERT STUCKELMAN
- ---------------------------- Director
Robert Stuckelman
November ___, 1999
/s/ WILLIAM B. BARNETT
- ---------------------------- Director
William B. Barnett
November ___, 1999
/s/ SHRI K. MISHRA
- -------------------------- Director
Shri K. Mishra, M.D., M.S.
November ___, 1999