-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYrN3H0ekYM0WIcKWVba3OgtmqI/O5d7wEyhOoL31+7aa3MiHPXWJDg7mRKedjCu 4kiWt+oRrRlE0Siv4UcuvA== /in/edgar/work/20000706/0001001277-00-000195/0001001277-00-000195.txt : 20000920 0001001277-00-000195.hdr.sgml : 20000920 ACCESSION NUMBER: 0001001277-00-000195 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000706 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROEX INC CENTRAL INDEX KEY: 0001097767 STANDARD INDUSTRIAL CLASSIFICATION: [2833 ] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-92299 FILM NUMBER: 668446 BUSINESS ADDRESS: STREET 1: 2801 BUSINESS CENTER DRIVE STREET 2: SUITE 185 CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 9164420400 SB-2/A 1 0001.txt SB-2/A As filed with the Securities and Exchange Commission on July 6, 2000 Registration No. 333-92299 ---------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------------------------------------------- AMENDMENT NO. TWO to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------------------------------------------------------- ROEX, INC. ---------------------------------------------------------------------- (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 ---------------------------------------------------------------------- (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 ---------------------------------------------------------------------- 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 410 Sherman Oaks, CA 91403 Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ii If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective Registration statement for the same offering. / / If 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 Amount to be Proposed Maximum Proposed Maximum Amount of Securities to be Registered Offering Price Per Aggregate Offering Registration Fee Registered Share - ------------------------- ----------------------- ----------------------- ----------------------- ----------------------- Common Stock 1,000,000 $6.00 $6,000,000 $1,584# Total 1,000,000 $6,000,000 $1,584 - ------------------------- ----------------------- ----------------------- ----------------------- ----------------------- - ----------------------------------------------------------------------- # 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. 1 SUBJECT TO COMPLETION. DATED JULY , 2000 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. We are offering a minimum of 500,000 shares and a maximum of 1,000,000 shares of our common stock at $6.00 per share. 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 American Stock Exchange under the symbol "ROEX". The shares being offered 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. Underwriting Price to Discounts and Proceeds to Public Commissions Company ---------- -------------- ----------- Per Share $ 6.00 $ .60 $ 5.40 Total - Minimum $3,000,000 $300,000 $ 2,700,000 Total - Maximum $6,000,000 $600,000 $ 5,400,000 This is a best-efforts, minimum-maximum offering. Our selected placement agents must sell the minimum offering of 500,000 shares if any are sold. The selected placement agents are not required to sell any specific number of dollar amount of securities in excess of the 500,000 share minimum offering, but will use their best efforts to sell all of the 1,000,000 shares offered. Funds received from subscribers will be held in escrow by Santa Barbara Bank and Trust. Unless the minimum offering is fully sold within 90 days from the date of this prospectus, which period can be extended for an additional 60 days by the placement agent, all purchase payments will be returned in full to subscribers, without interest or deduction. If the minimum offering is sold within the foregoing period, the offering may continue until 1,000,000 shares are sold or December 31, 2000, whichever occurs first. However, we may terminate the offering at any earlier time if we choose to do so. RH INVESTMENT CORPORATION The date of this Prospectus is JULY , 2000 2 TABLE OF CONTENTS Prospectus Summary 3 The Offering 3 Financial Data 4 Risk Factors 4 Risks Associated with Our Company 4 Our Business Has Only Recently Shown A Profit 4 Any Effect Of Unfavorable Publicity Is Particularly Harmful To Our Industry 5 We Are Dependent On New Radio Markets For Future Growth 5 Our Business Is Subject To Compliance With Various Government Regulations 5 If We Lose Our Key Personnel, Especially Our Founder And Spokesperson, Rodney Burreson, Our Business May Suffer 5 Failure Of Our Outside Suppliers To Provide Our Products In Sufficient Quantities And In A Timely Fashion May Cause Our Business To Suffer 6 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 6 Risks Associated With This Offering 6 This Is A Minimum/Maximum Offering And There Can Be No Assurance That We Will Be Able To Sell All Of The Shares Covered By The Offering 6 This Is Our Initial Public Offering Of Shares And There Is No Public Market For Our Common Stock 6 There Will Be No Public Market For Resale Of Our Shares Until Our Shares Are Listed On An Exchange Or Quoted Through NASDAQ 6 Factors That May Adversely Affect Our Common Stock 7 Our Stock Price May Be Extremely Volatile And You May Not Be Able To Resell Your Shares At Or Above The Initial Offering Price 7 Shares Eligible For Future Sale 7 Additional Information Is Available 7 Forward-Looking Statements 8 Dilution 8 Use Of Proceeds 9 Dividend Policy 10 Capitalization 10 Management's Discussion And Analysis Of Financial Conditions And Results Of Operations 11 Business 14 Management 25 Principal Shareholders 29 Shares Eligible For Future Sale 30 Description Of Capital Stock 31 Transfer Agent And Registrar 31 Underwriting 32 Legal Matters 34 Experts 34 Index to Financial Statements F-1
Until __________, 2000 (90 days after the date of this prospectus), all dealers effecting transactions in the common stock offered hereby, whether or not participating in this distribution, may be required to deliver a prospectus. This is an addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 3 PROSPECTUS SUMMARY Our Business Roex, Inc., was incorporated in California on October 5, 1994, to develop and market its own line of dietary supplement products using scientifically based branded ingredients. These products are not intended to diagnose, treat, cure mitigate, or prevent any disease. Since introducing our first product, PC-95, in 1995, we have added thirteen more dietary supplement products to our product line and we are committed to providing only the highest quality products to meet our customers' specific health needs. We have grown from under a million dollars of annual sales to approximately $4 million in 1998, and $5.7 million in 1999. We currently market our products primarily through radio programming. Mr. Burreson, our founder and president, appears live on local talk radio shows in New York, Los Angeles, Las Vegas, Tampa, Spokane and Philadelphia. The format is one-half and one-hour radio infomercials, with interactive customer call-ins. In December 1999, Internet e-commerce was added as a vehicle for marketing Roex products. Our radio programs now promote our web site, the web site promotes the radio programs, and we expect this synergy to accelerate sales. 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. This is a best-efforts, minimum-maximum offering. Unless at least 50,000 shares of our common stock are sold within 90 days following the date of this prospectus, which period can be extended for additional 60 days, the offering will terminate and no shares will be sold. If the 50,000 share minimum offering is sold within the foregoing period, the offering may continue until 1,000,000 shares are sold or December 31, 2000, whichever occurs first. Our selected placement agents are not obligated to (1) sell any number or dollar amount of our common stock in excess of the 50,000 share minimum offering or (2) purchase any shares at any time. While these agents have agreed to use their best efforts to sell on our behalf all of the common stock offered, we cannot guarantee how much stock in excess of the required minimum, if any, will actually be sold in the offering. 4 FINANCIAL DATA 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. (Unaudited) Year Three Months Ended Ended March 31 December 31 ------------------------------- -------------------------------- 2000 1999 1999 1998 ------------ ------------- ------------- ------------- Operating Data Net Sales $1,610,982 $1,250,721 $5,736,832 $3,934,910 Net Income (Loss) $ 229,204 $ 136,455 $ 534,132 $ (463,264) Net Income (Loss) Per Share: Basic $ 0.04 $ 0.03 $ 0.10 $ (0.10) Diluted $ 0.04 $ 0.02 $ 0.09 $ (0.10) Weighted Average Common Equivalent Shares Outstanding: Basic 5,288,584 5,288,296 5,288,296 4,826,870 Diluted 6,087,049 6,086,761 6,086,761 4,826,870 March 31 March 31 December 31 December 31 2000 1999 1999 1998 ------------- ------------- -------------- --------------- Balance Sheet Data Working Capital (Deficit) $ (25,494) $ 732 $ (175,910) $(267,223) Total Assets 977,931 473,637 810,763 383,182 Net Stockholders' Equity (Deficit) (165,955) (816,136) (395,159) (940,541)
RISK FACTORS 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. 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. Risks Associated With Our Company Our Business Has Only Recently Shown A Profit. Since we commenced operations in October 1994, we have accumulated net losses through March 31, 2000, of $798,642 and a stockholders' deficit of $165,955. We lost money for the years 1997 and 1998. Although we operated profitably for the year ended December 31, 1999, and the quarter ended March 31, 2000, we still had a net working capital deficit of $25,494. Although we expect to be profitable for the year ending December 31, 2000, we cannot assure that a year-end profit will be realized or that profitability will continue in the future. Any Effect Of Unfavorable Publicity Is Particularly Harmful To Our Industry. We believe that the dietary supplement market is affected by national media 5 attention regarding the consumption of dietary supplements. Future scientific research of 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. 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, Las Vegas, Spokane, Philadelphia 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 depends 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 remove 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 be able to 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, which regulates our products under the Federal Food, Drug and Cosmetic Act. In addition, the Federal Communications Commission regulates on-air content of radio shows and the Federal Trade Commission regulates advertising. 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 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 6 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 have no contracts with our suppliers and there is no assurance of continued supply or stable prices. 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 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. RISKS ASSOCIATED WITH THIS OFFERING This Is A "Minimum/Maximum" Offering And There Can Be No Assurance That We Will Be Able To Sell All Of The Shares Covered By The Offering. The managing placement agent, RH Investment Corporation, and the other selected placement agents are not obligated (1) to sell on our behalf any number or dollar amount of our common stock in excess of the 500,000 share minimum offering or (2) to purchase any number or dollar amount of shares at any time. These agents have agreed to use their best efforts to sell on our behalf all of the common stock offered by this prospectus. However, we cannot guarantee how much stock in excess of the required minimum, if any, will actually be sold in this offering. We have set a minimum of $3,000,000 of stock to be sold in this offering. Until acceptable subscriptions for such minimum amount have been received, all subscriptions will be held in an escrow account. Once deposited, these funds will only be returned to the investor if the minimum amount of $3,000,000 is not subscribed in the offering period. This Is Our Initial Public Offering Of Shares And There Is No Public Market For Our Common Stock. To this point, there has not been a market for our shares. We cannot give any assurances that a market will develop, or, if such a market should develop, that it will be sustained with sufficient liquidity to permit you to sell your shares at any time. We also cannot give any assurance to you that your shares could ever be sold at or near the offering price, or at all, even in an emergency. There Will Be No Public Market For Resale Of Our Shares Until Our Shares Are Listed On An Exchange Or Quoted Through NASDAQ. Because we are directly selling our stock, we have provided that our offering may remain open for up to 90 days after our offering becomes effective. It is doubtful that you could sell your shares for more than the initial offering price of $6.00 per share while our offering is still open. We do not anticipate applying to list our common stock on any exchange or through the Nasdaq quotation system until we have received acceptable subscriptions for at least the minimum amount of $3,000,000. We further anticipate that we may not receive such minimum amount until the end of the offering period and that, if we are able to list our common stock on an exchange or Nasdaq, such listing may not be effective until 30 days after we file the application. Therefore, it is possible that, even if we are able to list our common stock on an exchange or Nasdaq, such listing would not be effective until four (4) months after the effective date of this registration statement. 7 Factors That May Adversely Affect Our Common Stock. Our Stock Price May Be Extremely Volatile And You May Not Be Able To Resell Your Shares At Or Above The Initial Offering Price. Following this offering, the price at which our Common stock will trade may be extremely volatile and may fluctuate significantly. The public market may not agree with or accept this valuation. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies, particularly software and Internet companies. After this offering, therefore, you might not be able to resell your shares at or above the initial public offering price. 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, unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act 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"). As of March 31, 2000, options to purchase 903,850 shares of common stock were outstanding, of which 496,350 are currently exercisable. The Company intends to register on Form S-8 under the Securities Act the offering and sale of common stock issuable under the outstanding options as soon as practicable after the date of this Prospectus. ADDITIONAL INFORMATION IS AVAILABLE This prospectus is part of a Registration Statement on Form SB-2 filed under the Securities Act of 1933. 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. We will have to file reports under the Securities Exchange Act of 1934. You may read and copy the Registration Statement and our report at the Securities and Exchange Commission's 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. 8 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 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 March 31, 2000, we had a negative net tangible book value of $165,955, or approximately $(.03) 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 $6.00 per share of common stock (after deducting offering expenses payable by us), the net tangible book value of Roex at March 31, 2000, would have been approximately $2,334,045 and $5,034,045, or $.40 and $.80 per share of common stock, respectively. This would represent an immediate increase in the net tangible book value per share of common stock of $.43 (if 500,000 shares are sold) and $.83 (if 1,000,000 shares are sold) to existing shareholders and an immediate dilution of $5.60, or $5.20, respectively, per share to new investors purchasing shares of common stock in this offering. "Dilution" is determined by subtracting our 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 $6.00 $6.00 Net tangible book value per share of common stock before the offering $(.03) $(.03) Increase attributable to new investors $0.43 $0.83 Proforma net tangible book value after offering $0.40 $0.80 Dilution to new investors $5.60 $5.20 Percentage of dilution to new investors 93% 87%
The following table summarizes the number of shares of common stock purchased (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 Roex at March 31, 2000, and (ii) new investors purchasing shares 9 of common stock in this offering, before deducting the underwriting discounts and estimated offering expenses payable by us. Average Shares Purchased Consideration Paid Price Per Number Percentage Amount Percentage Share --------------- ---------------- ---------------- ---------------- ------------ Existing Shareholders 5,288,584 91% $ 632,687 17% $0.12 New Investors 500,000 9% $3,000,000 83% $6.00 --------------- ---------------- ---------------- ---------------- ------------ Total 5,788,584 100% $3,632,687 100%
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 existing shareholders of Roex at March 31, 2000, and new investors purchasing shares of common stock in this offering, before deducting commissions and estimated offering expenses payable by us. Average Shares Purchased Consideration Paid Price Per Number Percentage Amount Percentage Share --------------- ---------------- ---------------- ---------------- ------------ Existing Shareholders 5,288,584 84% $ 632,687 10% $0.12 New Investors 1,000,000 16% $6,000,000 90% $6.00 --------------- ---------------- ---------------- ---------------- ------------ Total 6,288,584 100% $6,632,687 100%
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 $6.00 per share, after deducting offering expenses payable by us, estimated to total approximately $200,000, plus 10%, are $2,500,000 and $5,200,000, respectively. Offering expenses are primarily legal, accounting, printing, and travel. 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 If Maximum 500,000 750,000 1,000,000 Shares Sold Shares Sold Shares Sold --------------- ------------- -------------- Sources of Funds: Offering Proceeds $3,000,000 $4,500,000 $6,000,000 Offering Expenses $ 500,000 $ 650,000 $ 800,000 --------------- ------------- -------------- Net Proceeds $2,500,000 $3,850,000 $5,200,000 --------------- ------------- -------------- Use of Net Proceeds: Expand Radio Markets $ 700,000 $ 950,000 $1,100,000 Marketing and Advertising 350,000 700,000 1,000,000 Debt Reductions 850,000 850,000 850,000 New Product Development 250,000 500,000 Inventory 150,000 200,000 250,000 Video Production 200,000 250,000 450,000 Developing Internet e-commerce 200,000 450,000 700,000 Working Capital 50,000 200,000 350,000 ----------------- ----------------- ------------ Total Uses $2,500,000 $3,850,000 $5,200,000 ================= ================= ============
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 10 on numerous factors including, but not limited to, changes in the economic climate or unanticipated complications, delay and expenses. The uses of funds for the minimum and maximum of the offering are as indicated in the table. Proceeds from the minimum will be used to retire our debt. The interest rates for the long and short term debts range from 12% to 16% and the maturity dates are from September 30, 2000 to June 30, 2002. The priority for use of funds beyond the minimum is for large proportional increases in radio marketing, advertising and developing Internet e-commerce with smaller proportional increases for the other categories shown in the table. Proceeds for working capital will be used for overhead and administrative purposes. 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 this is a self-underwritten offering, the numbers above do not include any deductions for selling commissions. DIVIDEND POLICY We have never paid dividends and do not anticipate paying dividends in the foreseeable future. CAPITALIZATION The following table sets forth, as of March 31, 2000, 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 $6.00 per share, after deducting estimated offering expenses and underwriting discounts and the initial application of the proceeds therefrom. The table also excludes the issuance of up to 903,850 shares of common stock reserved for issuance under outstanding stock options and conversion of debt ($195,000) into 170,000 shares of common stock. Actual As Adjusted Adjusted ------------------- ------------------- ------------------ Long-Term Debt $ 354,574 $ -0- $ -0- Stockholders' equity Common stock (no par value) 15,000,000 shares authorized; 5,288,584 shares issued and outstanding (actual); 5,788,584 as adjusted (minimum) and 6,288,584 as adjusted (maximum) $ 677,687 $3,177,687 $5,877,687 Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued and outstanding (actual) as adjusted Additional paid-in capital $ 35,000 $ 35,000 $ 35,000 Accumulated Deficit $(798,642) (798,642) (798,642) Stock Receivable (80,000) (80,000) (80,000) ------------------- ------------------- ------------------ Total stockholders' equity (deficit) (165,955) 2,334,045 5,034,045 ------------------- ------------------- ------------------ Total capitalization (deficit) $ 188,619 $2,334,045 $ 5,034,045 =================== =================== ==================
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 three months ended March 31, 2000 and 1999 and for the years ended December 31, 1999 and 1998 should be read in conjunction with our financial 11 statements and related notes thereto, and other financial data included elsewhere in this prospectus. Results of Operations Three-month period ended March 31, 2000 and 1999 Components of revenue and expenses as a percentage of revenue are given in the following table. March 31 December 31 2000 1999 1999 1998 ----- ----- ----- ---- Revenues 100% 100% 100% 100% Cost of Sales 23% 26% 22% 27% Gross Profit 77% 74% 78% 73% Operating Expenses Payroll 29% 25% 27% 32% Sales & Marketing 18% 20% 19% 24% General & Administration 13% 16% 20% 20% Other 3% 2% 3% 9% Net Income (Loss) 14% 11% 9% -12% Three Months Ended March 31, 2000 Sales are recognized when products are shipped. For the three months ended March 31, 2000, net sales increased to $1,610,882, which is 29% greater than for the same period in 1999. 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. Reorders from existing customers represent about 70% of monthly sales, a continuation of the trend in 1999. During the first quarter, our operating margin increased to 77% from 74% for the same period in the prior year because of greater buying economies. Our operating expenses remained at 63% of sales due to a continuation of internal efficiencies achieved last year. Net income for the quarter rose 68% to $229,204 compared to $136,455 in the March quarter of 1999 because of a combination of increased sales, improved profit margins and greater operating efficiencies. Net income in the March 2000 quarter increased to 14% of revenue compared to 11% the prior year. This resulted in a profit of $.04 per share compared to $.02 for the same period in the prior year on a fully diluted basis. Payroll and related expenses increased by $142,995 for the first three months of 2000 compared to 1999, which was only 3% of revenue greater because of a continuation of greater operating efficiencies achieved last year. Sales and marketing expenses increased by $55,939 in 2000 compared to 1999, which was 19%, compared to 20% of revenue in 1999. This was due to a continuation of sales efficiency and increased frequency of reorders from existing customers. General and administrative expenses for the first three months of 2000 increased $14,875 from the comparable period in 1999. This represented a reduction to 13% of revenue compared to 16% because of an increased use of computers and software and automated procedures. Interest expense decreased by $1,091 because of debt pay down. Monthly sales for the first quarter of 2000 and 1999 are as follows: 2000 1999 ------------- -------------- January $552,000 $380,000 February $481,000 $354,000 March $578,000 $517,000 In summary, our sales and profits have been increasing each period. The percentage of revenue by geographic market continues to be about the same as last year. 12 Years Ended December 31, 1999 and 1998 Sales are recognized when products are shipped. For the year ended December 31, 1999, net sales increased to $5,736,832, which is 46% greater than for 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. Reorders from existing customers represent about 70% of monthly sales. During the same period, our operating margin increased to 78% from 73% because of greater buying economies, and our operating expenses (including a non-recurring debt restructuring and loan fee of $229,775 or 6%) were reduced to 69% of sales from 85%, because of greater internal efficiencies and increased sales with certain fixed costs remaining constant. Net income before taxes rose to $534,132 (9%) from a loss of $462,264 (12%) because of a combination of increased sales, improved profit margins and operating efficiencies. This resulted in basic earnings per share of $0.10 and diluted earnings per share of $0.09 compared to a basic and diluted net loss per share of $.10 for the prior year. Payroll and related expenses increased by $194,063 in 1999 compared to 1998, but dropped as a percentage of revenue to 27% from 32% because of greater operating efficiency and increased sales. Sales and marketing expenses increased by $149,382 in 1999 compared to 1998, but dropped to 19% of revenue from 24% in 1998, because of increases in sales efficiencies and because of heavy reorders from existing customers. Reordering from existing customers accounted for about 70% of monthly orders and grew in dollar value in direct proportion to monthly sales increases. General and administrative expenses in 1999 increased by $392,820 compared to 1998, although it represented about 20% of revenue in each year. The dollar increase was due to an expanded infrastructure to handle the increased volume of sales and increased use of computers and software to automate procedures for increased sales. Other expenses decreased by $224,177 for 1999 compared to 1998, which represented 2% and 9% of revenue for the respective years. Other expenses were interest and debt restructuring. The debt restructuring cost was $229,775 in 1998 to permit Roex to keep operating, while there were no debt restructuring costs in 1999. Monthly sales for 1999 and 1998 are as follows. 1999 1998 --------------------- ----------------- January $ 380,000 $ 332,000 February 354,000 311,000 March 517,000 347,000 April 459,000 328,000 May 472,000 300,000 June 480,000 418,000 July 458,000 300,000 August 485,000 330,000 September 510,000 340,000 October 536,000 305,000 November 508,000 309,000 December 578,000 315,000 --------------------- ----------------- $5,737,000 $3,935,000 In summary, our sales and profits have been increasing each period and we have transitioned from losses to profits. 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% -------- Total 100% 13 Liquidity and Capital Resources Quarter Ended March 31, 2000 As of March 31, 2000, our current liabilities exceeded our current assets by $25,494, which was an 86% improvement over December 31, 1999. This improvement was primarily due to cash generated from current operations. The long-term portion of notes and loans payable, less current maturities, remained about the same at $540,000.00. As of March 31, 2000, the total stockholders' deficit was reduced by 58% to $165,955 compared to December 31, 1999. This reduction was due to net income of $229,204 for the quarter ended March 31, 2000. Our cash as of March 31, 2000 was $391,917, a 28% increase from December 31, 1999. This was primarily due to a $229,204 profit for the quarter. Cash in the amount of $182,925 was provided from operations, including depreciation and changes in receivables, inventory and payables, with a pay down of $13,348 of trade payables. $88,368 was used for financing activities, with the major contributors being payments on loans and capital leases and deferred offering costs. We expect to have adequate working capital for the next 12 months, without proceeds from this offering or additional financing, mainly from cash flow from operations. We have no material capital commitments at this time. Proceeds from this offering will provide funds for growth and to pay down existing loans. Profits and cash flow from operations were substantial in March 2000 quarter, $229,204 and $182,925, respectively. This is an improvement from a profit of $136,445 for the March quarter of 1999 and $534,132 for all of 1999 and heavy losses in prior years, $463,264 in 1998 and $511,847 in 1997. We expect profitability to continue and to increase in the next 12 months. Year ended December 31, 1999 As of December 31, 1999 our current liabilities exceeded our current assets by $175,910, which was a 34% improvement over December 31, 1998. This improvement occurred even with an increase of current maturities of notes and loans payable of $380,543 due to a shift into expiration of the notes in less than 12 months. The long term portion of notes and loans payable, less current maturities, was reduced by $392,758, even though $165,000 was borrowed in 1999 to help fund this offering. As of December 31, 1999 the total stockholders' deficit was reduced by 58% to $395,159 compared to December 31, 1998. This reduction was due to net income of $534,132 for 1999. Our cash as of December 31, 1999 was $306,552, a 460% increase from December 31, 1998. This was due to a $534,132 profit for the year; $383,561 cash was provided from operations, including depreciation and changes in receivables, inventory and payables, with the largest single factor being a pay down of $137,562 of trade payables; $117,512 was used for financing activities, with the major contributors being payments on loans and capital leases and deferred offering costs. We expect to have adequate working capital for the next 12 months, without proceeds from this offering or additional financing, mainly from cash flow from operations. We have no material capital commitments at this time. Proceeds from this offering will provide funds for growth and to pay down existing loans. Profits and cash flow from operations were substantial in 1999, $534,132 and $383,561 respectively. This is an improvement from heavy losses in prior years, $463,264 in 1998 and $511,847 in 1997. We expect profitability to continue and to increase in 2000. Year 2000 Compliance Roex was fully compliant by the end of the year. We are currently in Y2K compliance with our merchant card processing center. 14 BUSINESS Introduction Our company, Roex, Inc., was incorporated in California on October 5, 1994 to develop and market its own line of dietary supplement products using scientifically based branded ingredients. These products are not intended to diagnose, treat, cure, mitigate or prevent any disease. 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 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 in 1998 and $5.7 million in 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 Las Vegas, Spokane, Philadelphia and Southern Florida. The format is half hour and one-hour radio infomercials, with interactive customer call-ins. We recently added Internet e-commerce as a vehicle for marketing Roex products. Our radio programs promote our web site and the web site promotes the radio programs; we expect this synergy to accelerate sales. 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 constituents in the whole foods, and thus the dietary supplement industry was born. Today, the industry is thriving as never before in its history. 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. Dietary supplements may be found in tablet, capsules, liquid or powdered form. 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 broadly defined descriptions of "drugs", the benefits of dietary supplementation in health care has frequently been overlooked in U.S. scientific research. The European community has long recognized nutritional therapy in 15 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 building customer confidence in Roex products. This develops loyal customers who are repeat buyers. About 70% of Roex sales are from repeat buyers. 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. Roex currently presents 35 radio shows per week broadcasting on 7 radio stations in New York City, Los Angeles, Tampa, Philadelphia, Las Vegas, and Spokane. Roex recently entered retail 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 add to the number of potential customers, but will potentially 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 intend to selectively add cites and develop customer bases that are as loyal as many of our present customers. To further increase revenues, we intend to 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 16 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 sales by having telemarketing personnel increase their outbound calling. We recently added a web site ordering capability, and we promote our web site on our radio shows. Also, we currently have limited direct sales through third party distributors who resell 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 radio marketing 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, La Vegas, Spokane, Philadelphia 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. Roex currently presents 35 radio shows per week, broadcasting on 7 radio stations in New York, Los Angeles, Tampa, Philadelphia, Las Vegas and Spokane. 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 to 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. 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 linking arrangements with other web sites. Roex authors articles for this web site and in return receives cross link traffic. In December 1999, Roex started e-commerce and its web site is now taking 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. We use our radio shows to promote our web site, www.roex.com. Early results of this synergistic combination of radio and Internet show promising sales growth. Our first full month of e-commerce was January 2000. From January through May 31, 2000, we had an average of 170,000 hits per month, in which we sold an average of $12,500 (of which $7,500 is a shift from telephone orders) of product and experienced Internet orders which on the average were larger than those from 800 number call-ins. Telemarketing. Our database of customers is currently about 30,000 and growing at the rate of 1,000 per month. Each telemarketer is responsible for his or her customer list within the database. Telemarketers are frequently able to promote the Company's other products when a customer places an order. Our telemarketers also routinely make outbound calls during non-peak hours and send out newsletters, promotional flyers, gift certificates and new product information. 17 ACT Software is used to keep track of each telemarketer's calls to and from new and existing customers. We estimate that approximately 70% of our orders come from reorders from existing customers. Direct Sales. To supplement our radio and telemarketing sales, we 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 may create 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. Promotions and newsletters. Roex sends periodic newsletters to our customers featuring special promotions to educate and to stimulate phone-in orders. We also feature 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. This new program, referred to as the Level 1 program, is completely computerized. 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. 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 will be held in September, October and November, 2000 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, the market is dominated by companies who are self-regulating and adhere to FDA good manufacturing practices. Mainstream Roex competitors are 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. These major competitors sell in excess of $40 billion of food supplements annually and carry products similar to Roex products in form, function and manufacturing efficacy. All of these companies are much larger than Roex and have greater financial strength. Roex sales are concentrated in only seven United States cities (New York, Los Angeles, Miami, Tampa, Cleveland, Las Vegas and Spokane) and represent only a small portion of all dietary supplement sales in these cities. We believe that we may have an advantage in competing with this pool of manufacturers due to our brand identification with a loyal customer base. Although similar products are available from our competitors, we believe many of our 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. About 70% of all Roex sales are to existing customers. Thus, our competitive advantage is mainly in brand identity and service. Our Products Roex currently has fourteen "dietary supplements" 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 18 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 maintaining optimal health. Our Current Products: PC-95 (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 than vitamins C and E, yet these same phytochemicals 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. 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. The Ultimate Calcium & Mineral Formula(R). The Ultimate Calcium & Mineral Formula is one of the most comprehensive calcium products 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. Mother's Gift(R) Colostrum,. Colostrum contains all four of the key Immunoglobulins: 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. Lactoferrin also found in Colostrum has been shown to reduce the damaging effects of free radicals. 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(R) Colostrum comes from New Zealand pasture fed cows certified to be free of antibiotics and hormones Ester-C(R). Ester-C(R) 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 which results in a product having the same pH as distilled water. 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 bone fragility. Known for its 19 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(R) is a registered trademark of Inter-Cal Corporation, U.S. Patent No. -4,833,816. Immortale(R) for Men & Immortale(R) For Women. Immortale(R) is a specially designed formulation of herb and plant extracts and phytochernicals designed to 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(TM) (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 HCL (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, currently 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 Sulfur. Roex MSM is a dietary supplement which contains sulfur, 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 and is often overlooked in nutritional regimens. 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. 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. The most recent published material on Olive Leaf Extract is a book by Dr. Morton Walker called "Natures Antibiotic Olive Leaf Extract. 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 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. The Advanced Weight Loss Formulas CitriGenics(R) I. With the recent negative media attention to prescription drug weight loss products, 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. CitriGenics(R) I is designed to function 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) (from the Garcina Cambogia fruit), L-Camitine and ChromeMateTm, with a total of 24 different 20 nutrients that may hinder fat absorption and stimulate fat burning into the body in some individuals. CitriGenics(R) I also includes vitamins 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 immune system. Thermogenic herbs function at a cellular level to aid the body in utilizing body fat reserves. (CitimaxTm and ChromeMateTm are the registered trademarks of InterHealth Company.) CitriGenics(R) II (93% Deacetylated Chitosan). Roex CitriGenics(R) II provides dietary fiber, which may assist 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). CitriGenics(R) II 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(R) II - Chitosan provides a nutritional adjunct to weight loss programs, when combined with a healthy diet and physical exercise. 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 supplied Roex with 25,000 single sheet product descriptions at no charge to Roex which were inserted into its January Newsletter which was 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 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. Through our marketing channels, we sell the entire West Bend Water Systems product line of water distillers and related products. Distillation of water is thought by many experts to be far superior to any filtration system available on the market today. Distillation is a natural process and certain health advocates prefer distilled water over filtered 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. In addition there is a line of three automatic distillers available in three different sizes, three-gallon, seven-gallon and twelve-gallon. Daily Solutions(TM) Video. A 30-minute video featuring our President, Rod Burreson, speaking about some of the Roex products and how they address structure, function and benefits to the human body. Future Products Roex currently plans to add several new products into its line during the next calendar year. These new products will include a multivitamin, a book and a video. A description of each of these new products follows: 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 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. 21 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 fourth quarter, year 2000. Much of the content of the book to be titled "Yesterday, Today and Tomorrow" is already assembled. 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 After 55," will be an action video with our CEO, Rod Burreson, illustrating the different exercises that he does to maintain his health, physique and peace of mind. The exercise program will be 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. We intend to release the video during the first quarter of year 2001. 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 Good Manufacturing Process approved laboratories 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. Various laboratories supply Roex's product, mixing the pills to our specifications. They buy most of the raw materials. In some cases, we buy the ingredients directly to assure quality and we supply these ingredients to the mixing laboratories. All ingredients are available from multiple sources. We buy 60% of our product from three laboratories, Paragon Labs, Primary Services and Extracts Plus. Although we have no contracts with our sources of supply, we believe they have ample capacity to handle Roex's expanding needs, and many alternate laboratories are available in case they should be needed. These laboratories are competitive and alternate sources could be expected to supply equal quality product for similar prices. 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 or "DSHEA". To assist us in maintaining our competitiveness in the marketplace as well as to stay current with new 22 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 based upon scientific evidence to improve the product. Each 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). Some of 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 contract 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. We do not have a separate research and development budget as the defined research and development activities are part of the operational responsibilities of management and/or are done by our suppliers under our supervision and the supplier costs for this research and development are included in supplier pricing. The total cost of research and development for the past two years is estimated at under $100,000.00. Government Regulation In 1994, the Dietary Supplement Health Education Act (DSHEA) became law. This act concerns, 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. 23 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 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 24 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. Trademarks. Roex, Citrigenics and Immortale, Digestive Balance, WOW and Livanol are registered trademarks of ours. In addition, the names "PC-95", "Hurricane", "Colon Essentials", and "Staying Alive After 55", 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. 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 $115,000 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 with an annual rent of $24,000. Although currently our facilities are quite suitable and adequate, 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, although the annual rent may be higher. 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 Age Name With Company Director - -------------------------------------------- ----------------------------------------------- ------------------ ------- Rodney H. Burreson Chairman of the Board, President and Chief 1994 66 Executive Officer Derek Burreson Director, Chief Operating Officer and 1999 31 Secretary Peter Weber Chief Financial Officer N/A 52 William B. Barnett Director 1998 58 25 First Year Position Elected Age Name With Company Director - -------------------------------------------- ----------------------------------------------- ------------------ ------- Robert Stuckelman Director 1998 68 Shri K. Mishra, M.D., M.S. Director 1999 57
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, from January 1995 to 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. Mr. Burreson is Rodney H. Burreson's nephew. Peter Weber has been the Chief Financial Officer of Roex since May 1999. He joined Roex as Manager of Accounting in September 1998. From April 1996 to August 1998, Mr. Weber was a full-charge bookkeeper with National Associated Publisher/United Publishers Corp. in Las Vegas, Nevada. Between November 1994 and July 1996, Mr. Weber was employed by Charles Gellay, Inc., and Davenport International as an assistant controller. 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 26 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 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 limit the liability of our Company's directors for monetary damages to the maximum extent permitted by California law. California law provides that every person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or a person of whom he is the legal representative is or was a director or officer of our Company or is or was serving at the request of our Company or for its benefit as a director or officer of another corporation, or as our Company's representative in a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the California law from time to time against all expenses, liability and loss (including attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. In addition, we maintain Directors and Officers liability insurance and our Bylaws provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by our Company as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by our Company. Such right of indemnification is a contract right that is not exclusive of any other right such directors, officers or representatives may have, including rights under any bylaw, agreement, vote of shareholders, provision o law and any other rights. 27 We have also entered into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our Bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for certain expenses, including attorneys fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Roex, arising out of such person's services as a director or executive officer of Roex, any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 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, California law or the agreements described above, 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, our founder and Chief Executive Officer, during the fiscal years ended December 31, 1997, 1998 and 1999. Mr. Burreson is the only officer whose salary exceeded $100,000 for such fiscal year. No bonuses have ever been paid to Mr. Burreson. In accordance with a written employment agreement commencing November 1, 1998 and ending October 31, 2003, Mr. Burreson receives as a salary 6% of the net sales, plus $1,000/month car allowance. In addition, in July 1999, Mr. Burreson received 150,000 stock options exercisable at prices ranging between $1.50 and $1.65. Summary Compensation Table Annual Compensation Long-Term Compensation Awards - ---------------------------------------- -------------------------------------- ------------------------------ ------------- Name and Year Salary($) Bonus($) Other($) Securities Compensation All Other Other Principal Underlying ($) Awards Position Options - -------------------------------- ------- ------------- ----------- ------------ ------------- ---------------- ------------- Rodney H. Burreson, 1999 $322,998 -0- -0- 150,000 -0- -0- President & CEO 1998 $218,168 -0- -0- -0- -0- -0- 1997 $207,554 -0- -0- -0- -0- -0-
1999 Stock Incentive Plan On May 12, 1999, our Board of Directors approved a 1999 Stock Incentive 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 plan, regular salaried employees, including directors who are full time employees, may be granted options to purchase our common stock 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 three months after termination of employment or within twelve months of death. 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. 28 Under the plan, there are 1,000,000 common shares available for grant. The following table sets forth certain information with respect to all qualified and non-qualified stock options held as of December 31, 1999 by our executive officers under the 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. Option Grants in the Last Fiscal Year 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 65,000(1) 1.50 7/13/09 65,000 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. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values For valuation purposes, the last sale of a private placement at $1.50 per share is used. Value of Number of Unexercised Unexercised in-the-money Options/SARs Options/SARs Shares at FY-End(#) at FY-End($) Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized Unexercisable Unexercisable - ---------------------- --------------- ---------- -------------------- -------------------- Rodney H. Burreson -0- -0- 90,000/60,000 -0-/-0- Derek Burreson -0- -0- 65,000/65,000 -0-/-0- Peter Weber -0- -0- -0-/50,000 -0-/-0- Dennis M. Watson -0- -0- -0-/50,000 -0-/-0- William B. Barnett -0- -0- 100,000/-0- $25,000/-0- Robert Stuckelman -0- -0- 100,000/-0- $25,000/-0- Shri K. Mishra -0- -0- 50,000/-0- -0-/-0-
PRINCIPAL SHAREHOLDERS The following table sets forth the beneficial ownership of our common stock as of March 31, 2000 and as adjusted to reflect the sale of the shares of common stock offered hereby by: 30 o each person or entity who is known by us to beneficially own more than 5% of our outstanding common stock; o the CEO, each of the named executive officers and each of our directors; and o all executive officers and directors as a group. Unless otherwise indicated, the address for each of the named individuals is c/o Roex, Inc., 2081 Business Center Drive, Suite 185, Irvine, California 92612. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them. The information contained in this table with respect to beneficial ownership reflects "beneficial ownership" as defined in Rule 13d-3 under the Securities Exchange Act of 1934. 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. Percentage of Outstanding Common Stock ------------------------------------------- Shares Name and Address Beneficially Prior to After Offering of Beneficial Owner Owned Offering - --------------------------------------- ------------------- ------------- ----------------------------- Minimum Maximum Rodney H. Burreson 2,890,000 54.7 46.8 42.6 Derek Burreson 115,000 2.2 2.0 1.8 Peter Weber -0- * * * William B. Barnett 151,666 2.9 2.6 2.4 15233 Ventura Blvd. Suite 410 Sherman Oaks, CA 91403 Robert Stuckelman 151,666 2.9 2.6 2.4 2081 Business Center Drive Suite 185 Irvine, CA 92612 Shri M. Mishra, M.D., M.S. 50,000 * * * Bison Group 698,100 13.2 11.3 10.3 315 Arden Drive Glendale, CA 91206 All Officers and Directors 3,358,332 63.5 58.0 53.4 as a group (6 in number)
* Represents less than 1% of issued and outstanding shares. 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 30 1933, unless held by affiliates of Roex, as that term is defined in Rule 144. The remaining 5,288,584 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 170,000 shares of common stock for issuance upon conversion of our outstanding convertible notes and 496,350 for issuance upon exercise of the outstanding 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 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 this offering. Prior to this offering, there has not been any public market for our 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 March 31, 2000, 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 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. As of March 31, 2000, there are no preferred shares outstanding. 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 31 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 $195,000. All of the notes have an interest rate of 12% per annum. $30,000 of the notes are due and payable on October 14, 2000, and $165,000 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 170,000 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. UNDERWRITING We have entered into a managing placement agent agreement with RH Investment Corporation, in connection with this offering. The principal office of the managing placement agent is located at 15760 Ventura Boulevard, Suite 1732, Encino, California 91436, and its telephone number is (818) 386-6415. RH Investment Corporation, as managing placement agent, may engage other broker-dealer members of the National Association of Security Dealers to participate as selected placement agents in the offering of our common stock. This is a best-efforts, minimum-maximum offering. Our selected placement agents, including the managing placement agent, are not obligated (1) to sell on our behalf any number or dollar amount of our common stock in excess of the 500,000 share minimum offering or (2) to purchase any number or dollar amount of shares at any time. These agents have agreed to use their best efforts to sell on our behalf all of the common stock offered by this prospectus. However, we cannot guarantee how much stock in excess of the required minimum, if any, will actually be sold in this offering. All funds received from subscribers for our common stock will be held in escrow by Santa Barbara Bank and Trust, Santa Barbara, California, as escrow agent, pursuant to an agreement among us, the managing placement agent and the escrow agent until the minimum amount is sold. Pending disbursement, subscription proceeds will be deposited in a segregated account and invested in short-term United States government securities, securities guaranteed by the United States government, certificates of deposit or time or demand deposits in commercial banks located in the United States. In the event that at least 500,000 shares of common stock have not been sold within 90 days from the date of this prospectus, which period can be extended for an additional 60 days by the placement agent, the offering will terminate and all funds received from subscribers will be promptly returned in full by the escrow agent directly to subscribers, without interest or deduction, as provided in the escrow agreement. Provided that at least 500,000 shares of common stock are sold within the foregoing period, we may continue to offer our common stock for sale until (1) 1,000,000 shares are sold or (2) December 31, 2000, whichever 32 occurs first. However, we may terminate the offering at any earlier time if we choose to do so. We propose to offer our common stock to the public at the public offering price set forth on cover page of this prospectus, and will pay to RH Investment Corporation, the managing placement agent, commissions in an amount equal to 10% of the aggregate purchase price of the common stock sold. The managing placement agent may reallow all or any part of such commissions to any other selected placement agent, up to an amount equal to 10% of the aggregate purchase price of the common stock sold in this offering by that selected placement agent. We have also agreed to pay to the managing placement agent a non-accountable expense allowance equal to 3% of the aggregate purchase price of the common stock sold in this offering. The managing placement agent may reallow all or any part of such expense allowance to any other selected placement agent, up to an amount equal to 3% of the aggregate purchase price of the common stock sold in this offering by that selected placement agent. RH Investment Corporation has informed us that the selected placement agents, including the managing placement agent, will not confirm sales of common stock offered by this prospectus to accounts over which they exercise discretionary authority. To purchase common stock in this offering, a prospective investor must (1) complete and sign a subscription agreement, in the form attached to this prospectus as Exhibit A, and any other documents that we or the managing placement agent may require and (2) deliver such documents, together with payment in an amount equal to the full purchase price the shares of common stock being purchased, to the selling selected placement agent. Checks should be made payable to "Santa Barbara Bank and Trust, Escrow Agent." Each subscription payment must be transmitted to the escrow agent by 12:00 noon on the business day next following its receipt by a selected placement agent. We will determine, in our sole discretion, to accept or reject subscriptions within five days following their receipt. Funds of an investor whose subscription is rejected will be promptly returned directly to such person by the escrow agent, without interest or deduction, pursuant to the terms of the escrow agreement. No subscription may be withdrawn, revoked or terminated by the purchaser. We reserve the right to refuse to sell our common stock to any person at any time. We, our officers, directors and respective affiliates have agreed, subject to limited exceptions, not to sell, transfer or otherwise dispose of, directly or indirectly, any shares of common stock or any securities convertible or exchangeable for shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of RH Investment Corporation, the managing placement agent. RH Investment Corporation, however, may in its sole discretion, at any time without notice, release all or any portion of the shares of common stock subject to lock-up agreements. In connection with this offering, we have agreed to sell to the managing placement agent or its designee, which designee must be another selected placement agent or a bona fide officer or partner of a selected placement agent, at a purchase price of $.01 each, warrants to purchase from us shares of common stock in an amount equal to 10% of the number of shares of common stock sold in this offering. These underwriter's warrants are exercisable for a period of four years, commencing one year after the date of this prospectus, at an exercise price equal to 135% of the price per share set forth on the cover page of this prospectus. The underwriter's warrants will not be transferable, except to officers of RH Investment Corporation. The underwriter's warrants contain provisions for adjustment of the exercise price upon the occurrence of certain events, including stock dividends, stock splits, recapitalizations and the issuance of our common stock for consideration less than the exercise price. The holders of underwriter's warrants have no voting, dividend or other rights as stockholders of Roex with respect to shares underlying their warrants, unless and until the underwriter's warrants have been exercised. A new registration statement or post-effective amendment to the registration statement of which this prospectus is a part will be required to be filed and declared effective before distribution to the public of shares of our common stock issuable upon exercise of the underwriter's warrants. We have agreed, on 33 one occasion when requested, to make necessary filings, at our expense, in order to permit a public offering of the shares underlying the underwriter's warrants during the period beginning one year and ending five years after the date of this prospectus, and to use our best efforts to cause that registration statement or post-effective amendment to become effective and remain effective for a period of at least one year. In addition, we have agreed that, during the same four-year period, we will give advance notice to holders of underwriter's warrants and shares issued upon the exercise of underwriter's warrants, if any, of our intention to file a registration statement. In any such case, the warrantholders so notified shall have the right to require us to include any shares of common stock issued upon the exercise of their underwriter's warrants in that registration statement, at our expense, and to maintain the effectiveness of such registration statement for a period of at least one year. For the period during which the underwriter's warrants are exercisable, the managing placement agent and any transferee will have the opportunity to profit from a rise in the market price of our common stock, with a resulting dilution in the interest of our other stockholders. In addition, the terms on which we will be able to obtain additional capital during the exercise period may be adversely affected in that the managing placement agent or its transferee is likely to exercise the underwriter's warrants at a time when we would, in all likelihood, be able to obtain capital by a new offering of securities on terms more favorable than those provided by the terms of the underwriter's warrants. We and the selected placement agents have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. Prior to this offering, there has been no public market for our common stock. The initial public offering price has been determined by negotiations between us and the managing placement agent and is not necessarily related to our asset value, net worth, results of operations or other established criteria of value. The factors considered in determining the initial offering price include the history of and the prospects for Roex and the industry in which we operate, our past and present operating results and the trends of such results, our financial condition, the experience of our management, the market price of publicly traded stock of comparable companies in recent periods and the general condition of the securities markets at the time of this offering. 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 410, Sherman Oaks, California 91403. Mr. Barnett is a Director of the Company and owns 15,000 shares of our Company's common stock. He also owns $25,000 of debentures convertible into 36,666 shares and options exercisable into 100,000 shares. EXPERTS The audited financial statements 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. NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH 34 OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------- A MINIMUM OF 500,000 SHARES AND A MAXIMUM OF 1,000,000 SHARES [LOGO] COMMON STOCK ------------ PROSPECTUS ------------ RH INVESTMENT CORPORATION _______________, 2000 35 ROEX, INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999 AND 1998 CONTENTS Page ---- Independent Auditors' Report 1 Financial Statements: Balance Sheets 2 Statements of Income (Operations) 3 Statements of Stockholders' Deficit 4 Statements of Cash Flows 5-6 Notes to Financial Statements 7-15 F-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, 1999, and the related statements of income (operations), stockholders' deficit and cash flows for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Roex, Inc. as of December 31, 1999, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998, in conformity with generally accepted accounting principles. /s/ Stonefield Josephson, Inc. CERTIFIED PUBLIC ACCOUNTANTS Newport Beach, California January 19, 2000 F-2 ROEX, INC. BALANCE SHEETS ASSETS March 31, December 31, 2000 1999 --------------- --------------- (unaudited) Current assets: Cash $ 391,917 $ 306,552 Accounts receivable 412 2,600 Loans to officer-stockholder 33,152 33,152 Inventory 299,842 254,221 Prepaid expenses 38,495 30,802 --------------- -------------- Total current assets 763,818 627,327 --------------- -------------- Property and equipment, net of accumulated depreciation and amortization 83,533 80,648 --------------- -------------- Other assets: Deposits 7,659 10,853 Deferred offering costs 122,921 91,935 --------------- -------------- Total other assets 130,580 102,788 --------------- -------------- $ 977,931 $ 810,763 =============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 229,312 $ 242,659 Current maturities of obligations under capitalized leases 20,000 21,397 Current maturities of notes and loans payable 540,000 539,181 --------------- -------------- Total current liabilities 789,312 803,237 --------------- -------------- Obligations under capitalized leases, less current maturities 32,217 38,551 --------------- -------------- Notes and loan payable, less current maturities 322,357 364,134 --------------- -------------- Stockholders' deficit: Common stock; no par value, 15,000,000 shares authorized, 5,288,584 shares issued and outstanding 677,687 677,687 Additional paid-in capital 35,000 35,000 Stock subscriptions receivable (80,000) (80,000) Accumulated deficit (798,642) (1,027,846) --------------- -------------- Total stockholders' deficit (165,955) (395,159) --------------- -------------- $ 977,931 $ 810,763 =============== ==============
See accompanying independent auditors' report and notes to financial statements. F-3 ROEX, INC. STATEMENTS OF INCOME (OPERATIONS) Three months ended Three months ended Year ended Year ended March 31, 2000 March 31, 1999 December 31, 1999 December 31, 1998 ------------------ ------------------- ------------------ ------------------ (unaudited) (unaudited) Net sales $ 1,610,982 $ 1,250,721 $ 5,736,832 $ 3,934,910 Cost of sales 374,372 319,578 1,263,082 1,070,590 ------------------ ------------------- ------------------ ------------------- Gross profit 1,236,610 931,143 4,473,750 2,864,320 ------------------ ------------------- ------------------ ------------------- Operating expenses: Payroll and related expenses 458,886 315,891 1,567,779 1,273,716 Sales and marketing 307,968 252,029 1,086,092 936,764 General and administrative 212,470 197,595 1,165,721 772,901 Debt restructuring and loan fees - - - 229,775 Interest 27,282 28,373 119,226 113,628 ------------------ ------------------- ------------------ ------------------- 1,006,606 793,888 3,938,818 3,326,784 ------------------ ------------------- ------------------ ------------------- Net income (loss) before provision for income taxes 230,004 137,255 534,932 (462,464) Provision for income taxes 800 800 800 800 ------------------ ------------------- ------------------ ------------------- Net income (loss) $ 229,204 $ 136,455 $ 534,132 $ (463,264) ================== =================== ================== =================== Net income (loss) per share: Basic $ 0.04 $ 0.03 $ 0.10 $ (0.10) ================== =================== ================== =================== Diluted $ 0.04 $ 0.02 $ 0.09 $ (0.10) ================== =================== ================== =================== Weighted average common equivalent shares outstanding: Basic 5,288,584 5,288,296 5,288,296 4,826,870 ================== =================== ================== =================== Diluted 6,087,049 6,086,761 6,086,761 4,826,870 ================== =================== ================== ===================
See accompanying independent auditors' report and notes to financial statements. F-4 ROEX, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 31, 1999 AND 1998 Additional Stock Total Common stock paid-in subscriptions Accumulated stockholders' Shares Amount capital receivable deficit deficit ----------- ------------- ----------- -------------- ------------- -------------- Balance at January 1, 1998 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 and loan fees 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 35,000 (80,000) (1,561,978) (940,541) Issuance of common stock from private placement offering 7,500 11,250 11,250 Net income for the year ended December 31, 1999 534,132 534,132 ----------- ------------- ----------- -------------- ------------ -------------- Balance at December 31, 1999 5,288,584 677,687 35,000 (80,000) (1,027,846) (395,159) Net income for the three months ended March 31, 2000 (unaudited) 229,204 229,204 ----------- ------------- ----------- -------------- ------------- -------------- Balance at March 31, 2000 (unaudited) 5,288,584 $ 677,687 $ 35,000 $ (80,000) $ (798,642) $ (165,955) =========== ============= =========== ============== ============= ==============
See accompanying independent auditors' report and notes to financial statements. F-5 ROEX, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Three months ended Three months ended Year ended Year ended March 31, 2000 March 31, 1999 December 31, 1999 December 31, 1998 ------------------ ------------------ ----------------- ----------------- (unaudited) (unaudited) Cash flows provided by (used for) operating activities: Net income (loss) $ 229,204 $ 136,455 $ 534,132 $ (463,264) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Bad debts - - 2,780 4,950 Depreciation and amortization 15,000 12,000 66,689 62,187 Loan fees related to debt restructuring - - - 218,525 Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable 2,188 (8,743) (1,643) (3,548) Inventory (45,621) (1,853) (53,645) 11,206 Prepaid expenses (7,692) (10,531) (27,688) 6,770 Other assets 3,194 877 498 (10,473) Increase (decrease) in liabilities - accounts payable and accrued expenses (13,348) (38,444) (137,562) 66,213 ------------------ ------------------ ----------------- ----------------- Total adjustments (46,279) (46,694) (150,571) 355,830 ------------------ ------------------ ----------------- ----------------- Net cash provided by (used for) operating activities 182,925 89,761 383,561 (107,434) ------------------ ------------------ ----------------- ----------------- Cash flows used for investing activities - payments to acquire property and equipment (9,192) (4,408) (13,804) (5,352) ------------------ ------------------ ----------------- ----------------- (Continued)
See accompanying independent auditors' report and notes to financial statements. F-6 ROEX, INC. STATEMENTS OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Three months ended Three months ended Year ended Year ended March 31, 2000 March 31, 1999 December 31, 1999 December 31, 1998 ------------------- ------------------- ------------------ ----------------- (unaudited) (unaudited) Cash flows provided by (used for) financing activities: Advances to officer-stockholder - - (4,000) (1,892) Payments on notes and loan payable, other (40,958) - (171,196) (114,580) Proceeds from notes and loan payable, other - - 165,000 100,000 Deferred offering costs (30,986) (35,158) (91,935) - Payments on obligations under capitalized leases (16,424) (7,748) (26,631) (15,192) Proceeds from private placement, net of offering costs - 11,250 11,250 59,162 ------------------- ------------------- ------------------ ----------------- Net cash provided by (used for) financing activities (88,368) (31,656) (117,512) 27,498 ------------------- ------------------- ------------------ ----------------- Net increase (decrease) in cash 85,365 53,697 252,245 (85,288) Cash and cash equivalents, beginning of year 306,552 54,307 54,307 139,595 ------------------- ------------------- ------------------ ----------------- Cash and cash equivalents, end of year $ 391,917 $ 108,004 306,552 $ 54,307 =================== =================== ================== ================= Supplemental disclosure of cash flow information: Interest paid $ 27,282 $ 28,373 119,226 $ 113,628 =================== =================== ================== ================= Income taxes paid $ 800 $ 800 800 $ 800 =================== =================== ================== ================= Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock related to debt restructuring and loan fees $ - $ - - $ 183,525 =================== =================== ================== ================= Issuance of common stock options related to debt restructuring and loan fees $ - $ - - $ 35,000 =================== =================== ================== ================= Cancellation of stocks in exchange for elimination of receivable $ - $ - $ - $ 10,000 =================== =================== ================== ================= Property and equipment acquired under capitalized lease $ 8,693 $ 28,408 $ 52,588 $ - =================== =================== ================== =================
See accompanying independent auditors' report and notes to financial statements. F-7 ROEX, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999 AND 1998 (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, telemarketing and over the internet. 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. Revenue Recognition: The Company recognizes revenue at the time merchandise is shipped to its customers. 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. Inventory: Inventory is valued at the lower of cost (first-in, first-out) or market. See accompanying independent auditors' report. F-8 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (1) Summary of Significant Accounting Policies, Continued: Income Taxes: The Company uses the asset and liability approach to measure temporary differences in accounting for income taxes. Temporary differences arise from differences in the time of revenue and expense recognition for financial reporting and income tax return purposes and are measured using the currently enacted tax rates and laws. The principal temporary difference is the federal net operating loss carryforward of approximately $750,000 and $1,300,000 at December 31, 1999 and 1998, respectively, which if not utilized, will start to expire in year 2018. California State net operating loss carryforward of approximately $285,000 and $850,000 at December 31, 1999 and 1998, respectively, if not utilized, will start to expire in year 2003. A deferred asset has been provided and completely offset by a valuation allowance, because its utilization does not appear to be reasonably assured. Net Income (Loss) Per Share: Net income per share has been computed using the weighted average number of common and common equivalent shares outstanding during 1999. Common equivalent shares consist of the common shares issuable upon conversion of the debt (using the if-converted method) and shares issuable upon the exercise of stock options (using the treasury stock method). For the year ended December 31, 1998 net loss per share has been computed using the weighted average number of common shares outstanding and common stock equivalents have not been included since they reduce loss per share. 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 pronouncements did not materially affect the financial statements. Interim Financial Statements (Unaudited): The accompanying unaudited condensed financial statements for the interim periods ended March 31, 2000 and 1999 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to 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 three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. (2) Loans to Officer-Stockholder: Loans to officer-stockholder are due on demand, non-interest bearing and unsecured. See accompanying independent auditors' report. F-9 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (3) Inventory: Inventory is comprised of the following: March 31, December 31, 2000 1999 -------------- -------------- (unaudited) Finished goods $ 276,247 $ 227,537 Labels and packaging 23,595 26,684 -------------- -------------- $ 299,842 $ 254,221 ============== ============== (4) Property and Equipment: Property and equipment is comprised of the following: Computer equipment and software $ 172,091 Office furniture and equipment 81,207 Vehicle 24,778 Leasehold improvements 4,003 -------------- 282,079 Less accumulated depreciation and amortization 201,431 -------------- $ 80,648 ============== Total depreciation and amortization expense for the years ended December 31, 1999 and 1998 amounted to $66,689 and $62,187, respectively. (5) Major Vendor: Purchases from four vendors amounted to approximately $960,000 for the year ended December 31, 1999 representing approximately 76% of total purchases. Included in accounts payable and accrued expenses at December 31, 1999 is approximately $28,000 due to these vendors. Purchases from three vendors amounted to approximately $648,000 for the year ended December 31, 1998 representing approximately 60% of total purchases. See accompanying independent auditors' report. F-10 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (6) Notes and Loan Payable: Notes and loan 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 (see Note 6-A). $ 337,461 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. The due dates were extended to September 30, 2000. 200,000 Notes payable, others (Bridge Financing), unsecured, principal due on June 30, 2002, interest payable quarterly at 12% per annum and is convertible into 74,000 restricted shares of common stock anytime prior to June 30, 2002. 111,000 Notes payable, unsecured, payable on demand with interest ranging from 12.0% to 16.0% per annum and payable monthly. 87,500 Promissory notes payable, related parties (Bridge Financing), unsecured, principal due on June 30, 2002, interest payable quarterly at 12% per annum and is convertible into 36,000 restricted shares of common stock at anytime prior to June 30, 2002. 54,000 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 prime rate plus 2.0% per annum. 40,000 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 (see Note 6-B). 30,000 Note payable, related party, unsecured, payable on demand with interest at 12.0% (see Note 6-C). 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. 13,354 -------------- 903,315 Less current maturities 539,181 -------------- $ 364,134 ==============
See accompanying independent auditors' report. F-11 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (6) Notes and Loans Payable, Continued: A. In September 1998, the Company restructured its debt obligation to Bison Development Fund, L.P. 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 income (operations) for the year ended December 31, 1998. B. 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 income (operations). C. 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. The following table summarizes the aggregate maturities of the notes and loan payable as of December 31, 1999: Year ending December 31, 2000 $ 539,181 2001 199,134 2002 165,000 -------------- $ 903,315 ============== Total interest expense for the years ended December 31, 1999 and 1998, including interest on obligations under capital leases, amounted to $119,226 and $113,628, respectively. Bridge Financing Starting in July 1999, the Company issued 12% subordinated convertible notes in the amount of $165,000, 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 in cash 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 share of common stock. See accompanying independent auditors' report. F-12 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (7) Obligations Under Capitalized Leases: The Company leases office and computer equipment under capital leases which are secured by related assets with a net book value of approximately $63,000. 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, 1999: Year ending December 31, 2000 $ 23,230 2001 22,064 2002 17,034 2003 7,392 ------------ Total minimum lease payments 69,720 Less amounts representing interest 9,772 Present value of net minimum lease payments 59,948 Less current maturities 21,397 ------------ $ 38,551 ============ (8) Commitments, Contingencies and Other: 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, 1999: Warehouse and office space Equipment Total --------------- ------------- --------------- Year ending December 31, 2000 $ 120,833 $ 23,980 $ 144,813 2001 20,139 11,990 32,129 --------------- ------------- --------------- $ 140,972 $ 35,970 $ 176,942 =============== ============= ===============
Total rent expense amounted to $121,435 and $127,841 for the years ended December 31, 1999 and 1998, respectively. See accompanying independent auditors' report. F-13 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (8) Commitments, Contingencies and Other, Continued: 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, 1999 and 1998 amounted to $19,416 and $19,027, respectively. Advertising Advertising costs, consisting primarily of radio advertising, are expensed when incurred and amounted to approximately $991,000 and $794,000 for the years ended December 31, 1999 and 1998, 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: Private Placement 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. During 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. During 1999, net proceeds amounted to $11,250 from the issuance of 7,500 shares of its common stock. Initial Public Offering During December 1999, the Company filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission pursuant to regulation S-B under the Securities Act of 1933, to sell up to a total of 1,000,000 shares of its common stock at $5.00 per share. During 1999, the Company incurred $91,935 of offering costs (primarily related to legal, accounting and filing fees), which is presented on the accompanying balance sheet as deferred offering costs. Upon the successful completion of the proposed offering, deferred offering costs will be netted against the gross proceeds. See accompanying independent auditors' report. F-14 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (9) Common Stock, Continued: Non-Qualified Stock Options In 1998, pursuant to a debt and debt-restructuring agreement with a current stockholder (see Note 6), the Company granted 116,350 non-qualified common stock options with an average exercise price of $0.50 per option as an incentive to renegotiate. The Company also granted 50,000 non-qualified common stock options to two of its directors at an exercise price of $0.50 per share. Incentive Stock Option Plan In 1999, the Company adopted an Incentive Stock Option Plan (the "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 administer 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. During 1999, 737,500 options have been granted under this plan. The number and weighted average exercise prices of options granted for the years ended December 31, 1999 and 1998 are as follows: 1999 1998 ------------------------------- --------------------------- Average Average Exercise Exercise Number Price Number Price ----------- ------------ ----------- --------- Outstanding at beginning of the year 166,350 $ 0.50 581,750 $ 0.50 Granted during the year 737,500 1.53 166,350 0.50 Outstanding at end of the year 903,850 1.34 166,350 0.50 Exercisable at end of the year 496,350 1.19 166,350 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," ("FASB 123") 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 equal or exceed the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. See accompanying independent auditors' report. F-15 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 (9) Common Stock, Continued: Proforma information regarding net income (loss) and earnings (loss) per share, pursuant to the requirements of FASB 123, for the years ended December 31, 1999 and 1998, are as follows: 1999 1998 --------------------------------- ---------------------------- Historica Proforma Historical Proforma ---------------- ------------ -------------- ------------ Net income (loss) $ 534,132 $ 109,460 $ (463,264) $ (513,169) Net income (loss) per share - basic $ 0.10 $ 0.02 $ (0.10) (0.11) Net income (loss) per share - diluted $ 0.09 $ 0.02* $ (0.10) (0.11)
* In computing the proforma diluted net income, an adjustment of approximately $24,000 arising from interest savings from conversion of debts to equity has been made in the Proforma net income for the year ended December 31, 1999. See accompanying independent auditors' report. 1,000,000 SHARES ROEX, INC. COMMON STOCK ------------------------------------------ SUBSCRIPTION AGREEMENT Roex, Inc. 2801 Business Center Drive Suite 185 Irvine, CA 92612 Gentlemen: The undersigned irrevocably subscribe(s) for and agree(s) to purchase shares of common stock, no par value per share ("Common Stock"), of Roex, Inc. ("Company"), to be registered in the name(s) of the undersigned at the address appearing below. Delivered concurrently herewith is payment in full for the Common Stock subscribed for, at the price of $_________ per share (checks made payable to "Santa Barbara Bank and Trust, Escrow Agent"). The undersigned agree(s) that the Company has the right to reject this subscription for any reason and that, in the event of rejection, all funds delivered herewith will be promptly returned, without interest or deduction. WITHHOLDING CERTIFICATION Each of the undersigned certifies under penalty of perjury that: (1) The Social Security Number or other Federal Tax I.D. Number entered below is correct. (2) The undersigned is not subject to backup withholding because: (a) The IRS has not informed the undersigned that he/she/it is subject to backup withholding. (b) The IRS has notified the undersigned that he/she/it is no longer subject to backup withholding. NOTE: If this statement is not true and you are subject to backup withholding, strike out section (2). REGISTRATION OF SECURITIES Common Stock is to be registered as indicated below. (Please type or print.) - ---------------------------------------------------------- ------------------------------------------------------- Name(s) Social Security or Federal Tax ID Number(s) - ---------------------------------------------------------- ------------------------------------------------------- Street Address Telephone Number - ---------------------------------------------------------- City, State, Zip Code
OWNERSHIP: [ ] Individual [ ] Marital Property [ ] Joint Tenants with Right of Survivorship [ ] Tenants in Common [ ] Corporation [ ] Partnership [ ] Trust [ ] IRA/Qualified Plan [ ] Other If Common Stock is to be registered jointly, all owners must sign. For IRAs/Qualified Plans, the trustee must sign. Any registration in the names of two or more co-owners will, unless otherwise specified, be as joint tenants with rights of survivorship and not as tenants in common. Each subscriber certifies that he/she/it has full capacity to enter into this Agreement. This subscription is subject to acceptance by the Company and will not be accepted unless accompanied by payment in full. SUBSCRIBER SIGNATURES INDIVIDUALS (All proposed record holders must sign.) Dated: _________________________, 2000 - ---------------------------------------------------------- -------------------------------------------------------- (Signature) (Signature) - ---------------------------------------------------------- -------------------------------------------------------- (Print or Type Name) (Print or Type Name)
CORPORATIONS, PARTNERSHIPS, TRUSTS AND IRAS/QUALIFIED PLANS (Certificate of Signatory must be completed.) Dated: _________________________, 2000 ---------------------------------------------------- (Print or Type Name of Entity) By: ---------------------------------------------------- (Signature of Authorized Representative) CERTIFICATE OF SIGNATORY I, , am the ---------------------------------------------------------- (Print or Type Name of Authorized Representative) of - ---------------------------------- ----------------------------- ("Entity"). (Print or Type Title or Position) (Print or Type Name of Subscribing Entity) I certify that I am fully authorized and empowered by the Entity to execute this Subscription Agreement and to purchase Common Stock, and that this Subscription Agreement has been duly executed by me on behalf of the Entity and constitutes a valid and binding obligation of the Entity in accordance with its terms. ------------------------------------------------------------ (Signature of Authorized Representative) SALES AGENT Name of Selected Placement Agent: ------------------------------------------ Name of Registered Representative: ----------------------------------------- ACCEPTANCE Subscription [ ] accepted [ ] rejected as of , 2000. --------------------- ROEX, INC. By: ------------------------------------------ (Signature of Authorized Officer) 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 imitation 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 have entered into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our Bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for certain expenses, including attorneys fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Roex, arising out of such person's services as an director or executive officer of Roex, any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 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. 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 II-2 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 and the Indemnification Agreements 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 $ 1,584 Printing Expenses 30,000 Accounting Fees and Expenses 50,000 Legal Fees and Expenses 105,000 Blue Sky Fees and Expenses 7,500 Registrar and Transfer Agent Fees 2,500 Miscellaneous 3,416 --------- Total $200,000 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. This investor is an LLC in the business of lending monies to businesses. It is a sophisticated lender and had access to the kind of information normally provided in a prospectus. An exemption from registration is claimed by the registrant under Section 4(2). In October 1998, two of our directors, Messrs. Barnett and Stuckelman, 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, II-3 Roex issued 30,000 shares valued at $0.30 per share to the two directors. Both of the directors are sophisticated individuals and had access to information normally provided in a prospectus. An exemption from registration is claimed by the registrant under Section 4(2). Between December 1998 and January 1999, we sold 51,834 shares of our Common Stock at $1.50 per share (orproceeds of $70,412 net of offering cost of $7,339) 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. No general solicitation or general advertising was used in connection with these sales. Not more than 35 unaccredited investors were involved in purchasing this private placement. Each investor was given access to information normally provided in a prospectus. An exemption from registration is claimed by the registrant under Regulation D. Between July and September 1999, pursuant to a private placement, we issued Convertible Promissory Notes (the "Notes") 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. The Notes were purchased by only 12 investors, including Roex's three outside directors. All of the investors are sophisticated individuals and had access to information normally provided in a prospectus. Furthermore, each investor is either a director or had a prior personal and/or business relationship with a director or officer of Roex. An exemption from registration is claimed by the registrant under Section 4(2). 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. All of the investors (total of 27) in all of the private placements, except the December 1998 to January 1999 offering, were sophisticated and accredited persons. At least one of the officers and directors had a prior relationship with the investors. The December 1998 to January 1999 offering was pursuant to a private placement memorandum. Each investor executed a subscription agreement representing that he/she was purchasing securities not with a view to distribute. Less than 35 persons purchased in this offering. 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 - --------------- ---------------------------------------------------------------- 1 Form of Managing Placement Agent (Underwriter) Agreement 3 Charter Documents 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 II-4 EXHIBIT NUMBER DESCRIPTION - --------------- ---------------------------------------------------------------- 4.3 Subscription Agreement for this Offering 4.4* Form of Underwriter's Warrant 5* Opinion of Law Offices of William B. Barnett 10 Material Contracts 10.1 Form of Escrow Agreement with Santa Barbara Bank and Trust applicable to this Offering 10.2 1999 Stock Incentive Plan 10.3 Form of Officer and Director Indemnification Agreement 10.4 Loan Restructure Agreement with Bison Development Fund, L.P. 10.5 Stock Option granted to Bison Development Fund, L.P. 10.6 Employment Agreement dated November 1, 1998, between Roex and Rodney H. Burreson 10.7 Royalty Agreement dated July 23, 1996, between Roex and Dennis F. Gibson 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 small business issuer will provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer 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 small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer 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 small business issuer 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. The undersigned small business issuer will: II-5 (1) For determining any liability under the Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act as part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and the offering of the securities at that time as the initial bona fide offering of those securities. (3) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (4) For determining liability under the Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (5) File a post-effective amendment to remove from registration any of the securities which remain unsold at the end of the offering. 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 July 6, 2000. 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. II-6 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. NAME TITLE DATE /s/ RODNEY H. BURRESON Chairman of the Board and ------------------ Chief Executive Officer Rodney H. Burreson July 6, 2000 /s/ DEREK BURRESON Chief Operating Officer, -------------- Secretary and Director Derek Burreson July 6, 2000 /s/ PETER WEBER Chief Financial Officer ----------- (Principal Financial and Peter Weber Accounting Officer) July 6, 2000 /s/ ROBERT STUCKELMAN Director ----------------- Robert Stuckelman July 6, 2000 /s/ WILLIAM B. BARNETT Director ------------------ William B. Barnett July 6, 2000 /S/ Shri K. Mishra Director --------------------------- Shri K. Mishra, M.D., M.S. July 6, 2000 EX-1 2 0002.txt UNDERWRITING AGREEMENT MANAGING PLACEMENT AGENT (UNDERWRITING) AGREEMENT RH Investment Corporation June ___, 2000 Page 30 1,000,000 SHARES ROEX, INC. MANAGING PLACEMENT AGENT AGREEMENT June ____, 2000 RH Investment Corporation 15760 Ventura Boulevard Suite 1732 Encino, CA 91436 Gentlemen: Roex, Inc., a California corporation ("Company"), hereby confirms its agreement with you, as Managing Placement Agent, as follows: SECTION 1. Description of the Offering. The Company proposes to offer for sale and sell to the public up to 1,000,000 shares of its common stock, par value $.0001 per share ("Common Stock"), at the price of $6.00 per share ("Offering"). All funds received from subscribers will be held in escrow by the Santa Barbara Bank and Trust, Santa Barbara, California ("Escrow Agent"), pursuant to an agreement among you, the Company and the Escrow Agent ("Escrow Agreement"). The Company will determine, in its sole discretion, to accept or reject subscriptions for Common Stock within five days following receipt thereof. Funds of an investor whose subscription is rejected will be promptly returned directly to such person by the Escrow Agent, without interest thereon or deduction therefrom, pursuant to the terms of the Escrow Agreement. In the event that at least 500,000 shares of Common Stock have not been sold within 90 days from the initial effective date of the Registration Statement (as hereinafter defined) under the Securities Act of 1933, as amended ("Securities Act"), which period may be extended for an additional 60 days by you, the Offering will terminate and all funds received from subscribers will be promptly returned in full by the Escrow Agent directly to subscribers, without interest thereon or deduction therefrom, as provided in the Escrow Agreement. Provided that at least 500,000 shares of Common Stock are sold within the foregoing period, the Company may continue to offer the Common Stock for sale until (i) 1,000,000 shares are sold or (ii) December 31, 2000, whichever first occurs; the Offering may be terminated at any time prior thereto at the discretion of the Company. The Company reserves the right to refuse to sell shares of Common Stock to any person at any time. The Company, the Common Stock and the Offering are more fully described in the Registration Statement (as hereinafter defined) and the Prospectus (as hereinafter defined). All terms used in this Agreement, unless specifically defined herein, shall have the meanings set forth in such Registration Statement and Prospectus. SECTION 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with you, that: (a) The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of California. The Company has the full power and authority and all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental and regulatory officials and bodies required to own its properties and conduct its business as described in the Prospectus (as herein defined); the Company is duly qualified to do business under the laws of (and is in good standing as such in) each jurisdiction in which it owns or leases property, has an office, or in which business is conducted and such qualification is required, except where the failure to so qualify would not have a material adverse effect on the business, assets or financial condition of the Company, and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (b) The Company does not own or control, directly or indirectly, any corporation, association, partnership or other entity other than as identified in the Registration Statement (as herein defined). (c) The execution, delivery and performance by the Company of this Agreement has been duly authorized by all necessary action and will not (i) violate any provision of the Articles of Incorporation or Bylaws of the Company (in each case as amended at the time of this Agreement), (ii) result in the breach, or be in contravention, of any provision of any agreement, franchise, license, indenture, mortgage, deed of trust or other instrument to which the Company is a party or by which the Company or its property may be bound or affected, or any order, law, statute, rule or regulation applicable to the Company of any court or regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any of its property, or any order of any court or governmental agency or authority entered in any proceeding to which the Company was or is now a party or by which it is bound or (iii) result in the creation of any lien, charge or encumbrance upon any property of the Company. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement by the Company, or the consummation by the Company of the transactions contemplated hereby, other than under the Securities Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission ("Commission") thereunder (collectively, the "Exchange Act"), state securities laws and regulations (collectively, the "Blue Sky Laws") applicable to the public offering of the Common Stock as described in the Registration Statement and the Prospectus (as hereinafter defined), and/or the rules of the National Association of Securities Dealers, Inc. ("NASD"). This Agreement has been duly executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as rights to indemnity or contribution may be limited by applicable law and subject to bankruptcy, insolvency or similar laws generally affecting the rights of creditors and equitable principles affecting the right to obtain specific enforcement or similar equitable relief. (d) A registration statement on Form SB-2 (Registration File No. 333-92299) and an Amendment No. 1 with respect to the Common Stock has been carefully prepared by the Company in conformity with the requirements of the Securities Act and the rules and regulations ("Rules and Regulations") of the Commission thereunder, and has been filed with the Commission; the Company has so prepared and has filed or proposes to file prior to the effective date of such registration statement or subsequent to such effective date pursuant to Rule 430A under the Rules and Regulations, an additional amendment or amendments to such registration statement. There have been delivered to you and your counsel two signed copies of such registration statement, as initially filed with the Commission and each amendment thereto, together with copies of each exhibit filed therewith, and two conformed copies of such registration statement, as initially filed with the Commission and each amendment thereto (but without exhibits) and of each related preliminary prospectus ("Preliminary Prospectus") and of the proposed final form of prospectus. As used in this Agreement, the term "Registration Statement" means such registration statement, including exhibits, financial statements and schedules and documents incorporated therein by reference, as finally amended and revised at the time such registration statement becomes effective, including the information, if any, deemed to be a part thereof pursuant to Rule 430A of the Rules and Regulations, and the term "Prospectus" means the related prospectus in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) under the Securities Act. Any reference herein to any Registration Statement, Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents and information, if any, incorporated by reference therein. Any reference to any amendment or supplement to any Registration Statement, Preliminary Prospectus or Prospectus shall be deemed to refer to and include any documents filed after such date under the Exchange Act and incorporated therein by reference. (e) Neither the Commission nor any state securities or "blue sky" authorities has issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed fully in all material respects with the requirements of the Securities Act, the Rules and Regulations and the Blue Sky Laws and, as of its date, has not included any untrue statement of a material fact or omitted to state a fact required to be stated therein or necessary to make the statements therein not misleading; when the Registration Statement becomes effective, and at all times subsequent thereto up to each Closing Date (as defined herein), the Registration Statement and the Prospectus, and any amendments or supplements thereto, will contain all statements that are required to be stated therein in accordance with the Securities Act, the Rules and Regulations and the Blue Sky Laws and will in all material respects conform to the requirements of the Securities Act, the Rules and Regulations and the Blue Sky Laws, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state a fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you specifically for inclusion therein. (f) There are no contracts or other documents, transactions or relationships of or by and between the Company or any of the respective officers or directors of the Company required to be described in the Registration Statement or filed as exhibits to the Registration Statement by the Securities Act or the Rules and Regulations which have not been described or filed as required or incorporated by reference as permitted by the Securities Act and the Rules and Regulations. (g) The Company has authorized capital stock as set forth in the Prospectus. All outstanding shares of capital stock of the Company have been duly authorized, validly and legally issued and are fully paid and nonassessable; such shares have not been issued in violation of or subject to any preemptive rights provided for by law or by the Company's Articles of Incorporation or Bylaws. The Common Stock conforms in all material respects to all statements with respect thereto contained in the Prospectus, and such statements conform to the provisions set forth in the Articles of Incorporation and Bylaws of the Company. (h) The shares of Common Stock sold in the Offering, upon receipt of full payment therefor and delivery by the Company, will be duly authorized, validly and legally issued, fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive rights provided for by law or by the Company's Articles of Incorporation or Bylaws or be subject to any lien, claim, encumbrance, security interest, preemptive rights or any other claim of any third party. (i) Except as described in the Prospectus, there is not pending, or, to the knowledge of the Company, threatened, any action, suit, proceeding, inquiry or investigation to which the Company is a party, or to which the property of the Company is subject, before or brought by any court, governmental agency or body or arbitration tribunal, which, if determined adversely to the Company, would result in any material adverse change in the business, financial position, net worth, results of operations or prospects of the Company, or materially and adversely affect its property or assets. (j) The financial statements and the related notes included in the Registration Statement, in any Preliminary Prospectus or in the Prospectus present fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated and have been prepared in accordance with generally accepted accounting principles, except as otherwise stated therein. Stonefield, Josephson, Inc., who have audited certain financial statements as set forth in their report included in the Registration Statement and Prospectus and each Preliminary Prospectus, are independent accountants as required by the Securities Act and the Rules and Regulations. (k) The Company is not in violation of its Articles of Incorporation and Bylaws, or in default or breach under any court or administrative order or decree, or in default with respect to any provision of any lease, loan agreement, franchise, license, permit, agreement or other contractual obligation to which the Company is a party or by which the Company or any of its property is bound, and there does not exist any state of facts which constitutes an event of default or breach under such documents or which, upon notice or lapse of time or both, would constitute such an event of default or breach except those, if any, described in the Prospectus or such defaults or breaches which, individually or in the aggregate, are not, and with notice or lapse of time, or both, would not become, material to the Company. The Company is not in violation or breach of any law, order, rule, regulation, writ, injunction or decree of any governmental authority or instrumentality or any court, domestic or foreign, which violation would have a materially-adverse effect on its business as described in the Prospectus. (l) Neither the Company nor any of its affiliates, nor any director or officer of the foregoing, have taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in (i) a violation of Rule 10b-6 under the Exchange Act or (ii) the manipulation of the price of the Common Stock facilitate the sale or resale of such securities. (m) The Company has good and marketable title to all the property and assets reflected as owned by it in the Prospectus, subject to no lien, mortgage, pledge, charge or encumbrance of any kind or nature whatsoever, except those, if any, reflected in the Prospectus, or which are not material to the Company and do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property; all properties held or used by the Company under leases, licenses, franchises or other agreements are held by it under valid, subsisting and enforceable leases, licenses, franchises or other agreements (subject to bankruptcy, reorganization, moratorium or similar laws affecting creditors' rights generally). (n) Since its inception, the Company has not sustained any material loss or interference with its business or property from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, the Company has not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, not in the ordinary course of business, and there has not been any material change in the capital stock or long-term debt of the Company, or any material adverse change, or any development involving a prospective material adverse change, in the business, financial position, net worth, results of operations or prospects of the Company, except in each case as described in or contemplated by the Prospectus. (o) The Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown as due thereon, and has no knowledge of any tax deficiency which has been asserted or threatened against the Company which would materially adversely affect its business, operations or property. (p) The Company keeps accurate books and records and maintains internal accounting controls which provide reasonable assurance that (i) transactions are executed in accordance with management's authorization, (ii) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (iii) access to its assets is permitted only in accordance with management's authorization and (iv) the reported accountability for its assets is compared with existing assets at reasonable intervals. (q) There are no holders of securities of the Company having rights to registration thereof under the Securities Act or preferential rights to purchase Common Stock or any other securities of the Company, except as disclosed in the Registration Statement and the Prospectus. (r) All documents delivered or to be delivered by the Company or its representatives in connection with the issuance and sale of the Common Stock were on the dates on which they were delivered or will be on the dates on which they are to be delivered, in all material respects, true, complete and correct. (s) The Company owns, or possesses the requisite licenses or other rights to use, all trademarks, service marks, service names and trade names necessary to conduct its business as described in or contemplated by the Prospectus; there is no claim or action by any person pertaining to (or proceeding pending or threatened which challenges) the rights of the Company with respect to any trademarks, service marks, service names or trade names used in the conduct of its business as described in or contemplated by the Prospectus; the products, services and processes of the Company have not infringed and do not infringe upon proprietary rights held or asserted by third parties which infringement, if resolved adversely to the Company, could materially affect its earnings, assets, affairs, business prospects or condition (financial and other). (t) The Company has not distributed and will not distribute prior to the final Closing Date (as hereinafter defined), any offering material in connection with the offer and sale of the Common Stock other than as permitted by the Securities Act. (u) The Company has not (i) had any material dealings within the twelve months prior to the date of this Agreement with any member of the NASD, or any person related to or associated with such member, other than discussions and meetings relating to the Offering, except as disclosed in writing to you prior to the date hereof; (ii) entered into a financial or management consulting agreement except as contemplated hereunder; or (iii) engaged any intermediary between you and the Company, and/or any of the affiliates of the Company, in connection with the Offering, and no person has been or will be compensated in any manner for such service. (v) Each of the Company's directors, executive officers and 10% shareholders shall have agreed in writing that, from the date hereof through the final Closing Date (as hereinafter defined), and for a period of 90 days thereafter, they will not, without your prior written consent, sell, offer or contract to sell, or grant any option to purchase, or otherwise dispose of, directly or indirectly, any shares of Common Stock owned by them (or any securities convertible into or exchangeable for any shares of Common Stock) except pursuant to this Agreement. Any certificate signed by any officer of the Company and delivered to you or to your counsel shall be deemed a representation and warranty of the Company to you as to the matters covered thereby and any certificate delivered by the Company to its counsel for purposes of enabling such counsel to render any opinion referred to in this Agreement will also be furnished to you and to your counsel and shall be deemed to be additional representations and warranties to you by the Company. SECTION 3. Representations and Warranties of the Managing Placement Agent. You hereby represent and warrant to, and agree with, the Company as follows: (a) You are a corporation duly organized, validly existing under the laws of the State of California, with all requisite power and authority to enter into this Agreement and to carry out your obligations hereunder. (b) This Agreement (i) has been duly authorized, executed and delivered by you, (ii) constitutes your legal, valid and binding obligation, and (iii) subject to applicable bankruptcy, insolvency and other laws affecting the enforceability of creditors' rights generally, is enforceable as to you in accordance with its terms, specific performance hereof being limited by general principles of equity and the enforceability of the indemnification provisions hereof. (c) The execution, delivery and performance of this Agreement by you and the consummation by you of the transactions contemplated hereby and by the Prospectus will not conflict with or result in a breach or violation by you of any of the terms or provisions of, or constitute a default in any material respect under, (i) any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which you are a party or to which you or your property are subject, (ii) your Articles of Incorporation or Bylaws or (iii) any statute, judgment, decree, order, rule or regulation applicable to you of any court or governmental agency or body having jurisdiction over you, your affiliates or your property. (d) You are, and at all times through the final Closing Date (as herein defined) shall remain, duly registered pursuant to the provisions of the Exchange Act as a broker-dealer; you are, and at all times through the final Closing Date shall remain, a member in good standing of the NASD; you will not reallow discounts or pay commissions or other compensation for participation in the distribution of the Offering to any broker-dealer which is not a member of the NASD, including foreign broker-dealers registered under the Exchange Act; you shall act as an independent contractor, and nothing herein shall constitute you an employee of the Company; you shall not make sales of Common Stock discretionary accounts. (e) In connection with the offer, offer for sale and sale of Common Stock, you (and your representatives and agents) shall conform to and comply with (i) the provisions of the Conduct Rules of the NASD, (ii) applicable provisions of federal law, including without limitation the Securities Act, the Rules and Regulations and the Exchange Act, and (iii) the Blue Sky Laws applicable to the Offering, relating to, among other things, the period during which and conditions under which the Common Stock may be offered, offered for sale and sold; you shall not distribute the Prospectus or otherwise commence the Offering without prior written confirmation from the Company or its counsel that the Offering may be commenced under applicable securities laws, rules and regulations. (f) Pursuant to your appointment made in Section 4 hereof, you will use your best efforts to procure subscribers for Common Stock will conduct the Offering in compliance with the provisions of the Securities Act, the Rules and Regulations, the Exchange Act, applicable Blue Sky Laws and the rules and regulations of the NASD; accordingly, as of each Closing Date (as herein defined), you will have: (1) not made any untrue statement of a material fact and not omitted to state a material fact required to be stated or necessary to make any statement made not misleading, to the extent, if any, that representations are made by you concerning the Offering or matters set forth in the Prospectus other than those set forth in the Prospectus; (2) prior to any sale of any Common Stock, reasonably believed that an investment in the Common Stock was suitable for each subscriber; (3) promptly distributed any amendment or supplement to the Prospectus provided to you pursuant to Section 5(b) of this Agreement to persons who had previously received a Prospectus from you and who you believed continued to be interested in Common Stock and have included such amendment or supplement in all deliveries of the Prospectus made after receipt of any such amendment or supplement; (4) only used sales materials other than the Prospectus which have been approved for use in the Offering by the Company, and refrained from providing any such materials to any offeree unless accompanied or preceded by the Prospectus; (5) prior to the sale of any Common Stock, reasonably believed that each subscriber met the investor standards and other requirements set forth in the Prospectus and the Blue Sky Letters (as hereinafter defined) and that an investment in the Common Stock was suitable for such subscriber; you will have prepared and maintained, for your benefit and the benefit of the Company, file memoranda and other appropriate records substantiating the foregoing and shall retain such records for the period required under Exchange Act Rule 17a-4 or the laws of any state in which you offer the Common Stock for sale, whichever is longer; and (6) not made any representations on behalf of the Company other than those contained in the Prospectus, nor shall you have acted as an agent of the Company, or for the Company in any other capacity, except as expressly set forth herein. SECTION 4. Purchase Sale and Delivery of Common Stock. On the basis of the covenants, representations, and warranties herein contained and subject to the terms and conditions herein set forth: (a) The Company hereby engages you as its exclusive agent to solicit subscriptions for the Common Stock in accordance with the terms of the Registration Statement, the Prospectus and this Agreement, and you agree to use your best efforts to procure such subscriptions. You may, however, discharge your responsibilities under this Agreement by acting as a Managing Placement Agent and forming a group of securities dealers ("Selected Placement Agents" ), including you, to procure subscribers for the Common Stock. Any agreement between you and a securities dealer pursuant to which such securities dealer becomes a Selected Placement Agent shall require such dealer to represent and warrant that it will conduct the Offering in the manner set forth herein. The allocation of Common Stock among you and the Selected Placement Agents shall be made by you. (b) Subject to the terms and conditions set forth herein, in consideration of your execution of this Agreement and performance of your obligations hereunder, the Company agrees that, at each Closing (as defined herein), you shall receive (i) selling commissions in an amount equal to 10% of the aggregate purchase price of the Common Stock sold by you (or any Selected Placement Agent) and (ii) a nonaccountable expense allowance equal to 3% of the aggregate purchase price of the Common Stock sold by you (or any Selected Placement Agent). The aggregate commissions and expense allowance payable in connection with the sale of Common Stock will be disbursed to you, as provided herein and in Escrow Agreement; thereupon, you shall pay to each of the other Selected Placement Agents, if any, in such amount (which shall not exceed commissions and expense allowance in the amounts of 10% and 3%, respectively, of the aggregate purchase price of the Common Stock sold by such Agent), at such times and upon such terms and conditions as shall have been agreed upon between you and such Selected Placement Agent, that portion of the aggregate commissions to which such Selected Placement Agent is entitled. (c) As additional consideration for your services rendered pursuant to this Agreement, on the final Closing Date (as hereinafter defined), the Company will sell to you or your designees, at a price of $0.01 per warrant ("Warrant Price"), warrants ("Underwriter's Warrants") to purchase shares of Common Stock, under the following terms and conditions: (1) The aggregate number of shares of Common Stock subject to Underwriter's Warrants will be equal to 10% of the shares of Common Stock sold by you (or any Selected Placement Agent) pursuant to this Agreement. (2) The Underwriter's Warrants may not be sold, hypothecated, exercised, assigned or transferred for a period of one year after the initial effective date of the Registration Statement, except to partners or officers of the Selected Placement Agents (including the Managing Placement Agent). (3) Underwriter's Warrants shall be exercisable during the 4-year period commencing on the first anniversary of the final Closing Date ("Warrant Exercise Term"), at any time and from time to time, in whole or in part, during the said Warrant Exercise Term, and shall grant to the holder the right to purchase one share of Common Stock for each Underwriter's Warrant at a price per share equal to 135% of the initial public offering price of the Common Stock. (4) The Underwriter's Warrants shall contain such other terms and conditions as are satisfactory, in form and substance to you and your counsel, including without limitation, adjustment and exercise provisions. (5) The Company agrees and undertakes, upon the expiration of a 12-month period after the final Closing Date, and at any time during the 4-year period thereafter, one time only, to register under the Securities Act all or any part of the Underwriter's Warrants and/or the shares issuable upon the exercise thereof ("Underlying Shares"), upon the written request of holders of a majority of such Warrants and Underlying Shares, at the Company's sole cost and expense, including "blue sky" fees for counsel and "blue sky" filing fees to qualify the Underwriter's Warrants and Underlying Shares for sale in those jurisdictions requested by you, at the time determined by you. (6) The Company agrees and undertakes, during the four-year period described in subsection 4(c)(3), above, that if the Company shall seek to register any of its securities under the Securities Act, each holder of the Underwriter's Warrants shall be notified and shall be entitled to elect to have included in such proposed registration, without cost or expense, any or all of his Underwriter's Warrants or Underlying Shares ("Piggy-Back Rights"). In the event of such a proposed registration, the Company shall furnish the holders of Underwriter's Warrants with no less than 30 days written notice prior to the proposed filing of a registration statement. Such notice shall continue to be given by the Company to such Warrantholders for each proposed registration by the Company until such time as all Underwriter's Warrants or Underlying Shares have been registered. Warrantholders shall exercise Piggy-Back Rights by giving written notice within 20 days of the receipt of the Company's notice of intention to file a registration statement. (d) Each subscriber for Common Stock must (i) complete and execute a Subscription Agreement (in the form included as Exhibit A to the Prospectus) and any other documents which may be required by you or the Company in connection with such subscription (collectively, "Subscription Documents") and (ii) tender payment in full for the Common Stock subscribed for ("Subscription Payment"); checks representing Subscription Payments should be made payable to "Santa Barbara Bank And Trust, Escrow Agent"; you shall deliver Subscription Payments received by you to the Escrow Agent, _______________________________________________, Encino, California 91403, by 12:00, noon, on the business day following such receipt by you, together with a schedule setting forth the amount of each such Subscription Payment and the name, mailing address and state of residence of the subscriber. Concurrently with your delivery of each Subscription Payment to the Escrow Agent, you shall forward to the Company executed originals of all related Subscription Documents, retaining copies of all such Subscription Documents for your records. (e) Within five days following receipt by it of executed Subscription Documents, the Company shall determine to accept or reject each subscription and shall notify you and the Escrow Agent orally (to be confirmed in writing). If the Company elects to reject a subscription, the related Subscription Payment shall, upon receipt by the Escrow Agent of oral notice (to be confirmed in writing) from the Company of such rejection, promptly be returned directly to the rejected subscriber by the Escrow Agent, without interest thereon or deduction therefrom. (f) Subject to the terms hereof and of the Escrow Agreement, the first disbursement of subscription proceeds (including disbursement of amounts due to you hereunder) shall take place not less than 5 days nor more than 15 days following the date upon which cleared funds representing payment in full for at least 1,000 shares of Common Stock (or such lesser amount as may be agreed to in writing by the parties hereto, in their discretion) have been received by the Escrow Agent under the terms of the Escrow Agreement; such initial disbursement is referred to herein as the "Initial Closing," and the date thereof is referred to as the "Initial Closing Date." Following the Initial Closing, subscription proceeds shall be disbursed from time to time as agreed among you, the Company and the Escrow Agent; each such further disbursement of subscription proceeds is referred to herein as an "Additional Closing," and the date thereof as an "Additional Closing Date." The Initial Closing and Additional Closings are sometimes referred to herein as a "Closing" or "Closings"; and the Initial Closing Date and Additional Closing Dates are sometimes referred to herein as a "Closing Date" or "Closing Dates." (g) Each Closing shall take place at the offices of the Escrow Agent, in Encino, California, or, at your option, at such other place as you may agree upon in writing with the Company. (h) After the final Closing Date, you will not be considered to have any continuing or future duty or obligation of any kind to the Company. SECTION 5. Covenants of the Company. The Company covenants and agrees that: (a) The Company will use its best efforts to cause the Registration Statement to become effective at the earliest possible time and will advise you promptly upon notification from the Commission of effectiveness. The Company will advise you promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, or of any notification of the suspension of qualification of the Common Stock for sale in any jurisdiction or the initiation or threatening of any proceedings for that purpose, and will also advise you promptly of any request of the Commission for amendment or supplement to the Registration Statement (either before or after it becomes effective), to any Preliminary Prospectus or to the Prospectus, or for additional information, and will not file or make any amendment or supplement to the Registration Statement (either before or after it becomes effective), to any Preliminary Prospectus or the Prospectus of which you have not been furnished with a copy prior to such filing or to which you reasonably object; and the Company will file promptly and will furnish to you at or prior to the filing thereof copies of all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to the Exchange Act subsequent to the date of the Prospectus, and for so long as the delivery of a prospectus is required in connection with the offer or sale of the Common Stock. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. The Company will file the Prospectus pursuant to Rule 424(b) under the Securities Act, if required, not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A of the Commission. (b) If at any time when a prospectus relating to the Common Stock is required to be delivered under the Securities Act, any event occurs as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Securities Act or the Rules and Regulations, the Company will notify you and request you to suspend (and to advise the other Selected Placement Agents, if any, to suspend) solicitation of offers to purchase Common Stock; and the Company will promptly prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance; and, in case any Selected Placement Agent (including you) is required to deliver a Prospectus nine months or more after the effective date of the Registration Statement, the Company upon request will prepare promptly and deliver to you such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act and applicable provisions of the Blue Sky Laws. (c) The Company will not, prior to the final Closing Date, incur any material liability or obligation, direct or contingent, or enter into any material transaction other than in the ordinary course of business, except as disclosed prior thereto in the Prospectus. (d) The Company shall promptly prepare and file with the Commission such reports as may be required to be filed under the Securities Act, the Rules and Regulations, the Exchange Act or the Blue Sky Laws. (e) Not later than 3 months after the end of the period referred to below, the Company will make generally available to you and to the Company's security holders an earnings statement (which need not be audited) covering a period of at least 12 months beginning with its first fiscal quarter occurring after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder. (f) The Company shall comply in all respects with the undertakings given by it in connection with the qualification or registration of the Common Stock under the Securities Act or the Blue Sky Laws. (g) During such period as a prospectus is required by law to be delivered in connection with sales by any Selected Placement Agent, the Company will furnish to you at its expense, copies of the Registration Statement, the Prospectus, any Preliminary Prospectus and all amendments and supplements to any such documents in such quantities as you may reasonably request, for the purposes contemplated by the Securities Act and the Rules and Regulations. (h) The Company shall promptly apply for and take such steps as may reasonably be necessary, to obtain and maintain the quotation of a Common Stock by the NASDAQ Small Cap Market and on the NASD OTC Bulletin Board. (i) During the period of 3 years following the date of this Agreement, as soon as practicable after the end of each fiscal year, the Company will furnish to you two copies, and to each of the other Selected Placement Agents one copy, of the Annual Report of the Company containing a balance sheet as of the close of such fiscal year and corresponding statements of income, members' equity and cash flows for the fiscal year then ended, such financial statements to be under the report of independent public accountants. During such period, the Company will also furnish to you, if applicable, one copy of (i) each report filed by the Company with the Commission, or with any exchange or quotation source pursuant to the requirements of, or any agreement with, such exchange or quotation source, as soon as practicable after the filing thereof and (ii) each report of the Company mailed to its shareholders, as soon as available. (j) The Company will apply the net proceeds from the sale of the Common Stock to be sold by it hereunder for the purposes set forth in the Prospectus. (k) The Company will not make any offer, sale, transfer, issuance or other disposition of any of its securities, other than grants of options, within 120 days following the final Closing Date, and will obtain the undertaking of each executive officer (as defined under the Securities Act), director and holder of 10% or more of the aggregate equity ownership of the Company immediately prior to such date not to make any such offer, sale or other disposition within such period, otherwise than hereunder or with your written consent or pursuant to bona fide gifts, provided, in the last case, that each donee agrees in writing with you to be bound by the same restrictions on the offer, sale and disposition of securities as are expressed in this Section 5(k). (l) The Company shall at all times reserve and keep available such number of authorized shares of Common Stock as are sufficient to permit the exercise of all Underwriter's Warrants; all shares of Common Stock issued upon the exercise of Underwriter's Warrants, upon receipt of full payment therefor and delivery to the purchaser, will be duly authorized, validly and legally issued, fully paid and nonassessable, and such Common Stock will not have been issued in violation of or subject to any preemptive rights provided for by law or by the Company's corporate charter or Bylaws or be subject to any lien, claim, encumbrance, security interest, preemptive rights or any other claim of any third party. (m) Prior to the final Closing Date, the Company will not issue, directly or indirectly, without your prior written consent, a press release or other communication or hold any press conference with respect to the Company, its activities or the Offering. (n) The Company will, promptly upon your request, prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus, and take any other action, which, in your opinion or the opinion of your counsel, may be reasonably necessary or advisable in connection with the distribution of the Common Stock, and will use its best efforts to cause the same to become effective as promptly as practicable. SECTION 6. Covenants of the Managing Placement Agent. You will use your best efforts to procure subscribers for Common Stock and will conduct the Offering in compliance with the provisions of the Securities Act, the Rules and Regulations, the Exchange Act, applicable Blue Sky Laws and the rules and regulations of the NASD; accordingly, as of each Closing Date (as herein defined), you will have (i) not made any untrue statement of a material fact and not omitted to state a material fact required to be stated or necessary to make any statement made not misleading, to the extent any representations are made by you concerning the Offering or matters set forth in the Prospectus other than those which are set forth in the Prospectus, and (ii) prior to any sale of Common Stock, reasonably believed that an investment in the Common Stock was suitable for the subscriber. SECTION 7. State Qualifications. The Company further represents and warrants to, and agrees with, you as follows: (a) The Company will take all necessary action to either qualify or register the Common Stock for sale or exempt such securities from such qualification or registration in such states as you and the Company shall agree upon in writing. (b) The Company or its counsel will provide you or your counsel with copies, at the time they are filed, of all correspondence, applications, forms, and other documents filed with each jurisdiction where the Common Stock is to be registered or qualified or offered in an exempt transaction. (c) Upon receipt of notification by the Company of the qualification, registration, or exemption of the Common Stock by an applicable jurisdiction, the Company or its counsel will promptly notify you or your counsel in writing of such action, which writing shall summarize the conditions and other requirements imposed by such jurisdiction in granting such qualification, registration or exemption, including offeree qualification or suitability and broker-dealer and agent registration requirements applicable to the conduct of the Offering (collectively, the "Blue Sky Letters"); you shall not offer or sell the Common Stock in any jurisdiction until receipt of such Blue Sky Letters from the Company or its counsel. (d) In each jurisdiction where the Common Stock has been registered or qualified or is offered or sold in an exempt transaction as provided above, the Company will make and file such statements, documents, materials, and reports as are or may be required to be made or filed. (e) The Company will promptly provide to you for delivery to all offerees and purchasers of Common Stock any additional information, documents or instruments which you, the Company and/or your respective counsel deem necessary to comply with the rules, regulations, and judicial and administrative interpretations respecting compliance with such exemptions or qualifications and registrations in those jurisdictions where the Common Stock is to be offered or sold. SECTION 8. Payment of Expenses. (a) Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective or is terminated for any reason, except as set forth below (and in addition to the nonaccountable expense allowance provided for in Section 4(b) of this Agreement), the Company will pay or cause to be paid all costs and expenses incurred in connection with the Offering, including without limitation (i) the Commission's registration fee, (ii) the expenses of printing and distributing this Agreement, the Selected Dealer Agreements, the Registration Statement, each Preliminary Prospectus, the Prospectus (and any amendments or supplements thereto) and the Blue Sky Memorandum (and any supplements thereto), (iii) fees and expenses of accountants and counsel for the Company, (iv) expenses of qualification of the Common Stock under state "blue sky" and securities laws, including the fees and disbursements of counsel to the Managing Placement Agent in connection therewith, (v) filing fees paid or incurred by the Managing Placement Agent in connection with filings with the NASD and (vi) the costs and charges of its transfer agent and registrar. (b) The Company and each Selected Placement Agent (including the Managing Placement Agent) will bear its own travel, lodging and living expenses incurred in connection with marketing, dealer and other meetings and the cost of all advertising, publicity and selling or promotional materials used in connection therewith. (c) Notwithstanding any other provision hereof to the contrary, whether or not this Agreement is terminated pursuant to Section 12 hereof or otherwise, the Company will pay or reimburse the Managing Placement Agent for the actual itemized out-of-pocket expenses incurred by it in connection with investigating, preparing to market and marketing of the Common Stock, including fees and expenses of its counsel (in accordance with the provisions of NASD Conduct Rule 2710); provided, however, that, without the consent of the Company, such reimbursement for legal fees shall not exceed in the aggregate $12,500, and reimbursement for other out-of-pocket expenses shall not exceed in the aggregate $5,000. SECTION 9. Conditions of the Obligations of the Managing Placement Agent. Your obligations hereunder shall be subject to the condition that all of the representations and warranties of the Company herein as of the date hereof and as of each Closing Date are true and correct in all material respects and to the accuracy of the statements of the officers of the Company made pursuant hereto, to the performance by the Company of its obligations hereunder, and to the following conditions: (a) The Registration Statement shall have become effective not later than 1:00 P.M., Los Angeles, California, time, on the business day following the date hereof, unless otherwise effective prior hereto pursuant to Rule 430A of the Rules and Regulations or otherwise. The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, if required, within the applicable time period prescribed for such filing by the Rules and Regulations and in accordance with Section 5(a) of this Agreement. Prior to each Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been instituted or shall be pending or, to the knowledge of the Company or you, shall be contemplated by the Commission or any "blue sky" authority, and any request of the Commission or any Blue Sky authority of any jurisdiction for additional information (to be included in the Registration Statement or Prospectus or otherwise) shall have been complied with to your reasonable satisfaction. (b) The Common Stock shall have been qualified or registered for sale under the Blue Sky Laws of such states as shall have been agreed upon between you and the Company, pursuant to and as provided in Section 7 of this Agreement. (c) The legality and sufficiency of the authorization, issuance and sale of the Common Stock pursuant to the Registration Statement, the validity and form of the certificates representing the Common Stock, the execution and delivery of this Agreement, and all proceedings and other legal matters incident thereto, and the form of the Registration Statement (except financial statements, if any, and other financial data included in such Registration Statement) shall have been approved by your counsel. (d) You shall not have advised the Company that the Registration Statement or Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact, or omits to state a fact which is material and is required to be stated therein or necessary to make the statements therein not misleading, unless, in the opinion of your counsel, any such untrue statement or omission is not material. (e) Since the dates as of which information is given in the Registration Statement: (1) the Company shall not have sustained any material loss or interference with its business from any labor dispute, fire, explosion, flood or other calamity (whether or not insured), or from any court or governmental action, order or decree; and (2) there shall not have been any change in the equity ownership, short-term debt or long-term debt of the Company or a change, or a development involving a prospective change, in or affecting the ability of the Company to conduct its business (whether by reason of any court, legislative, other governmental action, order, decree, or otherwise), or in the general affairs, management, financial position, members' equity or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and Prospectus, the effect of which on the Company, in any such case described in clause (1) or (2) of this Section 9(e), is, in your judgment (exercising your sole discretion), so material and adverse as to make it impracticable or inadvisable to proceed with the distribution of the Offering or the delivery of the Common Stock as contemplated by the Registration Statement and the Prospectus. (f) There shall have been furnished to you on the Initial Closing Date and the final Closing Date the written opinion of counsel to the Company, addressed to you and dated as of such Closing Date, to the effect that, as of each Closing which has then occurred: (1) the Company is duly organized and validly existing as a corporation in good standing under the laws of the State of California and possesses full power and authority to own its property and conduct its business as described in the Prospectus; (2) the Company is duly qualified to do business under the laws of (and is in good standing as such in) each jurisdiction in which it owns or leases property, has an office, or in which business is conducted and such qualification is required, except where the failure to so qualify would not have a material adverse effect on the conduct of its business, its assets or its financial condition; (3) the Registration Statement has become effective under the Securities Act and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending before, or threatened by, the Commission or any "blue sky" or securities authority; such counsel has no reason to believe that either the Registration Statement or the Prospectus, or any document incorporated by reference therein, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except for the financial statements and other financial data included therein, as to which such counsel need express no opinion); to the best knowledge of such counsel, all descriptions in the Registration Statement and the Prospectus of statutes, regulations and governmental proceedings are accurate and fairly present the information disclosed in all material respects, and such counsel does not know of any legal, governmental or regulatory proceedings, pending or threatened, required to be described in the Prospectus, nor of any contracts or documents of a character required to be described in or filed as exhibits to the Registration Statement, which are not so described or filed; (4) the Company has full power and authority to enter into and perform this Agreement; this Agreement, and the performance of the obligations of the Company hereunder, have been duly authorized by all necessary action and this Agreement has been duly executed and delivered by and on behalf of the Company, and is a legal, valid and binding agreement of the Company, enforceable in accordance with its terms, except that rights to indemnity or contribution may be limited by applicable law and enforceability of the agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and no approval, authorization or consent of any court, board, agency or instrumentality of the United States or of any state or other jurisdiction is necessary in connection with the execution and delivery of this Agreement, or in connection with the issue or sale of the Common Stock by the Company pursuant to this Agreement (other than under the Securities Act, applicable Blue Sky Laws and the rules of the NASD) or the consummation by the Company of any transaction contemplated by this Agreement; (5) the shares of Common Stock to be sold in the Offering have been duly authorized and, when issued and delivered by the Company, against full payment therefor, will be legally and validly issued, fully paid and nonassessable, to the best knowledge of such counsel, such securities will not have been issued subject to any lien, claim, encumbrance, security interest or any other claim of any third party, except as described in the Prospectus; and the Common Stock conforms as to legal matters in all material respects to the description thereof set forth contained in the Prospectus; (6) to the best knowledge of such counsel, the execution and performance of this Agreement will not contravene any of the provisions of, or result in a default under, any agreement, franchise, license, indenture, mortgage, deed of trust or other instrument to which the Company is a party, or by which the Company or its property is bound; or violate any of the provisions of the Articles of Incorporation or Bylaws of the Company (in each case, as amended at the date of such opinion), or to the best knowledge of such counsel, violate any statute, order, rule or regulation of any regulatory or governmental body having jurisdiction over the Company; (7) to the best knowledge of such counsel, except as described in the Prospectus, there is not pending or threatened any action, suit, proceeding, inquiry or investigation to which the Company is a party, or to which the property of the Company is subject, before or brought by any court, governmental agency or body or arbitration tribunal, which, if determined adversely to the Company, would result in any material adverse change in the business, financial position, net worth, results of operations or prospects of the Company, or materially and adversely affect its properties or assets; (8) to the best knowledge of such counsel, the Company owns or possesses the requisite licenses or other rights to use, all trademarks, service marks, service names and trade names necessary to conduct its business as described in or contemplated by the Prospectus; to the best knowledge of such counsel, there is no claim or action by any person pertaining to (or proceeding pending or threatened which challenges) the rights of the Company with respect to any trademarks, service marks, service names or trade names used in the conduct of its business as described in or contemplated by the Prospectus; to the best knowledge of such counsel, the products, services and processes of the Company have not infringed and do not infringe upon proprietary rights held or asserted by third parties which infringement, if resolved adversely to the Company, could materially affect its earnings, assets, affairs, business prospects or condition (financial and other); (9) to the best knowledge of such counsel, the Company has good and marketable title to all the property and assets reflected as owned by it in the Prospectus, subject to no lien, mortgage, pledge, charge or encumbrance of any kind or nature whatsoever except those, if any, reflected in the Prospectus or which are not material to the Company and do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property; to the best knowledge of such counsel, all property held or used by the Company under leases, licenses, franchises or other agreements are held by it under valid, subsisting and enforceable leases, licenses, franchises or other agreements, subject to bankruptcy, insolvency or similar laws generally affecting the rights of creditors and equitable principles affecting the right to obtain specific enforcement or similar equitable relief; (10) to the best knowledge of such counsel, there are no holders of securities of the Company having rights to the registration of such securities, and there are no options, warrants or other rights to acquire any equity interest in the Company, or any security convertible into such equity interest, except as disclosed in the Prospectus; (11) the statements in the Registration Statement and Prospectus, insofar as they are descriptions of specific contracts, agreements or other documents, and the statements appearing in the Prospectus under the caption "Description of Securities," insofar as they refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; (12) to the best knowledge of such counsel, the Company is not in violation of its Articles of Incorporation or Bylaws, or other organizational or charter documents or in default (nor has an event occurred which, with notice, lapse of time or both, would constitute such a default) in the performance of any obligation, agreement or condition contained in any bond, indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other agreement or instrument to which the Company is a party or by which the Company or any of its property may be bound or affected, and to the best knowledge of such counsel, the Company is not in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where such violation or default could have a material adverse effect on the respective business, property or operations of the Company; (13) to the best knowledge of such counsel, there are no legal, governmental or regulatory proceedings, pending or threatened, required to be described in the Prospectus, which are not so described; (g) There shall have been furnished to you on the Initial Closing Date and the final Closing Date the written opinion of the law firm of William B. Barnett, special securities counsel to the Company, addressed to you and dated as of such Closing Date, to the effect that, as of each Closing which has then occurred: (1) the Registration Statement and Prospectus, and each amendment or supplement thereto (except for the financial statements and other financial data therein, as to which such counsel need express no opinion), as of their respective effective or issue dates, comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations and any required filing of the Prospectus and any supplements thereto pursuant to Rule 424(b) of the Rules and Regulations have been made in the manner and within the time period required by such Rules and Regulations; and (2) to the best knowledge of such counsel, there are no contracts or other documents required to be summarized or described in the Registration Statement or to be filed as exhibits thereto which are not so summarized, described or filed, nor does such counsel know of any regulations required to be described or referred to in the Registration Statement or Prospectus which are not described or referred to in the Registration Statement or Prospectus. (h) If you shall so request in writing, you shall have received, on the Initial Closing Date, a survey prepared by The Law Offices of William B. Barnett, addressed to you and dated as of such Closing Date, relating to "blue sky" laws of such jurisdictions upon which you and the Company agree in writing ("Blue Sky Survey"); the Blue Sky Survey will advise that the appropriate "blue sky" action, if any, was taken in each of such jurisdictions so as to permit such offers and sales as indicated in such Survey; the Blue Sky Survey may be based upon an examination of the statutes and regulations, if any, of such jurisdictions as reported in standard compilations and upon interpretive advice obtained from representatives of certain securities commissions. (i) If you so request in writing, there shall have been furnished to you, on each Closing Date an opinion of The Law Offices of William B. Barnett, addressed to you and dated as of each such Closing Date, with respect to the Common Stock, the Registration Statement and the Prospectus, and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. (j) There shall have been furnished to you, on the Initial Closing Date and the final Closing Date, a certificate of the principal executive officer and the principal financial officer of the Company, dated as of such Closing Date, to the effect that: (1) the representations and warranties of the Company which are set forth in Section 2 hereof are true and correct as of the date of this Agreement and as of each Closing Date, as if again made on and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such date; (2) to the best of their knowledge, the Commission has not issued an order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as part of the Registration Statement or any amendment thereto, no stop order suspending the effectiveness of the Registration Statement or enjoining the use of the Prospectus has been issued, and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (3) each of the respective signers of the certificate has carefully examined the Registration Statement and the Prospectus and, in his opinion and to the best of his knowledge, information and belief, the Registration Statement and the Prospectus and any amendments or supplements thereto contain all statements required to be stated therein, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth; and (4) since the effective date of the Registration Statement, there has not been any material adverse change or, to their knowledge, a development involving a prospective material adverse change in the business, properties, financial condition or earnings of the Company, whether or not arising from transactions in the ordinary course of business, except as disclosed in said Registration Statement theretofore amended including the proposed amendment thereto delivered to you prior to or contemporaneously with the execution of this Agreement or (but only if you expressly consent thereto in writing) delivered to you thereafter; since such date and except as so disclosed, or in the ordinary course of business, the Company has not incurred any liability or obligation, direct or indirect, or entered into any material transaction; since such date and except as so disclosed there has not been any material change in the equity ownership of the Company or its short-term debt or long-term debt; since such date and except as so disclosed, the Company has not incurred any material contingent obligations, and no material litigation is pending or, to their knowledge, threatened against the Company; and, since such date and except as so disclosed, the Company has not sustained a material loss or interference with its business from any labor dispute, fire, explosion, flood or other calamity (whether or not insured) or from any court or governmental action, order or decree. The delivery of the certificate provided for in this Section 9(k) shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (1), (2), (3) and (4) of this Section 9(j) to be set forth in said certificate. (k) There shall have been furnished to you, on or before the initial Closing Date, written agreements signed by the Company's directors, its executive officers and each holder of 10% or more of its equity securities to the effect that such persons will not make any offer, sale or other disposition of any equity interest in the Company for a period of 180 days after the final Closing Date, except with the prior written consent of the Managing Placement Agent or pursuant to bona fide gifts, provided, in the last case, that each donee agrees in writing with you to be bound by the same restrictions on the offer, sale or disposition of equity interests in the Company as are set forth in the agreements described in this Section 9(k). All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory to you and your counsel. The Company shall promptly furnish you with such manually signed or conformed copies of such opinions, certificates, letters and other documents as you may reasonably request from time to time. With respect to any Closing, by written instrument delivered to the Company, you may from time to time, in your sole discretion, waive any of the requirements imposed upon the Company pursuant to this Section, including without limitation the requirement that any opinion, certificate, survey or other document be delivered to you at any Closing or as of any Closing Date; any such waiver by you with respect to a Closing shall not in any way be construed as such waiver with respect to any other Closing. If any condition to your obligations hereunder to be satisfied prior to or a Closing Date is not so satisfied, this Agreement at your election will terminate upon notification to the Company without liability on the part of any Selected Placement Agent (including you) or the Company, except for the expenses or fees to be paid or reimbursed by the Company pursuant to Sections 4 and 8 hereof and except to the extent provided in Section 10 hereof. SECTION 10. Indemnification. (a) The Company agrees to indemnify and hold harmless you, each of your officers, directors, employees and agents, and each person, if any, who controls you within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which you or each such officer, director, employee, agent or controlling person may become subject under the Securities Act, the Exchange Act, Blue Sky Laws or other federal or state laws or regulations, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in or incorporated in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any application filed under any Blue Sky Law or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company and filed in any state or other jurisdiction in order to qualify any or all of the Common Stock under the securities laws thereof (any such document, application or information being hereinafter referred to as a "Blue Sky Application") or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; the Company agrees to reimburse you and each such other indemnified person for any legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that: (1) any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or in any Blue Sky Application in reliance upon and in conformity with written information furnished to the Company by you specifically for use therein (but in no event shall the assistance in the drafting of all or any portion of the Registration Statement, any Preliminary Prospectus, the Prospectus, such amendment or supplement or such other document of the type referred to in the preceding paragraph by you or your counsel constitute such information); or (2) if such statement or omission was contained or made in a Preliminary Prospectus and corrected in the Prospectus and (i) any such loss, claim, damage or liability suffered or incurred by you (or any person who controls you) resulted from an action, claim or suit by any person who purchased Common Stock from you in the Offering, and (ii) you failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Common Stock in any case where such delivery is required by the Securities Act unless such failure was due to failure by the Company to provide copies of the Prospectus to you as required by this Agreement. The indemnification obligations of the Company as provided above (i) extend upon the same terms and conditions to, and shall inure to the benefit of, each Selected Placement Agent and each of its respective officers, directors and each person, if any, who controls such Selected Placement Agent within the meaning of the Securities Act or the Exchange Act and (ii) are in addition to any liabilities the Company may otherwise have under other agreements, under common law or otherwise. (b) You will indemnify and hold harmless the Company, each of the directors, officers, employees and agents of the Company, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, employee, agent or controlling person may become subject under the Securities Act, the Exchange Act, Blue Sky Laws or other federal or state laws or regulations, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with your written consent, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, in reliance upon and in conformity with any written information furnished to the Company by you specifically for use therein (but in no event shall the assistance in the drafting of all or any portion of the Registration Statement, any Preliminary Prospectus, the Prospectus, such amendment or supplement or such other document of the type referred above by you or your counsel constitute such information). You agree to reimburse the Company and each such other indemnified person for any legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. Your indemnification obligations as provided above (i) extend upon the same terms and conditions to, and shall inure to the benefit of, the Company and each of its respective officers, directors and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act and (ii) are in addition to any liabilities which you may otherwise have under other agreements, under common law or otherwise. (c) Promptly after receipt by an indemnified party under this Section 10 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 10, notify the indemnifying party in writing of the commencement thereof, but the omission to so notify the indemnifying party will not relieve an indemnifying party from any liability which it or he may have to any indemnified party otherwise than under this Section 10. In case any such action is brought against any indemnified party, and such indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it or he and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election to assume the defense of such action and upon approval by the indemnified party of counsel to the indemnifying party, the indemnifying party will not be liable to such indemnified party under this Section 10 for any legal expenses subsequently incurred by such indemnified party as a result of or in connection with the defense of such action, unless: (1) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, in the event that you and one or more of your directors, officers or controlling persons are the indemnified parties); (2) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action; or (3) the indemnifying party has authorized the employment of counsel at the expense of the indemnifying party. (d) In order to provide for just and equitable contribution under the Securities Act or the Exchange Act in any case in which (1) any person who would be entitled to indemnification pursuant to this Section 10 if enforceable according to its terms makes a claim for indemnification pursuant to this Section 10, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 10 provide for indemnification in such case, or (2) contribution under the Securities Act or the Exchange Act may otherwise be required, you shall contribute to the aggregate losses, claims, damages or liabilities incurred (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) in either such case (after contribution from others) an amount equal to the product determined by multiplying the total amount of such losses, claims, damages or liabilities by a fraction, the numerator of which equals the fees paid to you under Section 4 plus the amount paid to you under Section 8, and the denominator of which is equal to the aggregate proceeds of the sale of Common Stock in the Offering (before deduction of commissions or expenses), and the Company shall be responsible for the balance of such losses, claims, damages or liabilities; provided, that with respect to the rescission of the sale of any Common Stock, your liability shall not exceed the compensation earned by you under this Agreement with respect to the rescinded sale. If the foregoing allocation is not permitted by law, there shall be considered, in determining the amount of contribution to which the respective parties are entitled, the relative benefits received by each party from the sale of Common Stock (taking into account the portion of the proceeds of the Offering realized by each), the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and you agree that it would not be equitable if the amount of such contribution were determined by pro rata or pro capita allocation. Neither you nor any person controlling you shall be obligated to make contribution hereunder which in the aggregate exceeds the total purchase price of Common Stock sold to subscribers procured by you, less the aggregate amount of any damages which you and your controlling persons have otherwise been required to pay in respect of the same or any substantially similar claim. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Securities Act other than those identified in this Section 10 as being entitled to indemnification. Any of the officers, directors or controlling persons of a Selected Placement Agent (including you) and any officers, directors or controlling persons of the Company shall be entitled to contribution to the same extent as you or the Company. SECTION 11. Effective Date. This Agreement shall become effective immediately upon execution as to Sections 4, 8 and 10 and, as to all other provisions, at 9:00 A.M., Los Angeles, California, time, on the day following the date upon which the Registration Statement becomes effective, unless such a day is a Saturday, Sunday or holiday (in which event this Agreement shall become effective at such hour on the business day next succeeding such Saturday, Sunday or holiday); notwithstanding the foregoing, this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company (which notice may be oral, to be confirmed promptly in writing). SECTION 12. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you or by you by notice to the Company at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company or you (except for the fees or expenses to be paid or reimbursed by the Company pursuant to Sections 4 and 8 hereof or paid by the Company pursuant to Section 10 hereof). (b) This Agreement may also be terminated by you prior to the final Closing Date if, in your judgment and discretion, the offer, offer for sale, sale and delivery of the Common Stock is rendered impracticable or inadvisable because: (1) additional material governmental restrictions or limitations, not in force on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange, the American Stock Exchange or over-the-counter, or trading in securities generally shall have been suspended or limited on either such exchange or over-the-counter or a general banking moratorium shall have been established by federal or New York authorities; (2) an outbreak or escalation of hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated to such extent as, in your judgment, to have a material adverse effect on the general securities market or make it impractical or inadvisable to proceed with the Offering; (3) any event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or which is not reflected in the Registration Statement but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect; (4) the Company shall have sustained a material loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity or from any labor dispute or court or governmental action or decree; (5) the passage by the Congress of the United States or any state legislative body of any act or measure, or the adoption or any proposed adoption of any orders, rules, legislation or regulations by any governmental body, any authoritative accounting institute or board or any governmental executive which is reasonably believed likely by the representative to have a material impact on the business, financial condition or financial statements of the Company, taken as a whole, or the market for the Common Stock; or (6) any material adverse change having occurred since the respective dates as of which information is given in the Registration Statement and the Prospectus in the condition (financial or otherwise) of the Company, taken as a whole, or in the earnings, affairs or business prospects of the Company, taken as a whole, whether or not arising in the ordinary course of business. Any termination pursuant to this Section 12(b) shall be without liability on the part of any Selected Placement Agent (including you) to the Company, or on the part of the Company to any Selected Placement Agent (including you), except for expenses or fees to be paid or reimbursed by the Company pursuant to Section 4 and 8 hereof and except as to indemnification as provided in Section 10 hereof. SECTION 13. Parties. (a) This Agreement shall inure to the benefit of and be binding upon you, the Company, and the respective successors and assigns of each. (b) No purchaser of Common Stock from you shall be construed as a successor or assign by reason merely of such purchase. (c) Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their respective successors and assigns and the controlling persons, officers and directors and counsel referred to in this Agreement, any legal or equitable right, remedy or claim under or in respect to this Agreement or any provision herein contained. SECTION 14. Representations and Indemnities to Survive Delivery. (a) All representations, warranties, covenants and agreements of the Company and the Managing Placement Agent contained herein or in certificates of officers delivered pursuant hereto, and the indemnity agreement contained in Section 10 hereof, shall survive the delivery and execution of this Agreement and the final Closing Date and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of you or any person controlling you, any Selected Placement Agent or any controlling person thereof, the Company or any of its officers, directors, or controlling persons. (b) The indemnification provisions of Section 10 hereof are in addition to any and all remedies or rights which either of the parties hereto may have, including the right to sue and recover damages for any breach of any representation, warranty or covenant made or given by either of the parties hereto to any other party. SECTION 15. Notices. All communications hereunder will be in writing and will be mailed, delivered, telegraphed or telecopied and confirmed as follows: If to the Managing Placement Agent: R.H. Investment Corporation 15760 Ventura Boulevard Suite 1732 Encino, CA 91403 If to the Company: Roex, Inc. 2801 Business Center Drive Suite 185 Irvine, CA 92612 SECTION 16. Integration. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matters hereof and supersedes all prior agreements and understandings among the parties both written and oral. SECTION 17. Partial Unenforceability. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. SECTION 18. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return the enclosed duplicate hereof, whereupon it will become a binding agreement between us in accordance with its terms. Very truly yours, ROEX, INC. By: -------------------------------------- Rodney H. Burreson, President Accepted and agreed to as of the day and year first above written. R.H. INVESTMENT CORPORATION By: -------------------------------------- Stuart S. Greenberg, Managing Director EX-23 3 0003.txt CONSENT CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Roex, Inc. Irvine, California We hereby consent to the use in the Prospectus constituting a part of the Registration Statement No. 333-92299 on Form SB-2, of our report dated January 19, 2000, relating to the financial statements of Roex, Inc. as of December 31, 1999. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ Stonefield Josephson, Inc CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California June 29, 2000 -----END PRIVACY-ENHANCED MESSAGE-----