-----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, AWKuQ1bLcHhCBdYPcuNhP+VsRO0jSYL5mgfy2SMnzn46dNZxok3vCa2cxOa9zbRQ hR7JZ9IwNPldQ5yVmNBH/g== /in/edgar/work/0001017386-00-000150/0001017386-00-000150.txt : 20001123 0001017386-00-000150.hdr.sgml : 20001123 ACCESSION NUMBER: 0001017386-00-000150 CONFORMED SUBMISSION TYPE: POS462C PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20001122 EFFECTIVENESS DATE: 20001122 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: POS462C SEC ACT: SEC FILE NUMBER: 333-92299 FILM NUMBER: 775950 BUSINESS ADDRESS: STREET 1: 2801 BUSINESS CENTER DRIVE STREET 2: SUITE 185 CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 9164420400 POS462C 1 0001.txt As filed with the Securities and Exchange Commission on November 22, 2000 Registration No. 333-92299 ---------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------------------------------------------- POST-EFFECTIVE AMENDMENT NO. ONE to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------------------------------------------------------- ROEX, INC. ---------------------------------------------------------------------- (Name of Small Business Issuer in its charter) California 2833 33-0634091 ------------------------------ ---------------------------- ---------------- (State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification No.) Code Number) ---------------------------------------------------------------------- 2081 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. /X/ 333-92299 i 1 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 Securities Amount Proposed Proposed Amount of to be Registered to be Maximum Maximum Aggregate Registration Registered Offering Price Offering Fee Per Share ================================== ============== ================ ================== ============= Common Stock 1,000,000 $6.00 $6,000,000(1) $1,584 Underwriters Warrants to Purchase 90,000 N/A $ 100 $0.03 Common Stock (1) Common Stock Underlying 90,000 $7.80 $ 702,000 $213.84 Underwriter's Warrants (3) Total $6,702,100 $1,797.87
- ------------------------- (1) Estimated solely for purposes of calculating the registration fee. (2) To be issued by the Company to the Underwriter. (3) Pursuant to Rule 416, there are being registered such shares as may be issued pursuant to the antidilution provisions of the Underwriter's Warrants. ii 2 SUBJECT TO COMPLETION. DATED OCTOBER 25, 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. 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 3 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 $ .555 $ 5.45 Total - Minimum $3,000,000 $277,500 $2,722,500 Total - Maximum $6,000,000 $555,000 $5,445,000 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 Wells Fargo Bank, N.A. 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 March 31, 2001, 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 November ___, 2000 iii 3 TABLE OF CONTENTS Page Number Prospectus Summary........................................................2 The Offering..............................................................2 Financial Data............................................................3 Risk Factors..............................................................3 Risks Associated With Our Company......................................3 Our Business Has Only Recently Shown A Profit.......................3 Failure To Obtain Appropriate New Radio Markets Could Impede Future Growth................................4 Our Business Is Subject To Compliance With Various Government Regulations..............................4 If We Lose Our Key Personnel, Especially Our Founder And Spokesperson, Rodney Burreson, Our Business May Suffer.......4 Failure Of Our Outside Suppliers To Provide Our Products In Sufficient Quantities And In A Timely Fashion May Cause Our Business To Suffer..............................5 Risks Associated With This Offering....................................5 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.............................5 This Is Our Initial Public Offering Of Shares And There Is No Public Market For Our Common Stock...............................5 There Will Be No Public Market For Resale Of Our Shares Until Our Shares Are Listed On An Exchange Or Quoted Through NASDAQ........5 Shares Eligible For Future Sale.....................................6 Additional Information Is Available.......................................6 Forward-Looking Statements................................................7 Dilution..................................................................7 Use Of Proceeds...........................................................9 Dividend Policy..........................................................10 Capitalization...........................................................10 Management's Discussion And Analysis Of Financial Condition And Results of Operations..............................10 Business.................................................................14 Management...............................................................28 Principal Shareholders...................................................34 Shares Eligible For Future Sale..........................................35 Description Of Capital Stock.............................................36 Transfer Agent and Registrar.............................................37 Underwriting.............................................................37 Legal Matters............................................................40 Experts..................................................................40 Index to Financial Statements...........................................F-1 Part II................................................................II-1 Exhibit Index.......................................................II-7 Until __________, 2001 (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. 1 4 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 nineteen 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, Miami, Tampa, Spokane, Kansas City and Cleveland. 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. - --------------------- (1) 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 500,000 share minimum offering is sold within the foregoing period, the offering may continue until 1,000,000 shares are sold or March 31, 2001, 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 500,000 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. 2 5 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 Six Months Ended Ended June 30 December 31 - ------------------------------------------------------------------------------- 2000 1999 1999 1998 - ------------------------------------------------------------------------------- Operating Data Net Sales $3,133,908 $2,662,519 $5,736,832 $3,934,910 Net Income (Loss) $ 392,348 $ 267,789 $ 534,132 $ (463,264) Net Income (Loss) Per Share: Basic $ 0.07 $ 0.05 $ 0.10 $ (0.10) Diluted $ 0.06 $ 0.04 $ 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 June 30 June 30 December 31 December 31 2000 1999 1999 1998 - ------------------------------------------------------------------------------- Balance Sheet Data Working Capital (Deficit) $ 49,445 $(415,737) $(175,910) $(267,223) Total Assets $1,100,365 $487,350 $ 810,763 $ 383,182 Net Stockholders' Equity $ (2,811) $(661,502) $(395,159) $(940,541) (Deficit) RISK FACTORS An investment in our common stock offered hereby is speculative in nature and involves a high degree of risk. In addition to the other information contained in this prospectus, the following factors should be considered carefully before making any investment decisions with respect to purchasing our common stock. 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 June 30, 2000, of $635,498 and a stockholders' deficit of $2,811. We lost money for the years 1997 and 1998. We operated profitably for the year ended December 31, 1999, and the six months ended June 30, 2000, and we have a net working capital surplus of 3 6 $49,445. 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. Failure to Obtain Appropriate New Radio Markets Could Impede 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: o selection of radio stations and time slots that appeal to the demographics of our customers, e.g., individuals over 45 years of age o consumer acceptance ratings of the show o consumer acceptance of our products advertised on the show o competition from other health and talk shows on the same or other stations o 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: o the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products; o health and safety; o 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. 4 7 Failure Of Our Outside Suppliers To Provide Our Products In Sufficient Quantities And In A Timely Fashion May Cause Our Business To Suffer. All of our products are provided by outside suppliers. Our profit margins and ability to deliver our products on a timely basis are dependent upon the ability of our outside suppliers to provide quality products in a timely and cost-efficient manner. Three large companies provide 60% of our products. Our ability to enter new markets and sustain satisfactory levels of sales in each market is dependent upon the ability of these or other suitable outside suppliers to respond to our needs. Further, the development of new products in the future will depend in part on these outside suppliers. The failure of any supplier to provide the products or ingredients of products that we require could have an adverse effect on our business, profitability and growth prospects. We have no contracts with our suppliers and there is no assurance of continued supply or stable prices. 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. 5 8 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. 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 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. As of June 30, 2000, options to purchase 998,850 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. 6 9 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. 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 June 30, 2000, we had a negative net tangible book value of $2,811, or approximately $(.00) 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 June 30, 2000, would have been approximately $2,497,189 and $5,197,189, or $.43 and $.83 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 $5.57, or $5.17, 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: 7 10 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 $(.00) $(00) Increase attributable to new investors $ 0.43 $ 0.83 Proforma net tangible book value after offering $ 0.43 $ 0.83 Dilution to new investors $ 5.57 $ 5.17 Percentage of dilution to new investors 93% 86% 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 June 30, 2000, and (ii) new investors purchasing shares of common stock in this offering, before deducting the underwriting discounts and estimated offering expenses payable by us. Shares Purchased Consideration Paid Average 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 June 30, 2000, and new investors purchasing shares of common stock in this offering, before deducting commissions and estimated offering expenses payable by us. Shares Purchased Consideration Paid Average 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%
8 11 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 $ 477,500 $ 616,250 $ 755,000 ------------------ ----------------- ------------- Net Proceeds $2,522,500 $3,883,750 $5,245,000 ========== ========== ========== 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 Television/Video Production 200,000 250,000 450,000 Developing Internet e-commerce 200,000 450,000 700,000 Working Capital 72,500 233,750 395,000 ------------- ------------ ---------- Total Uses $2,522,500 $3,883,750 $5,245,000 ========== ========== ========== 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 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. 9 12 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 June 30, 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 998,850 shares of common stock reserved for issuance under outstanding stock options and conversion of $195,000 debt into 170,000 shares of common stock. ACTUAL AS ADJUSTED ADJUSTED -------------- ----------------------- Long-Term Debt $ 308,615 $ -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 $3,200,187 $5,922,687 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 $(635,498) (635,498) (635,498) Stock Receivable ( 80,000) (80,000) (80,000) ------------- ----------------------- Total stockholders' equity (deficit) $ ( 2,811) $2,519,689 $5,242,189 ------------- ----------------------- Total capitalization (deficit) $ 305,804 $2,519,689 $5,242,189 ============= ======================= 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 six months ended June 30, 2000 and 1999 and for the years ended December 31, 1999 and 1998 should be read in conjunction with our financial statements and related notes thereto, and other financial data included elsewhere in this prospectus. Results of Operations Six-month period ended June 30, 2000 and 1999. Components of revenue and expenses as a percentage of revenue are given in the following table. 10 13 June 30 December 31 2000 1999 1999 1998 ---------------------------------------- Revenues 100% 100% 100% 100% Cost of Sales 22% 23% 22% 27% Gross Profit 78% 77% 78% 73% Operating Expenses Payroll 30% 27% 27% 32% Sales and Marketing 20% 21% 19% 24% General & Administration 13% 17% 20% 20% Other 2% 2% 3% 9% Net Income (Loss) 13% 10% 9% -12% Six Months Ended June 30, 2000 Sales are recognized when products are shipped. For the six months ended June 30, 2000, net sales increased to $3,133,908, which is 18% 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 six months, our operating margin increased to 78% from 77% for the same period in the prior year because of greater buying economies. Our operating expenses were reduced to 65% of sales compared to 67% due to a continuation of internal efficiencies achieved last year. Net income for the six months ended June 30, 2000, rose 47% to $392,348 compared to $267,789 in the first six months of 1999 because of a combination of increased sales, improved profit margins and greater operating efficiencies. Net income in the first six months of 2000 increased to 12% of revenue compared to 10% in the same period in the prior year. This resulted in a profit of $.06 per share compared to $.04 for the same period in the prior year on a fully diluted basis. Payroll and related expenses increased by $225,941 for the first six 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 $81,186 in 2000 compared to 1999, which was 20%, compared to 21% 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 six months of 2000 decreased $31,794 from the comparable period in 1999. This represented a reduction to 13% of revenue compared to 17% because of an increased use of computers and software and automated procedures. Interest expense decreased by $3,432 because of debt pay down. Monthly sales for the six months of 2000 and 1999 are as follows: 2000 1999 -------------------- -------------------- January $552,000 $380,000 February $481,000 $354,000 March $578,000 $517,000 April $465,000 $459,000 May $555,000 $472,000 June $503,000 $480,000 11 14 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. 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 12 15 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% Liquidity and Capital Resources Six Months Ended June 30, 2000 As of June 30, 2000, our current assets exceeded our current liabilities by $49,445 which was a substantial improvement over December 31, 1999, when current liabilities exceeded current assets by $175,910. This improvement was primarily due to cash generated from current operations. The long-term portion of notes and loans payable, less current maturities, was reduced to $308,605 on June 30, 2000 compared to $402,685 on December 31, 1999. As of June 30, 2000, the total stockholders' deficit was reduced by 99% to $2,811 compared to December 31, 1999. This reduction was due to net income of $392,348 for the six months ended June 30, 2000. Our cash as of June 30, 2000 was $391,325, a 28% increase from December 31, 1999. This was primarily due to a $392,348 profit for the six months. Cash in the amount of $248,962 was provided from operations, including depreciation and changes in receivables, inventory and payables, with a pay down of $8,097 of trade payables. $154,070 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 the first six months of 2000, $392,348 and $248,962, respectively. This is an improvement from a profit of $267,789 for the first six months 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 13 16 $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. 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 nineteen 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 14 17 live on local talk radio shows in New York, Los Angeles Las Vegas, Spokane, Cleveland 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 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 15 18 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 75 radio shows per week broadcasting on 13 radio stations in New York City, Los Angeles, Tampa, Cleveland, 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, 16 19 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 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, Miami, Tampa, Spokane, Kansas City and Cleveland 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, Miami, Tampa, Spokane, Kansas City and Cleveland. 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 17 20 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. 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. 18 21 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, Kansas City, Cleveland 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 twenty "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 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 19 22 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 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 20 23 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 Tablets Methylsulfonylmethane 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. MSM Powder Methylsulfonylmethane Natural Dietary Sulfur. Roex(R) MSM, Methylsulfonylmethane, is a dietary supplement currently formulated from sulfur. 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, a vital nutrient in human nutrition, is often overlooked in nutritional therapy. Sulfur can be found in many fresh fruits, vegetables, grains and dairy products. Modern food processing and cooking destroy the viability of the sulfur naturally occurring in foods due to its organically unstable nature. 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 21 24 supportive in cleansing the blood as well as detoxifying and supporting the function of the liver. Good health begins in the colon. Digestive Balance(TM) Digestive Enzyme Formula. Roex's Digestive Balance(TM) is a combination of specially selected digestive enzymes designed to assist the body in the breakdown and assimilation of proteins, carbohydrates, fats, starches, and dairy products that we ingest. As an added benefit, Roex(R) has added peppermint, chlorophyll, and a wonderful natural sweetener called xylitol which has been shown to reduce cavities by neutralizing the acids in the mouth and doubles as a very pleasing breath freshener. Colon Essentials(TM) Scientifically Designed Probiotics. Roex(R) is a scientifically designed blend of three different probiotics that give both the small and large intestines the "friendly" bacteria that are absolutely essential for optimal health. Probiotics (beneficial bacteria) compete with disease causing microorganisms in the gastrointestinal tract, assist in the manufacture of vitamins B and K, and produce antibacterial substances that kill disease causing bacteria. Roex(R) Colon Essentials(TM) may be helpful with the following conditions: aging, allergies (food), colon disturbances, candida, diarrhea, irritable bowel syndrome, and lowered immunity. Pharmaceutical Grade C Powder. Roex(R) Pharmaceutical Grade C Powder is the perfect companion product for Roex(R) MSM Powder because vitamin C boosts the efficiency and absorption of MSM in the body. Vitamin C is an important antioxidant and coupled with PC-95 is a co-factor in protecting the body from the effects of free radical damage. Vitamin C also plays a vital role in helping the body maintain health cholesterol levels and helps to promote a healthy cardiovascular system. Vitamin C has been shown to promote capillary health and maintain healthy collagen, promote wound healing, protect against allergies, increase resistance to infection, and support adrenal glands under times of great stress. Hurricane(TM). Roex(R) Hurricane(TM) is an all-natural herbal combination that addresses several key areas in the body. Hurricane(TM) creates an environment that drives undesirable elements (yeast, candida, and parasites) out of the body. Hurricane(TM) is also a very effective formula for assisting the body's immune system against the ravages of cold and flu. Hurricane(TM) increases circulation and blood flow throughout the body, and is also excellent to assist the cardiovascular system by stabilizing both blood pressure and cholesterol levels in the body. Finally, Hurricane(TM) tends to calm frayed nerves and is very soothing for the nervous system. Hurricane(TM) is also excellent for digestion. Livalon(TM) is the first in a new line of products offered by Roex.(R) This line of products will be marketed under the PRO-X Nutraceuticals name and will target medical professionals. Livalon is a milk thistle extract imported from Europe. Milk thistle has been shown to be very beneficial in supporting the detoxification of the liver. The extraction process used by Roex's supplier is patented and has proven to be more bio-available tan like products available in the United States. The efficacy of this product has been confirmed through years of medical research and testing. The Advanced Weight Loss Formulas CitriGenics(R) I. With the recent negative media attention to prescription drug 22 25 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 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 Water Distiller. Roex is also a distributor for Ecowater of St. Paul, Minnesota. 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: EFA'S relates to essential fatty acids. This product is a combination of omega 23 26 3, 6, and 9 fatty acids derived from flax, borage and fish oils. As the name implies, these fatty acids are essential to the body and support proper function of the body's brain, nervous, glandular, epidermal, and hormonal systems. Mr. Burreson has touted the benefits of supplementing one's diet with essential fatty acids for years and is confident that products will complete its line of daily essential nutrients. EFA'S is scheduled for release in the Fall of 2000. Book. The new product arena will include a book on health, lifestyle 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 Book. The exercise book will feature the daily exercise program developed by Mr. Burreson to maintain his health, physique and peace of mind. The complete development of this four-part program has taken over 20 years and has been influenced by routines used by Tibetan monks and Charles Atlas. The exercise program is designed to be used in conjunction with a nutrition program to help people understand their body as well as listen to it. The book 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. This book will be offered as a stand alone product in the fourth quarter of 2000 as well as a value added product packaged with the book, "Yesterday, Today and Tomorrow" and the exercise video, "Staying Alive After 55" due out in 2001. 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. 24 27 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 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 25 28 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. 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 26 29 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 27 30 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. Finally, DSHEA addresses new dietary ingredients, i.e., a dietary ingredient that was not marketed in the United States prior to October 15, 1994. The law specifically states that a dietary ingredient marketed prior to October 15, 1994 is not a new dietary ingredient. In order to market a new dietary ingredient without the product being adulterated, the product must: o contain only dietary ingredients that have been present in the food supply as an article used for food in a form in which the food has not been chemically altered (i.e., an ingredient in a "food" that has not previously been sold as a dietary supplement) or o there is a history of use or other evidence of safety for the ingredient when used as recommended and the manufacturer or distributor provides all relevant information to the FDA 75 days before introducing the product into interstate commerce. The information is to be kept confidential by the FDA for a period of 90 days after its receipt, after which time, the information will be made available to the public. This law also provides a mechanism for petitioning. 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. 28 31 MANAGEMENT Executive Officers and Directors Our officers and directors and their ages are as follows: Name Position First Year Age With Company Elected Director - ------------------------------------------------------------------------------- Rodney H. Burreson Chairman of the Board, President 1994 66 and Chief Executive Officer Derek Burreson Director, Chief Operating Officer 1999 31 and Secretary Peter Weber Chief Financial Officer N/A 52 William B. Barnett Director 1998 59 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. 29 32 William B. Barnett has served as a Director of the Company since September 1998. Mr. Barnett has been an attorney for over 25 years, specializing in corporate and securities law and is in private practice in Sherman Oaks, California. Mr. Barnett formerly taught corporate and securities law in the paralegal program at California State University at Los Angeles. Mr. Barnett received his L.L.B. from De Paul University Law School in Chicago, Illinois. Robert Stuckelman has served as a director of the Company since September 1998. He founded and served as President of CompuMed, Inc. (a manufacturer and distributor of medical products), from 1973 to 1982 and from 1989 to 1994. He has been a director of CompuMed since its inception to the present. From 1982 to 1989 and from 1994 until the present he has been a business consultant to small companies and large corporations. He has been on the Board of Directors of the Board of Medical Resources Management, Inc., since 1996 to the present. He holds a Master's degree in Electrical Engineering from USC and a Bachelor's degree in Electrical Engineering from Cornell University. Shri K. Mishra, M.D., M.S. (Administrative Medicine), was appointed a director in 1999. He has been a practicing neurologist, a teaching professor and a researcher and administrator as Associate Dean at the USC School of Medicine since 1987. He is also the coordinator of the Integrative (alternative and conventional) Medicine program at USC and is a staff neurologist at the Sepulveda VA Hospital. He has been Medical Director of the VA out-patient clinic in Los Angeles. He is involved at USC on the World Bank AIDS prevention program in India. He previously served as the Chief of Neurology at the University of Mississippi Medical Center. He lectures extensively at medical conferences in the United States, India, and other foreign countries. He received his initial medical degree from BHU Varanasi, India, in 1964. He subsequently received M.D. medical degree from the University of Toronto in 1971. He was board certified in Neurology in 1976, and received his M.S. in Administrative Medicine from the University of Wisconsin, in Madison, in 1990. He also has a Doctor of Ayurvedic Medicine from BHU Varanasi, India. He is Chair of Study Section of National Center for Complementary Alternative Medicine of the National Institute of Health. He has been involved as a health care consultant for profit and non-profit organizations. Election of Directors Each Director of Roex is elected at the annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his or her successor is elected and qualified. The Bylaws permit the Board of Directors to 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 30 33 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. 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 31 34 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. Related Party Transactions Any future material related party transactions and loans, including transactions between Roex and its officers and directors or its principal shareholders, will be on terms at least as favorable to us as could be obtained from non-related third parties. In addition, any such transactions and loans must be approved by a majority of the disinterested members of the Board of Directors who shall have access to advice from independent legal counsel at our expense. 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 $1.65. Summary Compensation Table Annual Compensation Long-Term Compensation Awards - ------------------------------------------------------------------------------------------------------------------ Name and Year Salary Bonus Other Securities Compensation All Other Principal ($) ($) ($) Underlying ($) Other Position Options Awards - ------------------------------------------------------------------------------------------------------------------ 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 32 35 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. 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 $1.50 per share is used. 33 36 Value of Number of Unexercised Unexercised in-the-money Options/SARs Options/SARs Shares at FY-End(#) at FY-End($) 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 June 30, 2000 and as adjusted to reflect the sale of the shares of common stock offered hereby by: 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. 34 37 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 (1) 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. (1) The beneficial owners of the Bison Group are the following three limited partnerships: Bison Investment Group One, Ltd., Bison Opportunity Ltd., and Bison Development, Ltd. Each limited partnership consists of between 10 and 15 limited partners. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, we will have outstanding a total of 6,288,584 shares of common stock, assuming the sale of all of the shares covered by this offering. Of these shares, the 1,000,000 shares offered hereby will be freely tradable without restriction or further registration under the Securities Act of 1933, 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. 35 38 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 June 30, 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 36 39 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 June 30, 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 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 37 40 by Wells Fargo Bank, N.A., Encino, 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 may 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) March 31, 2001, whichever 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 9.25% 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 9.25% 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 2% 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 2% 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 "Roex Subscription Account." 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 after acceptance of the subscription. We reserve the right to refuse to sell our common stock to any person at any time. 38 41 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 9% 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 130% of the price per share set forth on the cover page of this prospectus. The underwriter's warrants will be restricted from sale, transfer, assignment or hypothecation for one year after the date of this prospectus, except to officers of RH Investment Corporation, co-underwriters, selling group members, and their officers or partners. 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 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 39 42 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. Legal matters in connection with this offering will be passed upon for the underwriters by Gary Wykidal, Esq., Costa Mesa, California. 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 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. 40 43 ------------------- A MINIMUM OF 500,000 SHARES AND A MAXIMUM OF 1,000,000 SHARES [LOGO] COMMON STOCK ------------ PROSPECTUS ------------ RH INVESTMENT CORPORATION November ____, 2000 1,000,000 SHARES ROEX, INC. COMMON STOCK ------------------------------------------ 41 44 ROEX, INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999 AND 1998 CONTENTS Page INDEPENDENT AUDITORS' REPORT 2 FINANCIAL STATEMENTS: Balance Sheets 3 Statements of Income (Operations) 4 Statements of Stockholders' Deficit 5 Statements of Cash Flows 6-7 Notes to Financial Statements 8-16 F-1 45 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 Santa Monica, California January 19, 2000 F-2 46 ROEX, INC. BALANCE SHEETS ASSETS June 30, December 31, 2000 1999 (unaudited) CURRENT ASSETS: Cash $ 391,325 $ 306,552 Accounts receivable 1,578 2,600 Loans to officer-stockholder 16,576 33,152 Inventory 396,979 254,221 Other current assets 37,548 30,802 ----------- ----------- Total current assets 844,006 627,327 ----------- ----------- PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization 78,153 80,648 ----------- ----------- OTHER ASSETS: Deposits 27,659 10,853 Deferred offering costs 150,547 91,935 ----------- ----------- Total other assets 178,206 102,788 ----------- ----------- $ 1,100,365 $ 810,763 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable and accrued expenses $ 234,561 $ 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 794,561 803,237 ----------- ----------- OBLIGATIONS UNDER CAPITALIZED LEASES, less current maturities 28,570 38,551 ----------- ----------- NOTES AND LOAN PAYABLE, less current maturities 280,045 364,134 ----------- ----------- 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 (635,498) (1,027,846) ----------- ----------- Total stockholders' deficit (2,811) (395,159) ----------- ----------- $ 1,100,365 $ 810,763 =========== =========== See accompanying independent auditors' report and notes to financial statements. F-3 47 ROEX, INC. STATEMENTS OF INCOME (OPERATIONS)
Six months ended Six months ended Year ended Year ended June 30, 2000 June 30, 1999 December 31, 1999 December 31, 1998 (unaudited) (unaudited) NET SALES $ 3,133,908 $ 2,662,519 $ 5,736,832 $ 3,934,910 COST OF SALES 696,353 621,424 1,263,082 1,070,590 ----------- ----------- ----------- ----------- GROSS PROFIT 2,437,555 2,041,095 4,473,750 2,864,320 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Payroll and related expenses 940,813 714,872 1,567,779 1,273,716 Sales and marketing 628,236 547,050 1,086,092 936,764 General and administrative 418,627 50,421 1,165,721 772,901 Debt restructuring and loan fees -- -- -- 229,775 Interest 56,731 60,163 119,226 113,628 ----------- ----------- ---------- ----------- 2,044,407 1,772,506 3,938,818 3,326,784 ----------- ----------- ----------- ----------- NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 393,148 268,589 534,932 (462,464) PROVISION FOR INCOME TAXES 800 800 800 800 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 392,348 $ 267,789 $ 534,132 $ (463,264) =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE: Basic $ 0.07 $ 0.05 $ 0.10 $ (0.10) =========== =========== =========== =========== Diluted $ 0.06 $ 0.04 $ 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 48 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 six months ended June 30, 2000 (unaudited) 392,348 392,348 ----------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2000 (unaudited) 5,288,584 $ 677,687 $ 35,000 $ (80,000) $ (635,498) $ (2,811) =========== =========== =========== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. F-5 49 ROEX, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six months Six Months Year Year ended ended ended ended June 30, 2000 June 30, 1999 Dec.31,1999 Dec.31, 1998 (unaudited) . (unaudited) CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income ................................................................$ 392,348 $ 267,789 $ 534,132 $(463,264) ----------- ---------- ---------- ---------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Bad debts ............................................................. -- -- 2,780 4,950 Depreciation and amortization ......................................... 30,000 26,600 66,689 62,187 Loan fees related to debt restructuring ............................... -- -- -- 218,525 CHANGES IN ASSETS AND LIABILITIES: (INCREASE) DECREASE IN ASSETS: Accounts receivable ................................................... 1,022 (3,882) (1,643) (3,548) Inventory ............................................................. 142,758) (49,194) (53,645) 11,206 Other current assets .................................................. (6,747) 3,114 (27,688) 6,770 Other assets ................................................................ (16,806) 878 498 (10,473) INCREASE (DECREASE) IN LIABILITIES - accounts payable and accrued expenses ................................. (8,097) (105,023) (137,562) 66,213 ----------- ---------- --------- --------- Total adjustments ................................................. (143,386) (127,507) (150,571) 355,830 ----------- ---------- --------- --------- Net cash provided by (used for) operating activities .............. 248,962 140,282 383,561 (107,434) ----------- -------- --------- --------- CASH FLOWS USED FOR INVESTING ACTIVITIES - payments to acquire property and equipment ................................ (10,119) (7,480) (13,804) (5,352) ---------- --------- --------- ---------
(Continued) F-6 50 ROEX, INC. STATEMENTS OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six months Six months Year Year ended ended June 30,2000 June 30,1999 ended ended (unaudited) (unaudited) Dec,31,1999 Dec.31,1998 CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES: Advances (to)/from officer-stockholder 16,576 (375) (4,000) (1,892) Payments on notes and loan payable, other (83,270) (73,440) (171,196) (114,580) Proceeds from notes and loan payable, other -- -- 165,000 100,000 Deferred offering costs (58,612) (30,000) (91,935) -- Payments on obligations under capitalized leases (28,764) (24,816) (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 (154,070) (117,381) (117,512) 27,498 --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH 84,773 15,421 252,245 (85,288) CASH AND CASH EQUIVALENTS, beginning of year/period 306,552 54,307 54,307 139,595 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of year/period $ 391,325 $ 69,728 $ 306,552 $ 54,307 ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 27,282 $ 60,163 $ 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 stock 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 51 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 52 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 is 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 June 30, 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 See accompanying independent auditors' report. F-9 53 ROEX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1999 AND 1998 adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 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. (3) INVENTORY: Inventory is comprised of the following: June 30, December 31, 2000 1999 (unaudited) Finished goods $ 367,881 $ 227,537 Labels and packaging 29,098 26,684 -------------- ------------- $ 396,979 $ 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 54 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 Less current maturities .................................... 903,315 539,181 $364,134 ======== See accompanying independent auditors' report F-11 55 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 56 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 57 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 58 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 59 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 ------- -------- Historical 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. F-16 60 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 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. II-1 61 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, Bison Group Ltd. 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, 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). II-2 62 Between December 1998 and January 1999, we sold 51,834 shares of our Common Stock at $1.50 per share (proceeds 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 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 II-3 63 10.1 Form of Escrow Agreement with Wells Fargo Bank, N.A. 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. - ----------------- * Previously filed 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: (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. II-4 64 (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. II-5 65 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 Post-Effective Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on November 21, 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. 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 DATE TITLE /s/ Rodney H. Burreson - ------------------------ November 21, 2000 Chairman of the Board and Rodney H. Burreson Chief Executive Officer /s/ Derek Burreson - ------------------------ November 21, 2000 Chief Operating Officer, Derek Burreson Secretary and Director /s/ Peter Weber - ------------------------ November 21, 2000 Chief Financial Officer Peter Weber (Principal Financial and Accounting Officer) /s/ Robert Stuckelman - ------------------------ November 21, 2000 Director Robert Stuckelman /s/ William B. Barnett - ------------------------ November 21, 2000 Director William B. Barnett /s/ Shri K. Mishra - ------------------------ November 21, 2000 Director Shri K. Mishra, M.D., M.S. II-6 66 EX-1 2 0002.txt EXHIBIT 1 - MANAGING PLACEMENT AGENT AGREEMENT Document is copied. EXHIBIT 1 MANAGING PLACEMENT AGENT (UNDERWRITING) AGREEMENT RH Investment Corporation October 25, 2000 1,000,000 SHARES ROEX, INC. MANAGING PLACEMENT AGENT AGREEMENT October 25, 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 Wells Fargo Bank, Encino, 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) 90 days from the effective date plus the optional 60 day extension, 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. 1 67 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 2 68 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 Amendments thereto 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. 3 69 (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 4 70 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 5 71 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. 6 72 (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 180 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. 7 73 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 8 74 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 9 75 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 9.25% 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 2% 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 9.25% and 2%, 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. 10 76 (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 9% 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 130% 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. 11 77 (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 "Wells Fargo Bank, Escrow Agent"; you shall deliver Subscription Payments received by you to the Escrow Agent, at 15760 Ventura Boulevard, Encino, California 91436, 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 12 78 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 500,000 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 13 79 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. 14 80 (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 American Stock Exchange or NASDAQ Small Cap Market or 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 15 81 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 16 82 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 17 83 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 18 84 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; 19 85 (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 20 86 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, 21 87 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 22 88 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. 23 89 (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 24 90 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 25 91 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 26 92 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 27 93 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 28 94 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 29 95 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: 30 96 (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. 31 97 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 32 98 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: /s/ Rodney H. Burreson ------------------------------ Rodney H. Burreson, President Accepted and agreed to as of the day and year first above written. R.H. INVESTMENT CORPORATION By: /s/ Stuart S. Greenberg -------------------------------------- Stuart S. Greenberg, Managing Director 33 99 EX-4.4 3 0003.txt EXHIBIT 4.4 REPRESENTATIVES WARRANT EXHIBIT 4.4 REPRESENTATIVES WARRANT THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, OR AN OPINION OF COUNSEL SATISFACTION TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. ROEX, INC. COMMON STOCK PURCHASE WARRANT ROEX, INC., a California corporation, (the "Company"), hereby certifies that, for value received, RH Investment Corporation or its registered assigns (the "Holder"), is entitled, on the terms and subject to the conditions set forth herein, to purchase from the Company at any time commencing __________, 2000 and before 5:00 p.m., Los Angeles, California time, on __________, 2005 ____________ fully paid and nonassessable shares of Common Stock (as hereinafter defined) at a purchase price of $7.80 per share. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant. As used herein the following terms, unless the context otherwise requires, have the indicated meanings: "Company" means Roex, Inc. and any person (corporate or otherwise) that shall succeed to or assume the obligations of Roex, Inc. hereunder in accordance with the terms hereof. "Common Stock" means the Company's Common Stock, no par value per share, as authorized on the date hereof, and any other securities into which or for which the Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Date" means __________, 2005. "Holder" or "Holders" means the holder or holders of the Registerable Securities, including the holder or holders of Warrants to purchase Registerable Securities not then issued. "Issue Date" means the __________, 2000 date of the original issuance of this Warrant. "Majority Holders" means the holder or holders of Warrants and Registerable Securities theretofore issued upon exercise or conversion of Warrants, who own or have the right to acquire upon exercise or conversion of Warrants a majority of the Registerable Securities that would be outstanding if all of the outstanding Warrants were exercised in full on the date as of which the determination is being made. 1 "Nasdaq" means the NASDAQ SmallCap Market. "Other Securities" means any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities as a result of the provisions of Section 4. "Prospectus" means the prospectus included in the Registration Statement as of the date it becomes effective under the Securities Act ("SEC Effective Date"), including financial statements and all documents incorporated by reference therein. In the case of references to the Prospectus as of a date subsequent to the SEC Effective Date, Prospectus means as supplemented as of such subsequent date. "Purchase Price" means $7.80 per share. "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or statements in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement by the United States Securities and Exchange Commission (the "SEC"). "Registerable Securities" means the shares of Common Stock issued or issuable upon exercise or conversion of the Warrant and Other Securities issued or issuable as a result of the provisions of Sections 4 or 5 hereof. References herein to amounts or percentages of Registerable Securities as of or on any particular date shall be deemed to refer to amounts or percentages after giving effect to any applicable events contemplated by the preceding sentence. As to any particular Registerable Securities, such securities shall cease to be Registerable Securities when they have been sold pursuant to an effective registration statement or in compliance with Rule 144 or are eligible to be sold pursuant to subsection (k) of Rule 144. "Registration Period" means the period from the Issue Date to the earliest of (i) the date which is four years after the final Closing Date of the offering, (ii) the date on which the Holder may sell all of Holder's Registerable Securities without registration under the Securities Act pursuant to subsection (k) of Rule 144, without restriction on the manner of sale or the volume of securities which may be sold in any period and without the requirement for the giving of any notice to, or the mailing of any filing with the SEC and (iii) the date on which the Holder no longer owns any Registerable Securities. "Registration Statement" means a registration statement of the Company under the Securities Act on such form for which the Company then qualifies and which permits the secondary resale thereunder of Registerable Securities required by, the provisions hereof to be included therein. The term "Registration Statement" shall also include any amendment thereto and all exhibits and financial statements and schedules and documents incorporated by reference in such Registration Statement as of the SEC Effective Date. In the case of references to the Registration Statement as of a date subsequent to the SEC Effective Date, Registration Statement means as amended or supplemented as of such subsequent date. 2 "Rule 144" means Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit a holder of securities of the Company to sell such Company securities to the public without registration under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "SEC" means the United States Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is declared effective by the SEC. "SEC Filing Date" means the date the Registration Statement is first filed with the SEC pursuant to Section 20 hereof. "Trading Day" means a day on which the principal securities market for the Common Stock is open for general trading of securities. "Warrants" means this Warrant and any other warrants derived from this Warrant originally issued by the Company to RH Investment Corporation on the Issue Date. 1. EXERCISE OF WARRANT. 1.1 EXERCISE. This Warrant may be exercised by the Holder, in full or in part, at any time, or from time to time, commencing on the Issue Date to and including the Expiration Date by surrender of this Warrant and the subscription form annexed hereto (completed and signed by the Holder) to the principal office of the Company or the Company's transfer agent and registrar for the Common Stock, and by making payment by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription form by (b) the Purchase Price then in effect. The Holder shall provide a copy of the subscription form to the Company at the time of exercise and the Company will confirm the exercise instructions given therein by notice to the Company's transfer agent within one Trading Day after receiving such subscription form. On any partial exercise the Company will promptly issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the purchase of the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.2 CASHLESS EXERCISE. Notwithstanding anything to the contrary contained in Section 1.1, the Holder may elect to exercise this Warrant in whole or in part by receiving shares of Common Stock equal to the net issuance value (as determined below) of this Warrant, or any part hereof upon surrender of this Warrant to the principal office of the Company or the Company's transfer agent and registrar for the Common Stock together with the subscription form annexed hereto (completed and signed by the Holder), in which event the Company shall issue to the Holder a number of shares of Common Stock equal to X in the following formula: X = Y (A-B) ----------- A 3 1.2 CASHLESS EXERCISE (continued) Where: Y = the number of shares of Common Stock as to which this Warrant is to be exercised. A = the current fair market value of one share of Common Stock calculated as of the last Trading Day immediately preceding the exercise of this Warrant. B = the Purchase Price. As used herein, current fair market value of Common Stock as of a specified date shall mean with respect to each share of Common Stock the closing sale price of the Common Stock on the principal securities market on which the Common Stock may at the time be listed or, if there have been no sales on any such exchange on such day, the average of the reported closing bid and asked prices on the principal securities market at the end of such day, or, if on such day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq System as of 2:00 p.m., Los Angeles, California, time, or, if on such day the Common Stock is not quoted in the Nasdaq System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five consecutive Trading Days consisting of the day as of which the current fair market value of a share of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day. If on the date for which current fair market value is to be determined the Common Stock is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the current fair market value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless prior to such date the Company has become subject to a merger, acquisition or other consolidation transaction pursuant to which the Company is not the surviving party, in which case the current fair market value of the Common Stock shall be deemed to be the value received or agreed to be paid by the holders of the Company's Common Stock for each share thereof pursuant to such transaction. 2. DELIVERY UPON EXERCISE. As soon as practicable after the exercise of this Warrant, and in any event within three (3) Trading Days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which the Holder shall be entitled on such exercise, in such denominations as may be requested by the Holder plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current fair market value (as determined in accordance with subsection 1.2) of one full share, together with any other stock or other securities and property (including cash where applicable) to which the Holder is entitled upon such 4 2. DELIVERY UPON EXERCISE.(Continued) exercise pursuant to Section 1 or otherwise. Upon exercise of this Warrant as provided herein, the Company's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the Holder, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other person of any obligation to the Company, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with such exercise. If the Company fails to issue and deliver the certificates for the Common Stock to the Holder pursuant to the first sentence of this paragraph as and when required to do so, in addition to any other liabilities the Company may have hereunder and under applicable law, the Company shall pay or reimburse the Holder on demand for all out-of-pocket expenses including, without limitation, reasonable fees and expenses of legal counsel incurred by the Holder as a result of such failure. 3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY ETC.; RECLASSIFICATION ETC. In case at any time, or from time to time, after the Issue Date, all the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor: 3.1 other or additional stock or other securities or property (other than cash) by way of dividend, or 3.2 any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or 3.3 other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 5), then and in each such case the Holder, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subsections 3.2 and 3.3 of this Section 3) which the Holder would hold on the date of such exercise if on the date thereof the Holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the case referred to in subsections 3.2 and 3.3 of this Section 3) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Section 4. Notwithstanding anything in this Section 3 to the contrary, no adjustments pursuant to this Section 3 shall actually be made until the cumulative effect of the adjustments called for by this Section 3 since the date of the last adjustment actually made would change the amount of stock or other securities and property which the Holder would hold by more than 1%. 5 4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER ETC. In case at any time or from time to time after the Issue Date, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition of such reorganization, consolidation, merger, sale or conveyance the Company shall cause lawful and adequate provisions to be made whereby the Holder hereof shall thereafter have the right to receive upon exercise of this Warrant, in addition to or in lieu of (as the case may be) the shares of Common Stock of the Company immediately issuable upon such exercise, such securities or other property receivable upon such reorganization, consolidation, merger, sale or conveyance as though the Holder had exercised the Warrant and was the owner of the shares of Common Stock issuable hereunder immediately prior to any such events at a price equal to the product of (x) the number of shares issuable upon exercise of the Warrant and (y) the Purchase Price applicable immediately prior to the record date for such reorganization, consolidation, merger, sale or conveyance as though Holder had exercised the Warrant. The provisions of this Section shall apply to successive reorganizations, consolidations, mergers, sales or conveyances. 5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that after the Issue Date the Company shall (i) issue additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the Purchase Price in effect immediately prior to such event by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 5. The Holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would be issuable on such exercise immediately prior to such issuance by a fraction of which (i) the numerator is the Purchase Price in effect immediately prior to such issuance and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 6. ADJUSTMENT FOR CERTAIN STOCK ISSUANCES. 6.1 In case at any time the Company shall issue shares of its Common Stock or debt or equity securities convertible into or exercisable or exchangeable for shares of Common Stock (collectively, the "Newly Issued Shares"), other than for a consideration per share less than a price equal to the Purchase Price (i) an issuance pro rata to all holders of its outstanding Common Stock, (ii) issuances pursuant to options, warrants and convertible securities outstanding on the Issue Date and (iii) issuances pursuant to employee stock option plans (other than in connection with any corporate financing or acquisition transaction), at a price below the Purchase Price in effect at the time of such issuance, then, following such issuance of Newly Issued Shares, the number of shares of Common Stock which the Holder shall be entitled to receive upon exercise of this Warrant shall be increased and the 6 6. ADJUSTMENT FOR CERTAIN STOCK ISSUANCES.(Continued) Purchase Price shall be decreased to the respective amounts determined pursuant to this Section 6. The number of shares of Common Stock purchasable upon the exercise of this Warrant following any such adjustment shall be determined by multiplying the number of shares purchasable upon exercise of this Warrant immediately prior to such adjustment by a fraction, the numerator of which shall be the sum of (a) the number of shares of Common Stock outstanding or authorized to be outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the exercise or conversion of all options, warrants, purchase rights or convertible securities which are exercisable at the time of the issuance of the Newly Issued Shares), plus (b) the number of Newly Issued Shares, and the denominator of which shall be the sum of (a) the number of shares of Common Stock outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the conversion of all options, warrants, purchase rights or convertible securities which are exercisable at the time of the issuance of the Newly Issued Shares), plus (b) the number of shares of Common Stock which the aggregate consideration, if any, received by the Company for the number of Newly Issued Shares would purchase at a price equal to the Purchase Price in effect at the time of such issuance. Upon any adjustment under this Section 6, the number of shares of Common Stock purchasable upon exercise of this Warrant in full immediately after such adjustment shall be rounded to the nearest one-one-hundredth of a share of Common Stock subject, however, to Section 2 of this Warrant relating to fractional shares of Common Stock. Such adjustment of the number of shares purchasable provided for in this Section 6 may be expressed in the following formula: X = W x [O+N] ---------------- [O+(C/P)] Where: C = aggregate consideration received by the Company for the Newly Issued Shares. N = number of Newly Issued Shares. O = number of shares of Common Stock outstanding or authorized to be outstanding (on a fully diluted basis, as described above) immediately prior to the issuance of the Newly Issued Shares. P = Purchase Price in effect immediately prior to the time of the issuance of the Newly Issued Shares. W = number of shares of Common Stock issuable upon exercise of this Warrant prior to the issuance of the Newly Issued Shares. X = number of shares of Common Stock issuable upon exercise of this Warrant after the issuance of the Newly Issued Shares. 7 Upon the issuance of such Newly Issued Shares, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the Purchase Price in effect immediately prior to such event by a fraction, the numerator of which shall be the number of shares of Common Stock issuable upon exercise of this Warrant prior to the issuance of the Newly Issued Shares and the denominator of which shall be the number of shares of Common Stock issuable upon the exercise of this Warrant after the issuance of the Newly Issued Shares as provided in this Section 6, and the product so obtained shall thereafter be the Purchase Price then in effect. The number of shares of Common Stock issuable upon exercise of this Warrant and the Purchase Price, as each is so adjusted, shall be readjusted in the same manner upon the happening of any successive issuances of Newly Issued Shares described in this Section 6. 7. FURTHER ASSURANCES. The Company will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of all or any portion of this Warrant from time to time outstanding. 8. NOTICES OF RECORD DATE, ETC. In the event of: 8.1 any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend on, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or 8.2 any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to or consolidation or merger of the Company with or into any other person (other than a wholly-owned subsidiary of the Company), or 8.3 any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder, at least ten days prior to such record date, a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act, or a favorable vote of stockholders if either is required. Such notice shall be mailed at least ten days prior to the date specified in such notice on which any such action is to be taken or the record date, whichever is earlier. 8 9. RESERVATION OF STOCK ISSUABLE ON EXERCISE. The Company will at all times reserve and keep available out of its authorized but unissued shares of capital stock solely for issuance and delivery on the exercise of this Warrant, a sufficient number of shares of Common Stock (or Other Securities) to effect the full exercise of this Warrant and the exercise, conversion or exchange of any other warrant or security of the Company exercisable for, convertible into, exchangeable for or otherwise entitling the holder to acquire shares of Common Stock (or Other Securities), and if at any time the number of authorized but unissued shares of Common Stock (or Other Securities) shall not be sufficient to effect such exercise, conversion or exchange, the Company shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock (or Other Securities) to such number as shall be sufficient for such purposes. 10. TRANSFER OF WARRANT. This Warrant shall inure to the benefit of the successors to and assigns of the Holder. This Warrant and all rights hereunder, in whole or in part, are Registerable at the principal office of the Company or the office of the Company's transfer agent and registrar by the Holder hereof in person or by his duly authorized attorney, upon surrender of this Warrant properly endorsed. 11. REGISTER OF WARRANTS. The Company shall maintain, at the principal office of the Company (or such other office or agency as it may designate by notice to the Holder hereof), a register in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes. 12. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the principal office of the Company or the office of the Company's transfer agent and registrar, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said Holder hereof at the time of such surrender. 13. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 14. WARRANT AGENT. U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California, 91204, has been appointed the Company's Transfer Agent and Registrar and the Company's exercise agent for purposes of issuing shares of Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1. The Company may, by notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 12 and replacing this Warrant pursuant to Section 13, or either of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent. 9 15. REMEDIES. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 16. RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder hereof to purchase Common Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of the Holder for the Purchase Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 17. NOTICES. ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to be sufficiently given when delivered personally (by hand, by courier or by facsimile, with answer back confirmation) and shall be effective upon receipt, addressed: (i) if to the Company, at 2081 Business Center Drive, Suite 185, Irvine, California 92612, Attention: Chief Financial Officer, facsimile number (949) 476-8682, and (ii) if to the Holder, at 15760 Ventura Boulevard, Suite 1732, Encino, California 91436, Attention: Managing Director, facsimile number (818) 386-6429, or at such other address or facsimile number as a party shall have provided to the other party by written notice given in accordance with these provisions. 18. SECURITIES LAW RESTRICTIONS. By acceptance of this Warrant, the Holder represents to the Company that this Warrant is being acquired for the Holder's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution thereof, nor with any present intention of distributing or selling this Warrant or the Common Stock issuable upon exercise of this Warrant. Neither this Warrant nor the shares of Common Stock issuable upon the exercise or conversion of this Warrant have been registered under the Securities Act or under the securities laws of any state. Neither this Warrant, nor the shares of Common Stock issuable upon the exercise or conversion of this Warrant, may be sold, transferred, hypothecated, assigned, offered for sale or otherwise disposed of unless registered pursuant to the Securities Act and applicable state securities laws or unless in the opinion of counsel who is reasonably satisfactory to the Company an exemption from such registration is available. Certificates representing securities issued upon exercise or conversion of this Warrant shall bear a legend as provided in Section 19 hereof. 19. LEGEND. Unless theretofore registered for resale under the Securities Act, each certificate for shares issued upon exercise of this Warrant shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). The securities have been acquired for investment and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the Act, or an opinion of counsel satisfactory to the issuer that registration is not required under the Act. 10 20. REGISTRATION RIGHTS. Nothing contained herein shall be construed as requiring the exercise of this Warrant prior to the initial filing of any registration statement provided herein or the effectiveness thereof. 20.1 DEMAND REGISTRATION. At any time, for a period of five years from the date of this agreement, a Majority of the Holders shall have the right to request registration under the Securities Act for all or any portion of the Registerable Securities upon the terms and conditions set forth in this subsection 20.1. Promptly after receipt of a request for registration pursuant to this subsection 20.1 the Company shall notify all other Holders in writing of such request for registration. Upon receipt of such notice from the Company (the "Company Notice"), each such holder may give the Company a written request to register all or some of such holder's Registerable Securities in the Registration Statement described in the Company Notice, provided that such written request is given within 10 days after the date on which the Company Notice is given (with such request stating (i) the amount of Registerable Securities to be included and (ii) any other information reasonably requested by the Company to properly effect the registration of such Registerable Securities). The Company shall as soon as practicable after the date on which the Company Notice is given, file with the SEC and use its best efforts to cause to become effective a Registration Statement which shall cover the Registerable Securities specified in the Demand Notice and in any written request from any other holder received by the Company within 10 days of the date on which the Company Notice is given. No right to registration of Registerable Securities under this subsection 20.1 shall be construed to limit any registration required under subsection 20.2 hereof. The obligations of the Company under this subsection 20.1 shall expire after the Company has afforded the Holder the opportunity to exercise registration rights under this subsection 20.1 for one registration. 20.2 PIGGY-BACK REGISTRATION. If at any time the Company shall determine to prepare and file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act of any securities of the Company, other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to the Holder and each other holder who is entitled to registration rights under this subsection 20.2 written notice of such determination and if, within 10 days after receipt of such notice, Holder shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registerable Securities the Holder requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock (or Other Securities) which may be included in the Registration Statement because, in such underwriter(s)' judgement, such limitation is necessary to effect an orderly public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registerable Securities with respect to which Holder has requested inclusion. Any exclusion of Registerable Securities shall be made pro rata among all holders who have requested that Registerable Securities be included, in proportion to the number of Registerable Securities specified in their respective requests; provided, however, that the Company shall not exclude any Registerable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such Registration Statement; and provided further, however, that, after giving effect to the 11 20.2 PIGGY-BACK REGISTRATION.(Continued) immediately preceding proviso, any exclusion of Registerable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement, based on the number of securities for which registration is requested except to the extent such pro rata exclusion of such other securities is prohibited under any written agreement entered into by the Company with the holder of such other securities prior to the Issue Date of this Certificate, in which case such other securities shall be excluded, if at all, in accordance with the terms of such agreement. No right to registration of Registerable Securities under this subsection 20.2 shall be construed to limit any registration required under subsection 20.1 hereof. The obligations of the Company under this subsection 20.2 may be waived by a Majority of the Holders and such obligations of the Company shall expire after the Company has afforded the opportunity to the holders to exercise registration rights under this subsection 20.2 for one registration; provided, however, that any Holder who shall have had any Registerable Securities excluded from any Registration Statement in accordance with this subsection 20.2 shall be entitled to include in an additional Registration Statement filed by the Company the Registerable Securities so excluded. 20.3 OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registerable Securities, the Company shall: 20.3.1 prepare promptly and file with the SEC the Registration Statement provided in Section 20.1 with respect to the Registerable Securities and thereafter to use its best efforts to cause such Registration Statement relating to the Registerable Securities to become effective as soon as possible after such filing, and keep the Registration Statement effective at all times during the Registration Period; submit to the SEC, within three Business Days after the Company learns that no review of the Registration Statement will be made by the staff of the SEC or the staff of the SEC has no further comments on the Registration Statement, as the case may be, a request for acceleration of the effectiveness of the Registration Statement to a time and date not later then 48 hours after the submission of such request; notify the Holder of the effectiveness of the Registration Statement on the date the Registration Statement is declared effective; and, the Company represents and warrants to, and covenants and agrees with the Holder that the Registration Statement (including any amendments or supplements thereto and prospectuses contained therein, at the time it is first filed with the SEC, at the time it is ordered effective by the SEC and at all time during which it is required to be effective hereunder) and each such amendment and supplement at the time it is filed with the SEC and all times during which it is available for use in connection with the offer and sale of Registerable Securities shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; 20.3.2 prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registerable Securities of the Company covered by the Registration Statement until such time as all of such Registerable Securities have been disposed of in accordance with the intended methods of disposition by the Holder or Holders thereof as set forth in the Registration Statement; 12 20.3.3 furnish to each Holder whose Registerable Securities are included in the Registration Statement and its legal counsel, (i) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, one copy of the Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, each letter written by or on behalf of the Company to the SEC or the staff of the SEC and each item of correspondence from the SEC or the staff of the SEC relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment) and (ii) such number of copies of a prospectus, including a preliminary prospectus and all amendments and supplements thereto and such other documents, as such Holder reasonably may request in order to facilitate the disposition of the Registerable Securities owned by such Holder; 20.3.4 use reasonable efforts to (i) register and qualify the Registerable Securities covered by the Registration Statement under such securities or blue sky laws of such jurisdictions as the Holders who hold a majority of the Registerable Securities being offered reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times until the end of the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period and (iv) take all other actions reasonably necessary or advisable to qualify the Registerable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto (I) to qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection 20.3.4, (II) to subject itself to general taxation in any such jurisdiction, (III) to file a general consent to service of process in any such jurisdiction, or (IV) to make any change in its Articles of Incorporation or Bylaws which the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders; 20.3.5 in the event that the Registerable Securities are being offered in an underwritten offering, enter into and perform its obligations under an underwriting agreement in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering; 20.3.6 as promptly as practicable after becoming aware of such event or circumstance, notify each Holder of any event or circumstance of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an 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, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, file such supplement or amendment with the SEC at such time as shall permit the Holder to sell Registerable Securities pursuant to the Registration Statement as promptly as practicable, and deliver a number of copies of such supplement or amendment to each Holder as such Holder may reasonably request; 13 20.3.7 as promptly as practicable after becoming aware of such event, notify each Holder who holds Registerable Securities being sold (or, in the event of an underwritten offering the managing underwriters) of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement at the earliest possible time; 20.3.8 permit one legal counsel designated as selling stockholders' counsel by the Holder(s) holding a majority of the Registerable Securities being sold to review and comment on the Registration Statement and all amendments and supplements thereto a reasonable period of time prior to their filing with the SEC; 20.3.9 make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement; 20.3.10 at the request of the Holder(s) who hold a majority of the Registerable Securities being sold, furnish on the date that Registerable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters; and (ii) an opinion, dated such date, from counsel representing the Company for purposes of such Registration Statement, in form and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investors; 20.3.11 make available for inspection by Holder, any underwriter participating in any distribution or disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by Holder or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable Holder to exercise Holder's due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to a Holder) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction or (iii) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto; 14 20.3.12 use its best efforts (i) to cause all the Registerable Securities covered by the Registration Statement to be listed on the NASDAQ or such other principal securities market on which securities of the same class or series issued by the Company are then listed or traded or (ii) if securities of the same class or series as the Registerable Securities are not then listed on the NASDAQ or any such other securities market, to cause all of the Registerable Securities covered by the Registration Statement to be listed on the NASDAQ, New York Stock Exchange or the American Stock Exchange; 20.3.13 provide a transfer agent and registrar, which may be a single entity, for the Registerable Securities not later than the effective date of the Registration Statement; 20.3.14 cooperate with the Holder and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registerable Securities to be offered pursuant to the Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Holder may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Holder may request; 20.3.15 take all other reasonable actions necessary to expedite and facilitate disposition by the Holder of the Registerable Securities pursuant to the Registration Statement. 20.3.16 With a view to making available to the Holders the benefits of Rule 144, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (iii) furnish to each Holder so long as such Holder owns Registerable Securities, promptly upon request, (I) a written statement by the Company that it has complied with the reporting requirements of Rule 144 and the Exchange Act, (II) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (III) such other information as may be reasonably requested to permit the Holders to sell such securities pursuant to Rule 144 without registration. 20.4 OBLIGATIONS OF THE HOLDER. In connection with the registration of the Registerable Securities, the Holder shall have the following obligations: 20.4.1 it shall be a condition precedent to the obligations of the Company to complete the registration pursuant hereto with respect to the Holder's Registerable Securities that the Holder shall furnish to the Company such information regarding Holder, the Registerable Securities held by Holder and the intended method of disposition of the Registerable Securities held by Holder as shall be reasonably required to effect the registration of such Registerable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least five days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Holder of the information the Company requires from the Holder (the "Requested Information") if any of 15 20.4.1(Continued) Holder's Registerable Securities are eligible for inclusion in the Registration Statement. If at least two Business Days prior to the filing date the Company has not received the Requested Information from the Holder (at such time Holder becoming a "Non-Responsive Holder"), then the Company may file the Registration Statement without including Registerable Securities of Non-Responsive Holder but shall not be relieved of its obligation to file a Registration Statement with the SEC relating to the Registerable Securities of Non-Responsive Holder promptly after Non-Responsive Holder provides the Requested Information; 20.4.2 by Holder's acceptance of the Registerable Securities, Holder agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless Holder has notified the Company in writing of such Holder's election to exclude all of Holder's Registerable Securities from the Registration Statement; 20.4.3 in the event Holder(s) holding a majority of the Registerable Securities being registered determine to engage the services of an underwriter, each Holder agrees to enter into and perform such Holder's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registerable Securities, unless such Holder has notified the Company in writing of such Investor's election to exclude all of such Investor's Registerable Securities from the Registration Statement; 20.4.4 Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsections 20.3.6 or 20.3.7, Holder will immediately discontinue disposition of Registerable Securities pursuant to the Registration Statement covering such Registerable Securities until Holder's receipt of the copies of the supplemented or amended prospectus contemplated by subsections 20.3.6 or 20.3.7 and, if so directed by the Company, Holder shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession of the prospectus covering such Registerable Securities current at the time of receipt of such notice; 20.4.5 Holder may not participate in any underwritten registration hereunder unless Holder (i) agrees to sell Holder's Registerable Securities on the basis provided in any underwriting arrangements approved by the Holders entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses to the underwriters applicable with respect to its Registerable Securities, in each case to the extent not payable by the Company pursuant to the terms of this Agreement; and 20.4.6 Holder agrees to take all reasonable actions necessary to comply with the prospectus delivery requirements of the Securities Act applicable to its sales of Registerable Securities. 16 20.5 EXPENSES OF REGISTRATION. All costs and expenses, other than underwriting or brokerage discounts, commissions and other fees related to the distribution of the Registerable Securities, incurred in connection with registrations, filings or qualifications pursuant to subsections 20.1, 20.2 and 20.3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees and the fees and disbursements of counsel for the Company shall be borne by the Company, provided, however, that the Holder(s) shall bear the fees and out-of-pocket expenses of the one legal counsel selected by the Holder(s) pursuant to subsection 20.4.8 hereof and all reasonable costs and expenses incurred in connection with the second demand registration permitted by subsection 20.2, including all registration, listing and qualification fees, printers and accounting fees and the fees and disbursements of the Company counsel, shall be borne by the Holder(s) of the Registerable Securities covered by such registration. 20.6 INDEMNIFICATION. In the event any Registerable Securities are included in a Registration Statement under this Agreement: 20.6.1 To the extent permitted by law, the Company will indemnify and hold harmless each Holder who holds such Registerable Securities, the directors, if any, of such Holder, the officers, if any, of such Holder, each person, if any, who controls any Holder within the meaning of the Securities Act or the Exchange Act, any underwriter (as defined in the Securities Act) for the Holders, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each person, if any, who controls any such underwriter within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or 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 (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in subsection 20.6.4 with respect to the number of legal counsel, the Company shall reimburse the Holders and the other Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this subsection 20.6.1: (I) shall not apply to a Claim arising out of or based upon a 17 20.6.1(Continued) Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement, the prospectus or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to subsection 20.3.3 hereof; (II) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to subsection 20.3.3 hereof; and (III) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registerable Securities by the Holders pursuant to Section 24. 20.6.2 In connection with any Registration Statement in which a Holder is participating, each such Holder agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in subsection 20.6.1, the Company, each of its directors, each of its officers who signs the Registration Statement, each person on, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the Securities Act or the Exchange Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in connection with such Registration Statement; and such Holder will reimburse any legal or other expenses reasonably incurred by any Indemnified Party, promptly as such expenses are incurred and are due and payable, in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this subsection 20.6.2 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Holder, which consent shall not be unreasonably withheld; provided, further, however, that the Holder shall be liable under this subsection 20.6.2 for only that amount of a Claim as does not exceed the amount by which the net proceeds to such Holder from the sale of Registerable Securities pursuant to such Registration Statement exceeds the cost of such Registerable Securities to such Holder. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registerable Securities by the Holders pursuant to Section 10. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this subsection 20.6.2 with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. 20.6.3 The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information so furnished in writing by such persons expressly for inclusion in the Registration Statement. 18 20.6.4 Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 20.6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under Section 20.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel selected by the indemnifying party but reasonably acceptable to the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In such event, the Company shall pay for only one separate legal counsel for the Investors; such legal counsel shall be selected by the Holders holding a majority in interest of the Registerable Securities included in the Registration Statement to which the Claim relates. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 20.6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by Section 20.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 20.7 The agreements, representations and warranties of the Company and the Holder set forth or provided in this Section 20 shall survive any exercise of this Warrant and the delivery of and payment for the Registerable Securities hereunder and shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company and the Holder. 21. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of California. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. Dated: ____________________, 2000 ROEX, INC. ---------------------------------------- Rodney H. Burreson, President 19 FORM OF SUBSCRIPTION RH INVESTMENT CORPORATION (To be signed only on exercise of Warrant) TO: RH Investment Corporation 15760 Ventura Boulevard, Suite 1732 Encino, California 91436 Attention: Managing Director 1. The undersigned Holder of the attached original, executed Warrant hereby elects to exercise its purchase right under such Warrant with respect to ________ shares of Common Stock, as defined in the Warrant, of Roex, Inc., a California corporation (the "Company"). 2. The undersigned Holder (check one): (a) elects to pay the aggregate purchase price for such shares of Common Stock (the "Exercise Shares") (i) by lawful money of the United States or the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $__________, or (ii) by wire transfer of United States funds to the account of the Company in the amount of $__________, which transfer has been made before or simultaneously with the delivery of this Form of Subscription pursuant to the instructions of the Company; or (b) elects to receive shares of Common Stock having a value equal to the value of the Warrant calculated in accordance with Section 1.2 of the Warrant. 3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other name as is specified below: Name: ________________________________________ Address: ________________________________________ ________________________________________ Dated:_________________________ ________________________________________ (Signature must conform to name of Holder as specified on the face of the Warrant) ________________________________________ ________________________________________ (Address) EX-5 4 0004.txt CONSENT OF LAW OFFICES OF WILLIAM B. BARNETT Law Offices of William B. Barnett Letterhead October 25, 2000 Roex, Inc. 2081 Business Center Drive, Suite 185 Irvine, CA 92612 Re: Roex, Inc. Registration Statement on Form SB-2 File No. 333-92299 Gentlemen: We are acting as counsel to Roex, Inc., a California corporation (the "Company"), in connection with the preparation of a Registration Statement on Form SB-2 (File No. 333-92299) filed with the Securities and Exchange Commission on December 8, 1999 (the "Registration Statement"), related to a proposed offering by the Company to the public of a maximum of 1,000,000 shares of the Company's Common Stock, no par value (the "Common Stock"), and the Representative's Warrant to purchase 90,000 shares of Common Stock (the "Representative's Warrant") and the 90,000 shares of Common Stock issuable upon exercise of the Representative's Warrant. In this connection, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, certificates and written and oral statements of officers, legal counsel and accountants of the Company and of public officials, and other documents that we have considered necessary and appropriate for this opinion, and, based thereon, we advise you that, in our opinion: 1. The Company is a corporation duly organized and validly existing under the laws of the State of California; 2. The Common Stock and the Representative's Warrant, when issued pursuant to and in accordance with the Underwriting Agreement referred to in the Registration Statement, will be validly issued, fully paid and nonassessable; and 3. The shares of Common Stock, when issued upon exercise of the Representative's Warrant in accordance with the terms thereof, will be validly issued, fully paid and nonassessable. We hereby consent to the use of our name beneath the caption "Legal Matters" in the Prospectus forming a part of the Registration Statement and to the filing of this opinion as Exhibit 5 thereto. This opinion is conditioned upon the Registration Statement being declared effective and upon compliance by the Company with all applicable provisions of the Securities Act of 1933, as amended, and such state securities rules, regulations and laws as may be applicable. Very truly yours, /s/ William B. Barnett --------------------------------- LAW OFFICES OF WILLIAM B. BARNETT EX-10.1 5 0005.txt EXHIBIT 10.1 ESCROW AGREEMENT Document is copied. Exhibit 10.1 ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Agreement") is entered into as of the 24th day of October, 2000, by and among Roex, Inc., a California corporation ("Issuer"), RH Investments Corporation ("Placement Agent"), and Wells Fargo, National Association ("Escrow Agent") R E C I T A L S: A. Issuer propose to offer for sale to subscribers an aggregate of 1,000,000 shares of the capital stock of Issuer, having no par value (the "Shares") at a price of $6.00 per Share, payable at the time of subscribing for a Share. 500,000 shares and the proceeds therefrom shall be subject to this Agreement. The payment of $3,000,000 for at least 500,000 Shares will be paid into the escrow created by this Agreement. B. Issuer intends to sell the Shares on a best-efforts "minimum or none" basis in a public offering (the "Offering") by delivering to each subscriber a Prospectus (the "Prospectus") describing the Offering. C. Issuer desires to establish an escrow account in which funds received from subscribers would be deposited pending completion of the period during which the Escrow Account shall be open (the "Escrow Period"). Wells Fargo, National Association, serve as Escrow Agent in accordance with the terms and conditions set forth herein. AGREEMENT: NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Issuer hereby appoints Wells Fargo, National Association, as Escrow Agent and Escrow Agent shall establish an escrow account (the "Escrow Account") on its books styled "Wells Fargo Bank\Roex Escrow" ("Roex Subscription Account"). Commencing upon the execution of this Agreement, Escrow Agent shall act as Escrow Agent and hereby agrees to receive and disburse the proceeds from the offering of the Shares in accordance with the terms hereof. Issuer agrees to notify the Escrow Agent promptly of the closing of the offering and sale of the Shares. 2. Issuer or Placement Agent shall cause all checks received from subscribers for Shares to be promptly deposited into the Escrow Account no later than 12:00 Noon following the day of receipt of such checks. Issuer or Placement Agent shall deliver to the Escrow Agent checks of the subscribers made payable to the "Roex Subscription Account" or endorsed to the Roex Subscription Account. Any checks that are received by Escrow Agent that are not made payable or endorsed to the Roex Subscription Account shall be returned to the Issuer. Issuer or Placement Agent shall furnish to the Escrow Agent at the time of each deposit 37 103 of the above-mentioned funds a list containing the name of each subscriber, the subscriber's address, the number of Shares subscribed for, and receipt of the Minimum (as described below), the Issuer is aware and understands that it is not entitled to any proceeds from subscriptions deposited into the Escrow Account and no amounts deposited in the Escrow Account during the Escrow Period shall become the property of the Issuer or any other entity, or be subject to the debts of the Issuer or any other entity. 3. The Escrow Period shall commence on the date hereof and shall terminate ten (10) Business Days (as defined below) following the earlier to occur of the following dates: (a) The date upon which Escrow Agent confirms upon written request of the Issuer that it has received into the Escrow Account and collected gross subscription proceeds from the sale of 500,000 Shares aggregating $3,000,000 in deposited funds (the "Minimum") assuming that, prior to such date, the SB-2 Registration Statement as amended, File Number 333-92299 has been declared effective by the Securities and Exchange Commission; or (b) The "Cessation Date," which for the purposes of this Agreement shall be January 29, 2001, except as extended in writing by the agreement of parties for a period not to exceed an additional sixty (60) days. (c) The date upon which a determination is made by the Issuer to terminate the Offering prior to the sale of the Minimum, as communicated to Escrow Agent in writing. Upon the occurrence of any of the events described in (a), (b) or (c) above, the Escrow Period shall continue for such ten (10) Business-Day period solely for the limited purposes of collecting subscribers' checks that have been deposited prior to such event and disbursing funds from the Escrow Account as provided herein. Escrow Agent will not accept deposits of subscribers' checks after notice that any of the events described in subparagraphs (a), (b) and (c) has occurred. "Business Day" shall mean a day on which commercial banks in Los Angeles, California, are open for the general transaction of business. If any action or time for performance pursuant to this Agreement is to occur on any Saturday, Sunday or holiday, such time for action or performance shall be extended to the next Business Day. 4. The Escrow Agent will deposit the subscribers' checks for collection and credit the proceeds to the Escrow Account to be held by it under the terms of this Agreement. Notwithstanding anything to the contrary contained herein, Escrow Agent is under no duty or responsibility to enforce collection of any checks delivered to Escrow Agent hereunder. The Escrow Agent hereby is authorized to forward each check for collection and deposit the proceeds in the Escrow Account. As an alternative, the Escrow Agent may telephone the bank on which the check is drawn to confirm that the check has been paid. Additionally, 38 104 to insure that such funds have cleared normal banking channels for collection, Escrow Agent is authorized to hold for ten (10) Business Days funds to be released. Issuer shall immediately reimburse Escrow Agent any monies paid to it if thereafter the subscriber's check is returned unpaid. Any item returned unpaid to the Escrow Agent on its first presentation for payment shall be returned to Issuer and need not be again presented by the Escrow Agent for collection. Issuer agrees to reimburse Escrow Agent for the cost incurred with any returned check. The Escrow Agent shall not be required to invest any funds deposited in the Escrow Account and shall in no event be liable for any investment loss. For purposes of this Agreement, the term "collected funds" or the term "collected" when referring to the proceeds of subscribers' checks shall mean all funds received by Escrow Agent that have cleared normal banking channels and are in the form of cash 5. If prior to the Cessation Date, subscribers' checks in an amount of at least the Minimum have been deposited in the Escrow Account, upon request from, Escrow Agent will confirm the amounts collected by it from subscribers' checks. If such amount is at least equal to the Minimum, the may send Escrow Agent a written notice providing a list of all accepted subscribers, specifying the total amount of their subscription to be remitted to, and containing a request to terminate the Escrow Period and remit such amount, less any fees or other amounts then owing from Issuer to Escrow Agent hereunder, to the Issuer as promptly as possible, but in no event later than ten (10) Business Days after such termination, by issuing its bank check payable to the Issuer or by depositing such amount directly into the account of Issuer if maintained with Wells Fargo Bank, National Association, as designated in writing by Issuer to Escrow Agent. The Escrow Period shall not terminate upon receipt by Escrow Agent of such notice, but shall continue for such (10) Business-Day period solely for the limited purposes of collecting subscribers' checks that have been deposited prior to Escrow Agent's receipt of such notice and disbursing funds from the Escrow Account as provided herein. Escrow Agent will not accept deposits of subscribers' checks after receipt of such notice. If, on the Cessation Date, the Minimum Amount has not been deposited with the Escrow Agent and collected, or if Issuer notifies the Escrow Agent in writing that Issuer elects to terminate the Offering as provided in paragraph 3(c) above, the Escrow Agent shall then issue and mail one bank check in the full amount of the escrow account to the Placement Agent who will write and mail checks to the subscribers in the amount of the subscribers' respective checks, without deduction, penalty or expense to the subscriber. For this purpose, Placement Agent shall be authorized to rely upon the names and addresses of subscribers as furnished by the Issuer. No subscriber shall be paid interest with respect to such deposited funds. The purchase money returned to each subscriber shall be free and clear of any and all claims of the Issuer and any of its creditors. For each subscription for which the Escrow Agent has not collected funds but has submitted the subscriber's check for collection, the Escrow Agent shall include in its check to the Placement Agent the amount of the collected funds from such subscriber's check after the Escrow Agent has collected such funds. If Escrow Agent has not yet submitted such subscriber's check for collection, the Escrow Agent shall promptly remit the subscriber's check directly to the Placement Agent to mail directly to subscriber. At such time as Escrow Agent shall have made the payments and remittances provided in the Agreement, the Escrow Agent shall be completely discharged and released of any and all further liabilities and responsibilities hereunder. 39 105 6. As consideration for its agreement to act as Escrow Agent as herein described, Issuer agrees to pay the Escrow Agent an administration fee of $5,000.00 upon execution of this Agreement, plus the fees described on the attached fee schedule. Further, Issuer agrees to pay all disbursements and advances incurred or made by the Escrow Agent in performance of its duties hereunder, including reasonable fees, expenses and disbursements of its counsel, all in accordance with the attached fee schedule or the other provisions of this Agreement. No such fees or reimbursements shall be paid out of or chargeable to the funds on deposit in the Escrow Account until such time as the Minimum has been collected. If the Issuer rejects any subscription for which Escrow Agent has already collected funds, the Escrow Agent shall promptly issue a refund check to the rejected subscriber in the amount of the subscriber's check. If the Issuer rejects any subscription for which the Escrow Agent has not yet collected funds but has submitted the subscriber's check for collection, the Escrow Agent shall promptly issue a check in the amount of the collected funds from the subscriber's check to the rejected subscriber after the Escrow Agent has cleared such funds. If Escrow Agent has not yet submitted a rejected subscriber's check for collection, the Escrow Agent shall promptly remit the subscriber's check directly to the subscriber. 7. This Agreement shall automatically terminate upon the earlier of (i) twenty (20) days after the Cessation Date or (ii) twenty (20) days after the date upon which the Escrow Agent has delivered the final portion of Escrow Account funds pursuant to the terms of this Agreement. 8. It is understood that the Escrow Agent reserves the right to resign as Escrow Agent at any time by giving written notice of its resignation, specifying the effective date thereof, to each other party hereto. Within thirty (30) days after receiving the aforesaid notice, the other party or parties hereto shall appoint a successor Escrow Agent to which the Escrow Agent may distribute the property then held hereunder, less its fees, costs and expenses (including counsel fees and expenses) which may remain unpaid at that time. If a successor Escrow Agent has not been appointed and has not accepted such appointment by the end of such thirty (30) day period, the Escrow Agent may apply to a court of competent jurisdiction for the appointment of a successor Escrow Agent and the fees, costs and expenses (including reasonable counsel fees and expenses) which it incurs in connection with such a proceeding shall be paid by the Company. 9. The parties hereto agree that the following provisions shall control with respect to the rights, duties, liabilities, privileges and immunities of the Escrow Agent: (a) Escrow Agent shall have no obligation to invest the Escrow Account. (b) The Escrow Agent shall have no responsibility except for the safekeeping and delivery of the amounts deposited in the Escrow Account in accordance with this Agreement. The Escrow Agent shall not be liable for any act done or omitted to be done under this 40 106 Agreement or in connection with the amounts deposited in the Escrow Account, except as a result of the Escrow Agent's gross negligence or willful misconduct. The Escrow Agent is not a party to nor is it bound by, nor need it give consideration to the terms of provisions of, even though it may have knowledge of, (i) any agreement or undertaking by, between or among the Issuer and any other party, except this Agreement, (ii) any agreement or undertaking that may be evidenced by this Agreement, (iii) any other agreements that may now or in the future be deposited with the Escrow Agent in connection with this Agreement. The Escrow Agent is not a party to, is not responsible for, and makes no representation with respect to the offer, sale or distribution of the Shares including, but not limited to, matters set forth in any offering documents prepared and distributed in connection with the offer, sale and distribution of the Shares. The Issuer covenants that it will not commence any action against the Escrow Agent at law, in equity, or otherwise as a result of any action taken or thing done by the Escrow Agent pursuant to this Agreement, or for any disbursement made as authorized herein upon failure of the Issuer to give the notice within the times herein prescribed. The Escrow Agent has no duty to determine or inquire into any happening or occurrence of or of any performance or failure of performance of the Issuer or of any other party with respect to agreements or arrangements with any other party. If any question,dispute or disagreement arises among the parties hereto and/or any other party with respect to the funds deposited in the Escrow Account or the proper interpretation of this Agreement, the Escrow Agent shall not be required to act and shall not be held liable for refusal to act until the question or dispute is settled, and the Escrow Agent has the absolute right at its discretion to do either or both of the following: (i) withhold and/or stop all further performance under this Agreement until the Escrow Agent is satisfied, by receipt of a written document in form and substance satisfactory to the Escrow Agent and executed and binding upon all interested parties hereto (who may include the subscribers), that the question, dispute, or disagreement had been resolved; or (ii) file a suit in interpleader and obtain by final judgment, rendered by a court of competent jurisdiction, an order binding all parties interested in the matter. In any such suit, or should the Escrow Agent become involved in litigation in any manner 41 107 whatsoever on account of this Agreement or the Escrow Account, the Escrow Agent shall be entitled to recover from the Issuer its attorneys' fees and costs. The Escrow Agent shall never be required to post a bond in connection with any services hereunder. The Escrow Agent may consult with counsel of its own choice and shall have full and complete authorization and protection for and shall not be liable for any action taken or suffered by it hereunder in good faith and believed by it to be authorized hereby, nor for action taken or omitted by it in accordance with the advice of such counsel (who shall not be counsel for the Issuer). (c) The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth in this Agreement and may rely and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties and to take statements made therein as authorized and correct without any affirmative duty of investigation. (d) The Issuer hereby agrees to indemnify the Escrow Agent for, and to hold it harmless against, any loss, liability, or expense (including, without limitation, all legal expenses incurred in enforcing any of the provisions of this Agreement or otherwise in connection herewith) incurred without gross negligence or willful misconduct on the part of the Escrow Agent, arising out of or in connection with its entering into this Agreement and carrying out its duties hereunder, including the costs and expenses of defending itself against any claim of liability hereunder or arising out of or in connection with the sale of the Shares. This covenant shall survive the termination of this Agreement. (e) The Escrow Agent shall not be bound by any modification, amendment, termination, cancellation, rescission or supersession of this Agreement unless the same shall be in writing and signed by all of the other parties hereto and, if its duties as Escrow Agent hereunder are affected thereby, unless it shall have given prior written consent thereto. (f) Escrow Agent shall not be liable for any damage, loss, liability, or delay caused by accidents, strikes, fire, flood, war, riot, equipment breakdown, electrical or mechanical failure, acts of God or any cause which is reasonably unavoidable or beyond its reasonable control. 42 108 10. Notices required to be sent hereunder shall be delivered by hand, sent by an express mail service or sent via United States mail, postage prepaid, certified, return receipt requested, or via facsimile: to the following address: If to Placement Agent: RH Investment Corporation 15760 Ventura Boulevard Suite 1732 Encino, CA 91436 Attention: Stuart Greenberg Bruce C. Haapala If to Issuer: Roex, Inc. 2081 Business Center Drive Suite 185 Irvine, CA 92612 Attention: Rod Burreson If to Escrow Agent Wells Fargo Bank, NA Corporate Trust Services 707 Wilshire Blvd. 17th Floor Los Angeles, CA 90017 Attention: Kimberly A. Vann Phone: 213-614-3352 Fax: 213-614-3355 No notice to the Escrow Agent shall be deemed to be delivered until actually received by the Escrow Agent. From time to time any party hereto may designate an address other than the address listed above by giving the other parties hereto not less than five (5) days advance notice of such change in address in accordance with the provisions hereof. 11. This Agreement shall be construed, enforced and administered in accordance with the laws of the State of California. 12. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. [the remainder of this page left intentionally blank] 43 109 EXECUTED on the date first written above. ISSUER: Roex, Inc. By: /s/ Rodney H. Burreson ----------------------- Name: Rodney H. Burreson Title: President ESCROW AGENT: Wells Fargo Bank, National Association By: /s/ Kimberly A. Vann ----------------------- Name: Kimberly A. Vann Title: Trust Officer PLACEMENT AGENT: RH Investment Corporation By: /s/ Stuart Greenberg ----------------------- Name: Stuart Greenberg Title: Managing Director 44 110 EX-23.2 6 0006.txt EXHIBIT 23.2 CONSENT OF STONEFIELD, JOSEPHSON Document is copied. EXHIBIT 23.2 [Letterhead of Stonefield Josephson, Inc.] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Roex, Inc. Irvine, California We hereby consent to the use in the Prospectus constituting a part of the Post-Effective Amendment No. 1 of 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 and the Post-Effective Amendment No. 1 of Registration Statement No. 333-92299. STONEFIELD JOSEPHSON, INC. /s/ Stonefield Josephson, Inc. - --------------------------------------- CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California November 21, 2000 -----END PRIVACY-ENHANCED MESSAGE-----