Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement 83 388K
2: EX-3.1 Certificate of Incorporation 7 21K
3: EX-3.2 By-Laws 23 59K
4: EX-10.1 Employment Agreement - Mohammad Ali Khan 4 15K
11: EX-10.10 Clearing Agreement With Cowen & Company 17 62K
5: EX-10.2 Employment Agreement - Asim S. Kohli 4 15K
6: EX-10.3 Employment Agreement - R. Bret Jenkins 4 15K
7: EX-10.4 Employment Agreement - Richard Wogksch 4 15K
8: EX-10.5 Employment Agreement - Glen Jensen 4 15K
9: EX-10.6 Consulting Agreement With Eh Associates 3 12K
10: EX-10.8 Lease Agreement -- 110 Wall Street, New York 64 285K
12: EX-22.1 Consent of Eichler, Bergsman & Co., LLP 1 6K
REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MAY 14, 1998
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
UNITED STATES FINANCIAL GROUP, INCORPORATED
(Exact name of registrant as specified in charter)
110 WALL STREET, NEW YORK, NY
(Address of Principal executive offices and
principal place of business)
TELEPHONE: (212) 785-4545
COPIES TO:
RONALD J. BRESCIA
DOROS & BRESCIA, P.C.
1140 AVENUE OF THE AMERICAS
NEW YORK, NY 10036
(Name and Address of Agent for Service)
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DELAWARE 6749 13-3922249
State of Standard Industrial IRS Employer ID
Incorporation Classification Code No. Number
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this registration statement.
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
--------------------------- -------------- ---------------- -------------- ----------------
COMMON SHARES .............. 3,285,000 $15 $49,275,000 $14,537
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CROSS REFERENCE SHEET
[S-K ITEM 501(B)]
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ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and Outside Cover Page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover of Inside Front Cover and Outside Back Cover
Prospectus of Prospectus
3. Summary Information; Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Risk Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Cover Page; Cover Page Notes
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Beneficial Owners and Principal Shareholders
Management
12. Description of Securities to be Registered Cover Page; Description of Securities
13. Interest of Named Experts and Counsel Experts
14. Disclosure of Commission's Position Underwriting
on Indemnification for Securities
Act Liabilities
15. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Dilution;
Management; Description of Securities;
Business; Executive Compensation
and Financial Statements
16. Management's Discussion and Analysis or Plan Management's Discussion and Analysis of
of Operation Financial Condition
and Results of Operations
17. Description of Property Property
18. Certain Relationships and Related Transactions Certain Transactions
19. Market for Common Equity and Related Outside Front Cover
Stockholder Matters
20. Executive Compensation Management--Executive Compensation
21. Financial Statements Consolidated Financial Statements
UNITED STATES FINANCIAL GROUP, INCORPORATED
110 WALL STREET
NEW YORK, NY 10005
TELEPHONE: (212) 785-4545
3,000,000 SHARES
OFFERING PRICE $15.00 PER SHARE
United States Financial Group, Incorporated ("USFG" or the "Company") is
offering 3,000,000 shares of its common stock (the "Common Stock" or
"Shares"), par value $.0001 per share, at a price of $15.00 per Share (the
"Maximum Offering"). A minimum of 666,667 Shares at a price per Share of $15
must be sold in this offering before the offering may close (the "Minimum
Offering"). This Prospectus also relates to the offering of 275,000 shares of
Common Stock by a selling stockholder (the "Selling Stockholder"). Until the
Minimum Offering is sold, investor funds will be placed in an escrow account.
Upon selling the Minimum Offering, the funds will be released from escrow to
the Company. The offering will close at such time as the Maximun Offering is
sold or earlier if determined by the Company after the Minimum Offering is
sold. If the Minimum Offering has not been sold within six months from the
date of this Prospectus, the offering will not close and all investor funds
will be returned. The Common Stock has been approved for listing on the
NASDAQ National Market under the symbol , subject to official notice of
issuance.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED
BY ANYONE WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT (SEE
"INTRODUCTORY STATEMENTS AND RISK FACTORS").
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UNDERWRITING
PRICE TO DISCOUNTS AND THE PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
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Per Share ........ $15.00 $1.88 $13.12
Total (3):
Minimum Offering $10,000,000 $1,250,000 $ 8,750,000
Maximum Offering $45,000,000 $5,625,000 $39,375,000
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(1) See "Underwriting" for indemnification arrangements with the
Underwriter.
(2) These amounts represent the proceeds to the Company after
underwriting commissions and nonaccountable expenses but before
deduction of additional offering expenses of approximately $500,000
($425,000 if the Minimum Offering is sold) for legal and accounting
fees, printing costs, filing fees and miscellaneous expenses.
(3) Excludes shares being registered on behalf of the Selling
Stockholder.
UNDERWRITER
KLEIN, MAUS & SHIRE, INC.
110 WALL STREET
NEW YORK, NY 10005
(212) 785-4545
The date of this Prospectus is May , 1998.
The Shares are offered on a "best efforts" basis by the Underwriter
subject to prior sale, acceptance of an offer to purchase, and to withdrawal
or cancellation of the offering without notice.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR 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 UNDERWRITERS.
THE COMPANY, UPON COMPLETION OF THIS OFFERING, AND AT LEAST FOR THE
CURRENT FISCAL YEAR IN WHICH THE REGISTRATION STATEMENT BECOMES EFFECTIVE,
WILL BE REQUIRED TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORTS ON FORM 10-Q PROVIDING SPECIFIED COMPARATIVE FINANCIAL DATA
FOR EACH OF THE FIRST THREE FISCAL QUARTERS OF EACH FISCAL YEAR: AN ANNUAL
REPORT ON FORM 10-K CONTAINING A NARRATIVE DESCRIPTION OF THE COMPANY AS WELL
AS AUDITED FINANCIAL STATEMENTS AND INFORMATION REGARDING MANAGEMENT, CERTAIN
TRANSACTIONS, AND PRINCIPAL SHAREHOLDERS: AND PERIODIC REPORTS OF CERTAIN
SPECIFIED OR OTHER MATERIAL EVENTS AS THEY OCCUR. ALTHOUGH NOT SUBJECT TO THE
PROXY SOLICITATION RULES OF THE SECURITIES AND EXCHANGE COMMISSION, THE
COMPANY PROPOSES TO PROVIDE TO SHAREHOLDERS WITHIN A REASONABLE TIME
FOLLOWING THE END OF EACH FISCAL YEAR AN ANNUAL REPORT CONTAINING A GENERAL
DESCRIPTION OF ITS BUSINESS OPERATIONS AND FINANCIAL STATEMENTS WHICH HAVE
BEEN EXAMINED AND REPORTED ON, WITH AN OPINION EXPRESSED BY AN INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT. HOWEVER, SUCH ANNUAL REPORT WITH FINANCIAL
STATEMENTS WILL NOT NECESSARILY DISCLOSE THE SAME INFORMATION REQUIRED TO BE
DISCLOSED UNDER THE PROXY SOLICITATION RULES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OR SOLICITATION WITH
RESPECT TO THESE SECURITIES BY THE COMPANY TO ANY PERSON WHO MAY BE
CONSIDERED TO BE AN UNDERWRITER: OR TO ANY PERSON IN ANY STATE IN WHICH SAID
OFFERING OR SOLICITATION IS NOT AUTHORIZED BY THE LAWS THEREOF OR IN WHICH
THE PERSON MAKING SAID OFFERING OR SOLICITATION IS NOT QUALIFIED TO ACT AS
DEALER OR BROKER OR OTHERWISE TO MAKE SUCH OFFERING OR SOLICITATION.
THE SECURITIES BEING SOLD PURSUANT TO THIS PROSPECTUS ARE HIGHLY
SPECULATIVE IN NATURE AND NO GUARANTEES OR OTHER WARRANTIES TO THE CONTRARY
ARE MADE BY THE ISSUER.
THE ISSUER MAY UNDERTAKE TO MAKE POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS RELATES AND TO REFLECT
THEREIN ANY FACTS OR EVENTS ARISING AFTER THE DATE HEREOF WHICH REPRESENT A
FUNDAMENTAL OR MATERIAL CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN SAID
REGISTRATION STATEMENT. ANY SUCH AMENDMENTS, WHICH RELATE TO THIS PROSPECTUS,
WILL BE DISSEMINATED TO STOCKHOLDERS AND WARRANT HOLDERS OF THE COMPANY AFTER
THE REQUIRED FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION HAVE BEEN
MADE.
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the information
appearing elsewhere in this Prospectus.
THE COMPANY
United States Financial Group, Incorporated ("USFG" or the "Company") is a
diversified holding company, incorporated under the laws of the State of
Delaware. USFG's main business purpose is to acquire undervalued or
reasonably priced companies in industries well suited for roll up
consolidation transactions. These roll up or consolidation candidates operate
in industry or market niches that are well established, are served in a
fragmented way and do not compete directly with large competitors.
Furthermore, these target companies have to have experienced management teams
and do not require significant expenditures for research and development.
USFG has begun to implement this strategy through the acquisition and/or
establishment of four companies and has assembled a management team that is
experienced in mergers and acquisitions.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS"), an investment banking firm and a
broker-dealer of securities duly registered with the Securities and Exchange
Commission (the "SEC") and is a member firm of the National Association of
Securities Dealers, Inc. (the "NASD"), Municipal Securities Rulemaking Board
(known as the "MSRB"), and Securities Insurance Protection Corporation
("SIPC"). Sureal International, Inc. ("Sureal"), a sales and direct marketing
company that sells health and other consumer products in Russia and other
republics of the former Soviet Union through a network of independent
distributors was acquired in December 1997 in a pooling of interest
transaction.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated will be an asset management and international
financial consultancy company and will take advantage of USFG's contacts. US
Military Resale Group, Incorporated ("Military Resale Group") was established
to acquire military commissaries and other suppliers of consumer products to
the Army and Air Force Exchange System.
KMS is an investment bank providing full service investment banking,
trading, research and advisory services to over 3,000 high net worth
individuals and institutions around the world. The key to KMS' current and
future success is its principal client base of high net worth international
investors and institutions. KMS' access to this client base through its
senior management puts it in a strong position to expand its investment
banking activities without reliance on cold calling, high pressure marketing
activities. KMS' growth plans are based on a corporate policy emphasizing
generating revenues at a non-retail level, and maintaining a small sales
force comprised of experienced financial consultants with impeccable records.
KMS is located at 110 Wall Street in New York where it occupies two floors
totaling 14,000 square feet.
KMS Asset Management Group, Incorporated was formed to serve as an advisor
to institutions, individuals and governments. Its strategy will be to expand
its money management business by increasing assets under management and by
increasing its international consultancy business by becoming advisors to
additional institutions and governments of developing countries. It currently
acts as an advisor to several international corporations and individuals and
to the governments of Grenada, South Korea and Pakistan. It is acting as an
advisor to Grenadine government on its tourism and infrastructure development
project and to the government of Pakistan on establishing the first
"Technology Industrial Park" in Pakistan.
Military Resale Group was established for the purpose of effecting mergers
and acquisitions of military commissaries and other suppliers of consumer
products to the Army and Air Force Exchange System. USFG perceives this
marketplace as well suited for rollup transactions. Military Resale Group's
mission will be to provide the Military Resale Market with the widest variety
of products at below market prices. Military Resale Group will introduce new
consumer products to the military resale market and
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acquire companies serving the military resale market worldwide to expand
revenues. Military Resale Group has targeted several distributors of consumer
products to the military resale market for acquisition, although no formal
discussions will take place until after the completion of this Offering.
Sureal is a direct marketing company that was acquired by USFG in a
pooling of interests transaction completed in December 1997. Management
believes that Sureal will grow through acquisitions in addition to expanding
its present revenues. Sureal is a direct marketing company involved in the
distribution and sale of high quality nutritional and other products in
Russia and other republics of the former Soviet Union. It commenced its
operations in July 1995 using a network of 333 independent distributors in
Russia. The number of distributors in the network increased to 4,972 at
December 31, 1995; 94,307 at December 31, 1996 and 172,221 at May 31, 1997,
respectively. Monthly commissionable sales to these distributors rose from
$20,000 in July 1995 to $5,009,000 in February 1997. Sureal is headquartered
in Orem, Utah.
THE OFFERING
Securities offered by the
Company (1) .................. 3,000,000 shares of common stock, par value
$.0001 (666,667 if the Minimum Offering is
sold)
Common Stock outstanding prior
to the Offering (1) ........... 10,985,634 shares.
Common Stock to be outstanding
after the Offering (1): .......
Maximum Offering .............. 13,985,634 shares
Minimum Offering .............. 11,652,301 shares
Trading symbol for Common
Shares ........................
Use of proceeds ............... The net proceeds of this Offering will be
used to expand Sureal's operations, expand
commence the operations of the KMS Asset
Management Group, acquisitions of other
broker dealers, expand KMS' proprietary
trading operations and acquire seats on the
New York and American Stock Exchanges
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(1) Assumes the conversion of $873,000 of preferred stock into 291,000
shares of Common stock and includes the issuance of 750,000 shares of
Common Stock to effect the Sureal Merger and the 2 for 1 reverse
stock split effected December 8, 1997.
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SUMMARY FINANCIAL INFORMATION
The following summary financial data is qualified in its entirety by, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." The summary financial data presented below as of December 31,
1997 and 1996 and for the two years then ended are derived from the
Consolidated Financial Statements of the Company, which Financial Statements
have been audited by independent certified public accountants, and are
included elsewhere in this Prospectus. All amounts give retroactive effect to
the (i) acquisition of Sureal in December 1997 in a transaction accounted for
as a pooling of interests and (ii) the two for one reverse stock split
effected December 8, 1997.
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FOR THE YEAR ENDED
DECEMBER 31,
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1996 1997
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Statement of Operations Data:
Commissionable sales .......................... $21,594,562 $31,720,456
Commissions, trading income and other ........ $ 314,250 $ 2,935,059
Net loss ...................................... $ (863,564) $ (914,098)
Net loss per share ............................ $ (.08) $ (.09)
Weighted average number of shares outstanding 10,694,634 10,694,634
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AS OF AS OF 12/31/97 AS OF 12/31/97
12/31/97 AS ADJUSTED(1) AS ADJUSTED(1)
ACTUAL MAXIMUM MINIMUM
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Balance Sheet Data:
Total assets ......... $1,187,876 $38,852,876 $9,302,876
Liabilities .......... 646,424 436,424 436,424
Stockholders' equity 540,679 38,416,542 8,866,542
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(1) Adjusted to give effect to the sale of Securities offered by the
Company hereby and the application of the estimated net proceeds
therefrom. These amounts do not assume the exercise of the
Underwriter's Overallotment Option.
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RISK FACTORS
Any person contemplating an investment in the securities offered herein
should be aware of the risk factors of the Offering and should consider,
among others, those factors set forth below. An investment in the Shares
involves significant risks, including, but not limited to, those discussed or
referred to below.
RISKS RELATED TO THE COMPANY
Limited Operating History
The Company and each of its subsidiaries have operating histories of less
than three years. In addition, each subsidiary intends to change and expand
its operations upon the completion of the Offering. As such, past history and
performance are not necessarily an indication of future performance.
Broad Discretion in Application of Proceeds
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of the Offering in order to address
changed circumstances and opportunities. See "Use of Proceeds."
Substantial Control by Officers and Directors
Based upon the number of shares of Common Stock that will be outstanding
upon completion of the Offering, officers and directors of the Company and
persons who may be deemed to be affiliates, as a group, beneficially own
approximately 78 percent (91 percent if the Minimum Offering is sold) of the
Company's outstanding Common Stock. As a result, officers and directors of
the Company and their affiliates may be able to elect all members of the
Board of Directors and may retain the voting power to approve all matters
requiring approval by the shareholders of the Company.
Director Liability
The Company has provisions in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors which allows, the
Company, among other things, to pay for the expenses of an officer or
director in connection with legal proceedings brought about because of the
person's position with the Company. This could have the effect of making it
more difficult for the shareholders to recover against the officers and/or
directors of the Company for alleged breaches of fiduciary duties and other
matters.
Competition
The Company, through its subsidiaries, will compete with numerous other
companies worldwide. There are many other very large and financially stable
competing companies in the United States and in the world with much greater
resources. See "Competition."
Best Efforts, No Commitments to Purchase Shares
Under the terms of the offering, the Shares are being sold on a "best
efforts--all or none" basis with respect to the Minimum Offering of
$15,000,000. Unless the Minimum Offering is sold, no Shares will be issued
and the offering will be withdrawn.
Offering Price
The offering price of the Shares being offered hereby was arbitrarily
determined by the Underwriter. In determining the offering price, the Company
and the Underwriter considered such factors as the financial resources of the
Company, the nature of the Company's assets, estimates of the business
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potential of the Company, the amount of equity or control desired to be
retained by the Company's existing stockholders, the amount of dilution to
public investors and the general conditions of the securities markets. The
offering price has no relationship to the book value of the Company or any
other accepted criteria of value.
Lack of Public Market for Common Stock
At present, no market exists for the Company's securities, and there is no
assurance that a regular trading market will develop at the conclusion of
this Offering or, if developed, that it will be sustained. A purchaser of the
Shares may, therefore, be unable to sell the Shares should he desire to do
so. Furthermore, it is unlikely that a lending institution will accept the
Company's Common Stock as pledged collateral for loans unless a regular
trading market develops.
Dependence Upon Key Personnel
The Company is substantially dependent upon the efforts and abilities of
Mohammad Ali Khan, its President, and Asim S. Kohli, its Executive Vice
President, as well as the senior management teams of each subsidiary. The
loss of the services of any of these officers or key employees would
potentially and materially adversely affect the operations and financial
condition of the Company. At present, the Company has no keyman life
insurance on the life of any key officer or employee. See "Management."
Dilution and Benefits Realized by Original Stockholders
Each purchaser of Common Stock in this Offering will suffer immediate and
substantial dilution in the book value per share of Common Stock as compared
to the purchase price thereof. See "Risk Factors." If the Company's future
operations are unsuccessful, the persons who purchase the Shares offered
hereby will sustain the principal losses of cash investment. See "Dilution."
The public shareholders purchasing shares of Common Stock in connection with
this Offering will be bearing the risk for the Company. If it is successful,
the original shareholders will benefit by the investment made by the public
shareholders. If the Company is not successful, the public shareholders'
investment is principally at risk.
Possible Rule 144 Sales
A total of 10,985,634 shares (including 291,000 issuable upon the assumed
conversion of $873,000 of preferred stock) of insider shares of common stock
have been issued by the Company prior to this Offering and are held by
persons who are officers, directors, founders and others. These securities
may be sold in compliance with Rule 144 adopted under the Securities Act of
1933, as amended, which provides, in essence, that officers, directors and
others holding restricted securities (such as those described above) may each
sell in brokerage transactions an amount equal to 1% of the Company's
outstanding common stock every three months. Rule 144 provides that
restricted shares must not be sold until they have been held for a period of
one year from the date they were fully paid for and no sooner than one year
from the date of incorporation. Hence, the possible sale of these restricted
shares under Rule 144 may, in the future, have a depressive effect on the
price of the Company's common stock in the over-the-counter market, if there
is a market. Furthermore, persons holding restricted securities for one year
who are or become non-affiliates of the Company may sell their securities
pursuant to Rule 144 without limitation on the number of shares sold. Shares
of the Company's stock first become eligible for Rule 144 Sales in one year
from incorporation date.
The officers and directors of the Company and its subsidiaries have agreed
to hold their restricted shares of common stock for a period of two years
after the effective date.
Issuance of Additional Shares
There are enough shares of the Company's common stock authorized that the
Board of Directors will have authority to issue a number of shares in excess
of those that will be outstanding if all shares offered hereby are sold. The
issuance of any such shares to persons other than the public would reduce the
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amount of control held by the public following the Offering. There are
presently no commitments, contracts or intentions other than described herein
to issue any additional stock to any other persons, but such contracts or
commitments may occur in the future.
No Dividends
The Company has paid no dividends to date and does not intend to pay cash
dividends in the foreseeable future. Management presently intends to retain
any earnings to help finance the development of the Company's business.
Future dividend policy will depend upon earnings (if any), expansion, capital
requirements and other factors.
RISK FACTORS RELATED TO KMS
Nature of KMS' Business
KMS' securities business by its nature is subject to various risks,
particularly in volatile markets. These include the occurrence of losses from
trading and underwriting of securities, customer inability to meet
commitments (such as margin obligations), customer default and employee
misconduct and errors.
KMS' revenues, like those of other firms in the securities industry, will
be directly related to fluctuations in trading volume and price levels of
securities. Such fluctuations are directly affected by regional, national and
international economic, regulatory and political conditions, broad trends in
business and finance and interest rates. Low trading volume and lack of
increasing securities prices generally result in reduced commissions and
investment banking revenues for firms such as KMS. In the past, heavy trading
volume has caused clearing and processing problems for the securities
industry and may do so in the future. In periods of reduced volume or
decreasing securities prices, profitability for firms such as KMS may be
adversely affected since many costs other than commission compensation are
relatively fixed.
Participation in underwriting of securities will subject KMS to a risk of
loss if it is unable to resell the securities underwritten. In addition, in
connection with underwriting activities, KMS will be subject to risk of
liability and expense resulting from possible claims against the underwriter
under Federal and state securities laws. There can be no assurance that KMS
will not experience significant losses as a result of such activities.
Competition
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with numerous other securities brokers and dealers,
investment banking firms, life insurance sales agencies, investment advisors,
leveraged buyout firms, venture funds and, indirectly for investment funds,
with commercial banks. Many of KMS' competitors have substantially greater
capital and other resources than does KMS. Some commercial banks and thrift
institutions also offer securities brokerage services and many commercial
banks offer a variety of investment banking services. Competition among
financial services firms also exists for investment representatives and other
personnel.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms.
These developments have increased competition from firms with greater capital
resources than those of KMS. Furthermore, numerous commercial banks have
petitioned the Board of Governors of the Federal Reserve System for
permission to enter into various new business activities from which they are
currently barred, such as underwriting certain mortgage-backed and municipal
revenue securities and securities backed by consumer loans. Various
legislative proposals, if enacted, would also permit commercial banks to
engage in such activities. Ultimately, these developments or other
developments of a similar nature may lead to the creation of integrated
financial service firms that offer a broader range of financial services.
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The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business, including many offering low rates on the Internet. In addition, an
increasing number of specialized firms now offer "discount" services to
individual customers. These firms generally effect transactions for their
customers on an "execution only" basis without offering other services such
as portfolio valuation, investment recommendations and research. The
continuation of such discounting and an increase in the number of new and
existing firms offering such discounts could adversely affect KMS' retail
business.
Risks of Principal Transactions
KMS' securities trading, market making and underwriting activities will
involve the purchase and sale of securities as a principal. These involve the
risks of a change in the market price of such securities and of decreases in
the liquidity of markets, which can limit KMS' ability to sell securities
purchased or to purchase securities sold in such transactions. Trading
securities as a principal and underwriting corporate securities will
represent an important part of KMS' business and subject KMS' capital to
significant risk.
Regulation
KMS' business is, and the securities industry generally is, subject to
extensive regulation at both the Federal and state level by various
regulatory agencies which are charged with protecting the interests of
customers. Self-regulatory organizations such as the National Association of
Securities Dealers, Inc. (the "NASD") and state securities commissions
require strict compliance with their respective rules and regulations.
Failure to comply with any of these laws, rules and regulations could result
in fines, suspension or industry expulsion or criminal prosecution, which
could have a material adverse effect upon KMS.
Certain regulatory bodies perform audits or other procedures to ensure
compliance with their rules and regulations. The NASD completed an audit of
KMS in February 1998, at which time it issued a letter setting forth certain
alleged exceptions and areas of noncompliance noted during the performance of
its audit procedures. Management of KMS, based on its review of the letter,
discussions with counsel and with the NASD auditors, does not believe that
the ultimate resolution of the matters set forth in the letter from the NASD
will have a material adverse effect on KMS' results of operations or
financial condition, although no assurances thereof can be given.
Effect of Net Capital Requirements
The SEC's Net Capital Rule imposes minimum financial requirements for all
registered broker-dealers doing business with the public. KMS is subject to
the requirements of this rule. The Net Capital Rule places limits on certain
of KMS' operations, such as underwriting activities and market making and
other principal trading activities. A decrease below minimum net capital in
the form of a significant operating loss or any unusually large charge
against KMS' net capital could adversely affect the ability of KMS to expand
or even maintain its present levels of business.
Dependence Upon Key Personnel
KMS is dependent, in particular, upon the services of its President,
Mohammed Ali Khan, Asim S. Kohli and other key management members. See
"Management." If Mr. Khan or any of these management members are unable to
perform their duties for whatever reason, KMS' business could be adversely
affected.
Personnel Retention and Recruitment
A substantial portion of KMS' revenue will be generated through the
activities of its securities traders and registered representatives. The
inability to recruit and retain traders or such representatives or the
inhibition of such customer contact by regulation or otherwise could have a
material adverse impact on
9
KMS' business and financial condition. Similarly, implementation of KMS'
overall strategy will require it to identify, recruit and retain
professionals in the areas of corporate finance, research and similar areas.
No assurance can be given that KMS will be successful in these undertakings.
Use of Proceeds for Venture Capital Investments
KMS may use a portion of the proceeds from the Offering to invest in
venture capital opportunities and/or private placements. Such investment
decisions will be in the sole discretion of Management and the Board of
Directors. Prospective shareholders of the Company will have no control over
decisions to invest in any such capital venture opportunities.
RISK FACTORS OF SUREAL
Reliance Upon Independent Distributors of Sureal
Sureal distributes its products exclusively through independent
distributors who have entered into agreements with Sureal. Sureal depends
exclusively on the efforts and success of its distributors in generating
revenue and growth for the Sureal. The agreement with the distributors allows
the distributor to terminate the relationship at any time. Sureal will
experience turnover in its distributors from year to year. This dependence
requires the continued sponsoring and training of new distributors to
maintain or increase the total number of distributors of Sureal. Sureal will
experience seasonal decreases in distributor sponsoring and product sales in
countries where it operates because of holidays and vacations recognized in
those countries as well as other factors. Additionally, Sureal will
experience fluctuations in the level of distributor sponsorship. Sureal, like
other direct marketing companies, has little or no control over the level of
sponsorship of new distributors. Sureal cannot predict the timing of these
fluctuations or the degree of the fluctuations. There can be no assurance
that Sureal will attract and retain a sufficient distributors to permit
profitable operations because of the number of direct sales opportunities
that exist for potential dealers.
Potential Negative Impact of Distributor Actions
Sureal and its products can be negatively impacted by actions of
distributors. The publicity resulting from distributor activities such as
inappropriate earnings claims and product representations by distributors can
make the sponsoring and retaining of distributors more difficult, thereby
negatively impacting sales. There can be no assurance that distributor
actions will not have a material adverse effect on Sureal's business or
results or operations.
Government Regulation of Direct Selling Activities
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes,
that promise quick rewards for little or no effort, require high entry costs,
use high pressure recruiting methods and/or do not involve legitimate
products.
Sureal may receive inquiries from various government regulatory
authorities regarding the nature of its business and other issues such as
compliance with local business opportunity and securities laws. Such
inquiries may result in adverse publicity for Sureal.
Government Regulation of Products and Marketing
Sureal is subject to or affected by extensive governmental regulations not
specifically addressed to network or direct marketing. Such regulations
govern, among other things, (i) product formulation, labeling, packaging and
importation, (ii) product claims and advertising, whether made by Sureal or
distributors, (iii) fair trade and distributor practices, and (iv) taxes,
transfer pricing and similar regulations that affect foreign taxable income
and customs duties.
10
Sureal cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on the Company's business and
results of operations. Moreover, governmental regulations in countries where
Sureal plans to commence or expand operations may prevent, delay or limit
market entry of certain products or require the reformulation of such
products. Regulatory action, whether or not it results in a final
determination adverse to Sureal, has the potential to create negative
publicity, with detrimental effects on the motivation and recruitment of
distributors and, consequently, on Sureal's sales and earnings.
Reliance on Certain Distributors; Potential Divergence of Interests between
Distributors and Sureal
The Company's Global Compensation Plan allows distributors to sponsor new
distributors. The sponsoring of new distributors creates multiple distributor
levels in the network marketing structure. Sponsored distributors are
referred to as "down line" distributors within the sponsoring distributor's
"down line network". If down line distributors also sponsor new distributors,
additional levels of down line distributors are created, with the new down
line distributors also becoming part of the original sponsor's "down line
network". This structure may result in certain distributors developing large
down line organizations. The loss of such distributors and their down lines
could adversely affect sales and impair its ability to attract new
distributors.
Entering New Markets
Sureal intends to sell its products in additional countries such as the
United States, Mexico, Canada and Japan, each of which represents a new
market. Each of the proposed new markets will present additional unique
difficulties and challenges. Modifications to product lines may be needed to
accommodate the market conditions in each country, while maintaining the
integrity of Sureal's products. No assurance can be given that Sureal will be
able to reformulate its product lines successfully in any of its new markets
or make other adjustments brought about by local customs or tastes to attract
local consumers.
Change in Nature of Business and Current Reliance on and Concentration of
Outside Manufacturers
Until September 1997, Sureal's independent distributors were supplied with
branded products, which brands were not owned or controlled by Sureal. Until
such time, the revenue generated by the sales of those products was
distributed in an agreed upon manner among the supplier, shipper and Sureal
pursuant to the terms of a verbal agreement. In September 1997, Sureal
decided to develop and distribute its own branded products. Although the
product line is similar to that of the past, this change represents a
significant change in the way in which Sureal conducts its business and
requires Sureal to increase its need for working capital to acquire and hold
inventory. Virtually all of Sureal's branded products are sourced through and
are produced by manufacturers unaffiliated with Sureal. Sureal currently has
little or no direct contact with these manufacturers. Sureal's profit margins
and its ability to deliver its existing products on a timely basis are
dependent upon the ability of outside manufacturers to continue to supply
products in a timely and cost-efficient manner. Furthermore, Sureal's ability
to enter new markets and sustain satisfactory levels of sales in each market
is dependent in part upon the ability of suitable outside manufacturers to
reformulate existing products, if necessary, to comply with local regulations
or market environments, for introduction into such markets. Finally, the
development of additional new products in the future will likewise be
dependent in part on the services of suitable outside manufactures.
Sureal currently acquires products or ingredients from sole suppliers or
suppliers that are considered by Sureal to be the superior suppliers of such
ingredients. Sureal's management believes that, in the event that it is
unable to source any products or ingredients from its current suppliers,
Sureal could produce such products or replace such products or substitute
ingredients without a significant disruption to its operations or prohibitive
increases in the cost of goods sold. However, there can be no assurance that
the loss of such a supplier would not have a material adverse effect on
Sureal's business and results of operations. Similarly, no assurances can be
given that Sureal's branded products will gain market acceptance.
11
Competition
The markets for personal care and nutritional products are large and
intensely competitive. Sureal competes directly with companies that
manufacture and market personal care and nutritional products in each of
Sureal's product lines. Sureal competes with other companies in the personal
care and nutritional products industry by emphasizing the value and premium
quality of the Company's products and the convenience of the company's
distribution system. Many of Sureal's competitors have much greater name
recognition and financial resources than does Sureal. In addition, personal
care and nutritional products can be purchased in a wide variety of channels
of distribution. While Sureal believes that consumers appreciate the
convenience of ordering products from home through a sales person or through
a catalog, the buying habits of many consumers accustomed to purchasing
products through traditional retail channels are difficult to change.
Sureal's product offerings in each product category are also relatively small
compared to the wide variety of products offered by many other personal care
and nutritional product companies. There can be no assurance that Sureal's
business and results of operations will not be affected materially by market
conditions and competition in the future.
Sureal also competes with other direct selling organizations, many of
which have longer operating histories and higher visibility name recognition
and financial resources. The leading network marketing company in Sureal's
markets is Amway Corporation and its affiliates. Sureal competes for new
distributors on the basis of its Global Compensation Plan and its premium
quality products. Management envisions the entry of many more direct selling
organizations into the marketplace as this channel of distribution expands
over the next several years. Sureal also believes that other large,
well-financed corporations may launch direct selling enterprises which will
compete with Sureal in certain of its product lines. There can be no
assurance that Sureal will be able to successfully meet the challenges posed
by this increased competition.
Sureal competes for the time, attention and commitment of its independent
distributor force. Given that the pool of individuals interested in the
business opportunities presented by direct selling tends to be limited in
each market, the potential pool of distributors for Sureal's products is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes that
Sureal offers an attractive business opportunity, there can be no assurance
that other network marketing companies will not be able to recruit Sureal's
existing distributors or deplete the pool of potential distributors in a
given market.
Operations Outside the United States; Currency and Political Risks
Sureal's operations are located, and most of its revenues are derived
from, operations outside the United States. The Sureal's operations may be
materially and adversely affected by economic, political and social
conditions in the countries in which it operates. A change in policies by any
government in Sureal's markets could adversely affect Sureal and its
operations through, among other things, changes in laws, rules or
regulations, or the interpretation thereof, confiscatory taxation,
restrictions on currency conversion, currency repatriation or imports, or the
expropriation of private enterprises. Although the general trend in these
countries has been toward more open markets and trade policies and the
fostering of private business and economic activity, no assurance can be
given that the governments in these countries will continue to pursue such
policies or that such policies will not be significantly altered in future
periods. This could be especially true in the event of a change of
leadership, social or political disruption or upheaval, or unforeseen
circumstances affecting economic political or social conditions or policies.
Political Risks Inherent in Russia
A favorable political climate in the Russian Market and the openness of
its markets to United States trade is important to the success of Sureal. The
Russian Federation appears to have embraced political reforms and market
economies. However, there are no local procedures for such vast changes; the
region has known only totalitarianism and a centrally-planned economy for
most of this century. Any reversal in such perceived new political and
economic trends and policies, or in international trade policy generally,
12
could materially adversely affect Sureal's operations. Moreover, the
political situation in the Russian Federation, where Sureal expects to
generate a substantial portion of its revenues in the near future, remains in
constant transition. Since the arrival of the Yeltsin government in December
1991, the Russian Federation has experienced a proliferation of political
parties, an increase of nationalist sentiment, and a fragmentation of its
economic and political institutions. In addition, there has been a dramatic
increase in crime, including organized crime which may target businesses in
the Russian Federation. The viability of the Russian government has been
tested by various political factions gaining strength and unsuccessful coup
d'etats; there can be no assurance that a coup d'etat will not again be
attempted or that any future attempts will not be successful. In addition,
the privatization process in other parts of the Russian Federation has been
sporadic.
Because the Russian Federation is in the early stages of development of a
market economy, its commercial framework in still developing. New
market-oriented laws are being enacted, but their application is still
uncertain. Although Sureal believes that the Russian Federation has advanced
in the area of commercial law, Russian laws and courts are not well tested in
contract enforcement. Similarly, although Russian law regarding foreign
investment provides protection against nationalization and confiscation,
there is little or no judicial precedent in this area.
The various government institutions and the relations between them, as
well as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change. The
Constitution of the Russian Federation (the "Russian Constitution") gives the
President of the Russian Federation substantial authority, and any major
changes in, or rejection of, current policies favoring political and economic
reform by the President may have a material adverse effect on Sureal.
The Russian Federation is constituted as a federation of republics,
territories, regions (one of which is an autonomous region), cities of
federal importance and autonomous areas, all of which are equal members of
the Russian Federation. The delineation of authority among the regions, the
internal republics and the federal governmental authorities is, in many
instances, uncertain, and in some instances, contested. In Chechnya, for
example, regional and local authorities openly defied the powers of the
federal government, resulting in a protracted military confrontation. Lack of
consensus between local and regional authorities and the federal government
often results in the enactment of conflicting legislation at various levels
and may result in political instability. This lack of consensus may have
negative economic effects, which could be material to Sureal.
Furthermore, the political and economic changes in Russia in recent years
have resulted in significant dislocations of authority, as previously
existing structures have collapsed and new structures are only beginning to
take shape. The local press and international press have reported that
significant organized criminal activity has arisen, particularly in large
metropolitan centers. Moreover, the combination of the sudden loss of the
tight social control that was characteristic of the Soviet Union, a large but
poorly paid police force, an increase in unemployment, an influx of
unemployed persons from outlying areas to metropolitan centers and a decline
in real wages has led to a substantial increase in property crime in large
cities. In addition, the local press and international press have reported
high levels of official corruption in the Moscow Region, and elsewhere in the
Russian Federation. In an effort to decrease the levels of criminal activity
and corruption, President Yeltsin has issued a series of decrees granting the
security forces very broad powers. It has been acknowledged that many
provisions of these anti-crime decrees violate the Russian Constitution, as
well as the Criminal Code of the Russian Federation, and these decrees have
been viewed by many as a threat to civil rights. While the Sureal has not
been adversely affected by these factors to date, no assurance can be given
that the depredations of organized or other crime will not in the future have
a material adverse effect on Sureal.
The failure of many state-controlled enterprises to pay full salaries on a
regular basis, and the failure of salaries and benefits generally to keep
pace with the rapidly increasing cost of living have led in the past, and
could lead, in the future, to labor and social unrest. Such labor and social
unrest may have political, social and economic consequences, such as
increased support for a renewal of centralized authority, increased
nationalism (with restrictions on foreign involvement in the economy of the
Russian Federation) and increased violence, any of which could have a
material adverse effect on Sureal.
13
The health of Russia's current president, Boris Yeltsin, has been reported
to be poor and, as a result, he could be forced to step down, could become
incapacitated or could die. In such event, under the Russian Constitution the
prime minister would become acting president and would be required to call
new presidential elections. This process could result in a period of
political instability that could have a material adverse effect on companies
operating in Russia.
Currency Risks Associated with Russia
The recent history of trading in the rouble as against the U.S. Dollar has
been characterized by significant declines in value and considerable
volatility. Although in recent months, the rouble has experienced relative
stability against the U.S. Dollar, there is a risk of further declines in
value and continued volatility in the future. The rouble is generally not
convertible outside Russia. A market exists within Russia for the conversion
of roubles into other currencies, but it is limited in size and is subject to
rules limiting the purposes for which conversion may be effected. The limited
availability of other currencies may tend to inflate their values relative to
the rouble and there can be no assurance that such a market will continue to
exist indefinitely. Moreover, the banking system in Russia is not yet as
developed as its Western counterparts and considerable delays may occur in
the transfer of funds within, and the remittance of funds out of, Russia.
All of Sureal's billings to its distributors are denominated in U.S.
dollars. To date, its distributors have always paid such invoices promptly.
However, any delay in these distributors' ability to convert roubles into a
foreign currency in order to make a payment or delay in the transfer of such
foreign currency could have a material adverse effect on Sureal.
Legal Risks Associated with Russia
Russia lacks a fully developed legal system. Russian law is evolving
rapidly and in ways that may not always coincide with market developments,
resulting in ambiguities, inconsistencies and anomalies, and ultimately in
investment risk that would not exist in more developed legal systems. For
example, the ability of a creditor both to obtain a lien or other similar
priority in payment and to enforce such priority is uncertain. Furthermore,
effective redress in Russian courts in respect of a breach of law and
regulation, or in an ownership dispute, may be difficult to obtain.
Risks associated with the Russian legal system include: (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influences; (ii) the relative inexperience of
judges and courts in commercial dispute resolution, and generally in
interpreting legal norms; (iii) inconsistencies among laws, presidential
decrees and governmental and ministerial orders and resolutions; (iv)
oftentimes conflicting local, regional and national laws, rules and
regulations, particularly in the Russian Federation; (v) the lack of judicial
or administrative guidance on interpreting the applicable rules; and (vi) a
high degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly
in areas such as company law, property, commercial and contract law,
securities law, foreign trade and investment law and tax law. No assurance
can be given that the uncertainties associated with the existing and future
laws and regulations of Russia will not have a material adverse effect on
Sureal.
Furthermore, the relative infancy of business and legal cultures in Russia
is reflected in the inadequate commitment of local business people,
government officials and agencies, and the judicial system to honor legal
rights and agreements, and generally to uphold the rule of law. Accordingly,
Sureal may, from time to time, confront threats of, or actual, arbitrary or
illegal revision or cancellation of its licenses and agreements, and face
uncertainty or delays in obtaining legal redress, any of which could have a
material adverse effect on the results of Sureal's operations.
Sureal is incorporated in the State of Delaware. However, a substantial
portion of its assets will be located in the Russian Federation. By reason of
the foregoing, it may not be possible for Sureal to effect
14
service of process within the United States upon key distributors or
warehouse operators, or to enforce in the United States or outside of the
United States judgments obtained against such entities or individuals. No
treaty exists between the United States and the Russian Federation for the
reciprocal enforcement of foreign court judgments.
Social Risks Inherent in Russia
The political and economic changes in Russia since the breakup of the
former Soviet Union have resulted in significant social dislocations, as
existing structures of authority have collapsed and new ones are only
beginning to take shape. The resulting broad decline in the standard of
living has resulted in substantial political pressure on the government to
slow or even reverse the economic policies currently being pursued.
In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generated businesses, and an increased integration of
Russian organized crime and major international criminal organizations. In
addition, a substantial increase in property crime in large cities has been
reported. Finally, the local and international press have reported high
levels of official corruption in the locations where the Company operates. No
assurance can be given that organized or other crime or claims that Sureal's
independent distributors have been involved in official corruption will not,
in the future, have a material adverse effect on Sureal.
15
DILUTION
Prior to selling any shares under this Offering, based on the Company's
Consolidated Financial Statements as of December 31, 1997, the Company has
10,985,634 shares of common stock issued and outstanding (including 291,000
issuable upon the conversion of $873,000 in preferred stock) with a net
tangible book value of $540,679(or $.05 per share).
Assuming that the maximum number of 3,000,000 Shares is sold in this
Offering, there would be a total of 13,985,634 (11,652,301 if the Minimum
Offering is sold) shares issued and outstanding with a total net tangible
book value of $38,416,452 or $2.75 per share ($8,886,452 or $.76 per share if
the Minimum Offering is sold). The dilution to the public stockholders would
be $12.25 per share or 82% per share based on a purchase price of $15 per
share ($14.24 or 95% if the Minimum Offering is sold). The public
stockholders would own 21.5% (5.7% if the Minimum Offering is sold) of the
outstanding shares. The present stockholders would benefit by an increase in
net tangible book value of $2.70 ($.71 if the Minimum Offering is sold) per
share.
Net tangible book value per share is obtained by subtracting the total
liabilities from total tangible assets (total assets less intangible assets).
Dilution is the difference between the public offering price and the net
tangible book value of shares immediately after the Offering.
[Download Table]
MAXIMUM MINIMUM
--------- ---------
Public offering price per share ...................... $15.00 $15.00
--------- ---------
Net tangible book value per share before Offering (2). .05 .05
Increase per share attributable to public investors . 2.70 .71
--------- ---------
Net tangible book value per share after Offering (2) . 2.75 .76
--------- ---------
Dilution per share to public investors ............... $12.25 $14.24
========= =========
------------
(1) Before deduction of underwriting commissions and estimated expenses
to be paid by the Company.
(2) Gives effect to the issuance of 750,000 shares pursuant to the Share
Exchange Agreement associated with the acquisition of Sureal (see
"Business" and "Certain Transactions") and the two for one reverse
stock split effective December 8, 1997 and assumes the issuance of
291,000 Common Shares upon the conversion of $873,000 of preferred
stock (see "Description of Capital Stock").
The following table sets forth, after giving effect to the assumed
completion of the Offering, information relating to the number of shares
purchased from the Company, the total consideration paid and the average
price per share paid by existing shareholders and by the public participating
in the Offering.
[Enlarge/Download Table]
SHARES OWNED CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER (1) PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- ---------------
Present Shareholders 10,985,634 78.5 $ 3,401,949 7.0 $ .31
Public Investors:
Maximum Offering ... 3,000,000 21.5 45,000,000 93.0 15.00
------------ --------- ------------- ---------
Total .............. 13,985,634 100.0 $48,401,949 100.0
============ ========= ============= =========
[Enlarge/Download Table]
SHARES OWNED CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER (1) PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- ---------------
Present
Shareholders........ 10,985,634 94.3 $ 3,401,949 25.4 $ .31
Public Investors:
Minimum Offering .. 666,667 5.7 10,000,000 74.6 15.00
------------ --------- ------------- ---------
Total .............. 11,652,301 100.0 $13,401,949 100.0
============ ========= ============= =========
------------
(1) Gives effect to the issuance of 750,000 shares pursuant to the Share
Exchange Agreement associated with the acquisition of Sureal (see
"Business" and "Certain Transactions") and the two for one reverse
stock split effective December 8, 1997 and assumes the issuance of
291,000 Common Shares upon the conversion of $873,000 of preferred
stock (see "Description of Capital Stock").
16
USE OF PROCEEDS
The allocations set forth below are the estimates of management as to how
the net proceeds of the Offering (estimated to be $37,875,000 if the Maximun
Offering is sold and $8,325,000 if the Minimum Offering is sold) will be
allocated as set forth below. The determination of net proceeds assumes that
the Company will pay a total of 12.5 percent of gross proceeds to the
Underwriter in the form of commissions and expenses as well as incur expenses
of the offering of $500,000 ($425,000 if the Minimum Offering is sold). For
the purposes of this presentation, commissions and expenses that will be paid
to KMS, a subsidiary of the Company, are shown as expenses and treated as net
reductions of Offering proceeds. This table also excludes possible sales by
the Selling Shareholder because none of the proceeds from such sales will go
to the Company.
[Enlarge/Download Table]
MINIMUM MAXIMUM
OFFERING OFFERINMG
------------ -------------
Develop Sureal's business (including repayment of $210,000
principal amount of indebtedness) ................................. $3,000,000 $ 5,000,000
Purchase a seat on the New York Stock Exchange...................... 1,500,000
Purchase a seat on the American Stock Exchange...................... 500,000
Open brokerage office in Bahrain.................................... 4,000,000 4,000.000
Expand KMS' proprietary trading..................................... 7,000,000
Expand KMS Asset Management Group................................... 1,325,000 7,000,000
Effect other acquisitions or strategic investments.................. 12,875,000
------------ -------------
Total............................................................... $8,325,000 $37,875,000
============ =============
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of this Offering based upon the current state of its
business operations, its current plans and current economic and business
conditions and is subject to reapportionment among categories listed above or
to new categories. Future events, including the problems, expenses,
complications and delays frequently encountered by growing businesses, as
well as changing economic conditions, the regulatory environments confronting
the Company's subsidiaries, may make shifts in the allocation of funds
necessary or desirable.
The Company has identified the Direct Marketing and Military Resale
industries as offering attractive rollup opportunities. However, no formal
discussions have taken place with any potential acquiree and no such
discussions are anticipated until following the completion of this Offering.
The funds from the Offering will be invested in United States Treasury
Obligations or a similar instrument until needed for the purposes set forth
above.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as
"believes", "expects", "may", "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The Company
cautions readers that important factors may affect the Company's actual
results and could cause such results to differ materially from
forward-looking statements made by or on behalf of the Company. Such factors
include, but are not limited to, changing market conditions, the impact of
competitive products, pricing, acceptance of the Company's products in
development and other risks detailed herein and in other filings that the
Company makes with the SEC.
RESULTS OF OPERATION
The Company
The Company was organized under the laws of the State of Delaware in
December 17, 1996. It had no operating activities in 1996. In 1997, it had no
direct revenues other than those of its operating subsidiaries, KMS and
Sureal, that are described individually in the sections that follow. Its
expenses in 1997 consisted of:
[Download Table]
Officers' compensation .. $342,500
Start-up costs ........... 564,335
Office and administrative 36,523
----------
Total .................... $943,358
==========
The start-up costs relate principally to the costs of establishing a
brokerage firm in Bahrain to take advantage of KMS' contacts in the Middle
East. The Company is optimistic that all necessary approvals and
authorizations will be obtained, but no assurances thereof can be given.
18
KMS
1997 Compared to 1996
[Enlarge/Download Table]
DESCRIPTION 12/31/97 PERCENT 12/31/96 PERCENT DIFFERENCE
----------- ------------- --------- ------------ --------- ------------
Commissions and trading ..... $ 2,521,870 $ 243,097
Interest and other ........... 392,327 5,892
Total ........................ 2,914,197 100.00% 248,989 100.00% $2,665,208
Expenses:
Compensation and related .... 1,705,207 58.51% 481,678 193.45% 1,223,529
Clearance and floor
brokerage.................... 158,184 5.43% 68,385 27.47% 89,799
Occupancy and administratine . 668,104 22.93% 525,427 211.02% 142,677
Professional services ........ 273,039 9.37% 310,032 124.52% (36,993)
Communications ............... 317,447 10.89% 68,343 27.45% 249,104
Regulatory ................... 93,919 3.22% 44,608 17.92% 49,311
Other ........................ 1,100,754 37.77% 1,100,754
Total ........................ 4,316,654 148.12% 1,498,473 601.82% 2,818,181
Net loss ..................... (1,402,457) (1,249,484)
Less--Intercompany expenses . 818,271 28.08%
Net .......................... $ (584,186) $(1,249,484) $ 665,298
The periods are not comparable because KMS activities were de minimis
prior to May 1996. Revenues increased as follows:
[Download Table]
1997 1996 DIFFERENCE
------------ ----------- ------------
Commission income ... $ 863,673 $ 355,795 $ 507,878
Trading income - net . 1,658,197 (129,279) 1,789,476
Interest ............. 37,656 5,892 31,674
Other ................ 354,671 16,581 338,090
------------ ----------- ------------
Total .............. $2,914,197 $ 248,989 $2,665,208
============ =========== ============
The increase in commission income reflects the (i) general increase in
KMS' activities during the period and (ii) the receipt in 1997 of commissions
of $333,755 associated with underwriting activities. The increase in trading
income reflects (i) the increase in resources available for trading and (ii)
the impact of net trading losses of approximately $165,000 during the last
three months of 1996. Other revenues increased because of significant
increases in service and investment banking fees.
The overall level of expenses increased in 1997 because of the increase in
sales and trading activities. Increases not related to increases in activity
included consulting and legal fee increases of approximately $215,000. In
addition, KMS settled a dispute involving a guarantee of a customer/preferred
stockholder obligation for $282,483. Overall executive compensation also
increased by approximately $375,000.
The intercompany expense for 1997 is described in Note 4 to KMS' financial
statements.
No benefit has been recorded for KMS' net operating loss carryforwards
because of the uncertainty of utilizing such carryforwards.
SUREAL
Sureal was formed in August 1995, at which time it acted as the marketing,
sales and administrative arm for Eastern Europe for an existing direct
marketing company specializing in personal care and nutritional products. In
October 1997, it decided to change its strategic focus by developing its own
19
product line. These factors, taken as a whole, distort the comparability of
the data set forth below. Sureal commenced its operations in August 1995
using a network of 333 independent distributors in Russia. The number of
distributors in the network increased to 4,972 at December 31, 1995; 94,307
at December 31, 1996; and 172,221 at May 31, 1997, Commissionable sales
levels, to a large extent, are a function of the number of distributors
selling the product. On the other hand, commissionable sales were impacted in
the last quarter of 1997 while Sureal was developing its own branded product
line. It lacked sufficient inventory levels for its new products until
January 1998.
The nature of Sureal's business is such that it can process significant
volumes of business without increasing administrative expenses. It has a
highly automated administrative function and receives data from the major
independent distributors in electronic form.
1997 Compared to 1996
[Enlarge/Download Table]
1997 % 1996 % DIFFERENCE %
------------- ------- ------------- ------- ------------- --------
Commissionable sales ......... $31,720,456 $21,594,562 $10,125,894 46.9%
Cost of commissionable sales 30,459,297 20,720,459 9,738,838
Net .......................... 1,261,159 874,103 387,056
Other revenues ............... 67,208 65,261 1,947 3.0%
Gross Margin ................. 1,328,367 939,364 389,003 41.4%
Expenses:
Compensation and related .... 463,693 34.9% 348,309 37.1% 115,384 33.1%
Occupancy and administrative . 251,227 18.9% 205,135 21.8% 46,092 22.5%
Total ........................ 714,920 53.8% 553,444 58.9% 161,476 29.2%
Income (loss) before taxes .. 613,447 46.2% 385,920 41.1% 227,527 59.0%
Proforma income taxes ........ 229,000 17.2% 111,000 11.8% 118,000 106.3%
Proforma Net Income .......... $ 384,447 28.9% $ 274,920 29.3% $ 109,527 39.8%
Commissionable sales increased because of the greater number of
independent distributors in 1997 compared with 1996. This increase was offset
because Sureal changed its focus in 1997 and decided to introduce its own
branded products. This decision offset the increase because it took several
months to begin obtaining a sufficient quantity of inventory to meet the
demand of the independent distributors and to complete the registration
process for its products. Management believes that this new strategy will
result in significantly higher margins on sales.
Administrative expenses increased principally because of increased office
salaries and related benefits. Facilities costs increased because Sureal
increased the size of its office space to accommodate the growth in office
personnel. No other expense category fluctuated significantly between
periods.
Sureal was an S corporation during the periods covered. The pro forma
income tax provision reflected above represents the amounts that would have
been reported as a provision for income taxes if Sureal was filing a separate
return as a C corporation in each year.
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1996 Compared to 1995
[Enlarge/Download Table]
1996 % 1995 % DIFFERENCE %
------------- ------- ----------- --------- ------------- ---------
Commissionable sales ....... $22,726,683 $480,923 $22,245,760 4625.6%
Other revenues ............. 109,936 142,459 (32,523) (22.8)%
Total ...................... 22,836,619 623,382 22,213,237 3563.3%
Cost of revenues ........... 21,897,254 95.9% 568,417 91.2% 21,328,837 3752.3%
Gross profit ............... 939,365 4.1% 54,965 8.8% 884,400 1609.0%
Expenses:
General and administrative 437,081 1.9% 108,111 17.3% 328,970 304.3%
Selling .................... 95,622 0.4% 18,552 3.0% 77,070 415.4%
Facilities ................. 19,376 0.1% 8,974 1.4% 10,402 115.9%
Other ...................... 1,365 0.0% 823 1.5% 542 65.9%
Total ...................... 553,444 2.4% 136,460 21.9% 416,984 305.6%
Income (loss) before taxes $ 385,921 1.7% $(81,495) (13.1)% $ 467,416
Sureal began operations in August 1995 and was a start-up operation for
much of the period August 5, 1995 until December 31, 1995. Therefore, the two
periods are not comparable. Other revenues in 1995 consisted principally of
miscellaneous product sales outside the direct marketing network. The amount
of such sales decreased in each subsequent period as the direct marketing
network was put in place.
INFLATION
The Company's business and operations have not been materially affected by
inflation during the period ended December 31, 1997. However, KMS, by the
nature of its business, would be impacted by a period of inflation. Sureal
could be affected to the extent that inflation in the Russian Market causes
its products to be sold at unattractive price points.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had stockholders equity of $540,679,
after giving effect to the merger with Sureal completed in December 1997 and
accounted for as a pooling of interests. Management of the Company believes
that the proceeds from the initial public offering will be sufficient to meet
the initial liquidity and capital needs. The Company has not entered into any
material commitments regarding capital expenditures.
SEASONALITY
The demand for the Company's products and services is not seasonal.
However, it is not unusual for brokerage activity to decrease during the
summer months.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"; No.
129, " Disclosure of Information about Capital Structure"; No. 130,
"Reporting Comprehensive Income"; and No. 131, "Disclosure about Segments of
an Enterprise and Related Information." These new accounting pronouncements
are not expected to have a significant impact on the Company. SFAS No. 128
requires the presentation of Basic Earnings Per Share that the Company
believes will, in its case, approximate the amounts reported as Primary
Earning Per Share. The disclosure requirements in SFAS No. 129 and 130 are
not expected to impact the Company's financial statements. The merger with
Sureal is expected to result in the Company having to provide segment
information.
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BUSINESS
The Company
United States Financial Group, Incorporated ("USFG" or the "Company") is a
diversified holding company, incorporated under the laws of the State of
Delaware. USFG's main business purpose is to acquire undervalued or
reasonably priced companies in industries well suited for roll up
consolidation transactions. These roll up or consolidation candidates operate
in industry or market niches that are well established, are served in a
fragmented way and do not compete directly with large competitors.
Furthermore, these target companies have to have experienced management teams
and do not require significant expenditures for research and development.
USFG has begun to implement this strategy through the acquisition and/or
establishment of four companies and has assembled a management team that is
experienced in all phases of mergers and acquisitions.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS"), an investment banking firm and a
broker-dealer of securities duly registered with the SEC and is a member firm
of the NASD, Municipal Securities Rulemaking Board (known as the "MSRB"), the
Securities Insurance Protection Corporation ("SIPC"). Sureal International,
Inc. ("Sureal"), a sales and direct marketing company that sells health and
other consumer products in Russia and other republics of the former Soviet
Union through a network of independent distributors was acquired in December
1997 in a pooling of interest transaction.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated will be an asset management and international
financial consultancy company and will take advantage of the contacts of
USFG's president. US Military Resale Group, Incorporated ("Military Resale
Group") was established to acquire military commissaries and other suppliers
of consumer products to the Army and Air Force Exchange System.
The Company acquired KMS through a share exchange effected on March 31,
1997 in which Mr. Khan exchanged 18,889,267 shares of KMS' common stock for
18,889,267 shares of the Company's common stock. On December 8, 1997, the
shares held by Mr. Khan became subject to a two for one reverse stock split,
thereby converting into 9,944,634 shares. On December 3, 1997, the Company
exchanged 750,000 shares of its common stock, subject to adjustment, for all
of the outstanding shares of common stock of Sureal. Both of these
transactions were accounted for as pooling of interest. KMS, as a
broker-dealer and investment bank, will be the vehicle to obtain and provide
the capital necessary to implement the overall strategy.
The Company's principal place of business is located at 110 Wall Street,
New York, New York 10005, and its telephone number is 212-785-4545.
Klein Maus & Shire, Inc.
KMS is a broker-dealer of securities duly registered with the SEC and a
member firm of the NASD, was incorporated under the laws of the State of
Indiana on August 15, 1994 under the name Comprehensive Financial Products,
Inc. It changed its name to "Khan, Edwards & Company" on December 9, 1994 and
adopted its current name on February 26, 1996.
KMS is an investment bank providing full service investment banking,
trading, research and advisory services to over 3,000 high net worth
individuals and institutions around the world. The key to KMS' current and
future success is its principal client base of high net worth international
investors and institutions. KMS' access to this client base through its
senior management puts it in a strong position to expand its investment
banking activities without reliance on cold calling, high pressure marketing
activities. KMS' growth plans are based on a corporate policy emphasizing
generating revenues at a non-retail level, and maintaining a small sales
force comprised of experienced financial consultants with impeccable records.
KMS is located at 110 Wall Street in New York where it occupies two floors
totaling 14,000 square feet.
Most of KMS' activities to date involve the retail trading and selling of
securities. KMS has also participated as a member of the selling group on
seven initial public offerings and one secondary public
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offering and has co-managed one initial public offering. Its clients are
located throughout the country and around the world and include institutional
investors.
KMS' goal is to keep providing full service investment banking services,
including research and advisory capabilities, to sophisticated high net worth
individuals and institutions. The key to building upon this goal is the
expansion of the KMS Asset Management Group, Incorporated that manages funds
for a fee (see below). KMS also intends to acquire seats on the New York and
American Stock Exchanges because its principal client base is and is likely
to continue being high net worth international investors and institutions.
KMS access to this client base through its senior management which puts it in
a strong position to expand its investment banking activities without
reliance on cold calling, high pressure sales activities.
KMS' principal strategy is to focus its resources on certain core
businesses where Management believes KMS can compete profitably and be among
the leading participants in each targeted market. In addition, KMS emphasizes
economic and investment research in the development of its business. Over the
next several years, KMS plans to expand significantly the scope of its
business activities and its customer base, both in the U.S. and
internationally. This strategy will allow KMS to establish strong positions
in selected high-margin activities, including equity and high-yield corporate
securities underwriting. Mr. Khan, KMS' President, currently manages
investments for several international institutional investors and has KMS
poised to expand this aspect of its business. KMS' ability to identify,
recruit and retain experienced and talented professionals is and will be the
key element of its success in implementing its expansion strategy. These
professionals will augment the capabilities of the existing officers and
directors who have experience in capital market transactions and mergers and
acquisitions. No assurances can be given that KMS will be successful in
implementing its plans.
KMS conducts its business through several operating divisions, each of
which will become more distinctive as KMS expands its operations. These
divisions are (i) the Banking Group; (ii) the Capital Markets Group, which
includes the Fixed-Income, Institutional Equities, and other retail
operations; and the (iii) Money Management Group, which engages in the
business of providing fee-based advisory services to corporate and
institutional customers. The Capital Markets Group comprises substantially
all of KMS' activities to date.
THE BANKING GROUP has participated in raising capital and providing
financial advice to companies throughout the U.S. and plans to expand its
activities abroad. It also manages and underwrites public offerings of
securities, arranges private placements and provides advisory and other
services in connection with mergers, acquisitions, restructurings and other
financial transactions. In addition, it assists developing countries to
obtain project financing and the privatization of government owned
enterprises. It was recently engaged as the investment banker for the
Republic of Granada which marks the start of its undertakings in this arena.
The intermediate and long-term plans are to invest KMS Asset Management Group
funds in projects and financing arranged by the Banking Group.
THE CAPITAL MARKETS GROUP provides a broad range of services, including
retail trading, research origination and distribution of equity and
fixed-income securities, private equity investments and venture capital. Its
Fixed-Income Division will provide institutional and individual clients with
research, trading and sales services for a broad range of fixed-income
products, including high-yield corporate, investment grade, U.S. government
and asset-backed securities. The Institutional Equities Division provides
institutional clients with research, trading and sales services in listed and
over-the-counter equity securities.
The Capital Markets Group will also engage in proprietary trading. KMS
will manage its risks by limiting to nominal amounts the amount of securities
that will be held overnight in the trading portfolios.
KMS' retail customer accounts are carried on a "fully disclosed" basis by
Cowen & Co., members of the New York and other principle stock exchanges,
pursuant to a clearing agreement. This agreement provides, among other
things, that customer securities positions and credit balances are insured up
to $50,000,000 by Securities Investors Protection Corp. ("SIPC") and
supplementary private insurance coverage. All customer credit balances are
subject to immediate withdrawal from Cowen & Co., at the discretion of the
individual customer.
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The Company's trading and retail activities benefit from the utilization
of automated trading systems such as Selectnet, SOES and ACT. The company's
trading and retail activities will further benefit from the utilization of
other automated trading systems such as Instinet, BNET, and the automated
ticketless Brass trading program. The Brass system, which, in effect, makes
trading "paperless", enhances the ability of traders to focus on market
conditions by eliminating the prior administrative burden inherent in
trading. The Selectnet and Instinet networks link a company with trading
partners throughout the United States, including other brokerage firms, block
trading desks and specialists on the regional exchanges. These systems
provide KMS with access into every major securities exchange on a worldwide
basis. As it grows, KMS will also employ an electronic volume monitoring
system that will allow it to determine the percentage of its relative trading
volume in a specific security.
KMS is currently registered for retail distribution in the following
jurisdictions:
[Download Table]
Alabama Massachusetts South Dakota
Alaska Michigan Texas
Arizona Minnesota Utah
Arkansas Mississippi Vermont
California Montana Virginia
Colorado Nevada Washington, D.C.
Connecticut New Jersey Washington
Delaware New York West Virginia
Florida North Carolina Wisconsin
Georgia Ohio Wyoming
Illinois Oklahoma
Kansas Oregon Pending:
Kentucky Pennsylvania Indiana
Louisiana Rhode Island Maine
Maryland South Carolina Nebraska
KMS' trading and retail operations are regulated by the NASD. The NASD
places various restrictions and limitations on the operations of member
firms, subject to revision based on the NASD's experience with each firm. KMS
may make markets in 15 NASDAQ securities and employ up to 55 financial
consultants. KMS is allowed to co-manage a best efforts or a firm commitment
public offering of securities. KMS does not and may not participate in
transactions involving penny stocks.
KMS ASSET MANAGEMENT GROUP, INCORPORATED was formed to serve as an advisor
to institutions, individuals and governments. Its strategy will be to expand
its money management business by increasing assets under management and by
increasing its international consultancy business by becoming advisors to
additional institutions and governments of developing countries. It currently
acts as an advisor to several international corporations and individuals and
to the governments of Grenada, South Korea and Pakistan. It is acting as an
advisor to the Grenadine government on its tourism and infrastructure
development project and to the government of Pakistan on establishing the
first "High Technology Industry Park" in Pakistan.
The minimum investment required for investors within KMS asset management
group is $250,000. Each account is insured up to $50 million by an "A" rated
insurance company, but is subject to normal market risks associated with
investing. KMS charges fees equal to one percent of the average assets under
management plus performance bonuses.
Government Regulation
The SEC is the Federal agency responsible for the administration of the
Federal securities laws. KMS is registered as a broker-dealer with the SEC.
Much of the regulation of broker-dealers has been delegated to self-regulated
organizations, principally the NASD and national securities exchanges such as
NASDAQ. These self-regulatory organizations adopt rules (subject to approval
by the SEC) that govern the industry and conduct periodic examinations of
KMS' operations. Securities firms are also subject to
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regulation by state securities administrators in those states in which they
conduct business. KMS is currently registered as a broker/dealer in states
and the District of Columbia.
Broker-dealers are subject to regulation covering all aspects of the
securities business, including sales method, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record-keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules may directly affect
the mode of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer,
its officers or employees. The principal purpose of regulation and discipline
of broker-dealers is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers.
Certain regulatory bodies perform audits or other procedures to ensure
compliance with their rules and regulations. The NASD completed an audit of
KMS in February 1998, at which time it issued a letter setting forth certain
alleged exceptions and areas of noncompliance noted during the performance of
its audit procedures. Management of KMS, based on its review of the letter,
discussions with counsel and with the NASD auditors, does not believe that
the ultimate resolution of the matters set forth in the letter from the NASD
will have a material adverse effect on KMS' results of operations or
financial condition, although no assurances thereof can be given.
The SEC's Net Capital Rule imposes minimum financial requirements for all
registered broker-dealers doing business with the public. KMS is subject to
the requirements of this rule. The Net Capital Rule places limits on certain
of the KMS' operations, such as underwriting activities and market making and
other principal trading activities. A decrease below minimum net capital in
the form of a significant operating loss or any unusually large charge
against KMS' net capital could adversely affect its ability to expand or even
maintain its present levels of business. See "Risk Factors."
Competition
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with numerous other securities brokers and dealers,
investment banking firms, life insurance sales agencies, investment advisors,
leveraged buyout firms, venture funds and, indirectly for investment funds,
with commercial banks. Many of KMS' competitors have substantially greater
capital and other resources than does KMS. Some commercial banks and thrift
institutions also offer securities brokerage services and many commercial
banks offer a variety of investment banking services. Competition among
financial services firms also exists for investment representatives and other
personnel.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms.
These developments have increased competition from firms with greater capital
resources than those of KMS. Furthermore, numerous commercial banks have
petitioned the Board of Governors of the Federal Reserve System for
permission to enter into various new business activities from which they are
currently barred, such as underwriting certain mortgage-backed and municipal
revenue securities and securities backed by consumer loans. Various
legislative proposals, if enacted, would also permit commercial banks to
engage in such activities. Ultimately, these developments or other
developments of a similar nature may lead to the creation of integrated
financial service firms that offer a broader range of financial services.
The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business, including many offering low rates on the Internet. In addition, an
increasing number of specialized firms now offer "discount" services to
individual customers. These firms generally effect transactions for their
customers on an "execution only" basis
25
without offering other services such as portfolio valuation, investment
recommendations and research. The continuation of such discounting and an
increase in the number of new and existing firms offering such discounts
could adversely affect KMS' retail business.
SUREAL
Sureal is a direct marketing company involved in the distribution and sale
of high quality nutritional and other products. Sureal was founded as Legacy
Export, Inc. ("Legacy") in 1995 by Richard Wogksch, R. Bret Jenkins, and Glen
Jensen for the purpose of creating, developing and expanding direct marketing
businesses internationally, with an emphasis on Russia and other republics of
the former Soviet Union. The founders had experience in the direct marketing
industry, including the international aspects thereof. Legacy commenced its
operations as the marketing, sales and administrative arm for Eastern Europe
for an existing direct marketing company specializing in personal care and
nutritional products. Legacy commenced its operations in August 1995 using a
network of 333 independent distributors in Russia. The number of distributors
in the network increased to 4,972 at December 31, 1995; 94,307 at December
31, 1996; and 172,221 at May 31, 1997, respectively. Monthly commissionable
sales to these distributors rose from $20,000 in July 1995 to $5,009,000 in
February 1997. Sureal, which changed its name in October 1997, is
headquartered in Orem, Utah.
Sureal discontinued its relationship with other product companies in
September 1997, at which time it made a decision to introduce its own branded
products to be distributed through its sales network. Through September 1997,
the revenue generated by the sales of those products was distributed in an
agreed upon manner among the supplier, shipper and Sureal pursuant to the
terms of a verbal agreement. Sureal's product philosophy is to introduce its
own branded products based on researching the best that science and nature
can offer and produce, using contract manufacturers, innovative products that
are specifically designed for a network marketing distribution channel.
Sureal presently offers nutritional products and a line of air purification
products. It plans on expanding both of these lines, as well as introducing a
personal care line and other specialty products.
Nature of Direct Marketing
Sureal distributes its products through a system of direct or network
marketing. Under most network marketing systems, independent distributors
purchase products for retail sale or personal consumption. Direct marketing
involves the sale of products through a network of independent distributors
who enter into contract agreements or licenses with the direct marketer.
Pursuant to Sureal's Global Compensation Plan, products are sold exclusively
to or through independent distributors who are not employees of Sureal.
Direct marketing sales have increased rapidly in recent years. Many
products sold by direct marketers are characterized as having high margins.
Typically, distributor incentives and commissions represent the highest cost
for a direct marketer.
Network marketing is an effective vehicle to distribute Sureal's products
because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials
is enhanced; and (iv) as compared to other distribution methods, distributors
can give customers higher levels of service and attention, by, among other
things, delivering products to a consumer's home and following up on sales to
ensure proper product usage, customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products either for resale or for personal consumption.
International direct selling as a distribution channel has been enhanced
in the past decade because of advances in communications, including
telecommunications, and the proliferation of the use of videos, email and fax
machines. Direct selling companies can now produce or purchase high quality
videos for use in product education, demonstrations, and sponsoring sessions
that project a desired image for the company and product line. Sureal is
committed to fully utilizing current and future technological advances to
enhance the effectiveness of its direct selling program.
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Sureal's management believes that the distributor incentive program is the
most integral factor in developing a strong distributor network. Sureal's
network marketing program is specifically designed for the needs of
international distributors and differs from the compensation plans of many
other network marketing programs in several respects. First, Sureal's Global
Compensation Plan allows distributors to develop a seamless global network of
down line distributors (see below). Second, the Global Compensation Plan is
among the most financially rewarding plans offered to distributors by network
marketing companies, and can result in commissions to distributors
aggregating up to a maximum of 63% of a product's wholesale price.
Global Compensation Plan -- Sureal believes that the two principal
strengths of its Global Compensation Plan is the potential level of
commissions and bonuses available to distributors and its seamless
integration across all markets in which Sureal products are sold. Sureal
believes that the Global Compensation Plan is among the most financially
rewarding plans offered to distributors by network marketing companies. There
are two fundamental ways in which distributors can earn money: (i) through
retail markups, for which Sureal recommends a range of approximately 30%: and
(ii) through a series of commissions on each product sale which can result in
commissions to distributors aggregating up to a maximum of 63% of such
product's wholesale price. However, Sureal believes the actual commissions
paid will be significantly less. Commissions have averaged from 40% to 42% of
revenue from commissionable sales since inception.
By entering into distributor agreements with Sureal, distributors are
authorized to sponsor new distributors in each country where Sureal has
operations. This policy allows distributors to receive commissions for sales
at the same rate for sales in foreign countries as for sales in their home
country. This is a significant benefit to distributors because they are not
required to establish new distributorships or requalify for higher levels of
commissions within each new country in which they begin to operate. The
seamless integration of the Global Compensation Plan means that distributor
knowledge and experience can be used to rapidly build distributor leadership
in new markets.
Sureal's compensation plans for distributors also include:
o Permitting past ordering performance (during the period when Sureal
represented other direct marketers) to count in the new incentive
program;
o Establishing an investment program at a broker/dealer in which a
portion of bonuses may be retained and invested for the benefit of
distributors;
o Permitting distributors to represent more than one direct marketing
company;
o Providing products that management believes are needed in the
marketplace at price points that are realistic and attractive; and
o Continuing its distributor administrative program that includes timely
reporting and people who speak the local language fluently.
These programs, taken as a whole, are believed to be unique in the direct
marketing industry.
Sponsoring
Sureal relies solely on its existing distributor force to sponsor new
distributors. While Sureal provides product samples, brochures, and other
sales materials, distributors are primarily responsible for educating new
distributors with respect to products, the Global Compensation Plan, and how
to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"down line" distributors. If down line distributors also sponsor new
distributors, they create additional levels in the structure, but their down
line distributors remain part of the same down line network as their original
sponsoring distributor.
Sponsoring activities are not required of distributors. However, because
of the financial incentives provided to those who succeed in building a
distributor network, Sureal believes that most of its
27
distributors attempt, with varying degrees of effort and success, to sponsor
additional distributors. Generally, distributors invite friends, family
members and acquaintances to sales meeting where Sureal products are
presented and where the Global Compensation Plan is explained. People are
often attracted to become distributors after using Sureal products and
becoming regular retail customers. Once a person becomes a distributor, he or
she is able to purchase products directly from Sureal at wholesale prices for
resale to consumers or for personal consumption. The distributor is also
entitled to sponsor other distributors in order to build a network of
distributors and product users. Major distributors earn incentives or bonuses
based on the sales volume of their down lines.
A potential distributor must sign a distributor agreement with Sureal that
obligates the distributor to abide by Sureal's policies and procedures.
Russian Market
For the purpose of this section, the "Russian Market" incorporates the
markets of all of the republics of the former Soviet Union and several
countries in Eastern Europe. This market has a population in excess of 400
million people and is characterized by:
o Inadequate supplies of many basic consumer products at affordable
prices;
o Cumbersome and redundant government regulations and even corruption;
o Inadequate shipping services within a country; and
Many people seeking opportunities to benefit within the new capitalistic
framework.
To succeed in this environment a company, among other things, must:
o Establish an effective relationship with a reliable and influential
local business associate or "partner";
o Have a methodology for being paid in United States dollars on a timely
basis;
o Establish a system for warehousing, shipping and clearing customs in a
manner that minimizes delay and risk of loss through theft;
o Understand the needs of prospective dealers and customers; and
o Have a system in place to manage a business that is growing rapidly.
In addition, a direct marketing company, among other things, must:
o Have an effective system of accumulating information that gives rise to
distributor incentives;
o Have an effective program of distributor incentives tailored for
particular markets;
o Have key employees with knowledge of the language and culture of the
countries in which distributors operate;
o An efficient and fair means of resolving disputes and misunderstandings
on a timely basis; and
o An effective inventory control and distribution system.
Sureal believes that it has systems in place that accomplish each of the
foregoing requirements.
Sureal has developed relationships with reliable and influential local
collaberative partners in Russia to help Sureal:
o Get products certified for sale through the appropriate governmental
authorities and required approval processes;
o Clear incoming products through customs; and
o Repatriate currency.
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Substantially all of Sureal's commissionable sales have been made in the
Russian Market. All transactions involving Sureal are denominated in United
States dollars. Sureal does not assume any risk with respect to currency
fluctuations. Typically, products are shipped and billed to a limited number
of major distributors. These distributors have the responsibility of getting
shipments through customs and into a warehouse, redistributing the products
to smaller distributors, collecting sales proceeds, converting currencies and
remitting payment to Sureal (see "Risk Factors").
Products
Substantially all of Sureal's products are manufactured from readily
available ingredients and materials. Management believes that if any source
of ingredients becomes unavailable, alternative sources of supply are
available at comparable prices and delivery schedules. In the event that
Sureal were unable to find such alternate sources at competitive prices and
on a timely basis for its principal products, Sureal's operations would be
materially adversely affected. See "Risk Factors". Ingredients are stored by
the contract manufacturers. Finished products are shipped directly to foreign
warehouses by ship.
Substantially all of Sureal's products are manufactured from readily
available ingredients and materials. Management believes that if any source
of ingredients becomes unavailable, alternative sources of supply are
available at comparable prices and delivery schedules. In the event that
Sureal were unable to find such alternate sources at competitive prices and
on a timely basis for its principal products, Sureal's operations would be
materially adversely affected (see "Risk Factors"). Ingredients are stored by
the contract manufacturers. Finished products are shipped directly to foreign
warehouses by ship.
Sureal offers products in two distinct categories--nutritional supplement
products and air purification products. In addition to products, Sureal
offers a variety of sales aids to distributors, including starter kits,
introductory kits, brochures, and product catalogs. All sales aids are
targeted for the local markets and are written in the local language.
The following chart sets forth the Sureal branded products that are
available as of April 15, 1998.
[Download Table]
TOTAL
PRODUCTS
OFFERED
PRODUCT NAME BY SUREAL UNITED STATES RUSSIA
------------ ------------- --------------- ----------
Classical Herbs .......... 6 6 6
Children's Nutrition .... 1 1 1
Specialty ................ 4 4 4
Herbal Teas .............. 4 4 4
Preferred Pet ............ 2 2 2
Air Purification ......... 2 2 2
Total .................... 19 19 19
NUTRITIONAL SUPPLEMENTS PRODUCTS
The nutritional supplements product category is comprised of 17 products
in the following lines: classical herbs, children's nutrition, specialty,
herbal teas, and Preferred Pet. Sureal's nutritional supplements are designed
and marketed to promote a healthy, active lifestyle and general well being
through proper diet, exercise and nutrition.
Sureal believes that the nutritional supplement market is expanding in
Russia and the United States because of changing dietary patterns, a
health-conscious population and recent reports supporting the benefits of
using vitamin and mineral nutritional supplements. This product line is
particularly well suited to network marketing because the average consumer is
often uneducated regarding nutritional products. Sureal believes that network
marketing is a more efficient method than traditional retailing channels in
educating consumers regarding the benefits of nutritional products. Because
of the numerous over-the-counter vitamin and mineral supplements available in
Russia and the United States, Sureal believes that individual attention and
testimonials by distributors are effective methods of providing information
to a potential consumer.
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CLASSICAL HERBS
ALFALFA -- Alfalfa is a medicinal plant known to improve general health.
This herb contains most of the necessary vitamins and minerals required by
the human body. It aids the immune system, helps the body protect itself from
disease, and cleanses the blood. Alfalfa is often used by people with
gastrointestinal problems, as well as by people seeking relief from achy
muscles and joints, coughs and colds.
BEE POLLEN -- Bee pollen is traditionally known to provide the body with
additional energy and relief from fatigue and also helps increase the body's
ability to heal and build resistance to disease. Bee pollen is often used by
individuals and athletes seeking to increase energy or stamina. Bee pollen is
also be used to improve mental activity, facilitate sleep, and strengthen the
nerves.
ECHINACEA -- Echinacea, sometimes referred to as the "King of Blood
Purifiers", and a natural infection fighter, increases the body's ability to
combat infection. Echinacea is used to ward off any infection and is
especially effective in minimizing the symptoms of the common cold.
GOTU-KOLA -- Gotu-kola is traditionally known as the "food for the brain."
Gotu-kola is used to increase mental and physical capacity, combat stress,
improve reflexes, and energize the cells of the brain. Gotu-Kola is also used
to promote relaxation and strengthen memory. This product is recommended to
relax the central nervous system or for those who may be in danger of nervous
breakdown. It is also used by individuals who are confined to a bed and by
women recovering from childbirth.
PASSIONFLOWER -- Passionflower is a naturally occurring relaxant, used to
soothe and calm muscles, nerves and joints. It also is used to relieve
headaches and calm nerves and anxiety. Passionflower is used for insomnia and
other sleep disorders; for the anxiety women experience during menses,
childbirth or menopause; and for restless children.
RED CLOVER -- Red clover is famous for its ability to purify the blood of
toxins. It is also used to relieve coughing, sore throats and skin
irritations.
CHILDREN'S NUTRITION
LIL NIBBLES CHILDREN'S CHEWABLE VITAMIN AND MINERAL SUPPLEMENT -- Because
they are growing, children have unique nutritional needs for proper
nutrients, vitamins and minerals. Sureal's balanced formula features a
combination of multivitamins and minerals, including vitamin A, vitamin C,
the B vitamins, Folic and Pantothenic Acid, as well as providing anti-oxidant
protection.
SPECIALTY
MIGHTY APHRODITE FEMALE FACTORS -- Mighty Aphrodite Female Factors
contains specific vitamins, minerals, and herbs that are used to resolve
typical female issues, fight fatigue and increase endurance. The principal
ingredient, Pau d'Arco Bark has been used for centuries in South America for
relief from female issues such as PMS, cramps and infections. It also
includes Siberian Ginseng, an herb that is used to relieve stress, mental
fatigue and weakness
HERCULES MALE FACTORS -- Hercules Male Factors contains a specialized
blend of botanicals, vitamins and minerals designed for men. The principal
ingredients are Saw Palmetto powder for the prostate and Vitamin E and Garlic
for the heart. It also features one of the most advanced known anti-oxidants,
Lipoic Acid that acts as a substitute for other vitamins. Chromium is also
included to help develop lean muscle mass.
CUPIDS ARROWS APHRODISIAC -- Cupids Arrows Aphrodisiac combines
traditional folk ingredients with supplements and is used by men and women to
enhance sexual desire, function, and performance. The principal ingredient,
Siberian Ginseng, is a naturally occurring aphrodisiac. The other featured
ingredient, Yohimbe Bark, is an aphrodisiac that increases desire and
performance. The product also includes Arginine, an herb used by men, and
Green Oats extract, an herb used by women, to stimulate the sex drive.
30
EARTH SUPERFOODS COMPLEX -- Earth Superfoods Complex contains land and sea
greens, anti-oxidants, vitamins, minerals, probiotic cultures, herbs,
digestive plant enzymes, cruciferous vegetables and fruits, and other
beneficial cofactors. It also contains phytonutrients, digestive enzymes such
as vitamins E, A, C and B and Probiotics (known as "friendly bacteria").
HERBAL TEAS
PURITEA CLEANSING TEA -- PURITea contains a blend of natural herbs helpful
for regulating the bowels and urinary tract. The formula helps to cleanse and
soothe rather than irritate. This mild, yet effective, formula aids in
flushing stored waste from the body. This tea features Senna Leaf, a
cathartic that serves as a laxative to cleanse the colon and Uva Ursi, an
herb used for centuries to cleanse the bladder and kidneys.
ZESTEA ENERGY TEA --ZESTea contains a blend of natural herbs that
stimulate the body to produce energy, overcome stress, fatigue and weakness.
The principal ingredients in this tea are Kola Nut and Yerba Mate. Kola Nut
is a natural stimulant to the body's circulatory and respiratory system.
Yerba mate has been used for centuries to eliminate fatigue and rejuvenate
the body.
LESS-O-ME WEIGHT LOSS TEA -- Less-O-Me Weight Loss Tea contains a blend of
herbs that increase metabolism and burn body fat. These ingredients help
block fat and aid in appetite suppression. The principal ingredients in this
tea, gymnema sylvestra and garcinia cambogia, reduce the body's ability to
absorb fats and sugars, and help block the formation of fat cells. This tea
is used as a part of a weight management or general nutrition program.
TRANQUILITEA RELAXING TEA -- TRANQUILITea contains an assortment of medicinal
herbs used to quiet and soothe the nervous system and promote restful sleep.
The principal ingredients in this product are St. John's wart and Chamomile.
St. John's Wart is a natural anti-depressant that is used to promote deeper,
more restful sleep. Chamomile is used to relax nerves and relieve tension.
PREFERRED PET
DIGESTIVE AID -- Pet Digestive Aid assists pets in food digestion. Pet
Digestive Aid contains digestive enzymes that help pets digest processed
food, as well as absorb the essential vitamins, minerals, and phytonutrients
they need. The principal ingredient, Lacto Bacillius Sporogenes ("LBS"), is a
friendly bacteria that exists in the intestines and helps keep the intestinal
tract clean and free from disease.
ESSENTIAL GREENS -- Pet Essential Greens contains an assortment of vital
greens from the land and the sea. These greens contain important
Phytonutrients that provide pets with anti-oxidant protection and help to
keep them safe from the diseases and illnesses.
AIR PURIFICATION PRODUCTS
The air purification product category is comprised of two products that
use negative ions, ozonation, and germicidal UV light to deliver cleaner,
fresher and safer air.
Sureal believes that the air purification market is expanding in Russia
and the United States because of various reports ranking indoor air pollution
at or near the top of environmental health risks in the United States, and
findings that indoor air is, on the average, more polluted than outdoor air.
This product line is particularly well suited to network marketing because
the average consumer is generally uneducated regarding methods of air
purification. Sureal believes that network marketing is a more efficient
method than traditional retailing channels in educating consumers regarding
the unique benefits of air purification.
SUREAL AIR 2700 -- The Sureal Air 2700 is an air purification system uses
ozone and negative ions and adds the germicidal effects of UV light to purify
the air. The Sureal Air 2700 is designed for use in areas of 2700 square feet
or less.
SUREAL AIR 70 -- The Sureal Air 70 is designed for use in areas of 70
square feet or less, including cars and tables at restaurants.
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Sales Aids
Sureal provides an assortment of sales aids to distributors. Sales aids
include audiocassette tapes, promotional clothing, pens, and other
miscellaneous items to help create consumer awareness of Sureal and its
products. Sales aids are priced at Sureal's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on
purchases of sales aids).
Product Guarantees
Sureal believes that it is among the most consumer protective companies in
the direct selling industry. Sureal's product return policy allows a retail
purchaser to return any product to the distributor from whom the product was
purchased for a full refund for a period of 30 days from the date of
purchase. After 30 days from the date of purchase, the return privilege is at
the discretion of the distributor. Because distributors may return unused and
resalable products to Sureal for a refund of 90% of the purchase price for
one year, they are encouraged to provide consumer refunds beyond 30 days. The
product returns policy is a material aspect of the success of distributors in
developing a retail customer base.
Product Development Philosophy
Sureal is committed to building its brand name and distributor and
customer loyalty by selling premium quality, innovative personal care and
nutritional products that appeal to broad markets. Sureal's product
philosophy is to combine the best of science and nature and to include in
each of its products the highest quality ingredients. This philosophy has
also led to Sureal's commitment to avoid any ingredients in nutritional
supplements that are reported or believed to have any long-term addictive or
harmful effects, even if short-term effects may be desirable. Independent
distributors need to have confidence that they are distributing the best
products available in order to have a sense of pride in their association
with the Sureal and to have products that are distinguishable from "off the
shelf" products. Sureal is committed to developing and providing quality
products that can be sold at an attractive retail price and allow Sureal to
maintain reasonable profit margins.
Sureal is also committed to constantly improving its product formulations
to incorporate innovative and proven ingredients into its product line.
Whereas many consumer product companies develop a formula and stay with that
formula for years, and sometimes decades, Sureal believes that it must stay
current with product and ingredient evolution to maintain its reputation for
innovation to retain distributor and consumer attention and enthusiasm.
In addition, Sureal believes that timely and strategic product
introductions are critical to maintaining the growth of independent
distribution channels. Distributors become enthusiastic about new products
and are generally excited to share new products with their customer base. An
expanding product line helps to attract new distributors and generate
additional revenues.
Production
Virtually all Sureal's branded products are sourced through contract
manufacturers unaffiliated with Sureal. Sureal's profit margins and its
ability to deliver its existing products on a timely basis are dependent upon
the ability of Sureal's outside manufacturers to continue to supply products
in a timely and cost-efficient manner. Furthermore, Sureal's ability to enter
new markets and sustain satisfactory levels of sales in each market are
dependent in part upon the ability of suitable outside manufacturers to
reformulate existing products, if necessary to comply with local regulations
or market environments, for introduction into such markets. Finally, the
development of additional new products in the future will likewise be
dependent in part on the services of suitable outside manufacturers.
Sureal currently acquires products or ingredients from sole suppliers or
suppliers that are considered by Sureal to be the superior suppliers of such
ingredients. Sureal believes that, in the event it is unable to source any
products or ingredients from its current suppliers, Sureal could replace such
suppliers or products or substitute ingredients without great difficulty or
prohibitive increases in the cost of goods sold. However, there can be no
assurance that the loss of such a supplier would not have a material adverse
effect on Sureal's business and results of operations.
32
Operating Strengths
Sureal believes that its success in its operational and consulting
activities was a function of its commitment to provide high quality service
and products and a unique business opportunity to its independent
distributors. Sureal believes that it will continue to be successful by
providing high quality servicing to its distributors and by providing high
quality, innovatively packaged products and an appealing global business
opportunity. Sureal is committed to building its brand name and distributor
and customer loyalty by selling premium quality, innovative nutritional
products that appeal to broad markets.
All products are manufactured in the United States and shipped to
warehouses in the Russian markets. Sureal has established procedures to
ensure that products pass through customs in a timely fashion and are shipped
to warehouses safely with a minimal amount of pilferage. Products are shipped
by truck from the warehouse to distribution points.
Growth Strategy
Sureal plans to develop a disciplined approach to opening new markets.
Each market opening will be preceded by a thorough analysis of economic and
political conditions, regulatory standards and other business, tax and legal
issues. Prior to a market opening, Sureal's management team will work to
obtain all necessary regulatory approvals and establish facilities capable of
meeting distributor needs. Sureal plans to consider a variety of options in
opening new markets. Sureal may decide to open the market, or contract with a
partner, or license the market.
Sureal plans to increase its growth by introducing new products, opening
new markets, attracting new distributors and through promotions.
Introduce New Products -- Sureal plans to introduce new products on a
continuing basis. The introduction of new products has a tendency to increase
the sales of existing distributors and helps attract new distributors.
Introduce New Markets -- Sureal will pursue attractive new market
opportunities. Japan, Mexico, Canada India and the Middle East are the next
markets Sureal plans to pursue.
Attract New Distributors -- Sureal plans to contract new distributors by
providing unique and exciting business building promotions. For example, it
offered a personal volume boost of 10% on each nutritional product purchased
through March of 1998. Sureal intends to continue to create and maintain a
business climate to promote the growth in the number of active distributors
and to increase distributor retention, motivation and productivity. Sureal
will do this by continuing to enhance distributor recognition programs.
Competition
The markets for personal care and nutritional products are large and
intensely competitive. Sureal competes directly with companies that
manufacture and market personal care and nutritional products in each of
Sureal's product lines. Sureal competes with other companies in the personal
care and nutritional products industry by emphasizing the value and premium
quality of the Company's products and the convenience of the company's
distribution system. Many of Sureal's competitors have much greater name
recognition and financial resources than does Sureal. In addition, personal
care and nutritional products can be purchased in a wide variety of channels
of distribution. While Sureal believes that consumers appreciate the
convenience of ordering products from home through a sales person or through
a catalog, the buying habits of many may consumers accustomed to purchasing
products through traditional retail channels are difficult to change.
Sureal's product offerings in each product category are also relatively small
compared to the wide variety of products offered by many other personal care
and nutritional product companies. There can be no assurance that Sureal's
business and results of operations will not be affected materially by market
conditions and competition in the future.
Sureal also competes with other direct selling organizations, some of
which have longer operating histories and higher visibility name recognition
and financial resources. The leading network marketing
33
company in Sureal's markets is Amway Corporation and its affiliates. Sureal
competes for new distributors on the basis of its Global Compensation Plan
and its premium quality products. Management envisions the entry of many more
direct selling organizations into the marketplace as this channel of
distribution expands over the next several years. Sureal also believes that
other large, well-financed corporations may launch direct selling enterprises
which will compete with Sureal in certain of its product lines. There can be
no assurance that Sureal will be able to successfully meet the challenges
posed by this increased competition.
Sureal competes for the time, attention and commitment of its independent
distributor force. Given that the pool of individuals interested the business
opportunities presented by direct selling tends to be limited in each market,
the potential pool of distributors for Sureal's products is reduced to the
extent other network marketing companies successfully recruit these
individuals into their businesses. Although management believes that Sureal
offers an attractive business opportunity, there can be no assurance that
other network marketing companies will not be able to recruit Sureal's
existing distributors or deplete the pool of potential distributors in a
given market.
EMPLOYEES
At December 31, 1997, KMS had 22 employees, of which 8 were registered
representatives. Sureal had 11 employees at such date. None of these
employees is covered by a collective bargaining agreement.
FACILITIES
KMS leases 14,000 square feet of office space at 110 Wall Street, New
York, NY subject to a lease expiring on August 31, 2002 with minimum annual
rent increasing from $310,000 to $315,000.
Sureal rents a 4,080 square foot facility in Orem, Utah.
34
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to reflect the sale of the 3,000,000 of
Common Stock offered by the Company hereby (1,000,000 Shares if only the
Minimum Offering is sold)and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
[Download Table]
AS ADJUSTED
----------------------------------
ACTUAL MINIMUM OFFERING MAXIMUM OFFERING
------------- ---------------- ----------------
Indebtedness................ $ 210,000
-------------
Minority interest........... 773
-------------
Stockholders' Equity:
Preferred stock ............ 4
Common stock ............... 1,069 $ 1,165 $ 1,369
Additional paid-in capital 3,400,103 11,725,874 41,275,580
Retained earnings ......... (2,860,497) (2,860,497) (2,860,497)
------------- ---------------- ----------------
Total stockholders' equity 540,679 8,866,542 38,416,452
------------- ---------------- ----------------
Total Capitalization ....... $ 751,452 $ 8,866,542 $38,416,452
============= ================ ================
------------
(1) Gives effect to the issuance of 750,000 shares of Common Stock
pursuant to the Share Exchange Agreement associated with the
acquisition of Sureal (see "Business" and "Certain Transactions") and
the two for one reverse stock split effective December 3, 1997 (see
"Description of Common Stock").
35
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
[Enlarge/Download Table]
NAME AGE POSITION WITH THE COMPANY
---- ----- ---------------------------
Mohammad Ali Khan 31 Chairman of the Board, President, Chief Executive Officer
Asim S. Kohli ..... 32 Executive Vice President, Chief Operating Officer, Director
Rushdie Saddiqui . 33 Vice President and Manager of Business Development for KMS,
Director
Edward A. Heil ... 47 Consultant and Director
R. Bret Jenkins .. 39 President of Sureal and Director
Maurice Gross ..... 62 Consultant and Director
Steven Jacobson .. 54 Consultant and Director
William Walling .. 65 Chief Investment Advisor
William Triebel .. 46 Chief Financial Officer
Joseph Antonini .. 56 Director
Jamil Asghar ...... 39 Director
Leonard Yablon ... 68 Director
Jaffer Naqvi ...... 52 Director
All Directors hold office until the next annual meeting of shareholders of
the Company or until their successors have been elected. All officers are
appointed annually by the Board of Directors and, subject to existing
employment agreements, serve at the discretion of the Board.
Outside (nonexecutive) directors shall receive $15,000 and 10,000 shares
of Common Stock per year as compensation for serving on the Board of
Directors. All Directors are reimbursed by the Company for any expenses
incurred in attending Directors' meetings and receive $500 for attending
committee meetings. The Company also intends to obtain Officers and Directors
liability insurance, although no assurances can be given that such coverage
will be obtained.
Background of Executive Officers and Directors
MOHAMMAD ALI KHAN is the founder of the Company and serves as the Chairman
of the Board, President and CEO. He has also been the President of KMS since
1995. Mr. Khan started his career in the financial industry as a financial
consultant at Prudential Securities in 1990. Mr. Khan has served in a variety
of sales management and corporate finance positions with other investment
banks. In addition, he has been a member of the New Jersey State Governor's
counsel since 1997. Mr. Khan holds a Bachelors Degree in Physics and
Mathematics from Karachi University in Pakistan and a Bachelor of Arts Degree
in Finance from Rutgers University.
ASIM S. KOHLI was engaged as Director of Operations for Hardees
Corporation from July 1991 to May 1992; was Regional Sales Manager for Birov,
Incorporated from September 1992 to February 1993; was Senior Real Estate
Appraiser for Appraisal Network Associates from September 1993 to January
1994; was Senior Real Estate Appraiser for Lin Holz Associates from January
1994 to May 1995; was Director of Operations for The Rose Group from May 1995
to August 1995; and was Director of Operations for CFS Management,
Incorporated from August 1995 until December 1995. He joined KMS in January
1996. Mr. Kohli holds a Bachelor of Business Administration degree from
Northern Illinois University.
RUSHDI SIDDIQUI founded and was a principal in Siddiqui Rose & Associates,
a marketing consulting firm, from 1992 to 1993. From 1993 to 1996, he was
Chief Operating Officer of Welsh Technologies, Inc., which is engaged in the
alternate fuel vehicle conversion industry. He served as a Marketing Officer
for Mashreq Bank in 1996 and became Director of Business Development for KMS
in 1997. Mr. Siddiqui holds a Bachelor of Arts degree from New York
University, a Master of Business Administration degree from Baruch College
and a Juris Doctorate from Union University.
36
EDWARD A. HEIL is a certified public accountant and a managing director,
since January 1992, in Independent Network Group, Inc., a financial
consulting firm. From 1984 through December 1991 he was a partner in the
accounting firm, Deloitte & Touche, LLP. From 1973 to 1984 he was employed in
various professional capacities by Deloitte & Touche, LLP. Mr. Heil, who is
also a director of Thermo-Mizer Environmental Corp. (a New Jersey-based
public company), holds Bachelor of Arts and Master of Business Administration
degrees from New York University.
R. BRET JENKINS has been Chairman of Sureal since its inception. He has
also been a shareholder in the law firm Biyack, Ashton & Jenkins, P.C. since
1994 and practiced law with several law firms prior thereto. Mr. Jenkins
holds a Bachelor of Arts and Juris Doctorate degrees from the University of
Utah.
MAURICE GROSS has been a principal in the consulting firm of Maurice Gross
& Co. Prior thereto he was a Senior Vice President at Gruntal & Co.
STEVEN R. JACOBSON is a founder and principal of Steven R. Jacobson & Co.,
a broker/dealer specializing in restricted security lending, venture capital
and investment banking. He is also a partner in SRJ Financial Group which is
engaged in a variety of corporate financing activities, and is a member of
the Board of Directors of Enhance Reinsurance Company. Mr. Jacobson holds a
Bachelor of Business Administration degree from Iona College.
WILLIAM WALLING became Vice President of Investments for KMS in July 1996.
Prior thereto, from 1992, he held supervisory roles with RAS Securities. Mr.
Walling, who has received numerous awards and citations for his research
reports and other writings, holds a Bachelor of Arts degree from Michigan
State University and a Master of Business Administration from New York
University.
WILLIAM TRIEBEL became KMS' Chief Financial Officer in July 1997. He also
serves as Chief Financial Officer of USFG. Prior thereto, he was a senior
accountant for Gettenber Consulting Group from June 1996 to June 1997. Mr.
Triebel was the manager for finacial operations of Prime Capital Services,
which was located in Poughkeepsie, NY, from March 1984 to May 1996. Mr.
Triebel is a graduate of Marist College.
JOSEPH E. ANTONINI has over 30 years of experience building and operating
several of the nation's largest retailing chains. He is the former Chairman,
President, and CEO of Kmart Corporation, one of the world's largest
retailers. Mr. Antonini also directed the expansion of Kmart's specialty
retail group, which included Borders Bookstores, Payless Drug Stores, Office
Max, Sports Authority and Builders Square. Since then, Mr. Antonini has
served as a director and advisor to various enterprises. He is currently the
President of JEA Enterprises, an investment firm which he founded, and serves
as a director of American Speedy Printing Centers, Inc., Ziebart, Inc., Shell
Oil Company, Andretti Wine Group, LTD., NAMS Net and numerous civic and
charitable organizations. He holds a Bachelor of Science degree from West
Virginia University.
SYED JAMIL ASGHAR was President of National Telecommunication, a long
distance telephone company, from 1991 until 1993. Since then, he has been
President of Laser Dimension Graphics & Printing, Inc. Mr. Asghar holds a
Bachelor of Science degree from Southern Illinois University.
LEONARD YABLON has been employed by Forbes Company since 1963 and
currently serves as Executive Vice President and Chief Financial Officer. In
addition, he is also the President of Sangre de Cristo Ranches, Forbes
Trinchera, Fiji Forbes and Forbes Europe. He is also the Vico President of
Forbes investors Advisory Institute and Secretary and Treasurer of the Forbes
Foundation. Mr. Yablon holds a Bachelor of Science degree from Long Island
University and a Master of Business Administration in Taxation from City
College in New York.
JEFF A. NAQVI is the Founder and President of Interactive Network for
Continuing Education, which conducts educational seminars for physicians
throughout the United States on behalf of major pharmaceutical companies as
part of their effort to launch new drugs. Prior thereto, Mr. Naqvi was a
director of The Medicine Group, Ltd. of Abbingtton, England. Mr. Naqvi has
been in the pharmaceutical industry for over 30 years holding high level
management positions at major companies. He holds a Master of Business
Administration degree from New York University.
37
WILLIE MAYS is a retired professional baseball player and a member of the
National Baseball Hall of Fame.
Remuneration
The following officers received compensation in excess of $100,000 in 1997
or 1996. The Board of Directors intends to establish a compensation committee
comprised of outside directors to review compensation matters and any new
employment contracts. The Company will not enter into any new employment
contracts until after the Offering is completed.
The Company has or plans to adopt a health and disability plan and a
401(k) plan for its employees.
Committees
The Board of Directors will create Audit and Compensation Committees
comprised of independent members.
SUMMARY COMPENSATION TABLE
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LONG TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------- ---------------------
OTHER
NAME AND SALARY ANNUAL RESTRICTED ALL TIP
PRINCIPAL POSITION YEAR COMPEN. BONUS COMPEN. STOCK AWARDS OPTIONS PAYOUTS OTHER
------------------ ------ ---------- ------- --------- -------------- --------- --------- ----------
KMS:
M. Ali Khan ....... 1997 $617,839
Asim S. Kohli ..... 1997 $103,700
Sureal:
R. Bret Jenkins .. 1997 $ 82,923 $8,000 $292,000
1996 $ 80,500 $8,000 $ 97,535
Richard Wogksch .. 1997 $ 82,923 $8,000 $292,000
1996 $ 80,500 $8,000 $ 97,500
Glen Jensen ....... 1997 $ 82,923 $8,000 $292,000
1996 $ 80,500 $8,000 $ 97,500
------------
Note--The Other Payout amounts paid to Messrs. Jenkins, Wogksch and Jensen
were S corporation distribtions made to permit the recipients to pay their
personal income tax liabilities.
Employment Agreements
The Company has entered into employment agreements with Messrs. Khan and
Kohli under which it has agreed to pay them annual salaries of $350,000 and
$250,000 through 2003. The contracts, which contain two three-year renewal
clauses, provide for additional bonuses based at the discretion of the Board
of Directors.
Sureal has entered into employment agreements with Messrs. Jenkins,
Wogksch and Jensen providing that each receive annual compensation of
$120,000 through 2003. These contracts provide for additional compensation
linked to Sureal's performance.
Sureal has also entered into a consulting arrangement with a firm
associated with Mr. Heil under which it has agreed to pay annual fees of
$75,000, subject to upward adjustment based on work performed. The agreement
provides for success fees with respect to certain types of transactions.
Stock Option Plan
The United States Financial Group, Incorporated 1997 Stock Incentive Plan
(the "Plan"), which expires ten years from the date adopted, enables the
Company to grant incentive stock options,
38
nonqualified options and stock appreciation rights ("SARs") for up to
1,000,000 shares of the Company's Common Stock. Incentive stock options
granted under the Plan must conform to applicable Federal income tax
regulations and have an exercise price not less than the fair market value of
shares at the date of grant (110% of fair market value for ten percent or
more stockholders). Other options and SARs may be granted on terms determined
by a committee of the Board of Directors. As of December 31, 1997, no options
were outstanding under the Plan.
Principal Stockholders
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of
this Prospectus by (i) each person known by the Company to own, directly or
beneficially, more than 5% of the Company's Common Stock, (ii) each of the
Company's directors, and (iii) all officers and directors of the Company as a
group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws, where applicable.
[Enlarge/Download Table]
SHARES OF COMMON
SHARES OF COMMON STOCK
STOCK OWNED OWNED
BEFORE OFFERING AFTER OFFERING
------------------------------ ----------------------------------
PERCENT OF PERCENT OF PERCENT OF
NAME AND ADDRESS OF NUMBER OF SHARES OWNED SHARES OWNED-- SHARES OWNED--
BENEFICIAL OWNER (1) SHARES OWNED (!) MAXIMUM OFFERING MINIMUM OFFERING
-------------------- -------------- -------------- ---------------- ----------------
Mohammad Ali Khan ....... 9,944,634 90.5 71.1 85.3
Asim S. Kohli ...........
Rushdie Saddiqui ........
Edward A. Heil .......... 18,750 .1 -- --
R. Bret Jenkins ......... 133,333 1.2 .9 1.1
Maurice Gross ...........
Steven Jacobson .........
Joseph Antonini .........
Leonard Yablon ..........
Jamil Asghar ............
Jaffer Naqvi ............
Directors and Officers
as a Group (11 persons) 10,091,697 91.9 80.0 86.4
------------
(1) The address for each officer and director is c/o Klein, Maus & Shire,
Inc., 110 Wall Street, New York, NY 10005.
39
CERTAIN TRANSACTIONS
Merger with Sureal
On December 3, 1997, the Company exchanged 750,000 shares of its common
stock, subject to adjustment, for all of the outstanding shares of common
stock of Sureal. The number of shares issued will be adjusted at the closing
of the Offering made hereby such that the total shares issued will equal the
number determined by dividing $11,250,000 by the offering price per share.
This transaction was accounted for as a pooling of interests in accordance
with Opinion No. 16 of the Accounting Principles Board.
Bridge Financing
From January through March 1998, the Company sold 12 units of Bridge
Financing. Each Unit consists of (i) a 10 percent Promissory Note in the
principal amount of $50,000 due one year from the date of issuance and (ii)
1,667 shares of the Company's Common Stock. The holders of such shares have
certain registration rights. For financial reporting purposes, a portion of
the net proceeds of $575,000 will be allocated to the value of the Common
Stock. The resulting debt discount will be amortized to operations over the
term of the Promissory Notes.
Other
Ronald J. Brescia, a principal in the law firm of Doros & Brescia, P.C.
("D&B"), counsel to the Company, shall receive as partial compensation for
services rendered and to be rendered by D&B to the Company as Company
counsel, 10,000 shares of the Company's Common Stock per year for a minimum
of three years or as long as D&B serves as Company counsel, whichever is
longer, at a price per share of $.01.
40
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), a copy of which is filed as an Exhibit to this
Registration Statement, between the Company and (referred to in this
section as the "Underwriter"), the Company is offering a minimum of 666,667
shares of its Common Stock (the "Minimum Offering") and a maximum of
3,000,000 shares of its Common Stock (the "Maximum Offering") at a price of
$15 per share. The Company has agreed to pay the Underwriter a commission
equal to 10% of the gross proceeds from the sale of the Shares offered
hereby. The Underwriter has made no commitment to sell any of the Shares
offered hereby, and no assurance can be given that any of the Shares will be
sold. The Underwriter has agreed to use its "best efforts" to sell the
Shares. The Underwriter has a material association or relationship to the
Issuer by virtue of being a subsidiary thereof.
The Underwriter has the option to utilize other broker-dealers that are
member of the NASD (the "Selected Participating Dealers") to assist in the
sale of the Shares. At the date hereof, the Underwriter has not reached any
agreement with any Selected Participating Dealers to conduct selling efforts
with respect to the Shares being offered hereby. In the event that any
agreement is reached between the Underwriter and any Selected Participating
Dealers, the Underwriter intends to reallow to such Selected Participating
Dealers up to percentage points of the full 10% underwriting commission.
The Underwriter has informed the Company that it does not intend to
confirm sales to any accounts over which it exercises discretionary
authority.
The proceeds from the sale of the Shares will be held in an escrow account
at The Chase Manhattan Bank, New York, New York (the "escrow Account"), until
a minimum of 666,667 shares of Common Stock have been sold and $15,000,000 is
deposited in the Escrow Account. If at least 666,667 shares of Common Stock
are not sold by days from this Prospectus, the proceeds received from
investors will be refunded promptly to the investors in full without interest
thereon and/or deduction of any kind therefrom. Until the proceeds from the
sale of at least 666,667 Shares have been deposited in the Escrow Account,
investors will not be stockholders nor able to demand the return of their
subscription proceeds.
All purchaser checks should be made payable to "United States Financial
Group, Incorporated--Escrow Account." Certificates evidencing the Shares will
be issued to the purchasers only if the proceeds from the sale of at least
666,667 shares of Common Stock are actually deposited in the Escrow Account
and released to the Company pursuant to the terms of the Escrow Agreement.
Until such time as the proceeds are actually received by the Company and the
certificates delivered to the purchasers thereof, such purchasers will be
deemed subscribers and not stockholders of the Company. During the selling
period, purchasers will have no right to demand the return of their
subscription proceeds. If the Minimum Offering is successfully sold, the
Offering will continue until the maximum period of the Offering has elapsed
or until the Offering is terminated by the Company and the Underwriter,
whichever occurs first.
The Underwriting Agreement also provides that the Company will pay a
non-accountable expense allowance equal to 2.5 percent of the gross proceeds
of the Offering to the Underwriter ($250,000 if the Minimum Offering is sold
and $1,125,000 if the Maximum Offering is sold). The Company has also agreed
to pay all expenses in qualifying the Shares offered hereby for sale under
the laws of such states as the Underwriter may designate, including fees and
expenses of counsel retained for such purposes.
The Company has agreed to sell warrants to the Underwriter (the
"Underwriter's Warrants") at a purchase price of $0.0001 per Underwriter's
Warrant to acquire an aggregate of shares of Common Stock, subject to
adjustment in the event that the Maximum Offering is not sold, for a period
of four years commencing one year from the date of this Prospectus, at an
exercise price equal to 160% of the price of the Common Stock to the public
in this Offering (or $18 per share). The Underwriter's Warrants grant the
holder thereof certain demand and "piggy-back" registration rights for a
period of five years from the date of this Prospectus with respect to the
Shares issuable upon the exercise of the Underwriter's Warrants.
The offering price of $15.00 per Share was arbitrarily determined by
management of the Company and the Underwriter and was selected because the
Company and Underwriter believe the Shares can best
41
be sold at that price. The price has no relationship to the value of the
Issuer or its assets. In determining the price, the Company and Underwriter
considered such factors as the amount of equity and control desired to be
retained by existing stockholders, dilution to public investors and the
general marketability of the shares.
The Underwriting Agreement provides for reciprocal covenants of indemnity
against liabilities in certain instances under the Securities Act of 1933, as
amended. To the extent that the Underwriting Agreement may purport to provide
exculpation from possible liabilities arising from the Federal securities
laws, it is the opinion of the SEC that such indemnification is contrary to
public policy and unenforceable.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, a copies of which have been filed
as an Exhibit to this Registration Statement and are on file at the offices
of the Company and the Underwriter.
42
DESCRIPTION OF CAPITAL STOCK
The Company is presently authorized to issue 40,000,000 Shares of its
$.0001 par value common stock. Shares are presently issued and
outstanding or subscribed. A total of 3,000,000 Shares are offered for sale.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock. Shares of preferred stock have no voting rights and are not entitled
to receive dividends unless voted by the Board of Directors. Such shares are
convertible into shares of Common Stock and receive preferences in the event
of Company liquidation.
Common Stock
All Shares of Common Stock, when issued, will be fully-paid and
non-assessable. All Shares are equal to each other with respect to voting,
liquidation and dividend rights. Holders of Shares of Common Stock are
entitled to one vote for each Share they own at any stockholders' meeting.
Holders of Shares of Common Stock are entitled to receive such dividends as
may be declared by the Board of Directors out of funds legally available
therefor, and upon liquidation are entitled to participate pro rata in a
distribution of assets available for such a distribution to stockholders.
There are no conversion, preemptive, redemption, or other rights or
privileges with respect to any Shares. Reference is made to the Company's
Articles of Incorporation and its by-laws as well as to the applicable status
of the State of Delaware for a more complete description of the rights and
liabilities of holders of Common Stock. The Company hereby undertakes to
provide any stockholder at any time with a copy (at a nominal charge) of its
articles of incorporation and by-laws. Also these documents are on public
record as exhibits to the Registration Statement on file with the Securities
and Exchange Commission. The Common Stock of the Company does not have
cumulative voting rights which means that the holders of more than 50% of the
Shares voting for the election of directors may elect all of the directors if
they choose to do so. In such event, the holders of the remaining Shares
aggregating less than 50% will not be able to elect any directors.
Market For Shares
Application will be made to list the Shares of Common Stock on NASDAQ's
National Market System, if it meets the applicable entry standards. There is
no assurance the Company will be accepted by NASDAQ's National Market System
or that the Company will have sufficient income, assets, shareholders
publicly held shares and market makers to meet the requisite standards for
initial inclusion. If the Company qualifies and is included on NASDAQ's
National Market System, it will use its best efforts to maintain the listing.
If the Company fails to achieve or maintain its eligibility for listing on
NASDAQ's National Market System, the liquidity of the shares purchased by
investors may be reduced.
43
DIVIDENDS
The Company can give no assurance that it will generate earnings from
which cash dividends can be paid. However, Management may follow a policy of
retaining all such earnings to finance the development of its business. Such
a policy could be maintained so long as necessary to provide working capital
for the Company's operations. Any dividends that may be paid in the future
will be dependent upon the financial requirements of the Company and all
other relevant factors.
REPORTS TO SHAREHOLDERS
The Company will furnish annual reports to its shareholders that will
include audited financial statements and such other interim reports as
management deems appropriate.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock and
Warrants is American Stock Transfer and Trust Company, 40 Wall Street, New
York, New York 10005.
LEGAL PROCEEDINGS AND OTHER MATTERS
Legality of the Shares of Common Stock being offered hereunder and certain
other matters have been passed upon for the Issuer by Doros & Brescia, P.C.
1140 Avenue of the Americas, New York, NY, 10036.
KMS is a co-defendant in a legal action in which the plaintiff alleges
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demands compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. KMS denies the allegations and
believes that the ultimate resolution of this matter will not have a material
adverse impact on its financial condition. However, the ultimate
determination of this case cannot be determined at this time.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the three fiscal periods in the period then
ended, included herein, have been included in this Prospectus in reliance
upon the report of Eichler Bergsman & Co., LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
INDEMNIFICATION
The Company has provisions in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors which allows, the
Company, among other things, to pay for the expenses of an officer of
director in connection with legal proceedings brought about because of the
person's position with the Company.
FURTHER INFORMATION
The Company has filed with the Washington D.C. Office of the Securities
and Exchange Commission, a registration statement on form S-1 under the
Securities Act of 1933, as amended, with respect to the Common Shares to
which this Prospectus relates. As permitted by the Rules and Regulations of
the SEC, this Prospectus does not contain all of the information set forth in
the Registration Statement. For further information with respect to the
Company and the Shares offered hereby, reference is made to the Registration
Statement, including exhibits thereto, which may be reviewed and copies
obtained from the Public Reference Branch, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
44
INDEX TO FINANCIAL STATEMENTS
[Enlarge/Download Table]
UNITED STATES FINANCIAL GROUP, INCORPORATED:
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 ............................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 ...................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 ...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 ...................................................... F-6
Notes to Consolidated Financial Statements .............................................. F-7
SUREAL INTERNATIONAL, INC.:
Independent Auditors' Report ............................................................ F-15
Balance Sheets at December 31, 1996 and 1997 ............................................ F-16
Statements of Operations for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ...................... F-17
Statements of Stockholders' Equity for the period August 10, 1995 (inception) to December
31, 1995 and the Years ended December 31, 1996 and 1997 ............................... F-18
Statements of Cash Flows for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ...................... F-19
Notes to Financial Statements ........................................................... F-20
KLEIN, MAUS, SHIRE, INC.:
Independent Auditors' Report ............................................................ F-23
Balance Sheets at December 31, 1996 and 1997 ............................................ F-24
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 ........... F-25
Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997.. F-26
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 ........... F-27
Notes to Financial Statements ........................................................... F-28
F-1
INDEPENDENT AUDITORS' REPORT
United States Financial Group, Incorporated
New York, NY
We have audited the consolidated balance sheets of United States Financial
Group, Incorporated and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the three years ended December 31, 1995, 1996, and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Klein Maus &
Shire, Inc , a wholly-owned subsidiary, which statements reflect total assets
of $1,960 and $932,837 as of December 31, 1995 and 1996, respectively, and
total revenues of $1,031 and $248,989 for the years then ended. Those
statements were audited by other auditors whose reports have been furnished
to us, and our opinion, insofar as it relates to the amounts included for
Klein Maus & Shire, Inc., is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United States Financial Group,
Incorporated and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations, stockholders' equity, and their cash flows for
the three years ended December 31, 1995, 1996, and 1997 in conformity with
generally accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998, except for
Note 4 as of April 10, 1998
F-2
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
ASSETS
Cash and cash equivalents (Note 2).................................... $ 56,120 $ 394,493
Deposit at clearing broker (Note 5)................................... 255,651 103,285
Securities owned at market value (Notes 2f and h)..................... 361,506 99,729
Accounts receivable................................................... 149,662 4,231
Inventories (Note 2e)................................................. -- 118,554
Fixed assets at cost, net of accumulated depreciation and
amortization (Notes 2g and 6)........................................ 116,780 317,457
Other assets (Note 7)................................................. 202,121 150,127
------------- -------------
Total Assets........................................................ $ 1,141,840 $ 1,187,876
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to clearing broker (Note 5)...................................... $ -- $ 32,250
Accounts payable..................................................... 77,931 93,016
Accrued expenses, and other.......................................... 165,396 263,404
Securities sold, not yet purchased at market value (Notes 2f and 8) . 1,113 1,575
Notes payable to officers/stockholders (Note 9)...................... -- 210,000
Long-term capitalized lease obligations (Note 10).................... -- 46,179
------------- -------------
Total Liabilities................................................... 244,440 646,424
------------- -------------
Minority interest (Note 11)........................................... 504 773
------------- -------------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 1, 3, and 11):
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
40,000 (1997) shares issued and outstanding......................... -- 4
Common stock, $.0001 par value; 30,000,000 shares authorized;
10,694,634 (1997) shares issued and outstanding..................... -- 1,069
Paid-in capital...................................................... 2,134,687 3,400,103
Deficit.............................................................. (1,237,791) (2,860,497)
------------- -------------
Total stockholders' equity.......................................... 896,896 540,679
------------- -------------
Total liabilities and stockholders' equity.......................... $ 1,141,840 $ 1,187,876
============= =============
The accompanying notes are an integral part of this statement.
F-3
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------- -------------
Revenues:
Commissionable sales (Notes 2h and 3) ....... $ 995,670 $21,594,562 $31,720,456
Cost of commissionable sales................. 977,173 20,720,459 30,459,297
------------ ------------- -------------
Commissions.................................. 18,497 874,103 1,261,159
Commissions on brokerage trades.............. -- 243,097 863,673
Trading income (Notes 2f and h).............. -- -- 1,658,197
Other income................................. 37,500 71,153 413,189
------------ ------------- -------------
Total revenue............................... 55,997 1,188,353 4,196,218
------------ ------------- -------------
Expenses:
Officers' compensation....................... 65,250 234,173 975,155
Compensation and related expenses............ 18,635 595,814 1,536,246
Clearance and floor brokerage................ -- 272,035 158,184
Occupancy, office, and administrative
expense..................................... 53,104 526,912 955,854
Professional fees............................ -- 310,032 273,039
Communications............................... -- 68,343 317,447
Regulatory fees and expenses................. -- 44,608 93,919
Other expenses (Note 13)..................... -- -- 800,472
------------ ------------- -------------
Total expenses.............................. 136,989 2,051,917 5,110,316
Net loss...................................... $ (80,992) $ (863,564) $ (914,098)
============ ============= =============
Net loss per share............................ $ (.01) $ (.08) $ (.09)
============ ============= =============
Weighted average number of shares
outstanding.................................. 10,694,634 10,694,634 10,694,634
============ ============= =============
The accompanying notes are an integral part of this statement.
F-4
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
[Enlarge/Download Table]
PREFERRED STOCK COMMON STOCK
------------------------ -------------------------
PAR VALUE NUMBER PAR VALUE
NUMBER OF $.0001 OF $.0001 PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ----------- ------------ ----------- ------------ -------------- -----------
Balance--
January 1, 1995...... -- $-- -- $ -- $ 2,094 $ (635) $ 1,459
Capital
contributions........ -- -- -- -- 164,714 -- 164,714
Net loss.............. -- -- -- -- -- (80,992) (80,992)
----------- ----------- ------------ ----------- ------------ -------------- -----------
Balance--
December 31, 1995 ... -- -- -- -- 166,808 (81,627) 85,181
Issuance of shares ... -- -- -- -- 1,965,101 -- 1,965,101
Capital
contributions........ -- -- -- -- 2,778 -- 2,778
Net loss.............. -- -- -- -- -- (863,564) (863,564)
Distributions......... -- -- -- -- -- (292,600) (292,600)
----------- ----------- ------------ ----------- ------------ -------------- -----------
Balance--
December 31, 1996 ... -- -- -- -- 2,134,687 (1,237,791) 896,896
Issuance of shares ... 40,000 4 10,694,634 1,069 1,432,908 -- 1,433,981
Net loss.............. -- -- -- -- -- (914,098) (914,098)
Distributions......... -- -- -- -- (167,492) (708,608) (876,100)
----------- ----------- ------------ ----------- ------------ -------------- -----------
Balance--
December 31, 1997 ... 40,000 $ 4 10,694,634 $1,069 $3,400,103 $(2,860,497) $ 540,679
=========== =========== ============ =========== ============ ============== ===========
The accompanying notes are an integral part of this statement.
F-5
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ------------- ------------
Cash flows from operating activities:
Net loss.......................................... $(80,992) $ (863,564) $ (914,098)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 1,780 15,911 49,894
Increase in deposit at clearing broker .......... -- -- (103,285)
(Increase) decrease in securities owned ......... -- (361,506) 261,777
(Increase) decrease in accounts receivable ...... -- (149,662) 145,431
Increase in inventories.......................... -- -- (118,554)
Increase (decrease) in other assets.............. (12,203) (189,917) 52,742
Increase (decrease) in due to clearing brokers,
net............................................. -- (255,651) 287,901
Increase (decrease) in accounts payable ......... 11,706 (3,212) 84,522
Increase in accrued expenses..................... 8,305 226,527 28,572
Increase in securities sold, not yet purchased .. -- 1,113 462
Increase in notes payable to
officers/stockholders........................... -- -- 210,000
----------- ------------- ------------
Total adjustments............................... 9,588 (716,397) 899,462
----------- ------------- ------------
Net cash used by operating activities ......... (71,404) (1,579,961) (14,636)
----------- ------------- ------------
Cash flows from investing activities: .............
Purchase of furniture, equipment, and leasehold
improvements..................................... (7,117) (127,354) (250,570)
----------- ------------- ------------
Cash flows from financing activities:
Increase in capitalized lease obligation, net .... -- -- 46,179
Proceeds from issuance of common and preferred
stock............................................ 166,808 1,968,383 1,433,500
Distributions to stockholders..................... (9,890) (292,600) (876,100)
----------- ------------- ------------
Net cash provided by financing activities ..... 156,918 1,675,783 603,579
----------- ------------- ------------
Net increase (decrease) in cash.................... 78,397 (31,532) 338,373
Cash--beginning of year............................ 9,255 87,652 56,120
----------- ------------- ------------
Cash--end of year.................................. $ 87,652 $ 56,120 $ 394,493
=========== ============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense................................. $ -- $ 5,417 $ 21,110
=========== ============= ============
Income taxes..................................... $ -- $ -- $ 2,800
=========== ============= ============
The accompanying notes are an integral part of this statement.
F-6
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
United States Financial Group, Incorporated ("USFG or the "Company") is a
holding company, incorporated under the laws of the State of Delaware in
December 1996. USFG's main business purpose is to acquire undervalued or
reasonably priced companies in diversified, well-established industries.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS") is an investment banking firm, a member of
the National Association of Securities Dealers, Inc. (the "NASD") and
registered with the Securities and Exchange Commission (the "SEC"). Sureal
International, Inc. ("Sureal") is a direct marketing company that distributes
personal care and nutritional products in Russia and other republics of the
former Soviet Union through a network of independent distributors.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated was formed to be an asset management and
international financial consultancy company. U.S. Military Resale Group,
Incorporated was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
The Company acquired KMS through a share exchange effected on March 31,
1997 in which KMS' sole common shareholder exchanged 18,889,267 shares of
KMS' common stock (representing 100% of the total outstanding common shares
of KMS) for 18,889,267 shares of the Company's Common Stock. This merger
involving two entities under common control was accounted for as a pooling of
interests.
On December 3, 1997 the Company entered into an exchange agreement with
Sureal and its stockholders to exchange all outstanding common shares of
Sureal for newly-issued Common Shares of USFG, which shares will have a
market value of $11,250,000 (see Note 3). KMS, as a broker-dealer and
investment bank, will be the entity responsible for obtaining and providing
the capital necessary to complete the transaction.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
A summary of the Company's significant accounting and reporting policies
is as follows:
a. Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
b. Use of Estimates
The preparation of these consolidated 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 dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates include determining the
need for reserves and accruals for product returns, outcome of contingencies,
obsolete inventory and taxes. Actual results could differ from these
estimates.
c. Credit Risks
KMS maintains its cash accounts primarily with one bank. At December 31,
1997, KMS had an amount on deposit with such bank that exceeded the balance
insured by the Federal Deposit Insurance Corporation in the amount by
$257,070.
KMS executes, as agent, securities transactions on behalf of its
customers. If either a customer or a counterparty fails to perform, KMS may
sustain a loss if the market value of the security is different from the
contract value of the transaction. KMS as a nonclearing broker does not
handle any customer funds
F-7
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES (Continued)
or securities. The responsibility for processing customer activities resides
with KMS' clearing agent, Cowen & Company. KMS' customers are located
throughout the United States as well as in foreign countries.
d. Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents
include cash due from banks and brokerage accounts, certificates of deposit
and highly liquid instruments with original maturities of 90 days or less.
e. Inventories
Inventories consist of merchandise purchased by Sureal for resale and are
stated at the lower of cost or market using the first-in, first-out cost flow
assumption.
f. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective fair
values because of the short maturities of these instruments. The fair values
of securities owned and securities sold, not yet purchased are recorded
primarily at quoted prices for those or similar instruments. Changes in the
market value of these securities are reflected currently in the results of
operations for the year.
g. Fixed Assets
Fixed Assets are recorded at cost less accumulated depreciation or
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of such assets. At December 31, 1997 and 1996, all
such assets had an estimated useful life of five years. Leasehold
improvements are amortized over the lesser of their estimated useful lives or
the remaining terms of their respective leases. Expenditures for maintenance
and repairs are charged to expense as incurred.
h. Revenue Recognition
Commissions on product sales are recognized when products are shipped and
title passes to independent distributors.
Securities transaction and related revenue are recorded on a trade date
basis. Managers' fees, underwriters' fees, and other underwriting revenues
are recognized at the time the related underwriting is completed.
i. Income Taxes
The Company uses the liability method in compliance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Prior to its merger with the Company, Sureal had elected to be taxed as an
S corporation whereby the Federal and state income tax effects of Sureal's
activities accrued directly to its stockholders. There are no pro forma
Federal, state and local income tax provisions for any of the three years in
the period ended December 31, 1997 because on a consolidated basis net losses
were incurred in each of those years.
USFG intends to file a consolidated Federal corporation income tax return
for the year ended December 31, 1997. Net operating loss carrryforwards
amount to approximately $2,740,000 expiring in 2011 and 2012. No deferred tax
assets have been established for the potential benefits associated with these
carryforwards because of the uncertainty in utilizing net operating loss
carryforwards.
F-8
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES (Continued)
j. Loss Per Share
The loss per share is based on 10,694,634 common outstanding shares, for
each year presented which gives retroactive effect to the (i) two-for-one
reverse split effected on December 3, 1997 and (ii) the 750,000 shares of
common stock to be issued in connection with the Sureal merger (see Note 3).
The calculation does not assume the conversion of Preferred Stock because the
impact of such conversions would be anti-dilutive.
k. Restatement and Reclassification for Reverse Stock Splits
On December 8, 1997, the Company ratified a one-for-two reverse stock
split of common stock. All share and per share amounts affecting net loss per
share, weighted average number of common and common equivalent shares
outstanding, common stock and preferred stock issued and outstanding,
additional paid-in-capital and all other stock transactions presented in
these financial statements have been restated to reflect the
one-for-two-reverse stock split.
l. Industry Segment and Geographic Area
KMS operates as a broker-dealer of securities. Its customers are located
throughout the United States as well as internationally.
Sureal operates in a single industry, which is the direct marketing of
personal care and nutritional products, and in a single geographic area,
which is Russia and the republics of the former Soviet Union. In 1998 and
subsequent years, Sureal expects to operate in additional countries,
including the United States.
NOTE 3 -- MERGER WITH SUREAL
Sureal International, Inc. ("Sureal"), a Delaware corporation established
on August 10, 1995 as Legacy Export, Inc., changed its name in October 1997,
and is headquartered in Orem, Utah.
Through December 31, 1997 Sureal's income was primarily earned from
commissions. At the end of 1997 the nature of Sureal's business changed.
Sureal beginning in November 1997 began to buy its products directly from
manufacturers and sell such products in January 1998 directly through a
network of independent distributors.
On December 3, 1997 Sureal agreed to exchange all of its outstanding
shares of common stock for an estimated 750,000 shares of USFG Common Stock,
that will have an aggregate market value of $11,250,000 at the closing date
of an Initial Public Offering (the "Offering") contemplated by USFG. The
actual number of USFG Common Shares to be issued to the Sureal Stockholders
shall be the quotient obtained by dividing $11,250,000 by the opening sales
price per share of the USFG Common Shares sold to the public in the Offering.
The final number of USFG Common Shares issued to the Sureal Stockholders
shall be adjusted and finalized on the closing date of the Offering. The
accompanying financial statements have been prepared on the basis that the
750,000 Common Shares of USFG have been issued to the Shareholders of Sureal
in exchange for all their common shares. In the event that the Offering is
not completed by August 31, 1998, the Sureal Shareholders will have the
option of terminating the Exchange Agreement in which case each of the
parties will return all shares exchanged.
USFG accounted for the foregoing transaction, which resulted in Sureal
becoming a wholly-owned subsidiary of USFG, as a pooling of interests in
conformity with Opinion Number 16 of the Accounting Principles Board.
Accordingly, the results of Sureal's operations are included for all periods
presented.
F-9
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- REGULATORY MATTERS
KMS
KMS is subject to the Securities and Exchange Commission's uniform net
capital rule (Rule 15c3-1) which requires the maintenance of minimum net
capital, as defined, and also requires that the ratio of aggregate
indebtedness to aggregate net capital shall not exceed 15 to 1. Dividends may
not be paid nor capital withdrawn if such action results in the ratio of
aggregate indebtedness to aggregate net capital exceeding 10 to 1. At
December 31, 1997, KMS' aggregate net capital as defined was $234,481
(compared to a requirement of $100,000) and its ratio of aggregate
indebtedness to aggregate net capital was 1.40 to 1 (compared to a
requirement of not more than 15 to 1).
KMS is subject to the rules and regulations promulgated by various
Federal, state and industry regulatory and governmental agencies, including
the SEC and the NASD. Failure to comply with rules and regulations of these
organizations could result in fine, suspension or other civil or criminal
remedies. Certain of these regulatory bodies perform audits or other
procedures to ensure compliance with their rules and regulations. The NASD
completed an audit of KMS in February 1998, at which time it issued a
preliminary letter of audit findings in which it set forth certain alleged
exceptions and areas of noncompliance noted during the performance of its
audit procedures. Based on a review of the letter and discussions with the
NASD auditors, management of KMS and its counsel do not believe that the
ultimate resolution of the matters described in such letter will have a
material adverse effect on KMS' financial position or results of operations.
However, the ultimate outcome of this matter cannot be determined at this
time. As of April 10, 1998, the NASD has not issued any further
correspondence to KMS or had further discussions with KMS' management
concerning its audit.
SUREAL
Sureal is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
Sureal's direct selling system. Although management believes that Sureal is
in compliance, in all material respects, with the statutes, laws, rules and
regulations of every jurisdiction in which it operates, no assurance can be
given that Sureal's compliance with applicable statutes, laws, rules and
regulations will not be challenged by domestic or foreign authorities or that
such challenges will not have a material adverse effect on Sureal's future
financial position or results of operations or cash flows.
NOTE 5 -- RECEIVABLE FROM AND PAYABLE TO BROKER-DEALER AND CLEARING
ORGANIZATIONS
KMS introduces all customer transactions in securities traded on U.S.
securities markets to its clearing broker on a fully disclosed basis. The
agreement between KMS and its clearing broker provides that KMS is obligated
to assume any exposure related to nonperformance by customers or
counterparties. KMS monitors clearance and settlement of all customer
transaction on a daily basis. In accordance with the clearing agreement, KMS
deposited $100,000 in a standby money reserve fund with Cowen & Company. Such
deposit earns interest at a rate defined in the agreement.
The exposure to credit risk associated with the nonperformance of customer
and counterparties in fulfilling their contractual obligations pursuant to
these securities transactions can be directly impacted by volatile trading
markets which may impair the customers's or counterparty's ability to satisfy
their obligations to KMS. In the event of nonperformance, KMS may be required
to purchase or sell financial instruments at unfavorable market prices
resulting in a loss. Management does not anticipate material instances of
nonperformance by customers and counterparties in the above situations.
F-10
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- FIXED ASSETS
Fixed assets consist of the following:
[Download Table]
DECEMBER 31,
----------------------
1996 1997
---------- ----------
Furniture and fixtures......................... $ 63,372 $161,335
Equipment...................................... 71,099 191,403
Leasehold improvements......................... -- 32,302
---------- ----------
Less accumulated depreciation and
amortization.................................. 134,471 385,040
17,691 67,583
---------- ----------
$116,780 $317,457
========== ==========
NOTE 7 -- OTHER ASSETS
Other assets consist of the following:
[Download Table]
DECEMBER 31,
---------------------
1996 1997
---------- ---------
Employee and broker receivables................ $106,128 $ 46,082
Prepaid expenses and miscellaneous
receivables................................... 94,604 68,647
Deposits....................................... 1,389 35,398
---------- ---------
$202,121 $150,127
========== =========
The employee and broker receivables relate principally to advances and
expenses in excess of commission earnings and inventory losses charged to
registered representatives.
NOTE 8 -- TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by KMS.
NOTE 9 -- NOTES PAYABLE TO OFFICERS/STOCKHOLDERS
At December 31, 1997, Sureal is obligated under the term of 8% demand
notes payable in the aggregate principal amount of $210,000 due to three
officers/stockholders. The proceeds of such notes were principally used to
purchase inventory.
F-11
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- CAPITALIZED LEASE OBLIGATIONS
Included in fixed assets are the following assets held under capital
leases at December 31, 1997:
[Download Table]
Equipment..................... $52,003
Less accumulated
depreciation................. 5,200
---------
$46,803
=========
Future minimum lease payments for assets under capital leases are as
follows:
[Download Table]
1998........................................ $16,304
1999........................................ 16,304
2000........................................ 16,304
2001........................................ 16,304
2002........................................ 3,682
---------
Total minimum lease payments................ 68,898
Less amount representing interest........... 22,719
---------
Present value of net minimum lease
payments................................... $46,179
=========
There were no such assets at December 31, 1996.
NOTE 11 -- CAPITAL STRUCTURE
USFG is a Delaware corporation with its principal offices located at 110
Wall Street, New York, New York. It is authorized to issue up to 30,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock. Each share
of Common Stock entitles the holder thereof to one vote. There are no
cumulative voting rights or privileges. The Preferred Shares are nonvoting
and do not have a stated dividend rate. Holders of the preferred shares do
receive preference over holders of common shares in the event of liquidation.
In 1997, USFG received $200,000 from the issuance of 40,000 Preferred Shares.
KMS issued 773,275 shares of Series A convertible preferred stock and
raised an aggregate of $2,744,500 in 1996 and 1997 pursuant to a private
placement offering memorandum dated April 15, 1996. Each such share was
convertible into one share of KMS' common stock at a price of $3 per share.
The conversion feature remains in effect for a period of three years from the
date of issuance. The preferred share agreement was amended to permit the
holders of preferred shares to convert such shares into Common Shares of USFG
at a price of $3 per share. The par value of the KMS preferred shares is
shown as minority interest in the accompanying consolidated balance sheets.
From January to March 1998, the Company sold 12 Units of Bridge Financing
for an aggregate of $600,000 resulting in net proceeds of approximately
$575,000. Each Unit consists of (i) a 10% Promissory Note in the principal
amount of $50,000 due one year from the date of issuance and (ii) 1,667
shares of the Company's Common Stock. The holders of such shares of Common
Stock have certain registration rights. For financial reporting purposes, a
portion of the net proceeds will be allocated to the value of the Common
Stock. The resulting debt discount will be amortized to operations over the
term of the Promissory Notes.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Litigation
KMS is a co-defendant in legal action in which the plaintiff alleges that
KMS and certain of its representatives sold the plaintiff securities through
fraudulent sales practices, misrepresentations and
F-12
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- CAPITALIZED LEASE OBLIGATIONS (Continued)
omissions and that certain trades were unauthorized. The complaint demands
compensatory damages of $254,000, rescission damages of $100,000, unspecified
punitive damages, costs and attorneys' fees. KMS denies the allegations and
believes that the ultimate resolution of this matter will not have a material
adverse impact on its financial condition. However, the ultimate resolution
cannot be determined at this time.
Lease Agreements
The Company leases office space under noncancelable long-term operating
leases having minimum future operating lease obligations as follows at
December 31, 1997:
[Download Table]
YEAR ENDING
DECEMBER 31, AMOUNT
-------------- ----------
1998........... $366,000
1999........... 370,000
2000........... 348,000
2001........... 315,000
2002........... 210,000
Rental expense for operating leases totaled $8,000, $146,000, and $295,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
Employment Agreements
USFG has entered into employment agreements with two officers under which
it has agreed to pay such officers annual aggregate salaries of $600,000
through 2003. Sureal has entered into employment agreements with three
officers under which it has agreed to pay such officers annual aggregate
salaries of $360,000 through 2003. Sureal has also entered into a consulting
agreement with a member of the Board of Directors calling for the annual
payment of $75,000, subject to adjustment based on actual work performed,
through 2001.
NOTE 13 -- OTHER EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
[Download Table]
Settlement of customer guarantee............. $282,483
Preoperating costs for office in Bahrain
(a)......................................... 517,989
----------
Total....................................... $800,472
==========
------------
(a) The Company has incurred such costs to open an office of a
broker-dealer in Bahrain. Although the Company anticipates that all
necessary approvals for this branch will be obtained, no assurances
thereof can be given. Therefore, all such costs have been charged to
operations as incurred.
NOTE 14 -- SEGMENT REPORTING
The Company's operations are now reported in two segments. KMS is a
broker-dealer of securities and Sureal is a direct marketing company involved
in the distribution of personal care and nutritional products in Russia and
other republics of the former Soviet Union.
Identifiable assets are those assets used exclusively in the operations of
each business segment. Corporate assets are principally cash and investments.
F-13
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- CAPITALIZED LEASE OBLIGATIONS (Continued)
A summary of segment data follows:
[Enlarge/Download Table]
1997 SUREAL KMS CORPORATE ELIMINATIONS TOTAL
---- ------------ ----------- ----------- -------------- ---------
Net revenues........ $1,328,367 $ 2,914,197 $ -- $ 46,346 $4,196,218
Operating profits .
(losses)............ 613,447 (1,402,457) (914,098) 789,010 (914,098)
Identifiable
assets............. 232,501 878,712 541,452 (464,789) 1,187,876
1996
----
Net revenues........ $ 939,364 $ 248,989 $ -- $ -- $1,188,353
Operating profits .
(losses)............ 385,920 (1,249,484) -- -- (863,564)
Identifiable
assets............. 209,002 932,838 -- -- 1,141,840
1995
----
Net revenues........ $ 54,965 $ 1,032 $ -- $ -- $ 55,997
Operating profits .
(losses)............ (81,494) 502 -- -- (80,992)
Identifiable
assets............. 103,232 1,960 -- -- 105,192
Capital expenditures and depreciation expense were not significant during
the periods presented.
F-14
INDEPENDENT AUDITORS' REPORT
Sureal International, Inc.
Orem, Utah
We have audited the accompanying balance sheets of Sureal International,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period August 10,
1995 (date of inception) through December 31, 1995 and for the two years
ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sureal International,
Inc. as of December 31, 1996 and 1997, and the results of its operations,
stockholders' equity, and its cash flows for the period August 10, 1995 (date
of inception) through December 31, 1995 and for the two years ended December
31, 1996 and 1997 in conformity with generally accepted accounting
principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998
F-15
SUREAL INTERNATIONAL, INC.
BALANCE SHEETS
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1996 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents (Note 2b).............................. $ 38,659 $ 29,750
Accounts receivable.............................................. 149,662 4,231
Inventories (Note 2d)............................................ -- 118,554
Due from employees............................................... 3,984 --
Prepaid expenses and other current assets........................ 1,650 24,141
---------- ----------
Total current assets............................................ 193,995 176,676
Furniture and equipment, net of accumulated
depreciation (Notes 2f and 4).................................... 13,658 50,536
Deposits.......................................................... 1,389 5,289
---------- ----------
$209,002 $232,501
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 8,494 $ 93,016
Accrued expenses................................................. 21,189 12,820
Notes payable to officers/stockholders (Note 5).................. -- 210,000
---------- ----------
Total current liabilities....................................... 29,683 315,836
---------- ----------
Commitments and contingencies (Notes 1, 3, and 6)
Stockholders' equity (Note 1):
Preferred stock, 5,000 shares authorized......................... -- --
Common stock, $1 par value; 10,000 shares authorized; 9,000
shares issued and outstanding................................... 9,000 9,000
Paid-in capital.................................................. 158,492 --
(Deficit) retained earnings...................................... 11,827 (92,335)
---------- ----------
Total stockholders' equity...................................... 179,319 (83,335)
---------- ----------
Total liabilities and stockholders' equity...................... $209,002 $232,501
========== ==========
The accompanying notes are an integral part of this statement.
F-16
SUREAL INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
PERIOD FROM
AUGUST 10, 1995
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------- ----------------------------
1995 1996 1997
--------------- ------------- -------------
Revenues:
Commissionable sales (Notes 1 and 2f)............. $995,670 $21,594,562 $31,720,456
Cost of commissionable sales...................... 977,173 20,720,459 30,459,297
--------------- ------------- -------------
18,497 874,103 1,261,159
Other income...................................... 36,468 65,261 67,208
--------------- ------------- -------------
Total revenue.................................... 54,965 939,364 1,328,367
--------------- ------------- -------------
Expenses:
Officers' compensation............................ 65,250 234,173 253,615
Compensation and related expenses................. 18,635 114,136 210,078
Occupancy, office, and administrative expense .... 52,574 205,135 251,227
--------------- ------------- -------------
Total expenses................................... 136,459 553,444 714,920
--------------- ------------- -------------
Net income (loss).................................. $(81,494) $ 385,920 $ 613,447
=============== ============= =============
Pro forma data (Note 2h):
Income (loss) before pro forma income tax
provision........................................ $(81,494) $ 385,920 $ 613,447
Pro forma income tax provision.................... -- 111,000 229,000
--------------- ------------- -------------
Pro forma net income (loss)....................... $(81,494) $ 274,920 $ 384,447
=============== ============= =============
The accompanying notes are an integral part of this statement.
F-17
SUREAL INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIODS ENDED DECEMBER 31, 1995, 1996 AND 1997
[Enlarge/Download Table]
COMMON STOCK
------------------
NUMBER RETAINED TOTAL
OF PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- -------- ----------- ----------- ---------------
Balance--August 10, 1995 . -- $ -- $ -- $ -- $ --
Issuance of shares........ 9,000 9,000 155,714 -- 164,714
Net loss.................. -- -- -- (81,493) (81,493)
-------- -------- ----------- ----------- ---------------
Balance--December 31, 1995 9,000 9,000 155,714 (81,493) 83,221
Capital contribution ..... -- -- 2,778 -- 2,778
Net income................ -- -- -- 385,920 385,920
Distributions............. -- -- -- (292,600) (292,600)
-------- -------- ----------- ----------- ---------------
Balance--December 31, 1996 9,000 9,000 158,492 11,827 179,319
Net income................ -- -- -- 613,446 613,446
Distributions............. -- -- (158,492) (717,608) (876,100)
-------- -------- ----------- ----------- ---------------
Balance--December 31, 1997 9,000 $9,000 $ -- $ (92,335) $ (83,335)
======== ======== =========== =========== ===============
The accompanying notes are an integral part of this statement.
F-18
SUREAL INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
PERIOD FROM
AUGUST 10, 1995
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------- ------------------------
1995 1996 1997
--------------- ----------- -----------
Cash flows from operating activities:
Net income (loss)................................... $(81,493) $ 385,920 $ 613,447
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation....................................... 1,780 5,000 8,700
(Increase) decrease in accounts receivable ........ -- (149,662) 145,431
(Increase) in inventories.......................... -- -- (118,554)
(Increase) decrease in other assets................ (12,203) 5,180 (22,408)
Increase (decrease) in accounts payable............ 11,706 (3,212) 84,522
Increase (decrease) in accrued expenses............ 8,305 12,884 (8,369)
Increase in notes payable to
officers/stockholders............................. -- -- 210,000
--------------- ----------- -----------
Total adjustments................................. 9,588 (129,810) 299,322
--------------- ----------- -----------
Net cash used by operating activities............ (71,905) 256,110 912,769
--------------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets............................ (7,117) (13,321) (45,578)
--------------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. 164,714 2,778 --
Distributions to stockholders....................... -- (292,600) (876,100)
--------------- ----------- -----------
Net cash (used) provided by financing
activities...................................... 164,714 (289,822) (876,100)
--------------- ----------- -----------
Net increase (decrease) in cash...................... 85,692 (47,033) (8,909)
Cash--beginning of period............................ -- 85,692 38,659
--------------- ----------- -----------
Cash--end of period.................................. $ 85,692 $ 38,659 $ 29,750
=============== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense................................... $ -- $ 904 $ 727
=============== =========== ===========
Income taxes....................................... $ -- $ -- $ --
=============== =========== ===========
The accompanying notes are an integral part of this statement.
F-19
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Sureal International, Inc. ("Sureal" or the "Company"), a Delaware
corporation established on August 10, 1995 as Legacy Export, Inc., is a
direct marketing company involved in the distribution of personal care and
nutritional products in Russia and other republics of the former Soviet
Union. Sureal changed its name in October 1997 and is headquartered in Orem,
Utah.
Through December 31, 1997 Sureal's income was primarily earned from
commissions. At the end of 1997 the nature of Sureal's business changed.
Sureal beginning in November 1997 began to buy its products directly from
manufacturers and sell such products in January 1998 directly through a
network of independent distributors.
On December 3, 1997, Sureal agreed to exchange all of its outstanding
shares of Common Stock for an estimated 750,000 shares of common stock of
United States Financial Group, Incorporated ("USFG"), that will have an
aggregate market value of $11,250,000 at the closing date of an Initial
Public Offering (the "Offering") contemplated by USFG. The actual number of
USFG common shares to be issued to the Sureal Shareholders shall be the
quotient obtained by dividing $11,250,000 by the opening sales price per
share of the USFG common shares sold to the public in the Offering. The final
number of USFG Common Shares issued to the Sureal Shareholders shall be
adjusted and finalized on the closing date of the Offering. In the event that
the Offering is not completed by August 31, 1998, the Sureal Shareholders
will have the option of terminating the Exchange Agreement in which case each
of the parties will return all shares exchanged.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
A summary of the Company's significant financial accounting and reporting
policies is as follows.
a. Use of Estimates
The preparation of these 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 periods. Significant estimates include reserves for product
returns, outcome of contingencies, obsolete inventory and taxes. Actual
results could differ from these estimates.
b. Cash and Cash Equivalents
For the purpose of the Statement of Cash Flows, cash equivalents are
short-term, highly liquid instruments with original maturities of 90 days or
less.
c. Inventories
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost or market using the first-in, first-out method.
d. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective values due
to the short maturities of these instruments.
e. Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation or
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of such assets. At December 31, 1996 and 1997, all
such assets had an estimated useful life of five years. Expenditure for
maintenance and repairs are charged to expense as incurred.
F-20
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING (Continued)
f. Revenue Recognition
Commissions on product sales are recognized when products are shipped and
title passes to independent distributors.
g. Income Taxes
The Company complies with Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Prior to its merger with USFG, Sureal elected to be taxed as an S
corporation whereby the Federal and state income tax effects of Sureal's
activities accrued directly to its stockholders. The pro forma income tax
amounts reflect the amount of income tax provisions that would have been
recorded if Sureal had been a C corporation utilizing a net operating loss
carryover during all periods presented.
NOTE 3 -- REGULATORY MATTERS
Sureal is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
Sureal's direct selling system. Although management believes that Sureal is
in compliance, in all material respects, with the statutes, laws, rules, and
regulations of every jurisdiction in which it operates, no assurance can be
given that Sureal's compliance with applicable statutes, laws, rules and
regulations will not be challenged by domestic or foreign authorities or that
such challenges will not have a material adverse effect on Sureal's future
financial position or results of operations or cash flows.
NOTE 4 -- FIXED ASSETS
Fixed assets consists of the following:
[Download Table]
DECEMBER 31,
-------------------
1996 1997
--------- --------
Furniture and fixtures........ $ 6,666 $ 7,090
Equipment..................... 13,772 58,926
--------- --------
20,438 66,016
Less accumulated
depreciation................. 6,780 15,480
--------- --------
$13,658 $50,536
========= ========
NOTE 5 -- NOTES PAYABLE TO OFFICERS/STOCKHOLDERS
At December 31, 1997, Sureal is obligated under the terms of 8% demand
notes payable in the aggregate principal amount of $210,000 due to three
officers/stockholders. The proceeds of such notes were principally used to
purchase inventory.
F-21
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company leases office space, under noncancelable long-term operating
leases having minimum future operating lease obligations as follows at
December 31, 1997:
[Download Table]
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
1998..................... $55,000
1999..................... $55,000
2000..................... $32,000
Rental expense for operating leases totaled $8,000 for the period August 10
(inception) through December 31, 1995 and $19,000 and $36,000 for the years
ended December 31, 1996 and 1997, respectively.
Employment Agreements
Sureal has entered into employment agreements with three officers under
which it has agreed to pay such officers annual aggregate salaries of
$360,000 through 2003. Sureal has also entered into a consulting agreement
with a member of the USFG Board of Directors calling for the annual payment
of $75,000, subject to adjustment based on actual work performed, through
2003.
F-22
INDEPENDENT AUDITORS' REPORT
Klein Maus & Shire, Inc.
New York, NY
We have audited the accompanying statement of financial condition of Klein
Maus & Shire, Inc. as of December 31, 1997 and the related statements of
operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Klein Maus &
Shire, Inc. as of December 31, 1996 and 1997 were audited by other auditors
whose reports dated April 5, 1996 and February 5, 1997, respectively,
expressed unqualified opinions on those statements.
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 Klein Maus & Shire, Inc.
as of December 31, 1997, and the results of its operations, stockholders'
equity, and cash flows for the year then ended in conformity with generally
accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998, except for
Note 3 as of April 10, 1998
F-23
KLEIN MAUS & SHIRE, INC.
BALANCE SHEETS
[Enlarge/Download Table]
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
ASSETS
Cash (Note 2)................................................. $ 17,461 $ 359,130
Deposit at clearing broker (Note 5)........................... -- 103,285
Due from clearing broker...................................... 255,651 --
Securities owned at market value (Note 7)..................... 361,506 99,729
Fixed assets--at cost, less accumulated depreciation and
amortization [Notes 2(c) and 8].............................. 103,122 197,621
Other assets (Note 6)......................................... 195,098 118,947
------------- -------------
Total Assets................................................ $ 932,838 $ 878,712
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses............................................. $ 213,644 $ 250,584
Due to clearing broker (Note 5).............................. -- 32,250
Securities sold, not yet purchased at market value (Note 7) . 1,113 1,575
Capitalized lease obligations (Note 9)....................... -- 46,179
------------- -------------
Total Liabilities........................................... 214,757 330,588
------------- -------------
Commitments and cotingencies (Note 10)
Stockholders' equity:
Preferred stock, $.001 par value; 3,333,400 shares
authorized; 504,009 (1996) and 773,275 (1997) shares issued
and outstanding............................................. 504 773
Common stock, $.001 par value; 22,222,667 shares authorized;
18,889,267 shares issued and outstanding.................... -- 18,889
Paid-in capital.............................................. 1,967,195 3,180,537
Deficit...................................................... (1,249,618) (2,652,075)
------------- -------------
Total stockholders' equity.................................. 718,081 548,124
------------- -------------
Total liabilities and stockholders' equity.................. $ 932,838 $ 878,712
============= =============
The accompanying notes are an integral part of this statement.
F-24
KLEIN MAUS & SHIRE, INC.
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996* 1997
------- -------------- -------------
Revenues:
Commissions on customer trades............... $ -- $ 243,097 $ 863,673
Trading income [Notes 2(a) and (b)] ......... -- 5,892 1,658,197
Other income................................. 1,031 -- 354,671
Interest income--net......................... -- -- 37,656
------- -------------- -------------
Total revenue............................... 1,031 248,989 2,914,197
------- -------------- -------------
Expenses:
Officers' compensation....................... -- -- 379,039
Compensation and related expenses............ -- 481,678 1,326,168
Clearance and floor brokerage................ -- 68,385 158,184
Occupancy, office, and administrative
expense..................................... 530 525,427 668,104
Professional fees............................ -- 310,032 273,039
Communications............................... -- 68,343 317,447
Regulatory fees and expenses................. -- 44,608 93,919
Other expenses (Notes 4 and 11).............. -- -- 1,100,754
------- -------------- -------------
Total expenses.............................. 530 1,498,473 4,316,654
------- -------------- -------------
Net income (loss)............................. $ 501 $(1,249,484) $(1,402,457)
======= ============== =============
------------
* Reclassified for comparative purposes.
The accompanying notes are an integral part of this statement.
F-25
KLEIN MAUS & SHIRE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
[Enlarge/Download Table]
PREFERRED STOCK COMMON STOCK
--------------------- -----------------------
NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- -------- ------------ --------- ------------ -------------- -------------
Balance--
January 1, 1995..... -- $ -- -- $ 9,890 $ -- $ (635) $ 9,255
Capital
contribution........ -- -- -- 2,094 -- 2,094
Distribution......... -- -- -- (9,890) -- -- (9,890)
Net income........... -- -- -- -- -- 501 501
----------- -------- ------------ --------- ------------ -------------- -------------
Balance--
December 31, 1995 .. -- -- -- -- 2,094 (134) 1,960
Issuance of shares .. 504,009 504 -- -- 1,965,101 -- 1,965,605
Net loss............. -- -- -- -- -- (1,249,484) (1,249,484)
----------- -------- ------------ --------- ------------ -------------- -------------
Balance--
December 31, 1996 .. 504,009 $504 -- $ -- $1,967,195 $(1,249,618) $ 718,081
Issuance of shares .. 269,266 269 18,889,267 18,889 1,213,342 -- 1,232,500
Net loss............. -- -- -- -- -- (1,402,457) (1,402,457)
----------- -------- ------------ --------- ------------ -------------- -------------
Balance--
December 31, 1997 .. 773,275 $773 18,889,267 $18,889 $3,180,537 $(2,652,075) $ 548,124
=========== ======== ============ ========= ============ ============== =============
The accompanying notes are an integral part of this statement.
F-26
KLEIN MAUS & SHIRE, INC.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
--------- -------------- --------------
Cash flows from operating activities:
Net income (loss)................................. $ 501 $(1,249,484) $(1,402,457)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... -- 10,911 33,493
Increase in deposit at clearing broker .......... -- -- (103,285)
(Increase) decrease in securities owned ......... -- (361,506) 261,777
(Increase) decrease in other assets.............. -- (195,097) 76,150
(Increase) decrease in due from/to clearing
brokers, net.................................... -- (255,651) 287,901
Increase in securities sold, not yet purchased .. -- 1,113 462
Increase in accrued expenses..................... -- 213,643 36,941
--------- -------------- --------------
Total adjustments............................... -- (586,587) 593,439
--------- -------------- --------------
Net cash used by operating activities ......... 501 (1,836,071) (809,018)
--------- -------------- --------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leasehold
improvements..................................... -- (114,033) (127,992)
--------- -------------- --------------
Cash flows from financing activities:
Increase in capitalized lease obligation, net .... -- -- 46,179
Proceeds from issuance of preferred and common
stock............................................ 2,094 1,965,605 1,232,500
Distribution to stockholder....................... (9,890) -- --
--------- -------------- --------------
Net cash (used) provided by financing
activities.................................... (7,796) 1,965,605 1,278,679
--------- -------------- --------------
Net increase (decrease) in cash.................... (7,295) 15,501 341,669
Cash--beginning of year............................ 9,255 1,960 17,461
--------- -------------- --------------
Cash--end of year.................................. $ 1,960 $ 17,461 $ 359,130
========= ============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense................................. $ -- $ 4,513 $ 20,383
========= ============== ==============
Income taxes..................................... $ -- $ -- $ 2,800
========= ============== ==============
The accompanying notes are an integral part of this statement.
F-27
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Klein, Maus & Shire, Inc. ("KMS") is a registered broker-dealer of
securities under the Securities and Exchange Act of 1934, as amended. It
became a subsidiary of United States Financial Group, Incorporated ("USFG")
in March 1997 when its then sole stockholder exchanged all of KMS'
outstanding common stock for 18,889,267 shares of USFG's common stock. KMS
services institutional, corporate, government and individual clients and
conducts business in securities underwriting, sales and trading of securities
for its own account and that of clients. KMS has entered into a clearing
arrangement with another broker-dealer under which that broker-dealer clears
KMS' securities transactions on a fully disclosed basis.
KMS is an Indiana corporation with its principal offices located at 110
Wall Street, New York, New York. It is authorized to issue up to 22,222,667
shares of common stock and 3,333,400 shares of preferred stock. Each share of
Common Stock entitles the holder thereof to one vote. There are no cumulative
voting rights or privileges. The preferred shares are nonvoting and do not
have a stated dividend rate. Holders of the preferred shares do receive
preference over holders of common shares in the event of liquidation.
KMS issued 773,275 shares of Series A Convertible Preferred Stock in 1996
and 1997 pursuant to a Private Placement Offering memorandum dated April 15,
1996. Each such share is convertible into one share of Common Stock at a
price of $3 per share. The conversion feature remains in effect for a period
of three years from the date of issuance. The preferred share agreement will
be amended to permit the holders of Preferred Shares to convert such shares
into Common Shares of USFG at a price of $3 per share.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
A summary of KMS' significant financial accounting and reporting policies
follows.
a. Revenue Recognition
Securities transactions and related revenue are recorded on a trade date
basis. Managers' fees, underwriters' fees, and other underwriting revenues
are recognized at the time the underwriting is completed.
b. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective values due
to the short maturities of these instruments. The fair values of securities
owned and securities sold, not yet purchased are recorded primarily at quoted
market prices. Changes in the market value of these securities are recorded
currently in the results of operations for the year.
c. Fixed Assets
Fixed assets are stated at cost less accumulated depreciation or
amortization. Depreciation of furniture, fixtures, and equipment is computed
generally by the straight-line method over their estimated useful lives of
five years. Leasehold improvements are amortized over the lesser of their
estimated useful life or the remaining lives of their respective leases.
d. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash due from banks and brokerage accounts, certificates of deposit and
highly liquid debt instruments purchased with a maturity of three months or
less.
F-28
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING (Continued)
e. Income Taxes
KMS and USFG intend to file a consolidated Federal corporation income tax
return for the year ended December 31, 1997. No deferred tax asset has been
established by KMS because of the uncertainty in utilizing net operating loss
carryforwards. Net operating loss carryforwards amount to approximately
$1,800,000 expiring in 2011 and 2012.
f. Credit Risks
KMS maintains its cash accounts primarily with one bank. KMS had on
deposit with such bank at December 31, 1997 an amount that exceeded the
balance insured by the FDIC in the amount of $257,070.
KMS executes, as agent, securities transactions on behalf of its
customers. KMS as a nonclearing broker does not handle any customer funds or
securities. The responsibility for processing customer activities resides
with KMS' clearing agent, Cowen & Company. KMS' customers are located
throughout the United States as well as in foreign countries.
g. 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 these estimates.
NOTE 3 -- REGULATORY MATTERS
KMS is subject to the Securities and Exchange Commission's uniform net
capital rule (Rule 15c3-1) which requires the maintenance of minimum net
capital, as defined, and also requires that the ratio of aggregate
indebtedness to aggregate net capital shall not exceed 15 to 1. Dividends may
not be paid nor capital withdrawn if such action results in the ratio of
aggregate indebtedness to aggregate net capital exceeds 10 to 1. At December
31, 1997, KMS' aggregate net capital as defined was $234,481 (compared to a
requirement of $100,000) and its ratio of aggregate indebtedness to aggregate
net capital was 1.40 to 1 (compared to a requirement of 15 to 1).
KMS is subject to the rules and regulations promulgated by various
Federal, state and industry regulatory and governmental agencies, including
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. (the "NASD"). Failure to comply with rules and
regulations of these organizations could result in fine, suspension or other
civil or criminal remedies. Certain of these regulatory bodies perform audits
or other procedures to ensure compliance with their rules and regulations.
The NASD completed an audit of KMS in February 1998, at which time it issued
a preliminary letter of audit findings in which it set forth certain alleged
exceptions and areas of noncompliance noted during the performance of its
audit procedures. Based on the review of the letter and on discussions with
the NASD auditors, the management of KMS and its counsel do not believe that
the ultimate resolution of the matters described in such letter will have a
material adverse effect on KMS' financial position or operations. However,
the ultimate outcome of this matter cannot be determined at this time. As of
April 10, 1998, the NASD has not issued any further correspondence to KMS or
had further discussions with KMS' management concerning its audit.
NOTE 4 -- WRITE-OFF OF ADVANCES TO USFG
At December 31, 1997, USFG was obligated to KMS in the amount of $818,271
representing net advances made to USFG for various purposes. These advances
are unsecured, have no specified maturity dates and bear interest at 8%.
Interest income includes $46,346 of interest earned on advances to USFG.
F-29
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- WRITE-OFF OF ADVANCES TO USFG (Continued)
USFG utilized the funds advanced from KMS and $200,000 it raised from
issuing its Preferred Stock principally to pay legal, travel, and related
expenses connected with filing an application for an investment banking
license in Bahrain, for compensation paid on behalf of its
officer/stockholder and to purchase fixed assets.
USFG intends to repay such advances from the proceeds of an initial public
offering of its common stock. Accordingly, it will file a Registration
Statement on Form S-1 with the Securities and Exchange Commission. However,
no assurances can be given that such public offering will be successful. An
allowance for the net advances of $818,271, including interest was recorded
by KMS at December 31, 1997 (see Note 11).
NOTE 5 -- RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
ORGANIZATIONS
KMS introduces all customer transactions in securities traded on U.S.
securities markets to its clearing broker on a fully-disclosed basis. The
agreement between KMS and its clearing broker provides that KMS is obligated
to assume any exposure related to nonperformance by customers or
counterparties. KMS monitors clearance and settlement of all customer
transactions on a daily basis. In accordance with the clearing agreement, KMS
deposited with Cowen & Company $100,000 in a standby money reserve fund which
earns interest at a rate defined in the agreement.
The exposure to credit risk associated with the nonperformance of
customers and counterparties in fulfilling their contractual obligations
pursuant to these securities transactions can be directly impacted by
volatile trading markets which may impair the customer's or counterparty's
ability to satisfy their obligations to KMS. In the event of nonperformance,
KMS may be required to purchase or sell financial instruments at unfavorable
market prices resulting in a loss. Management does not anticipate material
instances of nonperformance by customers and counterparties in the above
situations.
NOTE 6 -- OTHER ASSETS
Other assets consist of the following:
[Download Table]
DECEMBER 31,
---------------------
1996 1997
---------- ---------
Employee and broker
receivables.................... $102,144 $ 44,341
Prepaid expenses................ 92,954 44,497
Deposits........................ -- 30,109
---------- ---------
$195,098 $118,947
========== =========
The employee and broker receivables relate principally to advances and
expenses in excess of commission earnings and inventory losses charged to
registered representatives.
NOTE 7 -- TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by KMS. The cost of such
securities was $1,200 (1996) and $1,659 (1997).
F-30
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- FIXED ASSETS
Fixed assets consist of the following:
[Download Table]
DECEMBER 31,
---------------------
1996 1997
---------- ---------
Furniture and fixtures............ $ 56,706 $ 77,245
Equipment......................... 57,327 132,478
Leasehold improvements............ -- 32,302
---------- ---------
114,033 242,025
Less accumulated depreciation and
amortization..................... 10,911 44,404
---------- ---------
$103,122 $197,621
========== =========
NOTE 9 -- CAPITALIZED LEASE OBLIGATIONS
Included in fixed assets are the following assets held under capital
leases:
[Download Table]
DECEMBER 31,
-----------------
1996 1997
------ ---------
Equipment................ $ -- $52,003
Accumulated
depreciation............ -- 5,200
------ ---------
$ -- $46,803
====== =========
Future minimum lease payments for assets under capital leases are as
follows:
[Download Table]
1998........................................ $16,304
1999........................................ 16,304
2000........................................ 16,304
2001........................................ 16,304
2002........................................ 3,682
---------
Total minimum lease payments................ 68,898
Less amount representing interest........... 22,719
---------
Present value of net minimum lease
payments................................... $46,179
=========
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
a. Litigation
KMS is a co-defendant in a legal action in which the plaintiff alleges
that KMS and certain of its representatives sold the plaintiff securities
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demands compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages,
costs and attorneys' fees. KMS denies the allegations and believes that the
ultimate resolution of this matter will not have a material adverse impact on
its financial condition. However, the ultimate resolution cannot be
determined at this time.
F-31
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (Continued)
b. Lease Agreements
KMS is obligated under certain noncancelable operating lease agreements
for office space. Future minimum cash payments, by year and in the aggregate,
required by such leases with initial or remaining terms of one year or more
consist of the following:
[Download Table]
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
1998..................... $310,000
1999..................... $315,000
2000..................... $315,000
2001..................... $315,000
2002..................... $210,000
Rent expense charged to operations amounted to $ -0-, $127,000, and
$269,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
KMS recognizes rent expense on a straight-line basis over the lease terms
of its two operating leases for office space. During the initial six month
periods of each lease, monthly payments were substantially reduced pursuant
to each lease. Accordingly, KMS recorded an accrued liability during these
periods which is amortized in subsequent periods by the excess of the monthly
payments over the monthly expense during the remainder of the leases' terms.
NOTE 11 -- OTHER -- EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
[Download Table]
Settlement of third-party guarantee ....... $ 282,483
Provision for write-off of amount due from
USFG (Note 4)............................. 818,271
-----------
Total.................................... $1,100,754
===========
F-32
[Download Table]
Cover Page .....................................................
Notes to Distribution Table . ..................................
Prospectus Summary .............................................
Table of Contents ..............................................
Introductory Notes and Risk Factors ............................
The Company ...................................................
Risk Factors ..................................................
Dilution .......................................................
Use of Proceeds ................................................
Management .....................................................
Directors and Officers ........................................
Other Information .............................................
Advisory Board ................................................
Principal Stockholders ........................................
Remuneration ..................................................
Certain Transaction ...........................................
Potential Conflicts of Interest ...............................
Selected Financial Data ........................................
Management's Discussion and Analysis of Financial Conditions
and Results of Operation ......................................
Results of Operation ..........................................
Inflation .....................................................
Liquidity and Capital Resources ...............................
Business .......................................................
Introduction ..................................................
Marketing .....................................................
Employees .....................................................
Selling Security Holders .......................................
Capitalization .................................................
Underwriting ...................................................
Description of Common Stock ....................................
Common Stock ..................................................
Market For Stock ...............................................
Dividends ......................................................
Reports to Shareholders ........................................
Transfer Agent and Registrar ...................................
Legal Proceedings and Other Matters ............................
Indemnification ................................................
Further Information ............................................
Consolidated Financial Statements:
United States Financial Group, Incorporated and subsidiaries .
Klein, Maus & Shire, Inc. .....................................
Sureal International, Ltd......................................
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 22. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has a provision in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any such
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 23. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses payable by the Registrant other than underwriting
commissions payable to the Underwriter in connection with the registration
and distribution of the Common Stock registered hereby are as follows:
[Download Table]
Registration fee ............................. $
NASD filing fee .............................. $
"Blue sky" filing fees and expenses (est.) .. $
Printing Expenses (estimated) ................ $ 50,000
Transfer agent and registrar's fees (est.) .. $
Legal fees and expenses ...................... $125,000
Accounting and other professional fees ...... $125,000
Miscellaneous (estimated) .................... $
TOTAL ........................................
ITEM 24. RECENT SALES OF UNREGISTERED SECURITIES.
ITEM 25. EXHIBITS.
The following exhibits can be found as exhibits to the filings listed.
[Download Table]
1 Underwriting Agreement*
3.1 Articles of Incorporation
II-1
3.2 By-Laws
4 Agreements Underlying Preferred Stock*
5 Opinion of Doros & Brescia, P.C.*
10.1 Employment Agreement--Mohammad Ali Khan
10.2 Employment Agreement--Asim S. Kohli
10.3 Employment Agreement--R. Bret Jenkins
10.4 Employment Agreement--Richard Wogksch
10.5 Employment Agreement--Glen Jensen
10.6 Consulting Agreement with EH Associates
10.7 Stock Option Plan*
10.8 Lease Agreement--110 Wall Street, New York
10.9 Lease Agreement--Orem, Utah*
10.10 Clearing Agreement with Cowen & Company
10.11 Share Exchange Agreement between United States Financial Group,
Incorporated and Sureal International, Inc.*
22.1 Consent of Eichler, Bergsman & Co., LLP
22.3 Consent of Doros & Brescia, P.C.*
------------
* Exhibit will be filed with the First Pre-Effective Amendment.
ITEM 26. UNDERTAKINGS.
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission hereto before or hereafter duly adopted pursuant
to authority conferred in that section.
The undersigned registrant hereby undertakes to provide to the Underwriter
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.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this S-1 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 13th day of May, 1998.
UNITED STATES FINANCIAL GROUP,
INCORPORATED
By /s/ Mohammad Ali Khan
--------------------------------
Mohammad Ali Khan, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Mohammad Ali Khan President and Director May 13, 1998
---------------------- (Principal Executive Officer)
Mohammad Ali Khan
/s/ William Triebel Principal Financial May 13, 1998
---------------------- Officer
William Triebel
II-3
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
1 Underwriting Agreement*
3.1 Articles of Incorporation
3.2 By-Laws
4 Agreements Underlying Preferred Stock*
5 Opinion of Doros & Brescia, P.C.*
10.1 Employment Agreement--Mohammad Ali Khan
10.2 Employment Agreement--Asim S. Kohli
10.3 Employment Agreement--R. Bret Jenkins
10.4 Employment Agreement--Richard Wogksch
10.5 Employment Agreement--Glen Jensen
10.6 Consulting Agreement with EH Associates
10.7 Stock Option Plan*
10.8 Lease Agreement--110 Wall Street, New York
10.9 Lease Agreement--Orem, Utah*
10.10 Clearing Agreement with Cowen & Company
10.11 Share Exchange Agreement between United States Financial Group,
Incorporated and Sureal International, Inc.*
22.1 Consent of Eichler, Bergsman & Co., LLP
22.3 Consent of Doros & Brescia, P.C.*
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* Exhibit will be filed with the First Pre-Effective Amendment.
Dates Referenced Herein
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