AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-11821
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------
M.D. LABS, INC.
(NAME OF SMALL BUSINESS ISSUER IN THE CHARTER)
<TABLE>
<S> <C> <C>
Delaware 2099 86-0835247
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1719 West University Drive, Suite 187, Tempe, Arizona 85281; (602) 437-0127
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF
BUSINESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICER)
----------
Hooman Nikzad, Chief Executive Officer
M.D. LABS, INC.
1719 W. University Drive, Suite 187
Tempe, Arizona 85281
(602) 437-0127
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------
COPIES TO:
P. Robert Moya, Esq. Dennis J. Doucette, Esq.
QUARLES & BRADY James A. Mercer III, Esq.
One E. Camelback Road, Suite 400 LUCE, FORWARD, HAMILTON & SCRIPPS LLP
Phoenix, Arizona 85012-1659 600 W. Broadway, Suite 600
(602) 230-5500 San Diego, California 92101
(619) 236-1414
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------
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.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996
1,300,000 SHARES
[M.D. LABS, INC. LOGO]
COMMON STOCK
----------
All of the shares of Common Stock, $.001 par value per share (the "Common
Stock"), offered hereby are being issued and sold by M.D. Labs, Inc., a Delaware
corporation (the "Company").
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. It is currently anticipated that the initial public offering
price per share will be $7.00. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The Company
has made application for the Common Stock to be quoted and traded on the Nasdaq
National Market under the symbol "MDLA" upon the effectiveness of this Offering.
THESE ARE SPECULATIVE SECURITIES THAT SHOULD ONLY BE PURCHASED BY PERSONS WHO
CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE
5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS PRIOR TO INVESTING IN THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Underwriting Proceeds
Price Discounts and to the
to Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......... $ 7.00 $ 0.63 $ 6.37
- --------------------------------------------------------------------------------
Total(3) .......... $ 9,100,000 $ 819,000 $ 8,281,000
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting Offering expenses estimated at $690,000, including the
Underwriters' non- accountable expense allowance, all of which are payable
by the Company. See "Underwriting."
(3) The Company has granted the Underwriters a 45-day option to purchase up to
195,000 additional shares of Common Stock at the Price to Public per share
less the Underwriting Discounts and Commissions solely to cover
over-allotments, if any (the "Over-allotment Option"). If the Over-
allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$10,465,000, $941,850, and $9,523,150, respectively. See "Underwriting."
----------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain conditions, including the right of the
Underwriters to reject orders in whole or in part. It is expected that delivery
of the certificates representing the Common Stock will be made against payment
therefor in San Diego, California on or about three business days from the date
of this Prospectus.
SENTRA SPELMAN
SECURITIES CORPORATION & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
INSIDE FRONT COVER:
12 photographs of containers of company products
(4 rows x 3 columns)
1. Citrium(TM) Lean and Trim Chewing Gum individual packets
2. Citrium(TM) Herbal Tea box
3. Display case of multiple Citrium(TM) Herbal Tea boxes
4. Citrium(TM) Lean & Trim Chewing Gum bottles (large and small)
5. Women's Nature(TM) Natural Balance Herbal Tea-raspberry flavor
box
6. Citrium(TM) Lean & Trim Chewing Gum box
7. DHEA bottles (large and small)
8. Women's Nature(TM) P.M.S. Tea boxes
9. Pro-Line(R) Product line bottles & boxes
10. Daily Detox(R) Herbal Tea box
11. Daily Detox(R) and Daily Detox(R) II bottles
12. Daily Detox(R) Detox Herbal Tea-apple cider cinnamon flavor
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in the Prospectus does not give
effect to the exercise of the Over-allotment Option granted to the Underwriters,
as described under "Underwriting." On May 31, 1996, the Company exchanged
3,000,000 shares of its Common Stock for all of the membership interest in
Houston Enterprises, L.L.C., an Arizona limited liability company ("Houston"),
and the financial statements at May 31, 1996 reflect that exchange. For the
years ended May 31, 1995 and 1996, the Company's predecessor was taxed as a
limited liability company. For income tax reporting purposes, all profits and
losses for such years, and certain other items, were passed through to the
members of Houston. Because the income of the Company will be taxable after May
31, 1996 certain temporary differences between financial and tax reporting are
reflected as an income tax benefit in the statement of income for the years
reported and as deferred tax assets in the balance sheets for the years
reported. Except for historical information, the matters discussed in this
Prospectus are forward-looking and involve risks and uncertainties. See "Risk
Factors."
THE COMPANY
M.D. Labs, Inc. (together with its subsidiaries, the "Company") packages,
markets and distributes natural food and dietary supplements, consisting
primarily of herbal products and sports nutrition products, as well as a weight
management chewing gum product. The Company has focused on new product
innovation, such as its Daily Detox(R) teas targeted to the detoxification
herbal tea market and its Citrium(TM) Lean and Trim chewing gum targeted to the
weight loss chewing gum market. The Company's products generally are sold to
distributors and to health food, drug and other retail stores.
The Company currently markets the Naturally Klean(R), Daily Detox(R), Women's
Nature(TM), HerbalPathic(TM) and Citrium(TM) product lines. Through its
wholly-owned subsidiary, Belnik Investment Group, Inc. doing business as Freedom
Wholesalers, Inc. ("Freedom"), the Company also markets The Stuff(TM) and
Naturally Klean(R) Herbal Tea,(TM) and under the PRO-LINE(R) name it markets
products such as Super ProLean(TM) Fat Burners, Amino Formula "1240"(TM) and
Chromoplex(TM). The Naturally Klean(R) and Daily Detox(R) lines are focused on
the detoxification market. These products are available in teas, capsules and
extracts. Women's Nature(TM) herbal tea and the HerbalPathic(TM) single herb
supplements support and enhance overall health. The Citrium(TM) product line
addresses the weight management market. The Freedom products are intended for
the detoxification and energy supplement markets, and the PRO-LINE(R) products
are formulated for the sports nutrition market.
Sales of herb-based products, including dietary supplements, are estimated to
exceed $1 billion in the United States annually. Industry sources also indicate
that sales of sports nutrition products, excluding beverages, were $675 million
in 1995. The market for natural dietary supplements, weight management and
sports nutrition products is highly fragmented, with intense competition among
larger companies offering full lines of products and smaller single product
companies. The industry is characterized by frequent new product introductions,
short product life cycles, rapid price declines and eroding profit margins. The
Company believes that the competitive forces within the industry are
characterized by product innovation, brand recognition, and effective marketing
and distribution.
The Company is pursuing a three-pronged growth strategy focusing on (i)
expansion of sales of existing products to current and new customers via
increased advertising and marketing and development of additional channels of
distribution; (ii) development of new products which complement the Company's
existing product lines or address new markets with significant growth potential;
and (iii) acquisition of other companies, products or product lines which, as in
the case of new products under internal development, complement the Company's
existing product lines or address new markets with significant growth potential.
The Company was incorporated in Delaware on February 7, 1996 to be the
successor to Houston. On May 31, 1996, the Company acquired all of the
membership interests in Houston and thereupon succeeded to Houston's business.
Houston acquired its original line of products from Houston Enterprises, Inc.,
an Arizona corporation, through an asset purchase completed in February 1994.
Houston Enterprises, Inc. introduced its first product line in 1987. In February
1996, the Company purchased all of the outstanding stock of an affiliated
company, Belnik Investment Group, Inc., an Arizona corporation, which
distributed the Freedom products. See "Certain Transactions." The Company
obtained the PRO-LINE(R) product line through the purchase of substantially all
of the assets of Olympian Global, L.L.C., an Arizona limited liability company
("Olympian Global") in January 1996.
The principal office of the Company is located at 1719 W. University, Suite
187, Tempe, Arizona 85281. The Company's telephone number is (602) 437-0127.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company ................... 1,300,000 shares
Common Stock to be outstanding after the Offering .... 4,300,000 shares(1)
Use of proceeds ....................................... To fund development of sports nutrition product lines;
increase marketing and advertising; upgrade computer
systems; acquire automating equip- ment; and
potentially acquire complementary products and
businesses. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol ................ "MDLA"
</TABLE>
- ----------
(1) Excludes (i) 464,421 common shares issuable upon the exercise of outstanding
warrants as of August 31, 1996, of which warrants for 276,149 shares were
exercisable, and (ii) 228,000 shares issuable upon exercise of outstanding
stock options authorized under the Company's 1996 Stock Option Plan, none of
which were exercisable as of August 31, 1996. See "Description of Capital
Stock -- Warrants" and "Management -- Stock Option Plan."
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary financial data of the Company have been derived from
the audited financial statements of the Company. The summary financial data
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, YEARS ENDED MAY 31,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net sales ...................................... $1,059,325 $ 977,990 $5,191,067 $4,193,997
Cost of goods sold ............................. 320,910 259,395 1,510,479 1,608,568
---------- ---------- ---------- ----------
Gross Profit ................................... 738,415 718,595 3,680,588 2,585,429
Selling, general and administrative expenses ... 565,278 464,539 2,141,926 2,012,641
---------- ---------- ---------- ----------
Income from operations ......................... 173,137 254,056 1,538,662 572,788
Interest expense ............................... 10,783 0 12,991 0
---------- ---------- ---------- ----------
Income before income tax ....................... 162,354 254,056 1,525,671 572,788
Income tax benefit ............................. 0 0 86,039 0
Income tax expense ............................. 64,942 0 0 0
---------- ---------- ---------- ----------
Net income ..................................... $ 97,412 $ 254,056 $1,611,710 $ 572,788
========== ========== ========== ==========
PRO FORMA NET INCOME DATA (UNAUDITED)(1):
Income before income tax ....................... $ 162,354 $ 254,056 $1,525,671 $ 572,788
Pro forma income taxes ......................... 64,942 101,622 610,039 229,115
---------- ---------- ---------- ----------
Pro forma net income ........................... $ 97,412 $ 152,434 $ 915,632 $ 343,673
========== ========== ========== ==========
Pro forma net income per share(2) .............. $ 0.03 $ 0.05 $ 0.29 $ 0.11
========== ========== ========== ==========
Shares used in pro forma net income per share(2) 3,199,140 3,197,940 3,197,940 3,197,940
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1996
(UNAUDITED)
--------------------------------
ACTUAL AS ADJUSTED(3)
----------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 163,309 $ 7,754,309
Working capital ........................ 1,302,829 8,893,829
Total assets ........................... 2,714,072 10,305,072
Long-term debt ......................... 0 0
Total shareholders' equity ............. 2,115,711 9,706,711
</TABLE>
- ----------
(1) For the two years ended May 31, 1996, Houston elected under Internal Revenue
Code Sub-Chapter K to be treated as a limited liability company, and
accordingly, generally was not subject to federal and state income taxes.
For income tax reporting purposes for these years, all profits and losses,
and certain other items, were passed through to the members of Houston.
Since the income of the Company will be taxable after May 31, 1996, income
tax expense for the years ended May 31, 1996 and 1995 has been presented as
if the Company was a C corporation during those years. The income tax
expense was calculated assuming an effective tax rate of 40%.
(2) Based on weighted average common shares and common share equivalents
outstanding as of May 31, 1996, giving retroactive effect to the Company's
conversion in May 1996 from a limited liability company to a corporation,
and the conversion of membership interests into Common Stock. See Note 14 of
Notes to Financial Statements.
(3) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock
offered by the Company hereby (at an assumed offering price of $7.00 per
share net of underwriting discounts and commissions, and other estimated
offering expenses, and exclusive of the Underwriters' Over-allotment
Option). See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
Prospective purchasers of the Common stock should carefully consider the
following risk factors and the other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Strategy." No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The following
matters constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward- looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
LIMITED INDUSTRY EXPERIENCE; RECENT BUSINESS VENTURE. Although the Company
has been profitable from inception, management has not had extensive experience
in the natural dietary supplement business or in the weight management products
business. Several of the Company's employees, however, have been active in the
industry for a number of years, although no employees are health science
professionals. The Company was formed in February 1996 and commenced business
through its predecessor in February 1994. Consequently, it has only a limited
operating history. It can be expected that future operating results may continue
to be subject to many of the problems, expenses, delays and risks inherent in
the early development of a business enterprise and that the Company may have
little control over some of such occurrences. For example, the Company has not
completed the process of updating formal government regulation compliance,
inventory control and processing and management information systems, nor has it
yet received governmental inspections, such as those conducted by entities such
as the Occupational Safety and Health Administration ("OSHA"), the Food and Drug
Administration ("FDA") and Federal Trade Commission ("FTC"), as can be expected
in the industry. There can be no assurance, therefore, that the Company will be
able to continue the development of its business while sustaining profitability
in future periods. See "Business -- Strategy" and "-- Government Regulation."
SHORT PRODUCT LIFE CYCLES; DEPENDENCE ON NEW PRODUCTS. Certain of the
Company's products primarily are used by consumers who are early to adopt new
products. The markets for such products are characterized by factors such as
changing customer demand, short product life cycles and frequent new product
introductions. Such changes and cycles often are not due to identifiable market
factors. The performance of the Company will depend on its ability continually
to develop and market new products that achieve customer acceptance and loyalty,
as well as its ability to adapt its product offerings to meet changing pricing
considerations, consumer preferences and other market factors. The Company's
business, financial condition and results of operations could be materially
adversely affected if the Company were to incur delays in developing new
products or if such new products did not gain market acceptance. Therefore,
there can be no assurance that the Company's existing or future products will be
sufficiently successful to enable the Company to compete effectively in its
current markets or, should the Company's product offerings meet with significant
customer acceptance, that one or more current or future competitors will not
introduce products which compete successfully with the Company's products. See
"Business -- Product Planning, Development and Acquisition."
COMPETITION AND LOW BARRIERS TO ENTRY. The market for health food supplements
and sports nutrition products is characterized by intense competition based on
factors such as product innovation, brand recognition and effective marketing
and distribution. The Company faces substantial competition in its efforts to
capture a significant share of its markets. A number of companies currently
offer competing products and additional competing products most probably will be
introduced by other companies in the future. There can be no assurance that
other companies will not develop products that are similar to those offered by
the Company. In addition, many of the Company's existing and potential
competitors have greater financial, marketing and research capabilities than the
Company. Therefore, these competitors may be better positioned to capture
incremental sales of products comparable to the Company's products which may
become accepted in the mainstream marketplace. See "Business -- Competition."
5
<PAGE>
ABSENCE OF CLINICAL STUDIES, SCIENTIFIC REVIEW AND TESTING. As discussed in
greater detail in the section relating to government regulation, current law
requires the Company to obtain scientific data and substantiation to support its
promotional claims concerning its products. Some products may require advance
FDA approval for the claims, and all product claims must be at least supported
by adequate substantiation. The Company has implemented a policy for collecting
the available substantiation for its product claims, which in most cases
consists of information prepared and supplied by other companies, including the
Company's suppliers. The sufficiency of the Company's substantiation for its
product claims has not been reviewed by any regulatory agency, and the Company
has not provided nor been requested to provide any scientific data to the FDA or
the FTC. There can be no assurance that the substantiation data obtained or
available to the Company in support of its product claims will be deemed
acceptable by the FDA or the FTC, should either agency request such
substantiation in the future. Further, the FTC has recently commenced
administrative proceedings against other businesses in the health food industry,
questioning the sufficiency of their substantiation for various product claims.
There is no assurance that such proceedings by the FTC or the FDA will not be
brought against the Company, and such proceedings or product changes needed to
avoid the commencement of such proceedings could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company markets its products on the premise that they fall within the
category known as "dietary supplements." Current regulations do not require that
this category of products undergo clinical testing or FDA review before they are
marketed. The Company does not conduct or sponsor such studies, nor does it
analyze the contents of products received from third-party manufacturers. See
"Risk Factors -- Reliance on Outside Suppliers and Manufacturers." As a result,
there can be no assurance that the Company's products contain ingredients
precisely as labelled, and there is increased risk that the Company's products
may cause unexpected side effects for which the Company may be liable to the
persons injured and/or the Company may be subject to administrative and judicial
proceedings by the regulatory authorities. Ingredients similar to those
contained in the Company's products have been associated with such adverse
effects. Additionally, the Company has received occasional complaints from
consumers of Daily Detox(R), Daily Detox(R) II and Naturally Klean(R) products
regarding dissatisfaction with product quality or suggesting a connection with
minor physical ailments, or, in one case, a customer's hospitalization. With the
exception of the hospitalization complaint, the Company has responded to the
complaining customers and has resolved their complaints by providing a
replacement or similar product of the Company. In the case of the reported
hospitalization, although the Company believes the complaint is meritless, the
Company has tendered the complaint to its product liability insurance carrier.
The Company has never been served with a product liability lawsuit. Because the
Company is highly dependent upon consumers' perception of the safety and quality
of its products as well as similar products distributed by other companies, the
Company's business, financial condition and results of operations could be
materially adversely affected if any of the Company's products or any similar
products distributed by other companies should prove to be harmful to consumers.
In addition, because of the Company's dependence upon consumer perceptions,
adverse publicity associated with illness or other adverse effects resulting
from consumers' failure to consume the Company's products as suggested by the
Company or other misuse or abuse of the Company's products or any similar
products distributed by other companies could have a material adverse effect on
the Company's business, financial condition and results of operations.
Further, the Company believes that recent growth experienced by the
nutritional supplement market is based in part on national media attention
regarding recent scientific research suggesting potential health benefits from
regular consumption of certain nutritional products. Such research has been
described in major medical journals, magazines, newspapers and television
programs. The scientific research to date is preliminary, and there can be no
assurance of future favorable scientific results and media attention or of the
absence of unfavorable or inconsistent findings. See "Business -- Government
Regulation." There is also no assurance that regulatory agencies will continue
to permit the marketing of such products based on the type of scientific
research available.
Some of the Company's products may not qualify for dietary supplemental
status, and may become the subject of regulatory classification as a "drug" or
"new drug." The absence of clinical studies and scientific review for such
products could require the Company to discontinue their sale until formal FDA
6
<PAGE>
approval of a New Drug Application is obtained. The Company does not expect that
it would be in a position to finance the submission of a New Drug Application.
At present all of the Company's products are of a type which are commonly
marketed by various companies as dietary supplements, and not as "drugs". There
is no assurance as to any of the Company's products that a "drug classification"
might not be imposed. For example, the Company's Naturally Clean(R) product line
consists of products designed to stimulate the body's natural cleansing process.
Such products are today sold by various companies as foods or dietary
supplements. If, by administrative or legislative action, products making such
claims were to be classified as "drugs," these products might no longer be able
to be sold with such claims. In the event that a drug classification is imposed
for any of the claims for which the Company markets its products, it is the
Company's intention to remove such claims from its product labels. This may
adversely affect the Company's ability to promote such products. The Company
cannot anticipate which of its products might be affected by such changes in
classification.
All or any of the above may require the Company to make a business decision
to discontinue the marketing of one or more of its products. There is no
assurance that any such discontinuance or the cumulative effect of such
discontinuance may not have a material adverse effect on the Company's business,
financial condition or results of operations.
UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF GOVERNMENT REGULATIONS. The
manufacturing, processing, formulating, packaging, labelling and advertising of
the Company's products are subject to regulation by one or more federal
agencies, including the FDA, the FTC, the Consumer Product Safety Commission
(the "CPSC"), the United States Department of Agriculture (the "USDA"), and the
Environmental Protection Agency (the "EPA"). The Company's activities are also
regulated by various agencies of the states, localities and foreign countries to
which the Company's products are distributed and in which the Company's products
are sold.
The composition and labelling of dietary supplements, which comprise a
significant majority of the Company's products, is most actively regulated by
the FDA under the provisions of the Federal Food, Drug, and Cosmetic Act ("FFDC
Act"). The FFDC Act has been revised in recent years by the Nutrition Labeling
and Education Act of 1990 ("NLEA") and by the Dietary Supplement Health and
Education Act of 1994 ("DSHEA"). While in the judgment of the Company these
regulatory changes are generally favorable to the dietary supplements industry,
there can be no assurance that the Company will not in the future be subject to
additional laws or regulations administered by various regulatory authorities.
In addition, there can be no assurance that existing laws and regulations will
not be repealed or be subject to more stringent or unfavorable interpretation by
applicable regulatory authorities.
The labelling requirements for dietary supplements have not been clearly
established. In December 1995, the FDA issued proposed regulations to govern the
labelling of dietary supplements. These regulations are expected to become final
later in 1996, and would require the Company to revise all of its dietary
supplement labels in 1997. The FDA has informally stated that it will, subject
to public comment, withhold enforcement of these regulations until January 1,
1998.
Marketing and sale of dietary supplements is to some extent dependent on
avoiding a drug classification for such products. The FDA has not yet delineated
how the drug versus dietary supplement distinctions will be made under the new
law. Some of the Company's products may be regulated separately as foods without
invoking the provisions of the law applicable to dietary supplements. The
adoption of new regulations in the United States or elsewhere, or changes in the
interpretation of existing regulations, could have a material adverse effect on
the Company's business, financial condition and results of operations.
In February and April of 1996, the Company was advised by the offices of the
district attorney of Sonoma County and Napa County, California of certain issues
regarding the label and advertising promotion claims made for the Company's
citrium and super prolean products. These counties requested the Company to
provide substantiation for the efficacy claims made on the labels and in the
advertising for these products. Through correspondence with these counties, the
Company has submitted its substantiation for the claims. The County of Sonoma
also questioned the Company's use of the word "natural" for these products, and
the Company responded by indicating that this use was consistent with current
7
<PAGE>
industry practice. The last correspondence with these counties was in May of
1996, and the Company has not heard further from these counties in response to
the substantiation submitted. See also "Business -- Government Regulation"
regarding substantiation requirements. The Company has also been advised by
several states, including the State of New York, that it may not sell its
Naturally High(TM) herbal energy product or any other product that contains ma
huang or ephedrine in that state. The Company has discontinued selling Naturally
High(TM), the only product of the Company which contained ma huang or ephedrine.
The Company cannot predict the nature of future laws, regulations,
interpretations or applications, nor can it determine what effect either
additional governmental regulations or administrative orders, when and if
promulgated, or disparate federal, state and local regulatory pronouncements
would have on its business in the future. Applicable regulations could, however,
require the reformulation of certain products to meet new standards, recall or
discontinuance of certain products not able to be reformulated, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.
Governmental regulations in foreign countries may also apply to sales of the
Company's products sold in these countries. The Company's international sales to
date have been primarily through distributors serving Japan, Taiwan, Canada,
Korea and Bermuda. The Company relies on its independent distributors in these
countries for compliance with foreign regulations. For example, the Company
altered the formulation of its Citrium(TM) gum for sale in Japan based upon
input from its distributors regarding Japanese law. These distributors are
independent contractors over whom the Company has limited control. There can be
no assurance that the sales of the Company's products comply with foreign
regulations or will continue to do so in the future. In the event of any such
failure, the Company may be subject to penalties for such non-compliance which
would have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, Governmental regulations in
foreign countries where the Company plans to commence or expand sales may
prevent or delay entry into the market or prevent or delay the introduction, or
require the reformulation of certain of the Company's products. See "Business --
Government Regulation."
NON-COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company's business is in the
industry commonly known as the "health food industry" which has been the subject
of many years of vigorous administrative and judicial enforcement by the FDA.
The FDA has taken the position that many businesses which conduct operations
similar to those of the Company are to varying extents in violation of the law.
The Company has recently undertaken a review of its products in light of current
regulations. Because of the evolving status of the regulatory environment and
the early stage in the life cycle of many of the Company's products, the Company
cannot be certain as to which regulations govern its activities. Nevertheless,
the Company believes that some of its products do not or may not comply with
existing regulations in all respects. The Company has commenced making the
modifications that it believes are necessary to come into material compliance
with such regulations. These modifications will apply to all of the Company's
products, and will include revised labeling to incorporate necessary statements
and disclosures (identification of product as a "dietary supplement" and, where
applicable, adding a notice that "This statement [about an efficacy claim] has
not been evaluated by the Food and Drug Administration. This product is not
intended to diagnose, treat, cure, or prevent any disease." After the labeling
changes are made, the Company will also provide formal notice to the FDA that
such statements have been placed on the label of a product. As part of this
process, the Company will also generally review its product line for compliance
with technical requirements such as type size, sufficiency of declaration of
ingredients, as well as for the sufficiency of substantiation for any product
claims. The Company estimates that the cost of making the label changes will be
approximately $35,000. The Company expects that it will be able to comply with
the modifications needed for the labels, but there is no assurance that the
Company's substantiation, for any particular claim will be adequate to support
the continued marketing of products with such claim. A requirement for the
removal of "unsubstantiated claims" from the Company's labeling and advertising
could have a material adverse effect on the Company. See "Business -- Government
Regulation" regarding substantiation requirements.
8
<PAGE>
The Company's facilities are subject to regulation by various governmental
agencies, including state and local licensing, zoning, land use, construction
and environmental regulations and various health, sanitation, safety and fire
codes and standards. Failure to obtain necessary licenses or approvals or
suspension, due to failure to comply with applicable regulations or otherwise,
could interrupt the Company's packaging and distribution operations. The Company
recently became aware of the need for local licensing with respect to certain
aspects of its business. The Company may be subject to criminal or civil
penalties, including orders or injunctions to cease certain operations for
failure to have such licensing. There can be no assurance that the Company can
obtain such licensing without incurring material disruption of its business or
material regulatory penalties, if at all.
EFFECT OF DISCONTINUED PRODUCT. The Company recently discontinued selling its
Naturally High(TM) herbal energy product. Naturally High(TM) represented less
than 1% of revenues in fiscal 1996. This product contains ma huang. Ma huang has
been the subject of certain adverse publicity in the United States and other
countries relating to alleged harmful effects. After numerous reports of adverse
reactions, the FDA has warned that people should not consume ma huang, and
several states and local governments have banned or heavily regulated products
containing ma huang. The FDA has investigated reports linking products
containing ma huang or its active ingredient, ephedrine, to adverse reactions
such as heart problems, stroke and death. The State of New York banned the sale
and distribution of Naturally High(TM) and 19 competitors' products due to this
reported link of products containing ephedrine to adverse reactions. In general,
there has been very vigorous regulatory activity at both the federal and state
level against products which might be construed as a substitute for otherwise
illegal street drugs. Also, on May 23, 1996 Bill Number S.1806 was introduced
into the United States Senate, which would amend the FDDC Act to provide that if
the label or labeling of a dietary supplement claims or implies that it produces
euphoria, heightened awareness, or similar mental or psychological effects --
such a product would be regulated as a drug under the Act. See the discussion
above regarding significance of drug classification.
While the Company believes that Naturally High(TM) is safe when used as
suggested and the Company does not know of any heart problems, strokes, deaths
or other health-related incidents that have been linked to the product, it has
chosen to focus on other products. In August 1996, the Company received a letter
from the FDA, which referred to the recent regulatory activity concerning the
above types of products, and specifically objected to the Company's continued
marketing of Naturally High.(TM) On August 30, 1996, the Company advised the FDA
that the Company had discontinued the sale of Naturally High(TM) and would not
market any other products which contained ma huang or any other type of
ephedrine.
The Company has not received any claims of liability with respect to products
containing ma huang previously sold by the Company, although there can be no
assurance that such claims will not be asserted in the future. See "Business --
Products," "-- Product Liability" and "-- Government Regulation."
PRODUCT CONCENTRATION. Sales of the Company's Naturally Klean(R) and related
products, and Citrium(TM) products accounted for approximately 51% and 25%,
respectively, of the Company's net sales for the fiscal year ended May 31, 1996.
The Company anticipates the sale of such products or a limited number of other
products will continue to contribute a substantial portion of total revenues in
subsequent periods. The market for the Company's products is characterized by
extensive competition, frequent new product introductions, short product life
cycles, rapid product declines, eroding profit margins and changing preferences
of consumers. A decline in the demand for any of the Company's products,
including the foregoing, whether as a result of competition, changes in
demographic trends or other factors, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Products."
DIFFICULTY OF PRODUCT POSITIONING. Approximately 55% of the Company's fiscal
1996 revenue was derived from sales of The Stuff(TM) and Naturally Klean(R).
These products are designed to eliminate temporarily toxins from the body.
However, the Company believes the products instead are often used in preparation
for urine drug testing. A change in drug testing methodology from urine tests to
blood or hair tests could cause a material decrease in sales of The Stuff(TM)
and Naturally Klean(R) and, therefore, in
9
<PAGE>
revenues and profits for the Company. Additionally, there can be no assurance
that the potential association by customers of the Company with such activities
would not hinder market acceptance of the Company's other products as it
attempts to replace any lost revenues from such a change in methodology or seeks
to diversify its product offerings. See "Business -- Products."
EXPOSURE TO PRODUCT LIABILITY. The Company faces a significant risk of
product liability claims in the event that the use of its products is alleged to
have resulted in adverse health effects. To date, no product liability lawsuits
have been brought against the Company. However, a number of the Company's
competitors are routinely sued on product liability claims. Moreover, the
Company's products contain ingredients, although in different combinations or
concentrations, which have been associated with adverse effects. The Company has
purchased product and general liability insurance with general aggregate limits
of $2 million and a $3 million excess liability umbrella policy. Such policies
provide coverage of up to $1 million for each occurrence. There can be no
assurance that liability claims will not exceed the coverage limits or be
excluded by coverage limitations or that such insurance will continue to be
available on commercially reasonable terms or at all. If the Company does not or
cannot maintain sufficient liability insurance, its ability to market its
products may be significantly impaired. In addition, product liability claims
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Product Liability."
LIMITED CAPITALIZATION. After completion of this Offering, the Company will
have approximately $9.58 million in working capital. There can be no assurance
that such capitalization is sufficient to enable the Company to compete
adequately in the industry on a continual basis or to defend itself against
potential liabilities associated with its products. Additionally, the Company
plans to continue to grow through development of its existing products and
through the development and acquisition of new products and existing operating
companies. The planned development and expansion of the Company's business will
place significant demands on the Company's working capital. There can be no
assurance that sufficient capital resources would be available to the Company if
and when required by management, or on terms that would be acceptable to the
Company. In the course of raising such additional capital, the Company may be
required to forego a substantial interest in its future revenues or dilute the
equity interests of existing stockholders, and a change in control could result.
See "Risk Factors -- Competition and Low Barriers to Entry," "-- Exposure to
Product Liability," "Selected Financial Data" and "Business -- General," "--
Strategy" and "-- Competition."
CUSTOMER CONCENTRATION. Over 50% of the Company's revenues are generated from
sales to distributors and large retail accounts, including one account, Naoki
Corporation of Japan ("Naoki"), which constituted $634,000, or approximately
12.2% of the Company's net sales in fiscal year ended May 31, 1996. The Company
does not have written contracts with its primary distributors. Additionally,
seven customers comprised approximately 60% of the accounts receivable balance
at May 31, 1996. Although there can be no assurance that the Company's principal
customers will continue to purchase products from the Company at current levels,
if at all, the Company expects to continue to depend on its principal customers
for a significant portion of its net sales. The loss of any one of such
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Marketing."
RELIANCE ON OUTSIDE SUPPLIERS AND MANUFACTURERS. The Company relies upon
various outside sources to supply its raw materials and to manufacture its
products, many of which obtain raw materials from outside the United States. The
Company has not determined if the outside manufacturers comply with applicable
regulations or licensing requirements or if the foreign jurisdictions provide
the Company recourse for manufacturing defects. The Company does not analyze the
contents of products received from outside suppliers or manufacturers. The
Company currently has no written agreements with any of such sources; however,
the Company's relationships with these sources are believed to be good.
Nevertheless, any disruption in the supply of raw materials, in the
manufacturing volume or delivery schedule, in the pricing or in the quality of
such products is outside of the Company's direct control and could adversely and
materially affect the Company's business, financial condition and results of
operations until replacement sources are established. In addition, the Company's
recourse against such suppliers for any
10
<PAGE>
damages it may suffer may be limited. Because the industry is characterized by a
fragmented manufacturing base, management believes that other outside
manufacturing services could be obtained at similar costs from a number of
alternative sources within a reasonable period of time, with the exception of
the source of most of the Company's herbal products. Management believes the
Company reserves adequate inventory in the event of a need to change suppliers.
However, an interruption in the supply of raw materials, such as through crop
failures or embargoes, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Production."
RELIANCE ON OTHERS TO DEVELOP PRODUCTS. None of the Company's employees are
health science professionals, and the Company itself has not developed any of
the products that it currently sells. To date, it has relied on the acquisition
of product formulas through various asset purchases and the commission of
product development with health science professionals. At present the Company
pays royalties to certain of the developers of the product formulas. See
"Business -- Product Royalties." The Company does not have long-term contracts
with any health science professionals for the development of new products and
will continue for the foreseeable future to rely on third parties to develop new
products. No assurances can be given that such individuals will be willing or
able to develop commercially successful products for the Company, or that such
individuals' services or product formulas will be available on terms that are
advantageous to the Company. See "Business -- Product Planning, Development and
Acquisition."
MANAGEMENT OF GROWTH. The Company plans to expand its overall level of
operations, which is expected to strain the Company's management, technical,
financial and other resources. To manage growth effectively, the Company is
likely to hire additional personnel, implement expanded operating, manufacturing
and financial controls, install enhanced reporting and management information
systems for materials procurement, manufacturing, order processing, system
monitoring, customer service and financial reporting, and otherwise to improve
coordination between product formulation, manufacturing processes, marketing,
sales and finance functions. The Company's failure to expand its sales base and
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Strategy."
SELECTION AND INTEGRATION OF ACQUISITIONS. A key element of the Company's
strategy is expansion through the acquisition of other companies, assets or
product lines. There can be no assurance, however, that the Company will be
successful in identifying appropriate opportunities or negotiating favorable
terms. The integration of any such acquisition is critical to the future
financial performance of the Company after any such acquisition. Complete
integration of any acquisitions could take several quarters to accomplish and
will require, among other things, integration of the companies' respective
product offerings and coordination of their sales and marketing, manufacturing,
research and development and regulatory compliance efforts. The difficulty of
combining companies may be increased by the need to integrate the personnel and
geographic distance between the companies. Changes brought about by any
acquisition may cause key employees or distributors to terminate their
relationship with the Company. In addition, the Company might incur significant
integration or additional operating costs associated with an acquisition. There
can be no assurance that such costs will not have an adverse effect upon the
Company's business, financial condition and results of operations, particularly
in the fiscal quarters immediately following the consummation of any
acquisition, while the operations of the acquired business are being integrated
into the Company's operations. The process of integrating companies may cause
management's attention to be diverted from operating the Company. In addition,
the process of combining two organizations could cause the interruption of, or a
loss of momentum in, the activities of either or both of the companies'
businesses. There can be no assurance that any acquisition will not materially
and adversely affect the Company's business, financial condition or results of
operations or that any such acquisition will enhance the Company's business.
See "Business -- Strategy."
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company depends upon the
active involvement of its senior managers, including its executive officers. The
loss of one or more of such officers could have a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company has not purchased key man insurance on any of its key personnel, it has
entered into
11
<PAGE>
employment agreements with Messrs. Nikzad, Todd Belfer, Djahandideh and Denton
as executive officers. Two of the Company's directors, Harvey Belfer, the father
of Todd Belfer, and Kenneth A. Steel, serve as consultants to the Company on a
part-time basis. They have committed to the Company that they will make their
time available to the Company as its business may require. Although the Company
believes that these directors' time commitments should be sufficient to meet the
demands of the business of the Company, there is no assurance they will continue
to have sufficient time available or that the Company will be able to hire
additional managers with the necessary expertise if the need arises. The
Company's success and growth strategy also depend on its ability to attract and
retain qualified finance, accounting, purchasing, marketing, sales and other
personnel. Such personnel are in high demand and are often subject to competing
offers. There can be no assurance that the Company will be able to attract and
retain the qualified personnel necessary for its business and planned growth.
See "Business -- Production" and "Management -- Employment Agreements."
UNCERTAINTY REGARDING PROPRIETARY RIGHTS. The Company's success will depend
in significant part on its ability to retain protection of its proprietary
rights, including preservation of its trade secrets and know-how, without
infringing on the rights of others. The Company's products are sold under a
variety of trademarks and trade names. While the Company believes that it has
valid proprietary interests in all currently used trademarks and trade names in
the United States, only certain of the trademarks have been granted registration
with the United States Patent and Trademark Office ("U.S. Pat. Off."), others
have been filed with the U.S. Pat. Off. and are in the process of being
registered, and others have not been filed. Additionally, the Company entered
into an agreement with Olympian Global in January 1996 for the acquisition of
rights to the federally-registered trademark, PRO-LINE(R), as well as certain
related names and marks. The Company believes Olympian Global may have breached
certain aspects of the acquisition agreement relating to the trademark and trade
name rights transferred thereunder. The Company is unable to predict the extent
(if any) to which its rights to the assigned trademark and trade name may be
affected by this matter. See "Business Products -- Sports Nutrition Products."
There can be no assurance that the Company will be able to successfully defend
its trademarks or trade names against claims that might be brought by third
parties or obtain protection for trademarks or trade names used with new
products. See "Business -- Proprietary Rights: Trade Names, Trademarks and
Copyrights."
The Company does not maintain patent protection for its products and
processes, but rather relies on trade secret laws and common law concepts of
confidentiality to protect its product formulations. There can be no assurance
that the measures taken by the Company will protect the Company's proprietary
information or that others will not gain access to, or independently develop
similar trade secrets or know-how which will permit them to develop formulations
or processes that are substantially similar or superior to those of the Company.
ACCOUNTS RECEIVABLE. The Company distributes its products primarily through
distributors and retailers. While the Company typically extends 30-day credit
terms to qualified customers, some of its distributors and retailers tend to
extend the payment of their accounts beyond such terms and some are requiring
longer payment terms. For the year ended May 31, 1996, the Company's receivable
turnover was approximately 44 days. Although the Company has experienced no cash
flow problems in the past caused by the aging of its accounts receivable, as
management implements its plans for growth and should revenues rise, the Company
may experience larger accounts receivable balances and increasing cash
requirements, possibly creating cash flow pressures. Such pressures could
present difficult working capital demands on the Company which, if not resolved,
could limit the Company's growth. See "Business -Marketing."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may vary
significantly due to a variety of factors, including changing market demands and
customer demographics, the availability and cost of raw materials, the
introduction of new products by the Company and its competitors, seasonality of
sales, the ability of the Company's sub-contractors and manufacturers to perform
as agreed, the timing and effectiveness of the Company's advertising and
promotional campaigns, pricing pressures, general economic and industry
conditions that affect customer demand and other factors. There can be no
assurance that the Company can continue to operate at historic levels or that
the Company's financial performance will remain stable from quarter-to-quarter.
The Company expects quarterly operating results
12
<PAGE>
to vary in the future. Accordingly, period-to-period comparisons of financial
results should not be relied upon as an indication of future performance. No
assurance can be given that the Company will maintain profitability, in any
given quarter, or at all, in the future. It is possible that, if the Company's
stock is followed by market analysts, the Company's results for any quarter will
fall below such analysts' expectations. In such event, the market for the Common
Stock would be materially adversely affected.
NO INDEPENDENT MARKET STUDIES. The Company participates in markets for which
there generally is limited available market data. The Company has formulated its
business strategies based on certain assumptions of the Company's management
regarding the size of its markets, the Company's anticipated share of the
markets, and the estimated prices for and acceptance of the Company's products.
There can be no assurance that these assessments will prove to be correct. No
independent market studies have been conducted on behalf of the Company, nor are
such studies planned. See "Business -Marketing."
RISK OF PRODUCT RETURNS. The Company encounters the risk of product returns
from its customers. The Company's current return policy for retail customers
generally involves exchange of products and not the refund of the purchase
price. Nevertheless, certain of the Company's larger customers are requiring
more favorable return policies including longer periods within which such
customers may return products for a credit. Product returns to date have been
less than 4% of sales; however, there can be no assurance that actual levels of
returns will not significantly exceed the amounts previously experienced by the
Company, and such returns could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In fiscal 1996, distributors
serving primarily Japan, Taiwan, Canada and Korea, and to a lesser extent
Bermuda, England, Israel, the West Indies, Australia and South Africa
represented approximately 17% of the Company's total revenues. The Company
intends to continue to expand its operations outside the United States and to
enter additional international markets, which will require significant
management attention and financial resources. The Company has committed and
continues to commit significant time and development resources to customizing
its products for selected international markets and to developing international
sales and support channels. There can be no assurance that the Company's efforts
to develop international sales will be successful. The failure of such efforts
could have a material adverse effect on the Company's business, financial
condition and results of operations.
International sales are subject to inherent risks, including unexpected
changes in regulatory requirements, uncertainties with regard to laws protecting
proprietary technology, import and export restrictions and tariffs, difficulties
in staffing and managing foreign operations, the burdens of complying with a
variety of foreign laws, greater difficulty and delay in accounts receivable
collection, potentially adverse tax consequences and political and economic
instability. The Company's export sales are currently denominated exclusively in
United States dollars. An increase in the value of the United States dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in foreign markets. If for any
reason exchange or price controls or other restrictions on foreign currencies
are imposed, the Company's business, financial condition and results of
operations could be materially adversely affected.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering,
there has been no public market for the Company's Common Stock. Accordingly,
there can be no assurance that an active trading market will develop or be
sustained upon completion of this Offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly operating results,
developments in the health supplement industry, the FDA and other regulatory
actions, public concern as to the safety of products developed by the Company or
others, stock market or general economic conditions, consumer tastes and other
factors. The initial public offering price of the Common Stock will be
determined by negotiations among the Company and the Underwriters and may not be
indicative of the prices that may prevail in the public market. See
"Underwriting."
13
<PAGE>
DILUTION. The initial public offering price per share of Common Stock is
substantially higher than the net tangible book value per share of the Common
Stock. Purchasers in this Offering will experience immediate and substantial
dilution of $4.86 Per share in the net tangible book value per share of the
Common Stock from the initial public offering price. See "Dilution."
WARRANT TO THE REPRESENTATIVES. In connection with this Offering, the Company
will sell to the representatives of the Underwriters, for a nominal cost, a
warrant (the "Representatives' Warrant") to purchase up to 10% of the number of
shares of Common Stock sold in this Offering. The Representatives' Warrant will
be exercisable commencing one year after the effective date of this Offering and
for five years thereafter, at an exercise price of $8.54 per share. Holders of
the Representatives' Warrant are given the opportunity to profit from a rise in
the market price of the Common Stock with a resulting dilution of the interest
of stockholders. Furthermore, the Company will grant certain registration rights
with regard to the Representatives' Warrant and such registration could result
in substantial expense to the Company. See "Underwriting."
CONTROL BY EXISTING STOCKHOLDERS. Following the sale of the shares offered by
this Prospectus, the Company's existing stockholders will beneficially own
approximately 70.4% of the outstanding Common Stock (67.4% if the Underwriters'
Over-allotment Option is exercised in full) and the Company's officers and
directors will own beneficially in the aggregate approximately 55.0% of the
Common Stock (52.6% if the Underwriters' Over-allotment Option is exercised in
full). Because of such ownership, these stockholders will continue to be able to
influence the election of members of the Company's Board of Directors and to
control the affairs of the Company, including mergers or other business
combinations. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK PRICE.
Sales of substantial amounts of Common Stock in the public market following the
Offering could have an adverse effect on the market price of the Common Stock.
The 1,300,000 shares offered hereby, and any shares sold pursuant to the
exercise of the Underwriter's Over-allotment Option, are freely tradeable
without restriction. Certain stockholders, including all officers and directors,
holding an aggregate of 2,324,625 shares of Common Stock have agreed that they
will not sell any Common Stock without the prior consent of the representative
of the Underwriters (the "Representative") for a period of 180 days from the
date of this Prospectus (the "Lockup Period"). All 3,000,000 shares outstanding
prior to this Offering are "restricted securities" and will be eligible for sale
in compliance with Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). In general, Rule 144 permits sales of securities, beginning
90 days after the date of this Prospectus, by persons who have beneficially
owned securities for a requisite holding period, subject to certain restrictions
as to the volume of the securities sold, the manner of sale, notice and the
availability of current public information about the Company. Holders of 498,375
shares of Common Stock and warrants to acquire 257,656 shares of Common Stock
have the right, under certain circumstances, to require the Company to register
their shares for resale under the Securities Act and to participate in future
Company registrations. Additionally, as of October 15, 1996, 268,000 shares of
Common Stock were issuable under options outstanding in the Company's 1996 stock
option plan ("Stock Option Plan"), none of which were exercisable, and 578,421
shares of Common Stock were issuable upon the exercise of outstanding warrants,
of which 267,656 were exercisable. Promptly after expiration of the Lockup
Period, the Company intends to register all shares reserved for issuance under
its Stock Option Plan. See "Management -- Stock Option Plan," "Description of
Capital Stock -- Registration Rights," and "Shares Eligible for Future Sale."
CERTAIN RESTRICTIVE CHARTER AND BYLAW PROVISIONS. The Company's Certificate
of Incorporation (the "Certificate") and Bylaws empower the Board of Directors,
without approval of the stockholders, to fix the rights and preferences of and
to issue shares of Preferred Stock; prohibit a substantial stockholder of the
Company from entering into a business combination or otherwise significantly
increasing its interest in the stock or assets of the Company and prohibit the
Company from purchasing assets or stock of such a substantial stockholder
without the consent of the Board of Directors or a two-thirds majority of the
stockholders of the Company; provides for staggered terms for the Company's
directors and prohibit stockholders of the Company from calling a special
meeting unless requested by at least 25% of the outstanding voting shares. The
Certificate does not provide for cumulative voting for election of directors
14
<PAGE>
and does require cause and the vote of a majority of stockholders to remove a
director. The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law which, in general, prohibits the Company from
engaging in certain business combinations with interested stockholders (as
defined in the statute) for a period of three years after the person is named an
interested stockholder unless (with certain exceptions) the transaction in which
the person became an interested stockholder is approved as prescribed in the
statute. These provisions could have the effect of deterring unsolicited
takeovers or other business combinations or delaying or preventing changes in
control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over
then-current market prices. In addition, these provisions may limit the ability
of stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock -Certain Anti-Takeover Provisions."
MANAGEMENT DISCRETION REGARDING USE OF PROCEEDS. Approximately $2,525,000 or
33.3% of the net proceeds of the Offering, after deducting all underwriting
discounts and commissions, and after deducting all estimated expenses of the
Offering, and assuming the Underwriters' Over-allotment Option is not exercised,
is committed to specific uses identified in this Prospectus, with the remainder
available for other corporate purposes such as working capital or future
acquisitions. The Company will have broad discretion in using the unallocated
net proceeds of the Offering. Prospective investors will not have an opportunity
to evaluate the relative merits of such unspecified uses. See "Use of Proceeds."
SUBSTANTIAL PORTION OF PROCEEDS TO BE USED FOR NEW PRODUCT INTRODUCTION.
Approximately $1,625,000, or 21% of the proceeds of this Offering, will be used
by the Company in connection with the development of sports nutrition product
lines. These product lines are still under development and have not been
marketed. Consequently, the Company does not have any information concerning
consumer acceptance of the product lines. As with all of the Company's existing
product lines, the sports nutrition market is extremely competitive, with
frequent product introductions. There can be no assurance that the Company will
complete development of its planned product lines or that such planned product
lines will be accepted by consumers, will be able to compete successfully
against other similar products, or will be commercially viable.
NO DISTRIBUTIONS OR DIVIDENDS. The Company has not paid dividends on its
Common Stock and does not intend to do so in the foreseeable future. See
"Dividend Policy."
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES. In order to continue to be
included in the Nasdaq National Market ("NNM"), a company must maintain 200,000
publicly held shares, a $1 million market value of its public float and $1
million in net tangible assets (total assets, excluding goodwill, minus total
liabilities). In addition, continued inclusion requires two market-makers, at
least 300 holders of the Common Stock and a minimum bid price of $1 per share;
provided, however, that if a company falls below such minimum bid price, it will
remain eligible for continued inclusion in NNM if the market value of the public
float is at least $3 million and the Company has $4 million in net tangible
assets. The Company's failure to meet these maintenance criteria in the future
may result in the discontinuance of the inclusion of its securities in NNM. As a
result, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of the securities.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Common Stock offered hereby at an assumed initial public offering price of $7.00
per share are estimated to be approximately $7.6 million (approximately $8.8
million if the Underwriters' Over-allotment Option is exercised in full), after
deducting commissions, discounts and estimated Offering expenses. The Company
intends to use the net proceeds of this Offering as set forth below:
<TABLE>
<CAPTION>
PERCENT OF
PURPOSE AMOUNT NET PROCEEDS
------- ---------- ------------
<S> <C> <C>
Development of Sports Nutrition Product Lines:
Increasing product research and development, including in
particular the completion of the development of two new sports
nutrition product lines .......................................... $ 375,000 4.9%
Introducing one of the above sports nutrition lines to be
marketed through professional trainers, including raw
material acquisition, product manufacturing, site leasing, initial
advertising campaigns and expenses associated with
establishing relationships with the professional trainers through
whom the product will be sold .................................... 750,000 9.9
Establishing a new approximately 10,000 square foot off-site
manufacturing and packaging facility to be utilized primarily for
the Company's sports nutrition product operations ................ 500,000 6.6
Increasing product marketing and advertising campaigns for other
products in fiscal 1997 ............................................ 400,000 5.3
Repay 12% note due March 6, 1997, payable to Belfer Labs, L.L.C., an
affiliated entity, plus interest ("Belfer Labs Note"). Proceeds of
the note were distributed to members of the Company's
predecessor. See "Certain Transactions." ........................... 200,000 2.6
Upgrading computer hardware and software systems, acquiring a new
trade show booth, and obtaining new and upgraded
product packaging, encapsulating and other automating
equipment .......................................................... 300,000 4.0
---------- ------
Total ................................................................. $2,525,000 33.3%
========== ======
</TABLE>
The remaining approximately $5.1 million of proceeds (approximately $6.3
million if the Underwriters' Over-allotment Option is exercised in full) has not
been specifically allocated, and in the interim will be utilized for general
working capital purposes. See "Risk Factors -- Management Discretion Regarding
Use of Proceeds." The Company plans to use a portion of such proceeds to acquire
existing product lines or entire operating companies in strategic markets,
although the Company currently has no understanding, commitment or agreement
regarding any such acquisition.
Pending such uses, the net proceeds will be invested in short-term,
interest-bearing, investment-grade securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
16
<PAGE>
LIMITED LIABILITY COMPANY DISTRIBUTIONS
The Company's predecessor, Houston, was an Arizona limited liability company
which was not obligated to pay federal or state income taxes. The earnings of
Houston were treated, for federal and state income tax purposes, as if they had
been earned directly by their respective members. For the fiscal years ended May
31, 1995 and 1996, Houston made distributions to its members totaling $692,817
and $1,300,000, respectively, which amount was intended, in part, to offset the
members' tax liability. See "Certain Transactions."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying such dividends for the foreseeable future. The Company
anticipates all earnings, if any, will be retained for future investment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
results of operations, financial condition and other factors deemed relevant by
the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of August
31, 1996 on an actual basis and as adjusted to reflect the estimated net
proceeds from the sale of 1,300,000 shares of Common Stock offered by the
Company hereby at an assumed offering price of $7.00 per share. This table
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AUGUST 31, 1996
-----------------------------
AS
ACTUAL ADJUSTED(1)(2)
----------- -------------
<S> <C> <C>
Long-term debt ......................................... $ 0 $ 0
Shareholders' equity:
Preferred Stock, par value $.01; 100,000 shares
authorized; none issued or outstanding ............. -- --
Common Stock, par value $.001; 8,000,000 shares
authorized; 3,000,000 shares issued and outstanding,
actual; 4,300,000 shares issued and outstanding, as
adjusted(1) ........................................ 3,000 4,300
Paid in capital ...................................... 2,021,808 9,611,508
Less: Unearned compensation ........................ (6,509) (6,509)
Retained earnings .................................... 97,412 97,412
----------- -----------
Total shareholders' equity ....................... 2,115,711 9,706,711
----------- -----------
Total capitalization ........................... $ 2,115,711 $ 9,706,711
=========== ===========
</TABLE>
- ----------
(1) Excludes (i) 464,421 common shares issuable upon the exercise of outstanding
warrants as of August 31, 1996, of which warrants for 276,149 shares were
exercisable, and (ii) 228,000 shares issuable upon exercise of outstanding
stock options authorized under the Company's 1996 Stock Option Plan, none of
which were exercisable as of August 31, 1996. See "Description of Capital
Stock -- Warrants" and "Management -- Stock Option Plan."
(2) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock
offered by the Company hereby (at an assumed offering price of $7.00 per
share net of underwriting discounts and commissions, and other estimated
offering expenses, and exclusive of the Underwriters' Over-allotment
Option). See "Use of Proceeds" and "Capitalization."
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for each of the two years in the period ended May
31, 1996 are derived from financial statements of the Company, which have been
audited by Coopers & Lybrand L.L.P. The Company has never declared or paid any
cash dividends on shares of its capital stock. The selected financial data for
the three months ended August 31, 1996 and 1995 are derived from unaudited
financial statements of the Company and include all adjustments, consisting only
of normal recurring adjustments, that the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. As with all quarterly results, the Company's operating results for the
three months ended August 31, 1996 are not necessarily indicative of the results
that may be expected for the entire year. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and related Notes thereto and other financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, YEARS ENDED MAY 31,
---------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME:
Net sales .................................... $1,059,325 $ 977,990 $5,191,067 $4,193,997
Cost of goods sold ........................... 320,910 259,395 1,510,479 1,608,568
---------- ---------- ---------- ----------
Gross profit ................................. 738,415 718,595 3,680,588 2,585,429
Selling, general and administrative expenses 565,278 464,539 2,141,926 2,012,641
---------- ---------- ---------- ----------
Income from operations ....................... 173,137 254,056 1,538,662 572,788
Interest expense ............................. 10,783 0 12,991 0
---------- ---------- ---------- ----------
Income before income tax ..................... 162,354 254,056 1,525,671 572,788
Income tax benefit ........................... 0 0 86,039 0
Income tax expense ........................... 64,942 0 0 0
---------- ---------- ---------- ----------
Net income ................................... $ 97,412 $ 254,056 $1,611,710 $ 572,788
========== ========== ========== ==========
PRO FORMA NET INCOME DATA (UNAUDITED)(1):
Income before income tax ..................... $ 162,354 $ 254,056 $1,525,671 $ 572,788
Pro forma income taxes ....................... 64,942 101,622 610,039 229,115
---------- ---------- ---------- ----------
Pro forma net income ......................... $ 97,412 $ 152,434 $ 915,632 $ 343,673
========== ========== ========== ==========
Pro forma net income per share(2) ............ $ 0.03 $ 0.05 $ 0.29 $ 0.11
========== ========== ========== ==========
Shares used in pro forma net income per
share(2) ................................... 3,199,140 3,197,940 3,197,940 3,197,940
========== ========== ========== ==========
</TABLE>
AUGUST 31, 1996
--------------------------------
(UNAUDITED)
ACTUAL AS ADJUSTED(3)
----------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 163,309 $ 7,754,309
Working capital ........................ 1,302,829 8,893,829
Total assets ........................... 2,714,072 10,305,072
Long-term debt ......................... 0 0
Total shareholders' equity ............. 2,115,711 9,706,711
- ----------
(1) For the two years ended May 31, 1996, Houston elected under Internal Revenue
Code Sub-Chapter K to be treated as a limited liability company, and
accordingly, generally was not subject to federal and state income taxes.
For income tax reporting purposes for these years, all profits and losses,
and certain other items, were passed through to the members of Houston.
Since the income of the Company will be taxable after May 31, 1996, income
tax expense for the years ended May 31, 1996 and 1995 has been presented as
if the Company was a C corporation during those years. The income tax
expense was calculated assuming an effective tax rate of 40%.
(2) Based on weighted average common shares and common share equivalents
outstanding as of August 31, 1996, giving retroactive effect to the
Company's conversion in May 1996 from a limited liability company to a
corporation, and the conversion of membership interests into Common Stock.
See Note 14 of Notes to Consolidated Financial Statements.
(3) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock
offered by the Company hereby (at an assumed offering price of $7.00 per
share net of underwriting discounts and commissions, and other estimated
offering expenses, and exclusive of the Underwriters' Over-allotment
Option). See "Use of Proceeds" and "Capitalization."
18
<PAGE>
DILUTION
The net tangible book value of the Company at August 31, 1996 was $1,611,525,
or $0.54 per share. Without taking into account any changes in net tangible book
value subsequent to August 31, 1996, other than to give effect to the sale of
1,300,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $7.00 per share and after deduction of the
estimated underwriting discount and estimated Offering expenses payable by the
Company estimated to be $690,000, the pro forma net tangible book value of the
Company's Common Stock at August 31, 1996 would have been $9,202,525, or $2.14
per share. This represents an immediate increase in net tangible book value of
$1.60 per share to existing stockholders and an immediate dilution in net
tangible book value of $4.86 per share to investors purchasing shares in this
Offering. The following table illustrates the per share dilution at August 31,
1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price(1) ............................. $7.00
Net tangible book value before Offering(2) ......................... $ .54
Increase in net tangible book value attributable to new investors .. 1.60
Pro forma net tangible book value after Offering ..................... 2.14
-----
Dilution to new investors ............................................ $4.86
=====
</TABLE>
- ----------
(1) Before deducting the estimated underwriting discount and Offering expenses
to be paid by the Company.
(2) Net tangible book value per share is determined by dividing the net tangible
book value of the Company (tangible assets less liabilities) by the number
of shares of the Company's Common Stock outstanding at August 31, 1996.
The following table sets forth, on a pro forma basis at August 31, 1996, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and to be paid by new investors based upon an assumed initial
public offering price of $7.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED CONSIDERATION PAID
------------------------ ---------------------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 3,000,000 69.8% $ 2,115,711(1) 18.9% $ 0.71
New investors ......... 1,300,000 30.2% $ 9,100,000 81.1% $ 7.00
----------- ----- ----------- ----- -----
Total ............... 4,300,000 100.0% $11,215,711 100.0% $ 2.61
=========== ===== =========== ===== =====
</TABLE>
- ----------
(1) Represents the total shareholders' equity as of August 31, 1996.
The foregoing table assumes no exercise of outstanding options and warrants.
Excludes (i) 464,421 common shares issuable upon the exercise of outstanding
warrants as of August 31, 1996, of which warrants for 276,149 shares were
exercisable, and (ii) 228,000 shares issuable upon exercise of outstanding stock
options authorized under the Company's 1996 Stock Option Plan, none of which
were exercisable as of August 31, 1996. See "Description of Capital Stock --
Warrants" and "Management -- Stock Option Plan."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of the Company's
financial condition and results of operations and should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
contained elsewhere in this Prospectus. The matters discussed in this section
that are not historical or current facts deal with potential future
circumstances and developments. Such forward- looking statements include, but
are not limited to, the development and market acceptance for new products,
trends in the results of the Company's operations and the mix of product
revenues. The Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed under the caption "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
M.D. Labs, Inc. (together with its subsidiaries, the "Company") packages,
markets and distributes natural dietary supplements, consisting primarily of
herbal products and sports nutrition products, as well as a weight management
chewing gum product. The Company has focused on new product innovation, such as
its Daily Detox(R) teas targeted to the detoxification herbal tea market and its
Citrium(TM) chewing gum targeted to the weight loss chewing gum market.
Currently, the Company's products are segmented into three primary categories:
(i) the all natural herbal tea and supplements line, (ii) the weight loss and
other chewing gum lines, and (iii) the amino acid sports nutrition product line.
For the fiscal year ended May 31, 1996, the Company's sales were as follows:
72% from the herbal line; 25% from the chewing gum line; and 3% from the sports
nutrition product line. The Company does not believe that such historical sales
are representative of future sales trends due to high initial demand for
Citrium(TM) resulting from strong introductory advertising and the initial
novelty of the product. Further, the Company did not enter the sports nutrition
business until January 1996.
Net sales have increased to $5.2 million in fiscal 1996 from $4.2 million in
fiscal 1995. The growth in sales primarily is attributable to the successful
launch of the Citrium(TM) and Women's Nature(TM) -- Natural Balance herbal tea
in fiscal 1996, as well as a significant increase in international sales.
International sales increased to approximately 17.4% of the Company's sales in
fiscal 1996, as compared to approximately 2.5% in fiscal 1995. However,
substantially all of the increase in international sales was due to the sale of
Citrium(TM) to a large distributor in Japan, and there are no assurances that
these sales will continue at this level in fiscal 1997.
The Company distributes its products through its in-house sales
representatives, who call on the approximately 8,000 independent health food
store operators, and through several large domestic and international
distributors. Recently, the Company has made initial sales to certain mass
retailers, such as large regional and national retail food and drug stores.
Generally, the Company's sales are not seasonal, with the primary exceptions
being (i) an increase in sales at the beginning of the calendar year related to
new year fitness resolutions and (ii) a decrease in tea sales during summer
months. Currently, the Company has 26 full-time employees, though management
believes this number will increase based upon anticipated Company growth.
The Company seeks to achieve revenue growth from three primary sources, (i)
growth of the Company's existing product lines, (ii) new product development and
(iii) product line and operating company acquisitions. At the present time, the
Company does not have any understanding, commitment or agreement regarding any
acquisition.
The Company continues to focus on new product innovation. The Company has
numerous products in various stages of research and development for possible
introduction in fiscal 1997 and thereafter, including a line of coffee chewing
gums, a Citrium(TM) tea, and new, complementary lines of sports nutrition
supplements. The Company expects that a gum, an herbal tea and at least one of
the sports nutrition products will be introduced in the third quarter of fiscal
1997. However, there can be no assurance that any new product can be introduced
successfully or on a timely basis.
20
<PAGE>
The market for the Company's products is characterized by extensive
competition, frequent new product introductions, short product life cycles,
rapid product declines, eroding profit margins and changing preferences of
consumers. A decline in the demand for any of the Company's products, whether as
a result of competition, changes in demographic trends or other factors, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
On May 31, 1996, the Company exchanged 3,000,000 shares of its common stock
for all of the membership interest in Houston Enterprises, L.L.C., an Arizona
limited liability company ("Houston"), and the financial statements at May 31,
1996 reflect that exchange. For the years ended May 31, 1995 and 1996, the
Company's predecessor was taxed as a limited liability company. For income tax
reporting purposes, all profits and losses for such years, and certain other
items, were passed through to the members of Houston. Because the income of the
Company will be taxable after May 31, 1996, certain temporary differences
between financial and tax reporting are reflected as an income tax benefit in
the statement of income for the years reported and as deferred tax assets in the
balance sheets for the years reported.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statements of income and
percentages of net sales represented by the individual line items for the
periods presented. These operating results and percentages are not necessarily
indicative of anticipated results for any future period.
THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED PERCENTAGE ENDED PERCENTAGE
AUGUST 31, OF NET AUGUST 31, OF NET
1996 SALES 1995 SALES
---------- ---------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ............... $1,059,325 100.0% $ 977,990 100.0%
Cost of goods sold ...... 320,910 30.3 259,395 26.5
---------- ----- ---------- -----
Gross profit ............ 738,415 69.7 718,595 73.5
Selling, general & admin. 565,278 53.4 464,539 47.5
---------- ----- ---------- -----
Income from operations .. 173,137 16.3 254,056 26.0
Interest expense ........ 10,783 1.0 0 0.0
---------- ----- ---------- -----
Income before income tax. $ 162,354 15.3% $ 254,056 26.0%
========== ===== ========== =====
</TABLE>
NET SALES. Net sales for the quarter ended August 31, 1996 increased
approximately $81,000 or 8.3%, compared to the same quarter during fiscal 1996.
The increase in net sales is primarily attributable to increased sales of the
Company sales of the PRO-LINE(R) product line which was acquired by the Company
in January 1996. See "Risk Factors -- Uncertainty Regarding Proprietary Rights"
and "Business -- Products; Sports Nutrition Products." The Company's sales in
the first quarter of fiscal 1997 were lower than the sales in both the third and
fourth quarters of fiscal 1996 due to decreases in sales of Citrium(TM) gum in
Japan. See "Business -- Litigation." Based on the preceeding, the Company may
not achieve comparable sales and net income in fiscal 1997 as it did in fiscal
1996.
The Company generally sells products on net 30-day terms. As of August 31,
1996 and May 31, 1996, the Company's accounts receivable balances, net of
allowances for doubtful accounts, were approximately $521,000 and $620,000,
respectively. Allowances for doubtful accounts were $25,000 and $27,876,
representing 4.6% and 4.3% of the gross accounts receivable balances as of
August 31, 1996 and May 31, 1996, respectively. Included in these balances was a
receivable from Revco Drug Stores ("Revco") for approximately $70,000. The
Company shipped approximately $161,000 of its Citrium(TM) chewing gum to Revco
during the fiscal year ended May 31, 1996 pursuant to a guaranteed sale
agreement allowing Revco to return all Citrium(TM) not sold 120 days subsequent
to receipt. The sales agreement required that Revco pay for all sales as the
product was actually sold. For financial reporting purposes, only the gum
actually sold by Revco is recorded as sales. The 120-day return period has
lapsed, and Revco has elected to retain the unsold gum and remit payment for the
sold Citrium(TM). On October 16, 1996, the Company collected
21
<PAGE>
$90,796 from Revco, representing payment in-full for their accounts receivable
balances as of May 31, 1996 and August 31, 1996. It is generally the Company's
policy to establish a reserve for customer accounts receivables greater than
approximately 90 days past due.
COSTS OF GOODS SOLD. Cost of goods sold for the first quarter in fiscal 1997
as compared to the first quarter in 1996 increased approximately $62,000, and as
a percentage of net sales increased from 26.5% to 30.3% for the same periods.
This increase in cost of goods sold is due to a change in the mix of products
sold during the quarter ended August 31, 1996 with the addition of PRO-LINE(R)
and other non-tea products which have lower gross margins.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. For the quarter ended August 31,
1996 selling, general and administrative expenses increased approximately
$101,000 or 21.7%, as compared to the quarter ended August 31, 1995. This
increase in selling, general and administrative expenses is primarily
attributable to increases in three expense categories. During the first quarter
ended August 31, 1996 payroll and related expenses increased approximately
$47,000 due to increased salaries expenditures for certain officers, as well as
the addition of new employees and merit raises. Secondly, advertising expense
increased approximately $24,000 during the quarter in connection with the
Company's expanded marketing plan in fiscal 1997. Lastly, professional expenses
incurred during the first quarter of fiscal 1997 increased $10,000, due to
various non-capitalizable professional fees associated with the Company's
growth.
INTEREST EXPENSE. During the first quarter of fiscal 1997, the Company
incurred approximately $11,000 in interest expense associated with the Belfer
Labs Note and the Olympian Global Note, both of which were executed by the
Company in the second half of fiscal 1996.
YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
YEAR YEAR
ENDED PERCENTAGE ENDED PERCENTAGE
MAY 31, OF NET MAY 31, OF NET
1996 SALES 1995 SALES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ................ $5,191,067 100.0% $4,193,997 100.0%
Cost of goods sold ....... 1,510,479 29.1 1,608,568 38.4
---------- ----- ---------- -----
Gross profit ............. 3,680,588 70.9 2,585,429 61.6
Selling, general & admin . 2,141,926 41.3 2,012,641 48.0
---------- ----- ---------- -----
Income from operations ... 1,538,662 29.6 572,788 13.7
Interest expense ......... 12,991 0.3 0 0.0
---------- ----- ---------- -----
Income before income tax . $1,525,621 29.3% $ 572,788 13.7%
========== ===== ========== =====
</TABLE>
NET SALES. Net sales for the year ended May were $5.2 million, an increase of
$997,000 or 24% compared to the same period during fiscal 1995. The growth in
sales primarily is attributable to the successful launch of Citrium(TM) and
Women's Nature(TM) -- Natural Balance herbal tea in fiscal 1996, as well as a
significant increase in international sales. International sales increased to
approximately 17.4% of the Company's net sales in fiscal 1996, compared to
approximately 2.5% in fiscal 1995. However, substantially all of the increase in
international sales was due to the sale of Citrium(TM) to a large distributor in
Japan, and there are no assurances that these sales will continue at this level
in fiscal 1997. Sales of the Company's Naturally Klean(R) and related products,
and Citrium(TM) products accounted for approximately 51% and 25%, respectively,
of the Company's net sales for the fiscal year ended May 31, 1996.
COST OF GOODS SOLD. Cost of goods sold for fiscal 1996 decreased from $1.6
million to $1.5 million, a decrease of $98,000 or approximately 6.1% from fiscal
1995. As a percentage of net sales, costs of goods sold decreased from 38.4% to
29.1% between the same periods. The reduction resulted from increased
efficiencies in purchasing herbs and other raw materials, as well as fiscal 1996
reductions in the volume of discounted sales and in the distribution of free
sample products and literature. In addition, a significant portion of the
Company's cost of goods sold is composed of fixed costs, which did not increase
in proportion to increased fiscal 1996 sales. The Company does not anticipate
that this trend will continue in fiscal 1997, in part because raw material costs
are volatile and outside the Company's direct control. See "Risk Factors --
Reliance on Outside Suppliers and Manufacturers."
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Fiscal 1996 selling, general
and administrative expenses increased $129,000 or 6.4% over fiscal 1995, yet
decreased as a percentage of net sales from 48.0%
22
<PAGE>
to 41.3% in such periods. The dollar increase in selling, general and
administrative expenses is primarily attributable to the net effect of increases
in three expense categories, offset by a significant decrease in another expense
line item. In fiscal 1996, professional fees increased $75,000 due to increased
accounting and legal fees associated with the Company's growth, and payroll
increased approximately $88,000 due to merit pay increases and the addition of
new personnel. Additionally, Company advertising increased approximately
$179,000 due to the initial marketing campaigns required for several new product
launches in fiscal 1996, as well as a general increase in advertising for all of
the Company's other products. These expense increases were offset by the
termination on December 31, 1995 of the Company's consulting agreement with Pure
Source International, Ltd., an affiliated British Virgin Island company ("Pure
Source") which provided marketing, purchasing, promotional and other
international advertising services for the Company. The Company incurred
$353,600 in expenses under the Pure Source arrangement in fiscal 1995 and $0 in
fiscal 1996. See "Certain Transactions." The Company anticipates significant
increases in marketing and advertising expenses in fiscal 1997 in connection
with the introduction of new products and increased promotion of existing
products. Increased sales resulting from such expenses may not be realized for
several quarters after such expenses are incurred, if at all.
On May 31, 1996, the members of Houston completed a private placement of
portions of their Houston membership interests, selling approximately 16.6% of
their interests. The Company did not receive any proceeds from the sale. On that
same date, all members converted their interests into shares of the Company's
Common Stock. Private placement costs associated with the transactions of
approximately $70,000 were paid by the Company.
INTEREST EXPENSE. The Company incurred approximately $13,000 in interest
expense in the third and fourth quarters of fiscal 1996 associated with the
Belfer Labs Note and the Olympian Global Note, both of which were executed in
fiscal 1996.
INCOME TAX BENEFIT. The Company recognized an $86,000 income tax benefit in
fiscal year 1996 due to the income tax effect of temporary differences between
financial and income tax reporting purposes. For the two years ended May 31,
1996, Houston elected to be treated as a limited liability company, and
generally was not subject to federal and state income taxes. The Company's
income is taxable commencing June 1, 1996, and the Company estimates an
effective tax rate for fiscal 1997 of 40%.
INFLATION
Management does not believe that inflation has had a material effect on the
Company's sales or results of operations during the past two fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
The Company traditionally has financed its capital needs from net cash flows
from operations. In fiscal 1996, the Company generated $1.1 million in cash
flows from operating activities, as compared to $475,000 in fiscal 1995. For the
quarter ended August 31, 1996, the Company generated approximately $193,000 in
cash flows from operating activities, as compared to approximately $290,000 for
the same quarter in fiscal 1995. As of August 31, 1996 and May 31, 1996, the
Company had working capital of approximately $1.3 million and $1.2 million, with
current ratios of 3.18 and 2.77, respectively. Management believes the Company
will continue to generate cash flows from operating activities in the near
future. The Company anticipates utilizing the proceeds from this Offering to
finance new product research and development and product introduction and
expanded general advertising campaigns, manufacturing and warehouse automation,
computer system upgrades, and for possible product line and/or operating company
acquisitions, as well as repayment of indebtedness discussed below. The Company
anticipates spending approximately $500,000 of the Offering proceeds for the
development of an in-house manufacturing facility for certain of its products.
The Company expects that such manufacturing facilities will be sufficient,
together with the Company's existing supply arrangements to meet the Company's
current needs and does not have any immediate plans to construct additional
manufacturing facilities.
As of August 31, 1996, the Company had approximately $1.1 million in
inventory. Such inventory balances are greater than desired primarily due to a
build up in chewing gum inventories and raw
23
<PAGE>
materials required for the Company's recently launched products and products in
development. Management intends to reduce these inventory balances through the
routine sale of its products prior to the end of fiscal 1997.
On March 6, 1996, the Company borrowed $300,000 from Belfer Labs LLC, an
affiliated company formed by Todd Belfer, president and director of the Company,
and Harvey Belfer, father of Todd Belfer and consultant and director of the
Company. The Belfer Labs Note accrues interest at the rate of 12% per annum and
is payable March 6, 1997. The proceeds of the Belfer Labs Note were distributed
to the members of Houston for, among other things, the member's tax liability
which resulted from the profitable operations of the Company prior to the
Company's conversion to a corporation. On July 23, 1996, the Company paid
$100,000 in principal on the note plus accrued interest of $14,100. Management
anticipates repaying the remaining balance payable on the note with the proceeds
from this Offering. See "Use of Proceeds" and "Certain Transactions."
At the present time the Company believes that it is in substantial compliance
with all regulatory and enforcement requirements. Due to the uncertain and
evolving nature of the regulatory environment in which the Company operates, it
is possible that the Company is unaware of non-compliance which could subject
the Company to remedial costs having a material adverse effect on the Company's
operating results and liquidity. See "Business -- Government Regulation."
Because such costs, if any, are unpredictable, the Company has not accrued any
contingent liabilities.
The Company does not currently have a working capital line of credit or other
term financing from a financial institution, nor has any financial institution
committed to provide any such financing to the Company.
The Company believes the net proceeds from this Offering and cash generated
from operations will be sufficient to fund its operations through fiscal 1997.
There can be no assurance, however, that the Company will not require additional
capital in the future, particularly for acquisitions of products or businesses.
If the Company were required to obtain additional financing in the future, there
can be no assurance that such sources of capital will be available on terms
favorable to the Company, if at all.
24
<PAGE>
BUSINESS
GENERAL
M.D. Labs, Inc., a Delaware corporation (together with its subsidiaries, the
"Company") packages, markets and distributes natural food and dietary
supplements, consisting primarily of herbal products and sports nutrition
products, as well as a weight management chewing gum product. The Company has
focused on new product innovation, such as its Daily Detox(R) teas targeted to
the detoxification herbal tea market and its Citrium(TM) chewing gum targeted to
the weight loss chewing gum market. The Company's products are sold generally to
distributors and to health food, drug and other retail stores.
The Company was incorporated in Delaware on February 7, 1996 to be the
successor to Houston Enterprises, L.L.C. ("Houston"), an Arizona limited
liability corporation. On May 31, 1996, the Company acquired all of the
membership interests in Houston and thereupon succeeded to Houston's business.
Houston acquired its original line of products from Houston Enterprises, Inc.,
an Arizona corporation, through an asset purchase completed in February 1994.
The acquisition cost to Houston was determined by negotiations between the
owners of Houston and the unrelated owners of Houston Enterprises, Inc. based on
their evaluation of the value of the assets involved. Houston Enterprises, Inc.
introduced its first product line in 1987.
In February 1996, the Company purchased all of the outstanding stock of
Belnik Investment Group, Inc., an Arizona corporation doing business as Freedom
Wholesalers, Inc. ("Freedom"), from Messrs. Hooman Nikzad and Todd Belfer. The
purchase price consisted of $1,000 plus warrants to purchase 21,000 shares of
the Company's Common Stock exercisable at $1.00 per share and vesting in three
equal annual installments commencing December 31, 1996. This purchase price was
determined by a subjective evaluation by the Company's management of the assets
and cash flows to be acquired offset by the liabilities assumed inherent in the
types of products sold by Freedom. See "Business -- Products -- Freedom
Products" and "Certain Transactions."
In January 1996, the Company acquired certain assets of Olympian Global
L.L.C., an Arizona limited liability company ("Olympian Global") for $50,000 and
a $210,000 note. The assets included the "PRO-LINE(R)" trademark, Olympian
Global's available inventory of PRO-LINE(R) products, and a list of Olympian
Global's PRO-LINE(R) customers and sales reports. The Company agreed not to
market for 36 months under the acquired trademark any new products that compete
with products sold by Olympian Global under the "Olympian Labs" trade name. The
Company also is obligated to pay royalty of 3% of the gross selling price of
each PRO-LINE(R) product sold during the 30-month period commencing February 1,
1996 to Lance Dreher, a former owner of assets purchased from Olympian Global.
See "Business -- Product Royalties."
INDUSTRY BACKGROUND
According to industry sources, the natural and organic products industry,
which includes vitamins, supplements, herbs, personal care, natural medicines
and groceries, and organic clothing and household cleaners, grew over 20% in
1995 to approximately $9 billion in retail sales. Herbs have been a significant
category in this industry in recent years. The herb category, which includes
dietary supplement formulas, capsules, extracts and teas such as those sold by
the Company, as well as bulk and medicinal herb sales, has been estimated to
exceed $1 billion in the United States. Industry sources also indicate that
sales of sports nutrition products, excluding beverages, were $675 million in
1995. See "Risk Factors -- No Independent Market Studies."
The Company believes that the growth in its industry is attributable to
several factors, including (i) expansion of natural product sales channels
through natural foods supermarkets, health food stores, mainstream supermarkets,
drug stores and mail order catalogs, (ii) the aging population focusing on
alleviating the effects of age, (iii) increased consumer awareness and
dissemination of academic studies of the connection between health and fitness
and nutrition, and the hazards of chemical agriculture, and (iv) the perceived
improvements in the regulatory environment resulting from the DSHEA. See "Risk
Factors -- Uncertainty and Potential Negative Effects of Government Regulations;
Non-Compliance with Government Regulations" and "Business -- Government
Regulation."
25
<PAGE>
Industry data indicates that the primary consumers of natural and organic
products are female, with at least some college education and a median household
income of approximately $30,000. Consumers of sports nutrition products,
however, are primarily men aged 24 to 35, with that age group shrinking and
consumption by women over 35 increasing. Such consumers are characterized as
early to adopt new products and susceptible to change product preferences. See
"Risk Factors -- Short Product Life Cycles; Dependence on New Products."
The Company estimates that the market for the Company's products now includes
not only the approximately 8,000 independent and chain health food stores in the
U.S., but also the several hundred thousand drug stores, supermarkets, and
convenience stores across the country and, on a direct response basis,
individual consumers. Management also believes the market for natural health
food supplements outside of the United States has become a promising environment
for the Company's products.
STRATEGY
The Company is pursuing a three-pronged growth strategy focusing on (i)
expansion of sales of existing products to current and new customers via
increased advertising and marketing and development of additional channels of
distribution; (ii) development of new products which complement the Company's
existing product lines or address new markets with significant growth potential;
and (iii) acquisition of other companies, products or product lines which, as in
the case of new products under internal development, complement the Company's
existing product lines or address new markets with significant growth potential.
See "Risk Factors -- Limited Industry Experience; Recent Business Venture," "--
Limited Capitalization," and "-Management of Growth." Key elements of the
strategy are as follows:
Build Brand Name Recognition. The Company believes that brand name
recognition is an increasingly important competitive factor in its target
markets as key customers tend to align themselves with fewer vendors of brand
name products. The Company believes that it has established significant brand
name recognition in detoxification markets. The Company intends to increase its
marketing and advertising programs after completion of the Offering to enhance
brand name recognition of current products and facilitate introduction of new
product offerings. Because a reputation for quality products is critical to
establishing a successful brand name, the Company will also focus efforts on
quality control. See "Risk Factors -- Competition and Low Barriers to Entry."
Increase Penetration in Domestic Health Food Market. The Company believes
that the expansion of retail distribution channels and the strong growth
characteristics of the nutritional supplement industry provide the Company with
significant opportunities to increase sales. The Company further believes that
increased brand name recognition of the Company's products will enable it to
increase its penetration of shelf space as health food retailers seek to align
themselves with companies which possess strong brand names, offer a wide range
of products, demonstrate continued marketing and advertising support and provide
high levels of customer service.
Build Upon Established Customer Relationships. The Company's established
relationships with distributors and health food store retailers are based upon
the Company's commitment to a high level of customer service. The Company's
direct sales force and management work with direct accounts, distributors and
individual retailers to build knowledge of the Company and its products, in turn
achieving increased exposure for these products.
Continue to Introduce New Products and Product Innovations. The Company has
introduced a number of innovative new products, including the successful
introductions in fiscal 1996 of Citrium(TM) weight management chewing gum and
Women's Nature(TM) -- Natural Balance herbal tea. The Company obtains new
product concepts through independent consultants, naturopathic doctors, market
feed back gained from its distributors and direct sales force, and other
sources. The Company intends to continue to emphasize the introduction of new
and innovative products not previously available in health food stores. See
"Risk Factors -- Short Product Life Cycle; Dependence on New Products," and "--
Competition and Low Barriers to Entry."
Increase Penetration of International Markets. The Company believes that
there are substantial opportunities for growth in foreign markets. For example,
over $750,000 in sales of Citrium weight
26
<PAGE>
management chewing gum were achieved through distributors selling in Japan in
fiscal 1996, and marketing relationships have been initiated in numerous
additional countries. The Company intends to build upon existing relationships
with distributors serving primarily Japan, Taiwan, Canada and Korea, and to
establish relationships in additional countries to pursue growth opportunities
in foreign markets. During fiscal 1996, the Company's revenues from sales to
these countries were approximately $750,000 for Japan (from sales of
Citrium(TM)), $78,000 for Taiwan (from sales of Citrium(TM), PRO-LINE(R) and
Women's Nature(TM) products), $55,000 for Canada (from sales of Citrium(TM),
Daily Detox(R), Daily Herbal(TM), Naturally Klean(R), Women's Nature(TM) and
HerbalPathic(TM) products) and $10,000 for Korea (from sales of Citrium(TM),
Daily Detox(R), Womens Nature(Tm) and HerbalPathic(TM) products). See "Risk
Factors -- Product Concentration" and "-- Risks Associated with International
Sales."
Supplement Internal Growth Through Strategic Acquisitions. The nutritional
supplement industry is highly fragmented with many companies producing only a
single product line or single product. The Company believes that it is
positioned strategically to participate in the consolidation of the industry due
to the Company's increasing brand name recognition and access to distribution
channels, its ability to launch new products, and the financial resources
available upon completion of this Offering. The Company has added significant
products in fiscal 1996 via the acquisition of Freedom (The Stuff(TM) and the
discontinued Naturally High(TM) product) and Olympian Global (the PRO-LINE(R)
products) and intends to pursue strategic acquisition opportunities where
appropriate. See "Risk Factors -- Selection and Integration of Acquisitions,"
"Business -- General" and "-- Products."
PRODUCTS
Certain of the Company's product formulations are marketed under different
packaging and labelling. The Company currently markets the Naturally Klean(R),
Daily Detox(R), Women's Nature(TM), HerbalPathic(TM), and Citrium(TM) product
lines. Through its wholly-owned subsidiary, Freedom, the Company also markets
The Stuff(TM) and Naturally Klean(R) Herbal Tea,(TM) and under the PRO-LINE(R)
name it markets sports nutrition products such as Super ProLean(TM) Fat Burners,
DHEA, Amino Formula "1240"(TM), and Chromoplex(TM). The Naturally Klean(R) and
Daily Detox(R) lines are focused on the detoxification market. These products
are available in teas, capsules and extracts. Women's Nature(TM) herbal tea and
the HerbalPathic(TM) single herb supplements are intended to support and enhance
overall health. The Company's Citrium(TM) product line addresses the weight
management market. The Freedom products are intended for the detoxification and
energy supplement markets and the PRO-LINE(R) products are formulated for the
sports nutrition market. See "Risk Factors -- Product Concentration," and "--
Difficulty of Product Positioning."
M.D. Labs Products
Naturally Klean(R). The Naturally Klean(R) product line consists of herbal
teas and capsules designed to stimulate the body's natural cleansing process to
flush out toxins stored in the body's eliminatory system. The tea consists of
nine herbs, is caffeine free, and available in three flavors: original herbal,
passion fruit, and lemon-lime. This product is also sold by Freedom.
Daily Detox(R). The Daily Detox(R) product line consists of herbal teas,
capsules and liquid extracts designed to support the body's natural
detoxification and cleansing process on a daily basis. The line is divided into
two herbal formulas: Daily Detox(R) with 11 herbs in two flavors, apple cider
cinnamon and original herbal, and Daily Detox(R) II, which is produced with nine
herbs in passion fruit and original herbal tea flavors. Each blend is also
available as encapsulated herbs and as a liquid herbal extract.
Women's Nature(TM). The Women's Nature(TM) product line consists of Women's
Nature(TM) PMS and Women's Nature(TM) -- Natural Balance. The product line was
developed by a naturopathic doctor. A Naturopathic doctor is a person who has
completed a four-year graduate level study of sciences with emphasis on disease
prevention and wellness. The products include Chinese, Ayurvedic and Western
herbs. Women's Nature(TM) PMS is designed to help balance naturally a woman's
system to alleviate the symptoms of pre-menstrual syndrome ("PMS"), including
cramps, water retention, fatigue and mood swings. This product comes in two
flavors, original and raspberry. Women's Nature(TM) -- Natural Balance is
designed to promote the natural balance of the female system.
27
<PAGE>
HerbalPathic(TM). The HerbalPathic(TM) product line consists of five single
herb supplements. These products are encapsulated with standardized extracts of
(i) echinacea (intended to aid the body's natural immune system), (ii) garlic
(intended to normalize blood pressure, bronchial congestion, allergies, colds,
digestion and general intestinal functions), (iii) ginkgo biloba (intended to
aid blood circulation through the central nervous system, lungs and kidneys and
to aid nerve damage repair, and eye sight improvement), (iv) ginseng (intended
to increase energy level, normalize blood pressure, reduce cholesterol and
combat fatigue) and (v) kudzu (intended for headache relief from dizziness,
diarrhea, and some effects of alcoholism as well as improvement in the body's
circulation). The product is competitively priced and packaged in a sealed,
tamper-resistant safety container.
Citrium(TM) Lean & Trim Chewing Gum. Citrium(TM) Lean & Trim is a
CitriMax-based weight management chewing gum manufactured in accordance with the
Company's specifications. Citrium(TM) combines CitriMax, ChromeMate and
L-Carnitine, three all-natural, weight management ingredients designed to
control appetite, balance blood sugar levels and stimulate the body's natural
fat burning metabolism.
Freedom Products
The Stuff(TM) and Naturally Klean(R) Herbal Tea. The Stuff(TM) powdered drink
is designed to eliminate toxins in the body temporarily by absorbing toxins and
other unnatural substances in the urinary tract and flushing them out through
the colon. The Stuff(TM) is available in grape, apple and orange flavors.
Naturally Klean(R) herbal tea is discussed above. The Company has discontinued
selling its Naturally High(TM) herbal energy product. See "Risk Factors --
Effect of Discontinued Product."
Sports Nutrition Products
Super ProLean(TM) Fat Burners, DHEA, Amino Formula "1240"(TM) and
Chromoplex(TM). The PRO-LINE(R) products consist of a variety of nutritional
supplements formulated for athletes. Included in this product line are the Super
ProLean(TM) Fat Burners, a natural weight management aid, DHEA, a hormone
supplement intended to fight the effects of aging, Amino Formula "1240"(TM) to
aid athletes in muscular recovery, and Chromoplex(TM), a chromium supplement
which combines two forms of chromium to stabilize insulin levels and act as a
weight management supplement. The Company entered the sports nutrition business
upon acquiring certain assets from Olympian Global in January 1996. The Company
believes that Olympian Global may have breached certain aspects of the
acquisition agreement relating to the trademark and trade name rights
transferred thereunder by, among other things, failing to transfer clean title
properly and failing to disclose a third-party's use of a similar mark which may
infringe on the PRO-LINE(R) mark. The Company is unable to predict the extent
(if any) to which its rights to the acquired trademarks and trade names may be
affected by this matter. However, the Company believes that its efforts to
expand its lines of sports nutrition offerings will not be materially adversely
affected should restrictions exist with respect to its rights to use the
acquired trademarks and trade names.
The Company is in the process of implementing two extensions of its current
line of sports nutrition offerings. The Company is developing a new line of
premium sports nutrition products to be marketed to health food stores and gyms.
The Company also is developing a separate line of sports nutrition products to
be marketed exclusively through professional trainers. The Company anticipates
that the new product lines will include weight management products. The Company
intends to use a portion of the proceeds from the sale of the Shares offered
hereby in connection with the development and introduction of these product
lines. See "Use of Proceeds." There can be no assurance that either product line
can be introduced successfully. See "Risk Factors -- Short Product Life Cycles;
Dependence on New Products" and "-- Substantial Portion of Proceeds to be Used
for New Product Introduction."
Although the above products are listed with indications for use for which
they have been designed, the Company does not necessarily have complete
scientific substantiation for such uses and the Company may not be able to
specifically label and promote the products for the indicated purposes. The
purposes stated above are based on alternative health concepts, which are not
necessarily recognized by the conventional medical establishment, or by such
regulatory authorities as the FDA and the FTC. As discussed in the section
"Business -- Government Regulation" the Company may be required to limit the
promotional and marketing claims which it may make as regulatory enforcement
practices are clarified
28
<PAGE>
and as the Company moves to bring itself into material compliance with
regulatory requirements. There is no assurance that the Company will be able to
effectively market its products absent the ability to promote them for the above
purposes. See "Risk Factors -- Uncertainty and Potential Negative Effects of
Government Regulations" and "-- Non-Compliance with Government Regulations."
PRODUCT PLANNING, DEVELOPMENT AND ACQUISITION
The Company engages in the planning, development and distribution of new,
specialty dietary supplements, weight management and sports nutrition products.
See "Risk Factors -- Short Product Life Cycles; Dependence on New Products" and
"-- Reliance on Others to Develop Products." Although it does not maintain
in-house research and formulation expertise, the Company engages independent
consultants, naturopathic doctors, and other experts to assist it in the
development of new products. Ideas for new products come from many sources,
including the Company's management and consultants, market feedback and
demographic trend analysis. In addition, some products are presented to the
Company for acquisition.
The Company works to develop innovative, cost effective new products from
conception to full production including the creation of product samples and
packaging mock-ups. Each product is intended to achieve a high level of customer
satisfaction. The Company estimates that research and development expenditures
during fiscal 1995 and 1996 were approximately $1,424 and $781, respectively. In
addition, a substantial portion of the Company's product development activities
are conducted in conjunction with third-party suppliers and manufacturers, which
generally invoice the Company for product ordered while not invoicing separately
for development costs associated with such products. In October 1996, the
Company engaged a consultant to assist the Company with research and development
activities, including new product development.
PRODUCTION
The Company orders the raw materials used in its products primarily from U.S.
distributors, most of which obtain the raw materials from Italy, China, Egypt,
India and the United States. The Company's principal raw material suppliers are
Marcor Development, Stryka Botanics, Interhealth, San Francisco Herb Company and
Stauber Performance, Ltd. The Company receives directly and inspects a portion
of such materials prior to trans-shipment to its manufacturers. Most raw
materials are shipped directly to the manufacturers for inspection, fumigation
and quarantine, if necessary, and processing.
The Company's products are obtained through oral agreements with independent
third-party manufacturers and manufacturers' representatives, primarily Business
Development Labs, Inc. and Willow International Marketing, Inc. These
manufacturers agree to produce products in accordance with the Company's
specifications. All finished products are shipped to the Company in bulk for
packaging, labelling, and in-house order fulfillment. See "Risk Factors --
Absence of Clinical Studies, Scientific Review and Testing." The Company has no
written agreements with its third-party manufacturers governing the services
they provide. See "Risk Factors -- Reliance on Outside Suppliers and
Manufacturers."
The Company anticipates that it will develop the capability to perform a
significant portion of its production capability internally over the next year,
but there can be no assurance that such capability will be developed or that it
will provide significant cost savings if developed.
The Company is contemplating the development of an in-house manufacturing
facility for certain of its products. The manufacture of dietary supplements is
subject to a requirement for conformance to Good Manufacturing Practices. See
"Business -- Government Regulation." The Company therefore will be required to
establish facilities for the laboratory testing of incoming raw materials;
control of raw materials; storage and handling; documentation of manufacturing
procedures; and final product quality assurance testing. These requirements also
apply to the Company's existing repackaging procedures. The full extent of the
Good Manufacturing Practices requirements is not yet known, but it is expected
that this will require the Company to hire additional skilled personnel,
purchase specialized technical equipment, and set aside portions of its facility
for the support and maintenance of proper good manufacturing practice
procedures.
29
<PAGE>
MARKETING
The Company's marketing strategy is to offer quality, unique products in
niche markets with distinguishable characteristics, such as detoxifying herbal
teas, herbs designed to aid digestion and herbal tea for PMS, weight management
chewing gum and the like. The Company's strategy also includes positioning its
products as innovative, competitively priced and effective.
The Company presently sells its products through distributors and brokers,
combined with an in- house direct sales force, into drug stores, supermarkets,
sporting goods stores, and other high volume retailers, and to consumers
directly. The Company's three largest customers (Naoki Corporation, RegaLabs,
Inc. and Forcite Distributors) accounted for approximately $1.25 million in
sales, or approximately 24.0% of fiscal 1996 net sales. The Company supports its
marketing strategy with a national advertising campaign in the print media,
mainstream sports and fashion magazines and television advertising, all prepared
and placed using the Company's public relations and advertising departments. The
Company advertises in publications such as Time, Vegetarian Times, Let's Live
and Natural Health. The Company intends to continue to use full-color brochures,
flyers, floor and counter displays, packaging and labels created by its in-house
advertising and marketing department for each product. See "Risk Factors --
Accounts Receivable" and "-- No Independent Market Studies." The Company also
plans to increase its share of the herbal detoxification market through trade
shows, advertising, public relations, corporate communications and the
aggressive marketing of its natural products, including direct response and mail
order marketing.
The Company also publishes a periodic multiple page newsletter called the
Health Advocate which contains articles related to the natural products
industry, general health, the environment and recent events at the Company.
Distribution generally includes health food retailers and wholesalers, trade and
non-profit organizations, health professionals, and the media. The Company also
operates a "Press Alert" marketing program through which it informs the media of
newsworthy events and information related to health, the environment, the
natural products industry, and recent Company events. As a policy, the Company
makes decisions with consideration to their environmental impact, including the
production of packaging, stationary, labels, and the like.
To capitalize on the increasing international demand for alternative health
care products, the Company's strategy also includes increasing product sales
through marketing abroad using foreign distributors and brokers, export guides
and trade shows. The Company has initiated distribution in Canada, Mexico, the
United Kingdom, Japan, Thailand, Korea, Taiwan, Australia, Greece and other
countries, and intends to establish distribution in additional countries. To
date, the majority of international sales have been effected in Japan. See "Risk
Factors -- Customer Concentration" and "-- Risks Associated With International
Sales."
COMPETITION
Although the Company believes that its herbal detoxification products were
among the first of such products marketed nationwide, competing products have
been introduced into the market. Similarly, while the Company's Citrium(TM) has
gained rapid acceptance in the market, the Company has experienced increased
competition for market share. The market for the Company's products is
characterized by competitive factors such as product innovation, brand
recognition and effective marketing and distribution. The Company's principal
competitive advantage in the marketplace has been the specialty nature of its
products and the market niches they occupy. By focusing on high-margin,
specialty products with innovative formulations and packaging, the Company has
enhanced its competitive position. Nevertheless, the market for natural dietary
supplements, weight management and sports nutrition products is characterized by
extensive competition, frequent new product introductions, short product life
cycles, rapid price declines and eroding profit margins, together with changing
customer preferences and demographics. The Company expects to face substantial
competition in its efforts to capture and maintain a market share in its target
markets. Numerous small, private companies as well as larger companies such as
Twinlab Corporation, Gumtech International, Inc., BNG Enterprises, Inc. (which
does business as Herbal Klean), Weider Nutrition, Inc., Nature's Secret, Inc.,
Nature's Way, Inc. and Celestial Seasonings, Inc., currently offer competing
products, and additional competition can be expected. In addition, there
30
<PAGE>
are a variety of channels of distribution for dietary supplements and for the
Company's other products including direct response marketing and multi-level
distribution, although the latter is not utilized by the Company. Many of the
Company's existing competitors have greater financial, marketing, distribution
and research capabilities than the Company. The performance of the Company will
depend on its ability to develop and market new products that can gain customer
acceptance and loyalty, as well as the Company's ability to adapt to its product
offerings to meet changing market conditions, including price pressures and
other factors. See "Risk Factors -- Competition and Low Barriers to Entry."
PROPRIETARY RIGHTS: TRADE NAMES, TRADEMARKS AND COPYRIGHTS
The Company owns registrations issued by the U.S. Pat. Off. for the following
trademarks: Naturally Klean(R), Daily Detox(R), and Daily Klean. The Company
entered into an agreement with Olympian Global in January 1996 for the
acquisition of rights to the federally registered trademark, PRO-LINE(R), as
well as certain related names and marks. The Company believes Olympian Global
may have breached certain aspects of the acquisition agreement relating to the
trademark and trade name rights transferred thereunder. The Company is unable to
predict the extent (if any) to which its rights to the assigned trademark and
trade name may be affected by this matter. See "Business -- Products -- Sports
Nutrition Products." The U.S. Pat. Off. has issued Notices of Allowance for the
following trademarks: Women's Nature(TM), Daily Herbal(TM), and Citrium(TM).
Thereafter, the Company filed Statements of Use providing evidence of the
Company's use of each of these marks. If the evidence of use is deemed
satisfactory by the U.S. Pat. Off., federal registrations should issue within
six months. Applications for federal registration have been filed with the U.S.
Pat. Off. for the following trademark and servicemark: "M.D. Labs." The Company
has filed applications for Citrium(TM) in the European Community (CTM) and in
South Korea. For all products in development, name searches and applications for
registration are submitted regularly. See "Risk Factors -- Uncertainty of
Proprietary Rights."
The Houston International tradename has not been registered and an associated
logo has not been registered as a trademark, though the Company claims rights to
use the Houston International trade name and the associated logo under common
law. The Company has recorded a fictitious name certificate in Maricopa County,
Arizona, for the Houston International name.
PRODUCT ROYALTIES
The Company has entered into a royalty agreement regarding Women's Nature(TM)
PMS herbal tea with a consultant (the "WN Consultant"), which calls for the
payment of a royalty of nine cents ($0.09) for each unit of the product sold for
18 months from March 15, 1995, the date the first unit was sold, and a royalty
of five cents ($0.05) thereafter (the "Women's Nature(TM) Royalty Contract").
The Women's Nature(TM) Royalty Contract calls for the WN Consultant to aid the
Company in developing Women's Nature(TM) PMS herbal tea through consultations,
research, formulation experiments and other procedures necessary to design the
product. The WN Consultant reserved the right to examine and approve all product
labeling, press releases, brochures and other material used to promote or market
the product prior to distribution. The original three-year term of the Women's
Nature(TM) Contract expires on March 14, 1998, three years from its effective
date, and is automatically renewed for an additional three-year term unless
either party provides advance written notice of intent not to renew prior to the
end of any such term. On such notice, the Company is entitled to continue to
sell Women's Nature(TM) PMS herbal tea and use the WN Consultant's name until
all inventory in stock and/or on order is exhausted. Thereafter, the Company
forfeits the right to use any reference to the WN Consultant in association with
Women's Nature(TM) PMS herbal tea and the WN Consultant forfeits the right to
any royalty payments for any sales occurring after the end of the last term and
the exhaustion of all inventory in stock and/or on order. The Women's Nature(TM)
Royalty Contract also contains non-disclosure and non-competition provisions.
The Company has entered into an additional agreement with the WN Consultant
dated February 21, 1996, governing Women's Nature(TM) -- Natural Balance herbal
tea and calling for the same terms, including royalties and automatic renewal of
its three-year term, as apply under the Women's Nature(TM) Royalty Contract
discussed above.
31
<PAGE>
The Company's obligation to pay a royalty to a consultant with respect to the
sales of Citrium(TM) has been terminated by mutual agreement in September 1996.
The Company also agreed to pay a former owner of the assets purchased from
Olympian Global a royalty of 3% of the gross selling price of each unit of
PRO-LINE(R) product sold during a 30-month period commencing February 1, 1996.
Olympian Global guaranteed that gross monthly sales of the PRO-LINE(R) products
would average $40,000 per month during the six-month period following closing,
and agreed that if the total gross sales for such products during the six-month
period were less than $240,000, the principal balance due under the Company's
note ($160,000 as of August 31, 1996) would be reduced by the same amount, up to
a $160,000 reduction. Through July 31, 1996, the Company sold approximately
$224,000 of PRO-LINE(R) products; however, a formal reduction in the note has
not yet been prepared. The note also provides that if certain sales levels are
reached prior to January 13, 1997, the Company must pay an additional $40,000.
The note is collateralized by the rights to the PRO-LINE(R) name and mark. The
Olympian Global note is payable in full at the earlier of February 1997 or 30
days after completion of the Company's initial public offering. The Company
believes that Olympian Global may have breached certain aspects of the
acquisition agreement relating to the trademark and trade name rights
transferred thereunder. The Company is unable to predict the extent (if any) to
which its rights to the acquired trademarks and trade names or the payment
obligations under the note may be affected by this matter.
PRODUCT LIABILITY
The natural dietary supplement, weight loss management and sports nutrition
markets are subject to product liability claims. Many of the Company's
competitors have been sued for injuries alleged to have occured as a result of
using their products. Recently, several companies have been sued for injuries
and wrongful death arising out of the use of products containing ma huang or
ephedrine. The Company marketed a product containing ma huang under the name
Naturally High(TM). The State of New York banned the sale and distribution of
Naturally High(TM) and 19 competitors' products due to reports linking products
containing ma huang or its active ingredient, ephedrine, to adverse reactions
such as heart problems, stroke and at least 15 deaths nationwide. The Company
has discontinued all sales of Naturally High(TM)and has not received any
indications or notice of any claim against it arising out of its sale of that
product.
The Company has never been served with a lawsuit based upon any product
liability claim to date. Because of the inherently differing sensitivities of
various individuals to certain chemicals and chemical combinations found in
dietary supplements, some risk of product liability is unavoidable. The Company
has purchased product and general liability insurance with general aggregate
limits of $2 million and a $3 million excess liability umbrella policy. Such
policies provide coverage of up to $1 million for each occurrence. The policies
are subject to annual renewal. There can be no assurance that liability claims
will not exceed the coverage limit or be excluded by coverage limitations or
that such insurance will continue to be available on commercially reasonable
terms or at all. Consequently, product liability claims could have a material
adverse effect on the business, financial condition and results of operations of
the Company. The Company has not experienced any product liability claims to
date. See "Risk Factors -Effect of Discontinued Product" and "-- Risk of Product
Liability Claims."
GOVERNMENT REGULATION
The formulation, processing, packaging, labeling, product claims advertising
and marketing, including direct marketing, of the Company's products are subject
to regulation in the U.S. by one or more federal agencies, including but not
limited to the FDA, the FTC, the CPSC, the USDA, the United States Postal
Service, and the EPA. These activities are also regulated by various agencies of
the states and localities in which the Company's products are sold. In addition,
the Company is also subject to regulation by the Occupational Safety and Health
Administration.
The most extensive regulations applicable to the Company's operations is that
of the FDA enforcement under the FDCA. This statute, with which the Company must
comply, establishes a comprehensive regulatory scheme enforceable by various
civil and criminal actions. The Company's facilities are subject to inspection
and review by federal and state authorities.
32
<PAGE>
The Company's business is in the industry commonly known as the "health food
industry" which has been the subject of many years of vigorous administrative
and judicial enforcement by the FDA. The FDA has taken the position that many
businesses which conduct operations similar to those of the Company are to
varying extents in violation of the law. These efforts by the FDA have resulted
in a series of judicial decisions and legislative enactments which have defined
the future course of this industry. On October 23, 1994, the DSHEA was enacted
and amended the FDCA, particularly with regard to dietary supplements. In the
judgment of the Company, this new law has been favorable to the dietary
supplement industry but, inasmuch as many aspects of the law have not yet been
fully interpreted or judicially applied, there is no assurance that this will in
fact continue to be the case.
First and foremost, the DSHEA legislation creates a new statutory class of
"dietary supplements." This new class includes vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet. The
statute establishes a new safety standard which dietary supplements must meet
and, in certain cases, authorizes the FDA to order dangerous dietary supplements
off the market. The statute potentially authorizes dietary supplements to make
so-called structure and function claims without advance FDA approval, but
requires companies to give the FDA special notice when such claims are made, and
also to provide special labeling for products which make such claims.
However, procedures previously established by the FDA for approval of
so-called "health claim" messages remain in full force and effect. The
regulations prohibit the use of any claim for a dietary supplement, unless the
health claim is supported by significant scientific agreement and is
pre-approved by the FDA. To date, the FDA has been very restrictive in its
approach to "health claims" and has approved the use of health claims for
dietary supplements only in connection with calcium and osteoporosis, and folic
acid and neural tube defects.
The Company's business is in large part dependent on the making of the
so-called structure and function claims, which do not require advance FDA
approval. This type of claim is one where a product is represented or intended
for use in affecting some "structure or function" of the human body. The
Company's products (e.g., those relating to weight loss) are generally labeled
with this type of claim. However, the dividing line between "health claims"
which do require advance approval, and "structure and function claims" which do
not, has not been definitively determined. There is no assurance that claims of
the type which the Company is currently making will not become subject to an
advance approval requirement.
Under DSHEA, a dietary supplement which contains a new dietary ingredient,
one not on the market as of October 15, 1994, will require evidence of a history
of use or evidence of safety, establishing that it will reasonably be expected
to be safe, such evidence to be provided by the manufacturer or distributor to
FDA at least 75 days before commencing to market such a product. Among other
changes, the new law prevents the further regulation of dietary ingredients as
"food additives" and establishes a commission to study and provide
recommendations for the regulation of label claims and statements for dietary
supplements, including the use of literature in connection with sale of dietary
supplements and procedures for the evaluation of such claims.
Pursuant to the new law, the FDA has published notices in the Federal
Register asking for public comments on proposals for implementing the
requirements of the legislation. These proposals would require changes in the
Company's labeling for its products, but the regulations are not yet in effect.
Consequently, the FDA has not finally reconciled its existing enforcement
practice with the new legislation described above. Businesses in this industry,
including the Company, are introducing various products in reliance on industry
interpretations of the law, which interpretations have not yet been proven or
judicially tested.
Therefore, the Company cannot determine to what extent any new, changed or
amended regulations or enforcement practices, when and if implemented, will
affect its business. Such actions could, among other things, require expanded or
different labeling, the recall or discontinuance of certain products, additional
record keeping and expanded documentation of the properties of certain products,
and more complete scientific substantiation. For example, the new legislation
requires that dietary supplements be manufactured in accordance with "Good
Manufacturing Practices." The FDA has not yet identified what
33
<PAGE>
the specific practices will be. The Good Manufacturing Practices requirement
will affect the businesses who supply finished dosage products to the Company.
If the Company implements its plans to undertake its own manufacturing
operations, the Company will also be required to comply with these manufacturing
practices.
Although the full aspects of the FDA's labeling requirements for dietary
supplements have not yet been clearly established, the regulations proposed in
December of 1995 and expected to become final later in 1996, do indicate
pursuant to the new statutory provisions the general types of changes which the
Company will be required to make. These modifications will apply to all of the
Company's products, and will include revised labeling to incorporate necessary
statements and disclosures (identification of product as a "dietary supplement"
and. where applicable, adding a notice "This statement [about an efficacy claim]
has not been evaluated by the Food and Drug Administration. This product is not
intended to diagnose, treat, cure, or prevent any disease". After the labeling
changes are made, the Company will also provide formal notice to the FDA that
such statements have been placed on the label of a product. As part of this
process, the Company will also generally review its product line for compliance
with technical requirements such as type size, sufficiency of declaration of
ingredients, as well as for the sufficiency of substantiation for any product
claims. The Company estimates that the cost of making the label changes will be
approximately $35,000. The FDA's final regulations are expected in December of
1996, and the FDA has informally stated that it will, subject to public comment,
withhold enforcement of the regulations until January 1, 1998. Accordingly, the
Company expects that it will be required to implement the labeling changes
during the course of 1997.
Similarly, marketing and sale of dietary supplements is to some extent
dependent on avoiding a drug classification for such products. The FDA has not
yet delineated how the drug versus dietary supplement will be made under the new
law. Classification as a drug and potentially as a "new drug" might prevent the
Company from continuing to sell, or from introducing certain types of products.
Some of the Company's products may be regulated separately as foods without
invoking the provisions of the law applicable to dietary supplements. This may
also require label changes to conform to FDA's separate food regulations.
Separate and apart from FDA regulations and enforcement, the promotional
activities of the Company are also subject to regulation by the FTC and to the
extent of the use of the mails, by the United States Postal Service. These
agencies impact on the Company's activities primarily in the areas of the
requirements for "truth in advertising." The Company's business is in large part
based upon the popularization of products and ingredients for which there have
been reports in the lay or scientific literature as to their usefulness in human
nutrition and health. These reports are often preliminary, and are not
necessarily supported and documented by the types of scientific studies which
would satisfy the FTC and FDA. The FTC has recently commenced proceedings
against other businesses in the health food industry challenging the sufficiency
of their "substantiation" in support of specific product marketing claims. As
FDA moves forward to finalize the regulations under DSHEA, it is expected that
the FTC, which to some extent works cooperatively with FDA, may also step up its
enforcement activities with regard to substantiation requirements for
promotional claims. There is therefore no assurance that the Company will be
able to continue making the types of promotional claims which have previously
characterized the Company's marketing efforts.
The management of the Company believes that it is in substantial compliance
with existing regulatory and enforcement requirements, taking into account the
manner in which other companies market and promote their products, and the
present pattern of enforcement activities by the respective agencies discussed
above. There is no assurance that the present enforcement policies of the
regulatory agencies will continue either in general, or specifically as regards
the Company. Company management expects that the regulatory and enforcement
requirements will to some extent become more stringent, and that the Company
will have to adapt its marketing and promotional activities accordingly. All or
any of the change which will be required in the Company's labeling and
promotional activities could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Absence of Clinical Studies, Scientific Review and Testing," "-- Uncertainty and
Potential Negative Effect of Government Regulations" and "-- Non-Compliance with
Government Regulations."
34
<PAGE>
Government regulations in foreign countries, where the Company may wish to
commence sales, may also prevent or delay entry into such markets. The Company
has not yet studied the requirements of regulations in foreign countries as they
may apply to the Company's products. The Company may be required to reformulate
or otherwise adapt its products in order to comply with the requirements of
foreign countries. Some foreign countries may prohibit the sales of products
which the Company sells in the United States. There is no assurance that the
Company will be able to comply with the applicable requirements of foreign
countries.
EMPLOYEES
As of August 15, 1996, the Company had 26 employees, 19 of whom were leased
through a professional employer organization ("PEO"), Employee Solutions, Inc.,
of which Harvey Belfer, a director and consultant to the Company, is a director.
See "Management -- Executive Officers and Directors" and "Certain Transactions."
Through this arrangement, the Company pays a fee of approximately 3% of the
employees' salary for the PEO to be the employer of record for these full-time
Company employees, thus easing the Company's payroll and benefits administration
burden. The Company intends to terminate this leasing arrangement by early 1997.
Six of the Company's employees are in sales, seven in shipping and receiving,
three in accounting, two in advertising and public relations and two in consumer
service. The remainder of the Company's employees, including the officers, serve
general and administrative functions. None of the Company's employees are
covered by a collective bargaining agreement.
FACILITIES
In October 1995, the Company moved into a 14,000 square foot leased office
and warehouse facility in Tempe, Arizona. Management believes that this facility
provides sufficient space for the Company's current operations, but anticipates
that additional space will be needed during fiscal 1997. See "Risk Factors --
Limited Capitalization." The Company believes that additional suitable space
will be available on commercially reasonable terms. The lease currently calls
for monthly rent of $6,941, increasing to $7,288 in August 1997, $7,652 in
August 1998 and $8,035 in August 1999, and expires on July 31, 2000. The Company
also intends to establish a 10,000 square foot manufacturing facility by the end
of the fiscal year. See "Use of Proceeds."
TRADE ASSOCIATIONS
The Company belongs to a number of trade associations, including the American
Botanical Council, the American Herbal Products Association, the Herb Research
Foundation, the Canadian Health Food Association, the World Watch Institute, and
the National Nutritional Foods Association, and is a contributor to Citizens for
Health.
LITIGATION
The Company has received correspondence from an overseas trading company
threatening to institute litigation in Japan based on allegations that the
Company breached a contract with the trading company by failing to designate it
the exclusive distributor of Citrium(TM) in Japan. The trading company is
claiming damages of $500,000. To the knowledge of the Company no lawsuit has
been filed or served in this matter at this time. The Company is in the initial
stages of reviewing the allegations, and it will take appropriate responsive
measures if a complaint is filed. See Note 4 of Notes to Unaudited Consolidated
Financial Statements for the three months ended August 31, 1996.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Hooman Nikzad .................. 30 Chief Executive Officer, Director
Todd P. Belfer ................. 28 President, Director
Faradjollah "Fred" Djahandideh 55 Vice President, Operations, Secretary/Treasurer, Director
Bradley A. Denton .............. 32 Chief Financial Officer, Vice President, Assistant Secretary
Harvey A. Belfer ............... 58 Director
Allan R. Lyons(1) .............. 55 Director
Kenneth A. Steel, Jr.(1) ...... 38 Director
</TABLE>
- ----------
(1) Member of the Audit Committee.
HOOMAN NIKZAD. Mr. Nikzad has been the Chief Executive Officer and a Director
of the Company since its inception. He was also a member and manager of the
Company's predecessor, Houston. In September 1990, Mr. Nikzad co-founded Pro
Pay, Inc. a staff leasing firm, which he and his co-owner sold to a publicly
traded company, Employee Solutions, Inc., in October 1993.
TODD P. BELFER. Todd Belfer has been the President and a Director of the
Company since its inception. He was also a member and manager of the Company's
predecessor, Houston. From May 1991 to December 1995, he served as Vice
President of Marketing and Investor Relations and Director of Employee
Solutions, Inc., an employee leasing company based in Phoenix, Arizona. Mr.
Belfer is the son of Harvey Belfer, a Director of and consultant to the Company.
FRED DJAHANDIDEH. Mr. Djahandideh has been the Vice President, Operations and
Secretary/Treasurer and a Director of the Company since its inception. He was
also a member and manager of the Company's predecessor. From 1990 to 1992, Mr.
Djahandideh was a consultant for Momtaz Carpet Co., an import/export textile
company then based in Los Angeles, California. Mr. Djahandideh is instrumental
in procuring many of the ingredients used in the Company's products.
BRADLEY A. DENTON. Mr. Denton, a Certified Public Accountant, has been the
Company's Chief Financial Officer since its inception. He was also the Chief
Financial Officer of the Company's predecessor, Houston, since December 1995.
From October 1993 to December 1995, he was an Assistant Vice President at First
Interstate Bank, Southwest Region, Financial Advisory Services Group, in
Phoenix, Arizona. From December 1991 to October 1993, he was an Associate at
Donaldson, Lufkin & Jenrette Securities Corporation, New York City, where he
worked in the firm's Taxable Fixed Income and Real Estate Investment Banking
Groups.
HARVEY A. BELFER. Harvey Belfer has been a Director of the Company since its
inception. He was also a member of the Company's predecessor, Houston. In 1991,
he co-founded Employee Solutions, Inc., an employee leasing company based in
Phoenix, Arizona, of which he has been a Director since its inception. He was
the President of Employee Solutions, Inc. from inception until June 1996, and
also served as its Chief Executive Officer. From 1984 to 1991, Mr. Belfer was an
executive officer of Contract Personnel Systems, Inc. and Corporate Personnel
Services, Inc., firms engaged in the staff leasing business. Mr. Belfer serves
as a consultant to the Company and is the father of the Company's President.
ALLAN R. LYONS. Mr. Lyons has been a Director of the Company since September
1996. Since 1968, he has been a Certified Public Accountant with Piaker & Lyons,
P.C. in Vestal, New York. Mr Lyons has been Chairman of the Board of Piaker &
Lyons since November 1993. He is also a director of The Score Board, Inc., a
Cherry Hill, New Jersey, marketer of telephone and trading cards and other
sports and entertainment-related products and of Franklin Credit Management
Corp., a New York specialty consumer finance company.
36
<PAGE>
KENNETH A. STEEL, JR. Mr. Steel has been a Director of the Company since
September 1996. Since October 1996 he has been the interim Chief Executive
Officer of Monterey Pasta Company, a San Francisco, California manufacturer of
fresh, refrigerated pasta. Since August 1978, Mr. Steel has been the Executive
Vice President of K.A. Steel Chemicals, Inc., a privately held Chicago, Illinois
based chemical company in which Mr. Steel holds primary responsibilities for
sales and marketing and operations management. Since October 1995, he has also
been a Director of Organic Food Products, Inc. (formerly Garden Valley Naturals,
Inc.), a privately held company engaged in processing, packing and marketing
natural foods. Mr. Steel serves as a consultant to the Company.
The Bylaws provide for a Board of Directors of three to nine members. All
current directors of the Company hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Commencing with the 1997 annual meeting of stockholders, the Board of Directors
will be classified into three classes with each class holding office for a
three-year period. To provide for the expiration of the term of one of the three
classes of directors each year, the initial term for one class of directors
shall be one year, the initial term for the second class of directors shall be
two years and the initial term for the third class of directors shall be three
years. Thereafter, the terms of all directors shall be three years.
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable expenses incurred in attending
meetings. The Company currently does not intend to pay any cash compensation to
directors. In September 1996, each non- employee director (Messrs. Lyons and
Steel) was granted options for 20,000 shares of Common Stock exercisable at $8
per share.
Effective June 1, 1996, the Company entered into a three-year consulting and
noncompetition agreement with Harvey A. Belfer, a director of the Company. The
agreement provides that the Company will pay Mr. Belfer an annual fee of
$12,000, increasing 10% each year, plus expenses in exchange for consulting
services in connection with the manufacturing operations, marketing, and sales
activities and business affairs of the Company. In connection therewith, Mr.
Belfer received five-year warrants exercisable for 40,000 shares of Common Stock
at an exercise price of $3.50 per share, vesting in stages through May 31, 1999.
On June 1, 1996, Mr. Belfer also received options to purchase 30,000 shares of
Common Stock at an exercise price of $3.50 per share under the Company's Stock
Option Plan.
Effective September 13, 1996, the Company entered into a one-year consulting
and noncompetition agreement with Kenneth A. Steel, Jr., a director of the
Company. The agreement provides that the Company will issue Mr. Steel five-year
warrants to purchase shares of the Company's Common Stock in exchange for
consulting services in connection with the manufacturing and operations
activities and business affairs of the Company. The warrants are exercisable for
100,000 shares of Common Stock at an exercise price of $7.00 per share, vesting
pro rata each day during the year beginning August 1, 1996. On September 10,
1996, Mr. Steel also received options to purchase 20,000 shares of Common Stock
at an exercise price of $8.00 per share under the Company's Stock Option Plan.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer. No executive officer
who was serving as an executive officer on May 31, 1996 had an aggregate salary
and bonus exceeding $100,000 for the fiscal year ended May 31, 1996.
Executive officers are elected annually by and serve at the discretion of the
Board of Directors.
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($) ($)
--------------------------- ---- --------- ------------ ------------
<S> <C> <C> <C> <C>
HOOMAN NIKZAD, CHIEF EXECUTIVE Officer(1) ............................. 1996 $42,870 $1,650(2) $2,691(3)
</TABLE>
- ------------
(1) Mr. Nikzad also received member draws as a member of Houston, predecessor to
the Company. See "Certain Transactions."
(2) Represents an automobile lease payment paid by the Company in lieu of salary
payments.
(3) Represents Company payment of cellular telephone charges.
The executive officer named in the Summary Compensation Table did not own or
receive any stock options or SARs during the fiscal year ended May 31, 1996. See
"Description of Capital Stock -- Warrants" and "Certain Transactions" for
information regarding warrants received by Mr. Nikzad during fiscal 1996. On
June 1, 1996, the Company adopted a plan pursuant to which the Company may grant
options to purchase Common Stock to employees, including officers, and others.
On June 1, 1996, the Company granted Mr. Nikzad an option to purchase 30,000
shares at $3.50 per share under the Stock Option Plan. See "Management -- Stock
Option Plan."
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was adopted by
the Board of Directors in June 1996 and approved by the stockholders in
September 1996 to grant options to purchase 300,000 shares of Common stock. As
of August 15, 1996, options to purchase 228,000 shares of Common Stock were
outstanding. The Stock Option Plan provides for the granting to employees of
either "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock
options to any individual, including employees and directors of the Company.
Incentive stock options may be granted only to employees, including officers.
The exercise price of incentive stock options granted under the Stock Option
Plan must be the fair market value of the Common Stock on the date of grant. The
exercise price of any incentive stock option granted to an optionee who
beneficially owns more than 10% (a "10% Holder") of the Company's voting stock
must be at least 110% of the fair market value of the underlying shares on the
date of grant. The Stock Option Plan expires in 2006 with respect to incentive
stock options.
Under the Stock Option Plan, nonqualified stock options may be granted to any
individual, including employees and directors and consultants who are not
employees of the Company. The exercise price of nonqualified stock options may
be any amount determined in good faith by the Board of Directors or a committee
appointed by the Board. The Company has no plans to grant nonqualified stock
options at an exercise price of less than the fair market value of the
underlying shares on the date of grant.
The Stock Option Plan is administered by the full Board of Directors or
compensation committee of the Board (the "Compensation Committee") which
determines the terms of options granted under the Stock Option Plan, including
the exercise price and the number of shares subject to the option. The Stock
Option Plan provides the Compensation Committee with the discretion to determine
when options granted thereunder shall become exercisable. Most options granted
under the Stock Option Plan become exercisable over a period of three years and
have a term of five years. No option may be exercised more than 10 years (or, in
the case of an incentive option granted to a 10% Holder, more than five years)
after its grant date. Options granted under the Stock Option Plan are not
transferable by the optionee after the date of its grant. Options granted under
the Stock Option Plan are not transferable by the optionee other than by will or
the laws of descent and distribution, and each option is exercisable during the
lifetime of the optionee only by the optionee, his guardian or legal
representative. Incentive stock options held by employees of the Company may be
exercised by the participant only while employed by the Company or within one
year following termination resulting from death or permanent disability or
within three months after termination for any reason other than cause, death or
permanent disability, or on or before the date
38
<PAGE>
the participant's employment with the Company is terminated, if for cause.
Options to non-employees may be exercised within such time period as the
Compensation Committee determines but no later than 10 years from the date of
grant, two years after cessation of services to the Company for any reason other
than death, permanent disability, retirement or cause, three years after
cessation of services by reason of death, permanent disability or cause, or the
date of cessation of services for cause. Upon the occurrence of a change in
control of the Company, 100% of all unvested options that had been outstanding
for at least six months will vest.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
Hooman Nikzad entered into a three-year employment agreement with the Company
as of June 1, 1996, pursuant to which he was employed as Chief Executive
Officer. Under the agreement, Mr. Nikzad is entitled to an annual base salary of
$85,000, increasing by 10% annually commencing May 31, 1997. Unless terminated
without cause, Mr. Nikzad is entitled to a lump sum payment equal to the greater
of the base salary due for the remainder of the term of the employment agreement
or 12 months' base salary, and continuation of coverage under medical plans for
up to 12 months. Mr. Nikzad is entitled to certain incentive compensation
payments, if any, made for the year of termination of his employment for death
or disability. If the employment is terminated within 12 months after certain
changes in control of the Company, Mr. Nikzad is entitled to a lump sum payment
(in lieu of the payment referred to in the second preceding sentence) not to
exceed 2.99 times the base amount defined in Section 280G of the Internal
Revenue Code of 1986, as amended, continuation of medical coverage for 12 months
and other benefits in effect at that time. The agreement also contains
confidentiality and non-competition covenants. These covenants might be held
unenforceable or only partially enforceable if challenged in a court. In
connection with his employment, Mr. Nikzad received options for 30,000 shares of
the Company's Common Stock on June 1, 1996, exercisable at $3.50 and vesting in
equal parts on the first three anniversaries of the grant date.
The Company has similar agreements with Messrs. Todd Belfer, Djahandideh and
Denton employing them in their capacities as officers with the Company, except
that their annual salary is $50,000, $85,000 and $65,000, respectively, and the
numbers of options received were 30,000, 30,000 and 10,000, respectively. Todd
Belfer's salary is $50,000 per annum, increasing 10% annually commencing May 31,
1997, and Mr. Denton's salary is $65,000 per annum, increasing to $70,000
January 1, 1997 and to $75,000 January 1, 1998, with provisions for Mr. Denton
to receive annual bonuses of $10,000, $15,000 and $20,000 for fiscal years 1997
through 1999, respectively, should the Company achieve net sales targets during
such years. In connection with his employment, Mr. Denton also received
five-year warrants exercisable for 60,000 and 30,000 shares of Common Stock at
an exercise price of $.50 and $1.00, respectively, vesting in stages through
December 31, 1998.
39
<PAGE>
CERTAIN TRANSACTIONS
The Company's predecessor, Houston, was founded by Hooman Nikzad, Todd P.
Belfer, Fred Djahandideh, Harvey A. Belfer and Marvin D. Brody. Houston was a
party to an agreement dated December 12, 1995 pursuant to which Marvin D. Brody
and Nancy P. Brody transferred their Houston membership interests to Harvey A.
Belfer, Todd P. Belfer, Hooman Nikzad and Fradjollah Djahandideh. Houston paid
approximately $4,100 in attorneys' fees relating to the agreement and agreed to
indemnify the sellers against all liabilities arising from Houston's operations.
In May 1996, Messrs. Nikzad, Todd Belfer, Djahandideh and Harvey Belfer
completed a private placement of portions of their membership interests in the
Company's predecessor, Houston, selling approximately 16.6% of their interests.
The Company did not receive any proceeds from the sale. On May 31, 1996, all
members converted their interests into shares of the Company's Common Stock.
Private placement costs associated with the transactions of approximately
$70,000 were paid by the Company. In connection with the transactions, the
Company also issued warrants to purchase an aggregate of 118,421 shares of
Common Stock to the underwriter of a portion of the private placement and
entities associated with an attorney involved in the private placement and a
director of the Company who subsequently resigned. See "Description of Capital
Stock -- Warrants."
Houston made limited liability company distribution payments to its members
in fiscal 1995 and fiscal 1996, including the following payments to current
executive officers and directors: Mr. Nikzad, $125,256 in 1995 and $220,313 in
1996; Mr. Todd Belfer, $125,256 in 1995 and $220,313 in 1996; Mr. Djahandideh,
$224,339 in 1995 and $495,313 in 1996; and Mr. Harvey Belfer, $112,966 in 1995
and $264,063 in 1996. The Company succeeded to Houston's business effective May
31, 1996 and no additional distributions will be made. See "Limited Liability
Company Distributions" and Consolidated Statements of Shareholders' Equity and
Notes to Consolidated Financial Statements.
The Company currently leases 19 of its employees through an employee leasing
company, Employee Solutions, Inc. ("ESI"), of which Harvey Belfer was co-founder
and Chief Executive Officer, and is a Director, and for which Todd Belfer
previously served as Director and Vice President of Marketing and Investor
Relations. For the years ended May 31, 1996 and 1995, Houston paid ESI
approximately $923,000 and $506,000, respectively, for employee leasing and
related expenses.
From February 1994 to October 1994, Houston retained the services of Propay,
Inc., an employee leasing firm ("Propay"), which Hooman Nikzad co-founded and
sold to ESI in October 1993. For the fiscal year ended May 31, 1995, the Company
paid Propay approximately $329,000 for such employee leasing services.
During fiscal 1995, Houston paid a total of approximately $353,600 in
consulting and other fees to Pure Source Ltd., a British Virgin Islands
corporation ("Pure Source") which provided marketing, purchasing, promotional
and other international advertising services and assisted in locating sources of
raw materials. On December 31, 1995, the consulting agreement was terminated. No
fees were paid to Pure Source in fiscal 1996. All of the members of Houston, the
predecessor to the Company, had beneficial interests in Pure Source and
benefitted from the payment of such fees. Current directors and executive
officers of the Company held the following ownership interests in Pure Source:
Mr. Todd Belfer, 15%; Mr. Nikzad, 15%; Mr. Harvey Belfer, 17.5% and Mr.
Djahandideh, 35%.
In February 1996, the Company purchased all of the outstanding stock of
Belnik Investment Group, Inc., an Arizona corporation doing business as Freedom
Wholesalers, Inc. ("Freedom"), from Messrs. Nikzad and Todd Belfer. The purchase
price consisted of $1,000 plus warrants issued to each of Messrs. Nikzad and
Todd Belfer to purchase 10,500 shares of the Company's Common Stock exercisable
at $1.00 per share and vesting in three equal annual installments commencing
December 31, 1996. Prior to acquiring Freedom, the Company had been distributing
certain of its products through Freedom as well as providing office space,
telephone facilities, other business services, and management to Freedom for
which Freedom reimbursed the Company $190,291 in fiscal 1995 and $437,310 in
fiscal 1996. See "Business -- Products" and "-Freedom Products." For financial
reporting purposes, the operations of Freedom are consolidated, and all
intercompany balances and transactions are eliminated. See Note 2 to the
Consolidated Financial Statements.
40
<PAGE>
On March 6, 1996, the Company borrowed $300,000 from Belfer Labs LLC, an
affiliated company formed by Todd Belfer, President and Director of the Company,
and Harvey Belfer, father of Todd Belfer and consultant and Director of the
Company. The Belfer Labs Note accrues interest at the rate of 12% per annum, is
payable March 6, 1997 and is collateralized by substantially all of the
Company's assets. The proceeds of the Belfer Labs Note were distributed to the
members of Houston for, among other things, the members' tax liability which
resulted from the profitable operations of the Company prior to the Company's
conversion to a corporation. On July 23, 1996, the Company paid $100,000 in
principal on the note plus accrued interest of $14,100. Management anticipates
repaying the remaining balance payable on the note with the proceeds from this
Offering.
The Company believes that the terms of the ongoing transactions described
above are fair, reasonable and consistent with the terms that the Company could
obtain from unaffiliated third parties. The Company has no plans to enter into
any additional transactions with officers, directors or stockholders of the
Company. In the future, the Company will not engage in any additional
transactions with its officers, directors or 5% stockholders or their affiliates
unless the transaction is approved by a majority of the disinterested directors
of the Company after full disclosure and will be on terms no less favorable to
the Company than would be available from an unaffiliated third party.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 7, 1996 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person or entity known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------------------------
PERCENT PRIOR PERCENT AFTER
IDENTITY OF STOCKHOLDER OR GROUP(2) NUMBER TO OFFERING OFFERING
----------------------------------- ------ ------------- -------------
<S> <C> <C> <C>
Hooman Nikzad ................................. 412,907 13.8% 9.6%
Todd P. Belfer ................................ 469,156(3) 15.6 10.9
Fred Djahandideh .............................. 994,359(4) 33.1 23.1
Harvey Belfer ................................. 400,203(5) 13.3 9.3
Allan R. Lyons ................................ 65,000(6) 2.2 1.5
Kenneth A. Steel, Jr .......................... 58,068(7) 1.9 1.3
Beth R. Belfer(8) ............................. 200,000 6.7 4.7
Storie Partners, L.P.(9) ...................... 180,000 6.0 4.2
All directors and executive officers as a group
(seven persons)(3)(4)(5)(6)(10) .............. 2,409,693 78.1 55.0
</TABLE>
- ----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC" or "Commission") and generally
includes voting or investment power with respect to securities. In
accordance with SEC rules, shares which may be acquired upon exercise of
stock options or warrants which are currently exercisable or which become
exercisable within 60 days of the date of the table are deemed beneficially
owned by the optionee. Except as indicated by footnote, and subject to
community property laws where applicable, the persons or entities named in
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Except as otherwise noted, mailing address is 1719 West University Drive,
Suite 187, Tempe, Arizona 85281.
(3) Represents shares owned by T.P.B. Investments Limited Partnership, of which
Todd Belfer is general partner, with beneficial interests accruing to Todd
Belfer and his sister, Beth R. Belfer.
(4) Includes 250,000 shares held by Mr. Djahandideh's daughter, Daniela
Djahandideh, for which Mr. Djahandideh holds power of attorney.
(5) Represents shares owned by To Be Limited Partnership, of which Harvey Belfer
is general partner, with beneficial interests accruing to Harvey Belfer's
son, Todd Belfer, and Harvey Belfer's daughter, Beth R. Belfer.
(6) Represents 45,000 shares held by two venture capital firms controlled by Mr.
Lyons and 20,000 shares Mr. Lyons has a right to acquire upon exercise of
stock options.
(7) Represents 55,068 shares Mr. Steel has a right to acquire upon exercise of
stock options.
(8) Mailing address is 6900 East Camelback Road, Suite 440, Scottsdale, Arizona
85251. Ms. Belfer is not a director or employee of the Company.
(9) General partners are Steven A. Ledger and Richard Dirickson. The partners
and the partnership are unrelated to the Company, the representatives of the
Underwriters of this Offering and their affiliates. Mailing address is 1
Bush Street, No. 1350, San Francisco, California 94104.
(10)Includes an aggregate of 85,068 shares issuable upon exercise of stock
options and warrants.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 8,000,000 shares of
Common Stock, $.001 par value per share, and 100,000 shares of Preferred Stock,
$.01 par value per share (the "Preferred Stock"), issuable in series. The
following summary of certain provisions of the Company's capital stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company's Certificate of Incorporation (the "Certificate") and
Bylaws which are included as exhibits to the Registration Statement of which
this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
Immediately prior to the Offering, there were 3,000,000 shares of Common
Stock outstanding which were held of record by 39 stockholders. The holders of
Common Stock are entitled to one vote per share on all matters to be voted upon
by the stockholders. Stockholders are not entitled to cumulate their votes for
the election of directors. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, the holders of Common Stock are entitled
to receive such dividends pro rata, if any, as may be declared from time to time
by the Board of Directors out of funds legally available for that purpose. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share pro rata in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this Offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 100,000 shares of undesignated Preferred
Stock. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to determine the powers, preferences
and rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated Preferred Stock and to
fix the number of shares constituting any series and the designation of such
series, without any further vote or action by the stockholders. Shares of
Preferred Stock so designated may have voting, conversion, liquidation
preference, redemption, sinking fund provisions and other rights which are
superior to those of the Common Stock. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of and the voting and other rights of the
holders of Common Stock. At present, the Company has no plans to issue any
shares of the Preferred Stock.
WARRANTS
As of August 31, 1996, the Company has outstanding warrants to purchase
464,421 shares of its Common Stock, of which 276,149 were exercisable, as
further described below. Each warrant expires in either May or June 2001,
respectively, and contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon exercise of the warrant under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassifications and consolidations, and in certain cases, for dilutive sales
of Common Stock below the then existing exercise price. Certain warrants are
entitled to registration rights. See "Description of Capital Stock --
Registration Rights."
Of the warrants referred to in the preceding paragraph, warrants to purchase
60,000 shares are exercisable at $.50 per share, vesting in stages through 1999.
Warrants to purchase 51,000 shares are exercisable at $1.00 per share, of which
10,000 warrants are vested, and the balance vest in stages through 1998.
Warrants to purchase 192,656 shares are exercisable at $3.50 per share, of which
107,656 are vested currently, and the balance vest in stages through 1999. Two
warrants to purchase 75,000 shares each are exercisable at $5.00 and $10.00 per
share, respectively, all of which are vested currently. Warrants to purchase
10,765 shares are exercisable at the price at which shares are sold in this
Offering, all of which warrants are vested.
43
<PAGE>
In September 1996, the Company granted warrants to purchase 100,000 shares
and 14,000 shares to a Company director/consultant and a paid endorser of the
Company's products, respectively. The warrants to purchase 100,000 shares are
exercisable at $7.00 per share and vest pro-rata, on a daily basis, over the
year ending July 31, 1997. The warrants to purchase 14,000 shares are
exercisable at $6.00 per share, and vest as to 7,000 shares on each September
14, 1997 and September 14, 1998.
CERTAIN ANTI-TAKEOVER PROVISIONS
Stockholders' rights and related matters are governed by Delaware corporate
law, the Certificate and Bylaws. Certain provisions of the Certificate and
Bylaws that are summarized below may affect potential changes in control of the
Company. The cumulative effect of these provisions may be to make it more
difficult to acquire and exercise control of the Company and to make changes in
management.
The affirmative vote of at least two-thirds of the shares entitled to vote is
required for a merger or a consolidation with, or a sale by the Company of all
or substantially all of its assets to, any person, firm or corporation, or any
group thereof, which owns, directly or indirectly, 5% or more of any class of
voting securities of the Company, exclusive of any person holding 10% or more at
May 31, 1996 (an "Interested Person"). In addition, two-thirds approval is
required with respect to other transactions involving any Interested Person,
including the purchase by the Company or any of its subsidiaries of all or
substantially all of the assets or stock of an Interested Person and any other
transaction with an Interested Person that requires stockholder approval under
Delaware law. The two-thirds voting requirement is not applicable to a
transaction that is approved by the Board of Directors if a majority of the
members of the Board of Directors voting to approve such transaction were
elected prior to the date on which the other party became an Interested Person
(the "Continuing Directors") or whose initial election as a director succeeds a
Continuing Director or fills a newly created directorship approved by the
Continuing Directors.
Commencing with the 1997 annual meeting of stockholders, each director will
serve for a three-year term and approximately one-third of the directors will be
elected annually. Candidates for election of directors shall be nominated only
by the Board of Directors or by a stockholder who gives prior written notice to
the Company, generally not less than 60 nor more than 90 days before the annual
meeting. The Company may have three to nine directors as determined from time to
time by the Board, which currently consists of six members. Between stockholder
meetings, the Board may appoint new directors to fill vacancies or newly created
directorships. The Certificate does not provide for cumulative voting at
stockholder meetings for election of directors. Stockholders controlling more
than 50% of the outstanding Common Stock can elect the entire Board of
Directors, while stockholders controlling less than 50% of the outstanding
Common Stock may not be able to elect any directors. A director may be removed
from office only for cause by the affirmative vote of a majority of the combined
voting power of the then outstanding shares of stock entitled to vote generally
in the election of directors.
The Certificate further provides that stockholder action must be taken at a
meeting of stockholders and may not be effected by any consent in writing. A
special meeting of stockholders may be called only by the Chairman of the Board,
the Chief Executive Officer, a majority of the whole Board of Directors or by
the holders of at least 25% of the Common Stock. If a stockholder wishes to
propose an agenda item for consideration at a meeting he must give a brief
description of each item and written notice to the Company not less than 60 nor
more than 90 days prior to the meeting or such other period of time necessary to
comply with applicable federal proxy solicitation rules or other regulations.
Stockholders may need to present their proposals or director nominations in
advance of the time they receive notice of the meeting because the Company's
Bylaws provide that notice of a stockholders' meeting must be given not less
than 10 or more than 60 days prior to the meeting date.
The Certificate provides further that the foregoing provisions of the
Certificate and Bylaws may be amended or repealed only with the affirmative vote
of at least two-thirds of the shares entitled to vote, unless the amendment is
recommended for stockholder approval by a majority of the Continuing Directors.
These provisions exceed the usual majority vote requirement of Delaware law and
are intended to prevent the holders of less than two-thirds of the voting power
from circumventing the foregoing terms by amending the Certificate or Bylaws.
These provisions, however, enable the holders of more than one-third of the
voting power to prevent amendments to the Certificate or Bylaws even if they
were favored by the holders of a majority of the voting power.
44
<PAGE>
The effect of these provisions may be to make more difficult the
accomplishment of a merger or other takeover or change in control of the
Company. To the extent that these provisions have this effect, removal of the
Company's incumbent Board of Directors and management may be rendered more
difficult. Furthermore, these provisions may make it more difficult for
stockholders to participate in a tender or exchange offer for Common Stock and
in so doing may diminish the market value of the Common Stock.
PERSONAL LIABILITY OF DIRECTORS
Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. The
Company believes that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly, the Certificate includes a provision
eliminating liability for monetary damages for any breach of fiduciary duty as a
director, except (i) for any breach of the duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for any transaction
from which the director derived an improper personal benefit; or (iv) for
unlawful payments of dividends or unlawful stock repurchase or redemptions as
provided in Section 174 of the Delaware General Corporation Law. Directors are
not insulated from liability for breach of their duty of loyalty or for claims
arising under the federal securities laws. The foregoing provisions of the
Certificate may reduce the likelihood of derivative litigation against directors
for breaches of their fiduciary duties, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
Furthermore, the Company has entered into indemnity agreements with all of its
directors and officers for the indemnification of and advancing of expenses to
such persons to the fullest extent permitted by law. The Company intends to
execute such indemnity agreements with its future officers and directors. The
Company is in the process of obtaining comprehensive directors and officers
liability insurance coverage, and anticipates obtaining an insurance policy with
an aggregate policy limit of not less than $3,000,000 for the benefit of its
officers and directors insuring such persons against certain liabilities,
including liabilities under the securities laws, no later than the effective
date of this Offering. Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act") may be permitted
to directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
REGISTRATION RIGHTS
Holders of 498,375 shares of Common Stock and holders of warrants to acquire
257,656 shares of Common Stock have the right to demand registration of up to
50% of such shares commencing September 1, 1997 and also will have the right to
receive notice of proposed registrations of securities by the Company and to
cause the Company to include all or a portion of such shares in such
registrations at the Company's expense, provided, among other conditions, that
the underwriters of any such offering shall have the right to limit the number
of shares included in such registration. The holders of these shares of Common
Stock are all of the Company's current stockholders other than the Company's
directors, officers
45
<PAGE>
and certain members of their respective immediate families. Holders of these
warrants are: Canyon Security, L.L.C., an Arizona limited liability company
which is associated with an attorney involved in the Company's private placement
of May 31, 1996. JBV Investments, L.C., a Utah limited liability company
associated with a former director of the Company; and Michael J. Dwyer, a broker
who has invested in the Company in his individual capacity. Holders of
applicable registration rights relating to this Offering have been notified that
their respective shares will not be included in this Offering. The Company is
obligated to pay the offering expenses of each such offering, except for the
selling stockholders' pro rata portion of underwriting discounts and
commissions.
Prior to this Offering, there has been no market for the Common Stock and no
precise prediction can be made of the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect prevailing market
prices.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Corporate Stock Transfer, Inc., Denver, Colorado as
the transfer agent and registrar for the Company's Common Stock.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 4,300,000 shares of
Common Stock outstanding. Of these shares, 1,300,000 of the shares sold in this
Offering (plus any additional shares sold upon the exercise of the Underwriters'
Over-allotment Option) will be freely tradable under the Securities Act except
for shares purchased by "affiliates" of the Company within the meaning of the
rules and regulations under the Securities Act.
The remaining 3,000,000 outstanding shares (the "Restricted Shares"), which
were issued by the Company on May 31, 1996 in reliance upon the "private
placement" exemption provided by Section 4(2) of the Securities Act, will be
deemed restricted securities within the meaning of Rule 144 under the Securities
Act. Restricted Shares may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including an exemption under Rule 144.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after the date of this Prospectus, a person (or persons whose
shares are aggregated) who has beneficially owned "restricted securities" for at
least two years (one year under currently proposed amendments to Rule 144),
including a person who may be deemed an affiliate of the Company, is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then outstanding shares of Common Stock of
the Company (43,000 shares after giving effect to this Offering) and the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding such sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner of sale,
notice and the availability of current public information about the Company. A
person who is not an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least three years
(two years under currently proposed amendments to Rule 144), would be entitled
to sell such shares without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent may require an opinion of counsel that a proposed
sale of shares comes within the terms of Rule 144 of the Securities Act prior to
effecting a transfer of such shares.
The Company and its officers and directors holding an aggregate of 2,324,625
shares of Common Stock have entered into lockup agreements with the Underwriters
pursuant to which such stockholders have agreed not to sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Underwriters. See
"Underwriting."
After the expiration of the lockup agreements with the Underwriters, the
Company expects to file a Registration Statement on Form S-8 under the
Securities Act to register all of the shares of Common Stock reserved for
issuance under the Company's 1996 Stock Option Plan. After the effective date of
such Registration Statement, shares purchased upon exercise of options granted
pursuant to the Stock Option Plan generally would be available for resale in the
public market. As of August 31, 1996, options to purchase 228,000 shares of
Common Stock were outstanding, none of which were exercisable. To date, no
options have been exercised.
Following completion of this offering, holders of 498,375 shares of Common
Stock and the holders of warrants to acquire 257,656 shares of Common Stock have
the right, under certain conditions, to cause the Company to register such
shares under the Securities Act and to participate in future Company
registrations. See "Description of Capital Stock -- Registration Rights."
Prior to this Offering, there has been no market for the Common Stock, and no
precise prediction can be made of the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect prevailing market
prices and limit the Company's ability to raise additional capital.
47
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Sentra Securities Corporation and
Spelman & Co., Inc. are acting as representatives (together, the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
set forth opposite their names.
NUMBER OF
UNDERWRITER SHARES
----------- ------
Sentra Securities Corporation......
Spelman & Co., Inc. ...............
---------
TOTAL ............................. 1,300,000
=========
The Company is obligated to sell, and the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby if any are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock purchased by them directly to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at a price that represents a concession of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
within the discretion of the Representatives. After the initial public offering
of the Common Stock, the offering price and the selling terms may be changed by
the Underwriters.
As a condition to the Underwriters' obligation to purchase the shares of
Common Stock offered hereby, the Underwriters must have received the opinion of
Bass & Ullman, P.C. on issues relating to FDA, FTC and state and local licensing
matters. The opinion must state that, unless otherwise disclosed in this
Prospectus, the Company's advertising and packaging complies with applicable
laws, the Company has all required licenses and permits and the descriptions in
this Prospectus regarding government regulations and the status of the Company's
compliance with such regulations are not misleading.
The Company has granted an option to the Underwriters to purchase, in the
aggregate, up to 195,000 additional shares of Common Stock. The option is
exercisable for 45 days from the date of this Prospectus at an initial offering
price, less underwriting discounts and commissions, as set forth on the cover
page of this Prospectus. The option may only be exercised for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby.
The Underwriters will purchase the Common Stock (including Common Stock
subject to the Over- allotment Option) from the Company at a price of $6.37 per
share. In addition, the Company has agreed to pay to the Representatives a 3%
nonaccountable expense allowance on the aggregate initial public offering price
of the shares of Common Stock, including shares subject to the Over-allotment
Option, of which $25,000 has been paid. The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that any Underwriter may be
required to make in respect thereof.
The Company has agreed to issue to the Representatives, for aggregate
consideration of $100, the Representatives' Warrant to purchase up to 10% of the
number of shares of Common Stock sold in this
48
<PAGE>
Offering for $8.54 per share. The number of shares of Common Stock covered by
the Representatives' Warrants and the exercise price are subject to adjustment
under certain events to prevent dilution. The Representatives' Warrants are
exercisable at any time in the five-year period commencing one year from the
effective date of this Offering. The Representatives' Warrants are not
transferable for one year from the date of this Prospectus except (i) to an
Underwriter or a partner or officer of an Underwriter or (ii) by will or
operation of law. During the term of the Representatives' Warrants, the holder
thereof is given the opportunity to profit from a rise in the market price of
the Company's securities. The Company may find it more difficult to raise
additional equity capital while the Representatives' Warrants are outstanding.
At any time at which the Representatives' Warrants are likely to be exercised,
the Company would probably be able to obtain additional equity capital on more
favorable terms. Additionally, the Company has agreed, beginning one year after
the date of this Prospectus, on demand of the holders of a majority of the
Representatives' Warrants or the Common Stock issued or issuable thereunder, to
register the Common Stock underlying the Representatives' Warrants one time at
the Company's expense. If the Company files a registration statement relating to
an equity offering under the provisions of the 1933 Act at any time during the
period following the date of issuance of the Representatives' Warrants, the
holders of the Representatives' Warrants or underlying Common Stock will have
the right, subject to certain conditions, to include in such registration
statements, at the Company's expense, all or part of the underlying Common Stock
at the request of the holders. The registration of securities pursuant to the
Representatives' Warrants may result in substantial expense to the Company at a
time when it may not be able to afford such expense and may impede future
financing.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Company, the Representative and the Commission.
The Representatives have advised the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Company's
Common Stock. The initial public offering price for the Common Stock was
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price was the
history of and the prospects for the Company and the industry in which it
operates, the past and present operating results of the Company and the trends
of such results, the future prospects of the Company, an assessment of the
Company's management, the general condition of the securities markets at the
time of this Offering and the prices for similar securities of comparable
companies.
LEGAL MATTERS
The legality of the shares offered hereby will be passed upon for the Company
by the Company's general counsel, Quarles & Brady, Phoenix, Arizona. Legal
issues related to FDA, FTC and state and local licensing matters are being
passed upon for the Company by Bass & Ullman, P.C., New York, New York. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Luce, Forward, Hamilton & Scripps LLP, San Diego, California.
EXPERTS
The consolidated balance sheet of the Company as of May 31, 1996 and the
consolidated statements of income, shareholders' equity, and cash flows of the
Company for each of the two years in the period ended May 31, 1996 included in
this Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The descriptions of the government regulations and the status of the
Company's compliance with such regulations included in this Prospectus have been
included herein in reliance on the opinion of Bass & Ullman, P.C., attorneys,
given on the authority of that firm as experts in such matters.
49
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities Act
concerning the Common Stock offered by this Prospectus. Certain portions of the
Registration Statement have not been included in this Prospectus as permitted by
the Commission's regulations. For further information concerning the Company and
the shares of Common Stock offered hereby, reference is made to the Registration
Statement and its exhibits, which may be inspected at the offices of the
Commission, without charge. Copies of the material contained therein may be
obtained from the Commission upon payment of the prescribed fees. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete; where such contract or other document is
an exhibit to the Registration Statement, each such statement is qualified in
all respects by the provisions of such exhibit, to which reference is hereby
made for a full statement of the provisions thereof.
After completion of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934 (the "1934
Act") and, in accordance therewith, will file reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at public reference facilities of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549; and at the regional
offices maintained by the Commission at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; 7 World Trade Center, 13th Floor, New York, New York
10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates.
Additionally, the Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission; the address of such site is
http://www.sec.gov.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants ...............................................................F-1
Audited Financial Statements:
Consolidated Balance Sheet as of May 31, 1996 ................................................F-2
Consolidated Statements of Income for the years ended May 31, 1996 and 1995 .................F-3
Consolidated Statements of Shareholders' Equity for the years ended May 31, 1996 and 1995 ...F-4
Consolidated Statements of Cash Flows for the years ended May 31, 1996 and 1995 .............F-5
Notes to Consolidated Financial Statements ...................................................F-6
Unaudited Financial Statements:
Consolidated Balance Sheets as of August 31, 1996 and May 31, 1996 ...........................F-13
Consolidated Statements of Income for the three months ended
August 31, 1996 and 1995 ...................................................................F-14
Consolidated Statement of Shareholders' Equity for the three months ended
August 31, 1996 ............................................................................F-15
Consolidated Statements of Cash Flows for the three months
ended August 31, 1996 and 1995 .............................................................F-16
Notes to Unaudited Consolidated Financial Statements .........................................F-17
</TABLE>
51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
M.D. Labs, Inc.
We have audited the accompanying consolidated balance sheet of M.D. Labs,
Inc. and subsidiary as of May 31, 1996, and the related consolidated statements
of income, shareholders' equity, and cash flows for the two years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
M.D. Labs, Inc. and subsidiary as of May 31, 1996, and the consolidated results
of their operations and their cash flows for the two years then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
July 12, 1996
F-1
<PAGE>
M.D. LABS, INC.
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents ................................................... $ 91,799
Trade accounts receivable, net of allowance for doubtful accounts of $27,876. 619,860
Inventories ................................................................. 1,080,406
Deferred tax asset .......................................................... 26,683
Other current assets ........................................................ 46,181
----------
Total current assets .................................................... 1,864,929
----------
Property and equipment, net ................................................... 219,399
Intangible assets ............................................................. 520,732
Deferred tax asset ............................................................ 59,356
Deposits and other assets ..................................................... 27,254
----------
Total assets ............................................................ $2,691,670
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................................... $ 213,817
Notes payable ................................................................. 460,000
----------
Total current liabilities ............................................... 673,817
----------
Shareholders' equity:
Common stock, $.001 par value; 8,000,000 shares authorized; 3,000,000 shares
issued and outstanding .................................................... 3,000
Preferred stock, $.01 par value; 100,000 shares authorized; none outstanding.
Paid-in capital ............................................................. 2,018,728
Less: unearned compensation ................................................. (3,875)
----------
Total shareholders' equity .............................................. 2,017,853
----------
Total liabilities and shareholders' equity .............................. $2,691,670
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
M.D. LABS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
----------- -----------
Net sales ..................................... $ 5,191,067 $ 4,193,997
Cost of goods sold ............................ 1,510,479 1,608,568
----------- -----------
Gross profit .................................. 3,680,588 2,585,429
Selling, general and administrative ........... 2,141,926 2,012,641
----------- -----------
Income from operations ........................ 1,538,662 572,788
Interest expense .............................. 12,991
----------- -----------
Income before income tax ...................... 1,525,671 572,788
Income tax benefit ............................ 86,039
----------- -----------
Net income .................................... $ 1,611,710 $ 572,788
=========== ===========
Pro forma net income data (unaudited):
Income before income tax .................... $ 1,525,671 $ 572,788
Pro forma income taxes ...................... 610,039 229,115
----------- -----------
Pro forma net income ...................... $ 915,632 $ 343,673
=========== ===========
Pro forma net income per share .............. $ 0.29 $ 0.11
=========== ===========
Shares used in pro forma net income per share 3,197,940 3,197,940
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
M.D. LABS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
MEMBERS' COMMON PAID-IN UNEARNED
EQUITY STOCK CAPITAL COMPENSATION TOTAL
------------ ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances as of May 31, 1994 .$ 1,424,471 $ $ $ $ 1,424,471
Cash distributions ........... (692,817) (692,817)
Contributions ................ 400,000 400,000
Net income ................... 572,788 572,788
------------ ------- ----------- -------- ------------
Balances as of May 31, 1995... 1,704,442 1,704,442
------------ ------- ----------- -------- ------------
Cash distributions ........... (1,300,000) (1,300,000)
Issuance of stock warrants.... 5,576 (4,500) 1,076
Amortization of unearned
compensation ................ 625 625
Net income ................... 1,611,710 1,611,710
Conversion of members' equity
to common stock ............. (2,016,152) 3,000 2,013,152
------------ ------- ----------- -------- ------------
Balances as of May 31, 1996...$ 0 $ 3,000 $ 2,018,728 $ (3,875) $ 2,017,853
============ ======= =========== ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
M.D. LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 1,611,710 $ 572,788
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization ......................................... 183,461 145,032
Changes in assets and liabilities:
Increase in accounts receivable ....................................... (113,329) (151,814)
Increase in inventories ............................................... (608,034) (81,578)
Increase in deferred tax asset ........................................ (86,039)
(Increase) decrease in other current assets ........................... 7,588 (51,508)
Increase in accounts payable and accrued expenses ..................... 92,371 74,973
------------ ----------
Net cash provided by operating activities ......................... 1,087,728 507,893
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment ....................................... (121,832) (56,944)
Purchase of Olympian Global ............................................... (50,000)
(Increase) decrease in deposits and other assets .......................... 6,718 (32,472)
------------ ----------
Net cash used in investing activities ............................. (165,114) (89,416)
------------ ----------
Cash flows from financing activities:
Proceeds from notes payable ............................................... 300,000
Repayment of notes payable ................................................ (50,000)
Distributions to members .................................................. (1,300,000) (692,817)
Contributions from members ................................................ 400,000
------------ ----------
Net cash provided by (used in) financing activities .............. (1,050,000) (292,817)
------------ ----------
Net increase (decrease) in cash and cash equivalents ........................ (127,386) 125,660
Cash and cash equivalents, beginning of year ................................ 219,185 93,525
------------ ----------
Cash and cash equivalents, end of year ...................................... $ 91,799 $ 219,185
============ ==========
Non-cash investing and financing activities:
Olympian Global assets received for notes payable ........................ $ 210,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND OPERATIONS:
M.D. Labs, Inc. and its subsidiary, Belnik Investment Group, Inc., are in the
business of developing, packaging, marketing and distributing natural dietary
supplements (consisting primarily of herbal products) and weight management
products. The formulation, processing, packaging, labeling, product claims,
advertising and marketing, including direct marketing, of these products are
subject to regulation in the U.S. by one or more federal agencies, including the
FDA, the FTC, the Consumer Product Safety Commission, the USDA, the United
States Postal Service and the Environmental Protection Agency. Sales are made to
large retailers, distributors and consumers, primarily in the United States and
Japan.
M.D. Labs, Inc., a Delaware corporation, was incorporated in February 1996.
On May 31, 1996, it exchanged three million shares of its common stock for all
of the investment units of Houston Enterprises, L.L.C. (the "Predecessor"), an
Arizona limited liability company. Concurrently, but prior to the exchange, the
members of the Predecessor sold in a private placement approximately 16.6% of
their investment units for $1,744,313. The Company received no proceeds from the
sale; however, private placement costs of approximately $70,000 were paid by the
Company.
On February 26, 1996, M.D. Labs, Inc. acquired from common owners all of the
assets of Belnik Investment Group, Inc. ("Belnik") from two owners of the
Predecessor for $1,000 and warrants to purchase 21,000 shares of M.D. Labs'
common stock.
On January 16, 1996, the Predecessor purchased all the assets of Olympian
Global, L.L.C., an unaffiliated Arizona limited liability company, for $260,000.
The excess of cost over the fair value of the net assets acquired of $240,000 is
included in intangibles. On February 14, 1994, the Predecessor purchased all of
the assets of Houston Enterprises, Inc., an unaffiliated Arizona corporation,
for $1,350,000. The excess of cost over the fair value of the net assets
acquired of $506,328 is included in intangibles. Both transactions were
accounted for in accordance with the purchase method of accounting and,
accordingly, the results of operations have been included in the consolidated
results of operations from the respective dates of acquisition.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
M.D. Labs, Inc., its Predecessor, and Belnik have historically operated under
a high degree of common ownership and management control. Accordingly, the
consolidated financial statements include the accounts of M.D. Labs, Inc., its
wholly-owned subsidiary, Belnik and its Predecessor (the "Company") for all
periods presented. All intercompany balances and transactions have been
eliminated.
The accompanying consolidated financial statements at May 31, 1996 reflect
the exchange of common shares for the investment units of its Predecessor, an
L.L.C.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
acquisition to be cash equivalents, carried at cost, which approximates fair
value. At times, the Company's cash deposited in financial institutions may be
in excess of federally insured limits.
F-6
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis. Inventories consist primarily of finished goods,
finished but not packaged (semi-finished) goods, raw herbs and packaging.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on
depreciable assets by the straight-line method over estimated useful lives while
leasehold improvements are amortized by the straight-line method over the
shorter of estimated useful lives or the remaining lease terms.
When items are retired or disposed of, the cost and accumulated depreciation
or amortization are removed from the accounts and any gain or loss is included
in the statements of income.
Intangible Assets
Amortization of the intangibles is as follows:
Goodwill, including trademarks 15 years
Non-compete agreements 3 years
Product propriety rights 10 years
The Company assesses the recoverability of goodwill at each balance sheet
date by determining whether amortization of the assets over their original
estimated useful life can be recovered through estimated future undiscounted
operating income, excluding amortization.
Revenue Recognition
Sales and related cost of sales are recorded at the time of shipment and a
provision for anticipated sales returns is recorded based upon historical
experience.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation ("FAS
123"), which defines a fair value based method of accounting for employee stock
options or similar equity instruments. However, it also allows an entity to
continue to account for these plans according to Accounting Principles Board
Opinion No. 25 ("APB 25"), provided proforma disclosures of net income and
earnings per share are made as if the fair value based method of accounting
defined by FAS 123 had been applied. The Company anticipates electing to
continue to measure compensation expense related to employee stock purchase
options using APB 25, and will provide proforma disclosures as required.
Income Taxes
For the two years ended May 31, 1996, the Predecessor elected under Internal
Revenue Code Sub-Chapter K to be treated as a limited liability company, and
accordingly, is generally not subject to federal and state income taxes. For
income tax reporting purposes for these years, all profits and losses, and
certain other items, were passed through to the members of the Predecessor.
Since the income of M.D. Labs, Inc. will be taxable after May 31, certain
temporary differences between financial and tax reporting are reflected as an
income tax benefit in the statement of income for the year ended May 31, 1996
and as deferred tax assets in the balance sheet as of May 31, 1996.
F-7
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
3. CONCENTRATION OF RISK:
Financial instruments subject to credit risk consist primarily of trade
accounts receivable. In the normal course of business, M.D. Labs, Inc. extends
unsecured credit to its customers. Additionally, M.D. Labs has certain sales
concentrations. As of and for the year ended May 31, 1996, the following
concentrations existed:
Accounts Receivable
Seven customers comprised approximately 60% of the accounts receivable
balance.
Customer Sales
One customer comprised approximately 12.2% of net sales for the year ended
May 31, 1996. No customer comprised sales in excess of 10% during the year ended
May 31, 1995.
Product Sales Lines
Major product lines, as a percentage of sales, for the years ended May 31,
1996 and 1995 were as follows:
1996 1995
---- ----
Product A ........................ 51% 72%
Product B ........................ 25% 0%
Product C ........................ 10% 20%
International Sales
International sales during the past two years were as follows:
1996............................... $904,901
1995............................... $102,990
4. INVENTORIES:
Inventories consist of the following:
1996
----
Finished and semi-finished goods......... $ 784,987
Raw materials ........................... 295,419
-----------
$ 1,080,406
===========
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
1996
---------
Computers and equipment ........................$ 212,112
Leasehold improvements ......................... 85,985
Furniture and fixtures ......................... 38,057
Vehicles ....................................... 4,232
--------
340,386
Less accumulated depreciation and amortization 120,987
--------
$ 219,399
========
F-8
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
6. INTANGIBLES:
Intangibles consist of the following:
1996
--------
Goodwill, including trademarks ................... $346,328
Non-compete agreements ........................... 300,000
Product propriety rights ......................... 100,000
--------
746,328
Less accumulated amortization .................... 225,596
--------
$520,732
========
7. NOTES PAYABLE:
At May 31, 1996, notes payable included:
Promissory note payable to Belfer Labs, L.L.C., a related party, due
March 6, 1997, 12% interest ........................................ $ 300,000
Note payable to Olympian Global, L.L.C., 7.5% interest, collateralized
by the right to the tradename of the purchased product line ........ 160,000
---------
$ 460,000
=========
The Belfer note is collateralized by substantially all of the Company's
assets.
The Olympian note matures on the earliest of February 28, 1997 or 30 days
after the Company becomes a publicly traded company. The note also provides that
if certain sales levels are reached prior to January 13, 1997, the Company must
pay an additional $40,000. Based on current sales levels, the Company does not
believe that payment of this amount is probable; therefore, no liability is
reflected in the financial statements.
Additionally, Olympian Global guaranteed that sales levels for the six months
ended July 31, 1996 would be $240,000 and that the amount of any such sales
shortfall would be reduced from the principal balance of the note. Based on
sales through July 31, 1996, the Company is entitled to a reduction in principal
of approximately $16,000. If any reduction in principal results from the above,
there will be no affect on net income since the reduction in principal will be
credited to goodwill.
8. COMMITMENTS:
M.D. Labs, Inc. is obligated under a long-term operating lease for office
and warehouse facilities through the year 2000.
Annual rental commitments under the above lease are as follows:
MAY 31,
-------
1997 ............................. 83,280
1998 ............................. 86,757
1999 ............................. 91,095
2000 ............................. 95,649
2001 ............................. 15,303
--------
$372,084
========
Rent expense under all operating leases amounted to $80,231 and $62,310, for
the years ended May 31, 1996 and 1995, respectively.
F-9
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
M.D. Labs, Inc. is obligated under various royalty agreements with product
designers. The agreements are based on product sales levels and expire through
February 1999. Royalty expense for the years ended May 31, 1996 and May 31, 1995
was $31,843 and $607, respectively.
9. STOCK WARRANTS AND OPTIONS:
Stock Warrants
Warrant transactions for the year ended May 31, 1996 were as follows:
Warrants granted in 1996, exercise price at:
$0.50 ....................................... 60,000
$1.00 ....................................... 51,000
$3.50 ....................................... 107,656
Initial public offering price ............... 10,765
-------
Outstanding at May 31, 1996 .................... 229,421
=======
During 1996, as officer compensation, the Company granted warrants to
purchase an aggregate total of 60,000 common shares at an exercise price of
$0.50 and 51,000 common shares at an exercise price of $1.00. The $0.50 warrants
become exercisable in equal increments at the end of calendar years 1996, 1997
and 1998. The $1.00 warrants become exercisable as follows: 10,000 on June 3,
1996, 17,000 on December 31, 1996 and 1997, and 7,000 on December 31, 1998. All
warrants expire on June 2, 2001. Compensation expense is recognized pro rata
during the periods in which the warrants are earned. Compensation expense for
the year ended May 31, 1996 was $625.
In conjunction with the 1996 private placement, certain financial advisors
were granted warrants to purchase 107,656 common shares at an exercise price of
$3.50 per share and 10,765 shares at an exercise price equal to the selling
price set for shares offered at such time as the Company initially registers
shares for sale to the public. These warrants are exercisable immediately and
expire on May 31, 2001.
On June 2, 1996, the Company sold for $1,500 a warrant to purchase 75,000
shares at an exercise price of $5.00 and 75,000 shares at an exercise price of
$10.00, exercisable immediately. Additionally, the Company granted an officer
and a director warrants to purchase an aggregate total of 85,000 shares at an
exercise price of $3.50. These warrants become exercisable at the end of fiscal
years 1997, 1998 and 1999 according to the following schedule: 23,333, 28,333
and 33,334 shares, per year, respectively. The above 235,000 warrants expire on
June 2, 2001.
Stock Options
The Company has adopted a Stock Option Plan, dated June 1, 1996, for the
granting of Incentive Stock Options and Nonqualified Stock Options. Officers,
directors and employees of the Company are eligible to receive these options.
The aggregate number of shares that may be issued pursuant to exercise of
options granted under the Plan shall be 300,000 shares.
Subsequent to June 1, 1996, options were granted to purchase 224,000 shares
of common stock at $3.50 a share and additional options were granted to purchase
5,000 shares of common stock at $6.00 a share. These options will vest as to one
third of the underlying shares on each of June 1, 1997, 1998 and 1999. Also,
options were granted to certain directors to purchase 40,000 shares of common
stock at $8.00 a share. The directors' options were 100% vested as of September
1996.
F-10
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
10. INCOME TAXES:
The income tax effect of temporary differences between financial and tax
reporting gives rise to the deferred income tax assets which consist of the
following:
MAY 31, 1996
------------
Current:
Accounts receivable .......................... $11,150
Inventories .................................. 2,800
Accrued expenses ............................. 12,733
-------
26,683
Noncurrent:
Intangibles .................................. 59,356
-------
$86,039
=======
11. RELATED PARTY TRANSACTIONS:
The Company retained the services of two employee leasing firms, Propay, Inc.
("Propay") and Employee Solutions, Inc. ("ESI"). Both Propay and ESI are
entities related by common ownership to the Company. For the year ended May 31,
1995, the Predecessor paid Propay approximately $329,000, and for the years
ended May 31, 1996 and 1995, the Predecessor paid ESI approximately $923,000 and
$506,000, respectively, for employee leasing and related expenses.
On March 10, 1994, Pure Source International, LTD., a British Virgin Island
Company ("Pure Source"), was incorporated and entered into a consulting
agreement with the Predecessor to provide marketing, promotional, advertising
and other similar services with respect to the sale of products outside of the
United States of America. Pure Source was an affiliated company with common
ownership of the Predecessor. During the year ended May 31, 1995, Houston paid
Pure Source consulting fees totaling $353,600. On December 31, 1995, the
Consulting Agreement terminated.
See Note 7, Notes Payable.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial Accounting Standard No. 107 requires the Company to disclose the
estimated fair value of its financial instruments. The Company's financial
instruments include cash and cash equivalents, accounts receivable, accounts
payable and notes payable. The carrying amounts of cash equivalents, accounts
receivable, accounts payable and notes payable approximate fair value at May 31,
1996.
13. SUBSEQUENT EVENTS:
Subsequent to May 31, 1996, the Board of Directors approved an initial public
offering of the Company's common stock. Also see Note 9.
14. UNAUDITED PRO FORMA DATA:
The following pro forma data has been presented on the historical statements
of income.
a. Income tax expense for the years ended May 31, 1996 and 1995 has been
presented as if the Company was a C corporation during those years. The income
tax expense was calculated assuming an effective tax rate of 40%.
F-11
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
The pro forma provision for income taxes consists of:
YEARS ENDED MAY 31,
-----------------------
1995 1994
---- ----
Current expense:
Federal ............................. 591,000 $195,000
State ............................... 105,000 34,000
-------- --------
696,000 229,000
Deferred benefit:
Federal ............................. 73,133
State ............................... 12,906
-------- --------
86,039
-------- --------
$609,961 $229,000
======== ========
Total pro forma provision for income taxes differs from the "expected"
pro forma tax expense of 34% due to state income taxes, net of the federal
benefit, of 6%.
b. Pro forma net income per share has been computed by dividing pro forma net
income for the years ended May 31, 1996 and 1995 by the 3 million shares
outstanding as of May 31, 1996 and common stock equivalents (representing
warrants and options issued within 12 months of the initial public offering in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
83).
F-12
<PAGE>
M.D. LABS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AUGUST 31, 1996 AND MAY 31, 1996
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 163,309 $ 91,799
Trade accounts receivable, net of allowance of $25,000 and
$27,876 respectively ..................................................... 521,148 619,860
Inventories ................................................................. 1,121,862 1,080,406
Deferred tax assets ......................................................... 26,683 26,683
Other current assets ........................................................ 68,188 46,181
----------- -----------
Total current assets ..................................................... 1,901,190 1,864,929
Property and equipment, net ................................................... 211,668 219,399
Intangibles ................................................................... 504,186 520,732
Deferred tax asset ............................................................ 59,356 59,356
Other assets and deposits ..................................................... 37,672 27,254
----------- -----------
Total assets ............................................................. $2,714,072 $ 2,691,670
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 173,419 $ 213,817
Income tax payable .......................................................... 64,942
Notes payable ............................................................... 360,000 460,000
----------- -----------
Total current liabilities ................................................ 598,361 673,817
Shareholders' equity:
Common stock, $.001 par value; 8,000,000 shares authorized; ................. 3,000 3,000
3,000,000 shares issued and outstanding
Preferred stock, $.01 par value; 100,000 shares authorized,
none outstanding
Paid-in capital ............................................................. 2,021,808 2,018,728
Less: unearned compensation ................................................. (6,509) (3,875)
Retained earnings ........................................................... 97,412
----------- -----------
Total shareholders' equity ............................................... 2,115,711 2,017,853
----------- -----------
Total liabilities and shareholders' equity ............................... $2,714,072 $ 2,691,670
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
M.D. LABS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
1996 1995
---- ----
Net sales ..................................... $1,059,325 $ 977,990
Cost of goods sold ............................ 320,910 259,395
---------- ----------
Gross profit .................................. 738,415 718,595
Selling, general and administrative ........... 565,278 464,539
---------- ----------
Income from operations ........................ 173,137 254,056
Interest expense .............................. 10,783
---------- ----------
Income before income tax ...................... 162,354 254,056
Income tax .................................... 64,942
---------- ----------
Net income .................................... $ 97,412 $ 254,056
========== ==========
Proforma (1995) net income data:
Income before income tax .................... 162,354 254,056
Proforma income taxes ....................... 64,942 101,622
---------- ----------
Proforma net income ........................... $ 97,412 $ 152,434
========== ==========
Proforma (1995) net income per share .......... $ 0.03 $ 0.05
========== ==========
Shares used in net income per share ........... 3,199,140 3,197,940
========== ==========
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
M.D. LABS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED UNEARNED
STOCK CAPITAL EARNINGS COMPENSATION TOTAL
------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balances as of May 31, 1996 ........... $ 3,000 $ 2,018,728 -0- $ (3,875) $ 2,017,853
Issuance of stock warrants ............ 850 (850)
Issuance of stock options ............. 2,230 (2,230)
Amortization of unearned
compensation.......................... 446 446
Net income ............................ 97,412 97,412
------- ----------- -------- ------------- -----------
Balances as of August 31, 1996 $ 3,000 $ 2,021,808 $ 97,412 $ (6,509) $ 2,115,711
======= =========== ======== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
M.D. LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 97,412 $ 254,056
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ....................... 36,060 39,931
Changes in assets and liabilities:
Decrease in accounts receivable ..................... 98,712 70,672
Increase in inventories ............................. (41,456) (38,725)
Increase in other current assets .................... (22,007) (17,831)
Decrease in accounts payable and accrued expenses ... (40,398) (18,180)
Increase in income tax payable ...................... 64,942
--------- ---------
Net cash provided by operating activities ........ 193,265 289,923
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment ....................... (10,014) (44,186)
Increase in intangible assets, deposits and other assets . (11,741) (9,608)
--------- ---------
Net cash used by investing activities ............ (21,755 (53,794)
--------- ---------
Cash flows from financing activities:
Repayments of notes payable .............................. (100,000) (298,362)
--------- ---------
Net cash used by financing activities ............ (100,000) (298,362)
--------- ---------
Net increase (decrease) in cash and cash equivalents ....... 71,510 (62,233)
Cash and cash equivalents, beginning of period ............. 91,799 219,185
--------- ---------
Cash and cash equivalents, end of period ................... $ 163,309 $ 156,952
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements
for the three months ended August 31, 1996
1. BASIS OF PRESENTATION:
The consolidated balance sheet as of August 31, 1996, the consolidated
statements of income and cash flows for the three months ended August 31, 1996
and 1995, and the consolidated statement of shareholders' equity for the three
months ended August 31, 1996 have been prepared by the Company without audit. In
the opinion of management, all adjustments (which included only normal,
recurring adjustments) necessary to present fairly the financial position at
August 31, 1996, and the results of operations and cash flows for the periods
presented have been made. The results of operations for the interim periods are
not necessarily indicative of the operating results for the full year.
2. STOCK WARRANTS:
Warrant transactions for the quarter ended August 31, 1996:
NUMBER OF PRICE RANGE OF
SHARES WARRANTS
--------- -----------------
Outstanding at May 31, 1996 .............. 229,421 $0.50 - IPO Price
Granted .................................. 235,000 $3.50 - IPO Price
--------- -----------------
Outstanding at August 31, 1996 ........... 464,421 $0.50 - IPO Price
========= =================
On June 2, 1996, the Company sold for $1,500 a warrant to purchase 75,000
shares at an exercise price of $5.00 and 75,000 shares at an exercise price of
$10.00, exercisable immediately. Additionally, the Company granted an officer
and a director warrants to purchase an aggregate total of 85,000 shares at an
exercise price of $3.50. These warrants became exercisable at the end of fiscal
years 1997, 1998 and 1999 according to the following schedule: 23,333, 28,333
and 33,334 shares, per year, respectively. The above 235,000 warrants expire on
June 2, 2001.
Total compensation expense related to the above-mentioned warrants for the
quarter ended August 31, 1996 was $446.
On September 14, 1996, warrants were granted, to a paid product endorser, to
purchase 14,000 common shares at an exercise price of $6.00. These warrants
become exercisable in equal increments at September 14, 1997 and 1998. The
warrants expire on September 14, 2001.
On September 13, 1996, warrants were granted, to an officer and director, to
purchase 100,000 common shares at an exercise price of $7.00. This warrant
becomes exercisable commencing August 1, 1996, and vests pro-rata each day
during the year ending July 31, 1997 and expires on August 14, 2001.
3. STOCK OPTIONS:
The Company has adopted a Stock Option Plan, dated June 1, 1996, for the
granting of Incentive Stock Options and Nonqualified Stock Options. Officers,
directors and employees of the Company are eligible to receive these options.
The aggregate number of shares that may be issued pursuant to exercise of
options granted under the Plan shall be 300,000 shares.
Stock option transactions for the quarter ended August 31, 1996:
NUMBER OF PRICE RANGE OF
SHARES OPTIONS
-------- --------------
Outstanding at May 31, 1996 ..................... 0
Granted ......................................... 269,000 $3.50 - $8.00
Canceled ........................................ (1,000) $3.50
--------
Outstanding at August 31, 1996 .................. 268,000 $3.50 - $8.00
========
F-17
<PAGE>
M.D. Labs, Inc.
Notes to Consolidated Financial Statements - (Continued)
On June 1, 1996, options were granted to purchase 224,000 shares of common
stock at $3.50 a share and additional options were granted to purchase 5,000
shares of common stock at $6.00 a share. These options will vest as to one third
of the underlying shares on each of the June 1, 1997, 1998 and 1999. Also,
options were granted to certain directors to purchase 40,000 shares of common
stock at $8.00 a share. The directors' options were 100% vested as of September
1996.
4. THREATENED LITIGATION:
In September 1996, the Company received correspondence from an overseas
trading company threatening to institute litigation in Japan. The trading
company alleges the Company breached a contract by failing to designate the
trading company as the exclusive distributor of Citrium(TM) gum in Japan. The
trading company is claiming damages of $500,000. The Company has not been served
with a lawsuit in this matter as of October 23, 1996. The Company believes that
it is reasonably possible that the allegations could result in the Company
paying certain damages. As of August 31, 1996, the Company has not accrued any
amounts in connection with this threatened litigation.
5. SUBSEQUENT EVENTS:
The Company has filed a Form SB-2 Registration Statement for the proposed
public offering of 1,300,000 common shares. A portion of the net proceeds of
this offering will be used to develop new product lines and repay existing note
agreements.
The Company's royalty agreement for the Citrium gum was terminated in
September 1996.
F-18
<PAGE>
INSIDE BACK COVER:
12 photographs (4 rows x 3 columns) surrounding M.D. Labs Logo:
1. Woman in lab coat operating computer
2. Open field
3. Truss of bridge from below
4. Back of woman in bathing suit at beach, leaning against
fence
5. Man water skiing
6. Top half of woman in pool
7. Man with arms raised in bike race
8. Man climbing cliff
9. Woman running
10. Beaker and flask containing liquid
11. Field with greenhouses in background
12. Transmitter with clouds in background
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ...................................................... 3
The Company ............................................................. 3
Risk Factors ............................................................ 5
Use of Proceeds ......................................................... 16
Limited Liability Company Distributions ................................. 17
Dividend Policy ......................................................... 17
Capitalization .......................................................... 17
Selected Financial Data ................................................. 18
Dilution ................................................................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................................. 20
Business ................................................................ 25
Management .............................................................. 36
Certain Transactions .................................................... 40
Principal Stockholders .................................................. 42
Description of Capital Stock ............................................ 43
Shares Eligible for Future Sale ......................................... 47
Underwriting ............................................................ 48
Legal Matters ........................................................... 49
Experts ................................................................. 49
Available Information ................................................... 50
Index to Financial Statements ........................................... 51
----------
UNTIL , 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,300,000 SHARES
[M.D. LABS, INC. LOGO]
COMMON STOCK
----------
PROSPECTUS
----------
SENTRA
SECURITIES CORPORATION
SPELMAN
& CO., INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the "General
Corporation Law") provides that a Delaware corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no cause to believe his conduct was
unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted under similar standards, except that no indemnification may be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that despite
the adjudication of liability, such person is fairly and reasonably entitled to
be indemnified for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense or any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liabilities under such Section 145.
Section 102(b)(7) of the General Corporation Law provides that a corporation
in its original certificate of incorporation or an amendment thereto validly
approved by stockholders may eliminate or limit personal liability of members of
its board of directors or governing body for violations of a director's duty of
care. However, no such provision may eliminate or limit the liability of a
director for breaching his duty of loyalty, acting or failing to act in good
faith, engaging in intentional misconduct or knowingly violating a law, paying
an unlawful dividend or approving an unlawful stock repurchase, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty. The Company's Certificate of Incorporation contains such a
provision.
The Company's Bylaws provide that the Company shall indemnify officers and
directors to the full extent permitted by and in the manner permissible under
the laws of the State of Delaware.
The Company is in the process of obtaining comprehensive directors and
officers liability insurance coverage, and anticipates obtaining an insurance
policy with an aggregate policy limit of not less than $3,000,000 for the
benefit of its officers and directors insuring such persons against certain
liabilities, including liabilities under the securities laws, no later than the
effective date of this Offering.
The Company has entered into indemnity agreements with its directors and
officers for indemnification of and advance of expenses to such persons to the
full extent permitted by law. The Company intends to execute such indemnity
agreements with its future officers and directors.
II-1
<PAGE>
The Company and its officers, directors and other persons are entitled to be
indemnified under certain circumstances for certain securities law violations in
the Underwriting Agreement (attached on Exhibit 1.1 hereto).
The holders of the Company's capital stock or warrants to purchase capital
stock who have contractual registration rights are required to be indemnified by
the Company against losses, claims, damages or liabilities arising out of any
untrue statement of a material fact or omission thereof in a Registration
Statement under the Securities Act of 1933. The Company's obligation to
indemnify such holders includes the officers, directors and partners of such
holders, some of whom are currently directors of the Company. The Company shall
not be liable for any such indemnity to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement or
material omission in reliance upon and in conformity with written information
furnished by such person to the Company, specifically for use therein.
The indemnification provided as set forth above is not exclusive of any
rights to which a director or officer of the Company may be entitled. The
general effect of the forgoing provisions may be to reduce the circumstances in
which a director or officer may be required to bear the economic burdens of the
foregoing liabilities and expenses.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses (other than
underwriting discounts) to be born by the Registrant in connection with the
issuance and distribution of the securities offered hereby:
TOTAL
---------
SEC filing fee ..................................................... $ 3,609
NASD filing fee .................................................... 1,547
Underwriter's non-accountable expense allowance .................... 313,950
Nasdaq National Market entry fee ................................... 26,500
Blue Sky fees and expenses, including legal fees ................... 15,000
Printing and engraving ............................................. 75,000
Legal fees and expenses ............................................ 90,000
Accounting fees and expenses ....................................... 50,000
Transfer agent and registrar fees and expenses .................... 2,000
Directors' and officers' liability insurance ...................... 100,000
Miscellaneous ...................................................... 12,394
---------
TOTAL ............................................................ $690,000
=========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information regarding unregistered sales of the Company's
Common Stock since January 1, 1996:
On May 31, the Company issued 3,000,000 shares of its Common Stock in
exchange for 100% of the outstanding units of membership interest in Houston
Enterprises, L.L.C., the Company's predecessor in reliance on Section 4(2) and
Rule 506 of the Securities Act. No cash was involved in the exchange. The
membership units were held by the officers and directors of the Company and
those who purchased the units as described in the following sentence. Certain of
the units of interest in Houston Enterprises, L.L.C. were sold by members of
Houston Enterprises, L.L.C. to persons who represented themselves as accredited
investors for $105,000 per unit in the weeks prior to each unit being exchanged
for 30,000 shares of the Company's Common Stock. The members paid a placement
fee of $5,250 per unit placed and the Company issued warrants to purchase 10,765
shares of Common Stock to Capital West Holding Company, Inc., which acted as
private placement agent for the selling members. In connection with the
transactions, the Company also issued warrants to purchase an aggregate of
107,656 shares of Common Stock to entities associated with an attorney involved
in the placement and to a director of the Company who subsequently resigned.
On February 7, the Company issued warrants to purchase an aggregate of 21,000
shares of Common Stock, at an exercise price of $1.00 per share, to officers of
the Company in connection with the purchase
II-2
<PAGE>
of Belnik Investment Group, Inc. from the officers. See "Certain Transactions."
On that same date, the Company issued warrants to purchase 30,000 and 60,000
shares of Common Stock at exercise prices of $1.00 and $0.50 respectively, to an
officer of the Company in connection with his employment agreement.
On June 3, 1996, the Company issued a warrant to purchase 75,000 shares of
Common Stock at an exercise price of $5.00 per share and another warrant to
purchase 75,000 shares at an exercise price of $10.00 per share to Michael J.
Dwyer, a stock broker familiar with the Company, for $1,500. On that same date,
the Company issued a warrant to purchase 40,000 shares of Common Stock at an
exercise price of $3.50 per share to a director of the Company in connection
with his consulting agreement (see "Management"), and a warrant to purchase
45,000 shares of Common Stock at an excersize price of $3.50 per share to an
employee of the Company.
In September 1996, the Company granted warrants to purchase 100,000 shares
and 14,000 shares to a Company director/consultant and a paid endorser of the
Company's products, respectively in connection with their service agreements
with the Company. The warrants to purchase 100,000 shares are exercisable at
$7.00 per share and vest pro-rata each day during the year beginning August 1,
1996. The warrants to purchase 14,000 shares are exercisable at $6.00 per share,
and vest 7,000 shares on each September 14, 1997 and September 14, 1998. The
warrants were not issued for cash.
Since June 1996, the Company has issued options to purchase an aggregate of
269,000 shares of Common Stock to its employees and directors pursuant to the
Company's Stock Option Plan at option exercise prices ranging from $3.50 to
$8.00 per share. There was no charge to the optionees for the grant of the
options.
Exemption from registration for each transaction described above, if deemed a
sale of securities, was claimed pursuant to Section 4(2) of the Securities Act
of 1933.
ITEM 27. EXHIBITS.
See Exhibit Index following the Signature page which is incorporated by
herein by reference.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of the registration
statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2, and has authorized this
amended registration statement to be signed on its behalf by the undersigned in
the City of Phoenix, State of Arizona, on October 25, 1996.
M.D. LABS, INC.
By: /s/ HOOMAN NIKZAD
--------------------------------
Hooman Nikzad
Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
amended registration statement was signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
PERSON TITLE DATE
------ ----- ----
<S> <C> <C>
/s/ HOOMAN NIKZAD Chief Executive Officer and Director October 25, 1996
------------------------------- (Principal Executive Officer)
Hooman Nikzad
/s/ TODD P. BELFER President and Director October 25, 1996
-------------------------------
Todd P. Belfer
/s/ FARADJOLLAH DJAHANDIDEH* Vice President, Operations, October 25, 1996
------------------------------- Secretary/Treasurer and Director
Faradjollah Djahandideh
/s/ BRADLEY A. DENTON Chief Financial Officer, Vice President, October 25, 1996
------------------------------- Assistant Secretary (Principal
Bradley A. Denton Financial and Accounting Officer)
/s/ HARVEY A. BELFER* Director October 25, 1996
-------------------------------
Harvey A. Belfer
/s/ ALLAN RICHARD LYONS* Director October 25, 1996
-------------------------------
Allan Richard Lyons
/s/ KENNETH A. STEEL, JR.* Director October 25, 1996
-------------------------------
Kenneth A. Steel, Jr.
*By: /s/ TODD P. BELFER
-------------------------------
Todd P. Belfer
Attorney-in-fact
</TABLE>
S-1
<PAGE>
M.D. LABS, INC.
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM SB-2
AMENDMENT NO. 1
<TABLE>
<CAPTION>
PREVIOUSLY FILED
EXHIBIT NO. DESCRIPTION FILED HEREWITH
- ----------- ----------- ----- --------
<S> <C> <C> <C>
1.1 Proposed Form of Underwriting Agreement x
1.2 Proposed Form of Selected Dealers Agreement x
1.3 Proposed Form of Representatives' Warrants x
3.1 Registrant's Amended Certificate of Incorporation x
3.2 Registrant's Amended Bylaws x
4.1 Articles Fourth, Eighth and Ninth of Registrant's Certificate of x
Incorporation
4.2 Articles II and VII of Registrant's Bylaws x
4.3 Specimen Common Stock Certificate x
5.1 Opinion of Quarles & Brady x
5.2 Opinion of Bass & Ullman, P.C. x
10.1 Employment Agreement dated June 1, 1996 by and between
Registrant and Hooman Nikzad x
10.2 Employment Agreement dated June 1, 1996 by and between
Registrant and Todd P. Belfer x
10.3 Consulting and Noncompetition Agreement dated June 1, 1996 by and x
between Registrant and Harvey A. Belfer
10.4 Employment Agreement dated June 1, 1996 by and between Registrant x
and Faradjollah Djahandideh
10.5 Employment Agreement dated June 1, 1996 by and between Registrant x
and Bradley A. Denton
10.6 Stock Purchase Warrant dated February 7, 1996 issued to Hooman x
Nikzad
10.7 Stock Purchase Warrant dated February 7, 1996 issued to Todd P. x
Belfer
10.8 Stock Purchase Warrant dated February 7, 1996 issued to Bradley A. x
Denton
10.9 Stock Purchase Warrant dated June 3, 1996 issued to Harvey A. Belfer x
10.10 Stock Purchase Warrant dated May 31, 1996 issued to Canyon Security, x
L.L.C.
10.11 Stock Purchase Warrant dated May 31, 1996 issued to JBV Investments, x
L.C.
10.12 Stock Purchase Warrant dated May 31, 1996 issued to Capital West x
Investment Holding Company, Inc.
10.13 Stock Purchase Warrant dated June 3, 1996 issued to Vincent Andrich x
10.14 Stock Purchase Warrant dated June 3, 1996 issued to Michael J. Dwyer x
10.14.1 Stock Purchase Warrant dated September 14, 1996 issued to Lee J. x
Reherman
</TABLE>
EX-1
<PAGE>
<TABLE>
<CAPTION>
PREVIOUSLY FILED
EXHIBIT NO. DESCRIPTION FILED HEREWITH
- ----------- ----------- ----- --------
<S> <C> <C> <C>
10.15 Registrant's 1996 Stock Option Plan x
10.16 Form of Grant Letter pursuant to 1996 Stock Option Plan x
10.17 Stock Purchase Agreement dated February 26, 1996 by and between x
Hooman Nikzad and Todd P. Belfer and Registrant
10.18 Purchase Agreement dated December 12, 1995 by and among Houston x
Enterprises, L.L.C., Marvin D. and Nancy P. Brody, Harvey A. Belfer,
Todd P. Belfer, Hooman Nikzad and Faradjollah Djahandideh
10.19 Form of M.D. Labs, Inc. Share Subscription Agreement x
10.20 Houston Enterprises, L.L.C. $300,000 Promissory Note payable to x
Belfer Labs, L.L.C. dated March 6, 1996
10.21 Product Purchase and Distribution Agreement dated January 2, 1996 by x
and between Belnik Investment Group, Inc. and Houston Enterprises,
L.L.C. and related Promissory Note
10.22 Asset Purchase Agreement dated January 16, 1996 between Olympian x
Global, L.C. and Houston International, L.L.C. and related
Promissory Note, Addendum and Security Agreement
10.22.1 Asset Purchase Agreement Amendment between the Registrant and Lance x
Dreher
10.23 Facilities and Management Agreement dated January 2, 1995 between x
Houston Enterprises, L.L.C. and Belnik Investment Group, Inc.
10.24 Standard Lease dated April 25, 1995 between PS Partners VI, Ltd. and x
Houston International, L.L.C.
10.25 Marketing Services Agreement dated March 18, 1996 between Pure x
Source International, Ltd. and Houston International, L.L.C.
10.26 Form of Directors' and Officers' Indemnification Agreement x
10.27 Form of Lock-up Agreement between the Registrant, its executive x
officers and directors and Spelman & Co., Inc.
10.28 Contract regarding Women's Nature(TM) Natural Balance Tea between x
Houston International, L.L.C. and Dr. Lori G. Kimata dated February
21, 1996
10.29 Consulting and Noncompetition Agreement between the Registrant and x
Kenneth A. Steel, Jr. effective September 13, 1996
10.30 Stock Purchase Warrant dated September 13, 1996 issued to Kenneth A. x
Steel, Jr.
10.31 Personal Services Agreement dated September 13, 1996 between the x
Registrant and Lee J. Reherman
10.32 Consulting Agreement between the Registrant and Chad Coy dated x
October 10, 1996
10.33 Contract regarding Women's Nature PMS Tea between Houston x
International, L.L.C. and Dr. Lori Kimata dated March 15, 1996
11.1 Statement regarding computation of per-share earnings x
21.1 Subsidiaries of the Registrant x
23.1 Consent of Coopers & Lybrand L.L.P. x
23.2 Consent of Quarles & Brady (included in Exhibit 5.1) x
23.3 Consent of Bass & Ullman, P.C. x
</TABLE>
EX-2
<PAGE>
<TABLE>
<CAPTION>
PREVIOUSLY FILED
EXHIBIT NO. DESCRIPTION FILED HEREWITH
- ----------- ----------- ----- --------
<S> <C> <C> <C>
24 Powers of attorney x
27 Financial Data Schedule x
</TABLE>
EX-3
M.D. LABS, INC.
1,300,000 Shares
UNDERWRITING AGREEMENT
________________, 1996
Sentra Securities Corporation
2355 Northside Drive, Suite 200
San Diego, CA 92108
Spelman & Co., Inc.
2355 Northside Drive, Suite 200
San Diego, CA 92108
(As Representatives of the Several
Underwriters Named in Schedule 1 hereto)
Dear Sirs:
M.D. Labs, Inc., a Delaware corporation (the "Company"), hereby
confirms its agreement (this "Agreement") with the several underwriters named in
Schedule 1 hereto (the "Underwriters"), for whom Sentra Securities Corporation
and Spelman & Co., Inc. have been duly authorized to act as representatives (in
such capacity, the "Representatives"), as set forth below:
SECTION 1.
Description of Transaction
The Company proposes to issue and sell to the Underwriters on the
Closing Date (as defined below), pursuant to the terms and conditions of this
Agreement, an aggregate of 1,300,000 shares ("Firm Shares") of the Company's
Common Stock ("Common Stock") at a price of $____ per Share on the terms as
hereinafter set forth. The Company also proposes to issue and sell to the
several Underwriters on or after the Closing Date not more than 195,000
additional Shares if requested by the Representatives as provided in Section
3.02 of this Agreement (the "Option Shares"). The Firm Shares and any Option
Shares are collectively referred to herein as the "Shares."
2
<PAGE>
SECTION 2.
Representations and Warranties of the Company
In order to induce the Underwriters to enter into this Agreement, the
Company hereby represents and warrants to and agrees with the Underwriters that:
2.1 Registration Statement and Prospectus. A registration
statement on Form SB- 2 (File No. 333-_______) with respect to the Shares,
including the related prospectus, copies of which have heretofore been delivered
by the Company to the Underwriters, has been filed by the Company in conformity
with the requirements of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(a) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration statement),
with such changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been provided to and approved
by the Representatives prior to the execution of this Agreement, or (b) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representatives prior to the execution of this
Agreement. As used in this Agreement, the term "Registration Statement" means
such registration statement on Form SB- 2 and all amendments thereto, including
the prospectus, all exhibits and financial statements, as it becomes effective;
the term "Preliminary Prospectus" means each prospectus included in said
Registration Statement before it becomes effective; and the term "Prospectus"
means the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or, if no prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the Registration Statement
when it becomes effective.
2.2 Accuracy of Registration Statement and Prospectus. Neither
the Commission nor the "blue sky" or securities authority of any jurisdiction
has issued any order preventing or suspending the use of any Preliminary
Prospectus. When (a) any Preliminary Prospectus was filed with the Commission,
(b) the Registration Statement or any amendment thereto was or is declared
effective, and (c) the Prospectus or any amendment or supplement thereto is
filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or supplement to
the Prospectus was or is declared effective) and on the Closing Date the
Prospectus, as amended or supplemented at any such time, such filing (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
promulgated thereunder (the "Rules and Regulations") and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make
3
<PAGE>
the statements therein not misleading in light of the circumstances under which
they were made. The foregoing representation does not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein.
2.3 Incorporation and Standing. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware and is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified does not amount to a material liability or disability to the Company.
2.4 Due Power and Authority. The Company has full corporate
power to own or lease its properties and conduct its business as described in
the Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus; and the Company has full
corporate power to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it. The execution and delivery of this
Agreement and consummation of the transactions contemplated herein have been
duly authorized by the Company and this Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with the terms
thereof, except as may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
general equitable principles, and as rights to indemnity and contribution
hereunder may be limited by applicable law.
2.5 Consents; No Defaults. The issuance, offering and sale of
the Shares to the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (a) require
the consent, approval, authorization, registration or qualification of or with
any governmental authority, except such as have been obtained, or as may be
required under the Act or under the securities or blue sky laws of any
jurisdiction, or (b) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other material agreement or instrument to
which the Company is a party or by which the Company or any of its properties is
bound, or the charter documents or bylaws of the Company, or any statute or any
judgment, decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company.
2.6 No Breach or Default. The Company is not in breach of any
term or provision of its Certificate of Incorporation or Bylaws; no default
exists, and no event has occurred which with notice or lapse of time or both,
would constitute a default, in the Company's due performance and observance of
any term, covenant or condition of any indenture, mortgage, deed of trust,
lease, note, bank loan or credit agreement or any other material agreement or
instrument to
4
<PAGE>
which the Company or its properties may be bound or affected in any respect
which would have a material adverse effect on the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company.
2.7 Licenses. Except as described in the Prospectus, the
Company possesses all certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary for the
conduct of its business, including without limitation the Food and Drug
Administration, the Federal Trade Commission, the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Postal Service and the Environmental Protection Agency, and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Registration Statement. Each approval,
registration, qualification, license, permit, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body or agency necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions contemplated (except such additional actions as may be required by
the National Association of Securities Dealers, Inc. or may be necessary to
qualify the Common Stock for public offering under state securities or blue sky
laws) has been obtained or made and each is in full force and effect.
2.8 Compliance with Laws. Except as disclosed in the
Registration Statement and in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company is not in
violation of any laws, ordinances, governmental rules or regulations to which it
is subject, including but not limited to the Federal Food, Drug and Cosmetic
Act, the Nutrition Labeling and Education Act of 1990, and the Dietary
Supplement Health and Education Act of 1994, which would have a material adverse
effect on the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company.
2.9 Existing Capital Structure and Shareholder Rights. The
Company has an authorized, issued and outstanding capitalization as set forth
in, and capital stock conforms in all material respects to the description
contained in, the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus. Except as described in the Registration Statement
and in the Prospectus there are no outstanding (a) securities or obligations of
the Company convertible into or exchangeable for any capital stock of the
Company, (b) warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (c) obligations of the Company to issue such
shares, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or obligations. All of the issued shares of capital stock
of the Company have been duly authorized and validly issued and are fully paid
and nonassessable, and have been issued in compliance with all federal and state
securities laws. No preemptive rights of shareholders exist with respect to any
capital stock of the Company. No shareholder of the Company has any right
pursuant to any
5
<PAGE>
agreement which has not been waived or honored to require the Company to
register the sale of any securities owned by such shareholder under the Act in
the public offering contemplated herein except as disclosed in the Registration
Statement. Other than MDLA, Inc. and Belnik Investment Group, Inc., the Company
has no subsidiaries, and does not own any shares of stock or any other equity
interest in any firm, partnership, association or other entity.
2.10 Authority for Issuance of Shares. The issuance of the
Common Stock issuable in connection with the Shares has been duly authorized and
at any Firm or Option Closing Date as defined herein after payment therefor in
accordance herewith, such Common Stock will be validly issued, fully paid and
nonassessable. The Shares will conform in all material respects with all
statements with regard thereto in the Registration Statement and the Prospectus.
2.11 Title to Tangible Property. Except as otherwise set forth
in or contemplated by the Registration Statement and Prospectus, the Company has
good and marketable title to all items of personal property owned by the
Company, free and clear of any security interest, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company, and any real property and
buildings held under lease by the Company are held under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such property
and buildings by the Company.
2.12 Title to Intellectual Property. The Company owns the
trademarks described in the Registration Statement to the extent described
therein. The Company has applied for registration of the trademark "M.D. Labs."
The Company does not own any patents. The Company owns or possesses, or can
acquire on reasonable terms, all material, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential information
currently employed by it in connection with its business, and the Company has
not received any notice of infringement of or conflict with asserted rights of
any third party with respect to any of the foregoing intellectual property
rights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding would result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company, except as described in or contemplated by the
Prospectus.
2.13 Contract Rights. The agreements to which the Company is a
party described in the Registration Statement and Prospectus are valid
agreements, enforceable by the Company in accordance with their terms, except as
the enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditor's rights generally or by equitable principles, and, to the Company's
knowledge, the other contracting party or parties thereto are not in material
breach or material default under any of such agreements.
6
<PAGE>
2.14 No Market Manipulation. The Company has not taken nor
will it take, directly or indirectly, any action designed to cause or result, or
which might reasonably be expected to cause or result, in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Common Stock.
2.15 No Other Sales or Commissions. The Company has not since
the filing of the Registration Statement (i) sold, bid for, purchased, attempted
to induce any person to purchase, or paid anyone any compensation for soliciting
purchases of, its capital stock or (ii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any securities of the Company
except for the sale of Shares by the Company under this Agreement.
2.16 Accuracy of Financial Statements. The financial
statements and schedules of the Company included in the Registration Statement
and the Prospectus, or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus, fairly present in all material respects the financial
position of the Company and the results of operations and changes in financial
condition as of the dates and periods therein specified. Such financial
statements and schedules have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved except as otherwise noted therein and include all financial information
required to be included by the Act. The selected financial data set forth under
the captions "PROSPECTUS SUMMARY--Summary Financial Information," "SELECTED
FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" in the Prospectus, or, if the Prospectus is not in
existence the most recent Preliminary Prospectus, fairly present in all material
respects, on the basis stated in the Prospectus or such Preliminary Prospectus,
the information included therein.
2.17 Independent Public Accountant. Coopers & Lybrand L.L.P.,
which have certified or shall certify certain of the financial statements of the
Company filed or to be filed as part of the Registration Statement and the
Prospectus, are independent certified public accountants within the meaning of
the Act and the Rules and Regulations.
2.18 Internal Accounting. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (c) access to assets is
permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.19 Litigation. Except as set forth in the Registration
Statement and Prospectus, there is and at the Closing Date there will be no
action, suit or proceeding before any court or governmental agency, authority or
body pending or to the knowledge of the Company threatened which might result in
judgments against the Company not adequately covered by insurance or which
7
<PAGE>
collectively might result in any material adverse change in the condition
(financial or otherwise), the business or the prospects of the Company, or would
have a material adverse effect on the properties or assets of the Company. The
Company is not subject to the provisions of any injunction, judgement, decree or
order of any court, regulatory body, administrative agency or other governmental
body or arbitral forum, which might result in a material adverse change in the
business, assets or condition of the Company.
2.20 No Material Adverse Change. Subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), (a) the Company has not incurred any material adverse
change in or affecting the condition, financial or otherwise, of the Company or
the earnings, business affairs, management, or business prospects of the
Company, whether or not occurring in the ordinary course of business, (b) there
has not been any material transaction entered into by the Company, other than
transactions in the ordinary course of business or transactions specifically
described in the Registration Statement as it may be amended or supplemented,
(c) the Company has not sustained any material loss or interference with its
business or properties from fire, flood, windstorm, accident or other calamity,
(d) the Company has not paid or declared any dividends or other distribution
with respect to its capital stock and the Company is not in default in the
payment of principal or interest on any outstanding debt obligations, and (e)
there has not been any change in the capital stock (other than the sale of the
Common Stock hereunder or the exercise of outstanding stock options or warrants
as described in the Registration Statement) or material increase in indebtedness
of the Company. The Company does not have any known material contingent
obligation which is not disclosed in the Registration Statement (or contained in
the financial statements or related notes thereto), as such may be amended or
supplemented.
2.21 Transactions With Affiliates. Subsequent to the
respective dates as of which information is given in the Registration Statement
and Prospectus or if the Prospectus is not in existence the most recent
Preliminary Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, (a) the Company has not entered into any transaction with an
"affiliate" of the Company, as defined in the Act and the Rules and Regulations,
or (b) declared, paid or made any dividend or distribution of any kind on or in
connection with any class of its capital stock, and (c) the Company has no
knowledge of any transaction between any affiliate of the Company and any
significant customer or supplier of the Company, except in its ordinary course
of business.
2.22 Insurance. Except as otherwise set forth in or
contemplated by the Registration Statement and Prospectus, the Company is
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the business in
which it is engaged, including without limitation products liability insurance;
the Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
8
<PAGE>
its business at a cost that would not materially and adversely affect the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company.
2.23 Tax Returns. The Company has filed all foreign, federal,
state and local tax returns that are required to be filed or has requested
extensions thereof and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that any of
the foregoing is due and payable or adequate accruals have been set up to cover
any such unpaid taxes, except for any such assessment, fine or penalty that is
currently being contested in good faith.
2.24 Political Contributions. The Company has not directly or
indirectly, (a) made any unlawful contribution to any candidate for public
office, or failed to disclose fully any contribution in violation of law, or (b)
made any payment to any federal, state, local, or foreign governmental officer
or official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any other such jurisdiction.
2.25 Relationships with Customers, Suppliers and
Manufacturers. The Company does not currently have any written contracts with
any of its customers, suppliers and manufacturers. The Company is in compliance
with all oral agreements with its customers, suppliers and manufacturers. The
Company has not received notice from any of its customers, suppliers and
manufacturers alleging any breach of contract, representation or warranty which,
in the aggregate, would have a material adverse effect on the financial
condition or operations results of the Company.
2.26 Investment Company Act. The Company conducts its
operations in a manner that does not subject it to registration as an investment
company under the Investment Company Act of 1940, as amended, and the
transactions contemplated by this Agreement will not cause the Company to become
an investment company subject to registration under the Investment Company Act
of 1940, as amended.
SECTION 3.
Purchase, Sale and Delivery of the Shares
3.1 Purchase of Firm Shares. On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to each of the Underwriters named in Schedule I hereto, and each
of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $____ per Share, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule 1 hereto. The Company
will make one or more certificates for Common Stock constituting the Firm
Shares, in definitive form and in such denomination or denominations and
registered in such name or names as the Representatives shall request upon
notice to the Company at least 48 hours prior to the Firm Closing Date,
available for checking and
9
<PAGE>
packaging by the Representatives at the offices of the Company's transfer agent
or registrar (or the correspondent or the agent of the Company's transfer agent
or registrar) at least 24 hours prior to the Firm Closing Date. Payment for the
Firm Shares shall be made by bank wire payable in same day funds to the order of
the Company drawn to the order of the Company for the Firm Shares, against
delivery of certificates therefor to the Representatives. Delivery of the
documents, certificates and opinions described in Section 6 of this Agreement,
the Firm Shares and payment for the Firm Shares and the Option Shares shall be
made at the offices of Sentra Securities Corporation, 2355 Northside Drive,
Suite 200, San Diego, California 92108, at 9:00 a.m., San Diego time, on the
third full business day following the date hereof (on the fourth full business
day if this Agreement is executed after 1:30 p.m., Arizona time), or at such
other places, time or date as the Representatives and the Company may agree upon
or as the Representatives may determine pursuant to Section 9 hereof, such time
and date of delivery against payment being herein referred to as the "Firm
Closing Date."
3.2 Over-Allotments; Option Shares. For the purpose of
covering any over-allotments in connection with the distribution and sale of the
Firm Shares as contemplated by the Prospectus, the Company hereby grants to you
on behalf of the several Underwriters an option to purchase, severally and not
jointly, the Option Shares. The purchase price to be paid for any Option Shares
shall be the same price per share as the price per Share for the Firm Shares set
forth above in Section 3.1, plus, if the purchase and sale of any Option Share
takes place after the Firm Closing Date and after the Common Stock is trading
"ex-dividend," an amount equal to the dividends payable on the Common Stock
contained in such Option Shares. The option granted hereby may be exercised in
the manner described below as to all or any part of the Option Shares from time
to time within forty-five days after the date of the Prospectus. The
Underwriters shall not be under any obligation to purchase any of the Option
Shares prior to the exercise of such option. The Representatives may from time
to time exercise the option granted hereby by giving notice in writing or by
telephone (confirmed in writing) to the Company setting forth the aggregate
number of Option Shares as to which the several Underwriters are then exercising
the option and the date and time for delivery of and payment for such Option
Shares. Any such date of delivery shall be determined by the Representatives but
shall not be earlier than two business days or later than seven business days
after such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or such other
time on such other date as the Representatives and the Company may agree upon or
as the Representatives may determine pursuant to Section 9 hereof, is herein
called the "Option Closing Date" with respect to such Option Shares. Upon each
exercise of the option as provided herein, subject to the terms and conditions
herein set forth, the Company shall become obligated to sell to each of the
several Underwriters, and each of the Underwriters (severally and not jointly)
shall become obligated to purchase from the Company, the same percentage of the
total number of the Option Shares as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Shares, as adjusted by the Representatives in such
manner as it deems advisable to avoid fractional shares. If the option is
exercised as to all or any
10
<PAGE>
portion of the Option Shares, one or more certificates for the Common Stock
contained in such Option Shares, in definitive form, and payment therefore,
shall be delivered on the related Option Closing Date in the manner, and upon
the terms and conditions, set forth in Section 3.1, except that reference
therein to the Firm Shares and the Firm Closing Date shall be deemed, for
purposes of this Section 3.2, to refer to such Option Shares and Option Closing
Date, respectively. No Option Shares shall be required to be, or be, sold and
delivered unless the Firm Shares have been, or simultaneously are, sold and
delivered as provided in this Agreement.
3.3 Default by an Underwriter. It is understood that you,
individually and not as the Representatives, may (but shall not be obligated to)
make payment on behalf of any Underwriter or Underwriters for any of the Shares
to be purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their obligations
hereunder.
SECTION 4.
Offering by the Underwriters
Upon payment by the Underwriters of the purchase price of $____ per
Share and the Company's authorization of the release of the Firm Shares, the
several Underwriters shall offer the Firm Shares for sale to the public upon the
terms set forth in the Prospectus. The Representatives may from time to time
thereafter change the public offering prices and other selling terms. If the
option set forth in Section 3.2 of this Agreement is exercised, then upon the
Company's authorization of the release of the Option Shares the several
Underwriters shall offer such Shares for sale to the public upon the foregoing
terms.
SECTION 5.
Covenants of the Company
Except as otherwise stated below, the Company covenants and agrees with
each of the Underwriters that:
5.1 Company's Best Efforts to Cause Registration Statement to
Become Effective. The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. If required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. During any time when a prospectus
relating to the Common Stock is required to be delivered under the Act, the
Company (a) will comply with all requirements imposed upon it by the Act and the
Rules and Regulations to the extent necessary to permit the continuance of sales
of or dealings in the Common Stock in accordance with the provisions hereof and
of the Prospectus, as then amended or supplemented, and (b) will not file with
the Commission the prospectus or the
11
<PAGE>
amendment referred to in the second sentence of Section 2.1 hereof, any
amendment or supplement to such prospectus or any amendment to the Registration
Statement unless and until the Representatives have been advised of such
proposed filing, has been furnished with a copy for a reasonable period of time
prior to the proposed filing, and has given its consent to such filing, which
shall not be unreasonably withheld or delayed.
5.2 Preparation and Filing of Amendments and Supplements. The
Company will prepare and file with the Commission, in accordance with the Rules
and Regulations of the Commission, promptly upon written request by the
Representatives or counsel for the Representatives, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be reasonably necessary or advisable in connection with the distribution of the
Shares by the several Underwriters, and the Company will use its best efforts to
cause any such amendment to the Registration Statement to be declared effective
by the Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Representatives of each such
filing or effectiveness.
5.3 Notice of Stop Orders. The Company will advise the
Representatives promptly after receiving notice or obtaining knowledge of: (a)
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or any amendment thereto, or any order preventing or
suspending the use of any Preliminary Prospectus of the Prospectus or any
amendment or supplement thereto; (b) the suspension of the qualification of the
Shares for offering or sale in any jurisdiction; (c) the institution,
threatening or contemplation of any proceeding for any such purpose; or (d) any
request made by the Commission for amending the Registration Statement, for
amending or supplementing the Prospectus or for additional information. The
Company will use its best efforts to prevent the issuance of any such stop order
and, if any such stop order is issued to obtain the withdrawal thereof as
promptly as possible.
5.4 Blue Sky Qualification. The Company will arrange and
cooperate with counsel to the Representatives for the qualification of the
Shares for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Shares; provided, however, that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to execute
a general consent to service of process in any jurisdiction.
5.5 Post-Effective Amendments. If, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event occurs as a result of which the Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading, in the light of
12
<PAGE>
the circumstances under which they were made, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules or Regulations, the Company will promptly notify the
Representatives thereof and, subject to Section 3 hereof, will prepare and file
with the Commission, at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus that corrects such
statement or omission or effects such compliance.
5.6 Delivery of Prospectuses. The Company will, without
charge, provide (a) to the Representatives and to counsel for the
Representatives a signed copy of the Registration Statement originally filed
with respect to the Shares and each amendment thereto (in each case including
exhibits thereto), (b) to each other Underwriter so requesting in writing, a
conformed copy of such Registration Statement and each amendment thereto (in
each case without exhibits thereto) and (c) so long as a prospectus relating to
the Shares is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request.
5.7 Section 11(a) Financials. The Company will, as soon as
practicable but in any event not later than 90 days after the period covered
thereby, make generally available to its security holders and to the
Representatives a consolidated earnings statement of the Company and its
subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule
158 thereunder covering a twelve-month period beginning not later than the first
day of the Company's fiscal quarter next following the effective date of the
Registration Statement.
5.8 Application of Proceeds. The Company will apply the net
proceeds from the sale of the Shares as set forth in the Prospectus and
Registration Statement and will not take any action that would cause it to
become an investment company under the Investment Company Act of 1940, as
amended.
5.9 Sales of Securities. The Company will not, directly or
indirectly, without the prior written consent of the Representatives, offer,
sell, grant any option to purchase or otherwise dispose (or announce any offer,
sale, grant of any option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of one year after the date hereof,
except (a) to the Underwriters pursuant to this Agreement and (b) options to any
person pursuant to and in accordance with the Company's 1996 Stock Option Plan,
as such plan is in effect on the date hereof, and provided that such person has
delivered to the Representatives the agreement described in Section 7.8 of this
Agreement.
5.10 Application to Nasdaq National Market. The Company will
cause the Common Stock to be duly included for quotation on the Nasdaq National
Market prior to the Closing Date. The Company will use its best efforts to
ensure that the Common Stock remains included for quotation on the Nasdaq
National Market following the Closing Date for a period of not less than three
years.
13
<PAGE>
5.11 Reports to Stockholders. So long as any Common Stock is
outstanding until five years after the Closing Date, the Company will furnish to
the Representatives (a) as soon as available a copy of each report of the
Company mailed to stockholders and filed with the Commission and (b) from time
to time such other information concerning the Company as the Representatives may
reasonably request.
5.12 Delivery of Documents. At or prior to the Closing, the
Company will deliver to the Representatives true and correct copies of the
certificate of incorporation of the Company and all amendments thereto, all such
copies to be certified by the Secretary of State of the State of Delaware, a
good standing certificate from the Secretary of State of Delaware, dated no more
than five business days prior to the Closing Date; true and correct copies of
the bylaws of the Company, as amended, certified by the Secretary of the Company
and true and correct copies of the minutes of all meetings of the directors and
stockholders of the Company held prior to the Closing Date which in any way
relate to the subject matter of this Agreement.
5.13 Underwriters' Warrant. On or prior to the Closing Date,
the Company shall deliver to the Representatives warrants (the "Underwriter's
Warrants"), at an aggregate purchase price of $100, to purchase Shares equal to
10% of the Firm Shares sold in the Offering, which Underwriter's Warrants shall
be exercisable for a per Share exercise price equal to 120% of the per Share
public offering price of the Firm Shares.
5.14 Cooperation With Representatives' Due Diligence. At all
times prior to the Closing Date, the Company will cooperate with the
Representatives in such investigation as the Representatives may make or cause
to be made of all the properties, business and operations of the Company in
connection with the purchase and public offering of the Shares and the Company
will make available to the Representatives in connection therewith such
information in its possession as the Representatives may reasonably request.
5.15 Stock Transfer Agent. The Company has appointed Corporate
Stock Transfer , Denver, Colorado, as Transfer Agent for the Common Stock. The
Company will not change or terminate such appointment for a period of two years
from the effective date without first obtaining the written consent of the
Representatives, which consent shall not be unreasonably withheld.
5.16 Publicity. Prior to the Firm Closing Date, or the Option
Closing Date, as the case may be, the Company shall not issue any press release
or other communication directly or indirectly and shall hold no press conference
with respect to the Company, its financial condition, results of operations,
business, properties, assets, liabilities and any of them, or this offering,
without the prior written consent of the Representatives. If at any time during
the 90 day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in the opinion of the
14
<PAGE>
Representatives the market price of the Common Stock has been or is likely to be
materially affected, regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus, the Company will,
after written notice from the Representatives, evaluate the propriety of
disseminating a press release or other public statement reasonably acceptable to
the Representatives and their counsel, commenting on such rumor, publication or
event.
5.17 Forecasts and Projections. For a period of two years from
the effective date of the Registration Statement, the Company shall provide the
Representatives with routine internal forecasts if any such reports are prepared
by the Company for dissemination to the public.
5.18 Registration and Transfer of Trademarks. The Company will
use its best efforts to register the trademark "M.D. Labs" and all other
trademarks material to the operation of its business. The Company shall transfer
and assign or caused to be transferred and assigned to it, all trademarks held
or used by any of its subsidiaries or affiliated entities.
SECTION 6.
Expenses
6.1 Offering Expenses. The Company will pay upon demand all
costs and expenses incident to the performance of the Company's obligations
under this Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 11 hereof,
including all costs and expenses incident to (a) the printing or other
production of documents with respect to the transactions, including any costs of
printing the Registration Statement originally filed with respect to the Shares
and any amendment thereto, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, and any blue sky memoranda, (b) all
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (c) the fees and disbursements of counsel, accountants and
any other experts or advisors retained by the Company, (d) preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Common
Stock, including transfer agent's and registrar's fees, (e) the qualification of
the Shares under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Representatives relating thereto, (f)
the filing fees of the Commission and the National Association of Securities
Dealers, Inc. relating to the Shares, (g) any listing fees for the quotation of
the Common Stock on the Nasdaq National Market, (h) one-half the cost of placing
"tombstone advertisements" in any publications which may be selected by
15
<PAGE>
the Representatives (provided that any such cost in excess of $5,000 shall
require the consent of both the Company and the Representatives), and (i) all
other advertising that has been approved in advance by the Company relating to
the offering of the Shares (other than as shall have been specifically approved
in writing by the Representatives to be paid for by the Underwriters). In
addition to the foregoing, the Company agrees to pay to the Representatives a
non-accountable expense allowance of 3% of the gross amount to be raised from
the sale of the Shares hereunder, payable at the Closing(s), of which $25,000
has already been paid by the Company in connection with this offering. If the
sale of the Shares provided for herein is not consummated because any condition
to the obligations of the Underwriters set forth in Section 7 (other than
Section 7.6) hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been reasonably incurred by them in connection
with the proposed purchase and sale of the Shares. The Company shall in no event
be liable to any of the Underwriters for the loss of anticipated profits from
the transactions covered by this Agreement.
6.2 Interim Indemnification. The Company agrees that as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding described in Section 8.1 hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Underwriters shall promptly return
such payment to the Company together with interest, compounded daily, determined
on the basis of the prime rate (or other commercial lending rate for borrowers
of the highest credit standing) listed from time to time in THE WALL STREET
JOURNAL which represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
The Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.2 hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters
16
<PAGE>
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
SECTION 7.
Conditions of the Underwriters' Obligations
The obligations of the several Underwriters to purchase and pay for the
Firm Shares shall be subject, unless waived by the Representatives in its sole
discretion, to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof and as of the Firm Closing Date as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
7.1 Effectiveness of Registration Statement. If the
Registration Statement or any amendment thereto filed prior to the Firm Closing
Date has not been declared effective as of the time of execution hereof, the
Registration Statement or such amendment shall have been declared effective not
later than 11 a.m., California time, on the date on which the amendment to the
Registration Statement originally filed with respect to the Shares or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Shares has been filed with the Commission,
or such later time and date as shall have been consented to by the
Representatives; if required, the Prospectus and any amendment or supplement
thereto shall have been filed with the Commission in the manner and within the
time period required by Rule 424(b) under the Act; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) to the reasonable
satisfaction of counsel for the underwriters.
7.2 Opinion of Counsel. The Representatives shall have
received an opinion, dated the Firm Closing Date, of Quarles & Brady, Phoenix,
Arizona, counsel for the Company, to the effect that:
(a) the Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, and duly qualified to transact business as a foreign corporation
and is in good standing under the laws of all other jurisdictions where the
ownership or leasing of its properties or the conduct of its business requires
17
<PAGE>
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company;
(b) the Company has the corporate power to own or
lease its properties; to conduct its business as described in the Registration
Statement and the Prospectus; to enter into this Agreement and to carry out all
of the terms and provisions hereof to be carried out by it;
(c) the Company has an authorized capital stock as
set forth under the heading "CAPITALIZATION" in the Prospectus; effective upon
the Closing all of the Company's shares have been duly authorized and validly
issued and are fully paid and nonassessable; the shares have been duly
authorized by all necessary corporate action of the Company, and, when issued
and delivered to and paid for pursuant to this Agreement, will be validly
issued, fully paid and nonassessable; the shares have been duly authorized for
quotation on the Nasdaq National Market; no holders of outstanding shares of
capital stock of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Shares; and no holders of securities of the
Company are entitled to have such securities registered under the Registration
Statement;
(d) the capital stock of the Company conforms, as to
legal matters, to the statements set forth under the heading "DESCRIPTION OF
SECURITIES" in the Prospectus in all material respects;
(e) the execution and delivery of this Agreement have
been duly authorized by all necessary corporate action of the Company and this
Agreement is a valid and binding obligation of the Company except as rights to
indemnity and contribution thereunder may be limited by applicable federal or
state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforceability of creditors' rights generally and subject to general principles
of equity.
(f) no legal or governmental proceedings are pending
to which the Company is a party or to which the property of the Company is
subject that are required to be described in the Registration Statement or the
Prospectus and are not described therein, and, to the best knowledge of such
counsel, no such proceedings have been threatened against the Company or with
respect to any of its properties that can reasonably be expected to, or, if
determined adversely to the Company, would, in any individual case or in the
aggregate, result in any material adverse change in the business, financial
condition or results of operations of the Company;
(g) no contract or other document is required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein or filed as
required;
(h) the issuance, offering and sale of the Shares by
the Company pursuant to this Agreement, the compliance by the Company with the
other provisions of this
18
<PAGE>
Agreement and the consummation of the other transactions herein contemplated do
not require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained and
such as may be required under state securities or blue sky laws, or conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument, known to such counsel, to which the Company is a
party or by which the Company or any of its properties are bound, or the
Certificate of Incorporation or Bylaws of the Company, or any statute or any
judgment, decree, order, rule or regulation of any court or other governmental
authority or any arbitrator known to such counsel and applicable to the Company;
(i) the Registration Statement is effective under the
Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued by the Commission, and no proceedings for that
purpose have been instituted or, to the knowledge of such counsel, are
threatened or contemplated by the Commission;
(j) the Registration Statement and the Prospectus and
each amendment or supplement thereto (in each case, other than the financial
statements and other financial and statistical information contained therein, as
to which such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the Rules and
Regulations;
(k) the Company is not required, and, if the Company
uses the proceeds of the sale of the Firm Shares and the Option Shares solely as
described in the Prospectus, will not be required as a result of the sale of
such Shares to be registered as an investment company within the meaning of the
Investment Company Act of 1940, as amended; and
(l) such counsel shall also state that they have no
reason to believe that the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its date or the date of
such opinion, included or includes any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided that in each case such counsel need not express any
opinion as to the financial statements and other financial and statistical
information contained therein.
In rendering any such opinion, such counsel may rely as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and public officials. The foregoing opinion may be limited to the
laws of the United States, the laws of the State or Arizona and the General
Corporation Law of the State of Delaware. With respect to certain regulatory
compliance issues, such counsel may rely on the opinion of Bass & Ullman
described in Section 7.3. References to the Registration Statement and the
Prospectus in this Section 7.2 shall include any
19
<PAGE>
amendment or supplement thereto at the date of such opinion. Such counsel shall
permit Luce, Forward, Hamilton & Scripps to rely upon such opinion in rendering
its opinion in Section 7.4.
7.3 Opinion of Special Counsel. The Representatives
shall have received an opinion dated the Firm Closing Date, of Bass & Ullman,
New York, New York, Special
Counsel for the Company, to the effect that:
(a) The Company's advertisements and packaging for
its products comply in all material respects with applicable federal and state
regulations.
(b) The Company has received all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary for the conduct of its business, including
without limitation the Food and Drug Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the United States Postal Service and the Environmental
Protection Agency, and the Company has not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company, except as described in or contemplated
by the Registration Statement. Each approval, registration, qualification,
license, permit, consent, order, authorization, designation, declaration or
filing by or with any regulatory, administrative or other governmental body or
agency necessary in connection with the execution and delivery by the Company of
this Agreement and the consummation of the transactions contemplated has been
obtained or made and each is in full force and effect.
(c) The Company is not in violation of any laws,
ordinances, governmental rules or regulations relating to federal, state or
foreign regulatory authorities necessary for the conduct of its business,
including without limitation the Food and Drug Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the United States Postal Service and the Environmental
Protection Agency which would have a material adverse effect on the condition
(financial or otherwise), business, properties, prospects, net worth or results
of operations of the Company.
(d) such counsel shall also state that they have no
reason to believe that the provisions of the Registration Statement under the
captions entitled "PROSPECTUS SUMMARY -- The Company", "RISK FACTORS -- Absence
of Clinical Studies and Scientific Review", "-- Effect of Discontinued Product",
"-- Difficulty in Product Positioning", "-- Uncertainty and Potential Negative
Effects of Government Regulations; Non-Compliance," and "BUSINESS "--Products"
and " -- Proprietary Rights: Trade Name, Trademarks and Copyrights", and
"--Government Regulation" as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or the date of such opinion, included or
includes any untrue statement of a material fact or omitted or omits to state a
material fact necessary
20
<PAGE>
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided that in each case such counsel
need not express any opinion as to the financial statements and other financial
and statistical information contained therein.
7.4 Review by and Opinion of Representatives' Counsel. The
Representatives shall have received an opinion, dated the Firm Closing Date, of
Luce, Forward, Hamilton & Scripps LLP, counsel for the Representatives, with
respect to certain matters as the Representatives may reasonably require, and
the Company shall have furnished to such counsel such documents and certificates
as they may reasonably request for the purpose of enabling them to pass upon
such matters.
7.5 Accountant's Letter. The Representatives shall have
received from Coopers & Lybrand L.L.P. a letter or letters dated, respectively,
the date hereof and the Closing Date, in form and substance satisfactory to the
Representatives, to the effect that:
(a) they are independent accountants with respect to
the Company within the meaning of the Act and the Rules and Regulations;
(b) in their opinion, the financial statements
audited by them and included in the Registration Statement and the Prospectus
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations;
(c) on the basis of a reading of the audited
financial statements of the Company, for the year ended May 31, 1996, and the
unaudited financial statements of the Company for the period ended [August 31,
1996], and the notes thereto, carrying out certain specified procedures (which
do not constitute an audit made in accordance with generally accepted auditing
standards) that would not necessarily reveal matters of significance with
respect to the comments set forth in this paragraph, a reading of the minute
books of the shareholders, the board of directors and any committees thereof of
the Company, and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters, nothing came to their
attention that caused them to believe that:
(i) the unaudited condensed financial
statements of the Company included in the Registration Statement and the
Prospectus do not comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement and the
Prospectus; and
(ii) at a specific date not more than
five business days prior to the date of such letter, there were any changes in
the capital stock or long-term debt of the Company
21
<PAGE>
or any decreases in net current assets or stockholders' equity of the Company,
in each case compared with amounts shown on the [August 31, 1996] balance sheet
included in the Registration Statement and the Prospectus, or for the period
from [August 31, 1996] to such specified date there were any decreases, as
compared with the corresponding period in the preceding year, in net sales,
gross profit, selling, general and administrative expenses, employee plans and
bonuses, income (loss) from operations, interest expenses, income (loss) before
income taxes, provision (benefit) for income taxes, net income (loss) or net
income (loss) per share of the Company, except in all instances for changes,
decreases or increases set forth in such letter; and
(d) they have carried out certain specified
procedures, not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the general
accounting records of the Company and are included in the Registration Statement
and the Prospectus, and have compared such amounts, percentages and financial
information with such records of the Company and with information derived from
such records and have found them to be in agreement, excluding any questions of
legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deems such explanation unnecessary, and such changes, decreases
or increases do not, in the sole judgment of the Representatives, make it
impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the Registration Statement, as amended as of the date
hereof.
References to the Registration Statement and the Prospectus in this
Section 7.5 with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
7.6 Officer's Certificate. The Representatives shall have
received a certificate, dated the Firm Closing Date, of the president and the
principal financial or accounting officer of the Company to the effect that:
(a) the representations and warranties of the Company
in this Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date, does
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading, in light
of the circumstances in which they were made and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein not misleading, in the light of the circumstances under
which they were made; and the Company has in all material respects performed all
covenants and agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Firm Closing Date;
22
<PAGE>
(b) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
of their knowledge, are contemplated by the Commission; and
(c) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto).
7.7 NASD Review. The NASD, upon review of the terms of the
public offering of the Firm Shares and Option Shares, shall not have objected to
the Underwriters' participation in such offering.
7.8 Lockups. The Representatives shall have received from each
officer and director who owns the Company's Common Stock, or securities
convertible into Common Stock, an agreement to the effect that such person will
not, directly or indirectly, without the prior written consent of the
Representatives, offer, sell or grant any option to purchase or otherwise
dispose (or announce any offer, sale, grant of an option to purchase or other
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable for, shares of Common Stock for a period of six months.
7.9 Due Diligence Examination. The counsel to the
Representatives and other persons retained by the Representatives to conduct a
due diligence investigation with respect to the offering, shall be reasonably
satisfied with the results of their respective due diligence investigations.
7.10 Blue Sky Qualification. The Shares shall be qualified in
such states as the Representatives may reasonably request pursuant to Section
5.4, and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Closing Date or Option Closing Date, as the
case may be.
7.10 Other Documents. On or before the Firm Closing Date, the
Representatives and counsel for the Representatives shall have received such
further certificates, documents or other information as they may have reasonably
requested from the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives. The
Company shall furnish to the
23
<PAGE>
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and the counsel to the
Representatives shall reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Shares shall be subject, in the Representatives' discretion,
to each of the foregoing conditions to purchase the Firm Shares, except that all
references to the Firm Shares and the Firm Closing Date shall be deemed to refer
to such Option Shares and the related Option Closing Date, respectively.
SECTION 8.
Indemnification and Contribution
8.1 Indemnification by Company. The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act") against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(a) any untrue statement or alleged untrue statement
made by the Company in Section 2 of this Agreement;
(b) any untrue statement or alleged untrue statement
of any material fact contained in (i) the Registration Statement or any
amendment thereto or any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (ii) any application or other document, or
any amendment or supplement thereto, executed by the Company and based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"); or
(c) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they are made, and
will reimburse, as incurred, each Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission
24
<PAGE>
or alleged omission made in such registration statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein; and provided further, that the
Company will not be liable to any Underwriter or any person controlling such
Underwriter with respect to any such untrue statement or omission made in any
Preliminary Prospectus that is corrected in the Prospectus (or any amendment or
supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Shares from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented), other than the documents
incorporated by reference therein at or prior to the written confirmation of the
sale of such Shares to such person in any case where such delivery of the
Prospectus (as amended or supplemented) is required by the Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5.5 of this Agreement. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
8.2 Indemnification by Underwriters. Each Underwriter will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any losses, claims, damages or liabilities to which
the Company, any such director or officer of the Company or any such controlling
person of the Company may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (a) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or (b) the omission
or the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or necessary to make the statements therein not misleading in light
of the circumstances in which they are made, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company or any director, officer or
controlling person of the Company in connection with investigation or defending
against or appearing as a third-party witness in connection with any such loss,
claim, damage, liability or any action in respect thereof. This
25
<PAGE>
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have. No Underwriter will, without the prior written consent of
the Company, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not the Company, any of its
directors, any of its officers who signed the Registration Statement or any
person who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Company and each such director, officer and
controlling person from all liability arising out of such claim, action, suit or
proceeding.
8.3 Notice of Defense. Promptly after receipt by an
indemnified party under this Section 8 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 8, notify the indemnifying
party of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party and the indemnified party shall have
reasonably concluded that there may be one or more legal defenses available to
it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party (which may not be
unreasonably withheld or delayed) under this Section 8 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (a) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel at any one time in any one action or
separate but substantially similar actions in the same jurisdiction arising out
of the same general allegations or circumstances, designated by the
Representatives in the case of Section 8.1, representing the indemnified parties
under such Section 8.1 who are parties to such action or actions) or (b) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party, unless
such indemnified party waived its rights under this Section 8 in which case the
indemnified party may effect such a settlement without such consent.
26
<PAGE>
8.4 Contribution. In circumstances in which the indemnity
agreement provided for in the preceding paragraphs of this Section 8 is
unavailable or insufficient to hold harmless an indemnified party in respect of
any losses, claims, damages or liability (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (a) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Shares or (b) if the
allocation provided by the foregoing clause (a) is not permitted by applicable
law, not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on the
other in connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liability (or action
in respect thereof). The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (after deducting expenses)
received by the Company bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take into account the equitable consideration
referred to in the first sentence of this Section 8.4. Notwithstanding any other
provision of this Section 8.4, no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the underwriter discount on
the Shares purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Agreement Among Underwriters. For purposes of
this Section 8.4, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, shall have the same right to
contribution as the Company as the case may be.
27
<PAGE>
SECTION 9.
Default of Underwriters
If one or more Underwriters default in their obligations to purchase
Firm Shares, or Option Shares hereunder and the aggregate number of such Shares
that such defaulting Underwriter or Underwriters agreed but failed to purchase
is ten percent or less of the aggregate number of Firm Shares or Option Shares
to be purchased by all of the Underwriters at such time hereunder, the other
Underwriters may make arrangements satisfactory to the Representatives for the
purchase of such Shares by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representatives), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally in
proportion to their respective commitments hereunder to purchase the Firm
Shares, or Option Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase. In the event of any default by one or more Underwriters
as described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purpose and delivery of the Firm Shares or Option Shares, as
the case may be. As used in this Agreement, the term "Underwriter" includes any
persons substituted for an Underwriter under this Section 9. Nothing herein
shall relieve any defaulting Underwriter from liability for its default.
28
<PAGE>
SECTION 10.
Survival
The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and directors and
the several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (a) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (b) delivery of and payment for the Shares.
The respective agreements, covenants, indemnities and other statements set forth
in Sections 5 and 8 hereof shall remain in full force and effect, regardless of
any termination or cancellation this Agreement.
SECTION 11.
Termination
11.1 By Representatives. This Agreement may be terminated with
respect to the Firm Shares or any Option Shares in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing date or such Option Closing Date,
respectively:
(a) the Company shall have sustained any material
loss or interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding or there shall
have been any material adverse change, or any development involving a
prospective material adverse change (including financial or otherwise), in the
business prospects, net worth or results of operations of the Company, except in
each case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(b) trading in the Common Stock shall have been
suspended by the Commission or the National Association of Securities Dealers
Automated Quotation National Market or trading in securities generally on the
New York Stock Exchange or the American Stock Exchange shall have been suspended
or minimum or maximum prices shall have been established on any such exchange or
market system;
(c) a banking moratorium shall have been declared by
New York, Arizona, or United States authorities; or
29
<PAGE>
(d) there shall have been (i) an outbreak or
escalation of hostilities between the United States and any foreign power, (ii)
an outbreak or escalation of any other insurrection or armed conflict involving
the United States or (iii) any other calamity or crisis having an effect on the
financial markets that, in the reasonable judgment of the Representatives, makes
it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares as contemplated by the Registration Statement, as amended
as of the date hereof.
11.2 Effect of Termination Hereunder. Termination of this
Agreement pursuant to this Section 11 shall be without liability of any party to
any other party, except as provided in Section 10 hereof.
SECTION 12.
Information Supplied by Underwriters
The statements set forth in the last paragraph on the front cover page
and under the heading "Underwriting" in any Preliminary Prospectus or the
Prospectus, to the extent such statements relate to the Underwriters constitute
the only information furnished by any Underwriter through the Representatives to
the Company for the purposes of Section 8 and 10 hereof. The Underwriters
represent and warrant to the Company that such statements, to such extent, are
correct as of the date hereof and at each Closing Date.
SECTION 13.
Notices
All communications hereunder shall be in writing and, if sent to any of
the Underwriters, shall be mailed (certified or registered mail, postage
prepaid, return receipt requested) or delivered or sent by facsimile
transmission and confirmed in writing to Sentra Securities Corporation, 2355
Northside Drive, Suite 200, San Diego, California 92108, Attention: Mr. Jason
Rogers (with a copy to Dennis J. Doucette, Esq., Luce, Forward, Hamilton &
Scripps LLP, 600 West Broadway, Suite 2600, San Diego, CA 92101), if sent to the
Company, shall be mailed (certified or registered mail, postage prepaid, return
receipt requested), delivered or sent by facsimile transmission and confirmed in
writing to the Company at 1719 W. University, Ste. 187, Tempe, Arizona 85281,
Attention: Mr. Hooman Nikzad, (with a copy to P. Robert Moya, Esq., Quarles &
Brady, One E. Camelback Road, Suite 400, Phoenix, Arizona 85012). Notices shall
be effective if mailed, 48 hours after deposit in the mail properly addressed,
sent by facsimile, upon receipt and in any other instance, when delivered.
SECTION 14.
Successors
30
<PAGE>
This Agreement shall inure to the benefit of and shall be binding upon
the several Underwriters, the Company and their respective successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (a) the indemnities of the
Company contained in Section 8 of this Agreement shall also be for the benefit
of any person or persons who control any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and (b) the indemnities
of the Underwriters contained in Section 8 of this Agreement shall also be for
the benefit of the directors of the Company, the officers of the Company who
have signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a
successor because of such purchase.
SECTION 15.
Applicable Law
The validity and interpretation of this Agreement, and the terms and
conditions set forth herein, shall be governed by and construed in accordance
with the laws of the State of California without giving effect to any provisions
relating to conflicts of laws.
SECTION 16.
Counterparts
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, and
each of the several Underwriters.
Very truly yours,
M.D. LABS, INC.
By:_________________________________
Hooman Nikzad
Chief Executive Officer
The foregoing Agreement is hereby
31
<PAGE>
confirmed and accepted as of the
date first above written.
Sentra Securities Corporation
Spelman & Co., Inc.
(As Representatives of the several
Underwriters named in Schedule 1 hereto)
By:______________________________________
Richard P. Woltman, President
32
<PAGE>
SCHEDULE 1
UNDERWRITERS
Number of Firm Shares
Underwriter to be purchased
- ----------- ---------------
Sentra Securities Corporation
Spelman & Co., Inc.
Total __________
COMMON STOCK COMMON STOCK
NUMBER SHARES
_____________ ____________
| | M.D. LABS | |
|_____________| |____________|
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 55268R 10 1
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
$.001 PAR VALUE PER SHARE, OF
- -------------------------------- M.D. LABS, INC. -------------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facisimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
M.D. Labs, Inc.
/s/ Fred Djahandideh CORPORATE /s/ Todd P. Belfer
Secretary SEAL President
DELAWARE
COUNTERSIGNED:
Corporate Stock Transfer, Inc.
370 17th Street, Suite 2350
Denver, Colorado 80202
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
[COPYRIGHT SYMBOL] SECURITY-COLUMBIAN UNITED STATES BANKNOTE COMPANY 1960
<PAGE>
M.D. LABS, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE STOCK IN ONE OR MORE CLASSES OR
SERIES. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO ANY STOCKHOLDER WHO SO
REQUESTS A STATEMENT AS TO THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties --------------- ---------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-----------------------------------
(State)
UNIF TRF MIN ACT Custodian (until age )
------------ ----------
(Cust)
under Uniform Transfers
------------------
(Minor)
to Minors Act
----------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
| |
| |
|_____________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ______________________________
X ________________________________________
X ________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
NOTICE: UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
[Quarles & Brady Letterhead]
October 22, 1996
M.D. Labs, Inc.
1719 West University Drive
Suite 187
Tempe, Arizona 85281
Re: Form SB-2 Registration Statement
Dear Sirs:
We refer to the Registration Statement on Form SB-2 (File No.
333-11821), as amended (the "Registration Statement"), filed by M.D. Labs, Inc.,
a Delaware corporation (the "Company"), with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the
issuance and sale of up to 1,495,000 shares of the Company's Common Stock, $.001
par value per share (the "Shares"), by the Company to the Underwriters named in
Schedule 1 to the Underwriting Agreement filed as Exhibit 1.1 to the
Registration Statement (the "Underwriting Agreement").
We have reviewed the General Corporation Law of the State of
Delaware and examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents, and such corporate and other records and
proceedings of the Company, and made such other investigation and inquiries of
public officials and the officers of the Company, as we deemed necessary to the
opinions hereinafter expressed. On the basis of the foregoing, we are of the
opinion that the Shares covered by the Registration Statement to be sold by the
Company pursuant to the Underwriting Agreement, when issued and delivered by the
Company against payment therefor as provided in the Underwriting Agreement, will
be legally issued, fully paid and non-assessable.
We do not find it necessary for the purposes of this opinion, and
accordingly do not purport to cover herein, the application of the securities or
"Blue Sky" laws of the various states to the issuance and sale of the Shares.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to our firm appearing under the
caption "Legal Matters" in the
Exhibit 5.1
M.D. Labs 1996 SB-2
Amendment No. 1
<PAGE>
M.D. Labs, Inc.
October 22, 1996
Page 2
Prospectus constituting part of the Registration Statement; provided, however,
that by so consenting we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission.
Sincerely,
/s/ QUARLES & BRADY
QUARLES & BRADY
Exhibit 5.1
M.D. Labs 1996 SB-2
Amendment No. 1
Exhibit 5.2
[Bass & Ullman, P.C. Letterhead]
October 24, 1996
Sentra Securities Corporation
2355 Northside Drive, Suite 200
San Diego, CA 92108
Spelman & Co., Inc.
2355 Northside Drive, Suite 200
San Diego, CA 92108
As Representatives of the Several Underwriters
Named in the Underwriting Agreement
Re MD Labs, Inc.
Re: Amendment No. 1 to Form SB-2 - MD Labs, Inc.
To be filed with SEC on October 25, 1996
--------------------------------------------
Dear Sirs:
We have acted as special counsel to MD Labs, Inc. with regard to FDA,
FTC and local licensing matters. In this regard we have reviewed the above
described Registration Statement as regards the sections entitled RISK FACTORS -
Absence of Clinical Studies, Scientific Review and Testing, Uncertainty and
Potential Negative Effects of Government Regulations, Noncompliance with
Government Regulations and Effect of Discontinued Product; and BUSINESS -
Government Regulation.
As of the stated effective date, we have no reason to believe that such
sections (a) contain any untrue statement of a material fact, or (b) omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
We note that our opinion is in part based upon information supplied to
us by the Company and its management, which we have relied on. Facsimile or
other copies of this opinion may be used to serve as an original.
Sincerely yours,
BASS & ULLMAN, P.C.
/s/ Jacob Laufer
Jacob Laufer
JL/ng
SCHEDULE A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION ("BLUE SKY LAWS"), AND CANNOT BE RESOLD UNLESS THEY ARE REGISTERED
UNDER THE ACT AND ANY APPLICABLE BLUE SKY LAWS, UNLESS AN EXEMPTION IS
AVAILABLE. THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF.
M.D. LABS, INC.
STOCK PURCHASE WARRANT
WARRANT TO PURCHASE 14,000 SHARES OF
COMMON STOCK AS DESCRIBED HEREIN
Dated: As of September 14, 1996
This certifies that, for value received including services to be
performed pursuant to a personal services agreement by and between M.D. Labs,
Inc. and Reherman, Inc. effective September 14, 1996:
Name: Lee J. Reherman
Address: 2120 The Strand, Suite 3
Manhattan Beach California, 90266
is entitled to purchase from M.D. Labs, Inc., a Delaware corporation (the
"Company"), having its principal office at 1719 W. University Dr., Suite 187,
Tempe, Arizona 85281, Fourteen Thousand (14,000) fully paid and nonassessable
shares of Common Stock, par value $.001, of the Company (the "Common Stock"),
subject to the terms set forth herein, at an exercise price of Six Dollars
($6.00) per share, subject to adjustment as provided elsewhere herein (the
"Warrant Price"). The holder of this Warrant shall be referred to herein as the
"Warrantholder" or the "Holder."
1. "Common Stock." If at any time, as a result of an adjustment made
pursuant to Section , the securities or other property obtainable upon exercise
of this Warrant shall include shares or other securities of the Company other
than common stock or securities of another corporation or other property,
thereafter the number of such other shares or other securities or property so
obtainable shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Section , and all other provisions of this Warrant
with respect to the Common Stock shall apply on like terms to any such other
shares or other securities or property. Subject to the foregoing, and unless the
<PAGE>
context requires otherwise, all references herein to "Common Stock" shall, in
the event of an adjustment pursuant to Section , be deemed to refer as well to
any other securities or property then obtainable as a result of such
adjustments.
2. Exercise of Warrant. The purchase rights represented by this Warrant
may be exercised by the Warrantholder or its duly authorized attorney or
representative, in whole or in part (but not as to a fractional share of Common
Stock), at any time and from time to time during the period commencing on the
date of this Warrant (the "Commencement Date") and expiring at 5:00 p.m.,
Mountain Standard Time, September 14, 2001 (the "Expiration Date")(or such
earlier date as may be provided pursuant to Section 9 herein), or if such date
is a day on which federal or state chartered banking institutions are authorized
by law to close, then on the next succeeding day which shall not be such a day,
upon presentation of this Warrant at the principal office of the Company, or at
the office of its stock transfer agent, if any, with the purchase form attached
hereto duly completed and signed, and upon payment to the Company in cash or by
certified check or bank draft of an amount equal to the number of shares being
so purchased multiplied by the Warrant Price, together with all taxes applicable
upon such exercise. The Company agrees that the Warrantholder will be deemed the
record owner of such shares as of the close of business on the date on which the
Warrant shall have been presented and payment shall have been made for such
shares as aforesaid. Certificates for the shares of Common Stock so purchased
shall be delivered to the Warrantholder within a reasonable time, not exceeding
20 days, after the exercise in full of the rights represented by this Warrant.
If the Warrant is exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, deliver a new Warrant evidencing the
rights of the Warrantholder to purchase the balance of the shares of Common
Stock which the Warrantholder is entitled to purchase hereunder.
3. Vesting Schedule. Subject to Section 9 herein, the purchase rights
represented by this Warrant shall become exercisable according to the following
schedule: warrants to acquire 7,000 shares of Common Stock shall be exercisable
at September 14, 1997; and warrants to acquire 7,000 shares of Common Stock
shall be exercisable at September 14, 1998.
4. Certain Adjustments to Warrant.
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock or (iv) issue by
reclassification
2
<PAGE>
of its shares of Common Stock other securities of the Company, the number of
shares of Common Stock purchasable upon exercise of this Warrant immediately
prior thereto shall be adjusted so that the Warrantholder shall be entitled to
receive the kind and number of shares of Common Stock or other securities of the
Company which he would have owned or have been entitled to receive at the
happening of any of the events described above, had such Warrant been exercised
immediately prior to the happening of such event or any record date with respect
thereto. An adjustment made pursuant to this paragraph (a) shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) Whenever the number of shares of Common Stock purchasable
upon the exercise of this Warrant is adjusted, as herein provided, the Warrant
Price shall be adjusted by multiplying such Warrant Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number of
shares of Common Stock purchasable upon the exercise of this Warrant immediately
prior to such adjustment, and of which the denominator shall be the number of
shares of Common Stock so purchasable immediately thereafter.
(c) In the event of any adjustment pursuant to this Section ,
no fractional shares of Common Stock shall be issued in connection with the
exercise of any Warrants, but the Company shall, in lieu of such fractional
shares, make such cash payment therefor on the basis of the current market price
on the day immediately prior to exercise.
(d) Irrespective of any adjustments pursuant to this Section
to the Warrant Price or to the number of shares or other securities obtainable
upon exercise of this Warrant, this Warrant may continue to state the Warrant
Price and the number of shares obtainable upon exercise, as the same price and
number of shares stated herein.
5. Merger. In the event of a merger, consolidation or reorganization
with another corporation in which the Company is not the surviving corporation,
the Company (subject to the approval of the Board) or the board of directors of
any corporation assuming the obligations of the Company hereunder shall take
action pursuant to either clause (a) or (b) below:
(a) Appropriate provision may be made for the
protection of this Warrant by the substitution on an equitable basis of
appropriate shares of the surviving corporation, provided that the excess of the
aggregate fair market value (as determined by the Company) of the shares subject
to this Warrant immediately before such substitution over the exercise price
hereof is not more than the excess of the aggregate fair market value of the
3
<PAGE>
substituted shares made subject to purchase immediately after such substitution
over the exercise price thereof; or
(b) Appropriate provision may be made for the
cancellation of this Warrant. In such event, the Company, or the corporation
assuming the obligations of the Company hereunder, shall pay the Holder an
amount of cash (less normal withholding taxes) equal to the excess of the
highest fair market value per share of the Common Stock during the 60-day period
immediately preceding the merger, consolidation or reorganization over the
exercise price, multiplied by the number of shares subject to this Warrant
(whether or not then exercisable).
6. Covenants of the Company. The Company covenants and agrees that:
(a) During the period within which the rights represented by
the Warrant may be exercised, the Company will at all times reserve and keep
available, free from preemptive rights out of the aggregate of its authorized
but unissued Common Stock, for the purpose of enabling it to satisfy any
obligation to issue shares of Common Stock upon the exercise of this Warrant,
the number of shares of Common Stock deliverable upon the exercise of this
Warrant. If at any time the number of shares of authorized Common Stock shall
not be sufficient to effect the exercise of this Warrant, the Company will take
such corporate action as may be necessary to increase its authorized but
unissued Common Stock to such number of shares as shall be sufficient for such
purpose. The Company shall have analogous obligations with respect to any other
securities or properties issuable upon exercise of this Warrant. The Company's
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock upon the exercise of this
Warrant;
(b) All Common Stock that may be issued upon exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid, nonassessable, and free from all taxes, liens, and charges with respect to
the issue thereof; and
(c) All original issue taxes payable with respect to the
issuance of shares upon the exercise of the rights represented by this Warrant
will be borne by the Company but in no event will the Company be responsible or
liable for income taxes or transfer taxes upon the transfer of any Warrant.
7. No Stockholder Rights. Until exercised, this Warrant shall not
entitle the Warrantholder to any voting rights or other rights as a stockholder
of the Company. The rights of the Holder are limited to those expressed in this
Warrant and are not
4
<PAGE>
enforceable against the Company except to the extent set forth herein.
8. Transfer Restrictions.
(a) This Warrant is not transferable except by will or the
laws of descent and distribution and, during Holder's lifetime, it may only be
exercised by Holder.
(b) Neither this Warrant nor the shares of stock issuable upon
the exercise hereof have been registered under the Securities Act of 1933, as
amended (the "Securities Act") or under any state securities laws and unless so
registered may not be transferred, sold, pledged, hypothecated or otherwise
disposed of unless an exemption from such registration is available. In the
event Holder desires to transfer any of the shares of stock issued hereunder,
the Holder must give the Company prior written notice of such proposed transfer
including the name and address of the proposed transferee. Such transfer may be
made only either (i) upon publication by the Securities and Exchange Commission
(the "Commission") of a ruling, interpretation, opinion or "no action letter"
based upon facts presented to said Commission, or (ii) upon receipt by the
Company of an opinion of counsel to the Company in either case to the effect
that the proposed transfer will not violate the provisions of the Securities
Act, the Securities Exchange Act of 1934, as amended, or the rules and
regulations promulgated under either such act, or in the case of clause (ii)
above, to the effect that the shares of stock to be sold or transferred have
been registered under the Securities Act and that there is in effect a current
prospectus meeting the requirements of Subsection 10(a) of the Securities Act,
which is being or will be delivered to the purchaser or transferee at or prior
to the time of delivery of the certificates evidencing the shares of stock to be
sold or transferred.
(c) Prior to any such proposed transfer, and as a condition
thereto, if such transfer is not made pursuant to an effective registration
statement under the Securities Act, the Holder will, if requested by the
Company, deliver to the Company (i) an investment covenant signed by the
proposed transferee, (ii) an agreement by such transferee to the impression of
the restrictive investment legend set forth herein on the certificate or
certificates representing the securities acquired by such transferee, (iii) an
agreement by such transferee that the Company may place a "stop transfer order"
with its transfer agent or registrar, and (iv) an agreement by the transferee to
indemnify the Company to the same extent as set forth in paragraph 8(d) below.
(d) Holder acknowledges that Holder understands the meaning
and legal consequences of this Section 8, and the Holder hereby agrees to
indemnify and hold harmless the Company, its
5
<PAGE>
representatives and each officer and director thereof from and against any and
all loss, damage or liability (including all attorneys' fees and costs incurred
in enforcing this indemnity provision) due to or arising out of (i) the
inaccuracy of any representation or the breach of any warranty of Holder
contained in, or any other breach of, this Warrant Agreement, (ii) any transfer
of any of this Warrant or the shares of stock issuable hereunder in violation of
the Securities Act, the Securities Exchange Act of 1934, as amended, or the
rules and regulations promulgated under either of such acts, (iii) any transfer
of this Warrant or any of said shares of stock not in accordance with this
Warrant Agreement or (iv) any untrue statement or omission to state any material
fact in connection with the investment representations or with respect to the
facts and representations supplied by the Holder to counsel to the Company upon
which its opinion as to a proposed transfer shall have been based.
(e) Any assignment, transfer, pledge, hypothecation or other
disposition of this Warrant attempted contrary to the provisions of this Warrant
Agreement, or any levy of execution, attachment or other process attempted upon
the Warrant, shall be null and void and without effect.
(f) Unless the shares of stock issuable hereunder have been
registered under the Securities Act, upon exercise of this Warrant (in whole or
in part) and the issuance of any of said shares, the Company shall instruct its
transfer agent to enter stop transfer orders with respect to such shares, and
all certificates representing said shares shall bear on the face thereof
substantially the following legend, insofar as is consistent with Arizona law:
"The shares of common stock represented by this certificate
have not been registered under the Securities Act of 1933, as
amended, and may not be sold, offered for sale, assigned,
transferred or otherwise disposed of unless registered
pursuant to the provisions of that Act or an opinion of
counsel to the Company is obtained stating that such
disposition is in compliance with an available exemption from
such registration."
9. Termination of the Warrant. Notwithstanding anything herein to the
contrary, this Warrant can become exercisable only while the Holder is a party
to the personal services agreement referred to above, and shall not be
exercisable after the earliest of (i) September 14, 2001; (ii) a material breach
of the personal services agreement which, if curable, remains uncured 10 days
after notice thereof from the Company to the Holder.
6
<PAGE>
10. No Guarantee of Services. This Agreement shall in no way restrict
the right (if any) of the Company or any of its subsidiaries to terminate
Holder's services at any time.
11. Lost Certificate. If this Warrant is lost, stolen, mutilated or
destroyed, the Company shall, on such terms as the Company may reasonably
impose, including a requirement that the Warrantholder obtain a bond, issue a
new Warrant of like denomination, tenor and date.
12. Binding Effect. This Warrant shall inure to the benefit of and be
binding upon the Warrantholder, the Company and their respective successors and
permitted assigns.
13. Company's Notice of Certain Events. So long as this Warrant shall
be outstanding and unexercised (i) if the Company shall pay any dividend or make
any distribution upon the Common Stock, or (ii) if the company shall offer to
the holders of Common Stock for subscription or purchase by them any shares of
stock of any class or any other rights, or (iii) in the event of any capital
reorganization of the Company, reclassification of the Company, reclassification
of the capital stock of the Company, consolidation or merger of the Company with
or into another corporation, sale, lease or transfer of shall or substantially
all of the property and assets of the Company to another corporation, or
voluntary or involuntary dissolution, the Company shall cause to be delivered to
the Holder, at least ten days prior to the date specified in (a) or (b) below,
as the case may be, a notice containing a brief description of the proposed
action and stating the date on which (a) a record is to be taken for the purpose
of such dividend, distribution or rights, or (b) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any, is to be fixed,
as of which the holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
14. Notice. Notices and other communications to be given to the Holder
of the Warrants evidenced by this certificate shall be delivered by hand, by
facsimile transmission, or by overnight express courtier or mailed, postage
prepaid, to the Holder at the address set forth above, or such other address as
Holder shall have designated by written notice to the Company as provided
herein. Notices or other communications to the Company shall be deemed to have
been sufficiently given if delivered by hand, by facsimile transmission, or by
overnight express courier or mailed, postage prepaid, to the company at 1719 W.
University Dr., Suite 187, Tempe, Arizona 85281, or such other address as the
Company shall have designated by written notice to such registered owner as
7
<PAGE>
herein provided. All notices required hereunder shall be in writing and shall be
deemed received when delivered personally, one business day after delivery to a
nationally recognized commercial overnight courier service, or two business days
after mailing when mailed by certified or registered mail to the Company or the
Warrantholder.
15. Governing Law. The validity, interpretation, and performance of
this Warrant and of the terms and provisions hereof shall be governed by and
construed in accordance with the internal laws of the State of Arizona without
giving effect to the principles of conflicts of laws.
16. Amendment. This Warrant may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by the Company and the Warrantholder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed effective as of September 14, 1996.
M.D. LABS, INC.
By: /s/ Hooman Nikzad
----------------------------------
Hooman Nikzad
Chief Executive Officer
8
<PAGE>
PURCHASE FORM
-------------
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase _______ shares
of Common Stock, evidenced by the within Warrant, according to the terms and
conditions thereof, and herewith makes payment of the purchase price in full.
The undersigned requests that certificate(s) for such shares shall be issued in
the name set forth below.
Dated: [NAME OF HOLDER]
-------------------
By
------------------------------
(Signature)
Name:
----------------------------
(Please Print)
Address:
-------------------------
-------------------------
-------------------------
Employer Identification No.,
Social Security No. or other
identifying number:
--------------------------------
If the number of shares specified above shall not be all the shares
purchasable under the within warrant, the Warrantholder hereby requests that a
new Warrant for the unexercised portion shall be registered in Warrantholder's
name and delivered to the address set forth in the Warrant.
9
M.D. LABS, INC.
Shares Subscription Package
Shares Subscription Agreement
(Two Copies)
--Accredited Investors Only--
<PAGE>
M.D. LABS, INC.
SHARES SUBSCRIPTION AGREEMENT
(Special Power of Attorney)
M.D. Labs, Inc.
1719 W. University, Suite 187
Temp, AZ 85281
Re: Acquisition of M.D. Labs, Inc. Common Stock in Exchange for
Investment Units of Houston Enterprises, L.L.C. Gentlemen:
The undersigned (the "Subscriber") hereby subscribes to acquire the
number of shares of common stock, $0.001 par value per share (the "Shares" or
"Share" when used in the singular) of M.D. Labs, Inc., a Delaware corporation
(the "Company" or "M.D. Labs") set forth on the signature page hereof. The
Shares are being acquired in exchange for investment units (the "Investment
Units" or Investment Unit" when used in the singular) of Houston Enterprises,
L.L.C., an Arizona limited liability company doing business as Houston
International, L.L.C. ("Houston") held by Subscriber and assigned to the Company
in exchange for the Shares acquired hereunder (the "Assigned Units"). The number
of Shares to be received by Subscriber for Assigned Units exchanged hereunder
will be at the rate of 30,000 Shares for one (1) Investment Unit and will be
adjusted proportionately for the number of Investment Units, or multiples or
fractions thereof, held by Subscriber. Such acquisition is subject to the terms
and conditions set forth in the Company's Private Placement Memorandum, dated
March 4, 1996 (including all documents incorporated therein, the "Memorandum"),
and to the following paragraphs. This subscription may be rejected by the
Company in its sole discretion.
1. Acquisition. Subject to the terms and conditions hereof, Subscriber
hereby irrevocably agrees to acquire the number of shares of Common
Stock, as hereinafter defined, set forth on the signature page hereof
and tenders herewith in exchange the number of Investment Units set
forth on the signature page hereof (minimum acquisition of 7,500 shares
of Common Stock for one quarter (0.25) Investment Unit). Full
consideration for the Shares acquired hereunder will be provided by the
execution and delivery with this Shares Subscription Agreement of the
Assignment, as hereinafter defined, assigning the Investment Units to
the Company.
2. Assignment of Membership Interests and Agreement of Assignee and
Power of Attorney. Subscriber agrees to execute and acknowledge the
Assignment of Membership Interests and Agreement of Assignee (Share
Exchange) in substantially the form of Exhibit H-2 to the Memorandum
(the "Assignment") or to do so through Subscriber's attorney-in-fact
designated herein. Subscribe hereby irrevocably constitutes and
appoints Hooman Nikzad or Todd P. Belfer, or either of their duly
<PAGE>
appointed successors, as Subscriber's true and lawful attorney-in-fact,
with full power and authority to act in Subscriber's name, place and
stead to make, execute, acknowledge, and deliver the Assignment and to
take all other action necessary or required to complete the Exchange,
as defined in the Memorandum, including, but not limited to, the
acquisition of the Shares hereunder.
Subscriber expressly acknowledges that the foregoing special
power of attorney is coupled with an interest, is irrevocable and shall
survive the death or legal incapacity of the Subscriber and the
delivery of any assignment by Subscriber of Subscriber's interest. This
power of attorney may be exercised by one of the above
attorneys-in-fact for Subscriber by signature or by listing all holders
of Investment Units acquiring shares of Common Stock for whom such
attorneys-in-fact are acting as attorneys-in-fact and executing any
instrument with the signature of such attorneys-in-fact acting as
attorneys-in-fact for all of them. The Subscriber shall be bound by all
representations of the above attorneys-in-fact as Subscriber's
attorney-in-fact and hereby waives any and all defenses which may be
available to Subscriber to contest, negate or disaffirm the actions of
the attorneys-in-fact or their successors under this power of attorney,
and hereby ratifies and confirms all acts which the attorneys-in-fact
or their successors hereunder may take as attorney-in-fact hereunder in
all respects as though performed by Subscriber.
The pages of this Shares Subscription Agreement upon which
this power of attorney is set forth and the pages hereof upon which the
Subscriber's signature appears may be separated from the rest of this
agreement and may be recorded as evidence of the power and authority of
the attorneys-in-fact and each of them to exercise the power of
attorney set forth herein.
3. Representations and Warranties. Subscriber hereby makes the
following representations and warranties to the Company, and Subscriber
agrees to indemnify, hold harmless, and pay all judgments of and claims
against the Company from any liability or injury, including, but not
limited to, that arising under Federal or state securities laws,
incurred as a result of any misrepresentation herein or any warranties
not performed by Subscriber.
(a) Subscriber owns the Assigned Units entirely free and clear
of any and all judgments, actions, claims, charges, liabilities, liens
or encumbrances of any kind or nature whatsoever (collectively, the
"Claims"). Subscriber has not pledged any portion of the Assigned Units
as collateral for any loans, and has good and marketable title to the
Assigned Units. Subscriber has the complete and unrestricted power and
the unqualified right to sell, assign, transfer, convey and deliver to
the Company title to the Assigned Units, entirely free and clear of any
and all Claims. Upon the date of assignment of the Assigned Units and
the consummation of this transaction, Subscriber shall be the sole
owner of the Assigned Units, entirely free and clear of any and all
Claims of any kind or nature whatsoever.
2
<PAGE>
(b) Subscriber is the sole and true party in interest and is
not acquiring for the benefit of any other person;
(c) Subscriber has read, analyzed, and is familiar with the
Memorandum and has retained copies of the Memorandum, this Shares
Subscription Agreement, and the Investor Suitability Questionnaire;
(d) Subscriber has read, analyzed, and is familiar with the
section of the Memorandum entitled "WHO MAY INVEST" and Subscriber
hereby warrants that Subscriber is an Accredited Investor, as defined
therein;
(e) Subscriber understands that all books, records and
documents of the Company relating to this investment have been and
remain available for inspection by Subscriber upon reasonable notice.
Subscriber confirms that all documents requested by Subscriber have
been made available, and that Subscriber has been supplied with all of
the additional information concerning this investment that has been
requested. In making a decision to acquire the Shares, Subscriber has
relied exclusively upon information provided in the Memorandum or by
the Company in writing or found in the books, records or documents of
the Company;
(f) Subscriber is aware that an investment in the Shares is
highly speculative and subject to substantial risks. Subscriber is
capable of bearing the high degree of economic risk and burdens of this
venture, including, but not limited to, the possibility of the complete
loss of all funds invested, the loss of any anticipated tax benefits,
the lack of a public market, and limited transferability of the Shares
which may make the liquidation of this investment impossible for the
indefinite future;
(g) The offer to sell the Shares was directly communicated to
Subscriber by the Company through the Memorandum in such a manner that
Subscriber was able to ask questions of and receive answers from the
Company, or a person acting on its behalf, concerning the terms and
conditions of this transaction. At no time was Subscriber presented
with or solicited by or through any article, notice or other
communication published in any newspaper or other leaflet, public
promotional meeting, television, radio or other broadcast or
transmittal advertisement or any other form of general advertising;
(h) Subscriber, if a corporation, partnership, trust or other
entity, is authorized and duly empowered to acquire and hold the
Shares, has its principal place of business at the address set forth on
the signature page and has not been formed for the specific purpose of
acquiring the Shares;
(i) The Shares are being acquired solely for Subscriber's own
account, for investment, and are not being acquired with a view to the
resale, distribution, subdivision or fractionalization thereof;
3
<PAGE>
(j) Subscriber understands that the Shares have not been
registered under the Securities Act of 1933, as amended (the "Act") or
any other state securities laws in reliance upon exemptions from
registration for non-public offerings. Subscriber understands that the
Shares or any interest therein may not be, and agrees that the Shares
or any interest therein, will not be, resold or otherwise disposed of
by Subscriber unless the Shares are subsequently registered under the
Act and under appropriate state securities laws or unless the Company
receives an opinion of counsel satisfactory to it that an exemption
from registration is available;
(k) Subscriber has been informed of and understands the
following:
(i) The Company's balance sheet is unaudited, management
prepared and pro forma,
(ii) There are substantial restrictions on the
transferability of the Shares unless they are registered under
the Act; and
(iii) No federal or state agency has made any finding or
determination as to the fairness of the Shares for public
investment nor any recommendation or endorsement of the
Shares;
(l) Except as set forth in the Memorandum, none of the
following information has ever been represented, guaranteed, or
warranted to Subscriber expressly or by implication, by any broker, the
Company, or agents or employees of the foregoing, or by any other
person;
(i) The approximate or exact length of time that
Subscriber will be
required to hold the Shares;
(ii) The percentage of profit and/or amount of or type of
consideration, profit or loss to be realized, if any, as a
result of an investment in the Shares; or
(iii) That the past performance or experience of the
Company, or associates, agents, affiliates, or employees of
the Company or any other person, will in any way indicate or
predict economic results in connection with the acquisition of
the Shares;
(m) The information set forth in the Investor Suitability
Questionnaire prepared for Subscriber's acquisition of the Assigned
Units and executed by Subscriber is true, correct and complete and may
be relied on by the Company for purposes of qualifying Subscriber to
acquire the Shares;
(n) Subscriber has not distributed the Memorandum to anyone,
no other person has used the Memorandum, and no copies of the
Memorandum have been
4
<PAGE>
made by Subscriber; and
(o) Subscriber hereby agrees to indemnify the Company, and
hold the Company harmless from and against any and all liability,
damage, cost or expense incurred on account of or arising out of:
(i) Any inaccuracy in the declarations, representations,
and warranties hereinabove set forth;
(ii) The disposition of any of the Shares by Subscriber
contrary to the foregoing declarations, representations and
warranties; and
(iii) Any action, suit or proceeding based upon (a) the
claim that said declarations, representations, or warranties
were inaccurate or misleading or otherwise cause for obtaining
damages or redress from the Company; or (b) the disposition of
any of the Shares.
4. Registration Under Securities Act of 1933, as amended.
4.1 Certain Other Definitions. As used in this Shares Subscription
Agreement, the following terms shall have the following respective
meanings:
"Commission" shall mean the United States Securities and
Exchange Commission and any successor federal agency having similar
powers.
"Initiating Holder" shall mean any Holder or Holders, as
hereinafter defined, who or which, in the aggregate, own not less than
50.1% of the aggregate number of Registrable Securities, as hereinafter
defined, then existing.
The term "majority of the Registrable Securities" refers
to a majority of the specified Registrable Securities.
The terms "register", "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Act, and the declaration or ordering
of the effectiveness of such registration statement.
"Registrable Securities" shall mean those Securities
which have not been sold to the public.
"Registration Expenses" shall mean all expenses incurred
by the Company in complying with this Section 4, including, without
limitation, (I) all registration and filing fees, printing expenses,
fees and disbursements of counsel for the Company (but not counsel
retained by the Holders), blue sky fees and expenses, and accountants'
expenses including without limitation any special audits or
5
<PAGE>
"comfort" letters incident to or required by any such registration,
transfer taxes, fees of transfer agents and registrars, costs of
insurances, and fees of the National Association of Securities Dealers,
Inc., and (ii) any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding underwriting
discounts and commissions.
"Securities" shall mean the Common Stock, as
hereinafter defined, acquired in the Offering, as defined in the
Memorandum, together with any other securities which are hereafter
issued with respect thereto by way of exchange, reclassification,
dividend or distribution, whether or not such and securities have been
sold to the public.
"Common Stock" shall mean all currently outstanding
shares of $0.001 par value per share common stock of the Company now
issued and outstanding and all shares hereafter issued and outstanding,
as well as any securities hereafter convertible into or exchangeable
for shares of Common Stock of the Company.
4.2 Registration on Demand.
(a) Demand. After September 1, 1997, and upon the written
demand of one or more Initiating Holders, requesting that the Company
effect the registration under the Act of up to fifty percent (50%) of
such Initiating Holder's Registrable Securities and specifying the
intended method or methods of disposition thereof, the Company will
promptly, but in any event within ten (10) days, give written notice of
such demanded registration to Subscriber, or its successors and
assigns, as the case may be (the "Holder"), and to the other acquirers
of Registrable Securities (together with the Holder, the "Holders") of
Registrable Securities and thereupon will use its best efforts to
effect the registration under the Act of:
(i) the Registrable Securities which the Company has been
so demanded to register by such Initiating Holder, for
disposition in accordance with the intended method or methods
of disposition stated in such demand,
(ii) all other Registrable Securities which the Company
has been demanded to register by the Holders thereof by
written demand delivered to the Company within ten (10) days
after giving of such written notice by the Company (which
request shall specify the intended method or methods of
disposition of such Registrable Securities), and
(iii) all shares of Common Stock which the Company may
elect to register for its own account in connection with the
offering of Registrable Securities pursuant to this Section
4.2,
6
<PAGE>
all to the extent requisite to permit the disposition (in accordance
with the intended methods thereof as aforesaid) of the Registrable
Securities so to be registered, provided that the Company shall not be
required to effect more than one (1) registration pursuant to this
Section 4.2. If, at the date of receipt of a demand by Initiating
Holder, the Company has previously filed a registration statement
pursuant to the Act (otherwise than on Form S-4 or S-8 or any similar
form for the registration of securities pursuant to an employee benefit
plan or business combination or reorganization), the Company may defer
the filing of any such demanded registration statement to a date not
later than ninety (90) days after the effective date of such prior
registration statement.
(b) Registration Statement Form. Each registration demanded
pursuant to this Section 4.2 shall be effected by the filing of a
registration statement on any form which the Company is eligible to
use, such form to be selected by the Company, after consultation with
counsel and after notice of such selection of such form is delivered to
the Holders of all Registrable Securities electing to participate in
such registration; provided, however, that if the Holders of at least a
majority of the Registrable Securities as to which registration has
been demanded pursuant to this Section 4.2 shall so request, the
Company shall file such registration statement pursuant to the
Commission's Rule 415, or any successor rule or regulation thereto, so
as to permit the continuous or delayed offering of the Registrable
Securities in accordance with the intended method of disposition
specified in the Initiating Holder's notice pursuant to subsection (a)
of this Section 4.2, but in no event shall the Company be required to
maintain the effectiveness of such registration beyond the period
specified in Section 4.4 (b). Such selection of form by the Company
shall be final unless the use of such form has been objected to in
writing by Holders holding at least a majority of the Registrable
Securities as to which registration has been requested pursuant to this
Section 4.2.
(c) Expenses. Except as otherwise prohibited by applicable
law, the Company will pay all Registration Expenses in connection with
the registration of Registrable Securities requested pursuant to this
Section 4.2.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 4.2 shall not be deemed to be effected unless
a registration statement covering all shares of Registrable Securities
specified in notices received as described in subsection (a), for sale
in accordance with the method of disposition specified by the
Initiating Holder, shall have been declared effective by the Commission
or otherwise becomes effective and, if such method of disposition is a
firm commitment underwritten public offering, all such shares shall
have been sold pursuant thereto; provided that a registration which
does not become effective after the Company has substantially prepared
and has filed or is in a position to file a registration statement with
respect thereto solely by reason of the refusal to proceed of all of
the Initiating Holders (other than any refusal to proceed based upon
the advice of their counsel that the registration statement, or the
prospectus contained therein, contains an untrue
7
<PAGE>
statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing) shall be deemed
to have been effected by the Company at the request of such Holder.
4.3. Piggyback Registration Rights.
(a) Right to Include Registrable Securities. If, at any time
within five (5) years from the date hereof, the Company proposes to
register any of its equity securities under the Act, whether or not for
sale for its own account, on a form and in a manner which would permit
registration of Registrable Securities for sale to the public under the
Act, it will, each such time, give notice at least thirty (30) days
prior to the proposed filing date to all Holders of Registrable
Securities of its intention to do so, describing such securities and
specifying the form and manner and the other relevant facts involved in
such proposed registration and, upon the written request of any such
Holder delivered to the Company within ten (10) business days after the
giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such Holder and the intended
method or methods of disposition thereof), the Company shall use its
best efforts to effect the registration under the Act of Registrable
Securities which the Company has been requested to register by the
Holders of Registrable Securities (hereinafter "Requesting Holders"),
but not exceeding ten percent (10%) of the Registrable Securities and
in the case of Subscriber and each such subscriber in the Offering not
exceeding ten percent (10%) of Subscriber's Registrable Securities to
the extent requisite to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the Registrable Securities so
to be registered, of those Registrable Securities which the Company is
requested to register by Holder up to ten percent (10%) of the
Registrable Securities provided that:
(i) if, at any time after giving such notice of its
intention to register any of its securities and prior to the
effective date of the registration statement filed in
connection with such registration, the Company shall determine
for any reason not to register such securities, the Company
may, at its election, give written notice of such
determination to each Holder of Registrable Securities and
thereupon shall be relieved of its obligation to register any
Registrable Securities in connection with such registration
(but not its obligation to pay the Registration Expenses in
connection therewith as provided in subsection (b) of this
Section 4.3), without prejudice, however, to the rights of any
one or more Holders to request that such registration be
effected in a subsequent such registration;
(ii) if (a) the registration so proposed by the Company
involves an underwritten offering of the securities so being
registered to be distributed by or through one or more
underwriters of recognized standing under underwriting terms
appropriate for such a transaction, (b) the Company
8
<PAGE>
proposes that the securities to be registered in such
underwritten offering will not include all of the Registrable
Securities requested to be so included, and (C) the managing
underwriter of such underwritten offering shall advise the
Company in writing that, in its opinion, the distribution of
all or a specified portion of such Registrable Securities
concurrently with the securities being distributed by such
underwriters will materially and adversely affect the
distribution of such securities by such underwriters (such
opinion to state the reasons therefor), then the Company will
promptly furnish each such Holder of Registrable Securities
with a copy of such opinion and may require, by written notice
to each such Holder accompanying such opinion, that the
distribution of all or a specified portion of such Registrable
Securities be excluded from such distribution (in case of an
exclusion of a portion of such Registrable Securities, such
portion to be allocated among such Holders in proportion to
the respective numbers of shares of Registrable Securities so
requested to be registered by such Holders); provided,
however, that no portion of the Registrable Securities shall
be excluded if any securities are to be included in such
underwriting for the account of any person other than the
Company; and if the Company shall require such a reduction,
the Holder of Registrable Securities shall have the right to
withdraw from the offering;
(iii) the Company shall not be obligated to effect any
registration of Registrable Securities under this Section 4.3
incidental to the registration of any of its securities in
connection with mergers, acquisitions, exchange offers,
dividend reinvestment plans or stock options or other employee
benefit plans or incidental to the registration of any
non-equity securities not convertible into equity securities;
and,
(iv) the number of shares of Registrable Securities which
shall be included in each such registration shall not exceed
ten percent (10%) of the Registrable Securities and, in the
case of Subscriber and each such subscriber in the Offering,
shall not exceed ten percent (10%) of Subscriber's Registrable
Securities.
No registration of Registrable Securities effected under this
Section 4.3 shall relieve the Company of its obligation to effect
registrations of Registrable Securities upon the request of an
Initiating Holder pursuant to Section 4.2.
(b) Expenses. Except as otherwise prohibited by applicable
law, the Company will pay all Registration Expenses in connection with
the registration of Registrable Securities requested pursuant to this
Section 4.3.
4.4 Registration Procedures. If and whenever the Company is
required to use its best efforts to effect the registration of any
Registrable Securities under the Act as provided in Section 4.2 and
4.3, the Company shall promptly:
9
<PAGE>
(a) prepare and (in any event within (90) days of the last
date on which the Holders of Registrable Securities may notify the
Company of their request to include their Registrable Securities in
such registration in accordance herewith or such earlier date as may be
provided elsewhere herein) file with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective
provided that, in the case of a registration of any Registrable
Securities pursuant to Section 4.3, such preparation and filing may be
delayed if, in the good faith determination of the Board of Directors
of the Company, such deferral would be in the best interest of the
Company and such deferral would be without prejudice to the rights of
the Holders of Registrable Securities to request that such registration
be effected as a subsequent registration under Section 4.3;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Act with
respect to the disposition of all Registrable Securities and other
securities covered by such registration statement until the earlier of
such time as all of such Registrable Securities and other securities
have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such
registration statement or the expiration of one (1) year (or, in the
case of registration of Registrable Securities pursuant to Section 4.3,
ninety (90) days) after such registration statement becomes effective;
and will furnish, upon request, to each such seller and each Requesting
Holder prior to the filing thereof a copy of any amendment or
supplement to such registration statement or prospectus and shall not
file any such amendment or supplement to which any such seller or
Requesting Holder shall have reasonably objected on the grounds that
such amendment or supplement does not comply in all material aspects
with the requirements of the Act or of the rules or regulations
thereunder;
(c) furnish to each seller of such Registrable Securities and
each Requesting Holder such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus included in such registration statement (including each
preliminary prospectus and any summary prospectus), in conformity with
the requirements of the Act, such documents, if any, incorporated by
reference in such registration statement or prospectus, and such other
documents, as such seller or Requesting Holder may reasonably request;
(d) use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of
the States of the United States as each seller shall reasonably
request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect, and do any and
all other acts and things which may be necessary or advisable to enable
such seller to consummate the
10
<PAGE>
disposition in such jurisdictions of its Registrable Securities covered
by such registration statement, except that the Company shall not for
any such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it is not and would
not, but for the requirements of this subsection (d), be obligated to
be so qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any such
jurisdiction;
(e) upon request, furnish to each seller of Registrable
Securities and each Requesting Holder a signed counterpart, addressed
to such seller and such Requesting Holder, of (I) an opinion of counsel
to the Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering,
dated the date of the closing under the underwriting agreement), and
(ii) a "comfort" letter, signed by the independent public accountants
who have certified the Company's financial statements included in such
registration statement, dated after the effective date of such
registration statement (and, if such registration statement includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in accountant's
letters delivered to underwriters in underwritten public offerings of
securities and, in the case of the accountant's letter, such other
financial matters, as the principal underwriter for such sellers or
such Requesting Holders may reasonably request;
(f) immediately notify each seller of Registrable Securities
covered by such registration statement and each Requesting Holder, at
any time when a prospectus relating thereto is required to be delivered
under the Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances then existing, which untrue statement or
omission requires amendment of the registration statement or
supplementation of the prospectus, and at the request of any such
seller or Requesting Holder, prepare and furnish to such seller and
Requesting Holder a reasonable number of copies of a supplement to or
an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the acquirers of such Registrable Securities,
such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances then existing; provided, however that each Holder of
Registrable Securities registered pursuant to such registration
statement agrees that such Holder will not sell any Registrable
Securities pursuant to such registration statement during the time that
the Company is preparing and filing with the Commission a supplement to
or an amendment of such prospectus or registration statement;
11
<PAGE>
(g) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its Holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve (12) months, but not
more than eighteen (18) months, beginning with the first month of the
first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11 (a) of the Act;
(h) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement; and
(i) use its best efforts to list all Registrable
Securities covered by such registration statement on each
securities exchange on which any of the Common Stock of the
Company is then listed or, if the Company's Common Stock is
not then quoted on NASDAQ or listed on any national securities
exchange, use its best efforts to have such Registrable
Securities covered by such registration statement quoted on
NASDAQ or, at the option of the Company, listed on a national
securities exchange.
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish the Company such
information regarding such seller and the distribution of such
securities as the Company may from time to time reasonably request in
writing and as shall be required by law or by the Commission in
connection therewith and such seller shall furnish such information.
4.5 Underwritten Offerings.
(a) Underwritten Offerings. If the number of shares of
Registrable Securities and any other securities to be sold in any
underwritten offering involves a registration requested by Initiating
Holders pursuant to Section 4.2 should be limited due to market
conditions or otherwise, the Company shall include in such registration
to the extent of the number which the Company is so advised can be sold
in such offering (I) first, Registrable Securities requested to be
included in such registration, pro rata among the Holders of such
Registrable Securities on the basis of the number of shares of such
securities requested to be included by such Holders, and (ii) other
securities of the Company proposed to be included in such registration,
in accordance with the priorities, if any, then existing among the
Company and the Holders of such securities.
(b) Underwriting Agreement. If requested by the underwriters
for any underwritten offering of Registrable Securities on behalf of a
Holder or Holders of Registrable Securities pursuant to a registration
requested under Section 4.2, the Company will enter into an
underwriting agreement reasonably acceptable to the Company with such
underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions
12
<PAGE>
as are customarily contained in underwriting agreements with respect to
distributions, including, without limitation, indemnities to the effect
and to the extent provided in Section 4.7, provided, however, that such
agreement shall not contain any provision which is inconsistent with
the provisions hereof. The Holders of Registrable Securities on whose
behalf Registrable Securities are to be distributed by such
underwriters shall be parties to any such underwriting agreement and
the representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall
also be made to and for the benefit of such Holders of Registrable
Securities. Such Holders of Registrable Securities shall not be
required by the Company to make any representations or warranties to or
agreements with the Company or the underwriters other than reasonable
representations, warranties or agreements (including indemnity
agreements customary in secondary offerings) regarding such Holder,
such Holder's Registrable Securities and such Holder's intended method
or methods of disposition and any other representation required by law.
(c) Piggyback Underwritten Offerings. If the Company at any
time proposes to register any of its securities under the Act as
contemplated by Section 4.3 and such securities are to be distributed
by or through one or more underwriters, the Company will use its best
efforts, if requested by any Holder of Registrable Securities, who
requests piggyback registration of Registrable Securities in connection
therewith pursuant to Section 4.3 to arrange for such underwriters to
include the Registrable Securities to be offered and sold by such
Holder among the securities to be distributed by or through such
underwriters, provided that, for purposes of this sentence, "best
efforts" shall not require the Company to reduce the amount or sale
price of such securities proposed to be distributed by or through such
underwriters. The Holders of Registrable Securities to be distributed
by such underwriters shall be parties to the underwriting agreement
between the Company and such underwriters and the representations and
warranties by, and the other agreements on the part of, the Company to
and for the benefit of such underwriters, shall also be made to and for
the benefit of such Holders of Registrable Securities, and the Company
will cooperate with such Holders of Registrable Securities to the end
that the conditions precedent to the obligations of such Holders of
Registrable Securities under such underwriting agreement shall not
include conditions that are not customary in underwriting agreements
with respect to combined primary and secondary distributions and shall
be otherwise satisfactory to such Holders. Such Holders of Registrable
Securities shall not be required by the Company to make representations
or warranties to or agreements (including customary indemnity
agreements) with the Company or the underwriters other than reasonable
representations, warranties or agreements regarding such Holder, such
Holder's Registrable Securities and such Holder's intended method or
methods of distribution and any other representation required by law.
(d) Selection of Underwriters. Whenever a registration
requested pursuant to Section 4.2 is for an underwritten offering, the
Holders of a majority of
13
<PAGE>
the Registrable Securities included in such registration shall have the
right to select the managing underwriter(s) to administer the offering,
subject to the approval of the Company, which approval shall not be
unreasonably withheld. If the Company at any time proposed to register
any of its securities under the Act for sale for its own account and
such securities are to be distributed by or through one or more
underwriters, the selection of the managing underwriter(s) shall be
made by the Company and notice of the selection thereof delivered to
the Holders of all Registrable Securities eligible to participate in
such registration.
(e) Holdback Agreements. If any registration pursuant to
Section 4.2 or 4.3 shall be in connection with an underwritten public
offering, each Holder of Registrable Securities agrees by acquisition
of such Registrable Securities, if so required by the managing
underwriter, not to effect any public sale or distribution of
Registrable Securities (other than as part of such underwritten public
offering) within seven (7) days prior to the effective date of such
registration statement or one hundred twenty (120) days after the
effective date of such registration statement.
4.6 Preparation: Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering
Registrable Securities under the Act, the Company will give the Holders
of Registrable Securities on whose behalf such Registrable Securities
are to be so registered and the Underwriters, if any, each Requesting
Holder, and their respective counsel and accountants, the opportunity
to participate in the preparation of such registration statement, each
prospectus included therein or filed with the Commission and each
amendment thereof or supplement thereto, and will give each of them
such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent
public accountants who have certified its financial statements as shall
be reasonably necessary to conduct a reasonable investigation within
the meaning of the Act. To minimize disruption and expense to the
Company during the course of the registration process, sellers of
Registrable Securities to be covered by any such registration statement
shall coordinate their investigation and due diligence efforts
hereunder and, to the extent practicable, will act through a single set
of counsel and a single set of accountants.
14
<PAGE>
4.7 Indemnification.
(a) Indemnification by the Company. In the event of any
registration of any securities of the Company under the Act, the
Company shall, and hereby does, hereby indemnify and hold harmless in
the case of any registration statement filed pursuant to this Section
4.2 or 4.3, the seller of any Registrable Securities covered by such
registration statement, such seller's directors, trustees and officers,
each other person who participates as an underwriter in the offering or
sale of such securities and each other person, if any, who controls
such seller or any such underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or
several, to which such seller or Requesting Holder or any such director
or officer or participating person or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions or proceedings in respect
thereof) arise out of or are based upon (x) any untrue statement or
alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered
under the Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto,
or any document incorporated by reference therein, or (y) any omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and the Company will reimburse such seller, Requesting
Holder and each such director, trustee, officer, participating person
and controlling person for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such
loss, claim, liability, action or proceeding, provided that the Company
shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or expense (or action or proceeding in respect
thereof) arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance
upon and in conformity with information furnished to the Company by
such seller or such Requesting Holder or any such director, trustee,
officer, participating person or controlling person.
(b) Indemnification by the Seller. The Company may require, as
a condition to including Registrable Securities in any registration
statement filed pursuant to Section 4.2 or 4.3, that the Company shall
have received an undertaking satisfactory to it from each prospective
seller of such securities, severally and not jointly, to indemnify and
hold harmless (in the same manner and to the same extent as set forth
in subsection (a) of this Section 4.7) the Company, each director of
the Company, each officer of the Company who shall sign such
registration statement and each other person, if any, who controls the
Company within the meaning of the Act, with respect to any untrue
statement in or omission from such registration statement, any
preliminary prospectus, final prospectus or summary prospectus included
therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with information
furnished
15
<PAGE>
to the Company by such seller. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf
of the Company or any such director, officer or controlling person and
shall survive the transfer of such securities by such seller.
(c) Notice of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or any
proceeding involving a claim referred to in the preceding subsection of
this Section 4.7, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written
notice to the latter of the commencement of such action, provided that
the failure of any indemnified party to give notice as provided therein
shall not relieve the indemnifying party of its obligations under the
preceding subsections of this Section 4.7, except to the extent that
the indemnifying party is actually materially prejudiced by such
failure to give notice. In case such action is brought against an
indemnified party, unless in such indemnified party's reasonable
judgment (I) a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, or (ii) the
indemnified party has available to it reasonable defenses which are
different from or additional to those available to the indemnifying
party, the indemnifying party shall be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying
party similarly notified, to the extent that it may wish, with counsel
reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense
thereof other than reasonable costs of investigation. Notwithstanding
the foregoing, in any such action, any indemnified party shall have the
right to retain its own counsel but the fees and disbursements of such
counsel shall be at the expense of such indemnified party unless (I)
the indemnifying party shall have failed to retain counsel for the
indemnified person as aforesaid, or (ii) the indemnifying party and
such indemnified party shall have mutually agreed to the retention of
such counsel. It is understood that the indemnifying party shall not,
in connection with any action or related actions in the same
jurisdiction, be liable for the fees and disbursements of more than one
separate firm qualified in such jurisdiction to act as counsel for the
indemnified party. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such
settlement or judgment. No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such
claim or litigation.
(d) Other Indemnification. Indemnification similar to that
specified in the
16
<PAGE>
preceding subsections of this Section 4.7 (with appropriate
modifications) shall be given by the Company and each seller of
Registrable Securities with respect to any required registration or
other qualification of such Registrable Securities under any federal or
state law or regulation of governmental authority other than the Act.
(e) Contribution. If the indemnification provided for in this
Section 4.7 is unavailable or insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages,
liabilities or expenses described as indemnifiable pursuant to
subsections (a) or (b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party, as a result of such losses, claims,
damages, liabilities or expenses in such proportion as appropriate to
reflect the relative fault of the Company, on the one hand, or such
seller of Registrable Securities on the other hand, and to the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent any untrue statement or omission giving rise to such
indemnification obligation. The Company and the Holder of Registrable
Securities agree that it would not be just and equitable if
contributions pursuant to this subsection (e) were determined by pro
raga allocation (even if Holders of Registrable Securities were treated
as one entity for such purpose) or by any other method of allocation
which did not take account of the equitable considerations referred to
above in this subsection (e). No person guilty of fraudulent
misrepresentations (within the meaning of Section 11 (f) of the Act)
shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation.
(f) Indemnification Payments. The indemnification required by
this Section 4.7 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when
bills are received or any expense, loss, damage or liability is
incurred.
(g) Limitation on Seller's Payments. Notwithstanding any
provision hereof to the contrary, the liability of any seller of
Registrable Securities under this Section 4.2 shall in no event exceed
the proceeds received by such seller from the sale of Registrable
Securities covered by the registration statement giving rise to such
liability.
5. Nominees for Beneficial Owners. In the event any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the Holder
of such Registrable Securities for purposes of any request or other
action by any Holder or Holders of Registrable Securities pursuant to
this Agreement or any determination of any number or percentage of
shares of Registrable Securities held by any Holder or Holders of
Registrable Securities contemplated by this Agreement. If the
beneficial owner of any Registrable Securities so elects, the Company
may require assurances reasonably satisfactory to it of such owner's
beneficial ownership of such Registrable Securities.
17
<PAGE>
6. Transferability. Subscriber agrees not to transfer or assign
the obligations or duties contained in this Shares Subscription
Agreement, or any of Subscriber's interest herein.
7. Regulation D. Notwithstanding anything herein to the contrary,
every person or entity who, in addition to or in lieu of Subscriber, is
deemed to be a subscriber pursuant to Regulation D promulgated under
the Act, or otherwise, does hereby make and join in the making of all
the covenants, representations and warranties made by Subscriber.
8. Acceptance. Execution and delivery of this Shares Subscription
Agreement and tender of the Assigned Units in payment as referenced in
Section 1 above shall constitute Subscriber's irrevocable offer to
acquire the Shares indicated, which offer may be accepted or rejected
by the Company in its sole discretion for any cause or for no cause.
Acceptance of this offer by the Company shall be indicated by the
execution hereof by the Company.
9. Binding Agreement. Subscriber agrees that Subscriber may not
cancel, terminate or revoke this Shares Subscription Agreement or any
agreement Subscriber makes hereunder, and that this Shares Subscription
Agreement shall survive upon the death or disability of Subscriber and
shall be binding upon and inure to the benefit of the heirs,
successors, assigns, executors, administrators, guardians,
conservators, or personal representatives of Subscriber.
10. Incorporation by Reference. The statement of the number of
Shares subscribed and related information set forth on the signature
page hereof are incorporated as integral terms of this agreement.
11. Notices. Notices and other communication under this agreement
shall be in writing and shall be deemed delivered when received or, if
by U.S. mail, when deposited in a regularly maintained receptacle, by
Certified First Class Mail, postage prepaid, addressed:
(a) if to Subscriber, at the address shown on the signature
page hereof unless the Subscriber has advised the Company, in writing,
of a different address as to which notices shall be sent under this
Agreement, and
(b) if to the Company, at 1719 W. University, Suite 187,
Tempe, Arizona, 85281, to the attention of Chief Executive Officer or
President or to such other address or to the attention of other such
officer, as the Company shall have furnished to Subscriber.
12. Miscellaneous. This Shares Subscription Agreement together
with the Memorandum and all exhibits to the Memorandum, together,
embody the entire agreement and understanding between the Company and
the other parties hereto and
18
<PAGE>
supersedes all prior agreements and understandings relating to the
subject matter hereof. This agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Arizona.
The headings in this agreement are for purposes of reference only and
shall not limit or otherwise affect the meaning hereof. This Shares
Subscription Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, Subscriber has executed this Shares
Subscription Agreement on the date set forth on the signature page.
Subscriber desires to take title in the Shares as follows
(check one):
_____(a) Individual (one signature required on page 21);
_____(b) Husband and Wife as community property (one signature
is required on page 21 if interest is held in one
name, i.e., managing spouse; two signatures are
required on page 21 if interest is held in both
names);
_____(c) Joint Tenants with rights of survivorship (both
parties must sign on page 21);
_____(d) Tenants in Common (both parties must sign on page
21);
_____(e) Trust (trustee(s) must sign on page 23);
_____(f) Partnership or Limited Liability Company (general
partner(s), managers, or authorized member(s) must
sign on page 25);
_____(g) Corporation (authorized officer must sign on page
27);
_____(h) Employee Benefit Plan (authorized officer must sign
on page 29);
_____(I) Individual Retirement Account (authorized party must
sign on page 29);
_____(j) Keogh Plan (authorized party must sign on page 29);
_____(k) Other Tax-Exempt Entities (authorized parties must
sign on page 29).
19
<PAGE>
The exact name(s) under which title to the Shares is to be
taken and as it is to appear on the stock certificate is as follows:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Please print
20
<PAGE>
SHARES SUBSCRIPTION AGREEMENT
M.D. LABS, INC.
SIGNATURE PAGE
FOR INDIVIDUAL SUBSCRIBERS
--------------------------
JOINT TENANTS AND TENANTS IN COMMON
-----------------------------------
Total Shares Subscribed: _____________________________
Total Investment Units Exchanged: _____________________________
Total Dollar Amount: $____________________________
Investor #l Investor #2
- ---------------------------- ------------------------
Signature Signature
- ---------------------------- ------------------------
Social Security Number Social Security Number
- ---------------------------- ------------------------
Print or Type Name Print or Type Name
Residence Address Residence Address
- ---------------------------- ------------------------
- ---------------------------- ------------------------
21
<PAGE>
ACKNOWLEDGMENT FORM
FOR
INDIVIDUAL SUBSCRIBERS.
-----------------------
JOINT TENANTS. AND TENANTS IN COMMON
------------------------------------
STATE OF )
:ss.
COUNTY OF )
On the__________day of__________________ ,19______ , personally
appeared before me,______________________and_________________________, the
signer(s) of the above instrument, who duly acknowledged to me that he/they
executed the same.
----------------------------------------------
Notary Public in and for Said County and State
SEAL
Subscription Accepted:
M.D. Labs, Inc.
By:_______________________________
Date:_____________________________
22
<PAGE>
SHARES SUBSCRIPTION AGREEMENT
M.D. LABS, INC.
SIGNATURE PAGE
FOR TRUST SUBSCRIBERS
---------------------
Total Shares Subscribed: _________________________________
Total Investment Units Exchanged: _________________________________
Total Dollar Amount: $________________________________
Executed at______________________,_____________________
this_______________day of_________________, 19___________
_______________________________________________________________________________
Name of Trust (Please print or type)
_______________________________________________________________________________
Name of Trustee (Please print or type)
_______________________________________________________________________________
Date Trust was formed
By:______________________________________________________________________
Trustee's signature
Taxpayer Identification Number: _________________________________________
Trustee's Address: __________________________________________________
__________________________________________________
__________________________________________________
Attention:_________________________________________________
23
<PAGE>
ACKNOWLEDGMENT FORM IF SUBSCRIBER IS A TRUST
STATE OF )
:ss.
COUNTY OF )
On the__________day of_______________, 19_____, personally appeared
before me,_____________________________________, who being duly sworn did say
that he/she is the trustee of the_____________________________, a trust, and
that said instrument was signed in behalf of said trust by authority of the
applicable trust instrument and said_______
__________________________acknowledged to me that said trust executed the same.
______________________________________________
Notary Public in and for said County and State
SEAL
Subscription Accepted:
M.D. Labs, Inc.
By:_________________________________
Date:________________________________
24
<PAGE>
SHARES SUBSCRIPTION AGREEMENT
M.D. LABS, INC.
SIGNATURE PAGE
FOR PARTNERSHIP AND LIMITED LIABILITY COMPANY SUBSCRIBERS
---------------------------------------------------------
Total Shares Subscribed: _______________________________________
Total Investment Units Exchanged: _______________________________________
Total Dollar Amount: $______________________________________
Executed at________________________________,___________________
this _______________day of___________, 19_____.
________________________________________________________________________________
Name of Partnership or Limited Liability Company (Please print or type)
By:_____________________________________________________________________________
Signature of General Partner, Manager, or authorized Member
_______________________________(Print or Type Name)
By:_________________________________________________________________________
Signature of additional General Partner, Manager, or authorized Member
(if required by Partnership Agreement or Operating Agreement)
_______________________________(Print or Type Name)
By:_________________________________________________________________________
Signature of additional General Partner, Manager, or authorized Member
(if required by Partnership Agreement or Operating Agreement)
_______________________________(Print or Type Name)
Taxpayer Identification Number: _____________________________________
Business Mailing Address: ________________________________________
________________________________________
________________________________________
Attention:______________________________
25
<PAGE>
ACKNOWLEDGMENT FORM IF SUBSCRIBER IS A PARTNERSHIP
OR LIMITED LIABILITY COMPANY
STATE OF )
:ss.
COUNTY OF )
On the ____ day of __________, 19__ , personally appeared before me,
__________ and __________ who being duly sworn (or affirmed) did say that
he/they are the __________ of the partnership/limited liability company that
executed the within instrument and such instrument was signed by him/them on
behalf of said partnership/limited liability company and acknowledged to me that
said partnership/limited liability company executed the same.
______________________________________________
Notary Public in and for said County and State
SEAL
Subscription Accepted:
M.D. Labs, Inc.
By:________________________________________
Date:______________________________________
26
<PAGE>
SHARES SUBSCRIPTION AGREEMENT
M.D. LABS, INC.
SIGNATURE PAGE
FOR CORPORATE SUBSCRIBERS
-------------------------
Total Shares Subscribed: ___________________________________
Total Investment Units Exchanged: ___________________________________
Total Dollar Amount: $__________________________________
Executed at ______________________________,_____________________ this___________
__day of________________________________, 19__________.
________________________________________________________________________________
Name of Corporation (Please print or type)
By:_____________________________________________________________________________
Signature of authorized agent
________________________________(Print or Type Name)
Title:__________________________________________________________________________
Taxpayer Identification Number:_______________________________________
Address of Principal _________________________________________________Corporate
Offices:
_________________________________________________
_________________________________________________
Mailing Address: _________________________________________________
(if different)
_________________________________________________
_________________________________________________
Attention: _________________________________________________
27
<PAGE>
ACKNOWLEDGMENT FORM IF SUBSCRIBER IS A CORPORATION
STATE OF )
: ss.
COUNTY OF )
On the ____ day of __________, 19__ , personally appeared before me,
__________ , who being duly sworn (or affirmed) did say that he/she is the
_______________, of _______________, and that said instrument was signed by
him/her on behalf of said corporation by authority of its bylaws (or of a
resolution of its board of directors, as the case may be), and said ,
acknowledged to that said corporation executed the same.
______________________________________________
Notary Public in and for said County and State
SEAL
Subscription Accepted:
M.D. Labs, Inc.
By: _______________________________________
Date: ____________________________________
28
<PAGE>
SHARES SUBSCRIPTION AGREEMENT
M.D. LABS, INC.
SIGNATURE PAGE IF SUBSCRIBER IS A
EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT
----------------------------------------------------
KEOGH PLAN OR OTHER ENTITY
--------------------------
Total Share Subscribed: ____________________________________
Total Investment Units Exchanged: ____________________________________
Total Dollar Amount: $___________________________________
Executed at_____________________________________,_________________________ this
day of____________________________, 19__________.
Name of Entity (Please print or type)
By: ____________________________________
Signature of authorized agent
____________________________________
Print or type name
____________________________________
Title
Taxpayer Identification Number:_________________________________________________
Address of Principal Offices: _________________________________________________
_________________________________________________
Mailing Business Address: _________________________________________________
_________________________________________________
Attention:_______________________________________
29
<PAGE>
ACKNOWLEDGMENT FORM IF SUBSCRIBER IS AN
EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT.
-----------------------------------------------------
KEOGH PLAN OR OTHER ENTITY
--------------------------
STATE OF )
:ss.
COUNTY OF )
On the______________________day of_________________________________,
19__________, personally appeared before me,
__________________________________________, of_______________________________,
and that said instrument was signed by him/her on behalf of said entity, and
said _______________________________________acknowledged to me that said entity
executed the same.
______________________________________________
Notary Public in and for said County and State
SEAL
Subscription Accepted:
M.D. Labs, Inc.
By:____________________________________________
Date:__________________________________________
30
ASSET PURCHASE AGREEMENT AMENDMENT
This Amendment to the Asset Purchase Agreement dated January 16, 1996 between
Olympian Global L.C., an Arizona limited liability company, address P.O. Box
12461, Scottsdale Arizona, 85267, ("Olympian Global"), and M.D. Labs, Inc.,
(formerly Houston Enterprises L.L.C. d.b.a. Houston International, L.L.C.) a
Delaware corporation whose principal address is 1719 West University Drive,
Suite 187, Tempe, Arizona, 85281 (collectively the "Company")(the "Agreement")
is entered into this 27th day of September, 1996 between Lance Dreher, 4945 West
Leaflane, Glendale, Arizona, 85310 ("Deher") and the Company (the "Amendment").
Dreher and the Company wish to amend and modify the terms of the Agreement as
set forth below, whereby the parties agree as follows:
1) M.D. Labs and Dreher desire to extend Dreher's royalty agreement with
the Company as detailed in the Agreement in section 2(v), 2(vi) and 2(vii) for
an additional six (6) months upon the expiration of the original Dreher royalty
agreement on or around February 1, 1998, extending the Dreher royal agreement to
approximately August 1, 1998.
2) All Other terms and conditions of the Agreement and First Addendum (plus
any other modifications to the Agreement, if any) shall remain unchanged.
In witness whereof, the parties have executed and delivered this Amendment to
the Agreement as of the date first written above.
M.D. Labs, Inc.
- ---------------
By: Signature illegible
-----------------------
Its: Chief Executive Officer
-------------------------
Lance Dreher
- ------------
By: /s/ Lance Dreher
--------------------
Its:
-------------------
LOCK-UP AGREEMENT
FOR DIRECTORS AND OFFICERS
This Lock-Up Agreement ("Agreement") is effective as of September 1,
1996 by and among M.D. Labs, Inc., a Delaware corporation (the "Company"),
_______________ , a director and/or officer of the Company (the "Executive"),
and Spelman & Co., Inc., a California corporation (the "Underwriter"). The
parties hereto agree as follows:
1. Lock-Up. The Company is currently in the process of preparing a
registration statement on Form SB-2 (the "Registration Statement") which will
register certain shares of the Company's common stock to be sold by the
Underwriter on a "firm commitment" basis. To satisfy Section 7.8 of the
Underwriting Agreement (the "Underwriting Agreement") to be entered into between
the Company and the Underwriter as representative of the several underwriters
named in Schedule I thereto, and in order to induce the Underwriter to undertake
the firm commitment public offering of the Company's common stock, the Executive
agrees that it will not, without the Underwriter's prior written consent, offer,
sell, contract to sell, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, any shares of the Company's common stock or any
security or other instrument which by its terms is convertible into, exercisable
for, or exchangeable for shares of the Company's common stock for a period of
six (6) months from the effective date of the Registration Statement; provided
that the foregoing shall not prohibit the Executive from exercising any warrant
or option to purchase shares of the Company's common stock.
2. Successors. The provisions of this Agreement shall be deemed to
obligate, extend to and inure to the benefit of the successors, assigns,
transferees, grantees and indemnitees of each of the parties to this Agreement.
3. Attorneys Fees. In the event of a dispute between the parties
concerning the enforcement or interpretation of this Agreement, the prevailing
party in such dispute, whether by legal proceedings or otherwise, shall be
reimbursed immediately for the reasonably incurred attorneys' fees and other
costs and expenses by the other parties to the dispute.
4. Choice of Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to its
choice of law rules.
5. Arbitration. Any dispute or claim arising to or in any way related
to this Agreement shall be settled by arbitration in San Diego, California. All
arbitration shall be conducted in accordance with the rules and regulations of
the American Arbitration Association ("AAA"). AAA shall designate an arbitrator
from an approved list of arbitrators following both parties' review and deletion
of those arbitrators on the approved list having a conflict of interest with
either party. Each party shall pay its own expenses associated with such
arbitration (except as set forth in Section 3 above). A demand for arbitration
shall be made within a reasonable time after the claim, dispute or other matter
has arisen and in no event shall such demand be made after the date when
institution of legal or equitable proceedings based on such claim, dispute or
other matter in question would be barred by the applicable statutes of
limitations. The decision of the arbitrators shall be rendered within 60 days of
submission of any claim or dispute, shall be in writing and mailed to all the
parties
<PAGE>
included in the arbitration. The decision of the arbitrator shall be binding
upon the parties and judgment in accordance with that decision may be entered in
any court having jurisdiction thereof.
6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which, taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth next to his or its signature.
M.D. LABS, INC.
By ______________________________________
Its _____________________________________
EXECUTIVE
_________________________________________
SPELMAN & CO., INC.
By ______________________________________
Its _____________________________________
Contract Between Houston International, LLC and Dr.Lori G. Kimata
This agreement, made this 21st day of February, 1996 between Houston
International, LLC located at 1719 West University Suite 187, Tempe, Arizona
85281, hereafter referred to as "Houston", and Dr. Lori G. Kimata located at
13832 N. 32nd Street, Suite C344, Phoenix, Arizona 85032, hereafter referred to
as "Dr. Kimata" is to define the terms and conditions related to the
development, sales and marketing of a new herbal tea product referred to as
"Women's Nature Natural Balance Herbal Tea".
It is mutually agreed as follows:
Dr. Kimata will aid Houston in developing "Women's Nature Natural Balance Herbal
Tea" through consultations, research, formulation experiments and other
procedures necessary to designing "Women's Nature Natural Balance Herbal Tea"
which will include the identifying name of each ingredient, the specific part of
each plant that is to be used, and the percentage of each ingredient that is to
be used in the manufacture of "Women's Nature Natural Balance Herbal Tea". Dr.
Kimata will provide autobiographical information to be used in the promotion of
"Women's Nature Natural Balance Herbal Tea" including information related to
education, credentials and professional experience. Dr. Kimata will allow
Houston to arrange and obtain photographs of Dr. Kimata to be used in the
marketing and promotion of "Women's Nature Natural Balance Herbal Tea". Dr.
Kimata will be available to promote "Women's Nature Natural Balance Herbal Tea"
directly and indirectly at speaking engagements, media interviews, expositions
and other special events as her schedule permits and as mutually agreed upon by
both Houston and Dr. Kimata. Reasonable expenses including but not limited to
travel, lodging and meals incurred by Dr. Kimata while promoting "Women's Nature
Natural Balance Herbal Tea" at speaking engagements, media interviews,
expositions and other special events will be paid for by Houston. Dr. Kimata
will be paid by Houston her usual rate for said special events. Dr. Kimata
reserves the right to examine and approve all product labeling, press releases,
brochures and other materials used to promote or market "Women's Nature Natural
Balance Herbal Tea" prior to their distribution by Houston. Houston will not
distribute any such promotional materials related to "Women's Nature Natural
Balance Herbal Tea" without first receiving approval of said promotional
materials from Dr. Kimata. Houston will have the right to use Dr. Kimata's name
verbally and in general correspondence in association with sales calls and
meetings related to the sales and marketing of "Women's Nature Natural Balance
Herbal Tea".
Houston will select all raw materials suppliers, transporters, manufacturers,
printers and other vendors related to the production of "Women's Nature Natural
Balance Herbal Tea". Houston will pay for all raw materials, manufacturing,
testing, transportation of raw materials, labeling, promotional materials,
marketing campaigns, advertising, transportation of finished product and other
expenses deemed necessary by Houston to the development, manufacture, marketing
and distribution of "Women's Nature Natural Balance Herbal Tea". Houston will be
responsible for all sales, billings, accounting, collections and debts incurred
by Houston and related to "Women's Nature Natural Balance Herbal Tea". Houston
will retain sole rights to all licenses, trademarks, distribution and customer
data related to "Women's Nature Natural Balance Herbal Tea". Houston will pay
for all reasonable expenses incurred by Dr. Kimata in the development of
"Women's Nature Natural Balance Herbal Tea". Houston will pay Dr. Kimata a
royalty fee of $.09(nine cents) for each unit (box) of "Women's Nature Natural
Balance Herbal Tea" sold for 18 months beginning on the date that the first unit
(box) of "Women's Nature Natural Balance Herbal Tea" is sold, and at the
conclusion of said 18 months Houston will pay Dr. Kimata a royalty of $.05 (five
cents) for each unit (box) of "Women's Nature Natural Balance Herbal Tea" sold
thereafter. Houston will provide said royalty payments to Dr. Kimata on or
before the last day of each calendar month for all sales of "Women's Nature
Natural Balance Herbal Tea" made during the previous calendar month. Houston
will provide with each said royalty payment a sales report showing the total
units of "Women's Nature Natural Balance Herbal Tea" sold during the said
previous month.
The term of this agreement will be for three (3) years from the effective date.
This agreement will automatically renew for additional three (3) year terms at
the royalty payment of $.05 (five cents) for each unit (box) of "Women's Nature
Natural Balance Herbal Tea" sold unless either party to this agreement shall, at
least 180 days prior to the expiration of any term, advise the other party in
writing that it does not intend to renew the agreement. Should either party
choose to not renew the agreement and notify the other party in accordance with
this agreement, Houston will continue to sell and market "Women's Nature Natural
Balance Herbal Tea" and pay Dr. Kimata the defined royalty on said sales until
all inventory in stock and/or on order is exhausted at which time Houston will
forfeit the right to use any reference to Dr. Kimata in association with
"Women's Nature Natural Balance Herbal Tea" and Dr. Kimata will forfeit the
right to any royalty payments for any sales occurring after the termination date
of this agreement and the exhaustion of all inventory in stock and/or on order.
Dr. Kimata confirms that she is free to enter this agreement and that she will
not disclose or make known to any person or party any of Houston's trade secrets
or processes or any part thereof which she may learn or be exposed to during the
term of this agreement. Dr. Kimata is free to enter into any other contract with
any other party that she chooses except in the case that such a contract would
relate to the development, sale, marketing or manufacture of an herbal tea
designed to compete directly with "Women's Nature Natural Balance Herbal Tea".
Dr. Kimata will be paid as an independent consultant to Houston and will not be
considered an employee of Houston. It is understood that this agreement
supercedes any and all prior agreements, oral or written, made between Houston
and Dr. Kimata, and can only be modified by an agreement in writing signed by
all applicable parties. Dr. Kimata and Houston make this agreement binding by
signing below.
/s/ Dr. Lori G. Kimata 2-21-96 /s/ Hooman Nikzad 2-21-96
- ----------------------------------- -------------------------------------------
Dr. Lori G. Kimata (signature) Date Houston International, LLC (signature) Date
Lori G. Kimata ND 2-21-96 Hooman Nikzad 2-21-96
- ----------------------------------- -------------------------------------------
(Print Name) Date (Print Name) Date
CONSULTING AND NONCOMPETITION AGREEMENT
This Consulting And Noncompetition Agreement (the
"Agreement"), which shall be effective as of September 13, 1996, is by and
between M.D. Labs, Inc., a Delaware corporation ("M.D. Labs" or "Company") and
Kenneth A. Steel, Jr. ("Consultant").
RECITALS
A. Consultant is qualified and experienced in the
business of consulting in connection with the Company's industry and general
business matters.
B. The Company desires to contract with Consultant to
provide the services of Consultant to the Company on an as-needed basis.
C. Consultant represents that he can perform those
services in a high-quality manner based on his qualifications and experience.
D. It is deemed to be to the mutual advantage of the
Company and Consultant to enter into this Agreement upon the terms and
conditions set forth below.
AGREEMENTS
In consideration of the mutual promises and covenants set
forth herein and for other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, it is hereby agreed as follows:
1. Engagement as a Consultant. The Company hereby
engages Consultant and Consultant hereby accepts such engagement with
the Company as a consultant in accordance with the terms and conditions
set forth herein. Consultant agrees to provide his services and will
devote his skill, knowledge, and attention to the business of the
Company and the performance of Consultant's duties under this
Agreement.
2. Term. This engagement of Consultant by the Company
shall commence on October 7, 1996, and continue until October 6, 1997.
Thereafter, this Agreement may be renewed only by a written agreement
signed by both parties.
3. Duties. Consultant agrees that he shall be available
to the Company, as may be requested by the Company, during the term of
this Agreement. Consultant shall be responsible for the following
duties during the term of this Agreement:
a. Provide consulting services in connection
with the manufacturing and operations activities and business
affairs of the Company, as may be assigned
<PAGE>
by the Chief Executive Officer or Board of Directors of the
Company from time to time;
b. Perform such other duties as may be assigned
by the Chief Executive Officer or Board of Directors of the
Company from time to time.
Consultant agrees to serve the Company faithfully, diligently,
and to the best of his ability and to devote his working time,
attention, and energies to the Company's business as required for the
efficient and timely performance of Consultant's duties hereunder.
Consultant shall act in the best interests of the Company at all times
in performing his duties and responsibilities hereunder.
4. Compensation. Consultant shall receive as his entire
compensation from the Company for his services hereunder a warrant to
purchase 100,000 shares of the Company's common stock at $7.00 per
share, identical in substance to Exhibit "A" attached hereto.
5. Expense Reimbursement. The Company shall pay all
ordinary and reasonable expenses of Consultant, up to $1,500.00 per
month, incurred in connection with the rendering of services to the
Company as a consultant pursuant to this Agreement, upon submission of
appropriate vouchers and supporting documentation in accordance with
the Company's usual and ordinary practices, provided that such expenses
are reasonable and necessary business expenses of the Company, and
provided further that all items for which at least $250 in
reimbursement is requested must be approved in advance, in writing, by
the Company.
6. Return of the Company's Materials. Upon the
termination of this Agreement, Consultant shall promptly return to the
Company all files, credit cards, keys, instruments, equipment, and
other materials, if any, owned or provided by the Company.
7. Terms of Consulting Arrangement. Consultant will be
the sole judge of the means, manner, and method by which he will
perform the services contracted for, the times at which those services
will be performed (within the deadlines reasonably established by the
Company) and the sequence of performance of those services. Consultant
warrants that he will perform the services for which he has contracted
in a timely and workmanlike manner. Consultant acknowledges that for
the term of this Agreement, Consultant is not an employee of the
Company and that he will not be treated or regarded as the Company's
employee under the laws or regulations of any government or
governmental agency. This Agreement does not constitute a hiring by
either party. The Consultant and the Company will be and shall remain
independent contractors bound by the provisions of this Agreement.
Consultant is under the control of the Company only as to the result of
Consultant's work and not as to the means,
- 2 -
<PAGE>
manner, and methods by which such result is accomplished. Neither party
hereto shall be liable for any obligation incurred by the other except
as provided in Section 5 of this Agreement. The Company shall not
withhold from Consultant's fees any amounts for income taxes or other
similar assessments. The Company shall provide the use of its employees
as deemed suitable by the Company to assist Consultant in carrying out
his duties hereunder.
8. Non-Competition. Consultant will not, during the term
of this Agreement, directly or indirectly manage, operate, join,
control, or participate or become interested in or be connected with as
an employee, partner, officer, director, stockholder, consultant, or
investor, any corporation, partnership, or other business entity other
than the Company or its affiliates, which shall operate a business in
competition with the business conducted by the Company or its
affiliates. Nothing herein shall prohibit Consultant from owning,
solely for investment purposes, publicly-traded securities of any
company which operates a business otherwise covered by this Section 8,
provided that such ownership constitutes less than 1% of the issued and
outstanding equity or debt securities, as the case may be, of such
company.
9. Confidential Treatment of Information. Consultant
shall not, either during or after the term of this Agreement, directly
or indirectly publish or disclose to any third party any confidential
information pertaining to the business of the Company unless the
Company gives written authorization to do so. Such information shall
not be used apart from Company business without the written approval of
the Company. Such prohibition against disclosure applies to all
confidential information, such as non-public information about the
Company's finances, any trade secrets, and any other information which
is normally kept confidential by the Company.
10. Remedies. The parties further agree that the services
to be performed hereunder are of a unique, special, and extraordinary
character and that any breach or threatened breach by Consultant of any
provision of Section 8 or 9 of this Agreement shall cause the Company
irreparable harm which cannot be remedied solely by damages. Therefore,
in the event of any controversy concerning the rights or obligations
under this Agreement, such rights or obligations shall be enforceable
in a court of competent jurisdiction at law or in equity by an
injunction or a decree of specific performance or, if the Company
elects, by obtaining damages or such other relief as the Company may
elect to pursue. Such remedies, however, shall be cumulative and
nonexclusive and shall be in addition to any other remedies which the
Company may have.
11. Indemnity. The Company shall not be liable for and
Consultant shall indemnify, defend, and hold the Company harmless from
any liability, claim, or loss whatsoever for any injury to or death of
Consultant, or for any damages to Consultant's property or the property
of any of its representatives or agents unless and only to the
- 3 -
<PAGE>
extent that such loss or damage is directly caused by the negligence of
the Company or its employees. Consultant shall also indemnify, defend,
and hold the Company harmless from any liability, claim, or loss
whatsoever for any personal injury or death and for any property damage
resulting from the conduct or negligent omission of Consultant or his
representatives or agents.
12. Taxes. Consultant shall be responsible for reporting
and paying any and all taxes imposed by any government or governmental
entity whatsoever in connection with the payments to Consultant
contemplated by this Agreement, and shall indemnify and hold the
Company harmless with respect thereto.
13. Assignment. This Agreement and the respective rights,
duties, and obligations of Consultant hereunder may not be assigned and
may not be delegated by Consultant, but the respective rights, duties,
and obligations of the Company hereunder may be assigned or delegated
by the Company to a parent or affiliated corporation or entity.
14. Notice. All notices, demands, instructions, or
requests relating to this Agreement shall be in writing and, except as
otherwise provided herein, shall be deemed to have been given for all
purposes (i) upon personal delivery, (ii) one day after being sent,
when sent by professional overnight courier service from and to
locations within the Continental United States, (iii) five days after
posting when sent by United States registered or certified mail, with
return receipt requested and postage paid, or (iv) on the date of
transmission when sent by facsimile with a hard-copy confirmation; if
directed to the person or entity to which notice is to be given at his
or its address set forth in this Agreement or at any other address such
person or entity has designated by notice.
To the Company: M.D. LABS, INC.
1719 W. University Drive
Suite 187
Tempe, Arizona 85281
Attn: Chief Executive Officer
Ph: 602-437-0127
Fax: 602-437-8561
Copy to: Quarles & Brady
One E. Camelback Road, Suite 400
Phoenix, Arizona 85012-1649
Attn: P. Robert Moya, Esq.
- 4 -
<PAGE>
To Consultant: KENNETH A. STEEL, JR.
1336 North State Parkway
Chicago, Illinois
Ph: 312-335-5428
Fax: 312-642-1989
15. Entire Agreement. This Agreement constitutes the
final written expression of all of the agreements between the parties
(except those relating to Consultant's service as a director of the
Company), and is a complete and exclusive statement of those terms. It
supersedes all understandings and negotiations concerning the matters
specified herein. Any representations, promises, warranties, or
statements made by either party that differ in any way from the terms
of this written Agreement shall be given no force or effect. The
parties specifically represent, each to the other, that there are no
additional or supplemental agreements between them related in any way
to the matters herein contained unless specifically included or
referred to herein. No addition to or modification of any provision of
this Agreement shall be binding upon any party unless made in writing
and signed by all parties.
16. Waiver. The waiver by either party of the breach of
any covenant or provision in this Agreement shall not operate or be
construed as a waiver of any subsequent breach by either party.
17. Invalidity of Any Provision. The provisions of this
Agreement are severable, it being the intention of the parties hereto
that should any provisions hereof be invalid or unenforceable, such
invalidity or unenforceability of any provision shall not affect the
remaining provisions hereof, but the same shall remain in full force
and effect as if such invalid or unenforceable provisions were omitted.
18. Applicable Law. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the
State of Arizona, exclusive of the conflict of law provisions thereof,
and the parties agree that any litigation pertaining to this Agreement
shall be in courts located in Maricopa County, Arizona.
19. Headings. Headings in this Agreement are for
informational purposes only and shall not be used to construe the
intent of this Agreement.
20. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and
the same agreement.
- 5 -
<PAGE>
21. Binding Effect; Benefits. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, successors, executors, administrators, and
assigns. Notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, expressed or implied, is intended
to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators, and assigns
any rights, remedies, obligations, or liabilities under or by reason of
this Agreement.
22. Attorneys' Fees. If any party finds it necessary to
employ legal counsel or to bring an action at law or other proceeding
against the other party to enforce any of the terms hereof, the party
prevailing in any such action or other proceeding shall be paid by the
other party its reasonable attorneys' fees as well as court costs all
as determined by the court and not a jury.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Consulting Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
M.D. LABS, INC.
/s/ Hooman Nikzad
------------------------------------
By: Hooman Nikzad
Its: Chief Executive Officer
the "COMPANY"
KENNETH A. STEEL, JR.
/s/ Kenneth A. Steele, Jr.
------------------------------------
"CONSULTANT"
- 6 -
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION ("BLUE SKY LAWS"), AND CANNOT BE RESOLD UNLESS THEY ARE REGISTERED
UNDER THE ACT AND ANY APPLICABLE BLUE SKY LAWS, UNLESS AN EXEMPTION IS
AVAILABLE. THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF.
M.D. LABS, INC.
STOCK PURCHASE WARRANT
WARRANT TO PURCHASE 100,000 SHARES OF
COMMON STOCK AS DESCRIBED HEREIN
Dated: September 13, 1996
This certifies that, for value received:
Name: Kenneth A. Steel, Jr.
Address: 1336 State Parkway
Chicago, Illinois 60610
is entitled to purchase from M.D. Labs, Inc., a Delaware corporation (the
"Company"), having its principal office at 1719 W. University Dr., Suite 187,
Tempe, Arizona 85281, One Hundred Thousand (100,000) fully paid and
nonassessable shares of Common Stock, par value $.001, of the Company (the
"Common Stock"), subject to the terms set forth herein, at an exercise price of
$7.00 per share, subject to adjustment as provided elsewhere herein (the
"Warrant Price"). The holder of this Warrant shall be referred to herein as the
"Warrantholder" or the "Holder." This Warrant is issued pursuant to a consulting
agreement dated September 13, 1996 by and between the Company and the Holder as
consideration for Holder's commitment to provide consultation services to the
Company.
1. "Common Stock." If at any time, as a result of an adjustment
made pursuant to Section 4, the securities or other property obtainable upon
exercise of this Warrant shall include shares or other securities of the Company
other than common stock or securities of another corporation or other property,
thereafter the number of such other shares or other securities or property so
obtainable shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Section 4, and all other provisions of this Warrant
with respect to the Common Stock shall apply on like terms to any such other
shares or other securities or property. Subject to the foregoing, and unless the
context requires otherwise, all references herein to "Common Stock"
<PAGE>
shall, in the event of an adjustment pursuant to Section 4, be deemed to refer
as well to any other securities or property then obtainable as a result of such
adjustments.
2. Exercise of Warrant. The purchase rights represented by this
Warrant may be exercised by the Warrantholder or its duly authorized attorney or
representative, in whole or in part (but not as to a fractional share of Common
Stock), at any time and from time to time during the period commencing on the
date described in the Vesting Schedule below (the "Commencement Date") and
expiring at 5:00 p.m., Mountain Standard Time, August 1, 2001 (the "Expiration
Date")(or such earlier date as may be provided pursuant to Section 9 herein), or
if such date is a day on which federal or state chartered banking institutions
are authorized by law to close, then on the next succeeding day which shall not
be such a day, upon presentation of this Warrant at the principal office of the
Company, or at the office of its stock transfer agent, if any, with the purchase
form attached hereto duly completed and signed, and upon payment to the Company
in cash or by certified check or bank draft of an amount equal to the number of
shares being so purchased multiplied by the Warrant Price, together with all
taxes applicable upon such exercise. The Company agrees that the Warrantholder
will be deemed the record owner of such shares as of the close of business on
the date on which the Warrant shall have been presented and payment shall have
been made for such shares as aforesaid. Certificates for the shares of Common
Stock so purchased shall be delivered to the Warrantholder within a reasonable
time, not exceeding 20 days, after the exercise in full of the rights
represented by this Warrant.
If the Warrant is exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, deliver a new Warrant evidencing the
rights of the Warrantholder to purchase the balance of the shares of Common
Stock which the Warrantholder is entitled to purchase hereunder.
3. Vesting Schedule. Subject to Section 9 herein, the purchase
rights represented by this Warrant shall become exercisable on a pro-rata daily
basis over the course of one year, based on a 365-day year (i.e. approximately
273.972 shares per day), beginning August 1, 1996, and continuing until the
earlier of July 31, 1997 or the termination of the Warrantholder's consulting
agreement with the Company.
4. Certain Adjustments to Warrant.
(a) In case the Company shall (i) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock or (iv)
issue by reclassification of its shares of Common Stock other securities of the
Company, the number of shares of Common Stock purchasable upon exercise of this
Warrant immediately prior thereto shall be adjusted so that the Warrantholder
shall be entitled to receive the kind and number of shares of Common Stock or
other securities of the Company which he would have owned or have been entitled
to receive at the happening of any of the events described above, had such
Warrant been exercised immediately prior to the
2
<PAGE>
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.
(b) Whenever the number of shares of Common Stock
purchasable upon the exercise of this Warrant is adjusted, as herein provided,
the Warrant Price shall be adjusted by multiplying such Warrant Price
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of shares of Common Stock purchasable upon the exercise of this
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of shares of Common Stock so purchasable immediately thereafter.
(c) In the event of any adjustment pursuant to this
Section 4, no fractional shares of Common Stock shall be issued in connection
with the exercise of any Warrants, but the Company shall, in lieu of such
fractional shares, make such cash payment therefor on the basis of the current
market price on the day immediately prior to exercise.
(d) Irrespective of any adjustments pursuant to this
Section to the Warrant Price or to the number of shares or other securities
obtainable upon exercise of this Warrant, this Warrant may continue to state the
Warrant Price and the number of shares obtainable upon exercise, as the same
price and number of shares stated herein.
5. Merger; Change in Control.
(a) Change in Control shall be deemed to have occurred if
(i) any "person" (as such term is used in Paragraphs 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended [the "Exchange Act"]), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing one-third or more of the total voting power represented by the
Company's then outstanding Common Stock, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Common Stock of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into Common
Stock of the surviving entity) at least two-thirds of the total voting power
represented by the Common Stock of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or
3
<PAGE>
disposition by the Company of (in one transaction or a series of transactions)
all or substantially all the Company's assets.
(b) In the event of a merger, consolidation or
reorganization with another corporation in which the Company is not the
surviving corporation, the Company (subject to the approval of the Board) or the
board of directors of any corporation assuming the obligations of the Company
hereunder shall take action pursuant to either clause (i) or (ii) below:
(i) Appropriate provision may be made for the
protection of this Warrant by the substitution on an equitable basis of
appropriate shares of the surviving corporation, provided that the excess of the
aggregate fair market value (as determined by the Company) of the shares subject
to this Warrant immediately before such substitution over the exercise price
hereof is not more than the excess of the aggregate fair market value of the
substituted shares made subject to purchase immediately after such substitution
over the exercise price thereof; or
(ii) Appropriate provision may be made for the
cancellation of this Warrant. In such event, the Company, or the corporation
assuming the obligations of the Company hereunder, shall pay the Holder an
amount of cash (less normal withholding taxes) equal to the excess of the
highest fair market value per share of the Common Stock during the 60-day period
immediately preceding the merger, consolidation or reorganization over the
exercise price, multiplied by the number of shares subject to this Warrant
(whether or not then exercisable).
(c) Upon a Change in Control, subject to Section 9
herein, this Warrant (provided that it has been outstanding for at least six
months) shall accelerate so that the Holder shall have the right, at all times
until the expiration or earlier termination of this Warrant, to exercise the
unexercised portions of this Warrant, including the portions thereof which
would, but for this paragraph 5(c), not yet be exercisable.
6. Covenants of the Company. The Company covenants and agrees
that:
(a) During the period within which the rights represented
by the Warrant may be exercised, the Company will at all times reserve and keep
available, free from preemptive rights out of the aggregate of its authorized
but unissued Common Stock, for the purpose of enabling it to satisfy any
obligation to issue shares of Common Stock upon the exercise of this Warrant,
the number of shares of Common Stock deliverable upon the exercise of this
Warrant. If at any time the number of shares of authorized Common Stock shall
not be sufficient to effect the exercise of this Warrant, the Company will take
such corporate action as may be necessary to increase its authorized but
unissued Common Stock to such number of shares as shall be sufficient for such
purpose. The Company shall have analogous obligations with respect to any other
securities or properties issuable upon exercise of this Warrant. The Company's
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of
4
<PAGE>
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant;
(b) All Common Stock that may be issued upon exercise of
the rights represented by this Warrant will, upon issuance, be validly issued,
fully paid, nonassessable, and free from all taxes, liens, and charges with
respect to the issue thereof; and
(c) All original issue taxes payable with respect to the
issuance of shares upon the exercise of the rights represented by this Warrant
will be borne by the Company but in no event will the Company be responsible or
liable for income taxes or transfer taxes upon the transfer of any Warrant.
7. No Stockholder Rights. Until exercised, this Warrant shall not
entitle the Warrantholder to any voting rights or other rights as a stockholder
of the Company. The rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
8. Transfer Restrictions.
(a) This Warrant is not transferable except by will or
the laws of descent and distribution and, during Holder's lifetime, it may only
be exercised by Holder.
(b) Neither this Warrant nor the shares of stock issuable
upon the exercise hereof have been registered under the Securities Act of 1933,
as amended (the "Securities Act") or under any state securities laws and unless
so registered may not be transferred, sold, pledged, hypothecated or otherwise
disposed of unless an exemption from such registration is available. In the
event Holder desires to transfer any of the shares of stock issued hereunder,
the Holder must give the Company prior written notice of such proposed transfer
including the name and address of the proposed transferee. Such transfer may be
made only either (i) upon publication by the Securities and Exchange Commission
(the "Commission") of a ruling, interpretation, opinion or "no action letter"
based upon facts presented to said Commission, or (ii) upon receipt by the
Company of an opinion of counsel to the Company in either case to the effect
that the proposed transfer will not violate the provisions of the Securities
Act, the Securities Exchange Act of 1934, as amended, or the rules and
regulations promulgated under either such act, or in the case of clause (ii)
above, to the effect that the shares of stock to be sold or transferred have
been registered under the Securities Act and that there is in effect a current
prospectus meeting the requirements of Subsection 10(a) of the Securities Act,
which is being or will be delivered to the purchaser or transferee at or prior
to the time of delivery of the certificates evidencing the shares of stock to be
sold or transferred.
(c) Prior to any such proposed transfer, and as a
condition thereto, if such transfer is not made pursuant to an effective
registration statement under the Securities Act, the Holder will, if requested
by the Company, deliver to the Company (i) an investment covenant signed by the
proposed transferee, (ii) an agreement by such transferee to the impression of
the
5
<PAGE>
restrictive investment legend set forth herein on the certificate or
certificates representing the securities acquired by such transferee, (iii) an
agreement by such transferee that the Company may place a "stop transfer order"
with its transfer agent or registrar, and (iv) an agreement by the transferee to
indemnify the Company to the same extent as set forth in paragraph 8(d) below.
(d) Holder acknowledges that Holder understands the
meaning and legal consequences of this Section 8, and the Holder hereby agrees
to indemnify and hold harmless the Company, its representatives and each officer
and director thereof from and against any and all loss, damage or liability
(including all attorneys' fees and costs incurred in enforcing this indemnity
provision) due to or arising out of (i) the inaccuracy of any representation or
the breach of any warranty of Holder contained in, or any other breach of, this
Warrant Agreement, (ii) any transfer of any of this Warrant or the shares of
stock issuable hereunder in violation of the Securities Act, the Securities
Exchange Act of 1934, as amended, or the rules and regulations promulgated under
either of such acts, (iii) any transfer of this Warrant or any of said shares of
stock not in accordance with this Warrant Agreement or (iv) any untrue statement
or omission to state any material fact in connection with the investment
representations or with respect to the facts and representations supplied by the
Holder to counsel to the Company upon which its opinion as to a proposed
transfer shall have been based.
(e) Any assignment, transfer, pledge, hypothecation or
other disposition of this Warrant attempted contrary to the provisions of this
Warrant Agreement, or any levy of execution, attachment or other process
attempted upon the Warrant, shall be null and void and without effect.
(f) Unless the shares of stock issuable hereunder have
been registered under the Securities Act, upon exercise of this Warrant (in
whole or in part) and the issuance of any of said shares, the Company shall
instruct its transfer agent to enter stop transfer orders with respect to such
shares, and all certificates representing said shares shall bear on the face
thereof substantially the following legend, insofar as is consistent with
Arizona law:
"The shares of common stock represented by this certificate
have not been registered under the Securities Act of 1933, as
amended, and may not be sold, offered for sale, assigned,
transferred or otherwise disposed of unless registered
pursuant to the provisions of that Act or an opinion of
counsel to the Company is obtained stating that such
disposition is in compliance with an available exemption from
such registration."
9. Termination of the Warrant. Notwithstanding anything herein to
the contrary, this Warrant shall not be exercisable after the earliest of: (i)
June 2, 2001; or (ii) one year after the date the Holder's employment with the
Company terminates, if such termination is the result of death or permanent
disability.
6
<PAGE>
10. No Guarantee of Employment. This Agreement shall in no way
restrict any right (which might otherwise exist) of the Company or any of its
subsidiaries to terminate Holder's employment at any time.
11. Lost Certificate. If this Warrant is lost, stolen, mutilated
or destroyed, the Company shall, on such terms as the Company may reasonably
impose, including a requirement that the Warrantholder obtain a bond, issue a
new Warrant of like denomination, tenor and date.
12. Binding Effect. This Warrant shall inure to the benefit of and
be binding upon the Warrantholder, the Company and their respective successors
and permitted assigns.
13. Company's Notice of Certain Events. So long as this Warrant
shall be outstanding and unexercised (i) if the Company shall pay any dividend
or make any distribution upon the Common Stock, or (ii) if the company shall
offer to the holders of Common Stock for subscription or purchase by them any
shares of stock of any class or any other rights, or (iii) in the event of any
capital reorganization of the Company, reclassification of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of shall
or substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, the Company shall cause to
be delivered to the Holder, at least ten days prior to the date specified in (a)
or (b) below, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which (a) a record is to be taken for
the purpose of such dividend, distribution or rights, or (b) such
reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any, is
to be fixed, as of which the holders of Common Stock of record shall be entitled
to exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
14. Notice. Notices and other communications to be given to the
Holder of the Warrants evidenced by this certificate shall be delivered by hand,
by facsimile transmission, or by overnight express courtier or mailed, postage
prepaid, to the Holder at the address set forth above, or such other address as
Holder shall have designated by written notice to the Company as provided
herein. Notices or other communications to the Company shall be deemed to have
been sufficiently given if delivered by hand, by facsimile transmission, or by
overnight express courier or mailed, postage prepaid, to the company at 1719 W.
University Dr., Suite 187, Tempe, Arizona 85281, or such other address as the
Company shall have designated by written notice to such registered owner as
herein provided. All notices required hereunder shall be in writing and shall be
deemed received when delivered personally, one business day after delivery to a
nationally recognized commercial overnight courier service, or two business days
after mailing when mailed by certified or registered mail to the Company or the
Warrantholder.
15. Governing Law. The validity, interpretation, and performance
of this Warrant and of the terms and provisions hereof shall be governed by and
construed in accordance with
7
<PAGE>
the internal laws of the State of Arizona without giving effect to the
principles of conflicts of laws.
16. Amendment. This Warrant may not be modified, amended, altered
or supplemented except upon the execution and delivery of a written agreement
executed by the Company and the Warrantholder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed effective as of September 13, 1996.
M.D. LABS, INC.
By: /s/ Hooman Nikzad
--------------------------
Hooman Nikzad
Chief Executive Officer
8
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase _______ shares
of Common Stock, evidenced by the within Warrant, according to the terms and
conditions thereof, and herewith makes payment of the purchase price in full.
The undersigned requests that certificate(s) for such shares shall be issued in
the name set forth below.
Dated: [NAME OF HOLDER]
By
-----------------------------------
(Signature)
Name:
-------------------------------
(Please Print)
Address:
-----------------------------
-----------------------------
-----------------------------
Employer Identification No., Social Security
No. or other identifying number:
-----------------------------
If the number of shares specified above shall not be all the shares
purchasable under the within warrant, the Warrantholder hereby requests that a
new Warrant for the unexercised portion shall be registered in Warrantholder's
name and delivered to the address set forth in the Warrant.
9
PERSONAL SERVICES AGREEMENT
---------------------------
THIS AGREEMENT is entered into as of the 14th day of September 1996, by
and between M.D. Labs, Inc. ("M.D. Labs"), a Delaware corporation with offices
located at, 1719 West University Drive, Suite 187, Tempe, Arizona 85281, and Lee
J. Reherman, Inc., a California business located at 2120 The Strand, Suite 3,
Manhattan Beach, California 90266 ("Reherman, Inc.").
WITNESSETH:
-----------
WHEREAS, M.D. Labs packages, markets and distributes sports nutrition,
fitness foods and supplements, natural food and dietary supplements, vitamins,
and weight loss and management products (collectively, the "M.D. Labs
Products"); and
WHEREAS, Lee J. Reherman ("Reherman") has appeared as "Hawk" of the
television show "American Gladiators" and is otherwise active, in his own
persona, in the sporting and fitness industry; and
WHEREAS, M.D. Labs desires to obtain the right to use the name,
likeness and endorsement of Reherman in connection with the advertisement,
promotion and sale of the M.D. Labs Products; and
WHEREAS, Reherman, Inc. has the authority to grant the right to use
Reherman's name, likeness, and endorsement to M.D. Labs in connection with the
advertisement, promotion and sale of the M.D. Labs Products and desires to do
so; and
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements contained herein, the sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Term of Agreement. The term of this Agreement shall commence
on the date of execution of this Agreement and shall continue for a period of
two years therefrom (the "Term"), unless terminated earlier as provided in
Paragraph 11 below.
a. The Term can be renewed at M.D. Labs's option and M.D. Labs
shall have the right of first refusal for such renewal on the same terms and
conditions for an additional one (1) year period upon M.D. Labs giving Reherman
at least thirty (30) days prior written notice of its intent to renew before the
end of the initial term.
2. Services to Be Rendered.
a. During the Term of this Agreement, Reherman, Inc.
agrees to make Reherman available to render his services in connection with his
endorsement of M.D. Labs Products when and where required by M.D. Labs for the
advertisement, promotion and sale of the M.D. Labs Products in the following
fields and media: (i) print, point of sale and mail-order advertising; (ii)
tie-in promotions; (iii) publicity; (iv) radio and television
<PAGE>
programs and commercials (live, recorded and/or filmed); (v) labeling, packaging
and displays; and (vi) organizational, dealer, sales, industry and public
meetings, conventions and sales clinics, trade shows, and personal appearances.
b. During the Term of this Agreement, subject to
Reherman's bona fide prior commitments, Reherman, Inc. agrees to cause Reherman
to make at least fifteen (15) personal appearances at trade shows and/or
company-related functions on M.D. Labs' behalf at M.D. Labs' request
(hereinafter referred to as a "Personal Appearance"). M.D. Labs will give
Reherman, Inc. 28 days notice of the date of any Personal Appearance and
Reherman, Inc. will respond within seven days if Reherman is not available on
the designated date. Failure to respond within seven days will constitute
Reherman, Inc.'s acceptance of the designated date.
c. Reherman, Inc. agrees to cause Reherman to render his
services hereunder in a positive, competent and painstaking manner as directed
by M.D. Labs. Reherman will have concept approval prior to performance primarily
for the purpose of insuring that the advertising and promotional materials
produced hereunder are consistent and compatible with Reherman's current image,
which approval will not be unreasonably withheld.
d. Reherman, Inc. shall allow M.D. Labs to advertise and
promote its relationship with Reherman in a manner and by means as determined by
M.D. Labs in its sole discretion and Reherman, Inc. agrees that Reherman shall
participate in all media production events that M.D. Labs requests of Reherman.
e. During the Term of this Agreement, if M.D. Labs
requests it, Reherman, Inc. agrees to cause Reherman to wear a costume designed
and provided embodying a character designed by M.D. Labs to represent and
promote the M.D. Labs Products, subject to Reherman's review and approval of the
character and/or costume design, primarily for the purpose of ensuring that the
costume design is consistent and compatible with Reherman's current image, which
approval will not be unreasonably withheld.
f. Reherman, Inc. covenants that Reherman will utilize
M.D. Labs Products whenever possible.
3. Compensation.
a. In consideration of the services to be performed
by Reherman, Inc. and Reherman hereunder in connection with the production of
and M.D. Labs' rights to use the advertising and promotional materials produced
during the Term of this Agreement and for all rights, privileges and options
herein granted to us by you, M.D. Labs agrees to pay to Reherman, Inc.'s sole
employee and officer, Lee J. Reherman, and Reherman, Inc. and its sole employee
and officer, Lee J. Reherman, agree to accept warrants to purchase 14,000 shares
of M.D. Labs' common stock at $6.00 per share, such warrants to vest in equal
parts at the end of each year of the two year Term of this Agreement. Such
warrants shall be in the form attached as Schedule A.
2
<PAGE>
b. As compensation for each Personal Appearance made by
Reherman pursuant to Paragraph 2(b) M.D. Labs agrees to pay Reherman, Inc. $1000
per day for each day on which Reherman makes such a Personal Appearance.
c. M.D. Labs further agrees to reimburse Reherman, Inc.
for all reasonable preapproved travel expenses incurred by Reherman and paid by
Reherman, Inc. in connection with Reherman, Inc.'s and Reherman's duties
hereunder (the "Travel Expenses"). M.D. Labs has the right to request reasonable
substantiation of such Travel Expenses and deny payment if satisfactory
substantiation is not provided.
d. The Travel Expenses shall be payable thirty (30) days
after receipt by M.D. Labs of an invoice from Reherman, Inc. itemizing and
documenting, to an extent reasonably acceptable to M.D. Labs, expenses
associated with Personal Appearances and other appearances and all other
allowable expenses.
4. Payments. All payments hereunder shall be deemed to include
all applicable taxes, duties and charges. Reherman shall be responsible for
paying all withholding, FICA, FUTA and similar taxes applicable to the
compensation received under this Agreement.
5. Right to Use Name and Likeness; Property of M.D. Labs.
a. Reherman, Inc. hereby grants to M.D. Labs the
irrevocable right to use and reproduce Reherman's name, voice and any and all
photographs, likenesses, sketches, motion pictures, audio or visual recordings
and biographies taken or made of Reherman in connection with his appearances and
activities related to this Agreement or in connection with trade or consumer
promotions of the M.D. Labs Products.
b. Reherman, Inc. agrees that all pictures, prints,
motion pictures, audio or visual tapes, artists' renderings, plans, ideas,
concepts and other things which may relate to the marketing, advertising or
promotion of any product or service by M.D. Labs and which may be prepared for
or submitted to M.D. Labs or its agents in connection with this Agreement shall,
from the commencement of this Agreement and thereafter, become and remain solely
and exclusively the property of M.D. Labs, except as may be otherwise agreed to
in writing by Reherman, Inc. and M.D. Labs.
c. M.D. Labs shall have the right to obtain, register
and otherwise perfect its sole and exclusive ownership of any of the
aforementioned items, by means of copyright, trademark, service mark, or other
proprietary interest, anywhere and at any time, and shall have the right to use
any such items in any manner, when and where it may designate, without any claim
on the part of Reherman to any rights of ownership or rights to additional
compensation, and Reherman shall assist and cooperate with M.D. Labs in
perfecting its ownership and rights to use such items upon request.
d. Reherman, Inc., on behalf of Reherman, his heirs,
executors, administrators, assigns and next of kin, hereby releases M.D. Labs
and its parent, agents, officers, directors, employees, successors, assigns,
subsidiary companies, affiliated companies and the advertising agencies of any
of the foregoing from any and all claims for
3
<PAGE>
damages based on the reasonable use of Reherman's name, voice, signature and any
and all photographs, likenesses, sketches, motion pictures and biographies,
including, but not limited to, libel, slander, invasion or rights of privacy, or
any other claim.
6. Covenant. Reherman, Inc. agrees that while this Agreement is in
force, it will not authorize or permit Reherman, so far as it is within its
control, to render his services or permit the use of his name, recorded voice,
likeness, photograph or biography in advertising or publicizing or otherwise
endorse any products that compete with the M.D. Labs Products, including but not
limited to, any natural foods or dietary supplements, vitamins, or weight loss
or management products other than the M.D. Labs's Products, except that for a
period of six months from the date of this Agreement, Reherman may continue to
endorse the products and services of Met-rx, Inc.
7. Reherman's Reputation. If Reherman, at any time while this
Agreement is in force, shall commit any act or become involved in any situation
or occurrence which brings him into public disrepute, contempt, scandal or
ridicule or which tends to shock, insult or offend the community or any group or
class thereof which reflects unfavorably upon the reputation of M.D. Labs or its
products, then M.D. Labs shall have the right to terminate this Agreement
without further obligation to Reherman, Inc., except to pay it such sums as may
have become due under this Agreement prior to such act, situation or occurrence.
8. Inability to Perform. In the event that, during the term of
this Agreement, Reherman dies, is injured, or for any other reason beyond his
control, other than while performing a M.D. Labs contracted function, he is
unable to adequately, in the sole judgment of M.D. Labs, render the services
referred to herein within thirty (30) days after M.D. Labs's request, then M.D.
Labs shall have the right at its sole option to either extend the term of this
Agreement for a period of time equivalent to Reherman's failure to render
services or cancel this Agreement without obligation to make any further
payments to Reherman, except that M.D. Labs shall be obligated to pay to
Reherman or his legal representative all unpaid reimbursement sums which shall
have accrued to the date of such injury or death injury or death, provided M.D.
Labs has had some usage of Reherman's services during the year in question. Upon
payment of such sum(s) to Reherman, M.D. Labs shall be relieved of any further
obligations hereunder.
9. Confidential Information. Reherman, Inc. agrees that it shall
not, without M.D. Labs's prior written consent, disclose to any person or
entity:
a. Any of M.D. Labs's marketing, advertising or
promotional activities, information, data or ideas which may be of a proprietary
or confidential nature; or
b. Any of M.D. Labs's trade secrets or contemplated
trademarks which may originate or be produced or developed under this Agreement
or which Reherman, Inc. may learn of as a result of this Agreement.
c. Reherman, Inc. further agrees to prohibit Reherman
from disclosing any of the information listed in sub-paragraphs 9(a) or (b)
above and agrees to indemnify
4
<PAGE>
M.D. Labs against any damages it may incur as a result of any such disclosure by
Reherman.
10. Proprietary Rights. M.D. Labs shall have the opportunity to
review and preapprove all uses of its names, marks and/or logo(s) in connection
with this Agreement. Upon termination of this Agreement, Reherman shall cease
all use of such names, marks and logo(s). All use of the names marks, logos,
characters, costume designs and other identifications and symbols used in
connection with this Agreement shall remain the exclusive property of M.D. Labs,
and shall inure to the benefit of M.D. Labs.
11. Termination. This Agreement shall terminate, at M.D. Labs's
discretion, if a default or breach of this Agreement by Reherman, Inc. occurs.
If M.D. Labs is prohibited by law or regulations from engaging in or utilizing
any of the activities described in this Agreement, M.D. Labs, in its sole
discretion may either terminate this Agreement in its entirety, or continue
under the Agreement to the extent permissible by law. Otherwise, this Agreement
shall terminate at the end of the initial term or, if renewed, at the end of the
renewal term.
12. Notices. All notices required or permitted to be given under
the terms of this Agreement shall be in writing, and shall be deemed to be
given, as of the date of delivery if hand delivered or as of the postmark if
sent by United States certified or registered mail return receipt requested,
postage full prepaid, to the applicable address set forth above, or to such
other person or address as the receiving party may have designated by written
notice to the other. An extra copy of all notices to M.D. Labs shall be sent to
M.D. Labs's Legal Counsel in order for the notice to be binding on M.D. Labs.
13. Broadcast of Advertisements. M.D. Labs shall be under no
obligation to cause any commercials, advertisements or other promotional
materials produced pursuant to this Agreement to be broadcast, or in any other
way displayed, published or aired, it being understood that the only obligation
of M.D. Labs is to make such payments as are required under this Agreement.
14. Commissions. M.D. Labs shall be under no obligation for the
payment of any commissions to Reherman, Inc. or Reherman on account of this
Agreement.
15. Ownership of Material. Reherman, Inc. agrees that neither it
nor Reherman have nor shall claim to have, either under this Agreement or
otherwise, any right, title or interest of any kind or nature in and to any
advertising ideas, announcements, phrases, titles, characters, costume design,
music or words originated and supplied by M.D. Labs and used, and that all
rights therein are recognized to be in M.D. Labs. Both during and after the term
of this Agreement, M.D. Labs shall have the right to the unlimited use and reuse
of any and all of the advertising and promotional materials produced hereunder,
as it may elect, on any or all network and local television and radio programs
broadcast under the full or partial sponsorship of M.D. Labs, its affiliates and
subsidiaries, and as spot announcements on television and radio, and for the
sales training and trade development purposes of M.D. Labs, its employees,
retailers, affiliates and subsidiaries (including distribution to trade and
consumer groups).
5
<PAGE>
16. Warranty. Reherman Inc. warrants and represents that it has
the right and power to enter into and to perform this Agreement on behalf of
Reherman.
17. Product Statements. Reherman, Inc. understands that product
claims, marketing and advertising of the M.D. Labs Products is heavily regulated
in the United States by one or more federal, state and local agencies and
authorities. Reherman, Inc. agrees that Reherman will not make any claims
concerning the structure, function, purpose, or effect of any products of M.D.
Labs without prior written approval of M.D. Labs.
18. Indemnification. Both during and after this Agreement,
Reherman shall indemnify, defend and hold M.D. Labs, its parent corporation,
officers, directors, employees, customers, distributors, suppliers, agents,
successors and assigns harmless from and against all actions, suits,
proceedings, judgments, demands or claims (whether valid or invalid),
liabilities, losses or expenses whatsoever (including reasonable attorneys'
fees) incurred in connection with or arising from Reherman, Inc.'s breach,
misrepresentation or nonperformance under this Agreement.
19. Relationship of the Parties.
a. All operations by each party under the terms of this
Agreement shall be carried on by it as an independent contractor and not as an
agent for the other.
b. It is understood and agreed that since Reherman is an
independent contractor, M.D. Labs will not carry insurance covering any aspect
of Reherman's appearances, travel or promotional efforts, and Reherman, Inc., on
behalf of Reherman, his heirs, legatees, personal representatives, and all those
claiming by or through him, consents to and hereby discharges and releases M.D.
Labs, its employees and agents, from any and all claims, actions, losses,
damages, or expenses for personal or bodily injury, including death, and
property damage, of whatever nature or cause, arising out of or in any way
connected with this Agreement or with Reherman's appearances hereunder.
20. Nature of Services. It is mutually agreed that the services
contracted hereunder are special, unique and extraordinary and have peculiar
value to M.D. Labs. In the event of any breach of this Agreement, M.D. Labs
shall be entitled, in addition to any other remedies available to it, to obtain
equitable relief by way of temporary or permanent injunction.
21. Assignment. Reherman, Inc. may not assign, transfer, or
subcontract any of its rights or obligations under this Agreement without M.D.
Labs's prior written consent.
22. Severability. If any provision of this Agreement (or any
portion thereof) shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remainder of this Agreement shall
not in any way be affected or impaired thereby; any such provision shall be
modified to the minimum extent necessary to make it valid and enforceable, but
if it cannot be so modified, it shall be severed and the remainder of the
Agreement shall be interpreted to provide for the maximum enforceability allowed
by law.
6
<PAGE>
23. Entire Agreement; Amendment. This Agreement embodies the
entire agreement between the parties regarding the subject matter hereof, and
neither the Agreement nor any term, provisions, covenant or condition hereof may
be waived, amended, modified, revised, extended or supplemented in any manner
whatsoever except by an express prior written agreement executed by fully
authorized representatives of both M.D. Labs and Reherman, Inc.
24. Attorneys' Fees and Costs. Should either party be required
to enforce its rights hereunder, the prevailing party in an action for such
enforcement shall be entitled to recover its reasonable costs and expenses,
including without limitation attorneys' fees, to be determined by the court and
not a jury.
25. Captions and Headings. The paragraph captions in this
Agreement are for convenience only and are not intended to limit or interpret
the provisions hereof.
26. Governing Law. This Agreement shall be governed by and
construed and enforced under the laws of the State of Arizona, which state shall
have exclusive jurisdiction of the subject matter hereof. Both parties agree
that any action to enforce any provision of this Agreement shall be brought only
in courts located in Maricopa County, Arizona.
27. Waiver. The failure of either party hereto to insist in any
instance upon the strict performance of any provision of this Agreement or to
exercise any election contained herein shall not be construed as a waiver or
relinquishment for the future of such provision or election. No waiver or
modification by any party shall have been deemed to have been made unless
expressed in writing by such party.
28. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
M.D. LABS, INC.
By: Signature Illegible
------------------------
Title: CFO
---------------------
Date: 10/8/96
----------------------
7
<PAGE>
LEE J. REHERMAN, INC.
By: Signature Illegible
------------------------
Its: President
-----------------------
Date: 9/27/96
----------------------
2120 The Strand #3
--------------------------
Business Address
Manhattan Beach, CA 90266
--------------------------
City, State Zip Code
I hereby guarantee performance of all personal service obligations of
Reherman, Inc. hereunder.
/s/ Lee J. Reherman
- ----------------------------
Lee J. Reherman
###-##-####
- ----------------------------
Social Security No.
2120 The Strand #3
- ----------------------------
Residential Address
Manhattan Beach, CA 90266
- ----------------------------
City, State, Zip Code
8
CONSULTING AGREEMENT
The following represents the Consulting Agreement (the "Agreement") between Chad
Coy, 3722 South Reed, Kokomo, Indiana, 46902 (the "Consultant") and M.D. Labs,
Inc., 1719 West University Drive, Suite 187, Tempe, Arizona, 85281 (the
"Company").
1. Consulting Services to be Performed:
- ---------------------------------------
The Consultant will conduct various research and development projects and tasks
for the Company, including but not limited to developing and targeting new
health food supplement products, primarily herbal, amino acid, and hormonal
products, which could reasonably and cohesively be integrated into the Company's
existing or proposed product lines. In any event, the Consultant will only be
asked to perform such consulting work in areas of his expertise. Additionally,
the Consultant will aid the Company in sourcing suppliers of the raw materials
required for the production, and if necessary the sub-contracting of the
manufacturing of the products developed and sourced. The Consultant will perform
various research projects for the Company, as directed by Company officers, and
the Consultant will perform a minimum of forty (40) hours of research and
development work per month for the Company, either as directed by the Company or
self directed.
In the course of providing the Company with the research and development
services, the Consultant will also attempt to source potential operating company
and product line acquisitions ("Acquisition(s)") for the Company. The Consultant
agrees that he is not entitled to any commissions or finder's fees associated
with any such Acquisition services. However, the Company reserves the right, in
its sole discretion, to pay the Consultant a commission for any Acquisitions
sourced by the Consultant without establishing precedence for required Company
commission payments for any subsequent Acquisitions sourced by the Consultant.
2. Compensation and Duration of Agreement:
- ------------------------------------------
The Company will pay the Consultant one thousand five hundered dollars ($1,500)
per month for performing the aforementioned consulting services. The Consultant
agrees that he is not entitled to any royalty or commission payments upon the
Company's sale of any products developed or sourced by the Consultant, unless a
separate royalty or commission agreement is prepared in writing and executed by
both the Consultant and the Company. The Consultant will obtain prior written
approval from a Company officer for all expenses for which the Consultant
desires reimbursement.
The terms of this Agreement are for six (6) months from October 1, 1996, and can
be renewable for an additional six (6) months at the sole discretion of the
Company provided that both the Consultant and the Company execute such an
extension agreement.
3. Product and Property Ownership:
- ----------------------------------
All research and development of any products, trade names, trade marks, and any
other tangible or intellectual property developed by the Consultant either
independent of the Company or in conjunction with Company personnel, prepared
during the period(s) covered by this Agreement are the property of the Company
and not the Consultant. The Consultant will work with the Company to assure that
all research and development work is not obtained or utilized by any individual
or entity not a party to this
1
<PAGE>
Agreement, and will further aid the Company in obtaining legal ownership of all
products, trade names, trade marks, and any other tangible or intellectual
property developed by the Consultant.
4. Non-Compete and Confidentiality of Information:
- --------------------------------------------------
The Consultant agrees not to compete in any manner with the Company, including
any competition through any Consultant affiliated or related entity for the
duration of this Agreement and for six (6) months following the termination of
the Agreement. The Consultant further agrees that he will maintain all
information about the Company and all research work performed by the Consultant
in the strictest of confidence.
The Consultant acknowledges that the Company is in the latter stages of becoming
a publicly traded company, and that the Company will become subject to numerous
laws imposed by the Securities and Exchange Commission, and that the Consultant
may become privy to confidential Company information. Any such confidential
"insider information" is to also be held in the strictest confidence, and no
trades of the Company's securities are to be executed by the Consultant based on
any such Company "inside information" and that Consultant will be held solely
responsible for any disclosure of Company "inside information" and any illegal
security trades executed based on the Consultant's disclosure or utilization of
such information.
5. Potential for Extended Relationship:
- ---------------------------------------
Should this Agreement prove to be mutually advantageous to both the Consultant
and the Company, the company desires to extend the scope and services of this
Agreement, possibly allowing the Consultant to become a full-time employee of
the Company. Any such changes to this Agreement to that effect must be in
writing and executed by both the Consultant and the Company.
6. Purchases of Company Product:
- --------------------------------
The Consultant will be entitled to purchase for retail resale purposes at
Powerhouse Gym in Indiana, any and all Company products at Company cost plus
postage, for the duration of this Agreement and during the six (6) month
non-compete period. The Consultant agrees to be practical and reasonable
regarding the purchase of Company products at cost, only ordering those products
actually required.
7. Severability:
- ----------------
If any provision of this Agreement is found to be unenforceable by a court of
competent jurisdiction, such finding shall not effect the enforceability of any
other provision(s) herein.
8. Governing Law and Venue:
- ---------------------------
This Agreement shall be interpreted in accordance with the laws of the State of
Arizona, and any actions brought relating to this Agreement shall lie only in
the courts of competent jurisdiction located in Maricopa County, Arizona.
2
<PAGE>
9. Consideration:
- -----------------
It is expressly understood and agreed that this document sets forth the entire
consideration for this Agreement, and that said consideration for this Agreement
is contractual and not mere recital.
10. Entire Agreement:
- ---------------------
This Agreement embodies, merges and integrates all prior and current agreements
and understandings of the parties hereto, and may not be modified, clarified,
changed or amended, except in writing signed by each and every one of the
signatories hereto, or their authorized representatives. There are no oral
agreements between the parties.
11. Construction:
- -----------------
This Agreement is a negotiated agreement and any documents delivered pursuant
hereto shall be construed without regard to the identity of the persons who
drafted the various provisions thereof. Every provision of this Agreement and
such other documents, if any, shall be construed as though all parties
participated equally in the drafting thereof. Any legal rule of construction
that a document is to be construed against the drafting party shall not be
applicable and is expressly waived.
12. Captions:
- -------------
The captions used in this Agreement are inserted for convenience only and shall
not affect the meaning or construction of this Agreement.
Agreed and accepted to this 10th day of October, 1996
For the Consultant:
- -------------------
Chad Coy
- --------------------------------------------
Name (Print)
/s/ Chad Coy
- --------------------------------------------
Signature
For the Company:
Bradley A. Denton
- -------------------------------------------
Name (Print)
/s/ Bradley A. Denton
- -------------------------------------------
Signature
C.F.O.
- -------------------------------------------
Title
3
Contract Between Houston International, LLC and Dr.Lori G. Kimata
This agreement, made this 15th day of March, 1996 between Houston International,
LLC located at 3658 E. Chipman Rd. Phoenix, Arizona 85040, hereafter referred to
as "Houston", and Dr. Lori G. Kimata located at 13832 N. 32nd Street, Suite
C2-4, Phoenix, Arizona 85032, hereafter referred to as "Dr. Kimata" is to define
the terms and conditions related to the development, sales and marketing of a
new herbal tea product, hereafter referred to as "Women's Nature PMS Herbal
Tea".
It is mutually agreed as follows:
Dr. Kimata will aid Houston in developing "Women's Nature PMS Herbal Tea"
through consultations, research, formulation experiments and other procedures
necessary to designing "Women's Nature PMS Herbal Tea". Dr. Kimata and Houston
will work together to develop a formula to be reviewed and approved by Houston
for "Women's Nature PMS Herbal Tea" which will include the identifying name of
each ingredient, the specific part of each plant that is to be used, and the
percentage of each ingredient that is to be used in the manufacture of "Women's
Nature PMS Herbal Tea". Dr. Kimata will provide autobiographical information to
be used in the promotion of "Women's Nature PMS Herbal Tea" including
information related to education, credentials and professional experience. Dr.
Kimata will allow Houston to arrange and obtain photographs of Dr. Kimata to be
used in the marketing and promotion of "Women's Nature PMS Herbal Tea". Dr.
Kimata will be available to promote "Women's Nature PMS Herbal Tea" directly and
indirectly at speaking engagements, media interviews, expositions and other
special events as her schedule permits and as mutually agreed upon by both
Houston and Dr. Kimata. Reasonable expenses including but not limited to travel,
lodging and meals incurred by Dr. Kimata while promoting "Women's Nature PMS
Herbal Tea" at speaking engagements, media interviews, expositions and other
special events will be paid for by Houston. Dr. Kimata will be paid by Houston
her usual rate for said special events. Dr. Kimata reserves the right to examine
and approve all product labeling, press releases, brochures and other materials
used to promote or market "Women's Nature PMS Herbal Tea" prior to their
distribution by Houston. Houston will not distribute any such promotional
materials related to "Women's Nature PMS Herbal Tea" without first receiving
approval of said promotional materials from Dr. Kimata. Houston will have the
right to use Dr. Kimata's name verbally and in general correspondence in
association with sales calls and meetings related to the sales and marketing of
"Women's Nature PMS Herbal Tea".
Houston will select all raw materials suppliers, transporters, manufacturers,
printers and other vendors related to the production of "Women's Nature PMS
Herbal Tea". Houston will pay for all raw materials, manufacturing, testing,
transportation of raw materials, labeling, promotional materials, marketing
campaigns, advertising, transportation of finished product and other expenses
deemed necessary by Houston to the development, manufacture, marketing and
distribution of "Women's Nature PMS Herbal Tea". Houston will be responsible for
all sales, billings, accounting, collections and debts incurred by Houston and
related to "Women's Nature PMS Herbal Tea". Houston will retain sole rights to
all licenses, trademarks, distribution and customer data related to "Women's
Nature PMS Herbal Tea". Houston will pay for all reasonable expenses incurred by
Dr. Kimata in the development of "Women's Nature PMS Herbal Tea". Houston will
pay Dr. Kimata a royalty fee of $.09(nine cents) for each unit (box) of "Women's
Nature PMS Herbal Tea" sold for 18 months beginning on the date that the first
unit (box) of "Women's Nature PMS Herbal Tea" is sold, and at the conclusion of
said 18 months Houston will pay Dr. Kimata a royalty of $.05 (five cents) for
each unit (box) of "Women's Nature PMS Herbal Tea" sold thereafter. Houston will
provide said royalty payments to Dr. Kimata on or before the last day of each
calendar month for all sales of "Women's Nature PMS Herbal Tea" made during the
previous calendar month. Houston will provide with each said royalty payment a
sales report showing the total units of "Women's Nature PMS Herbal Tea" sold
during the said previous month.
The term of this agreement will be for three (3) years from the effective date.
This agreement will automatically renew for additional three (3) year terms at
the royalty payment of $.05 (five cents) for each unit (box) of "Women's Nature
PMS Herbal Tea" sold unless either party to this agreement shall, at least 180
days prior to the expiration of any term, advise the other party in writing that
it does not intend to renew the agreement. Should either party choose to not
renew the agreement and notify the other party in accordance with this
agreement, Houston will continue to sell and market "Women's Nature PMS Herbal
Tea" and pay Dr. Kimata the defined royalty on said sales until all inventory in
stock and/or on order is exhausted at which time Houston will forfeit the right
to use any reference to Dr. Kimata in association with "Women's Nature PMS
Herbal Tea" and Dr. Kimata will forfeit the right to any royalty payments for
any sales occurring after the termination date of this agreement and the
exhaustion of all inventory in stock and/or on order.
Dr. Kimata confirms that she is free to enter this agreement and that she will
not disclose or make known to any person or party any of Houston's trade secrets
or processes or any part thereof which she may learn or be exposed to during the
term of this agreement. Dr. Kimata is free to enter into any other contract with
any other party that she chooses except in the case that such a contract would
relate to the development, sale, marketing or manufacture of an herbal tea
designed to compete directly with "Women's Nature PMS Herbal Tea". Dr. Kimata
will be paid as an independent consultant to Houston and will not be considered
an employee of Houston. It is understood that this agreement supercedes any and
all prior agreements, oral or written, made between Houston and Dr. Kimata, and
can only be modified by an agreement in writing signed by all applicable
parties. Dr. Kimata and Houston make this agreement binding by signing below.
/s/ Dr. Lori G. Kimata 3-15-95 /s/ Hooman Nikzad 3-15-95
- ----------------------------------- -------------------------------------------
Dr. Lori G. Kimata (signature) Date Houston International, LLC (signature) Date
Lori G. Kimata ND 3-15-95 Hooman Nikzad 3-15-95
- ----------------------------------- -------------------------------------------
(Print Name) Date (Print Name) Date
Exhibit 11.1
M.D. Labs, Inc.
Statement Regarding Computation of Per-Share Earnings
Calculation of Earnings Per Common Share
<TABLE>
<CAPTION>
Quarter Ended Year Ended Year Ended
August 31, 1996 May 31, 1996 May 31, 1995
<S> <C> <C> <C>
Pro forma (May 31, 1996 and 1995) net income $ 97,412 $ 915,632 $ 343,673
for earnings per-share calculation
----------------- ----------------- -----------------
Weighted average shares outstanding at May 31 3,000,000 3,000,000 3,000,000
Stock options, less the number of shares assumed
purchased under the Treasury Stock Method 67,629 67,629 67,629
Warrants, less the number of shares assumed
purchased under the Treasury Stock Method 131,511 130,311 130,311
----------------- ----------------- -----------------
Weighted average common shares outstanding 3,199,140 3,197,940 3,197,940
================= ================= =================
Pro forma (May 31, 1996 and 1995) net income
per common share
(Primary and Fully Diluted) $ 0.03 $ 0.29 $ 0.11
----------------- ----------------- -----------------
</TABLE>
Exhibit 23.1
Consent of Independent Accountants
We consent to the inclusion in this Registration Statement on Form SB-2 of our
report dated July 12, 1996, on our audit of the financial statements of M.D.
Labs, Inc. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
October 24, 1996
Exhibit 23.3
CONSENT OF BASS & ULLMAN, P.C.
We consent to the inclusion in this Registration Statement on Form SB-2 of our
opinion dated October 24, 1996 regarding MD Labs, Inc. We also consent to the
reference to our firm under the caption "Experts."
Facsimile and other copies of this Consent may be used to serve as an original.
BASS & ULLMAN, P.C.
747 Third Avenue
New York, New York 10017
By /s/ Jacob Laufer
---------------------
JACOB LAUFER
A member of the Firm
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANT'S
AMENDED REGISTRATION STATEMENT ON FORM SB-2 FILED
ON OCTOBER 25, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM SB-2
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 163,309
<SECURITIES> 0
<RECEIVABLES> 546,148
<ALLOWANCES> 25,000
<INVENTORY> 1,121,862
<CURRENT-ASSETS> 1,901,190
<PP&E> 370,696
<DEPRECIATION> 159,028
<TOTAL-ASSETS> 2,714,072
<CURRENT-LIABILITIES> 598,361
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 2,112,711
<TOTAL-LIABILITY-AND-EQUITY> 2,714,072
<SALES> 1,059,325
<TOTAL-REVENUES> 1,059,325
<CGS> 320,910
<TOTAL-COSTS> 565,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,783
<INCOME-PRETAX> 162,354
<INCOME-TAX> 64,942
<INCOME-CONTINUING> 97,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,412
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
