AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1999
REGISTRATION NO. 33- [ ]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNOVATIVE HEALTH PRODUCTS, INC.
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(Exact name of small business issuer as specified in its charter)
6950 BRYAN DAIRY ROAD
LARGO, FL 33777
(727) 544-8866
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(Address, including zip code, and telephone
number, including area code, of Registrant's
principal executive offices)
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FLORIDA 5961 592 600 232
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<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
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Kotha S. Sekharam, President
6950 Bryan Dairy Road
Largo, FL 33777
(727) 544-8866
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(Name and address, including zip code, and telephone number, including area
code, of agent for service)
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Copies to:
Gregory Sichenzia, Esq.
SICHENZIA, ROSS & FRIEDMAN LLP
135 West 50th Street, 20th Floor
New York, New York 10020
(212) 664-1200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.001 par value(2) 1,150,000 $7.00 $8,050,000 $2,238
Underwriter's Warrants(3) 100,000 $0.001 $100 (4)
Common Stock, $.001 par value(5) 100,000 $8.40 $840,000 $234
TOTAL $8,890,100 $2,472
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<FN>
(1) Estimated solely for the purpose of determining the registration fee.
(2) Includes 150,000 shares of common stock, $.001 par value per share, subject
to sale upon exercise of the Underwriter's over-allotment option.
(3) The Underwriter's Warrant is for the purchase of common stock, $.001 par
value per share.
(4) No fee pursuant to Rule 457(g).
(5) Represents shares of common stock, $.001 par value per share, issuable to
the underwriter upon exercise of the underwriter's warrants.
</FN>
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
The information in this Prospectus is not complete and may change. We may not
sell these securities until the Registration Statement filed with the Securities
and Exchange Commission is effective. This Prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
Subject to Completion, Dated December 15, 1999
[INNOVATIVE HEALTH PRODUCTS, INC. LOGO]
1,000,000 SHARES OF COMMON STOCK
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INNOVATIVE HEALTH PRODUCTS, INC.: THE OFFERING:
<S> <C>
o We create, manufacture, develop, package o This is the initial public offering of
and distribute proprietary and private Innovative Health Products, Inc. There
label nutritional supplements and health has been no public market for our common
and beauty care products. Our stock prior to this offering.
distribution channels included health food,
drug, convenience and mass market o We are offering 1,000,000 shares of our
stores, as well as direct marketing and common stock.
catalog sales.
o The underwriters have a 45-day option to
o Our wholly-owned subsidiary, Herbal purchase an additional 150,000 shares of
Health Products, Inc., develops, markets our common stock, at the offering price,
and distributes health supplements for to cover any overallotments.
domestic animals and horses, and for human
consumption. Herbal markets its products o We currently estimate that the initial
to various targets and operates under the public offering price for our common stock
trade names Vitality Systems, Vitality will range between $6.00 and $7.00 per
Pet, Equine Solutions and Vitality Health share.
Systems.
o We plan to use the proceeds from this
o Our pricipal executive offices are located offering for business expansion, working
at 6950 Bryan Dairy Road, Largo, FL capital and general corporate purposes.
33777 and our telephone number is
(727) 544-8866. We are a Florida o Kashner Davidson Securities Corporation
corporation. expects to deliver the shares, on behalf of
the underwriters, on or about __________, 1999.
o Proposed NASDAQ SmallCap Market Symbol: IHPI
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YOUR INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
INVESTING IN OUR COMMON STOCK, YOU SHOULD CONSIDER CAREFULLY THE RISKS
DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 7.
- ------------------------------------------------------ ----------------------
THE OFFERING PER SHARE TOTAL
- ------------------------------------------------------ ----------------------
Public Offering Price.................................. [____] [____]
Underwriting Discounts and Commissions................. [____] [____]
Proceeds to Innovative................................. [____] [____]
- ------------------------------------------------------ ----------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved our common
stock, or determined that this prospectus is complete or accurate.
Any representation to the contrary is a criminal offense.
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KASHNER DAVIDSON SECURITIES CORPORATION
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<PAGE>
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and financial
statements that appear elsewhere in this prospectus. This summary is not
complete and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus carefully,
including the risk factors and financial statements.
INNOVATIVE HEALTH PRODUCTS, INC.
Our Business...................... Innovative Health Products, Inc., creates,
manufactures, and packages a wide variety of
proprietary and private label nutritional
supplements and health and beauty care
products. Although we manufacture our own
"branded" products and distribute them
through various outlets, our primary
business is the contract manufacture of
products for others (private label
manufacturing). The distribution channels we
use for our proprietary and private label
products include health food, drug,
convenience and mass market stores, as well
as direct marketing.
Herbal Health Products, Inc., our
wholly-owned subsidiary, develops, markets
and distributes health supplements for
domestic animals and horses, and for human
consumption. Herbal markets its products and
operates under the trade names Vitality
Systems, Vitality Pet, Equine Solutions and
Vitality Health Systems to reach veterinary
and human nutritional supplement markets.
Vitality Systems has developed, distributed
and marketed animal supplements exclusively
to veterinarians for the past eighteen
years. Equine Solutions offers similar
product lines to horse training and horse
boarding facilities. Vitality Pet markets
and distributes its product lines as
specialty supplements for domestic animals.
Finally, Vitality Health Systems formulates,
markets and distributes supplements for
human consumption.
Our Products...................... Innovative's products include
over-the-counter topical analgesics, sport
drinks, nutritional and herbal supplements,
body building supplements, functional
cosmetics, weight management and dietary
supplements. We also manufacture
over-the-counter pharmaceuticals and health
and beauty care products for others. Some of
the branded products that Innovative
currently manufactures and markets include
"Arth-Aid(TM)" roll-on and cream for
arthritis, "Nutri-Sure(TM)" meal replacement
powder, and "Physician's
Pharmaceuticals(TM)" dietary supplement
product line.
In addition to these products, Innovative
primarily manufactures a wide array of
specialty, custom and private label formulas
for multi-level marketing companies, direct
sales companies and medical institutions.
Herbal's products include health
supplements, vitamins, performance enhancers
and nutriceuticals for domestic animals and
horses, and for human consumption. Herbal's
primary product is MSM, an anti-oxidant and
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anti-inflammatory nutritional supplements
for domestic animals and horses, and for
human consumption
Our Customers..................... Innovative's and Herbal's customers include
consumers, marketing companies, wholesalers
and retailers, including independent
pharmacies, regional and national chain drug
stores, alternate care facilities, mail
order facilities, mass merchandisers, deep
discounters and brokers. In addition,
Innovative is the exclusive manufacturer of
products for Nutriceuticals.com and Java
Sports.com, two internet based health
product sales companies.
Our Industry...................... According to the NUTRITION BUSINESS JOURNAL
1999 Industry Overview, U.S. sales of herbal
and botanical supplements were approximately
$3.53 billion in 1997, an increase of 18% as
compared to 1996. The overview forecasts
annual growth in sales of herbs and
botanicals at 16-18%.
Our Strategy...................... Key elements of our strategy are to:
o RESPOND TO CUSTOMER NEEDS MORE
EFFICIENTLY;
o DEVELOP NEW PRODUCTS UTILIZING THE
LATEST TECHNOLOGICAL INNOVATIONS AND
MOST UP-TO-DATE RESEARCH FINDINGS;
o RAPIDLY INTRODUCE NEW PRODUCTS TO OUR
MARKETS;
o CREATE MORE VALUE ADDED PRODUCTS;
o DEVELOP A COMPREHENSIVE MARKETING
PROGRAM FOR OUR BRANDED PRODUCTS;
o ACQUIRE UNDER-PERFORMING COMPLEMENTARY
BUSINESS AND MAXIMIZE PERFORMANCE
THROUGH HANDS-ON MANAGEMENT;
o CONSOLIDATE CORPORATE AND ADMINISTRATIVE
INFRASTRUCTURES TO ACHIEVE ECONOMIES OF
SCALE.
Our Manufacturing Operations........Innovative and Herbal conduct manufacturing
operations from our 33,222 square foot
production, laboratory and office facility,
located in Largo, Florida, and our 9,694
square foot manufacturing facility, located
in Tampa, Florida.
Our Principal Offices...............Our principal executive offices are located
at 6950 Bryan Dairy Road, Largo, FL 33777
and our telephone number is (727) 544-8866.
We are a Florida corporation.
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THE OFFERING
Shares Outstanding..................We have 2,000,000 shares of common stock
outstanding.
Shares Offered......................We are offering 1,000,000 shares of common
stock. There will be a total of
approximately 3,000,000 shares of common
stock outstanding after this offering. We
have granted the Underwriters of this
offering a 45-day option to purchase 150,000
shares of common stock to cover any
over-allotments.
Use of Proceeds.....................We will use the net proceeds of this
offering primarily for business expansion,
and for working capital and general
corporate purposes. See "Use of Proceeds"
for a more detailed and complete
explanation.
Proposed Trading Symbol.............We have applied to list our common stock on
the Nasdaq Small Cap Market under the
proposed symbol "IHPI." See "Underwriting."
Forward-Looking Statements..........This Prospectus contains forward-looking
statements that address, among other things,
our expansion and acquisition strategy,
business development, use of proceeds,
projected capital expenditures, liquidity,
and our development of additional revenue
sources. These statements may be found in
the sections of this Prospectus entitled
"Prospectus Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results
of Operations," "Business" and in this
Prospectus generally. The forward-looking
statements are based on our current
expectations and are subject to risks,
uncertainties and assumptions, including
those described in the "Risk Factors" and
under "Management's Discussion and Analysis
of Financial Condition and Results of
Operations" and "Business." We base these
forward-looking statements on information
currently available to us, and we assume no
obligation to update them. Our actual
results may differ materially from the
results anticipated in these forward-looking
statements, due to various factors,
including all of the risks discussed in
"Risk Factors" and elsewhere in this
Prospectus.
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SUMMARY SELECTED COMBINED FINANCIAL DATA
The summary financial data set forth below have been derived from our audited
and unaudited financial statements included in this prospectus beginning on page
F-1.
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YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
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1998 1999 1998 1999
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(UNAUDITED) (UNAUDITED)
COMBINED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues ................................... $ 1,906,935 $ 5,040,054 $ 2,141,213 $ 3,062,656
Cost of goods sold ......................... 1,388,816 3,519,041 1,582,526 2,123,395
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Gross profit ............................... 518,119 1,521,013 558,687 939,261
Selling, general and administrative expenses 468,578 1,589,961 518,407 1,089,651
----------- ----------- ----------- -----------
Income (loss) from operations .............. 49,541 (68,948) 40,280 (150,390)
Other income (expenses), net ............... 434 (167,596) (11,268) (54,136)
----------- ----------- ----------- -----------
Income (loss) before income taxes .......... 49,975 (236,544) 29,012 (204,526)
Income taxes ............................... -- -- -- --
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Net income (loss) .......................... $ 49,975 $ (236,544) $ 29,012 $ (204,526)
=========== =========== =========== ===========
Basic and diluted income (loss) per share .. $ .02 $ (.12) $ .01 $ (.01)
=========== =========== =========== ===========
Basic and diluted weighted average number of
common shares outstanding ................ 2,000,000 2,000,000 2,000,000 2,000,000
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AS OF
AS OF SEPTEMBER 30, 1999
MARCH 31, ---------------------------
1999 ACTUAL AS ADJUSTED
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(UNAUDITED) (UNAUDITED)
COMBINED BALANCE SHEETS DATA:
<S> <C> <C> <C>
Cash and cash equivalents .................. $ 25,395 $ 111,386 $ 4,785,386
Working capital (deficit) .................. $(2,296,868) $ (450,212) $ 4,349,788
Total assets ............................... $ 5,857,172 $ 4,676,132 $ 9,350,132
Long-term obligations, less current portion. $ 1,336,461 $ 524,260 $ 114,260
Shareholders' equity (deficit).............. $ (302,395) $ 993,079 $ 6,203,079
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The numbers in the column captioned "As Adjusted" under the heading "As of
September 30, 1999" have been adjusted to reflect our sale of 1,000,000 shares
of common stock at an assumed public offering price of $6.50 per share and our
application of the estimated net proceeds. See "Use of Proceeds" for a more
detailed description of how we will use the net proceeds.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
DECIDING WHETHER TO INVEST, YOU SHOULD READ AND CONSIDER CAREFULLY THE FOLLOWING
RISK FACTORS.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. Numerous
state and federal government agencies extensively regulate the manufacture,
packaging, labeling, advertising, promotion, distribution and sale of our
products. The broad language used in the laws that regulate our business often
make it difficult for us to remain in strict compliance, but we employ a
full-time compliance person for that purpose. Our failure or inability to comply
with applicable laws and governmental regulations may materially and adversely
affect our business. See "Business - Government Regulation."
OUR BUSINESS MAY EXPERIENCE SIGNIFICANT VOLATILITY IN QUARTERLY EARNINGS
AND COMMON STOCK VALUE. Our quarterly operating results could fluctuate due to
many factors, including:
o trends and general conditions in the dietary supplement industry and our
ability to recognize these trends and introduce and market new products
that effectively respond to them;
o our introduction of new products;
o our competitors' introduction of new products;
o the loss of one or more significant customers;
o increased media attention on the use and efficacy of dietary
supplements;
o consumers' perceptions of our products and operations, or those of our
competitors; and
o the availability of raw materials from suppliers.
All of these factors are described in more detail in the "Risk Factors" below.
Many of these factors are beyond our control. Our failure to produce operating
results that meet securities analysts' or investor expectations in one or more
quarters may materially and adversely affect the price of our common stock and
our business.
OUR BUSINESS IS GREATLY AFFECTED BY MEDIA PUBLICITY. We are highly
dependent upon consumers' perceptions of the safety and quality of our products,
as well as dietary supplements distributed by other companies. National media
publicity associated with illness or other harmful effects caused by the use of
our products (or similar products distributed by other companies) may adversely
affect our business. In addition, future research reports that contradict or
suggest less favorable results than earlier research may adversely affect our
business. Consequently, the publication of reports suggesting that dietary
supplements may be harmful or inefficient may materially and adversely affect
our business, regardless of whether the reports are scientifically supported or
based on our products' recommended dosage.
OUR BUSINESS IS SUSCEPTIBLE TO PRODUCT LIABILITY CLAIMS. We inherently
face the risk of product liability claims based on injuries caused by the use of
our products. In the event that we do not have adequate insurance, product
liability claims relating to our products may materially and adversely affect
our business.
WE CANNOT ASSURE THAT WE HAVE ADEQUATE INSURANCE PROTECTION. We
maintain insurance policies in amounts, with coverage and deductibles, which our
management believes are reasonable and prudent. We cannot assure that these
insurance policies will adequately protect our Company from liabilities and
expenses that may arise from claims for personal and property damage arising in
the ordinary course of our business. We also cannot assure that we will maintain
our current levels of insurance or that these levels of insurance will be
available at economic prices. Our inability to maintain adequate levels of
insurance may materially and adversely affect our business.
OUR BUSINESS IS DEPENDENT UPON THE DEVELOPMENT OF NEW PRODUCTS.
Products that are currently experiencing strong popularity and rapid growth may
not maintain their sales over time. As a result, it is important for us to
develop new products that can gain widespread market acceptance. We cannot
assure that our efforts or strategy to develop these new products will be
successful. Our failure to develop these new products may materially and
adversely affect our business. See "Business -- Business Strategy."
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THERE ARE NO CLINICAL STUDIES DOCUMENTING OUR PRODUCTS' LONG-TERM
EFFECTS. Although many of the ingredients in our products are vitamins,
minerals, herbs and other substances with a long history of human consumption,
some of our products contain ingredients without any such history. In addition,
although the ingredients contained in our products are approved by various
regulatory agencies, there is little long-term experience with human consumption
of some of these product ingredients in concentrated form. For these reasons, we
cannot assure that our products, even when used as directed, will have the
intended effects or that they will not have harmful side effects. Such
unintended effects may result in adverse publicity or product liability claims
that may materially and adversely affect our business.
WE FACE INTENSE COMPETITION IN THE DIETARY SUPPLEMENT INDUSTRY. The
dietary supplement industry is highly competitive. Numerous companies compete
with us in the development, manufacture and marketing of dietary supplements. In
addition, we face strong competition in our health food store and mass market
distribution channels, from private label dietary supplements offered by health
and natural food store chains, drugstore chains, mass merchandisers and
supermarket chains. Many of these competitors are larger and have greater
financial, personnel, manufacturing, distribution, marketing and other resources
than we do. Competition from these companies may materially and adversely affect
our business. See "Business - Competition."
OUR BUSINESS IS DEPENDENT UPON OUR RAW MATERIALS SUPPLIERS. We obtain
all of the raw materials used in the manufacture of our products from
third-party suppliers. Many of the raw materials used in our products are
harvested internationally. We cannot assure that suppliers will provide the raw
materials we need, in the quantities we request, or at a price we are willing to
pay. In addition, interruptions in our suppliers' production that are beyond our
control may delay delivery of our raw materials. Our inability to obtain
adequate supplies of raw materials for our products at favorable prices, or at
all, may materially and adversely affect our business.
OUR BUSINESS IS SUSCEPTIBLE TO BREAKDOWN OR LOSS OF OUR MANUFACTURING
FACILITIES. Our operating results depend upon the continued operation of our
manufacturing facilities in Florida. The operation of dietary supplement
manufacturing plants involves many risks, including the breakdown, failure or
substandard performance of equipment, natural and other disasters, and the need
to comply with government agency directives. In addition, our manufacturing
facilities are located in central Florida, a region that has historically been
susceptible to potentially catastrophic hurricanes. Any damage to, or
destruction of, our manufacturing facilities due to any of these causes may
materially and adversely affect our business.
WE CANNOT ASSURE THE ACCURACY OF MARKET STATISTICS PRESENTED IN THIS
PROSPECTUS. Market data referred to in this prospectus regarding the size and
projected growth rate of the dietary supplement market generally indicates that
this market is large and growing. Nonetheless, we cannot assure that this market
is as large as reported or that any projected growth will occur or continue.
Market data and projections such as those presented in this prospectus are
inherently uncertain and subject to change. In addition, underlying market
conditions may change due to shifts in economic conditions, consumer preferences
and other factors that are beyond our control. An adverse change in the size or
growth rate of the dietary supplement market may materially and adversely affect
our business.
OUR PRODUCTS HAVE LIMITED TRADEMARK PROTECTION. Our policy is to pursue
registrations for all of the trademarks associated with our key proprietary
products. We rely on common law trademark rights to protect our unregistered
trademarks as well as our trade dress rights. Generally, common law trademark
rights are limited to the geographic area in which the trademark is actually
used, while a United States federal trademark registration enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States. We intend to register our trademarks in certain
foreign jurisdictions where our products are sold. We cannot assure that the
protection available in such jurisdictions, if any, will be as extensive as the
protection available to us in the United States. In addition, because we have no
patents on our proprietary products, another company may replicate them.
Inadequate trademark and patent protection of our proprietary products may
materially and adversely affect our business.
OUR PRODUCTS MAY INFRINGE UPON OTHER COMPANIES' INTELLECTUAL PROPERTY
RIGHTS. Although we seek to ensure that we do not infringe upon the intellectual
property rights of others, we cannot assure that third parties will not assert
intellectual property infringement claims against us. We also cannot assure that
our proprietary marks do not or will not violate the proprietary rights of
others, that a court will uphold our marks if they are legally challenged, or
that we would not be prevented from using our marks. The occurrence of any of
these events may adversely affect our business.
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OUR CHAIRMAN MAY EXERCISE SIGNIFICANT CONTROL OVER US FOLLOWING THIS
OFFERING. The shares offered in this prospectus represent a minority portion of
our outstanding voting shares. Dynamic Health Products, Inc., currently owns all
of our outstanding shares. Upon completion of this offering, Dynamic will own
approximately 66.7% of our outstanding shares of Common Stock and will be able
to elect all of our Directors and otherwise control us. Our shareholders do not
have cumulative voting and, except for Dynamic, will not be able to elect any
directors of the Company. Jugal K. Taneja, our Chairman of the Board of
Directors, is also Chairman of the Board of Directors and Chief Executive
Officer of Dynamic and beneficially owns approximately 54.1 % of the voting
shares of Dynamic. Consequently, he will have a significant influence on all
matters on which shareholders are entitled to vote.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS. As
a small company, with only 56 employees at Innovative and 6 employees at Herbal,
our success depends greatly on our senior management team. The loss of one or
more of these employees may materially and adversely affect our business. See
"Management."
WE ARE GROWING RAPIDLY AND MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR
GROWTH. We believe that continued growth may strain our management, operations,
sales and administrative personnel and other resources. In order to serve the
needs of our existing and future customers, we have increased and intend to
continue to increase our workforce, which requires us to attract, train,
motivate, manage and retain qualified employees. Our ability to manage further
growth depends in part upon our ability to expand our operating, management,
information and financial systems, and production capacity, which may
significantly increase our future operating expenses. We cannot assure that our
business will grow in the future or that we will be able to effectively manage
our growth. See "Business -- Business Strategy."
WE MAY NOT BE ABLE TO FULFILL OUR GROWTH STRATEGY IF WE ARE UNABLE TO
CONSUMMATE FUTURE ACQUISITIONS. We expect to pursue additional acquisitions in
the future as a part of our business strategy. We cannot assure that attractive
acquisition opportunities will be available to us or that we will be able to
obtain financing for future acquisitions. If we are unable to consummate future
acquisitions, our business, financial condition and operating results may be
materially and adversely affected.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR
BUSINESS. We intend to expand our business through acquisitions. Acquisitions
involve numerous risks, including:
o the acquired business not performing in accordance with expectations;
o difficulties in the integration of the acquired business' operations and
products with our own;
o diversion of our management's attention from other aspects of our
business;
o risks associated with entering geographic and product markets in which
we have limited or no direct prior experience; and
o the potential loss of key employees of the acquired business due to the
acquisition.
In addition, future acquisitions may require us to obtain additional financing
and increase our indebtedness or issue additional capital stock. Issuing
additional capital stock may dilute our shareholders' stock value, including
purchasers of shares in this offering. Furthermore, in the event that we have
outstanding indebtedness under our credit facilities or are required to incur
indebtedness to enter into an acquisition agreement, we may have to obtain our
lenders' consent before going forward with the acquisition. See "Business -
Business Strategy."
OUR COMPUTER SYSTEMS OR OUR CUSTOMERS' OR SUPPLIERS' COMPUTER SYSTEMS
MAY NOT BE YEAR 2000 COMPLIANT. Many existing computer programs and databases
use only two digits to identify a year in the date field (i.e., 99 would
represent 1999). These programs and databases were designed and developed
without considering the impact of the upcoming millennium. If not corrected,
these computer systems could fail or create erroneous results relating to the
year 2000. Our failure or the failure of our software providers or our customers
or suppliers to adequately address the year 2000 issue may result in
misstatements of reported financial information or otherwise adversely affect
our business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance."
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WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE. We
have not declared cash dividends on our common stock and we do not anticipate
paying cash dividends on our common stock in the foreseeable future.
Furthermore, under the terms of our current credit facility, we are precluded
from paying cash dividends.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT MAY
DISCOURAGE TAKEOVERS OR MAKE THEM MORE DIFFICULT. Certain provisions of our
Articles of Incorporation and Bylaws, as well as certain sections of the Florida
Business Corporation Act, and our board of directors' ability to issue shares of
preferred stock and to establish voting rights, preferences and other terms of
our stock, may be deemed to have an anti-takeover effect and may discourage
takeover attempts that are not first approved by our board of directors. This
anti-takeover effect may discourage takeovers which shareholders may deem to be
in their best interests. See "Description of Capital Stock -- Certain Provisions
of the Company's Articles of Incorporation and Bylaws."
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK'S MARKET PRICE MAY EXPERIENCE WIDE FLUCTUATIONS. Following
the completion of this offering, the trading price of our common stock could
fluctuate greatly due to various factors, including, among other things:
o responses to quarter-to-quarter variations in our operating results;
o material announcements made by us or our competitors;
o governmental regulatory action;
o conditions or trends in the dietary supplement industry; o changes in
securities analysts' financial estimates;
o announcements of significant acquisitions, strategic partnerships or
joint ventures made by us or our competitors;
o capital commitments;
o additions or departures of key personnel; and
o sales of our common stock.
Many of these factors are beyond our control. These factors may materially and
adversely affect the market price of our common stock, regardless of our
operating performance. In addition, the stock market has historically
experienced extreme price and volume fluctuations that have affected the market
prices of dietary supplement companies' common stock. In many instances, these
fluctuations have been unrelated to the operating performance of the companies
they have affected.
OUR COMMON STOCK HAS NO PRIOR PUBLIC TRADING MARKET AND THE OFFERING
PRICE OF OUR COMMON STOCK MAY BE ARBITRARY. Prior to this offering, there has
been no active public market for our common stock. We cannot predict the extent
to which a trading market will develop, if at all, or how liquid that market may
become. The initial public offering price of our common stock for this offering
will be determined by negotiations with Kashner Davidson Securities Corporation
and may not be indicative of the market price of our common stock after this
offering. The offering price of the shares is not related to assets, earnings,
book value, or other criteria traditionally used to value companies. You should
not consider the offering price as representative of the actual value of our
common stock. The price of our common stock is subject to change due to market
conditions and other factors. We cannot assure that you will be able to resell
our common stock at the offering price. See "Underwriting" for a more detailed
explanation of how the offering price of the common stock in this offering will
be determined.
OUR COMMON STOCK PRICE MAY FALL UPON THE FUTURE SALE OF ADDITIONAL
SHARES OF OUR COMMON STOCK. Future sales of our common stock in the public
market, or even the possibility of such sales, may materially and adversely
affect the market price of our common stock. There were 2,000,000 shares of
common stock outstanding before this offering. Of these outstanding shares,
2,000,000 shares are "restricted securities" within the meaning of Rule 144 of
the Securities Act of 1933. All of these restricted shares of our common stock
will become eligible for resale under Rule 144 one year from the day that the
shares offered herein are deemed "effective" by the Securities & Exchange
Commission. See "Shares Eligible for Future Sale" for a more detailed
description of the circumstances under which these restricted shares may be
sold. Finally, our directors and officers hold no additional outstanding shares
of our common stock.
9
<PAGE>
WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU
MAY NOT AGREE. We intend to spend a significant portion of this offering's net
proceeds on business expansion. Nonetheless, our management will have broad
discretion in allocating the net proceeds from this offering as well as the
timing of our expenditures. Investors may not agree with the way our management
decides to spend these proceeds. See "Use of Proceeds."
THE INTERESTS OF OUR CONTROLLING SHAREHOLDERS MAY CONFLICT WITH OUR
INTERESTS AND THE INTERESTS OF OUR OTHER SHAREHOLDERS. Before this offering, our
directors, executive officers and principal shareholders beneficially owned
approximately 100% of the outstanding shares of our common stock. Following this
offering, they will beneficially own approximately 66.7% of our outstanding
shares (or approximately 63.5% if the over-allotment option is exercised in
full). Therefore, these stockholders will have significant control over the
election of our directors and most of our corporate actions.
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF OUR
COMMON STOCK'S BOOK VALUE. If you purchase our common stock in this offering,
the net tangible book value of the common stock will experience immediate and
substantial dilution. We estimate that this dilution will be approximately $4.76
per share, or approximately 73.2%.
10
<PAGE>
USE OF PROCEEDS
Our net proceeds from selling the 1,000,000 shares of common stock that we are
offering are estimated to be $5,210,000, after deducting underwriting discounts
and commissions, the Underwriter's non-accountable expense allowance and other
estimated offering expenses. This estimate is based on an initial public
offering price of $6.50 per share. We expect to use the net proceeds of this
offering for the following purposes:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Business expansion(1)..................................... $2,000,000 38.4%
Debt retirement(2)........................................ 536,000 10.3%
Working capital and general corporate purposes(3)......... 2,674,000 51.3%
---------- -----
Total................................................. $5,210,000 100%
========== =====
<FN>
- ---------
(1) Represents amounts allocated for the purchase and installation of
manufacturing equipment for: (i) an automated liquid line; (ii) an
automated powder line; and (iii) other automated equipment to meet the
higher standards of over-the-counter drug manufacturing.
(2) Represents amounts to be expended to repay all of our indebtedness
outstanding under: (i) the Term Loan portion of our existing credit
facility with The CIT Group/Credit Finance of approximately $435,000,
including fees and accrued and unpaid interest; (ii) our capital lease
obligation to JDR Capital Corporation of approximately $65,500, including
fees and accrued and unpaid interest; and (iii) our capital lease
obligation to Commerce Security Bank of approximately $35,500, including
fees and accrued and unpaid interest.
(3) Amounts to be expended for working capital and general corporate purposes
may include approximately $1,000,000 for marketing of our branded
products.
</FN>
</TABLE>
We routinely evaluate potential acquisitions of businesses and or product lines
that would compliment or expand our business or further our strategic goals. We
may use a portion of the net proceeds of this offering for one or more such
transactions; however, we currently have no commitments or agreements with
respect to such transactions.
Our credit facility consists of a $2,000,000 revolving line of credit, a portion
of which is in the form of a 60-month term loan. The note bears interest at the
Prime Rate of The Chase Manhattan Bank in New York, New York, plus 2.25% per
annum on the unpaid outstanding principal of each advance, payable monthly. The
note is secured by a blanket lien on all of our assets, exclusive of certain
leased assets.
11
<PAGE>
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and we currently intend
to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any credit facilities or other
contractual arrangements and such other factors deemed relevant by our Board of
Directors. Our current bank credit facility prohibits the payment of dividends.
12
<PAGE>
DILUTION
As of September 30, 1999, our net tangible book value was $23,496 or $.01 per
share of common stock. Net tangible book value per share is determined by
dividing a company's tangible net worth (total assets, net of intangible assets,
less total liabilities) by the number of outstanding common shares. Our pro
forma net tangible book value as of September 30, 1999 would have been
approximately $5,233,496 or $1.74 per share, without taking into account any
change in our net tangible book value after September 30, 1999 and after
deducting underwriting discounts and commissions, the Underwriter's
non-accountable expense allowance and other estimated offering expenses. This
represents an immediate increase in the net tangible book value of $1.73 per
share to existing shareholders and an immediate dilution of $4.76 per share to
new investors. The following table illustrates this per share dilution:
Assumed public offering price per share.............................. $6.50
Net tangible book value per share as of September 30,1999.......... $ .01
Increase per share attributable to this offering................... 1.73
-----
Pro forma net tangible book value per share after this offering...... 1.74
-----
Dilution to new investors............................................ $4.76
=====
The following table sets forth the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
the existing shareholders and by new investors in this offering on a pro forma
basis as of September 30, 1999.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 2,000,000 66.7% $ 20,000 .3% $ .01
New investors............. 1,000,000 33.3% $6,500,000 99.7% $6.50
--------- ------ ---------- -----
Total................ 3,000,000 100.0% $6,520,000 100.0%
========= ====== ========== =====
</TABLE>
13
<PAGE>
CAPITALIZATION
The following table summarizes our short-term debt, long-term obligations and
capitalization as of September 30, 1999 and as adjusted as of that date to
reflect our sale of 1,000,000 shares of common stock and our application of the
estimated net proceeds, and after deducting the underwriting discounts and our
estimated offering expenses. The information in the table assumes an initial
public offering price of $6.50 per share. The information in the table should be
read in conjunction with the more detailed combined financial statements and
notes presented elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------
AS
ACTUAL ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SHORT-TERM DEBT:
Credit line payable .............................................. $ 810,811 $ 810,811
Related party notes payable ...................................... 111,500 111,500
Current portion of long-term obligations ......................... 201,059 75,059
----------- -----------
1,123,370 997,370
LONG-TERM OBLIGATIONS, LESS CURRENT PORTION ........................... 524,260 114,260
SHAREHOLDERS' EQUITY:
Preferred stock, series A, 8% cumulative, no par, 6,000,000 shares
authorized, 150,000 shares issued and outstanding .............. 1,500,000 1,500,000
Common stock, $.01 par value, 24,000,000 shares authorized,
2,000,000 shares issued and outstanding; 3,000,000 shares
issued and outstanding, as adjusted ............................ 20,000 30,000
Additional paid-in capital ....................................... -- 5,200,000
Accumulated deficit .............................................. (526,921) (526,921)
----------- -----------
Net shareholders' equity ......................................... 993,079 6,203,079
----------- -----------
TOTAL CAPITALIZATION .................................................. $ 2,640,709 $ 7,314,709
=========== ===========
</TABLE>
ADDITIONAL INFORMATION ABOUT FINANCIAL PRESENTATION
OPTIONS AND WARRANTS. Unless this prospectus indicates otherwise, all
information presented in this prospectus assumes no exercise of:
i. the Underwriter's over-allotment option;
ii. Kashner Davidson Securities Corporation's warrants to purchase 100,000
shares of common stock in connection with this offering (see
"Underwriting"); or
iii. warrants or options outstanding or available for grant under the
Company's 1999 Stock Option Plan (see "Management - Compensation pursuant
to Plans").
Please read the Capitalization table together with the financial statements
included in this Prospectus and the sections of this Prospectus entitled
"Selected Combined Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
14
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined statement of operations data for the year ended March 31,
1999, and the following selected combined balance sheet data as of March 31,
1999 are derived from our audited combined financial statements included
elsewhere in this prospectus and have been audited by Grant Thornton LLP. The
selected combined statement of operations data for the year ended March 31, 1998
and the following selected combined balance sheet data as of March 31, 1998 are
derived from the audited financial statements included elsewhere in this
prospectus and have been audited by Kirkland, Russ, Murphy & Tapp. The following
selected combined statements of operations data for the six month periods ended
September 30, 1998 and 1999, and the following selected balance sheet data as of
September 30, 1999, are derived from our unaudited financial statements that, in
the opinion of our management, contain all adjustments necessary for a fair
presentation of such data. The following selected combined financial data have
been prepared in accordance with generally accepted accounting principles. The
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the combined financial statements and notes thereto appearing elsewhere in the
prospectus. The selected interim combined financial data presented below do not
necessarily indicate our operating results or our performance for the full year.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
---------------------------- ------------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
COMBINED STATEMENTS OF OPERATIONS DATA:
Revenues ................................... $ 1,906,935 $ 5,040,054 $ 2,141,213 $ 3,062,656
Cost of goods sold ......................... 1,388,816 3,519,041 1,582,526 2,123,395
----------- ----------- ----------- -----------
Gross profit ............................... 518,119 1,521,013 558,687 939,261
Selling, general and administrative expenses 468,578 1,589,961 518,407 1,089,651
----------- ----------- ----------- -----------
Income (loss) from operations .............. 49,541 (68,948) 40,280 (150,390)
Other income (expenses), net ............... 434 (167,596) (11,268) (54,136)
----------- ----------- ----------- -----------
Income (loss) before income taxes .......... 49,975 (236,544) 29,012 (204,526)
Income taxes ............................... -- -- -- --
Net income (loss) .......................... $ 49,975 $ (236,544) $ 29,012 $ (204,526)
=========== =========== =========== ===========
Basic and diluted income (loss) per share .. $ .02 $ (.12) $ .01 $ (.10)
=========== =========== =========== ===========
Basic and diluted weighted average number of
common shares outstanding ................ 2,000,000 2,000,000 2,000,000 2,000,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------- AS OF SEPTEMBER 30,
1998 1999 1999
-------- ---------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
COMBINED BALANCE SHEETS DATA:
Cash and cash equivalents ................. $239,604 $ 25,395 $ 111,386
Working capital (deficit) ................. $(17,048) $(2,296,868) $ (450,212)
Total assets .............................. $873,998 $ 5,857,172 $ 4,676,132
Long-term obligations, less current portion $258,974 $ 1,336,461 $ 524,260
Shareholder's equity (deficit) ............ $(65,851) $ (302,395) $ 993,079
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this prospectus are not purely historical
statements, but rather include what we believe are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which are indicated by words or phrases such as "anticipate," "expect,"
"intend," "plan," "will," "we believe," "the company believes", "management
believes" and similar words or phrases. The forward-looking statements are based
on our current expectations and are subject to certain risks, uncertainties and
assumptions, including factors set forth in the following discussion and in the
discussions under "Risk Factors" and "Business." Our actual results could differ
materially from results anticipated in these forward-looking statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements.
OVERVIEW
Innovative derives its revenues from developing, manufacturing and wholesaling a
wide variety of non-prescription nutritional supplements, and health and beauty
care products. Revenues are billed and recognized as product is produced and
shipped, net of discounts, allowances, returns and credits. We have not
experienced any material loss of revenues and do not anticipate any significant
losses in the future. Revenues have increased from $1.9 million for the year
ended March 31, 1998 to $5.0 million for the year ended March 31, 1999,
primarily due to the acquisition of Energy Factors in June 1998, increased
marketing efforts and the introduction of new products in the private label
markets.
Cost of goods sold is comprised of direct personnel compensation, statutory and
other benefits associated with such personnel and other direct manufacturing and
material product costs. Cost of goods sold also includes indirect costs relating
to labor to support the warehousing of production and manufacturing overhead.
Research and development expenses are charged against cost of goods sold as
incurred and are not material to our operations. Selling, general and
administrative costs include administrative, sales and marketing and other
indirect operating costs. Interest and other income (expense) consists primarily
of interest expense associated with borrowings to finance capital equipment
expenditures and other working capital needs.
We have no income tax provision for the periods presented due to net operating
losses. These net operating losses may be carried forward for up to 20 years. As
such, we do not anticipate any liability for income taxes for the fiscal year
ended March 31, 2000.
RESULTS OF OPERATIONS
The following table sets forth selected combined statements of operations data
as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31, SEPTEMBER 30,
---------------- -------- --------------------
1998 1999 1999 1998 1999
----------------- ----- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues ................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......................... 72.8 69.8 71.6 73.9 69.3
----- ----- ----- ----- -----
Gross profit ............................... 27.2 30.2 28.4 26.1 30.7
Selling, general and administrative
expenses.................................. 24.6 31.6 33.6 24.2 35.6
Other expense, net ......................... -- 3.3 3.3 .5 1.8
----- ----- ----- ----- -----
Income (loss) before income taxes .......... 2.6 (4.7) (8.5) 1.4 (6.7)
Income taxes ............................... -- -- -- -- --
----- ----- ----- ----- -----
Net income (loss) .......................... 2.6% (4.7)% (8.5)% 1.4% (6.7)%
===== ===== ===== ===== =====
</TABLE>
16
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
REVENUES. Revenues increased $3.1 million, or 164.3%, to $5.0 million
in 1999 as compared to $1.9 million in 1998. The increase is primarily
attributable to increased volume of private label sales resulting from continued
expansion of marketing efforts and the introduction of new products, and
increased sales associated with the June 1998 acquisition of Energy Factors.
GROSS PROFIT. Gross profit increased $1.0 million, or 193.6%, to $1.5
million in 1999 as compared to $518,000 in 1998. Gross margin increased from
27.2% in 1998 to 30.2% in 1999. The increase was primarily attributable to a
change in the mix of sales, which yields a higher gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of advertising and promotional
expenses; personnel costs related to general management functions, finance,
accounting and information systems, payroll expenses and sales commissions;
professional fees related to legal, audit and tax matters; and depreciation and
amortization expense. Selling, general and administrative expenses increased
$1.1 million, or 239.3%, to $1.6 million in 1999 as compared to $469,000 in
1998. The increase was primarily due to additional advertising, promotional and
payroll expenses to support increased net sales and our growth, as well as
additional amortization of goodwill and depreciation of fixed assets associated
with acquisitions during 1999. As a percentage of sales, selling, general and
administrative expenses increased to 31.6% in 1999 from 24.6% in 1998.
INTEREST INCOME (EXPENSE), NET. Interest expense, net of interest
income, increased $249,000 to $253,000 in 1999, from $5,000 in 1998. The
increase in interest expense in 1999 is a result of greater borrowings to
finance the purchase of additional machinery and equipment, to make necessary
plant modifications, and for financing of additional working capital needs with
the expansion of our operations.
INCOME TAXES. We have no income tax provision for 1998 due to the
utilization of net operating losses not previously recognized and we have no
income tax provision for 1999 due to net operating losses. These net operating
losses may be carried forward for up to 20 years. As such, we do not anticipate
any liability for income taxes for the fiscal year ended March 31, 2000.
We believe that there was no material effect on our operations or on
our financial condition as a result of inflation in 1999 and 1998. We also
believe that our business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. Revenues increased $921,000, or 43.0%, to $3.0 million for
the six months ended September 30, 1999, as compared to $2.1 million for the six
months ended September 30, 1998. The increase is primarily attributable to
increased volume of private label sales resulting from continued expansion of
marketing efforts and the introduction of new products and increased sales
associated with the June 1998 acquisition of Energy Factors.
GROSS PROFIT. Gross profit increased $381,000, or 68.1%, to $939,000
for the six months ended September 30, 1999, as compared to $559,000 in the
corresponding period. Gross margin increased from 26.1% for the six months ended
September 30, 1998 to 30.7% for the six months ended September 30, 1999. The
increase was primarily attributable to a change in the mix of sales, which
yields a higher gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $571,000, or 110.2%, to $1.1 million for the
six months ended September 30, 1999, as compared to $518,000 in the
corresponding period. The increase was primarily due to additional advertising,
promotional and payroll expenses to support increased net sales and our growth.
As a percentage of sales, selling, general and administrative expenses increased
to 35.6% for the six months ended September 30, 1999, from 24.2% in the
corresponding period.
INTEREST INCOME (EXPENSE), NET. Interest expense, net of interest
income, increased $75,000 to $175,000 for the six months ended September 30,
1999, from $99,000 in the corresponding period. The increase in interest expense
for the period is a result of greater borrowings to finance the purchase of
additional machinery and equipment, to make necessary plant modifications, and
for financing of additional working capital needs with the expansion of our
operations.
17
<PAGE>
INCOME TAXES. We have no income tax provision for 1998 due to the utilization of
net operating losses not previously recognized and we have no income tax
provision for 1999 due to net operating losses. These net operating losses may
be carried forward for up to 20 years. As such, we do not anticipate any
liability for income taxes for the fiscal year ended March 31, 2000.
We believe that there was no material effect on our operations or on
our financial condition as a result of inflation in 1999 and 1998. We also
believe that our business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through available borrowings under our
credit line facility and through borrowings from our parent company. We had a
working capital deficit of $2.3 million at March 31, 1999, inclusive of current
portion of long-term obligations, obligations under our credit line facility,
and obligations to our parent company, as compared to a working capital deficit
of $17,000 at March 31, 1998.
Net cash used in operating activities was ($1.5 million) for 1999, as
compared to net cash provided by operating activities of $26,000 for fiscal
1998. The usage of cash is primarily attributable to an increase in accounts
receivable ($709,000), as a result of increased sales by us during such period,
and an increase in inventory ($494,000), an increase in other assets ($31,000),
an increase in prepaid expenses and other current assets ($16,000), a decrease
in accounts payable ($90,000), and a decrease in accrued expenses ($43,000). In
conjunction with the installation of new manufacturing software in March and
April 1999, we implemented additional procedural controls in accounts receivable
and inventory procurement including requiring deposits from customers on new
orders and inventory cycle counts, which we expect will have future positive
cash effects in our operating activities.
Net cash used in investing activities was ($76,000), representing the
purchase of property and equipment, and plant modifications ($175,000),
partially offset by proceeds from an involuntary conversion of land $99,000.
Net cash provided by financing activities was $1.3 million representing
proceeds of long-term obligations $638,000, net borrowings on lines of credit
$949,000, net borrowings from our parent company and affiliates $583,000,
partially offset by repayments of long-term obligations ($838,000).
Management believes that cash expected to be generated from operations,
current cash reserves, and existing financial arrangements will be sufficient
for us to meet our capital expenditures and working capital needs for our
operations as presently conducted. Our future liquidity and cash requirements
will depend on a wide range of factors, including the level of business in
existing operations, expansion of facilities and possible acquisitions. In
particular, we plan to add additional manufacturing lines and purchase
additional fully automated manufacturing equipment to meet our present and
future growth. Our plans will require the leasing of additional facilities to
accommodate a liquid processing line. We will need the proceeds of this offering
for general working capital purposes to support future growth, the retirement of
debt, and the planned expansion of our facilities, manufacturing lines, and
equipment.
In May 1998, $100,000 was loaned to Energy Factors, before Energy
Factors was acquired by Dynamic, for the purpose of assisting Energy Factors
with its working capital needs.
In June 1998, Energy Factors was acquired by our parent company, from
U.S. Diversified Technologies, Inc. U.S. Diversified Technologies, Inc. was to
receive 400,000 shares of Series A Convertible Preferred Stock of Dynamic in
exchange for all of the issued and outstanding stock of Energy Factors. As a
result of the completion of the December 31, 1997 audited financial statements
for Energy Factors the number of shares issued to U.S. Diversified Technologies,
Inc. was reduced to 310,000, in accordance with a right of set-off provided for
in the acquisition agreement. The Series A Preferred Stock was valued at $2.50
per share based on several factors, including prices of recent common stock
issuances of Dynamic's common stock. Subsequent to the acquisition, Energy
Factors changed its name to Innovative.
In December 1998, our parent company formed Herbal Health Products,
Inc., a Florida corporation, as a wholly-owned subsidiary of Dynamic, to
purchase certain assets related to the marketing of veterinary products, in
return for approximately $18,000, and 32,243 shares of common stock of our
parent company.
18
<PAGE>
In February 1999, we established a $2,000,000 credit facility to
provide additional working capital to support our continued growth. A portion of
the proceeds from the line of credit were funded in the form of a 60-month term
loan for approximately $491,000, for repayment of certain capital lease
obligations. The remainder of this credit facility is in the form of a revolving
line of credit. The note bears interest at the Prime Rate of The Chase Manhattan
Bank in New York, New York, plus 2.25% per annum on the unpaid outstanding
principal of each advance, payable monthly. The note is to be secured by a
blanket lien on all of our assets, exclusive of certain leased assets. The note
is also secured by all of the assets of Dynamic and by personal guarantee from
our Chairman of the Board. The credit facility provides substantial penalties
for early termination. At September 30, 1999, the outstanding principal balance
on the line of credit was approximately $810,000.
In August and September 1999, we borrowed $86,500 from our Chairman of
the Board. The notes bear interest at 10% per annum and are payable on demand.
In September 1999, we transferred our land and building in Largo,
Florida to our parent company at net book value, which we believe approximated
fair market value on the date of transfer, based upon a recent independent
appraisal of the property. In conjunction with the transfer, our parent company
satisfied all of our outstanding mortgages on the premises. In addition,
approximately $430,000 of our obligation to our parent company was extinguished,
which represented the difference between net book value and amounts outstanding
under existing mortgages.
In September 1999, $1.5 million of our obligation to our parent company
was converted to 150,000 shares of our Series A 8% Cumulative Preferred Stock.
In September 1999, we agreed to lease the facility in Largo, Florida,
from our parent company, pursuant to a ten-year lease that expires on September
30, 2009. We have an option to renew the lease at the end of the ten-year term.
The rental under the lease is $16,000 per month subject to annual inflationary
adjustments.
We believe that material affiliated transactions and loans, and
business relationships entered into by us with certain of our officers,
directors and our parent company or its affiliates were on terms no less
favorable than we could have obtained from independent third parties.
YEAR 2000 STATEMENT
The Year 2000 issue encompasses the required recognition of computer
hardware and software systems and computer controlled devices, including
equipment, used in our operations to properly acknowledge the change from Year
1999 to Year 2000. The failure of any hardware and software systems or equipment
to timely and accurately recognize such change could result in partial or
complete systems failure. In the normal course of business, we rely on
products and services from critical vendors, customers and other third parties
whose computer systems must also be Year 2000 compliant in order for us to
realize the uninterrupted flow of our business operations. We are actively
taking steps to ensure that our systems and equipment will be Year 2000
compliant, including assessing the scope of work, prioritizing, certifying
compliance, and testing compliance.
We have identified those systems and equipment in our operations that
are considered to be critical to our day to day operations. All of the systems
and equipment utilized in our operations was tested for Year 2000 compliance
during February and March 1999, with approximately 95% of such systems and
equipment being certified as Year 2000 compliant. We are in the process of
obtaining written assurances from third-party software providers that the
software used by us is Year 2000 compliant. In addition, we are actively seeking
assurances of Year 2000 compliance from each of our key suppliers, customers and
other third parties with whom we conduct business. A lack of response or
inadequate or inaccurate information from such third parties could materially
affect our assessment for Year 2000 readiness. We cannot predict whether the
failure of any such third party to be Year 2000 compliant will have a materially
adverse effect on our business.
To date the costs we have incurred to address Year 2000 issues have
been immaterial, and we expect that the costs to complete Year 2000 compliance
certification, testing and verifications will also be immaterial. Where
appropriate, for areas that we determine Year 2000 readiness is insufficient, we
will develop contingency plans. However, no assurances can be given that our
Year 2000 efforts are appropriate, adequate, or complete. In addition, we are
unable to fully determine the effect of a failure of our own systems or those of
any third party with whom we conduct business, but any significant failures
could have a materially adverse effect on our financial condition, results of
operations and cash flows.
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BUSINESS
OVERVIEW
Innovative Health Products, Inc., was incorporated in 1985 as a Florida
corporation, under the name Energy Factors, Inc., as a private label
manufacturer of high quality nutritional supplements and health and beauty care
products. In 1990, Energy Factors expanded their manufacturing capabilities by
constructing a 33,222 square foot laboratory, office, manufacturing and
warehouse facility in Largo, Florida. They continued manufacturing private label
products at approximately 25% of their production capacity until 1998. On June
12, 1998, Dynamic Health Products, Inc. Florida holding company, acquired Energy
Factors as a wholly-owned subsidiary, with the intention of utilizing Energy
Factors' excess manufacturing capacity to expand their private label operations.
Upon completion of the acquisition, Energy Factors changed its name to
Innovative Health Products, Inc.
Today, Innovative continues to manufacture, package and ship private label
products for over 400 customers, as well as developing, manufacturing and
distributing our own nutritional supplements and health and beauty care
products. Some of our branded products include "Arth-Aid" roll-on and cream for
arthritis, "Nutri-Sure" meal replacement powder, and "Physician's
Pharmaceuticals" dietary supplement product line. We also manufacture
non-prescription pharmaceuticals, health and beauty care products and a wide
array of private label formulas for medical institutions, multi-level marketing
and direct sales companies. We distribute these branded and private label
products to consumers, marketing companies, wholesalers and retailers, including
independent pharmacies, regional and national chain drug stores, alternate care
facilities, mail order facilities, mass merchandisers, deep discounters and
brokers. Finally, we recently entered the e-commerce market as the exclusive
manufacturer of products for Nutriceuticals.com Corporation, a publicly held
online business-to-business nutritional supplement company, and Java Sports.com
Corporation, a privately held internet sports supplement company. Jugal K.
Taneja, Innovative's and Herbal's Chairman, is a Director of Nutriceuticals.com
and Chairman of Java Sports.com and beneficially owns a majority share of both
companies.
Simultaneous with this offering, Innovative will be acquiring Herbal Health
Products, Inc. as a wholly-owned subsidiary. Herbal is currently a wholly-owned
subsidiary of Dynamic, Innovative's and Herbal's parent company, and will be
sold to Innovative for a nominal value. Herbal was formed by Dynamic in 1998, to
acquire certain assets of a veterinary health supplement sole proprietorship.
Herbal develops, markets and distributes health supplements, vitamins,
performance enhancers and nutriceuticals for domestic animals and horses, and
for human consumption. Herbal markets its products and operates under the trade
names Vitality Systems, Vitality Pet, Equine Solutions and Vitality Health
Systems. Vitality Health Systems formulates, markets and distributes versions of
the same dietary supplements for human consumption. Vitality Systems has
manufactured, distributed and marketed animal supplements exclusively to
veterinarians for the past eighteen years. Over that same period, Equine
Solutions has offered similar product lines to the horse training and boarding
markets. Vitality Pet markets and distributes the product lines as specialty
supplements for domestic animals.
INDUSTRY
Based on estimates in the annual industry overview published by the NUTRITION
BUSINESS JOURNAL (the "Overview"), a recognized trade journal, U.S. nutrition
industry retail sales grew 10% to $25.8 billion in 1998, with sales of dietary
supplements representing $13.9 billion, or 54% of the market. The largest
growth, at 23%, was in the specialty supplement category with the arthritis
relief supplement glucosamine, the main ingredient in Vitality Health's "Ultra
Flex Plus", leading the way. The Overview also noted a 15% growth in Internet
sales of dietary supplements in 1998. The Overview also predicted that Internet
sales will quadruple from $40 million in sales in 1998, to $160 million in 1999,
and triple again by 2001, for a total of $500 million.
Recent growth in the U.S. dietary supplement market can be attributed to an
increase of products in health food stores and greater penetration into mass
market and non-retail distribution channels. Future growth is expected to come
from greater market penetration at the consumer level of product users. New
scientific research is critical to further penetration of the consumer base, as
is more aggressive niche marketing toward groups such as health maintenance
organizations and international markets.
One reason for the rapid growth of dietary supplement sales in recent years has
been the extraordinary sales of St. John's Wort, glucosamine, Kava Kava and
ginkgo biloba. The significant emotional appeal of these products has
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focused both negative and positive media attention on the industry. According to
the Overview, from 1996 to 1997, household penetration of herbal products
increased nearly twofold, from 19% to 32%. Unless new products with similar
appeal are developed in the future, growth could be slow.
The major retail sales channels for dietary supplements are health food stores,
mass market retailers (drugstore chains, supermarkets and other mass
merchandisers), multi-level distributors, mail order, and medical practitioners.
According to the Overview, the health food store channel includes 18,630 retail
stores and represented 36% of retail dietary supplement sales in 1997. Health
food stores are either independently owned or associated with one of several
regional or national chains such as GNC, Wild Oats Markets and Whole Foods
Market. The United States mass market distribution channel consists of
drugstores, including chains such as Walgreens, American Drug Stores and Eckerd,
C.V.S., mass merchandisers such as Wal-Mart, Kmart, BJ's Wholesale club and
ShopKo, and food stores, including national supermarket chains. Mass market
sales accounted for 30% of 1997 dietary supplement retail sales. Of the $5.8
billion of nutrition products sold by mass marketers in 1997, 65% represented
sales of dietary supplements. Sales by mass marketers of vitamins, minerals and
herbs increased 20.6% in 1997.
U.S. dietary supplement sales by multi-level marketing firms in 1998 totaled
$7.6 billion, up 27.4% from 1997, with direct sales of dietary supplements
through mail order totaled $800 million in 1997. The mail order distribution
channel uses mail, advertising, infomercials, and increasingly, the internet as
alternative channels to market directly to consumers and avoid the high costs of
traditional distribution and retail channels.
The NUTRITION BUSINESS JOURNAL predicted in the Overview that dietary supplement
sales via the internet will be $160 million in 1999, rising as high as $500
million by 2003. To take advantage of this trend, we have entered into
an agreement to act as the exclusive manufacturer of products for
Nutriceuticals.com, a publicly held internet health product company, and Java
Sports.com, a privately held internet sports supplement company. Jugal K.
Taneja, Innovative's and Herbal's Chairman, is a Director of Nutriceuticals.com
and Chairman of Java Sports.com and beneficially owns a majority share of both
companies.
Medical practitioners, primarily chiropractors, traditional Chinese medicine
practitioners, homeopaths and naturopaths accounted for $690 million in U.S.
dietary supplement retail sales in 1997. According to the Overview, the future
is promising for sales by more established medical channels as succeeding
generations of professionals, insurance companies and health maintenance
organizations become more inclined to accept alternative therapies.
The Overview indicates that U.S. retail sales of herbal and botanical
supplements showed the highest growth of any nutritional products in 1997,
growing 18% from $2.99 billion to $3.53 billion. The natural food/health chain
channel remained the largest contributor to sales (37%), followed by network
marketing (30%), mass market (14%), direct/mail order (9%), and practitioners
and specialty herb shops. Mass market herb sales expanded 79% in 1997. The
Overview indicates that the mass market is expected to remain the strongest
growth area as consumer awareness grows and well-funded new product lines from
multi-national companies are introduced. In 1997, 17 of the 40 herb product
categories tracked by Information Resources, Inc. ("IRI"), more than doubled
mass market sales led by St. John's Wort at 20,000% to $48 million and Kava Kava
at 1,000%.
Sales of herbs and botanicals in 1997 by natural food stores expanded 19% to
$1.29 billion. Mass market sales of ginkgo biloba, ginseng, garlic, St. John's
Wort and echinacea ranked as the leaders, accounting for 77% of single herb
sales according to IRI. Sales by natural food stores of those same products
represented only 50% of single herb sales in 1997. In all distribution channels,
products with herbal combinations accounted for about 40% of sales, with
multi-level marketing firms selling a higher proportion of combinations.
U.S. consumer sales of each of the five leading herbs (ginkgo biloba, ginseng,
garlic, St. John's Wort and echinacea) exceeded $200 million in 1997. More than
50 other single herbs make up sales of another $1.1 billion, and sales of herb
combinations account for the remaining $1.2 billion. The NUTRITION BUSINESS
JOURNAL forecasts annual growth for retail sales of herbs and botanicals at
16-18%.
In the fall of 1998, three large multinational pharmaceutical firms launched
herbal products. Bayer Consumer Care, a division of Bayer Corp., introduced
seven herbal/vitamin/mineral combinations under its ONE-A-DAY brand into mass
market outlets, including supermarkets, pharmacies, and discount chain stores.
Bayer initiated a $17 million advertising campaign targeting older consumers as
well as consumers in the 18-34 age range. Warner-Lambert, Inc. and American Home
Products also introduced or test-marketed herbal products last fall. We believe
that other pharmaceutical industry giants will also enter the market in the
future.
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The Overview estimates that there are 1,050 manufacturers and branded marketers
of supplements in the United States, 16 of which report revenues of over $100
million and represent 55% of the market, up from 12 companies and 44% of the
market in 1996. We believe this consolidation is ongoing. Small companies tend
to sell to companies using relatively low barrier-to-entry, non-traditional
sales channels, such as multi-level marketing, mail order and the internet. We
believe that there are opportunities for growth through acquisitions of many of
these small manufacturers.
BUSINESS STRATEGY
Key elements of Innovative's business strategy are to:
o BROADEN MANUFACTURING CUSTOMER BASE. We are continuously seeking ways to
expand our manufacturing customer base. We believe that we can increase
our market penetration of manufacturing customers by continuing to
reduce manufacturing time using fully-automated high-speed manufacturing
equipment, by delivering high quality products and by providing the
research and development support to improve our current product base and
develop new products. We will also continue to develop strategic
alliances with manufacturing customers to become their exclusive
manufacturer and receive a portion of retail sales profits.
o DEVELOP A COMPREHENSIVE SALES AND MARKETING PROGRAM FOR OUR BRANDED
PRODUCTS. Historically, we have not had the capital to increase our
market penetration and the scope of the distribution of our products.
Currently, our branded products have limited distribution in health food
stores, retail mass market retailers and direct mail channels of
distribution. We intend to expand our sales force to initiate direct and
regular contact with key store personnel, to inform them of new product
developments and industry trends, aid them in the design of store
displays and create merchandising programs which promotes our branded
products. We also intend to increase our marketing efforts through
direct mailings, newsprint advertising and national print media.
o PROVIDE RAPID INTRODUCTION OF CUTTING EDGE PRODUCTS. Much of the recent
growth in the dietary supplement industry can be attributed to emotional
appeal of these products and the intense consumer and media interest
associated with that appeal. We feel that this growth can only be
maintained through the rapid introduction of products that pique the
interest of health conscious consumers and maintain their interest over
the long term. We intend to increase our ongoing development and
marketing of new products in order to capitalize on and create these
market opportunities. We are in the process of finalizing a process that
should increase our ability to anticipate consumer trends and monitor
product developments in the dietary supplement industry. This will
maximize margins on our branded products, which we believe will be
significantly higher than on products produced by other manufacturers.
o CREATE MORE VALUE ADDED PRODUCTS. We feel that we can differentiate
ourselves from our competition by providing customers with more value
added products. Consequently, we intend to produce more dietary and
health supplements that integrate a variety of compounds to achieve
greater bio-availability, effectiveness and product convenience.
o PURSUE STRATEGIC ACQUISITIONS. We believe that the dietary supplement
industry is fragmented and currently offers attractive acquisition
opportunities. We intend to pursue acquisition opportunities that will
broaden our product line, provide efficiencies in manufacturing through
economies of scale, broaden our customer base, complement our existing
business and further our strategic goals.
o PROVIDE FASTER AND APPROPRIATE RESPONSE TO CUSTOMER NEEDS. We believe
that we can differentiate ourselves from competitors in the dietary
supplement industry by providing customers with faster and more
appropriate responses to their needs. Our response time in developing
both proprietary and private label products is critical to take
advantage of consumer trends and preferences. We intend to capitalize on
these trends and preferences to expand our customer base and provide
consumers with the most timely and well-adapted products for their
needs.
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o EXPAND VETERINARY DIETARY SUPPLEMENT SALES. Herbal develops, markets and
distributes health supplements for domestic animals and horses, and for
human consumption under the following four product trade names:
o VITALITY SYSTEMS brand name markets nutritional supplements for
pets and horses exclusively to veterinarians;
o EQUINE SOLUTIONS brand name markets nutritional supplements for
horses to feed stores, trainers, stables or boarding facilities and
to the individual horse owner by direct mail, telemarketing and
limited print advertising;
o VITALITY PET brand name is a line extension of Equine Solutions
that markets nutritional specialty supplements for domestic
animals. We intend to develop strategies to increase awareness and
sales of these products in pet distribution channels; and
o VITALITY HEALTH SYSTEMS brand name is a dietary supplement for
humans. Herbal markets these products through expositions, new
product releases, display advertising in trade and consumer
magazines, referrals and telemarketing.
We intend to increase distribution of these branded products through increased
mass direct mailings, expanded print media advertising and telemarketing.
MANUFACTURING AND DISTRIBUTION FACILITIES
Innovative leases a 33,222 square foot office, manufacturing, research and
development, laboratory, packaging and warehouse facility located in the greater
Tampa Bay, Florida area. We use this site for our executive offices and for the
manufacture of tablets, capsules, liquids and powders. We are currently
expanding this site with 16,000 square feet of additional manufacturing space.
This addition should be completed by the second calendar quarter of the year
2000. The facility utilizes high-speed encapsulating, tableting and production
line equipment. It also houses our graphic arts department, which designs and
produces labels for products produced at both of our facilities. The facility is
large enough to handle large orders, but still able to provide quick response to
customer needs. Our research and development department, also housed in this
facility, develops and improves both our proprietary products and the products
we manufacture for others.
Our second manufacturing facility, which is also located in the greater Tampa
Bay, Florida area in 9,694 square feet of leased space, is used to manufacture
over-the-counter products, creams and lotions. This facility is registered with
the U.S. Food and Drug Administration to manufacture and package
over-the-counter drugs.
We currently have manufacturing capability to produce approximately 270 million
tablets and capsules and four million bottles annually. We, on average, operate
our manufacturing facilities one shift per day, five days per week. At times,
certain packaging lines or capsule and tablet production lines run longer as
demand warrants. We believe we can double sales volume without expanding our
current facilities. An increase in production would require additional space for
warehousing and shipping operations as well as additional personnel, but would
not necessarily require substantial capital investment.
We operate flexible manufacturing lines which enable us to shift output
efficiently among various pieces of equipment depending upon such factors as
batch size, tablets or capsule count, and labeling requirements. We strive to
fulfill and ship all orders within 30-45 days.
RESEARCH AND DEVELOPMENT
Our research and development department is staffed by three full-time chemists.
The department is responsible for the development of new concepts and
formulations for our branded products and products manufactured for others. The
technical staff prepares cost estimates and samples based on these formulations,
refining them as necessary. They also develop operational procedures and conduct
pilot operations prior to the final manufacture of the product. Nutritional
information and label requirements are prepared by the department's regulatory
staff personnel.
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The laboratory is equipped with modern up-to-date laboratory test equipment,
including high pressure liquid chromatography, atomic absorption spectroscopy,
as well as instruments to test pH, viscosity, moisture, gradient sizing, ash,
melting point, refractive index, tablet hardeners and disintegration. The
laboratory includes stability chambers to test both long-term and accelerated
shelf life of each product. The laboratory is also capable of conducting
microbiological tests for total plate count and choliform.
We believe we are in compliance with all applicable environmental regulations.
DISTRIBUTION
The products we manufacture for others are distributed to health food and drug
stores, mass merchandisers, and directly marketed by our in-house sales force
and by various other means including internet sales. Our branded non-veterinary
products are distributed to health food, drug and convenience stores. Herbal's
branded veterinary dietary supplement products are distributed through
veterinary clinics, feed stores, boarding facilities, animal trainers, and mail
order.
MARKETING AND SALES
Our in-house sales force markets our branded products, and the products we
manufacture for others, directly to our wholesale customers.
Herbal markets its veterinary products directly to consumers by direct mail and
markets to wholesale purchasers through our sales force. We utilize our in-house
sales force to market directly to manufacturing customers.
BACKLOG
Our revenues are generated by fulfilling sales orders received from our
customers within an average turn-around time ranging from 30-45 days.
Consequently, we have experienced a backlog for future revenues at all times. As
of September 30, 1999, we had approximately $580,000 in backlog sales orders.
PRODUCT DEVELOPMENT
Generally, the novelty and uniqueness of our products yield higher profit
margins. Our product development team works closely with our customers to
understand their needs, strengths and potential, and to create products with
more unique sales points. We develop our products by applying the latest
technologies to solve the end user's needs. Our response time in developing both
proprietary products and products for others is critical in order to take
advantage in consumer trends and preferences. For example, we developed a
touch-free roll-on for arthritis so users need not touch the irritating active
ingredient with their fingers. Dr. Sekharam, our President, provides guidance
and direction for the research and development team in product development.
PRINCIPAL SUPPLIERS AND SOURCES OF SUPPLY
We obtain all of our raw materials for the manufacture of our products from
third-party suppliers. Many of the raw materials used in our products are
harvested internationally. We do not have contracts with any suppliers
committing such suppliers to provide materials required for the production of
our products. There can be no assurance that suppliers will provide raw
materials needed by us in the quantities requested or at a price we are willing
to pay. Because we do not control the actual production of these raw materials,
we are also subject to delays caused by interruption in production of materials
based on conditions not within our control. Such conditions include job actions
or strikes by employees of suppliers, adverse weather and crop conditions,
transportation interruptions and natural disasters or other catastrophic events.
Our inability to obtain adequate supplies of raw materials for our products at
favorable prices, or at all, could have a materially adverse effect on our
business, financial condition, results of operations, and cash flows. During the
Christmas holiday season, many of our suppliers are closed. Consequently, we
adjust our raw material inventory levels to minimize shortages during that time.
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PRIVATE LABEL PRODUCTS
Sales of our private label products accounted for approximately 99% of our
revenues for the six month period ended September 30, 1999. We currently
manufacture products for over 400 private label customers in 47 states in the
U.S. and ship to several countries internationally. Our private label business
has a widely distributed revenue base, with no individual customer comprising
more than 5% of our private label revenues.
BRANDED PRODUCTS
Sales of the our branded products accounted for approximately 1% of our revenues
for the six month period ended September 30, 1999. Innovative's branded products
currently include:
o "Arth-Aid (TM)" arthritis cream and easy-to-use roll-on is designed to
relieve arthritic pain, and is formulated with capsaicin and functional
botanicals;
o "Nutri-Sure (TM)" is a meal replacement powder mix with nutritious
proteins, medium chain triglycerides and antioxidants that conforms with
diabetic diet requirements; and
o "Physicians' Pharmaceuticals (TM)" is a proprietary line of dietary
supplements which includes vitamins, minerals and herbal supplements.
Sales of Herbal's branded products accounted for approximately 98% of Herbal's
revenues for the six month period ended September 30, 1999. Herbal's branded
products currently include:
o "MSM" (Methylsulfonylmethane)- a naturally occurring bioactive form of
sulfur that provides anti-oxidant and anti-inflammatory relief. MSM is
marketed by Vitality Systems, Vitality Health Systems, Vitality Pet and
Equine Solutions;
o "DMG"- a metabolic enhancer designed to improve stamina and endurance
and enhance cellular immune response (marketed by Vitality Systems,
Vitality Health Systems, Vitality Pet and Equine Solutions);
o "Ester-C"- a bio-available form of Vitamin C which does not cause
digestive upset (marketed by Vitality Systems, Vitality Health Systems,
Vitality Pet and Equine Solutions);
o "Integra-4x"- a formulated product containing Chondroitin sulfate
designed to provide elasticity to joints and connective tissue (marketed
by Vitality Health Systems);
o "Ultra Flex Plus"- a Glucosamine HCL based amino supplement that assists
in healing of joints and relief of joint related pain (marketed by
Vitality Systems, Vitality Health Systems, Vitality Pet and Equine
Solutions);
o "Capsaicin Cream"- pain relief cream, designed particularly for
arthritis sufferers (marketed by Vitality Health Systems);
o "Power Play"- a mixture of Creatine Monohydrate, Tribulus Terrestris,
Chromium, Selenium and MSM designed to provide safe nutritional support
for athletes seeking peak performance in short duration, high intensity
efforts (marketed by Vitality Health Systems);
o "Neuro-Balance"- a mixture of St. John's Wort, Gingko biloba, American
Ginseng, Siberian Ginseng, MSM and Vitamin B12 designed to provide the
ultimate in nutritional support to the brain (marketed by Vitality
Health Systems);
o "Creams and Lotions"- a mixture of MSM, Vitamins A, C, and E, Aloe Vera,
Jojoba oil, Green Tea Extract and Arnica designed to promote skin
permeability and pliability and eliminate inflammation, scars and
blemishes (marketed by Vitality Health Systems);
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o "Multi-Vitamin Mineral" for Dogs- flavored vitamin-mineral chewable
tablet for dogs (marketed by Vitality Systems and Vitality Pet);
o "Power Source" for Dogs- designed to restore and recuperate cellular
energy and build muscle mass in the active dog or cat (marketed by
Vitality Systems and Vitality Pet);
o "StimuPlus Pro"- compact electro-therapeutic micro current stimulator
designed to detect and stimulate acupuncture points (marketed by
Vitality Systems, Vitality Pet and Equine Solutions);
o "Hoof & Coat Conditioner"- intensive biotin product for maintaining
healthy hooves and coat (marketed by Vitality Systems and Equine
Solutions);
o "E-Quest"- horse feed supplement formulated to provide optimal
nutrition, balance and nutrient bio-availability (marketed by Vitality
Systems and Equine Solutions); and
o "Vitamin E with Selenium Pellets"- balanced supplement designed to
enhance the antioxidant activity of a wide variety of equine diets
(marketed by Vitality Systems and Equine Solutions).
COMPETITION
The manufacturing, wholesale, retail and distribution industries in which we
operate are highly competitive. Numerous companies, many of which have greater
size and financial, personnel, distribution and other resources than us, compete
with us in our development, manufacture, distribution, wholesaling and retailing
businesses. The NUTRITION BUSINESS Journal estimates that there are 1,050
manufacturers and branded marketers of dietary supplements in the United States
with at least $500,000 in annual sales. The NUTRITION BUSINESS JOURNAL'S 1997
database includes 16 companies with over $100 million in revenues, representing
55% of the dietary supplement market, up from 12 companies and 44% of the market
in the 1996 analysis.
Our branded products face substantial competition from broadline manufacturers,
major private label manufacturers and, more recently, large pharmaceutical
companies. Increased competition from such companies could have a materially
adverse effect on our operations because such companies have greater financial
and other resources available to them and possess manufacturing, distribution
and marketing capabilities far greater than ours.
We compete on the basis of product quality and customer service. Our ability to
compete favorably with our competitors with respect to our branded products will
depend primarily upon our development of brand recognition across multiple
distribution channels, our ability to quickly develop new products with market
potential, to successfully advertise, market and promote our products, as well
as our product quality and the development of a strong and effective
distribution network.
TRADEMARKS
We utilize the following federally registered trademarks: Nutrisure (TM),
Physician Pharmaceutical (TM) and Arth-Aid (TM). We believe that protecting some
of our trademarks is crucial to our business strategy of building strong brand
name recognition and that such trademarks have significant value in the
marketing of our products.
Our policy is to pursue registrations of all the trademarks associated with our
key products. We rely on common law trademark rights to protect our unregistered
trademarks. These unregistered trademarks include Vitality Systems, Vitality
Health Systems, Vitality Pets and Equine Solutions. Common law trademark rights
generally are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States. Furthermore, the protection available, if any, in
foreign jurisdictions may not be as extensive as the protection available to us
in the United States.
Although we seek to ensure that we do not infringe the intellectual property
rights of others, there can be no assurance that third parties will not assert
intellectual property infringement claims against us. Any infringement claims by
third parties against us may have a materially adverse effect on our business,
financial condition, results of operations and cash flows.
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GOVERNMENTAL REGULATORY MATTERS
The manufacture, packaging, labeling, advertising, promotion, distribution and
sale of our products are subject to regulation by numerous governmental
agencies, the most active of which are the U.S. Food and Drug Administration
(the "FDA"), which regulates our products under the Federal Food, Drug and
Cosmetic Act (the "FFDCA") and regulations promulgated thereunder and the U.S.
Federal Trade Commission ("FTC") which regulates the advertising of our products
under the Federal Trade Commission Act ("FTCA"). Our products are also subject
to regulation by, among other regulatory agencies, the Consumer Product Safety
Commission, the U.S. Department of Agriculture, the U.S. Department of
Environmental Regulation and the Occupational Safety and Health Administration.
The manufacture, labeling and advertising of our products are also regulated
under the Occupational Safety and Health Administration by various state and
local agencies as well as each foreign country to which we distribute our
products.
The regulation of dietary supplement labeling claims by the FDA is governed by
the FFDCA and the recent Dietary Supplement Health and Education Act of 1994
("DSHEA"). Under ss.6 of the DSHEA, structure/function claims are permitted in
dietary supplement labeling without prior authorization by the FDA, provided
that the manufacturer has substantiation for the claims and complies with
certain notification and disclaimer requirements. The DSHEA amended the FTCA and
set up a new framework for FDA regulation of dietary supplements. It also
created an office in the National Institutes of Health to coordinate research on
dietary supplements, and has called on President Clinton to set up an
independent dietary supplement commission to report on the use of claims in
dietary supplement labeling. In passing the DSHEA, Congress recognized first,
that many people believe that dietary supplements offer health benefits and
second, that consumers want a greater opportunity to determine whether
supplements may help them. The law essentially gives dietary supplement
manufacturers freedom to market more products as dietary supplements and provide
information about their products' benefits.
Traditionally, dietary supplements referred to products made of one or more of
the essential nutrients, such as vitamins, minerals, and protein. But DSHEA
broadened the definition to include, with some exceptions, any product intended
for ingestion as a supplement to the diet. This includes vitamins, minerals,
herbs, botanicals, and other plant-derived substances; and amino acids and
concentrates, metabolites, constituents and extracts of these substances. DSHEA
requires manufacturers to include the words "dietary supplement" on product
labels. Also, starting in March 1999, a "Supplement Facts" panel is required on
the labels of all dietary supplements. The substantial majority of the products
marketed or manufactured by us are regulated as dietary supplements under the
FDA.
The FDA oversees product safety, manufacturing and product information, such as
claims in a product's labeling, package inserts, and accompanying literature.
One of the most important functions of the FDA relates to drugs. A drug, which
sometimes can be derived from plants used as traditional medicines, is an
article that, among other things, is intended to diagnose, cure, mitigate,
treat, or prevent diseases. Before marketing, drugs must undergo clinical
studies to determine their effectiveness, safety, possible interactions with
other substances, and appropriate dosages, and the FDA must review the data and
authorize the drugs' use before they are marketed. Although we do not develop
drugs, we manufacture over-the-counter drugs for others and distribute them. Our
manufacture of over-the-counter drugs must be in compliance with all FDA
guidelines and FDA enforced Good Manufacturing Practices regulations ("GMP's")
for those products as set forth in official monographs of the U.S. Pharmacoepia
and other applicable laws enforced by the FDA.
The FDA does not authorize, endorse, or test dietary supplements. However, a
product sold as a dietary supplement and touted in its labeling as a new
treatment or cure for a specific disease or condition would be considered an
unauthorized (and thus illegal) drug. Labeling changes consistent with the
provisions in DSHEA would be required to maintain the product's status as a
dietary supplement.
As with food, federal law requires manufacturers of dietary supplements to
insure that the products they put on the market are safe. Dietary supplement
manufacturers wanting to market a new ingredient (that is, an ingredient not
marketed in the United States before 1994) have two options. They can first
submit to the FDA, at least 75 days before the product is expected to go to
market, information that supports their conclusion that the new ingredient can
reasonably be expected to be safe, meaning that the new ingredient does not
present a significant or unreasonable risk of illness or injury under conditions
of use recommended in the product's labeling. The information the manufacturer
submits becomes publicly available 90 days after the FDA receives it. Another
option for
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<PAGE>
manufacturers is to petition the FDA to establish the condition under
which the new dietary ingredient would reasonably be expected to be safe.
Under DSHEA and previous food labeling laws, supplement manufacturers are
permitted to use, when approved by the FDA, three types of claims:
nutrient-content claims, disease claims, and nutrition-support claims, which
include "structure-function claims." Nutrient-content claims describe the level
of a nutrient in a food or dietary supplement. For example, a supplement
containing at least 200 mg of calcium per serving could carry the claim "high in
calcium." A supplement with at least 12 mg per serving of Vitamin C could state
on its label, "excellent source of Vitamin C."
Disease claims show a link between a substance and a disease or health-related
condition. The FDA authorizes disease claims based on a review of the scientific
evidence. Alternatively, after the FDA is notified, the claims may be based on
an authoritative statement from certain scientific bodies, such as the National
Academy of Sciences, that shows or describes a well-established diet-to-health
link. For instance, it is permissible to advertise a link between calcium and a
lower risk of osteoporosis, if the supplement contains sufficient amounts of
calcium.
Nutrition-support claims can describe a link between a nutrient and the
deficiency disease that can result if the nutrient is lacking in the diet. For
example, the label of a Vitamin C supplement could state that Vitamin C prevents
scurvy. When these types of claims are used, the label must mention the
prevalence of the nutrient-deficiency disease in the United States.
Claims can also refer to the supplement's effect on the body's structure or
function, including its overall effect on a person's well-being. These are known
as structure-function claims. Examples of structure-function claims are:
"calcium builds strong bones"; "antioxidants maintain cell integrity"; and
"fiber maintains bowel regularity."
Under DSHEA, manufacturers are also permitted to use structure-function claims
without FDA authorization. These claims are based on the manufacturer's review
and interpretation of scientific literature. Like all label claims,
structure-function claims must be true and not misleading. Structure-function
claims must be accompanied by the disclaimer "This statement has not been
evaluated by the Food and Drug Administration. This product is not intended to
diagnose, treat, cure, or prevent any disease." Manufacturers who plan to use a
structure-function claim on a particular product must inform the FDA of the use
of the claim no later than 30 days after the product is first marketed. The
manufacturer must be able to substantiate its claim. If the submitted claims
promote the product as drugs instead of supplements, the FDA can advise the
manufacturer to change or delete the claim.
Recently, the FDA has identified several problems where manufacturers were
buying herbs, plants and other ingredients without first adequately testing them
to determine whether the product they ordered was actually what they received or
whether the ingredients were free from contaminants. The FDA has advised
consumers to look for ingredients in products with the U.S.P. notation, which
indicates the manufacturer followed standards established by the U.S.
Pharmacopoeia, and to consider the name of the manufacturer or distributor,
stating that supplements made by a nationally known food and drug manufacturer
have likely been made under tight controls because these companies already have
in place GMP's for their already existing products.
Claims made for our dietary supplement products may include statements of
nutritional support and health and nutrient content. The FDA's interpretation of
what constitutes an acceptable statement of nutritional support may change in
the future thereby requiring that we revise our labels. The FDA recently issued
a proposed rule on what constitutes permitted structure/function claims as
distinguished from prohibited disease claims. Although we believe our product
claims comply with the law, depending on the content of the final regulation, we
may need to revise our labels.
The FDA issued final dietary supplement labeling regulations in 1997 that
required a new format for dietary supplement product labels by March 23, 1999.
All companies in the dietary supplement industry are required to comply with
these labeling regulations. The FDA has also announced that it is considering
promulgating new GMP's, specific to dietary supplements. Such GMP's, if
promulgated, may be significantly more rigorous than currently applicable GMP
requirements and contain quality assurance requirements similar to GMP
requirements for drug products. Therefore, we may be required to expend
additional capital resources on upgrading manufacturing processes and/or
equipment in the future in order to comply with the law.
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<PAGE>
Our failure to comply with applicable FDA regulatory requirements could result
in, among other things, injunctions, product withdrawals, recalls, product
seizures, fines, and criminal prosecutions.
We cannot predict the nature of any future laws, regulations, interpretations or
applications, nor can we determine what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on our
business in the future. The FDA or other governmental regulatory bodies could,
however, require the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products not capable of reformulation,
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 our
business, financial condition and results of operations.
Our advertising of dietary supplement products is subject to regulation by the
FTC under the FTCA. The FTCA prohibits unfair methods of competition and unfair
or deceptive acts or practices in or affecting commerce. The FTCA provides that
the dissemination or the causing to be disseminated of any false advertisement
pertaining to drugs or foods, which would include dietary supplements, is an
unfair or deceptive act or practice. Under the FTC's Substantiation Doctrine, an
advertiser is required to have a "reasonable basis" for all objective product
claims before the claims are made. Failure to adequately substantiate claims may
be considered either deceptive or unfair practices. Pursuant to this FTC
requirement we are required to have adequate substantiation for all material
advertising claims made for our products.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist supplement marketers in understanding and
complying with the substantiation requirement. Upon release of this guidance
document we will be required to evaluate our compliance with the guideline and
may be required to change our advertising and promotional practices. We may be
the subject of investigation in the future. The FTC may impose limitations on
our advertising of products. Any such limitations could materially adversely
affect our ability to successfully market our products.
The FTC has a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory processes, cease and
desist orders, and injunctions. FTC enforcement can result in orders requiring,
among other things, limits on advertising, corrective advertising, consumer
redress, divestiture of assets, rescission of contracts and such other relief as
may be deemed necessary. A violation of such orders could have a material
adverse effect on our business, financial condition and results of operations.
Advertising, labeling, sales and manufacturing of dietary supplements and
conventional foods are also regulated by state and local authorities. There can
be no assurance that state and local authorities will not commence regulatory
action which could restrict the permissible scope of our product claims or our
ability to sell in that state.
Governmental regulations in foreign countries where our 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 our products.
Compliance with such foreign governmental regulations is generally the
responsibility of our distributors for those countries. These distributors are
independent contractors over whom we have limited control.
We manufacture certain products pursuant to contracts with customers who
distribute the products under their own or other trademarks. Such private label
customers are subject to government regulations in connection with their
purchase, marketing, distribution and sale of such products. We are subject to
government regulations in connection with our manufacturing, packaging and
labeling of such products. However, our private label customers are independent
companies, and their labeling, marketing and distribution of such products is
beyond our control. The failure of these customers to comply with applicable
laws or regulations could have a materially adverse effect on our business,
financial condition, results of operations and cash flows.
We may be subject to additional laws or regulations by the FDA or other federal,
state or foreign regulatory authorities, the repeal of laws or regulations which
we consider favorable, such as the Dietary Supplement Health and Education Act
of 1994, or more stringent interpretations of current laws or regulations, from
time to time in the future. We are unable to predict the nature of such future
laws, regulations, interpretations or applications, nor can we predict what
effect additional governmental regulations or administrative orders, when and if
promulgated, would have on our business in the future. The FDA or other
governmental regulatory bodies could, however, require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not able to
29
<PAGE>
be reformulated, imposition of additional recordkeeping requirements, expanded
documentation of the properties of certain products, expanded or different
labeling and scientific substantiation. Any or all of such requirements could
have a materially adverse effect on our business, financial condition, results
of operations and cash flows.
EMPLOYEES
As of September 30, 1999, Innovative had 56 employees and Herbal had 6
employees. Of these employees, 11 were engaged in marketing and sales, 38 were
devoted to production and distribution and 13 were responsible for management
and administration. None of Innovative's or Herbal's employees are covered by a
collective bargaining agreement. We believe we have good relations with our
employees.
LEGAL MATTERS
From time to time we are subject to litigation incidental to our business
including possible product liability claims. Such claims, if successful, could
exceed applicable insurance coverage. We are not currently a party to any legal
proceedings that we consider to be material.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR NOMINEES AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company and their
ages and positions with the Company as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS AND DIRECTORS
<S> <C> <C>
Jugal K. Taneja...................................... 55 Chairman of the Board and Director
Paul A. Santostasi................................... 63 Vice Chairman, Business Development and Director
Kotha S. Sekharam, Ph.D.............................. 48 President and Director
Carol Dore-Falcone................................... 35 Vice President, Chief Financial Officer
Mihir K. Taneja...................................... 24 Vice President, Marketing and Secretary
Todd Hay............................................. 32 Vice President, Brand Sales
William L. LaGamba................................... 40 Director
Rakesh K. Sharma, M.D................................ 42 Director
Gerald Schmoling, D.V.M.............................. 41 President of Herbal Health Products, Inc.
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
JUGAL K. TANEJA has served as Innovative's Chairman of the Board since June 12,
1998. Until June 1998, he also served as Chief Executive Officer for Dynamic
Health Products, Inc., Innovative's and Herbal's parent company. From November
1991 until December 1998, he also served as the Chairman of the Board and Chief
Executive Officer of NuMed Home Health Care, Inc., a provider of home health
care services and contract staffing of health care employees. From June 1993
until March 1998, he was also the Chief Executive Officer of National
Diagnostics, Inc., a provider of medical diagnostic services. NuMed Home Health
Care, Inc and National Diagnostics, Inc., are publicly traded companies. Mr.
Taneja is also a Director of Nutriceuticals.com Corporation, a public company
operating as an online business-to-business wholesaler and retailer of
pharmaceuticals, over-the-counter drugs, health and beauty care products and
private label nutritional supplements. Although he devotes substantial time to
our operations and business, Mr. Taneja does not devote his full time to our
business. See "Principal Shareholders."
PAUL A. SANTOSTASI has served as Vice Chairman of Business Development since
June 1998. Prior to being Vice Chairman of Business Development he was the
Chairman and Chief Executive Officer of Energy Factors, Innovative's
predecessor, from 1989 until its acquisition in June 1998. Prior to his
affiliation with Energy Factors, he was the founder, Chairman and Chief
Executive Officer of Suncoast Plastics, a public company, from 1980 until 1989.
Mr. Santostasi holds a B.S. degree in mechanical engineering.
DR. KOTHA S. SEKHARAM was a founder and director of Nu-Wave Health Products,
Inc., a developer and manufacturer of over-the-counter analgesic roll-ons and
creams, dietary supplements and health and beauty products. Dynamic Health
Products, Inc. acquired Nu-Wave Health Products, Inc. in January 1998. Dr.
Sekharam served as Vice President of Nu-Wave from September 1995 until June
1996. From 1992 until September 1995, he served as Director of Research and
Development of Energy Factors, Inc., Innovative's predecessor. He has served as
President of Dynamic since June 1996 and President of Innovative since June
1998. Presently, he continues to serve as President for both Innovative and
Dynamic. Dr. Sekharam holds a Ph.D. in food sciences from Central Food
Technological Research Institute, Mysore, India, a United Nations university
center and has over fifteen years of experience in the food and health industry.
CAROL DORE-FALCONE has served as Innovative's Vice President and Chief Financial
Officer since August 1999. She has also served as Vice President and Chief
Financial Officer of Dynamic Health Products, Inc. since August 1999. Prior to
joining Innovative, Ms. Dore-Falcone was employed as an audit manager with
Deloitte & Touche LLP, Certified Public Accountants, where she had served in
various capacities since January of 1990. Ms. Dore-Falcone is a certified public
accountant and holds an M.B.A. from the University of Tampa.
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<PAGE>
MIHIR K. TANEJA has served as Vice President of Marketing since June of 1998 and
Secretary of Innovative since November of 1999. He also served as Vice President
of Marketing of Dynamic from July 1996 to September 1998. Prior to joining
Dynamic, Mr. Taneja served as a market and financial analyst for Bancapital
Corporation from 1994 to 1996, while pursuing his undergraduate education. Mr.
Taneja holds B.A. degrees in finance and marketing from the University of Miami.
TODD HAY has served as Innovative's Vice President, Brand Sales since August
1999. Prior to joining Innovative, Mr. Hay served as Senior Vice President and
Chief Operating Officer of Stellar Health Products, Inc. from 1997 to 1999. From
1993 to 1997, Mr. Hay served as Director of Marketing for National Chemical,
Inc. Mr. Hay holds an M.B.A. from Nova Southeast University.
WILLIAM L. LAGAMBA is a director of Innovative and has been the Chief Executive
Officer of Dynamic Health Products, Inc. from June 1998 until November 1999. He
was a founder and the President of Becan Distributors, Inc., a wholesaler of
prescription and non-prescription pharmaceuticals from its inception in January
1997, until June 1998. For 14 years prior to January 1997, Mr. LaGamba was
employed in various capacities by McKesson Drug Company, a large distributor of
pharmaceuticals, health and beauty aids and services.
RAKESH K. SHARMA, M.D., has served as a director of the Company since June 1999.
Dr. Sharma is a practicing cardiologist and is a member of the medical staff of
several hospitals in Pinellas County, Florida. Prior to holding these positions,
Dr. Sharma served as Assistant Professor of Cardiology at University of
Missouri, Columbia from June 1993 to June 1995.
GERALD SCHMOLING, D.V.M., has served as a director of Herbal and its President
since December 1998. Prior to Dynamic's formation of Herbal in 1998, Dr.
Schmoling served as President and Chief Executive Officer of Schmoling &
Associates, Inc., a distributor and marketer of animal health products, since
January 1994. Dr. Schmoling holds a D.V.M. degree from Michigan State University
and an M.B.A. from Indiana Wesleyan University.
BOARD, BOARD COMMITTEES AND COMPENSATION
We reimburse each of our directors for reasonable expenses incurred in attending
meetings of our Board of Directors. Directors currently receive no other
compensation for their services as directors. Following completion of this
offering, however, we intend to pay each non-employee director a fee of $500 for
each meeting attended by such director, but not less than $2,000 per year if
they attend at least three meetings during the year. Outside directors who serve
on board committees will be paid a fee of $100 for each committee meeting
attended by such director.
The Board of Directors currently has no standing nominating committee.
EMPLOYMENT AGREEMENTS
Upon completion of this offering, we intend to enter into three year employment
agreements with Dr. Kotha S. Sekharam, President, and Mihir K. Taneja, Vice
President of Marketing, at annually salaries of $90,000 and $60,000,
respectively. In addition, upon completion of this offering, we intend to assume
Mr. Santostasi's current employment agreement with Dynamic, at an annual salary
of $125,000, which shall expire in June of the year 2001.
In each case, the employees will be permitted to participate in benefits and
employee benefit plans of Innovative that may be in effect from time to time, to
the extent eligible, and each employee is entitled to receive an annual bonus as
determined in the sole discretion of our Board of Directors based on the Board's
evaluation of the employee's performance and the financial performance of
Innovative.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain information
regarding compensation earned by Kotha S. Sekharam, Gerald Schmoling, and
Paul A. Santostasi (the "Named Executive Officers"), during the years
ended March 31, 1999, 1998 and 1997. No executive officer of Herbal had total
cash and non-cash compensation in excess of $100,000 during the previous three
years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
FISCAL --------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)
--------------------------- ---- ---------- ---------
<S> <C> <C> <C>
Kotha S. Sekharam, Ph.D., President of Innovative 1999 75,000 --
1998 75,000 5,414(1)
1997 52,500 --
Gerald Schmoling, President of Herbal 1999 12,692 --
1998 N/A N/A
1997 N/A N/A
Paul A. Santostasi, Vice Chairman, Business Development, Innovative 1999 121,711 N/A
1998 N/A N/A
1997 N/A N/A
<FN>
(1) Dr. Sekharam's employment agreement during this period provided for annual
bonuses based on individual performance and the financial performance of
the Company.
</FN>
</TABLE>
COMPENSATION PURSUANT TO PLANS
1999 STOCK OPTION PLAN. In December 1999, Innovative's Board of Directors
adopted the company's 1999 Stock Option Plan, which has been approved by the
company's shareholders, subject to the mailing of an Information Statement in
accordance with Securities and Exchange Commission rules. The purpose of the
1999 plan is to enable the company to attract and retain top-quality employees,
officers, directors and consultants and to provide such employees, officers,
directors and consultants with an incentive to enhance stockholder return. The
1999 plan provides for the grant to officers, directors, or other key employees
and consultants of the company, of options to purchase up to an aggregate of
500,000 shares of common stock.
The 1999 plan may be administered by the board of directors or a committee of
the Board, which has complete discretion to select the optionees and to
establish the terms and conditions of each option, subject to the provisions of
the 1999 plan. Options granted under the 1999 plan may be "incentive stock
options" as defined in Section 411 of the Internal Revenue Code of 1986 or
so-called nonqualified options.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the common stock as of the date of grant (110% of the fair
market value if the grant is to an employee who owns more than 10% of the total
combined voting power of all classes of capital stock of the company). The
Internal Revenue Code currently limits to $100,000 the aggregate value of common
stock that may be acquired in any one year pursuant to incentive stock options
under the 1999 plan or any other option plan adopted by the company.
Nonqualified options may be granted under the 1999 plan at an exercise price of
not less than 100% of the fair market value of the common stock on the date of
grant. Nonqualified options also may be granted without regard to any
restriction on the amount of common stock that may be acquired pursuant to such
options in any one year.
Subject to the limitations contained in the 1999 plan, options become
exercisable at such times and in such installments (but not less than 20% per
year) as the Committee shall provide in the terms of each individual stock
option agreement. The Committee must also provide in the terms of each stock
option agreement when the option expires and becomes unexercisable, and may also
provide the option expires immediately upon termination of employment for any
reason. No option held by directors, executive officers or other persons subject
to Section 16 of the Securities Exchange Act of 1934 may be exercised during the
first six months after such option is granted.
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<PAGE>
Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then exercisable
would terminate three months (twelve months in the case of termination by reason
of death or disability) following termination of employment. Any options which
were not fully vested and exercisable on the date of such termination would
immediately be cancelled concurrently with the termination of employment.
Options granted under the 1999 plan may not be exercised more than ten years
after the grant (five years after the grant if the grant is an incentive stock
option to an employee who owns more than 10% of the total combined voting power
of all classes of capital stock of the company). Options granted under the 1999
plan are not transferable and may be exercised only by the respective grantees
during their lifetime or by their heirs, executors or administrators in the
event of death. Under the 1999 plan, shares subject to cancelled or terminated
options are reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in the case
of certain transactions such as mergers, recapitalizations, stock splits or
stock dividends. The 1999 plan is effective for ten years, unless sooner
terminated or suspended.
DIRECTOR AND OFFICER INDEMNIFICATION
Innovative's and Herbal's articles of incorporation provide that the Company
will indemnify its officers, directors and other eligible persons to the fullest
extent permitted under the laws of the State of Florida. The Company has also
entered into indemnification agreements with each of its current directors and
executive officers which will provide for indemnification of, and advancement of
expenses to, such persons for expenses and liability incurred by them by reason
of the fact that they are or were a director, officer, shareholder of the
Company including indemnification under circumstances in which indemnification
and advancement of expenses are discretionary under Florida law.
The Company believes that it is the position of the Securities and Exchange
Commission that, insofar as the foregoing provisions may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, the provisions
are against public policy as expressed in the Securities Act of 1933 and are,
therefore, unenforceable.
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<PAGE>
TRANSACTIONS INVOLVING OFFICERS, DIRECTORS
AND PRINCIPAL SHAREHOLDERS
Prior to this offering, we entered into transactions and business relationships
with certain of our officers, directors and principal stockholders or their
affiliates. We believe that all of the transactions were on terms no less
favorable than we could have obtained from independent third parties. Any future
transactions between us and our officers, directors or affiliates will be
subject to approval by a majority of disinterested directors or stockholders in
accordance with Florida law.
ACQUISITION OF ENERGY FACTORS, INC. In June 1998, Dynamic, Innovative's and
Herbal's parent company, acquired Energy Factors, Inc., a corporation
wholly-owned by U.S. Diversified Technologies, Inc., in return for 310,000
shares of Dynamic's Series A Convertible Preferred Stock, which is convertible
into 310,000 shares of Dynamic's common stock. Shortly before the acquisition
was consummated, Dynamic loaned $100,000 to Energy Factors, which was used as
working capital. Paul A. Santostasi, Innovative's Vice Chairman of Business
Development and one of its Directors, is also the President and owns
approximately 30% of the issued and outstanding equity securities of U.S.
Diversified. At the time of the acquisition, Dynamic entered into an employment
agreement with Mr. Santostasi and granted to Mr. Santostasi an option to
purchase 200,000 shares of Dynamic common stock at a purchase price of the
greater of $9 per share or the price at which the common stock is offered under
a public offering of Dynamic's common stock. The options vest over a period of
three years, commencing on June 12, 1998.
EXCLUSIVE MANUFACTURING AGREEMENTS. In November 1999, Innovative entered into
exclusive manufacturing agreements with Nutriceuticals.com Corporation and Java
Sports.com Corporation, whereby Innovative agreed to manufacture for them all
products which Innovative is capable of manufacturing.
We believe that the prices Innovative will charge these companies will be
competitive and at no less favorable terms than those with non-affiliated third
parties. Jugal K. Taneja, Innovative's Chairman, is a director of
Nutriceuticals.com and Chairman of Java Sports.com.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Company voting
securities as of September 30, 1999, by (i) each person known by the Company to
beneficially own 5% or more of the outstanding shares of voting securities, (ii)
each director of the Company, (iii) the Named Executive Officer of the Company,
and (iv) all directors and executive officers of the Company as a group. The
information set forth in the table and accompanying footnotes has been furnished
by the named beneficial owners. An asterisk denotes beneficial ownership of less
than 1%. The Company's voting securities are its common stock.
As of September 30, 1999, Dynamic Health Products, Inc. held all of Innovative's
outstanding shares. Nonetheless, Jugal Taneja and William LaGamba are listed as
additional beneficial owners by virtue of their controlling interest in Dynamic,
pursuant to which they may be deemed to have shared voting and investment power
with respect to Dynamic, and may be deemed beneficial owners of the Company.
Messrs. Jugal Taneja and William LaGamba disclaim such beneficial ownership,
except as to their ownership of Dynamic.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) OF CLASS
-------------- --------------------------- ----------------------- --------
<S> <C> <C> <C>
Common Stock Dynamic Health Products, Inc. ........... 2,000,000 (3) 66.7%
Common Stock Jugal K. Taneja (4) ..................... 1,082,916 (5) 36.1%
Common Stock William L. LaGamba (6) .................. 243,000 (7) 8.1%
Common Stock All executive officers and directors as
a group (7 persons) ..................... 1,314,386 43.8%
<FN>
- --------------
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company at 6950 Bryan Dairy Road, Largo, FL 33777.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to the shares shown. Except where indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of voting
securities shown as beneficially owned by them.
(3) Includes shares that may be deemed beneficially owned by Jugal K. Taneja
and William LaGamba, as described in notes 4 and 5 below.
(4) By virtue of his positions as Chairman of the Board, as well as an 54.1%
beneficial owner of Dynamic, Mr. Taneja may be deemed to have shared voting
and investment power with respect to, and therefore may be deemed
beneficial owner of, Dynamic's ownership of the Company, which beneficial
ownership Mr. Taneja disclaims, except as to his 54.1% ownership of
Dynamic.
(5) Includes 244,000 shares beneficially owned by Manju Taneja, Jugal K.
Taneja's wife, 210,000 shares beneficially owned by Mihir K. Taneja, Jugal
K. Taneja's son, and 210,000 shares beneficially owned by Mandeep Taneja,
Jugal Taneja's other son, as to all of which Mr. Taneja exercises no
investment or voting power and disclaims beneficial ownership. Also
includes, 379,333 shares owned by Carnegie Capital, Ltd. and 39,627 shares
owned by First Delhi Family Partnership, Ltd. Mr. Taneja is the general
partner of Carnegie Capital, Ltd. and First Delhi Family Partnership, Ltd.
As such, Mr. Taneja holds sole voting and investment power with respect to
the shares held of record by Carnegie Capital and First Delhi Family
Partnership, Ltd.
(6) By virtue of his position as a Director, as well as an 12.3% beneficial
owner of Dynamic, Mr. LaGamba may be deemed to have shared voting and
investment power with respect to, and therefore may be deemed beneficial
owner of, Dynamic's ownership of the Company, which beneficial ownership
Mr. LaGamba disclaims, except as to his 12.3% ownership of Dynamic.
(7) Includes 110,956 shares beneficially owned by Michele LaGamba, Mr.
LaGamba's wife, as to which Mr. LaGamba exercises no investment or voting
power and disclaims beneficial ownership. Also includes and 71,329 shares
held by Mr. LaGamba as custodian for his minor children.
</FN>
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 24,000,000 shares of
common stock, par value $.01 per share, of which 2,000,000 shares were issued
and outstanding as of September 30, 1999, and 6,000,000 shares of "blank check"
preferred stock, of which 150,000 have been authorized and issued as Series A
preferred stock and are outstanding as of September 30, 1999.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders. The holders of common
stock are entitled to receive dividends ratably, when, as and if declared by the
Board of Directors, out of funds legally available therefor. In the event of a
liquidation, dissolution or winding-up of the Company, the holders of common
stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are, and the
shares of common stock offered by the Company hereby, when issued against the
consideration set forth in this prospectus, will be, validly issued, fully-paid
and nonassessable.
PREFERRED STOCK
GENERAL. Under the Company's Articles of Incorporation, the Board of Directors
is authorized, subject to any limitations prescribed by the laws of the State of
Florida, but without further action by the Company's shareholders, to provide
for the issuance of up to 6,000,000 shares of preferred stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the designations, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. The Board of Directors may authorize
and issue preferred stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of common stock. The
issuance of preferred stock, for example in connection with a shareholder
right's plan, could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, a majority of
the outstanding stock of the Company.
As of September 30, 1999, the Board of Directors has issued 150,000 of the
Company's preferred stock as Series A preferred stock and fixed the
designations, powers, preferences and rights of the Series A preferred stock.
CLASS A PREFERRED STOCK. The Company has designated and is authorized to issue
150,000 shares of Class A voting preferred stock, par value $.01 per share, all
of which are validly issued, fully paid nonassessable and outstanding as of the
date of this Memorandum. Holders of the Class A preferred stock are entitled to
an 8% cumulative quarterly dividend. Holders of the Class A preferred stock will
vote together with the holders of common stock with respect to all matters as to
which such shareholders vote, with each share of Class A preferred stock
entitled to one vote. Upon liquidation, dissolution or winding-up of the
Company, holders of Class A preferred stock will be paid an amount equal to $.01
per share of Class A preferred stock before any payment is made with respect to
the common stock. The Company may not redeem the shares of Class A preferred
stock in whole or in part.
OUTSTANDING WARRANTS AND OPTIONS
As of September 30, 1999 there were no outstanding warrants or options to
purchase the Company's common stock.
37
<PAGE>
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation provide for a classified Board of
Directors. The directors are divided into three classes, as nearly in number as
possible. The directors are elected for three-year terms, which are staggered so
that the terms of one-third of the directors expire each year. The Company's
Bylaws provide that any vacancies on the Board of Directors may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum. The Articles of Incorporation establish an advance notice procedures for
both nominations of director candidates and introduction of business at
shareholders' meetings and provide that special shareholder meetings may only be
called by the Chairman of the Board of Directors pursuant to a resolution
adopted by a majority of the entire Board or upon application of shareholders
owning at least 35% of the stock entitled to vote at the special meeting. The
Articles of Incorporation also require the affirmative vote of the holders of at
least 75% of the voting power of the Company entitled to vote generally in the
election of directors for any addition, change or deletion of certain provision.
The above-described provisions may have certain anti-takeover effects. Such
provisions, in addition to the provisions described below and the possible
issuance of preferred stock discussed above, may make it more difficult for
other persons, without the approval of the Company's Board of Directors, to make
a tender offer or acquisitions of substantial amounts of common stock or to
launch other takeover attempts that a shareholder might consider in such
shareholder's best interest, including attempts that might result in the payment
of a premium over the market price of the common stock held by such shareholder.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to several anti-takeover provisions under Florida law
that apply to a public corporation organized under Florida law, unless the
corporation has elected to opt out of those provisions in its articles of
incorporation or bylaws. The Company has not elected to opt out of those
provisions. The Florida Business Corporation Act ("FBCA") prohibits the voting
of shares in a publicly-held Florida corporation that are acquired in a "control
share acquisition" unless the holders of a majority of the corporation's voting
shares (exclusive of shares held by officers of the corporation, inside
directors, or the acquiring party) approve the granting of voting rights as to
the shares acquired in the control share acquisition. A "control share
acquisition" is defined as an acquisition that immediately thereafter entitles
the acquiring party to vote in the election of directors within each of the
following ranges of voting power: (i) one-fifth or more but less than one-third
of such voting power; (ii) one-third or more but less than a majority of such
voting power; and (iii) more than a majority of such voting power.
The FBCA also contains an "affiliated transaction" provision that prohibits a
publicly-held Florida corporation from engaging in a broad range of business
combinations or other extraordinary corporate transactions with an "interested
shareholder" unless (i) the transaction is approved by a majority of
disinterested directors before the person becomes an interested shareholder;
(ii) the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years; or (iii) the transaction is
approved by the holders of two-thirds of the corporation's voting shares other
than those owned by the interested shareholder. An interested shareholder is
defined as a person who together with affiliates and associates beneficially
owns more than 10% of the corporation's outstanding voting shares.
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company, in Cranford, New Jersey, serves as transfer
agent and registrar for the Company's common stock.
38
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADABLE AFTER OFFERING. Upon completion of this
offering, the Company will have approximately 3,000,000 shares of common stock
outstanding. The 1,000,000 shares to be sold by the Company in this offering
will be freely tradable without restriction or limitation under the Securities
Act, except for any such shares held by "affiliates" of the Company, as such
term is defined under Rule 144 of the Securities Act, which shares will be
subject to the resale limitations under Rule 144. All of the remaining 2,000,000
outstanding shares are "restricted securities" within the meaning of Rule 144
and may be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as Rule 144. All
of these restricted shares of common stock will become eligible for resale under
Rule 144 one year from the date that the securities offered herein are declared
"effective" by the Securities & Exchange Commission. The Company's parent
company, Dynamic, which owns an aggregate of 2,000,000 shares of common stock
has agreed not to sell, directly or indirectly, any shares owned by them for a
period of eighteen months after the date of the completion of this offering
without the prior written consent of the representative. Upon the expiration of
this eighteen month lock-up period (or earlier upon the consent of the
representative), all of these shares will become eligible for sale subject to
the restrictions of Rule 144.
RULE 144. In general, under Rule 144, as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially owned shares for
at least one year, including an affiliate of the Company, would be entitled to
sell, within any three-month period, that number of shares that does not exceed
the greater of 1% of the then-outstanding shares of common stock (approximately
30,000 shares after this offering) and the average weekly trading volume in the
common stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Commission, provided certain manner
of sale and notice requirements and requirements as to the availability of
current public information about the Company are satisfied. In addition,
affiliates of the Company must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of common stock. As defined in Rule 144, an "affiliate" of an issuer is a
person who, directly or indirectly, through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer. Under Rule 144(k), a holder of "restricted securities" who is not
deemed an affiliate of the issuer and who has beneficially owned shares for at
least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above.
FORM S-8 REGISTRATION OF OPTIONS. The Company intends to file a
registration statement on Form S-8 covering the shares of common stock that have
been reserved for issuance under its 1999 Stock Option Plan, which would permit
the resale of such shares in the public market.
EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK. The
Company is unable to estimate the number of shares that may be sold in the
future by its existing shareholders or the effect, if any, that such sales will
have on the market price of the common stock prevailing from time to time. Sales
of substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of the common stock.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement, the
underwriters named below, for whom Kashner Davidson Securities Corporation is
acting as representative, have agreed to purchase from the Company, and the
Company has agreed to sell to the underwriters, the number of shares of common
stock set forth opposite each underwriter's name below, excluding shares set
aside for options granted for over-allotments.
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
Kashner Davidson Securities Corporation..................... 1,000,000
---------
Total....................................................... 1,000,000
=========
The underwriting agreement provides that the obligations of the several
underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company's counsel
and independent public accountants. The nature of the underwriters' obligation
is such that they are committed to purchase and pay for all the shares of common
stock if any are purchased.
The Company has been advised by the representative that the underwriters propose
to offer the shares of common stock directly to the public at the public
offering price set forth on the cover page of this prospectus and to certain
securities dealers at such price less a concession not in excess of $[ ] per
share. The underwriters may allow, and such selected dealers may reallow, a
discount not in excess of $[ ] per share to certain brokers and dealers. After
the public offering of the shares, the public offering price and other selling
terms may be changed by the representative. No change in such terms shall change
the amount of proceeds to be received by the Company as set forth on the cover
page of this prospectus.
The Company's parent company, Dynamic, which owns an aggregate of 2,000,000
shares of common stock has agreed that it will not, without the prior written
consent of Kashner Davidson Securities Corporation (which consent may be
withheld in its sole discretion) and subject to certain limited exceptions,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
sell short, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or similar
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of the common stock, for a period of eighteen months after the date
of completion of this offering. Kashner Davidson Securities Corporation , on
behalf of the underwriters, may, in its sole discretion and at anytime without
notice, release all or any portion of the securities subject to these lock-up
agreements. In addition the Company has agreed that, for a period of eighteen
months after the date of completion of this offering, it will not, without the
consent of Kashner Davidson Securities Corporation, make any offering, purchase,
or sale or other disposition of any shares of common stock of the Company or
other securities convertible into or exchangeable or exercisable for shares of
common stock (or agreement for such) except for (i) the grant of options to
purchase shares of common stock pursuant to the 1999 plan, (ii) shares of common
stock issued pursuant to the exercise of options granted under such plan, (iii)
and except for shares issued, options granted or shares purchased in connection
with acquisitions, and (iv) pursuant to the exercise of warrants and options
outstanding prior to the sale of the common stock in this offering. See
"Management - Compensation Pursuant to Plans" and "Shares Eligible for Future
Sale" for a description of shares issued pursuant to the exercise of options.
The Company has agreed to issue to the representative, warrants to purchase up
to 100,000 shares of common stock at an exercise price per share equal to 120%
of the initial public offering price of the shares in this offering. The
exercise price of the representative's warrants has been determined by
negotiations between the Company and the representative. The exercise price of
the representative's warrants is one of the factors used by the National
Association of Securities Dealers, Inc. under its Corporate Financing Rule to
determine whether the total compensation paid to an underwriter and its
associated and related persons for services in connection with a public offering
is excessive. The sole factor considered by the Company and the representative
in negotiating the exercise price of the representative's warrants in this
offering was to select an amount that would not be considered excessive under
the National Association of Securities Dealers, Inc.'s Corporate Financing Rule
in light of the total compensation payable by the Company in connection with
this offering. The representative's warrants will be exercisable for a period of
five years after the date of this prospectus. The representative's warrants
include a "net" exercise provision permitting the holders to pay the exercise
price by cancellation of a number of shares with a fair
40
<PAGE>
market value equal to the exercise price of the representative's warrants. The
holders of the representative's warrants will have no voting, dividend or other
stockholder rights until the representative's warrants are exercised. In
addition, the Company has granted certain rights to the holders of the
representative's warrants to register the common stock underlying the
representative's warrants under the Securities Act. The Company has agreed to
pay the representative a non-accountable expense allowance of 3% of the total
offering proceeds from the sale of shares of common stock by them, of which the
Company has already paid $25,000.
The Company has agreed to retain Kashner Davidson Securities Corporation as a
financial consultant for a period of thirty-six months to commence on the
closing of this Offering, at a monthly fee of $3,000 all of which $108,000 shall
be payable in advance on the closing of the Offering. Pursuant to this
agreement, Kashner Davidson Securities Corporation will be obligated to provide
general financial advisory services to the Company on an "as needed" basis with
respect to possible future financing or acquisitions by the Company and related
matters. The agreement does not require Kashner Davidson Securities Corporation
to provide any minimum number of hours of consulting services to the Company.
The representative has advised the Company that it does not expect any sales of
the shares of common stock offered hereby to be made to discretionary accounts
controlled by the underwriters.
The Company's common stock has not been quoted or traded on any securities
market prior to this offering. Accordingly, the Company is determining the price
of the common stock in this offering in the same manner that the price of common
stock offered in an initial public offering is determined - through consultation
and negotiation with the representative of the underwriters. Among the factors
to be considered in such negotiations are the preliminary demand for the common
stock, the prevailing market and economic conditions, the Company's results of
operations, estimates of the business potential and earnings prospects of the
Company, the present state of the Company's business operations, an assessment
of the Company's management, the number of shares of common stock being offered
and the total number of shares to be outstanding upon completion of this
offering, the price that purchasers might be expected to pay for the common
stock given the nature of the Company and the general condition of the
securities markets at the time of the offering, the consideration of these
factors in relation to the market valuation of comparable companies in related
businesses or whose operations are conducted in the same geographic area as
those of the Company and the current condition of the markets in which the
Company operates. There can be no assurance that an active trading market will
develop for the common stock after this offering or that the common stock will
trade in the public market subsequent to this offering at or above the initial
public offering price.
Application has been made to list the common stock for quotation on the Nasdaq
Small Cap Market under the symbol "IHPI."
The underwriting agreement provides that the Company will indemnify the
underwriters and their controlling persons against certain liabilities under the
Securities Act or will contribute to payments the underwriters and their
controlling persons may be required to make in respect thereof. The Company is
generally obligated to indemnify the underwriters and their respective
controlling persons in connection with losses or claims arising out of any
untrue statement of a material fact contained in this prospectus or in related
documents filed with the Securities and Exchange Commission or with any state
securities administrator or arising out of any omission to state in any of such
documents any material fact required to be stated in such documents or necessary
to make the statements made in such documents, in light of the circumstances
under which they were made, not misleading. In addition, the Company is
generally obligated to indemnify the underwriters and their respective
controlling persons in connection with losses or claims arising out of any
breach of any representation, warranty agreement or covenant of the Company
contained in the underwriting agreement.
The foregoing is a summary of the principal terms of the underwriting agreement
and the representative's warrants, it does not purport to be complete and is
qualified in its entirety by reference to the form of underwriting agreement and
the form of representative's warrant which have been filed as exhibits to the
Company's registration statement of which this prospectus is a part.
41
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Sichenzia, Ross & Friedman LLP, New York, New York.
EXPERTS
The financial statements of the Company as of March 31, 1999 and for the year
ended March 31, 1999 included in this prospectus have been audited by Grant
Thornton LLP, independent public accountants, as stated in their report
appearing herein and are so included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of the Company as of March 31, 1998 and for the year
ended March 31, 1998 included in this prospectus have been audited by Kirkland,
Russ, Murphy & Tapp, independent public accountants, as stated in their report
appearing herein and are so included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports, proxy or
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the following regional offices: Seven World Trade Center, New
York, New York 10048, and Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C.20549, at prescribed rates. In addition, the Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's website is http://www.sec.gov.
The Company has filed with the Commission, a registration statement on Form SB-2
under the Securities Act of 1933 with respect to the common stock being offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to the Company and the common stock offered hereby, reference is made to
the registration statement, and such exhibits and schedules. A copy of the
registration statement, and the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
at the addresses set forth above, and copies of all or any part of the
registration statement may be obtained from such offices upon payment of the
fees prescribed by the Commission. In addition, the registration statement may
be accessed at the Commission's website. Statements contained in this prospectus
as to the contents of any contract or other document are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited pro forma combined financial statements......................F-2 - F-3
Report of Independent Certified Public Accountants.....................F-4 - F-5
Combined Balance Sheets - as of March 31, 1998 and 1999
and as of September 30, 1999 (unaudited)................................F-6
Combined Statements of Operations - for each of the years ended
March 31, 1998 and 1999 and for each of the six month periods
ended September 30, 1998 and 1999 (unaudited)...........................F-7
Combined Statements of Shareholder's Equity (Deficit) - for each
of the years ended March 31, 1998 and 1999 and for the six month
period ended September 30, 1999 (unaudited).............................F-8
Combined Statements of Cash Flows - for each of the years ended
March 31, 1998 and 1999 and for each of the six month periods
ended September 30, 1998 and 1999 (unaudited)....................F-9 - F-10
Notes to Combined Financial Statements..........................F-11 - F-24
F-1
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statement gives effect to
the acquisition of the capital stock of Energy Factors, Inc. (which was
subsequently renamed innovative Health products, Inc.) by Dynamic Health
products, Inc.
A Pro Forma Combined Balance Sheet is not presented as the acquisition occurred
prior to March 31, 1999. The Pro Forma Combined Statement of Operations for the
fiscal year ended March 31, 1999 gives effect to the acquisition as if it had
occurred as of april 1, 1998.
The pro forma adjustments are based on estimates, available information and
certain assumptions that management deems appropriate. The pro forma financial
data do not purport to represent what the financial position or results of
operations would actually have been if such transactions had occurred on those
dates and are not necessarily representative of the financial position or
results of operations for any future period. The pro forma financial statements
should be read in conjunction with the historical financial statements and notes
thereto included elsewhere in this prospectus. See "Risk Factors" included
elsewhere herein.
F-2
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
INNOVATIVE ENERGY
FOR THE FACTORS
YEAR ENDED APRIL 1, 1998 INNOVATIVE
MARCH 31, TO JUNE 12, PRO FORMA PRO FORMA
1999 1998 TOTAL ADJUSTMENT COMBINED
----------- ----------- ----------- ----------- -----------
(Audited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 5,040,054 $ 658,565 $ 5,698,619 $ -- $ 5,698,619
Cost of sales 3,519,041 562,026 4,081,067 -- 4,081,067
----------- ----------- ----------- ----------- -----------
Gross profit 1,521,013 96,539 1,617,552 -- 1,617,552
Selling, general and
administrative expenses 1,589,961 364,451 1,954,412 (40,267) (a) 1,914,145
----------- ----------- ----------- ----------- -----------
Operating loss (68,948) (267,912) (336,860) 40,267 (296,593)
Other expense (167,596) (31,383) (198,979) 12,500 (a) (186,479)
----------- ----------- ----------- ----------- -----------
Loss before income taxes (236,544) (299,295) (535,839) 52,767 (483,072)
Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss $ (236,544) $ (299,295) $ (535,839) $ 52,767 $ (483,072)
=========== =========== =========== =========== ===========
Basic and diluted loss
per share $ (.12) $ (.24)
=========== ===========
Basic and diluted weighted
number of common
shares outstanding 2,000,000 2,000,000
========= ===========
(a) Adjustment reflects the following:
Selling, general and administrative expenses:
Decrease in executive salaries and related payroll taxes through
employment contracts and dismissals associated with Energy Factors $ (47,970)
Decrease in depreciation expense due to fair market value adjustments on assets acquired
associated with Energy Factors (9,762)
Increase in amortization of goodwill associated with Energy Factors 17,465
-----------
$ (40,267)
===========
Other expense:
Decrease in interest expense associated with Energy Factors termination of factoring
agreements on accounts receivable $ 12,500
===========
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Innovative Health Products, Inc.
We have audited the accompanying combined balance sheet of Innovative Health
Products, Inc. and Herbal Health Products, Inc. as of March 31, 1999 and the
related combined statements of operations, shareholder's equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined 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 combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Innovative
Health Products, Inc. and Herbal Health Products, Inc. as of March 31, 1999 and
the combined results of operations and cash flows for the year ended March 31,
1999, in conformity with generally accepted accounting principles.
By: /s/ GRANT THORNTON LLP
- --------------------------
Grant Thornton LLP
Tampa, Florida
October 14, 1999
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors
Nu-Wave Health products, Inc.
We have audited the accompanying balance sheet of Nu-Wave Health Products, Inc.
(a wholly owned subsidiary of dynamic Health Products, Inc., formerly known as
Direct Rx Healthcare, inc.) as of March 31, 1998 and the related statements of
operations, shareholders' equity (deficit), and cash flows for the year ended
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nu-Wave Health Products, Inc.
as of March 31, 1998 and the results of its operations and its cash flows for
the year ended March 31, 1998, in conformity with generally accepted accounting
principles.
BY: /s/ KIRKLAND, RUSS, MURPHY & TAPP
---------------------------------
Kirkland, Russ, Murphy & Tapp
Clearwater, Florida
November 1, 1999
F-5
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1999 1999
----------- ----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 239,604 $ 25,395 $ 111,386
Accounts receivable, net 179,099 906,167 663,054
Inventories 224,632 1,357,859 1,544,325
Prepaid expenses and other current assets 20,492 108,011 138,726
Due from affiliates, net -- 128,806 251,090
----------- ----------- -----------
Total current assets 663,827 2,526,238 2,708,581
Property, plant and equipment, net 176,462 2,354,496 946,216
Intangible assets (primarily goodwill), net 8,223 920,556 969,583
Other assets 25,486 55,882 51,752
----------- ----------- -----------
TOTAL ASSETS $ 873,998 $ 5,857,172 $ 4,676,132
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 331,715 $ 1,231,807 $ 1,329,874
Accrued expenses 72,397 167,143 109,323
Credit line payable -- 949,139 810,811
Obligations to related parties -- 25,000 111,500
Obligations to parent 247,836 2,080,509 596,226
Current portion of long-term obligations 28,927 369,508 201,059
----------- ----------- -----------
Total current liabilities 680,875 4,823,106 3,158,793
Long-term obligations, less current portion 258,974 1,336,461 524,260
----------- ----------- -----------
TOTAL LIABILITIES 939,849 6,159,567 3,683,053
Commitments and contingencies -- -- --
Shareholder's equity (deficit):
Preferred stock, 8% cumulative, no par value,
6,000,000 shares authorized, 0, 0, and 150,000
issued and outstanding, at face value -- -- 1,500,000
Common stock, $.01 par value; 24,000,000 shares
authorized; 2,000,000 shares issued and outstanding 20,000 20,000 20,000
Additional paid-in capital -- -- --
Accumulated deficit (85,851) (322,395) (526,921)
----------- ----------- -----------
TOTAL SHAREHOLDER'S EQUITY (DEFICIT) (65,851) (302,395) 993,079
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) $ 873,998 $ 5,857,172 $ 4,676,132
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ 1,906,935 $ 5,040,054 $ 2,141,213 $ 3,062,656
COST OF GOODS SOLD 1,388,816 3,519,041 1,582,526 2,123,395
----------- ----------- ----------- -----------
GROSS PROFIT 518,119 1,521,013 558,687 939,261
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 468,578 1,589,961 518,407 1,089,651
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) BEFORE OTHER
INCOME (EXPENSE) 49,541 (68,948) 40,280 (150,390)
OTHER INCOME (EXPENSE):
Other income and expenses, net 5,026 85,813 88,069 120,375
Interest expense (4,592) (253,409) (99,337) (174,511)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 434 (167,596) (11,268) (54,136)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 49,975 (236,544) 29,012 (204,526)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 49,975 $ (236,544) $ 29,012 $ (204,526)
=========== =========== =========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE $ .02 $ (.12) $ .01 $ (.10)
=========== =========== =========== ===========
BASIC AND DILUTED WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 2,000,000 2,000,000 2,000,000 2,000,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHAREHOLDER'S
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED EQUITY
SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1997 -- $ -- 2,000,000 $ 20,000 $ -- $ (135,826) $ (115,826)
Net income -- -- -- -- -- 49,975 49,975
----------- ----------- ----------- -------- ----------- ----------- -----------
BALANCES AT MARCH 31, 1998 -- -- 2,000,000 20,000 -- (85,851) (65,851)
Net loss -- -- -- -- -- (236,544) (236,544)
----------- ----------- ----------- -------- ----------- ----------- -----------
BALANCES AT MARCH 31, 1999 -- -- 2,000,000 20,000 -- (322,395) (302,395)
Conversion of obligations to parent to
preferred stock (unaudited) 150,000 1,500,000 -- -- -- -- 1,500,000
Net loss (unaudited) -- -- -- -- -- (204,526) (204,526)
----------- ----------- ----------- -------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1999 (UNAUDITED) 150,000 $ 1,500,000 2,000,000 $ 20,000 $ -- $ (526,921) $ 993,079
=========== =========== =========== ======== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 49,975 $ (236,544) $ 29,012 $ (204,526)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 32,614 229,233 74,815 129,674
Gain on involuntary conversion of property -- (81,192) (81,192) --
Changes in operating assets and liabilities
(exclusive of effect of business acquisitions):
Accounts receivable (64,415) (708,513) (432,215) 243,113
Inventories (116,586) (494,275) (52,095) (186,466)
Other assets (13,199) (31,070) 33,779 (69,614)
Prepaid expenses and other current assets (5,064) (16,157) 84,581 (30,715)
Accounts payable 142,897 (89,561) (456,241) 98,067
Accrued expenses -- (42,500) 13,092 (20,770)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 26,222 (1,470,579) (786,464) (41,237)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (37,147) (174,772) (6,503) (144,996)
Proceeds from involuntary conversion of property -- 99,100 99,100 --
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (37,147) (75,672) 92,597 (144,996)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving line of credit agreement -- 949,139 -- (138,328)
Proceeds from issuance of long-term obligations 240,200 638,419 -- --
Payments of long-term obligations (21,567) (838,180) (136,327) (224,676)
Proceeds from issuance of related party obligations -- -- -- 86,500
Increase in obligations to/from parent and affiliates, net -- 582,664 591,271 548,728
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 218,633 1,332,042 454,944 272,224
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 207,708 (214,209) (238,923) 85,991
CASH AT BEGINNING OF PERIOD 31,896 239,604 239,604 25,395
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 239,604 $ 25,395 $ 681 $ 111,386
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
COMBINED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,036 $250,956 $ 78,863 $143,884
Cash paid during the period for income taxes $ -- $ -- $ -- $ --
</TABLE>
During the fiscal year ended March 31, 1998, the Company incurred $63,635 of
capital lease obligations for the purchase of equipment.
During the fiscal year ended March 31, 1999, Dynamic acquired Energy Factors and
certain assets of Gerald Schmoling, which resulted in the recording on the books
of the Company of approximately $3.0 million of tangible assets, approximately
$900,000 of goodwill, approximately $3.0 million of liabilities and
approximately $900,000 of obligations to Dynamic.
In September 1999, the Company transferred approximately $1.5 million of land
and building to its parent. In conjunction with the property transfer,
approximately $484,000 of the Company's obligations to its parent were
extinguished (see Note 14).
In September 1999, the company issued 150,000 shares of its preferred stock to
its parent in conversion of $1,500,000 of the Company's obligations to its
parent.
See accompanying notes to combined financial statements.
F-10
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 1 - BACKGROUND INFORMATION
Innovative Health Products, Inc. ("Innovative") is combined with Herbal Health
Products, Inc. ("Herbal"), both of which are wholly owned subsidiaries of
Dynamic Health products, Inc. ("Dynamic" or the "parent"). In June 1998, Dynamic
acquired Energy Factors, Inc. which was then renamed Innovative Health products,
Inc. at which time the manufacturing operations of Dynamic, formerly Nu-Wave
Health Products, Inc. ("NuWave"), were transferred to the Company. Subsequent to
June 1998, Dynamic became a holding company and maintained the records of the
corporation.
As a result, the operations of NuWave are included in the financial statements
through June 1998, at which time they were merged into the operations of
Innovative. Subsequent to June 1998, the financial statements represent the
operations of Innovative and those of Herbal after Dynamic's December 1998
formation of Herbal and Herbal's acquisition of certain assets and liabilities
of Dr. Gerald Schmoling.
Innovative creates, manufactures, develops, packages and distributes a wide
variety of proprietary and private label non-prescription medications,
nutritional supplements and health and beauty care products. Innovative's
primary business is the contract manufacture of products for others throughout
the United States. The channels of distribution for the products it manufactures
for others include health food, drug, convenience and mass market stores, and
direct marketing and catalog sales.
Herbal develops, markets and distributes health supplements for pets, horses and
people. The channels of distribution for the products it sells include direct
marketing and mail order to veterinary clinics, feed stores, animal boarding
facilities, and health food, drug, and convenience stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF COMBINATION
The financial statements include the accounts of NuWave through June 1998 and
Dynamic's wholly owned subsidiaries, Innovative Health Products, Inc. and Herbal
Health Products, Inc. (together, the "Company"). Significant intercompany
balances and transactions have been eliminated in the combination.
b. RESTATEMENT
Unless otherwise noted, all information has been adjusted to retroactively
reflect the Company's common stock split to 2,000,000 shares issued and
outstanding.
c. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
F-11
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
d. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
e. PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives (asset categories range from three to seven years).
Leasehold improvements are amortized using the straight-line method over the
lives of the respective leases or the service lives of the improvements,
whichever is shorter. Leased equipment under capital leases is amortized using
the straight-line method over the lives of the respective leases or over the
service lives of the assets for those leases that substantially transfer
ownership. Accelerated methods are used for tax depreciation.
f. INTANGIBLE ASSETS
Intangible assets consist primarily of the excess of cost over the net assets
acquired relating to the acquisitions (see Note 3). The excess of cost over net
assets acquired (goodwill) is amortized over a 20-year period, using the
straight-line method. Amortization expense totaled $3,367, $44,739, $18,637 and
$24,717 for the years ended March 31, 1998 and 1999 and the six months ended
September 30, 1998 and 1999, respectively. Accumulated amortization totaled
approximately $9,000, $45,000 and $69,000 at March 31, 1998 and 1999 and
September 30, 1999, respectively.
g. IMPAIRMENT OF ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, the Company's policy is to evaluate whether
there has been a permanent impairment in the value of long-lived assets, certain
identifiable intangibles and goodwill when certain events have taken place that
indicate that the remaining balance may not be recoverable. When factors
indicate that the intangible assets should be evaluated for possible impairment,
the Company uses an estimate of related undiscounted cash flows. Factors
considered in the valuation include current operating results, trends and
anticipated undiscounted future cash flows. There have been no impairment losses
for the fiscal years 1998 or 1999 or for the six month period ended September
30, 1999.
F-12
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
h. INCOME TAXES
The Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. Under the liability
method specified by SFAS 109, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. The Company is part of the parent company,
Dynamic Health Products, Inc.'s consolidated group tax return; accordingly, the
deferred taxes as described in Note 8, reflect that portion of the consolidated
group attributable to the Company.
i. EARNINGS PER COMMON SHARE
Earnings per share are computed using the basic and diluted calculations on the
face of the statement of operations. Basic earnings (loss) per share is
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss) per
share is calculated by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method. There were
no potentially dilutive instruments outstanding for all periods presented.
j. 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 disclosures of
contingent assets and liabilities at March 31, 1998 and 1999 and September 30,
1999, as well as the reported amounts of revenues and expenses for the periods
then ended. The actual outcome of the estimates could differ from the estimates
made in the preparation of the financial statements.
k. REVENUE RECOGNITION
Revenues are recognized for the Company when the merchandise is shipped to the
customer.
l. ADVERTISING COSTS
The Company charges advertising costs to expense as incurred. Advertising
expense was $1,500, $29,600, $2,100 and $37,500 for the years ended March 31,
1998 and 1999 and the six months ended September 30, 1998 and 1999,
respectively.
F-13
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
m. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The
carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate their
fair value due to their relatively short maturity.
LONG-TERM OBLIGATIONS: The fair value of the Company's fixed-rate
long-term obligations is estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. At March 31, 1998 and 1999 and
September 30, 1999, the fair value of the Company's long-term
obligations approximated its carrying value.
CREDIT LINE PAYABLE: The carrying amount of the Company's credit line
payable approximates fair market value since the interest rate on these
instruments changes with market interest rates.
n. OBLIGATIONS TO PARENT
Obligations to the parent arise primarily as Dynamic's available cash is
advanced to the Company for purposes of consolidated cash management. The
Company repays Dynamic's cash advances, as Dynamic requires funds for
operations.
A management fee is charged to the Company by Dynamic, which represents the
Company's portion of corporate general and administrative expenses.
o. UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements and the related notes thereto for September
30, 1998 and 1999 include all normal and recurring adjustments which, in the
opinion of management, are necessary for a fair presentation and are prepared on
the same basis as audited annual statements. The interim results are not
necessarily indicative of the results that may be expected for the full year.
p. RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for the
years ended March 31, 1998 and 1999 to conform to the presentation at September
30, 1999.
F-14
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 3 - ACQUISITIONS AND MERGERS
On June 12, 1998, Energy Factors, Inc., a wholly-owned subsidiary of U.S.
Diversified Technologies, Inc. was acquired by an exchange of its capital stock
for 310,000 shares of Series A Convertible Preferred Stock of Dynamic
representing a fair market value of approximately $775,000. The Preferred Stock
valuation of $2.50 per share is based on several factors, including prices of
recent common stock issuances of Dynamic. The acquisition was accounted for
under the purchase method of accounting and has been recorded on the books of
the Company. Management has determined that the goodwill of approximately
$881,000 associated with this transaction will be amortized over a 20-year life.
Subsequent to the acquisition, Energy Factors, Inc. changed its name to
Innovative Health products, Inc. The results of operations of Innovative have
been reflected in the Company's results of operations beginning immediately
subsequent to the acquisition date of June 12, 1998.
The aggregate purchase price of $775,000 was allocated as follows:
Inventory $ 575,000
Property, plant and equipment 2,167,000
Other assets 82,000
Goodwill 881,000
----------
3,705,000
Less: liabilities assumed (2,930,000)
----------
$ 775,000
==========
The following pro forma information has been derived from the historical
financial statements of Innovative and such information has been adjusted to
give effect to the acquisition of Energy Factors, assuming that the acquisition
of Energy Factors occurred on April 1, 1997. The unaudited pro forma financial
information is not necessarily indicative of the results which would actually
have occurred had the transaction been in effect on the dates and for the
periods indicated or which may result in the future.
YEARS ENDED MARCH 31,
------------------------------
1998 1999
---------- ----------
Revenues $7,661,000 $5,699,000
Operating loss $ (286,000) $ (297,000)
Net loss $ (316,000) $ (483,000)
Net loss per common share $ (0.16) $ (0.24)
On December 29, 1998, Herbal Health Products, Inc. was formed. Herbal acquired
approximately $160,000 of the assets of Dr. Gerald Schmoling and assumed
approximately $120,000 of the liabilities of Dr. Gerald Schmoling in return for
approximately $18,000 and 32,243 shares of common stock of the Dynamic valued at
$80,608. The acquisition was accounted for under the purchase method of
accounting and resulted in goodwill of approximately $60,000. The results of
operations of Herbal have been reflected in the Company's results of operations
beginning immediately subsequent to the acquisition by Dynamic on December 29,
1998. Pro forma information for Herbal is not provided due to its immateriality.
F-15
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 4 - ACCOUNTS RECEIVABLE, net
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------- SEPTEMBER 30,
1998 1999 1999
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Trade accounts receivable $ 207,599 $ 1,007,925 $ 770,408
Less allowance for doubtful accounts (28,500) (101,758) (107,354)
----------- ----------- ---------
$ 179,099 $ 906,167 $ 663,054
=========== =========== =========
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------- SEPTEMBER 30,
1998 1999 1999
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Raw materials $156,247 $ 737,625 $1,258,537
Work in process 56,048 180,838 158,925
Finished goods 12,337 439,396 126,863
-------- ---------- ----------
$224,632 $1,357,859 $1,544,325
======== ========== ==========
</TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, net
Property, plant and equipment, net, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------- SEPTEMBER 30,
1998 1999 1999
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Land and building $ -- $1,421,460 $ --
Machinery and equipment 196,784 1,005,931 1,045,077
Furniture, fixtures and equipment 14,998 126,880 138,613
Vehicles -- 14,293 14,293
Leasehold improvements 13,766 19,514 19,514
---------- ---------- ----------
225,548 2,588,078 1,217,497
Less accumulated depreciation and
amortization (49,086) (233,582) (271,281)
---------- ---------- ----------
$ 176,462 $2,354,496 $ 946,216
========== ========== ==========
</TABLE>
F-16
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, net - (CONTINUED)
Depreciation and leasehold amortization expense totaled $29,271, $184,494,
$56,178 and $104,957 for the years ended March 31, 1998 and 1999 and the six
months ended September 30, 1998 and 1999.
See Note 14 for discussion of the land and building transfer.
NOTE 7 - RELATED PARTY TRANSACTIONS
For the fiscal year ended March 31, 1999 and for the six months ended September
30, 1998 and 1999, revenues of approximately $297,000, $82,000 and $211,000,
respectively, were recorded from sales by the Company to other companies owned
by Dynamic.
In August and September 1999, the Company borrowed a total of $86,500 from the
Chairman of the Company. The notes bear interest at 10% per annum and interest
totaled $728 for the six months ended September 30, 1999. The notes have since
been repaid.
In June 1998, the Company assumed a $25,000 note payable to the Company's Vice
Chairman of Business Development, associated with the June 12, 1998 Energy
Factors acquisition. The note bears interest at 10.8% per annum and interest
totaled $229 for the year ended March 31, 1999 and $1,583 for the six months
ended September 30, 1999. The note is to be repaid in 24 equal monthly payments
beginning September 1, 1999.
Due from affiliates represents balances owed the Company, predominantly from
Dynamic Life, Inc., a wholly owned subsidiary of the parent, for products
manufactured by the Company for Dynamic Life, Inc. The receivables have no
maturity date and are non-interest bearing.
The Company has agreed to lease its facilities in Largo, Florida for a ten year
term from the parent at approximately $192,000 annually (see Note 9).
A management fee is charged to the Company by the parent, which represents the
Company's portion of corporate general and administrative expenses.
F-17
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 8 - INCOME TAXES
Income taxes for the years ended March 31, 1998 and 1999 and the six months
ended September 30, 1998 and 1999 differ from the amounts computed by applying
the effective U.S. federal income tax rate of 34% to income before income taxes
as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
----------------------- -----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Computed tax expense at the
statutory rate $ 17,000 $(80,000) $ 10,000 $(69,000)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal
tax benefit 2,000 (8,000) 1,000 (7,000)
Effect of permanent differences,
principally non-deductible
goodwill -- 16,000 6,000 10,000
Utilization of net operating loss
carryforwards (19,000) (12,000) (12,000) --
Change in valuation allowance -- 84,000 (5,000) 66,000
-------- -------- -------- --------
Income tax expense $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
Temporary differences that give rise to deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------------- -------------
1998 1999 1999
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Bad debts $ 11,000 $ 38,000 $ 40,000
Inventories 1,000 1,000 1,000
Accrued vacation -- 3,000 4,000
Deposits -- 31,000 11,000
Net operating loss carryforwards 13,000 315,000 398,000
--------- --------- ---------
Gross deferred tax assets 25,000 388,000 454,000
Less: valuation allowance (14,000) (86,000) (152,000)
--------- --------- ---------
$ 11,000 $ 302,000 $ 302,000
========= ========= =========
Deferred tax liabilities:
Fixed asset basis differences $ 11,000 $ 302,000 $ 302,000
========= ========= =========
</TABLE>
F-18
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 8 - INCOME TAXES - (CONTINUED)
At March 31, 1999, the Company has tax net operating loss carryforwards of
approximately $840,000, to offset future taxable income. The tax net operating
loss carryforwards begin to expire in 2009. Realization of any portion of the
deferred tax assets is uncertain. Accordingly, a valuation allowance has been
established for the full amount of the deferred tax asset.
The Company acquired tax operating loss carryforwards of approximately $650,000
in conjunction with the acquisitions. The use of pre-acquisition losses is
subject to limitations imposed by the Internal Revenue Code. As a result, their
tax operating loss carryforwards were assigned a fair value of $-0- at
acquisition and are not included in the Company's net operating loss
carryforwards.
Other consolidated tax group members may utilize the net operating losses (other
than the acquired losses) of the Company.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases for facilities and certain machinery and
equipment that expire at various dates through 2009. Certain leases provide an
option to extend the lease term. Certain leases provide for payment by the
Company of any increases in property taxes, insurance, and common area
maintenance over a base amount and others provide for payment of all property
taxes and insurance by the Company.
Future minimum lease payments, by year and in aggregate under non-cancelable
operating leases, consist of the following at March 31, 1999:
YEAR ENDING MARCH 31,
---------------------
2000 $ 226,770
2001 290,815
2002 223,080
2003 223,080
2004 217,900
Thereafter 1,056,000
----------
Total minimum lease payments $2,237,645
==========
In conjunction with the transfer of the land and building (see note 14), the
Company agreed to lease the building for a ten year term at approximately
$192,000 annually. The lease provides for an annual cost-of-living increase.
Management considers these lease terms to be comparable to those of unrelated
third parties. The future minimum lease payments as of March 31, 1999 have been
adjusted to reflect this commitment.
F-19
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Total rent expense for the years ended March 31, 1998 and 1999 and the six
months ended September 30, 1998 and 1999 was approximately $93,000, $80,000,
$43,000 and $50,000, respectively.
LITIGATION
The Company is, from time to time, involved in litigation relating to claims
arising out of its operations in the ordinary course of business. The Company
believes that none of the claims that were outstanding as of March 31, 1999 and
September 30, 1999 would have a material adverse impact on its financial
condition, results of operations, or cash flows.
YEAR 2000 ISSUE
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company will not be fully determinable until the Year
2000 and thereafter. The Company is in the process of completing the
installation of a new financial accounting software package and replaced or
updated all of the hardware associated with the operations that could have had a
material effect due to the Year 2000 issue. The Company is currently requesting
that all suppliers supply certification statements that comply with the Year
2000 requirements. If the Year 2000 modifications are not properly completed
either by the Company, Dynamic or entities with which the Company conducts
business, the Company's revenues and financial condition could be adversely
impacted.
NOTE 10 - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------- SEPTEMBER 30,
1998 1999 1999
-------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Notes payable collateralized by real
property, due in monthly principal
payments of $12,256 plus interest at a rate
of 12% through October 2002, requiring a
balloon payment due October 2002. $ -- $ 839,276 $ --
Note payable collateralized by certain
equipment, due in monthly principal
payments of $8,192 plus interest through
February 2004, interest rate at prime
(7.75% at March 31, 1999) plus 2.25%. -- 483,328 434,194
</TABLE>
F-20
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 10 - LONG-TERM OBLIGATIONS - (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
---------------------------- SEPTEMBER 30,
1998 1999 1999
-------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Capitalized lease obligations for
equipment, due in monthly principal and
interest payments of approximately
$7,499 through 2004. 54,314 198,080 138,107
Unsecured 10% notes payable due at April 30, 1999 225,000 -- --
Other 8,587 185,285 153,018
-------- ---------- -----------
287,901 1,705,969 725,319
Less current maturities (28,927) (369,508) (201,059)
-------- ---------- -----------
$258,974 $1,336,461 $ 524,260
======== ========== =========
</TABLE>
At March 31, 1999, aggregate maturities of long-term obligations are as follows:
YEAR ENDING MARCH 31,
---------------------
2000 $ 369,508
2001 233,061
2002 206,655
2003 789,477
2004 107,268
----------
$1,705,969
==========
NOTE 11 - CREDIT LINE PAYABLE
In February 1999, the Company established a $2 million revolving credit facility
scheduled to mature in February 2002. The credit available to the Company is
based on a percentage of eligible accounts receivable and inventory. A portion
of the proceeds from the line of credit was funded in the form of a 60-month
term loan for approximately $491,000 (see Note 10). The credit available to the
Company under this line was approximately $949,000 and $810,000 at March 31,
1999 and September 30, 1999. The facility imposes no financial covenants.
Minimum borrowing under the agreement is $1,000,000. The agreement places
limitations on disposition of assets and debt funding to transactions within the
normal course of business and restricts the payment of dividends to any
shareholder of record of any class of Company stock during the term of the
agreement. All borrowings accrue interest at prime (7.75% at March 31, 1999)
plus 2.25% and are secured by all assets of the company. At March 31, 1999 and
September 30, 1999, the Company had borrowed approximately $949,000 and
$810,000, respectively, under this facility.
F-21
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 11 - CREDIT LINE PAYABLE - (CONTINUED)
The credit line payable is included with current liabilities instead of
long-term liabilities, as management believes that this presentation better
reflects the utility of the current assets as the source of repayment for the
credit lines payable.
NOTE 12 - CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the distribution of sales over a large customer base as of March
31, 1999 and September 30, 1999. For the year ended March 31, 1999, three
customers represented approximately 32% of revenues derived from the Company's
operations. For the year ended March 31, 1998, four customers represented
approximately 67% of revenues derived from the Company's operations.
The Company has no concentration of customers within specific geographic areas
outside the United States that would give rise to significant geographic credit
risk.
NOTE 13 - SHAREHOLDER'S EQUITY
COMMON STOCK
As of September 30, 1999, the number of outstanding Common Stock shares have
been adjusted to 2,000,000 shares at $.01 par value per share, to reflect the
stock split. Subject to preferences that might be applicable to any Preferred
Stock, the holders of the Common Stock are entitled to receive dividends when,
as, and if declared from time to time by the Board of Directors out of funds
legally available therefor. Under the terms of the Company's current credit
facility, the Company is precluded from paying dividends. In the event of
liquidation, dissolution, or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities subject to prior distribution rights of any Preferred Stock then
outstanding. The Common Stock has no preemptive or conversion rights and is not
subject to call or assessment by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock.
F-22
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 13 - SHAREHOLDER'S EQUITY - (CONTINUED)
PREFERRED STOCK
The Company is authorized to issue 6,000,000 shares of Preferred Stock, no par
value per share, and issued 150,000 shares of Preferred Stock to its parent in
exchange for $1,500,000 of obligations due to its parent. The Board of Directors
has the authority, without any further vote or action by the Company's
shareholders, to issue Preferred Stock in one or more series and to fix the
number of shares, designations, relative rights (including voting rights),
preferences, and limitations of those series to the full extent now or hereafter
permitted by Florida law. The Company believes that this power to issue
Preferred Stock will provide flexibility in connection with possible corporate
transactions. The issuance of Preferred Stock, however, could adversely affect
the voting power of holders of Common Stock and restrict their rights to receive
payments upon liquidation and could have the effect of delaying, deferring, or
preventing a change in control of the Company.
STOCK OPTION PLAN
On September 30, 1999, the Company adopted a Company Stock Option Plan, which
provides for the grant to employees of incentive or non-qualified options to
purchase up to 500,000 shares of Common Stock. The exercise price represents the
estimated fair value of the Company's Common Stock at the time of the grant or
the proposed public offering price, whichever is greater, as approved by the
Board of Directors. All outstanding options vest upon the change in control of
the Company. Options granted under the Plan expire not later than ten years
after the date granted or sooner in the event of death, disability, retirement
or termination of employment.
THE NON-EMPLOYEE PLAN
The Non-Employee Plan provides for the grant of nonqualified stock options to
purchase up to 100,000 shares of Common Stock to members of the Board of
Directors who are not employees of the Company. As of the date of these
financial statements, such members held no options under the Non-Employee Plan.
Upon the completion of the offering, each non-employee director will be granted
options to purchase 4,000 shares of Common Stock for each full remaining year of
the director's term at the offering price. Thereafter, on the date on which a
new non-employee director is first elected or appointed he will automatically be
granted options to purchase 4,000 shares of Common Stock for each year of his
initial term. Each non-employee director will be granted options to purchase
4,000 shares of Common Stock for each year of any subsequent term to which he is
elected. All options become exercisable ratably over the director's term and
have an exercise price equal to the fair market value of the Common Stock on the
date of grant.
F-23
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC. AND HERBAL HEALTH PRODUCTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1999
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED)
In September 1999, the Company transferred land and building to its parent
company at net book value, which approximated market value. In conjunction with
the transfer, the parent satisfied all outstanding mortgages on the property and
reduced the Company's obligation to the parent by approximately $430,000, which
represented the difference between the net book value and amounts outstanding
under the then existing mortgages. Additionally, the Company agreed to lease the
property from the parent for $192,000 annually, subject to annual inflationary
adjustments, for a period of ten years.
In December 1999, the Company established a $500,000 revolving line of credit
with First Community Bank of America, to provide additional working capital for
the Company. The note is secured by a guarantee in the form of a Third Party
Pledge Agreement in favor of First Community Bank of America from the parent,
which is secured by the parent's $500,000 Certificate of Deposit with First
Community Bank of America. The line of credit bears interest initially at 6.5%
per annum. The interest rate on the line of credit varies and may change as
often as daily, and will be 2.1% over the rate paid on the Certificate of
Deposit which serves as collateral for this line of credit. Interest is payable
monthly and principal is due on November 10, 2000.
F-24
<PAGE>
1,000,000 SHARES
COMMON STOCK
[INNOVATIVE HEALTH PRODUCTS, INC. LOGO]
--------
PROSPECTUS
--------
KASHNER DAVIDSON SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS ________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Florida Act") permits a
Florida corporation to indemnify a present or former director or officer of the
corporation (and certain other persons serving at the request of the corporation
in related capacities) for liabilities, including legal expenses, arising by
reason of service in such capacity if such person shall have 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 in any criminal proceeding if such person had
no reasonable cause to believe his conduct was unlawful. However, in the case of
actions brought by or in the right of the corporation, no indemnification may be
made with respect to any matter as to which such director or officer shall have
been adjudged liable, except in certain limited circumstances. The Company's
Articles of Incorporation provide that the Company shall indemnify directors and
executive officers to the fullest extent now or hereafter permitted by the
Florida Act. In addition, the Company has entered into Indemnification
Agreements with its directors and executive officers in which the Company has
agreed to indemnify such persons to the fullest extent now or hereafter
permitted by the Florida Act, including in circumstances in which
indemnification and advancement of expenses are discretionary under the Florida
Act. The indemnification provided by the Florida Act and the Company's Articles
of Incorporation is not exclusive of any other rights to which a director or
officer may be entitled. The general effect of the foregoing provisions may be
to reduce the circumstances which an officer or director may be required to bear
the economic burden of the foregoing liabilities and expense. The Company
intends to obtain a liability insurance policy for its directors and officers as
permitted by the Florida Act, which may extend to, among other things, liability
arising under the Securities Act of 1933, as amended.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for the underwriters' indemnification of the company and its
directors and officers for certain liabilities arising under the Securities Act
or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities offered hereby.
SEC registration fee........................................ $ 2,472.42
NASD registration fee....................................... 1390.00
Nasdaq SmallCap Market listing fee.......................... 15,000.00
Boston Stock Exchange listing fee........................... 7,500.00
Printing and engraving...................................... 55,000.00
Accountants' fees and expenses.............................. 60,000.00
Legal fees.................................................. 100,000.00
Transfer agent's and warrant agent's fees and expenses...... 5,000.00
Blue Sky fees and expenses.................................. 50,000.00
Underwriter's non-accountable expense allowance............. 195,000.00
Underwriter's consulting agreement.......................... 108,000.00
Miscellaneous............................................... 40,638.58
------------
Total................................... $ 640,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company has not issued or sold any of its securities other than the
2,000,000 shares sold to its parent company, Dynamic Health Products, Inc. No
underwriters were involved in the transaction and there were no underwriting
discounts or commissions paid in connection therewith.
II-1
<PAGE>
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Specimen Stock Certificate of the Company *
4.2 Form of Underwriters' Warrant *
4.3 Form of Consulting Agreement with Underwriter
5.1 Opinion of Sichenzia, Ross & Friedman *
10.1 Form of Indemnification Agreement with officers and directors *
10.2 Form of 1999 Stock Option Plan *
10.3 Form of Employment Agreement with Paul A. Santostasi *
10.4 Form of Employment Agreement with Kotha S. Sekharam, Ph.D. *
10.5 Form of Employment Agreement with Mihir K. Taneja *
10.6 Lease of Company's Facility at 6950 Bryan Dairy Road, Largo, Florida
33777 *
21.1 List of Subsidiaries *
23.1 Consent of Grant Thornton, LLP, the Company's Independent Auditors
23.2 Consent of Kirkland, Russ, Murphy & Tapp, the Company's Independent
Auditors
23.2 Consent of Sichenzia, Ross & Friedman (included in Exhibit 5.1) *
* To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during
any period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post- effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) ((S)230.424(b) of this Chapter) if, in the
aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement of any material change to such information in the
Registration Statement.
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
(3) 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 Underwriter to permit prompt delivery to
each purchaser.
(4) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
(5) That, insofar as indemnification for liabilities arising from the
Securities Act 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
Commission such indemnification is against public policy as expressed in
the Securities 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 Securities Act and will be governed by
the final adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Company certifies that it
has reasonable grounds to believe that it meets all of the requirement for
filing on Form SB-2 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the State of
Florida on December 15, 1999.
INNOVATIVE HEALTH PRODUCTS, INC.
By: /s/ KOTHA S. SEKHARAM, PH.D., PRESIDENT
---------------------------------------
Kotha S. Sekharam, Ph.D., President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Jugal K.
Taneja and Kotha S. Sekharam, or either of them, his true and lawful
attorney-in-fact and agent, acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, any Amendments thereto and any Registration
Statement of the same offering which is effective upon filing pursuant to Rule
462(b) under the Securities Act, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent, each acting alone, full powers
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intends and
purposes as he might or could do in person, hereby ratifying and confirming all
said attorney-in-fact and agent, acting alone, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ JUGAL K. TANEJA Chairman of the Board and Director, December 15, 1999
- ------------------------------------ Innovative Health Products, Inc.
Jugal K. Taneja
/s/ KOTHA S. SEKHARAM President and Director December 15, 1999
- ------------------------------------ Innovative Health Products, Inc.
Kotha S. Sekharam
/s/ PAUL A. SANTOSTASI Vice Chairman, Business Development December 15, 1999
- ------------------------------------ Innovative Health Products, Inc.
Paul A. Santostasi
/s/ CAROL DORE-FALCONE Vice President and Chief Financial Officer December 15, 1999
- ------------------------------------ (principal financial and accounting officer),
Carol Dore-Falcone Innovative Health Products, Inc.
/s/ MIHIR K. TANEJA Vice President, Marketing and Secretary December 15, 1999
- ------------------------------------ Innovative Health Products, Inc.
Mihir K. Taneja
/s/ WILLIAM L. LAGAMBA Director December 15, 1999
- ------------------------------------- Innovative Health Products, Inc.
William L. LaGamba
/s/ RAKESH K. SHARMA, M.D. Director December 15, 1999
- ------------------------------------ Innovative Health Products, Inc.
Rakesh K. Sharma, M.D.
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Specimen Stock Certificate of the Company *
4.2 Form of Underwriters' Warrant *
4.3 Form of Consulting Agreement with Underwriter
5.1 Opinion of Sichenzia, Ross & Friedman *
10.1 Form of Indemnification Agreement with officers and directors *
10.2 Form of 1999 Stock Option Plan *
10.3 Form of Employment Agreement with Paul A. Santostasi *
10.4 Form of Employment Agreement with Kotha S. Sekharam, Ph.D. *
10.5 Form of Employment Agreement with Mihir K. Taneja *
10.6 Lease of Company's Facility at 6950 Bryan Dairy Road, Largo, Florida
33777 *
21.1 List of Subsidiaries *
23.1 Consent of Grant Thornton, LLP, the Company's Independent Auditors
23.2 Consent of Kirkland, Russ, Murphy & Tapp, the Company's Independent
Auditors
23.2 Consent of Sichenzia, Ross & Friedman (included in Exhibit 5.1) *
* To be filed by amendment.
INNOVATIVE HEALTH PRODUCTS, INC.
1,000,000 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
[ ], 2000
Kashner Davidson Securities Corporation
77 South Palm Avenue
Sarasota, Florida 34326
Gentlemen:
Innovative Health Products, Inc., a corporation organized under the
laws of the State of Florida and together with Herbal Health Products, Inc.,
("Herbal"), a corporation incorporated under the laws of Florida, which
Innovative Health Products, Inc. will acquire simultaneously with the closing of
this offering (collectively the "Company"), hereby confirms its agreement with
Kashner Davidson Securities Corporation, ("Kashner") as the managing underwriter
of its securities (the "Underwriter" and together with the several underwriters
the "Underwriters"), as set forth below.
The Company proposes to issue and sell to the Underwriters, severally
and not jointly, 1,000,000 shares of the Company's common stock, $.01 par value
per share (the "Common Stock"). The shares of Common Stock being sold by the
Company are referred to as the "Firm Shares." The Common Stock will be sold to
the public at a price of $[ ] per share and the Underwriter will be entitled to
a discount of [ ]% ($[ ] per share). The Underwriter shall also be entitled to a
3% non-accountable expense allowance as described herein.
In addition, for the sole purpose of covering over-allotments from the
sale of the Firm Shares the Company proposes to grant to the Underwriters an
option to purchase an additional 150,000 shares of Common Stock, (the "Firm
Option Shares" or the "Option Shares"), all as provided in Section 2(c) of this
agreement (the "Agreement") and to issue to you the Underwriter's Warrant (as
defined in Section 2 hereof) to purchase certain further additional shares of
Common Stock. The Firm Shares and the Option Shares are collectively referred to
herein as either the "Shares" or the "Securities".
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Underwriter that:
<PAGE>
(a) A registration statement on Form SB-2 (File No. 33-[ ]),
with respect to the Securities and the Underwriter's Warrant Securities (as
hereinafter defined), including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act "), and one
or more amendments to that registration statement may have been so filed. Copies
of such registration statement and of each amendment heretofore filed by the
Company with the Commission have been delivered to the Underwriters. After the
execution of this Agreement, the Company will file with the Commission either
(i) if the 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 that registration statement (or, if an amendment
thereto shall have been filed, in such amendment), 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
Underwriters prior to the execution of this Agreement, or (ii) if that
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to that registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriters prior to the execution of this
Agreement. The Company also may file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for purposes of registering
certain additional Securities, which registration statement shall become
effective upon filing with the Commission (the "Rule 462(b) Registration
Statement"). As used in this Agreement, the term "Registration Statement" means
that registration statement, as amended at the time it was or is declared
effective, and any amendment thereto that was or is thereafter declared
effective, including all financial schedules and exhibits thereto and any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined), together with any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with the Registration Statement (including the
prospectus subject to completion, if any, included in the Registration Statement
at the time it was or is declared 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 so filed pursuant to Rule 424(b), the prospectus
included in the Registration Statement. The Company has caused to be delivered
to the Underwriters copies of each Preliminary Prospectus and has consented to
the use of those copies for the purposes permitted by the Act. If the Company
has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement
has not been declared effective, then (i) the Company has filed a Rule 462(b)
Registration Statement in compliance with and that is effective upon filing
pursuant to Rule 462(b) and has received confirmation of its receipt and (ii)
the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When each Preliminary
Prospectus and each amendment and each supplement thereto was filed with the
Commission it (i) contained all statements required to be stated therein, in
accordance with, and complied with the requirements of, the Act and the rules
and regulations of the Commission thereunder and (ii) did not include any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement was or is
declared effective, it (i) contained or will contain all statements
2
<PAGE>
required to be stated therein in accordance with, and complied or will comply
with the requirements of, the Act and the rules and regulations of the
Commission thereunder 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 the
statements therein not misleading. When the Prospectus and each 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 so to be filed,
when the Registration Statement containing such Prospectus or amendment or
supplement thereto was or is declared effective) and on the Firm Closing Date
and any Option Closing Date (as each such term is hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The foregoing provisions of this paragraph (b)
do not apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
in reliance upon and in conformity with written information furnished to the
Company by the Underwriters specifically for use therein.
(c) The Company is duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdictions of
incorporation, and duly qualified or authorized to transact business as a
foreign corporation and is in good standing in each jurisdiction where the
ownership or leasing of its properties or the conduct of its businesses require
such qualification or authorization.
(d) The Company has full corporate power and authority, and
all necessary material authorizations, approvals, orders, licenses, certificates
and permits of and from all governmental regulatory authorities, to own or lease
its property and conduct its business as now being conducted and as proposed to
be conducted as described in the Registration Statement and the Prospectus (and,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(e) At the date of the Closing, the Company does not own,
directly or indirectly, an interest in any corporation, partnership, limited
liability company, joint venture, trust or other business entity, except for
Herbal.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company, have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other securities, other than as described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Firm Shares have been duly authorized, by all
necessary corporate action on the part of the Company and, when the Firm Shares
are issued and delivered to and paid for by the Underwriter pursuant to this
Agreement, the Firm Shares will be validly issued, fully paid, nonassessable and
free of preemptive rights and will conform to the description thereof in the
Prospectus (and, if the Prospectus is not in existence, the
3
<PAGE>
most recent Preliminary Prospectus). No holder of outstanding securities of the
Company is entitled as such to any preemptive or other right to subscribe for
any of the Securities, and no person is entitled to have securities registered
by the Company under the Registration Statement or otherwise under the Act other
than as described in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(g) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been
effected pursuant to an exemption from the registration requirements of the Act.
No compensation was paid to or on behalf of any member of the National
Association of Securities Dealers, Inc. ("NASD"), or any affiliate or employee
thereof, in connection with any such issuance.
(i) The financial statements of the Company included in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company as of the dates indicated and the results of operations
of the Company for the periods specified. Such financial statements have been
prepared in accordance with accounting principles generally accepted in effect
in the United States of America, consistently applied, except to the extent that
certain footnote disclosures regarding unaudited interim periods may have been
omitted in accordance with the applicable rules of the Commission under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The financial data
set forth under the caption "Summary Financial Information" in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein.
(j) Kirkland, Russ, Murphy &Tapp LLP has audited the financial
statements of the Company as of March 31, 1998 and Grant Thornton LLP has
audited the financial statements of the Company and Herbal as of March 31, 1999,
and each have delivered their report with respect to the financial statements
included in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), and are
independent public accountants with respect to the Company as required by the
Act and the applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (and, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (i) except as
otherwise contemplated therein, there has been no material adverse change in the
business, operations, condition (financial or otherwise), earnings or prospects
of the Company, whether or not arising in the ordinary course of business, (ii)
except as otherwise stated therein, there have been no transactions entered into
by the Company and no commitments made by the Company that, individually or in
the aggregate, are material with respect to the Company, (iii) there has not
been any change in the capital stock or indebtedness of the Company, and (iv)
there has been no dividend or distribution of any kind declared, paid or made by
the Company in respect of any class of its capital stock.
4
<PAGE>
(l) The Company has full corporate power and authority to
enter into and perform its obligations under this Agreement and the
Underwriter's Warrant Agreement (as hereinafter defined). The execution and
delivery of this Agreement and the Underwriter's Warrant Agreement have been
duly authorized by all necessary corporate action on the part of the Company and
this Agreement and the Underwriter's Warrant Agreement have each been duly
executed and delivered by the Company and each is a valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law), and except as rights to indemnity and contribution under this Agreement
may be limited by applicable law. The issuance, offering and sale by the Company
to the Underwriters of the Securities pursuant to this Agreement or the
Underwriter's Securities pursuant to the Underwriter's Warrant Agreement, the
compliance by the Company with the provisions of this Agreement and the
Underwriter's Warrant Agreement, and the consummation of the other transactions
contemplated by this Agreement and the Underwriter's Warrant Agreement do not
(i) require the consent, approval, authorization, registration or qualification
of or with any court or governmental or regulatory authority, except such as
have been obtained or may be required under state securities or blue sky laws
and, if the registration statement filed with respect to the Securities (as
amended) is not effective under the Act as of the time of execution hereof, such
as may be required (and shall be obtained as provided in this Agreement) under
the Act, or (ii) conflict with or result in a breach or violation of, or
constitute a default under, any material contract, indenture, mortgage, deed of
trust, loan agreement, note, lease or other material agreement or instrument to
which the Company is a party or by which the Company or any of its property is
bound or subject, or the certificate of incorporation or by-laws of the Company,
or any statute or any rule, regulation, judgment, decree or order of any court
or other governmental or regulatory authority or any arbitrator applicable to
the Company.
(m) No legal or governmental proceedings are pending to which
the Company is a party or to which the property of the Company is subject, and
no such proceedings have been threatened against the Company or with respect to
any of its property, except such as are described in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). 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 (and, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) or filed as required.
(n) The Company is not in (i) violation of its certificate of
incorporation, by-laws or other governing documents, (ii) violation in any
material respect of any law, statute, regulation, ordinance, rule, order,
judgment or decree of any court or any governmental or regulatory authority
applicable to it, or (iii) other than as described in the Prospectus, default in
any material respect in the performance or observance of any obligation,
agreement, covenant or condition contained in any material contract, indenture,
mortgage, deed of trust, loan agreement, note, lease or other material agreement
or instrument to which it is a party or by which it or any of its property may
be bound or subject, and no event has occurred which with notice or lapse of
time or both would constitute such a default.
5
<PAGE>
(o) The Company currently owns or possesses adequate rights to
use all intellectual property, including all trademarks, service marks, trade
names, copyrights, inventions, know-how, trade secrets, proprietary
technologies, processes and substances, or applications or licenses therefor,
that are described in the Prospectus (and if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and any other rights or interests in
items of intellectual property as are necessary for the conduct of the business
now conducted or proposed to be conducted by them as described in the Prospectus
(or, such Preliminary Prospectus), and, except as disclosed in the Prospectus
(and such Preliminary Prospectus), the Company is not aware of the granting of
any patent rights to, or the filing of applications therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict with asserted rights of others with respect to any of the foregoing.
All such intellectual property rights and interests are (i) valid and
enforceable and (ii) to the best knowledge of the Company, not being infringed
by any third parties.
(p) The Company possesses adequate licenses, orders,
authorizations, approvals, certificates or permits issued by the appropriate
federal, state or foreign regulatory agencies or bodies necessary to conduct its
business as described in the Registration Statement and the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
and, except as disclosed in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there are no pending or, to
the best knowledge of the Company, threatened, proceedings relating to the
revocation or modification of any such license, order, authorization, approval,
certificate or permit.
(q) The Company has good and marketable title to all of the
properties and assets reflected in the Company's financial statements or as
described in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind, except those
reflected in such financial statements or as described in the Registration
Statement and the Prospectus (and such Preliminary Prospectus). Except as
disclosed in the Prospectus, the Company occupies its leased properties under
valid and enforceable leases conforming to the description thereof set forth in
the Registration Statement and the Prospectus (and such Preliminary Prospectus).
(r) The Company is not and does not intend to conduct its
business in a manner in which it would be an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) The Company has obtained and delivered to the Underwriter
the agreements (the "Lock-up Agreements") with the officers, directors and
principal shareholders of the Company substantially to the effect that, among
other things, each such person will not, commencing on the date that the
Registration Statement is declared effective by the SEC (the "Effective Date")
and continuing for a period of eighteen (18) months thereafter, without the
prior written consent of the Underwriter, directly or indirectly, publicly sell,
offer or contract to sell or grant any option to purchase, transfer, assign or
pledge, or otherwise encumber, or dispose of any shares of Common Stock now or
hereafter owned by such person and that the purchaser or transferee in any
private sale agrees to be bound by the Lock-Up Agreement.
6
<PAGE>
(t) No labor dispute with the employees of the Company exists,
is threatened or, to the best of the Company's knowledge, is imminent that could
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 (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(u) 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 businesses in which it is engaged; 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 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, except as described in or contemplated by the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Underwriter's Warrant (as hereinafter defined) will
conform to the description thereof in the Registration Statement and in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and, when sold to and paid for by the Underwriter in
accordance with the Underwriter's Warrant Agreement, will have been duly
authorized and validly issued and will constitute valid and binding obligations
of the Company entitled to the benefits of the Underwriter's Warrant Agreement.
The shares of Common Stock issuable upon exercise of the Underwriter's Warrant
(the "Underwriter's Warrant Shares") have been duly authorized and reserved for
issuance upon exercise of the Underwriter's Warrant by all necessary corporate
action on the part of the Company and, when issued and delivered and paid for
upon such exercise in accordance with the terms of the Underwriter's Warrant
Agreement and the Underwriter's Warrant, respectively, will be validly issued,
fully paid, nonassessable and free of preemptive rights and will conform to the
description thereof in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or is
entitled to any commission, fee or other compensation or payment for services as
a finder for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriter with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. No promoter, officer,
director or stockholder of the Company is, directly or indirectly, affiliated or
associated with an NASD member and no securities of the Company have been
acquired by an NASD member, except as previously disclosed in writing to the
Underwriter.
(x) The Company has filed all federal, state, local and
foreign tax returns which are required to be filed through the date hereof, or
has received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it to the extent that the same are material and
have become due.
7
<PAGE>
(y) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the Company has,
directly or indirectly: used any corporate funds for unlawful contributions,
gifts, entertainment, or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment. No transaction has occurred between or
among the Company and any of its officers or directors or any affiliates of any
such officer or director, that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES AND THE UNDERWRITER'S
WARRANTS.
(a) 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 the
Underwriter, and the Underwriter agrees, to purchase from the Company, the
number of Firm Shares as set forth opposite its name on Schedule 1 annexed
hereto, at a purchase price of $[ ] per share.
(b) Certificates in definitive form for the Firm Securities
that the Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Underwriters request upon notice to the Company at least 48 hours prior to the
Firm Closing Date, shall be delivered by or on behalf of the Company to the
Underwriter, against payment by or on behalf of the Underwriters of the purchase
prices therefor by wire transfer of immediately available funds to a bank
account specified by the Company. Such delivery of the Firm Securities shall be
made at the offices of [ ], Counsel for the Underwriter, [ADDRESS] at [ ], New
York City time on [DAY], [DATE] 2000, within ten (10) business days from the
Effective Date, or at such other place, time or date as the Underwriter and the
Company may agree upon, such time and date of delivery against payment being
herein referred to as the "Firm Closing Date". The Company will make such
certificates for the Firm Securities available for checking and packaging by the
Underwriter, at such offices as may be designated by the Underwriter, at least
24 hours prior to the Firm Closing Date. In lieu of physical delivery, the
closing may occur by "DTC" delivery.
(c) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as contemplated
by the Prospectus, the Company hereby grants to the Underwriter an option to
purchase any or all of the Option Shares, which options are exercisable by the
Underwriter on behalf of and for the account of the Underwriter. The purchase
price to be paid for any of the Option Shares shall be the same price per share
for the Firm Securities
8
<PAGE>
set forth above in paragraph (a) of this Section 2. The option granted hereby
may be exercised as to all or any part of the Option Shares from time to time
within 45 calendar days after the Firm Closing Date. The Underwriter shall not
be under any obligation to purchase any of the Option Shares prior to the
exercise of such option. The Underwriter 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 Underwriter is 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 Underwriter but shall not be earlier than two business days
or later than three 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 Underwriter
and the Company may agree upon, is herein called the "Option Closing Date" with
respect to such Option Shares. Upon exercise of the option as provided herein,
the Company shall become obligated to sell to the Underwriter, and, subject to
the terms and conditions herein set forth, the Underwriter shall become
obligated to purchase from the Company, the Option Shares as to which the
Underwriter is then exercising its option. If the option is exercised as to all
or any portion of the Option Shares, certificates in definitive form for such
Option Shares, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (b) of this Section 2, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (c), to refer to such Option Shares and Option Closing Date,
respectively.
(d) On the Firm Closing Date, the Company will further issue
and sell to the Underwriter or, at the direction of the Underwriter, to bona
fide officers of the Underwriter, for an aggregate purchase price of $10,
warrants to purchase Common Stock (the "Underwriter's Warrant") entitling the
holders thereof to purchase an aggregate of 100,000 shares of Common Stock for a
period of four years, such period to commence on the first anniversary of the
Effective Date. The Underwriter's Warrant shall be exercisable at a price equal
to 120% of the public offering price of the Common Stock, and shall contain
terms and provisions more fully described herein below and as set forth more
particularly in the warrant agreement relating to the Underwriter's Warrant to
be executed by the Company on the Effective Date (the "Underwriter's Warrant
Agreement"), including, but not limited to, (i) customary anti-dilution
provisions in the event of stock dividends, split mergers, sales of all or
substantially all of the Company's assets, sales of stock below then prevailing
market or exercise prices and other events, and (ii) prohibitions of mergers,
consolidations or other reorganizations of or by the Company or the taking by
the Company of other action during the five-year period following the Effective
Date unless adequate provision is made to preserve, in substance, the rights and
powers incidental to the Underwriter's Warrant. As provided in the Underwriter's
Warrant Agreement, the Underwriter may designate that the Underwriter's Warrant
be issued in varying amounts directly to bona fide officers of the Underwriter.
As further provided, no sale, transfer, assignment, pledge or hypothecation of
the Underwriter's Warrant shall be made for a period of 12 months from the
Effective Date, except (i) by operation of law or reorganization of the Company,
or (ii) to the Underwriter and bona fide partners, officers (not directors)of
the Underwriter and selling group members.
3. OFFERING BY THE UNDERWRITER. The Underwriter propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus (the "Offering").
9
<PAGE>
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, 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 Securities is
required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the continuance of sales
of or dealings in the Securities in accordance with the provisions hereof and of
the Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission any prospectus or amendment referred to in the first sentence of
section (a) (i) hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement as to which the Underwriter shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Underwriter
shall not have given its consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Underwriter or counsel to the Underwriter, any
amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the Underwriter, and 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
Underwriter, 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 as been filed
and will provide evidence satisfactory to the Underwriter of each such filing or
effectiveness.
(b) The Company will advise the Underwriter, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the
suspension of the qualification of any Securities for offering or sale in any
jurisdiction, (iii) the institution, threat or contemplation of any proceeding
for any such purpose, or (iv) 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.
(c) The Company will, in cooperation with counsel to the
Underwriter, arrange for the qualification of the Securities for offering and
sale under the blue sky or securities laws of such jurisdictions as the
Underwriter may designate and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the
Securities 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
10
<PAGE>
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, 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 of the Commission thereunder,
the Company will promptly notify the Underwriter thereof and, subject to Section
4(a) 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.
(e) Intentionally left blank.
(f) The Company will, without charge, provide to the
Underwriter and to counsel for the Underwriter (i) as many signed copies of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) as the Underwriter
may reasonably request, (ii) as many conformed copies of such registration
statement and each amendment thereto (in each case without exhibits thereto) as
the Underwriter may reasonably request, and (iii) so long as a prospectus
relating to the Securities 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 Underwriter may reasonably request.
(g) The Company, as soon as practicable, will make generally
available to its security holders and to the Underwriter an earnings statement
of the Company that satisfies the provisions of Section 11 (a) of the Act and
Rule 158 thereunder.
(h) The Company will reserve and keep available for issuance
that maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of any outstanding warrants and the Underwriter's Warrant
(including the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of
the Securities being sold by it as set forth under "Use of Proceeds" in the
Prospectus.
(j) Intentionally left blank.
(k) Prior to the Closing Date or the Option Closing Date (if
any), the Company will not, directly or indirectly, without prior written
consent of the Underwriter, issue any press release or other public announcement
or hold any press conference with respect to the Company or its activities with
respect to the Offering (other than trade releases issued in the ordinary course
of the Company's business consistent with past practices with respect to the
Company's operations).
(l) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance upon
Rule 430A under the Act, then immediately following the execution of this
Agreement, the Company will prepare, and file or transmit for filing with the
Commission in accordance with Rule 430A and Rule 424(b) under the Act, copies of
the Prospectus including the information omitted in reliance on Rule 430A, or,
if required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
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<PAGE>
(m) The Company will assist the Underwriter in causing the
Securities to be listed on the Nasdaq SmallCap Market on the Effective Date and
to maintain such listing thereafter.
(n) During the period of five years from the Firm Closing
Date, the Company will, as promptly as possible, not to exceed 135 days, after
each annual fiscal period render and distribute reports to its stockholders
which will include audited statements of its operations and changes of financial
position during such period and its audited balance sheet as of the end of such
period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion and shall timely file all reports
required to be filed under the securities laws.
(o) During a period of three years commencing with the Firm
Closing Date, the Company will furnish to the Underwriter, at the Company's
expense, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(p) The Company has appointed American Securities Transfer &
Trust Inc., Denver Colorado, as transfer agent for the Common Stock, subject to
the Closing. The Company will not change or terminate such appointment for a
period of three years from the Firm Closing Date without first obtaining the
written consent of the Underwriter. For a period of three years after the
Effective Date, the Company shall cause the transfer agent to deliver promptly
to the Underwriter a duplicate copy of the daily transfer sheets relating to
trading of the Securities. The Company shall also provide to the Underwriter, on
a weekly basis, copies of the DTC special securities positions listing report.
(q) During the period of 180 days after the date of this
Agreement, the Company will not at any time, directly or indirectly, take any
action designed to or that will constitute, or that might reasonably be expected
to cause or result in, the stabilization of the price of the Common Stock to
facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the
sale of any shares of Common Stock pursuant to Rule 144 under the Act if any
such sale would violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the
Company will provide the Underwriter and their designees with four bound volumes
of the transaction documents relating to the Registration Statement and the
closing(s) hereunder, in form and substance reasonably satisfactory to the
Underwriter.
(t) The Company shall consult with the Underwriter prior to
the distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriter will consult with the Company prior to the issuance
of any research report or recommendation concerning the Company's securities.
Copies of all documents that the Company or its public relations firm intend to
distribute will be provided to the Underwriter for review prior to such
distribution.
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(u) The Company and the Underwriter will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent the Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriter will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
(v) The Company shall first submit to the Underwriter
certificates representing the Securities for approval prior to printing, and
shall, as promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(w) The Company will prepare and file a registration statement
with the Commission pursuant to section 12 of the 1934 Act, and will use its
best efforts to have such registration statement declared effective by the
Commission on an accelerated basis on the day after the Effective Date. For this
purpose the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
(x) For so long as the Securities are registered under the
1934 Act, the Company will hold an annual meeting of stockholders for the
election of directors within 180 days after the end of each of the Company's
fiscal years and within 135 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(y) The Company will take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions or other
equivalent manual and to maintain its listing therein for a period of five (5)
years from the Effective Date or until such time as the Company's securities are
listed on the Nasdaq National Market . Such application shall be made on an
accelerated basis no more than two days following the Effective Date.
(z) On or prior to the Effective Date, the Company will give
written instructions to the transfer agent for the Common Stock directing said
transfer agent to place stop-order restrictions against, and appropriate legends
advising of the Lock-Up Agreements on, the certificates representing the
securities of the Company owned by the persons who have entered into the Lock-up
Agreements.
5. EXPENSES
(a) The Company shall pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the Registration
Statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the selected dealer
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agreement and the other agreements and documents governing the underwriting
arrangements and any blue sky memoranda, (ii) all reasonable and necessary
arrangements relating to the delivery to the Underwriter of copies of the
foregoing documents, and the costs and expenses of the Underwriter in mailing or
otherwise distributing the same including telephone charges, duplications and
other accountable expenses, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv) the
preparation, issuance and delivery to the Underwriter of any certificates
evidencing the Securities, including transfer agent's, warrant agent's and
registrar's fees or any transfer or other taxes payable thereon, (v) the
qualification of the Securities under state blue sky or securities laws,
including filing fees and fees and disbursements of counsel relating thereto and
any fees and disbursements of local counsel, if any, retained for such purpose,
(vi) the filing fees of the Commission and the NASD relating to the Securities,
(vii) the inclusion of the Securities on The Nasdaq SmallCap Market and in the
Standard and Poor's Corporation Descriptions Manual, (viii) any "road shows" or
other meetings with prospective investors in the Securities, including
transportation, accommodation, meal, conference room, audio-visual presentation
an similar expenses, but not including such expenses for the Underwriter or
their designees and (ix) the publication of "tombstone advertisements" in
newspapers or other publications selected by the Underwriter, and the
manufacture of prospectus memorabilia. In addition to the foregoing, the
Company, shall reimburse the Underwriter for its expenses on the basis of a
non-accountable expense allowance in the amount of 3.00% of the gross offering
proceeds to be received by the Company. The non-accountable expense allowance,
based on the gross proceeds from the sale of the Firm Securities, shall be
deducted from the funds to be paid by the Underwriter in payment for the Firm
Securities, pursuant to Section 2 of this Agreement, on the Firm Closing Date.
To the extent any Option Shares are sold, any remaining non-accountable expense
allowance based on the gross proceeds from the sale of the Option Shares shall
be deducted from the funds to be paid by the Underwriter in payment for the
Option Shares, pursuant to Section 2 of this Agreement, on the Option Closing
Date. The Company warrants, represents and agrees that all such payments and
reimbursements will be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if
the Offering is terminated in accordance with the provisions of Section 6 or
Section 10(a), the Company agrees that, in addition to the Company paying its
own expenses as described in subparagraph (a) above, the Company shall pay
Underwriter a non-accountable out-of-pocket expense allowance (in addition to
expenses referred to in subparagraph (a) above) equal to 3% of the total
offering proceeds, up to a maximum of $210,000.
6. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Firm Shares shall be subject, in the
Underwriter's 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:
(a) If the Registration Statement, as heretofore amended, has
not been declared effective as of the time of execution hereof, the Registration
Statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been
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declared effective not later than 5:30 P.M., New York City time, on the date on
which the amendment to such Registration Statement containing information
regarding the initial public offering price of the Securities has been filed
with the Commission, or such later time and date as shall have been consented to
by the Underwriter; 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 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 Underwriter, 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).
(b) The Underwriter shall have received an opinion, dated the
Firm Closing Date, of Sichenzia, Ross & Friedman LLP, counsel to the Company,
substantially to the effect that:
(1) the Company and Herbal have been duly
incorporated and are validly existing as corporations in good standing under the
laws of the jurisdiction of their organization and are duly qualified to
transact business as a foreign corporation and is in good standing under the
laws of each other jurisdiction in which its ownership or leasing of any
properties or the conduct of its business requires such qualification, except
where the failure to be in good standing or so qualify would not have a
materially adverse effect upon the Company;
(2) the Company has full corporate power and
authority to own or lease its property and conduct its business as it is now
being conducted and as it is proposed to be conducted, as described in the
Registration Statement and the Prospectus, and the Company has full corporate
power and authority to enter into this Agreement and the Underwriter's Warrant
Agreement and to carry out all the terms and provisions hereof and thereof to be
carried out by it;
(3) to the knowledge of such counsel, there are
no outstanding options, warrants or other rights granted by the Company to
purchase shares of its Common Stock, preferred stock or other securities other
than as described in the Prospectus; the Shares have been duly authorized and
the Underwriter's Warrant Shares have been duly reserved for issuance by all
necessary corporate action on the part of the Company and the Shares when issued
and delivered to and paid for by the Underwriter, pursuant to this Agreement,
the Underwriter's Warrant when issued and delivered and paid for in accordance
with this Agreement and the Underwriter's Warrant Agreement by the Underwriter,
and the Underwriters Warrant Shares when issued upon payment of the exercise
price specified in the Underwriter's Warrant, will be validly issued, fully
paid, non-assessable and free of preemptive rights and will conform to the
description thereof in the Prospectus; to the knowledge of such counsel, no
holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Shares or the
Underwriter's Warrant Shares; and to the knowledge of such counsel, no person is
entitled to have securities registered by the Company under the Registration
Statement or otherwise under the Act other than as described in the Prospectus;
(4) the execution and delivery of this Agreement
and the Underwriter's Warrant Agreement have been duly authorized by all
necessary corporate action on the part of the
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Company and this Agreement and the Underwriter's Warrant Agreement have been
duly executed and delivered by the Company, and each is a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law) and except as rights to indemnity and contribution under this Agreement and
the Underwriter's Warrant Agreement may be limited by applicable securities laws
and the public policy underlying such laws;
(5) the Underwriter's Warrant is duly authorized
and upon payment of the purchase price therefore specified in Section 2(d) of
this Agreement will be validly issued and constitute valid and binding
obligations of the Company; and the certificates representing the Securities are
in due and proper form under law;
(6) the statements set forth in the Prospectus
under the caption "Description of Capital Stock" insofar as those statements
purport to summarize the terms of the capital stock and warrants of the Company,
provide a fair summary of such terms; to the knowledge of such counsel, the
statements set forth in the Prospectus describing statutes and regulations and
the descriptions of the consequences to the Company under such statutes and
regulations are fair summaries of the information set forth therein and are
accurate in all material respects; to the knowledge of such counsel, the
statements in the Prospectus, insofar as those statements constitute summaries
of the contracts, instruments, leases or licenses referred to therein,
constitute a fair summary in all material respects of those contracts,
instruments, leases or licenses and include all material terms thereof, as
applicable;
(7) none of (A) the execution and delivery of
this Agreement and the Underwriter's Warrant Agreement, (B) the issuance,
offering and sale by the Company to the Underwriter of the Securities pursuant
to this Agreement and the Underwriter's Warrant Shares pursuant to the
Underwriter's Warrant Agreement, or (C) the compliance by the Company with the
other provisions of this Agreement and the Underwriter's Warrant Agreement and
the consummation of the transactions contemplated hereby and thereby, to the
knowledge of such counsel (1) requires the consent, approval, authorization,
registration or qualification of or with any court or governmental authority
known to us, except such as have been obtained and such as may be required under
state blue sky or securities laws as to which we express no opinion or (2)
conflicts with or results in a breach or violation of, or constitutes a default
under, any material contract, indenture, mortgage, deed of trust, loan
agreement, note, lease or other material agreement or instrument known to such
counsel to which the Company is a party or by which the Company or any of its
property is bound or subject, or the certificate of incorporation or by-laws of
the Company, or any material statute or any judgment, decree, order, rule or
regulation of any court or other governmental or regulatory authority known to
us applicable to the Company;
(8) to the knowledge of such counsel, (A) no
legal or governmental proceedings are pending to which the Company is a party or
to which the property of the Company is subject except those arising in the
ordinary course of business and fully covered by insurance and (B) 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
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filed as required;
(9) to the knowledge of such counsel, the
Company possesses adequate licenses, orders, authorizations, approvals,
certificates or permits issued by the appropriate federal, state or local
regulatory agencies or bodies necessary to conduct its business as described in
the Registration Statement and the Prospectus, and, there are no pending or
threatened proceedings relating to the revocation or modification of any such
license, order, authorization, approval, certificate or permit, except as
disclosed in the Registration Statement and the Prospectus, which would have a
material adverse effect on the Company;
(10) The Company is not in violation or breach
of, or in default with respect to, any term of its certificate of incorporation
or by-laws, and to the knowledge of such counsel, the Company is not in (i)
violation in any material respect of any law, statute, regulation, ordinance,
rule, order, judgment or decree of any court or any governmental or regulatory
authority applicable to it, or (ii) default in any material respect in the
performance or observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, deed of trust, loan
agreement, note, lease or other material agreement or instrument to which it is
a party or by which it or any of its property may be bound or subject, and no
event has occurred which with notice, lapse of time or both would constitute
such a default;
(11) the Shares have been approved for inclusion on
the Nasdaq SmallCap Market and
the Boston Stock Exchange;
(12) 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
to our knowledge, 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 knowledge of such
counsel, are contemplated by the Commission;
(13) the Registration Statement originally filed
with respect to the Securities and each amendment thereto and the Prospectus (in
each case, other than the financial statements, the notes, schedules 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 of the
Commission thereunder; and
(14) the Company is not an "investment company"
as defined in Section 3(a) of the Investment Company Act of 1940 and, if the
Company conducts its business as set forth in the Prospectus, it will not become
an Investment company" and will not be required to register under the Investment
Company Act of 1940.
Such counsel also shall state in its opinion that it has
participated in the preparation of the Registration Statement and the Prospectus
and that nothing has come to its attention that has caused it to believe that
the Registration Statement, at the time it became effective (including the
information deemed to be a part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b), if applicable), contained an untrue
statement of a material fact or omitted to state
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a 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 as
of the Firm Closing Date, contained an untrue statement of material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
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, copies of which certificates will
be provided to the Underwriter, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriter, in form and substance acceptable to
the Underwriter, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriter's reliance upon such opinion is justified.
(c). A. At the time this Agreement is executed, the
Underwriter shall have received a letter, dated such date, addressed to the
Underwriter in form and substance satisfactory (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
in all respects to the Underwriter and Underwriter's counsel, from Grant
Thornton LLP.
i. confirming that it is a independent certified
public accountant with respect to the Company within the meaning of the Act and
the applicable Rules and Regulations;
ii. stating that it is their opinion that the
financial statements of the Company as included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations thereunder and that the
Underwriter may rely upon the opinion of Grant Thornton LLP and Kirkland, Russ
Murphy & Tapp LLP, auditors for the Company and Herbal, with respect to the
financial statements included in the Registration Statement;
iii. stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries (which, as to the interim financial statements included
in the Registration Statement, shall constitute a review as described in SAS No.
71, Interim Financial Statements), nothing has come to attention of Grant
Thornton LLP or the attention of Kirkland Russ Murphy & Tapp LLP, which would
lead them to believe that (A) the unaudited financial statements of the Company
included in the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the Rules
and Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent with
that of the audited financial statements of the Company included in the
Registration Statement, or (B) at a specified date not more than five (5) days
prior to the Effective Date, there has been any change in the capital stock or
long-term debt of the Company, or any decrease in the stockholders' equity or
net current assets or net assets of the Company as compared with amounts shown
in the March 31, 1999 consolidated balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the Registration
Statement, or, if there was any change or decrease, setting forth
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<PAGE>
the amount of such change or decrease, and (C) during the period from March 31,
1999 to a specified date not more than five (5) days prior to the Effective
Date, there was any decrease (increase) in net revenues, net income (loss) or in
net earnings (loss) per common share of the Company, in each case as compared
with the corresponding period beginning March 31, 1999, other than as set forth
in or contemplated by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease (increase);
iv. setting forth, at a date not later than five (5)
days prior to the Effective Date, the amount of liabilities of the Company;
v. stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement; and
vi. statements as to such other matters incident to
the transaction contemplated hereby as the Underwriter may request.
B. At the Firm Closing Date and the Option
Closing Date, if any, the Underwriter shall have received from Grant Thornton
LLP and Kirkland Russ, Murphy & Tapp LLP, a letter, dated as of the Firm Closing
Date or the Option Closing Date, as the case may be, to the effect that it
reaffirms that statements made in the letter furnished pursuant to subsection A
of this Section 6(c), except that the specified date referred to shall be a date
not more than five (5) days prior to the Firm Closing Date or the Option Closing
Date, as the case may be, and, if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that they have carried out
procedures as specified in clause (v) of subsection A of this Section 6(c) with
respect to certain amounts, percentages and financial information as specified
by the Underwriter and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(d) The representations and warranties of the Company
contained in this Agreement shall be true and correct as if made on and as of
the Firm Closing Date; the Registration Statement shall not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein in order to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have 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.
(e) No stop order suspending the effectiveness of the
Registration Statement or
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any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or contemplated by the
Commission.
(f) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(g) The Underwriter shall have received a certificate, dated
the Firm Closing Date, of the Chief Executive Officer and the Secretary of the
Company to the effect set forth in subparagraphs (d) through (f) above.
(h) The Common Stock shall be qualified in such jurisdictions
as the Underwriter may reasonably request pursuant to Section 4(c), and each
such qualification shall be in effect and not subject to any stop order or other
proceeding on the Firm Closing Date.
(i) The Company shall have executed and delivered to the
Underwriter the Underwriter's Warrant Agreement and a certificate or
certificates evidencing the Underwriter's Warrant, in each case in a form
acceptable to the Underwriter.
(i) The Underwriter shall have received Lock-up Agreements
executed by the persons listed on Schedule 2 annexed hereto.
(j) On or before the Firm Closing Date, the Underwriter and
counsel for the Underwriter shall have received such further certificates,
documents, letters or other information as they may have reasonably requested
from the Company and other security holders of 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 Underwriter and counsel
for the Underwriter. The Company shall furnish to the Underwriter such conformed
copies of such opinions, certificates, letters and documents in such quantities
as the Underwriter and counsel for the Underwriter shall reasonably request.
The obligation of the Underwriter to purchase and pay for any Option
Shares shall be subject, in its discretion, to each of the foregoing conditions,
except that all references to the Firm Securities and the Firm Closing Date
shall be deemed to refer to such Option Shares and the related Option Closing
Date, respectively.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20 of the 1934 Act against any
losses, claims, damages, or liabilities, joint or several, to which the
Underwriter, or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are
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based upon:
(1) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (B) any application or other document, or
any amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the Blue Sky or securities
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"), or
(2) the omission or alleged omission to state in
such 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, and will reimburse, as incurred, the Underwriter and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriter or such controlling person in connection with investigating or
defending against any loss, claim, damage, liability, action, investigation,
litigation or proceeding; 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 or alleged omission made in such Registration Statement or any
amendment thereto, any Preliminary Prospectus, 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 the Underwriter,
specifically for use therein. 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 the Underwriter, or controlling person,
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 Underwriter or any person who
controls the Underwriter or within the meaning of Section 15 of the Act or
Section 20 of the 1934 Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) The 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 1934 Act against, any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or otherwise,
but only insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) 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 (ii) 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 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
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furnished to the Company by the Underwriter 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 such director, officer, or controlling person in connection with
investigating or defending against any such loss, claim, damage, liability,
action investigation, litigation or proceedings, in respect thereof. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 7 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 7, 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 7. 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 similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; PROVIDED, HOWEVER, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be 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 under this Section 7 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 (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence or (ii) 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.
(d) In circumstances in which the indemnity obligation
provided for in the preceding paragraphs of this Section 7 is unavailable or
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (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 (i) 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 Securities, or (ii) if
the allocation provided by the foregoing clause (i) 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 liabilities (or
actions in respect thereof). The relative benefits received by the
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Company on the one hand and the Underwriter on the other shall be deemed to be
in the same proportion as the total proceeds from the Offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriter. 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 Underwriter, the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, and the other equitable considerations
appropriate in the circumstances. The Company and the Underwriter agree that it
would not be equitable if the amount of such contribution were determined by pro
rata or per capita allocation or by any other method of allocation that does not
take into account the equitable considerations referred to in the first sentence
of this paragraph (d). Notwithstanding any other provision of this paragraph
(d), the Underwriter shall not be obligated to make contributions hereunder that
in the aggregate exceed the total public offering price of the Securities
purchased by the Underwriter under this Agreement, less the aggregate amount of
any damages that the 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 is not guilty of such
fraudulent misrepresentation. For purposes of this paragraph (d), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the Act
or Section 20 of the 1934 Act shall have the same rights to contribution as the
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 1934
Act, shall have the same rights to contribution as the Company.
8. SUBSTITUTION OF UNDERWRITER.
If any Underwriter shall for any reason not permitted hereunder cancel
its obligations to purchase the Firm Securities hereunder, or shall fail to take
up and pay for the number of Firm Securities set forth opposite names in
Schedule 1 hereto upon tender of such Firm Securities in accordance with the
terms hereof, then:
(a) If the aggregate number of Firm Securities which such
Underwriter or Underwriter agreed but failed to purchase does not exceed 10% of
the total number of Firm Securities, the other Underwriter shall be obligated to
purchase the Firm Securities which such defaulting Underwriter agreed but failed
to purchase.
(b) If any Underwriter so defaults and the agreed number of
Firm Securities with respect to which such default or defaults occurs is more
than 10% of the total number of Firm Securities, the remaining Underwriter shall
have the right to take up and pay for the Firm Securities which the defaulting
Underwriter agreed but failed to purchase. If such remaining Underwriter does
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase, the time for delivery of
the Firm Securities shall be extended to the next business day to allow the
remaining Underwriter the privilege of substituting within twenty-four hours
(including non-business hours) another underwriter or Underwriter satisfactory
to the Company. If no such underwriter or Underwriter shall have been
substituted as
23
<PAGE>
aforesaid, within such twenty-four hour period, the time of delivery of the Firm
Securities may, at the option of the Company, be again extended to the next
following business day, if necessary, to allow the Company the privilege of
finding within twenty-four hours (including non-business hours) another
underwriter or Underwriter to purchase the Firm Securities which the defaulting
Underwriter or Underwriter agreed but failed to purchase. If it shall be
arranged for the remaining Underwriter or substituted Underwriter to take up the
Firm Securities of the defaulting Underwriter as provided in this section, (i)
the Company or the Underwriter shall have the right to postpone the time of
delivery for a period of not more than seven business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other document or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of Firm Securities to be purchased by the remaining Underwriter or
substituted Underwriter shall be taken as the basis of the underwriting
obligation for all purposes of this agreement.
In the event of a default by any Underwriter, if the remaining
Underwriter shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter, or substitute another underwriter or
Underwriter as aforesaid, and the Company shall not find or shall not elect to
seek another underwriter or Underwriter for such Firm Securities as aforesaid,
then this Agreement shall terminate.
If, following exercise of the option provided in Section 2(c) hereof,
any Underwriter or Underwriter shall for any reason not permitted hereunder
cancel their obligations to purchase Option Shares at the Option Closing Date,
or shall fail to take up and pay for the number of Option Shares, which it
became obligated to purchase at the Option Closing Date upon tender of such
Option Shares in accordance with the terms hereof, then the remaining
Underwriter or substituted Underwriter may take up and pay for the Option Shares
of the defaulting Underwriter in the manner provided in Section 8(b) hereof. If
the remaining Underwriter or substituted Underwriter shall not take up and pay
for all such Option Shares, the Underwriter shall be entitled to purchase the
number of Option Shares for which there is no default or, at their election, the
option shall terminate, the exercise thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 8 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
9. SURVIVAL. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its officers
or directors and the Underwriter 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 (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriter or any
controlling person referred to in Section 7 hereof, and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 4 and 7 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
24
<PAGE>
10. TERMINATION.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Shares in the sole discretion of the Underwriter 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 under Section 6 hereunder at or prior
thereto or if at or prior to the Firm Closing Date or such Option Closing Date,
respectively. Termination of this Agreement pursuant to this Section 10 shall be
without liability of any party to any other party, except as provided in Section
5(b) and Section 7 hereof.
11. INFORMATION SUPPLIED BY THE UNDERWRITER. The statements set forth
in the first paragraph on page 41, (as to the underwriting commitment of the
Underwriter) and the fourth paragraph under the heading "Underwriting" in any
Preliminary Prospectus or the Prospectus (to the extent such statements relate
to the Underwriter) constitute the only information furnished by the Underwriter
to the Company for the purposes of Section 7(b) hereof. The Underwriter confirms
that such statements (to such extent) are correct.
12. NOTICES. All notice hereunder to or upon either party hereto shall
be deemed to have been duly given for all purposes if in writing and (i)
delivered in person or by messenger or an overnight courier service against
receipt, or (ii) sent by certified or registered mail, postage paid, return
receipt requested, or (iii) sent by telegram, facsimile, telex or similar means,
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: Innovative Health Products, Inc.
6950 Bryan Dairy Road
Largo Florida 33777
Attn: Stephen M. Waters, President
With Copy To: Sichenzia, Ross & Freidman, LLP
135 West 50th Street, 20th Floor
New York, New York 10020
Attn: Gregory Sichenzia, Esq.
To the Underwriter: Kashner Davidson Securities Corporation
77 South Palm Avenue
Sarasota, Florida 34326
Attn: Matthew Meister
25
<PAGE>
with a copy to:
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
13. AMENDMENT. Except as otherwise provided herein, no amendment of
this Agreement shall be valid or effective, unless in writing and signed by or
on behalf of the parties hereto.
14. WAIVER. No course of dealing or omission or delay on the part of
either party hereto in asserting or exercising any right hereunder shall
constitute or operate as a waiver of any such right. No waiver of any provision
hereof shall be effective, unless in writing and signed by or on behalf of the
party to be charged therewith. No waiver shall be deemed a continuing waiver or
waiver in respect of any other or subsequent breach or default, unless expressly
so stated in writing.
15. APPLICABLE LAW. This agreement shall be governed by, and
interpreted and enforced in accordance with, the laws of the State of [ ]
without regard to principles of choice of law or conflict of laws.
16. JURISDICTION. Each of the parties hereto hereby irrevocably
consents and submits to the exclusive jurisdiction of the [ ] Court of the State
of Florida and the United States District Court for the [ ] District of Florida
in connection with any suit, action or other proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby, waives any
objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of Section 12.
17. REMEDIES. In the event of any actual or prospective breach or
default by either party hereto, the other party shall be entitled to equitable
relief, including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
18. ATTORNEYS' FEES. The prevailing party in any suit, action or other
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, shall be entitled to recover its costs and reasonable
attorneys' fees.
19. SEVERABILITY. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
26
<PAGE>
20. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original and which together shall constitute one and
the same agreement.
21. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Underwriter, the Company and their respective successors and
assigns. 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 (i) the indemnities of the Company contained in
Section 7 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 1934 Act, and (ii) the indemnities of the Underwriter
contained in Section 7 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 1934 Act. No purchaser
of Securities from the Underwriter shall be deemed a successor because of such
purchase.
22. TITLES AND CAPTIONS. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
23. GRAMMATICAL CONVENTIONS. Whenever the context so requires, each
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
24. REFERENCES. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
25. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
[SIGNATURES ON FOLLOWING PAGE]
27
<PAGE>
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 the
Underwriter.
Very truly yours,
INNOVATIVE HEALTH PRODUCTS, INC.
BY:
-------------------------------------
Name: Dr. Kotha S. Sekharam
Title: President
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
KASHNER DAVIDSON SECURITIES CORPORATION
By:
------------------------------------
Name: Matthew Meister
Title: CEO
28
EXHIBIT 3.1
STATE OF FLORIDA
[SEAL]
DEPARTMENT OF STATE
I certify the attached is a true and correct copy of the Articles of
Incorporation of ENERGY FACTORS INC., a corporation organized under the laws of
the State of Florida, filed on September 3, 1985, as shown by the records of
this office.
The document number of this corporation is H74029.
Given under my hand and the
Great Seal of the State of Florida
at Tallahassee, the Capitol, this the
Fifteenth day of June, 1998
[SEAL] /s/ SANDRA B. MORTHAM
CR2E022(2-95) ---------------------
SANDRA B. MORTHAM
SECRETARY OF STATE
<PAGE>
ARTICLES OF INCORPORATION
OF
ENERGY FACTORS INC.
The undersigned sole incorporator, being a natural person competent to contract
and desiring to form a corporation under Title XXXV, Chapter 607 of the revised
Florida statutes, herewith submits the following information:
1. The name of the corporation is ENERGY FACTORS INC.
2. The duration of the corporation shall be perpetual.
3. The general purpose or purposes for which this corporation is being formed
are to include the transaction of any or all lawful business for which
corporations may be incorporated under this chapter.
4. The aggregate number of shares which the corporation shall have authority
to issue is Sixty (60) shares, all without par value and of one class.
5. The street address of its initial registered office is 6420 68th Avenue
North, Pinellas Park, Florida 33565, and the name of its initial registered
agent at such address is Ray F. Blair.
6. The number of directors constituting the initial board of directors is One
and the name and address of each person who is to serve as a member thereof
is as follows:
Ray F. Blair
6420 68th Avenue North
Pinellas Park, Florida 33565
<PAGE>
7. The name and address of the sole incorporator is:
Jean M. Sherett
62 White Street
New York, New York 10013
IN WITNESS WHEREOF, the undersigned, as sole incorporator of this corporation
has executed these Articles of Incorporation.
August 26, 1983 /s/ JEAN M. SHERETT
- --------------- -------------------
Date: Jean M. Sherett
STATE OF NEW YORK
COUNTY OF NEW YORK
I, HEREBY CERTIFY that on this day, before me, a Notary Public duly authorized
in the State and County named above to take acknowledgements, personally
appeared Jean M. Sherett, to me known to be the person described as the
subscriber in and who executed the foregoing Articles of Incorporation, and
acknowledged before me that she subscribed to those Articles of Incorporation.
WITNESS my hand and official seal in the County and State named above
this 26, day of August, 1985.
/s/ ARTHUR M. MCGUIRE
---------------------
Notary Public
Arthur M. McGuire
Notary Public, State of New York
No. 31-4700219
Qualified in New York County
Term Expires March 30, 1987
I, the undersigned, hereby accept appointment as Resident Agent of the above
noted corporation.
/s/ RAY F. BLAIR
----------------
Ray F. Blair
EXHIBIT 3.2
BY-LAWS
OF
ENERGY FACTORS, INC.
ARTICLE I.
OFFICES
-------
Section A. PRINCIPAL OFFICE. The principal office of the corporation
shall be in the City of Largo, County of Pinellas, and State of Florida.
Section B. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Florida as the Board
of Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II.
STOCKHOLDERS
------------
Section A. ANNUAL MEETING. The annual meeting of the stockholders
shall be held between January 1 and December 31, inclusive, in each year for the
purpose of electing directors and for the transaction of such other proper
business as may come before the meeting, the exact date to be established by the
Board of Directors from time to time.
Section B. SPECIAL MEETINGS. Special meetings of the stockholders may
be called, for any purpose or purposes, by the President or the Board of
Directors and shall be called by the President or the Secretary if the holders
of not less than 10 percent or more of all the votes entitled to be cast on any
issue proposed to be considered at such special meeting sign, date and deliver
to the corporation's Secretary one or more written demands for a special
meeting, describing the purpose(s) for which it is to be held. Notice and call
of any such special meeting shall state the purpose or purposes of the proposed
meeting, and business transacted at any special meeting of the stockholders
shall be limited to the purposes stated in the notice thereof.
Section C. PLACE OF MEETING. The Board of Directors may designate any
place, either within or without the State of Florida, as the place of meeting
for any annual or special meeting of the stockholders. A waiver of notice signed
by all stockholders entitled to vote at a meeting may designate any place,
either within or without the State of Florida, as the place for the holding of
such meeting. If no designation is made, the place of meeting shall be the
principal office of the corporation in the State of Florida.
Section D. NOTICE OF MEETING. Written notice stating the place, day
and hour of an annual or special meeting and the purpose or purposes for which
it is called shall be
<PAGE>
delivered not less than ten (10) nor more than sixty (60) days before the date
of the meeting to each stockholder entitled to vote at such meeting, except that
no notice of a meeting need be given to any stockholders for which notice is not
required to be given under applicable law. Notice may be delivered personally,
via first-class United States mail, telegraph, teletype, facsimile or other
electronic transmission, or by private mail carriers handling nationwide mail
services, by or at the direction of the President, the Secretary, the Board of
Directors, or the person(s) calling the meeting. If mailed via first-class
United States mail, such notice shall be deemed to be delivered when deposited
in the United States mail, addressed to the stockholder at the stockholder's
address as it appears on the stock transfer books of the corporation, with
postage thereon prepaid.
Section E. NOTICE OF ADJOURNED MEETING. If an annual or special
stockholders' meeting is adjourned to a different date, time, or place, notice
need not be given of the new date, time or place if the new date, time or place
is announced at the meeting before an adjournment is taken, and any business may
be transacted at the adjourned meeting that might have been transacted on the
original date of the meeting. If, however, a new record date for the adjourned
meeting is or must be fixed under law, notice of the adjourned meeting must be
given to persons who are stockholders as of the new record date and who are
otherwise entitled to notice of such meeting.
Section F. WAIVER OF CALL AND NOTICE OF MEETING. Call and notice of
any stockholders' meeting may be waived by any stockholder before or after the
date and time stated in the notice. Such waiver must be in writing signed by the
stockholder and delivered to the corporation. Neither the business to be
transacted at nor the purpose of any special or annual meeting need be specified
in such waiver. A stockholder's attendance at a meeting (a) waives such
stockholder's ability to object to lack of notice or defective notice of the
meeting, unless the stockholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting; and (b) waives such
stockholder's ability to object to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the stockholder objects to considering the matter when it is
presented.
Section G. QUORUM. Except as otherwise provided in these by-laws or in
the Articles of Incorporation, a majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at any meeting of the stockholders. Once a share is
represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting, unless a new record date is or must be set for the adjourned meeting,
and the withdrawal of stockholders after a quorum has been established at a
meeting shall not effect the validity of any action take at the meeting or any
adjournment thereof.
Section H. ADJOURNMENT; QUORUM FOR ADJOURNED MEETING. If less than a
majority of the outstanding shares are represented at a meeting, a majority of
the shares so represented may adjourn the meeting from time to time without
further notice. At such adjourned meeting at which a quorum shall be present or
represented or deemed to be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
Section I. VOTING ON MATTERS OTHER THAN ELECTION OF DIRECTORS. At any
meeting at which a quorum is present, action on any matter other than the
election of directors shall be approved if the votes cast by the holders of
shares represented at the meeting
<PAGE>
and entitled to vote on the subject matter favoring the action exceed the votes
cast opposing the action, unless a greater number of affirmative votes or voting
by classes is required by these by-laws, the Articles of Incorporation or by
law.
Section J. VOTING FOR DIRECTORS. Directors shall be elected by a
plurality of the votes cast by the shares entitled to vote at a meeting at which
a quorum is present.
Section K. VOTING LISTS. At least ten (10) days prior to each meeting
of stockholders, the officer or agent having charge of the stock transfer books
for shares of the corporation shall make a complete list of the stockholders
entitled to vote at such meeting, or any adjournment thereof, with the address
and the number, class and series (if any) of shares held by each, which lest
shall be subject to inspection by any stockholder during normal business hours
for at least ten (10) days prior to the meeting. The list also shall be
available at the meeting and shall be subject to inspection by any stockholder
at any time during the meeting or its adjournment. The stockholders list shall
be prima facie evidence as to who are the stockholders entitled to examine such
list or the transfer books or to vote at any meeting of the stockholders.
Section L. VOTING OF SHARES. Each stockholder entitled to vote shall
be entitled at every meeting of the stockholders to one vote in person or by
proxy on each matter for each share of voting stock held by such stockholder.
Such right to vote shall be subject to the right of the Board of Directors to
close the transfer books or to fix a record date for voting stockholders as
hereinafter provided.
Section M. PROXIES. At all meetings of stockholders, a stockholder
may vote by proxy, executed in writing and delivered to the corporation in the
original or transmitted via telegram, or as a photographic, photostatic or
equivalent reproduction of a written proxy by the stockholder or by the
stockholder's duly authorized attorney-in-fact; but, no proxy shall be valid
after eleven (11) months from its date, unless the proxy provides for a longer
period. Each proxy shall be filed with the Secretary of the corporation before
or at the time of the meeting. In the event that a proxy shall designate two or
more persons to act as proxies, a majority of such persons present at the
meeting, or, if only one is present, that one, shall have all of the powers
conferred by the proxy upon all the persons so designated, unless the instrument
shall provide otherwise.
Section N. INFORMAL ACTION BY STOCKHOLDERS. Unless otherwise provided
in the Articles of Incorporation, any action required or permitted to be taken
at a meeting of the stockholders may be taken without a meeting, without prior
notice and without a vote if one or more consents in writing, setting forth the
action so taken, shall be signed by stockholders holding shares representing not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. No written consent shall be effective to take the corporate
action referred to therein unless, within sixty (60) days of the date of the
earliest dated consent delivered to the Secretary, written consent signed by the
number of stockholders required to take action is delivered to the Secretary. If
authorization of an action is obtained by one or more written consent but less
than all stockholders so consent, then within ten (10) days after obtaining the
authorization of such action by written consents, notice must be given to each
stockholder who did not consent in writing and to each stockholder who is not
entitled to vote on the action.
Section O. INSPECTORS. For each meeting of the stockholders, the Board
of Directors or the President may appoint two inspectors to supervise the
voting; and, if inspectors
<PAGE>
are so appointed, all questions respecting the qualification of any vote, the
validity of any proxy, and the acceptance or rejection of any vote shall be
decided by such inspectors. Before acting at any meeting, the inspectors shall
take an oath to execute their duties with strict impartiality and according to
the best of their ability. If any inspector shall fail to be present or shall
decline to act, the President shall appoint another inspector to act in his
place. In case of a tie vote by the inspectors on any question, the presiding
officer shall decide the issue.
ARTICLE III.
BOARD OF DIRECTORS
------------------
Section A. GENERAL POWERS. The business and affairs of the corporation
shall be managed by its Board of Directors, which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by law, the
Articles of Incorporation or these by-laws directed or required to be exercised
or done only by the stockholders.
Section B. NUMBER, TENURE AND QUALIFICATIONS. The number of directors
of the corporation shall be not less than one (1) nor more than fifteen (15),
the number of the same to be fixed by the stockholders at any annual or special
meeting. Each director shall hold office until the next annual meeting of
stockholders and until such director's successor shall have been duly elected
and shall have qualified, unless such director sooner dies, resigns or is
removed by the stockholders at any annual or special meeting. It shall not be
necessary for directors to be stockholders. All directors shall be natural
persons who are 18 years of age or older.
Section C. ANNUAL MEETING. After each annual meeting of stockholders,
the Board of Directors shall hold its annual meeting at the same place as and
immediately following such annual meeting of stockholders for the purpose of the
election of officers and the transaction of such other business as may come
before the meeting; and, if a majority of the directors are present at such
place and time, no prior notice of such meeting shall be required to be given to
the directors. The place and time of such meeting may be varied by written
consent of all the directors.
Section D. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as shall be
determined from time to time by the Board of Directors.
Section E. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board, if there be one, or the
President. The person or persons authorized to call special meetings of the
Board of Directors may fix the place for holding any special meetings of the
Board of Directors called by him or them, as the case may be. If no such
designation is made, the place of meeting shall be the principal office of the
corporation in the State of Florida.
Section F. NOTICE. Whenever notice of a meeting is required, written
notice stating the place, day and hour of the meeting shall be delivered at
least two (2) days prior thereto to each director, either personally, or by
first-class United States mail, telegraph, teletype, facsimile or other form of
electronic communication, or by private mail carriers handling nationwide mail
<PAGE>
services, to the director's business address. If notice is given by first-class
United States mail, such notice shall be deemed to be delivered five (5) days
after deposited in the United States mail so addressed with postage thereon
prepaid or when received, if such date is earlier. If notice is given by
telegraph, teletype, facsimile transmission or other form of electronic
communication or by private mail carriers handling nationwide mail services,
such notice shall be deemed to be delivered when received by the director. Any
director may waive notice of any meeting, either before, at or after such
meeting. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened and so states at the beginning of the
meeting or promptly upon arrival at the meeting.
Section G. QUORUM. A majority of the total number of directors as
determined from time to time shall constitute a quorum.
Section H. ADJOURNMENT; QUORUM FOR ADJOURNED MEETING. If less than a
majority of the total number of directors are present at a meeting, a majority
of the directors so present may adjourn the meeting from time to time without
further notice. At any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally noticed.
Section I. MANNER OF ACTING. If a quorum is present when a vote is
taken, the act of a majority of the directors present at the meeting shall be
the act of the Board of Directors.
Section J. REMOVAL. Any director may be removed by the stockholders
with or without cause at any meeting of the stockholders called expressly for
that purpose, but such removal shall be without prejudice to the contract
rights, if any, of the person removed. This by-law shall not be subject to
change by the Board of Directors.
Section K. VACANCIES. Any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum of the Board of Directors, or by the
stockholders, unless otherwise provided in the Articles of Incorporation. A
director elected to fill a vacancy shall be elected for the unexpired term of
such director's predecessor in office.
Section L. COMPENSATION. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as directors. No payment
shall preclude any director from serving the corporation in any other capacity
and receiving compensation therefor.
Section M. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
such director objects at the beginning of the meeting (or promptly upon his
arrival) to the holding of the meeting or the transacting of specified business
at the meeting or such director votes against such action or abstains from
voting in respect of such matter.
<PAGE>
Section N. INFORMAL ACTION BY BOARD. Any action required or permitted
to be taken by any provisions of law, the Articles of Incorporation or these
by-laws at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if each and every member of the Board or of such
committee, as the case may be, signs a written consent thereto and such written
consent is filed in the minutes of the proceedings of the Board of such
committee, as the case may be. Action taken under this section is effective
when the last director signs the consent, unless the consent specifies a
different effective date, in which case it is effective on the date so
specified.
Section O. MEETING BY TELEPHONE, ETC. Directors or the members of any
committee thereof shall be deemed present at a meeting of the Board of Directors
or of any such committee, as the case may be, if the meeting is conducted using
a conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the same time.
ARTICLE IV.
OFFICERS
--------
Section A. NUMBER. The officers of the corporation shall consist of a
President, a Secretary and a Treasurer, each of whom shall be appointed by the
Board of Directors. The Board of Directors may also appoint a Chairman of the
Board, one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers and such other officers as the Board of Directors shall
deem appropriate. The same individual may simultaneously hold more than one
office in the corporation.
Section B. APPOINTMENT AND TERM OF OFFICE. The officers of the
corporation shall be appointed annually by the Board of Directors at its annual
meeting. If the appointment of officers shall not be made at such meeting, such
appointment shall be made as soon thereafter as is convenient. A duly appointed
officer may appoint one or more officers or assistant officers if authorized by
the Board of Directors. Each officer shall hold office until such officer's
successor shall have been duly appointed and shall have qualified, unless such
officer sooner dies, resigns or is removed by the Board. The appointment of an
officer does not itself create contract rights.
Section C. RESIGNATION. An officer may resign at any time by
delivering notice to the corporation. A resignation shall be effective when the
notice is delivered unless the notice specifies a later effective date. An
officer's resignation shall not affect the corporation's contract rights, if
any, with the officer.
Section D. REMOVAL. The Board of Directors may remove any officer at
any time with or without cause. Any officer or assistant officer, if appointed
by another officer, may likewise be, removed by such officer. An officer's
removal shall not affect the officers contract rights, if any, with the
corporation.
Section E. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
<PAGE>
Section F. DUTIES OF OFFICERS. The Chairman of the Board of the
corporation, or the President if there shall not be a Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders.
The President shall be the chief executive officer of the corporation. The
Secretary shall be responsible for preparing minutes of the directors' and
stockholders' meetings and for authenticating records of the corporation.
Subject to the foregoing, the officers of the corporation shall have such powers
and duties as ordinarily pertain to their respective officers and such
additional powers and duties specifically conferred by law, the Articles of
Incorporation and these by-laws, or as may be assigned to them from time to time
by the Board of Directors or an officer authorized by the Board of Directors to
prescribe the duties of other officers.
Section G. SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving a salary by reason of the fact that the officer is also a director of
the corporation.
Section H. DELEGATION OF DUTIES. In the absence or disability of any
officer of the corporation, or for any other reason deemed sufficient by the
Board of Directors, the Board may delegate the powers or duties of such officer
to any other officer or to any other director for the time being.
Section I. DISASTER EMERGENCY POWERS OF ACTING OFFICERS. Unless
otherwise expressly prescribed by action of the Board of Directors taken
pursuant to Article XV of these by-laws, if, as a result of some catastrophic
event, a quorum of the corporations' directors cannot readily be assembled and
the President is unable to perform the duties of the office of President and/or
other officers are unable to perform their duties, (a) the powers and duties of
President shall be held and performed by that officer of the corporation highest
on the list of successors (adopted by the Board of Directors for such purpose)
who shall be available and capable of holding and performing such powers and
duties; and, absent any such prior designation, by that Vice President who shall
be available and capable of holding and performing such powers and duties whose
surname commences with the earliest letter of the alphabet among all such Vice
Presidents; or, if no Vice President is available and capable of holding and
performing such powers and duties, then by the Secretary; or, if the Secretary
is likewise unavailable, by the Treasurer; (b) the officer so selected to hold
and perform such powers and duties shall serve as Acting President until the
President again becomes capable of holding and performing the powers and duties
of President, or until the Board of Directors shall have elected a new President
or designated another individual as Acting President; (c) such officer (or the
President, if such person is still serving) shall have the power, in addition to
all other powers granted to the President by law, the Articles of Incorporation,
these by-laws and the Board of Directors, to appoint acting officers to fill
vacancies that may have occurred, either permanently or temporarily, by reason
of such disaster or emergency, each of such acting appointees to serve in such
capacity until the officer for whom the acting appointee is acting is capable of
performing the duties of such office, or until the Board of Directors shall have
designated another individual to perform such duties or shall have elected or
appointed another person to fill such office; (d) each acting officer so
appointed shall be entitled to exercise all powers invested by law, the Articles
of Incorporation, these by-laws and the Board of Directors in the office in
which such person is serving; and (e) anyone transacting business with the
corporation may rely upon a certificate signed by any two officers of the
corporation that a specified individual has succeeded to the powers and duties
of the President or such other specified office. Any person, firm, corporation
or other entity to which such certificate has been delivered
<PAGE>
by such officers may continue to rely upon it until notified of a change by
means of a writing signed by two officers of this corporation.
ARTICLE V.
EXECUTIVE AND OTHER COMMITTEES
------------------------------
Section A. CREATION OF COMMITTEES. The Board of Directors may
designate an Executive Committee and one or more other committees, each to
consist of two (2) or more of the directors of the corporation.
Section B. EXECUTIVE COMMITTEE. The Executive Committee, if there
shall be one, shall consult with and advise the officers of the corporation in
the management of its business, and shall have, and may exercise, except to the
extent otherwise provided in the resolution of the Board of Directors creating
such Executive Committee, such powers of the Board of Directors as can be
lawfully delegated by the Board.
Section C. OTHER COMMITTEES. Such other committees, to the extent
provided in the resolution or resolutions creating them, shall have such
functions and may exercise such powers of the Board of Directors as can be
lawfully delegated.
Section D. REMOVAL OR DISSOLUTION. Any Committee of the Board of
Directors may be dissolved by the Board at any meeting; and any member of such
committee may be removed by the Board of Directors with or without cause. Such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
Section E. VACANCIES ON COMMITTEES. Vacancies on any committee of the
Board of Directors shall be filled by the Board of Directors at any regular or
special meeting.
Section F. MEETINGS OF COMMITTEES. Regular meetings of any committee
of the Board of Directors may be held without notice at such time and at such
place as shall from time to time be determined by such committee and special
meetings of any such committee may be called by any member thereof upon two (2)
days notice of the date, time and place of the meeting given to each of the
other members of such committee, or on such shorter notice as may be agreed to
in writing by each of the other members of such committee, given either
personally or in the manner provided in Section 6 of Article III of these
by-laws (pertaining to notice for directors' meetings).
Section G. ABSENCE OF COMMITTEE MEMBERS. The Board of Directors may
designate one or more directors as alternate members of any committee of the
Board of Directors, who may replace at any meeting of such committee, any member
not able to attend.
Section H. QUORUM OF COMMITTEES. At all meetings of committees of the
Board of Directors, a majority of the total number of members of the committee
as determined from time to time shall constitute a quorum for the transaction of
business.
<PAGE>
Section I. MANNER OF ACTING OF COMMITTEES. If a quorum is present when
a vote is taken, the act of a majority of the members of any committee of the
Board of Directors present at the meeting shall be the act of such committee.
Section J. MINUTES OF COMMITTEES. Each committee of the Board of
Directors shall keep regular minutes of its proceedings and report the same to
the Board of Directors when required.
Section K. COMPENSATION. Members of any committee of the Board of
Directors may be paid compensation in accordance with the provisions of Section
12 of Article III of these by-laws (pertaining to compensation of directors).
Section L. INFORMAL ACTION. Any committee of the Board of Directors
may take such informal action and hold such informal meetings as allowed by the
provisions of Section 14 and 15 of Article III of these by-laws.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Section A. GENERAL. To the fullest extent permitted by law, the
corporation shall indemnify any person who is or was a party, or is threatened
to be made a party, to any threatened, pending or completed action, suit or
other type of proceeding (other than an action by or in the right of the
corporation), whether civil, criminal, administrative, investigative or
otherwise, and whether formal or informal, by reason of the fact that such
person is or was a director or officer of the corporation or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against judgments, amounts paid in settlement, penalties, fines (including an
excise tax assessed with respect to any employee benefit plan) and expenses
(including attorney's fees, paralegals' fees and court costs) actually and
reasonably incurred in connection with any such action, suit or other
proceeding, including any appeal thereof, if such person acted in good faith and
in a manner such person 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 reasonable cause to believe such person's conduct was
unlawful. The termination of any such action, suit or other proceeding by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner that such person reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
Section B. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. To the
fullest extent permitted by law, the corporation shall indemnify any person who
is or was a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or other type of proceeding (as further
described in Section 1 of this Article VI) by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that such person is or
was a director or officer of the corporation or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees, paralegals' fees and court costs) and
amounts
<PAGE>
paid in settlement not exceeding, in the judgment of the Board of Directors, the
estimated expenses of litigating the action, suit or other proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such action, suit or other proceeding, including any appeal
thereof, if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made under this Section 2
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable unless, and only to the extent that, the court in which
such action, suit or other proceeding was brought, or any other court of
competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses
that such court shall deem proper.
Section C. OBLIGATION TO INDEMNIFY. To the extent that a director or
officer has been successful on the merits or otherwise in defense of any action,
suit or other proceeding referred to in Section 1 or Section 2 of this Article
VI, or in the defense of any claim, issue or matter therein, such person shall,
upon application, be indemnified against expenses (including attorneys' fees,
paralegals' fees and court costs) actually and reasonably incurred by such
person in connection therewith.
Section D. DETERMINATION THAT INDEMNIFICATION IS PROPER.
Indemnification pursuant to Section 1 or Section 2 of this Article VI, unless
made under the provisions of Section 3 of this Article VI or unless otherwise
made pursuant to a determination by a court, shall be made by the corporation
only as authorized in the specific case upon a determination that the
indemnification is proper in the circumstances because the indemnified person
has met the applicable standard of conduct set forth in Section 1 or Section 2
of this Article VI. Such determination shall be made either (1) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to the action, suit or other proceeding to which the indemnification
relates; (2) if such a quorum is not obtainable or, even if obtainable, by
majority vote of a committee duly designated by the Board of Directors (the
designation being one in which directors who are parties may participate)
consisting solely of two or more directors not at the time parties to such
action, suit or other proceeding; (3) by independent legal counsel (i) selected
by the Board of Directors in accordance with the requirements of subsection (1)
or by a committee designated under subsection (2) or (ii) if a quorum of the
directors cannot be obtained and a committee cannot be designated, selected by
majority vote of the full Board of Directors (the vote being one in which
directors who are parties may participate); or (4) by the stockholders by a
majority vote of a quorum consisting of stockholders who were not parties to
such action, suit or other proceeding or, if no such quorum is obtainable, by a
majority vote of stockholders who were not parties to such action, suit or other
proceeding.
Section E. EVALUATION AND AUTHORIZATION. Evaluation of the
reasonableness of expenses and authorization of indemnification shall be made in
the same manner as is prescribed in Section 4 of this Article VI for the
determination that indemnification is permissible; provided, however, that if
the determination as to whether indemnification is permissible is made by
independent legal counsel, the persons who selected such independent legal
counsel shall be responsible for evaluating the reasonableness of expenses and
may authorize indemnification.
Section F. PREPAYMENT OF EXPENSES. Expenses (including attorney's
fees, paralegals' fees and court costs) incurred by a director or officer in
defending a civil or criminal
<PAGE>
action, suit or other proceeding referred to in Section 1 or Section 2 of this
Article VI shall be paid by the corporation in advance of the final disposition
thereof upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if such person is ultimately found not to be
entitled to indemnification by the corporation pursuant to this Article VI.
Section G. NONEXCLUSIVITY AND LIMITATIONS. The indemnification and
advancement of expenses provided pursuant to this Article VI shall not be deemed
exclusive of any other rights to which a person may be entitled under any law,
by-law, agreement, vote of stockholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in any other capacity while holding office with the corporation, and shall
continue as to any person who has ceased to be a director or officer and shall
inure to the benefit of such person's heirs and personal representatives. The
Board of Directors may, at any time, approve indemnification of or advancement
of expenses to any other person that the corporation has the power by law to
indemnify, including, without limitation, employees and agents of the
corporation. In all cases not specifically provided for in this Article VI,
indemnification or advancement of expenses shall not be made to the extent that
such indemnification or advancement of expenses is expressly prohibited by law.
Section H. CONTINUATION OF INDEMNIFICATION RIGHT. Unless expressly
otherwise provided when authorized or ratified by this corporation,
indemnification and advancement of expenses as provided for in this Article VI
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors, and
administrators of such person. For purposes of this Article VI, the term
"corporation" includes, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger, so that any person who is or was a director or
officer or a constituent corporation, or is or was serving at the request of a
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, is in the
same position under this Article VI with respect to the resulting of surviving
corporation as such person would have been with respect to such constituent
corporation if its separate existence had continued.
Section I. INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity or
arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against the liability under
Section 1 or Section 2 of this Article VI.
ARTICLE VII.
INTERESTED PARTIES
------------------
Section A. GENERAL. No contract or other transaction between the
corporation and any one or more of its directors or any other corporation, firm,
association or entity in which one or more of its directors are directors or
officers or are financially interested shall be either void or voidable because
of such relationship or interest, because such director or directors were
present at the meeting of the Board of Directors or of a committee thereof which
authorizes, approves or
<PAGE>
ratifies such contract or transaction or because such director's or directors'
votes are counted for such purpose if: (a) the fact of such relationship or
interest is disclosed or known to the Board of Directors or committee which
authorizes, approves or ratifies the contract or transaction by a vote or
consent sufficient for the purpose without counting the votes or consents of
such interested directors; (b) the fact of such relationship or interest is
disclosed or known to the stockholders entitled to vote on the matter, and they
authorize, approve or ratify such contract or transaction by vote or written
consent; or (c) the contract or transaction is fair and reasonable as to the
corporation at the time it is authorized by the Board of Directors, a committee
thereof or the stockholders.
Section B. DETERMINATION OF QUORUM. Common or interested directors may
be counted in determining the presence of a quorum at a meeting of the Board of
Directors or a committee thereof which authorizes, approves or ratifies a
contract or transaction referred to in Section 1 of this Article VII.
Section C. APPROVAL BY STOCKHOLDERS. For purposes of Section 1(b) of
this Article VII, a conflict of interest transaction shall be authorized,
approved or ratified if it receives the vote of a majority of the shares
entitled to be counted under this Section 3. Shares owned by or voted under the
control of a director who has a relationship or interest in the transaction
described in Section 1 of this Article VII may not be counted in a vote of
stockholders to determine whether to authorize, approve or ratify a conflict of
interest transaction under Section 1(b) of this Article VII. The vote of the
shares owned by or voted under the control of a director who has a relationship
or interest in the transaction described in Section 1 of this Article VII, shall
be counted, however, in determining whether the transaction is approved under
other sections of the corporation's by-laws and applicable law. A majority of
those shares that would be entitled, if present, to be counted in a vote on the
transaction under this Section 3 shall constitute a quorum for the purpose of
taking action under this Section 3.
ARTICLE VIII.
CERTIFICATES OF STOCK
---------------------
Section A. CERTIFICATES FOR SHARES. Shares may but need not be
represented by certificates. The rights and obligations of stockholders shall be
identical whether or not their shares are represented by certificates. If shares
are represented by certificates, each certificate shall be in such form as the
Board of Directors may from time to time prescribe, signed (either manually or
in facsimile) by the President, a Vice President, the Secretary, or the
Treasurer and sealed with the seal of the corporation or its facsimile),
exhibiting the holder's name, certifying the number of shares owned and stating
such other matters as may be required by law. The certificates shall be numbered
and entered on the books of the corporation as they are issued. If shares are
not represented by certificates, then, within a reasonable time after issue or
transfer of shares without certificates , the corporation shall send the
stockholder a written statement in such form as the Board of Directors may from
time to time prescribe, certifying as to the number of shares owned by the
stockholder and as to such other information as would have been required to be
on certificates for such shares.
<PAGE>
Section B. SIGNATURES OF PAST OFFICERS. if the person who signed
(either manually or in facsimile) a share certificate no longer holds office
when the certificate is issued, the certificate shall nevertheless be valid.
Section C. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may,
in its discretion, appoint responsible banks or trust companies in such city or
cities as the Board may deem advisable from time to time to act as transfer
agents and registrars of the stock of the corporation; and, when such
appointments shall have been made, no stock certificate shall be valid until
countersigned by one of such transfer agents and registered by one of such
registrars.
Section D. TRANSFER OF SHARES. Transfers of shares of the corporation
shall be made upon its books by the holder of the shares in person or by the
holder's lawfully constituted representative, upon surrender of the certificate
of stock for cancellation if such shares are represented by a certificate of
stock or by delivery to the corporation of such evidence of transfer as may be
required by the corporation if such shares are not represented by certificates.
The person in whose name shares stand on the books of the corporation shall be
deemed by the corporation to be the owner thereof for all purposes and the
corporation shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Florida.
Section E. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation and alleged to have been lost
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or the owner's
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed.
ARTICLE IX.
RECORD DATE
-----------
Section A. RECORD DATE FOR STOCKHOLDER ACTIONS. The Board of directors
is authorized from time to time to fix in advance a date, not more than seventy
(70) nor less than ten (10) days before the date of any meeting of the
stockholders, a date in connection with the obtaining of the consent of
stockholders for any purpose, or the date of any other action requiring a
determination of the stockholders, as the record date for the determination of
the stockholders entitled to notice of and to vote at any such meeting and any
adjournment thereof (unless a new record date must be established by law for
such adjourned meeting), or of the stockholders entitled to give such consent or
take such action, as the case may be. In no event may a record date so fixed by
the Board of Directors precede the date on which the resolution establishing
such record date is adopted by the Board of Directors. Only those stockholders
listed as stockholders of record as of the close of business on the date so
fixed as the record date shall be entitled to notice of and to vote at such
meeting and any adjournment thereof, or to exercise
<PAGE>
such rights or to give such consent, as the case may be, notwithstanding any
transfer of any stock on the books of the corporation after any such record date
fixed as aforesaid. If the Board of Directors fails to establish a record date
as provided herein, the record date shall be deemed to be the date ten(10) days
prior to the date of the stockholders' meeting.
Section B. RECORD DATE FOR DIVIDEND AND OTHER DISTRIBUTIONS. The Board
of Directors is authorized from time to time to fix in advance a date, not more
than seventy (70) nor less than (10) days before the date of any dividend or
other distribution, as the record date for the determination of the stockholders
entitled to receive such dividend or other distribution. In no event may a
record date so fixed by the Board of Directors precede the date on which the
resolution establishing such record date is adopted by the Board of Directors.
Only those stockholders listed as stockholders of record as of the close of
business on the date so fixed as the record date shall be entitled to receive
the dividends or other distribution, as the case may be, notwithstanding any
transfer of any stock on the books of the corporation after any such record date
fixed as aforesaid. If the Board of Directors fails to establish a record date
as provided herein, the record date shall be deemed to be the date of
distribution of the dividend or other distribution.
ARTICLE X.
DIVIDENDS
---------
The Board of Directors may from time to time declare, and the corporation
may pay, dividends on its outstanding shares of capital stock in the manner and
upon the terms and conditions provided by the Articles of Incorporation and by
law. Subject to the provisions of the Articles of Incorporation and to law,
dividends may be paid in cash or property, including shares of stock or other
securities of the corporation.
ARTICLE XI.
FISCAL YEAR
-----------
The fiscal year of the corporation shall be the period selected by the
Board of Directors as the taxable year of the corporation for federal income tax
purposes, unless the Board of Directors specifically establishes a different
fiscal year.
ARTICLE XII.
SEAL
----
The corporate seal shall have the name of the corporation, the word "SEAL"
and the year of incorporation inscribed thereon, and may be a facsimile,
engraved, printed or impression seal. An impression of said seal appears on the
margin hereof.
<PAGE>
ARTICLE XIII.
STOCK IN OTHER CORPORATIONS
---------------------------
Shares of stock in other corporations held by the corporation shall be
voted by such officer of officers or other agent of the corporation as the Board
of Directors shall from time to time designate for the purpose or by a proxy
thereunto duly authorized by said Board.
ARTICLE XIV.
AMENDMENTS
----------
These by-laws may be altered, amended or repealed and new by-laws may be
adopted by the Board of Directors; provided that any by-law or amendment thereto
as adopted by the Board of Directors may be altered, amended or repealed by vote
of the stockholders entitled to vote thereon, or a new by-law in lieu thereof
may be adopted by the stockholders, and the stockholders may prescribed in any
by-law made by them that such by-law shall not be altered, amended or repealed
by the Board of Directors.
ARTICLE XV.
EMERGENCY BY-LAWS
-----------------
Section A. SCOPE OF EMERGENCY BY-LAWS. The emergency by-laws provided
in this Article XV shall be operative during any emergency, notwithstanding any
different provision set forth in the preceding articles hereof or the Articles
of Incorporation. For purposes of the emergency by-law provisions of this
Article XV, an emergency shall exist if a quorum of the corporation's directors
cannot readily be assembled because of some catastrophic event. To the extent
not inconsistent with the provisions of this Article, the by-laws provided in
the preceding Articles shall remain in effect during such emergency and upon
termination of such emergency, these emergency by-laws shall cease to be
operative.
Section B. CALL AND NOTICE OF MEETING. During any emergency, a meeting
of the Board of Directors may be called by any officer or director of the
corporation. Notice of the date, time and place of the meeting shall be given by
the person calling the meeting to such of the directors as it may be feasible to
reach by any available means of communication. Such notice shall be given at
such time in advance of the meeting as circumstances permit in the judgment of
the person calling the meeting.
Section C. QUORUM AND VOTING. At any such meeting of the Board of
Directors, a quorum shall consist of any one or more directors, and the act of
the majority of the directors present at such meeting shall be the act of the
corporation.
Section D. APPOINTMENT OF TEMPORARY DIRECTORS.
1. The director or directors who are able to be assembled at a
meeting of directors during an emergency may assemble for the purpose of
appointing, if such directors deem
<PAGE>
it necessary, one or more temporary directors (the "Temporary Directors") to
serve as directors of the corporation during the term of any emergency.
2. If no directors are able to attend a meeting of directors
during an emergency, then such stockholders as may reasonably be assembled shall
have the right, by majority vote of those assembled, to appoint Temporary
Directors to serve on the Board of Directors until the termination of the
emergency.
3. If no stockholders can reasonably be assembled in order to
conduct a vote for Temporary Directors, then the President or his successor, as
determined pursuant to Section 9 of Article IV herein shall be deemed a
Temporary Director of the corporation, and such President or his successor, as
the case may be, shall have the right to appoint additional Temporary Directors
to serve with him on the Board of Directors of the corporation during the term
of the emergency.
4. Temporary Directors shall have all of the rights, duties and
obligations of directors appointed pursuant to Article III hereof, provided,
however, that a Temporary Director may be removed from the Board of Directors at
any time by the person or persons responsible for appointing such Temporary
Director, or by vote of the majority of the stockholders present at any meeting
of the stockholders during an emergency, and, in any event, the Temporary
Director shall automatically be deemed to have resigned from the Board of
Directors upon the termination of the emergency in connection with which the
Temporary Director was appointed.
Section E. MODIFICATION OF LINES OF SUCCESSION. During any emergency,
the Board of Directors may provide, and from time to time modify, lines of
succession different from that provided in Section 9 of Article IV in the event
that during such an emergency any or all officers or agents of the corporation
shall for any reason be rendered incapable of discharging their duties.
Section F. CHANGE OF PRINCIPAL OFFICE. The Board of Directors may,
either before or during any such emergency, and effective during such emergency,
change the principal office of the corporation or designate several alternative
head offices or regional offices, or authorize the officers of the corporation
to do so.
Section G. LIMITATION OF LIABILITY. No officer, director or employee
acting in accordance with these emergency by-laws during an emergency shall be
liable except for willful misconduct.
Section H. REPEAL AND CHANGE. These emergency by-laws shall be subject
to repeal or change by further action of the Board of Directors or by action of
the Stockholders, but no such repeal or change shall modify the provisions of
section 6 above with regard to actions taken prior to the time of such repeal or
change. Any amendment of these emergency by-laws may make any further or
different provision that may be practical or necessary under the circumstances
of the emergency.
EXHIBIT 4.3
ADVISORY AND INVESTMENT BANKING AGREEMENT
This Agreement is made and entered into as of the [__]th day
of [____], 2000 by and between Kashner Davidson Securities Corporation, a
Florida corporation ("Kashner") and Innovative Health Products, Inc., a Florida
corporation (the "Company").
In consideration of the mutual promises made herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. PURPOSE: The Company hereby engages Kashner for the term
specified in Paragraph 2 hereof to render consulting advice to the Company as an
investment banker relating to financial and similar matters upon the terms and
conditions set forth herein.
2. TERM: Except as otherwise specified in paragraph 4 hereof,
this Agreement shall be effective from [THE EFFECTIVE DATE] to [36 months
later].
3. DUTIES OF KASHNER: During the term of this Agreement,
Kashner shall seek out Transactions (as hereinafter defined) on behalf of the
Company and shall furnish advice to the Company in connection with any such
Transactions.
4. COMPENSATION: In consideration for the services rendered by
Kashner to the Company pursuant to this Agreement (and in addition to the
expenses provided for in Paragraph 5 hereof), the Company shall compensate
Kashner as follows:
(a) The Company shall pay Kashner a fee of
$3,000 per month during the term of this Agreement. The sum of $108,000 shall be
payable in full on the date of this Agreement. In the event that Kashner ceases
its business operations as a financial advisor and investment banker, materially
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breaches or is unable to satisfy its performance obligations hereunder, then
Kashner shall repay to the Company the pro rata unearned portion of foregoing
fee, based on the number of months for which performance was delivered and the
remaining number of months in the term.
(b) In the event that any Transaction (as hereinafter
defined) occurs during the term of this Agreement or one year thereafter, the
Company shall pay fees to Kashner as follows:
(i) five percent (5%) of any consideration up to and including $1,000,000
paid pursuant to the Transaction, plus
(ii) four percent (4%) of any consideration from $1,000,001 up to and
including $2,000,000 paid pursuant to the Transaction, plus
(iii) three percent (3%) of any consideration from $2,000,001 up to and
including $3,000,000 paid pursuant to the Transaction, plus
(iv) two percent (2%) of any consideration from $3,000,001 up to and
including $4,000,000 paid pursuant to the Transaction, plus
(v) one percent (1%) of any consideration greater than $4,000,000 paid
pursuant to the Transaction.
For the purposes of this Agreement, "Consideration"
shall mean the total market value on the day of the closing of stock, cash,
assets and all other property (real or personal) exchanged or received, directly
or indirectly by the Company or any of its security holders in connection with
any Transaction. Any co-broker or brokers retained by Kashner shall be paid by
Kashner.
For the purposes of the Agreement, a "Transaction"
shall mean (a) any transaction originated by Kashner, whereby, directly or
indirectly, control of or a material interest in the Company or any of its
businesses or any of their respective assets, is transferred for Consideration,
or (b) any transaction originated by Kashner whereby the Company acquires any
other company or the assets of any other company or an interest in any other
company (an "Acquisition") or to so act.
In the event Kashner originates a line of credit with
a lender, the Company and Kashner will mutually agree on a satisfactory fee for
such services provided based upon reasonable and
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customary practice in the industry and the terms of payment of such fee;
provided, however, that in the event the Company is introduced to a corporate
partner by Kashner in connection with a merger, Acquisition or financing and a
credit line develops directly as a result of the introduction, the appropriate
fee shall be the amount set forth in the schedule above with consideration to be
based upon the amount of the line of credit. In the event Kashner introduces the
Company to a joint venture partner or customer and sales develop as a result of
the introduction, the Company agrees to pay a fee of five percent (5%) of total
sales generated directly from this introduction during the first two years
following the date of the first sale, in lieu of the fees set forth in the
schedule above. Total sales shall mean cash receipts less any applicable
refunds, returns, allowances, credits and shipping charges and monies paid by
the Company by way of settlement or judgment arising out of claims made by or
threatened against the Company. Commission payments shall be paid on the 15th
day of each month following the receipt of customers' payment. In the event any
adjustments are made to the total sales after the commission has been paid, the
Company shall be entitled to an appropriate refund or credit against future
payments under this Agreement. All fees to be paid pursuant to this Agreement,
except as otherwise specified, are due and payable to Kashner in cash at the
closing or closings of any transaction specified in Paragraph 4 hereof. In the
event that this Agreement shall not be renewed or if terminated for any reason,
notwithstanding any such non-renewal or termination, Kashner shall be entitled
to a full fee as provided under Paragraphs 4 and 5 hereof, for any transaction
for which the discussions were initiated during the term of this Agreement and
which is consummated within a period of twelve months after non-renewal or
termination of this Agreement.
5. EXPENSES OF KASHNER: In addition to the fees payable
hereunder, and regardless of whether any transaction set forth in Paragraph 4
hereof is proposed or consummated the Company shall
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reimburse Kashner for all fees and disbursements of Kashner's counsel and
Kashner's travel and reasonable out-of-pocket expenses incurred in connection
with and in direct furtherance of the services performed by Kashner pursuant to
this Agreement, including without limitation, hotels, food and associated
expenses and long-distance telephone calls. Kashner shall obtain the consent of
the Company before incurring any expense over $1,000.
6. LIABILITY OF KASHNER:
(a) The Company acknowledges that all opinions and
advice (written or oral) given by Kashner to the Company in connection with
Kashner's engagement are intended solely for the benefit and use of the Company
in considering the transaction to which they relate, and the Company agrees that
no person or entity other than the Company shall be entitled to make use of or
rely upon the advice of Kashner to be given hereunder, and no such opinion or
advice shall be used for any other purpose or reproduced, disseminated, quoted
or referred to at any time, in any manner or for any purpose, nor may the
Company make any public references to Kashner, or use Kashner's name in any
annual reports or any other reports or releases of the Company without Kashner's
prior written consent.
(b) The Company acknowledges that Kashner makes no
commitment whatsoever as to making a market in the Company's securities or to
recommending or advising its clients to purchase the Company's securities,
except that Kashner has committed to make a market in the Company=s securities
for at least 45 days after the effective date of the Company=s initial public
offering. Research reports or corporate finance reports that may be prepared by
Kashner will, when and if prepared, be done solely on the merits or judgment of
analysis of Kashner or any senior corporate finance personnel of Kashner.
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7. KASHNER'S SERVICES TO OTHERS: The Company acknowledges that
Kashner or its affiliates are in the business of providing financial services
and consulting advice to others. Nothing herein contained shall be construed to
limit or restrict Kashner in conducting such business with respect to others, or
in rendering such advice to others.
8. COMPANY INFORMATION:
(a) The Company recognizes and confirms that, in
advising the Company and in fulfilling its engagement hereunder, Kashner will
use and rely on data, material and other information furnished to Kashner by the
Company. The Company acknowledges and agrees that in performing its services
under this engagement, Kashner may rely upon the data, material and other
information supplied by the Company without independently verifying the
accuracy, completeness or veracity of same.
(b) Except as contemplated by the terms hereof
or as required by applicable law, Kashner shall keep confidential all material
non-public information provided to it by the Company, and shall not disclose
such information to any third party, other than such of its employees and
advisors as Kashner determines to have a need to know. Upon termination of this
Agreement, at the request of the Company, Kashner shall deliver to the Company
all non-public material in its possession relating to the business affairs of
the Company.
9. INDEMNIFICATION:
(a) The Company shall indemnify and hold Kashner and
its directors, officers, employees and agents harmless against any and all
liabilities, claims, lawsuits, including any and all awards and/or judgments to
which it may become subject under the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "Act") or any
other federal or state statute, at common law or otherwise, insofar as said
liabilities, claims and lawsuits (including awards
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and/or judgments) arise out of or are in connection with the services rendered
by Kashner or any transactions in connection with this Agreement, except for any
liabilities, claims and lawsuits (including awards judgments and related costs
and expenses), arising out of acts or omissions of Kashner. In addition, the
Company shall also indemnify and hold Kashner harmless against any and all
reasonable costs and expenses, including reasonable counsel fees, incurred or
relating to the foregoing. If it is finally judicially determined that the
Company will not be responsible for any liabilities, claims and lawsuits or
expenses related thereto, the indemnified party, by his or its acceptance of
such amounts, agrees to repay the Company all amounts previously paid by the
Company to the indemnified person and will pay all costs of collection thereof,
including but not limited to reasonable attorneys' fees related thereto.
Kashner shall give the Company prompt notice of any
such liability, claim or lawsuit which Kashner contends is the subject matter of
the Company's indemnification and the Company thereupon shall be granted the
right to take any and all necessary and proper action, at its sole cost and
expense, with respect to such liability, claim and lawsuit, including the right
to settle, compromise and dispose of such liability, claim or lawsuit, excepting
therefrom any and all proceedings or hearings before any regulatory bodies
and/or authorities.
Kashner shall indemnify and hold the Company and its
directors, officers, employees and agents harmless against any and all
liabilities, claims and lawsuits, including any and all awards and/or judgments
to which it may become subject under the 1933 Act, the Act or any other federal
or state statute, at common law or otherwise, insofar as said liabilities,
claims and lawsuits (including awards and/or judgments) arise out of or are
based upon Kashner's gross negligence, useful misconduct, bad faith or any
untrue statement or alleged untrue statement of a material fact or omission at a
material fact required to be stated or necessary to make the statement provided
by Kashner, not
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misleading, which statement or omission was made in reliance
upon information furnished in writing to the Company by or on behalf of Kashner
for inclusion in any registration statement or prospectus or any amendment or
supplement thereto in connection with any transaction to which this Agreement
applies. In addition, Kashner shall also indemnify and hold the Company harmless
against any and all costs and expenses, including reasonable counsel fees,
incurred or relating to the foregoing.
The Company shall give to Kashner prompt notice of
any such liability, claim or lawsuit which the Company contends is the subject
matter of Kashner's indemnification and Kashner thereupon shall be granted the
right to a take any and all necessary and proper action, at its sole cost and
expense, with respect to such liability, claim and lawsuit, including the right
to settle, compromise or dispose of such liability, claim or lawsuit, excepting
therefrom any and all proceedings or hearings before any regulatory bodies
and/or authorities.
(b) In order to provide for just and equitable
contribution under the Act in any case in which (i) any person entitled to
indemnification under this Section 9 makes claim for indemnification pursuant
hereto but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 10 provides for
indemnification in such case, or (ii) contribution under the Act may be required
on the part of any such person in circumstances for which indemnification is
provided under this Section 10, then, and in each such case, the Company and
Kashner shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after any contribution from others) in such
proportion taking into consideration the relative benefits received by each
party from the offering covered by the prospectus with respect to any
transactions in connection with this Agreement (taking into account
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the portion of the proceeds of the offering realized by each), the parties'
relative knowledge and access to information concerning the matter with respect
to which the claim was assessed, the opportunity to correct and prevent any
statement or omission and other equitable considerations appropriate under the
circumstances; provided, however, that notwithstanding the above in no event
shall Kashner be required to contribute any amount in excess of 10% of the
public offering price of any securities to which such Prospectus applies; and
provided, that, in any such case, no person guilty of a 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.
Within fifteen (15) days after receipt by any party
to this Agreement (or its representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is to be made against another party (the "Contributing Party"),
notify the Contributing Party of the commencement thereof, but the omission so
to notify the Contributing Party will not relieve it from any liability which it
may have to any other party other than for contribution hereunder. In case any
such action, suit or proceeding is brought against any party, and such party
notifies a Contributing Party or his or its representative of the commencement
thereof within the aforesaid fifteen (15) days, the Contributing Party will be
entitled to participate therein with the notifying party and any other
Contributing Party similarly notified. Any such Contributing Party shall not be
liable to any party seeking contribution on account of any settlement of any
claim, action or proceeding effected by such party seeking contribution without
the written consent of the Contributing Party. The indemnification provisions
contained in this Section 10 are in addition to any other rights or remedies
which either party hereto may have with respect to the other or hereunder.
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10. KASHNER AS INDEPENDENT CONTRACTOR : Kashner shall perform
its services hereunder as independent contractors and not as employees of the
Company or an affiliate thereof. It is expressly understood and agreed to by the
parties hereto that Kashner shall have no authority to act for, represent or
bind the Company or any affiliate thereof in any manner, except as may be agreed
to expressly by the Company in writing from time to time.
11. MISCELLANEOUS:
(a) This Agreement between the Company and Kashner
constitutes the entire agreement and understanding of the parties hereto, and
supersedes any and all previous agreements and understandings, whether oral or
written, between the parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required
hereunder shall be in writing and shall be deemed sufficiently given if
hand-delivered or sent (i) postage prepaid by registered mail, return receipt
requested, or (ii) by facsimile, to the respective parties as set forth below,
or to such other address as either party may notify the other in writing:
If to the Company, to: Innovative Health Products
6950 Bryan Dairy Road
Largo, FL 33777
Attn: Dr. Kotha S. Sekharam
with a copy to: Sichenzia, Ross & Freidman LLP
135 West 50th Street, 20th Floor
New York, New York 10020
Attn: Gregory Sichenzia, Esq.
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If to Kashner, to: Kashner Davidson Securities Corporation
77 South Palm Avenue
Sarasota, Florida 34236
Attn: Mathew Meister
with a copy to:
(c) This Agreement shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors, legal
representatives and assigns.
(d) This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same original
document.
(e) No provision of this Agreement may be amended,
modified or waived, except in a writing signed by all of the parties hereto.
(f) This Agreement shall be construed in accordance
with and governed by the laws of the State of [ ], without giving effect to
conflict of law principles. The parties hereby agree that any dispute which may
arise between them arising out of or in connection with this Agreement shall be
adjudicated before a court located in [ ], and they hereby submit to the
exclusive jurisdiction of the courts of the State of Florida located in [ ] and
of the federal courts in the [ ] District of [ ] with respect to any action or
legal proceeding commenced by any party, and irrevocably waive any objection
they now or hereafter may have respecting the venue of any such action or
proceeding brought in such a court or respecting the fact that such court is an
inconvenient forum, relating to or arising out of this Agreement, and consent to
the service of process in any such action or legal proceeding by means of
registered or certified mail, return receipt requested, in care of the address
set forth in Paragraph 11(b) hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
KASHNER DAVIDSON SECURITIES CORPORATION
By:________________________________
INNOVATIVE HEALTH PRODUCTS, INC.
By:________________________________
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of the 12th day
of June, 1998, by and between Nu-Wave Health Products, Inc., a Florida
corporation (the "Employer") and Paul Santostasi, residing at 3651 Torrey Pines
Blvd., Sarasota, FL 34238 (the "Employee").
WITNESSETH:
1. EMPLOYMENT. The Employer hereby employs the Employee as the
Vice Chairman of the Board of Directors of the Employer, and the Employee hereby
accepts such employment, upon the terms and subject to the conditions set forth
in this Agreement.
2. TERM. Subject to the provisions of termination as hereinafter
provided, the term of employment under this Agreement shall begin as of June 12,
1998, and terminate on June 13, 2001.
3. COMPENSATION; REIMBURSEMENT, ETC.
(a) The compensation payable to the Employee shall be
fixed at an annual salary of $125,000. Such compensation may be paid in weekly
or in other convenient installments, as determined by the Employer. In addition,
the Board of Directors of Employer may, in its discretion, establish a bonus
plan which may include the Employee. The terms of any such bonus plan shall be
in the discretion of the Employer.
(b) The Employer shall reimburse the Employee on a
monthly basis for all reasonable expenses incurred by the Employee in the
performance of his duties under this Agreement; provided, however, that the
Employer will not reimburse the Employee for any expense which had not been
approved by the Employer prior to such expense; and provided further, that the
Employee shall have previously furnished to the Employer an itemized account,
satisfactory to the Employer, in substantiation of such expenditures.
(c) The Employer currently provides to the Employee a
leased automobile, with 15 months remaining on such lease. The Employer shall
maintain such lease until its expiration, at which time such vehicle shall be
returned to the lessor. Thereafter, Employer shall pay to Employee an automobile
allowance of $750 per month for each month during the term hereof.
(d) The Employer shall maintain a life insurance policy
on the life of the Employee during the term of this Agreement in the face amount
of $500,000. The Employee, his designee or estate shall be the beneficiary of
$250,000 of the death benefit of such life insurance policy and, until the date
that the Employer refinances its existing note and mortgage encumbering its
facilities (the "Note"), $250,000 of the death benefit shall be payable to the
Employer, but pledged as additional security for the Note. After the Note is
refinanced, the death benefit previously pledged as additional security for the
Note shall be payable to the Employee's designated beneficiary.
<PAGE>
4. DUTIES. The Employee is engaged as the Vice Chairman of the
Board of the Employer. Employee shall report to and take direction from
Employer's Chairman of the Board. Employee's primary responsibility shall be
business development and acquisitions. The Employee shall adhere to the minimum
performance standards set forth in Exhibit "A" hereto. In addition, the Employee
shall have such other duties and hold such offices as may from time to time be
reasonably assigned to him by the Board of Directors of the Employer.
5. EXTENT- OF SERVICES. During the term of his employment under
this Agreement, the Employee shall devote his entire time, attention, energies
and skill to the benefit and business of the Employer, and shall not during the
term of this Agreement be employed by any other person without board approval.
6. BENEFITS. The Employee shall be entitled to the same benefits
package made available by the Employer to its management personnel, including
health insurance for employee and his immediate family. The Employee shall be
entitled to four (4) weeks vacation time during each fiscal year of the
Employer.
7. DISABILITY, ILLNESS OR INCAPACITY.
(a) The Employee shall receive full compensation for any
period of disability, illness or incapacity during the term hereof which renders
the Employee at least temporarily unable to perform the services required under
this Agreement, provided, however, that if the Employee's disability, illness or
incapacity extends beyond a period of one hundred twenty (120) days, the
Employee shall not be entitled, after the expiration of such one hundred twenty
(120) day period, to any further compensation hereunder until he returns to full
time service hereunder, but he shall be entitled only to such disability
payments as may be provided by a disability insurance policy or policies
purchased by the Employer.
(b) Successive periods of disability, illness or
incapacity will be considered separate periods unless the later period of
disability, illness or incapacity is due to the same or related cause and
commences less than six (6) months after the ending of the previous period of
disability.
(c) If and when the period of disability, illness or
incapacity of the Employee totals six (6) months, his employment with the
Employer may be terminated by the Board. If the Employee and the Employer agree,
the Employee may thereafter be employed by the Employer upon such terms as may
be mutually agreeable.
(d) Any dispute regarding the existence, extent or
continuance of the disability, illness or incapacity shall be resolved by the
determination of a majority of three competent doctors who are not employees of
the Employer, one of which shall be selected by the Employer, one of which shall
be selected by the Employee and a third selected by the other two doctors.
8. DEATH OR RETIREMENT.
(a) All rights of the Employee hereunder (other than
rights accrued prior thereto) shall terminate upon his death, except that the
Employer shall pay to the estate of the
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Employee such compensation as would otherwise have been payable to the Employee
up to six months after the death occurs. The Employer shall. have no additional
financial obligation under this Agreement to the Employee or his estate.
(b) All rights of the Employee hereunder (other than
rights accrued prior thereto) shall terminate upon his retirement, except that
the Employer shall pay to the Employee such compensation as would otherwise have
been payable to the Employee up to the end of the month in which his retirement
occurs. The Employer shall have no additional financial obligation under this
Agreement to the Employee.
9. OTHER TERMINATIONS.
(a) (i) The Employer may terminate the employment of the
Employee hereunder without notice (1) upon the Employee's breach of any
provision of this Agreement, or (2) for good cause (as defined below).
(ii) The term "good cause" as used in this
Agreement shall include, but shall not necessarily be limited to fraud, habitual
absenteeism, a pattern of conduct which tends to hold the Employer up to
ridicule in the community, conduct disloyal to the Employer, conviction of any
crime of moral turpitude and substantial dependence, as determined by the Board
of Directors of the Employer, on any addictive substance, including but not
limited to alcohol, amphetamines, barbiturates, methadone, cannabis, cocaine,
PCP, THC, LSD or other illegal or narcotic drugs. If any determination of
substantial dependence by the Board of Directors is disputed by the Employee,
the parties hereto agree to abide by the decision of a panel of three physicians
selected in the manner provided in Section 7(d) of this Agreement. The Employee
agrees to make himself available for and submit to examinations by such
physicians as may be directed by the Employer. Failure to submit to any such
examination shall constitute a breach of a material part of this Agreement.
(b) If the employment of the Employee is terminated
pursuant to this Section 9, the Employer shall pay to the Employee any
compensation earned but not paid to the Employee prior to such termination. Such
payment shall be in full and complete discharge of any and all liabilities or
obligations of the Employer to the Employee hereunder, and the Employee shall be
entitled to no further benefits under this Agreement, except as provided in
Section 9 of this Agreement.
(c) In the event termination for reasons other than those
pursuant to this Section 9 the Employer will pay the balance of compensation due
pursuant to that contact, less any bonus, up to the termination date of this
contract.
10. DISCLOSURE.
(a) The Employee agrees that he will fully disclose and
disclose only to the Employer all ideas, methods, plans, developments,
improvements or patentable inventions, of any kind, which relate directly or
indirectly to the business of the Employer and which are known, made or
discovered by him during the performance of his duties under this Agreement. All
disclosures are to be made promptly after conception or discovery of the idea,
method, plan,
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development, improvement or invention. Nothing in this Section 10 shall be
construed as requiring any communication to the Employer of the idea, method,
plan, development, improvement or invention if lawfully protected by any other
lawful prohibition against such communication.
(b) Any idea, method, plan, development, improvement or
invention which the Employee is obligated to disclose to the Employer under this
Section 10 shall be the property of the Employer, regardless of whether it is
disclosed by the Employee to the Employer. The Employee agrees that he will
provide any and all assistance to the Employer in making any patent applications
or other applications for obtaining exclusive rights in, and will do all other
things that may be reasonably necessary to vest in the Employer or its assigns,
the ideas, methods, plans, developments, improvements or inventions.
11. CONFIDENTIALITY. The Employee agrees to keep in strict secrecy
and confidence any and all information the Employee assimilates or to which he
has access during his employment by the Employer and which has not been publicly
disclosed and is not a matter of common knowledge in the fields of work of the
Employer. The Employee agrees that both during and after the term of his
employment by the Employer, lie will not, without prior written consent of the
Employer, disclose any such confidential information to any third person,
partnership, joint venture, company, corporation or other organization.
12. NONCOMPETITION AND NONSOLICITATION.
(a) During the term of this Agreement, except as
contemplated herein, and for a period of three (3) years after the termination
of his employment with the Employer, regardless of the reason for such
termination, the Employee shall not, directly or indirectly, within Florida,
enter into, engage in, be employed by, or consult with any business in
competition with the business of the Employer or Nu-Wave Health Products, Inc.,
a Florida corporation ("Nu-Wave") as it is then carried on (except for vitamin
outlets); further, the Employee shall not sell to, market, produce or otherwise
deal with any customer of the Employer or Nu-Wave. The restrictions of this
Section 12 shall extend to any and all activities of the Employee, whether as an
independent contractor, partner or joint venturer, or as an officer, director,
stockholder, agent, employee or salesman for any person, firm, partnership,
corporation or other entity, or otherwise. The restrictions of this Section 12
shall not be violated by the ownership of no more than 2% of the outstanding
securities of any company whose stock is traded on a national securities
exchange or is quoted in the Automated Quotation System of the National
Association of Securities Dealers (NASDAQ). Solicitation or acceptance of orders
outside of any prohibited territory as described above for shipment to, delivery
in or service in any restricted territory shall also constitute engaging in
business within the restricted territories in violation of this Section 12.
(b) During his employment with the Employer, except as
contemplated herein, and for a period of one (1) year after the termination of
his employment with the Employer, regardless of the reason for such termination,
the Employee agrees he will refrain from and will not, directly or indirectly,
as independent contractor, employee, consultant, agent, partner, joint venturer,
or otherwise, (1) solicit any of the employees of the Employer or Nu-Wave to
terminate their employment or (2) accept employment with or seek remuneration by
any of the customers
4
<PAGE>
of the Employer or Nu-Wave with whom the Employer or Nu-Wave did business during
the term of the Employee's employment.
(c) The period of time during which the Employee is
prohibited from engaging in certain business practices pursuant to Sections
12(a) or (b) shall be extended by any length of time during which the Employee
is in breach of such covenants.
(d) It is understood by and between the parties hereto
that the foregoing restrictive covenants set forth in Sections 12(a) through (c)
are essential elements of this Agreement, and that, but for the agreement of the
Employee to comply with such covenants, the Employer would not have agreed to
enter into this Agreement. Such covenants by the Employee shall be construed as
agreements independent of any other provision in this Agreement. The existence
of any claim or cause of action of the Employee against the Employer, whether
predicated on this Agreement, or otherwise, shall not constitute a defense to
the enforcement by the Employer of such covenants.
(e) It is agreed by the Employer and the Employee that if
any portion of the covenants set forth in this Section 12 are held to be
invalid, unreasonable, arbitrary or against public policy, then such portion of
such covenants shall be considered divisible both as to time and geographical
area. The Employer and Employee agree that, if any court of competent
jurisdiction determines the specified time period or the specified geographical
area applicable to this Section 12 to be invalid, unreasonable, arbitrary or
against public policy, a lesser time period or geographical area which is
determined to be reasonable, nonarbitrary and not against public policy may be
enforced against the Employee. The Employer and the Employee agree that the
foregoing covenants are appropriate and reasonable when considered in light of
the nature and extent of the business conducted by the Employer.
13. SPECIFIC PERFORMANCE. The Employee agrees that damages at law
will be an insufficient remedy to the Employer if the Employee violates the
terms of Sections 10, 11 or 12 of this Agreement and that the Employer would
suffer irreparable damage as a result of such violation. Accordingly, it is
agreed that the Employer shall be entitled, upon application to a court of
competent jurisdiction, to obtain injunctive relief to enforce the provisions of
such Sections, which injunctive relief shall be in addition to any other rights
or remedies available to the Employer. The Employee agrees to pay to the
Employer all costs and expenses incurred by the Employer relating to the
enforcement of the terms of Sections 10, 11 or 12 of this Agreement, including
reasonable fees and disbursements of counsel (both at trial and in appellate
proceedings).
14. COMPLIANCE WITH OTHER AGREEMENTS. The Employee represents and
war-rants that the execution of this Agreement by him and his performance of his
obligations hereunder will not conflict with, result in the breach of any
provisions of or the termination of or constitute a default under any Agreement
to which the Employee is a party or by which the Employee is or may be bound.
15. WAIVER OR BREACH. The waiver by the Employer of a breach of
any of the provisions of this Agreement by the Employee shall not be construed
as a waiver of any subsequent breach by the Employee.
5
<PAGE>
16. BINDING EFFECT ASSIGNMENT. The rights and obligations of the
Employer under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Employer. This Agreement is a personal
employment contract and the rights, obligations and interests of the Employee
hereunder may not be sold, assigned, transferred, pledged or hypothecated.
17. ENTIRE AGREEMENT. This Agreement contains the entire agreement
and supersedes all prior agreements and understandings, oral or written, with
respect to the subject matter hereof. This Agreement may be changed only by an
agreement in writing signed by the party against whom any waiver, change,
amendment, modification or discharge is sought.
18. HEADINGS. The headings contained in this Agreement are for
reference purposes and shall not affect the meaning or interpretation of this
Agreement.
19. GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of Florida. 20. NOTICES. Any notice
required or permitted to be given under this Agreement shall Sufficient if in
writing and if sent by certified or registered mail, first class, return receipt
requested, to the parties at the following addresses:
To the Employer: Nu-Wave Health Products, Inc.
c/o Nu-Wave Health Products, Inc.
5770 Roosevelt Boulevard, Suite 700
Clearwater, Florida 34620
Attention: Kotha S. Sekharam, President
To the Employee at his address herein first above written.
The parties hereto have executed this Agreement the day and year first
above written.
EMPLOYER:
NU-WAVE HEALTH PRODUCTS, INC.
By: /s/ KOTHA S. SEKHARAM
-------------------------------------
Kotha S. Sekharam, President
EMPLOYEE:
/s/ PAUL SANTOSTASI
-------------------------------------
Paul Santostasi
6
EXHIBIT 10.6
LINE OF CREDIT AGREEMENT
Innovative Health Products, Inc. FIRST COMMUNITY BANK OF AMERICA
6950 Bryan Dairy Rd. P.O. Box 20559
Largo, Florida St. Petersburg, Florida
33777 33742
Loan #: 24237
Date: December 3, 1999
Credit Line Amount: $500,000.00
You have extended to me a line of credit in the amount of Five Hundred
Thousand and 00/000 ($500,000.00).
You will make loans to me from time to time until 5:00 p.m. on November
10, 2000. Although the line of credit expires on that date, I will remain
obligated to perform all my duties under this agreement as long as I owe you any
money advanced according to the terms of this agreement, as evidenced by any
note or notes I have signed to repay these amounts.
This line of credit is an agreement between you and me. It is not
intended that any third party receive any benefit from this agreement, whether
by direct payment, reliance for future payment or in any other manner. This
agreement is not a letter of credit.
1. AMOUNT: This line of credit is:
[XX} OBLIGATORY: You may not refuse to make a loan to me under this
line of credit unless one of the following occurs;
a: I have borrowed the maximum amount available to me;
b: This line of credit has expired;
c: I have defaulted on the note (or notes) which show my indebtedness
under this line of credit;
d. I have violated any term of this line of credit or any note or
other agreement entered into in connection with this line of
credit;
e. N/A
[ ] DISCRETIONARY: You may refuse to make a loan to me under this line of credit
once the aggregate outstanding advances equal or exceed $.
Subject to the obligatory or discretionary limitations above, this line of
credit is:
[XX] OPEN-END (Business or Agricultural only): I may borrow up to the
maximum amount of principal more than one time.
[ ] CLOSED-END I may borrow up to the maximum only one time.
2. PROMISSORY NOTE: I will repay any advances made according to this line of
credit agreement as set out in the promissory note I signed on December 3, 1999,
or any other note(s) I sign at a later time which represent advances under this
agreement. The note(s) set(s) out the terms relating to maturity, interest rate,
repayment and advances. If indicated on the promissory note, the advances will
be made as follows:
I hereby authorize Lender to pay advances against any loan with Lender
which I am a signer, maker, co-maker or guarantor; or deposit any advances
into my deposit account with Lender on which I am a signer, these advances
can be authorized by me or my designated representative in writing or
verbally, either in person or by phone. The minimum draw amount will be
$5,000.00 or the balance of the Line.
3. RELATED DOCUMENTS: I have signed the following documents in connection with
this line of credit and note(s) entered into in accordance with this line of
credit:
Security Agreement dated December 3, 1999;
Assignment of Savings Deposit dated December 3, 1999.
4. REMEDIES: If I am in default on the notes you may:
a. take any action as provided in the related documents:
b. without notice to me, terminate this line of credit:
By selecting any of these remedies you do not give up your right to later use
any other remedy. By deciding not to use any remedy should I default, you do
NOT waive your right to later consider the event a default, if it happens again.
5. COSTS AND FEES: If you hire an attorney to enforce this agreement I will pay
your reasonable attorney's fees, where permitted by law. I will also pay your
court costs and cost of collection, where permitted by law.
6. COVENANTS: For as long as this line of credit is in effect or I owe you money
for advances made in accordance with the line of credit, I will do the
following:
a. maintain books and records of my operations relating to the need for
this line of credit;
b. permit you or any of your representatives to inspect and/or copy these
records;
c. provide to you any documentation requested by you which support the
reason for making any advance under this line of credit;
d. permit you to make any advance payable to the seller (or seller and me)
of any items being purchased with that advance;
e. provide periodic financial statements as you may reasonably request from
time to time;
f. N/A
7. NOTICES: All notices and other correspondence with me should be sent to my
address stated above. The notice or correspondence shall be effective when
deposited in the mail, first class, or delivered to me in person.
8. MISCELLANEOUS: This line of credit may not be changed except by a written
agreement signed by you and me. The laws of the State of Florida will govern
this agreement. Any term of this agreement which is contrary to applicable law
will not be effective, unless the law permits you and me to agree to such a
variation.
First Community Bank of America SIGNATURES: I AGREE TO THE TERMS OF
THIS LINE OF CREDIT. I HAVE RECEIVED
A COPY ON TODAY'S DATE.
Innovative Health Products, Inc.
/s/ SCOTT C. BOYLE /s/ JUGAL K. TANEJA
- ---------------------------------- --------------------------------------
Scott C. Boyle, President Jugal K. Taneja, Chairman/Secretary
/s/ KOTHA SEKHARAM
--------------------------------------
Kotha Sekharam, President
<PAGE>
INNOVATIVE HEALTH PRODUCTS, INC.
6950 BRYAN DAIRY RD.
LARGO, FL 33777
BORROWER'S NAME AND ADDRESS
"I" includes each Borrower above, joint and severally.
FIRST COMMUNITY BANK OF AMERICA
6100 4TH STREET NORTH
ST. PETERSBURG, FL 33703
LENDER'S NAME AND ADDRESS
"You" means the lender, its successors and assigns.
Loan Number 24237
-----------------------
Date DECEMBER 3, 1999
-----------------------------
Maturity Date NOVEMBER 10, 2000
--------------------
Loan Amount $500,000.00
----------------------
Renewal Of
-----------------------
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of FIVE HUNDRED THOUSAND AND NO/100**************
Dollars $500,000.00
[ ] SINGLE ADVANCE: I will receive all of this principal sum on _______________.
No additional advances are contemplated under this note.
[X] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On DECEMBER 3, 1999 _______________
I will receive the amount of $___________________ and future principal
advances are contemplated.
CONDITIONS: The conditions for future advances are AS PER THE TERMS OF THE
LINE OF CREDIT AGREEMENT OF EVEN DATE.
____________________________________________________________________________
[X] OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on NOVEMBER 10, 2000.
[ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from
DECEMBER 3, 1999 at the rate of 6.500% per year until FIRST CHANGE DATE.
[X] VARIABLE RATE: This rate may then change as stated below.
[X] INDEX RATE: The future rate will be 2.100% OVER the following index
rate: RATE PAID ON CERTIFICATE #30023878 HYPOTHECATED BY DYNAMIC HEALTH
PRODUCTS, INC. WHICH SERVES AS COLLATERAL FOR THIS LOAN.
[ ] NO INDEX: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
[X] FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY.
A change in the interest rate will take effect ON THE SAME DAY.
[X] LIMITATIONS: During the term of this loan, the applicable annual
interest rate will not be more than 18.000% or less than 5.000%. The rate
may not change more than 2.000% each DAY.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments:
[X] The amount of each scheduled payment will change.
[X] The amount of the final payment will change.
[ ]_________________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/365 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
[ ] on the same fixed or variable rate basis in effect before maturity (as
indicated above).
[X] at a rate equal to 18.00%
[X] LATE CHARGE: If a payment is made more than 10 days after it is due, I agree
to pay a late charge of 5.000% OF THE LATE PAYMENT.
[X] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which [ ] are [X] are not included in the principal amount above:
DOC STAMPS - $1,750.00, LOAN FEE- $125.00, COURIER FEE - $70.00.
PAYMENTS: I agree to pay this note as follows:
[X] INTEREST: I agree to pay accrued interest ON THE 10TH DAY OF EACH MONTH
BEGINNING JANUARY 10, 2000.
[X] PRINCIPAL: I agree to pay the principal NOVEMBER 10, 2000.
[ ] INSTALLMENTS: I agree to pay this note in ____ payments. The first payment
will be in the amount of $________________ and will be due ________________.
A payment of $______________ will be due ____________________ thereafter.
The final payment of this entire unpaid balance of principal and interest
will be due_____________________________________________.
ADDITIONAL TERMS:
[X] SECURITY: This note is separately secured by (describe separate document by
type and date); SECURITY AGREEMENT OF EVEN DATE.
(This section is for your internal use. Failure to list a separate security
document does not mean the agreement will not secure this note.)
Signature for Lender
____________________________________
____________________________________
PURPOSE: The purpose of this loan is
BUSINESS: WORKING CAPITAL.
SIGNATURES: I AGREE TO THE TERMS OF
THIS NOTE (INCLUDING THOSE ON PAGE 2).
I have received a copy on today's date.
INNOVATIVE HEALTH PRODUCTS, INC.
- -------------------------------------
BY: /s/ JUGAL K. TANEJA
- -------------------------------------
JUGAL K. TANEJA, CHAIRMAN/SECRETARY
BY: /s/ KOTHA SEKHARAM
- -------------------------------------
KOTHA SEKHARAM, PRESIDENT
<PAGE>
DEFINITIONS: As used on page 1, "[X]" means the terms that apply to this loan.
"I", "me" or "my" means each Borrower who signs this note and each other person
or legal entity (including guarantors, endorsers, and sureties) who agrees to
pay this note (together referred to as "us", "You" or "your" means the Lender
and its successors and assigns.
APPLICABLE LAW: The law of the state of Florida will govern this note. Any
term of this note which is contrary to applicable law will not be effective,
unless the law permits you and me to agree to such a variation. If any provision
of this agreement cannot be enforced according to its terms, this fact will not
affect the enforceability of the remainder of this agreement. No modification of
this agreement may be made without your express written consent. Time is of the
essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of each
payment will then reduce accrued unpaid interest, and then unpaid principal. If
you and I agree to different application of payments, we will describe our
agreement on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this note. Any
partial prepayment will not excuse or reduce any later scheduled payment until
this note is paid in full (unless, when I make the prepayment, you and I agree
in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to time,
until paid in full. If I receive the principal in more than one advance, each
advance will start to earn interest only when I receive the advance. The
interest rate in effect on this note at any given time will apply to the entire
principal advanced at that time. Notwithstanding anything to the contrary, I do
not agree to pay and you do not intend to charge any rate of interest that is
higher than the maximum rate of interest you could charge under applicable law
for the extension of credit that is agreed to here (either before or after
maturity). If any notice of interest accrual is sent and is in error, we
mutually agree to correct it, and if you actually collect more interest than
allowed by law and this agreement, you agree to refund it to me.
INDEX RATE: The index will serve only as a device for setting the rate on this
note. You do not guarantee by selecting this index, or the margin, that the rate
on this note will be the same rate you charge on any other loans or class of
loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the interest rate and accrual method stated on page 1 of this
note. For the purpose of interest calculation, the accrual method will determine
the number of days in a "year". If no accrual method is stated, then you may use
any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other amounts
to the principal if you make any payments described in the "PAYMENTS BY LENDER"
paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat those
payments made by you as advances and add them to the unpaid principal under this
note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your possession for
collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of which
you are entitled to demand payment under the terms of this note at the time you
set off. This total includes any balance the due date for which you properly
accelerate under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to an account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor occurs
because you set off this debt against any of my accounts. I agree to hold you
harmless from any such claims arising as a result of your exercise of your right
of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a
residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the terms
of any separate instrument creating the security interest and, to the extent not
prohibited by law and not contrary to the terms of the separate security
instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur: (1) I
fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required: (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I ow him through court proceedings; (5) I die, am declared
incompetant, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to pay
my debts as they become due); (6) I make any written statement or provide any
financial information that is untrue or inaccurate at the time it was provided;
(7) I do or fail to do something which causes you to believe that you will have
difficulty collecting the amount I owe you; (8) any collateral securing this
note is used in a manner or for a purpose which threatens confiscation by a
legal authority; (9) I change my name or assume an additional name without
first notifying you before making such a change; (10) I fail to plant, cultivate
and harvest crops in due season; (11) any loan proceeds are used for a purpose
that will contribute to excessive erosion of highly erodible land or to the
conversion of wetlands to produce an agricultural commodity, as further
explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M.
REMEDIES: If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set-off" paragraph herein.
(3) You may demand security, additional security, or additional parties to be
obligated to pay this note as a condition for not using any other remedy.
(4) You may refuse to make advances to me or allow purchases on credit by me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right to
later use any other remedy. By waiving your right to declare an event to be a
default, you do not waive your right to later consider the an event as a default
if it continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection,
replevin, or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any reasonable
fee you incur with such attorney plus court costs (except where prohibited by
law). I agree that reasonable attorneys' fees shall be construed to mean 10% of
the principal sum named in this note, or such larger fee that the court may
determine to be reasonable and just. To the extent permitted by the United
States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and
costs you incur to collect this debt as awarded by any court exercising
jurisdiction under the Bankruptcy Code.
WAIVER: I give up my right to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
I waive any defenses I have based on suretyship or impairment of collateral.
TO THE EXTENT PERMITTED BY LAW, I ALSO WAIVE MY RIGHT TO A TRIAL BY JURY IN
RESPECT TO ANY LITIGATION ARISING FROM THIS NOTE AND ANY OTHER AGREEMENT
EXECUTED IN CONJUNCTION WITH THIS CREDIT TRANSACTION.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or a separate
guarantee or endorsement). You may sue me alone, or anyone else who is obligated
on this note, or any number of us together, to collect this note. You may do so
without any notice that it has not been paid (notice of dishonor). You may
without notice release any party to this agreement without releasing any other
party. If you give up any of your rights, with or without notice, it will not
affect my duty to pay this note. Any extension of new credit to any of us, or
renewal of this note by all or less than all of us will not release me from my
duty to pay it. (Of course, you are entitled to only one payment in
full). I agree that you may at your option extend this note or the debt
represented by this note, or any portion of the note or debt, from time to time
without limit or notice and for any term without affecting my liability for
payment of the note, I will not assign my obligation under this agreement
without your prior written approval.
CREDIT INFORMATION; I agree and authorize you to obtain credit information about
me from time to time (for example, by requesting a credit report) and to report
to others your credit experience with me (such as a credit reporting agency). I
agree to provide you, upon request, any financial statement or information you
may deem necessary. I warrant that the financial statements and information I
provide to you are or will be accurate, correct and complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in writing
of any change in my address. I will give any notice to you by mailing it first
class to your address stated on page 1 of this agreement, or to any other
address that you have designated.
<TABLE>
<CAPTION>
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(NOT REQUIRED) THROUGH
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
We have issued our report dated October 14, 1999 accompanying the combined
financial statements of Innovative Health Products, Inc. and Herbal Health
Products, Inc. (both wholly owned subsidiaries of Dynamic Health Products, Inc.)
contained in the Registration Statement and Prospectus. We consent to the use of
the aforementioned report in the Registration Statement and Prospectus, and to
the use of our name as it appears under the caption "Experts" and "Summary
Financial Information".
/s/ GRANT THORNTON LLP
Tampa, Florida
December 13, 1999
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Innovative Health Products, Inc.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "experts" in the prospectus.
/s/ KIRKLAND, RUSS, MURPHY & TAPP
Clearwater, Florida
December 13, 1999
