UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF
1934
Commission file
No. 00
0-50875
VITACUBE SYSTEMS HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
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Nevada
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84-1575085
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|
(State of
incorporation)
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|
(I.R.S.
Employer Identification Number)
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480 South Holly Street
Denver, CO 80246
(Address of principal executive offices)
(303)-316-8577
(Issuer’s telephone number)
Securities registered
under Section 12(b) of the Exchange Act:
None
Securities registered
under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per
share
Check whether the issuer
(1) filed all reports to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES
ý
NO
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Check if there is no
disclosure of delinquent filers in response to Item 405 of Regulation S-B is
not contained in this form and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
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Issuer’s revenues for the
year ended December 31, 2004 were $803,640.
Aggregate market value of
voting stock held by non-affiliates of 2,249,105 shares outstanding at March 2,
2005 was approximately $7,984,323. Amount was computed using the average bid
and ask price as of March 2, 2005, which was $3.55. Shares of common stock
held by the officers and directors named in Item 9, and each person who owns
10% or more of the common stock have been excluded from the calculation in that
such persons may be deemed affiliates.
As of March 2, 2005,
the Company had 6,534,043 shares of its $.001 par value common stock issued and
outstanding.
Index
to VitaCube Systems Holdings, Inc. 2004 Form 10-KSB
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB for VitaCube Systems Holdings,
Inc. (“the Company”) contains “forward-looking statements” within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact are “forward-looking statements” for purposes of federal and
state securities laws, including any projections of earnings, revenue or other
financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements concerning proposed new
products or developments; any statements regarding future economic conditions
or performance; any statements of belief; and any statements of assumptions
underlying any of the foregoing. Forward-looking statements may include the
words “may,” “will,” “estimate,” “intend,” “continue,”
“believe,” “expect” or “anticipate” and other similar words.
Although we believe that the expectations
reflected in any of our forward-looking statements are reasonable, actual
results could differ materially from those projected or assumed in any of our
forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change
and to inherent risks and uncertainties. Actual future results may differ
significantly from the results discussed in the forward-looking statements. Some
of the risks that may affect our performance are discussed below under “Risk
Factors Associated with Our Business.”
RISK FACTORS ASSOCIATED WITH OUR BUSINESS
The Company is subject to various risks that
could have a negative effect on the Company and its financial condition. These
risks could cause actual operating results to differ from those expressed in
certain “forward looking statements” contained in this Form 10-KSB as well as
in other Company communications.
We have a history of operating losses and a
significant accumulated deficit, and we may never achieve profitability.
We have not been profitable since inception
in 2001. We had net losses for the years ended December 31, 2004 and 2003
of $2,513,999 and $2,267,533, respectively.
At December 31, 2004, we had an accumulated deficit of $7,564,955.
We may never achieve or maintain profitability. Our ability to achieve and
maintain a profit is dependent upon our attracting and maintaining a large base
of independent distributors who generate significant sales.
We may be unable to continue as a going
concern in which case our securities will have little or no value.
Our independent auditors have noted in their
reports concerning our financial statements as of December 31, 2004 and 2003, that we have incurred substantial losses since
inception, which raises substantial doubt about our ability to continue as a
going concern. In the event we are not able to continue operations you will
likely suffer a complete loss of your investment in our securities. See the
auditors’ reports on our consolidated financial statements elsewhere in this
Form 10-KSB.
Our limited operating history and recent
change in marketing strategy make it difficult to evaluate our prospects.
We have a limited operating history on which
to evaluate our business and prospects. Our products were formulated in 2000
and 2001, and we began selling our products to the general public in early
2002. In late 2003, we began to refocus our sales and marketing efforts on
direct sales of products through our network of independent distributors. There
is no assurance that we will achieve significant sales as a result of this new
strategy. Our revenue for the year ended December 31, 2004 decreased by
34% compared to 2003 due in large part to the start up efforts relating to our
direct sales program. There is no assurance that we will achieve significant
sales as a result of our new marketing strategy.
We also may not be successful in addressing
our operating challenges such as establishing a viable network of independent
distributors, developing brand awareness and expanding our market presence. Our
prospects for
2
profitability
must be considered in light of our evolving business model. These factors make
it difficult to assess our prospects.
Our failure to recruit, maintain and motivate
a large base of productive independent distributors could limit our ability to
generate revenues.
To increase revenue, we must increase the
sales and recruiting productivity of our independent distributors. We cannot
assure you that we will be successful in recruiting and retaining productive
independent distributors, particularly since direct sales organizations usually
experience high turnover rates of independent distributors. Our independent
distributors can terminate their relationships with us at any time. The
distributors also typically work on a part-time basis and may engage in other
business activities, which may reduce their efforts for us.
In recruiting and keeping independent
distributors, we will be subject to significant competition from other direct
sales organizations, both inside and outside our industry. Our ability to
attract and retain independent distributors will be dependent on the
attractiveness of our compensation plan, our product mix, and the support we
offer to our independent distributors. Adverse publicity concerning direct
sales marketing and public perception of direct selling businesses generally
could negatively affect our ability to attract, motivate and retain independent
distributors.
Based on our knowledge of the direct selling
industry, we anticipate that our independent distributor organization will be
headed by a relatively small number of key independent distributors who
together with their downline network will be responsible for a disproportionate
amount of revenues. We believe this structure is typical in the direct selling
industry, as sales leaders emerge in these organizations, and it is the current
situation with us. The loss of key independent distributors will adversely
affect our revenues and could adversely affect our ability to attract other
independent distributors, especially if an independent distributor takes other
independent distributors of ours to a competitor or to any other organization.
A change in the amount of compensation paid
to our independent distributors could reduce our ability to recruit and retain
them and to realize a profit.
We expect that one of our significant
expenses will be payment of compensation to our independent distributors. This
compensation includes commissions, bonuses, awards and prizes. From the date we
changed our sales method to direct sales through independent distributors, August 1,
2003, through December 31, 2004, compensation paid to our independent
distributors represented 29% of our total revenues. We may change our
independent distributor compensation plan in seeking to better manage these
incentives, to monitor the amount of independent distributor compensation paid
and to prevent independent distributor compensation from having a significant
adverse effect on our revenues. Changes to our independent distributor
compensation plan may make it difficult for us to recruit and retain qualified
and motivated independent distributors. We do not have any current plans to change
our distributor compensation plan.
We are not in a position to exert the same
level of influence or control over our independent distributors as we could if
they were our employees, and we may be subject to significant costs and
reputational harm in the event our independent distributors violate any laws or
regulations applicable to our operations.
Our independent distributors are independent
contractors and, accordingly, we are not in a position to provide the same
level of control and oversight as we would if independent distributors were our
employees. While we have implemented independent distributor policies and
procedures designed to govern independent distributor conduct and to protect
our goodwill, there can be no assurance that our independent distributors will
comply with our policies and procedures. Violations by our independent
distributors of applicable law or of our policies and procedures dealing with
customers could reflect negatively on our products and operations and harm our
business reputation. To date, we have not experienced any significant problems
affecting our products, operations or business reputation caused by distributor
violations of our policies and procedures.
In addition, extensive federal, state and
local laws regulate our direct selling program. The Federal Trade Commission (“FTC”)
or a court could hold us liable for the actions of our independent
distributors. The FTC could also find us liable civilly for deceptive
advertising if health benefit representations made by our independent
distributors are not supported by competent and reliable scientific evidence.
If any of these representations made by our independent distributors were
deemed fraudulent, the FTC could refer the matter to the Department of Justice
3
for
criminal
fraud prosecution. Also, the Food and Drug Administration (“FDA”) could seek to
hold us civilly and criminally liable for misbranding, for adulteration, or for
sale of an unapproved new drug if an independent distributor were to make false
or misleading claims, sell a product past its shelf life, or represent that any
of our products were intended for use in the cure, treatment, or prevention of
a disease or health-related condition. While we train our independent
distributors and attempt to monitor our independent distributors’ marketing
claims and sales materials, we cannot ensure that all of these materials comply
with applicable law.
Our direct selling program through
independent distributors could be found not to be in compliance with current or
newly adopted laws or regulations, which could subject us to increased costs
and reduced distributor participation in sales efforts, and our revenues would decrease significantly.
Our direct marketing program could be found
to violate laws or regulations applicable to direct selling marketing
organizations. These laws and regulations generally are directed at preventing
fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales”
schemes, by ensuring that product sales ultimately are made to consumers and
that advancement within an organization is based on sales of the organization’s
products rather than investments in the organization or other non-retail sales-related
criteria. The regulations concerning these types of marketing programs do not
include “bright line” rules and are inherently fact-based. Thus, even in
jurisdictions where we believe that our direct selling program is in full
compliance with applicable laws or regulations governing direct selling
programs, we are subject to the risk that these laws or regulations or the
enforcement or interpretation of them by governmental agencies or courts can
change. The failure of our direct selling program to comply with current or newly
adopted laws or regulations could result in costs and fines to us and make our
independent distributors reluctant to continue their sales efforts, which would
reduce our revenues significantly.
We are also subject to the risk of private
party challenges to the legality of our direct selling program. Direct selling
programs of some other companies have been successfully challenged in the past.
The challenges centered on whether the marketing programs of direct selling
companies are investment contracts in violation of applicable securities laws
and pyramid schemes in violation of applicable FTC rules and regulations. These
challenges have caused direct selling companies to focus greater attention on
generating product sales to non-participants or non-distributors. Direct
selling companies have addressed these issues by promoting retail sales
incentives, tying sales commissions more directly to retail sales and
reclassifying those persons who enroll as distributors but do not make sales to
other persons as retail customers. An adverse judicial determination with
respect to our direct selling program, or in proceedings not involving us
directly but which challenge the legality of direct selling systems, could have
a material adverse effect on our sales efforts, leading to lower revenues. To
date, we have not been subject to any adverse judicial determination with
respect to our direct selling program.
We may be held responsible for taxes or
assessments relating to the activities of our independent distributors resulting
in greater costs to us.
We treat our independent distributors as
independent contractors and do not pay social security or similar taxes with
respect to compensation paid to them. In the event that we are required to
treat our independent distributors as employees, rather than independent
contractors, we may be held responsible for social security and related taxes,
plus any related assessments and penalties, which could significantly increase
our operating costs.
We are affected by extensive laws,
governmental regulations, administrative determinations, court decisions and
similar constraints which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The formulation, manufacturing, packaging,
labeling, holding, storage, distribution, advertising and sale of our products
are affected by extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar constraints at the
federal, state and local levels. There can be no assurance that we or our
independent distributors will be in compliance with all of these regulations. A
failure by us or our distributors to comply with these laws and regulations
could lead to governmental investigations, civil and criminal prosecutions,
administrative hearings and court proceedings, civil and criminal penalties,
injunctions against product sales or advertising, civil and criminal liability
for the Company and/or its principals, bad publicity, and tort claims arising
out of governmental or judicial findings of fact or conclusions of law adverse
to the Company or its principals. In addition, the adoption of new regulations
and policies or changes in the interpretations of existing regulations and
policies may result in significant new compliance costs or discontinuation of
product sales and may adversely affect the marketing of our products, resulting
in decreases in revenues.
4
The FDA regulates our products and our
product labeling. Among other matters the FDA regulates nutrient content and
ingredient information, claims of the effect of a dietary supplement or dietary
ingredient on a body structure or function, and claims of the effect of a
dietary supplement or dietary ingredient on disease or risk of disease. The FDA
can initiate civil and criminal proceedings against persons who make false or
misleading claims on labels or in labeling, who engage in misbranding, who
evidence an intent to sell their products for a therapeutic use not approved by
the agency, who sell misbranded products, or who sell adulterated products. The
FDA can also require the recall of all products that are misbranded or
adulterated.
The FTC has jurisdiction over our product
advertising. The FTC can initiate civil proceedings for deceptive advertising
and deceptive advertising practices. It can seek for companies to make payments
to consumers or disgorgement of profits from the sale of any product held to
have been deceptively advertised. The FTC or a federal court can require a
company found liable to give notice of the availability of refunds in part or
whole for the product purchase price for all products sold through use of
advertising deemed deceptive.
State authorities may likewise bring
enforcement actions for misbranding, adulteration, and deceptive advertising.
Those actions may be pursued simultaneously with federal actions.
On March 13, 2003, the FDA proposed a
new regulation to require current Good Manufacturing Practice guidelines (“cGMPs”)
in the manufacture, packing, holding, and distribution of nutritional
supplements. The proposed rules would establish minimum standards that must be
met by all companies that manufacture, package, and hold nutritional
supplements in the United States. Violation of those standards would render the
products in question presumptively adulterated and unlawful to sell. The
proposed cGMPs would require manufacturers to follow procedures that would
track nutrients from source to finished product, test nutrients for identity,
purity, quality, strength, and composition at each stage of production, and
record full compliance with specific regulations governing production,
manufacture, and holding of nutritional supplements. The cGMPs are expected to
be adopted in 2005 and may become fully effective by 2007. We expect that the
cGMPs will increase our product costs by requiring our various contract
manufacturers to expend additional capital and resources on quality control
testing, new personnel, plant redesign, new equipment, facilities placement,
recordkeeping and ingredient and product testing.
The FDA and some state agencies invite the
public to complain if they experience any adverse effects from the consumption
of nutritional supplements. These complaints may be made public. Regardless of
whether complaints of this kind are substantiated or proven, public release of
complaints of this type may have an adverse effect upon public perception of
us, the quality of our products or the prudence of taking our products. Changes
in consumer attitudes based on adverse event reports could adversely affect the
potential market for and sales of our products and make it more difficult to
recruit and retain independent distributors and obtain endorsers.
We are dependent on a limited number of
independent suppliers and manufacturers of our products, which may affect our
ability to deliver our products in a timely manner. If we are not able to
ensure timely product deliveries, potential distributors and customers may not
order our products, and our revenues may decrease.
We rely entirely on a limited number of third
parties to supply and manufacture our products. Our manufacturers produce our
products on a purchase order basis only and can terminate their relationships
with us at will. Our two primary supplement manufacturers are Vitatech
International Inc. and GMP Laboratories of America, Inc. These third parties
may be unable to satisfy our supply requirements, manufacture our products on a
timely basis, fill and ship our orders promptly, provide services at
competitive costs or offer reliable products and services. The failure to meet
of any of these critical needs would delay or reduce product shipment and
adversely affect our revenues, as well as jeopardize our relationships with our
independent distributors and customers. In the event any of our third party
manufacturers were to become unable or unwilling to continue to provide us with
products in required volumes and at suitable quality levels, we would be
required to identify and obtain acceptable replacement manufacturing sources.
There is no assurance that we would be able to obtain alternative manufacturing
sources on a timely basis. An extended interruption in the supply of our
products would result in decreased product sales and our revenues would likely
decline. We believe that we can meet our current supply and manufacturing
requirements with our current suppliers and manufacturers or with available
substitute suppliers and manufacturers. Historically, we have not experienced
any delays or disruptions to our business caused by difficulties in obtaining
supplies.
5
We are dependent on our third party
manufacturers to supply our products in the compositions we require, and we do
not independently analyze our products. Any errors in our product manufacturing
could result in product recalls, significant legal exposure, and reduced
revenues and the loss of distributors.
While we require that our manufacturers
verify the accuracy of the contents of our products, we do not have the
expertise or personnel to monitor the production of products by these third
parties. We rely exclusively, without independent verification, on certificates
of analysis regarding product content provided by our third party suppliers and
limited safety testing by them. We cannot be assured that these outside
manufacturers will continue to supply products to us reliably in the
compositions we require. Errors in the manufacture of our products could result
in product recalls, significant legal exposure, adverse publicity, decreased
revenues, and loss of distributors and endorsers.
We face significant competition from existing
suppliers of products similar to ours. If we are not able to compete with these
companies effectively, then we may not be profitable.
We face intense competition from numerous
resellers, manufacturers and wholesalers of energy drinks, protein shakes and
nutritional supplements similar to ours, including retail, online and mail
order providers. We consider the significant products in the U.S. market to be
Myoplex® for protein drinks, Gatorade®, Powerade®, Acclerade® and All Sport®
for energy drinks, and that Nature’s Bounty, Inc. and General Nutrition
Centers, Inc. are the significant producers of vitamins. Most of our
competitors have longer operating histories, established brands in the
marketplace, revenues significantly greater than ours, more capital and better
access to capital than us. We expect that these competitors may use their
resources to engage in various business activities that could result in reduced
sales of our products. Companies with greater capital and research capabilities
could re-formulate existing products or formulate new products that could gain
wide marketplace acceptance, which could have a depressive effect on our future
sales. In addition, aggressive advertising and promotion by our competitors may
require us to compete by lowering prices because we do not have the resources
to engage in marketing campaigns against these competitors, and the economic
viability of our operations likely would be diminished.
We may not be able to attract high visibility
endorsers, which may result in reduced product sales for us.
A principal component of our marketing
program is the use and endorsement of our products by well-known professional
and Olympic athletes and others associated with professional sports teams.
Although we have obtained several well-known sports celebrities as endorsers of
our products, some of these persons may not continue their endorsements, may
not continue to succeed in their fields, may engage in activities which could
bring disrepute on themselves and, in turn, on us and our products, and our
revenues could suffer. We also may not be able to attract new endorsers,
especially sports celebrities that may emerge in the future. Competition for
endorsers is significant and adverse publicity regarding us or our industry
could make it more difficult to attract and retain endorsers.
Adverse publicity associated with our
products, ingredients or direct selling program, or those of similar companies,
could adversely affect our sales and revenues.
Adverse publicity concerning any actual or
purported failure of our Company or our independent distributors to comply with
applicable laws and regulations regarding any aspect of our business could have
an adverse effect on the public perception of our Company. This, in turn, could
negatively affect our ability to obtain endorsers and attract, motivate and
retain independent distributors, which would have a material adverse effect on
our ability to generate sales and revenues.
Our independent distributors’ and customers’
perception of the safety and quality of our products as well as similar
products distributed by others can be significantly influenced by national
media attention, publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar products
distributed by others. Adverse publicity, whether or not accurate, that
associates consumption of our products or any similar products with illness or
other adverse effects, will likely diminish the public’s perception of our
products. Claims that any products are ineffective, inappropriately labeled or
have inaccurate instructions as to their use, could have a material adverse
effect on the market demand for our products, including reducing our sales and
revenues.
The results of new nutritional dietary
supplement studies could be contrary to general industry knowledge on which the
formulation and marketing of our products are based and could materially and
adversely impact our
6
product
sales.
The federal government, research institutes, universities and others regularly
conduct research into the use, effectiveness and potential for adverse results
from the use of nutritional dietary supplements. Even if adverse studies are
subject to substantial criticism or not supported by accepted scientific
methodology, publicity surrounding the reports of these studies may result in
flat or decreased sales of our products. In the past few years, the
effectiveness of, and potential for harm from, some of the leading herbal
supplements, which contain ingredients not in our products, have come into
question as a result of research studies. These negative study results and
other negative publicity could adversely affect the potential market and sales
of our products, as well as increase our product returns, resulting in
increased expenses to us.
While we have not received any direct
negative publicity, recent negative publicity such as the ban from the FDA on
the ingredient ephedra and the publicized studies associating increased
mortality rates with high dosages of Vitamin E has increased awareness of our
consumers relating to the safety of the ingredients in our supplements.
Nutritional supplement products may be
supported by only limited conclusive clinical studies resulting in less market
acceptance of these products and lower revenues or lower growth rates in
revenues.
Our nutritional supplement products are made
from vitamins, minerals, amino acids, herbs, botanicals, and other substances
for which there is a long history of human consumption. However, there is
little long-term experience with human consumption of certain product
ingredients or combinations of ingredients in concentrated form. Although we
believe all of our products fall within the generally known safe limits for
daily doses of each ingredient contained within them, nutrition science is
imperfect. Moreover, some people have peculiar sensitivities or reactions to
nutrients commonly found in foods and may have similar sensitivities or
reactions to nutrients contained in our products. Furthermore, nutrition
science is subject to change based on new research. New scientific evidence may
disprove the efficacy of our products or prove our products to have effects not
previously known. We could be adversely affected in the event that our products
should prove to be or if they are asserted to be ineffective or harmful to
consumers, or if adverse effects are associated with a competitor’s similar
products.
Our products have higher prices than the
products of most of our competitors, which may make it difficult for us to
achieve significant revenues.
We may have difficulty in achieving market
acceptance of our products because our products are among the highest priced in
their categories due to the ingredients that we require in our products. While
we believe that our products are superior to competing, lower priced products,
consumers must be educated about our products. If we are unable to achieve
market acceptance, we will have difficulty in achieving revenue growth, which
would likely result in continuing operating losses.
The sale of our products involves product
liability and related risks that could expose us to significant insurance and
loss expenses.
We face an inherent risk of exposure to
product liability claims if the use of our products results in, or is believed
to have resulted in, illness or injury. Most of our products contain
combinations of ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these products with
other products, prescription medicines and over-the-counter drugs have not been
fully explored or understood and may have unintended consequences. While our
third party manufacturers perform tests in connection with the formulations of
our products, these tests are not designed to evaluate the inherent safety of
our products.
Although we maintain product liability
insurance, it may not be sufficient to cover product liability claims and such
claims could have a material adverse effect on our business. The successful
assertion or settlement of an uninsured claim, a significant number of insured
claims or a claim exceeding the limits of our insurance coverage would harm us
by adding further costs to our business and by diverting the attention of our
senior management from the operation of our business. Even if we successfully
defend a liability claim, the uninsured litigation costs and adverse publicity
may be harmful to our business.
Any product liability claim may increase our
costs, and adversely affect our revenues and operating income. Moreover,
liability claims arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles, and may make it more
difficult to secure adequate insurance coverage in the future. In addition, our
product liability insurance may fail to cover future product liability claims,
which if adversely determined could subject us to substantial monetary damages.
7
We have primarily used one individual to
formulate all of our products, and the loss of his services may result in
delays in formulating new products and our revenues may decrease.
The loss of the services of Dr. William
Wheeler, a nutritionist, could have an adverse effect on our future revenues,
as he is the primary person responsible for the formulation of all of our
existing products. Although we have entered into a consulting agreement
providing us with certain services by Dr. Wheeler, there is no assurance that
he will be available to formulate new products for us. In addition, Dr. Wheeler
formulates nutritional products for others, including his own company, and
these products may compete with our products. Dr. Wheeler formulated and
markets Gold Standard Protein®, a protein shake which competes with our VitaPro®
shakes, although we sell our products through direct marketing and his protein
shake is sold directly to consumers without network marketing. If he is unavailable to us for any reason, our ability to formulate
new products may be impaired, which could result in lower revenues.
A slower growth rate in the nutritional
supplement industry could lessen our sales and make it more difficult for us to
achieve growth and become profitable.
According to the Nutrition Business Journal
(May/June 2004), nutritional supplement companies, analysts, publications
and other industry sources have indicated that the nutritional supplement
industry has experienced a significantly slower rate of growth in recent years,
although available data revealed this trend was reversed in 2003, and numbers
for 2004 are not available. In our view, this slowdown may be attributable in
part to the maturing of the market for nutritional supplements, the lack of any
significant developments of new products over the past few years, negative publicity
about the effectiveness of some ingredients in certain nutritional supplements,
the increase in the number of products competing in the industry, and the
increased number of private label brands. Despite the growth in 2003, a
slowdown in the industry’s rate of growth could continue over the long term and
impair the prospects for increasing the sale of and the demand for our
products.
New products may render our products obsolete
and our sales may suffer.
The nutritional supplement market historically
has been influenced by “fad” products that became popular due to changing
consumer tastes and media attention. Our products may be rendered obsolete by
changes in popular tastes as well as media attention on new products or adverse
media attention on nutritional supplements, which could reduce our sales. It
may be difficult for us to change our product line to adapt to changing tastes.
In addition, other “fad” food regimens, such as low carbohydrate diets, may
decrease the overall popularity and use of our products, as well as result in
higher returns of our products, thereby increasing our expenses.
We may from time to time write off obsolete
inventories resulting in higher expenses and consequently greater net losses.
Because we maintain high levels of
inventories to meet the product needs of our independent distributors and
customers, a change by us of our product mix could result in writedowns of our
inventories. For example, in 2003 and 2004 we discontinued certain products and
sales tools that we deemed obsolete, and we incurred a writedown against
inventory in 2003 of $177,896 and a charge against obsolete inventory of
$22,319 in 2004. Writedowns and charges of this type have historically
increased our net losses, and if experienced in the future, will make it more
difficult for us to achieve profitability.
Product returns in excess of our estimates
could require us to incur significant additional expenses, which would make it
difficult for us to achieve profitability.
We have established a reserve in our
financial statements for product returns which is based upon our limited
historical experience. If this reserve were to be inadequate, we may incur
significant expenses for product returns. We began our direct selling marketing
in the last quarter of 2003 and expanded our return policy in May 2004 to allow
product returns for up to 12 months after purchase. We may need to revise our
reserves for product returns as we gain more operating experience.
8
If we are not able to adequately protect our
intellectual property, then we may not be able to compete effectively and we
may not be profitable.
Our existing proprietary rights may not
afford remedies and protections necessary to prevent infringement,
reformulation, theft, misappropriation and other improper use of our products
by competitors. We own the formulations contained in our products. We consider
our product formulations our critical proprietary property, which must be
protected from competitors. We do not have any patents because we do not
believe they are necessary to protect our proprietary rights. Although trade
secret, trademark, copyright and patent laws generally provide such protection
and we may attempt to protect ourselves through contracts with manufacturers of
our products, we may not be successful in enforcing our rights. In addition,
enforcement of our proprietary rights may require lengthy and expensive
litigation. We have attempted to protect the trade names and trademarks used for
our products by registering them with the U.S. Patent and Trademark Office, but
we must rely on common law trademark rights to protect our unregistered
trademarks. Common law trademark rights do not provide the same remedies as are
granted to federally registered trademarks and the rights of a common law
trademark are limited to the geographic area in which the trademark is actually
used. Our inability to protect our intellectual property could have a material
adverse impact on our ability to compete and could make it difficult for us to
achieve a profit.
Interruptions to or failure of our
information processing systems may disrupt our business and our sales may
suffer.
We are dependent on our information
processing systems to timely process customer orders, oversee and manage our
distributor network and control our inventory, and for our distributors to
communicate with their customers and distributors in their network. Since the
initial purchase of our technology system in 2001 through December 31, 2004,
we had spent $180,151 on technology system upgrades. We have experienced
interruptions and may in the future experience interruptions to or failure of
our information processing system; however, none of the interruptions to date
have materially disrupted our business. Interruptions to or failure of our
information processing systems may be costly to fix and may damage our
relationships with our customers and distributors, and cause us to lose
customers and distributors. If we are unable to fix problems with our
information processing systems in a timely manner our sales may suffer.
Loss of key personnel could impair our
ability to operate.
Our success depends on the skills, experience
and efforts of our senior management and skilled employees, including Earnest
Mathis, Jr., our Chief Executive Officer,
Timothy Transtrum, our Chief Operating Officer, David Litt, our Vice President of Sales and
Marketing and Sanford D. Greenberg, our founder, in order to expand our
business. As with all personal service providers, our officers can terminate
their relationship with us at will. Our inability to retain these individuals
may result in our reduced ability to operate our business. We do not have key man life insurance on any
of our executive officers.
9
PART I
ITEM
1.
DESCRIPTION OF
BUSINESS
Overview
We develop, sell, market and distribute
nutritional supplement products primarily through a direct sales or network
marketing system in which independent distributors sell our products, as well
as purchase them for their own personal use. We also sell our products directly
to professional and Olympic athletes and to professional sports teams.
We formulated our products in 2000 and 2001
for sale to professional and Olympic athletes. We launched our sales and
marketing programs to the general public in early 2002 through our internal
sales force targeting specialty retail stores, health clubs and personal
trainers. During 2003, we refocused our marketing and sales strategy on direct
selling through independent distributors. We believe, based upon our sales
experience in 2001 and 2002, our products can be more effectively sold through
the face-to-face sales method afforded by direct selling.
A key part of our marketing strategy, in
conjunction with our direct sales program, is the endorsement of our products
by sports celebrities. Some of our celebrity endorsers include:
•
Mike
Shanahan (football): Head Coach, Denver Broncos—five Super Bowl teams;
•
Randy
Johnson (baseball): Pitcher, New York Yankees—four-time Cy Young Award Winner
and 2001 World Series Co-MVP;
•
Mike
Alstott (football): Fullback, Tampa Bay Buccaneers—four-time Pro Bowl
selection;
•
John
Lynch (football): Safety, Denver Broncos—six-time Pro Bowl selection;
•
Gary
Gait (lacrosse): Forward, Colorado Mammoth—six-time National Lacrosse League
MVP; and
•
Megan
Addy (track and field): world-ranked 400 meter hurdler.
In addition, we supply our products to the
following professional sports teams:
•
National
Football League (“NFL”): Denver Broncos, Buffalo Bills, Chicago Bears, Green
Bay Packers, New England Patriots, Seattle Seahawks;
•
Major
League Baseball (“MLB”): Arizona Diamondbacks, Boston Red Sox, Cincinnati Reds,
Chicago White Sox, Milwaukee Brewers and Oakland Athletics;
•
National
Basketball Association (“NBA”): Denver Nuggets, Los Angeles Clippers, Memphis
Grizzlies, Washington Wizards; and
•
National
Hockey League (“NHL”): Columbus Blue Jackets and Florida Panthers.
We were formed in 2001, under the name “Instanet,
Inc.” to provide Internet fund transfers. Instanet, which had no operating
revenues, was a development stage company. Instanet’s business model was not
successful and it was searching for an operating business. V3S, a Colorado corporation
formed in October 2000, contacted Instanet in May 2003. The parties
completed a stock-for-stock exchange on June 20, 2003, in which Instanet
acquired V3S. The acquisition was conducted on an “arms-length” basis. In the
exchange, the then existing stockholders of V3S exchanged their stock in V3S
for 2,714,403 shares of common stock of Instanet, then representing a 90%
ownership interest in Instanet. V3S then became a wholly-owned subsidiary of
Instanet and V3S’s management became management of Instanet. Instanet changed
its name to VitaCube Systems Holdings, Inc. V3S at the
time of the acquisition had $810,743 of current and long-term assets and
$3,000,080 of current and long-term liabilities. V3S’s assets included cash and
cash equivalents, inventory, product formulations, an office information
technology system
10
and
office
equipment and furniture. The acquisition of V3S by Instanet is considered a
reverse acquisition and accounted for under the purchase method of accounting.
Under reverse acquisition accounting, V3S is considered the acquirer for
accounting and financial reporting purposes.
The description of our business describes the
business conducted by V3S. Instanet discontinued its business prior to the
stock-for-stock exchange.
Industry
Overview
The Nutrition Industry
According to the latest industry overview,
Nutrition Business Journal
(May/June 2004),
despite the changing regulatory atmosphere surrounding supplements, the
fundamentals of growth for the nutrition industry—aging baby boomers’ health
concerns, the obesity epidemic and rising health care costs—were strong enough
to propel nutritional industry growth overall to 8.2% and total U.S. consumer
sales to $62.9 billion in 2003, the first increase in sales growth in several
years. The supplements segment contributed $19.8 billion to nutrition industry
sales and increased 5.7% in 2003 over the prior year, the highest annual growth
rate since 1999. Vitamin sales grew 7.6% over 2002 or the highest growth rate
since 1997. Topping the growth list were minerals and specialty supplements,
both of which advanced sales by 15% in 2003. Rounding out the supplement
categories is sports nutrition that gained 8% in sales in 2003 over 2002.
We believe that the size of the supplement
market is due to public awareness of the positive effects of nutritional
dietary supplements. Helping to increase awareness are reports and industry
marketing that provides a correlation between the consumption of nutritional
dietary supplements and better health. Both the United States government and
universities have increased sponsorship of research relating to nutritional
dietary supplements. For example, in fiscal year 2002, the National Institutes
of Health (NIH) continued to lead all Federal agencies with a total of $917
million spent on research and training. This total represents the combined
individual contributions of the 18 NIH institutes and three centers that
supported biomedical nutrition research and training. In addition, as part of
the NIH, Congress has established the Office of Alternative Medicine, which
focuses on alternative medical treatments, and the Office of Dietary
Supplements, which conducts and coordinates research regarding the role of
dietary supplements in maintaining health and preventing disease. New
developments in 2004 have been the FDA’s ban on ephedra and the steroid
scandals in Major League Baseball and Track and Field. While these scandals may
be perceived as having a negative effect on the nutritional supplement
business, we have never produced or sold any products with the ingredients
under public scrutiny.
The Direct Selling Industry
Firms that use direct sales as their
distribution method have grown in numbers, sales and profits, both domestically
and abroad. Results of the 2004 Direct Selling Association’s Annual Growth and
Outlook Survey indicate a 10.7% increase in direct sales over the previous two
years to a record high of $29.55 billion. This represents the 19
th
consecutive year of growth for the industry. The survey, which measures the
size and activity of the U.S. direct selling industry, is conducted annually
and includes responses from a cross-section of direct selling companies.
Other major results of the survey indicate wellness products, such as weight
loss products and nutritional supplements, account for approximately 15.3% of
direct sales. The Direct Selling Association’s published figures for 1999-2003
indicate that annual U.S. retail sales for the five years ended December 31,
2003, have grown from $24.5 billion to nearly $30 billion along with the
independent distributor base growing from 10.3 million to nearly 13.3 million
during the same time period.
We believe the prospects for continued growth
in direct sales are good and should benefit us, and we perceive several reasons
as to why such growth has occurred:
•
The
growth of direct sales has given it public visibility. We believe that
governmental regulation of the direct selling industry has facilitated the
public’s market acceptance of legitimate direct selling companies.
•
The
current economic climate of business closures, lay-offs, downsizing,
outsourcing, and merging has resulted in motivated, educated workers seeking
direct sales. These workers generally have professional and social networks,
which offer personalized credibility to the direct selling industry.
11
•
With
improved technology and the expanding use of the Internet, direct selling firms
can become more efficient. For example, none of our independent distributors
are required to carry inventory or personally conduct public presentations, and
our computer systems keep track of and communicate with independent
distributors and their organizations. We believe these efficiencies make direct
selling easier to administer than in the past.
Our Products
Currently we offer 18 different nutritional
products. None of our products contain substances that have been the subject of
publicized health concerns by the medical community such as ephedra, creatine,
androstene, androstenedione, aspartame, steroids or human growth hormones. Our
products include:
eForce
® Sports Drink
eForce® is a sports drink that has been
reformulated to support sustained energy without the levels of sugar and
caffeine of most colas, and with one-tenth the amount of carbohydrates and two
additional hydrating electrolytes not found in Gatorade®, a competing sports
drink. eForce® has been reformulated to provide support for sustained energy
before activity by incorporating the ingredients D-Ribose, 5 ginsengs and a
complete B-Vitamin Complex (B1, B2, B6 and B12). eForce®
also contains antioxidants such as Vitamins A, C and E and pomegranate
extract in its formulation designed to benefit the body after activity.
VitaPro®
Nutrition Shake
VitaPro® is a balanced shake that has a blend
of proteins, carbohydrates and sugars and is available in chocolate or vanilla
flavors. Its blend of proteins is designed to support metabolism and provide
energy.
VitaPro® is formulated with 27 vitamins,
minerals and antioxidants delivered in a shake form to help provide
nourishment. VitaPro® combines various protein sources, vitamins, and minerals
with ingredients such as Aminogen®—an ingredient that contributes amino acids
to the body and Fibersol-2®, a fiber that aids in digestion.
Vitamins
and Minerals
Our vitamins, minerals, and specialty
formulations are sold in various VitaCubes®, and consist of tablets, capsules
and soft gel formulations. The VitaCube® is a compartmentalized container in
which each supplement is separated into its own compartment, with a label above
to designate the location of supplement. This label also provides the
supplement name, a photograph, its benefits, the main ingredients and dosages,
and the time to take it. VitaCubes® are divided into three primary and gender-specific
packages:
•
VitaCube®
Basic, designed for individuals who are new to nutritional supplement programs
or who are recreational athletes;
•
VitaCube®
Essential, designed for the individuals who have taken supplements previously
and who seek a continued, serious exercise routine; and
•
VitaCube®
Elite, designed for the individual who wants to maximize his or her exercise
regimen and sports performance.
Supplements found in
our VitaCube® and their product description:
12
|
Name
of Supplement
|
|
Product Description/Intended
Benefits
|
|
M32+® (Multi System Formula)
|
|
32 vitamins and minerals—multivitamins
|
|
|
|
|
|
Cal/Mag+
|
|
Calcium and Magnesium—support bones and
muscles
|
|
|
|
|
|
Absorbit
|
|
Digestive Enzymes and Aminogen®—aid
digestion of nutrients
|
|
|
|
|
|
CP Complex®
|
|
Vitamin C and Potassium—aid metabolic
function
|
|
|
|
|
|
AO Elite®
|
|
L-Arginine and L-Ornithine—aid circulation
and muscle repair
|
|
|
|
|
|
ZMA Pro
|
|
Zinc and Magnesium Aspartate—support muscle
function and muscle recovery from exercise
|
|
|
|
|
|
WNB
|
|
Women’s Natural Balance—support for women’s
health
|
|
|
|
|
|
GC Elite®
|
|
L-Glutamine and L-Carnitine amino
acids—facilitate muscle recovery and fat metabolism
|
|
|
|
|
|
Ultra EFA
|
|
Essential Fatty Acids with Vitamin
E—support cardiovascular health (essential fatty acids) and cellular
functions (Vitamin E)
|
|
|
|
|
|
AlphaNac®
|
|
Alpha Lipoic Acid and N-Acetyl-L-Cysteine
antioxidants—help neutralize effects of muscle stress associated with
exercise
|
|
|
|
|
|
JSH® (Joint Support Health)*
|
|
Glucosamine and Chondroitin—support joint
flexibility and mobility
|
|
|
|
|
|
Q-Zyme®*
|
|
CoEnzyme Q10—support energy metabolism in
the heart
|
*
Also
sold separately from our VitaCube®
Products sold
individually:
|
Name of Supplement
|
|
Product
Description/Intended Benefits
|
|
Complex SPP®
|
|
Saw Palmetto—support prostate health in men
over 30
|
|
|
|
|
|
Visual Eyes®
|
|
Lutein and Vitamin A—support eye health
|
|
|
|
|
|
Enduro Max
|
|
B Vitamins and 5 Types of Ginsengs—support
endurance and stamina
|
|
|
|
|
|
Pure Heat®
|
|
Cayenne, Boswellia and Turmeric—support
soft tissue health
|
Quality
in Our Products
In seeking quality in our products, we
require that before a product is brought to market, all:
•
supplements are supported with publicly available scientific
research and references;
•
our manufacturers carry applicable manufacturing licenses;
•
ingredients are combined so that their effectiveness is not
impaired;
•
ingredients
are in dosage levels that fall within tolerable upper intake levels established
for healthy people by the Institute of Medicine of the National Academies;
•
products do not contain adulterated ingredients such as
ephedra, creatine, androstenedione, aspartame, steroids or human growth
hormones;
•
formulations have a two year shelf life;
•
products are 100% free of lead and the typical allergens of
wheat, corn and yeast; and
13
•
tablets, capsules and soft gels are designed to readily
dissolve in the body to facilitate absorption.
Product
Development and Advisory Boards
In February of 2001, we retained the
services of William E. Wheeler, PhD., ACSM, to act as our Director of Science
and Technology. Dr. Wheeler has over 25 years of experience in the nutritional
industry with over 260 senior author scientific publications as well as three
Presidential Awards for Excellence in Research. Dr. Wheeler also served as
staff nutritionist to the President of the United States (1976-1981) and served
as staff nutritionist to the 1996 U.S. Olympic Decathlon Team. We employed Dr.
Wheeler from February 2001 until April 2002. During this time, Dr.
Wheeler headed a team of manufacturers and third party experts to research, formulate and test our products, the proprietary
rights to which are solely ours. Currently, we have entered into a consulting
agreement providing us with Dr. Wheeler’s services on a limited basis,
including advising us on product formulations and updates on nutritional
science, for $2,000 per month plus reasonable expenses. The agreement expires
in March 2007, and may be terminated by either party upon 30 days written
notice.
Over the past two years, we have assembled a
Scientific Review and Medical Advisory Board and a Professional Athletic Advisory
Board. Our Scientific Review and Medical Advisory Board is
composed of Dr. Wheeler (chairman), Herbert Jacobs, M.D., FACS, FACOG, and Paul
Dragul, M.D. These health and medical professionals emphasize nutrition and
nutritional supplement in their practices. They advise us on potential
products, ingredients and formulations, and they review our existing products
for potential enhancements to improve effectiveness and marketability.
Due to the number of professional athletes
using our products, we created a Professional Athletic Advisory Board made up
of strength coaches and trainers from various professional sports. Members of
our Professional Athletic Advisory Board are Steve Hess, Professional Strength
and Conditional Coach for the Denver Nuggets, National Basketball Association,
Dave Page, Strength and Conditioning Coach for the Arizona Diamondbacks, Major
League Baseball, and Mark Casterline, Strength and Conditioning Coach for the
Columbus Blue Jackets, National Hockey League. This board provides feedback on
the use and perceived benefits of our products.
New Product Identification.
From time to time we expand our product line
through the development of new products. New product ideas are derived from a
number of sources, including trade publications, scientific and health
journals, consultants, distributors, and other third parties. Prior to
introducing new products, we investigate product formulations as they relate to
regulatory compliance and other issues. We expect to formulate from two to four
new products within the next 12 to 18 months.
Celebrity
Endorsements
As part of our marketing efforts, we
compensate several sports celebrities for endorsing our products. We believe
these endorsements lead health and fitness conscious consumers to use our
products.
Our endorsers have agreed to provide written
testimonials to advertise our products including the use of their name,
likeness, and pictures for print, radio, electronic media, and video
announcements. Additionally some endorsers have agreed to make personal
appearances, participate in website chats, and wear apparel containing our
logo.
The terms of our endorsement contracts vary.
These contracts are generally for a period of one to three years and the
endorsers are provided with our products for personal use on a reduced or no
cost basis. In addition to receiving our products, these endorsers may receive
cash compensation, stock options, stock grants, a percentage of net revenues,
or other consideration. Some of our endorsement contracts also provide that the
endorser will not endorse any competing products.
Our
Independent Distributors and Customers
Overview.
We distribute products through a direct
selling program with independent distributors. Our distributors purchase
products for their own consumption and for sale to their customers. Generally
distributors do not maintain an inventory of products, but rather introduce new
customers who purchase directly from us.
14
Independent distributors are encouraged to
recruit and sign up new independent distributors and customers for us, the
result of which is the creation of new “levels” within their sales
organizations. These new enrollees are referred to as the “downline” of their
enrolling distributor. Downline independent distributors are also encouraged to
recruit new independent distributors, thereby creating additional levels in
their organizations, but still connected to the original enrolling distributor.
Enrollments occur based on personal introduction regardless of geographic
location. We have no sales territories. Our independent distributors are
compensated with commissions and bonuses on sales generated through their
downline.
We believe direct selling is an effective way
to distribute our products because:
•
distributors can educate consumers about our products in
person;
•
direct sales allows for actual product sampling by potential
consumers;
•
compared
to other distribution methods our distributors can provide customers high levels
of service and attention;
•
direct selling has benefited from advancements in
technology, including low-cost telephone services and the Internet; and
•
products can be introduced to the market through
person-to-person selling, resulting in lower up front capital outlays for us
than conventional methods.
Our marketing team utilizes multimedia CDs
and video e-mail to enhance the selling and recruiting capabilities of our
independent distributors. These materials are sold to the independent
distributors so that the ongoing advertising costs borne by us are not
substantial. In addition, we utilize print, telecommunications and the Internet
to recruit and train independent distributors. We have created a compensation
plan that we believe motivates independent distributors to sell our products,
build their sales organizations, and participate in Company-sponsored contests.
Structure of Our Direct Selling Program.
To become one of our independent
distributors, a person must be enrolled through an existing independent
distributor and must purchase a starter kit or business builder pack, except in
states where a purchase of a starter kit is optional due to state regulations,
in which case the distributor is given a starter kit at no charge. The starter
kit consists of forms, policy and procedures and selling aids, and costs $40.
The business builder packs contain the starter kit, a selection of our
products, and other materials, and range in price from $199 to $399.
Compensation Plan.
Independent distributors can earn
compensation in four different ways:
•
selling
products directly to customers (earning a “retail rebate” for the spread
between their price and their customer’s price as established by us);
•
generating
commissions based on their personal sales volume and the sales volume of their
downline organization. We do not pay compensation for an existing distributor
enrolling a new distributor;
•
qualifying
for bonuses based on sales performance by distributors and their downline
organization; and
•
participating
in Company contests and promotions.
Independent Distributor Training, Support and
Motivation.
We believe that training, support and motivation are key elements in our
independent distributors achieving success. Training from our corporate management
includes live training events, conference calls and video e-mail. We have
conference call capabilities which are available any time and can be accessed
from any U.S. location for use by our independent distributors. In addition,
every independent distributor is provided with an online “back office” or
website. This provides the distributors the ability to send e-mails directly to
his or her downline database along with tools for placing and reviewing orders
and managing his or her downline.
15
For motivation, we recognize our independent
distributors with pins and awards based upon sales achievements. In addition,
from time to time, we use memorabilia signed by our celebrity endorsers as a
further incentive. In August 2004, we had our first leadership retreat at
a resort in Colorado Springs, Colorado, and we plan on utilizing trips and
vacations as a primary component of our motivation strategy.
Additional Methods of Distribution.
We
also sell directly to professional and Olympic athletes using our in-house
staff. Many of these athletes purchase our products at a discounted price,
although some endorse our products in return for receiving them at no charge.
We believe the endorsements of these high-profile athletes
provides credibility to our products.
We are not dependent on one customer or a
group of customers.
Management
Information, Internet and Telecommunication Systems
The ability to efficiently manage
distribution, compensation, inventory control, and communication functions
through the use of sophisticated and dependable information processing systems
is critical to our success.
We continue to upgrade systems and introduce
new technologies to facilitate our continued growth and support independent
distributor activities. These systems include: (1) an internal network server
that manages user accounts, print and file sharing, firewall management, and
wide area network connectivity; (2) a Microsoft SQL database server to manage
sensitive transactional data, and corporate accounting and sales information;
(3) a centralized host computer located in Utah supporting our customized order
processing, fulfillment and independent distributor management software; (4) a
standardized Nortel Meridian telecommunication switch and system; (5) a hosted
independent distributor website system designed specifically for network
marketing and direct sales companies; and (6) procedures to perform daily and
weekly backups with both onsite and offsite storage of backups.
Importantly, our technology systems provide
key financial and operating data for management, timely and accurate product
ordering, commission payment processing, inventory management and detailed
independent distributor records. Additionally, these systems deliver real-time
business management, reporting and communications tools to assist in retaining
and developing our sales leaders and independent distributors. We intend to
continue to invest in our technology systems in order to strengthen our operating
platform.
Product
Returns
We revised our return policy in 2004 to
provide an initial purchase guarantee to all first-time customers and first-time
independent distributors who are not satisfied with our products for any
reason. These customers and distributors may return to us any products
purchased within 60 days of their initial order for a full refund. After 60
days and on all subsequent orders, customers and independent distributors may
return unused, unopened and undamaged product that is currently being sold by
us for a refund of 100% of the sales price less a 10% restocking fee, provided
it is returned to us within 12 months of the purchase date. Returned product
damaged during shipment is replaced. Historically, product returns as a
percentage of our net sales have ranged from 1.7% to 3.8% of our monthly net
sales.
Our
Competition
We compete with many companies engaged in
selling nutritional supplements. We also compete with direct selling companies
who sell products similar to ours. Most of our competitors have significantly
more financial and human resources than we do, and have operating histories
longer than ours. We seek to differentiate our products and marketing from our
competitors based on our product quality, the use of sports
celebrity endorsers, our attractive compensation plan for our
independent distributors and through our simple selling program.
The retail market for nutritional supplements
is characterized by a few dominant national companies, including General
Nutrition Centers, Vitamin World, Vitamin Shoppe, and Great Earth Vitamin
Stores. Others have a presence within local markets, such as Vitamin Cottage in
Denver, Colorado. Three companies dominate the Internet—Vitamins.com (owned by
Puritan’s Pride), GNC.com and VitaminShoppe.com, the latter two having retail
sales locations as well.
16
Major competitors in the sports nutrition and
weight-loss markets consist of companies such as EAS, Inc., Weider Nutrition
International, Inc. and Twinlab Corporation, which dominate the market with
such products as Myoplex (EAS), Body Shaper (Weider) and Ripped Fuel (Twinlab).
Competitors for our sports energy drink
include Gatorade®, Powerade®, Accelerade® and All Sport®. Indirect competition
includes soft drinks and orange juice and related products such as Sunny
Delight®, CapriSun® and other fruit drinks.
We compete with a number of large direct
selling firms selling nutritional, diet, health, personal care and
environmental products, and numerous small competitors. The principal direct
selling competitors are Amway Corporation, Nature’s Bounty, Inc., Sunrider
Corporation, New Vision USA, Inc., Herbalife International of America, Inc.,
USANA, Inc., and Melalecua, Inc.
Our
Manufacturers
We use four principal manufacturers for the
components of our products, and multiple vendors for packaging and labeling. We
have contracts with our two main manufacturers. Our relationship with any of
our manufacturers may be terminated at will or upon short notice. We have
established relationships with other manufacturers that we believe can satisfy
our needs if our relationship with any principal manufacturer terminates.
Product Delivery
All of our products are shipped by our
manufacturers directly to us for storage at our facilities in Denver, Colorado.
Products sold to our independent distributors and their customers are shipped
directly by us to the distributors or customers. We collect sales tax on
products based upon the address of the consumer to whom products are sent
regardless of how the order is placed. Sales to our professional and Olympic
athletes, our sports teams and from our non-distributor customers are shipped
directly to them from our facilities.
Regulatory Matters
General.
Our operations are affected by extensive
laws, governmental regulations, administrative determinations, court decisions
and enforcement policies. These requirements exist at the federal, state and
local levels in the United States, including laws and regulations pertaining
to:
•
the formulation, manufacturing, packaging, labeling,
holding, storage, distribution, advertising, and sale of our products;
•
product
claims and advertising, including direct claims and advertising by us, as well
as claims and advertising by independent distributors, for which we may be held
responsible;
•
our direct selling program; and
•
taxation of independent distributors (which in some
instances could impose an obligation on us to collect the taxes and maintain
appropriate records).
The formulation, manufacturing, packaging,
labeling, holding, storage, distribution, advertising, and sale of our products
are subject to regulation by one or more federal agencies, including the FDA,
the FTC, the Consumer Product Safety Commission (“CPSC”), the Occupational
Safety and Health Administration (“OSHA”), the Department of Agriculture (“USDA”)
and the Environmental Protection Agency (“EPA”). These activities are also
regulated by various agencies of the states and localities in which our products
are sold. Pursuant to the Federal Food, Drug, and Cosmetic Act (“FDCA”), the
FDA regulates the processing, formulation, safety, manufacture, packaging,
labeling, holding, sale, and distribution of foods and nutritional supplements
(including vitamins, minerals, amino acids, herbs, and botanicals). The FTC has
jurisdiction to regulate the advertising of these products. The CPSC is charged
with protecting the public from risks of serious injury or death associated
with the use of consumer products. Nutritional supplements are among the over
15,000 types of consumer products under CPSC’s jurisdiction. When consumers
complain to the CPSC about alleged harm stemming from ingestion of a
nutritional supplement, CPSC may contact the entity concerned, inform it of the
nature of the complaint, and invite a response.
17
CPSC has conducted several recalls of iron-containing dietary
supplements that do not comply with the child-resistant packaging requirement.
The OSHA is charged with protecting workplace safety. Nutritional supplement
companies must maintain a safe workplace and may from time to time be subject
to queries from OSHA if manufacturing methods or procedures raise a question of
worker safety. The USDA has jurisdiction over animal food and animal feed,
including regulatory control over the harvesting of animal-based source
materials, including animal-derived proteins, and animal-derived gelatin
capsules, used in the making of dietary supplements. The EPA regulates dietary
supplement compliance with standards established under the Clean Air Act, the
Clean Water Act, the Occupational Safety and Health Act, and the Pollution
Prevention Act as they affect the use, maintenance, and disposal of substances
used in and facilities used for the manufacture of nutritional supplements.
The FDCA has been amended several times with
respect to nutritional supplements, in particular by the Dietary Supplement
Health and Education Act of 1994 (“DSHEA”), which established a new framework
governing the composition, safety, labeling and marketing of nutritional
supplements. Nutritional supplements are defined as vitamins, minerals, herbs,
other botanicals, amino acids and other dietary substances for human use to
supplement the diet, as well as concentrates, metabolites, constituents,
extracts or combinations of such dietary ingredients. Generally, under DSHEA,
dietary ingredients that were on the market prior to October 15, 1994, may
be used in nutritional supplements without notifying the FDA. New dietary
ingredients, consisting of dietary ingredients that were not marketed in the
United States before October 15, 1994, are subject to a FDA pre-market new
dietary ingredient notification requirement unless the ingredient has been
present in the food supply as an article used for food without being
chemically altered. A new dietary ingredient notification must provide the FDA
with evidence of a history of use or other evidence of safety establishing that
use of the dietary ingredient will reasonably be expected to be safe. A new
dietary ingredient notification must be submitted to the FDA at least 75 days
before the initial marketing of the new dietary ingredient. There is no
certainty that the FDA will accept any particular evidence of safety for any
new dietary ingredient. The FDA’s refusal to accept such evidence could prevent
the marketing of such dietary ingredients.
The FDA issued a consumer warning in 1996,
followed by proposed regulations in 1997, covering nutritional supplements that
contain ephedra or its active substance, ephedrine alkaloids. We have never
produced or sold products containing ephedra. In February 2004, the FDA
issued a final regulation declaring nutritional supplements containing ephedra
under the FDCA because they present an unreasonable risk of illness or injury
under the conditions of use recommended or suggested in labeling, or if no
conditions of use are suggested or recommended in labeling, under ordinary
conditions of use. The rule took effect on April 12, 2004, and bans the
sale of nutritional supplement products containing ephedra. Similarly, the FDA
issued a consumer advisory in 2002 with respect to nutritional supplements that
contain the ingredient Kava, and the FDA is currently investigating adverse effects
associated with ingestion of this ingredient. We have never produced or sold
any products containing Kava.
DSHEA permits statements of nutritional
support to be included in labeling for nutritional supplements without FDA
premarket approval. These statements must be submitted to the FDA within 30
days of marketing and must bear a label disclosure that “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.” These statements
may describe a benefit related to a nutrient deficiency disease, the role of a
nutrient or nutritional ingredient intended to affect the structure or function
in humans, the documented mechanism by which a nutrient or dietary ingredient
acts to maintain such structure or function, the general well-being from
consumption of a nutrient or dietary ingredient, but may not expressly or
implicitly represent that a nutritional supplement will diagnose, cure,
mitigate, treat or prevent a disease. An entity that uses a statement of
nutritional support in labeling must possess scientific evidence substantiating
that the statement is truthful and not misleading. If the FDA determines that a
particular statement of nutritional support is an unacceptable drug claim or an
unauthorized version of a disease claim for a food product, or if the FDA
determines that a particular claim is not adequately supported by existing
scientific data or is false or misleading, we would be prevented from using the
claim.
In addition, DSHEA provides that so-called “third-party
literature,” e.g., a reprint of a peer-reviewed scientific publication linking
a particular nutritional ingredient with health benefits, may be used in
connection with the sale of a nutritional supplement to consumers without the
literature being subject to regulation as labeling. Such literature must not be
false or misleading; the literature may not promote a particular manufacturer
or brand of nutritional supplement; the literature must present a balanced view
of the available scientific information on the nutritional supplement; if
displayed in an establishment, the literature must be physically separate from
the nutritional supplement; and the literature may not have appended to it any
information by sticker or any other method. If the literature fails to satisfy
each of these requirements, we may be prevented from disseminating it with
18
our
products, and
any dissemination could subject our products to regulatory action as an illegal
drug. Moreover, any written or verbal representation by us that would associate
a nutrient in a product that we sell with an effect on a disease will be deemed
evidence of an intent to sell the product as an unapproved
new drug, a violation of the FDCA.
We expect that the FDA will adopt in the
future the final regulations, originally proposed in March 2003, regarding
cGMPs in manufacturing, packing, holding and distributing dietary ingredients
and nutritional supplements. These regulations will require nutritional
supplements to be prepared, packaged, and held in compliance with strict rules,
and will require quality control provisions that may mandate redundant testing
of product ingredients at each separate stage of manufacture. We or our third-party
suppliers or vendors could incur substantial additional expenses in order to
comply with any new rules. If the FDA issues the final cGMPs for dietary
supplements in 2005, as we expect, we will have up to a year to ensure
compliance. We expect to see an increase in our manufacturing costs as a result
of the necessary increase in testing of raw ingredients and finished products
and compliance with higher quality standards, although we are not certain of
the amount of these costs.
The proposed regulations would establish
standards to ensure that nutritional supplements and dietary ingredients are
not adulterated with contaminants or impurities, and are labeled to reflect
accurately the ingredients in the products. It also includes proposed
requirements for designing and constructing physical plants, establishing
quality control procedures, and testing manufactured dietary ingredients and
nutritional supplements, as well as proposed requirements for maintaining
records and for handling consumer complaints related to cGMPs. We are
evaluating this proposal with respect to our manufactures. However, the
proposed regulation can be expected to result in additional costs and possibly
the need to seek alternate suppliers.
The FDA has broad authority to enforce the
provisions of the FDCA applicable to nutritional supplements, including powers
to issue a public warning letter to an entity, to publicize information about
illegal products, to request a recall of illegal products from the market, and
to request the Department of Justice to initiate a seizure action, an
injunction action, or a criminal prosecution in the United States courts. The
regulation of nutritional supplements may increase or become more restrictive
in the future.
In 2004, legislation was introduced in both
houses of Congress that imposed substantial new regulatory requirements for
dietary supplements. These bills did not
pass and are no longer pending, but we believe the 2004 proposed legislation
evidences a continuing effort to further regulate dietary supplements.
On April 12, 2004, the FDA adopted a new
test for determining when a nutritional supplement is adulterated. Under this
test, the FDA may declare a nutritional supplement adulterated (i.e., to
present an unreasonable risk of illness or injury) if it finds any benefit
provided by the supplement outweighed by a risk of illness of injury. The new
risk/benefit test is ill-defined and can be interpreted to permit FDA to hold a
wide range of nutritional supplements adulterated. It is possible that FDA
might hold more nutritional supplements adulterated in the future, reducing the
nutritional ingredients available for use in our products.
The FTC exercises jurisdiction over the
advertising of nutritional supplements. In recent years, the FTC has instituted
numerous enforcement actions against nutritional supplement companies for
deceptive advertising based on those companies’ alleged failure to possess
competent and reliable scientific evidence in support of claims made in
advertising.
The FTC may monitor our advertising and could
request all evidence in support of our advertising claims, which evidence is
required to be kept by us in advance of advertising. Discerning what
constitutes “competent and reliable scientific evidence” involves, to a degree,
a subjective assessment of the relative level, degree, quality, and quantity of
scientific evidence and its acceptance in the scientific community as proof of
the advertising statement. It is therefore possible that we may think evidence
we have as sufficient but the FTC may deem the evidence inadequate. We believe
we are in material compliance with applicable federal, state and local rules.
Direct Selling Program.
Our direct selling program is subject to a
number of federal and state regulations administered by the FTC and various
state agencies. These regulations include anti-pyramid laws, securities laws,
and laws and regulations governing business opportunities, franchises,
lotteries and deceptive trade practices.
The anti-pyramid laws generally are directed
at ensuring that product sales ultimately are made to the retail consumers,
that advancement within an organization is based on sales of the organization’s
products rather than the
19
recruitment
of
new distributors, and that distributors are not saddled with large quantities
of non-returnable inventory. We remain subject to the risk that, in one or more
markets, our marketing system could be found not to be in compliance with
applicable anti-pyramid laws. Failure by us to comply with these regulations
could have a material adverse effect on our business in a particular market or
in general.
We also are subject to the risk of private
party challenges to the legality of our direct selling program. For example, in
Webster v. Omnitrition International, Inc.
,
79 F.3d 776 (9
th
Cir. 1996), the multi-level marketing program of
Omnitrition International, Inc. (“Omnitrition”) was successfully challenged in
a class action by Omnitrition distributors who alleged that Omnitrition was
operating an illegal “pyramid scheme” in violation of federal and state laws.
We believe that our direct selling program satisfies the standards set forth in
the Omnitrition case and other applicable statutes and case law defining a
legal marketing system, in part based upon what we believe are differences
between our marketing system and that described in the Omnitrition case.
We monitor and respond to regulatory and
legal developments, including those that may affect our direct selling program.
However, the regulatory requirements concerning direct selling programs do not
include bright line rules and are inherently fact-based. An adverse judicial
determination with respect to our direct selling program could have a material
adverse effect on our business. An adverse determination could: (1) require us
to make modifications to our direct selling program, (2) result in negative
publicity, (3)have a negative impact on independent distributor morale, (4)
result in reduced revenues, (5) result in fewer celebrity endorsers of our
products, and (6) potentially lead to the failure of the Company. In addition,
adverse rulings by courts in any proceedings challenging the legality of multi-level
marketing systems, even in those not involving us directly, could have a
material adverse effect on our operations.
Regulatory enforcement by the FTC against
direct sales programs that it believes are pyramids or that are engaging, or
have engaged in, significant deceptive consumer practices have resulted in
complete failure of entities prior to an adverse ruling by a court in a
contested hearing or trial. The FTC’s practice is to conduct an investigation
into a company’s practices and activities as well as the practices and
activities of its independent distributors. If the FTC believes that it has
developed sufficient evidence, it will apply to a court for an
ex parte
temporary restraining order, an
asset freeze, and the appointment of a receiver to run the company. The FTC has
been successful in receiving such extraordinary relief from the courts. Once
the temporary restraining order is issued, the independent distributors
commonly abandon the selling company and move to other opportunities quickly.
This can result in the failure of a direct selling company before a contested
judicial proceeding occurs.
Federal and state securities laws may also
apply to network marketing programs. If a network marketing company’s
compensation plan is not properly designed or implemented, the plan itself can
fall within the definition of an “investment contract,” which is a form of a
security. Promoting such a program without registration is a violation of the
securities laws and regulations. A violation could be prosecuted by the
Securities and Exchange Commission, state securities commissions, or a civil
cause of action could be instituted by private parties, and may result in
significant damage to, or the closure of, a direct selling company.
The FTC and many states have “Business
Opportunity” laws and regulations. Business opportunities that have a required
investment threshold that exceeds a specified amount are subject to
registration and disclosure obligations. Some states also require the promoter
of the program to secure a surety bond before offering the business opportunity
in the state and impose a “cooling off” period before the promoter can sell the
business opportunity to a prospect. If a state or the FTC determines that our
program is subject to regulation under the business opportunity laws or
regulations, we will be required to register and adhere to the applicable
obligations imposed by the respective states to which the determination
applies. This could impede the enrollment of new distributors and slow the
sales of our products.
The application of the
Federal Franchise Rule and state franchise laws have similar application
as the business opportunity laws. If found to be a franchise, we would be
required to prepare and submit a Uniform Franchise Offering Circular or similar
disclosure document to independent distributors before they could enroll in the
program. Additional compliance obligations would also be imposed. This could
have a material adverse impact on the enrollment of new distributors and the
sales of our products.
The United States Postal Services (“USPS”)
has determined that some network marketing programs constitute illegal postal
lotteries. If a participant in the program must give consideration to
participate, and the selling entity remunerates the participants based on the
element of chance, the program constitutes a postal lottery. A
20
determination
that we are operating a postal lottery would have a material adverse
consequence on us as the USPS would discontinue all mail service and could
pursue criminal prosecution.
Research and Development
We incurred $6,498 on research and
development for the year ended December 31, 2004. We spent no funds in
2003 on research and development.. We are developing
an appetite suppressant chocolate raspberry chew and a protein based liquid
meal. Neither product will require FDA or other regulatory approval. We
anticipate marketing efforts for the chocolate raspberry chew will begin in March 2005
and marketing efforts for the liquid meal will begin in the third quarter of
2005, and that estimated aggregate amounts to complete development and testing
of these products are approximately $25,000.
Patents, Trademarks and Proprietary Rights
We have obtained registration on trademarks
for nine of our supplements: “Alpha Nac,” “AO Elite,” “Complex SPP,” “CP
Complex,” “GC Elite,” “JSH,” “M32+,” “Pure Heat,” “Q-Zyme,” and “Visual Eyes.”
We have also obtained trademarks for our energy drink “eForce” and our protein
shake product “VitaPro,” as well as for three products we have discontinued. We
have abandoned or not pursued efforts to register marks identifying other items
in our product line for various reasons including the inability of some names
to qualify for registration. We also received federal trademark registration
for six names or expressions that we use or intend to use to distinguish
ourselves from others: “Cube Up,” “Get Cubed,” “Simple, Innovative, Complete
Nutrition,” “The Power of Nutrition,” “VitaCube” and “V3S.” All trademark
registrations are protected for a period of 10 years and then are renewable
thereafter if still in use. We are currently pursuing a trademark for “PROformance”
to be used in association with our direct sales marketing program.
In January 2004, we abandoned efforts to
obtain a patent for the VitaCube® delivery system. We felt that to continue
this effort was not warranted in light of the costs involved and the limited
protection we might have been able to achieve. We are not currently pursuing
any patents and do not expect to do so for the foreseeable future.
Employees
We had 12 full-time employees as of March 2,,
2005. We consider our employee relations to be good.
ITEM
2.
DESCRIPTION OF
PROPERTY
Facilities
We lease an office, located at 480 South
Holly Street, Denver, Colorado, from the father of Sanford D. Greenberg, our
founder, for $3,090 per month, with the lease expiring in December 31,
2005, with a one-year extension right with rent of $3,180 per month. Our annual
office rent for 2004 and 2003 was $36,000 and $42,000, respectively.
On June 1, 2003, we contracted on a
month-to-month basis with Stonepath Logistics, Inc. (“Stonepath”) to
manage and store our products. Stonepath stores our products in a controlled-environment
warehouse in Denver, Colorado, and accepts bulk shipments on our behalf. We pay
for these services on a per transaction basis, and our costs have been
approximately $1,000 per month.
Insurance
We maintain commercial general liability,
including product liability coverage, and property insurance. Our policy
provides for a general liability limit of $1 million per occurrence, and $2
million annual aggregate umbrella coverage. We also have a casualty insurance
policy with a limit of $1.5 million on our main facility, including inventory,
and $500,000 on our products not located at our main facility.
21
ITEM
3.
LEGAL
PROCEEDINGS
We are involved in two legal proceedings
incidental to the conduct of our business, involving breach of contract
claims. Although the results of
litigation and claims cannot be predicted with certainty, we do not believe
that any such proceeding will have a material adverse effect on our business or
results of operations. Regardless of the
outcome, because of defense costs and diversion of management resources,
litigation has a negative impact on us.
We are a defendant in a lawsuit filed in
Denver, Colorado District Court in 2001, by Jordan Simons. Mr. Simons claims that we hired him to create
a website and breached our contract by terminating him after he had performed
some work for us but had not completed the project. Mr. Simons claims that we agreed to pay him a
percentage of gross sales and issue him stock warrants and restricted common
stock. We have denied all material
allegations of the complaint, including that we entered into a contract with
Mr. Simons and that he provided any services that had any value to us. We have denied that we owe any amount to Mr.
Simons and have asserted a counterclaim for damages. Mr. Simons’ lawsuit was dismissed with
prejudice on January 15, 2004, for his failure to prosecute the case and
participate in discovery; however, on November 22, 2004, the Denver
District Court reinstated Mr. Simons’ lawsuit.
Although the case has been set for trial, no discovery has been
conducted and no other material action has been taken in this case. We believe that Mr. Simons is not likely to
prevail and, even if he prevails, the little work he did for us will not entitle
him to recover any material amounts from us.
We are also a defendant in a lawsuit filed in
the District Court for El Paso County, Colorado, in late 2004, by Massachusetts
Mutual Life Insurance Company, d/b/a Cheyenne Mountain Resort (“CMR”). The action was not served upon us until February 2005. CMR claims a breach of contract and damages
in the amount of $54,424. We have not
yet filed an answer, and no other activity, other than the filing of the
complaint, has taken place. We intend to
vigorously defend against CMR’s claims.
Even if CMR prevails, we do not believe the proceeding will have a
material adverse effect on our business.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On October 15, 2004, by written consent, holders of 59% of our
common stock approved the following actions:
1.
A 1-for-5 reverse
stock split of our common stock, with no change in the number of authorized
shares of common stock.
2.
An amendment to our
2003 Stock Incentive Plan to increase the number of shares of common stock
eligible for awards under the Plan from 4,000,000 pre-split (800,000
post-split) to 5,000,000 pre-split (1,000,000 post-split) shares.
The 1-for-5 reverse stock split approved by
the stockholders was effected on December 8,
2004.
On November 29, 2004, by written
consent, the holders of 59% of our common stock approved the grant of
discretional authority to our Board of Directors to effect up to a 1-for-2
reverse stock split of our common stock, with no change in the number of
authorized shares of common stock. The
Board of Directors has not effected a reverse stock
split under this discretionary authority.
22
PART II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our common stock commenced trading on the OTC
Bulletin Board on December 26, 2001. Our trading symbol is “VCUB.OB.”
Since there is only a limited trading market for our stock, stockholders, may
find it difficult to sell their shares. Until June 20, 2003, the common
stock trades reflected the business of Instanet prior to the share exchange
with V3S.
The following table sets forth high and low
bid prices for our common stock for the calendar quarters indicated as reported
by the OTC Bulletin Board for the fiscal quarters indicated. These prices have
been stated after giving retroactive effect to a 1-for-5 reverse split of our
common stock consummated on December 8, 2004, and represent quotations
between dealers without adjustment for retail markup, markdown, or commission
and may not represent actual transactions.
|
|
|
High
|
|
Low
|
|
|
First
Quarter 2005 (through March 2, 2005)
|
|
$
|
3.90
|
|
$
|
3.50
|
|
|
Fourth
Quarter 2004
|
|
$
|
3.75
|
|
$
|
2.00
|
|
|
Third
Quarter 2004
|
|
$
|
4.25
|
|
$
|
1.55
|
|
|
Second
Quarter 2004
|
|
$
|
7.55
|
|
$
|
3.50
|
|
|
First
Quarter 2004
|
|
$
|
7.55
|
|
$
|
4.00
|
|
|
Fourth
Quarter 2003
|
|
$
|
15.00
|
|
$
|
7.00
|
|
|
Third
Quarter 2003
|
|
$
|
16.25
|
|
$
|
14.00
|
|
|
Second
Quarter 2003
|
|
$
|
14.00
|
|
$
|
0.75
|
|
|
First
Quarter 2003
|
|
$
|
6.25
|
|
$
|
0.75
|
|
Holders
As of March 2, 2005, we had
approximately 170 holders of record of our common stock. A significant number
of our shares were held in street name and, as such, we believe that the actual
number of beneficial owners is significantly higher.
Dividends
We have never declared or paid any cash
dividends on our common stock. For the foreseeable future, we intend to retain
any earnings to finance the development and expansion of our business, and we
do not anticipate paying any cash dividends on our common stock. Any future
determination to pay dividends will be at the discretion of our board of
directors and will be dependent upon then existing conditions, including our
financial condition and results of operations, capital requirements,
contractual restrictions, business prospects, and other factors that our board
of directors considers relevant.
Recent Sales of Unregistered Securities
In October 2004, we issued options to
purchase 80,000 shares of our common stock under our 2003 Stock Incentive Plan
to David Litt, our Vice President of Sales and Marketing, pursuant to his
employment agreement. The options are exercisable for five years, provided he
is still employed by us, at an exercise price of $5.00 per share, and vest over
four years. Options to purchase 30,000
shares are contingent on meeting certain performance criteria. We issued these securities in reliance on an
exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, based on the limited number of recipients, access to material
information, and status as an accredited investor.
23
ITEM
6. MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should
read the following discussion and analysis in conjunction with our financial
statements, including the notes thereto contained in this report. This
discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of certain factors, including those set forth under “Risk Factors Associated
with Our Business” and elsewhere in this report.
Overview
We are in the business of developing,
selling, marketing and distributing nutritional supplement products. We market
our products primarily through direct selling or network marketing, in which
independent distributors sell our products. In addition, we sell our products
directly to professional and Olympic athletes and professional sports teams.
Our product lines consist of two powdered
beverages, 12 individual supplements packaged in our VitaCube®, and four
supplements sold separately. Our VitaCube® is an easy to use, compartmentalized
box with instructions for which supplements to take and the proper times to
take them.
During the third quarter of 2003, we
initiated a transition of our sales and marketing efforts from sales to retail
outlets and in-house telemarketing to direct selling through independent
distributors and we launched our direct sales program in the second quarter of
2004. As of March 2, 2005 we had 1,086 independent distributors and 1,016
customers (excluding professional athletes and sports teams) who had purchased
our products within the prior eight months.
We maintain an inventory of our products to
insure that we can timely fill our customer orders. We can have large increases
in inventory levels if we have multiple product reorders in the same period. In
addition, our manufacturers typically may take up to 12 weeks to deliver
products after we place an order, and they have minimum order requirements,
which also adds to higher inventory levels. In connection with our change to
direct selling in the third quarter of 2003, we discontinued several specialty
supplements and various combinations of supplements sold in our VitaCube®,
taking a charge against inventory at September 30, 2003 of $177,896. We
also established at that date a provision for future obsolete inventory of
$31,782. Our inventory net of our allowance for obsolescence was $478,300 at December 31,
2004 an increase from $286,037 at December 31, 2003, a historically low
level compared to inventory of $527,055 at December 31, 2002, and $419,309
at December 31, 2001.
The increase of inventory was a result of a
reorder for five supplements used in all of our VitaCubes® and our initial
manufacturing order of eForce®. Even though our inventory level currently is
relatively high based on our sales for the year ended December 31, 2004,
we believe our inventory is appropriately classified as a current asset based
on the ongoing implementation of our new marketing plan which is designed to
increase our distributor base and sales.
During the year ended December 31, 2004,
we discontinued some sales and marketing tools, taking a charge against
operations for obsolete inventory of $11,518. Our allowance for obsolete
inventory was increased to $43,300 from $31,782 for the year ended December 31,
2004 and 2003, respectively. We believe
our reserve for obsolescence is reasonable because (i) substantially all of our
inventory has been recently purchased, (ii) the shelf life of our products
averages three years, and (iii) we have no current plans to eliminate any of
our products.
Our network marketing program is designed to
provide an incentive for independent distributors to build, maintain and
motivate a sales organization of customers and other independent distributors
to enhance earning potential. Our independent distributors are compensated with
commissions and bonuses on sales generated through their downline organization.
Independent distributors advance in distributor levels as they develop their
sales organization and increase their sales volume, which increases their
compensation.
We recognize revenue when products are
shipped to our customers. Revenue is reduced by product returns at the time we
take the product either back into inventory or dispose of it. In addition, we
estimate a reserve total for future returns. Cost of our sales consists of
expenses directly related to the production and distribution of the
24
products and certain sales materials. Included in the sales and
marketing expenses are independent distributor commissions, bonus and
incentives along with other general selling expenses. We expect our independent
distributor expenses, as a percentage of net revenues, to increase as
independent distributors reach the higher levels of incentives in our direct
sales program. General and administrative expenses include salaries and
benefits, rent and building expenses, legal, accounting, telephone and
professional fees.
Our revenue will depend on the number and
productivity of our independent distributors, who purchase products and sales
materials from us for resale to their customers or for personal use. Because we
will distribute substantially all of our products through our independent
distributors, our failure to retain our existing distributors and recruit
additional distributors could have an adverse effect on our revenue.
Due to the recent start-up of our direct
sales program we believe we need to gain more operating experience in order to
discern and discuss key indicators of our performance. To date, however, we
believe that the number of our distributors is an important indicator to
monitor. In addition, we will monitor the sales generated per independent
distributor as well as the success of our independent distributors in
recruiting new independent distributors. At this time it is too early to
determine what indicators will be necessary for us to be profitable.
With respect to industry and market factors
that may affect us directly, we believe that industry credibility in both
direct selling and nutritional supplements will be critical elements in whether
we can increase revenues and become profitable. Any adverse developments in
either of these two areas, to us or in our industry, could lead to a lower number
of our independent distributors and reduced sales and recruiting efforts by
existing distributors, as well as a loss or no increase in the number of sports
celebrity endorsers of our products. We do not know what industry growth was
for 2004 or will be for 2005 nor do we have enough experience in the direct
sales channel to determine whether a slower industry growth rate, which
occurred for several years leading up to 2003, will adversely affect us.
Our operating plan for 2005 is focused on
increasing the number of independent distributors, growing revenues, and
generating gross profits. Due to the recent commencement of our direct selling
program through independent distributors, we cannot predict our revenue, gross
profit, net income or loss or use of cash and cash equivalents; however, we
expect net losses will continue for at least the next 12 months.
Our independent auditors have noted in their
reports on our financial statements as of December 31, 2004 and 2003 and
for the years then ended, that there is substantial doubt regarding our ability
to continue as a going concern. To date this qualification has not affected our
ability to secure funding for our operations; however, going forward, in the
event this uncertainty is not resolved, we may experience more difficulty in
raising adequate funds to operate our Company.
We have filed an Amendment No. 1 to our
previously filed Form 10-KSB for the year ended December 31, 2003 for a
restatement of our financial statements for the fiscal year ended December 31,
2003 and the related disclosures. A
calculation error in computing the fair value of options granted using the
Black-Scholes option pricing model resulted in an $182,551 understatement of
2003 stock-based compensation expense and the reported net loss. In addition, we reclassified $211,746 from
general and administrative expenses to cost of goods sold accounts causing a
restatement of gross profits.
Critical Accounting Polices and Estimates
Discussion and analysis of our financial
condition and results of operations are based upon financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to collection of receivables, inventory obsolescence, sales
returns and non-monetary transactions such as stock and stock options issued
for services and beneficial conversion features of notes payable. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial statements.
25
Revenue
Recognition
.
In accordance with Staff Accounting Bulletin
No. 104 “Revenue Recognition”, revenue is recognized at the point of shipment,
at which time title is passed. Net sales include sales of products, sales of
marketing tools to independent distributors and freight and handling charges.
With the exception of approved professional sports teams, we receive the net
sales price from all of our orders in the form of cash or credit card payment
prior to shipment. Professional sports teams with approved credit have been
extended payment terms of net 30 days.
Allowances
for Product Returns
.
Allowances for
product returns are recorded at the time product is shipped. These accruals are
based upon the historical return rate since the inception of our network marketing
program in the third quarter of 2003, and the specific historical return
patterns by product. Our return rate since the third quarter of 2003 has varied
from 1.7% to 3.8% of our monthly net sales.
We offer a 60-day, 100% money back
unconditional guarantee to all customers and independent distributors who have
never before purchased products from us. As of December 31, 2004, orders
shipped that are subject to our 60-day money back guarantee were approximately
$40,600. All other product may be returned to us by any customer or independent
distributor if it is unopened and undamaged for a 100% sales price refund, less
a 10% restocking fee, provided the product is returned within 12 months of
purchase and is being sold by us at the time of return. We are not able to
estimate the amount of revenue we have recognized that is held by these buyers
of product and which is returnable, because it is not possible to determine the
amount of product that is unopened and undamaged. Returned product damaged
during shipment is replaced wholly at our cost, which historically has been
negligible.
We monitor our return
estimate on an ongoing basis and may revise allowances to reflect our
experience. We established our allowance for product returns of $2,857 on September 30,
2003. We have no relevant historical data on product returns before September 2003,
as we did not market in the direct sales channel until August 1,
2003. Our reserve for product returns at
the year ended December 31, 2004 and 2003 was $4,110 and $1,660,
respectively. To date, product expiration dates have not played any role in
product returns, and we do not expect they will in the future because it is
unlikely that we will ship product with an expiration date earlier than the
latest allowable product return date.
Inventory
Valuation
.
Inventories are stated at the lower of cost
or market on a first-in first-out basis. A reserve for inventory obsolescence
is maintained and is based upon assumptions about current and future product
demand, inventory whose shelf life has expired and market conditions. A change
in any of these variables may require additional reserves to be taken. We
reserved $43,300 for obsolete inventory as of December 31, 2004 and
$31,782 as of December 31, 2003. Prior to September 30, 2003, we did
not provide for a reserve for obsolete inventory due to lack of historical
information on which to base a reserve.
Stock
Based Compensation.
We
account for our stock-based compensation using Accounting Principles Board’s
Opinion No. 25 (“APB No. 25”). Under APB
No. 25, compensation expense is recognized for stock options with an exercise
price that is less than the market price on the grant date of the option and
for options granted to non-employees.
For stock options with exercise prices at or above the market value of
the stock on grant, we have adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 “Accounting for Stock-Based
Compensation” (“SFAS 123”). We have
adopted the disclosure-only provisions of SFAS 123 for the stock options
granted to the employees and directors of ours.
Accordingly, no compensation cost has been recognized for these
options. Many equity instrument
transactions are valued based on pricing models such as Black-Scholes, which
require judgments by us. Values for such
transactions can very widely and are often material to the financial
statements.
Results of
Operations
For year ended December 31, 2004,
compared the year ended December 31, 2003.
The discussion below
first presents the results of 2004 year followed by the results of 2003 year.
Net
Sales
.
Net sales were $803,640 compared
to $1,211,402, a decrease of 34%. The decrease in sales was the result of
refocusing of sales and marketing efforts from in-house sales to direct selling
through independent
26
distributors. Independent distributors purchase our products for resale
to customers and for their own personal consumption.
The percentage that each product category
represented of our net sales is as follows:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Product Category
|
|
% of Sales
|
|
% of Sales
|
|
|
eForce®
sports drink
|
|
10
|
%
|
1
|
%
|
|
VitaPro®
nutrition shake
|
|
17
|
%
|
33
|
%
|
|
Vitamins and
minerals
|
|
71
|
%
|
64
|
%
|
|
Other -
educational materials, apparel
|
|
2
|
%
|
2
|
%
|
Gross
Profit
.
Gross profit decreased to $522,299
from $585,426, a decrease of 11%. Gross profit as a percentage of revenue
(gross margin) increased to 65% compared to 48%, a result of obtaining higher
profit margin sales through independent distributors and the elimination of
sales to low margin retail outlets. Also during the year ended December 31,
2003, we took a charge against inventory of $177,896 for items that we
determined would not sell well through the independent distributor marketing
plan that contributed to the lower gross margin for 2003. The overall decrease
in gross profit also reflects the decrease in net revenue.
Sales
and Marketing Expenses
.
Sales and marketing
expenses decreased to $1,098,550 from $1,273,497 a decrease of 14%. Sales and
marketing activities decreased due to our transition to sales through our
independent distributors. Costs previously incurred with maintaining an
in-house sales staff have been eliminated. The independent distributors now incur
most of the costs of print and radio advertising. Therefore, we expect that the
primary expense items will be the direct compensation to our independent
distributors in the form of commissions, promotions and sales events and the
continued commitments to our sports celebrity endorsers.
General
and Administrative Expenses
.
General
and administrative expenses were $1,569,730 compared to $1,273,830 or an
increase of 23%. In 2004, we incurred higher consulting and compensation
expenses. Executive compensation increased as a result of an employment
agreement with Sanford D. Greenberg
effective April 1, 2004. Prior to that time, Mr. Greenberg drew a
nominal salary. In addition, on October 1, 2004 we hired and entered into
an employment agreement with our Vice President of Sales and Marketing, prior
to that we utilized consultants.
Research
and Development Expenses
. Research and development expenses were
relatively minor increasing to $6,498 from $0. We completed the introduction of
our reformulated eForce® sports energy drink during the third quarter of 2004.
We are developing an appetite suppressant chocolate raspberry chew and a
protein based liquid meal. We anticipate marketing efforts for the chocolate
raspberry chew to begin in March 2005 and marketing efforts for the liquid
meal to begin in the third quarter of 2005. The estimated aggregate amounts to
complete development and testing of these products are approximately $25,000.
Interest
Expense
.
Interest expense was $300,872 compared to $225,075 an increase of
34%. This increase was due to $205,000
of beneficial conversion feature interest on bridge loans in 2004 compared to
$50,000 for 2003.
Net
Loss
.
Our
net loss was $2,513,999 or $(0.44) per share compared to $2,267,533 or $(0.77)
per share, an increase of 11% . The increase in net loss is a result of lower
revenue and increased general and administrative costs.
Liquidity and
Capital Resources
To date, our operating funds have been
provided primarily by loans from our founder, our Chief Executive Officer and
by various stockholders ($3,624,209), and from sales of our common stock
($3,537,905), through December 31, 2004, and to a lesser degree, cash flow
provided by sales of our products.
On January 31, 2004, we closed a private
offering of our common stock that was begun in 2003 with the total issuance of
207,999 shares for gross proceeds of $1,039,980. On April 15, 2004, we
closed a second offering of our common stock issuing 1,665,290 shares for gross
proceeds of $2,497,925. In conjunction with the second offering, both our
founder and one of our former directors
converted outstanding loans plus accrued interest into 1,391,087 shares of our
common stock at March 31, 2004, further reducing our debt. In April 2004,
we repaid all of
27
our then existing debt of $220,000. As of December 31, 2004, we
had no outstanding interest bearing short-term or long-term debt.
We used $2,061,929 of cash for operations in
the year ended December 31, 2004, and we used $1,073,761 of cash in the
year ended December 31, 2003. The use of cash in our operations results
from incurring and accruing expenses to suppliers necessary to generate
business and service our customers at a time when revenues did not keep pace
with expenses. As of December 31, 2004, we had $114,794 in cash and cash
equivalents available to fund future operations. Working capital increased from
a deficit of $1,056,203 at December 31, 2003, to positive working capital
of $94,369 at December 31, 2004. This increase in working capital was the
result of the completion of a private placements of our common stock and debt
conversions as described in “Notes to Consolidated Financial Statements—Note 2
Shareholders’ Equity.” From the initial purchase of our technology system in
2001 through December 31, 2004, we had spent $180,151 on technology system
upgrades.
We do not have
sufficient capital to meet our anticipated working capital needs through fiscal
year 2005. We have filed a registration statement with the Securities and
Exchange Commission with respect to a proposed public offering of $8 to $10
million of our equity securities. If the offering is completed, we expect the
net proceeds from the offering together with our operating revenues, should be
sufficient to fund our operations for at least the next 12 to 18 months after
the completion of the offering. However, there can be no assurance that our
proposed public offering will be successful. No offer of our securities should
be inferred and no such offer is intended to be implied by us as result of this
disclosure of our capital plan.
In order for
us to conserve cash, certain of our officers have deferred approximately
$100,000 of salary and related payroll tax for the first four payrolls of 2005.
We cannot assume that these individuals will be willing or able to continue
deferment in the future. These deferred salaries and related payroll tax would
be repaid from proceeds of the offering, if completed.
On March 1,
2005, we obtained a $25,000 short term loan from Christopher Marlett, a
significant shareholder. In addition, on
March 2, 2005, we obtained short term loans from our Chief Executive Officer
and an unrelated party, each to loan us up to $200,000 on an as needed
basis. The loans provide for interest at
10% per annum and are due and payable on the earlier of May 30, 2005, or
closing of the proposed public offering.
Our independent auditors have noted in their
reports on our financial statements as of December 31, 2004 and 2003 and
for the years then ended, that there is substantial doubt regarding our ability
to continue as a going concern. To date this qualification has not affected our
ability to secure funding for our operations; however, going forward, in the
event this uncertainty is not resolved, we may experience more difficulty in
raising adequate funds to operate our Company.
In the event that we successfully complete
our planned public offering of common stock and depending up the profitability
of sales levels achieved, we believe that our cash resources will be sufficient
to fund our operations for the next 12 to 18 months. If our business operations
do not result in increased product sales, our business viability, financial
position, results of operations and cash flows will likely be adversely
affected. Further, if we are not successful in achieving profitability,
additional capital will be required to conduct ongoing operations. We cannot
predict the terms upon which we could raise such capital or if any capital
would be available at all.
Contractual
Obligations
.
We lease office space from the father of our
founder with the lease expiring at December 31, 2005. We also have various
operating leases for automobiles, computer and telephone equipment. At December 31,
2004, our commitments under these obligations were as follows:
|
Contractual Obligations
|
|
Less than
1 year
|
|
2 – 3 years
|
|
4 – 5 years
|
|
|
Office lease
|
|
$
|
37,080
|
|
$
|
—
|
|
$
|
—
|
|
|
Operating
leases
|
|
97,421
|
|
59,617
|
|
9,614
|
|
|
Total
|
|
$
|
134,501
|
|
$
|
59,617
|
|
$
|
9,614
|
|
The Company has commitments for contract
services with an unrelated party totaling approximately $280,000. The agreement provides for various payments
to be made over a two-year period and contains provisions to terminate the payment
of obligations with a contract buyout of $75,000.
The Company maintains employment agreements
with certain key management. The
agreements provide for minimum base salaries, eligibility for stock options and
performance bonuses and severance payments.
28
Customer
Concentrations
.
We had no single customer that accounted for
any substantial portion of our revenues.
Off-Balance
Sheet Items
.
We had no off-balance sheet items as of December 31,
2004.
ITEM
7. FINANCIAL STATEMENTS
The financial statements are included in this
annual report on Form 10-KSB at page F-1.
Index to
Financial Statements
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On August 12, 2003, Ehrhardt Keefe
Steiner & Hottman PC, was replaced as our independent accountant effective
upon completion of its review of our financial statements for the year ended December 31,
2002, and Spicer Jeffries LLP (“Spicer”), was appointed as our new independent
accountant. The board of directors approved the appointment on August 13,
2003. We did not have any disagreement with Ehrhardt Keefe Steiner &
Hottman, PC, on any accounting principles or practices, financial statement
disclosure or auditing scope of procedure. Neither the Company nor anyone on
our behalf consulted Spicer on any matter relating to the application of
accounting principles to a specified completed or contemplated transaction or
the type of audit opinion that might be rendered on our financial statements.
On March 19, 2004, Spicer resigned as
our principal independent accountants and Staley Okada & Partners (“Staley”),
was appointed as the principal independent accountants to replace Spicer for
the year ended December 31, 2003. Spicer resigned due to its inability to
obtain professional liability insurance coverage for public reporting
companies. Our Audit Committee recommended the nomination of Staley as our new
independent accountants to the board of directors and the appointment was
approved on March 24, 2004. We did not have any disagreement with Spicer
on any accounting principles or practices, financial statement disclosure or
auditing scope of procedure. Neither the Company nor anyone on our behalf
consulted Staley on any matter relating to the application of accounting
principles to a specified completed or contemplated transaction or the type of
audit opinion that might be rendered on our financial statements.
On October 6, 2004, Staley Okada &
Partners resigned as our principal independent accountant and on October 8,
2004, we engaged Gordon, Hughes & Banks, LLP (“GHB”) as our principal
independent accountant to audit our financial statements. Our Audit Committee
recommended and approved the change in accountants.
The report on the financial statements
prepared by Staley for the fiscal year ended December 31, 2003, did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to audit scope or accounting principles. However, the report
included a going concern emphasis paragraph. We did not have any disagreements
with Staley on any accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. Neither us nor anyone on our behalf
consulted GHB on any matter relating to the application of accounting
principles to a specified completed or contemplated transaction or the type of
audit opinion that might be rendered on our financial statements.
29
ITEM
8A. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s controls and other
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Commission’s rules and forms are effective,
based upon their evaluation of these controls and procedures as of a date within
90 days of the filing date of this Form 10-KSB.
Changes in
Internal Controls
There were no significant changes in the
Company’s internal controls or in other factors that could significantly affect
those controls subsequent to the date of this evaluation, including any
corrective actions with regard to significant deficiencies and weaknesses.
ITEM 8B. OTHER INFORMATION
None
30
PART III
ITEM
9. DIRECTORS AND EXECUTIVE OFFICERS
Directors and
Executive Officers
The following sets forth certain information
regarding each of our directors and executive officers:
|
Name
|
|
Age
|
|
Position
|
|
Committee
|
|
Earnest Mathis, Jr.
|
|
45
|
|
Chairman , Chief Executive Officer and
President
|
|
-
|
|
Sanford D Greenberg
|
|
46
|
|
Founder
|
|
-
|
|
Timothy Transtrum
|
|
41
|
|
Chief Operating Officer
|
|
-
|
|
Mary Pat O’Halloran
|
|
47
|
|
Chief Financial Officer
|
|
-
|
|
David Litt
|
|
39
|
|
Vice President Sales and Marketing
|
|
-
|
|
Doug Ridley
|
|
48
|
|
Director
|
|
Compensation
|
|
John B McCandless
|
|
56
|
|
Director
|
|
Audit/Compensation
|
|
Anthony DiGiandomenico
|
|
38
|
|
Director
|
|
Audit/Compensation
|
Directors hold office until the next annual
meeting of stockholders following their election unless they earlier resign or
are removed as provided in the bylaws. Our board of directors has determined
that our directors, other than Mr. Mathis, are “independent directors” under
the American Stock Exchange listing standards. Our officers serve at the
discretion of our board of directors.
Earnest Mathis, Jr.,
Chairman, Chief Executive Officer and President.
Mr. Mathis was appointed as the Chairman,
Chief Executive Officer and President on March 2, 2005. Prior to the merger with VitaCube Systems,
Inc. Mr. Mathis served as Instanet’s
Chief Executive Officer and a director from February 2001 to June 2003. Mr. Mathis is the current President and a
director of Inverness Investments, Inc., a privately-held financial consulting
company in Denver, Colorado. He has served in these positions since January 1987. Mr. Mathis is currently serving as Manager of
Amerigolf, LLC, a private golf course development company. He has served in
this position since February 1998. Mr. Mathis is a Founder and current
Manager of Waveland Ventures, LLC, a private capital management company,
managing governmental economic redevelopment programs. He has served in this
position since March, 2002. Mr. Mathis
is a Manager with Waveland Colorado Ventures, LLC, a Colorado certified capital
company that invests and loans money to Colorado-based businesses. He has
served in this position since March 2002.
Mr. Mathis is currently Chief Executive Officer, Chief Financial Officer
and a director for Petramerica, a public development stage company. He has
served in this position since April 2002.
Mr. Mathis was managing director of Integrated Medical Services, Inc., a
private medical waste transport company, from January 1997 to December 2004. From February 2001 through December 2002,
Mr. Mathis served as President, Chief Financial Officer and a director of Care
Concepts I, Inc., a public development stage company, that acquired Ibid
America, Inc in December 2002.
From January 1999 through January 2002, Mr. Mathis served as
Chief Executive Officer, Chief Financial Officer and as the sole director of
Milestone Capital, Inc., a public company that acquired Elite Agents, Inc. in January 2002. From April 1987 to June 2000, Mr.
Mathis was President and a director of Haleakala Enterprises, Inc., a public
development stage company that merged with One Dentist.Com in June 2000.
Sanford D. Greenberg, Founder.
Mr. Greenberg is one
of our founders and served as our Chairman and Chief Executive Officer from our
inception in October 2000 through March 2, 2005. He also served as our President from July 2002
until March 2, 2005. On March 2,
2005, Mr. Greenberg resigned his positions of director, Chief Executive Officer
and President to devote his full-time business efforts to train, motivate and
recruit our independent distributors.
From April 2002 to October 2004, Mr. Greenberg was also a
part-time stockbroker for GunnAllen Financial, Inc. From October 2000 to April 2002 he
was a part-time stockbroker for Wachovia Securities and its predecessors. From 1999 to October 2000, Mr. Greenberg
was the Executive Vice President for GSG Securities, Inc., a broker-dealer.
From 1989 through 1998, Mr. Greenberg was the
Chief Executive Officer of Chatfield Dean, Inc., a broker-dealer. In late 1993, without admitting or denying
wrongdoing, Mr. Greenberg agreed to settle allegations made by the SEC and the
National Association of Securities Dealers, Inc. (“NASD”) that as Chief
Executive Officer of Chatfield Dean he failed to properly supervise its
associates. In connection with the
settlements, Mr. Greenberg
31
agreed to the SEC entering an order which provided for his six-month
suspension from association with a broker-dealer, investment adviser or
municipal securities dealer, and he entered into a letter of acceptance, waiver
and consent with the NASD agreeing to a
four-month suspension from association with a broker-dealer, which suspensions
occurred concurrently from February 1994 through July 1994. Thereafter, Mr. Greenberg rejoined Chatfield
Dean as its Chief Executive Officer. He
served in that capacity with Chatfield Dean until it was sold to GSG
Securities, Inc. at the end of 1998.
Timothy Transtrum,
Chief Operating Officer.
Mr. Transtrum joined us on February 2,
2004, as Chief Operating Officer. Prior to that, he was President and Chief
Operating Office for NutriHealth USA, a division of the global nutrition
company Natural Health Holdings LTD, from May 2002 to February 2004. From February 1999
to May 2000, he served as Vice President of Operations and International
Development for Oasis Wellness Network, a network marketing company. From February 1998
to February 2004, Mr. Transtrum also was President of TF Transtrum
Associates, an operations and retention consulting firm. From 1991 to 1998, he
worked for Melaleuca Inc., a network marketing company, during which time he
became Director of International Operations.
Mary Pat O’Halloran,
Chief Financial Officer.
Ms. O’Halloran has served as our Chief
Financial Officer since January 1, 2002. Ms. O’Halloran served as a
consultant to us from October 2001 until January 1, 2002. From July 1998
to October 2001, Ms. O’Halloran was the Information Systems Manager for
EAS, Inc., a nutritional supplement company. From September 1997 to July 1998,
Ms. O’Halloran performed financial consulting through her consulting company
Mpatt System and from November 1989 to September 1997 she was the
Chief Financial Officer for Page Digital, Inc., a software company that
develops and markets an enterprise software package for the catalog industry.
David Litt, Vice
President of Sales and Marketing.
Mr. Litt joined us as our Vice President of
Sales and Marketing on October 1, 2004. Mr. Litt was an independent
consultant for us from February 2004 until October 1, 2004, through
his consulting business that he conducted from January 2003 until October 2004.
From October 1998 to January 2003, Mr. Litt was the Chief Sales and
Marketing Officer for Oasis Wellness Network, a network marketing company and
from June 1996 to October 1998 he was the Vice President of Marketing
for Mercantile Stores, Inc., a retail department store.
Doug Ridley,
Director.
Mr.
Ridley was appointed as a director on January 1, 2004, and serves on our
Compensation Committee. Mr. Ridley was an independent consultant to us from April 2003
until December 31, 2003. Mr. Ridley is currently President of Simply
Because, a gift products network marketing company and since 1997, has been
President of Chad Management Co., LLC, a nutritional products network marketing
company.
John B. McCandless,
Director.
Mr.
McCandless was appointed as a director on February 19, 2004, and serves on
our Audit and Compensation Committees. Mr. McCandless is currently the Vice
President of Technical Services at Weider Nutrition International, Inc. Mr.
McCandless provided operations and product consulting services to nutrition and
direct selling companies as a consultant from November 2002 to October 2003,
and from October 1995 to November 2002, he served as Senior Vice
President and Chief Operating Officer for USANA Health Sciences, a health science
company.
Anthony
DiGiandomenico, Director.
Mr. DiGiandomenico was appointed as a
director on May 25, 2004, and he serves on our Audit and Compensation
Committees. Mr. DiGiandomenico co-founded MDB Capital Group LLC, a NASD member
broker-dealer, in 1997 and serves as a managing director of the firm. From 1990
to 1995, he served as President and Chief Executive Officer of the Digian
Company, a real estate development company. He currently serves on the board of
Orion Acquisition Corp. II, a corporation which files reports pursuant to the
Securities Exchange Act of 1934, which was formed in 1995 to acquire an
operating business by purchase, merger or otherwise.
There are no family relationships between or
among our executive officers and directors.
Mr. McCandless works for a competitor of ours
in the nutritional supplement market, Weider Nutrition International, Inc. We
believe that his services as a board member are valuable to us. In the event a
conflict arises between Mr. McCandless and us in connection with his board
duties, he will recuse himself from board deliberations and decisions relating
to the conflict.
32
Director Compensation
Our directors who are also employees do not
receive any additional compensation for their services as directors. During the
year ended December 31, 2003, non-employee directors received no fees.
During the fiscal year ended December 31, 2004, non-employee directors did
not receive fees for service as directors but were reimbursed for reasonable
travel expenses in attending meetings. We do not expect to pay director fees to
our non-employee directors during 2005; however, directors will be reimbursed
for reasonable travel expenses in attending meetings.
In connection with their appointment to the
board of directors, Doug Ridley, John B. McCandless and Anthony DiGiandomenico
were each granted stock options to purchase 10,000 shares of our common stock
at an exercise price of $5.00 per share. Each option was exercisable for 2,500
shares on the date the option was granted. The options held by Mr. Ridley and
Mr. McCandless vested with respect to an additional 2,500 shares on December 1,
2004 and will vest with respect to the remaining 5,000 shares on December 1,
2005. The options held by Mr. DiGiandomenico vest with respect to an additional
2,500 shares on May 20, 2005 and with respect to the remaining 5,000 shares on
May 20, 2006.
Board Committees
Our board of directors has appointed an Audit
Committee and a Compensation Committee. The composition of the Audit Committee
will comply with the requirements of the Sarbanes-Oxley Act of 2002.
Audit
Committee
Mr. McCandless and Mr. DiGiandomenico serve
on the Audit Committee. Our Audit Committee’s main function is to oversee our accounting
and financial reporting processes, internal systems of control, independent
auditor relationships and the audits of our financial statements. The Audit
Committee’s responsibilities include:
•
selecting,
hiring, and compensating our independent auditors;
•
evaluating
the qualifications, independence and performance of our independent auditors;
•
overseeing
and monitoring the integrity of our financial statements and our compliance
with legal and regulatory requirements as they relate to financial statements
or accounting matters;
•
approving
the audit and non-audit services to be performed by our independent auditor;
•
reviewing
with the independent auditor the design, implementation, adequacy and
effectiveness of our internal controls and our critical accounting policies;
and
•
preparing
the report that the Securities and Exchange Commission requires in our annual
proxy statement.
The board of directors has adopted an Audit
Committee Charter. The board of
directors has determined that it does not have an audit committee financial
expert serving on its Audit Committee.
The board of directors does not believe any of its current members
qualify as audit committee financial expert.
Compensation Committee
Messrs. Ridley, McCandless and DiGiandomenico
serve on the Compensation Committee. Our Compensation Committee’s main
functions are assisting our board of directors in discharging its
responsibilities relating to the compensation of outside directors, the Chief
Executive Officer and other executive officers, as well as administering our
2003 Stock Incentive Plan. The Compensation Committee’s responsibilities
include the following:
•
reviewing
and recommending to our board of directors the compensation of our Chief
Executive Officer and other executive officers, and the outside directors;
•
conducting
a performance review of our Chief Executive Officer;
33
•
reviewing
our compensation policies;
•
administering
and overseeing our 2003 Stock Incentive Plan; and
•
if
required, preparing the report of the Compensation Committee for inclusion in
our annual proxy statement.
The board of directors has adopted a
Compensation Committee Charter.
The Compensation Committee’s policy is to
offer our executive officers competitive compensation packages that will permit
us to attract and retain highly qualified individuals and to motivate and
reward these individuals in an appropriate fashion aligned with the long-term
interests of our Company and our stockholders.
Compensation Committee and Insider
Participation
Our Compensation Committee is responsible for
establishing the compensation to be paid to our executive officers. None of our
executive officers serve as a member of the board of directors or compensation
committee of any entity that has one or more of its executive officers serving
as a member of our board of directors or Compensation Committee.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange
Act of 1934, as amended requires our executive officers and directors and
persons who own more than 10% of a registered class of our equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Executive officers,
directors and greater than 10% stockholders are required by Commission
regulation to furnish us with copies of all Section 16(a) forms they
file. Except for David Litt, who was
late filing his initial report of Form 3, we believe all of our executive
officers and directors complied with all applicable filing requirements during
the fiscal year ended December 31, 2004.
Code of Ethics
We have adopted a Code of Ethics that applies
to all of our directors, officers and employees. We publicize the Code of
Ethics through posting the policy on our website, http://www.vitacube.com. We
will disclose on our website any waivers of, or amendments to, our Code of
Ethics.
ITEM
10. EXECUTIVE COMPENSATION
The following table sets forth information
with respect to compensation earned by Sanford D. Greenberg, our Chief
Executive Officer, in 2003 and 2004. No other executive officer received cash
compensation from us of $100,000 or more in 2003 or 2004.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
Long Term
Compensation
|
|
|
|
|
|
|
Annual Compensation
|
|
Securities
Underlying
Securities
Options
|
|
|
|
|
Name and Principal
Position
|
|
Years
|
|
Salary
|
|
Bonus
|
|
Other Annual
Compensation
|
|
|
All Other
Compensation
|
|
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
($)
|
|
|
Sanford D.
Greenberg,
|
|
2004
|
|
114,905
|
|
-0-
|
|
17,631
|
(1)
|
800,000
|
|
-0-
|
|
|
Chief
Executive Officer
|
|
2003
|
|
4,445
|
|
-0-
|
|
4,127
|
(1)
|
-0-
|
|
-0-
|
|
(1)
Includes
auto allowance.
34
Employment
Contracts
Sanford D. Greenberg entered into an
employment agreement with us, effective as of April 1, 2004. Mr. Greenberg’s
employment agreement provided for his employment as our Chief Executive Officer
and President. On March 2, 2005, in
connection with Mr. Greenberg’s resignation as Chairman, Chief Executive Officer,
and President, Mr. Greenberg’s employment agreement was amended and restated to
provide that his primary duties involve training, motivating, and recruiting
independent distributors. Mr. Greenberg will receive a salary of $150,000 per
year and may receive bonuses in such amounts as determined by our board of
directors. Mr. Greenberg will also be eligible to participate in bonuses on the
same basis as our executives under any executive bonus plan adopted by us.
Either party may terminate the agreement upon 30 days prior written notice.
Additionally, Mr. Greenberg may be terminated for “just cause” as defined in
the employment agreement upon one business day’s prior written notice. Mr.
Greenberg may terminate his employment for “good reason” as defined in employment
agreement. If we terminate Mr. Greenberg
without just cause or he terminates his employment for good reason, he is
entitled to three years salary payable over 36 months. Mr. Greenberg’s
employment agreement also includes a non-competition provision for a period of
two years after his termination of employment or, if later, one year after
final payment of any pay-out provision upon termination.
In connection with his employment agreement,
dated April 1, 2004, Mr. Greenberg also received stock options to purchase
800,000 shares of our common stock at $3.00 per share. The options vest over
four years provided that Mr. Greenberg is still employed by us and are
exercisable for five years after vesting. If Mr. Greenberg is terminated
without just cause, all his unvested options vest and are exercisable for a
period of five years from the date of termination. If Mr. Greenberg is
terminated for just cause, all unexercised options terminate as of his date of
termination. On March 2, 2005, in connection with Mr. Mathis’ employment
as Chief Executive Office, Mr. Greenberg forfeited options to purchase 275,000
shares. In addition, Mr. Greenberg has
agreed to forfeit options to purchase 50,000 shares if the planned public
offering is completed.
Earnest Mathis entered into an employment agreement with us, effective March 2, 2005, providing for his employment as our Chief Executive Officer and President. The employment agreement is for a two-year term and provides that he will devote approximately 80% of his time and energies to the business of the Company. Mr. Mathis will receive a salary of $150,000 per year and may receive bonuses in such amounts as determined by our Compensation Committee. Mr. Mathis will also be eligible to participate in bonuses on the same basis as other executives under any executive bonus plan adopted by us. Either party may terminate the agreement upon 30 days prior written notice. Additionally, Mr. Mathis may be terminated immediately for “just cause” as defined in the employment agreement. Mr. Mathis may also terminate his employment for “good reason” as defined in the employment agreement. If we terminate Mr. Mathis without just cause or he terminates his employment for good reason, he is entitled to one year’s salary payable over 12 months. Mr. Mathis’ employment agreement also includes a non-competition provision for a period of one year after his termination of employment.
Pursuant to his employment agreement,
Mr. Mathis also received stock options to purchase 275,000 shares of our
common stock at $3.00 per share. One half of the options were vested as of the
date of the grant and the balance vest on the one-year anniversary of the grant
provided that Mr. Mathis is still employed by us. The options are exercisable for five years
after vesting. If Mr. Mathis is terminated without just cause or he
terminates his employment for good reason, all his unvested options vest and
are exercisable for a period of five years from the date of termination. If
Mr. Mathis is terminated for just cause, all unexercised options terminate
as of his date of termination.
Timothy Transtrum entered into an employment
agreement with us, effective as of February 2, 2004. Mr. Transtrum’s
employment agreement provides for his employment as our Chief Operating
Officer. Mr. Transtrum will receive a salary of $110,000 per year and may
receive bonuses in such amount as determined by the Compensation Committee. Mr.
Transtrum will also be eligible to participate in bonuses on the same basis as
other executives under any executive bonus plan adopted by us. Either party may
terminate the agreement upon 14 days prior written notice. Additionally, Mr.
Transtrum may be terminated for “just cause” as defined in the employment
agreement upon one business day’s prior written notice. If Mr. Transtrum is
terminated by us without just cause, he is entitled to a minimum six months
salary payable over six equal monthly installments, and 50% of his unvested
stock options would vest immediately. In the event we experience a change in
control, Mr. Transtrum, at his option, may terminate his employment and require
us to pay him two months of his then existing salary for each full year of
employment with us, up to a maximum of six months salary.
Pursuant to his employment agreement, Mr.
Transtrum also received stock options to purchase 50,000 shares of our common
stock at $5.00 per share. The options vest over four years provided that Mr.
Transtrum is still employed by us and are exercisable for five years. If Mr.
Transtrum is terminated for just cause, all unexercised options terminate as of
his date of termination.
35
David Litt entered into an employment
agreement with us, effective as of October 1, 2004. Mr. Litt’s employment
agreement provides for his employment as our Vice President of Sales and
Marketing. Mr. Litt will receive a base salary of $150,000 per year plus a
bonus of up to a maximum of $150,000 per year based on the performance of the
Company. He will be eligible for bonuses based on certain performance criteria
as set forth in his employment agreement and may receive additional bonuses in
such amount as determined by our board. Either party may terminate the
agreement upon 15 days prior written notice. Additionally, Mr. Litt may be
terminated for “just cause,” as defined in the employment agreement, upon one
business day’s prior written notice. If Mr. Litt is terminated by us without
just cause he is entitled to two months’ base salary, any performance salary
earned and any accrued but unpaid bonus. Mr. Litt will not be entitled to any
severance benefits if, within six months of his termination of employment, he
is employed by or becomes an advisor to one of our competitors.
Pursuant to his employment agreement, Mr. Litt
also received stock options to purchase 80,000 shares of our common stock at
$5.00 per share, 30,000 of which are contingent based on meeting certain
performance criteria as set forth in his employment agreement. The 50,000
non-contingent options vest over four years, with the first 10,000 shares
vesting on October 1, 2004. Once the performance criteria are met, the
contingent options will vest on the same schedule as the non-contingent
options. The non-contingent options and the contingent options, if earned, are
exercisable for five years provided that Mr. Litt is still employed by us. If
Mr. Litt is terminated without just cause, he is entitled to any earned but not
issued stock options based on the performance criteria and all vested options,
all of which will terminate in accordance with the provisions of our equity
incentive plan. All unvested stock options will terminate as of his date of
termination.
Stock Options
The following table sets forth options
granted to our Chief Executive Officer in 2004:
Option
Grants in 2004
|
Name
|
|
Number of securities
underlying options
granted (#)
|
|
Percent of total options
granted to employees in
fiscal year
|
|
Exercise or base
price ($/Sh)
|
|
Expiration date
|
|
|
Sanford D.
Greenberg
|
|
800,000
|
|
86
|
%
|
$
|
3.00
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information
with respect to the December 31, 2004 option values held by Mr. Greenberg:
Aggregated
Option Exercises in 2004
and
Options Values at December 31, 2004
|
Name
|
|
Shares
Acquired
On
exercise(#)
|
|
Value
realized
($)
|
|
Number of unexercised
options at
December 31, 2004
|
|
Value of unexercised in-the
money
options at
December 31, 2004(1)
|
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
Sanford D.
Greenberg
|
|
-0-
|
|
-0-
|
|
16,000
|
|
800,000
|
|
$
|
-0-
|
|
$
|
440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
value of each option is based on $3.55, the last reported sales price of the
common stock as reported by the OTC Bulletin Board Market on December 31,
2004, less the exercise price payable for such shares.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
Securities Authorized for Issuance Under
Equity Compensation Plans
The following table provides information
about our equity compensation plans as of March 2, 2005.
36
Equity
Compensation Plan Information
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation plan
|
|
|
Equity
compensation plans approved by stockholders
|
|
680,500
|
|
$
|
5.00
|
|
319,500
|
|
|
Equity
compensation plans not approved by stockholders
|
|
-0-
|
|
N/A
|
|
-0-
|
|
|
Total
|
|
680,500
|
|
$
|
5.00
|
|
319,500
|
|
The following table sets forth information
concerning ownership of our common stock as of March 2, 2005 by our
executive officers and directors, and persons known by us to own more than 5%
of our issued and outstanding shares of common stock.
|
Name and Address
|
|
Number of
Shares (1)
|
|
Percent of
Class (2)
|
|
|
Earnest Mathis, Jr.(12)c
|
|
334,432
|
(3)
|
5.0
|
%
|
|
Chief
Executive Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanford D. Greenberg (12)
|
|
2,735,406
|
(4)
|
40.5
|
%
|
|
Founder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy Transtrum (12)
|
|
12,500
|
(5)
|
|
*
|
|
Chief
Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary Pat O’Halloran (12)
|
|
24,750
|
(6)
|
|
*
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Litt (12)
|
|
10,000
|
(7)
|
|
*
|
|
Vice
President of Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doug Ridley (12)
|
|
5,000
|
(8)
|
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John B. McCandless (12)
|
|
5,000
|
(8)
|
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony DiGiandomenico
|
|
168,395
|
(9)
|
2.5
|
%
|
|
Director 401
Wilshire Blvd. Ste. 1020
Santa Monica, CA 90401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers and directors as a group (8 persons)
|
|
3,295,483
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
Christopher
Marlett
401 Wilshire Blvd. Ste. 1020
Santa Monica, CA 90401
|
|
458,958
|
(10)
|
6.7
|
%
|
|
|
|
|
|
|
|
|
Warren Cohen
595 South Broadway, Suite 200
Denver, CO 80209
|
|
1,338,800
|
(11)
|
20.5
|
%
|
|
*
|
|
Less than 1%
|
|
|
|
|
|
(1)
|
|
All entries exclude beneficial ownership of
shares issuable pursuant to options that have not vested or that are not
otherwise exercisable as of March 2, 2005 and which will not become vested or
exercisable within 60 days of the filing of the form 10-KSB.
|
37
|
(2)
|
|
Percentages are rounded to nearest
one-tenth of one percent. Percentages are based on 6,534,043 shares of common
stock outstanding. Options that are presently exercisable or exercisable
within 60 days are deemend to be beneficially owned by the person holding the
options for the purpose of computing the percentage ownership of that person,
but are not treated as outstanding for the purpose of computing the
percentage of any other person.
|
|
|
|
|
|
(3)
|
|
Includes shares either held directly or
through entities that are controlled by Earnest Mathis, Jr. or as custodian
for a minor child and includes 171,500 shares issuable pursuant to options
which are presently exercisable or which become exercisable within 60 days of
the filing of the Form 10-KSB , and 162,932 shares held of record.
|
|
|
|
|
|
(4)
|
|
Includes shares either held directly or as
custodian for a minor child and includes 216,000 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of the filing of the Form 10-KSB, and 2,519,406 shares held of record.
The voting rights associated with Mr. Greenberg’s shares are subject to a
voting trust agreement. See — “Item 12 Certain Relationship and Related
Transactions.”
|
|
|
|
|
|
(5)
|
|
Includes 12,500 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of the filing of the Form 10-KSB.
|
|
|
|
|
|
(6)
|
|
Includes 14,750 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of the filing of the Form 10-KSB, 10,000 shares held of record.
|
|
|
|
|
|
(7)
|
|
Includes 10,000 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of the filing of the Form 10-KSB.
|
|
|
|
|
|
(8)
|
|
Includes 5,000 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of the filing of the Form 10-KSB.
|
|
|
|
|
|
(9)
|
|
Includes 99,095 shares issuable pursuant to
public warrants and 2,500 shares pursuant to options which are presently
exercisable or which become exercisable within 60 days of the filing of the
Form 10-KSB, and 66,800 shares held of record.
|
|
|
|
|
|
(10)
|
|
Includes shares either held directly or through
entities that are controlled by Christopher A. Marlett. Includes 271,958
shares issuable pursuant to public warrants which are presently exercisable
or which become exercisable within 60 days of the filing of the Form 10-KSB ,
and 187,000 shares held of record.
|
|
|
|
|
|
(11)
|
|
Includes 1,338,800 shares held of record.
|
|
|
|
|
|
(12)
|
|
Address: 480 South Holly Street, Denver,
Colorado 80246
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our current corporate office space
from Arnold Greenberg, the father of our founder, Sanford D. Greenberg. We paid
$42,000 and $36,000 in rent for the years ended December 31, 2003 and
2004, respectively. Our current lease at $3,090 per month expires at the end of
December 2005, with a one-year extension right with rent of $3,180 per
month.
On June 30, 2002, prior to the Instanet
merger with V3S, V3S agreed to repurchase 2,131,952 shares of its common stock
from Warren Cohen, a founder and former director; in exchange he returned an
additional 116,925 shares and received a long-term subordinated note for
$1,335,861, which included additional monies loaned to V3S and accrued
interest. V3S did not have a market for its common stock at the time of this
transaction. The note provided for interest at 8% per year with principal and
interest payable from 25% of adjusted quarterly net income. Accrued interest on
the note as of December 31, 2003, was $160,450. On March 31, 2004,
this note and all accrued interest were converted into 1,015,304 shares of our
common stock at a conversion price of $1.50 per share, the price for which
shares of common stock were being sold in a private offering of our securities.
This price was determined pursuant to arms-length negotiations between third
party investors and us, and the conversion of the
38
above debt owed to Mr. Cohen was a condition to completing the private
offering. On March 31, 2004, the trading price for our common stock was
$2.55 per share; however, our common stock was thinly traded.
Sanford D. Greenberg converted $133,127 and
$166,873 that he advanced us plus accrued interest into long-term subordinated
loans on June 30, 2002 and September 30, 2002, respectively. These
notes provided for interest at 8% per year with principal and interest payable
from 5% of our adjusted quarterly net income. Accrued interest on the notes as
of December 31, 2003, was $34,040. Also on June 30, 2002, Mr.
Greenberg contributed $788,780 of advances as additional paid in capital. On December 31,
2002, Mr. Greenberg converted $200,000 that he advanced us into a bridge loan
with interest at 10% per year, principal and interest due December 31,
2003. As part of the terms of the bridge loan, Mr. Greenberg was granted an
option to purchase 16,000 shares of our common stock at $5.00 per share. As of December 31,
2003, Mr. Greenberg had advanced an additional $110,040 which was due on demand
accruing interest at 10% per year. As of December 31, 2003, accrued
interest on the advance was $6,776. On March 31, 2004, Mr. Greenberg
converted $500,000 of principal and $63,674 of accrued interest on the long
term subordinated loan and the bridge loan into 375,783 shares of our common
stock at a conversion price of $1.50 per share, the price for which shares of common
stock were being sold in a private offering of our securities. This price was
determined pursuant to arms-length negotiations between third party investors
and us, and the conversion of the above debt owed to Mr. Greenberg was a
condition to completing the private offering. On March 31, 2004, the
trading price for our common stock was $2.55 per share; however, our common
stock was thinly traded.
On February 28, 2005, Sanford D.
Greenberg entered into a Voting Trust Agreement covering all of the shares of
our common stock held by him and any shares of common stock subsequently
acquired by him. The Voting Trust
Agreement does not become effective unless our securities are listed for
trading on the American Stock Exchange.
The Voting Trust Agreement is for a term of five years and will
terminate earlier on the happening of certain events. During the term of the Voting Trust
Agreement, the voting trustee is entitled to vote the shares covered by the
trust in connection with any shareholder action. The voting trustee is required to vote the
shares subject to the trust, as directed by the Company’s independent board
members. If the independent board
members fail to instruct the voting trustee, the voting trustee must vote the
shares in the same manner as the votes cast by a majority of votes received by
the Company on the matter. The initial
voting trustee is Earnest Mathis. Mr.
Greenberg is permitted to transfer the shares subject to the voting trust
agreement subject to compliance with the securities laws and any lock-up
agreement covering the shares.
In December 2003, Earnest Mathis, Jr.
advanced us $50,000, evidenced by a promissory note. As part of the consideration for the loan,
Mr. Mathis received an option to purchase 2,000 shares of our common stock at
$5.00 per share. The option is fully
vested and exercisable for five years. The promissory note provided for
interest at 18% per annum and was due 30 days after the loan was funded. The note further provided that, in the event
the note was not paid when due, Mr. Mathis was entitled to (i) an additional
option to purchase 20,000 shares of our common stock at $5.00 per share (with
this option having the same terms as the option for 2,000 shares) and (ii)
conversion of the note into shares of our common stock at a price of $2.50 per
share. This note was not paid when due,
and in January 2004, Mr. Mathis was granted the second option to purchase
20,000 shares of our common stock at $5.00 per share. During January 2004, we borrowed an
additional $50,000 from Mr. Mathis. The
terms of the note were the same as the loan made in December 2003. An option to purchase 2,000 shares of our
common stock at $2.50 per share was granted as partial consideration for this
loan. This note was not paid when due, and in February 2004, Mr. Mathis
was granted a second option to purchase 10,000 shares of our common stock at
$2.50 per share. In February 2004,
Mr. Mathis converted the principal of the notes payable totaling $100,000 into
40,000 shares of our common stock at $2.50 per share, forgiving a total of
$2,441 in accrued interest.
On March 2, 2005, Mr Mathis agreed to
advance funds (“Advances”) to us on an as needed basis up to a maximum of
$200,000, evidenced by a promissory note.
The note provides that the Advances together with interest at 10% per
annum are due and payable on the earlier of May 30, 2005, or the closing of our
proposed public offering. The note also
provides for acceleration on the event of certain defaults and a default
interest rate of 12%.
Mr. DiGiandomenico, a Director, is a managing
member of MDB Capital LLC, (“MDB”) the placement agent in a private offering of
our common stock to accredited investors which we completed in April 2004.
As compensation, MDB received a warrant to purchase 224,398 shares of common
stock exercisable at $1.50 per share until April 15, 2009. In addition,
employees and owners of MDB received warrants with the same terms with respect
to 210,026 shares of our common stock, including a warrant for 99,095 shares
issued to Mr. DiGiandomenico. The
39
conversion price of the warrants was based on the offering price of our
common stock in the then just completed private offering. At the time the
trading price for our common stock was $2.55 per share; however, our common
stock was thinly traded.
Mr. Ridley, a Director, served as a
consultant to us in 2003, assisting us in establishing our network marketing
program, for approximately 10 hours per week. He received total fees of
$36,000.
Mr. Litt, our Vice President of Sales and
Marketing, served as a consultant to us in 2004, regarding sales and marketing
activities including the launch of our network marketing program. Mr. Litt
consulted for 16 to 24 hours per week and received total fees of $75,000, prior
to his employment on October 1, 2004.
ITEM 13. EXHIBITS
(a)
Exhibits
|
Exhibit
No
|
|
Description
|
|
3.1
|
|
Articles of Incorporation incorporated by
reference to Exhibit 3.01 filed with Form SB-2 filed February 27, 2001
|
|
3.1.1
|
|
Certification of Amendment to the Articles
of Incorporation incorporated by reference to Exhibit 3.1.1 filed with Form
10-QSB filed November 14, 2003
|
|
3.2
|
|
Amended and Restated By-laws filed herewith
|
|
4.1
|
|
Warrant – MDB Capital Group filed with Form
SB-2 on June 29, 2004, and incorporated herein by reference
|
|
4.2
|
|
Sample Stock Purchase Agreement with
Registration Rights filed with Form SB-2 on June 29, 2004, and
incorporated herein by reference
|
|
4.3
|
|
Warrant – Anthony DiGiandomenico filed with
Form SB-2 on June 29, 2004, and incorporated herein by reference
|
|
4.4
|
|
Warrant – Christopher A. Marlett filed with
Form SB-2 on June 29, 2004, and incorporated herein by reference
|
|
9.1
|
|
Voting Trust Agreement for Sanford D.
Greenberg filed herewith
|
|
10.1
|
|
VitaCube Systems Holdings, Inc. 2003 Stock
Incentive Plan incorporated by reference to Exhibit 10.1 filed with Form
10-QSB filed November 14, 2003
|
|
10.1.1
|
|
Form of Incentive Stock Option Agreement under the 2003 Stock Incentive Plan filed herewith
|
|
10.1.2
|
|
Form of Nonqualified Stock Option Agreement under the 2003 Stock Incentive Plan filed herewith
|
|
10.2
|
|
Agreement Concerning the Exchange of Securities by and between the Company and VitaCube Systems, Inc. and the Security Holders of VitaCube Systems, Inc. incorporated by reference to Exhibit 2 filed with Form 8-K filed July 1, 2003
|
|
10.3
|
|
Restated Employment Agreement – Sanford D. Greenberg filed herewith.
|
|
10.4
|
|
Option Agreement – Sanford D. Greenberg filed with Form 8-K on April 2, 2004, as Exhibit 10.2, and incorporated herein by reference
|
|
10.4.1
|
|
Amendment No 1 to Stock Option Agreement – Sanford D. Greenberg filed herewith
|
|
10.5
|
|
Lockup Agreements – Sanford D. Greenberg and Warren Cohen filed with Form SB-2 on June 29, 2004, and incorporated herein by reference
|
|
10.6
|
|
Employment Agreement – Timothy Transtrum filed with Form SB-2 on June 29, 2004, and incorporated herein by reference
|
|
10.7
|
|
MDB Capital Group, LLC – Engagement Letter filed with Form SB-2 on June 29, 2004, and incorporated herein by reference
|
|
10.8
|
|
Employment Agreement – David Litt filed with Form 8-K on November 5, 2004, and incorporated herein by reference
|
|
10.9
|
|
Incentive Stock Option Agreement – David Litt filed herewith
|
|
10.10
|
|
Employment Agreement – Earnest Mathis Jr. filed herewith
|
|
10.11
|
|
Stock Option Agreement – Earnest Mathis Jr. filed herewith
|
|
10.12
|
|
Office Lease and Addendums – A.L. Greenberg filed with Form SB-2 on January 18, 2005, and incorporated herein by reference
|
|
10.13
|
|
Consulting Agreement – Dr. William Wheeler filed with Form SB-2 on January 18, 2005, and incorporated herein by reference
|
40
|
14.1
|
|
Code of Ethics filed herewith
|
|
21.1
|
|
Subsidiaries of VitaCube Systems Holdings,
Inc. filed herewith
|
|
31.1
|
|
Certification of CEO as Required by Rule
13a-14(a)/15d-14 filed herewith
|
|
31.2
|
|
Certification of CFO as Required by Rule
13a-14(a)/15d-14 filed herewith
|
|
32.1
|
|
Certification of CEO as Required by Rule
13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of
Chapter 63 of Title 18 of the United States Code filed herewith
|
|
32.2
|
|
Certification of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code filed herewith
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Set forth below are fees paid to the Company’s
independent accountants for the past two years for the professional services
performed for the Company.
Audit Fees
We paid Spicer Jefferies LLP, a total of
$28,000 for professional services rendered in connection with the review of the
June 30, 2003 and September 30, 2003 Form 10-QSB and audit of our
financials for the year ended December 31, 2003.
We paid Staley Okada & Partners, a total
of $9,350 for professional services rendered in connection with the audit of
our financials for the year ended December 31, 2003 Form 10-KSB, review of
the March 31, 2004 and June 30, 2004 Form 10-QSB.
We have been billed by Gordon, Hughes &
Banks, LLP a total of $2,497 for professional services rendered in review of
the September 30, 2004 Form 10-QSB and audit of our financials for the
year ended December 31, 2004.
Audit Related Fees
None
Tax Fees
We paid Spicer Jefferies LLP, a total of
$4,880 for professional services rendered in connection with the preparation of
our federal and state income tax returns for the year ended December 31,
2003.
All Other Fees
We paid Spicer Jefferies, LLP a total of
$2,600 for professional services rendered in review of our filing a Form SB-2.
We have paid Gordon, Hughes & Banks, LLP
a total of $773 been billed for $2,500 for professional services rendered in
review of our filing a registration statement on Form SB-2.
Audit Committee Policies and
Procedures
The Audit Committee has adopted certain policies
and procedures regarding permitted audit and non-audit services and the annual
pre-approval of such services. Each
year, the Audit Committee will ratify the types of audit and non-audit services
to which the Company may wish to avail itself, subject to pre-approval of
specific services. Each year, management
and the independent auditors will jointly submit a pre-approval request, which
will list each known and/or anticipated audit and non-audit service for the upcoming
calendar year and which will include associated budgeted fees. The Audit Committee will review the request
and approve a list of annual pre-approved non-audit services. The Audit Committee will also designate a
member to have the authority to pre-approve interim requests for additional
non-audit services that were not contained in the annual pre-approval
request. Such member shall approve or
reject any interim non-audit service requests and report any interim service
pre-approvals at the following Audit Committee meeting.
41
SIGNATURES
In accordance with Section 13 or 15(d)
of Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
VITACUBE SYSTEMS HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ Earnest
Mathis, Jr.
|
|
|
|
|
Earnest Mathis, Jr.
|
|
|
|
|
Chairman, Chief Executive Officer and
President
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Exchange Act, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 4, 2005.
|
|
|
|
|
|
/s/ Earnest
Mathis, Jr.
|
|
|
|
|
Earnest Mathis, Jr.
|
|
|
|
|
Chairman, Chief Financial Officer,
President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Mary Pat
O’Halloran
|
|
|
|
|
Mary Pat O’Halloran
|
|
|
|
|
Chief Financial Officer (Principal Financial
and Accounting Officer )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Anthony
DiGiandomenico
|
|
|
|
|
Anthony DiGiandomenico
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John B.
McCandless
|
|
|
|
|
John B. McCandless
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Doug Ridley
|
|
|
|
|
Doug Ridley
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
42
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
VitaCube Systems Holdings, Inc
Denver, Colorado
We have audited the accompanying consolidated balance sheet of VitaCube
Systems Holdings, Inc. as of December 31,
2004 and the related consolidated statements of operations, changes in
shareholders’ equity (deficit) and cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolodiated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VitaCube
Systems Holdings, Inc. as of December 31,
2004, and the results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been presented
assuming that the Company will continue as a going concern which contemplates
the realization of assets and the satisifaction of liabilities in the normal
course of business. As discussed in Note
1 to the consolidated financial statements, the Company has incurred a net loss
of $2,513,999, for the year ended December 31, 2004 and has incurred
significant net losses since inception.
These factors raise substantial doubt about the Company’s ability to
continue as a going concern. The
financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classification of liabilities that might result from the outcome of this
uncertainity.
Gordon, Hughes & Banks, LLP
Greenwood Village, Colorado
January 27, 2005
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
VitaCube Systems Holdings, Inc. and Subsidiaries
We have audited the accompanying balance sheet of VitaCube Systems
Holdings, Inc. and Subsidiaries as of December 31, 2003, the related
statements of operations, changes in shareholders’ 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance 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.
As discussed in Note 1 to the financial statements, these financial
statements have been restated to reflect the correct fair value of stock option
expense based on correct volatility assumptions. The effect of this restatement is quantified
in Note 1. In addition, there was a
reclassification of the Company’s obsolescence reserve for inventory, which
reclassification did not affect net loss or primary and fully diluted net loss
per share.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of VitaCube Systems
Holdings, Inc. and Subsidiaries as of December 31, 2003 and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern.
As discussed in Note 1, the Company has incurred a net loss of
$2,267,533 for the year ended December 31, 2003 and has incurred net
losses since inception. In addition, at December 31,
2003, current liabilities exceed current assets by $1,056,203. These factors raise substantial doubt about
the Company’s ability to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability of and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
|
/s/ STALEY, OKADA
& PARTNERS
|
|
Vancouver, Canada
March 22, 2004,
except as to Note 11,
which is as of December 8, 2004 and Notes 1 and 3, which are as of February 25,
2005.
F-2
VITACUBE
SYSTEMS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
For the
Years Ended December 31, 2004 and 2003
|
|
|
2004
|
|
2003
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
114,794
|
|
$
|
7,963
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $237 and $136,
respectively
|
|
4,358
|
|
6,672
|
|
|
Inventory,
net of allowance for obsolescence of $43,300 and $31,782, respectively
|
|
478,300
|
|
286,037
|
|
|
Prepaid
expenses and other current assets
|
|
108,315
|
|
55,477
|
|
|
Total
current assets
|
|
705,767
|
|
356,149
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net (Note 5)
|
|
40,015
|
|
43,352
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net (Note 4)
|
|
109,275
|
|
167,271
|
|
|
|
|
|
|
|
|
|
Deferred
offering costs (Note 10)
|
|
269,106
|
|
—
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,124,163
|
|
$
|
566,772
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
611,398
|
|
$
|
954,812
|
|
|
Advances
from shareholder (Note 6)
|
|
—
|
|
110,040
|
|
|
Related
party bridge loan (Note 9)
|
|
—
|
|
200,000
|
|
|
Bridge loan
(Note 9)
|
|
—
|
|
147,500
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
611,398
|
|
1,412,352
|
|
|
|
|
|
|
|
|
|
Long term
subordinated loans (Note 6)
|
|
—
|
|
1,635,861
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
(Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY (DEFICIT) (Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, authorized 5,000,000 shares, $.001 par value, none issued or
outstanding
|
|
—
|
|
—
|
|
|
Common
stock, authorized 50,000,000 shares, $.001 par value, 6,534,043 and 3,241,006
issued and outstanding, respectively
|
|
6,534
|
|
3,241
|
|
|
Additional
paid in capital
|
|
8,071,186
|
|
2,566,274
|
|
|
Accumulated
(deficit)
|
|
(7,564,955
|
)
|
(5,050,956
|
)
|
|
Total
shareholders’ equity (deficit)
|
|
512,765
|
|
(2,481,441
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity (deficit)
|
|
$
|
1,124,163
|
|
$
|
566,772
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
F-3
VITACUBE
SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2004 and 2003
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
803,640
|
|
$
|
1,211,402
|
|
|
Cost of goods sold
|
|
281,341
|
|
625,976
|
|
|
Gross profit
|
|
522,299
|
|
585,426
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Selling and
marketing expenses
|
|
1,098,550
|
|
1,273,497
|
|
|
General and
administrative expenses
|
|
1,569,730
|
|
1,273,830
|
|
|
Research and
development expenses
|
|
6,498
|
|
—
|
|
|
Depreciation
and amortization
|
|
65,339
|
|
82,353
|
|
|
Total
operating expenses
|
|
2,740,117
|
|
2,629,544
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
(2,217,818
|
)
|
(2,042,458
|
)
|
|
Other income
(expense)
|
|
|
|
|
|
|
Interest
income
|
|
4,691
|
|
—
|
|
|
Interest
(expense)
|
|
(300,872
|
)
|
(225,075
|
)
|
|
|
|
|
|
|
|
|
Total other
income (expense)
|
|
(296,181
|
)
|
(225,075
|
)
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(2,513,999
|
)
|
$
|
(2,267,533
|
)
|
|
|
|
|
|
|
|
|
Net (loss)
per common share
Basic and diluted net (loss) per share
|
|
$
|
(.44
|
)
|
$
|
(.77
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding, basic and diluted
|
|
5,716,404
|
|
2,952,907
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
F-4
VITACUBE
SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES
IN SHAREHOLDERS’ EQUITY (DEFICIT)
For
the Years Ended December 31, 2004 and 2003
|
|
|
Common Stock
|
|
Additional
paid in
Capital
|
|
Accumulated
(deficit)
|
|
Total
shareholders’
equity
(deficit)
|
|
|
Shares
|
|
Amount
|
|
Balances,
December 31, 2002
|
|
2,662,019
|
|
$
|
2,662
|
|
$
|
1,086,118
|
|
$
|
(2,783,423
|
)
|
$
|
(1,694,643
|
)
|
|
Issuance of
common stock for services
|
|
52,384
|
|
52
|
|
67,149
|
|
—
|
|
67,201
|
|
|
Common stock
issued in private placement, net of offering costs of $44,381
|
|
202,000
|
|
202
|
|
965,417
|
|
—
|
|
965,619
|
|
|
Shares
issued in connection with reverse acquisition
|
|
301,600
|
|
302
|
|
28,498
|
|
—
|
|
28,800
|
|
|
Bridge loans
converted to common stock
|
|
23,000
|
|
23
|
|
114,977
|
|
—
|
|
115,000
|
|
|
Stock-based
compensation
|
|
—
|
|
—
|
|
254,115
|
|
—
|
|
254,115
|
|
|
Beneficial
conversion feature interest
|
|
—
|
|
—
|
|
50,000
|
|
—
|
|
50,000
|
|
|
Net (loss)
|
|
—
|
|
—
|
|
—
|
|
(2,267,533
|
)
|
(2,267,533
|
)
|
|
Balances,
December 31, 2003
|
|
3,241,003
|
|
3,241
|
|
2,566,274
|
|
(5,050,956
|
)
|
(2,481,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock for services
|
|
42,000
|
|
42
|
|
62,958
|
|
—
|
|
63,000
|
|
|
Issuance of
common stock for payment of accounts payable
|
|
66,667
|
|
67
|
|
99,933
|
|
—
|
|
100,000
|
|
|
Common stock
issued in private placement
|
|
5,996
|
|
6
|
|
29,974
|
|
—
|
|
29,980
|
|
|
Bridge loan
converted to common stock
|
|
149,991
|
|
150
|
|
224,836
|
|
—
|
|
224,986
|
|
|
Long term
subordinated debt converted to common Stock
|
|
1,241,096
|
|
1,241
|
|
1,860,402
|
|
—
|
|
1,861,643
|
|
|
Notes
payable converted to common stock
|
|
122,000
|
|
122
|
|
304,878
|
|
—
|
|
305,000
|
|
|
Common stock
issued in private placement into public entity, net of offering costs of
$123,841
|
|
1,665,290
|
|
1,665
|
|
2,372,419
|
|
—
|
|
2,374,084
|
|
|
Stock-based
compensation
|
|
—
|
|
—
|
|
294,512
|
|
—
|
|
294,512
|
|
|
Beneficial
conversion feature interest
|
|
—
|
|
—
|
|
255,000
|
|
—
|
|
255,000
|
|
|
Net (loss)
|
|
—
|
|
—
|
|
—
|
|
(2,513,999
|
)
|
(2,513,999
|
)
|
|
Balances,
Decmeber 31, 2004
|
|
6,534,043
|
|
$
|
6,534
|
|
$
|
8,071,186
|
|
$
|
(7,564,955
|
)
|
$
|
512,765
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
F-5
VITACUBE
SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2004 and 2003
|
|
|
2004
|
|
2003
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(2,513,999
|
)
|
$
|
(2,267,533
|
)
|
|
Adjustments
to reconcile net (loss) to cash (used in) operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
65,339
|
|
82,353
|
|
|
Beneficial
conversion feature interest
|
|
255,000
|
|
50,000
|
|
|
Stock issued
in payment of accounts payable
|
|
100,000
|
|
—
|
|
|
Stock and
stock options issued for services
|
|
357,512
|
|
321,316
|
|
|
Change in
allowance for inventory obsolescence
|
|
11,518
|
|
211,745
|
|
|
Change in
allowance for doubtful accounts
|
|
101
|
|
136
|
|
|
Change in
allowance for product returns
|
|
2,450
|
|
1,660
|
|
|
Interest
forgiven on loans
|
|
—
|
|
(7,240
|
)
|
|
Decrease in
accounts receivable
|
|
2,214
|
|
73,084
|
|
|
(Increases)
decrease in inventory
|
|
(203,781
|
)
|
29,273
|
|
|
(Increases)
in prepaids and other current assets
|
|
(52,838
|
)
|
(27,927
|
)
|
|
(Decrease)
increase in accounts payable and accrued expenses
|
|
(131,317
|
)
|
284,297
|
|
|
Increase in
accrued interest
|
|
45,872
|
|
175,075
|
|
|
|
|
|
|
|
|
|
Net cash
(used in) operating activities
|
|
(2,061,929
|
)
|
(1,073,761
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of
office equipment
|
|
(4,007
|
)
|
—
|
|
|
Decrease in
patents and trademarks
|
|
—
|
|
9,534
|
|
|
|
|
|
|
|
|
|
Net cash
(used in) provided by investing activities
|
|
(4,007
|
)
|
9,534
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Deferred
offering costs
|
|
(269,106
|
)
|
—
|
|
|
Advances
from shareholders
|
|
12,481
|
|
96,598
|
|
|
Re-payments
of shareholder advances
|
|
(132,173
|
)
|
—
|
|
|
Re-payments
on bridge loans
|
|
(47,500
|
)
|
(172,500
|
)
|
|
Proceeds
from notes payable
|
|
205,000
|
|
125,000
|
|
|
Acquisition
of VitaCube Systems, Inc., net of cash received
|
|
—
|
|
28,800
|
|
|
Issuance of
common stock, net of offering costs
|
|
2,404,064
|
|
965,619
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
2,172,766
|
|
1,043,517
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
106,831
|
|
(20,710
|
)
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
|
7,963
|
|
28,673
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
114,794
|
|
$
|
7,963
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
|
|
Subordinated
notes and interest converted to common stock
|
|
$
|
1,861,643
|
|
$
|
—
|
|
|
Bridge loans
and interest converted to common stock
|
|
$
|
224,986
|
|
$
|
115,000
|
|
|
Interest and
debt forgiveness
|
|
$
|
8,964
|
|
$
|
12,240
|
|
|
Notes
payable converted to common stock
|
|
$
|
305,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW
|
|
|
|
|
|
|
Cash paid
for interest
|
|
$
|
45,872
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
VITACUBE
SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include those of
VitaCube Systems Holdings, Inc., (VSHI) and its wholly owned subsidiaries,
VitaCube Systems, Inc. and VitaCube Network, Inc. Collectively, they are referred to herein as
the “the Company.”
The Company is in the business of selling, marketing
and distributing nutritional supplement products. Our product lines consist of a sports energy
drink, a protein shake and a full product line of vitamins and minerals in the
form of tablets, softgels or capsules, all of which are manufactured using our
proprietary product formulations.
During the last 6 months ended December 31, 2003,
the Company changed its sales and marketing focus to direct selling, in which
independent distributors sell our products through a network of customers and
other distributors. These activities are
conducted through VitaCube Network Inc., a wholly owned Colorado corporation,
formed on July 9, 2003. In addition,
we sell our products directly to professional and Olympic athletes and
professional sports teams through VitaCube Systems, Inc.
Reorganization in
2003
VSHI was incorporated under the laws of the State of
Nevada on January 9, 2001 under the name of Instanet, Inc. On June 20, 2003 VSHI acquired VitaCube
Systems, Inc. (“V3S”), a Colorado corporation incorporated on October 30,
2000, in a stock-for stock exchange. The
acquisition was accomplished through the exchange of all of the outstanding
shares of V3S for 2,714,403 common shares of VSHI, then representing a
controlling interest in VSHI. Coincident
with the reorganization, VSHI changed its name to VitaCube Systems Holdings,
Inc.
The acquisition of V3S by VSHI was recorded as a
recapitalization effected by a reverse merger wherein V3S is considered the
acquirer for accounting and financial purposes, acquiring the assets and
assuming the liabilities of VSHI. Assets
acquired and liabilities assumed are reported at their historical cost, and no
adjustments were required to the carrying values since management considered
the historical cost to approximate fair value and goodwill was not
recorded. The accompanying financial
statements include the operations of V3S for all periods presented of VSHI
since the date of reorganization, June 20, 2003.
Going Concern
The accompanying financial statements have been
presented in conformity with accounting principles generally accepted in the
United States of America, which contemplates continuation of the Company as a
going concern. The Company has incurred
a net loss of $2,513,999 for the year ended December 31, 2004 and has incurred significant net losses since
inception.
The Company has been developing awareness of
its products through its newly implemented marketing plan. Within time, management believes that demand
for its products will develop to allow the Company to become profitable,
through the development of its independent distributor and customer base. The Company believes that raising additional
capital of a minimum of $2.6 million will enable it to sustain operations
through at least December 31, 2005.
However realization of a significant portion of the assets in the
accompanying balance sheet is dependent on successful continued operations of
the Company, which in turn is dependent on the ability of the Company to raise
additional capital.
These factors raise substantial doubt about
the Company’s ability to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets, or the
amounts and classification of liabilities that might result from the outcome of
this uncertainity.
F-7
Principals of
Consolidation
The accompanying financial statements include
the accounts of the Company and its wholly owned subsidiaries VitaCube Systems,
Inc. and VitaCube Network, Inc. All
intercompany accounts and transactions have been eliminated in the preparation
of these consolidated statements.
Reverse Stock Split
On October 15, 2004, a majority of our
shareholders approved a 1-for-5 reverse stock split of our common stock,
effective on December 8, 2004, and amended the 2003 Stock Incentive Plan,
increasing the number of shares of common stock eligible for awards under the
Plan from 800,000 shares to 1,000,000 shares.
All shares and per share amounts have been retroactively restated to
reflect the effect of the reverse merger.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Management believes that the estimates
utilized in the preparation of the financial statements are prudent and
reasonable. Actual results could differ
from these estimates.
Revenue Recognition
The Company ships its products by common carrier and
receives payment in the form of cash, credit card or approved credit
terms. In May 2004, the Company revised
its product return policy to provide a 60-day money back guarantee on orders
placed by first-time customers and distributors. After 60 days and for all subsequent orders
placed by customers and distributors, the Company allows resellable products to
be returned within 12 months of the purchase date for a 100% sales price
refund, subject to a 10% restocking fee.
Since August 2003, the Company has experienced monthly returns
ranging from 1.7% to 3.6% of net sales.
Sales revenue and estimated returns are recorded when the merchandise is
shipped since performance by the Company is considered met when products are in
the hands of the common carrier. Amounts received for unshipped merchandise are
recorded as customer deposits and are included in accrued liabilities.
Cash and Cash
Equivalents
For the purposes of reporting cash flows, the Company
considers all cash and highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Concentration of
Credit Risk and Reliance on Suppliers
The Company has no significant
off-balance sheet concentrations of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its
cash balances with three financial institutions in the form of demand deposits
and money market funds. Funds in excess
of the federally insured amount of $100,000 are subject to credit risk, and the
Company believes that the financial institution is financially sound and the
risk of loss is minimal.
As of December 31, 2004,
the Company has relied significantly on three suppliers for its purchases of
raw materials for its supplements and its energy drink. These three suppliers accounted for 80% of
inventory purchases for the year ended December 31, 2004. The reliance on these suppliers are critical
to the Company’s operations. However,
the Company believes the risk of over reliance on one supplier or on a few
suppliers is mitigated by having access to other available vendors.
Accounts Receivable
The Company uses the allowance method in
accounting for doubtful accounts receivable. At December 31, 2004 and December 31,
2003, the Company has recorded a net allowance of $237 and $136, respectively,
for uncollectible receivables.
F-8
Fair Value of
Financial Instruments
Substantially all of the Company’s assets and
liabilities are carried at fair value or contracted amounts that approximate
fair value. Estimates of fair value are
made at a specific point in time, based on relative market information and
information about each financial instrument, specifically, the value of the
underlying financial instrument. Assets
that are recorded at fair value consist largely of short-term receivables and
other assets, which are carried at contracted amounts that approximate fair
value. Similarly, the Company’s
liabilities consist primarily of short term liabilities recorded at contracted
amounts that approximate fair value.
Inventory
Inventory is stated at the lower of cost or market on
a FIFO (first-in first-out) basis.
Provision is made to reduce excess or obsolete inventory to the
estimated net realizable value. The
Company purchases for resale a sports energy drink, a protein shake and other
vitamins and nutritional supplements, which it packages in various forms and
containers.
Inventory is comprised of the
following:
|
|
|
December 31,
2004
|
|
December 31,
2003
|
|
|
Purchased materials
|
|
$
|
294,529
|
|
$
|
36,854
|
|
|
Finished goods
|
|
227,071
|
|
280,965
|
|
|
Reserve for obsolete inventory
|
|
(43,300
|
)
|
(31,782
|
)
|
|
|
|
$
|
478,300
|
|
$
|
286,037
|
|
A
summary of the reserve for obsolete and excess inventory was as follows as of December 31, 2004
and 2003:
|
|
|
2004
|
|
2003
|
|
|
Balance as of January 1
|
|
$
|
31,782
|
|
$
|
—
|
|
|
Addition to provision
|
|
33,837
|
|
209,678
|
|
|
Write-off of obsolete inventory
|
|
(22,319
|
)
|
(177,896
|
)
|
|
Balance as of December 31
|
|
$
|
43,300
|
|
$
|
31,782
|
|
Property and
Equipment
The Company provides
for depreciation of property and equipment using the straight-line method based
on estimated useful lives of between three and ten years.
Long-Lived Assets
The Company reviews its long-lived assets for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For
purposes of evaluating the recoverability of long-lived assets, the
recoverability test is performed using undiscounted net cash flows estimated to
be generated by the asset.
Intangible Assets
The Company’s intangible assets, consisting
of trademark and patent costs, are being amortized over their estimated life of
15 years.
Advertising Costs
Advertising
and marketing costs were $321,846 and $405,254 for the year ended December 31,
2004 and 2003, respectively and are expensed as incurred.
F-9
Income
Taxes
The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, “Accounting for
Income Taxes.” Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled.
Stock-Based
Compensation
The Company has adopted the disclosure-only provisions
of SFAS NO. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),
and applies Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB No. 25”), and related interpretations in accounting
for stock options granted to employees.
If the Company measured compensation cost based on the
fair value of the options at the grant date consistent with the method
prescribed by SFAS 123, the Company’s net loss and loss per common share would
have been increased to the pro forma amounts indicated below:
|
|
|
2004
|
|
2003
|
|
|
Net loss, as
reported
|
|
$
|
(2,513,999
|
)
|
$
|
(2,267,533
|
)
|
|
|
|
|
|
|
|
|
Add:
Stock-based compensation expense included in reported net income, net of
related tax effects
|
|
343,192
|
|
321,316
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based compensation expense determined under fair value based
method for all awards, net of related tax effects
|
|
(661,129
|
)
|
(360,278
|
)
|
|
|
|
|
|
|
|
|
Pro forma
net loss
|
|
$
|
(2,831,936
|
)
|
$
|
(2,306,495
|
)
|
|
|
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
Basic and
diluted earnings (loss) per common share
|
|
|
|
|
|
|
As reported
|
|
$
|
(.44
|
)
|
$
|
(.77
|
)
|
|
Pro forma
|
|
(.50
|
)
|
(.78
|
)
|
The fair value of each option grant was estimated at
the date of the grant using the Black-Scholes option pricing model with the
following assumptions for 2003 and 2004: risk-free interest rate between 3.18%–3.29%
and 2.79%-3.93%, respectively; no dividend yield; expected life of 5 years; and
volatility of 86.97% and between 37.2%-37.5%, respectively.
During the initial phase-in period of applying SFAS
123 for pro forma disclosure purposes, the results may not be representative of
the effects on reported net income (loss) for future years because options vest
over several years and additional grants generally are made each year.
The Company accounts for stock-based compensation
issued to non-employees and consultants in accordance with the provisions of
SFAS 123 and Emerging Issues Task Force No. 96-18 (“EITF 96-18”), “Accounting
for Equity Instruments that are issued to Other Than Employees for Acquiring or
in Conjunction with Selling Goods or Services.”
Beneficial
Conversion Feature of Debt
In accordance with Emerging Issues Task Force
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and No. 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments, the Company
recognizes the value of conversion rights attached to convertible debt. These
rights give the debt holder the ability to convert his debt into common stock
at a price per
F-10
share that is less than the trading price to the public on the day the
loan is made to the Company. The beneficial value is calculated based on the
market price of the stock at the commitment date in excess of the conversion
rate of the debt and related accruing interest and is recorded as a discount to
the related debt and addition to additional paid in capital. The discount is amortized and recorded as
interest expense over the remaining outstanding period of related debt.
Net
Loss Per Share
Earnings per share requires presentation of
both basic earnings per common share and diluted earnings per common
share. Since the Company has a net loss
for all periods presented, any common stock equivalents would not be included
in the weighted average calculation since their effect would be anti-dilutive.
Reclassifications and
Restatement
Certain prior year amounts have been
reclassified to conform to the current year presentation. Reclassification
entries of $211,746 for the year ended December 31, 2003 have been
recorded to reflect the charges or write-offs against the Company’s
obsolescence reserve for inventory as cost of goods sold and not as general and
administrative expenses as previously reported.
The accompanying 2003 financial statements as well as
previously filed interim financial statements have been restated. The restatements are the result of correcting
errors in the application of Black-Scholes in valuing stock options. The effect of the adjustments on the
previously reported net losses for the quarterly periods ended September 30,
2003, March 31, 2004, September 30, 2004 and year ended December 31, 2003 financial
statements is as follows:
|
|
|
Three
Months
Ended
September
30, 2003
|
|
Three
Months
Ended
December
31, 2003
|
|
Year Ended December 31,
2003
|
|
Three
Months
Ended
March 31,
2004
|
|
Three
Months
Ended
September
30, 2004
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
reported
|
|
$
|
(677,053
|
)
|
$
|
(531,034
|
)
|
$
|
(2,084,982
|
)
|
$
|
(702,351
|
)
|
$
|
(568,120
|
)
|
|
Adjustment
|
|
(109,856
|
)
|
(72,695
|
)
|
(182,551
|
)
|
(109,498
|
)
|
(153,940
|
)
|
|
Restated net
loss
|
|
$
|
(786,909
|
)
|
$
|
(603,729
|
)
|
$
|
(2,267,533
|
)
|
$
|
(811,849
|
)
|
$
|
(722,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
reported
|
|
$
|
(.22
|
)
|
$
|
(.17
|
)
|
$
|
(.71
|
)
|
$
|
(.21
|
)
|
$
|
(.09
|
)
|
|
Adjustment
|
|
(.03
|
)
|
(.02
|
)
|
(.06
|
)
|
(.03
|
)
|
(.02
|
)
|
|
Restated net
loss
|
|
$
|
(.25
|
)
|
$
|
(.19
|
)
|
$
|
(.77
|
)
|
$
|
(.24
|
)
|
$
|
(.11
|
)
|
Recent Accounting
Pronouncements
FASB 151 - Inventory Costs
In November 2004, the FASB issued FASB
Statement No. 151, which revised ARB No.43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In
addition, this Statement requires the allocation of fixed production overheads
to the costs of conversion be based on normal capacity of the production facilities.
This Statement is effective for financial statements for fiscal years beginning
after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this Statement will have
no impact on the financial statements of the Company once adopted.
FASB 152 - Accounting for Real Estate
Time-Sharing Transactions
In December 2004, the FASB issued FASB
Statement No. 152, which amends FASB Statement No. 66, Accounting for Sales of
Real Estate, to reference the financial accounting and reporting guidance for
real estate
F-11
time-sharing transactions that is provided in AICPA Statement of
Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real-estate time-sharing
transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005. Management believes this Statement will have
no impact on the financial statements of the Company once adopted.
FASB 153 - Exchanges of Non-monetary Assets
In December 2004, the FASB issued FASB
Statement No. 153. This Statement
addresses the measurement of exchanges of non-monetary assets. The guidance in APB Opinion No. 29,
Accounting for Non-monetary Transactions, is based on the principle that
exchanges of non-monetary assets should be measured based on the fair value of
the assets exchanged. The guidance in
that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for non-monetary asset exchanges incurred during
fiscal years beginning after the date of this Statement is issued. Management believes this Statement will have
no impact on the financial statements of the Company once adopted.
FASB 123 (revised 2004) - Share-Based
Payments
In December 2004, the FASB issued a
revision to FASB Statement No. 123, Accounting for Stock Based
Compensation. This Statement supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting
guidance for share-based payment transactions with parties other than employees
provided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services.” This Statement does not address the accounting
for employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans.
A nonpublic entity will measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of those instruments, except in certain
circumstances.
A public entity will initially measure the
cost of employee services received in exchange for an award of liability
instruments based on its current fair value; the fair value of that award will
be re-measured subsequently at each reporting date through the settlement
date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that
period. A nonpublic entity may elect to
measure its liability awards at their intrinsic value through the date of
settlement.
The grant-date fair value of employee share
options and similar instruments will be estimated using the option-pricing
models adjusted for the unique characteristics of those instruments (unless
observable market prices for the same or similar instruments are available).
Excess tax benefits, as defined by this
Statement, will be recognized as an addition to paid-in-capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax
assets relating to unrealized tax benefits associated with recognized compensation
cost will be recognized as income tax expense unless there are excess tax
benefits from previous awards remaining in paid-in capital to which it can be
offset.
F-12
The notes to the financial statements of both
public and nonpublic entities will disclose information to assist users of
financial information to understand the nature of share-based payment
transactions and the effects of those transactions on the financial statements.
The effective date for public entities that
do not file as small business issuers will be as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. For public entities that file as small
business issuers and nonpublic entities the effective date will be as of the
beginning of the first interim or annual reporting period that begins after December 15,
2005. Management intends to comply with
this Statement at the scheduled effective date for the relevant financial
statements of the Company.
NOTE 2 – SHAREHOLDERS’ EQUITY
The authorized capital stock of the Company
consists of 50,000,000 shares of common stock at $.001 par value and 5,000,000
shares of preferred stock at $.001 par value.
The holders of the common stock are entitled to receive, when and as
declared by the Board of Directors, dividends payable either in cash, in
property or in shares of the common stock of the Company. Dividends have no cumulative rights and
dividends will not accumulate if the Board of Directors does not declare such
dividends. Through December 31,
2004, no dividends have been declared or paid by the Company.
On January 1, 2003, the Company issued
52,384 shares of its common stock at $1.28 per share to certain individuals and
entities as compensation.
In June 2003, the Company commenced a
private placement of its common stock, which was completed as of January 31,
2004. In this private placement the Company issued 207,996 shares of its common
stock at $5.00 per share. The Company raised a net total of $995,599 after
commissions and other associated expenses with the private placement. As part
of the private placement, one of the bridge loan lenders converted a $25,000
note payable into 5,000 shares of common stock at $5.00 per share. In addition,
a second bridge lender converted $75,000 of the principal amount of a note
payable and $15,000 of accrued interest due into 18,000 shares of common stock
at $5.00 per share.
During February 2004, holders of notes
payable elected to convert the notes into 122,000 shares of the Company’s
common stock at $2.50 per share, (see Note 9.)
During March 2004, the Company undertook
a second private offering of a minimum of $2,300,000 (“the Offering”) of its
common stock. On April 15, 2004,
the Company closed the Offering, raising a total of $2,497,925 through the sale
of 1,665,290 shares of the Company’s common stock at $1.50 per share. The Company incurred associated direct
expenses of approximately $123,841 with the Offering. In addition, the Company issued warrants to
the placement agent for the purchase of 434,424 shares of the Company’s common
stock at an initial exercise price of $1.50 per share, exercisable for 5 years.
In connection with the Offering, the Company’s
founder , Sanford Greenberg, converted $300,000 of long term subordinated loans
and $200,000 of bridge loans plus $63,674 of accrued interest into 375,783
shares of the Company’s common stock valued at $1.50 per share. One of the Company’s former directors, Warren
Cohen, converted $1,335,861 of a long term subordinated loan plus $187,094 of
accrued interest into 1,015,304 shares of the Company’s common stock at $1.50
per share. In addition, the Company
issued 66,667 shares of the Company’s common stock valued at $1.50 per share to
a creditor for $100,000 of previously accrued services.
In April 2004, the
Company issued 10,000 shares of its common stock valued at $1.50 per share as a
bonus to its chief financial officer and 2,000 shares of its common stock at
$1.50 per share to its outside video production company for services rendered.
In July 2004, the Company issued a total
of 30,000 shares of its common stock, valued at $1.50 per share to endorsers of
the Company for endorsement of our products.
NOTE 3 – STOCK OPTIONS
Effective July 1, 2003 the shareholders
of the Company adopted the 2003 Stock Incentive Plan (the “Plan”). The Plan includes incentive and non-qualified
stock options and restricted stock grants.
The maximum
F-13
number of shares of common stock available for grants under the Plan
was 800,000 shares. In connection with
the reverse acquisition of V3S, the Company issued options under the Plan with
an exercise price of $5.00 per share in exchange for options that were
previously issued by V3S under its stock incentive plan. The Company incurred additional compensation
cost for the incremental increase in value, if any, received by these
optionees. For vested options, the
compensation cost is the excess of the value of the new options over the
previously issued options and was recognized in 2003. Non-vested options are measured similarly,
though the excess value, if any, is amortized over the remaining vesting
period.
The Plan provides that with respect to
incentive stock options (“ISO”) the option price per share must be at least the
fair market value (as determined by the Compensation Committee or, in lieu
thereof, the Board of Directors) of the common stock on the date the stock
option is granted or based on daily quotes from an exchange or quotation system
designated by the Compensation Committee as the primary market for the
shares. Under the Plan, if an ISO is
granted to an employee who owns more than 10% of the total combined voting
power of all classes of stock of the Company or any of its subsidiaries, then
the option price must be at least 110% of the fair market value of the stock
subject to the option, and the term of the option must not exceed 5 years from
the date of grant. Under the Plan, if
for any reason, a change in control of the Company occurred, all shares subject
to the Plan immediately become vested and exercisable.
On October 15, 2004, the shareholders
approved an amendment to the Plan to increase the number of shares available
under the Plan to 1,000,000 shares of common stock.
A summary of the status of the Plan for the
years ended December 31, 2004 and 2003, together with changes during each
of the years then ended, is presented in the following table:
2003 Stock Incentive Plan
|
|
|
Qualified
Options
|
|
Non-qualified
Options
|
|
Total
|
|
Exercise
Price Range
|
|
Weighted
Average
Exercise
Price
|
|
|
Balances, December 31,
2002
|
|
129,500
|
|
73,550
|
|
203,050
|
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Granted
|
|
38,000
|
|
357,600
|
|
395,600
|
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Forfeited
|
|
(36,375
|
)
|
(12,000
|
)
|
(48,375
|
)
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Balances, December 31,
2003
|
|
131,125
|
|
419,150
|
|
550,275
|
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Granted
|
|
128,500
|
(1)
|
114,600
|
|
243,100
|
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Forfeited
|
|
(57,375
|
)
|
(55,500
|
)
|
(112,875
|
)
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Balances, December 31,
2004
|
|
202,250
|
|
478,250
|
|
680,500
|
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Number of
options exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2004
|
|
85,000
|
|
360,750
|
|
445,750
|
|
$
|
5.00
|
|
$
|
5.00
|
|
(1) – Excludes 30,000 qualified options that are
contingent on meeting certain performance criteria, which had not been meet at December 31,
2004.
The following table sets forth the exercise price
range, number of shares, weighted average exercise price and remaining
contractual lives at December 31, 2004:
|
|
|
Outstanding
|
|
Exercisable
|
|
|
Exercise
Prices
|
|
Number of
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Contractual
Life (months)
|
|
Number of
Shares
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00
|
|
560,500
|
|
$
|
5.00
|
|
54.7
|
|
385,750
|
|
$
|
5.00
|
|
|
5.00
|
|
120,000
|
|
$
|
5.00
|
|
102
|
|
60,000
|
|
$
|
5.00
|
|
|
|
|
680,500
|
|
|
|
|
|
445,750
|
|
|
|
At December 31, 2004, 319,500 options were
available for future grants under the Plan.
F-14
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
|
|
|
December 31,
2004
|
|
December 31,
2003
|
|
|
Furniture
& fixtures
|
|
$
|
50,963
|
|
$
|
50,963
|
|
|
Office
equipment
|
|
10,822
|
|
6,815
|
|
|
Software
|
|
175,649
|
|
175,649
|
|
|
Leasehold
improvements
|
|
121,605
|
|
121,605
|
|
|
|
|
359,039
|
|
355,032
|
|
|
Accumulated
depreciation
|
|
(249,764
|
)
|
(187,761
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
109,275
|
|
$
|
167,271
|
|
Depreciation
expense was $62,002 and $75,653 for the years ended December 31, 2004 and
2003, respectively.
NOTE 5 – INTANGIBLE ASSETS
The Company has incurred costs to trademark 14 of its
current and former products and 6 specific marketing nomenclatures. Patents and trademarks are being amortized
over a period of 15 years, at approximately $3,338 per year. During the year ended December 31, 2003,
certain amounts that were previously capitalized were charged to expense that
approximated $9,500.
Intangible assets are:
|
|
|
December 31,
2004
|
|
December 31,
2003
|
|
|
Patents and
trademarks
|
|
$
|
50,052
|
|
$
|
50,052
|
|
|
Accumulated
amortization
|
|
(10,037
|
)
|
(6,700
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
40,015
|
|
$
|
43,352
|
|
NOTE 6 – DUE TO SHAREHOLDERS AND SHAREHOLDER SUBORDINATED LOANS
The Company’s founderr and one of the Company’s
shareholders and former directors advanced monies to the Company totaling
$1,635,861 as of December 31, 2003, which amounts were represented by
subordinated promissory notes. The notes
to both shareholders bore interest at 8% per annum with principal and interest
payable contingent on a quarterly percentage of net income (as defined). The notes, if not re-paid in five years, were
due on June 30, 2007 and September 30, 2007, respectively. On March 31, 2004 both note holders
converted the principal and accrued interest of $225,782 totaling $2,086,629 into
1,391,087 shares of the Company’s common stock at $1.50 per share (Note 2).
In addition at various times during 2003, the Company’s
founder advanced the Company a total of $122,521, which was due upon demand
with interest at the rate of 10% per annum.
On March 31, 2004 the Company re-paid the loan and accrued interest
of $9,652.
NOTE 7 – INCOME TAXES
As of December 31, 2004, the Company had
approximately $3,808,000 in pretax federal and state net operating loss
carryforwards, expiring beginning in 2023.
F-15
The Company provides for deferred taxes arising from
temporary differences in the book and tax carrying amounts of assets and
liabilities. Temporary differences arise
primarily from differences in reporting stock based compensation and allowance
accounts.
The deferred tax assets that result from such
operating loss carryforwards and temporary differences of approximately
$1,429,000 at December 31, 2004, have been fully reserved for in the
accompanying consolidated financial statements as follows.
|
|
|
Year Ended
December 31,
2004
|
|
Year Ended
December 31,
2003
|
|
|
Deferred tax
liabilities
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
Net
operating loss deductions
|
|
$
|
1,411,000
|
|
$
|
689,000
|
|
|
Stock based
compensation
|
|
—
|
|
119,000
|
|
|
Other
deferred assets
|
|
18,000
|
|
12,000
|
|
|
Total
deferred tax assets
|
|
1,429,000
|
|
820,000
|
|
|
Valuation
allowance
|
|
(1,429,000
|
)
|
(820,000
|
)
|
|
|
|
$
|
—
|
|
$
|
—
|
|
Reconciliation of the differences between the
statutory tax rate and the effective tax rate is as follows:
|
|
|
Year Ended
December 31,
2004
|
|
Year Ended
December 31,
2003
|
|
|
Federal
statutory tax (benefit) rate
|
|
(34.00
|
)%
|
(34.00
|
)%
|
|
State taxes,
net of federal tax (benefit) rate
|
|
(3.06
|
)%
|
(3.06
|
)%
|
|
Effective
tax rate
|
|
(37.06
|
)%
|
(37.06
|
)%
|
|
Valuation
allowance
|
|
(37.06
|
)%
|
(37.06
|
)%
|
|
Effective
income tax rate
|
|
—
|
|
—
|
|
NOTE 8 – COMMITMENTS
The Company leases office space from a related party
with the current lease of $3,090 per month expiring at the end of December 2005,
with a one-year extension right with rent of $3,180 per month. Rent expense for the years ended December 31,
2004 and 2003 was $36,000 and $42,000, respectively. Minimum future rentals at December 31,
2004, under this agreement approximate:
|
December 31,
|
|
|
|
|
2005
|
|
$
|
37,080
|
|
|
Total
|
|
$
|
37,080
|
|
The Company has
various operating leases for vehicles, telephone and computer equipment that
range from 2 to 3 years in length.
Rental expenses for these operating leases were $74,692 and $35,374 for
the years ended December 31, 2004 and 2003, respectively Minimum future
rentals under these agreements at December 31, 2004 are as follows:
|
December 31,
|
|
|
|
|
2005
|
|
$
|
97,421
|
|
|
2006
|
|
59,617
|
|
|
2007
|
|
9,614
|
|
|
Total
|
|
$
|
166,652
|
|
F-16
The Company has
commitments for contract services with an unrelated party totaling
approximately $280,000. The agreement
provides for various payments to be made over a two-year period and contains
provisions to terminate the payment of obligations with a contract buyout of
$75,000.
The Company maintains
employment agreements with certain key management. The agreements provide for minimum base
salaries, eligibility for stock options and performance bonuses and severance
payments.
NOTE 9 – BRIDGE LOANS AND NOTES PAYABLE
As of December 31, 2003 the Company had an
outstanding loan balance of $147,500 from bridge financing obtained from an
unrelated party. In April 2004, the
Company re-paid all outstanding bridge loan financing.
In addition, the Company’s founder and major
shareholder advanced $200,000 of bridge financing as of December 31, 2003,
and on March 31, 2004, converted the principal of $200,000 and accrued
interest of $24,986 into 149,991 shares of the Company’s common stock at $1.50
per share.
During October 2003, the Company borrowed $50,000
from an unrelated party, evidenced by a promissory note. As part of the consideration for the loan,
the Company granted an option to purchase 2,000 shares of its common stock at
$5.00 per share, which option was fully vested and exercisable for 5
years. This option was not part of the
Company’s 2003 Stock Incentive Plan. The
promissory note provided for interest at 18% per annum and was due 30 days
after the loan was funded. The note
further provided that, in event the note was not paid when due, the holder of
note was entitled to (i) an additional option to purchase 20,000 shares of the
Company’s common stock at $5.00 per share (with this option having the same
terms as the option for 2,000 shares) and (ii) conversion of the note into
shares of the Company’s common stock at a price of $2.50 per share. This note was not paid when due, and in December 2003
the holder was granted the second option to purchase 20,000 shares of the
Company’s common stock at $5.00 per share.
In connection with this transaction the Company recorded interest of
$50,000 in November 2003 related to the beneficial conversion feature
embedded in the note.
In December 2003, Mr. Mathis, our
current Chief Executive Officer advanced us $50,000, evidenced by a promissory
note. As part of the consideration for
the loan, Mr. Mathis received an option to purchase 2,000 shares of our common
stock at $5.00 per share. The option is
fully vested and exercisable for five years.
This option was not part of our 2003 Stock Incentive Plan. The promissory note provided for interest at
18% per annum and was due 30 days after the loan was funded. The note further provided that, in the event
the note was not paid when due, Mr. Mathis was entitled to (i) an additional
option to purchase 20,000 shares of our common stock at $5.00 per share (with
this option having the same terms as the option for 2,000 shares) and (ii)
conversion of the note into shares of our common stock at a price of $2.50 per
share. This note was not paid when due,
and in Janauary 2004, Mr. Mathis was granted the second option to purchase
20,000 shares of our common stock at $5.00 per share. In connection with this transaction, we
recorded interest of $50,000 in January 2004 related to the beneficial
conversion feature embedded in this note.
During January 2004, we borrowed an
additional $50,000 from Mr. Mathis. The
terms of the note were the same as the loan made in December 2003. An option to purchase 2,000 shares of our
common stock at $2.50 per share was granted as partial consideration for this
loan. This note was not paid when due, and in February 2004, Mr. Mathis
was granted a second option to purchase 10,000 shares of our common stock at
$2.50 per share. Also in February 2004,
we recorded interest of $50,000 related to the beneficial conversion features
embedded in the note. In February 2004,
Mr. Mathis converted the principal of the notes payable totaling $100,000 into
40,000 shares of our common stock at $2.50 per share, forgiving a total of
$2,441 in accrued interest.
During January 2004 the Company borrowed an
additional $155,000 from multiple unrelated parties. As part of the consideration for these loans,
the Company granted options to purchase 14,200 shares of its common stock at
$2.50 per share, which options were fully vested and exercisable for 5
years. These options were not part of
the Company’s 2003 Stock Incentive Plan.
The promissory notes provided for interest at 18% per annum and were due
30 days after the loans were funded. The
notes further provided that, in event the notes were not paid when due, the
holders of the notes were entitled to (i) an additional options to purchase
21,000 shares of the Company’s common stock at $2.50 per share (with these
options having the same terms as the options for 14,200 shares) and (ii)
conversion of the notes into shares of the Company’s common stock at a price of
$2.50 per share. The notes were not paid
when due, and in February 2004 the holders were granted the second options
to purchase 21,000 shares of the Company’s common stock at $2.50 per
share. In February 2004 in
connection with this transaction, the Company recorded interest of $155,000
related to the beneficial conversion features embedded in the notes.
F-17
In February 2004
certain of the note holders converted the principal of the notes payable
totaling $305,000 into 122,000 shares of the Company’s common stock at $2.50
per share. There was $8,964 of accrued
interest with respect to the notes, which was
forgiven when the notes were converted into common stock.
NOTE 10 – DEFFERED OFFERING COSTS
On August 30, 2004 the Company announced that it
had entered into a non-binding letter of intent with an underwriter to raise
from $8 to $10 million in an offering of the Company’s securities. In the proposed offering the Company intends
to sell units consisting of shares of common stock and warrants to purchase
common stock. The proposed offering is
conditioned upon market conditions and other requirements from the letter of
intent. At December 31, 2004 the
Company had incurred $269,106 of costs in connection with the offering.
NOTE 11 – RELATED PARTY TRANSACTIONS
The Company incurred $7,564 of legal expenses
on behalf of a former member of the board of directors for the year ended December 31,
2004.
As further described in Note 8, the Company
leases office space from a relative of the Company’s founder.
As further described in Note 9, three
shareholders of the Company provided bridge loan financing and notes payable to
the Company. The three shareholders were
also the founder, chief executive officer and a former director of the Company,
respectively. Subsequently and during
2004, the related party bridge loan financing and shareholder notes payable
were converted to common stock.
On March 1, 2005, Christopher Marlett, a
significant shareholder loaned the Company $25,000 evidenced by a promissory
note. The note provides that the
principal together with interest at 10% per annum, are due and payable on the
earlier of May 30, 2005 or the closing of our proposed public offering. The note also provides for acceleration on
the event of certain defaults and a default interest rate of 12%.
On March 2, 2005, Mr. Mathis, our Chief
Executive Officer and an unrelated party agreed to advance funds (“Advances”)
to us on an as needed basis up to a maximum of $400,000, evidenced by a
promissory note. The note provides that
the Advances together with interest at 10% per annum are due and payable on the
earlier of May 30, 2005, or the closing of our proposed public offering. The note also provides for acceleration on
the event of certain defaults and a default interest rate of 12%.
On March 2, 2005, Sanford D. Greenberg,
our founder forfeited options to purchase 275,000 shares of the Company common
stock.
On March 2, 2005, options to purchase
275,000 shares of the Company’s common stock were issued to Earnest Mathis
exercisable at $3.00 per share. Options
to purchase 137,500 shares were vested on the date of the grant and the balance
vest on the March 2, 2006. Options
remain exercisable no longer than five years after the vesting date.
F-18
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
VITACUBE SYSTEMS HOLDINGS, INC.,
a Nevada Corporation
BYLAWS
OF
VITACUBE SYSTEMS HOLDINGS, INC.
ARTICLE I
Offices
The principal office of the corporation shall be designated from time
to time by the corporation and may be within or outside of Nevada. The corporation may have such other offices,
either within or outside Nevada, as the board of directors may designate or as
the business of the corporation may require from time to time.
The registered office of the corporation required by the Nevada General
Corporation Law to be maintained in Nevada may be, but need not be, identical
with the principal office, and the address of the registered office may be
changed from time to time by the board of directors.
ARTICLE II
Shareholders
Section
1
. Annual
Meeting
. The annual meeting of the shareholders shall be held
each year on a date and at a time fixed by the board of directors of the
corporation (or by the president in the absence of action by the board of
directors), for the purpose of electing directors and for the transaction of
such other business as may come before the meeting. If the election of
directors is not held on the day fixed as provided herein for any annual
meeting of the shareholders, or any adjournment thereof, the board of directors
shall cause the election to be held at a special meeting of the shareholders as
soon thereafter as it may conveniently be held.
Section
2
.
Special Meetings
. Unless otherwise prescribed by statute,
special meetings of the shareholders may be called for any purpose by the chief
executive officer, the president, the board of directors, or any two directors.
The president shall call a special meeting of the shareholders if the
corporation receives one or more written demands for the meeting, stating the
purpose or purposes for which it is to be held, signed and dated by holders of
shares representing at least ten percent of all the votes entitled to be cast
on any issue proposed to be considered at the meeting.
Section
3
. Place
of Meeting
. The board of directors may designate any place,
either within or outside Nevada, as the place for any annual meeting or any
special meeting called by the board of directors. A waiver of notice signed by
all shareholders entitled to vote at a meeting may designate any place, either
within or outside Nevada, as the place for such meeting. If no designation is
made, or if a special meeting is called other than by the board, the place of
meeting shall be the principal office of the corporation.
Section
4
. Notice
of Meeting
. Written notice stating the purpose or purposes for
which the meeting is called, place, date, and hour of the meeting, and the
means of electronic communications, if any, by which stockholders and proxies
shall be deemed to be present in person and vote shall be given not less than
ten nor more than sixty days before the date of the meeting, unless any other
longer notice period is required by the Nevada General Corporation Law. The
secretary shall be required to give such notice only to shareholders entitled
to vote at the meeting except as otherwise required by the Nevada General
Corporation Law.
Notice shall be given personally or by mail, postage prepaid or by a
form of electronic transmission consented to by the stockholder to whom the
notice was given. If mailed and if in a comprehensible form, such notice shall
be deemed to be given and effective when deposited in the United States mail,
properly addressed to the shareholder at his address as it appears in the
corporation’s current record of shareholders, with first class postage prepaid.
If notice is given other than by mail, the notice will be deemed given as
provided by the Nevada General Corporation Law..
1
If requested by the person or persons lawfully calling such meeting,
the secretary shall give notice thereof at corporate expense. No notice need be
sent to any shareholder if two consecutive annual meetings, and all notices of
meetings or of the taking of action by written consent without a meeting during
the period between those two consecutive annual meetings or all, and at least
two, payments sent by first-class mail of dividends or interest on securities
during a 12-month period mailed to the last known address of such shareholder
have been returned as undeliverable until such time as another address for such
shareholder is made known to the corporation by such shareholder. In order to
be entitled to receive notice of any meeting, a shareholder shall advise the
corporation in writing of any change in such shareholder’s mailing address as
shown on the corporation’s books and records.
When a meeting is adjourned to another date, time or place, notice need
not be given of the new date, time or place if the new date, time or place of
such meeting is announced before adjournment at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which may have been transacted at the original meeting. If a new record date is
fixed for the adjourned meeting, a new notice of the adjourned meeting shall be
given to each shareholder of record entitled to vote at the meeting as of the
new record date.
A shareholder may waive notice of a meeting before or after the time
and date of the meeting by a writing signed or by transmission of an electronic
record by such shareholder. Such waiver shall be delivered to the corporation
for filing with the corporate records, but this delivery and filing shall not
be conditions to the effectiveness of the waiver. Further, by attending a meeting either in
person or by proxy, a shareholder waives objection to lack of notice or
defective notice of the meeting unless the shareholder objects at the beginning
of the meeting to the holding of the meeting or the transaction of business at
the meeting because of lack of notice or defective notice. By attending the
meeting, the shareholder also waives any objection to consideration at the
meeting of a particular matter not within the purpose or purposes described in
the meeting notice unless the shareholder objects to considering the matter when
it is presented.
Section
5
. Fixing
of Record Date
. For the purpose of determining shareholders
entitled to (i) notice of or vote at any meeting of shareholders or any
adjournment thereof, (ii) receive distributions or share dividends, (iii)
demand a special meeting, or (iv) make a determination of shareholders for any
other proper purpose, the board of directors may fix a future date as the
record date for any such determination of shareholders, such date in any case
to be not more than sixty days, and, in
case of a meeting of shareholders, not less than ten days, prior to the date on
which the particular action requiring such determination of shareholders is to
be taken. If no record date is fixed by the directors, the record date shall be
the day before the notice of the meeting is given to shareholders, or the date
on which the resolution of the board of directors providing for a distribution
is adopted, as the case may be. When a determination of shareholders entitled
to vote at any meeting of shareholders is made as provided in this section,
such determination shall apply to any adjournment thereof unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than sixty days after the date fixed for the original meeting.
Unless otherwise specified when the record date is fixed, the time of day for
such determination shall be as of the corporation’s close of business on the
record date.
Notwithstanding the above, the record date for determining the shareholders
entitled to take action without a meeting by written consent may not precede or
be more than ten days after the date the resolution is adopted by the board of
directors. If the board of directors
does not adopt a resolution prescribing a record date for determining
shareholders entitled to give written consent, the record date shall be (a) if
no prior action by the board is required by the Nevada General Corporation Law,
the date is the first date on which a valid, written consent is delivered to
the corporation, or (b) if prior action by the board is required by the Nevada
General Corporation Law, the date is at the close of business on the day the
board of directors adopts the resolution.
The record date for determining shareholders entitled to demand a
special meeting shall be the date of the earliest of any of the demands
pursuant to which the meeting is called.
Section
6
.
Recognition Procedure for Beneficial Owners.
The board of
directors may adopt by resolution a procedure whereby a shareholder of the
corporation may certify in writing to the corporation that all or a
2
portion of the shares registered in the name of such shareholder are
held for the account of a specified person or persons. The resolution may set
forth (i) the types of nominees to which it applies, (ii) the rights or
privileges that the corporation will recognize in a beneficial owner, which may
include rights and privileges other than voting, (iii) the form of certification
and the information to be contained therein, (iv) if the certification is with
respect to a record date, the time within which the certification must be
received by the corporation, (v) the period for which the nominee’s use of the
procedure is effective, and (vi) such other provisions with respect to the
procedure as the board deems necessary or desirable. Upon receipt by the
corporation of a certificate complying with the procedure established by the
board of directors, the persons specified in the certification shall be deemed,
for the purpose or purposes set forth in the certification, to be the
registered holders of the number of shares specified in place of the
shareholder making the certification.
Section
7
. Quorum
and Manner of Acting
. A majority of the votes entitled to be
cast on a matter by a voting group represented in person or by proxy, shall
constitute a quorum of that voting group for action on the matter. If less than
a majority of such votes are represented at a meeting, a majority of the votes
so represented may adjourn the meeting from time to time without further
notice, for a period not to exceed 60 days for any one adjournment. If a quorum
is present at such adjourned meeting, any business may be transacted which
might have been transacted at the meeting as originally noticed. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, unless the meeting is adjourned and a
new record date is set for the adjourned meeting.
If a quorum exists, action on a matter other than the election of
directors by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group
opposing the action, unless the vote of a greater number or voting by classes
is required by law or the articles of incorporation.
Section
8
.
Proxies.
At all meetings of shareholders, a shareholder may vote
by proxy by signing an appointment form or similar writing, either personally
or by his duly authorized attorney- in-fact. A shareholder may also appoint a
proxy by transmitting or authorizing the transmission of an electronic record to the person who will
be the holder of the proxy or to a firm which solicits proxies or like agent
who is authorized by the person who will
be the holder of the proxy to receive the transmission. Any such electronic record must either set
forth or be submitted with information from which it can be determined that the
stockholder authorized the electronic record. The appointment of a proxy is
effective when received by the corporation and is valid for six months from the
date of its creation unless a different period is expressly provided in the appointment
form or similar writing.
Any copy, communication by electronic transmission, or other reliable
reproduction of an appointment of a proxy may be substituted for or used in
lieu of the original appointment for any purpose for which the original appointment
could be used, if the copy, communication by electronic transmission or other
reproduction is a complete reproduction of the entire original record.
Revocation of a proxy does not affect the right of the corporation to
accept the proxy’s authority unless (i) the corporation had notice that the
appointment was coupled with an interest and notice that such interest is
extinguished is received by the secretary or other officer or agent authorized
to tabulate votes before the proxy exercises his authority under the
appointment, or (ii) other notice of the revocation of the appointment is
received by the secretary or other officer or agent authorized to tabulate
votes before the proxy exercises his authority under the appointment. Other
notice of revocation may, in the discretion of the corporation, be deemed to
include the appearance at a shareholders’ meeting of the shareholder who
granted the proxy and his voting in person on any matter subject to a vote at
such meeting.
The death or incapacity of the shareholder appointing a proxy does not
affect the right of the corporation to accept the proxy’s authority unless
notice of the death or incapacity is received by the secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment.
The corporation shall not be required to recognize an appointment made
irrevocable if it has received a writing revoking the appointment signed by the
shareholder (including a shareholder who is a successor to
3
the shareholder who granted the proxy) either personally or by his
attorney-in-fact, notwithstanding that the revocation may be a breach of an
obligation of the shareholder to another person not to revoke the appointment.
Subject to Section 10 and any express limitation on the proxy’s
authority appearing on the appointment form, the corporation is entitled to
accept the proxy’s vote or other action as that of the shareholder making the
appointment.
Section
9
. Voting
of Shares
. Each outstanding share, regardless of class, shall be
entitled to one vote, except in the election of directors, and each fractional
share shall be entitled to a corresponding fractional vote on each matter
submitted to a vote at a meeting of shareholders, except to the extent that the
voting rights of the shares of any class or classes are limited or denied by
the articles of incorporation as permitted by the Nevada Business Corporation
Code. Cumulative voting shall not be permitted in the election of directors or
for any other purpose. Each record holder of stock shall be entitled to vote in
the election of directors and shall have as many votes for each of the shares
owned by him as there are directors to be elected and for whose election he has
the right to vote.
At each election of directors, that number of candidates equaling the
number of directors to be elected, having the highest number of votes cast in
favor of their election, shall be elected to the board of directors.
Except as otherwise ordered by a court of competent jurisdiction upon a
finding that the purpose of this Section would not be violated in the
circumstances presented to the court, the shares of the corporation are not
entitled to be voted if they are owned, directly or indirectly, by a second
corporation, domestic or foreign, and the first corporation owns, directly or
indirectly, a majority of the shares entitled to vote for directors of the
second corporation except to the extent the second corporation holds the shares
in a fiduciary capacity.
Redeemable shares are not entitled to be voted after notice of
redemption is mailed to the holders and a sum sufficient to redeem the shares
has been deposited with a bank, trust company or other financial institution
under an irrevocable obligation to pay the holders the redemption price on
surrender of the shares.
Section
10
.
Corporation’s Acceptance of Votes.
If the name signed on a vote,
consent, waiver, proxy appointment, or proxy appointment revocation corresponds
to the name of a shareholder, the corporation, if acting in good faith, is
entitled to accept the vote, consent, waiver, proxy appointment or proxy
appointment revocation and give it effect as the act of the shareholder. If the name signed on a vote, consent,
waiver, proxy appointment or proxy appointment revocation does not correspond
to the name of a shareholder, the corporation, if acting in good faith, is
nevertheless entitled to accept the vote, consent, waiver, proxy appointment or
proxy appointment revocation and to give it effect as the act of the
shareholder if:
(i) the shareholder is an entity and the name signed purports to be
that of an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator, executor,
guardian or conservator representing the shareholder and, if the corporation
requests, evidence of fiduciary status acceptable to the corporation has been
presented with respect to the vote, consent, waiver, proxy appointment or proxy
appointment revocation;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests, evidence of
this status acceptable to the corporation has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment revocation;
(iv) the name signed purports to be that of a pledgee, beneficial owner
or attorney-in-fact of the shareholder and, if the corporation requests,
evidence acceptable to the corporation of the
4
signatory’s authority to sign for the shareholder has been presented
with respect to the vote, consent, waiver, proxy appointment or proxy
appointment revocation;
(v) two or more persons are the shareholder as co-tenants or fiduciaries
and the name signed purports to be the name of at least one of the co-tenants
or fiduciaries, and the person signing appears to be acting on behalf of all
the co-tenants or fiduciaries; or
(vi) the acceptance of the vote, consent, waiver, proxy appointment or
proxy appointment revocation is otherwise proper under rules established by the
corporation that are not inconsistent with this Section 10.
The corporation is entitled to reject a vote, consent, waiver, proxy
appointment or proxy appointment revocation if the secretary or other officer
or agent authorized to tabulate votes, acting in good faith, has reasonable
basis for doubt about the validity of the signature on it or about the
signatory’s authority to sign for the shareholder.
Neither the corporation nor its officers nor any agent who accepts or
rejects a vote, consent, waiver, proxy appointment or proxy appointment
revocation in good faith and in accordance with the standards of this Section
is liable in damages for the consequences of the acceptance or rejection.
Section
11
.
Informal Action by Shareholders
. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if before or after the action, a written consent (or counterparts thereof)
that sets forth the action so taken is signed by shareholders holding at least
a majority of the voting power entitled to vote with respect to the subject
matter thereof except if a different proportion of voting power is required for
such an action at a meeting, then that proportion of written consents is
required. Such consent shall have the same force and effect as a vote of the
shareholders and may be stated as such in any document. Action taken under this
Section 12 is effective as of the date the last writing necessary to effect the
action is received by the corporation, unless all of the writings specify a
different effective date, in which case such specified date shall be the
effective date for such action.
Any shareholder who has signed a writing describing and consenting to
action taken pursuant to this Section 11 may revoke such consent by a writing
signed by the shareholder describing the action and stating that the
shareholder’s prior consent thereto is revoked, if such writing is received by
the corporation before the effectiveness of the action.
In no instance where action is authorized by written consent need a
meeting of shareholders be called or notice given.
Section
12
.
Meetings by Telecommunication
. Any or all of the shareholders may
participate in an annual or special shareholders’ meeting by, or the meeting
may be conducted through the use of, any means of communication by which all
persons participating in the meeting may hear each other during the meeting. A
shareholder participating in a meeting by this means is deemed to be present in
person at the meeting.
Board of Directors
Section 1.
General
Powers
.
All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the corporation shall be managed under the direction
of, its board of directors, except as otherwise provided in the Nevada General
Corporation Law or the articles of incorporation.
Section 2.
Number,
Qualifications and Tenure
. The number of directors
of the corporation shall be fixed from time to time by the board of directors,
within a range of no less than one or more than nine, but no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. A director shall be a natural person who is eighteen years
of age or older. A director need not be a resident of Nevada or a shareholder
of the corporation.
5
Directors shall be elected at each annual meeting of shareholders. Each
director shall hold office until the next annual meeting of shareholders
following his election and thereafter until his successor shall have been
elected and qualified. Directors shall be removed in the manner provided by the
Nevada General Corporation Law. Any director may be removed by the shareholders
of the voting group that elected the director, with or without cause, at a
meeting called for that purpose. The notice of the meeting shall state that the
purpose or one of the purposes of the meeting is removal of the director. A
director may be removed only if the number of votes cast in favor of removal
exceeds the number of votes cast against removal.
Section
3. Vacancies
. Any director may resign at any
time by giving written notice to the secretary. Such resignation shall take
effect at the time the notice is received by the secretary unless the notice
specifies a later effective date. Unless otherwise specified in the notice of
resignation, the corporation’s acceptance of such resignation shall not be
necessary to make it effective. Any vacancy on the board of directors may be
filled by the affirmative vote of a majority of the shareholders at a special
meeting called for that purpose or by the board of directors. If the directors
remaining in office constitute fewer than a quorum of the board, the directors
may fill the vacancy by the affirmative vote of a majority of all the directors
remaining in office. If elected by the directors, the director shall hold
office until the next annual shareholders’ meeting at which directors are
elected. If elected by the shareholders, the director shall hold office for the
unexpired term of his predecessor in office; except that, if the director’s
predecessor was elected by the directors to fill a vacancy, the director
elected by the shareholders shall hold office for the unexpired term of the
last predecessor elected by the shareholders.
Section
4. Regular Meetings
. A regular meeting of the
board of directors shall be held without notice immediately after and at the
same place as the annual meeting of shareholders. The board of directors may
provide by resolution the time and place, either within or outside Nevada, for
the holding of additional regular meetings without other notice.
Section
5. Special Meetings
. Special meetings of the
board of directors may be called by or at the request of the chief executive
officer, the president or any one of the
directors. The person or persons authorized to call special meetings of the
board of directors may fix any place, either within or outside Nevada, as the
place for holding any special meeting of the board of directors called by them.
Section
6. Notice
. Notice of the date, time and place
of any special meeting shall be given to each director at least two days prior
to the meeting by written notice either personally delivered or mailed to each
director at his business address, or by notice transmitted by private courier,
, electronically transmitted facsimile or other form of electronic transmission
. If mailed, such notice shall be deemed to be given and to be effective on the
earlier of (i) five days after such notice is deposited in the United States
mail, properly addressed, with first class postage prepaid, or (ii) the date
shown on the return receipt, if mailed by registered or certified mail return
receipt requested, provided that the return receipt is signed by the director
to whom the notice is addressed. If notice is given by telex, electronically
transmitted facsimile or other similar form of electronic transmission, such
notice shall be deemed to be given and to be effective when sent.
A director may waive notice of a meeting before or after the time and
date of the meeting by a writing signed by such director or by transmission of
an electronic record. Such waiver shall be delivered to the secretary for
filing with the corporate records, but such delivery and filing shall not be
conditions to the effectiveness of the waiver.
Further, a director’s attendance at or participation in a meeting waives
any required notice to him of the meeting unless at the beginning of the
meeting, or promptly upon his later arrival, the director objects to holding
the meeting or transacting business at the meeting because of lack of notice or
defective notice and does not thereafter vote for or assent to action taken at
the meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
Section
7. Quorum
.
A majority of the number of directors fixed by the board of directors pursuant
to Article III, Section 2 or, if no number is fixed, a majority of the number
in office immediately before the
6
meeting begins, shall constitute a quorum for the transaction of
business at any meeting of the board of directors.
Section
8. Manner of
Acting
. The act of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the board of
directors.
Section
9. Compensation
. By resolution of the board of
directors, any director may be paid any one or more of the following: his
expenses, if any, of attendance at meetings, a fixed sum for attendance at each
meeting, a stated salary as director, or such other compensation as the
corporation and the director may reasonably agree upon. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
Section 10. Presumption of Assent
.
A director of the corporation who is
present at a meeting of the board of directors or committee of the board at
which action on any corporate matter is taken shall be presumed to have
assented to all action taken at the meeting unless (i) the director objects at
the beginning of the meeting, or promptly upon his arrival, to the holding of
the meeting or the transaction of business at the meeting and does not
thereafter vote for or assent to any action taken at the meeting, (ii) the
director contemporaneously requests that his dissent or abstention as to any
specific action taken be entered in the minutes of the meeting, or (iii) the
director causes written notice of his dissent or abstention as to any specific
action to be received by the presiding officer of the meeting before its
adjournment or by the secretary promptly after the adjournment of the meeting.
A director may dissent to a specific action at a meeting, while assenting to
others. The right to dissent to a specific action taken at a meeting of the
board of directors or a committee of the board shall not be available to a
director who voted in favor of such action.
Section
11. Committees
. By resolution adopted by a
majority of all the directors in office when the action is taken, the board of
directors may designate from among its members an executive committee and one
or more other committees, and appoint one or more members of the board of
directors to serve on them. To the extent provided in the resolution, each
committee shall have all the authority of the board of directors, except that
no such committee shall have the authority to (i) authorize distributions, (ii)
approve or propose to shareholders actions or proposals required by the Nevada
General Corporation Law to be approved by shareholders, (iii) fill vacancies on
the board of directors or any committee thereof, (iv) amend articles of
incorporation, (v) adopt, amend or repeal the bylaws, (vi) approve a plan of
merger not requiring shareholder approval, (vii) authorize or approve the
reacquisition of shares unless pursuant to a formula or method prescribed by
the board of directors, or (viii) authorize or approve the issuance or sale of
shares, or contract for the sale of shares or determine the designations and
relative rights, preferences and limitations of a class or series of shares,
except that the board of directors may authorize a committee or officer to do
so within limits specifically prescribed by the board of directors. The
committee shall then have full power within the limits set by the board of
directors to adopt any final resolution setting forth all preferences,
limitations and relative rights of such class or series and to authorize an
amendment of the articles of incorporation stating the preferences, limitations
and relative rights of a class or series for filing with the Secretary of State
under the Nevada General Corporation Law.
Sections 4, 5, 6, 7, 8 or 12 of Article III, which govern meetings,
notice, waiver of notice, quorum, voting requirements and action without a
meeting of the board of directors, shall apply to committees and their members
appointed under this Section 11.
Neither the designation of any such committee, the delegation of
authority to such committee, nor any action by such committee pursuant to its
authority shall alone constitute compliance by any member of the board of
directors or a member of the committee in question with his responsibility to
conform to the standard of care set forth in Article III, Section 14 of these
bylaws.
Section 12. Informal Action by Directors
.
Any action required or permitted to be taken at a meeting of the directors or
any committee designated by the board of directors may be taken without a
meeting if a written consent (or counterparts thereof) that sets forth the
action so taken is signed by all of the directors entitled to vote with respect
to the action taken. Such consent shall have the same force and effect as a
7
unanimous vote of the directors or committee members and may be stated
as such in any document. Unless the consent specifies a different effective
time or date, action taken under this Section 12 is effective at the time or
date the last director signs a writing describing the action taken, unless,
before such time, any director has revoked his consent by a writing signed by
the director and received by the president or the secretary of the corporation.
Section 13. Telephonic Meetings
.
The board of directors may permit any director (or any member of a committee
designated by the board) to participate in a regular or special meeting of the
board of directors or a committee thereof through the use of any means of
communication by which all directors participating in the meeting can hear each
other during the meeting. A director participating in a meeting in this manner
is deemed to be present in person at the meeting.
Section
14. Standard of Care
. A director shall perform
his duties as a director, including without limitation his duties as a member
of any committee of the board, in good faith, in a manner he reasonably
believes to be in the best interests of the corporation, and with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances. In performing his duties, a director shall be entitled to rely
on information, opinions, reports or statements, including financial statements
and other financial data, in each case prepared or presented by the persons
herein designated. However, he shall not be considered to be acting in good
faith if he has knowledge concerning the matter in question that would cause
such reliance to be unwarranted. A director shall not be liable to the
corporation or its shareholders for any action he takes or omits to take as a
director if, in connection with such action or omission, he performs his duties
in compliance with this Section 14.
The designated persons on whom a director is entitled to rely are (i)
one or more officers or employees of the corporation whom the director reasonably
believes to be reliable and competent in the matters presented, (ii) legal
counsel, public accountant, or other person as to matters which the director
reasonably believes to be within such person’s professional or expert
competence, or (iii) a committee of the board of directors on which the
director does not serve if the director reasonably believes the committee
merits confidence.
ARTICLE IV
Officers and Agents
Section
1. General
. The officers of the corporation
shall be a president, a secretary and a treasurer, and may also include a
chairman of the board, chief executive officer, chief operating officer, chief
financial officer, controller, and one or more vice presidents, each of which
officer shall be appointed by the board of directors and shall be a natural
person eighteen years of age or older. One person may hold more than one
office. The board of directors or an officer or officers so authorized by the
board may appoint such other officers, assistant officers, committees and
agents, including assistant secretaries and assistant treasurers, as they may
consider necessary. Except as expressly prescribed by these bylaws, the board
of directors or the officer or officers authorized by the board shall from time
to time determine the procedure for the appointment of officers, their
authority and duties and their compensation, provided that the board of
directors may change the authority, duties and compensation of any officer who
is not appointed by the board.
Section
2. Appointment and
Term of Office
. The officers of the
corporation to be appointed by the board of directors shall be appointed at
each annual meeting of the board held after each annual meeting of the
shareholders. If the appointment of officers is not made at such meeting or if
an officer or officers are to be appointed by another officer or officers of
the corporation, such appointments shall be made as determined by the board of
directors or the appointing person or persons. Each officer shall hold office
until the first of the following occurs: his successor shall have been duly
appointed and qualified, his death, his resignation, or his removal in the
manner provided in Section 3.
8
Section
3. Resignation
and Removal
. An officer may resign at any time by giving
written notice of resignation to the president, secretary or other person who
appoints such officer. The resignation is effective when the notice is received
by the corporation unless the notice specifies a later effective date.
Any officer or agent may be removed at any time with or without cause
by the board of directors or an officer or officers authorized by the board.
Such removal does not affect the contract rights, if any, of the corporation or
of the person so removed. The appointment of an officer or agent shall not in
itself create contract rights.
Section
4. Vacancies
.
A vacancy in any office, however occurring, may be
filled by the board of directors, or by the officer or officers authorized by
the board, for the unexpired portion of the officer’s term. If an officer
resigns and his resignation is made effective at a later date, the board of
directors, or officer or officers authorized by the board, may permit the
officer to remain in office until the effective date and may fill the pending
vacancy before the effective date if the board of directors or officer or
officers authorized by the board provide that the successor shall not take
office until the effective date. In the alternative, the board of directors, or
officer or officers authorized by the board of directors, may remove the
officer at any time before the effective date and may fill the resulting
vacancy.
Section 5. Chairman of
the Board; Vice Chairman of the Board
.
The chairman of the board shall have the
power to preside at all meetings of the board of directors and shall have such
other powers and duties as provided in these bylaws and as the board of
directors may from time to time prescribe.
In the absence or upon the disability of the chairman of the board, the
vice chairman of the board shall have all of the powers of the chairman of the
board as provided in these bylaws, and shall have such other powers as the
board of directors may from time to time prescribe.
Section 6. Chief Executive
Officer
.
The chief executive officer (“CEO”), if
any, shall preside at all meetings of shareholders, and the CEO shall also
preside at all meetings of the board of directors unless the board of directors
has appointed a chairman, vice chairman or other officer of the board and has
authorized such person to preside at meetings of the board of directors. Subject to the direction and control of the
board of directors, the CEO shall be the chief executive officer of the
corporation and as such shall have general and active management of the
business of the corporation and shall see that all orders and resolutions of
the board of directors are carried into effect.
The CEO may negotiate, enter into and execute contracts, deeds and other
instruments on behalf of the corporation as are necessary or appropriate to the
conduct of the business and affairs of the corporation or as are approved by
the board of directors. The CEO shall
have such additional authority and duties as are appropriate and customary for
the office of chief executive officer, except as the same may be expanded or
limited by the board of directors from time to time.
Section 7. President
.
The president shall be the officer next
in seniority to the CEO. In the absence
of a CEO, the president shall be the chief executive officer and, in addition
to the duties of president, shall perform the duties of the CEO. Subject to the direction and control of the
board of directors and the CEO, if any, the president shall be the officer of
the corporation charged with active management of the operations of the
corporation and shall see that all orders and resolutions of the board of
directors and the CEO, if any, are carried into effect. The president may negotiate, enter into and
execute contracts, deeds and other instruments on behalf of the corporation as
are necessary or appropriate to conduct the business and affairs of the
corporation, or as are approved by the board of directors. The president shall have such additional
authority and duties as are appropriate and customary for the office of
president, except as the same may be expanded or limited by the board of
directors or CEO, if any, from time to time.
Section
8. Chief Operating
Officer
.
The chief operating officer,
shall manage the day-to-day activities of the corporation. The
chief operating officer shall have such additional authority and duties as are
appropriate and customary for the office of chief operating officer, except as
the same may be expanded or limited by the board of directors, the CEO, or
president, from time to time.
Section
9. Vice
Presidents
.
The vice presidents shall assist the CEO, the president, and the chief
operating officer and shall perform such duties as may be assigned to them by
the CEO, the president or by the board
9
of directors. In the absence of the president, the vice president, if
any (or, if more than one, the vice presidents in the order designated by the
board of directors, or if the board makes no such designation, then the vice
president designated by the president, or if neither the board nor the
president makes any such designation, the senior vice president as determined
by first election to that office), shall have the powers and perform the duties
of the president.
Section
10. Secretary
. The secretary shall (i) prepare
and maintain as permanent records the minutes of the proceedings of the
shareholders and the board of directors, a record of all actions taken by the
shareholders or board of directors without a meeting, a record of all actions
taken by a committee of the board of directors in place of the board of
directors on behalf of the corporation, and a record of all waivers of notice
of meetings of shareholders and of the board of directors or any committee
thereof, (ii) see that all notices are duly given in accordance with the
provisions of these bylaws and as required by law, (iii) serve as custodian of
the corporate records and of the seal of the corporation and affix the seal to
all documents when authorized by the board of directors, (iv) keep at the
corporation’s registered office or principal place of business a record
containing the names and addresses of all shareholders in a form that permits
preparation of a list of shareholders arranged by voting group and by class or
series of shares within each voting group, that is alphabetical within each
class or series and that shows the address of, and the number of shares of each
class or series held by, each shareholder, unless such a record shall be kept
at the office of the corporation’s transfer agent or registrar, (v) maintain at
the corporation’s principal office the originals or copies of the corporation’s
articles of incorporation, bylaws, minutes of all shareholders’ meetings and
records of all action taken by shareholders without a meeting for the past
three years, all written communications within the past three years to
shareholders as a group or to the holders of any class or series of shares as a
group, a list of the names and business addresses of the current directors and
officers, a copy of the corporation’s most recent corporate report filed with
the Secretary of State, and financial statements showing in reasonable detail
the corporation’s assets and liabilities and results of operations for the last
three years, (vi) have general charge of the stock transfer books of the
corporation, unless the corporation has a transfer agent, (vii) authenticate
records of the corporation, and (viii) in general, perform all duties incident
to the office of secretary and such other duties as from time to time may be
assigned to him by the CEO, the president or by the board of directors.
Assistant secretaries, if any, shall have the same duties and powers, subject
to supervision by the secretary. The directors and/or shareholders may however
respectively designate a person other than the secretary or assistant secretary
to keep the minutes of their respective meetings.
Any books, records, or minutes of the corporation may be in written
form or in any form capable of being converted into written form within a
reasonable time.
Section
11. Chief Financial
Officer and Treasurer
. The chief
financial officer shall be the principal financial officer of the corporation,
shall have the care and custody of all funds, securities, evidences of
indebtedness and other personal property of the corporation and shall deposit
the same in accordance with the instructions of the board of directors. Subject
to the limits imposed by the board of directors, he shall receive and give
receipts and acquittances for money paid in on account of the corporation, and
shall pay out of the corporation’s funds on hand all bills, payrolls and other
just debts of the corporation of whatever nature upon maturity. He shall
perform all other duties incident to the office of the chief financial officer
and, upon request of the board, shall make such reports to it as may be
required at any time. He shall, if required by the board, give the corporation
a bond in such sums and with such sureties as shall be satisfactory to the
board, conditioned upon the faithful performance of his duties and for the
restoration to the corporation of all books, papers, vouchers, money and other
property of whatever kind in his possession or under his control belonging to
the corporation. He shall have such other powers and perform such other duties
as may from time to time be prescribed by the board of directors or the
president. The treasurer, and assistant treasurers, if any, shall have the same
powers and duties, subject to the supervision of the chief financial officer.
The chief financial officer shall also be the principal accounting
officer of the corporation. He shall prescribe and maintain the methods and
systems of accounting to be followed, keep complete books and records of
account as required by the Nevada General Corporation Law, prepare and file all
local, state and federal tax returns, prescribe and maintain an adequate system
of internal audit and prepare and furnish to
10
the CEO, the president and the board of directors statements of account
showing the financial position of the corporation and the results of its
operations.
Section
1. Certificates
. The board of directors shall
be authorized to issue any of its classes of shares with or without
certificates. The fact that the shares are not represented by certificates
shall have no effect on the rights and obligations of shareholders. If the
shares are-represented by certificates, such shares shall be represented by
consecutively numbered certificates signed, either manually or by facsimile, in
the name of the corporation by the president. In case any officer who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer before such certificate is issued, such
certificate may nonetheless be issued by the corporation with the same effect
as if he were such officer at the date of its issue. All certificates shall be
consecutively numbered, and the names of the owners, the number of shares, and
the date of issue shall be entered on the books of the corporation. Each
certificate representing shares shall state upon its face:
(i)
That the
corporation is organized under the laws of Nevada;
(ii)
The name of the
person to whom issued;
(iii)
The number and class of
the shares and the designation of the series, if any, that the certificate
represents;
(iv)
The par value, if any, of
each share represented by the certificate;
(v)
Any restrictions imposed
by the corporation upon the transfer of the shares represented by the
certificate.
If shares are not represented by certificates, within a reasonable time
following the issue or transfer of such shares, the corporation shall send the
shareholder a complete written statement of all of the information required to
be provided to holders of uncertificated shares by the Nevada General
Corporation Law.
Section 2. Consideration for Shares
.
Certificated or uncertificated shares shall not be issued until the shares
represented thereby are fully paid. The board of directors may authorize the
issuance of shares for consideration consisting of any tangible or intangible
property or benefit to the corporation, including cash, promissory notes,
services performed, contracts for services to be performed, or other securities
of the corporation. The corporation may
place in escrow shares issued for a contract for future services or benefits or
a promissory note, or make any other arrangements to restrict the transfer of
the shares. The corporation may credit
distributions made for the shares against their purchase price until the
services are performed, the benefits are received or the promissory note is
paid. If the services are not performed,
the benefits are not received or the promissory note is not paid, the shares
escrowed or restricted and the distributions credited may be cancelled in whole
or in part.
Section 3. Lost Certificates
.
In case of the alleged loss, destruction or mutilation of a certificate of
stock, the board of directors may direct the issuance of a new certificate in
lieu thereof upon such terms and conditions in conformity with law as the board
may prescribe. The board of directors may in its discretion require an
affidavit of lost certificate and/or a bond in such form and amount and with
such surety as it may determine before issuing a new certificate.
Section 4. Transfer of Shares
.
Upon surrender to the corporation or to a transfer agent of the corporation of
a certificate of stock duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, and receipt of such
documentary stamps as may be required by law and evidence of compliance with
all applicable securities laws and other restrictions, the corporation shall
issue a new certificate to the person entitled thereto, and cancel the old
certificate. Every such transfer of stock shall be entered on the stock books
of the corporation which shall be kept at its principal office or by the person
and at the place designated by the board of directors.
11
Except as otherwise expressly provided in Article II, Sections 6 and
10, and except for the assertion of dissenters’ rights to the extent provided
in Article 113 of the Nevada General Corporation Law, the corporation shall be
entitled to treat the registered holder of any shares of the corporation as 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 shares or
rights deriving from such shares on the part of any person other than the
registered holder, including without limitation any purchaser, assignee or
transferee of such shares or rights deriving from such shares, unless and until
such other person becomes the registered holder of such shares, whether or not
the corporation shall have either actual or constructive notice of the claimed
interest of such other person.
Section 5. Transfer Agent, Registrars and
Paying Agents
. The board may at its discretion
appoint one or more transfer agents, registrars and agents for making payment
upon any class of stock, bond, debenture or other security of the corporation.
Such agents and registrars may be located either within or outside Nevada. They
shall have such rights and duties and shall be entitled to such compensation as
may be agreed.
ARTICLE VI
Section
1. Indemnification
. For purposes of Article
VI, a “Proper Person” means any person (including the estate or personal
representative of a director) who was or is a party or is threatened to be made
a party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and whether formal or
informal, by reason of the fact that he is or was a director, officer,
employee, fiduciary or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, partner, trustee, employee,
fiduciary or agent of any foreign or domestic profit or nonprofit corporation
or of any partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company, or other enterprise or employee benefit
plan. The corporation shall indemnify any Proper Person against reasonably
incurred expenses (including attorneys’ fees), judgments, penalties, fines
(including any excise tax assessed with respect to an employee benefit plan)
and amounts paid in settlement reasonably incurred by him in connection with
such action, suit or proceeding if it is determined by the groups set forth in
Section 4 of this Article that he conducted himself in good faith and that he
reasonably believed (i) in the case of conduct in his official capacity with
the corporation, that his conduct was in the corporation’s best interests, or
(ii) in all other cases (except criminal cases), that his conduct was at least
not opposed to the corporation’s best interests, or (iii) in the case of any
criminal proceeding, that he had no reasonable cause to believe his conduct was
unlawful. Official capacity means, when used with respect to a director, the
office of director and, when used with respect to any other Proper Person, the
office in a corporation held by the officer or the employment, fiduciary or
agency relationship undertaken by the employee, fiduciary, or agent on behalf
of the corporation. Official capacity does not include service for any other
domestic or foreign corporation or other person or employee benefit plan.
A director’s conduct with respect to an employee benefit plan for a
purpose the director reasonably believed to be in the interests of the
participants in or beneficiaries of the plan is conduct that satisfies the
requirement in (ii) of this Section 1. A director’s conduct with respect to an
employee benefit plan for a purpose that the director did not reasonably
believe to be in the interests of the participants in or beneficiaries of the
plan shall be deemed not to satisfy the requirement of this section that he
conduct himself in good faith.
No indemnification shall be made under this Article VI to a Proper
Person with respect to any claim, issue or matter in connection with a
proceeding by or in the right of a corporation in which the Proper Person was
adjudged liable to the corporation or in connection with any proceeding
charging that the Proper Person derived an improper personal benefit, whether
or not involving action in an official capacity, in which he was adjudged
liable on the basis that he derived an improper personal benefit. Further,
indemnification under this section in connection with a proceeding brought by
or in the right of the corporation shall be limited to reasonable expenses,
including attorneys’ fees, incurred in connection with the proceeding.
12
Section
2. Right to
Indemnification
. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in defense
of any action, suit, or proceeding as to which he was entitled to
indemnification under Section 1 of this Article VI against expenses (including
attorneys’ fees) reasonably incurred by him in connection with the proceeding
without the necessity of any action by the corporation other than the determination
in good faith that the defense has been wholly successful.
Section 3. Effect of Termination
of Action
. The termination of any
action, suit or 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 seeking indemnification did not meet the standards
of conduct described in Section 1 of this Article VI. Entry of a judgment by
consent as part of a settlement shall not be deemed an adjudication of
liability, as described in Section 2 of this Article VI.
Section 4. Groups Authorized
to Make Indemnification Determination
.
Except where there is a right to indemnification as set forth in Sections 1 or
2 of this Article or where indemnification is ordered by a court in Section 5,
any indemnification shall be made by the corporation only as determined in the
specific case by a proper group that indemnification of the Proper Person is
permissible under the circumstances because he has met the applicable standards
of conduct set forth in Section 1 of this Article. This determination shall be
made by the board of directors by a majority vote of those present at a meeting
at which a quorum is present, which quorum shall consist of directors not
parties to the proceeding (“Quorum”). If a Quorum cannot be obtained, the
determination shall be made by a majority vote of a committee of the board of
directors designated by the board, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee. If a Quorum of the board of directors cannot be obtained and the
committee cannot be established, or even if a Quorum is obtained or the
committee is designated and a majority of the directors constituting such
Quorum or committee so directs, the determination shall be made by (i)
independent legal counsel selected by a vote of the board of directors or the
committee in the manner specified in this Section 4 or, if a Quorum of the full
board of directors cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full board
(including directors who are parties to the action) or (ii) a vote of the
shareholders.
Authorization of indemnification and advance of expenses shall be made
in the same manner as the determination that indemnification or advance of
expenses is permissible except that, if the determination that indemnification
or advance of expenses is permissible is made by independent legal counsel,
authorization of indemnification and advance of expenses shall be made by the
body that selected such counsel.
Section
5. Court-Ordered
Indemnification
. Any Proper Person may apply for indemni-
fication to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnification for reasonable expenses incurred to obtain court-ordered
indemnification. If a court determines that the Proper Person is entitled to
indemnification under Section 2 of this Article, the court shall order
indemnification, including the Proper Person’s reasonable expenses incurred to
obtain court-ordered indemnification. If the court determines that such Proper
Person is fairly and reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not he met the standards of conduct set
forth in Section 1 of this Article or was adjudged liable in the proceeding,
the court may order such indemnification as the court deems proper except that
if the Proper Person has been adjudged liable, indemnification shall be limited
to reasonable expenses incurred in connection with the proceeding and
reasonable expenses incurred to obtain court-ordered indemnification.
Section
6. Advance of
Expenses.
Reasonable expenses (including attorneys’ fees)
incurred in defending an action, suit or proceeding as described in Section 1
may be paid by the corporation to any Proper Person in advance of the final
disposition of such action, suit or proceeding upon receipt of (i) a written
affirmation of such Proper Person’s good faith belief that he has met the
standards of conduct prescribed by Section 1 of this Article VI, (ii) a written
undertaking, executed personally or on the Proper Person’s behalf, to repay
such advances if it is ultimately determined that he did not meet the
prescribed standards of conduct (the
13
undertaking shall be an unlimited general obligation of the Proper
Person but need not be secured and may be accepted without reference to
financial ability to make repayment), and (iii) a determination is made by the
proper group (as described in Section 4 of this Article VI) that the facts as
then known to the group would not preclude indemnification. Determination and
authorization of payments shall be made in the same manner specified in Section
4 of this Article VI.
Section 7. Additional Indemnification to
Certain Persons Other Than Directors
.
In addition to the indemnification provided to officers, employees, fiduciaries
or agents because of their status as Proper Persons under this Article, the
corporation may also indemnify and advance expenses to them if they are not
directors of the corporation to a greater extent than is provided in these
bylaws, if not inconsistent with public policy, and if provided for by general
or specific action of its board of directors or shareholders or by contract.
Section
8. Witness
Expenses.
The sections of this Article VI do not limit the
corporation’s authority to pay or reimburse expenses incurred by a director in
connection with an appearance as a witness in a proceeding at a time when he
has not been made or named as a defendant or respondent in the proceeding.
Section
9. Report to
Shareholders
. Any indemnification of or advance of
expenses to a director in accordance with this Article VI, if arising out of a
proceeding by or on behalf of the corporation, shall be reported in writing to
the shareholders with or before the notice of the next shareholders’ meeting.
If the next shareholder action is taken without a meeting at the instigation of
the board of directors, such notice shall be given to the shareholders at or
before the time the first shareholder signs a writing consenting to such
action.
ARTICLE VII
Section 1. Provision of Insurance
.
By action of the board of directors, notwithstanding any interest of the
directors in the action, the corporation may purchase and maintain insurance,
in such scope and amounts as the board of directors deems appropriate, on
behalf of any person who is or was a director, officer, employee, fiduciary or
agent of the corporation, or who, while a director, officer, employee,
fiduciary or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of any other foreign or domestic profit or nonprofit corporation or of
any partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company, other enterprise or employee benefit
plan, against any liability asserted against, or incurred by, him in that
capacity or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Article VI or applicable law. Any such insurance may be procured
from any insurance company designated by the board of directors of the
corporation, whether such insurance company is formed under the laws of Nevada
or any other jurisdiction of the United States or elsewhere, including any
insurance company in which the corporation has an equity interest or any other interest,
through stock ownership or otherwise.
ARTICLE VIII
Miscellaneous
Section
1. Seal
. The board of directors may adopt a
corporate seal, which shall be in the form adopted by the board of directors.
Section
2. Fiscal Year
. The fiscal year of the corporation
shall be as established by the board of directors.
Section
3. Amendments
. The board of directors shall
have power, to the maximum extent permitted by the Nevada General Corporation
Law, to make, amend and repeal the bylaws of the corporation at any regular or
special meeting of the board unless the shareholders, in making, amending or
repealing a particular bylaw, expressly provide that the directors may not
amend or repeal such bylaw. The
shareholders also
14
shall have the power to make, amend or repeal the bylaws of the
corporation at any annual meeting or at any special meeting called for that
purpose.
Section 4. Receipt of Notices
by the Corporation
. Notices,
shareholder writings consenting to action, and other documents or writings
shall be deemed to have been received by the corporation when they are actually
received: (1) at the registered office of the corporation in Nevada; (2) at the
principal office of the corporation (as that office is designated in the most
recent document filed by the corporation with the secretary of state for Nevada
designating a principal office) addressed to the attention of the secretary of
the corporation; (3) by the secretary of the corporation wherever the secretary
may be found; or (4) by any other person authorized from time to time by the
board of directors or the president to receive such writings, wherever such
person is found.
Section
5. Gender
. The masculine gender is used in
these bylaws as a matter of convenience only and shall be interpreted to
include the feminine and neuter genders as the circumstances indicate.
Section
6. Conflicts
. In the event of any
irreconcilable conflict between these bylaws and either the corporation’s
articles of incorporation or applicable law, the latter shall control.
Section
7. Definitions
. Except as otherwise
specifically provided in these bylaws, all terms used in these bylaws shall
have the same definition as in the Nevada General Corporation Law.
15
Exhibit 9.1
VOTING TRUST AGREEMENT
THIS AGREEMENT is made this 28
th
day of February, 2005, by and among SANFORD D. GREENBERG (“Greenberg”), EARNEST
MATHIS (as initial voting trustee hereunder and his successors as voting
trustee hereunder, collectively referred to as the “Voting Trustee”) and
VITACUBE SYSTEMS HOLDINGS, INC., a Nevada corporation (the “Corporation”). This Agreement will not take effect unless
and until the Corporation’s securities are listed for trading on the American
Stock Exchange.
BACKGROUND
A.
Greenberg is the
beneficial owner of the shares of common stock, par value $.001 per share, of
the Corporation set forth in Annex 1 (the “Shares”).
B.
The Corporation
has filed a registration statement on Form SB-2 with the Securities and Exchange
Commission on December 7, 2004, covering the public offering of its securities
(the “Public Offering”) and has applied to list its securities on the American
Stock Exchange.
C.
As an inducement
to The Shemano Group, Inc, and any other underwriters that may participate in
the Public Offering to continue their efforts in connection with the Public
Offering, Greenberg is willing to have the Shares voted during the term of the
Voting Trust by the Voting Trustee.
NOW, THEREFORE, Greenberg, in order to assure the voting of the Shares
by the Voting Trustee does hereby transfer all of the Shares to the Voting
Trustee for the purpose of vesting in the Voting Trustee the right to vote
thereon and to act in respect thereof, upon the following terms and conditions:
1.
Transfer of Shares to Voting Trustee.
Greenberg agrees immediately to assign and
transfer to Voting Trustee the Shares for the purpose of vesting in Voting
Trustee, as trustee of an active trust, the right to vote thereon and act in
respect thereof, for a period commencing on the date of this Agreement and
terminating on the fifth-anniversary of the closing date of the Public
Offering, subject to earlier termination pursuant to Section 8. Greenberg
agrees that all stock of all classes hereafter issued to him by Corporation
during the term of this Agreement shall be subject to this Agreement. All shares of the Corporation so transferred
to the Voting Trustee under this Agreement may be registered in the name of the
Voting Trustee or in the name of “Voting Trustee of Shares of VitaCube Systems
Holdings, Inc. under Voting Trust Agreement dated February 28, 2005.”
2.
Voting Trust Certificate.
2.1.
Upon
surrender and cancellation of the stock certificates representing the Shares
held by Greenberg, the Voting Trustee shall cause to be issued, in respect of
the
stock of the Corporation held by Greenberg,
pursuant to the terms of this Agreement, a voting trust certificate in
substantially the following form:
This Voting Trust Certificate is subject to
the terms, restrictions, and conditions of a Voting Trust Agreement on file
with VitaCube Systems Holdings, Inc., dated February 28, 2005. The securities represented by this Voting
Trust Certificate have not been registered under the Securities Act of 1933
(the “Act”) or applicable state securities laws (the “State Acts”), and shall
not be sold, pledged, hypothecated, donated or otherwise transferred (whether
or not for considerations) by the holder except upon the issuance to the Voting
Trustee of a favorable opinion of holder’s counsel or submission to the Voting
Trustee of such other evidence as may be satisfactory to counsel to the Voting
Trustee, to the effect that any such transfer shall not be in violation of the
Act and the State Acts.
VITACUBE SYSTEMS HOLDINGS, INC.
COMMON STOCK VOTING TRUST CERTIFICATE
THIS IS TO CERTIFY that on the day of ,
2010, Sanford D. Greenberg shall be entitled to receive a stock certificate or
certificates, expressed to be fully paid and non-assessable, for
shares of the common stock, of VitaCube Systems Holdings, Inc. (the “Common
Stock”), and, in the meantime, to receive payments equal to the amount of
dividends or other distributions, if any, collected by the Voting Trustee upon
a like number of such shares standing in his name, subject to the terms and
conditions of the Voting Trust Agreement dated February 28, 2005 (the “Agreement”).
Until the actual transfer of such stock certificate or certificates, the Voting
Trustee shall possess and shall be entitled subject to the terms of the
Agreement, to exercise the right to vote in respect of any or all of such
Common Stock except as in the Agreement expressly limited; it being expressly
agreed that no voting right shall pass to others by or under this certificate,
or by or under any agreement express or implied. This certificate is issued
pursuant to, and the rights of the holder are subject to and limited by, the
terms and conditions of the Agreement, which Agreement is on file in the principal
office of the Corporation. The holder hereof, his guardians, personal and legal
representatives and assigns, by the acceptance hereof, expressly assent to all
of the terms and conditions of the Agreement, including the assumption of such
obligations and liabilities as are mentioned therein. The shares represented by
this Certificate may be transferred as provided in the Agreement by the
registered holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. Until so transferred, the
Voting Trustee may treat the registered holder as owner hereof for all purposes
except as otherwise provided in the Agreement. This certificate is not valid
unless duly signed by the Voting Trustee as of the date of issuance hereof.
No assignment, transfer, sale or alienation of this certificate or the
shares represented hereby shall be valid or effective unless all terms,
conditions and provisions hereof and in the Agreement above referred to shall
have been fully complied with.
2
IN WITNESS WHEREOF, the undersigned Voting Trustee has signed this
Certificate, this day of ,
20 .
(Form of Assignment)
FOR VALUE RECEIVED,
hereby sells, assigns, and transfers unto
whose address is ,
shares of the Common Stock of the Corporation represented by this Voting Trust
Agreement and hereby directs and instructs the Voting Trustee to transfer the
shares on the books of the Corporation.
2.2.
The
holder of any voting trust certificate shall immediately notify the Voting
Trustee of any mutilation, loss or destruction thereof, and Voting Trustee may,
in his discretion, cause one or more new certificates representing the same
number of shares in the aggregate, to be issued to such holder upon the
surrender of the mutilated certificate, or in case of loss or destruction, upon
satisfactory proof of such loss or destruction, and the deposit of indemnity by
way of bond or otherwise, in such form and amount and with such surety or
sureties as Voting Trustee may require to indemnity him against loss or
liability by reason of the issuance of such new certificate.
3.
Stock Dividends.
In the event that
the Voting Trustee shall receive any additional stock certificates of the
Corporation by way of dividend upon stock held by him under this Agreement, the
Voting Trustee shall hold such stock certificates likewise subject to the terms
of this Agreement, and shall issue voting trust certificates representing such
stock certificates to Greenberg.
4.
Distributions and Other Payments.
Until the termination of this Agreement
Greenberg shall be entitled to receive promptly from the Voting Trustee
payments equal to the amount of dividends (other than dividends represented by
capital stock of the Corporation) or other distributions, if any, collected by
the Voting Trustee upon the Shares, and any payment representing the amount
received upon redemption or sale of any common stock represented by the voting
trust certificate or certificates held by Greenberg, subject, however, to the
terms and conditions of this Agreement.
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5.
Recapitalization; Merger; Dissolution.
In case any recapitalization of the stock of
Corporation shall have been duly authorized, Voting Trustee is hereby
authorized to surrender the Shares, as may be required under the terms pursuant
to which such recapitalization is to be effected, and to receive and hold any
and all stock of Corporation issued in exchange for such surrendered stock.
Following any such action, the voting trust certificates issued and outstanding
pursuant hereto shall be deemed to represent a proportionately reduced number
of shares. Upon any duly authorized agreement of merger or share exchange
becoming effective, the Voting Trustee is authorized to surrender the Shares as
may be required thereby, and to receive and hold hereunder any and all stock or
securities issued to him in exchange for such surrendered stock or otherwise.
The voting trust certificates shall thereupon be deemed to represent the
securities then received in exchange by the Voting Trustee. In the event of the
distribution of the assets of the Corporation upon the dissolution thereof,
Voting Trustee shall promptly distribute the amount thereof received by him to
Greenberg, upon the surrender of the voting trust certificates held by him.
Upon the distribution of such assets by Voting Trustee, as aforesaid, this
Agreement shall terminate and all liability of the Voting Trustee for the
delivery of stock certificates hereunder shall cease and terminate.
6.
Subscription Rights.
If any stock or other securities of the
Corporation are offered for subscription to the holders of the Corporation’s
common stock, the Voting Trustee, promptly upon receipt of notice of such
offer, shall mail a copy to Greenberg. Upon receipt by the Voting Trustee of a
request by Greenberg to subscribe on his behalf to the securities so offered
accompanied by the sum of money required to pay for the securities subject to
the subscription, the Voting Trustee shall make such subscription and
payment. Upon receiving from the
Corporation the certificates for the securities so subscribed for, the Voting
Trustee shall issue to Greenberg a voting trust certificate with respect to the
securities if the securities received have general voting powers. If the securities received do not have
general voting powers, the Voting Trustee shall mail or deliver the securities
to Greenberg, or may instruct the Corporation to make delivery directly to
Greenberg.
7.
Acquisition of Additional Shares.
Greenberg will not, without the
prior approval of the board of directors, acquire any additional shares of
common stock of the Corporation including any shares under Section 6, except
for shares of common stock acquired upon the exercise of existing stock options
held by Greenberg or stock options hereafter granted to Greenberg provided that
such options were approved by the Corporation’s compensation committee or board
of directors.
8.
Transfer of Voting Trust Certificates and
Underlying Shares.
8.1.
Subject
to the limitations set forth below and in compliance with federal and state
securities law, Greenberg may sell, gift, donate, hypothecate, assign, or
otherwise transfer the shares of the Corporation represented by the voting
trust certificate or certificates. As a
condition of transfer, the Corporation may require a favorable opinion of
holder’s counsel or submission to the Corporation of such other evidence as may
be satisfactory to counsel to the Corporation, to the effect that any such
transfer shall not be in violation of the securities laws. The Voting Trustee may rely on the
determinations of the Corporation in this regard. The number of Shares that may
be sold or otherwise transferred
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under this provision is limited to the number
of shares that may be sold under Rule 144(e)(1) of the Act. This limitation shall not apply to any
transfer in connection with any bridge financing in connection with the Public
Offering. The transfer of the Shares shall
be restricted as provided in the lock-up agreement with The Shemano Group,
Inc., as amended by the lock-up extension agreement, copies of which are
attached as Annex 2. Promptly upon
receipt of a request to transfer the shares of the Corporation represented by
the voting trust certificate and upon surrender of the certificate properly
endorsed, the Voting Trustee will submit a transfer request to the Corporation’s
transfer agent to so transfer the shares held by the Voting Trustee.
8.2.
The
voting trust certificates may be transferred to any trust, limited liability
company, or other person or entity controlled by Greenberg, where Greenberg
remains the beneficial owner of the Shares under the Act. Upon surrender of the voting trust
certificate duly endorsed by Greenberg, the Voting Trustee shall issue a voting
trust certificate to the transferee.
Every transferee of any voting trust certificate shall by acceptance of
such trust certificate or certificates become a party to this Agreement with
like effect as though an original party.
Such transferees shall be included within the term “Greenberg.”
9.
Termination.
This Agreement shall terminate, in any event,
on the fifth-anniversary of the closing date of the Public Offering. This Agreement will terminate earlier on the
happening of any of the following events (1) the Corporation withdraws the
Registration Statement covering the Public Offering prior to it becoming
effective; (2) the number of shares of common stock of the Corporation
beneficially owned by Greenberg is less than 5% of the outstanding shares of
common stock of the Corporation; (3) the death of Greenberg; or (4) if after
the closing of the Public Offering the Corporation’s securities are no longer
listed on the American Stock Exchange. Upon termination of this Agreement, the
Voting Trustee, in exchange for, or upon surrender of, any voting trust
certificate then outstanding, shall, in accordance with the terms hereof, and
out of the stock held by him hereunder, deliver proper certificates of stock of
the Corporation to Greenberg and thereupon all liability of Voting Trustee, for
the delivery of said stock certificates shall cease and terminate.
10.
Powers of Voting Trustee.
10.1.
Until the
actual transfer of stock certificates to Greenberg hereunder the Voting Trustee
shall have the right, subject to the provisions of Section 9.2, to exercise, in
person or by his nominees or proxies, all stockholders’ voting rights and
powers in respect of the Shares, and to take part in or consent to any
corporate or stockholders’ action of any kind whatsoever. The right to vote shall include the right to
vote for the election of directors, and in favor of or against any resolution
or proposed action of any character whatsoever, which may be presented at any
meeting or require the consent of the Corporation’s stockholders. The Voting
Trustee is specifically authorized by way of example, without limiting his
rights hereunder, to vote the Shares for, or to consent in respect thereof to,
any increase or reduction of the stock of the Corporation, any agreement of
merger, share exchange or the sale or other disposition of all, substantially
all, or any part
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of the property, assets and franchises of
Corporation, or the dissolution of Corporation.
The Voting Trustee shall have no right to sell or hypothecate the
Shares.
10.2.
In voting
the Shares, the Voting Trustee shall vote the stock as directed in writing by
the Voting Trust Committee. The Voting
Trust Committee shall consist of all of the Corporation’s independent
directors. Directors of the Corporation
will be deemed to be independent if (a) they meet the definition of independent
director for purposes of serving on the audit committee under the rules established
by the American Stock Exchange, (b) they have no family relationship with
Greenberg, and (c) they have no business relationship with Greenberg other than
in connection with the Corporation. The
action of a majority of the independent directors, acting at a meeting, or by a
writing, without a meeting, shall constitute the action of the Voting Trust
Committee. At any meeting of the Voting
Trust Committee any member may vote in person or by proxy given to any other
member; and any member may give a power of attorney to any other member to sign
for him in case of action of the Voting Trust Committee taken in writing
without a meeting. If the Voting Trust Committee is deadlocked or fails to
direct the Voting Trustee with respect to any action to be taken, the Voting
Trustee shall vote the Shares in the same manner as the majority of votes
received by the Corporation with respect to the matter.
11.
Qualifications: Successor Voting Trustee.
If a Voting Trustee shall cease to qualify
as the Voting Trustee, the Voting Trust Committee will appoint a successor
Voting Trustee. The successor Voting Trustee may be the Chief Executive
Officer, the President, the Chief Financial Officer, or one of the Corporation’s
independent directors. An officer of the
Corporation will qualify to serve as Voting Trustee so long as such person
continues to serve as an officer of the Corporation and provided that such
person is not a family member of Greenberg and does not have a business
relationship with Greenberg outside the Corporation. An independent director of the Corporation
will qualify to serve as Voting Trustee so long as such person continues to be
an independent director of the Corporation.
The right, powers, and obligations of the Voting Trustee shall be possessed
by any successor Voting Trustee as though such successor had originally been a
party to this Agreement.
12.
Liability of Voting Trustee/Voting Trust
Committee.
In directing the voting of the Shares, the members of the
Voting Trust Committee shall exercise their best judgment to the end that the
business and affairs of the Corporation shall be properly managed; but they
assume no responsibility in respect of any action taken by them or the Voting
Trustee under their direction. Neither
the Voting Trustee nor any member of the Voting Trust Committee shall incur any
responsibility by reason of any error of law, or of any matter or thing done or
suffered or omitted, except for his own individual willful misconduct. Neither the Voting Trustee nor any member of
the Voting Trust Committee shall be required to give any bond or other security
for the discharge of his duties under this Agreement.
13.
Compensation; Indemnification.
The
person acting as Voting Trustee shall not be entitled to any compensation for
his services as such. The person acting
as Voting Trustee shall be reimbursed for, and indemnified against and saved
harmless from, any and all liabilities, costs, damages and expenses including
attorneys’ fees arising out of his ownership in trust of the Shares; and the
Voting Trustee shall be entitled from time to time to be reimbursed by the
Corporation for
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any such liabilities, costs,
damages and expenses. The members of the
Voting Trustee Committee shall be reimbursed for, and indemnified against and
saved harmless by the Corporation from, any and all liabilities, costs, damages
and expenses including attorneys’ fees arising out of their direction of the
voting of the Shares under this Agreement.
14.
Notices.
All notices to be given
to the holders of voting trust certificates may be given by mailing the same to
the registered holders thereof at the addresses furnished by them to the Voting
Trustee. Any notice when mailed as
herein provided shall be taken as though personally served on all the holders
of voting trust certificates, and such mailing shall be the only notice
required to be given under any provisions of this Agreement.
15.
Governing Law.
This Agreement shall be governed by and
construed under the laws of the state of Colorado.
16.
Succession.
This Agreement shall be binding upon and
shall inure to the benefit of the parties, their heirs, successors, assigns and
legal representatives.
17.
Entireties.
This Agreement constitutes the entire
agreement between the parties relating to its subject matter. No modification
shall be binding upon the parties unless in writing and approved by all parties
and consented to by all of the then members of the Voting Trust Committee.
18.
Access to Trust Records.
At
any reasonable time, the American Stock Exchange (or its legal representative)
shall have the right to demand a copy of the Voting Trustee’s accounts. The
Corporation shall comply with all reasonable requests from the American Stock
Exchange for documentation concerning actions taken by the Voting Trustee or
any decisions made by the Voting Trustee Committee affecting the common stock
of the Corporation, or its successors or assigns, subject to this Agreement.
19.
Severability.
If any provision of this Agreement is found
to be illegal or unenforceable for any reason whatsoever, this Agreement shall
be interpreted and construed without reference to such provision, and the
balance of this Agreement shall remain in full force and effect.
20.
Paragraph Headings.
The paragraph headings are inserted in this
Agreement for convenience only and are not intended to affect the terms of this
Agreement.
21.
Survival.
The respective agreements, covenants,
representations, warranties, and other statements made by the parties to this
Agreement, and their respective obligations to be performed under this
Agreement, shall survive and remain in full force and effect following the
execution and closing of this Agreement.
22.
Counterparts; Facsimiles.
This Agreement may be executed in
counterparts, each of which shall be deemed an original and which together
shall constitute a single instrument.
This Agreement may be executed and delivered by facsimile transmission,
all with
7
the same force and effect as if
the same was a fully executed and delivered original manual counterpart.
DATED as of the day and year first above mentioned.
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/s/ Sanford D. Greenberg
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Sanford D. Greenberg
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/s/ Earnest Mathis
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Earnest Mathis, as Voting Trustee
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VITACUBE SYSTEMS HOLDINGS, INC.
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By:
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/s/ Mary Pat O’Halloran
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Mary Pat O’Halloran, Chief Financial
Officer
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8
Exhibit 10.3
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480 S. Holly Street . Suite 5
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Denver, Colorado 80246
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Main: 303-316-8577
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Toll Free: 800-313-2234
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Fax: 303-316-9004
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www.v3s.com
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RESTATED EMPLOYMENT AGREEMENT BETWEEN
VITACUBE SYSTEMS HOLDINGS, INC.
AND SANFORD D. GREENBERG
This Restated Employment Agreement (“the Agreement”) between VitaCube
Systems Holdings, Inc. and Sanford D. Greenberg (“Employee”) entered effective
as of the 2nd day of March, 2005 (“Effective Date”), sets forth the terms,
which shall govern the employment of Employee with VitaCube Systems Holdings,
Inc. (“Employer” or the “Company”), which replaces in full, the Employment
Agreement between Employer and Employee dated April 1, 2004.
1.
EMPLOYMENT.
(a)
Employer
agrees to employ Employee, and Employee agrees to be employed by Employer until
terminated as herein provided. The
Company’s Board of Directors may amend employee’s job title (“Founder”), and
job description from time to time.
Employee will report only to the Chief Executive Officer and Board of
Directors. Employee hereby accepts
employment by the Company and agrees diligently and faithfully to perform his
duties pursuant to this Agreement on a full time basis.
(b)
Employee
will devote his full business hours and energies to the business of the Employer
to accomplish all duties reasonably assigned, and will devote his best efforts
to advance the interests of the Employer.
During the term of this Agreement, without the prior approval of the
Company’s Board, Employee shall not be engaged in any other business activity,
whether or not pursued for gain, profit or other pecuniary advantage, which may
interfere with his duties under this Agreement, except that Employee shall be
entitled to act as a stockbroker so long as such activity does not materially
interfere with his employment by the Company.
Employee’s duties shall include (i) training
and motivating, the Company’s independent distributors, and recruiting new
independent distributors for the Company, (ii) consulting with the Company’s
management with respect to strategic planning for the Company, including, but
not limited to, use, focus and direction of the Company’s independent
distributors, and (iii) all other duties necessary to perform the foregoing
responsibilities or other responsibilities assigned to Employee by the
Board. The
1
Company will provide Employee with an
administrative assistant as necessary on a nonexclusive basis to assist the
Employee in carrying out his duties.
(c)
EMPLOYEE
ACKNOWLEDGES AND THE PARTIES AGREE THAT THE CONFIDENTIALITY AND
NON-SOLICITATION COVENANTS AND PROVISIONS CONTAINED IN THIS AGREEMENT ARE FULLY
ENFORCEABLE AGAINST HIM.
(d)
Employer
agrees to duly notify Employee of all meetings of the Board, and to provide Employee
with an agenda of the meeting and copies of all documents provided to the Board
members for such meeting. Employee shall
be entitled to attend all Board meets and participate in discussions concerning
the Employer and its business, but, unless Employee is duly elected a director
of Employer, Employee shall not be entitled to vote on any matters. Employee agrees to keep all matters learned
by Employee at Board meetings strictly confidential as if Employee were a
member of the Board.
2.
COMPENSATION.
(a)
Employee
will receive as compensation for all responsibilities a base salary (“Base
Salary”) of $150,000 per year, payable according to the salary schedule of
Employer. In addition to the Base Salary
and the Plan Bonus described below, Employee may receive a bonus in such
amount, as the Board of Directors in its sole discretion shall determine.
(b)
Employee
also shall receive such options (the “Options”) to purchase Employer’s common
stock, as the Board shall determine from time to time.
3.
DEDUCTIONS.
To the
extent required by law, all compensation the Company pays Employee is subject
to federal, state, and municipal withholding requirements, any applicable
occupational privilege tax and any court ordered deductions such as
garnishments. Compensation may also be
reduced by deductions the Employee authorizes for insurance, 401(k)
contributions, and other similar purposes.
The Employee’s final paycheck will be reduced by the amount of any
lawful charge or indebtedness the Employee owes the Company.
4. BONUSES.
Employer intends to
initiate an incentive executive bonus plan (the “Plan Bonus”) for all
executives of the Company. Employee will
be eligible for inclusion for the Plan Bonus if and when it is instituted by
the Company, but only on the same basis as other executives may participate and
as approved by the compensation committee of the Board of Directors, or such
equivalent Board body, on this basis.
5. B
ENEFITS.
Employee
will be entitled to participate in any and all benefit plans, including health
insurance, provided to other senior executive employees. In addition:
2
a.
Employer shall
provide Employee with an auto allowance of $1500 per month.
b.
Employee shall be
entitled to eight (8) weeks of paid vacation each year, with such vacation to
be scheduled and taken in accordance with the Company’s standard vacation
policies applicable to such personnel. Any unused vacation time will be
carried forward and may be used in a subsequent year. In addition, Employee
shall be entitled to such sick leave and holidays at full pay in accordance
with the Company’s policies established and in effect from time to time.
Employee, to the extent allowed
by the insurance company, will be entitled to the protection of any director
and officer liability insurance that the Company in its sole discretion may
purchase. The Company is not required to
carry such insurance. The Company will
indemnify Employee to the full extent provided in the Company’s by-laws, is if
Employee was a corporate officer of the Company
6. E
XPENSES.
Employee
shall be promptly reimbursed for all expenses reasonably and necessarily
incurred by him in the performance of his duties under this Agreement upon
presentation of proof of such expenses in a form acceptable to the Company. In
addition, the Company shall pay the expenses reasonably incurred by Employee in
connection with a cellular telephone and a home high-speed digital
telephone/internet connection.
7.
CONFIDENTIAL INFORMATION.
(a)
Employee recognizes
and acknowledges that he will have access to, become acquainted with, and
obtain certain confidential and proprietary information of the Employer, and
that such information constitutes valuable, special and unique property of the
Employer. Employee acknowledges and
agrees that such information shall include, but is not limited to, trade
secrets, know-how, formulas, ingredients, inventions, techniques, processes,
computer programs, schematics, data, designs, financial information, studies,
supply contracts, formulations, strategic and marketing plans and data, sales
and marketing plans, nutritional and fitness plans, and vendor and customer
lists. Employee will not disclose any of
such confidential, proprietary or trade secret information except as is
necessary to perform his duties for the Employer. Employee further agrees that he will not at
any time use any of such confidential information in competing with Employer. Employee further agrees that he shall
maintain, at all times, the Employer’s confidential, proprietary and trade
secret information in a confidential manner and protect it from disclosure to
any person who is not subject to a Confidentiality Agreement with the Employer.
(b)
In the event of a
breach or threatened breach by Employee of this Section, or Sections 8 and 9
below, Employee agrees that irreparable harm would come to Employer under such
circumstances, and that, in such event, Employer’s remedy at law for such a
breach or threatened breach would be inadequate and that Employer shall be
entitled at its election, to injunctive relief, without the necessity of
posting bond therefore, against such breach or threatened breach and to
specific performance of this
3
Agreement, in addition to any other remedies at law or in equity
available to Employer for such breach or threatened breach, including the
recovery of damages, court costs, and attorneys’ fees.
(c)
The
restrictions and obligations in the preceding subparagraph (a) shall survive in
perpetuity the termination of this Agreement and the termination of Employee’s
employment by Company.
8.
OWNERSHIP AND ASSIGNMENT OF PROPRIETARY INFORMATION.
Upon termination of Employee’s employment
with Employer or at Employer’s request, Employee shall promptly deliver to
Employer all documents, material and property in Employee’s possession or
control (such as drawings, notebooks, reports, sketches, records, fitness and
nutritional plans, computer programs, and the like) whether delivered to
Employee or made by Employee in the performance of services for Employer,
relating in any way to Employee’s employment and the business activities of
Employer, and containing any data or information whatsoever, whether or not it
is confidential. Employee further agrees
that Employer is the sole owner of any formulas, information technology,
processes, or other property rights created by Employee in the performance of
services for Employer, including but not limited to, the right to use, sell,
license or otherwise transfer to exploit the formulas, information technology,
processes and other property rights and the right to make such changes in them
and the uses thereof as Employer may from time to time determine. Employee hereby assigns to Employer, without
further consideration, Employee’s entire right, title, and interest worldwide,
free and clear of all encumbrances, in and to all material, designs, and other
property created for Employer by Employee pursuant to his employment during the
term of this Agreement, all of which property shall be the sole property of
Employer. Employee also agrees to
cooperate with Employer both during and after the term of performance of this
Agreement, in evidencing, maintaining, defending, obtaining and enforcing
patents, trademarks, copyrights and other protection of Employer’s right to
formulas, processes and other property rights created pursuant to this
Agreement. In the event Employer is
unable for any reason to secure Employee’s signature to any lawful and
necessary documents required to apply for or execute any patent, trademark,
copyright or other applications with respect to any property for which such an
application may be presented (including improvements, renewals, extensions,
continuations, divisions or continuations in part thereof), Employee hereby
irrevocably designates and appoints Employer and its duly authorized officers
and agents as his agent and attorney-in-fact to act for and in his behalf and
instead of Employee, to execute and file such application and to do all
otherwise lawfully permitted acts to further the prosecution and issuance of
patents, trademarks, copyrights, and other rights with the same legal force and
effect as if executed by Employee.
9.
RESTRICTIVE
COVENANTS.
a.
Employee agrees that during the
Non-Competitive Period, as defined below, Employee shall not, directly or
indirectly, as owner, partner, joint-venturer, stockholder, employee, broker,
agent, principal, trustee, corporate officer, director, licensor, creditor, or
in any capacity whatsoever, engage in, become financially interested in, be
employed by, render any consultation or business
4
advice with respect to, or have any connection with any business engaged
in manufacturing, selling, marketing, developing, packaging, or distributing of
vitamins, dietary supplements or nutritional supplements or any other product
being manufactured, sold, developed, marketed or distributed by Employer, in
any geographic area where, at the time of the termination of his employment
hereunder, the business of the Employer was being conducted in any material
way. The term “Non-Competitive Period”
shall mean the period commencing on the date of his termination or resignation
and ending on the later of the date which is two (2) years after the date of
termination or one (1) year after final payment under any pay out provisions on
termination.
b.
During the Non-Competitive Period,
Employee will not knowingly (i) initiate contact to hire, or attempt to hire,
any Employee of the Employer or of any of the Employer’s affiliated or
subsidiary companies (if any); (ii) assist in such hiring by any other person;
or (iii) encourage any such Employee to terminate his/her employment with the Employer
or any such subsidiaries or affiliated entities.
c.
If any portion of the restrictions set
forth in this Section should for any reason whatsoever, be declared invalid by
a court of competent jurisdiction, the validity or enforceability of the remainder
of such restrictions shall not be adversely affected.
d.
Employee agrees that the territorial and
time limitations set forth in this Section are reasonable and properly required
for the adequate protection of the business of the Employer. In the event any such territorial or time
limitation is deemed to be unreasonable by a court of competent jurisdiction,
Employee agrees to the reduction of the territorial or time limitation to the
areas or period which such court shall have deemed reasonable. The restrictions in this section shall not
apply if Employee is terminated without “just cause” as herein defined.
10.
TERMINATION.
The employment relationship
established herein is “at will” and shall continue so until terminated by
thirty (30) days written advance notice to the Employer or the Employee, unless
the Employee is terminated by the Employer for “just cause.” The provisions of Sections 7 through 11, 13,
15, and 17 shall remain in full force and effect following termination of
Employee’s employment with Employer.
(a) For Cause. If the Employee is terminated
for “just cause,” the Employer will give the Employee one (1) business day
written advance notice. For all purposes
under this Agreement, “just cause” shall mean (i) willful failure or unjustifiable
neglect by the Employee to substantially perform his duties hereunder after
written notice to Employee and subsequent failure to perform within five (5)
business days, (ii) a willful act by the Employee which constitutes gross
misconduct, (iii) a willful breach by the Employee of a material provision of
this Agreement, or (iv) a material and willful violation of a federal or state
law or regulation applicable to the business of the Company or its status as a
5
public company. If Employee is
terminated for just cause, Employee will not receive any salary or bonuses not
earned as of the date of termination and all unexercised Options under the
Option Agreement will terminate as of the date of termination.
(b) Without Cause. In the event that the Employee is terminated without
just cause, Employee is entitled to receive three (3) years Base Salary payable
over thirty-six (36) equal monthly installments, and all of Employees un-vested
options will vest immediately, and Employee shall have the right to exercise
all vested options pursuant to the Option Agreement. Employee also is entitled to all salary or
bonuses earned as of the date of termination.
(c) Resignation. In the event that Employee terminates his employment,
unless such resignation is for good reason as hereafter defined, Employee will
not receive any salary or bonuses not earned as of the date of
resignation. All Options under the
Option Agreement that have not vested as of the date of Employee’s resignation
will terminate. If Employee resigns with
good reason, he shall be entitled to the same benefits he would have received
if he had been terminated by Employer without cause.
(d) Good Reason. Employee may
terminate his employment for “good reason” after giving Employer a detailed
written notice of the basis for his termination and Employer fails to remedy
the default with five (5) business days after receipt of the notice. Good reason shall mean the occurrence of any
of the following without the written consent of the Employee:
•
Any
material breach of this Agreement by Employer.
•
Any
material reduction in Employee’s duties and responsibilities hereunder.
•
Employer
relocating its main office outside of the Denver metro area.
11.
SEVERABILITY.
The provisions of this Agreement
are severable. The invalidity of any
provision shall not affect the validity of any other provision. A Court or other tribunal is required upon a
finding of invalidity of any provision of Section 7 to enforce the remainder of
the invalid Sections or interpret the language to fully comply and satisfy the
parties’ interest.
12.
WAIVER.
No waiver of any of the provisions
of this Agreement shall be deemed or constitute, a waiver of any other
provision, whether or not similar, nor shall said waiver constitute a
continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
13.
NOTICES.
All notices required or permitted
to be given hereunder shall be in writing and shall be deemed effective when
personally delivered or delivered by email if delivered by 5:00 pm, local time
on a business day, or the next business day if delivered after 5:00 pm, local
time, or, if mailed, three business days after being deposited in the U.S.
Mail, postage prepaid, registered or certified, return receipt requested. Unless changed by written
6
notice given to a party by the
other, such notices shall be given to the Employer at the following address:
VitaCube Systems Holdings, Inc.
480 South Holly Street
Denver, Colorado 80246
Email: marypat@v3s.com
Attention: Board of Directors
And such notices shall be given to Employee at the following address:
Sanford D. Greenberg
At his home address or email address most
recently on file with the Employer
14.
ASSIGNABILITY.
The duties and obligations of Employee under
this Agreement are personal unto him and may not be assigned or otherwise
transferred, in whole or in part, by Employee, but rights of Employee under
this Agreement shall inure to the benefit of Employee. Employer may assign this Agreement, or any
benefit, duty or obligation thereof hereunder.
15.
APPLICABLE LAW.
The terms and conditions of this Agreement shall be construed
under, governed by and enforced in accordance with the laws of the State of
Colorado.
16.
ENTIRE
AGREEMENT; AMENDMENT.
This
Agreement constitutes the entire Agreement between the parties and supersedes
any and all prior agreements, either oral or written, between the parties
hereto with respect thereto. Any
modifications to this Agreement must be made in writing and signed by both
parties.
17.
ARBITRATION.
Any
dispute relating to this Agreement, or to the Breach of this Agreement, except
such as may concern Sections 7, 8, and 9, arising between the Employer and
Employee, shall be settled by arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association (“AAA”), which
arbitration may be initiated by any party hereto by written notice to the other
of such party’s desire to arbitrate the dispute. The arbitration proceedings shall take place
in Denver, Colorado, and shall be administered by AAA. Colorado’s Uniform
Arbitration Act of 1975, C.R.S. §13-22-201 et seq. as amended, shall govern any
arbitration under this Agreement.
Employer’s right to equitable relief set forth in Sections 7, 8, and 9
may be brought and enforced in any court of competent jurisdiction. Employee agrees and consents to the District
Court of the City and County of Denver, State of Colorado, having jurisdiction
over any such dispute.
7
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year written above.
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EMPLOYER:
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VITACUBE SYSTEMS HOLDINGS, INC.
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By:
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/s/ Mary Pat O’Halloran
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Mary Pat O’Halloran, Chief Financial
Officer
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Date:
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March 2, 2005
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EMPLOYEE:
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/s/ Sanford
D. Greenberg
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Sanford D.
Greenberg
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Date:
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March 2,
2005
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8
Exhibit
10.9
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No. Q–15
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Number of Shares: 150,000
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Date of Grant: October 1, 2004
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VITACUBE SYSTEMS HOLDINGS, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is
made effective as of October 1, 2004, between David Litt (the “Optionee”) and
VITACUBE SYSTEMS HOLDINGS, INC., a Nevada corporation (the “Company”).
1.
Grant
of Option
. The Company, pursuant to
the VitaCube Systems Holdings, Inc. 2003 Stock Incentive Plan (“Plan”), a copy
of which is attached as Attachment A, hereby grants to the Optionee an option
(the “Option”) to purchase from the Company an aggregate of 150,000 Common
Shares, as such Common Shares are now constituted, at the purchase price of
$1.00 per share (the “Option Price”), contingent upon the Company meeting the
performance criteria set forth in Section 3.
Such Option is intended to be an Incentive Stock Option as defined in
the Plan. The provisions of the Plan
governing the terms and conditions of Incentive Stock Options are incorporated
in full by this reference. Certain capitalized
terms used in this Agreement and not defined herein will have the meaning set
forth in the Plan.
2.
Termination
. Unless terminated earlier as provided herein
or in the Plan, the Option will terminate and be of no force or effect after
5:00 p.m. Mountain Time on September 30, 2009 (the “Expiration Date”).
3.
Performance
Criteria
.
3.1.
For
purposes of this section:
“Employment Agreement”
means the employment agreement between the Company and Optionee, effective
October 1, 2004.
“Monthly Performance
Sales” means the monthly net sales (gross sales less returns and allowances) of
the Company’s multi-level marketing subsidiary, less sales of sales aids.
3.2.
The
Option is contingent upon the Company meeting the performance criteria set
forth below. The Option will become
non-contingent, as follows:
3.2.1.
The Option
will become non-contingent with respect to 50,000 Common Shares on the first
day of the month following the month in which the Company has Monthly
Performance Sales of $1 million.
3.2.2.
The Option
will become non-contingent with respect to an additional 50,000 Common Shares
(bringing the cumulative number of non-contingent
Common Shares to 100,000)
on the first day of the month following the month in which the Company has
Monthly Performance Sales of $2 million.
3.2.3.
The Option
will become non-contingent with respect to an additional 50,000 Common Shares
(bringing the cumulative number of non-contingent Common Shares to 150,000) on
the first day of the month following the month in which the Company has Monthly
Performance Sales of $3 million.
3.3.
Except
as otherwise provided in Section 7.1 of this Agreement, if Optionee’s
employment with the Company is terminated by the Company other than for “just
cause” as defined in the Employment Agreement or if Optionee terminates his
employment with the Company after September 30, 2006, provided that Optionee
does not violate the noncompetition provision set forth in Section 9(c) of his
Employment Agreement, this Option will become non-contingent and vesting shall
occur as provided in Section 4 of this Agreement with respect to those Common
Shares for which the performance criterion is met in the calendar month in
which Optionee’s termination of employment becomes effective. If Optionee’s employment with the Company is
terminated for “just cause” as defined in the Employment Agreement, Optionee
terminates his employment with the Company on or before September 30, 2006, or
Optionee violates the noncompetition provision set forth in Section 9(c) of his
Employment Agreement, this Option will terminate immediately with respect to
any Common Shares for which the performance criteria have not been met as of
effective date of Optionee’s termination of employment.
3.4.
This
Option will terminate immediately with respect to any Common Shares for which
the performance criteria have not been met as of October 1, 2008.
4.
Exercise
of Option
.
4.1.
Subject
to the provisions of the Plan and as provided herein regarding termination of
the Option, with respect to each installment of 50,000 Common Shares that
become non-contingent pursuant to Section 3, this Option will vest and be
exercisable in increments as follows:
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Number of
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Vesting Date
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Common Shares Vested
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October 1, 2004
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10,000
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October 1, 2005
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10,000
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October 1, 2006
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10,000
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October 1, 2007
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10,000
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October 1, 2008
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10,000
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To the extent any vesting date has passed on the date
the Common Shares become non-contingent, the Option shall be vested with
respect to those Common Shares on the date the Common Shares become
non-contingent. For example, if the
Company first has Monthly
2
Net Sales of $1 million in November 2005, on December
1, 2005, this Option would be non-contingent with respect of 50,000 Common
Shares of which 20,000 Common Shares would be vested, and an additional 10,000
shares would vest on each of October 1 2006, 2007, and 2008.
4.2.
Notwithstanding
the above, in the event of a Change in Control, to the extent the Option is
non-contingent, the Option will earlier vest and be
exercisable as provided in the Plan.
4.3.
Optionee
may exercise this Option only with respect to whole shares.
5.
Method
of Exercise
. The Option evidenced
hereby is exercisable by delivery to and receipt by the Company of (a) a
written notice of election to exercise (“Exercise Notice”), substantially in
the form set forth in Attachment B hereto, specifying the number of Common
Shares to be purchased; (b) payment of the Option Price in full for the number
of Common Shares specified in the Exercise Notice; and (c) this Agreement for
endorsement of exercise by the Company on Schedule I hereof.
6.
Payment
of Purchase Price
. The Option Price
is payable in cash or certified check payable to the order of the Company. Upon the prior written consent of the
Committee, the Option Price may be paid by a recourse promissory note in favor
of the Company.
7.
Early
Termination
. The right to exercise
this Option is subject to the following additional limitations:
7.1.
This
Option will terminate immediately with respect to any Common Shares for which
the performance criteria have not been met or for which this Option has not
been exercised upon the occurrence of the following events:
7.1.1.
The termination of Optionee’s
employment with the Company by the Company For Cause.
7.1.2.
A breach by Optionee of any
confidentiality, noncompetition, or nonsolicitation covenant contained in any
employment agreement or any other agreement executed by the Optionee for the
benefit of the Company.
7.1.3.
The consummation of a Change in
Control, unless the agreement governing the Change in Control provides
otherwise.
7.1.4.
The dissolution or liquidation of
the Company other than in connection with a Change in Control.
7.2.
If
the Optionee’s employment with the Company is terminated other than For Cause,
including termination because of Optionee’s death or disability, this Option
will be exercisable, to the extent it was exercisable on the date the Optionee’s
employment terminated or to the extent it became non-contingent and exercisable
pursuant to Section 3 of
3
this
Agreement, for a period of
three months following such termination of employment. Upon the expiration of the three-month
exercise period, or, if earlier, upon the Expiration Date of this Option, the
Option will terminate and cease to be outstanding for any Common Shares for
which this Option has not been exercised.
8.
Transferability
of Option
. During the lifetime of
the Optionee, the Option is exercisable only by the Optionee and is not
assignable or transferable. If the
Optionee dies prior to the Expiration Date, the Option, to the extent
exercisable on the date of Optionee’s death or to the extent it becomes
noncontingent and exercisable pursuant to Section 3 of this Agreement, may be
exercised by the personal representative of the Optionee’s estate, or by the
persons to whom the Option is transferred pursuant to the Optionee’s will or in
accordance with the laws of descent and distribution.
9.
Restrictions
on Option Shares
. Optionee may not
sell, pledge, or otherwise transfer any interest in any Common Shares (the “Option
Shares”) acquired pursuant to exercise of the Option except pursuant to an effective
registration under the Securities Act of 1933, as amended (the “Act”) and the
applicable state securities laws (“State Acts”) or if exemptions from such
registration are available. Optionee
understands that the Company may require an opinion of Optionee’s counsel or
other evidence satisfactory to the Company that any such transfer is not in
violation of the Act or State Acts.
Unless the Option Shares are subject to an effective registration, the
certificates representing the Option Shares will bear a legend substantially as
follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) OR UNDER ANY
STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS UNLESS EXEMPTIONS FROM REGISTRATION THEREUNDER ARE AVAILABLE, THE
AVAILABILITY OF WHICH MUST BE ESTABLISHED TO THE SATISFACTION OF VITACUBE
SYSTEMS HOLDINGS, INC. (THE “COMPANY”).
10.
Notice
of Disqualifying Disposition
. If
Optionee sells or otherwise disposes of any of the Option Shares on or before
the later of (a) the date two years after the Date of Grant, or (b) the date
one year after the date of exercise, Optionee will immediately notify the
Company in writing of such disposition.
Optionee acknowledges and agrees that Optionee may be subject to income
tax withholding by the Company on the compensation income recognized by
Optionee from such disposition.
11.
Governing
Law
. This Agreement will be governed
by and construed under the laws of the state of Colorado.
4
12.
Notices
. Any and all notices, designations, consents,
offers, acceptances, or any other communication provided for herein must be
given in writing and will be deemed to have been duly given, (a) if delivered
by personal delivery or confirmed facsimile, (b) one business day after being
deposited with a nationally recognized overnight courier, or (c) five days after
being mailed, registered or certified mail, postage prepaid. Such communications will be addressed, in the
case of the Company, to its principal office, and in the case of the Optionee,
to Optionee’s address appearing on the record books of the Company or Optionee’s
residence, or at such other address as may be designed by Optionee.
13.
Entire
Agreement
. This Agreement together
with the Plan contains the entire agreement and the understanding by and
between the parties with respect to the subject matter hereof.
14.
Succession
. Except as otherwise
provided herein or in the Plan, this Agreement will be binding upon and will
enure to the benefit of the parties, their heirs, successors, assigns, and
legal representatives.
15.
Severability
. If any provision of this Agreement is found
to be illegal or unenforceable for any reason whatsoever, the Agreement will be
interpreted and construed without reference to such provision, and the balance
of the Agreement will remain in full force and effect.
16.
Paragraph
Headings
. The paragraph headings are
inserted in this Agreement for convenience only and are not intended to affect
the terms of this Agreement.
17.
Counterparts
. This Agreement may be executed in
counterparts, each of which will be deemed an original and which together will
constitute a single instrument.
18.
Execution
By Optionee Required
. For this
Agreement to be effective, the Optionee must sign the following page (the “Acceptance
Page”) and return it to the Company.
THIS AGREEMENT WILL BE DEEMED WITHDRAWN AND THE OPTION WILL BE OF NO
FORCE OR EFFECT UNLESS THE OPTIONEE HAS SIGNED AND RETURNED THE ACCEPTANCE PAGE
TO THE COMPANY WITHIN 60 DAYS FROM THE DATE THIS AGREEMENT IS SIGNED ON BEHALF
OF THE COMPANY.
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VITACUBE SYSTEMS HOLDINGS, INC.
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Dated:
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March 1, 2005
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By:
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/s/ Sanford D.
Greenberg
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Sanford D. Greenberg,
President
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5
ACCEPTANCE
BY OPTIONEE
The
undersigned, by his or her signature below, hereby accepts the Option,
acknowledges having read this Agreement and the Plan, agrees to be bound by all
provision set forth herein and in the Plan, and represents and warrants to
Corporation as follows:
This Option is being acquired by Optionee for investment only, for
Optionee’s own account, and not with a view to, for offer for sale, or for sale
in connection with the distribution or transfer thereof.
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OPTIONEE
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Dated:
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March 3, 2005
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/s/ David Litt
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David Litt
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Address:
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Social Security Number:
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6
Attachment A
(Copy of VitaCube Systems
Holdings, Inc.
2003 Stock Incentive Plan)
A-1
Attachment
B
(Suggested form of
Exercise Notice - please retype or make a copy of this letter before using.)
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Date:
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Treasurer
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VitaCube Systems Holdings, Inc.
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480 South Holly Street, Suite 200
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Denver, CO 80246
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Dear Sir:
In accordance with the Incentive Stock Option Agreement (the “Agreement”)
evidencing the option granted to me on ,
200 , under the VitaCube Systems Holdings, Inc. 2003
Stock Incentive Plan, I hereby elect to exercise the option to the extent of
Common Shares (the “Shares”). In
connection with this exercise, enclosed is the original Agreement for
endorsement by the Company as to exercise on Schedule I thereof.
In payment of the purchase price (initial all that apply):
A.
I
enclose a check or money order payable to the order of “VitaCube Systems
Holdings, Inc.” in the amount of $ .
B.
Promissory
Note (prior approval of the Committee required).
In the event I hereafter sell any of the Shares within one year from
the date of this exercise or within two years after the date of grant of this option,
I agree to notify the Company promptly of the amount of taxable compensation
realized by me by reason of such event for federal income tax purposes.
I agree to execute and deliver such additional documents reasonably
requested by the Company with respect to my acquisition of the Shares.
When the certificate for the Shares has been issued, please deliver it
to me, along with my endorsed Agreement if the option was not exercised in
full, at the address set forth below my signature.
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[Signature]
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[Address]
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[Print Name]
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[Social Security Number]
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B-1
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Optionee: David Litt
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Option No. Q–15
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Date of Grant: October 1, 2004
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Schedule I
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Unexercised
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Issuing
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Shares
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Payment
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Shares
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Officer
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Date
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Purchased
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Received
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Remaining
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Initials
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Exhibit 10.10
EMPLOYMENT AGREEMENT
This Agreement
is made this 2nd day of March, 2005 (the “Effective Date”), by and between
VITACUBE SYSTEMS HOLDINGS, INC.
, a Nevada
corporation (“Employer” or the “Company”), and
EARNEST MATHIS, JR.
(“Employee”).
This Agreement supersedes and replaces all prior employment agreements
between the parties whether written or oral.
BACKGROUND
A.
The
Company desires to employ Employee as the Chief Executive Officer and
President.
B.
Employee
desires employment with the Company as the Chief Executive Officer and
President.
THEREFORE, in
consideration of the Background, the mutual promises contained herein, and
other good and valuable consideration, the parties agree as follows:
1.
Employment Duties
.
1.1.
Employment
. Company agrees to employ Employee as Chief
Executive Officer and President until terminated as herein provided. The Company’s board of directors may amend
Employee’s job title and description from time to time. Employee hereby accepts employment by the
Company and agrees diligently and faithfully to perform his duties pursuant to
this Agreement. EMPLOYEE ACKNOWLEDGES AND THE PARTIES AGREE THAT EMPLOYEE IS
ONE OF THE COMPANY’S EXECUTIVE AND MANAGEMENT PERSONNEL AND THAT ALL
CONFIDENTIALITY, NON-COMPETE AND NON-SOLICITATION COVENANTS AND PROVISIONS
CONTAINED IN THIS AGREEMENT ARE FULLY ENFORCEABLE AGAINST EMPLOYEE.
1.2.
Time
Devoted
. Employee will devote approximately 80% of his time and energies to
the business of the Company to accomplish all duties reasonably assigned, and
will devote his best efforts to advance the interests of the Company. During the term of this Agreement, Employee
may be engaged in other business activity provided that, without the prior
approval of the Company’s board of directors, Employee shall not be engaged in
any Competitive Business (as defined in Section 8.6).
1.3.
Duties
. Employee’s duties shall include: management
of the day-to-day operations of the Company, general administration of the
Company’s business including
1
sales,
marketing, and strategic planning for the Company, supervision and direction of
employees and other corporate officers, and all other duties necessary to
perform the foregoing responsibilities or assigned to Employee by the board of
directors. Employee will have the
authority to perform and execute the necessary actions to implement the
operational initiatives set by the Company acting through its board of
directors.
2.
Term
.
The term of Employee’s employment hereunder shall commence on the
Effective Date and shall continue for a period of two years (the “Initial Term”). Employee’s employment shall terminate at the
end of the Initial Term unless extended by mutual agreement of the parties
unless earlier terminated as provided below.
3.
Compensation
.
3.1.
Salary
. Employee will receive as compensation for all
responsibilities a base salary (“Base Salary”) of $150,000 per year, payable
according to the salary schedule of Employer.
In addition to the Base Salary and the Plan Bonus described below,
Employee may receive a bonus in such amount as the board of directors in its
sole discretion shall determine.
3.2.
Stock
Options
. Employee also shall receive nonqualified stock options (the “Options”)
to purchase, at a price of $3.00 per share, an aggregate of 275,000 shares of
Employer’s common stock. The Options
will be in the form of Option Agreement attached to this Agreement as Annex 2.
3.3.
Bonuses
.
Employer intends to initiate an
incentive executive bonus plan (the “Plan Bonus”) for all executives of the
Company. Employee will be eligible for
inclusion for the Plan Bonus if and when it is instituted by the Company, but
only on the same basis as other executives may participate and as approved by
the compensation committee of the Board of Directors, or such equivalent Board
body.
3.4.
Withholding/Deductions
. All
compensation the Company pays Employee, including commissions, is subject to
all federal, state, and municipal withholding requirements, any applicable
occupational privilege tax and any court ordered deductions such as
garnishments. Compensation may also be
reduced by deductions Employee authorizes for insurance, 401(k) contributions,
and other similar purposes.
3.5.
Final Salary
.
Employee’s final paycheck will be reduced by the amount of any lawful
charge or indebtedness Employee owes the Company.
4.
Benefits
.
4.1.
Voluntary Benefits
.
Employee shall receive all benefits generally available to senior
executive employees of the Company from time to time. The Company does not promise to provide any
fringe benefits but agrees that, if provided, Employee shall have the
2
right to participate. Such
participation shall be subject to all qualification, vesting and other
requirements of the plans.
4.2.
Additional Benefits
. In
addition to the benefits set forth in Section 4.1,
4.2.1.
Employer
shall provide Employee with an auto allowance of $1,000 per month.
4.2.2.
Employee
shall be entitled to four weeks of paid vacation each year, with such vacation
to be scheduled and taken in accordance with the Company’s standard vacation
policies applicable to such personnel.
In addition, Employee shall be entitled to such sick leave and holidays
at full pay in accordance with the Company’s policies established and in effect
from time to time.
4.2.3.
The
Company shall pay the expenses reasonably incurred by Employee in connection
with a cellular telephone and a home high-speed digital telephone/internet connection.
4.2.4.
The
Company shall maintain director and officer liability insurance at all times
during the term of Employee’s employment and for a period of three years after
Employee’s termination of employment.
4.2.5.
The
Company shall reimburse the Employee for the cost of health insurance for the
Employee and his family.
4.3.
Expense Reimbursement
.
Employee shall be entitled to reimbursement from the Company of all
expenses incurred in performing duties hereunder, including without limitation,
meals, lodging, travel, and business entertainment, subject to the rules and
regulations adopted by the Company for handling of such business expenses.
5.
Best Efforts of Employee
.
Employee shall at all times faithfully, with diligence and to the best
of Employee’s ability, experience and talents, perform all duties required of
and from Employee pursuant to the express and implicit terms hereof to the
reasonable satisfaction of the Company.
6.
Termination
.
Employee’s employment hereunder may be
terminated under the circumstances set forth below.
6.1.
Death
. Employee’s employment hereunder shall
terminate immediately upon his death.
6.2.
Disability
.
Employee’s
employment hereunder shall terminate if Employee becomes physically or mentally
disabled so as to become unable, for a period of more than 90 consecutive
working days, or for more than 90 working days in the aggregate during any
3
12-month
period, to perform his duties hereunder, to the same extent he performed them
prior to the onset of such disability.
6.3.
Cause
. The Company may terminate Employee’s
employment immediately for “just cause.”
“Just cause” shall mean the occurrence of any of the following:
6.3.1.
Employee
materially breaches or fails to perform his obligations in accordance with the
terms and conditions of this Agreement, provided that the Company shall have
delivered to Employee written notice setting forth Employee’s deficiencies and
Employee shall have not taken reasonable steps to cure such deficiency within
five business days of such notice.
6.3.2.
Employee
commits a felony or any other act abhorrent to the community which a reasonable
person would consider materially damaging to the reputation of the Company or
its successors or assigns.
6.3.3.
Employee
commits an act of fraud, misappropriation, or personal dishonesty in connection
with his employment hereunder.
6.3.4.
Employee
commits a material and willful violation of a federal or state law or
regulation applicable to the business of the Company or its status as a public
company.
6.4.
Good
Reason
. Employee may terminate his
employment for “good reason” after giving the Company detailed written notice
thereof, if the Company shall have failed to cure the event or circumstances
constituting “good reason” within five business days after receiving such
notice. Good reason shall mean the
occurrence of any of the following without the written consent of Employee:
6.4.1.
Any
material breach by the Company of this Agreement.
6.4.2.
Any
material reduction in Employee’s duties or responsibilities.
6.4.3.
The
Company relocates its offices outside the Denver metropolitan area.
6.4.4.
The
Company is the subject of a regulatory action brought by the Securities and
Exchange Commission or a state securities administrator that results in a
finding that the Company committed a material violation of a securities law
arising out of actions by the Company prior to the date of this Agreement.
6.4.5.
A
change in control. A “change in control”
means (a) the acquisition, directly or indirectly by any person or group
(within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended) other than a trustee or other fiduciary holding
securities under an employee benefit plan of the
4
Company, of
beneficial ownership (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) of securities possessing more than 30% of the
total combined voting power in the election of directors of the Company’s
then-outstanding securities or (b) a change in a majority of the board of
directors in a period of less than one year.
6.5.
Without
Cause
. The Company shall have the
right to terminate Employee’s employment hereunder without cause by providing
Employee with at least 30 days prior written notice of such termination.
6.6.
Without
Good Reason
. Employee shall have the
right to terminate his employment without good reason by providing the Company
with at least 30 days advance written notice of such termination.
7.
Compensation Upon Termination
.
7.1.
If
Employee’s employment is terminated because of disability, for cause by the
Company, or without good reason by Employee, the Company shall only be obligated
to pay Employee the salary and bonuses earned as of the date of termination,
and reimbursement of all outstanding business expenses for which reimbursement
is due.
7.2.
If
the Company terminates this Agreement without cause, or if Employee resigns for
good reason
,
Employee shall
receive from the Company, as long as Employee does not violate the provisions
of Section 8 hereof, severance pay equal to one year’s Base Salary, payable in
equal monthly installments, for a period of 12 months from the date of termination
of employment, and all of Employee’s unvested options will vest and will be
exercisable as provided in the Option Agreement. Employee is also entitled to all salary and
bonuses earned as of the date of termination and reimbursement of all outstanding
business expenses for which reimbursement is due. At the option of the Company, the payments
due hereunder may be paid in a lump sum rather than in installments.
7.3.
If
Employee’s employment is terminated as a result of his death, the Company shall
pay Employee’s spouse or estate, all salary and bonuses earned as of the date
of termination and reimbursement of all outstanding business expenses for which
reimbursement is due.
8.
Covenants and Conditions
.
8.1.
Confidentiality
. Employee
acknowledges that during the course of Employee’s employment with the Company,
Employee will be exposed to and have access to confidential and proprietary
information including trade secrets concerning the business and affairs of the
Company. Employee acknowledges that such
confidential and proprietary information has been and will continue to be of
central importance to the Company and that disclosure of it to or its use by
others could cause substantial loss to the Company. Employee acknowledges that the Company developed
such confidential and proprietary information for
5
its exclusive
use and benefit and it is an exclusive, confidential, and proprietary asset of
the Company. Accordingly, Employee
agrees as follows:
Employee,
except with the prior written consent of the Company or as may be required by
law or any legal process, will not, at any time during or after employment, use
(except in connection with employment by the Company) or disclose to any person
or entity any confidential or proprietary information of the Company which was
obtained by Employee as a result of Employee’s employment with the Company, and
shall hold all of the same confidential.
For purposes of this Agreement, “confidential or proprietary information”
means information, whether written or otherwise, which has a business purpose
and is not known or generally available from sources outside the Company,
concerning, among other things, (a) the Company’s business operations, internal
structure, and financial affairs, including, but not limited to, its
distributors, products, services, employees, forecasts, sales and marketing
methods, costs, inventories, and sources of supply; (b) the current,
prospective, or past distributors or customers of the Company, their buying
habits, and the prices at which products
are offered or sold to them; (c) past, present, or future contracts held
by the Company respecting the business or operations of the Company or distributors
or customers, or suppliers of the Company; (d) the work performed by Employee
for the Company; and (e) all other compilations of information which relate to
the business of the Company.
The
restrictions and obligations in this Section 8.1 shall survive in perpetuity
the termination of this Agreement and the termination of Employee’s employment
by the Company.
8.2.
Company Property
. All
contracts, agreements, financial books, records, instruments and documents;
distributor lists, customer lists, memoranda, data, reports, programs, software,
tapes; rolodexes; telephone and address books; research; bids; proposals;
drawings; print-outs; graphs; listings; programming; and any other instruments,
records, or documents relating or pertaining to (a) distributors or customers
of the Company; (b) any employee or independent contractor of the Company; (c)
suppliers of the Company; or (d) the services rendered by Employee to the
Company, or in connection with the Company business (collectively the “Records”),
shall at all times be and remain the property of the Company. Except as authorized by the Company, Employee
agrees not to retain or carry away from the premises of the Company any
Records, copies of Records, equipment, or any other materials or matter of any
kind which are the property of the Company.
Upon the termination for any reason of employment with the Company,
Employee shall immediately turnover to the Company all Records, copies of any
Records, equipment, and other materials or matter which are in Employee’s
possession or control and which are the property of the Company.
8.3.
Developments
. Employee acknowledges that all designs,
drawings, graphs, sketches, print-outs, formulas, software, inventions,
discoveries, innovations, new technology, or other developments (collectively
called “Developments”) conceived or developed by Employee during the term of
employment, which Developments are related in
6
any way to the business of the Company then being conducted or proposed
to be conducted by the Company or to the business of any distributor or
customer or prospective distributor or customer of the Company, are and will be
the exclusive property of the Company, and shall be subject to the provisions
of Section 8.1 of this Agreement. Employee
will promptly notify the Company of any such Developments. Employee shall, when appropriate and upon
request of the Company, actively assist the Company in executing all papers and
performing all other lawful acts which the Company deems necessary or advisable
for the securing of legal protection for any such Developments, whether through
patent, copyright, or any other means.
Employee further agrees that, upon request of the Company, and at no
charge, Employee will assign any rights arising out of such Developments to the
Company.
8.4.
Papers, Drawings, and
Other Documents
. Employee agrees not to make or permit to be
made, except in the pursuance of employment duties under the terms of this
Agreement and for the sole use and account of the Company, any copies,
abstracts, or summaries of any designs, papers, drawings, or any other
documents of any kind which may come into Employee’s possession and which
relate or refer to the Company or its business.
Employee grants to the Company all rights to possession and all title in
and to any such designs, papers, drawings, or other documents, or copies,
abstracts, or summaries thereof, which come into the possession of Employee
within the period of employment by the Company and which relate or refer to the
Company’s business. Notwithstanding
anything herein to the contrary, Employee may retain any course materials
Employee obtains from attending private or college courses or seminars. If the Company desires a copy of such
materials, Employee shall provide it to the Company for copying, at the Company’s
expense, upon reasonable notice to Employee.
8.5.
Security Regulations
. Employee
agrees to abide by the Company’s personnel policies and all security
regulations and rules of employment adopted by the Company from time to time.
8.6.
Covenant Not to
Compete
. Employee agrees that during
the term of this Agreement and for a period of 12 months following termination
of this Agreement, he will not (except through the ownership of not more than
5% of the securities of an entity listed on the NASDAQ Stock Market or a
national securities exchange), directly or indirectly, as a proprietor,
director, officer, employee, partner, stockholder, consultant, owner or
otherwise, render services to or participate in the affairs of any Competitive
Business. A “Competitive Business” shall
mean any business that engages in the manufacturing, selling, marketing,
developing, packaging, or distributing of vitamins, nutritional supplements or
any other product being manufactured, sold, developed, marketed or distributed
by the Company, in any geographic area in which the Company has business or
distributor operations at the time of Employee’s termination of employment.
8.7.
Nonsolicitation of
Employees
. Employee agrees that
during the term of this Employment and for a period of 12 months following
termination of this Agreement, Employee will not (except on behalf of the
ownership of not more than 5% of the securities
7
of any entity listed on the NASDAQ Stock Market or a national
securities exchange), directly or indirectly, as proprietor, director, officer,
employee, partner, stockholder, consultant, owner or otherwise, solicit or
attempt to solicit the employment of, hire, or assist or participate in any
manner in the hiring or recruitment of any employee or independent contractor
employed or retained by the Company, or any former employee or independent
contractor whose employment or retention by the Company has ceased within six
months prior to the date of such solicitation, hire or other involvement in the
hiring or recruitment or such persons.
8.8.
Scope and
Reasonableness
. The parties to this Agreement expressly agree
and contract that it is not their intention to violate any policy, statute or
common law. The parties to this
Agreement agree that the limitations contained in Section 8 with respect to
time, geographical area, and scope of activity are reasonable. However, if any court shall determine that
the time, geographical area, or scope of activity of any restriction contained
in Section 8 is unenforceable, it is the intention of the parties that such
restrictive covenant set forth herein shall not thereby be terminated but shall
be deemed amended to the extent required to render it valid and enforceable.
8.9.
Remedies for Breach
. The
parties acknowledge that breach of Section 8 of this Agreement by Employee will
result in immediate, substantial, and irreparable harm to the Company. The parties therefore agree that the Company
shall have, in addition to any remedy available to it at law or in equity, the
right to enforce the terms of Section 8 of this Agreement by the remedy of
specific performance or injunction upon proper application to a court of
competent jurisdiction. Employee agrees
that the Company does not need to post a bond to obtain an injunction and
waives Employee’s rights to require such a bond.
9.
Representations of Employee.
Employee
hereby represents and warrants that as of the date hereof, Employee is not a
party to any agreement, contract, or understanding, and that no facts or
circumstances exist that would in any way restrict or prohibit Employee from
undertaking or performing any of Employee’s obligations under this
Agreement. Furthermore, Employee understands
and acknowledges that Employee may have confidentiality obligations to prior
employers under common law, statute, or contract. Employee represents and warrants that in the
course of rendering services to the Company, Employee will not use or otherwise
disclose any confidential or proprietary information obtained by Employee in
connection with any prior employment.
Employee shall indemnify and hold the Company harmless from any claims,
demands, costs, or liabilities (including attorneys’ fees and disbursements)
incurred by the Company in connection with or resulting from Employee’s breach
of the representations set forth in this Section 9.
10.
Assignment
.
Employee’s
obligations and duties under this Agreement are personal in nature. Employee shall not, without the consent of
the Company, assign or transfer this Agreement or any rights or obligations
hereunder. The Company may assign this
Agreement, or any benefit, duty, or obligation under this Agreement.
8
11.
Construction
.
The titles
appearing herein are used for purposes of convenience only and shall in no way
change the meaning of this Agreement.
12.
Notices
.
All notices,
requests, demands, consents, and other communications which are required or may
be given under this Agreement (collectively, the “Notices”) shall be in writing
and shall be deemed received (a) if given by facsimile, when transmitted, and
confirmation received, if transmitted on a business day before 5:00 p.m. local
time and, otherwise, on the next business day following transmission; (b) if
given by email, when transmitted, if transmitted on a business day before 5:00
p.m. local time and, otherwise, on the next business day following
transmission; (c) if given by certified mail, return receipt requested, postage
pre-paid, three business days after being deposited in the United States mail;
(d) if given by a nationally recognized overnight courier service, one business
day after being so deposited; and (e) if personally delivered, when received or
personally delivered. The mailing
address, facsimile number, and email address of the parties are as follows:
If to
Employee, address to:
Earnest
Mathis, Jr.
At his home
address, email address or fax number
most recently
on file with the Company
If to Company,
address to:
Vitacube
Systems Holdings, Inc.
408 S. Holly
Street
Denver,
CO 80246
Facsimile: 303-316-4116
Email: marypat@v3s.com
Any party may, from time to time, specify a different
address or facsimile number by giving Notice in accordance with this section.
13.
Entire Agreement
.
This
Agreement constitutes the full and complete understanding and agreement of the
parties, supersedes all prior understandings and agreements as to the
employment of Employee, and cannot be amended, changed, modified, or terminated
without the consent, in writing, of the parties hereto.
14.
Non-Waiver
.
The waiver by
either party of a breach of any term of this Agreement shall not operate or be
construed as a waiver of any subsequent breach thereof.
15.
Severability
.
If any of the
provisions of this Agreement shall be or become invalid or illegal under any
provision of applicable law or for any other reason, the remainder of the
Agreement shall not be affected and shall remain in full force and effect.
9
16.
Governing Law - Venue
.
THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF COLORADO (WITHOUT REGARD TO ITS RULES OF CONFLICTS OF LAWS).
17.
Arbitration
.
Any dispute relating to this Agreement,
or to the breach of this Agreement, except such as may concern Section 8,
arising between Employer and Employee, shall be settled by arbitration in
accordance with the commercial arbitration rules of the American Arbitration
Association (“AAA”), which arbitration may be initiated by any party hereto by
written notice to the other of such party’s desire to arbitrate the
dispute. The arbitration proceedings
shall take place in Denver, Colorado, and shall be administered by AAA.
Colorado’s Uniform Arbitration Act of 1975, C.R.S. §13-22-201 et seq. as
amended, shall govern any arbitration under this Agreement. Employer’s right to equitable relief set
forth in Section 8 may be brought and enforced in any court of competent
jurisdiction. Employee agrees and
consents to the District Court of the City and County of Denver, State of
Colorado, having jurisdiction over any such dispute.
18.
Counterparts; Facsimiles
.
This Agreement may be executed in counterparts,
each of which shall be deemed an original and which together shall constitute a
single instrument. This Agreement may be
executed and delivered by facsimile transmission, all with the same force and
effect as if the same was a fully executed and delivered original manual
counterpart
[signatures appear on following page ]
10
IN WITNESS WHEREOF, the parties have executed
this Agreement effective as of the day and year written above.
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EMPLOYER:
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VITACUBE SYSTEMS HOLDINGS, INC.
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By:
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/s/
Mary Pat O’Halloran
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Mary Pat O’Halloran, Chief Financial
Officer
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Date:
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March 2, 2005
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EMPLOYEE:
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/s/ Sanford D. Greenberg
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Sanford D. Greenberg
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Date:
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March 2, 2005
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11
Exhibit 10.11
THE SECURITIES
REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES ACTS (THE “STATE
ACTS”), AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE
TRANSFERRED (WHETHER OR NOT FOR CONSIDERATION) BY THE HOLDER, EXCEPT UPON THE
ISSUANCE TO VITACUBE SYSTEMS HOLDINGS, INC. (THE “CORPORATION”) OF A FAVORABLE
OPINION OF THE HOLDER’S COUNSEL, OR SUBMISSION TO THE CORPORATION OF SUCH OTHER
EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO COUNSEL FOR THE CORPORATION, TO
THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND THE
STATE ACTS.
STOCK OPTION AGREEMENT
This Stock Option Agreement is made effective as of the 2nd day of
March 2005, between
VITACUBE SYSTEMS
HOLDINGS, INC.
, a Nevada corporation (the “Corporation”) and Earnest
Mathis, Jr. (“Optionee”).
BACKGROUND:
A.
Optionee
is employed by the Corporation as its chief executive officer and president.
B.
Pursuant
to the terms of Optionee’s employment agreement with the Corporation, the
Corporation agreed to issue an option to purchase common stock of the
Corporation to Optionee.
IN CONSIDERATION of Optionee’s employment with the Corporation and the
mutual promises and undertakings described below, the parties agree as follows:
1.
Grant of Option
.
The Corporation hereby grants to Optionee an
option (“Option”) to acquire from the Corporation, at an initial purchase price
of $3.00 per share, 275,000 fully paid and nonassessable shares of common
stock, par value $.001 per share (the “Common Stock”) of the Corporation. The Option shall vest and be exercisable as
provided below. The purchase price per
share of the Common Stock, as adjusted from time to time as provided herein, is
referred to as the “Purchase Price.”
2.
Exercise of Option
.
2.1.
This Option is vested and
exercisable with respect to 137,500 shares of Common Stock as of the date of
this Agreement and will vest and be exercisable with respect to the balance of
the Common Stock on the one-year anniversary of this Agreement. Each increment of Common Stock that has
vested hereinafter referred to as the “Vested Options.” Except as provided in Section 2.2, upon
termination of Optionee’s
employment with the Corporation, this Option will be exercisable only
with respect to Vested Options as of the date of termination of
employment. Except as provided in
Section 2.3, Vested Options will be exercisable for a period of five years following
their vesting date. The Option will
terminate and cease to be outstanding for any Vested Options for which the
Option has not been exercised on the 5-year anniversary of the respective
vesting dates unless earlier terminated as provided in Section 2.3.
2.2.
If the Corporation
terminates Optionee’s employment with the Corporation without “just cause” or
Optionee terminates for “good reason” as defined in the Employment Agreement
dated March 2, 2005, between the Optionee and the Corporation (the “Employment
Agreement”), all unvested options will immediately vest and become
exercisable. Options that vest under
this section will be exercisable for a period of five years following the date
of Optionee’s termination of employment.
The Option will terminate and cease to be outstanding for any Options
which vest under this Section 2.2 on the 5-year anniversary of Optionee’s
termination of employment
2.3.
If the Corporation
terminates Optionee’s employment with the Corporation for “just cause” as
defined in the Employment Agreement, this Option will immediately terminate and
cease to be outstanding for any Common Shares that have not been exercised as
of the date of Optionee’s termination of employment.
3.
Manner of Exercise
.
3.1.
The Optionee may exercise
this Option, in whole or in part, upon surrender of this Option, with the
exercise form annexed hereto duly executed, at the office of the Corporation,
480 S. Holly Street, Denver, Colorado 80246, or such other office of which the
Corporation shall notify the Optionee in writing, together with a certified or
bank cashier’s check payable to the order of the Corporation in the amount of
the Purchase Price times the number of shares of Common Stock being purchased.
3.2.
As soon as practical
after the exercise date and in compliance by the Optionee with any request
pursuant to Section 6.2 of this Agreement, the Corporation will issue to or on
behalf of the Optionee a certificate representing the shares of Common Stock
purchased pursuant to this Option.
3.3.
In no event shall any
fractional share of Common Stock of the Corporation be issued upon any exercise
of this Option. If, upon exercise of
this Option as an entirety, the Optionee would, except as provided in this
section, be entitled to receive a fractional share of Common Stock, then the
Corporation shall issue the next higher number of full shares of Common Stock,
issuing a full share with respect to such fractional share.
4.
Reservation of Shares
.
The Corporation covenants that it will at all
times reserve and keep available a number of its authorized shares of Common
Stock, free from all preemptive rights, which will be sufficient to permit the
exercise of this Option. The Corporation
further covenants that such shares as may be issued pursuant to the exercise of
this
2
Option will, upon issuance, be
duly and validly issued, fully paid and nonassessable and free from all taxes,
liens, and charges.
5.
Adjustments to Purchase Price
.
5.1.
If the Corporation shall
at any time prior to the expiration of this Option subdivide its outstanding
shares of Common Stock, by split-up or otherwise, or combine its outstanding
shares of Common Stock, or issue additional shares of Common Stock in payment
of a stock dividend in respect of its shares of Common Stock, the Purchase
Price then applicable to shares covered by this Option shall forthwith be
proportionately decreased in the case of a subdivision or stock dividend, or
proportionately increased in the case of a combination.
5.2.
In the case of any
reclassification, capital reorganization, or change of the outstanding shares
of Common Stock of the Corporation (other than as a result of a subdivision,
combination or stock dividend), or in the case of any consolidation of the
Corporation with, or merger of the Corporation into, another corporation or
other business organization (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result in any
reclassification or change of the outstanding shares of Common Stock of the
Corporation), or in the case of any sale or conveyance to another corporation
or other business organization of the property of the Corporation as an
entirety or substantially as an entirety, at any time prior to the expiration of
this Option, then, as a condition of such reclassification, reorganization,
change, consolidation, merger, sale or conveyance, lawful provision shall be
made, and duly executed documents evidencing the same from the Corporation or
its successor shall be delivered to the Optionee of this Option, so that the
Optionee shall have the right prior to the expiration of this Option to
purchase, at a total price not to exceed that payable upon the exercise of the
unexercised portion of this Option, the kind and amount of shares of stock and
other securities and property receivable upon such reclassification,
reorganization, change, consolidation, merger, sale or conveyance, by an
Optionee of the number of shares of Common Stock of the Corporation which might
have been purchased by the Optionee immediately prior to such reclassification,
reorganization, change, consolidation, merger, sale, or conveyance, and in any
such case appropriate provisions shall be made with respect to the rights and
interest of the Optionee to the end that the provisions hereof (including,
without limitation, provisions for the adjustment of the Purchase Price and of
the number of shares purchasable upon exercise of this Option) shall thereafter
be applicable in relation to any shares of stock and other securities and
property thereafter deliverable upon exercise hereof.
5.3.
Whenever the Purchase
Price is adjusted, as herein provided, the Corporation shall promptly deliver
to the Optionee a certificate setting forth the Purchase Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
5.4.
If at any time prior to
the expiration or exercise of this Option, the Corporation shall pay any
dividend or make any distribution upon its shares of Common Stock or shall make
any subdivision or combination of, or other change in its shares of
3
Common Stock, the Corporation shall cause notice thereof to be mailed,
first class, postage prepaid, to the Optionee at least ten full business days
prior to the record date set for determining the holders of Common Stock who
shall participate in such dividend, distribution, subdivision, combination or
other change. Such notice shall also
specify the record date as of which holders of Common Stock who shall
participate in such dividend or distribution are to be determined. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of any dividend or
distribution.
6.
Restricted Shares
.
6.1.
Neither this Option nor
the shares of Common Stock issuable upon exercise of this Option have been
registered under the Securities Act of 1933, as amended (the “Act”), or any
state acts. Optionee understands and
agrees that any shares of Common Stock purchased by Optionee pursuant to this
Option will be “restricted shares”, as such term is defined under the Act, and
that such shares must be held indefinitely unless and until subsequently
registered under the Act and the state acts, unless an exemption from such
registration is available.
6.2.
Unless a current
registration statement under the Securities Act, shall be in effect with
respect to the securities to be issued upon exercise of this Option, the
Optionee, by accepting this Option, covenants and agrees that, at the time of
exercise hereof, the Corporation may require the Optionee to make such
representations, and may place such legends on certificates representing the
shares of Common Stock issuable upon exercise of this Option, as may be reasonably
required in the opinion of counsel to the Corporation to permit such shares of
Common Stock to be issued without such registration.
7.
Transferability of Option
. During the lifetime of the Optionee, the
Option is exercisable only by the Optionee and is not assignable or
transferable. If the Optionee dies prior
to the expiration of this Option, the Option to the extent exercisable on the
date of Optionee’s death may be exercised by the personal representative of the
Optionee’s estate, or by the persons to whom the Option is transferred pursuant
to the Optionee’s will or in accordance with the laws of descent and
distribution.
8.
No Employment Rights
.
Nothing in this Agreement will confer
upon Optionee any right to continue in the employment of the Corporation for
any period or specific duration or interfere with or otherwise restrict in any
way the rights of the Corporation or of the Optionee, to terminate his
employment as provided in the Employment Agreement.
9.
Compliance with Laws and Regulations
.
9.1.
The exercise of this
Option and the issuance of the shares of Common Stock issuable upon exercise of
this Option shall be subject to compliance by the Corporation and Optionee with
all applicable requirements of law.
9.2.
The inability of the Corporation
to obtain approval from any regulatory body having authority deemed by the
Corporation to be necessary to the lawful issuance and sale of any shares of
Common Stock issuable upon exercise of this Option shall
4
relieve the Corporation of any liability with respect to the
non-issuance or sale of the shares of Common Stock issuable upon exercise of
this Option as to which such approval shall not have been obtained. The Corporation, however, shall use its best
efforts to obtain all such approvals.
9.3.
The Corporation’s
obligation to deliver shares of common stock pursuant to the exercise of this
Option is subject to the Optionee’s payment to the Corporation in cash of the
amount necessary to satisfy all applicable federal, state, and local income and
employment tax withholding requirements.
10.
Representations and Warranties by Optionee
.
Optionee represents and warrants to
Corporation as follows:
10.1.
This Option is being acquired
by Optionee for investment only, for Optionee’s own account, and not with a
view to, for offer for sale, or for sale in connection with the distribution or
transfer thereof.
10.2.
This Option is not being
purchased for subdivision or fractionalization thereof; Optionee has no
contract, undertaking, agreement or arrangement with any person or entity to
sell, hypothecate, pledge, donate, or otherwise transfer (with or without
consideration) to any such person or entity the Option; and Optionee has no
present plans or intentions to enter into any such contract, undertaking,
agreement or arrangement.
11.
Governing Law
.
THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF COLORADO WITHOUT
REFERENCE TO ANY CONFLICTS OF LAW PROVISION THAT WOULD REQUIRE APPLICATION OF
THE LAW OF ANY OTHER JURISDICTION. VENUE
FOR ANY PROCEEDING BROUGHT TO ENFORCE THE TERMS OF THIS AGREEMENT SHALL BE
PROPER ONLY IN THE STATE OR FEDERAL COURTS LOCATED IN THE CITY AND COUNTY OF
DENVER, STATE OF COLORADO.
12.
Severability
.
If any provision of this Option is determined
to be invalid or unenforceable for any reason, the remainder of the Option
shall remain in full force and effect.
13.
Succession
.
This Option shall be binding upon the
parties, their respective heirs, successors, assigns, and legal
representatives.
5
IN WITNESS
WHEREOF, the parties have executed this Option effective as of the day and year
first above written.
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VITACUBE SYSTEMS HOLDINGS, INC.
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By:
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/s/ Mary Pat O’Halloran
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Mary Pat O’Halloran,
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Chief Financial Officer
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Date:
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March 2, 2005
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OPTIONEE
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/s/ Earnest Mathis, Jr.
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Earnest Mathis, Jr.
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Date:
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March 2, 2005
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6
Form of Exercise
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Date:
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To:
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VitaCube Systems Holdings, Inc.
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480 S. Holly Street
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Denver, CO 80246
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The undersigned hereby subscribes for
shares of Common Stock of VitaCube Systems Holdings, Inc. covered by this Option
and hereby makes payment of $
in payment of the purchase price therefor.
I understand that the Corporation’s obligation to deliver the Common
Stock is subject to all applicable federal and state securities laws. I agree to execute such additional documents
as the Corporation may reasonably request with respect to my acquisition of the
Common Stock.
The certificate(s) for such shares should be issued in the name of the
undersigned or as otherwise indicated below:
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Signature
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Print Name
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Social Security Number or
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Employee Identification Number
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Exhibit 14.1
VITACUBE SYSTEMS HOLDINGS, INC.
CODE OF CONDUCT AND ETHICS
I.
APPLICATION OF CODE
This Code of Conduct and Ethics (the “Code”) applies to all directors,
officers, and employees (“Covered Persons”) of VitaCube Systems Holdings, Inc.
and its subsidiaries (“VitaCube”).
This Code is neither a contract of employment nor a guarantee of
continuing VitaCube policies. VitaCube
reserves the right to amend, supplement or discontinue this Code, without prior
notice, at any time.
II. DECISION–MAKING;
OPERATION OF THE CODE
A.
CORE
VALUES
The world of business is complex and ever more
fast-paced. How to make good choices and
take the right action is sometimes unclear.
VitaCube’s long-term success depends upon the choices we make every day,
so we must all understand and meet the high expectations set herein as to the
way we behave in our business at all times.
First, we must base our decisions and actions on our core
values of honesty, fairness and integrity.
•
We will not tolerate fraud, deceit or
concealment.
•
Business and company decisions must be based
on fact and fairness, not bias or prejudice.
•
Business and company decisions must be based
on strict principles of right and wrong as defined by the principles set forth
in this Code.
B.
COMPLIANCE WITH THE CODE
Simply put, we all must comply with this Code. It supports us in making good decisions and
taking the right actions to help keep us from making the wrong choice and helps
us comply with the laws, rules and regulations that apply to our business.
Covered
Persons are expected to understand how the Code applies to his or her own job,
business decisions and activities. If
you do not understand, the Chief Financial Officer (the “CFO”) is available to
answer your questions.
1
VitaCube recognizes that some choices about how to conduct
business are complicated. Any time one
encounters a difficult decision or does not understand how the Code applies in
a particular case, they should ask for advice and guidance. If anyone covered
by this Code becomes aware of any violations or potential violations, or has
complaints or concerns regarding accounting, internal accounting controls, or
auditing matters, they must promptly notify the CFO or Chief Executive Officer
(the “CEO”). Covered Persons found to
have violated this Code will be subject to disciplinary action that may include
termination of employment.
VitaCube
will not tolerate retaliation against anyone who makes a good
faith report regarding a violation or
potential violation of this Code.
III.
BASIC PRINCIPLES
1.
FAIR DEALING:
We
will deal honestly and ethically with VitaCube and with its distributors,
customers, suppliers, competitors, endorsers, employees and other stakeholders.
We will treat people fairly. We must not take unfair
advantage of anyone through manipulation, concealment, abuse of privileged or
otherwise undisclosed information, misrepresentation of material facts or any
other unfair-dealing practices.
2.
CONFLICT SITUATIONS:
A
conflict situation can arise when one of us takes action or has interests that
may make it difficult to perform our VitaCube work objectively and effectively.
We
must avoid any investment, interest, or association that interferes or might
interfere with the independent exercise of our own individual best judgment and
with our obligation to perform our responsibilities in VitaCube’s best
interest.
For example:
1.
We will deal with all suppliers, customers,
and all other persons doing business with VitaCube in a completely fair and
objective manner without favor or preference based upon personal financial or
relationship considerations.
2.
We will not accept from or give to any
supplier, customer, or competitor any gift or entertainment except as allowed
under “Gifts, Meals and Entertainment” under Policy 4 below.
3.
We will not do business on behalf of VitaCube
with a member of our household or a close relative, unless the transaction is
disclosed in writing to the CEO, and it is determined that the transaction is
on arms-length terms and is consistent with the purposes of this Principle.
A
close relative would include, for example, at a minimum, a spouse, domestic
partner, parent, parent-in-law, sibling, sibling-in-law, child or
son/daughter-in-law, or stepparent, stepsibling, or stepchild.
2
4.
We will not, directly or indirectly, have a
financial interest in any firm or company which is a competitor of VitaCube if
such financial interest represents a material percentage of the total net worth
of the Covered Person, or if such ownership creates a direct conflict of
interest for the Covered Person in connection with work the Covered Person is
performing for VitaCube.
5.
We will not, directly or indirectly, have a
financial interest in or hold any employment, managerial, directorial,
consulting or other position with any firm or company which does or seeks to do
business with VitaCube, if such interest or position may influence any decision
that we might make in the performance of our regular duties.
6.
Officers and employees must disclose to the
CEO, and a director must disclose to the board of directors, the existence of
any such conflict of interest or position, whether actual or proposed. VitaCube
will review such case with the appropriate officers, directors and legal
counsel, if necessary, and they will determine whether the existence of such
conflict of interest or position is or may be in conflict with this Principle
or otherwise detrimental to the best interest of VitaCube or any of its
operations. If they determine that such conflict or detrimental effect may
occur, such steps as are necessary to correct the situation will be immediately
taken.
3.
OPPORTUNITIES:
When presented with opportunities related to VitaCube’s
business interests, we must first offer those opportunities to VitaCube. We
will not: (a) take for ourselves personally, or for members of our household or
close relatives, opportunities that are discovered through the use of VitaCube
property, information or position; or, (b) use VitaCube property, information,
or position for personal gain.
4.
GIFTS, MEALS
AND ENTERTAINMENT:
When you are providing a gift, meal,
entertainment or other accommodation in connection with VitaCube business, you
must do so in a manner that is in good taste and without excessive
expense. You may not furnish or offer to
furnish any gift that is of more than token value or that goes beyond the
common courtesies associated with accepted business practices.
You
also should follow the above guidelines for receiving gifts. You should not accept any significant gift,
payment, or anything of value from distributors, customers, vendors or anyone
else doing business with VitaCube, if the gift would likely be perceived as
unduly influencing your business decisions.
Accepting a company t-shirt or coffee mug, for instance, is not likely
to change your assessment of a potential business relationship.
Our
suppliers and customers likely have gift and entertainment policies of their
own. You must be careful never to
provide a gift or entertainment that violates the other company’s gift and
entertainment policy.
What
is acceptable in the commercial business environment may be entirely
unacceptable in dealings with governments in the United States and other
countries. There are strict laws that
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govern providing gifts,
including meals, entertainment, transportation and lodging to government
officials and employees. You are
prohibited from providing gifts or anything of value to government officials or
employees or members of their families in connection with VitaCube business
without prior written approval from the CEO.
For more information, see the section of this Code regarding “Laws
Relating to Payments to Government Officials/Employees.”
5.
ACCURACY AND
INTEGRITY OF BOOKS, RECORDS AND ACCOUNTS:
All VitaCube books,
records and accounts must accurately reflect the nature of the transactions
recorded. Books and records include but
are not limited to ledgers, vouchers, bills, invoices, time sheets, expense
reports, payroll and benefits records and other essential company data.
All
assets and liabilities of VitaCube must be properly recorded in the regular
books of account.
No
undisclosed or unrecorded fund or asset shall be established in any amount for
any purpose.
No
transaction or arrangement shall be structured to circumvent VitaCube’s
internal control system.
No
false or artificial entries shall be made for any purpose.
No
payment shall be made, nor purchase price agreed to, with the intention or
understanding that any part of such payment is to be used for any purpose other
than that described in the document supporting the payment.
6.
PROTECTION OF
CONFIDENTIAL INFORMATION OF CUSTOMERS AND OTHERS:
We must not accept non-public information provided by a
supplier or other party with the condition or understanding that it be kept
confidential unless such information is subject to a written confidential disclosure
agreement or confidentiality provision drafted or approved by VitaCube’s legal
advisors.
We
must maintain the confidentiality of information entrusted to VitaCube by a
third party, except when disclosure is legally mandated as determined by VitaCube’s
legal advisors.
We
must not seek or accept confidential information of or about a competitor in an
illegal or unethical manner.
If
we have confidential information about a former employer or any other entity
with which we were previously affiliated, we are expected to abide by our
obligation to keep such information confidential. VitaCube will not require and does not want
us to use or disclose such information in our capacity as a director, officer
or employee of VitaCube.
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7.
FULL, FAIR, ACCURATE TIMELY AND UNDERSTANDABLE
DISCLOSURES:
We
will ensure that VitaCube’s public disclosures comply with all applicable
securities laws, including all applicable financial reporting and accounting
regulations. Strict compliance with corporate accounting policies and
procedures is required, as is full cooperation with internal and external
auditors.
8.
COMPLIANCE WITH THE LAW:
We are required to familiarize ourselves with all the laws,
rules and regulations that apply in the areas within the scope of our work
responsibilities, including, as applicable, the following areas:
A.
Food and Drug Laws
We must comply with all applicable laws, rules, regulations,
consent decrees and other orders of the United States Food and Drug
Administration governing research, development, manufacture, distribution and
promotion of foods, nutritional or related products and services.
B.
Antitrust and Competition Laws:
When we are dealing with competitors, the following policies
shall apply:
1.
We must not enter into any agreement or
understanding that has the purpose or effect of improperly restraining
competition. Illegal agreements or understandings among competitors include
price fixing, market allocation, and bid rigging.
2.
We must not exchange, discuss, or benchmark
with any competitor information relating to VitaCube prices or pricing
policies, distribution policies, supplier pricing or selection, customer
selection or classification, credit policies, advertising policies or any other
similar competitive information.
3.
We must not participate in any formal or
informal trade association or other meetings with competitors at which
agreements or understandings of the type described in paragraph (1) are being
made or at which competitive information of the type described in paragraph (2)
is being exchanged or discussed.
C.
Insider Trading.
If a person possesses material non–public information
concerning a company that issues publicly–traded securities, it is generally
illegal for the person to trade in securities of that company or to “tip”
others who might trade in such securities.
Covered Persons and third parties who are in a confidential
relationship with VitaCube (as well as such individuals’ household members and
close relatives), shall not trade in or recommend the purchase or sale of
VitaCube’s common stock (or any other equity or debt securities of VitaCube)
while they are in possession of material information regarding the operations
or prospects of VitaCube that has not been publicly disclosed and disseminated.
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Covered Persons shall also similarly abstain from trading in,
or recommending the purchase or sale of the securities of any other company
that issues publicly–traded securities of which they have obtained material
non–public information as a result of their employment by or affiliation with
VitaCube.
Covered Persons shall not disclose any such material
non–public information to third parties except when done for valid business
purposes (and covered by an appropriate confidential disclosure agreement). In
such cases the Covered Persons must have no reason to believe the information
will be misused or the disclosure might otherwise violate federal securities
laws. United States’ securities laws prohibit selective disclosures of material
non-public information to third parties who are not bound by confidentiality
agreements or certain confidential relationships to preserve the
confidentiality of such information. Covered Persons should consult with the
CEO or CFO before making disclosures to third parties that might constitute
selective disclosure or if they believe a selective disclosure may have already
been made by inadvertence or otherwise.
“Material information” is information which, if publicly
disclosed, could reasonably be expected to affect the market value of a company’s
securities or to influence a reasonable investor’s decisions with respect to
those securities. Specific examples of material information include generally
unanticipated changes in revenues, annual and quarterly earnings or dividend
rates, significant write-offs or significant increases in reserves, public
offerings of any VitaCube securities, significant acquisitions or dispositions,
joint ventures, proposed tender offers or stock splits, and senior management
changes. Information regarding major new product developments, suppliers,
contract awards or terminations, expansion plans, or significant litigation or
regulatory proceedings may also fall in the category of material information.
To prevent violations of these laws and avoid even the
appearance of impropriety, VitaCube may impose “blackout periods” during which
certain Covered Persons should not engage in any transactions involving
VitaCube’s securities. Affected Covered Persons will be notified of any such
blackout period.
D.
Laws
Relating to Payments to Government Officials/Employees.
We must not directly or indirectly pay, give, offer, or
promise any form of bribe, gratuity, or kickback to any government official or
employee. We must comply with the United
States Foreign Corrupt Practices Act, and with similar laws elsewhere, that
apply to payments to government officials/employees of other countries.
Under the Foreign Corrupt Practices Act, we may not directly
or indirectly pay, give, offer, or promise money or anything of value to any
officer, employee or representative of a government outside the United States
or of a public international organization, or to any political party, party
official, or candidate for political office outside the United States in order
to (1) secure an improper advantage in obtaining, retaining, or directing
business, (2) influence any act or decision of the recipient in an official
capacity, or (3) induce the recipient to do or omit to do an act in violation
of such person’s lawful duty.
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An example of an impermissible indirect activity would be a
payment made through an intermediary or agent where we know or should be aware
that such payment would be passed along for prohibited purposes.
E.
Laws Relating to Equal Employment Opportunity and Workplace
Harassment and Discrimination.
VitaCube’s policy is to provide employment opportunities
without regard to race, religion, color, national origin, sex, age, ancestry,
citizenship, veteran status, marital status, sexual orientation, or disability
or any other reason prohibited by law. Decisions as to hiring, promotion and
other aspects of the employment relationship should be based solely upon
job–related qualifications.
VitaCube also prohibits sexual harassment, as well as
harassment based on any of the other characteristics listed above, and will
take appropriate action to eliminate prohibited harassment and remedy the
effects of such harassment. VitaCube’s
harassment policy is described in further detail in the Staff Handbook.
F.
Laws Relating to Data Privacy
VitaCube is committed to the protection of an individuals’
privacy. We must comply with applicable privacy laws, rules and regulations
wherever VitaCube does business, and in all aspects of its business. Those
laws, rules and regulations are complex. If anyone has a question or concern
about collecting, using, disclosing or storing an individual’s information,
either within VitaCube or in a relationship with a third party, contact the CFO
for advice before proceeding.
G.
Laws Relating to the Environment.
VitaCube is committed to protecting the environment by
minimizing the negative environmental impact of our operations and promoting
sustainable use of natural resources. We must comply with all applicable
environmental laws, rules and regulations wherever we do business.
H.
Laws Relating to Political Contributions.
Except as permitted by applicable law, we will not provide or
promise VitaCube funds or services for political purposes to any political
party or any candidate for, or incumbent in, any public office.
In many instances in the United States, gifts, contributions,
or expenditures by or on behalf of VitaCube in connection with any federal,
state, or local election or political process are prohibited or regulated. We
will not make any contributions on behalf of VitaCube without the prior written
approval of the CEO.
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I.
Anti Money-Laundering Laws
We will comply with all applicable anti money-laundering
laws, rules and regulations of the United States and other countries having
comparable laws.
The anti money-laundering laws prohibit us from engaging in a
financial transaction if we know that the funds involved in the transaction
were derived from illegal activities. If you believe that the other party to a
business transaction is engaged in any illegal activity or is using proceeds derived
from an illegal activity, you must obtain approval from the CEO to entering
into the transaction.
9.
PROTECTION OF
RESOURCES:
We
must safeguard VitaCube’s assets against loss, damage, carelessness, waste,
misuse and theft.
VitaCube’s assets, such as intellectual property, electronic
media, work time, equipment, funds, products and services, are intended for
legitimate business use.
We must use VitaCube’s assets efficiently and for legitimate
business purposes; never for illegal or unethical purposes.
10.
PROTECTION OF
CONFIDENTIAL INFORMATION:
The disclosure of
confidential information regarding VitaCube’s business, financial, or legal
matters or operations, whether intentional or accidental, can adversely affect
the financial stability and competitive position of VitaCube and the job
security of its employees.
Because
of this risk of harm to VitaCube and its employees, we must not, during the
term of our employment by or affiliation with VitaCube or thereafter, disclose
to third parties any confidential information obtained during the course of
employment or affiliation except pursuant to an approved confidential
disclosure agreement, unless such disclosure is legally mandated as determined
by the VitaCube board of directors.
11.
EMPLOYEE
HEALTH AND SAFETY:
VitaCube is committed to protecting the health
and safety of its employees. We will act promptly to address any unhealthy or
unsafe condition. This includes taking steps to protect the physical safety and
security of VitaCube employees.
To
meet this principal, each employee has responsibilities. We need to follow
health and safety requirements. But beyond that, each of us must observe
established safe work practices to ensure our own safety and that of our
co–workers. This includes reporting to work free from the influence of drugs or
alcohol that could impair one’s ability to work safely and conscientiously.
If
you are involved in, or know of, an accident or dangerous situation, it is your
duty to report it to management promptly and, when appropriate, take corrective
action.
12.
ELECTRONIC
MEDIA USAGE:
VitaCube provides access to and use of
electronic mail, voicemail, the intranet, the Internet, and other electronic
media for business
8
purposes. We do this to make it
easier for VitaCube employees to communicate with each other and with
appropriate outside parties – including distributors, contractors, suppliers,
and customers.
We
must not use VitaCube’s electronic media for any purposes that violate
applicable laws, rules and regulations or VitaCube standards, policies or
procedures. This includes transmission of threatening, obscene or harassing
materials.
13.
ACCOUNTABILITY FOR ADHERENCE TO THIS CODE:
Each of us is responsible for our decision–making
and for adherence to the Principles set forth in this Code. VitaCube will address violations or potential
violations of the Code in a variety of ways including, but not limited to,
internal investigations and disciplinary action. Disciplinary action may, when appropriate,
include dismissal.
IV.
WAIVERS AND AMENDMENTS
Any waiver of this Code for a director or executive officer
may be made only by the VitaCube board of directors. Any waiver of this Code
for a person covered by this Code who is not a director or executive officer
may be made by the CEO. VitaCube will
make public disclosure, as and to the extent required by applicable laws, rules
and regulations, of waivers of, or amendments to, this Code.
9