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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
(Amendment No. 1)
GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO
SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
BIONUTRICS, INC.
(Exact Name of Registrant Specified in Charter)
Nevada 86-0760991
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2425 E. Camelback Road, Suite 650, Phoenix, Arizona 85016
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (602) 508-0112
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title or Class)
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ITEM 1. BUSINESS.
GENERAL
Bionutrics, Inc. ("Bionutrics" or the "Company"), a biopharmaceutical
company, was founded for the purpose of discovering and developing novel
biologically active compounds derived from natural sources. Technology based on
natural biologically active compounds has applications not only as classic
ethical drugs, but also as food ingredients and dietary supplements.
The Company's first product addresses the incident of heart disease and
stroke, which are among the largest health-care market issues in the western
world: the cause of approximately one out of every two adult deaths. Bionutrics
has developed a new all natural product that has been shown in research trials
to be effective in promoting cardiovascular health by inhibiting key events
associated with the progression of heart disease and stroke. The new product is
called TRF(25) and will be marketed under the trade name "Clearesterol(TM)". It
is based on a patented novel compound (P(25)-tocotrienol), a vitamin-E like
product derived from rice bran, which has been shown to promote normal
cardiovascular circulation by lowering LDL cholesterol levels, providing
cardiovascular antioxidant protection and by inhibiting events of clot
formation.
The patented P(25)-tocotrienol technology has potential for
exploitation as an ethical drug. Because TRF(25) is a natural complex found in
rice bran that contains P(25)-tocotrienol, this technology also has applications
as a food ingredient and a dietary supplement.
The marketing and sales strategy for the Company is first to launch a
new dietary supplement product (trade name evolvE(TM)) containing the ingredient
Clearesterol(TM). evolvE(TM) can be introduced into the U.S. market without the
delays associated with the regulatory approval required for food additives and
drugs. Once the brand is established, the Company will sell the active
ingredient Clearesterol(TM) as a branded ingredient in other companies'
products. The Company will employ a strategy similar to the successful
NutraSweet(R) branding strategy for the product Equal(R) in which NutraSweet(R)
is the proprietary ingredient. The next goal is to explore opportunities to add
strategic distribution partners in Europe, the Middle East and Asia. The
international market not only represents an opportunity to expand revenue, but
also allows the Company to spread the lower regulatory and market risks.
Bionutrics together with industry partners intends to pursue regulatory approval
for P(25)- tocotrienol as a drug and TRF(25) as a food ingredient. Such approval
would allow curative and preventative claims to be made for the technology.
The Company has only now begun to receive orders for its products and
has had no revenue from sales. Accordingly, there is limited historical
financial information about the Company. The Company has generated an
accumulated deficit of approximately $5,139,991 through October 1996, and
expects to incur a loss in fiscal year 1997. The Company expects to transition
from the development stage to the operating stage in the second and third
quarters of calendar 1997. The Company is currently conducting testing and
marketing activities relating to evolvE(TM) and Clearesterol(TM). In preparation
for the initial launch of the product, manufacturing operations are being
refined, distribution channels established and preliminary discussions with
potential customers are being held. Internal and external
cholesterol/cardiovascular testing is continuing.
The research and development relating to the product and production
technology began in 1990 in a predecessor to LipoGenics, Inc., a Delaware
corporation ("LipoGenics"), which was formed in July 1992.
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LipoGenics formed NutraGenics, Inc., a Delaware corporation ("NutraGenics
(Delaware)") in April 1994 pursuant to a rights offering to all LipoGenics
shareholders. The purpose of NutraGenics (Delaware) was to provide a vehicle to
engage in manufacturing and marketing of the technology developed by LipoGenics
pursuant to a licensing arrangement. NutraGenics (Delaware) merged in December
1994 into Nutrition Technology Corporation, a Nevada corporation and wholly
owned subsidiary of ERBA Corporation ("ERBA"), a publicly traded Nevada
corporation incorporated in 1983. Although Nutrition Technology Corporation
survived the merger, the merger was accounted for as a reverse acquisition and
the historical financials of NutraGenics (Delaware) became the financials for
the surviving corporation. ERBA had minimal historical operations and as such
the merger of its subsidiary with NutraGenics (Delaware) had no impact on
operations and operating results of NutraGenics (Delaware). ERBA changed its
name to NutraGenics, Inc. at the time of the merger. NutraGenics, Inc.
subsequently changed its name to Bionutrics, Inc. on December 26, 1996.
Bionutrics completed a merger with LipoGenics on October 31, 1996 and
LipoGenics became a wholly owned subsidiary of the Company. Bionutrics issued
2,092,743 shares in connection with the merger, which was accounted for as a
pooling. Pursuant to the merger, Bionutrics obtained ownership of the
proprietary rights previously licensed to it by LipoGenics.
As used herein, the terms "Bionutrics" and the "Company" refer to
Bionutrics, Inc., a Nevada corporation and its subsidiaries, Nutrition
Technology Corporation, LipoGenics, Inc., and Bionutrics Health Products, Inc.
The Company maintains its principal offices at 2425 East Camelback Road, Suite
650, Phoenix, Arizona and its telephone number is (602) 508-0112.
THE COMPANY'S PRODUCTS
Bionutrics' proprietary ingredient, TRF(25), has been shown in animal
tests and human trials to promote elements associated with cardiovascular health
by altering cholesterol metabolism. TRF(25) has been shown in animal and human
trials to reduce high levels of LDL (low density lipoprotein cholesterol,
commonly referred to as "bad" cholesterol), act as a strong cholesterol
antioxidant and promote normal circulation by inhibiting clot formation.
By attacking these three events, TRF(25) and its components have
possible application in dietary supplement, drug and food ingredient products.
Because Bionutrics is able to market TRF(25) under the trade mark "Clearesterol"
as a dietary supplement ingredient and advertise certain functional benefits
without FDA approval, the dietary supplement market is the Company's first
market priority, ahead of drug and food uses. See "Market and Competition" and
"Government Regulations."
Six years of research created the product and manufacturing technology
on which Bionutrics has based its new product. evolvE(TM) (which contains
Clearesterol(TM)) is an all natural product extracted from rice bran through a
proprietary processing method. Rice bran is a low cost by-product of rice
milling. Rice bran has been reported in scientific literature to contain a
variety of cholesterol lowering agents with varying degrees of efficacy,
including beta-sitosterol, ferulic acid, phytic acid, gamma-oryzanol, soluble
fiber and tocotrienols. With the exception of tocotrienols, these agents
required ingredient concentrations of 5,000 parts per million to 200,000 parts
per million to effect reduction in cholesterol in various test models ranging
from 5% to 25%. evolvE(TM) is comprised of a class of compounds that are called
tocotrienols, which are in turn part of a larger class of compounds called
tocols. Vitamin E ([alpha]-tocopherol) is part of this larger class. All tocols,
to varying degrees, are antioxidants. Many, but not all tocotrienols, lower
cholesterol. evolvE(TM) compounds, in particular TRF(25), have been shown to be
the most active antioxidant and cholesterol lowering agents of all natural
tocols --
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tocotrienols or tocopherols. Clearesterol(TM)has been shown in animal trials to
be effective in levels of 50 parts per million.
Vitamin E ([alpha]-tocopherol) was discovered in 1922 and identified as
essential for normal spermatogenesis. The name tocopherol is derived from the
Greek words tokos and pherein, meaning to bring forth childbirth. Since then
numerous physiologic associations have been identified with vitamin E
deficiency, such as muscular dystrophy, exudative diathesis, megaloblastosis,
pulmonary degeneration, nephrosis and liver necrosis. More generally, vitamin E
is the term used for eight naturally occurring essential fat-soluble nutrients.
The series are composed of four compounds with a tocopherol structure bearing a
phytyl C(16) saturated side chain ([alpha]-, [beta]-, [gamma]-,
[delta]-tocopherol) and four compounds with a tocotrienol structure having an
unsaturated phytyl side chain bearing three double bonds ([alpha]-, [beta]-,
[gamma]-, [delta]-tocotrienol).
Until recently, very little information was available about the
biological activity of tocotrienols. Dr. Asaf Qureshi, while employed at the
Wisconsin Alumni Research Foundation ("WARF"), University of Wisconsin, Madison,
Wisconsin, led research that demonstrated the cholesterol lowering ability of
[alpha]-tocotrienol. A patent was received by WARF for the use of
[alpha]-tocotrienol in lowering cholesterol and the patent is now owned by the
Company. Subsequent work has shown the other known tocotrienols to be of varying
degrees of effectiveness in lowering cholesterol. P(25)-tocotrienol has been
shown to be up to 150% more effective than other known tocotrienols.
P(25)-tocotrienol, a new, particularly active, isomer or type of tocotrienol, is
found in rice bran as part of a tocotrienol rich fraction (TRF(25)) and a patent
on this proprietary ingredient has been granted to the Company by the U.S.
Patent and Trademark Office, Patent No. 5,591,772. TRF(25) is extracted from
rice bran by a proprietary process and is the primary ingredient in
Clearesterol(TM).
Initial research with TRF(25) was conducted on the modification of
blood lipid chemistry, including lowering serum cholesterol, and resulted in
identification of the proprietary compounds that demonstrate significant blood
cholesterol lowering (hypocholesterolemic) efficacy. A variety of industry and
academic studies have shown a correlation of the lowering of blood serum
cholesterol levels with a reduction in coronary heart disease caused death. This
lowering of cholesterol levels, combined with high antioxidant vitamin E levels
in the blood, has been reported to reduce predictive mortality from coronary
heart disease. In animal tests, the Company has achieved P(25)-tocotrienol
reduced LDL of approximately 60%. A physician controlled and independently
administered double-blind human trial conducted by the Company with TRF(25)
demonstrated the effectiveness of this dietary supplement. Results from this
study support the earlier animal findings of significant LDL reduction with an
average reduction in humans of 16% after only 4 weeks and 22% when combined with
a pre-treatment low fat diet.
Tocol-like antioxidants (including vitamin-E and Clearesterol(TM)) in
blood appear to reduce damage caused by oxidizing or "free radical" agents to
normal cholesterol and blood vessel wall cells. Clearesterol(TM) research
indicates that it is a more effective antioxidant than vitamin-E
([alpha]-tocopherol) or any other known tocols. The research also indicates that
unlike the antioxidants vitamin-E or beta-carotene, Clearesterol(TM) may reduce
blood cholesterol levels substantially and may reduce the ratio of LDL to HDL
(high density lipoprotein cholesterol, commonly referred to as "good"
cholesterol). This combination of high antioxidant activity and lowering of
cholesterol levels while reducing the LDL to HDL ratio is not an approved claim
for any currently marketed hypocholesterolemic prescription drug.
Clearesterol(TM) appears also to interrupt elements of blood coagulation similar
to a therapy with low levels of aspirin but without the side effects of aspirin.
For these reasons, the Company believes Clearesterol(TM) represents an important
advancement in dietary supplement technology as a potent cholesterol lowering
antioxidant which significantly outperforms vitamin-E.
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PATENTS AND LICENSING
LipoGenics has one patent application pending for a method of
manufacturing Clearesterol(TM) dietary supplements ("Processing" claims) and
Clearesterol(TM) products derived via the proprietary methods ("Products by
Process" claims), and has a recently issued U.S. patent, Patent No. 5,591,772,
for chemical composition of key compounds in Clearesterol(TM) ("Composition of
Structure" claims) and the use of the proprietary Clearesterol(TM) product and
its compounds ("Utility" claims). In addition it has corresponding international
patent applications as follows:
<TABLE>
<CAPTION>
International
Applications # Inventors Title
<S> <C> <C>
1. WO 9117985 A. Qureshi, Processes for recovering tocotrienols,
K. Becker, tocopherols and tocotrienol-like
M. Wells, R. Lane compounds
2. WO 930977 R. Lane, A. Qureshi, Tocotrienols and tocotrienol-like compounds and
W. Salser methods for their use
</TABLE>
In addition, LipoGenics owns a patent originally owned by Wisconsin
Alumni Research Foundation entitled "Cholesterol Lowering Method of Use" Patent
No. 4,603,142 issued in July 1986 and was acquired by the Company in 1996.
In October 1994, Bionutrics' predecessor entered into a Licensing
Agreement (the "License") with LipoGenics, which was modified in October 1995.
The License granted Bionutrics' predecessor the exclusive license to manufacture
and market dietary supplements which are based upon the proprietary rights
covered by the LipoGenics patent applications. The License also granted
Bionutrics' predecessor a non-exclusive license to use the technology in
connection with manufacturing and marketing of certain other health and/or diet
products. The License provided that Bionutrics' predecessor would pay LipoGenics
royalties, which royalty obligations have been negated by the merger of
LipoGenics into the Company and the acquisition of ownership of the proprietary
rights covered by the patent and patent applications.
RESEARCH AND DEVELOPMENT
The Company has conducted extensive research and development studies
and has incurred expenses of $626,735 for the 12 months ended October 31, 1996,
$25,300 for the 10 months ended October 31, 1995 and $0 for the 12 months ended
December 31, 1994. Since inception a total of $922,203 has been incurred as
research and development expense.
MARKET AND COMPETITION
The Company will compete within the health and natural food market in
the United States. This market increased from an estimated $7.6 billion of sales
in 1994 to an estimated $9.2 billion of sales in 1995. Within this market,
vitamin and mineral sales in 1995 amounted to approximately $3.1 billion. Of
this $3.1 billion vitamin and minerals market, antioxidants are clearly the
growth leader, with Vitamin-E showing strong growth, resulting in estimated
retail sales in excess of $500 million in 1995. Because the Company is just now
commencing its manufacturing and sales activities, it currently does not have a
share of any of these markets.
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The Company believes that its products will compete with four other
types of compounds: (1) vitamin-E ([alpha]-tocopherol), (2) non-TRF(25)
tocotrienols, (3) non-tocotrienol products claiming to demonstrate benefits
similar to evolvE(TM), and (4) potential over-the-counter switches of
past-generation cholesterol-lowering drugs.
Vitamin-E is established in the market and has accelerating sales.
Vitamin-E is manufactured from both natural and chemically synthesized sources.
The least expensive forms of vitamin-E tend to be synthetic. Clearly, vitamin-E,
especially synthetic vitamin-E, has a price advantage. However, the Company
believes Clearesterol(TM) to be a more effective antioxidant than vitamin-E and
the Company anticipates that research supporting this fact will be published.
The Company has been advised that Dr. Qureshi has submitted an article which has
been accepted for publication. In addition, vitamin-E does not lower
cholesterol, no matter how much is consumed and no matter how inexpensive it is.
Informing the consumer of the evolvE(TM) difference and the importance of that
difference will directly impact Bionutrics' marketing success. Several
multi-billion dollar manufacturers, including Hoffmen LaRoche, ADM, Henkel, and
BASF, market vitamin E.
Introduction of other non-TRF(25) tocotrienol or tocol-like products by
competitors is currently in process. The Company believes evolvE(TM) has
advantages over these other products, including a base of scientific support for
greater apparent efficacy and a product source that may be more attractive to
U.S. consumers (rice bran versus palm oil). Solgar and Tree of Life market a
generic tocotrienol product with no health claims contained on the label.
Other dietary supplement products, including Pycnogenol, deodorized
garlic and Co-Enzyme-Q-10, all have customer overlap with evolvE(TM). The
Company believes that these products do not have the same benefit profile of
evolvE(TM).
With respect to ethical drugs, there is the possibility that
past-generation cholesterol-lowering prescription drugs could switch to
over-the-counter in the next 18 to 36 months. In comparison, although for a
different purpose, the products Rogain, Tagamet and Zantac were available only
through prescription and are now sold over the counter. The Company believes
evolvE(TM)'s broader, natural, more complete cardiovascular positioning should
help to set it apart from the more narrowly positioned past-generation
cholesterol-lowering drugs. The Company does not believe it competes directly
with current cholesterol-lowering prescription drugs such as Lovastatin
(Mevacor) and Zocor by Merck & Co. as these products require a prescription from
a physician. The Company believes that current prescription drugs constitute a
separate market and evolveE(TM) will therefore not compete directly in this
market. Future development of Bionutrics' P(25) and TRF(25) as drug and food
ingredients with regulatory approval for curative and preventative claims would
position the Company's products to compete with prescription drugs.
MARKETING STRATEGY
Bionutrics intends to promote sales through its marketing plan designed
to cultivate customer loyalty and brand identification. The Company is applying
for worldwide trademarks for evolvE(TM) and Clearesterol(TM). The trademarks
will be used to identify the Company's proprietary and novel TRF(25) tocol
complex and build brand recognition. Marketing efforts will initially focus on
the United States.
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The Company believes that the end users of its products will
principally be consumers concerned about nutrition and health. Individuals with
high cholesterol, or who otherwise have cardiovascular concerns, are prime
marketing targets because of their concern about their possible declining
health. It is estimated that over 50 million people in the United States suffer
from high cholesterol.
As the first step in its United States marketing efforts, the Company
intends to produce and market Clearesterol(TM) as its own branded dietary
supplement, evolvE(TM). evolvE(TM) will be brought to the marketplace in a
gelcap form (7.5 clear oval) with a dosage of 25 mg. There will be several
package sizes with different capsule counts from which to choose. The active
ingredient, Clearesterol(TM), will be highlighted in the marketing of
evolvE(TM).
As the evolvE(TM) and Clearesterol(TM) brands become recognized, the
Company intends to implement the second step of its United States marketing
plan. In this phase, the Company will sell Clearesterol(TM) as a branded
ingredient for use in other companies' products. The Company anticipates that
Clearesterol(TM) will be sold in a bulk form for use in such products as
multi-vitamins, specially formulated dietary supplements and other dietary
supplement applications.
In addition, after it has commenced both phases of its United States
marketing efforts, the Company anticipates that it will explore marketing
opportunities in Europe, the Middle East and Asia. The international market
represents an opportunity to increase revenue and spread and decrease regulatory
and market risks.
In all three phases of its marketing plan, the Company will utilize its
internal resources for marketing activities in two ways. First, it will seek to
establish networks of independent distributors and retailers in various
submarkets, who will in turn promote sales of the Company's products. Second, it
will implement an educational and advertising campaign to create public
awareness of Clearesterol(TM), its health benefits and its brand name.
Bionutrics intends to develop its U.S. market by working through the
various submarkets characterizing the dietary supplement business. Such
submarkets include retailers (health food stores and mass merchandise
retailing), alternative medicine practitioners, multi-level marketing,
telemarketing and catalogs. Bionutrics intends to structure its market strategy
around a core business of the mass merchandise and health food retailers. The
mass merchandise and health food stores marketing program will be directed and
managed by Bionutrics' staff primarily through brokers. Clearesterol(TM) will be
marketed under Bionutrics Health Products' label as well as third party private
labels with Clearesterol(TM) identified by logo. Other markets will be
approached through potential relationships with partners, brokers, joint
venturers or license arrangements. It is currently planned that all products
sold will be identified by the Clearesterol(TM) logo, even if it is sold through
independent organizations under their private label.
Retail. Bionutrics believes that its core business will be found in the
mass merchandise and large health food retailers, and primary marketing efforts
will focus on penetrating this market. Market development will prioritize in the
sequence of (i) mass merchandise markets (136,000 stores), (ii) health food
chains (3,000 stores) and (iii) small health food stores (6,600 stores). The
Company believes it can obtain a faster introduction of its products and greater
market penetration by concentrating on the larger health food chains and mass
merchandise retailers.
Health Care Practitioners. The alternative medicine market reportedly
comprises in excess of 30,000 practitioners in the United States and includes
medical doctors, chiropractors, acupuncturists and many osteopathic doctors.
Direct sales by these practitioners of dietary supplements to their patients is
common and
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represents a significant portion of the dietary supplement market. Bionutrics
intends to market directly with in-house sales representatives to these
practitioners with a specially formulated Clearesterol(TM) product.
Multi-Level Marketing. United States sales of all products by direct
sales/multi-level marketing organizations reportedly exceeds $100 billion in
retail sales according to Money Maker's Monthly. There are an estimated 3,000
direct sales/multi-level marketing companies with an estimated 10 million
"distributors". Dietary supplements, personal care and household products
represent the primary sales categories for this industry. Bionutrics intends to
attempt to contract with leading firms to market a specially formulated series
of Clearesterol(TM) derivative products under their private labels displaying
the Clearesterol(TM) logo.
Catalog/Mail Order. Catalog sales have had a long and important history
in merchandising. Because of convenience and price, catalogs and mail-order have
been important for health and personal care merchandising. The advantage of
mail-order to Bionutrics is simplicity, bulk sales and cost advantage.
Bionutrics intends to entertain both contracts with established and successful
catalog houses for private label products (with the Clearesterol(TM) logo) as
well as the development of its own label for such marketing.
Bionutrics' educational and advertising efforts for evolvE(TM)and
Clearesterol(TM) will focus on informing consumers about the Company's product
benefits within the guidelines established by the Dietary Supplement Health and
Education Act of 1994 ("DSHEA"). See "Government Regulation" below. The Company
intends to disseminate three related types of information: normal cardiovascular
circulation; the relevance of diet and exercise; and the significance of
Clearesterol(TM) to normal cardiovascular circulation, good health and quality
of life. Three elements that help explain the relationship between normal
cardiovascular circulation and evolvE(TM) are already familiar to a certain
extent with the target population: (1) LDL/HDL-cholesterol, (2) antioxidants,
and (3) aspirin-anticoagulant circulation therapy. The Company will use these
elements, correctly stated within the guidelines of DSHEA, as a foundation to
communicate its "story" about the importance of evolvE(TM) as a dietary
supplement. The Company intends to utilize scientific and medical journals,
health and general publications and electronic media to help develop an evolving
story with new research findings constantly being reported to keep evolvE(TM)
highly visible to the consumer. The Company also plans to sponsor continuing
independent research to demonstrate the effects of the active ingredient,
TRF(25) on critical aspects of normal cardiovascular circulation in a logical
and systematic way.
OPERATIONS AND PRODUCTION
The Company's manufacturing operation through its subsidiary Nutrition
Technology Corporation involves conversion of raw rice bran into
Clearesterol(TM) encapsulated in a soft gel. The proprietary process involves
"stabilizing" and selective extraction and concentration of the rice bran
followed by encapsulation. The Company contracts processing services to perform
most of the requisite steps in manufacturing Clearesterol(TM). The technically
most sensitive steps will be undertaken directly by Nutrition Technology
Corporation and its business partners. Nutrition Technology Corporation plans to
continue to optimize the manufacturing process with a proprietary system and
believes this system could reduce manufacturing costs significantly over the
next few years. In addition, Nutrition Technology Corporation has entered into a
joint venture with Incon Technologies, LLC, that provides for the research and
development of non-proprietary dietary supplements, nonproprietary nutritional
and health-promoting products, and for the manufacture and sale of existing as
well as newly developed supplements and products.
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The supplies used in Bionutrics' manufacturing process are widely
available. The raw material for Clearesterol(TM) is rice bran, a rice milling
byproduct in abundant supply. Bionutrics is currently negotiating a supply
agreement with millers of retail rice products in the U.S. The Company intends
to obtain the appropriate rice bran in a raw form. There is sufficient rice bran
produced in the U.S. to exceed Bionutrics' projected needs by several orders of
magnitude. The bran will have to be processed to a limited degree as it is
milled. Cost of the raw bran varies seasonally, but is anticipated to be less
than $150 per ton on average.
Bionutrics places the highest importance on the quality of its product.
One of the particularly difficult aspects for "natural" health oriented products
is that the composition of raw products is not consistent. Contents of key plant
molecules that are the focus of production vary from plant to plant, batch to
batch and harvest to harvest. The Company will very tightly monitor processing,
control quality and Clearesterol(TM) concentration. The Company will maintain a
fully equipped analytical laboratory to provide quality assurance and control
output from one batch to the next. Bionutrics' production strategy and methods
are also designed specifically to insure consistency and the necessary quality
control.
EMPLOYEES
The Company currently employs 20 people, including five people with
consulting agreements. Of the current employees and consultants, six are
involved in marketing and sales, seven in operations and seven in corporate and
general administration.
RISK FACTORS
Limited Operating History; Accumulated Deficit; Possible Need for
Additional Capital. The Company has only now begun to receive orders for its
products and the Company has had no revenue from sale of its products.
Accordingly, there is limited historical financial information about the Company
upon which to base an evaluation of the Company's performance or to make a
decision regarding an investment in shares of the Company's Common Stock. The
Company has generated an accumulated deficit of approximately $5,139,991 through
its fiscal year ended October 1996, and expects to incur a loss in fiscal year
1997. The Company's operations to date have related primarily to research and
development activities. The Company is currently conducting testing and
marketing activities relating to evolvE(TM), a vitamin E replacement dietary
supplement, and the active ingredient, Clearesterol(TM). The Company has just
commenced manufacturing and marketing activities, and there can be no assurance
that sales of its products will achieve significant levels of market acceptance.
As a result, the Company's business will be subject to all of the problems,
expenses, delays and risks inherent in the establishment of a new business
enterprise including limited capital, delays in product development, possible
cost overruns due to price and cost increases in raw product and manufacturing
processes, uncertain market acceptance and the absence of an operating history.
Therefore, there can be no assurance that the Company's business or products
will be successful or that the Company will be able to achieve or maintain
profitable operations. No assurance can be given that the Company will not
encounter unforeseen difficulties that may deplete its capital resources more
rapidly than anticipated.
To become and remain competitive, the Company may be required to make
significant investments in research and development on an ongoing basis. The
Company from time to time may seek additional equity or debt financing to
provide for the capital required to maintain or expand the Company's marketing
and production capabilities. The timing and amount of any such capital
requirements cannot be predicted at this time. There can be no assurance that
any such financing will be available on acceptable terms. If such financing is
not available
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on satisfactory terms, the Company may be unable to develop and expand its
business, develop new products, or develop new markets at the rate desired and
its operating results may be adversely affected. Debt financing increases
expenses must be repaid regardless of operating results. Equity financing could
result in additional dilution to existing shareholders.
Market Risks of a New Business. The Company has formulated its business
plans and strategies based on certain assumptions regarding the size of the
dietary supplement market, the Company's anticipated share of this market, and
the estimated price and acceptance of the Company's products. These assumptions
are based on the best estimates of the Company's management. There can be no
assurance that the Company's assessments regarding market size, potential market
share attained by the Company, the price at which the Company will be able to
sell its products, market acceptance of the Company's products or a variety of
other factors will prove to be correct. Any future success that the Company
might enjoy will depend upon many factors including factors which may be beyond
the control of the Company or which cannot be predicted at this time. These
factors may include changes in the dietary supplement industry, governmental
regulation, increased levels of competition including the entry of additional
competitors and increased success by existing competitors, changes in general
economic conditions, increases in operating costs including costs of production,
supplies, personnel, equipment, and reduced margins caused by competitive
pressures and other factors.
Competition. Competition in the nutritional supplement industry is
vigorous with a large number of businesses engaged in the industry. The Company
anticipates marketing to mass merchandise and high volume health-food retailers
and will face competition from vitamin and other health related products that
will be competing for the same shelf space. Many of the competitors have
established reputations for successfully developing and marketing dietary
supplement products. Many of such companies have greater financial, managerial,
and technical resources than the Company, which may put it at a competitive
disadvantage. For example, such channels of distribution also often require the
expenditure of significant up front capital to capture shelf space, which may
put the Company at a competitive disadvantage to better capitalized firms. If
the Company is not successful in competing in this market, it may not be able to
recognize its business objectives.
Governmental Regulation. The processing, formulation, packaging,
labeling and advertising of the Company's products are subject to regulation by
one or more federal agencies. Although Congress has recently recognized the
potential impact of dietary supplements in promoting the health of U.S. citizens
by enacting the Dietary Supplemental Health Education Act of 1994 ("DSHEA"),
which severely limits the Food and Drug Administration's jurisdiction in
regulating dietary supplements, there is no way to predict the potential effect
of DSHEA. Further, because of the technical requirements imposed by DSHEA, it
may be difficult for any company manufacturing or marketing dietary supplements
to remain in strict compliance. The Food and Drug Administration ("FDA") has
recently proposed regulations with the purpose of implementing DSHEA and
proposals have been made to modify or change the provisions of DSHEA. It is
impossible to predict whether those regulations or proposed changes will become
law or the effect that such regulations or proposed changes, if implemented,
will have on the business and operations of the Company.
Reliance on Limited Number of Products. The Company's only products are
based on one vitamin E-like complex, TRF(25) derived from rice bran. The Company
will market a dietary supplement and the active ingredient for inclusion in
other company's products. The dependence on one product increases the risk since
a decline in the market demand for the Company's products as well as the
products of other companies utilizing the Company's product could have a
significant adverse impact on the Company.
Dependence on Marketing Efforts. The Company is dependent on its
ability to market its product to large mass merchandise and health food
retailers and to other companies for use in their products. The Company
9
<PAGE> 11
does not anticipate that it will have long-term contractual relationships with
any of its customers. The Company must increase the level of awareness of
dietary supplements in general and the Company's products in particular. The
Company will be required to devote substantial management and financial
resources to this marketing and advertising effort and there can be no assurance
that these efforts will be successful.
Science and Technology. The Company has invested six years in research
and development to demonstrate the potential value of its technology. The
Company has chosen to apply for patent protection of strategic elements of this
technology. There is no assurance that the science upon which the technology is
based will not be refuted or otherwise drawn into question by further research
conducted by the Company or independent laboratories.
Dependence on Management. The Company is dependent on its management,
particularly Dr. Ronald Lane, a founder and the chief executive officer, for all
its business activities, including the advancement of the Company's identity and
recognition in the dietary supplement industry. The Company is dependent on its
ability to attract, retain and motivate additional qualified personnel. There
are no long-term employment or other agreements with any executive officer or
key employee. The loss of the services of Dr. Lane or other key employees could
have a material adverse effect on the business of the Company.
Dependence on Manufacturers. The Company intends to enter into
manufacturing agreements with third-party manufacturers that are not anticipated
to be long-term. The Company may be adversely impacted by any difficulties
encountered by third-party manufacturers that result in product defects,
production delays or the inability to fulfill orders on a timely basis. In the
event that a manufacturer can not meet the Company's manufacturing and delivery
requirements at some time in the future, the Company may suffer interruptions of
delivery while it arranges for alternative manufacturing sources. This can be
delayed in the event that the Company must complete a review of a manufacturer's
quality control and manufacturing capabilities.
Patents, Licenses and Intellectual Property Claims. The Company's
success depends in part on its ability to obtain patents, licenses and other
intellectual property rights covering its products. The Company's intellectual
property rights and patents are held by its subsidiary, LipoGenics. LipoGenics
has one U.S. patent application pending and two international applications
pending. The process of seeking patent protection can be long and expensive, and
there can be no assurance that all patents will issue from currently pending or
future applications or that any of the patents when issued will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. The Company may be subject to or may initiate interference
proceedings in the U.S. Patent and Trademark Office. Such proceedings could
demand significant financial and management resources. The Company may in the
future receive communications alleging possible infringement of patents or other
intellectual property rights of others. The Company believes that in most cases
it could obtain any necessary licenses or other rights on commercially
reasonable terms, but no assurance can be given that licenses would be available
on acceptable terms, that litigation would not ensue or that damages for any
past infringements would not be assessed. Litigation, which could result in
substantial cost to and diversion of effort by the Company, may be necessary to
enforce patents or other intellectual property rights of the Company or to
defend the Company against claimed infringement of the rights of others. The
failure to obtain necessary licenses or other rights or litigation arising out
of infringement claims could have a material adverse effect on the Company.
Thin Market; Possible Volatility of Stock Price. There has been a
limited public market for the Common Stock of the Company. There can be no
assurance that an active public market will be developed or sustained. The
Company is a development stage company whose success is dependent on certain
intangible intellectual property and the Company may therefore not meet
established criteria for valuation of its Common
10
<PAGE> 12
Stock such as book value, assets or net worth. The stock markets have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors may adversely affect the market
price of the Common Stock.
Shares Eligible for Sale. Of the 15,067,979 shares outstanding as of
October 31, 1996, 9,331,807 are eligible for resale in the public markets. Of
these eligible shares, 7,384,066 shares are eligible for resale in the public
markets subject to compliance with Rule 144 under the Securities Act of 1933, as
amended (the "1933 Act"), and 1,947,741 are eligible for resale in the public
markets either as unrestricted shares or pursuant to Rule 144(k). In general,
under Rule 144 as currently in effect, any person (or persons whose shares are
aggregated for purposes of Rule 144) who beneficially owns restricted securities
with respect to which at least two years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock of the Company, or, if the Common Stock is quoted on Nasdaq or a stock
exchange, the average weekly trading volume in Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 also are subject to
certain manner-of-sale provisions and notice requirements and to the
availability of current public information about the Company. A person who is
not an affiliate, who has not been an affiliate within three months prior to
sale, and who beneficially owns restricted securities with respect to which at
least three years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company, is entitled to
sell such shares under Rule 144(k) without regard to any of the volume
limitations or other requirements described above.
GOVERNMENT REGULATION
The manufacturing, packaging, labeling, advertising, distribution and
sale of the Company's products are subject to regulation by one or more federal
agencies.
The FDA, the most active regulatory authority exercising jurisdiction
over vitamins, minerals and other dietary supplements, regulates the Company's
products under the FDCA and regulations promulgated by the FDA to implement this
statute. In 1976, the FDA's ability to regulate the composition of dietary
supplements was restricted in several material respects by the Proxmire
Amendment to the FDCA. Under this Amendment, the FDA is precluded from
establishing maximum limits on the potency of vitamins, minerals and other
dietary supplements, from limiting the combination or number of any vitamins,
minerals or other food ingredients in dietary supplements, and from classifying
a vitamin, mineral, or combination of vitamins and minerals as a drug solely
because of its potency. However, the Proxmire Amendment did not affect the FDA's
authority to determine that a vitamin, mineral or other dietary supplement is a
new drug on the basis of drug claims made in the product's labeling. Such a
determination would require deletion of the drug claims, or the Company's
submission and the FDA's approval of a new drug application, which entails
costly and time-consuming clinical studies.
In 1990, the FDA's authority over dietary supplement labeling was
expanded in several respects by the Nutrition Labeling and Education Act
("NLEA"). This statute amended the FDCA by establishing a requirement for the
nutrition labeling of most foods, including dietary supplements. In addition,
the NLEA prohibits the use of any health benefit claim ("health claim") in
dietary supplement labeling unless the claim is supported by significant
scientific agreement and is pre-approved by the FDA. Interested companies may
petition the FDA for the approval of health claims. To date, the FDA has
approved health claims for dietary supplements only in connection with the use
of calcium for prevention of osteoporosis and the use of folic acid for
prevention of neural tube defects. The NLEA also allows nutrient content claims
characterizing the level of a particular nutrient in a dietary supplement (e.g.,
"high in," "low in," "source of") if they are in compliance with definitions
issued by the FDA. Significantly, the NLEA precludes any state from mandating
nutritional labeling, nutrient content claim
11
<PAGE> 13
or health claim requirements which differ from those established under the NLEA,
as a result of which the Company's products will not be subject to inconsistent
labeling requirements.
In October 1994, the FDCA was amended by enactment of the DSHEA, which
introduced a new statutory framework governing the composition and labeling of
dietary supplements which, in the Company's judgment, is in some parts favorable
to the dietary supplement industry while imposing additional burdens in other
parts. With respect to composition, the DSHEA creates a new class of "dietary
supplements," dietary ingredients consisting of vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet, as well
as concentrates, metabolites, extracts or combinations of such dietary
ingredients. Generally, under the DSHEA, dietary ingredients on the market
before October 15, 1994 may be sold without obtaining the FDA pre-approval and
without notifying the FDA. On the other hand, a new dietary ingredient (one not
on the market before October 15, 1994) requires proof that it has been used as
an article of food without being chemically altered, or evidence of a history of
use or other evidence establishing that it is reasonably expected to be safe.
The FDA must be supplied with such evidence at least 75 days before the initial
use of a new dietary ingredient. There can be no assurance, however, that the
FDA will accept the evidence of safety for any new dietary ingredients the
Company may decide to use, and the FDA's refusal to accept such evidence could
result in judicial proceedings by the FDA to prevent the sale of products
containing the new dietary ingredient as being adulterated.
As for labeling, the DSHEA permits "statements of nutritional support"
for dietary supplements without FDA pre-approval. Such statements may describe
how particular dietary ingredients affect the structure, function or general
well-being of the body, or the mechanism of action by which a dietary ingredient
may affect body structure, function or well-being (but may not state that a
dietary supplement will diagnose, mitigate, treat, cure or prevent a disease),
nor can a claim be made which would be interpreted as a health claim under NLEA.
A company making a statement of nutritional support must possess substantiating
evidence for the statement, disclose on the label that the FDA has not reviewed
the statement and that the product is not intended for use for a disease, and
notify the FDA of the statement within 30 days after its initial use. However,
there can be no assurance that the FDA will not determine that a given statement
of nutritional support the Company decides to make is a drug claim rather than
an acceptable nutritional support statement. Such a determination would require
deletion of the drug claim or the submission by the Company and the approval by
the FDA of a new drug application, which would entail costly and time-consuming
clinical studies. In addition, if the FDA takes the position that a claim is a
"health claim," rather than a statement of material support, the Company would
need prior agency approval. There can be no assurance that the FDA will accept
as adequate such substantiation as is provided for nutritional support claims.
The DSHEA allows the dissemination of "third party literature", publications
such as reprints of scientific articles that link particular dietary ingredients
with health benefits. Third party literature may be used in connection with the
sale of dietary supplements to consumers. Such a publication may be so
distributed if it is not false or misleading, if no particular manufacturer or
brand of dietary supplement is mentioned, if the publication is presented in
such manner so as to offer a balanced view of available scientific information
on the subject matter, if it is physically separated from products when used in
a retail establishment and if it does not have any other information appended to
it. There can no assurance, however, that all pieces of third party literature
that may be disseminated in connection with the Company's products will be
determined by the FDA to satisfy each of these requirements, and any such
failure to comply could subject the product involved to regulation as a new
drug.
On December 24, 1996, the Company filed its notification letter for
evolve(TM) with the FDA with respect to the product's statements of nutritional
support. On January 29, 1997, the FDA responded with a courtesy letter raising
questions concerning one of the statements of nutritional support. Although the
Act only requires companies to notify the FDA, the FDA has adopted an unofficial
policy of responding with a letter, which has
12
<PAGE> 14
become known as a "courtesy letter," when it believes that there may be a
question with respect to any statement of nutritional support. The Company is
currently reviewing language for the statement in question.
In December 1995, the FDA proposed regulations to implement certain
DSHEA labeling provisions, which, although expected to be finalized in late
1996, remain in proposed form. The DSHEA also requires that dietary supplements
be prepared, packed and held under conditions which meet the good manufacturing
practice ("GMP") regulations to be promulgated by the FDA with respect to
dietary supplements. The FDA has not yet proposed GMP regulations for dietary
supplements. Therefore, there can be no assurance that the Company's proposed
production facilities will meet all of the GMP regulations when issued by the
FDA with respect to dietary supplements, and the Company may be required to
expend resources to take appropriate action to comply with such regulations.
The FTC, which exercises jurisdiction over the advertising of dietary
supplements, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees, agency cease and desist orders, judicial injunctions and the
payment of fines by the companies involved. In addition, the FTC has increased
its scrutiny of infomercials. There can be no assurance that the FTC will not
question the Company's advertising in the future. The FTC has been very active
in enforcing its requirements that companies possess adequate substantiation in
their files for claims in product advertising.
The Company intends to manufacture certain products pursuant to
contracts with customers who will distribute the products under their own or
other trademarks. Such customers are subject to the governmental regulations
discussed in this section in connection with their purchase, marketing,
distribution and sale of such products, and the Company will be subject to such
regulations in connection with the manufacture of such products and its delivery
of services to such customers. However, the Company's contract manufacturing
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. The failure of
these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company. Governmental regulations in foreign
countries where the Company plans to sell products may prevent or delay entry
into the market or prevent or delay the introduction, or require the
reformulation, of certain of the Company's products. Compliance with such
foreign governmental regulations generally will be the responsibility of the
Company's customers in those countries. Those customers are independent
companies over which the Company will have no control.
The FDA has broad authority to enforce the provisions of the FDCA
applicable to dietary supplements, including the power to seize adulterated or
misbranded products or unapproved new drugs, to request their recall from the
market, to enjoin their further manufacture or sale, to publicize information
about a hazardous product, to issue warning letters, and to institute criminal
proceedings. The Company may be subject to additional laws or regulations
administered by the FDA or other regulatory authorities, the repeal of laws or
regulations which the Company might consider favorable, or more stringent
interpretations of current laws or regulations, from time to time in the future.
The Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling, and/or scientific
substantiation. Any or all of such requirements could have a material adverse
effect on the Company's results of operations and financial condition.
13
<PAGE> 15
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the related notes and
with the Company's management's discussion and analysis of financial condition
and results of operations, provided elsewhere herein. The selected financial
data for the three months ended January 31, 1997 and 1996 are derived from
financial statements prepared by the Company that have not been audited. The
results of operations for the three months ended January 31, 1997 and 1996 are
not necessarily indicative of the results of operations for a full fiscal year.
See Item 15. "Financial Statements and Exhibits" for the historical financial
statements of, and other financial information regarding, the Company.
14
<PAGE> 16
<TABLE>
<CAPTION>
TEN MONTH
THREE MONTHS ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
JANUARY 31, OCTOBER 31, OCTOBER 31, DECEMBER 31,
1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue $ 0 $ 0 $ 20,000 $ 50,000 $ 0
Operating Expense 1,307,238 583,834 2,996,880 341,900 249,351
Other Income (Expense) 55,755 (15,106) (30,667) (39,585) (44,843)
Net Loss (1,251,483) (598,940) (3,007,547) (331,485) (294,194)
Loss Per Share(1) (.08) (.06) (.26) (.03) (.13)
Weighted Average
Shares Outstanding 15,222,451 10,956,269 11,564,327 9,853,970 2,214,743
BALANCE SHEET DATA:
Working capital 4,074,413 (295,889) $ 4,739,882 $ 184,546 $ (460,069)
Total assets 6,018,058 563,102 6,217,348 1,099,521 630,280
Total liabilities 579,367 607,176 936,478 544,654 1,452,160
Stockholders equity 5,438,691 (44,074) 5,280,870 554,867 (821,880)
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 22,
SIX MONTH 1990 (DATE OF
PERIOD ENDED YEAR ENDED YEAR ENDED INCEPTION
DECEMBER 31, JUNE 30, JUNE 30, TO OCTOBER 31,
1993 1993 1992 1996
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue $ 0 $ 0 $ 0 $ 72,448
Operating Expense 43,813 423,602 621,876 4,965,674
Other Income (Expense) (7,520) (35,265) (61,816) (246,765)
Net Loss (51,333) (458,867) (683,692) (5,139,991)
Loss Per Share(1) (.17) (2.29) (10.62)
Weighted Average
Shares Outstanding 307,124 200,000 64,400
BALANCE SHEET DATA:
Working capital $ (374,271) $(300,700) $ (255,690)
Total assets 475,011 426,871 342,117
Total liabilities 1,034,177 934,705 1,138,182
Stockholders equity (559,166) (507,834) (796,065)
</TABLE>
- -----------------------
(1) These shares do not include an aggregate of 2,128,144 of additional
shares of Common Stock as of October 31, 1996, 566,955 of additional
shares as of October 31, 1995, and 220,288 for the year ended December
31, 1994, the six month period ended December 31, 1993, the year ended
June 30, 1993 and the year ended June 30, 1992 that may be issued upon
exercise of outstanding stock options, warrants and conversion of debt.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
To date, management's efforts have been primarily directed toward
conducting research and development, applying for patent approvals, recruiting
employees, developing manufacturing and distribution arrangements for its
dietary supplement product and obtaining initial capital and financing, to fund
these activities. Management plans to transition the Company from the
development stage to the operating stage in the second and third quarters of
calendar 1997. The Company does not anticipate a significant change in the
number of employees.
The research and development relating to the product and production
technology began in 1990 in a predecessor to LipoGenics, Inc., a Delaware
corporation ("LipoGenics") which was formed in July 1992. LipoGenics formed
NutraGenics, Inc., a Delaware corporation ("NutraGenics (Delaware)") in April
1994 pursuant to a rights offering to all LipoGenics shareholders. The purpose
of NutraGenics (Delaware) was to provide a vehicle to engage in manufacturing
and marketing of the technology developed by LipoGenics pursuant to a licensing
arrangement. NutraGenics (Delaware) merged in December 1994 into Nutrition
Technology Corporation, a Nevada corporation and wholly owned subsidiary of ERBA
Corporation ("ERBA"), a publicly traded Nevada corporation incorporated in 1983.
Although Nutrition Technology Corporation survived the merger, the merger was
accounted for as a reverse acquisition and the financials of NutraGenics
(Delaware) became the financials for the surviving corporation. ERBA had minimal
historical operations and as such the merger of its subsidiary with NutraGenics
(Delaware) had no impact on operations and operating results. ERBA changed its
name to NutraGenics, Inc. at the time of the merger. NutraGenics, Inc.
subsequently changed its name to Bionutrics on December 26, 1996.
Bionutrics completed a merger with LipoGenics on October 31, 1996 and
LipoGenics became a wholly owned subsidiary of the Company. The merger with
LipoGenics was accounted for as a pooling and as such Bionutrics accounts
reflect the historic operations of LipoGenics. Pursuant to the merger,
Bionutrics obtained ownership of the proprietary rights previously licensed to
it by LipoGenics.
RESULTS OF OPERATIONS
Three months ended January 31, 1997 and January 31, 1996
There were no revenues recorded in the first quarter as the Company is
presently transitioning from research and development to sales and distribution.
The sale of its first product is targeted for April 1997.
Consulting services were $288,441 for the quarter ended January 31,
1997 compared to $33,782 for the same period in 1996. This increase is primarily
attributable to expenditures relating to preparation for product introduction.
Research and development expenses were $62,474 for the quarter ended
January 31, 1997 compared to $92,295 for the same period in 1996. This decrease
is due to lower levels of research and development as the Company is moving from
a research to a production mode.
Other operating expenses were $956,323 for the quarter ended January
31, 1997 compared to $457,757 for the same period in 1996. This increase in
operating expenses is due primarily to higher levels of salaries and related
costs for anticipated product sales and distribution in the second quarter of
1997.
16
<PAGE> 18
Interest income was $55,992 for the quarter ended January 31, 1997
compared to $819 for the same period in 1996 due to increased levels of cash.
Net loss increased to $(1,251,483) or $(.08) per share for the quarter
ended January 31, 1997 from $(598,940), or $(.06) per share, for the quarter
ended January 31, 1996 due to increased levels of expenses as outlined above.
Year ended December 31, 1994, 10 months ended October 31, 1995 and year ended
October 31, 1996
Net losses for the Company were $294,194 for the 12 months ended
December 31, 1994, $331,485 for the 10 months ended October 31, 1995 and
$3,007,547 for the 12 months ended October 31, 1996. Since inception the Company
recorded net losses of $5,139,991. Although minor revenues unrelated to product
sales were recorded during these periods, operating expenses increased in
preparation for the launch of the Company's product resulting in increasing
losses being recognized.
Historic revenues represent amounts derived from a short-term agreement
licensing certain proprietary technology to an independent party and do not
pertain to the sale of any type of consumer product. There were no revenues
recorded for the 12 months ended December 31, 1994, $50,000 for the 10 months
ended October 31, 1995 and $20,000 for the 12 months ended October 31, 1996.
Since inception revenues were $72,448.
As the timing for the product launch for evolvE approaches,
management's efforts, as outlined above, have accelerated resulting in
additional expenditures and investment in infrastructure. Expenses were $249,351
for the 12 months ended December 31, 1994, $341,900 for the 10 months ended
October 31, 1995 and $2,996,880 for the 12 months ended October 31, 1996. Total
expenses since inception were $4,965,674. The largest components included in
these expenditures are research and development, salaries, consulting fees and
advertising. As a start up company, management recognizes the critical
importance of controlling and managing expenses and to that end has implemented
budget guidelines, integrated general ledger system and has employed a corporate
controller.
LIQUIDITY AND CAPITAL RESOURCES
Three months ended January 31, 1997 and January 31, 1996
Net cash used in operating activities during the quarter ended January
31, 1997 was $1,672,381 as compared to $317,804 during the same period in 1996.
The increase in cash used is primarily due to increased expenses incurred in
preparation for the launch of the Company's product in the second quarter.
Net cash used in investing activities during the quarter ended January
31, 1997 was $849,271 as compared to $48,109 during the same period in 1996.
This increase is attributable to a $400,000 investment in a joint venture and
capital expenditures for manufacturing operations.
The Company received proceeds from issuance of its Common Stock in the
quarter ended January 31, 1997 of $1,366,304 versus $0 for the same period in
1996.
17
<PAGE> 19
Year ended December 31, 1994, 10 months ended October 31, 1995 and year ended
October 31, 1996
Net cash used in operating activities was $166,861 for the 12 months
ended December 31, 1994, $244,861 for the 10 months ended October 31, 1995 and
$2,185,267 for the 12 months ended October 31, 1996. Total net cash used in
operating activities since inception was $3,571,589. Cash used in operating
activities primarily related to the need to pay fees to professionals in the
course of research and development of the proprietary product, to develop
manufacturing capability, and to build the organization for the purpose of
selling the proprietary product.
With regard to investing activities, the Company has had minimal
investments in property, a total of $91,900 since inception, and has incurred
notes receivable, most of which have been collected. Net cash used in investing
activities was $151,900 for the 12 months ended December 31, 1994, $61,800 for
the 10 months ended October 31, 1995 and cash provided for the 12 months ended
October 31, 1995 was $103,802. Total net cash used in investing activities since
inception was $109,898.
Net cash provided by financing activities was $333,159 for the 12
months ended December 31, 1994, $719,000 for the 10 months ended October 31,
1995 and $7,330,625 for the 12 months ended October 31, 1996. Total net cash
provided by financing activities was $9,357,847 since inception. The Company has
funded its development stage costs primarily through the proceeds of private
placements of debt which was subsequently converted to Common Stock and the
issuance of Common Stock. The Company has liquidity to meet its business needs
for the next year based upon projections in its Business Plan. The primary
business need is the investment in infrastructure, manufacturing equipment and
personnel.
On October 31, 1996, the Company completed a Regulation S offering of
Common Stock in the amount of $5,000,000 to one overseas investor. The Company
has commitments for $6,000,000 of Common Stock from various overseas investors
pursuant to a second Regulation S offering. Of that amount, $4,200,000 has been
received.
In addition to the projected recurring operating expenses in fiscal
1997 capital expenditures for production are estimated at $750,000. This capital
expenditure is a one-time cost of investment to prepare for production
requirements.
The Company had no long-term debt as of October 31, 1996.
As discussed in Note 1, the Company's continuation as a going concern
is dependent upon its ability to evolve from a development stage to an operating
stage company. To achieve the operating stage, management has developed a plan
which, if successful, will allow for the Company to generate sufficient cash
flow to meet its obligations on a timely basis, secure agreements regarding the
manufacturing and distribution of the dietary supplement product, obtain
additional equity financing as may be required, and ultimately, attain
profitable operations. Management's projections for the next 12 months indicate
that the cash generated from investors and sales of product are more than
sufficient to meet the requirements of operating expenses and capital
expenditures.
ITEM 3. PROPERTIES.
FACILITIES AND EQUIPMENT
The Company leases its principal executive offices in Phoenix, Arizona.
The offices contain approximately 4,200 square feet. The term of the lease is
for 36 months commencing December 1, 1995 and lease payments are approximately
$8,000 per month. The total rental expense for fiscal year 1996 was $96,000.
18
<PAGE> 20
The Company also leases a small production and storage facility of approximately
1,200 square feet in Crowley, Louisiana on a month-to-month basis for $400 a
month. The Company believes these facilities are adequate for its current
purposes and does not anticipate any immediate need for additional facilities.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 15, 1997 by (i)
each executive officer of the Company, (ii) each director of the Company, (iii)
certain key employees, (iv) all directors, executive officers and key employees
of the Company as a group, and (v) each person known by the Company to be the
beneficial owner of more than five percent of the Common Stock.
<TABLE>
<CAPTION>
AMOUNT BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2) PERCENT
- ------------------------ ------------- --------
<S> <C> <C>
Ronald H. Lane, Ph.D.(3)(4) 3,631,919 23.55%
George E. Duck, Jr.(3) ___ *
Steven H. Friedman(3) ___ *
D. Michael Wells(3) 398,216 2.58%
Richard M. Feldheim(3)(5) 934,182 6.06%
Ian R. Ferrier, M.D., Ph.D.(3) 110,949 *
Steve Henig, Ph.D.(3)(6) 670,666 4.35%
C. Everett Koop, M.D., Sc.D.(3)(7) 200,000 1.30%
William M. McCormick(3)(8) 441,667 2.86%
Milton Okin(3)(9) 650,000 4.21%
Frederick Rentschler(3) 162,092 1.05%
Winston A. Salser, Ph.D.(3)(10) 861,299 5.58%
Total Directors, Officers 8,060,990 52.26%
and Key Employees
(12 persons)(11)
Other 5% Shareholders:
LipoGenics, Inc.(12) 1,202,886 7.80%
Spanswick Investments Limited(13) 1,166,990 7.57%
</TABLE>
- --------
* Less than 1% of the outstanding shares of Common Stock.
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investing power with respect to all shares of Common Stock shown as
beneficially owned by them.
19
<PAGE> 21
(2) Includes shares of Common Stock issuable to the identified person
pursuant to stock option or warrants that may be exercised within 60 days
after January 15, 1997. In calculating the percentage of ownership, such
shares are deemed to be outstanding for the purpose of computing the
percentage of shares of Common Stock owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of Common Stock owned by any other stockholders.
(3) Each of such persons may be reached through the Company at 2425 E.
Camelback Road, Suite 650, Phoenix, Arizona 85016.
(4) Represents shares held of record by R.H. Lane Limited Partnership of
which Mr. Lane is a general partner. He shares voting power over these
shares with Richard M. Feldheim, a general partner. Mr. Lane disclaims
beneficial ownership of 686,000 shares held by such partnership for the
benefit of other partners and 900,000 shares held by the partnership
for the benefit of his wife.
(5) Includes 133,280 shares held of record by Millrich Corporation, a company
controlled by Mr. Feldheim, 19,826 shares held of record by Abby's, Inc.,
a corporation controlled by Mr. Feldheim, 395,076 shares held of record
by the R. M. Feldheim Limited Partnership of which Mr. Feldheim is the
general partner, and 386,000 shares held by R.H. Lane Limited Partnership
of which Mr. Feldheim is a general partner. Does not include 3,245,919
shares held by R.H. Lane Limited Partnership for the benefit of other
partners. He shares voting power over the shares held by Millrich
Corporation, Abby's, Inc. and R.H. Lane Limited Partnership.
(6) Represents 560,522 shares and 110,144 shares issuable upon exercise of an
option held by Hunt-Wesson, Inc., of which Mr. Henig disclaims beneficial
ownership.
(7) Includes 180,000 shares issuable upon exercise of options granted by the
Company.
(8) Includes 300,000 shares issuable upon exercise of warrants. Also includes
30,000 shares held by Mr. McCormick's wife and 20,000 shares held by Mr.
McCormick's minor children, of which shares he disclaims beneficial
ownership.
(9) Also includes 100,000 shares held by family members of Mr. Okin, of which
shares he disclaims beneficial ownership.
(10) Includes 100,000 shares held by the Salser Family Partnership No. 1. Mr.
Salser shares voting power with respect to these shares with other family
members.
(11) Includes 590,144 shares issuable upon the exercise of options and
warrants within 60 days of December 20, 1996.
(12) The address of LipoGenics is 2425 E. Camelback Road, Suite 650, Phoenix,
Arizona 85016. LipoGenics is a wholly owned subsidiary of the Company.
(13) The address of Spanswick Investments Limited is P.O. Box 71, Craigmuir
Chambers, Roadtown, Tortola, BVI. Non-U.S. persons are the beneficial
owners of Spanswick Investments Limited.
20
<PAGE> 22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The officers, directors and significant employees of Bionutrics are as
follows:
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ---- --- -------- -------
<S> <C> <C> <C>
Ronald H. Lane, Ph.D. 52 Chairman of the Board, Chief 1997
Executive Officer and President
George E. Duck, Jr. 39 Vice President, Finance,
Secretary and Treasurer
Steven H. Friedman 51 Executive Vice President,
Marketing and Sales of
Bionutrics Health Products,
Inc.
D. Michael Wells 47 President of Nutrition 1997
Technology Corporation and
Director
William M. McCormick 56 Vice Chairman of the Board 1997
Richard M. Feldheim 56 Director 1998
Ian R. Ferrier, M.D., Ph.D. 53 Director 1997
Steve Henig, Ph.D. 54 Director 1998
C. Everett Koop, M.D., Sc.D. 80 Director 1999
Milton Okin 81 Director 1999
Frederick B. Rentschler 57 Director 1999
Winston A. Salser, Ph.D. 57 Director 1998
</TABLE>
RONALD HOWARD LANE, PH.D. has served as Chairman of the Board, Chief Executive
Officer and President of the Company since December 1994 and its predecessor,
NutraGenics (Delaware) since April 1994 and has served as director, President
and Chief Executive Officer of LipoGenics since July 1992. Dr. Lane received a
Ph.D. and post-doctorate NIH fellowship from the University of Wisconsin
(Madison) in Neurophysiology and is responsible for directing Bionutrics'
corporate development and growth. Dr. Lane spearheaded the development of the
technology at LipoGenics and has been employed previously with Norcap Financial
Corporation, The National Western Group, Inc. (an investment company), and
Taylor Pierson Corporation.
STEPHEN FRIEDMAN has served as Executive Vice President Marketing and Sales of
Bionutrics since November 1996. Mr. Friedman is a graduate of Syracuse
University and holds an MBA from Suffolk University in Boston. He served as Vice
President Marketing and Sales and Group Vice President Personal and Diagnostic
Products at Carter Wallace from 1977 to 1996 with responsibility for leading
healthcare and health and beauty aids products. Prior to Carter Wallace he has
held officer positions in consumer marketing and sales at Lever Brothers.
21
<PAGE> 23
GEORGE E. DUCK, JR. has served as Vice President, Finance, and Secretary and
Treasurer of the Company since October 1996 and has served as director, Vice
President, Secretary and Treasurer of LipoGenics since November 1996. Mr. Duck,
who is a CPA, was Vice President and Chief Financial Officer of the Custom Foot
Corporation from March 1996 to October 1996. He was Vice President and Chief
Financial Officer of the Coca Cola Bottling Company of New York, Inc. from March
1992 to March 1996 and its Treasurer from 1986 to 1992. Previously he had been
Controller for Joyce Beverages, a 7-Up/Royal Crown Cola Bottler and Distributor
as well as Manager of Accounting for Pepsico, Inc. Mr. Duck began his career at
the firm of Coopers & Lybrand upon graduation from Pace University.
D. MICHAEL WELLS has served as President of Nutrition Technology Corporation
since November 1996. He also has served as director of the Company and its
predecessor NutraGenics (Delaware) since December 1994 and served as Secretary
and Treasurer of the Company and NutraGenics (Delaware) from April 1994 to
October 1996. Mr. Wells served as a director for LipoGenics from July 1992 until
October 1996. He served as General Manager of Zapata Protein (USA), Inc. from
1995 to 1996 and is an inventor of portions of the technology. Mr. Wells was
previously employed by Riviana Foods, Inc. of Houston, Texas as a General
Manager of their Abbeville, Louisiana rice milling operations. Mr. Wells
received a B.S. in chemistry from Southeastern Oklahoma State University and
undertook graduate work in physical organic chemistry at East Texas State
University. Previously, Mr. Wells was employed as Director of Technical Affairs
for Conway Oil and Division Quality Assurance Manager for Safeway Stores, Inc.,
which included new product development management.
WILLIAM M. MCCORMICK is the Vice Chairman of the Company's Board and has been a
member of the Board of Directors since May 1996. Mr. McCormick was President,
Chief Executive Officer and a director of PennCorp Financial Group, Inc., a NYSE
company, from 1990 to 1995 and remains a director. Prior thereto, Mr. McCormick
was employed by the American Express Company. His titles ranged from Senior Vice
President Finance, Systems & Operations of the American Express International
Banking Corporation to President of American Express' Travel Related Services
Company. Mr. McCormick then spent five years as Chairman and CEO of Fireman's
Fund Insurance. After graduating from Yale, Mr. McCormick spent his early years
in investment banking and management consulting with Donaldson, Lufkin &
Jenrette and McKinsey & Company, Inc., respectively.
C. EVERETT KOOP, M.D., SC.D. is the former Surgeon General of the United States
and has been a member of the Board of Directors since October 1995. Dr. Koop's
past and present committee and board of director elections include the World
Health Organization, Pan American Health Organization, American College of
Surgeons, National Library of Medicine, Association of Military Surgeons of the
United States, Biopure Corporation, Neurocrine, Aprex, and the Carnegie Council.
Faculty appointments include Professor of Pediatrics at University of
Pennsylvania School of Medicine, Elizabeth DeCamp McInery Professor, Dartmouth,
Senior Scholar of C. Everett Koop Institute at Dartmouth, and Distinguished
Scholar at Carnegie Foundation for the Advancement of Teaching. Dr. Koop's
hospital and administrative appointments include President of the Children's
Hospital of Philadelphia and Pediatric Surgical Consultant of the U.S. Naval
Hospital of Philadelphia. Dr. Koop received an M.D. at Cornell University
Medical College and a Sc.D. from the University of Pennsylvania (Medicine).
MILTON OKIN has been a member of the Board of Directors since October 1995. Mr.
Okin has many years of diet and health food development experience, having
created Weight Watchers low calorie foods that he subsequently sold to Weight
Watchers International. Mr. Okin developed a unique all natural Vitamin C from
acerola berry grown in plantations in Puerto Rico and Florida. The acerola
operation was sold to Booker McConnell Ltd. of England in 1978. Mr. Okin has
owned and operated a chain of health food related retail stores including
outlets
22
<PAGE> 24
in Sears Roebuck and Company, and presently owns a mail order vitamin and health
products business in Hastings, N.Y. Mr. Okin is a biochemist graduate of New
York City College with graduate research at Mount Sinai Hospital in lipids,
cholesterol and vitamins.
IAN R. FERRIER, M.D., PH.D. has been a member of the Board of Directors since
October 1995 and was a director of NutraGenics (Delaware) from April 1994 until
December 1994 and a director of LipoGenics from July 1992 until October 1996. He
is a founder of Bogart Delafield Ferrier, Inc., a pharmaceutical and food
industry consulting firm and has been with that firm since 1980. He serves on
the board of directors of Nastech, Inc. and Dynagen, Inc. and on the
compensation committee of Nastech, Inc. Dr. Ferrier has had over two decades of
management and marketing experience in international healthcare, ethical
pharmaceuticals, diagnostics and devices, generic drugs, and animal health. Dr.
Ferrier has guided the growth of several multinational pharmaceutical companies
through both internal development and acquisitions and has had senior level
responsibility for technical development, commercialization and marketing of new
healthcare products in the global marketplace. Dr. Ferrier was previously
affiliated with ICI Pharmaceuticals, Kalichemie (Solvay et Cie); McCann
Healthcare; Covington Group; Monadnock Medical; University of Edinburgh Teaching
Hospitals; University of Bristol Teaching Hospitals. He earned his M.D. at the
University of Edinburgh School of Medicine and holds a Ph.D. in Pharmacology
(University of Edinburgh).
STEVE HENIG, PH.D. has been a member of the Board of Directors since October
1995 and served as a director of LipoGenics from August 1992 until October 1996.
He has served as Senior Vice President of Technology and Marketing Services for
Hunt-Wesson, Inc. since 1992. He joined Hunt-Wesson in 1983 as Vice President of
Research and Development. His previous position was Vice President of Corporate
Research & Development and Corporate Engineering for Land O'Lakes, Inc. in
Minneapolis, Minnesota. Prior to that he held positions with Pillsbury Company
and General Foods Corporation. Dr. Henig received his Bachelor of Science Degree
in Chemical Engineering and a Master of Science Degree in Food and Biotechnology
from the Technion-Israel Institute of Technology. He earned his Ph.D. Degree in
Food Science from Rutgers University, New Brunswick, New Jersey.
FREDERICK B. RENTSCHLER has been a member of the Board of Directors since
October 1995 and served as a director of LipoGenics from January 1993 until
October 1996. He is Chairman of the Board of the Salk Institute in La Jolla,
California. He serves on the board of directors and compensation committee of
International Game Technology, a NYSE company. He served as President and Chief
Executive Officer of Beatrice Companies from 1987 to 1990, having completed a
leveraged buyout of Beatrice Companies in 1986 with the firm of Kohlberg,
Kravis, Roberts & Company. Prior to Beatrice, Mr. Rentschler was employed as
President/Chief Executive Officer of Armour-Dial and, subsequently had the same
responsibility at Hunt-Wesson. Following his retirement from Beatrice, he served
as President/Chief Executive Officer of Northwest Airlines and remains on their
Board of Directors. Mr. Rentschler's current affiliations in addition to the
Salk Institute include: ESCAgenetics Corporation, Woods Hole Oceanographic
Institution (Massachusetts), and Hamilton Foundry and Machine Company. In
addition, he is President of the Heard Museum National Advisory Board (Arizona),
and a member of the Alumni Board of Vanderbilt University and Advisory Board of
Canned Foods, Inc. (California). Mr. Rentschler received his B.A. in Economics
and History from Vanderbilt University and MBA from Harvard Business School.
RICHARD M. FELDHEIM has been a director of the Company since October 1995. He
served as a director, Secretary and Chief Financial Officer of LipoGenics from
July 1992 until October 1996. Mr. Feldheim has served as Chairman and Co-Chief
Executive Officer of Abby's, a restaurant chain in Oregon since 1991. He was in
private place as a lawyer prior thereto, has previously been employed with
Goldman Sachs & Co.; Donaldson, Lufkin & Jenrette; J. Aron Company; and Price
Waterhouse, and was President of Norcap Financial Corporation.
23
<PAGE> 25
Mr. Feldheim received a B.S., B.A., a Master's Degree in Accounting, and a J.D.
from the University of Arizona, as well as an LL.M. in Taxation from New York
University. He is a Certified Public Accountant.
WINSTON A. SALSER, PH.D. has served as a member of the Board of Directors since
October 1995, served as a director of LipoGenics from August 1992 until October
1996 and is Chairman of Bionutrics' Scientific Advisory Board. Dr. Salser has
been a Professor of Molecular Biology at the University of California, Los
Angeles since 1968. Dr. Salser was the founding President of Amgen, Inc. and
formed its Scientific Advisory Board. He received a B.S. from the University of
Chicago in physics, a Ph.D. from the Massachusetts Institute of Technology in
molecular biology, and was a Helen Hay Whitney Foundation Postdoctoral Fellow.
SCIENTIFIC ADVISORY BOARD
In addition to Dr. Salser, Dr. Asaf A. Qureshi serves on the Company's
Scientific Advisory Board and is a consultant to the Company. Dr. Qureshi is a
principal international researcher in vitamin E like compounds. He has been
conducting analytical chemistry and biochemistry research for LipoGenics since
1989 and presently performs proprietary work for Bionutrics. Dr. Qureshi is the
President of Advanced Medical Research in Madison, Wisconsin, and conducts
independent contract chemical analysis and experimentation. He received a
Bachelor of Pharmacy from the University of Punjab in Lahore, Pakistan; a Ph.D.
in Organic and Analytical Chemistry from Manchester University; and was
Postdoctoral Fellow at Sussex University and Yale University. Dr. Qureshi has
published well over 100 articles and chapters of books on biochemistry and
analytical chemistry.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation earned by the Company's
Chief Executive Officer (the named executive officer) for services rendered to
the Company for the last three completed fiscal years. No other executive
officer of the Company earned more than $100,000 during such prior fiscal years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------------------------------------ ------
SECURITIES
OTHER ANNUAL UNDERLYING
YEAR SALARY($)(1) BONUS($) COMPENSATION($) OPTIONS(#)
---- ------------ -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Ronald H. Lane 1996 $211,756 $250,000(2) $167,884(3) 760,000
Chairman of the 1995 $103,282 --- --- ---
Board, Chief
Executive Officer
and President
</TABLE>
(1) Mr. Lane received certain perquisites, the value of which did not
exceed 10% of his salary and bonus.
(2) Awarded and accrued but not yet paid.
(3) Reflects a promissory note in the amount of $147,000 and accrued
interest owed to the Company by Mr. Lane which was converted to
compensation.
24
<PAGE> 26
OPTION GRANTS
The following table provides information on stock options granted to
the Company's named executive officer during the fiscal year ended October 31,
1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM(2)
-----------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
NAME Granted(#)(1) Fiscal Year ($/Sh) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Ronald H. Lane
Chairman of the Board, Chief 760,000 61.39% $5.00 10/31/01 $1,084,800 $2,318,000
Executive Officer and President
</TABLE>
- ---------------------
(1) The options vest with respect to one-third of the shares on each of the
first, second and third anniversaries of the grant date.
(2) Calculated from a base price equal to the exercise price of each
option, which was the fair market value of the Common Stock on the date
of the grant. The amounts represent only certain annual rates of
appreciation. Actual gains, if any, on stock option exercises and
Common Stock holdings cannot be predicted, and there can be no
assurance that the gains set forth on the table will be achieved.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year-End(#) at Fiscal Year-End($)
Acquired on Value
Exercise Realized Exercisable Unexercisable(1) Exercisable Unexercisable(1)(2)
<S> <C> <C> <C> <C> <C> <C>
Ronald H. Lane 0 $0 0 760,000 $0 $ 0
Chairman of the
Board, Chief
Executive Officer
and President
</TABLE>
- ---------------------
(1) The options vest with respect to one-third of the shares on each of the
first, second and third anniversaries of the grant date.
(2) The options were granted at fair market value on the last day of the
fiscal year-end and therefore the value on that date less the exercise
price equals $0.
25
<PAGE> 27
1996 STOCK OPTION PLAN
General. The Company's 1996 Stock Option Plan (the "1996 Plan"),
provides for the granting of options to acquire Common Stock of the Company
("Options"), the direct granting of Common Stock ("Stock Awards"), the granting
of stock appreciation rights ("SARs"), and the granting of other cash awards
("Cash Awards") (Stock Awards, SARs, and Cash Awards are collectively referred
to herein as "Awards"). The 1996 Plan is intended to comply with Rule 16b-3 as
promulgated under the Securities Exchange Act of 1934 with respect to persons
subject to Section 16 of such Act. The Company believes that the 1996 Plan is
important in attracting and retaining executives and other key employees and
constitutes a significant part of the compensation program for key personnel,
providing them with an opportunity to acquire a proprietary interest in the
Company and giving them an additional incentive to use their best efforts for
the long-term success of the Company. The 1996 Plan will remain in effect until
October 31, 2006. The Company reserved 1,900,000 shares of Common Stock issuable
pursuant to the 1996 Plan. On October 31, 1996, an aggregate of 1,223,000
Options were granted to employees, consultants and directors with a five year
exercise period, which vest equally over a three year period. Options for an
additional 15,000 shares were issued on the same terms to the widow of a
former officer.
If any Option or SAR terminates or expires without having been
exercised in full, stock not issued under such Option or SAR will again be
available for the purposes of the 1996 Plan. If any change is made in the stock
subject to the 1996 Plan, or subject to any Option or SAR granted under the 1996
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, split-up, combination of shares, exchange of shares, change in
corporate structure, or otherwise), the 1996 Plan provides that appropriate
adjustments will be made as to the maximum number of shares subject to the 1996
Plan and the number of shares and exercise price per share of stock subject to
outstanding Options.
Eligibility and Administration. Options and Awards may be granted only
to persons ("Eligible Persons") who at the time of grant are either (i) key
personnel, including officers and directors of the Company or its subsidiaries,
or (ii) consultants and independent contractors who provide valuable services to
the Company or to its subsidiaries. Options that are incentive stock options may
only be granted to key personnel of the Company who are also employees of the
Company (or its subsidiaries). To the extent that granted Options are incentive
stock options, the terms and conditions of those Options must be consistent with
the qualification requirements set forth in the Internal Revenue Code. Employees
of the Company may not receive grants of Options or Awards representing more
than 50 percent of the shares of Common Stock issuable under the 1996 Plan.
The Eligible Persons under the 1996 Plan are divided into two groups,
and there is a separate administrator (each a "Plan Administrator") for each
group. One group consists of Eligible Persons who are executive officers and
directors of the Company and all persons who own 10% or more of the Company's
issued and outstanding stock. The power to administer the 1996 Plan with respect
to those persons rests with the Board of Directors or a committee comprised of
two or more non-employee directors who are appointed by the Board of Directors.
The power to administer the 1996 Plan with respect to the remaining Eligible
Persons is vested with the Board of Directors or a committee appointed by the
Board of Directors. Each Plan Administrator determines (i) which of the Eligible
Persons in its group will be granted Options and Awards; (ii) the amount and
timing of the grant of such Options and Awards; and (iii) such other terms and
conditions as may be imposed by the Plan Administrator consistent with the 1996
Plan. To the extent that granted Options are incentive stock options, the terms
and conditions of those Options must be consistent with the qualification
requirements set forth in the Internal Revenue Code.
26
<PAGE> 28
Exercise of Options. The expiration date, maximum number of shares
purchasable and other provisions of the Options, including vesting, are
established at the time of grant. Options may be granted for terms of up to 10
years. The exercise prices of Options are determined by the Plan Administrator,
but if the option is intended to be an incentive stock option may not be less
than 100% (110% if the option is granted to a stockholder who at the time the
option is granted owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of its subsidiaries) of
the fair market value of the Common Stock at the time of the grant.
To exercise an Option, the optionholder will be required to deliver to
the Company full payment of the exercise price for the shares as to which the
option is being exercised. Generally, options can be exercised (i) by delivery
of cash or bank cashier's check to the Company; (ii) payment in other shares of
previously owned stock of the Company; or (iii) a sale and remittance procedure
by the optionholder whereby the shares are immediately sold and funds to cover
the aggregate exercise price are remitted to the Company.
The Plan Administrator may authorize the grant of reload Options.
Reload Options shall equal (i) the number of shares of previously owned stock
used to exercise the underlying Options and (ii) the number of shares withheld
or the number of shares of previously owned stock used to satisfy tax
withholding requirements incident to the exercise of the underlying Options. The
exercise price of the reload Options shall be the fair market value on the date
of grant of the reload Options and such Options shall have a term equal to the
remaining term of the underlying Options. No reload Options shall be granted
when the exercise of the underlying Options occurs following termination of the
Optionholder's employment.
Unless otherwise authorized by the Board of Directors in its sole
discretion, Options granted under the 1996 Plan are nontransferable other than
by will or by the laws of descent and distribution upon the death of the
optionholder and, during the lifetime of the optionholder, are exercisable only
by such optionholder. Unless the terms of the stock option agreement otherwise
provide, in the event of the death or termination of the employment or services
of the participant (but never later than the expiration of the term of the
Option) Options may be exercised within a three month period. If termination is
by reason of disability, however, Options may be exercised by the optionholder
or the optionholder's estate or successor by bequest or inheritance during the
period ending one year after the optionholder's retirement (but not later than
the expiration of the term of the option). Termination of employment at any time
for cause immediately terminates all Options held by the terminated employee.
Awards. The Plan Administrator also may grant Awards to Eligible
Persons under the 1996 Plan. SARs entitle the recipient to receive a payment
equal to the appreciation in market value of a stated number of shares of Common
Stock from the price stated in the award agreement to the market value of the
Common Stock on the date first exercised or surrendered. Stock Awards entitle
the recipient to directly receive Common Stock. Cash Awards entitle the
recipient to receive direct payments of cash depending on the market value or
the appreciation of the Common Stock or other securities of the Company. The
Plan Administrator may, consistent with the 1996 Plan, determine such other
terms, conditions, restrictions and limitations, if any, on any Awards.
DIRECTORS' COMPENSATION
The Company pays its directors $1,000 for attendance at each meeting of
the Company's directors. In addition, directors may be reimbursed for certain
expenses in connection with attendance at board and committee meetings. The
Company granted each of its directors options to purchase 10,000 shares of
Common Stock on October 31, 1996. The Company issued additional options to
purchase 100,000 shares of stock to Mr. Wells on October 31, 1996 in connection
with his employment at the Company. The options have a five year term and
27
<PAGE> 29
vest with respect to one-third of the shares on each of the first, second and
third anniversaries of the grant date. See Item 7. "Certain Relationships and
Related Transactions" with respect to consulting services and grant of warrants
to William M. McCormick, a director, in fiscal 1996.
BOARD COMMITTEES
The Compensation Committee consists of Messrs. Henig and Rentschler.
The Compensation Committee establishes salaries, incentive and other forms of
compensation for officers and other employees, administers incentive
compensation and benefit plans, including the Company's 1996 Stock Option Plan,
and recommends policies relating to such plans. Mr. Henig is a Senior Vice
President of Hunt-Wesson Inc., which holds an option granted by LipoGenics in
July 1992 for the purchase of 110,144 shares of the Company at a price of
$150,000.
The Audit Committee consists of Messrs. Feldheim and Ferrier. The Audit
Committee will meet periodically with management and the Company's independent
auditors and will review the results and scope of the audit and other services
provided by the Company's independent auditors, and the adequacy of internal
controls.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 5, 1995, Mr. Okin, a director, and the Company entered into
an agreement pursuant to which: (i) Mr. Okin and his children purchased a total
of 250,000 shares of restricted Common Stock of the Company at $1.00 per share;
(ii) Mr. Okin agreed to loan the Company funds to pay certain legal fees
incurred by the Company for FDA counsel, which were to be repaid in 12 months
without interest; and (iii) Mr. Okin agreed to loan the Company $250,000 secured
by various assets. The term of the $250,000 loan was for two years with a
variable rate of interest based upon six-month interbank offered rate (LIBOR)
plus the spread of 1.5 points above LIBOR. Mr. Okin at his sole option, may
elect to receive all or part of any repayment of such secured loan as well as
any loan advanced for legal fees in Common Stock of the Company at a price of
$1.50 per share. The proceeds from the purchase of shares and the secured loan
were used for the manufacture, marketing and sales of the product. The secured
loan was subsequently converted into Common Stock in October 1996. There were no
loans to the Company to pay legal fees as the Company used other funds to pay
FDA counsel legal fees.
On March 1, 1996, an additional secured loan was entered into between
the Company and Mr. Okin. The additional loan was for an aggregate amount of
$350,000 and was advanced in stages to the Company from March 1, 1996 to June 1,
1996. This loan also permitted conversion of the loan into Common Stock of the
Company at a price of $1.50 per share and also carried a variable interest rate
on the unpaid balance based upon LIBOR plus 1.5 points. This loan was
subsequently converted into Common Stock in October 1996. The proceeds from this
loan were utilized to fund operations, in particular, salaries, consulting fees
and product testing.
The Company loaned Ronald Lane, Chairman, President and Chief Executive
Officer, $147,000 pursuant to a note dated July 1994 bearing interest at 8% per
annum and due July 1997. The note plus accrued interest was converted to
compensation in fiscal 1996.
C. Everett Koop, M.D., entered an agreement with the Company on October
31, 1995 to serve on the Board of Directors of the Company and in return
received options exercisable within three years to purchase 180,000 shares of
the Company's restricted Common Stock at a price of $1.50 per share.
Simultaneously with the execution of such agreement, Dr. Koop purchased 20,000
restricted shares of Common Stock of the Company at $1.00 per share.
28
<PAGE> 30
In consideration for consulting services rendered or to be rendered to
the Company, William M. McCormick, a director, was granted a warrant in May 1996
for the purchase of 250,000 shares of restricted common stock at the price of
$2.50 per share. He also was granted unvested warrants that become exercisable
at the rate of 50,000 shares per quarter commencing in November 1996 to May 1998
for a total of 350,000 shares. The exercise price of such warrants is $2.50 per
share for the first 50,000 and $4.00 per share for the remaining 300,000. All
warrants have 10 year exercise periods upon becoming exercisable. Mr.
McCormick's responsibilities under the consulting arrangement are assisting the
Company in raising capital, representing the Company with investors and
brokerage firms and assisting in the development of the Company. He is currently
serving as Vice-Chairman of the Board of Directors.
The shareholders of LipoGenics approved a merger of a wholly owned
subsidiary of Bionutrics with and into LipoGenics wherein LipoGenics survived
the merger and became a wholly owned subsidiary of Bionutrics. The consideration
paid by Bionutrics in the merger was 2,092,743 restricted shares of Common Stock
of Bionutrics. The shareholders of LipoGenics received the shares of Bionutrics
in a nontaxable exchange. The effect of the merger ended the royalty obligations
under the License Agreement to LipoGenics and resulted in Bionutrics acquiring
full rights to the technology. The merger was completed in October 1996. The
directors of LipoGenics were directors of the Company at the time of the merger
and all of LipoGenics' shareholders were also shareholders of the Company.
LipoGenics and the Company were under common control as a result of the December
1994 merger of the Company and NutraGenics (Delaware). NutraGenics (Delaware)
was formed pursuant to a rights offering in April 1994 to all shareholders of
LipoGenics.
Winston A. Salser through a family limited partnership acquired 100,000
shares of the Company's Common Stock in November 1996 at a purchase price of
$7.00 per share. These funds are intended for working capital, primarily
salaries, consulting fees and product testing.
All future transactions, including any loans from the Company to its
officers or directors, will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested members of the Board
of Directors, or, if required by law, a majority of disinterested shareholders,
and will be on terms no less favorable to the Company than can be obtained from
unaffiliated third parties.
ITEM 8. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 9. MARKET PRICE OF, AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ OTC Bulletin Board
under the symbol BNRX. The high and low closing bid information for the
Company's Common Stock during the year ended October 31, 1995, the year ended
October 31, 1996, and the quarter ended January 31, 1997 is based on OTC
Bulletin Board information.
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<PAGE> 31
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended October 31, 1995
First Quarter ........................ 1 1
Second Quarter ....................... 2 1
Third Quarter ........................ 2 1/2 2
Fourth Quarter ....................... 2 1/2 1 1/2
Year Ended October 31, 1996
First Quarter ........................ 1 1/2 1/2
Second Quarter ....................... 2 1/4 1/4
Third Quarter ........................ 6 3 1/2
Fourth Quarter ....................... 8 4 7/8
Year Ended October 31, 1997
First Quarter ........................ 11 8
</TABLE>
Such quotations reflect inter-dealer bids, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
On March 18, 1997 the closing price of the Common Stock was 7 3/4. As
of March 18, 1997 there were 214 holders of record of the Company's Common
Stock.
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividend in the foreseeable
future. The payment of dividends, if any, is within the discretion of the Board
of Directors and will depend on the Company's earnings, if any, its capital
requirements, and financial condition and such other factors as the Board of
Directors may consider.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In February 1994, the Company issued 250,000 shares to the then
President and sole director of the Company for a total offering price of
$10,000, or $0.04 per share.
In connection with the merger of NutraGenics (Delaware) into a
subsidiary of the Company, the Company on December 29, 1994 issued 7,134,066
shares of Common Stock to the 39 shareholders of NutraGenics (Delaware) existing
at such time, 28 of which were founders of NutraGenics (Delaware) and three of
which were founders, officers and directors of NutraGenics (Delaware) and became
officers and directors of the Company.
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<PAGE> 32
In October, 1995, the Company issued 250,000 shares of Common Stock to
Mr. Okin, a director of the Company, and three of his children for a total
offering price of $250,000, or $1.00 per share (the "Okin Financing").
From January through October, 1995, the Company issued a total of
393,000 shares of Common Stock to 10 persons for a total purchase price of
$393,000, or $1.00 per share. Of such $393,000, $88,000 was paid through the
cancellation of indebtedness owed by the Company to two of the purchasers of
shares.
In September 1995, the Company issued 10,000 shares at $1.00 per share
to the Company's chief financial officer for consulting services rendered by him
valued at $10,000. Such issuance was exempt from registration under the 1933 Act
pursuant to Rule 701 promulgated thereunder.
In September 1995, the Company authorized the issuance of shares to two
consultants for services to be rendered at the rate of $1.00 per share. An
aggregate of 15,000 shares were issued in August 1996 and 25,000 shares in
January 1997.
In October 1995, the Company issued to Dr. Koop, a director of the
Company, 20,000 shares of Common Stock for a total offering price of $20,000, or
$1.00 per share.
In October 1995, the Company issued 22,500 shares of Common Stock at
$1.00 per share to two individuals for services rendered by them in connection
with accounting and other consulting services provided to the Company.
In October 1995, the Company issued 28,061 shares of Common Stock to
Goldstein & Goldstein for legal services rendered to the Company by such firm.
In October 1995, the Company issued a total of 700,901 shares of Common
Stock to 11 stockholders of LipoGenics, eight of which were directors of the
Company or their affiliates and three of which were consultants or providers of
professional services to the Company, to repay an aggregate of $980,669 of
indebtedness of LipoGenics to such persons. Such issuance was effected pursuant
to the terms of a License Agreement between LipoGenics and the Company, which
provided for the assumption of such indebtedness of LipoGenics by the Company.
In May 1996, the Company issued a total of 26,425 shares of Common
Stock valued at $1.00 per share to one individual as compensation for consulting
services rendered to the Company in connection with a second round of Okin
financing and issued a total of 24,000 shares of Common Stock valued at $1.00
per share to four individuals as compensation for consulting services rendered
to the Company in connection with Dr. Koop joining the Board of Directors of the
Company. Such issuance was exempt from registration under the 1933 Act pursuant
to Rule 701 promulgated thereunder.
From May through July 1996, the Company issued a total of 546,875
shares of Common Stock to Incon Technologies, L.L.C. ("Incon") for a total
offering price of $1,465,625. Of such shares, 175,001 were issued at the price
of $2.00 per share and 371,875 were issued at the price of $3.00 per share.
Incon entered into a joint venture arrangement with the Company relating to
certain manufacturing requirements of the Company.
In June 1996, the Company issued 90,000 shares of Common Stock to two
investors known to directors of the Company, one for a total offering price of
$105,000, or $1.75 per share, and one for a total offering price of $60,000 or
$2.00 per share.
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<PAGE> 33
In June 1996, the Company issued a total of 146,667 shares of Common
Stock to William McCormick, a director of the Company, and his family members.
The total offering price for such shares was $200,000. Of such shares, 66,667
were issued for $1.50 per share and 50,000 were issued for $2.00 per share.
In October 1996, the Company repaid $600,000 principal amount of
indebtedness owed to Mr. Okin, a director, under the terms of certain promissory
notes by issuing to him 400,000 shares of Common Stock at the price of $1.50 per
share. Such repayment was made pursuant to Mr. Okin's exercise of rights
previously granted to him in connection with the funding of such loans. See Item
7 above.
In October 1996, the Company issued 1,000,000 shares of Common Stock to
one overseas institutional investor for a total offering price of $5,000,000, or
$5.00 per share. Such offering was made without registration under the 1933 Act
pursuant to the exemption from such registration afforded by Regulation S
promulgated thereunder.
In connection with the Company's acquisition of LipoGenics on October
31, 1996, as a wholly owned subsidiary of the Company, the Company issued a
total of 2,092,743 shares of Common Stock to the 31 stockholders of LipoGenics,
all of whom were existing shareholders of the Company, including eight directors
or their affiliates, and two consultants.
In October 1996, the Company issued options pursuant to its 1996 Stock
Option Plan for the purchase of an aggregate of 1,223,000 shares at $5.00 per
share. Options for an additional 15,000 shares were issued outside the plan to
the widow of a former officer. None of these options have been exercised. An
exemption from registration under the 1933 Act was unnecessary in that the
issuance of the securities did not involve a sale of securities as that term is
used in Section 2(3) of the 1933 Act.
In November 1996, the Company issued 100,000 shares of restricted
Common Stock to a family limited partnership of Mr. Salser, a director, for a
total offering price of $700,000, or $7.00 per share.
In January 1997, the Company issued 63,818 shares of Common Stock to
four individual foreign investors for a total offering price of $319,090, or
$5.00 per share, pursuant to a commitment entered into in August 1996. Such
offering was made without registration under the 1933 Act pursuant to the
exemption from such registration afforded by Regulation S promulgated
thereunder.
In February 1997, the Company issued a total of 59,600 shares to two
existing shareholders for $417,200, or $7.00 per share.
In March 1997, the Company has received commitments for $6,000,000
pursuant to a second Regulation S offering. Of that amount, 452,706 shares have
been or are to be issued for a total offering price of $3,200,000 or $7.00 per
share to the same overseas investor and an affiliate who invested in October
1996. The balance of 400,000 shares at a total offering price of $2,800,000 or
$7.00 per share were issued to three European institutional investors and 20
European individual investors. Such offering was made without registration under
the 1933 Act pursuant to the exemption from such registration afforded by
Regulation S promulgated thereunder.
The sales and issuances of the securities in the transaction above to
the extent not noted otherwise were deemed to be exempt from registration under
the 1933 Act by virtue of Section 4(2). Appropriate legends have been placed on
the stock certificates for all shares issued by the Company and investment
representations were obtained from the purchasers. All purchasers of securities
either received adequate information about the Company or had access, through
employment or other relationships, to such information and were sophisticated
investors. All of such securities issued pursuant to such exemption are
restricted securities as defined in Rule 144(a)(3) promulgated under the 1933
Act.
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<PAGE> 34
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company's authorized capital stock consists of 45,000,000 shares of
Common Stock, par value $0.001 per share (the "Common Stock"), and 5,000,000
shares of preferred stock, par value $0.001 per share ("Preferred Stock"). As of
January 15, 1997, there were issued and outstanding 15,256,797 shares of Common
Stock and no shares of Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, the holders of a majority of the stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Subject to the preferences that may be applicable to any then
outstanding Preferred Stock, the holders of Common Stock will be entitled to
receive such dividends, if any, as may be declared by the Board from time to
time out of legally available funds. Upon the liquidation, dissolution, or
winding up of the Company, the holders of Common Stock will be entitled to share
ratably in all assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of holders of any preferred stock then outstanding. The holders
of Common Stock have no preemptive, subscription, redemption, or conversion
rights.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations
prescribed by the laws of the state of Nevada, but without further action by the
Company's stockholders, to provide for the issuance of Preferred Stock in one or
more series, to establish from time to time the number of shares to be included
in such series, to fix the designations, powers, preferences and rights of the
shares of each such series (including dividend, redemption, sinking fund,
conversion, voting and liquidation rights) and any qualifications, limitations,
or restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. The Board may authorize
and issue Preferred Stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In
addition, the issuance of Preferred Stock may have the effect of delaying,
deterring, or preventing a change in control of the Company. The Company has no
current plan to issue any shares of Preferred Stock.
NEVADA GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS
The provisions of the Company's Restated Articles of Incorporation and
Bylaws and the Nevada General Corporation Law (the "Nevada GCL") summarized
below may have the effect of discouraging, delaying, or preventing hostile
takeovers, including those that might result in a premium over the market price,
and discouraging, delaying, or preventing changes in control or management of
the Company.
Combinations with Interested Stockholders under the Nevada GCL. The
Company is subject to the provisions of Sections 78.411 through 78.445 of the
Nevada GCL. In general, these statutes prohibit a publicly held Nevada
corporation from engaging, under certain circumstances, in a "combination" with
an "interested stockholder" for a period of three years after the interested
stockholder's date of acquiring shares, unless the combination or the purchase
of shares made by the interested stockholder on the interested stockholder's
date of acquiring shares is approved by the Board of Directors of the
corporation before that date. In addition, these statutes generally prohibit a
publicly held corporation from engaging in a combination with an interested
stockholder after the expiration of three years after the interested
stockholder's date of acquiring shares, other than
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<PAGE> 35
a combination meeting one of the following requirements: (i) a combination
approved by the Board of Directors of the corporation before the interested
stockholder's date of acquiring shares, or as to which the purchase of shares
made by the interested stockholder on that date has been approved by the Board
of Directors of the corporation before that date; (ii) a combination approved by
the affirmative vote of the holders of stock representing a majority of the
outstanding voting power not beneficially owned by the interested stockholder
proposing the combination, or any affiliate or associate of the interested
stockholder proposing the combination; (iii) a combination in which the
aggregate amount of the cash and the market value, as of the date of
consummation, of consideration other than cash to be received per share by the
holders of outstanding common stock of the corporation not beneficially owned by
the interested stockholder immediately before that date is at least equal to the
higher of the following: (a) subject to certain adjustments, the highest price
per share paid by the interested stockholder, at a time when such stockholder
was the beneficial owner, directly or indirectly, of five percent or more of the
outstanding voting stock of the corporation, for any common stock of the same
class or series acquired by such stockholder within three years immediately
before the date of announcement with respect to the combination or within three
years immediately before, or in, the transaction in which such stockholder
became an interested stockholder, whichever is higher; and (b) subject to
certain adjustments, the market value per common share on the date of
announcement with respect to the combination or on the interested stockholder's
date of acquiring shares, whichever is higher; or (iv) a combination in which
the aggregate amount of the cash and the market value, as of the date of
consummation, of consideration other than cash to be received per share by the
holders of outstanding shares of any class or series of stock, other than common
stock, not beneficially owned by the interested stockholder immediately before
that date is at least equal to the highest of the following, whether or not the
interested stockholder has previously acquired any shares of the class or series
of stock: (x) subject to certain adjustments, the highest price per share paid
by the interested stockholder, at a time when such stockholder was the
beneficial owner, directly or indirectly, of five percent or more of the
outstanding voting stock of the corporation, for any shares of that class or
series of stock acquired by such stockholder within three years immediately
before the date of announcement with respect to the combination or within three
years immediately before, or in, the transaction in which such stockholder
became an interested stockholder, whichever is higher; (y) subject to certain
adjustments, the highest preferential amount per share to which the holders of
shares of the class or series of stock are entitled in the event of any
voluntary liquidation, dissolution or winding up of the corporation, plus the
aggregate amount of any dividends declared or due to which the holders are
entitled before payment of the dividends on some other class or series of stock;
and (z) the market value per share of the class or series of stock on the date
of announcement with respect to the combination or on the interested
stockholder's date of acquiring shares, whichever is higher. An "interested
stockholder" is generally defined in the statutes as a person who is (i) the
beneficial owner, directly or indirectly, of 10 percent or more of the voting
power of the outstanding voting shares of the corporation; or (ii) an affiliate
or associate of the corporation and at any time within three years immediately
before the date in question was the beneficial owner, directly or indirectly, of
10 percent or more of the voting power of the then outstanding shares of the
corporation. The statutes define a "combination" to include mergers,
consolidations, stock sales and asset based transactions, and other transactions
resulting in a financial benefit to the interested stockholder.
Acquisition of a Controlling Interest under Nevada GCL. The Company is
also subject to the provisions of Sections 78.378 through 78.3793 of the Nevada
GCL. These sections generally provide that any "control shares" acquired by a
person in the direct or indirect acquisition of a "controlling interest" in a
Nevada corporation, greater than a level of "controlling interest" previously
authorized by the corporation's stockholders, (i) shall be divested of all
voting rights, except to the extent that the retention of voting rights is
authorized by the stockholders of the corporation other than the acquiring
person and associated persons, and (ii) may be redeemed, in whole but not in
part, by the corporation at the average price paid for the control shares. These
sections define "control shares" as those voting shares which an acquiring
person and associated persons acquire in the acquisition of a "controlling
interest," greater than a level of controlling interest previously authorized by
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the corporation's stockholders, or within 90 days immediately preceding the date
the acquiring person acquired such greater controlling interest. A "controlling
interest" is defined in the statutes as the ownership of voting shares
sufficient, but for the provisions of Sections 78.378 through 78.3793, to enable
a person, directly or indirectly and individually or in association with others,
to exercise (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more, of all of the voting
power of the corporation in the election of directors.
Certain Charter Provisions. The Company's Restated Articles of
Incorporation and Bylaws contain a number of other provisions relating to
corporate governance and to the rights of stockholders. These provisions include
(i) the division of the Board of Directors into three staggered classes, with
directors of each class holding office for a period of three years, (ii) the
authority of the Board to fill vacancies on the Board, and (iii) the authority
of the Board of Directors to issue Preferred Stock in series with such voting
rights and other powers as the Board of Directors may determine. Among other
things, these provisions could have the result of delaying or preventing an
acquiror from being able to elect a majority of the Board of Directors, or
otherwise obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Pacific Stock
Transfer Company, Las Vegas, Nevada.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Articles of Incorporation provide that no
director or officer of the Company shall be personally liable to the Company or
its stockholders for monetary damages for any breach of fiduciary duty by such
person as a director or officer, except that a director or officer shall be
liable, to the extent provided by applicable law, (i) for acts or omissions
which involve intentional misconduct, fraud or a knowing violation of law, or
(ii) for the payment of dividends in violation of restrictions imposed by
Section 78.300 of the Nevada GCL. The effect of this provision in the Restated
Articles of Incorporation is to eliminate the rights of the Company and its
stockholders, either directly or through stockholders' derivative suits brought
on behalf of the Company, to recover monetary damages from a director or officer
for breach of the fiduciary duty of care as a director or officer except in
those instances provided under the Nevada GCL.
In addition, the Company has adopted provisions in its Bylaws that
require the Company to indemnify its directors, officers and certain other
representatives of the Company against expenses, liabilities and other matters
arising out of their conduct on behalf of the Company, or otherwise referred to
in or covered by applicable provisions of the Nevada GCL, to the fullest extent
permitted by the Nevada GCL.
Section 78.751 of the Nevada GCL provides that a corporation may
indemnify its directors and officers against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by the director or officer in connection with an action, suit or
proceeding in which the director or officer has been made or is threatened to be
made a party, if the director or officer acted in good faith and in a manner
which the director or officer reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal proceeding,
had no reason to believe the director's or officer's conduct was unlawful. Any
such indemnification may be made by the corporation only as ordered by a court
or as authorized in a specific case upon a determination made in accordance with
the Nevada GCL that such indemnification is proper in the circumstances.
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Indemnification may not be made under the Nevada GCL for any claim,
issue or matter as to which the director or officer has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction determines that in view of all
the circumstances of the case, the director or officer is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
To the extent that a director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding or in defense of any claim, issue or matter therein, the director or
officer must be indemnified under the Nevada GCL by the corporation against
expenses, including attorneys' fees, actually and reasonably incurred by the
director or officer in connection with the defense.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements required by this Item 13 are set forth in
pages F-1 through F-12 of this Registration Statement. No supplementary
financial information is required.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In November 1996, the Company's predecessor auditors, LeMaster &
Daniels PLLC, were dismissed and Deloitte & Touche LLP was engaged as the
Company's independent public accountants. The change in accountants was
recommended by the Audit Committee and approved by the Board of Directors. Prior
reports of the predecessor auditors did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles except for a modification that describes
substantial doubt surrounding NutraGenics's ability to continue as a going
concern. During the two most recent fiscal years and the subsequent interim
period, there have not been any disagreements with the predecessor auditors on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure. The Company has authorized the predecessor
auditors to respond to any inquiries of Deloitte & Touche LLP.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
Independent Auditors' Report dated December 6, 1996.
Consolidated balance sheets as of October 31, 1995 and 1996,
and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended
December 31, 1994, the 10 month period ended October 31, 1995,
the year ended October 31, 1996 and for the period from
February 22, 1990 (date of inception) to October 31, 1996.
Consolidated balance sheets as of January 31, 1997 (unaudited)
and October 31 1996, and the related unaudited consolidated
statements of operations, stockholders' equity and cash flows
for the three months ended January 31, 1997 and 1996.
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(b) Exhibits
<TABLE>
<S> <C>
3.1* Restated Articles of Incorporation
3.2* Articles of Amendment to the Articles of Incorporation
3.3* Bylaws
4.1* Form of Certificate evidencing shares of Common Stock
10.1* Option granted to Hunt-Wesson, Inc. by LipoGenics, Inc., dated July 1992.
10.2* Agreement dated October 1995 between the Company and Milton Okin, Kenneth Okin,
Robert Okin and Nicki Closset and Amendment to Agreement dated October 1995
10.3* Agreement between the Company and C. Everett Koop for the purchase of 20,000
shares of Common Stock and the issuance of 180,000 options dated October 1995
10.4* Additional Secured Loan Agreement dated March 1996 between the Company and
Milton Okin
10.5* Warrant Agreement for the purchase of 600,000 shares between the Company and
William M. McCormick dated May 1996
10.6 Joint Venture Agreement between the Company and Incon Technologies, LLC.
10.7* Stock Purchase Agreements dated September 16, 1996 and October 31, 1996 between
the Company and Spanswick Limited
10.8* 1996 Stock Option Plan
16 Letter for change in certifying accountant
21* Subsidiaries of the Company
27* Financial Data Schedule
</TABLE>
*Previously filed on January 21, 1997
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this amended registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
BIONUTRICS, INC.
Date: March 20, 1997 By: /s/Ronald H. Lane
_______________ ___________________________
Ronald H. Lane
President and Chief Executive
Officer
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<PAGE> 40
BIONUTRICS, INC.
(FORMERLY NUTRAGENICS, INC.)
(A DEVELOPMENT STAGE COMPANY)
Consolidated Financial Statements
Year Ended December 31, 1994,
Ten Month Period Ended October 31, 1995,
Year Ended October 31, 1996 and
Period from February 22, 1990 (Date of Inception) to
October 31, 1996, and
Independent Auditors' Report
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bionutrics, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of Bionutrics, Inc. (formerly
NutraGenics, Inc.) and subsidiaries (a development stage company) (collectively
referred to as the "Company") as of October 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1994, the ten month period ended October 31, 1995,
the year ended October 31, 1996 and for the period from February 22, 1990 (date
of inception) to October 31, 1996. 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 audits. The
consolidated financial statements give retroactive effect to the merger of
Bionutrics, Inc. and LipoGenics, Inc., which has been accounted for in a manner
similar to a pooling of interests as described in Note 1 to the consolidated
financial statements. We did not audit the balance sheet of NutraGenics, Inc.
("NutraGenics") as of October 31, 1995, or the related statements of operations,
stockholders' equity and cash flows of NutraGenics for the ten month period
ended October 31, 1995 and the period from April 5, 1994 (date of NutraGenics'
inception) to October 31, 1995, which statements reflect total assets of
$1,093,000 as of October 31, 1995, and no revenues. Those statements were
audited by other auditors whose report, dated December 22, 1995, expressed an
unqualified opinion on those statements and included an explanatory paragraph
that described the substantial doubt surrounding NutraGenics' ability to
continue as a going concern. The other auditors' report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for
NutraGenics for such prior period, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at October 31, 1995 and
1996, and the results of their operations and their cash flows for the year
ended December 31, 1994, the ten month period ended October 31, 1995, the year
ended October 31, 1996 and the period from February 22, 1990 (date of inception)
to October 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is a development
stage enterprise engaged in developing and marketing dietary supplements using
proprietary technology. As discussed in Note 1 to the consolidated financial
statements, the Company's operating losses since inception raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Deloitte & Touche LLP
Phoenix, Arizona
December 6, 1996
- 2 -
<PAGE> 42
BIONUTRICS, INC.
(Formerly NutraGenics, Inc.)
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1996
- --------------------------------------------------------------------------------------------------
ASSETS 1995 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 427,200 $ 5,676,360
Note receivable (Note 3) 50,000
Accrued interest (Note 3) 2,000
------------ ------------
Total current assets 479,200 5,676,360
------------ ------------
PROPERTY - Net of accumulated depreciation
of $21,701 in 1996 (Note 2) 70,199
------------ ------------
OTHER ASSETS:
Notes receivable (Note 3) 147,000 16,665
Accrued interest (Note 3) 14,700 1,333
Organizational costs - net 5,830
Patent applications and other related costs (Note 2) 452,791 452,791
------------ ------------
Total other assets 620,321 470,789
------------ ------------
TOTAL $ 1,099,521 $ 6,217,348
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 286,686 $ 565,823
Accrued payroll and compensation 306,481
Accrued other 7,968 64,174
------------ ------------
Total current liabilities 294,654 936,478
------------ ------------
LONG-TERM LIABILITY - Note payable (Note 4) 250,000
------------ ------------
Total liabilities 544,654 936,478
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 7 and 9)
STOCKHOLDERS' EQUITY (Note 5):
Common stock, $.001 par value - authorized, 45,000,000 shares;
issued and outstanding, 10,956,269 and 15,067,979 shares 10,956 15,068
Preferred stock, $.001 par value - authorized, 5,000,000 shares;
no issued and outstanding shares
Additional paid-in capital 2,677,558 10,406,996
Deficit accumulated during the development stage (2,132,444) (5,139,991)
Common stock in treasury (1,203) (1,203)
------------ ------------
Total stockholders' equity 554,867 5,280,870
------------ ------------
TOTAL $ 1,099,521 $ 6,217,348
============ ============
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE> 43
BIONUTRICS, INC.
(Formerly NutraGenics, Inc.)
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
February 22,
Ten 1990
Month (Date of
Year Period Year Inception)
Ended Ended Ended to
December 31, October 31, October 31, October 31,
1994 1995 1996 1996
<S> <C> <C> <C> <C>
REVENUES - Licensing fees (Note 1) $ $ 50,000 $ 20,000 $ 72,448
----------- ----------- ----------- -----------
EXPENSES - Including related party
amounts of $55,178, $68,972, $469,103
and $976,995, respectively:
Consulting services (Notes 5 and 8) 101,832 153,650 385,916 1,317,915
Research and development
(Notes 2 and 8) 25,300 626,735 922,203
Other operating expenses (Note 8) 147,519 162,950 1,984,229 2,725,556
----------- ----------- ----------- -----------
Total expenses 249,351 341,900 2,996,880 4,965,674
----------- ----------- ----------- -----------
OTHER (EXPENSE) INCOME:
Interest expense - including related
party amounts of $45,809, $33,756,
$35,457 and $213,119, respectively
(Note 8) (54,833) (52,391) (45,019) (283,913)
Interest income 9,990 12,806 14,352 37,148
----------- ----------- ----------- -----------
Total other expense (44,843) (39,585) (30,667) (246,765)
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR
INCOME TAXES (294,194) (331,485) (3,007,547) (5,139,991)
PROVISION FOR INCOME
TAXES (Note 6)
----------- ----------- ----------- -----------
NET LOSS $ (294,194) $ (331,485) $(3,007,547) $(5,139,991)
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 44
BIONUTRICS, INC.
(Formerly NutraGenics, Inc.)
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 22, 1990 (Date of Inception) TO DECEMBER 31, 1993, YEAR
ENDED DECEMBER 31, 1994, TEN MONTH PERIOD ENDED OCTOBER 31, 1995 AND YEAR ENDED
OCTOBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock
----------------------
Shares Amount
<S> <C> <C>
BALANCE, FEBRUARY 22, 1990 (Date of Inception) - $ -
Issuance of common shares in merger with Pentad, July 13, 1992 (Note 5) 64,400 64
Notes and other liabilities converted to stock at $.62 per share (converted rate), July 1992 129,600 130
Issuance of common shares for cash at $2.39 per share (converted rate), July 1992 1,900 2
Issuance of common shares for cash at $2.52 per share (converted rate), July 1992 2,000 2
Issuance of common shares for services at $2.52 per share (converted rate), July 1992 2,000 2
Issuance of common shares for cash at $5.04 per share (converted rate), July 1992 100
Issuance of common shares for cash at $.004 per share, December 1993 642,741 643
Net loss - February 22, 1990 through December 31, 1993
---------- -------
BALANCE, DECEMBER 31, 1993 842,741 843
Issuance of common shares for cash at $.015 per share, February - December 1994 1,555,000 1,555
Issuance of common shares in reverse acquisition with Erba, December 1, 1994 (Note 5) 7,134,066 7,134
Reclassification of intercompany shares to treasury shares
Net loss - year ended December 31, 1994
---------- ------
BALANCE, DECEMBER 31, 1994 9,531,807 9,532
Issuance of common shares for cash at $1 per share, January 1995 - October 1995 663,000 663
Issuance of common shares for services at $1 per share, January 1995 - October 1995 60,561 60
Issuance of common shares for services at $1.40 per share, October 1995 380,494 381
Notes payable and other liabilities converted to stock at $1.40 per share, October 1995 320,407 320
Net loss - ten month period ended October 31, 1995
---------- ------
BALANCE, OCTOBER 31, 1995 10,956,269 10,956
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development
Capital Stage
<S> <C> <C>
BALANCE, FEBRUARY 22, 1990 (Date of Inception)
Issuance of common shares in merger with Pentad, July 13, 1992 (Note 5) $ - $ -
Notes and other liabilities converted to stock at $.62 per share (converted rate), July 1992
Issuance of common shares for cash at $2.39 per share (converted rate), July 1992 797,406
Issuance of common shares for cash at $2.52 per share (converted rate), July 1992 44,998
Issuance of common shares for services at $2.52 per share (converted rate), July 1992 49,998
Issuance of common shares for cash at $5.04 per share (converted rate), July 1992 49,998
Issuance of common shares for cash at $.004 per share, December 1993 5,000
Net loss - February 22, 1990 through December 31, 1993 1,857
(1,506,765)
--------- ----------
BALANCE, DECEMBER 31, 1993 949,257 (1,506,765)
Issuance of common shares for cash at $.015 per share, February - December 1994
Issuance of common shares in reverse acquisition with Erba, December 1, 1994 (Note 5) 21,495
Reclassification of intercompany shares to treasury shares
Net loss - year ended December 31, 1994
(294,194)
--------- ----------
BALANCE, DECEMBER 31, 1994 970,752 (1,800,959)
Issuance of common shares for cash at $1 per share, January 1995 - October 1995
Issuance of common shares for services at $1 per share, January 1995 - October 1995 662,337
Issuance of common shares for services at $1.40 per share, October 1995 60,501
Notes payable and other liabilities converted to stock at $1.40 per share, October 1995 534,160
Net loss - ten month period ended October 31, 1995 449,808
(331,485)
--------- ----------
BALANCE, OCTOBER 31, 1995 2,677,558 (2,132,444)
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Shares Amount
<S> <C> <C>
BALANCE, FEBRUARY 22, 1990 (Date of Inception) $ - $ -
Issuance of common shares in merger with Pentad, July 13, 1992 (Note 5)
Notes and other liabilities converted to stock at $.62 per share (converted rate), July 1992
Issuance of common shares for cash at $2.39 per share (converted rate), July 1992
Issuance of common shares for cash at $2.52 per share (converted rate), July 1992
Issuance of common shares for services at $2.52 per share (converted rate), July 1992
Issuance of common shares for cash at $5.04 per share (converted rate), July 1992
Issuance of common shares for cash at $.004 per share, December 1993
Net loss - February 22, 1990 through December 31, 1993
---------- ------
BALANCE, DECEMBER 31, 1993
Issuance of common shares for cash at $.015 per share, February - December 1994
Issuance of common shares in reverse acquisition with Erba, December 1, 1994 (Note 5)
Reclassification of intercompany shares to treasury shares
Net loss - year ended December 31, 1994 (1,202,886) (1,203)
---------- ------
BALANCE, DECEMBER 31, 1994 (1,202,886) (1,203)
Issuance of common shares for cash at $1 per share, January 1995 - October 1995
Issuance of common shares for services at $1 per share, January 1995 - October 1995
Issuance of common shares for services at $1.40 per share, October 1995
Notes payable and other liabilities converted to stock at $1.40 per share, October 1995
Net loss - ten month period ended October 31, 1995
---------- ------
BALANCE, OCTOBER 31, 1995 (1,202,886) (1,203)
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
<S> <C>
BALANCE, FEBRUARY 22, 1990 (Date of Inception) $ -
Issuance of common shares in merger with Pentad, July 13, 1992 (Note 5) 64
Notes and other liabilities converted to stock at $.62 per share (converted rate), July 1992 797,536
Issuance of common shares for cash at $2.39 per share (converted rate), July 1992 45,000
Issuance of common shares for cash at $2.52 per share (converted rate), July 1992 50,000
Issuance of common shares for services at $2.52 per share (converted rate), July 1992 50,000
Issuance of common shares for cash at $5.04 per share (converted rate), July 1992 5,000
Issuance of common shares for cash at $.004 per share, December 1993 2,500
Net loss - February 22, 1990 through December 31, 1993 (1,506,765)
----------
BALANCE, DECEMBER 31, 1993 (556,665)
Issuance of common shares for cash at $.015 per share, February - December 1994 23,050
Issuance of common shares in reverse acquisition with Erba, December 1, 1994 (Note 5) 7,134
Reclassification of intercompany shares to treasury shares (1,203)
Net loss - year ended December 31, 1994 (294,194)
----------
BALANCE, DECEMBER 31, 1994 (821,878)
Issuance of common shares for cash at $1 per share, January 1995 - October 1995 663,000
Issuance of common shares for services at $1 per share, January 1995 - October 1995 60,561
Issuance of common shares for services at $1.40 per share, October 1995 534,541
Notes payable and other liabilities converted to stock at $1.40 per share, October 1995 450,128
Net loss - ten month period ended October 31, 1995 (331,485)
----------
BALANCE, OCTOBER 31, 1995 554,867
</TABLE>
(Continued)
- 5 -
<PAGE> 45
BIONUTRICS, INC.
(Formerly NutraGenics, Inc.)
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 22, 1990 (Date of Inception) TO DECEMBER 31, 1993, YEAR
ENDED DECEMBER 31, 1994, TEN MONTH PERIOD ENDED OCTOBER 31, 1995 AND YEAR ENDED
OCTOBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
---------------------- Paid-In
Shares Amount Capital
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1995 10,956,269 10,956 2,677,558
Warrants granted for services, May 1996 (Note 5) 87,500
Issuance of common shares for services at $1 per share, May 1996 - August 1996 65,425 65 65,360
Issuance of common shares for cash at $1.50 per share, June 25, 1996 66,667 67 99,933
Issuance of common shares for cash at $1.75 per share, June 25, 1996 60,000 60 104,940
Issuance of common shares for cash at $2 per share, June 1996 - October 1996 255,000 255 509,745
Notes payable converted to stock at $1.50 per share, October 31, 1996 (Note 4) 400,000 400 599,600
Issuance of common shares for cash at $3 per share, October 31, 1996 371,875 372 1,115,253
Issuance of common shares for cash at $5 per share, October 31, 1996 1,000,000 1,000 4,999,000
Issuance of common shares for cash at $1.36 per share (converted rate) under
option agreement, October 31, 1996 (Note 1) 11,111 11 149,989
Issuance of common shares in merger, October 31, 1996 (Note 1) 1,881,632 1,882 (1,882)
Net loss - year ended October 31, 1996
---------- ------- -----------
BALANCE, OCTOBER 31, 1996 15,067,979 $15,068 $10,406,996
========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Treasury Stock Total
Development ------------------ Stockholders'
Stage Shares Amount Equity
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1995 (2,132,444) (1,202,886) (1,203) 554,867
Warrants granted for services, May 1996 (Note 5) 87,500
Issuance of common shares for services at $1 per share, May 1996 - August 1996 65,425
Issuance of common shares for cash at $1.50 per share, June 25, 1996 100,000
Issuance of common shares for cash at $1.75 per share, June 25, 1996 105,000
Issuance of common shares for cash at $2 per share, June 1996 - October 1996 510,000
Notes payable converted to stock at $1.50 per share, October 31, 1996 (Note 4) 600,000
Issuance of common shares for cash at $3 per share, October 31, 1996 1,115,625
Issuance of common shares for cash at $5 per share, October 31, 1996 5,000,000
Issuance of common shares for cash at $1.36 per share (converted rate) under
option agreement, October 31, 1996 (Note 1) 150,000
Issuance of common shares in merger, October 31, 1996 (Note 1)
Net loss - year ended October 31, 1996 (3,007,547) (3,007,547)
----------- ---------- ------- ----------
BALANCE, OCTOBER 31, 1996 $(5,139,991) (1,202,886) $(1,203) $5,280,870
=========== ========== ======= ==========
</TABLE>
See notes to consolidated financial statements. (Concluded)
-6-
<PAGE> 46
BIONUTRICS, INC.
(Formerly NutraGenics, Inc.)
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
February 22,
Ten 1990
Month (Date of
Year Period Year Inception)
Ended Ended Ended to
December 31, October 31, October 31, October 31,
1994 1995 1996 1996
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (294,194) $ (331,485) $(3,007,547) $(5,139,991)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 32,765 29,898 27,531 152,499
Stock based compensation expense 87,500 87,500
Expenses incurred in exchange for
common stock 70,613 65,425 626,114
Changes in operating assets and liabilities:
Prepaid expenses 19,327
Other assets (100,000) (25,000) (583,589)
Accounts payable 26,527 123,130 279,137 565,823
Accrued expenses and other liabilities 148,714 (112,017) 362,687 720,055
----------- ----------- ----------- -----------
Net cash used in operating activities (166,861) (244,861) (2,185,267) (3,571,589)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (91,900) (91,900)
Net (increase) decrease in notes receivable (151,900) (61,800) 195,702 (17,998)
----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities (151,900) (61,800) 103,802 (109,898)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt 311,664 250,000 350,000 986,627
Proceeds from issuance of stock 23,050 663,000 6,980,625 8,566,775
Repayments of long-term debt (1,555) (194,000) (195,555)
----------- ----------- ----------- -----------
Net cash provided by
financing activities 333,159 719,000 7,330,625 9,357,847
----------- ----------- ----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 14,398 412,339 5,249,160 5,676,360
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 463 14,861 427,200
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 14,861 $ 427,200 $ 5,676,360 $ 5,676,360
=========== =========== =========== ===========
</TABLE>
(Continued)
- 7 -
<PAGE> 47
BIONUTRICS, INC.
(Formerly NutraGenics, Inc.)
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
February 22,
Ten 1990
Month (Date of
Year Period Year Inception)
Ended Ended Ended to
December 31, October 31, October 31, October 31,
1994 1995 1996 1996
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION - Cash
paid during the period for interest $ 575 $ 962 $ 39,813 $ 122,794
======= ======= ========== ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company incurred loans
payable to various stockholders
in exchange for services from
inception to October 31, 1995 totaling
$450,128. In October 1995, the Company
repaid these and other stockholder loans
and current liabilities totaling
$984,669 by issuing 700,901 common shares
of the Company
In October 1995, the Company repaid
loans payable to a stockholder of
$600,000 by issuing 400,000 common
shares of the Company
</TABLE>
See notes to consolidated financial statements. (Concluded)
- 8 -
<PAGE> 48
BIONUTRICS, INC.
(FORMERLY NUTRAGENICS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, TEN MONTH PERIOD ENDED
OCTOBER 31, 1995, YEAR ENDED OCTOBER 31, 1996 AND
PERIOD FROM FEBRUARY 22, 1990 (DATE OF INCEPTION) TO OCTOBER 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
BIONUTRICS, INC. ("BIONUTRICS") - Subsequent to October 31, 1996,
NutraGenics, Inc. ("NutraGenics") changed its name to Bionutrics.
Bionutrics and its wholly-owned subsidiaries, LipoGenics, Inc.
("LipoGenics"), Bionutrics Health Products, Inc. (formed in November 1996
to market the Company's product), and Nutrition Technologies Corporation
("Nutrition Technologies") (collectively referred to as the "Company") is
considered a development stage company under Statement of Financial
Accounting Standards ("SFAS") No. 7 since no revenues have been earned
from the Company's planned principle operations.
Revenues to date represent amounts derived from a short-term agreement
licensing certain proprietary technology, which expired in 1996. The
planned principal operations are the development, manufacturing, marketing
and selling of dietary supplements using proprietary technology (the
"Technology"). The dietary supplement that the Company will be producing
and marketing is known as Clearesterol. The product is expected to be
marketed beginning in the second or third quarters of fiscal 1997.
Effective with the December 31, 1994 year-end, the Company changed to a
fiscal year-end of October 31.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the consolidated financial statements, during the year ended December 31,
1994, the ten month period ended October 31, 1995, the year ended October
31, 1996 and the period from February 22, 1990 (date of inception) to
October 31, 1996, the Company incurred net losses of approximately
$294,000, $331,000, $3,008,000 and $5,140,000, respectively, however, as
of October 31, 1995 and 1996, the Company's current assets exceeded its
current liabilities by approximately $185,000 and $4,740,000,
respectively, and its total assets exceeded its total liabilities by
approximately $555,000 and $5,281,000, respectively. Losses incurred to
date, the Company's development stage status and the uncertainty regarding
the potential market for the Company's product may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis,
maintaining adequate financing, and ultimately to attain successful
operations.
-9-
<PAGE> 49
Management is continuing its efforts to obtain additional funds so that
the Company can meet its obligations and sustain operations through the
issuance of common stock in private nonregistered transactions. Subsequent
to October 31, 1996, the Company obtained $4,200,000 through an overseas
common stock offering and is in process of obtaining an additional
$1,800,000. In addition, management intends to further the Company through
execution of various distribution and manufacturing agreements and through
the development of nonsupplemental technology products.
To date, management's efforts have been primarily directed towards
obtaining initial capital and financing, developing manufacturing and
distribution arrangements for its dietary supplement product, conducting
research and development, applying for patent approvals and recruiting
employees.
On July 13, 1992, LipoGenics, Inc. ("LipoGenics"), a Delaware corporation
incorporated on July 13, 1992, acquired all of the outstanding shares of
the common stock of Pentad Foods International, Ltd. ("Pentad"), an
Arizona corporation incorporated on February 22, 1990, in exchange for
64,400 shares of LipoGenics' common stock.
On October 31, 1996, NutraGenics acquired LipoGenics, a company controlled
by the controlling stockholders of NutraGenics, through the exchange of
2,092,743 shares of its common stock for all 211,111 shares of outstanding
common stock of LipoGenics. LipoGenics had previously developed the
technology and was the owner of patent applications underlying the
technology. The business combination has been accounted for in a manner
similar to a pooling-of-interests, and, accordingly, the consolidated
financial statements for periods prior to the combination have been
restated to include the results of LipoGenics. In October 1994,
NutraGenics issued 1,202,886 shares of its common stock to LipoGenics in
consideration for a license agreement under which NutraGenics was given
the right to produce and market products. As a result of the pooling, the
common stock of NutraGenics owned by LipoGenics, now a wholly-owned
subsidiary, has been classified as treasury stock.
LipoGenics and its predecessors effectively commenced operations in 1990
and NutraGenics effectively commenced operations in 1994. Accordingly, the
financial statements reflect the accumulated losses of both NutraGenics
and LipoGenics.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the amounts of Bionutrics and its wholly-owned subsidiaries,
LipoGenics, and Nutrition Technologies. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash and cash equivalents.
PROPERTY AND DEPRECIATION - Property is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the individual assets, which range from three to five years. Expenditures
for additions are capitalized. Expenditures of a repair and maintenance
nature are expensed when incurred.
-10-
<PAGE> 50
LICENSING FEES - The Company recognizes licensing fees as revenue when
received.
PATENTS - Legal and other costs related to patent applications are
capitalized as incurred and amortized using a straight-line basis over 17
years commencing at the date patent approval is obtained. Patents
currently capitalized and unamortized relate to both the processes and
products associated with the Company's business.
INCOME TAXES are accounted for under the asset and liability approach,
which can result in recording tax provisions or benefits in periods
different from the periods in which such taxes are paid or benefits
realized. Deferred federal income taxes result principally from certain
tax carryforwards that are recognized for financial reporting purposes in
different years than for income tax reporting purposes.
RESEARCH AND DEVELOPMENT - The cost of research and development is charged
to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair values of notes receivable,
accounts payable, accrued compensation and other accrued liabilities
approximate the carrying value due to the short-term nature of these
instruments.
STOCK OPTIONS have been accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Options granted to consultants or independent contractors are recorded as
expense, based on the fair market value of the stock, at the date of
grant.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENT - In October 1995, SFAS No. 123,
Accounting for Stock Based Compensation, was issued. SFAS No. 123
establishes a fair value based method of accounting for stock-based
compensation plans and the related disclosures. The Company is required to
adopt the disclosure requirements of SFAS No. 123 for the year ending
October 31, 1997, as they relate to employee stock based compensation
plans. The Company has not completed the process of evaluating the impact
that will result from SFAS No. 123, but no material impact on the results
of operations or the financial condition of the Company is expected. SFAS
No. 123 is effective for non-employee stock based compensation plans for
all transactions entered into after December 15, 1995.
3. NOTES RECEIVABLE
At October 31, 1996, a stockholder and employee owes the Company $16,665
on a note receivable. Principal plus interest calculated at 8% per annum
are due on or before April 30, 1998.
Notes receivable of $147,000 and the related accrued interest at October
31, 1995, were converted to compensation during the fiscal year ended
October 31, 1996 and recorded as compensation expense. Remaining notes
receivable of $50,000 at October 31, 1995, from a stockholder, were repaid
during 1996.
4. NOTE PAYABLE
At October 31, 1995, the Company had a note payable of $250,000 to a
stockholder of the Company and during 1996, the same stockholder advanced
an additional $350,000 to the Company. Prior to October 31, 1996, the
stockholder exercised the right and option under the note agreements to
accept as repayment 400,000 shares of unregistered common stock of the
Company at a price of $1.50 per share.
-11-
<PAGE> 51
5. STOCKHOLDERS' EQUITY
On December 29, 1994, Erba Corporation ("Erba"), a Nevada corporation with
no operations, acquired all 143,204 shares of the common stock of
NutraGenics, Inc., a Delaware corporation incorporated on April 5, 1994
("NutraGenics - Delaware"), in exchange for 7,134,066 shares of Erba's
common stock. Erba then changed its name to NutraGenics, Inc. For
accounting purposes, the acquisition has been treated as a
reverse-acquisition of Erba by NutraGenics - Delaware with NutraGenics -
Delaware being treated as the acquiror ("reverse-acquisition"). The
historical financial statements prior to December 29, 1994, are those of
NutraGenics - Delaware. The pro forma effects of the acquisition for the
period prior to the acquisition are not significant.
EMPLOYEE STOCK-BASED COMPENSATION - At October 31, 1995, the Company
granted 180,000 options to a stockholder and board member to purchase
shares of the Company's unregistered common stock at an exercise price of
$1.50 per share for a period of three years commencing October 31, 1995.
No options under this agreement have been exercised at October 31, 1996.
At October 31, 1996, the Company authorized 1,900,000 shares of common
stock for issuance under its 1996 Stock Option Plan (the "1996 Plan") to
key personnel, consultants and independent contractors. The options are
granted to purchase common stock at 100% (110% for an optionee who is a
10% stockholder) of the fair market value of the stock on the date of
grant. Options granted under this plan can be exercisable for a period of
up to ten years from the date of grant (five years for an option granted
to a 10% stockholder). All participants are eligible to receive stock
awards and stock appreciation rights, as to be determined by the Company's
board of directors. At October 31, 1996, 1,223,000 options with a five
year exercise period and an option price of $5 were granted under the
plan. These options vest equally over a three year period from the date of
grant. No stock awards or stock appreciation rights have been granted
under the plan. No options under the 1996 Plan have been exercised at
October 31, 1996.
NONEMPLOYEE STOCK-BASED COMPENSATION - At July 21, 1992, the Company
granted 110,144 options to a stockholder to purchase shares of the
Company's unregistered common stock at a total exercise price of $150,000
expiring on the earlier of July 21, 2002, or a public offering of the
Company's shares of common stock, none of which have been exercised at
October 31, 1996. Options to another stockholder under a similar agreement
were fully exercised at October 31, 1996.
In May 1996, the Company granted 600,000 warrants to a stockholder and
board member to purchase shares of common stock at an exercise price of
$2.50 per share for the first 300,000 shares and $4 per share for the
remaining 300,000 shares in exchange for consulting services rendered, or
to be rendered, to the Company. Of the 600,000 warrants granted, 200,000
became exercisable at the date of grant and the remaining warrants become
exercisable at a rate of 50,000 per quarter commencing August 1996 through
May 1998. All warrants have ten year exercise periods. The fair value of
each warrant is estimated on the date of grant using the Black-Scholes
pricing model with the following weighted average assumptions used for
grants in 1996: risk free interest rate of 6%; expected dividend yield of
0%; expected life of five years; and, expected volatility of 60%.
Compensation related to warrants granted at fair market value totaling
$87,500 was expensed during 1996. None of the warrants granted under this
agreement have been exercised at October 31, 1996.
-12-
<PAGE> 52
6. INCOME TAXES
The Company had no income tax liability at December 31, 1994, October 31,
1995 or 1996, as it has generated operating losses to date. At October 31,
1996, the Company had available for federal income tax purposes the
following tax carryforwards:
<TABLE>
<CAPTION>
Year of Expiration Amount
<S> <C>
2009 $1,801,000
2010 331,000
2011 3,008,000
----------
Total net operating losses $5,140,000
==========
</TABLE>
At October 31, 1995 and 1996, a deferred tax asset of approximately
$725,000 and $1,748,000, respectively, relating to such potential tax
benefits was fully offset by a valuation allowance.
7. OPERATING LEASE
The Company leases office space under a three year operating lease
beginning December 1, 1995, which contains option renewal provisions and
escalation of future rents. Total rental expense was approximately $96,000
for fiscal year 1996. Future minimum lease payments under noncancellable
operating leases at October 31 are as follows:
<TABLE>
<S> <C>
1997 $ 94,800
1998 97,700
1999 8,100
--------
Total $200,600
========
</TABLE>
8. RELATED PARTY
Various stockholders have provided consulting and other administrative
services to the Company. Expense for the year ended December 31, 1994, the
ten month period ended October 31, 1995, the year ended October 31, 1996
and the period from inception to October 31, 1996 was approximately
$55,000, $69,000, $469,000 and $977,000, respectively, and is included in
consulting, research and development, and other operating expenses in the
accompanying consolidated statements of operations.
Interest paid to stockholders in connection with outstanding notes was
approximately $46,000, $34,000, $35,000 and $213,000 for the year ended
December 31, 1994, the ten month period ended October 31, 1995, the year
ended October 31, 1996 and the period from inception to October 31, 1996,
respectively.
-13-
<PAGE> 53
9. JOINT VENTURE
On July 31, 1996, the Company entered into an agreement with InCon
Technologies, L.L.C. to form a limited liability company ("joint venture")
to undertake the further research and development of certain
non-proprietary dietary supplements and other non-proprietary nutritional
and health promoting products and to manufacture, market and sell
existing, as well as newly developed supplements and products. The two
companies will share equally in the capital contributions, profits and
losses derived, and management of the joint venture. No costs were
incurred prior to October 31, 1996, however, approximately $400,000 was
incurred subsequent to year-end.
* * * * * *
-14-
<PAGE> 54
BIONUTRICS, INC.
QUARTERLY REPORT
FOR THE QUARTER ENDED JANUARY 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets-
January 31, 1997 (unaudited) and October 31, 1996 .............. 1
Consolidated Unaudited Statements of Operations -
Three Months Ended January 31, 1997 and 1996 ................... 2
Consolidated Unaudited Statements of Cash Flows-
Three Months Ended January 31, 1997 and 1996 .................. 3
Notes To Consolidated Financial Statements ............................ 4
Managements Discussion and Analysis of Financial Condition and
Results of Operations............................................ 5
</TABLE>
<PAGE> 55
[BIONUTRICS LOGO]
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1997 1996
(UNAUDITED)
------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,521,012 $ 5,676,360
Inventory 33,962
Prepaid expenses 84,168
Other receivable 14,638
------------------------------
Total Current Assets 4,653,780 5,676,360
------------------------------
PROPERTY, PLANT and EQUIPMENT 539,982 91,900
Less-Accumulated depreciation (27,386) (21,701)
------------------------------
Net Property, Plant and Equipment 512,596 70,199
------------------------------
OTHER ASSETS:
Notes Receivable 16,665
Accrued interest 1,333
Patent applications and other related costs 451,682 452,791
Other 400,000
------------------------------
Total Other Assets 851,682 470,789
------------------------------
TOTAL $ 6,018,058 $ 6,217,348
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 235,367 $ 565,823
Accrued Liabilities 344,000 370,655
------------------------------
Total Current Liabilities 579,367 936,478
------------------------------
STOCKHOLDERS' EQUITY
Common Stock 15,307 15,068
Additional Paid in Capital 11,816,061 10,406,996
Deficit accumulated during the development stage (6,391,474) (5,139,991)
Common stock in treasury (1,203) (1,203)
------------------------------
Total stockholders' equity 5,438,691 5,280,870
------------------------------
TOTAL $ 6,018,058 $ 6,217,348
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
<PAGE> 56
[BIONUTRICS LOGO]
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended January 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES: $ 0 $ 0
------------ ------------
EXPENSES:
Consulting Services 288,441 33,782
Research and development 62,474 92,295
Other operating expenses 956,323 457,757
------------ ------------
Total expenses 1,307,238 583,834
------------ ------------
OTHER (EXPENSE) INCOME:
Interest Income 55,992 819
Interest Expense (15,925)
Loss on disposal of asset (237)
------------ ------------
Total other expense 55,755 (15,106)
------------ ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (1,251,483) (598,940)
------------ ------------
PROVISION FOR INCOME TAXES 0 0
------------ ------------
NET LOSS $ (1,251,483) $ (598,940)
============ ============
Earnings per common share and
common share equivalent $ (0.08) $ (0.06)
============ ============
Weighted average number of common
shares and common share equivalents
outstanding 15,222,451 10,956,269
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
of operation
<PAGE> 57
[BIONUTRICS LOGO]
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months
Ended January 31,
--------------------------
OPERATING ACTIVITIES: 1997 1996
--------------------------
<S> <C> <C>
Net Loss $(1,251,483) $(598,940)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization 7,984 4,915
Expenses incurred in exchange for common stock 25,000
Non-employee stock based compensation 18,000
Changes in operating assets and liabilities:
Receivables 3,361 197,000
Inventory (33,962)
Prepaids (84,168)
Accounts payable and accrued liabilities (357,113) 79,221
--------------------------
Net cash used in operating activities (1,672,381) (317,804)
--------------------------
INVESTING ACTIVITIES:
Capital expenditures (449,271) (48,109)
Investment in NuRx (400,000)
--------------------------
Net cash (used in) provided by investing activities (849,271) (48,109)
--------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,366,304
--------------------------
Net cash provided by financing activities 1,366,304 0
--------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,155,348) (365,913)
--------------------------
CASH AND CASH EQUIVALENTS, BEG OF PERIOD 5,676,360 427,200
--------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,521,012 $ 61,287
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
cash flow
<PAGE> 58
BIONUTRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A- The accompanying unaudited Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do
not included all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash
flows for all periods presented have been made. The results of
operations for the three month period ended January 31, 1997 are
not necessarily indicative of the operating results that may be
expected for the entire year ending October 31, 1997. These
financial statements should be read in conjunction with the
Company's October 31, 1996 financial statements and accompanying
notes thereto.
NOTE B- Net Loss per share is computed by dividing net loss by the weighted
average number of common shares assumed outstanding during the
three-month periods. Options and warrants are excluded from the net
loss per share calculation as they are anti-dilutive.
NOTE C- The company raised $1,366,304 in capital through issuance of common
stock during the quarter ended January 31, 1997. This capital stock
was issued at $5.00 to $7.00 per share.
NOTE D- The company invested $400,000 in a joint venture with InCon
Technologies during the quarter ended January 31, 1997. On July 31,
1996, the Company entered into an agreement with InCon Technologies,
L.L.C. to form a limited liability company ("joint venture") to
undertake the further research and development of certain
non-proprietary dietary supplements and other non-proprietary
nutritional and health promoting products and to manufacture, market
and sell existing, as well as newly developed supplements and
products. The two companies will share equally in the capital
contribution, profits and losses derived, and management of the
joint venture.
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three months ended January 31, 1997 and January 31, 1996
There were no revenues recorded in the first quarter as the Company is
presently transitioning from research and development to sales and distribution.
The sale of its first product is targeted for April 1997.
Consulting services were $288,441 for the quarter ended January 31,
1997 compared to $33,782 for the same period in 1996. This increase is primarily
attributable to expenditures relating to preparation for product introduction.
Research and development expenses were $62,474 for the quarter ended
January 31, 1997 compared to $92,295 for the same period in 1996. This decrease
is due to lower levels of research and development as the Company is moving from
a research to a production mode.
Other operating expenses were $956,323 for the quarter ended January
31, 1997 compared to $457,757 for the same period in 1996. This increase in
operating expenses is due primarily to higher levels of salaries and related
costs for anticipated product sales and distribution in the second quarter of
1997.
Interest income was $55,992 for the quarter ended January 31, 1997
compared to $819 for the same period in 1996 due to increased levels of cash.
Net loss increased to $(1,251,483) or $(.08) per share for the quarter
ended January 31, 1997 from $(598,940), or $(.06) per share, for the quarter
ended January 31, 1996 due to increased levels of expenses as outlined above.
LIQUIDITY AND CAPITAL RESOURCES
Three months ended January 31, 1997 and January 31, 1996
Net cash used in operating activities during the quarter ended January
31, 1997 was $1,672,381 as compared to $317,804 during the same period in 1996.
The increase in cash used is primarily due to increased expenses incurred in
preparation for the launch of the Company's product in the second quarter.
Net cash used in investing activities during the quarter ended January
31, 1997 was $849,271 as compared to $48,109 during the same period in 1996.
This increase is attributable to a $400,000 investment in a joint venture and
capital expenditures for manufacturing operations.
The Company received proceeds from issuance of its Common Stock in the
quarter ended January 31, 1997 of $1,366,304 versus $0 for the same period in
1996.
<PAGE> 1
EXHIBIT 10.6
LIMITED LIABILITY COMPANY AGREEMENT
OF
NURX INTERNATIONAL, LLC.
A DELAWARE LIMITED LIABILITY COMPANY
AUGUST 23, 1996
<PAGE> 2
TABLE OF CONTENTS
TO
LIMITED LIABILITY COMPANY AGREEMENT
OF
NURX INTERNATIONAL, LLC.
AUGUST 23, 1996
SECTION 1. CERTAIN DEFINITIONS ........................................... 1
SECTION 2. MANAGEMENT COMMITTEE .......................................... 3
2.1 General ................................................. 3
2.2 Elections; Meetings ..................................... 3
2.3 Specific Authority of Management Committee .............. 5
2.4 Fundamental Changes ..................................... 6
2.5 Duties and Obligations of the Management Committee ...... 7
2.6 Company Expenses ........................................ 7
2.7 Liability of the Management Committee ................... 8
2.8 Indemnification of the Management Committee ............. 8
2.9 Members Have No Exclusive Duty to Company ............... 8
SECTION 3. MEMBER MEETINGS AND VOTING RIGHTS ............................. 8
3.1 Calling of Meetings ..................................... 8
3.2 Notice of Meeting ....................................... 9
3.3 Quorum .................................................. 9
3.4 Proxies ................................................. 9
SECTION 4. CAPITAL ACCOUNTS; SHARING OF LOSSES ........................... 9
4.1 Initial Capital Contributions ........................... 9
4.2 Capital Accounts - General .............................. 9
4.3 Additional Capital Requirements ......................... 10
4.4 Sharing of Losses; Indemnity in Event of Sale of Interest 10
4.5 Loans to the Company .................................... 11
DISTRIBUTIONS, PAYMENTS, AND ALLOCATIONS ................................. 11
5.1 Distributions and Payments .............................. 11
5.2 Allocation of Net Profits and Net Losses ................ 12
5.3 Tax Allocations; Code Section 704(c) .................... 12
SECTION 6. ACCOUNTING, RECORDS AND BUDGETS ............................... 12
6.1 Records, Audits and Reports ............................. 12
6.2 Tax Return .............................................. 13
6.3 Tax Matters Partner ..................................... 13
<PAGE> 3
6.4 Fiscal Year ............................................. 14
6.5 Bank Accounts ........................................... 14
6.6 Budgets ................................................. 14
SECTION 7. TRANSFERS; WITHDRAWALS; ADMISSIONS ............................ 14
7.1 Restrictions on Transfer ................................ 14
7.2 Admission of Additional Members ......................... 15
7.3 Right of First Refusal on Transfer of Interest .......... 15
7.4 Buy/Sell Agreement ...................................... 17
7.5 Agreed Value ............................................ 19
7.6 Closing ................................................. 20
SECTION 8. DISSOLUTION .................................................. 20
8.1 Events of Dissolution ................................... 20
8.2 Sale of Assets by the Management Committee .............. 21
SECTION 9. BUSINESS PURPOSE OF COMPANY/ACTIVITIES OF
MEMBERS ....................................................... 21
9.1 Business Purpose and Activities of Company .............. 21
9.2 Activities of NTC ....................................... 21
9.3 Activities of InCon ..................................... 21
9.4 Ownership of Company Assets ............................. 22
9.5 Covenant Not to Disclose ................................ 22
9.6 Other Business Interests of the Members ................. 22
9.7 Transaction With Members or Affiliates .................. 23
SECTION 10. MISCELLANEOUS ............................................... 23
10.1 Enforcement ............................................. 23
10.2 Notices ................................................. 23
10.3 Amendments .............................................. 24
10.4 Waiver of Action for Partition .......................... 24
10.5 Successors and Assigns .................................. 24
10.6 Title to Property ....................................... 24
10.7 Captions ................................................ 24
10.8 Terms ................................................... 24
10.9 Invalidity .............................................. 24
10.10 Counterparts ............................................ 24
10.11 Further Assurances ...................................... 25
10.12 Complete Agreement ...................................... 25
10.13 Governing Law; Consent to Jurisdiction .................. 25
10.14 No Third Party Beneficiary .............................. 25
10.15 Exhibits and Schedules .................................. 25
10.16 References to this Agreement ............................ 25
<PAGE> 4
LIMITED LIABILITY COMPANY AGREEMENT
THIS AGREEMENT, made as of August 23, 1996, by and among [NUTRITION
TECHNOLOGY CORP.], a corporation organized and existing under the law of the
State of Nevada, having its principal office at 2425 East Camelback Road, Suite
650, Phoenix, Arizona ("NTC"), and INCON TECHNOLOGIES, LLC, a limited liability
company organized and existing under the laws of the State of Delaware, having
its principal office at 970 Douglas Road, Batavia, Illinois 60510 ("InCon")
(InCon and NTC are collectively referred to herein as the "Members").
RECITALS:
1. NTC is engaged in the research, development, manufacturing,
marketing and sale of certain dietary supplement and other nutrition and health
promoting products.
2. InCon has knowledge, expertise and capabilities relating to
research, development, manufacturing, marketing and sale of certain dietary
supplements and other nutritional and health promoting products.
3. The Members desire to form a joint venture to undertake (a)
further research and development of certain dietary supplements and other
nutritional and health promoting products, and (b) to manufacture, market and
sell existing as well as said newly developed supplements and products.
AGREEMENT:
In consideration of the foregoing and the mutual covenants and
agreements contained in this Agreement, the parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS.
The following terms used in this Limited Liability Company Agreement
shall have the following meanings:
"Act" shall mean the Delaware Limited Liability Company Act, as
amended from time to time.
"Agreed Value" has the meaning set forth in Section 7.5.
"Agreement" means this Limited Liability Company Agreement as
originally executed and amended from time to time.
"Capital Account" has the meaning set forth in Section 4.2(a).
<PAGE> 5
"Capital Contribution" means, with respect to each Member (or the
predecessor holder of the Interest of such Member), the total amount of money
and the fair market value of all property contributed to the Company by such
Member net of liabilities secured by such contributed property that the Company
is considered to assume or take subject to under Code Section 752 at the time of
such contribution.
"Cause" means with respect to the removal of a Manager, fraud, bad
faith, gross negligence, willful misconduct or breach of the fiduciary duty of
loyalty on the part of the manager to the material detriment of the Company.
"Certificate of Formation" shall mean the Certificate of Formation
of NuRx International, LLC., as filed with the Secretary of State of Delaware on
August 23, 1996, as the same may be amended from time to time. A copy of the
Certificate of Formation is attached hereto as Exhibit A.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Company" means NuRx International, LLC., the limited liability
company governed hereby, as said limited liability company may from time to time
be constituted.
"Entity" shall mean a general partnership, a limited partnership, a
domestic or foreign limited liability company, a trust, an estate, an
association, a corporation or any other illegal or commercial entity.
"Event of Dissociation" means an event that causes a person to cease
to be a Member, as provided in the Act.
"Fundamental Change" shall have the meaning set forth in Section
2.4.
"Interest" means the entire ownership interest of a Member in the
Company as determined under this Agreement and the Act, including the rights and
obligations of such Member to share in the distributions and the Net Profits and
Net Losses of the Company. Expressed as a percentage, a Member's Interest at any
time is equal to the number of Shares held by such Member, divided by the total
number of Shares outstanding at that time, in each case as set forth in Schedule
1 hereto, as the same may be amended from time to time pursuant to this
Agreement.
"Management Committee" has the meaning set forth in Section 2.1.
"Member" shall mean each of the parties who executes a counterpart
of this Limited Liability Company Agreement as a Member and each of the parties
who may hereafter become Members as permitted herein.
2
<PAGE> 6
"Net Profits" and "Net Losses means, for any fiscal year, an amount
equal to the Company's taxable income or loss, respectively, for such fiscal
period, determined in accordance with Section 703(a) of the Code, including,
without limitation, each item of Company income, gain, loss, deduction or credit
(as adjusted to take into account income that is exempt from federal income tax
and expenditures of the Company described in Code Section 705(a)(2)(B) not
deductible in computing its taxable income and not properly chargeable to
Capital Accounts).
"Person" means an individual, trust, estate, partnership, joint
venture, association, limited liability company, corporation or other entity.
"Regulatory Anthority" has the meaning set forth in Section 4.2(b).
"Required Consent" shall mean the approval of all of the members of
the Management Committee to the action contemplated.
"Selling Member" shall mean any Member or Interest owner which
sells, assigns, or otherwise transfers for consideration all or any portion of
its Interest.
"Shares" means an Interest in the Company, as initially set forth in
Schedule 1 hereto, as the same may be amended from time to time pursuant to this
Agreement.
"Tax Matters Partner" has the meaning set forth in Section 6.3.
"Transfer" has the meaning set forth in Section 7.1(a).
SECTION 2. MANAGEMENT COMMITTEE.
2.1 GENERAL.
The business and affairs of the Company will be managed by a
Management Committee (the "Management Committee"). Each member of the Management
Committee shall be a Manager of the Company, as defined under the Act. Except as
expressly provided in this Agreement or as required under the Act, only the
Management Committee acting in accordance with the terms of this Agreement,
shall have the full, exclusive and complete discretion in the management and
control of the business and affairs of the Company and shall make all decisions
regarding the business of the Company. Other than as specifically provided in
this Agreement or as required under the Act, neither the Members nor the members
of the Management Committee acting individually, shall participate in the
management of, or have any control over, the Company's business, nor shall the
Members or the members of the Management Committee acting individually, have the
power to represent, act for, sign for or bind the Management Committee or the
Company.
2.2 ELECTIONS; MEETINGS.
3
<PAGE> 7
(a) Number, Tenure and Qualifications.
The number of members of the Management Committee will be four (4),
two of which shall be appointed by NTC and two of which shall be appointed by
InCon, and each of which shall be a representative of one of the Members. Each
member of the Management Committee will hold office for a term of one (1) year
and until his successor has been appointed. After notice to the other Member,
one or more members of the Management Committee may be removed at any time with
or without cause by the Member that appointed the Management Committee member
being removed.
(b) Quorum.
A majority of the number of Management Committee Members fixed by
this Section 2.2, present in person or by telephone, will constitute a quorum
for the transaction of business at any meeting of the Management Committee.
(c) Manner of Acting.
The act of all of the Management Committee members present at a
meeting, in person or by telephone, at which a quorum is present will be the act
of the Management Committee.
(d) Resignation.
A member of the Management Committee may resign at any time by
providing notice to the remaining members of the Management Committee.
(e) Vacancies.
Any vacancy occurring in the Management Committee shall be filled by
appointment of the Member who appointed the departing Management Committee
member. A member elected to fill a vacancy will be elected for the unexpired
term of his predecessor in office.
(f) Informal Action by Members.
Any action required to be taken at a meeting of Members, or any
action which may be taken at a meeting of the Management Committee, may be taken
without a meeting if a consent in writing, setting forth the action taken, is
signed by all of the Members of the Management Committee.
(g) Regular Meetings.
A regular meeting of the Management Committee may be held without
notice of the date, time, place and purpose of the meeting.
4
<PAGE> 8
(h) Special Meetings.
Any member of the Management Committee may call a special meeting of
the Management Committee. Unless waived as provided and allowed in this
Agreement, notice of any special Management Committee meeting must be given at
least three days prior to the meeting by written notice delivered personally or
by facsimile, to each Management Committee member at his business address. The
notice of a special meeting must contain the date, time, location and purpose
for the meeting. Attendance of a Management Committee member at a meeting in
person or by the use of telephone will constitute waiver of notice of the
meeting, except where a member attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not lawfully
called or convened.
(i) Compensation.
The members of the Management Committee shall serve without
compensation for their duties.
2.3 SPECIFIC AUTHORITY OF MANAGEMENT COMMITTEE.
Subject to Section 2.4 below, the authority and powers of the
Management Committee shall include, without limitation, the following:
(i) to enter into contracts and agreements on behalf of the
Company, and execute and deliver all documents and instruments in connection
therewith;
(ii) to buy, sell or otherwise acquire, hold, trade or dispose
of property of the Company;
(iii) to establish the Company's employment policies and
procedures, including, but not limited to, compensation, hiring, termination and
benefits of employees;
(iv) in the normal course of the Company's business, to borrow
money and to make, issue, endorse and accept promissory notes, drafts, bills of
exchange, guarantees and other instruments and evidences of indebtedness, and to
secure the payment thereof by mortgage, pledge or assignment of or security
interest in all or any part of the property then owned or thereafter acquired by
the Company;
(v) To enter into, make and perform such contracts, leases,
agreements and other undertakings, and to do such other acts, as it may deem
necessary or advisable for, or as may be incidental to, the conduct of the
business, including, without in any manner limiting the generality of the
foregoing, contracts, leases, agreements, undertakings and transactions with any
Member, affiliate or with any other person, firm or corporation having any
business, financial or other relationship with any Member or Members;
5
<PAGE> 9
(vi) to acquire, enter into and pay for any contract of
insurance which the Management Committee deems necessary or advisable for the
protection of the Company, the conservation of the assets of the Company, or for
any other purpose beneficial to the Company;
(vii) to employ attorneys, brokers, consultants, managers and
accountants on behalf of the Company;
(viii) to bring or defend, pay, collect, compromise,
arbitrate, resort to legal action, or otherwise adjust claims or demands of or
against the Company;
(ix) to establish such reserve funds as the Management
Committee deems necessary or desirable from income derived from the Company's
operation; and
(x) to delegate any or all of its authority to one or more
individuals, who may or may not be Members.
2.4 FUNDAMENTAL CHANGES.
The unanimous consent of the Members must be obtained in order to
make any Fundamental Change, as defined below. A fundamental change
("Fundamental Change"), shall mean any one or more of the following actions of
the Company:
(i) the sale, lease, exchange or other disposition of greater than
$100,000 of the Company's assets, whether or not in the ordinary course of
business;
(ii) the mortgage, pledge or grant of other security interest or
encumbrance upon greater than $100,000 of the Company's assets, whether or not
in the ordinary course of business;
(iii) any new debts, obligations or commitments which, in the
aggregate, exceed $100,000;
(iv) engaging in a new line of business (defined as any business not
conducted by the Company as of the date hereof);
(v) the sale, lease, exchange or other disposition of any of the
Company's assets to any member or affiliate of the Management Committee;
(vi) the admission of a new Member or increase in the Interest of an
existing Member other than a pro rata increase as a result of the redemption of
an existing Member's Interest.
(vii) the amendment or modification of any of the provisions of this
Agreement, as further provided in Section 10.3 below; or
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(viii) any action that would cause the Company to cease to be a
limited liability company under the Act.
2.5 DUTIES AND OBLIGATIONS OF THE MANAGEMENT COMMITTEE.
(a) The Management Committee shall take all actions necessary for
the continuation of the Company's valid existence.
(b) The Management Committee shall devote such time as is reasonably
required to conduct the business and affairs of the Company.
(c) The Management Committee shall at all times conduct its affairs
and the affairs of the Company in such a manner that no Member will have any
personal liability with respect to any indebtedness of the Company.
(d) The Management Committee shall, at the sole expense of the
Company, prepare or cause to be prepared, and shall file on or before the due
date (or any extension thereof), any federal, state or local tax returns
required to be filed by the Company. The Management Committee shall cause the
Company to pay any taxes payable by the Company.
(e) The Management Committee shall, from time to time, submit to and
file with any appropriate state or federal securities administrative agencies
all documents, papers, statistics and reports required to be filed or submitted.
(f) The Management Committee shall use its best efforts to cause the
Company to be formed, re-formed, qualified to do business, or registered under
any applicable assumed or fictitious name statutes or similar law in any state
in which the Company may elect to do business.
(g) The Management Committee shall file a certificate of amendment
to the Certificate of Formation with the State of Delaware after the occurrence
of any of the following events: (i) a change in the name of the Company; or (ii)
a change in the name or address of the registered agent of the Company.
(h) In its conduct of the business of the Company under this
Agreement, the Management Committee shall observe and carry out the rules,
regulations, and requirements of the federal and state securities laws and those
of any Regulatory Authority.
2.6 COMPANY EXPENSES.
All administrative, operating, accounting and legal expenses of the
Company, including all expenses incurred in organizing the Company, as well as
any other expenses incurred by the Management Committee on behalf of the
Company, shall be borne by the Company, and, if necessary, shall be reimbursed
by or credited to the Company upon presentation of appropriate
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receipts therefor. Unless expressly provided in this Agreement or as approved by
the Management Committee, no Member shall be entitled to reimbursement or credit
from the Company for any cost or expense which it has incurred or paid on behalf
of the Company.
2.7 LIABILITY OF THE MANAGEMENT COMMITTEE.
The Management Committee shall perform its duties under this
Agreement with ordinary prudence and in a manner characteristic of businessmen
in similar circumstances. However, members of the Management Committee shall not
have any liability whatsoever to the Company or to any other Member for any loss
incurred by reason of any act or omission performed or omitted by such member if
the loss suffered arises out of circumstances beyond the control of the
Management Committee, or out of a mistake in judgment, or if in good faith, it
reasonably believed that the act or omission giving rise to the loss was (i) in
the best interests of the Company, and (ii) within the scope of the authority
granted to it by this Agreement or by law, or based on the advice of counsel.
2.8 INDEMNIFICATION OF THE MANAGEMENT COMMITTEE.
To the fullest extent permitted by law, the Company shall indemnify
and hold harmless the members of the Management Committee against any loss or
threat of loss as a result of any claim or legal proceeding related to any act
or omission or alleged act or omission arising out of the Management Committee's
activities if the member against whom the claim is made or the legal proceeding
is directed was (i) acting in good faith within what he reasonably believed to
be the scope of his authority, and (ii) for a purpose which he reasonably
believed to be in the best interests of the Company. Such indemnification shall
include, without limitation, payment of attorney's fees incurred in connection
with the investigation of any such claim or the defense of any such action,
which attorneys' fees shall be paid as incurred, liabilities under federal and
state securities laws, to the extent permitted by law, and judgments, fines and
amounts paid in settlement, so long as such Management Committee member was not
guilty of willful misconduct or fraud, or any other willful breach of a
fiduciary duty with respect to such acts or omissions, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
2.9 MEMBERS HAVE NO EXCLUSIVE DUTY TO COMPANY.
The Management Committee members shall not be required to manage the
Company as their sole and exclusive function, and the Members and Management
Committee members may have other business interests and may engage in other
activities in addition to those relating to the Company.
SECTION 3. MEMBER MEETINGS AND VOTING RIGHTS.
3.1 CALLING OF MEETINGS.
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Meetings of the Members, for any purpose or purposes, unless
otherwise prescribed by statute, may be called by the Management Committee or
any Member.
3.2 NOTICE OF MEETING.
Written, telephonic, confirmed facsimile or electronic mail notice
stating the place, day and hour of the meeting and the purpose for which the
meeting is called, must be delivered not less than two business days before the
date of the meeting, either personally or by mail, by or at the direction of the
Management Committee, to each Member of the record entitled to vote at the
meeting. If mailed, the notice will be deemed to be delivered when deposited in
the United States mail, addressed to the Member at its address as it appears on
the books of the Company, with postage prepaid. When all the authorized
representatives of Members of the Company are present at any meeting, or if
those not present sign in writing a waiver of notice of the meeting, or
subsequently ratify all the proceedings of the meeting, the transactions of the
meeting are as valid as if a meeting were formally called and notice had been
given.
3.3 QUORUM.
At any meeting of the Members, a majority of the Shares, as
reflected by the books of the Company, represented in person or by proxy, will
constitute a quorum.
3.4 PROXIES.
At all meetings of Members, a Member may vote by proxy executed in
writing by the Member or by its duly authorized attorney-in-fact. The proxy must
be filed with a member of the Management Committee before or at the time of the
meeting. No proxy may be valid after three months from date of execution, unless
otherwise provided in the proxy.
SECTION 4. CAPITAL ACCOUNTS; SHARING OF LOSSES.
4.1 INITIAL CAPITAL CONTRIBUTIONS.
The initial Capital Contribution of each Member, made concurrently
with the execution of this Agreement, shall be equal and shall be credited to
the Capital Account of each such Member, is set forth in Schedule 1 hereto. Each
Member agrees that it will duly execute and deliver to the Company any
additional documents and instruments which the Management Committee may
reasonably determine to be necessary to confirm the title of the Company in and
to the property contributed to it.
4.2 CAPITAL ACCOUNTS - GENERAL.
(a) Maintenance.
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A Capital Account ("Capital Account") shall be established and
maintained for each Member in accordance with the rules set forth in Treasury
Regulations Section 1.704-1(b)(2)(iv). Each Member's Capital Account shall be
increased by (i) the amount of money contributed by such Member to the Company,
(ii) the fair market value of any property contributed by such Member to the
Company (net of liabilities secured by such contributed property that the
Company is considered to assume or take subject to under Code Section 752 at the
time of such contribution), and (iii) the amount of any Net Profits allocated to
such Member. Each Member's Capital Account shall be decreased by (i) the amount
of money distributed to such Member by the Company, (ii) the fair market value
of any property distributed to such Member by the Company (net of liabilities
secured by such distributed property that such Member is considered to assume or
take subject to under Code Section 752 at the time of such distribution) and
(iii) the amount of any Net Losses charged to such Member. The foregoing
provisions and the other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with Treasury Regulation
Section 1.704-1(b), and shall be interpreted and applied in a manner consistent
with such Regulation and any amendment or successor provision thereto.
(b) No Interest.
Except as otherwise provided in this Agreement, no interest shall be
paid on any Member's Capital Account. No part of any Member's Capital Account
may be withdrawn by such Member except as expressly provided herein. The Company
shall not redeem or repurchase any Member's Interest except as set forth herein.
No portion of a Capital Account of a Member shall be withdrawn from or paid by
the Company under any circumstances if the effect thereof would be to impair the
net capital of the Company, or result in the loss of any material right of the
Company, pursuant to applicable law or as determined by any regulatory body
which has jurisdiction over any business of the Company ("Regulatory
Authority").
4.3 ADDITIONAL CAPITAL REQUIREMENTS.
Except as otherwise expressly provided in this Agreement, no Member
shall have any duty or responsibility to make loans, advances or additional
capital contributions to the Company. Specifically, but not by way of
limitation, no Member shall be required upon the liquidation and winding up of
the Company to contribute to the capital of the Company the amount of the
negative balance, if any, in its Capital Account. The foregoing notwithstanding,
the Management Committee may, by unanimous consent, determine from time to time
that additional Capital Contributions are necessary or appropriate in connection
with the conduct of the Company's business (including without limitation,
expansion or diversification or to meet operating deficits). In such event, the
Members shall participate equally in such additional Capital Contributions.
4.4 SHARING OF LOSSES; INDEMNITY IN EVENT OF SALE OF INTEREST.
(a) Unless otherwise agreed by the Management Committee, the Members
hereby agree that if a Member (the "Loss Member") incurs a loss ("Loss," as
defined in subsection 4.4(b) below)
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as a result of (i) the failure of the Company to repay a loan made by the Loss
Member according to the terms of the loan; (ii) the transfer of property
belonging to the Loss Member to a third party pursuant to a mortgage, pledge of
assets or similar instrument in connection with a loan made to the Company; or
(iii) the payment of money to a third party by the Loss Member pursuant to a
personal guarantee of a loan made to the Company, then in any such event the
non-Loss Member(s), shall reimburse the Loss Member so that the Loss shall be
borne by the Members in proportion to their respective ownership of the Shares
of the Company. Such reimbursement shall be made by each non-Loss Member within
sixty (60) days of receipt of written notice from the Loss Member setting forth
the amount of the Loss.
(b) For purposes of this section, the Loss Member's "Loss" is equal
to (i) in the case of a loss on a loan to the Company, the amount due and
unpaid; (ii) in the case of a transfer of property for the benefit of the
Company, the fair market value of the property transferred at the date of the
Loss; and (iii) in the case of the payment on a guarantee, the amount paid to
the lender.
(c) Upon the sale of a Member's Interest pursuant to any provision
of this Agreement, the Company and the remaining Member(s) hereby agree to use
their best efforts, in good faith, to obtain the release of any guarantee and
any lien, mortgage or pledge of any assets made by the selling Member in
connection with any debt or other obligation incurred by the Company. Such best
efforts may require the Company or the remaining Member(s) to offer substitute
guarantees or collateral for that of the selling Member. If the Company and the
remaining Member(s) are unable to obtain such release, they shall be obligated,
jointly and severally, to indemnify and hold harmless the selling Member from
all damages, losses, judgments, settlements, fees and expenses, including
attorneys' fees, incurred by or assessed against the selling Member as a result
of any claim or action in connection with the subject debt or obligation of the
Company.
4.5 LOANS TO THE COMPANY.
Nothing in this Agreement shall prevent any Member from making
secured or unsecured loans to the Company by agreement with the Company.
SECTION 5. DISTRIBUTIONS, PAYMENTS, AND ALLOCATIONS
5.1 DISTRIBUTIONS AND PAYMENTS.
(a) Discretionary Distributions and Payments.
The Company shall make cash distributions or payments at such times
as the Management Committee shall determine, all of which distributions shall,
unless otherwise agreed by the Management Committee, be made to the Members in
proportion to their respective Capital Account balances immediately prior to the
time at which such distribution is made.
(b) Liquidating Distributions.
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Upon the liquidation of the Company, liquidating distributions shall
be made to the Members in the following order: first, to each of the Members to
the extent of its Capital Account; and second, to the Members in accordance with
their respective Interests. The Company may offset damages for breach of this
Limited Liability Company Agreement by a Member or Interest Owner whose interest
is liquidated (either upon the withdrawal of the Member or the liquidation of
the Company) against the amount otherwise distributable to such Member.
5.2 ALLOCATION OF NET PROFITS AND NET LOSSES.
The Net Profits and Net Losses of the Company shall be allocated to
the Members in accordance with the Members' respective Interests.
5.3 TAX ALLOCATIONS; CODE SECTION 704(c).
In accordance with Code Section 704(c) and the Treasury Regulations
thereunder, depreciation, amortization, gain and loss, as determined for federal
income tax purposes, with respect to any property whose Fair Market Value on the
date of contribution differs from its adjusted basis for federal income tax
purposes shall be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for federal
income tax purposes and its Fair Market Value.
Any elections or other decisions relating to such allocations shall
be made by the Management Committee in any manner that reasonably reflects the
purposes and intentions of this Agreement. Allocations pursuant to this Section
are solely for purposes of federal, state, and local income taxes and shall not
affect, or in any way be taken into account in computing, any Member's Capital
Account or share of Net Profit, Net Loss, other items, or distributions pursuant
to any provision of this Agreement other than this Subsection 5.3 by prorating
the number of days each Member held such Interest during the year.
SECTION 6. ACCOUNTING, RECORDS AND BUDGETS.
6.1 RECORDS, AUDITS AND REPORTS.
The Management Committee shall maintain records and accounts of all
operations and expenditures of the Company. At a minimum, the Company shall keep
at the offices of InCon located at 970 Douglas Road, Batavia, Illinois 60510,
the following records:
(a) Members.
A current and a past list setting forth in alphabetical order the
full name and last known business, residence, or mailing address of each Member,
both past and present.
(b) Certificate of Formation.
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A copy of the Certificate of Formation of the Company and all
amendments thereto, together with executed copies of any powers of attorney
pursuant to which any articles of amendment have been executed.
(c) Financial Information.
Copies of the Company's federal, state, and local income tax returns
and financial statements for the three most recent years, or, if such returns or
statements were not prepared for any reason, copies of the information and
statements provided to, or which should have been provided to, the Members to
enable them to prepare their federal, state and local tax returns for such
period. Books of account for the Company which shall show a true and accurate
record of all costs and expenses incurred, all charges made, all credits made
and received and all income derived in connection with the operation of any
Company business.
(d) Limited Liability Company Agreement.
Copies of the Company's current effective written Limited Liability
Company Agreement and all amendments thereto and copies of any written Limited
Liability Company Agreements no longer in effect.
(e) Contributed Property.
A writing setting forth the amount of cash, if any, and a statement
of the agreed value of other property or services contributed by each Member and
the times at which or the events upon the happening of which any additional
contributions are to be made by each Member.
6.2 TAX RETURNS.
The Management Committee shall cause to be prepared all income and
other tax returns of the Company. The Management Committee shall furnish to each
Member and each Person who was a Member during the previous fiscal year, a copy
of each such return as soon as it has been prepared, together with any schedules
or other information, including a Form K-1, which each Member may reasonably
require in connection with such Member's own tax affairs. Each of the Members
shall, in its respective income tax return and other statements filed with the
Internal Revenue Service or other taxing authority, report taxable income in
accordance with the provisions of this Agreement.
6.3 TAX MATTERS PARTNER.
NTC shall be the "Tax Matters Partner" as such term is used in the
Code. The Management Committee shall be the party designated to receive all
notices from the Internal Revenue Service which pertain to the tax affairs of
the Company, and the Management Committee shall be entitled to require that any
Internal Revenue Service examinations or audits shall take place at the offices
of the Management Committee, provided, that the Management Committee shall
promptly advise the
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Member(s), from time to time, of any such examinations or audits. The Management
Committee shall perform all duties imposed on the Management Committee by the
Code, including, but not limited to, the following: (a) the power to conduct all
audits and other administrative proceedings with respect to Company tax items;
(b) the power to extend the statute of limitations for all Member(s) with
respect to Company tax items; and (c) the power to file a petition with an
appropriate federal court for review of a final Company administrative
adjustment.
6.4 FISCAL YEAR.
The fiscal year of the Company shall be the calendar year. As used
in this Agreement, the term "fiscal year" shall include any partial fiscal year
at the beginning and end of the Company term.
6.5 BANK ACCOUNTS.
The funds of the Company shall be deposited in the name of the
Company in such bank account or accounts as the Management Committee shall from
time to time determine. All withdrawals and disbursements therefrom shall be
signed by a member of the Management Committee or pursuant to delegated
authority.
6.6 BUDGETS.
The Management Committee shall establish, or cause to be
established, (a) an annual operating budget for the Company, and (b) an annual
capital budget for the Company. Each of the budgets shall be reviewed and
revised by the Management Committee quarterly.
SECTION 7. TRANSFERS; WITHDRAWALS; ADMISSIONS.
7.1 RESTRICTIONS ON TRANSFER.
(a) General Prohibition.
Except as expressly provided in this Agreement, no Member may,
without the unanimous consent of Management Committee, sell, convey, transfer,
assign, mortgage, pledge, hypothecate or otherwise encumber in any way
("Transfer") all or any portion of its Interest in the Company other than any
Transfer which may occur by operation of law.
(b) Management Committee Approval.
Notwithstanding any other provision of this Agreement other than
Sections 7.2 and 7.3 hereof, a Transfer of a Member's Interest may not be made
unless it is the opinion of the Management Committee and counsel for the Company
(i) that such Transfer would not cause the Company to lose its status as a
partnership for federal income tax purposes, or (ii) that
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such Transfer would not violate any provision of federal or state securities
laws applicable to the Company or the Interest therein.
7.2 ADMISSION OF ADDITIONAL MEMBERS.
The Management Committee, by the Required Consent, may from time to
time issue Interest in the Company and admit additional Members for such
consideration as such Members deem appropriate. As a condition to receiving any
interest in the Company, any additional Member must sign a counterpart of this
Agreement.
7.3 RIGHT OF FIRST REFUSAL ON TRANSFER OF INTEREST.
(a) Except as otherwise provided in this Agreement, in the event
that a Member (the "Transferring Member"), desires or is required (for any
reason whatsoever including, but not limited to, pursuant to a third party
offer, a transfer to a judgment creditor, the filing of a bankruptcy petition or
pursuant to the terms of a court decree), to sell or otherwise transfer all or
any portion of its Interest (the "Offered Interest"), the Transferring Member
shall give the Company written notice of the terms of the proposed transaction,
including the portion of the Interest included in the proposed transfer, the
name(s) of the person(s) to whom the transfer or sale is proposed to be made,
and the price at which the proposed sale is to be made or, in the case of an
involuntary transfer or bankruptcy petition, the value attributed to such
Offered Interest. Upon the receipt of the notice, the Company, or any other
party designated by the Company, shall have the first option (exercisable upon
the consent of all Members other than the Transferring Member) to purchase, or
designate a third party to purchase, all of such Offered Interest at a purchase
price equal to the lesser of (i) the price quoted in such notice, or (ii) the
Agreed Value (as defined in Section 7.5) of the Shares comprising the Offered
Interest. The Company may exercise its option to purchase such Offered Interest
by giving written notice to the Transferring Member, with a copy to each of the
remaining Members, within thirty (30) days after receipt of the Transferring
Member's notice of intent to sell or transfer the Offered Interest. In the event
of a purchase by the Company, or third party designated by the Company, of the
Offered Interest hereunder, the Members, including the Transferring Member,
agree to take such action as may be necessary to enable the Company, or such
other party as may be designated by the Company, to lawfully purchase the
Offered Interest. If the Company does not wish to exercise its option pursuant
to this Section 7.3, it shall give written notice to all the Members of such
declination on or before the expiration of the thirty day option period.
(b) Any Offered Interest not repurchased by the Company or its
designee pursuant to subparagraph (a) above, may be purchased by the remaining
Members at the price set forth in subparagraph (a) above. Each such Member shall
have the right to purchase within thirty (30) days after the expiration of the
30-day period during which the Company may exercise its purchase option under
subparagraph (a) above, such proportion of the Offered Interest pursuant to
subparagraph (a) hereof as the number of Shares owned by him on such date bears
to the total number of Shares owned by all the remaining Members; provided,
however, that if any remaining Member does not purchase his full proportionate
share of the Offered Interest, the portion of the Offered Interest not
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purchased by such Member may be purchased by the other remaining Member(s)
proportionately in accordance with their then respective Shares. The procedure
of proration as set forth herein shall continue until either all of the Offered
Interest has been purchased by the remaining Members or all the remaining
Members shall have declined to purchase the Offered Interest.
(c) The purchase price for an Offered Interest sold to the Company
pursuant to subparagraph (a) above, or to any remaining Members pursuant to
subparagraph (b) above, shall be provided for at the time of the purchase by
certified or bank check or, at the option of the purchaser(s), as follows: (i) a
downpayment equal to ten percent (10%) of the purchase price, and (ii) the
remaining balance of the purchase price shall be evidenced by a promissory note
which shall bear interest at the prime rate of Citibank, N.A., or its successors
or assigns, as in effect during the period of repayment, and shall be payable
monthly in 60 equal installments of principal together with accrued interest;
provided, however, that if the payment terms set forth in the notice of proposed
transfer pursuant to Subparagraph (a) above are less favorable to the
Transferring Member than provided in this Subparagraph (c), the Company or each
purchasing Member, as the case may be, shall have the right at its option to pay
for any Offered Interest purchased by it on terms equivalent to those set forth
in such notice.
(d) Upon payment of the purchase price and delivery of the
promissory note, if applicable, as provided in subparagraph (c), the
Transferring Member shall execute such documentation as shall reasonably be
required by the Company and/or the purchasing Members. Simultaneously, with the
delivery to the Transferring Member of the purchase price, such Transferring
Member shall deliver appropriate duly executed instruments of transfer and
assignment, assigning and transferring good and marketable title to the Offered
Interest, free from any liens or encumbrances or rights of others therein. The
Offered Interest thus transferred shall include all of the Transferring Member's
right, title and interest in and to the Shares, the Company, the Company's name
and all of the Company's assets, including, but not limited to, the Transferring
Member's capital account and his share of undrawn profits from the beginning of
the fiscal year in which the transfer occurs. The Offered Interest shall not be
deemed to include any debts and liabilities of the Company to the Transferring
Member for loans and advances (other than by way of capital contribution) made
by the Transferring Member, which shall be repaid by the Company to the
Transferring Member as required by the terms of such loans and advances.
(e) In the event that neither the Company nor the remaining Members
shall purchase all of the Offered Interest, the Transferring Member shall be
free, for a period of thirty (30) days commencing on the earlier of (i) the
expiration of the 30-day period afforded to the remaining Members to exercise
their purchase rights under subparagraph (b) hereof, or (ii) receipt by the
Transferring Member of notice from the Company and all of the remaining Members
declining to purchase the Offered Interest, to consummate the proposed sale or
transfer upon the terms set forth in the notice originally given to the Company
and the remaining Members or on terms less favorable to the transferee or, in
the case of a transfer other than a sale, in accordance with the terms of such
transfer, provided however, that any such sale or transfer shall be subject to
the condition that the
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transferee must execute a counterpart of, and agree to be bound by the terms and
conditions set forth in, this Agreement.
(f) Promptly upon the consummation of any such sale or transfer, the
Transferring Member shall confirm in writing to the Company the terms of the
transaction so consummated, including the Interest involved, the consideration
received, the name of the party or parties with whom the transaction was made,
and evidence of compliance with this Section 7. After the expiration of the
thirty (30) day sale period, if the Transferring Member again wishes to sell any
Interest owned by him, such proposed sale shall be subject to the purchase
options set forth in this Section.
7.4 BUY/SELL AGREEMENT.
(a) Put-Call Transfer of Shares. Each Member shall have the right,
at any time, to initiate the procedures for the transfer of Shares from one to
the other as hereinafter set forth. The party initiating such procedures shall
hereinafter be referred to as the "Offeror", and the party being asked to
respond to such procedures shall hereinafter be referred to as the "Offeree".
(b) Procedure for Initiating Put-Call. The Offeror may initiate a
put-call transfer contemplated by this section (the "Put-Call Transfer") by
delivering a written notice (the "Put-Call Notice") to the Offeree expressly
stating that the Offeror is thereby initiating a Put-Call Transfer. The Put-Call
Notice shall specify the per share value being established by the Offeror for
the Shares.
(c) Effect of Put-Call Notice. If a Put-Call Notice is given, it
shall be deemed to constitute an offer by the Offeror either to:
(i) sell all (and not less than all) Shares owned by the
Offeror upon such terms and conditions as are set forth in subsection (e) below
at the per share value specified in the Put-Call Notice; or
(ii) purchase all (and not less than all) Shares owned by the
Offeree upon such terms and conditions as are set forth in subsection (e) below
at the per share value specified in the Put-Call Notice.
In all events, and by way of further explanation of the foregoing,
the Offeree shall state only one per share value for the Shares and the offer
shall be to purchase or sell at the same per share value. Such offer, as
contained within the Put-Call Notice, shall become irrevocable at such time that
the Offeree shall have delivered his Written Response thereto, as below
provided.
(d) Response to Put-Call Notice. The Offeree shall deliver to the
Offeror a written response (the "Written Response") to the Put-Call Notice not
later than sixty (60) days following the date of delivery of the Put-Call
Notice. Unless the Offeree shall have delivered the Written Response within such
time period expressly stating that he wishes to purchase all Shares owned by
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the Offeror, the Offeree shall be deemed, for the purpose of this agreement, to
have agreed to sell or cause to be sold to the Offeror all of the Shares owned
by the Offeree.
(e) Certain Terms and Conditions with Respect to Put-Call Transfer
of Shares. For the purposes of the following, the party selling Shares is
referred to as the "Seller" and the purchaser thereof is referred to as the
"Purchaser".
(i) Delivery and Transfer. At the closing of a purchase of
Shares pursuant to this Section, the Seller shall deliver a bill of sale or any
other documentation reasonably requested by the Purchaser for transfer of the
Shares. The Seller shall cause such Shares to be transferred free and clear of
any liens, encumbrances, restrictions and security interests of any kind. The
Purchaser shall thereupon be obligated to pay the purchase price therefor in
accordance with subparagraph (ii) below.
(ii) Payment of Purchase Price for Shares. The Purchaser of
Shares pursuant to this Section shall, at its option, (a) pay the purchase price
for said Shares in full at the closing by bank or certified check or by wire
transfer of immediately available funds to an account designated by the Seller,
or (b) pay twenty percent (20%) of the purchase price for said Shares at the
closing by bank or certified check or by wire transfer of immediately available
funds to an account designated by the Seller, with the principal balance thereof
to be paid, together with simple interest at the rate, from time to time, of
five-year United States Treasury Notes, in equal annual installments over five
(5) years.
(iii) Closing Date. The closing of a purchase contemplated
under this Section shall take place within sixty (60) days after the date of
delivery of the Written Response or, if no response is given by the Offeree,
within ninety (90) days following the date of delivery of the Put-Call Notice
(in either case, the "Closing Date"). The exact Closing Date shall be determined
by the Purchaser.
(iv) Removal of Guarantees. As a condition to the completion
of the purchase by the Purchaser, the Purchaser shall be obligated to obtain
releases, on behalf of the Seller, from any guarantees by the Seller of
indebtedness and other obligations of the Company. If such releases are not
provided to the Seller on or before the Closing Date, in form satisfactory to
the Seller and his counsel, the Seller shall have the following options, notice
of the choice of which must be provided to Purchaser within sixty (60) days
following the originally designated Closing Date:
(1) To consummate the sale contemplated hereunder, but
subject to an unlimited joint and several indemnity from the Company and the
Purchaser, in form satisfactory to the Seller and his counsel, holding the
Seller harmless from any claims and losses arising by reason of such unreleased
guarantees; or
(2) To purchase all Shares owned by the Purchaser upon
all of the same terms and conditions hereinabove described, including the
provision of this subparagraph (iv); provided, however, that if the Seller
chooses to acquire the Purchaser's Shares pursuant to this
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subparagraph (iv)(2), but is unable to obtain the removal of all necessary
guarantees, then in such case, the parties agree that they shall be deemed to
have elected application of subparagraph (iv)(3) below; or
(3) To require a sale of 100% of the Shares, or
substantially all of the assets of the Company, to a third party purchaser, upon
terms and conditions mutually agreeable to the Members. In the event the Members
are unable to agree upon the procedures to be followed in seeking such a
purchaser, or upon the terms and conditions of a sale, the Management Committee
shall choose an independent third party (which may be an investment banking
firm, certified public accounting firm, or any other third party that is
qualified to value businesses of the nature conducted by the Company) which
shall direct the effort to sell such Shares or assets. In such event, the
Management Committee shall accept that offer obtained within six (6) months
after hiring such third party which is recommended by such third party as
containing the most favorable terms, taken as a whole unless the Members
unanimously agree that such offer is not acceptable. Each of the Members shall
cooperate fully with the Company and/or such third party in order to effect the
sale of Shares or assets, including by giving standard representations and
warranties to the purchaser thereof and entering into noncompetition and/or
nondisclosure agreements with such purchaser.
(v) Resignation of Seller. In the event of a purchase
contemplated under this section, the Seller's representative shall resign from
the Management Committee and, if applicable, as an officer or other employee of
the Company, effective as of the Closing Date.
7.5 AGREED VALUE.
(a) Initial Valuation. Unless otherwise stated in this Agreement,
the purchase price for the purchase or transfer of any Interest in the Company
shall be the Agreed Value of each Share of the Company, multiplied by the number
of Shares comprising the Interest of the Member whose Interest is being sold or
transferred. The Agreed Value of each Share of the Company as of the date hereof
is set forth in the Certificate of Agreed Value attached hereto as Schedule 2.
Within four months after the end of each calendar year, the Members shall
determine a new Agreed Value of each Share of the Company which shall be net of
any Company liabilities, and shall state such new Agreed Value in a writing
signed by all of the Members. In the event that more than two (2) years have
elapsed since the determination of the last Agreed Value, the purchase price
shall be determined as set forth in Subparagraph (b) below.
(b) Revised Agreed Value. In the event that more than two (2) years
have elapsed since the determination of the last Agreed Value, the purchase
price shall be the net book value at the end of the month immediately preceding
the month in which the proposed sale or other transfer occurs, as certified to
the Company and the Members in a statement prepared by the Company's regular
accountant prepared in accordance with generally accepted accounting principles
and upon a basis consistent with the most recent financial statements which have
been prepared by said accountant, except that the value of any real estate owned
by the Company shall be the fair market value as of
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such date. The fair market value of the real property shall be calculated within
six weeks of the date of an event which applies the Agreed Value formula.
7.6 CLOSING.
The closing of a purchase and sale of any Interest, unless otherwise
stated in this Agreement, shall be held at the office of the Company.
Simultaneously with the delivery to the Member or his legal representative of
the purchase price, such Member or legal representative, as the case may be,
shall deliver appropriate duly executed instruments of transfer and assignment,
assigning and transferring good and marketable title to the Interest, free from
any liens or encumbrances or rights of others therein. The Interest thus
transferred shall include all of the seller's right, title and interest in and
to the Shares and the Company, the Company's name and all assets thereof,
including, but not limited to, the transferring Member's capital account and its
share of any undrawn profits for any fiscal year in which the closing date
falls. The transferred Interest shall not be deemed to include any debts and
liabilities of the Company to the transferring Member for loans and advances
(other than by way of capital contribution) made by such transferring Member,
which debts and liabilities shall be repaid by the Company as required by the
terms of such loans and advances.
SECTION 8. DISSOLUTION.
8.1 EVENTS OF DISSOLUTION.
(a) The Company shall be dissolved and its affairs shall be wound up
upon the happening of any of the first to occur of the following:
(i) at the time specified in its Certificate of Formation;
(ii) the Required Consent;
(iii) an Event of Dissociation of a Member, unless there are
at least two remaining Members and the business of the Company is continued by
the written consent of a majority in Interest of the remaining Members within
120 days after the Event of Dissociation; or
(iv) entry of a decree of dissolution under Section 18-802 of
the Act.
(b) Notwithstanding anything to the contrary in this Limited
Liability Company Agreement, if the Management Committee votes to dissolve the
Company by the Required Consent, then all of the Members shall agree in writing
to dissolve the Company as soon as possible (but in any event not more than 10
days) thereafter.
(c) As soon as possible following the occurrence of any of the
events specified in this section 8 effecting the dissolution of the Company, the
Members shall proceed to wind up the Company's business in accordance with
Section 18-803 of the Act.
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(d) Except as expressly permitted in this Limited Liability Company
Agreement, a Member shall not (i) voluntarily resign, (ii) take any other
voluntary action which directly causes an Event of Dissociation; or (iii) make
an application for the dissolution of the Company as provided in Section 18-802
of the Act.
8.2 SALE OF ASSETS BY THE MANAGEMENT COMMITTEE.
Upon the dissolution of the Company, the Management Committee shall
proceed diligently to wind up the affairs of the Company and distribute its
assets. The Management Committee shall have full right and unlimited discretion
to determine the time required and used for liquidation, which in no event shall
be greater than one year from the date of dissolution, and the manner and terms
of any sale or sales of Company assets pursuant to such liquidation, for the
purpose of obtaining, in its opinion, fair value for such assets, having due
regard for the activity and condition of the relevant markets and general
financial and economic conditions. In winding up the affairs of the Company, the
Management Committee shall pay the liabilities of the Company in such order of
priority as provided by law.
SECTION 9. BUSINESS PURPOSE OF COMPANY/ACTIVITIES OF MEMBERS.
9.1 BUSINESS PURPOSE AND ACTIVITIES OF COMPANY.
In addition to any other business or purpose set forth in the
Certificate of Formation or as otherwise determined by the Management Committee
from time to time, the Company (a) shall research and develop dietary
supplements, cosmetics, nutritional and health promoting products and any other
products that the Management Committee may determine ("New Products") including,
without limitation, fish, oil, TRF (tocotrienol rich fraction), SuperE
(tocopherol/TRF), Sqalene/Sqalane and Sterols, and (b) shall manufacture, market
and sell the New Products and may manufacture, market and sell certain existing
supplements and products ("Existing Products", New Products and Existing
Products being collectively referred to herein as "Company Products"). InCon and
NTC shall work jointly to develop New Products. All costs and expenses related
to the development of New Products shall be authorized in advance by the
Required Consent, and shall be the exclusive responsibility of the Company.
9.2 ACTIVITIES OF NTC.
The Company shall enter into an exclusive agreement with NTC for the
sale and marketing of Company Products (the "Sale and Marketing Agreement"). The
Sale and Marketing Agreement shall be subject to the Required Consent of the
Management Committee. All costs and expenses related to the Sale and Marketing
Agreement shall be authorized in advance upon the Required Consent of the
Management Committee, and shall be the exclusive responsibility of the Company.
9.3 ACTIVITIES OF INCON.
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The Company shall enter into an exclusive agreement with InCon for
the manufacture of Company Products (the "Manufacturing Agreement"). The
Manufacturing Agreement shall be subject to the Required Consent of the
Management Committee. All costs and expenses related to the Manufacturing
Agreement shall be authorized in advance upon the required Consent of the
Management Committee, and shall be the exclusive responsibility of the Company.
9.4 OWNERSHIP OF COMPANY ASSETS.
Notwithstanding any other provision of this Agreement, the Company
shall be the sole and exclusive owner of all raw materials, work-in-progress and
accounts receivable relating to the Company Products and/or the development,
manufacturing, marketing or sale thereof. The Company shall have no ownership
of, or claim to, any equipment or facilities unless such equipment or facilities
have been expressly contributed, assigned, leased or otherwise conveyed to the
Company.
9.5 COVENANT NOT TO DISCLOSE.
Each Member acknowledges and agrees that much of the information,
documents, files and other papers concerning the products, business, operations,
financial affairs or condition of the Company are strictly confidential,
including but not limited to, financial statements, customer lists, training
manuals, marketing methods, pricing structures, technical data, process
information and know-how (the "Confidential Information"). Each Member covenants
and agrees that it will not at any time divulge, make known to any person, or
use, in each case for his own personal benefit, any of the Confidential
Information, whether or not made known to such Member by reason of his being a
Member, Management Committee member, officer or employee of the Company, except
(i) as reasonably necessary to conduct the business of the Company, (ii) as
required by law, regulation or legal process, or (iii) to third parties who have
executed and delivered to the Company a non-disclosure agreement, in form and
substance satisfactory to the Company.
All materials, records, and documents developed or owned by the
Company, whether embodied in electronic media or in written form, shall be the
sole property of the Company and upon the request of the Company, each Member
shall promptly deliver to the Company such materials, records and documents or
copies thereof as are then maintained by him or otherwise under his control,
and shall retain no copies thereof.
The obligations of a Member under this Section shall be binding on a
Member even after he ceases to be a Member of the Company and shall survive
termination of this Agreement.
9.6 OTHER BUSINESS INTERESTS OF THE MEMBERS.
This Agreement shall not be construed to grant any right, privilege
or option to a Member to participate in any manner in any other business,
corporation, partnership or investment in which another Member may participate,
including those which may be the same as or similar to the Company's business
and in direct competition therewith, and each of the Members expressly waives
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the doctrine of corporate opportunity (or any analogous doctrine) with respect
to any such other business, corporation, partnership or investment of the other
Members or their Affiliates.
9.7 TRANSACTION WITH MEMBERS OR AFFILIATES.
The Members or any of their respective affiliates shall have the
right to contract or otherwise deal with the Company in connection with the sale
of goods or services by the Members or their respective affiliates to the
Company in the following circumstances: (a) where the Management Committee has
voted to give consent or (b) if (i) the compensation paid or promised for such
goods or services is reasonable and is paid only for goods or services actually
furnished to the Company, (ii) the goods or services to be furnished are
reasonable for and necessary to the Company and (iii) the terms for the
furnishing of such goods and services are at least as favorable to the Company
as would be attainable in an arms-length transaction with third parties.
SECTION 10. MISCELLANEOUS.
10.1 ENFORCEMENT.
In the event that any party hereto commits a breach of that party's
obligations hereunder, any non-breaching party damaged thereby shall be entitled
to recover from the party in breach the costs and expenses incurred, including
reasonable attorneys' fees and disbursements, in connection with enforcing the
provisions hereof. The obligation of any person to transfer Shares in accordance
with the terms of this Agreement may be specifically enforced by any court of
competent jurisdiction, it being acknowledged and agreed that money damages will
not provide an adequate remedy for the breach of any obligation. The rights and
remedies set forth in this Section 10.1 shall be in addition to, and not in lieu
of, any other rights and remedies available at law or in equity.
10.2 NOTICES.
All notices required or permitted by this Agreement shall be in
writing and shall be delivered (i) to any Member, at the address of such Member
set forth on the books and records of the Company or such other mailing address
of which such Member shall advise the Management Committee in writing, and (ii)
to the Company or the Management Committee, at the principal office of the
Company. Any notice shall be deemed to have been duly given if personally
delivered or sent by United States mail or express mail service or by telegram
confirmed by letter and will be deemed given, unless earlier received, (1) if
sent by certified mail, return receipt requested, or by first-class mail, five
calendar days after being deposited with such mail service, postage prepaid, (2)
if sent by United States Express Mail or other express mail service, two
calendar days (other than Sundays and Federal holidays) after being deposited
with such mail service, postage prepaid, (3) if sent by telegram, on the date
sent provided a notice of confirmation is sent by first-class mail, postage
prepaid, and (4) if delivered by hand, on the date of receipt. Any notice or
other document sent or delivered in any other manner shall be effective only if
and when received.
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10.3 AMENDMENTS.
This Agreement may be amended only with the written consent of all
of the Members.
10.4 WAIVER OF ACTION FOR PARTITION.
Each Member irrevocably waives during the term of the Company any
right that it may have to maintain any action for partition with respect to the
property of the Company.
10.5 SUCCESSORS AND ASSIGNS.
Subject to the restrictions on transfer set forth herein, this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective legal representatives, successors and assigns.
10.6 TITLE TO PROPERTY.
All property owned by the Company shall be owned by the Company as
an entity and, insofar as permitted by applicable law, no Member shall have any
ownership interest in such property in its individual name or right. Each
Member's interest in the Company shall be personal property for all purposes.
10.7 CAPTIONS.
Any article, section or paragraph titles or captions contained in
this Agreement and the table of contents are for the convenience of reference
only and shall not be deemed a part of this Agreement.
10.8 TERMS.
Common nouns and pronouns shall be deemed to refer to the masculine,
feminine, neuter, singular and plural, as the context may require. Any
references to the Code or other statutes or laws shall include all amendments,
modifications or replacements of the specific sections and provisions concerned.
10.9 INVALIDITY.
If any provision of this Agreement shall be held invalid, it shall
not affect in any respect whatsoever the validity of the remainder of this
Agreement.
10.10 COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall
be deemed an original and all of which, when taken together, shall constitute
one and the same instrument, binding on the
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Members, and the signature of any party to any counterpart shall be deemed a
signature to, and may be appended to, any other counterpart.
10.11 FURTHER ASSURANCES.
The parties hereto agree that they will cooperate with each other
and will execute and deliver or cause to be delivered, all such other
instruments, and will take all such other actions, as the Management Committee
may reasonably request from time to time in order to effectuate the provisions
and purposes hereof.
10.12 COMPLETE AGREEMENT.
This Agreement constitutes the complete and exclusive statement of
the agreement among the Members with respect to the subject matter hereof, and
supersedes all prior written and oral statements.
10.13 GOVERNING LAW; CONSENT TO JURISDICTION.
This Agreement shall be construed and enforced in accordance with
the laws of the State of Delaware, except as may be otherwise required by the
laws of any other jurisdiction in which the Company conducts business to the
extent necessary in order for the Company to conduct business in such other
jurisdiction. Each Member further agrees that service of process or notice sent
in any such action, suit or proceeding shall be effective if given as provided
in Section 10.2 hereof.
10.14 NO THIRD PARTY BENEFICIARY.
Any agreement to pay any amount and any assumption of liability
herein contained, express or implied, shall be only for the benefit of the
Members and their respective heirs, successors and assigns, and such agreements
and assumption shall not inure to the benefit of the obligees of any
indebtedness or any other party, whomsoever, it being the intention of the
Members that no one shall be deemed to be a third party beneficiary of this
Agreement.
10.15 EXHIBITS AND SCHEDULES.
Each of the Exhibits and Schedules attached hereto is hereby
incorporated herein and made a part hereof for all purposes, and references
herein thereto shall be deemed to include this reference and in Company.
10.16 REFERENCES TO THIS AGREEMENT.
Numbered or lettered articles, sections and subsections herein
contained refer to articles, sections and subsections of this Agreement unless
otherwise expressly stated. The words "herein," "hereof," "hereunder," "hereby,"
"this Agreement" and other similar references shall be construed
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to mean and include this Agreement and all amendments thereof and supplements
thereto unless the context shall clearly indicate or require otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date and year first written above.
NUTRITION TECHNOLOGY CORP.
By:_________________________________
Its:________________________________
INCON TECHNOLOGIES, L.L.C.
By:_________________________________
Its:________________________________
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EXHIBITS AND SCHEDULES
----------------------
Exhibits
--------
Exhibit A - Certificate of Formation
Schedules
---------
Schedule 1 - Company Shares and Initial Capital Contributions
Schedule 2 - Valuation of Company
<PAGE> 1
EXHIBIT 16
[LEMASTER & DANIELS PLLC LETTERHEAD]
February 6, 1997
Securities and Exchange Commission
Washington, D.C. 20549
Re: Bionutrics
Dear Sir or Madam:
We have read Item 14 of the Form 10 of Bionutrics as filed with the Commission
and agree with the statements contained therein.
Very truly yours,
/s/ LeMASTER & DANIELS PLLC
- ----------------------------
LeMaster & Daniels PLLC
