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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
(AMENDMENT NO. 2)
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 TRF25 and will be marketed under the trade name "Clearesterol(TM)". It is
based on a patented novel compound (P25-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 P25-tocotrienol technology has potential for exploitation as
an ethical drug. Because TRF25 is a natural complex found in rice bran that
contains P25-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(TM) branding strategy for the product Equal(TM) in which
NutraSweet(TM) 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 P25-tocotrienol as a drug and TRF25 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 market research activities relating to
evolvE(TM) and Clearesterol(TM). In preparation for the initial launch of the
product
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in April 1997, the Company has begun marketing its products through an
independent broker network of five organizations with multiple locations
throughout the United States. The Company will be reducing its reliance on
outside processors with the initiation of processing at a facility in Louisiana.
Product research and development efforts continue through its subsidiary and
through a joint venture partner to explore potential product enhancements and
new products.
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 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, TRF25, has been shown in animal tests
and human trials to promote elements associated with cardiovascular health by
altering cholesterol metabolism. TRF25 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, TRF25 and its components have possible
application in dietary supplement, drug and food ingredient products. Because
Bionutrics is able to market TRF25 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
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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 TRF25, have been shown to be the most active
antioxidant and cholesterol lowering agents of all natural tocols --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 C16 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 performed with animal models in support of the
Company's patent has shown the other known tocotrienols to be of varying degrees
of effectiveness in lowering cholesterol, ranging from reductions in LDL of
approximately 20% for [alpha]-tocotrienol to approximately 40% for
[gamma]-tocotrienol and [delta]-tocotrienol. P25-tocotrienol has been shown in
these same trials to be up to 150% more effective than these known tocotrienols.
P25-tocotrienol, a new, particularly active, isomer or type of tocotrienol, is
found in rice bran as part of a tocotrienol rich fraction (TRF25) 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. TRF25 is extracted from rice
bran by a proprietary process and is the primary ingredient in Clearesterol(TM).
Initial research with TRF25 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. A physician controlled and independently administered
double-blind human trial conducted by the Company with TRF25 demonstrated the
effectiveness of this dietary supplement. Results from this study support the
earlier animal findings of significant LDL reduction with an average
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reduction in humans of 16% after only 4 weeks and 24% 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.
PATENTS AND LICENSING
LipoGenics has two patent applications filed in 1992 and 1996,
respectively, entitled "Processes for recovering tocotrienols, tocopherols and
tocotrienol-like compounds" that are pending for a method of manufacturing
Clearesterol(TM) dietary supplements ("Process" claims) and Clearesterol(TM)
products derived via the proprietary methods ("Product by Process" claims).
LipoGenics also has one patent, U.S. Patent No. 5,591,772, filed in 1994 and
issued in January 1997 and one application pending filed in 1996 entitled
"Tocotrienols and tocotrienol-like compounds and methods for their use" for
chemical composition of key compounds in Clearesterol(TM) ("Composition of
Matter" claims) and the use of the proprietary Clearesterol(TM) product and its
compounds ("Method of Use" claims). In addition it has pending corresponding
international patent applications in at least 10 foreign countries and in
Europe.
In addition, LipoGenics owns a patent originally obtained by Wisconsin
Alumni Research Foundation entitled "Cholesterol Lowering Method of Use," U.S.
Patent No. 4,603,142 issued in July 1986 and acquired by the Company in 1996.
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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.
The Company believes that its products will compete with four other types
of compounds: (1) vitamin-E ([alpha]-tocopherol), (2) non-TRF25 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
an article by Dr. Qureshi, which has been submitted and accepted for
publication, supports the Company's belief. 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-TRF25 tocotrienol or tocol-like products by
competitors is currently in process. The Company believes evolvE(TM) has
advantages over these other products,
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including a base of scientific support for greater apparent efficacy discussed
above and a product source (rice bran versus palm oil) that may be more
attractive to U.S. consumers inasmuch as rice has not been portrayed as
unhealthy as has 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. Although well known products such as Rogaine, Tagamet and
Zantac, which all have different purposes, were available only through
prescription for a number of years before being available over-the-counter, the
Company cannot predict how long past-generation cholesterol-lowering drugs will
remain prescription drugs. 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' P25 and TRF25 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 TRF25 tocol complex and
build brand recognition. Marketing efforts will initially focus on the United
States.
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).
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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 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
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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, TRF25,
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, non-proprietary nutritional
and health-promoting products, and for the manufacture and sale of existing as
well as newly developed supplements and products.
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
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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
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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 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, TRF25 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
10
<PAGE> 12
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 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 three U.S. patent applications pending and corresponding 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 believes the basis on which it
has made applications for the patent for process and product by process that
corresponds to the patent that has been issued for composition and method of use
is reasonable given the issuance of the latter patent; however, no assurance
can be given that the patents for which it has applied will be issued. 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
11
<PAGE> 13
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 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
12
<PAGE> 14
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 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
13
<PAGE> 15
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 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,
14
<PAGE> 16
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.
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.
15
<PAGE> 17
<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)
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)
<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) (.13) (.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.
16
<PAGE> 18
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 other
operating expenses of $498,566 is due
17
<PAGE> 19
primarily to higher levels of salaries and travel expenses of $92,522, increased
advertising of $143,250 and legal expenses of $198,003. These additional costs
pertain to preparation for product introduction 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.
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
18
<PAGE> 20
January 31, 1997 of $1,366,304 versus $0 for the same period in 1996.
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. The Company's marketing activities through an independent
broker network of five organizations has resulted in 34 orders for delivery in
April and May. The Company expects to invest $750,000 in the Louisiana
processing facility to reduce its reliance on outside processors and to contain
costs. The Company expects to hire 15 persons to operating the processing
facility. Management's projections for the next 12
19
<PAGE> 21
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. 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
NAME OF BENEFICIAL OWNER BENEFICIALLY PERCENT
- ------------------------ OWNED(1)(2) -------
------------
<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%
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
AMOUNT
NAME OF BENEFICIAL OWNER BENEFICIALLY PERCENT
- ------------------------ OWNED(1)(2) -------
------------
<S> <C> <C>
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.
(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
21
<PAGE> 23
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.
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, 1997
Chief 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
22
<PAGE> 24
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.
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,
23
<PAGE> 25
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 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
24
<PAGE> 26
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. 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
25
<PAGE> 27
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 $100,000 during such prior fiscal years.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- ------------
AWARDS
------
SECURITIES
OTHER ANNUAL UNDERLYING
YEAR SALARY($)(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 $147,000 and accrued interest
owed to the Company by Mr. Lane which was converted to compensation.
OPTION GRANTS
The following table provides information on stock options granted to the
Company's named executive officer during the fiscal year ended October 31, 1996.
26
<PAGE> 28
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM(2)
------------------------------------------------------ ------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR ($/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 $2,318,000
Executive Officer and President
</TABLE>
(1) The options vest with respect to one-third of the shares on each of the
first, second and third anniversaries of the grant date.
(2) Calculated from a base price equal to the exercise price of each option,
which was the fair market value of the Common Stock on the date of the
grant. The amounts represent only certain annual rates of appreciation.
Actual gains, if any, on stock option exercises and Common Stock holdings
cannot be predicted, and there can be no assurance that the gains set
forth on the table will be achieved.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
SHARES ----------------------------- ---------------------------------
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.
27
<PAGE> 29
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
28
<PAGE> 30
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.
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.
29
<PAGE> 31
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 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
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<PAGE> 32
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.
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.
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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.
<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 2
Second Quarter...................................... 2 1/4 3
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.
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<PAGE> 34
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.
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
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<PAGE> 35
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.
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 a reverse triangular merger of LipoGenics with and into
a wholly owned subsidiary of the Company on October 31, 1996, the Company issued
a total of 2,092,743 shares of Common Stock in exchange for all of the
outstanding shares of LipoGenics, to the 31 stockholders of LipoGenics all of
whom were existing shareholders of the Company, including eight directors or
their affiliates, and two consultants.
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<PAGE> 36
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.
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
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<PAGE> 37
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 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
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<PAGE> 38
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
the corporation's stockholders, or within 90 days immediately preceding the date
the acquiring person acquired such
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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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<PAGE> 41
(b) Exhibits
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
* Previously filed on January 21, 1997
** Previously filed on March 20, 1997 with Form 10/A (Amendment No. 1)
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<PAGE> 42
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: April 16, 1997 By: /s/ Ronald H. Lane
_____________________________________
Ronald H. Lane
President and Chief Executive
Officer
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<PAGE> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
[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> 59
[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> 60
[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> 61
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> 62
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.
