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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 COMMISSION FILE NUMBER 0-22011
BIONUTRICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEVADA 86-0760991
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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 PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
(TITLE OF EACH CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 31, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the closing
sales price of such stock as of such date on the Nasdaq SmallCap Market, was
$70,830,350. No other capital stock is outstanding. Shares of Common Stock held
by each officer and director and by each person who owned 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily
conclusive and may not apply for other purposes.
As of January 9, 1998, there were 17,876,705 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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PART I................................................................................. 2
Item 1. Business...................................................................
2
Item 2. Properties.................................................................
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Item 3. Legal Proceedings..........................................................
17
Item 4. Submission of Matters to Vote of Security Holders..........................
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PART II................................................................................
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......
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Item 6. Selected Consolidated Financial Data.......................................
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................
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Item 8. Financial Statements and Supplementary Data................................
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................
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PART III...............................................................................
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Item 10. Directors and Executive Officers of Registrant.............................
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Item 11. Executive Compensation.....................................................
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Item 12. Security Ownership of Certain Beneficial Owners and Management.............
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Item 13. Certain Relationships and Related Transactions.............................
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PART IV................................................................................
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............
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SIGNATURES.............................................................................
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FINANCIAL STATEMENTS...................................................................
F-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Bionutrics, Inc. ("Bionutrics" or the "Company") is a biopharmaceutical
company founded to discover and develop novel, biologically active compounds
derived from natural sources. Natural, biologically active compounds have
applications as ethical drugs as well as functional food ingredients and dietary
supplements. The Company intends to develop and market products that target
these three applications, and also to generate profit by marketing the
commodities that result from its processing of natural products.
The Company operates through four primary subsidiaries: LipoGenics, Inc.
("LipoGenics"), Bionutrics Health Products, Inc. ("BHP"), Nutrition Technology
Corporation ("Nutrition Technology") and the latter's subsidiary InCon
Technologies Inc. ("InCon"). LipoGenics serves as the research and development
arm of the Company focused on the discovery and development of drug products and
on providing scientific support for the Company's dietary supplement and
functional food business. BHP is the marketing company focused on delivering to
the dietary supplement and functional food market health-oriented products
derived from proprietary technology developed by LipoGenics and third parties.
Nutrition Technology is a food ingredient and commodity processing company. It
operates a rice bran extraction and processing plant in West Monroe, Louisiana.
InCon, acquired by the Company in October 1997, provides molecular distillation
and toll processing services for Nutrition Technology and other food and
industrial companies. InCon also designs and sells molecular separation
technology internationally, primarily for applications dealing with edible oils.
Its production facility is in Batavia, Illinois.
The Company's first product -- the cardiovascular dietary supplement
"evolvE(R)" -- was first introduced by BHP in April 1997. Research and
development leading to evolvE(R) began in 1990. The efficacy of
Clearesterol(TM), the active ingredient, with respect to the promotion of
cardiovascular health has been demonstrated in clinical trials that show it to
promote normal cardiovascular health three ways by helping to lower cholesterol
levels, providing cardiovascular antioxidant protection and promoting normal
circulation. The dietary supplement contains the all natural ingredient
"Clearesterol(TM)" patented by Bionutrics. Clearesterol(TM) is a tocotrienol
form of vitamin E, superior in critical ways to the standard tocopherol form of
vitamin E. Clearesterol(TM) is made from rice bran oil.
As a dietary supplement, evolvE(R) was introduced into the U.S. market
without the delays associated with the regulatory approval required for food
additives and drugs. Once the brand is fully established, the Company intends to
sell the active Clearesterol(TM) ingredient as a branded ingredient in other
companies' products. The Company together with an industry partner or partners
intends under arrangements yet to be concluded to pursue FDA approval for the
Clearesterol(TM) ingredient as a functional food ingredient.
BHP commenced its national sales effort of evolvE(R) in the third quarter
of 1997 through a network of brokers and began a national advertising campaign
on TV, radio and in print and expects to reach its target distribution by the
second quarter of 1998. Its distribution as of October 1997 was 32,500 stores
including the mass merchandise chains Wal-Mart and GNC. The Company has reached
agreement with K-Mart to carry evolvE(R) starting February 1998. With K-Mart,
evolvE(R) will be handled by every major mass merchandiser in the U.S. evolvE(R)
sales during this initial distribution period were $2.1 million and total sales
for the fiscal year 1997 were $2.9 million.
As used herein, the terms "Bionutrics" and the "Company" refer to
Bionutrics, Inc., a Nevada corporation, and its subsidiaries except where
otherwise indicated. The Company maintains its principal offices at 2425 East
Camelback Road, Suite 650, Phoenix, Arizona; its telephone number is (602)
508-0112.
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STRATEGY
The Company's goal is to become a recognized leader in the provision of
health products and medicines based on natural, biologically active compounds.
The Company intends to employ the following strategies:
- Discover and develop biologically active compounds from natural sources
with potential ethical drug, dietary supplement and functional food
applications. Research of biologically active compounds is expected to
result in the development of products appropriate for multiple
applications. LipoGenics will pursue drug applications and BHP will
exploit functional food and dietary supplement applications. Nutrition
Technology will process and sell edible oil and derivatives (such as gum
and wax) derived from the oil extraction process of natural products.
Nutrition Technology also supplies the Clearesterol(TM) ingredient used
in evolvE(R).
- Obtain regulatory approval for and market acceptance of
cardiovascular-related ethical and over-the-counter drugs. LipoGenics is
continuing its research and development of proprietary
pharmaceuticals -- both ethical and over-the-counter -- with the
objective of obtaining regulatory approval and commercial acceptance for
its cardiovascular product and for other health-related products.
LipoGenics expects to file its first investigational new drug application
in fiscal 1998 for compounds that address coronary heart disease. FDA
approvals and clinical studies along with marketing efforts for approved
drug products will be carried out with strategic joint venture partners
to be identified.
- Leverage product development and generate revenue by increasing its
presence in the dietary supplement and functional food markets. Where
products are developed, such as evolvE(R), that are appropriate for the
dietary supplement and functional food markets, the Company through BHP
will market such products as health products. BHP expects to build brand
recognition through the introduction and sales of quality products from
natural sources. BHP is focused on penetration of the dietary supplement
market for evolvE(R) through the expansion of its distribution channels
and expects to enter the international market through a joint venture
partner in 1998. BHP also anticipates the introduction of
Clearesterol(TM) in the functional food market.
- Offset research and development expenditures by generating revenue from
rice bran oil and derivative products and related services. The
extraction of oils and derivative commodity products from natural sources
is expected to generate revenue to offset production costs and support
product development. The first derivative products are from rice bran,
the basis of the Company's first commercial product. The Company also
intends to expand InCon's molecular separation business through the
design and sale internationally of edible oil processing plants.
MARKET AND COMPETITION
Dietary Supplements
The Company competes within the health and natural food market in the
United States. This market increased from an estimated $9.2 billion in sales in
1995 to $11.5 billion in 1996, a growth rate of 25%. Within this market, vitamin
and supplement sales from mid-1995 to mid-1996 amounted to approximately $6
billion. Of this vitamin and dietary supplement market, antioxidants are clearly
the growth leader, with vitamin E showing strong growth, resulting in estimated
retail sales in excess of $250 million in mass market sales alone in 1996. BHP
has only recently commenced its marketing and sales activities and currently
does not have a significant share of the dietary supplement market.
The Company believes that evolvE(R) competes or will compete with three
other types of compounds: (1) standard vitamin E (a-tocopherol), (2) other
non-patented tocotrienols and (3) non-tocotrienol products claiming to
demonstrate benefits similar to or of the sort provided by the evolvE(R) dietary
supplement.
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Standard tocopherol vitamin E is established in the market and has
accelerating sales. It is manufactured from both natural and chemically
synthesized sources. Several multi-billion dollar manufacturers, including
Hoffmann LaRoche, ADM, Henkel and BASF, market tocopherol vitamin E. The least
expensive forms of vitamin E tend to be synthetic and have a substantial price
advantage over the tocotrienol form of vitamin E (Clearesterol(TM)) used in
evolvE(R). However, evolvE(R)'s Clearesterol(TM) ingredient has been shown to be
a far more powerful antioxidant than standard vitamin E. Moreover,
Clearesterol(TM) has also been shown to lower cholesterol, whereas standard
vitamin E does not. Informing the consumer of the evolvE(R) dietary supplement
difference, and the importance of that difference, will directly impact
Bionutrics's marketing success.
Introduction of other tocotrienol products by competitors is expected. The
Company believes the evolvE(R) dietary supplement has advantages over these
other expected products. Solgar and Tree of Life market a generic tocotrienol
product with no statements of nutritional support on the label.
Other dietary supplement products including Cholestin (from red yeast
rice), Cho-less-terol, deodorized garlic and Cholestrex all have customer
overlap with the evolvE(R) dietary supplement. The Company believes that these
products do not have the same benefit profile of evolvE(R), which, judging from
product claims, is the only dietary supplement that helps maintain
cardiovascular health three ways (see above under "Introduction.")
With respect to competition for evolvE(R), hypocholesterolemic
(cholesterol-lowering) prescription drugs could switch to over-the-counter. The
Company cannot predict whether or for how long past-generation
hypocholesterolemic drugs will remain available by prescription only. The
Company believes that evolvE(R)'s broader, natural, more complete cardiovascular
positioning should help to set it apart from more narrowly-positioned,
past-generation hypocholesterolemic drugs. The Company does not believe it
competes directly with current cholesterol-lowering drugs such as lovastatin
(Mevacor) and simvastatin (Zocor) by Merck & Co. as these products require a
prescription and do not provide antioxidant protection, which recent research
indicates is more important than lowering cholesterol in maintaining
cardiovascular health. The Company believes that current prescription drugs are
considered to address hypercholesterolemia or what health care practitioners may
view as a disease state requiring drug intervention and medical care. The
Company believes that such drugs constitute a separate market and the evolvE(R)
dietary supplement will therefore not compete directly in this market.
Marketing Plan
BHP's strategy with respect to its initial product evolvE(R) is to promote
sales through a marketing plan designed to promote product benefits and
cultivate customer loyalty and brand identification. The Company has applied for
trademarks throughout the world for the evolvE(R) dietary supplement and the
Clearesterol(TM) ingredient in countries significant to its marketing plan. The
evolvE(R) brand name was registered as a U.S. trademark on October 21, 1997. The
trademarks will be used to identify the Company's proprietary and novel
tocotrienol 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 higher than
normal cholesterol, but without disease conditions, or who seek antioxidant
protection or who otherwise wish to maintain cardiovascular health, are the
prime marketing target. It is estimated that over 58 million people in the
United States suffer from cholesterol levels higher than normal or recommended
for good cardiovascular health but below the hypercholesterolemic level where
physician attention and drug intervention may be indicated.
BHP is marketing the Clearesterol(TM) ingredient as its own branded dietary
supplement, evolvE(R). The evolvE(R) dietary supplement is available in a gelcap
form (7.5 clear oval) with a dosage of 25 mg. There are several package sizes
with different capsule counts from which to choose. The active Clearesterol(TM)
ingredient is highlighted in the marketing.
As the evolvE(R) dietary supplement and Clearesterol(TM) ingredient brands
become recognized, the Company intends to implement the second step of its
United States marketing strategy. In this phase, BHP
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will sell the Clearesterol(TM) ingredient as a branded ingredient for use in
other companies' products. The Company intends to employ a strategy similar to
the successful NutraSweet branding strategy for the product Equal in which
NutraSweet is the proprietary ingredient. BHP plans for the Clearesterol(TM)
ingredient to be sold in a bulk form for use in such products as multi-vitamins,
specially formulated dietary supplements, functional foods and other dietary
supplement applications. In addition, concurrently with this marketing phase,
the Company intends as a third phase to explore marketing opportunities through
strategic distribution partners in Europe, the Middle East and Asia. The
international market represents an opportunity to increase revenue and at the
same time spread and decrease regulatory and market risks.
In all three phases of its marketing plan, BHP will utilize its internal
resources for marketing activities. 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 health products. Second, it will implement an
educational and advertising campaign to create public awareness of the
Clearesterol(TM) ingredient, its health benefits and its brand name.
BHP intends to develop its U.S. market by working primarily through mass
merchandise retailers and secondarily health food stores. The mass merchandise
and health food stores marketing program will be managed by BHP's staff
primarily through brokers. BHP also intends to work with alternative medicine
practitioners and engage in multi-level marketing and telemarketing. The
Clearesterol(TM) ingredient will be marketed under BHP's label as well as third
party private labels with the Clearesterol(TM) ingredient identified by logo.
For example, BHP has entered into an agreement with Aspen Benefits Group to
market evolvE(R) to healthcare practitioners under the trade name "Cardiem," but
identifying the active ingredient as Clearesterol(TM). Other markets will be
approached through potential relationships with partners, brokers, joint
venturers or license arrangements. Bionutrics plans for all products sold with
Clearesterol(TM) to be identified by the Clearesterol(TM) ingredient logo, even
if sold through an independent organization under a private label.
RETAIL. The Company believes it can obtain a faster introduction of its
products and greater market penetration by concentrating on mass merchandise
retailers (over 130,000 stores) and the larger health food chains (over 4,000
stores) such as GNC. Primary marketing efforts will continue to focus on
expanding this distribution. As of October 31, 1997, the Company's initial
product evolvE(R) was carried by some 32,500 stores nationwide and is now
carried in, among others, Wal-Mart, GNC, Kroger, Walgreens and Eckerds. K-Mart,
representing over 1,600 stores in the U.S., has agreed to carry evolvE(R)
starting in February 1998. With K-Mart, evolvE(R) will be represented by all
mass merchandisers.
HEALTH CARE PRACTITIONERS. The alternative medicine market is estimated to
encompass over 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 represent a significant portion of the dietary supplement market. BHP has
begun to market the evolvE(R) dietary supplement to these practitioners under
the trade name Cardiem with labeling that the product contains Clearesterol(TM).
MULTI-LEVEL MARKETING. United States retail sales of all products by
direct sales/multi-level marketing organizations neared $18 billion according to
the Direct Selling Association. There are an estimated 3,000 direct
sales/multi-level marketing companies. Dietary supplements, personal care and
household products represent the primary sales categories for this industry. BHP
intends to contract with leading firms to market the Clearesterol(TM) ingredient
in dietary supplement products under private labels displaying the
Clearesterol(TM) ingredient logo.
ADVERTISING. BHP's advertising efforts for the evolvE(R) dietary
supplement and the Clearesterol(TM) ingredient 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. Starting in August 1997, Bionutrics ran TV ads featuring
Robert Kowalski, author of the New York times best seller, The 30-Day
Cholesterol Cure. Radio spots featuring Dr. Kowalski's endorsement had begun in
June 1997. Point-of-sale brochures have also been prepared to educate retailers
and consumers. Bionutrics also intends to distribute special brochures to
pharmacists and to sponsor public education of the benefits of tocotrienols, the
special form of vitamin E found in evolvE(R). Moreover, the Company intends to
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utilize scientific and medical journals, health and general publications and
electronic media to extend awareness of ongoing research on tocotrienols, and to
help keep the evolvE(R) dietary supplement highly visible to the consumer. The
Company also plans to sponsor continuing research on the efficacy of evolvE(R)
and its cholesterol-lowering, anti-oxidation and healthy blood circulation
properties.
Drugs
The Company's first drug candidates are expected to relate to compounds
that address the incidence of heart disease and stroke, the cause of
approximately one out of every two adult deaths. Cholesterol-lowering or
hypocholesterolemic drugs, in particular "statin" drugs, represent a
multi-billion dollar category. The Company does not intend to compete with the
successful statin hypocholesterolemic market, but to direct its technology to
other elements associated with good cardiovascular health.
The Company expects to pursue FDA approvals and conduct clinical studies
for approval of portions of its technology as drugs. Because the pharmaceutical
market is highly competitive and requires extensive resources to enter, the
Company expects to pursue joint venture arrangements or strategic corporate
partnerships for this purpose. No specific arrangements have been entered into
and no assurance can be given that partners can be found or that terms
acceptable to the Company can be negotiated. The Company does not have any
products that have been submitted for regulatory approval and all its research
is focused on compounds that are in the preclinical stage of development.
EVOLVE(R)
The evolvE(R) dietary supplement contains the Clearesterol(TM) ingredient,
an all-natural complex extracted from rice bran oil through a proprietary
(patent pending) processing method. Rice bran is a low cost by-product of rice
milling and is in good supply, although price can vary widely. There is
sufficient rice bran produced in the U.S. to exceed the Company's anticipated
needs. The rice bran is converted to rice bran oil and through molecular
distillation the oil is converted into Clearesterol(TM) and encapsulated in a
soft gel. The proprietary process involves "stabilization of rice bran" and
selective extraction and concentration of the rice bran oil.
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 harvest to harvest and by
harvest from plant to plant. The Company tightly monitors processing and
controls quality and the Clearesterol(TM) ingredient concentration as part of
its overall quality management program. The Company maintains a fully equipped
analytical laboratory to provide quality assurance and control output from one
batch to the next. Bionutrics's production strategy and methods are also
designed specifically to insure consistency of potency.
Rice bran has been reported in scientific literature to contain a variety
of hypocholesterolemic (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, based upon
various test models these agents require ingredient concentrations of 5,000
parts per million to 200,000 parts per million to effect substantial reduction
in cholesterol. The evolvE(R) dietary supplement contains a class of compounds
called tocotrienols, which are in turn part of a larger class of compounds
called tocols. Standard vitamin E ((LOGO)-tocopherol) is also part of this
larger class. All tocols, to varying degrees, are antioxidants. Many, but not
all tocotrienols, lower cholesterol. The evolvE(R) dietary supplement
ingredient, Clearesterol(TM), has been shown to contain the most active
antioxidant and cholesterol-lowering activity of all natural tocols,
tocotrienols or tocopherols.
TOCOTRIENOLS
Standard vitamin E ((LOGO)-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
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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 saturated phytyl C(16) side
chain ((LOGO)-, (LOGO)-, (LOGO)-, (LOGO)-tocotrienol) and four compounds with a
tocotrienol structure having an unsaturated phytyl C(16) side chain bearing
three double bonds ((LOGO)-, (LOGO)-, (LOGO)-, (LOGO)-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, University of Wisconsin, Madison, Wisconsin, led
research that demonstrated the cholesterol-lowering capability of
(LOGO)-tocotrienol. A patent was received by the Foundation for the use of
(LOGO)-tocotrienol in lowering cholesterol and the patent is now owned by
LipoGenics. Subsequent work performed with animal models in support of
LipoGenics's patent has shown the other known tocotrienols to be of varying
degrees of effectiveness in lowering cholesterol, ranging from reductions in LDL
(low density lipoprotein cholesterol, commonly referred to as "bad cholesterol")
of approximately 20% for (LOGO)-tocotrienol to approximately 40% for
(LOGO)-tocotrienol and (LOGO)-tocotrienol. P(25)(TM) (2-desmethyl tocotrienol)
is a new, particularly active, isomer or type of tocotrienol shown in these same
trials to be up to 150% more effective than these known tocotrienols.
P(25)(TM)(2-desmethyl tocotrienol), together with other novel tocotrienol and
tocotrienol-like compounds, is found in rice bran oil as part of a tocotrienol
rich fraction (TRF(25)(TM)). A patent on P(25)(TM)(2-desmethyl tocotrienol) has
been granted to LipoGenics by the U.S. Patent and Trademark Office (Patent No.
5,591,772). TRF(25)(TM) is extracted from rice bran oil by a proprietary process
for which Bionutrics has submitted a patent application.
Initial research with TRF(25)(TM) 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
hypocholesterolemic (cholesterol-lowering) efficacy. A variety of industry and
academic studies have shown a correlation between a decrease in blood serum
cholesterol levels and good cardiovascular health. A physician-controlled and
independently-administered double-blind human trial conducted by LipoGenics has
demonstrated the effectiveness of TRF(25)(TM). Results from this study support
earlier animal findings of significant LDL reduction by demonstrating an average
reduction of total cholesterol in humans of 16% after 4 weeks and 24% when
combined with a low-fat diet before and during the study.
Tocol antioxidants (including vitamin-E and the Clearesterol(TM)
ingredient) in blood appear to reduce damage caused by oxidizing or "free
radical" agents to blood vessel wall cells. The Clearesterol(TM) ingredient
research indicates that it is a far more effective antioxidant than standard
vitamin-E ((LOGO)-tocopherol) or any other known tocols and, unlike the
antioxidants standard vitamin E or beta-carotene, the Clearesterol(TM)
ingredient helps to reduce blood cholesterol levels. The Clearesterol(TM)
ingredient also has been shown to promote normal circulation. For these reasons,
the Company believes the Clearesterol(TM) ingredient represents an important
advancement in dietary supplement technology that promotes cardiovascular health
and that also significantly outperforms vitamin E as an antioxidant.
PROCESSING, COMMODITY PRODUCTION AND OTHER SERVICES
Nutrition Technology operates a rice bran extraction and processing plant
in West Monroe, Louisiana. In addition to manufacturing Clearesterol(TM) for
inclusion in the Company's evolvE(R), it produces rice bran oil and other
derivative products marketed as commodities. These include processed rice bran
as a food component for livestock and gums and waxes for food and cosmetic
purposes.
The Company acquired InCon in October 1997 to increase its internal
production capability for its first product evolvE(R), and enhance its ability
to generate revenue from toll processing and molecular distillation for other
customers. At its Batavia, Illinois, facility InCon provides molecular
separation services for Eastman Chemical, General Electric and Monsanto among
others. Molecular separation toll processing for food and other industrial uses
is an expanding market in the U.S. InCon expects to increase its application of
such technology especially in the edible oils area.
The Company expects to capitalize on the expertise of InCon Technologies as
a consultant in the design and construction oversight of edible oil processing
plants as well as the sale of related equipment.
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PATENTS AND TRADEMARKS
Bionutrics's first U.S. patent, obtained through its R&D subsidiary,
LipoGenics (U.S. patent 5,591,772), was issued in January 1997. This patent
through composition of matter claims secures protection for several novel
vitamin E-like compounds discovered by Bionutrics, and through method and
process claims, protects methods for using and processes for producing those
compounds. The patent also serves to protect the Clearesterol(TM) ingredient
contained in Bionutrics's evolvE(R) brand dietary supplement. Bionutrics also
obtained U.S. trademark protection for the evolvE(R)brand name during fiscal
1997 as part of its plan to develop product identity and brand name recognition.
As of December 31, 1997, Bionutrics had eight U.S. patent applications
pending (with numerous foreign counterparts) covering novel compounds, methods
and processes discovered through Bionutrics's internal research program. One of
these U.S. patent applications, a continuation of the January 1997 patent, was
awarded a Notice of Allowance from the United States Patent and Trademark Office
in October 1997. The resultant patent (expected to issue in the second quarter
of 1998) will more broadly protect the novel tocotrienol compounds discovered by
Bionutrics (including those present in evolvE(R)) and methods for their use.
Bionutrics has obtained additional patent rights by acquisition. In late
1995, LipoGenics acquired a patent from the Wisconsin Alumni Research Foundation
(U.S. patent 4,603,142) covering the use of (LOGO)-tocotrienol for lowering
cholesterol. Negotiations are ongoing for several additional patents relating to
technology of interest to the Company.
GOVERNMENT REGULATION
Dietary Supplements
The Federal Food and Drug Administration ("FDA") is the most active
regulatory authority exercising jurisdiction over vitamins, minerals and other
dietary supplements. It regulates the Company's products under the Food, Drug
and Cosmetic Act ("FDCA") and regulations promulgated by FDA to implement this
statute. In 1976 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, FDA is precluded from establishing
maximum limits on the potency of vitamins, minerals and other dietary
supplements, from limiting the combination or number of any vitamins, minerals
or other food ingredients in dietary supplements and from classifying a vitamin,
mineral or combination of vitamins and minerals as a drug solely because of its
potency. However, the Proxmire Amendment did not affect FDA's authority to
determine that a vitamin, mineral or other dietary supplement is a new drug on
the basis of disease claims made in the product's labeling. Such a determination
would require deletion of the disease claims, or the Company's submission and
FDA's approval of a new drug application, which entails costly and
time-consuming clinical studies over successive phases.
In 1990 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 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
seldomly, including in connection with the use of calcium for prevention of
osteoporosis and the use of folic acid for prevention of neural tube defects
and, it is understood, applications therefor have been few. 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 FDA. Significantly, the NLEA precludes any
state from mandating nutritional labeling, nutrient content claim or health
claim requirements that differ from those established under the NLEA, thereby
eliminating the risk that the Company's products might be subject to
inconsistent labeling requirements.
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<PAGE> 10
In October 1994 the FDCA was amended by enactment of the Dietary Supplement
and Health Education Act ("DSHEA"), which introduced a new statutory framework
governing the composition and labeling of dietary supplements. In the Company's
judgment, DSHEA is in some parts favorable to the dietary supplement industry
while imposing additional burdens in other parts. With respect to composition,
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.
As for labeling, 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 that would be interpreted as a health claim under the
NLEA, that is, generally a claim that the dietary supplement will lower the risk
of a disease. A company making a statement of nutritional support must possess
adequate substantiating scientific evidence for the statement, disclose on the
label that FDA has not reviewed the statement and that the product is not
intended to mitigate, treat, cure or prevent disease, and notify FDA of the
statement within 30 days after its initial use. There can be no assurance that
FDA will, if it makes a demand therefor, accept as adequate in support of the
Company's product structure/function claims substantiating scientific evidence
possessed by the Company. There can be no assurance that FDA will not determine
that a given statement of nutritional support the Company decides to make is a
disease claim rather than an acceptable nutritional support statement relating
to body function or structure. Such a determination would require deletion of
the disease claim or, if it is to be used at all, submission by the Company and
the approval by FDA of a new drug application (which would entail costly and
time-consuming clinical studies) or revision to a health claim, which would, as
noted above, require demonstration of significant scientific agreement and prior
FDA approval. There can be no assurance that FDA will accept as adequate for a
health claim such substantiation as is amassed for nutritional support claims
and thus, the Company, if the health claim is to be used at all, may be required
to document or await significant scientific agreement on the claim's basis.
The Company's chief structure/function claims for evolvE(R) are that it
works to help lower cholesterol, act as a powerful antioxidant and promote
normal circulation.
DSHEA allows 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 under certain conditions. 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 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 the
evolvE(R) dietary supplement with FDA with respect to the product's statements
of nutritional support. Although DSHEA only requires companies to notify FDA,
the agency 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. On January 29,
1997, FDA responded with a courtesy letter raising questions concerning one of
Bionutrics's statements of nutritional support. The Company has made labeling
changes -- to add a statement on the importance of a low-fat diet and
exercise -- in deference to FDA's courtesy letter, but there is no assurance
that FDA will be satisfied with the Company's revised claim.
In September 1997 FDA published final regulations to implement certain
DSHEA labeling provisions, which become effective in March 1999. These new
regulations are being reviewed by the Company, and will require material changes
in the labeling of all dietary supplement products, including products sold by
the
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<PAGE> 11
Company. DSHEA also requires that dietary supplements be prepared, packed and
held under conditions that meet the good manufacturing practice ("GMP")
regulations to be promulgated but not yet proposed by FDA with respect to
dietary supplements. Therefore, there can be no assurance that the Company's
proposed production facilities will meet all GMP regulations when issued by 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, 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 market 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 marketing, distribution and sale of such
products, and the Company will be subject to such regulations in connection with
the manufacture of such products. However, the Company's manufacturing
contractors are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control except by
contract. 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 expected to be
independent companies over which the Company will have no control except by
contract.
FDA has broad authority to enforce the provisions of the laws and
regulations 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 FDA or other regulatory authorities, the repeal
of laws or regulations that the Company might consider favorable or more
stringent interpretations of current laws or regulations. 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, may have on its business.
They could 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
additional scientific substantiation. Any of or all such requirements could have
a material adverse effect on the Company's results of operations and financial
condition.
Drugs
Products that are intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in humans are subject to extensive
governmental regulation. All such products must undergo extensive
characterization, and are subject to regulation for quality assurance,
toxicology and safety. Products containing such agents must undergo thorough
preclinical and clinical evaluations of performance as to safety and efficacy
under approved protocols.
The Company intends to pursue regulatory approval for the pharmaceutical
and related uses of its future drug products. Such pharmaceutical products will
be subject to the regulatory approval processes for new drugs. To take a
pharmaceutical product from the discovery stage through research and preclinical
development to the point where the Company and/or its partners can make the
necessary filings (to the FDA
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<PAGE> 12
and governmental agencies outside the U.S.) to conduct human clinical trials may
take several years. Regulatory requirements for human clinical trials are
substantial, depend upon a variety of factors, vary by country, and will further
add to the time necessary to determine whether a product candidate can be
approved for human use. The Company does not have any pharmaceutical products
that have commenced this trial process. All of its prospective products are in
various stages of preclinical and clinical development. There can be no
assurance that the Company's proposed drug products will prove to be
efficacious, or safe and effective, under these regulatory procedures.
EMPLOYEES
The Company currently employs 112 people, including 12 with consulting
agreements. Of the current employees and consultants, 14 are involved in
marketing and sales, 93 in operations and five in corporate and general
administration.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of Bionutrics are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ---- -----------------------------------
<S> <C> <C>
Ronald H. Lane, Ph.D................................. 53 Chairman of the Board,
Chief Executive Officer
and President
George E. Duck, Jr................................... 40 Vice President of Finance,
Secretary and Treasurer
J. Robert Horton..................................... 58 Vice President and
General Counsel
D. Michael Wells..................................... 48 President, Nutrition
Technology Corporation
John R. Palmer....................................... 55 Chief Executive Officer and
President, InCon Technologies
Inc.
Howard Schneider, Ph.D............................... 59 President, LipoGenics, Inc.
Steven H. Friedman................................... 52 Executive Vice President,
Marketing and Sales,
Bionutrics Health Products, Inc.
Sandra Gotham Meehan................................. 49 Senior Vice President/
Director of Corporate
Communications, Bionutrics Health
Products, Inc.
</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 served as Chief
Executive Officer and President of LipoGenics from July 1992 to October 1997.
Dr. Lane is responsible for directing Bionutrics's corporate development and
growth. He received a Ph.D. and post-doctorate NIH fellowship from the
University of Wisconsin (Madison) in Neurophysiology. Dr. Lane spearheaded
development of the technology at LipoGenics. He was employed previously with
Norcap Financial Corporation, The National Western Group, Inc. (an investment
company), and Taylor Pearson Corporation.
GEORGE E. DUCK, JR., has served as Vice President, Finance, and Secretary
and Treasurer since October 1996 and has served as Vice President, Secretary and
Treasurer of LipoGenics since November 1996. Mr. Duck, who is a CPA, was Vice
President and Chief Financial Officer of Custom Foot Corporation from March 1996
to October 1996. He was Vice President and Chief Financial Officer of the
Coca-Cola Bottling
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<PAGE> 13
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.
J. ROBERT HORTON has served as Vice President and General Counsel since
June 1997. Prior to joining Bionutrics, Mr. Horton had been in private practice
in New York and California for over 25 years and has served in New York City and
New Jersey government posts. He began with Cravath, Swaine & Moore, New York,
and was most recently a corporate, securities and banking partner with Friedman
Siegelbaum, Roseland, New Jersey, and New York City. He was graduated with
honors in economics from the University of Virginia and with honors in law from
the University of Chicago.
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 also served as a director of LipoGenics from
July 1992 until October 1996. He served as General Manager of Zapata Protein
(USA), Inc. from 1995 to 1996. He is an inventor of portions of the technology
held by Bionutrics. 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.
JOHN R. PALMER has served as Chief Executive Officer and President of InCon
Technologies since its acquisition by Bionutrics in October 1997. Mr. Palmer was
Chief Executive Officer and an owner of InCon Technologies at the time of the
acquisition. Prior to organizing InCon Technologies in 1990 he was employed at
E.I. DuPont for 22 years in various technical and management jobs. Mr. Palmer
was graduated from Cornell University in 1966 with a masters degree in chemical
engineering and marketing.
HOWARD SCHNEIDER, PH.D., has served as President of LipoGenics since
November 1997. Before joining LipoGenics, Dr. Schneider served from 1991 to 1997
as Senior Vice President, Technology at DynaGen, Inc., a Cambridge,
Massachusetts, firm that develops proprietary therapeutic and medical device
products. Prior experience includes positions as Senior Vice President,
Technology (and partner) at McCann Healthcare-Bogart Delafield Ferrier,
co-founder and President of Bioassay Systems Research Corporation and research
chemist at Merck Sharp and Dohme. Dr. Schneider has authored over 60 scientific
articles and holds several patents relating to therapeutic uses of natural
products. He earned his Ph.D. from the Department of Pharmacology at Yale
University School of Medicine and served as a National Science Foundation
Postdoctoral Fellow at Oxford University, Department of Pharmacology.
STEPHEN FRIEDMAN has served as Executive Vice President, Marketing and
Sales, of Bionutrics Health Products 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 aid products.
Prior to Carter Wallace he held officer positions in consumer marketing and
sales at Lever Brothers.
SANDRA GOTHAM MEEHAN has served as Senior Vice President/Director of
Corporate Communications of Bionutrics Health Products, Inc., since June 1997.
Ms. Meehan was Managing Partner of Gotham Meehan Partners, a positioning and
identity consulting firm she founded in 1993. Previously, she was a Senior Vice
President at Siegel & Gale, New York, where she managed positioning and identity
programs for such clients as Banc One, U.S. Trust, CS First Boston and the
American Medical Association. She has also held executive positions with Young &
Rubicam, Ogilvy & Mather Partners and Steuben Glass, a division of Corning, Inc.
Ms. Meehan received B.A. and M.A. degrees from Stanford University.
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<PAGE> 14
SCIENTIFIC ADVISORY BOARD
In addition to Dr. Salser, a member of the Company's Board of Directors and
a Professor of Molecular Biology at the University of California, Dr. Asaf A.
Qureshi serves on the Company's Scientific Advisory Board and is a consultant to
the Company. Dr. Qureshi is recognized internationally for his research in
vitamin E-like compounds. He has been conducting analytical chemistry and
biochemistry research for LipoGenics since 1989 and currently 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 in England; 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.
SPECIAL CONSIDERATIONS
Limited Operating History; Accumulated Deficit. The Company commenced
sales of its first product late in the second quarter of fiscal 1997. Additional
revenue sources have only recently been acquired or developed. 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 $17.9 million through its
fiscal year ended October 31, 1997. The Company's operations to date have
related primarily to research and development activities and start-up and launch
of its first product evolvE(R). There can be no assurance that sales of
evolvE(R) or such other products if any it may introduce will achieve
significant levels of market acceptance. As a result, the Company's business
will be subject to all 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 increases in raw
product and unforseen difficulties in its manufacturing processes, uncertain
market acceptance and the absence of an operating history. Therefore, there can
be no assurance 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.
Need for Additional Capital. To become and remain competitive, the Company
will be required to make significant investments in research and development on
an ongoing basis. The Company from time to time, including in the near term,
will be required to seek additional equity or debt financing to provide the
capital required to maintain or expand the Company's marketing and production
capabilities. The timing and amount of any such capital requirements cannot be
predicted at this time. There can be no assurance that any such financing will
be available on acceptable terms. If such financing is not available 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 and 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 opportunities in the
ethical drug market based on the Company's technology, the depth and nature of
edible oil and derivative products markets, the size of the dietary supplement
market, the Company's anticipated share of these markets and the estimated price
and acceptance of the Company's projected products. There can be no assurance
that the Company's assessments regarding these 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 that may be beyond the control of the
Company or that cannot be predicted at this time. Factors beyond the Company's
control may include changes in the pharmaceutical, edible oil (and processing
derivatives) and 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.
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<PAGE> 15
Competition. Competition in the dietary supplement industry is vigorous
with a large number of businesses present. Competition is based principally upon
price, quality of products, customer service and marketing support. The Company
markets to mass merchandise and high volume health-food retailers and faces
competition from vitamin and other health related products that compete for the
same shelf space and in some cases for the same customers. 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. In addition, the Company's retail customers are not generally
bound to purchase products from the Company for any significant length of time.
Although the Company has entered into agreements with certain of its retail
customers, these agreements can generally be canceled on short notice without
cause and with minimal or no liability by such customers. The loss of a large
customer or a number of customers, or a significant reduction in purchase volume
by or financial difficulty of such customers, for any reason, could have a
material adverse effect on the Company. If the Company is not successful in
competing in the dietary supplement market, it may not be able to recognize its
business objectives. Competition in the pharmaceutical area is intense and
competitors have substantially greater resources. The Company will be required
to obtain joint venture partners to effectively enter the drug market.
Governmental Regulation. The processing, formulation, packaging, labeling
and advertising of the Company's products are subject to regulation by FDA and
FTC. Although Congress has recently recognized by enacting DSHEA the potential
impact of dietary supplements in promoting the health of U.S. citizens, there
are a number of new provisions not yet subject to judicial interpretation with
respect to FDA's regulation of dietary supplements and the ultimate effect of
DSHEA cannot be predicted. 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. FDA has recently promulgated
regulations effective in March 1999 in part to implement DSHEA and proposals
have been made to modify or change the provisions of DSHEA. It is impossible to
predict whether those proposed changes will become law or the full effect that
such regulations will have on the business and operations of the Company. The
regulations are still being reviewed by the Company. Among other changes they
will require material changes in the labeling of all dietary supplement
products, including products sold by the Company.
Pending FDA Regulatory Action Against Competitive Product. In May 1997 FDA
took regulatory action against a competitor of the Company with regard to its
cholesterol-lowering product introduced in November 1996. The pending action
involves the regulatory classification of a dietary supplement containing an
ingredient promoted as being the same as or similar to an ingredient contained
in a prescription drug product used to lower cholesterol, and raises issues that
do not affect the Bionutrics evolvE(R) product. However, the respondent
competitor also combines its claim to lower cholesterol with other claims that
suggest that cholesterol reduction will both reduce formation and facilitate
regression of plaque, which, according to FDA, are claims to mitigate or prevent
disease not permitted for a dietary supplement under DSHEA. While Bionutrics
does not make such claims and would not be bound by a regulatory determination
involving its competitor's product, nonetheless a negative determination on the
competition's labeling could have a bearing on "lowering cholesterol" claims in
general, and thereby have an adverse effect on the marketing and advertising
programs currently being used for the evolvE(R) product.
Reliance on Limited Number of Products. To date the Company's only product
is the evolvE(R) dietary supplement (plus the physician's private label of
evolvE(R), Cardiem), a patented tocotrienol vitamin E complex, Clearesterol(TM),
derived from rice bran. The Company intends to market Clearesterol(TM) for
inclusion in other company's products and to produce derivative products. The
dependence on one product increases risk since a decline in the market demand
for the Company's product or the products of other companies that may utilize
Clearesterol(TM) could have a significant adverse impact on the Company. The
Company is just beginning to market derivative products and no assurance can be
given that it can capture a share of the market for such products.
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<PAGE> 16
Product Liability Claims. As a marketer of dietary supplements that are
ingested by consumers, the Company may be subject to various product liability
claims, including, among others, that its products contain contaminants or
include inadequate instructions as to use or inadequate warnings concerning side
effects and interactions with other substances. While no such claims have been
made to date and the Company maintains product liability insurance, there can be
no assurance that product liability claims and the resulting adverse publicity
will not have a material adverse effect 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 value of its technology and secure patents and
make patent applications. The Company has chosen to apply for and secure and
acquire by acquisition 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.
Effect of Unfavorable Publicity. The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of dietary supplements. There can be no assurance that future
scientific research or publicity will not be unfavorable to the dietary
supplement market or any particular product, or inconsistent with earlier
favorable research or publicity. Future reports of research that are perceived
as less favorable or that question such earlier research could have a material
adverse effect on the Company. Because of the Company's dependence upon consumer
perceptions, adverse publicity associated with adverse effects resulting from
the consumption of the Company's products or any similar products distributed by
other companies could have a material adverse impact on the Company. Such
adverse publicity could arise even if the adverse effects associated with such
products resulted from consumers' failure to consume such products as directed.
In addition, the Company may not be able to counter the effects of negative
publicity concerning the efficacy of its products.
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. 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 except for Messrs.
Friedman and Palmer. The loss of the services of Dr. Lane or other executive
officers and key employees could have a material adverse effect on the business
of the Company.
Dependence on Suppliers and Manufacturers. While the Company has rice bran
supply agreements, they are not long term. The Company may encounter
difficulties in obtaining on commercially reasonable terms quality rice bran for
use in its manufacturing process, which could result in production delays or the
inability to fulfill orders on a timely basis. The Company relies on outside
sources for evolvE(R) encapsulation. In the event its contract manufacturers
cannot meet the Company's manufacturing and delivery requirements, the Company
may suffer interruptions of delivery while it arranges for alternative
manufacturing sources. Access to replacement sources could be delayed if the
Company must first complete a review of the manufacturer's quality control and
capabilities.
Risks Associated with International Markets. The Company may experience
difficulty entering international markets due to greater regulatory barriers,
the necessity of adapting to new regulatory systems and problems related to
entering new markets with different cultural bases and political systems.
Operating in international markets exposes the Company to certain risks,
including, among other things: (i) changes in or interpretations of foreign
regulations that may limit the Company's ability to sell certain products or
repatriate profits to the United States; (ii) exposure to currency fluctuations;
(iii) the potential imposition of trade or foreign exchange restrictions or
increased tariffs; and (iv) political instability. As the Company expands into
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<PAGE> 17
international operations, these and other risks associated with international
operations are likely to be encountered.
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 patent rights
are held by its subsidiary LipoGenics. There can be no assurance that the
Company's patents and patent applications are sufficiently comprehensive to
protect evolvE(R) or other Company products intended. The process of seeking
further patent protection can be long and expensive, and there can be no
assurance that all patents will issue from the eight currently pending or future
patent 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. While the Company believes the basis on which it has made
further patent applications correspond to the patent that has been issued for
composition and method of production and use and is reasonable given the
issuance of the latter patent, there can be no assurance that the patents for
which it has applied will be issued. The Company may be subject to or may be
required to initiate interference proceedings in the U.S. Patent and Trademark
Office. Such proceedings could demand significant financial and management
resources. The Company may receive communications alleging possible infringement
of patents or other intellectual property rights of others. The Company believes
that in most cases it could obtain necessary licenses or other rights on
commercially reasonable terms, but no assurance can be given on this point or
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 and may
continue to be at least for the immediate future a limited public market for the
Common Stock of the Company. Despite its recent listing on Nasdaq SmallCap there
can be no assurance that an active public market will be developed or sustained
for the Company's Common Stock. 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 and
the Company's ability to raise necessary capital and finance possible
acquisitions including of technology.
Shares Eligible for Sale. Of the 17,814,205 shares outstanding as of
October 31, 1997, 15,277,503 are eligible for resale in the public markets. Of
these eligible shares, 11,186,887 shares are eligible for resale in the public
markets subject to compliance with Rule 144 under the Securities Act of 1933, as
amended, and 4,090,616 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 one year has 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
and 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 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 such shares
under Rule 144(k) without regard to any of the volume limitations or other
requirements described above.
ITEM 2. PROPERTIES
FACILITIES AND EQUIPMENT
The total rental expense for fiscal 1997 was $242,000.
16
<PAGE> 18
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. An expansion of the Phoenix office is planned effective January 31,
1998, for 2,000 square feet, raising the monthly rent to $12,000. The Company
leases two production locations. The first location, for Nutrition Technology is
in Monroe, Louisiana, and is approximately 50,000 square feet. The term of the
lease is for 24 months, commencing September 1, 1997, at the rate of $30,000 per
month for the first six months, $50,000 per month for the next twelve months and
$75,000 per month for the remaining six months. The second production location,
for InCon, is in Batavia, Illinois, and contains approximately 24,000 square
feet. The lease term is for 10 years, commencing August 1, 1997, and requires
monthly payments of $13,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock traded on the Nasdaq OTC Bulletin Board under
the symbol BNRX until November 1997. The high and low closing bid information
for the Company's Common Stock during the year ended October 31, 1996, and the
year ended October 31, 1997, is based on OTC Bulletin Board information. The
Company began trading on the Nasdaq SmallCap Market on November 19, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended October 31, 1996
First Quarter................................................................ 1 1/2 1/2
Second Quarter............................................................... 2 1/4 1/4
Third Quarter................................................................ 6 3 1/2
Fourth Quarter............................................................... 8 4 7/8
Year Ended October 31, 1997
First Quarter................................................................ 11 8
Second Quarter............................................................... 14 5/8 6 5/8
Third Quarter................................................................ 10 5/8 8 1/4
Fourth Quarter............................................................... 9 3/4 7 1/8
</TABLE>
Such quotations reflect inter-dealer bids, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
On January 8, 1998 the closing price of the Common Stock on the Nasdaq
SmallCap Market was 7 1/4. As of January 9, 1998 there were 228 holders of
record of the Company's Common Stock.
DIVIDEND POLICY
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.
17
<PAGE> 19
RECENT SALES OF UNREGISTERED SECURITIES
In November 1996 the Company issued 100,000 shares of restricted Common
Stock to a family limited partnership of Mr. Salser, a director, for $700,000,
or $7 per share.
In January 1997 the Company issued 63,818 shares of Common Stock to 14
individual foreign investors for $319,090, or $5 per share, pursuant to
commitments 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 59,600 shares of restricted Common
Stock to two existing shareholders for $417,200, or $7 per share.
In March 1997 the Company received commitments for $6,254,381 pursuant to a
second overseas offering. Of that amount, 452,706 shares were issued for
$3,168,942, or $7 per share, to the same overseas investor and a related party
who invested in October 1996. The balance of 440,777 shares for $3,085,439, or
$7 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.
In March 1997 the Company issued 8,000 shares of restricted Common Stock
for $56,000, or $7 per share, to an existing shareholder and director who made a
gift of the shares to related parties.
In June 1997 the Company issued 21,428 shares of restricted Common Stock at
$7 per share to an existing shareholder and director as reimbursement for
$149,996 in research expenses.
In September 1997 the Company issued 62,500 shares of restricted Common
Stock for $500,000, or $8 per share, to one institutional investor related to an
existing shareholder.
In October 1997 two directors purchased an aggregate of 100,000 shares of
restricted Common Stock for $800,000, or $8 per share.
In connection with a forward triangular merger of a subsidiary of Nutrition
Technology with InCon on October 31, 1997, the Company issued a total of
1,400,000 shares of Common Stock to the sole shareholder of InCon, a limited
liability company all of whose members are shareholders of the Company.
In October 1997 the Company issued 500,000 shares of restricted Common
Stock at $8 per share pursuant to two stock purchase agreements with two
overseas investors, both of whom are related to an existing shareholder. Payment
of the $4 million purchase price is evidenced by promissory notes requiring
payment no later than May 1, 1998. The share issuance is void under Nevada law
if payment is not received, and for accounting purposes the notes are not booked
as assets, and the shares so issued against promissory notes are not considered
issued and outstanding until the notes are paid.
The sales and issuances of the securities in the transactions 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 such securities issued pursuant to such exemption are restricted
securities as defined in Rule 144(a)(3) promulgated under the 1933 Act.
18
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED 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. See Item 14. "Exhibits,
Financial Schedules and Reports on Form 8-K" for the historical financial
statements of, and other financial information regarding, the Company.
<TABLE>
<CAPTION>
TEN-MONTH SIX-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA:
Gross Revenue............. $ 2,862,843 $ 20,000 $ 50,000 $ 0 $ 0
Operating Expense......... 10,022,163 2,996,880 341,900 249,351 43,813
Other Income (Expense).... 266,929 (30,667) (39,585) (44,843) (7,520)
Net Loss.................. (12,341,866) (3,007,547) (331,485) (294,194) (51,333)
Loss Per Share(1)......... (.77) (.26) (.03) (.13) (.17)
Weighted Average Shares
Outstanding(1).......... 16,042,785 11,564,327 9,853,970 2,214,743 307,124
BALANCE SHEET DATA:
Working capital........... $ 1,668,227 $ 4,739,882 $ 184,546 $ (460,069) $ (374,271)
Total assets.............. 14,182,034 6,217,348 1,099,521 630,280 475,011
Total liabilities......... 5,145,715 936,478 544,654 1,452,160 1,034,177
Stockholders equity....... 9,036,319 5,280,870 554,867 (821,880) (559,166)
</TABLE>
- ---------------
(1) These shares do not include 2,749,577 shares of Common Stock as of October
31, 1997, or 2,128,144 shares as of October 31, 1996, or 566,955 shares as
of October 31, 1995, or 220,288 shares for the year ended December 31, 1994,
and the six-month period ended December 31, 1993, that may be issued upon
exercise of outstanding stock options and warrants.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations includes certain forward looking statements. When used in this
report, the words "expects," "intends," "plans" and "anticipates" and similar
terms are intended to identify forward looking statements that relate to the
Company's future performance. Such statements involve risks and uncertainties.
The Company's actual results may differ materially from the results discussed
here. Factors that might cause such a difference include, but are not limited
to, those discussed under "Business -- Special Considerations."
INTRODUCTION
Results of operations for fiscal 1997 reflect the activities of Bionutrics,
Inc., in transition from a research and development to production and sales.
Prior to 1997, management's efforts have been primarily directed toward
conducting research and development, applying for patent approvals, developing
manufacturing and distribution arrangements for its dietary supplement product
and obtaining initial capital and financing to fund these activities.
Bionutrics's history began in 1990 with a predecessor to LipoGenics, Inc.,
a Delaware corporation ("LipoGenics") 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, to engage in
manufacturing and marketing pursuant to a licensing agreement of certain of the
technology developed by LipoGenics. NutraGenics (Delaware) merged in December
1994 into Nutrition Technology Corporation ("Nutrition Technology"), a Nevada
corporation and wholly-owned subsidiary of ERBA Corporation ("ERBA"), a publicly
traded Nevada corporation incorporated in 1990. Although Nutrition
19
<PAGE> 21
Technology 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. The merger with
LipoGenics was accounted for in a manner similar to a pooling-of-interest and as
such Bionutrics's accounts reflect the historic operations of LipoGenics.
Bionutrics issued 2,092,743 shares in connection with the merger. Pursuant to
the merger, Bionutrics obtained ownership of certain proprietary rights related
to dietary supplements previously licensed to it by LipoGenics and acquired
ethical drug, functional food and other dietary supplement rights owned by
LipoGenics.
On October 31, 1997, Nutrition Technology Corporation, a subsidiary of
Bionutrics, completed a forward triangular merger of a subsidiary of Nutrition
Technology with InCon Technologies Inc. ("InCon"), and InCon became a
wholly-owned subsidiary of Nutrition Technology. The merger with InCon was
accounted for as a purchase and Bionutrics issued 1,400,000 shares in connection
with the merger. In connection with the merger, the edible oil plant sales and
consulting business formerly conducted by an InCon affiliate was transferred to
Bionutrics International Ltd., a wholly-owned subsidiary, and specialty vitamin
E technology relating to soluble and powder vitamin E owned by another affiliate
was transferred to InCon.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997, COMPARED TO YEAR ENDED OCTOBER 31, 1996
The Company rolled out nationally its first product, evolvE(R) dietary
supplement, during the second quarter of the year and also recognized sales from
production by-products. Consolidated gross sales for the 12 months ended October
31, 1997, were $2,862,843 versus $20,000 for the same 12 months in 1996. Of the
$2,862,843 in gross sales, $2,092,318 was attributable to the sale of evolvE(R)
dietary supplement. As of the end of the year, the evolvE(R) dietary supplement
was distributed by many leading drug and food chains and mass merchandisers
throughout the United States. The $20,000 in revenues for the prior year was
derived from a short-term agreement licensing certain proprietary technology and
does not pertain to the sale of a consumer product.
Cost of sales for the 12 months ended October 31, 1997, was $5,013,751
versus $0 for the same 12 months in 1996. Cost of sales for the year ended
October 31, 1997, resulted in negative margins as the Company has not achieved
operating level efficiency due to low volume activity and start-up cost
associated with initial product introduction. Margins are anticipated to turn
positive with increased sales and decreasing cost of sales of products. Company
sales and revenue are anticipated to be increased through full product rollout
of evolvE(R), increased derivative product sales and revenues generated from
InCon. Cost of sales are anticipated to decrease on a product basis as start-up
costs associated with initial product introduction phase out and higher volume
levels absorb a greater portion of overhead costs.
Operating expenses for the 12 months ended October 31, 1997, of $10,022,163
were $7,025,283 higher than that recognized for the same 12 months in 1996 of
$2,996,880. This increase in expenses directly reflects preparation for product
launch and infrastructure development chiefly during 1997. Significant increases
were incurred for salaries, advertising and marketing, legal and consulting
fees.
Other income net for the 12 months ended October 31, 1997, was $266,929
versus other expense of $30,667 for the prior year. The increased income is
attributable to increased interest earnings from higher balances of cash.
Net loss increased to $12,341,866 or $0.77 per share for the 12 months
ended October 31, 1997, from a net loss of $3,007,547 or $0.26 per share for the
12 months ended October 31, 1996, due primarily to the increased levels of
expenses as outlined above offset in part by net income from sales.
20
<PAGE> 22
YEAR ENDED OCTOBER 31, 1996, COMPARED TO 10 MONTHS ENDED OCTOBER 31, 1995
Net losses for the Company were $331,485 for the 10 months ended October
31, 1995, and $3,007,547 for the 12 months ended October 31, 1996. Although
minor revenues unrelated to product sales were recorded during the period since
inception operating expenses increased in preparation for the launch of the
Company's initial 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. Revenues recorded were
$50,000 for the 10 months ended October 31, 1995, and $20,000 for the 12 months
ended October 31, 1996.
As the timing for the product launch for the evolvE(R) dietary supplement
approached, management's efforts, as outlined above, accelerated resulting in
additional expenditures and investment in infrastructure. Expenses were $341,900
for the 10 months ended October 31, 1995, and $2,996,880 for the 12 months ended
October 31, 1996. The largest components included in these expenditures are
research and development, salaries, consulting fees and advertising. As a
development stage company, management recognized the critical importance of
controlling and managing expenses and to that end implemented budget guidelines,
an integrated general ledger system and employed a corporate controller.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the 12 months ended October
31, 1997, was $10,686,234 as compared to $1,989,565 during the same period in
1996. The increase in cash used was primarily due to increased expenses incurred
in preparation for the launch of the Company's product, evolvE(R) dietary
supplement, in the second and third quarter along with investment in inventory
and build-up of accounts receivable from sales made.
Net cash used in investing activities during the 12 months ended October
31, 1997, was $1,477,516 as compared to $91,900 during the same period in 1996.
This increase is primarily attributable to $1,510,550 in capital expenditures,
essentially for manufacturing operations, and a $403,739 investment in a joint
venture. These expenditures are offset by $431,067 of cash received in the InCon
Technologies acquisition.
The Company received net proceeds from the issuance of its Common Stock in
the 12 months ended October 31,1997, of $8,668,511 versus $6,980,625 from the
same period in 1996.
The Company's current cash resources, formal and informal commitments for
additional financing and expected improvements in margins are projected to be
sufficient to fund its capital needs for the foreseeable future. The Company
intends in the near term to raise additional capital through private equity
financings or by securing a bank line of credit. There can be no assurance that
margins will improve or that such additional financing if necessary will be
attainable, or attainable on terms acceptable to the Company, and, if necessary
and not secured, such lack of capital could have a material adverse affect on
the Company's business. Access by the Company to additional capital would depend
upon prevailing market conditions, interest rates, and the financial condition
of the Company at the time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, the notes
thereto and Report of Independent Public Accountants thereon commencing at Page
F-1 of this Report, which Consolidated Financial Statements, Notes and Report
are incorporated herein by reference.
ITEM 9. 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
21
<PAGE> 23
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by Item 10 is incorporated by reference to the
information to be contained under the heading "Proposal to Elect
Directors -- Nominees" to be set forth in the Company's definitive Proxy
Statement for its 1998 Annual Meetings of Stockholders. The information required
by this Item relating to executive officers of the Company is included in
"Business -- Executive Officers and Key Employees" contained in Item 1 of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 relating to directors of the Company is
incorporated herein by reference to the information to be contained under the
heading "Director Compensation and Other Information" to be set forth in the
Company's definitive Proxy Statement for its 1998 Annual Meetings of
Stockholders. The information required by this Item relating to executive
officers of the Company is to be included in "Executive Compensation" to be set
forth in the Company's definitive proxy statement for its 1998 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information to be contained under the heading "Security Ownership of Principal
Stockholders, Directors and Officers' Nominees" to be set forth in the Company's
definitive Proxy Statement for its 1998 Annual Meetings of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information to be contained under the heading "Certain Relationships and Related
Transactions" to be set forth in the Company's definitive Proxy Statement for
its 1998 Annual Meetings of Stockholders.
22
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) 3.1 Restated Articles of Incorporation(1)
3.2 Articles of Amendment to the Articles of Incorporation(1)
3.3 Bylaws(1)
4.1 Form of Certificate evidencing shares of Common Stock(1)
10.1 Option granted to Hunt-Wesson, Inc. by LipoGenics, Inc., dated July 1992(1)
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(1)
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(1)
10.4 Additional Secured Loan Agreement dated March 1996 between the Company and
Milton Okin(1)
10.5 Warrant Agreement for the purchase of 600,000 shares between the Company and
William M. McCormick dated May 1996(1)
10.6 Stock Purchase Agreements dated September 16, 1996 and October 31, 1996
between the Company and Spanswick Limited(1)
10.7 1996 Stock Option Plan(1)
10.8 Form of Stock Purchase Agreement and Subscription Application entered into
between the Company and certain European investors in January and March 1997
pursuant to Regulation S
10.9 Form of Stock Purchase Agreement entered into between the Company and an
institutional investor in September 1997
10.10 Form of Stock Purchase Agreement and Note between the Company and two overseas
investors in October 1997
10.11 Employment Agreement between the Registrant and John R. Palmer
10.12 Employment Agreement between Bionutrics Health Products Inc. and Stephen H.
Friedman
10.13 Agreement and Plan of Merger by and among InCon Technologies, Inc., InCon
Holdings, L.L.C., Bionutrics, Inc. and BNRX, Inc.(3)
16 Letter for change in certifying accountant(2)
21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Form 10 filed with the Commission
on or about January 21, 1997.
(2) Incorporated by reference to Registrant's Amendment No. 1 to Form 10/A filed
with the Commission on or about March 20, 1997.
(3) Incorporated by reference to Registrant's From 8-K filed with the Commission
on or about November 7, 1997.
(b) Financial Statements filed as part of this Report:
Independent Auditors' Report dated January 13, 1998.
Consolidated balance sheets as of October 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the two years ended October 31, 1997, and the 10 month
period ended October 31, 1995.
(c) Reports on Form 8-K:
None
(d) Financial Statement Schedules:
None
23
<PAGE> 25
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIONUTRICS, INC.
By: /s/
--------------------------------------
Ronald H. Lane
President and Chief Executive Officer
Date: January 14, 1998
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<S> <C> <C>
By /s/ Chairman of the Board, Chief January 14, 1998
--------------------------------------- Executive Officer and
Ronald H. Lane President (Principal
Executive Officer)
By /s/ Vice President of Finance, January 14, 1998
--------------------------------------- Secretary and Treasurer
George E. Duck, Jr. (Principal Financial and
Accounting Officer)
By /s/ Vice Chairman of the Board and January 14, 1998
--------------------------------------- Director
William M. McCormick
By /s/ Director January 14, 1998
---------------------------------------
Richard M. Feldheim
By /s/ Director January 14, 1998
---------------------------------------
Ian Ferrier
By Director January , 1998
---------------------------------------
Steve Henig
By Director January , 1998
---------------------------------------
C. Everett Koop
By /s/ Director January 14, 1998
---------------------------------------
Milton Okin
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<S> <C> <C>
By /s/ Director January 14, 1998
---------------------------------------
Frederick Rentschler
By /s/ Director January 14, 1998
---------------------------------------
Winston A. Salser
By /s/ Director January 14, 1998
---------------------------------------
D. Michael Wells
</TABLE>
25
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bionutrics, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of Bionutrics, Inc. and
subsidiaries (collectively referred to as the "Company") as of October 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended October 31, 1997 and 1996, and the
ten month period ended October 31, 1995. 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. We did not audit the statements of operations, stockholders' equity and
cash flows of NutraGenics for the ten month period ended October 31, 1995. 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, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company at October 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended 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. 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
January 13, 1998
F-1
<PAGE> 28
BIONUTRICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 2,181,121 $ 5,676,360
Trade receivables.............................................. 2,334,719
Inventory (Note 3)............................................. 1,407,760
Prepaids and other current assets.............................. 554,052
------------ -----------
Total current assets................................... 6,477,652 5,676,360
------------ -----------
PROPERTY (Notes 4 and 9)......................................... 6,698,811 70,199
------------ -----------
OTHER ASSETS:
Notes receivable (Note 5)...................................... 16,665
Accrued interest (Note 5)...................................... 1,333
Goodwill (Note 1).............................................. 563,878
Patent applications and other related costs.................... 441,693 452,791
------------ -----------
Total other assets..................................... 1,005,571 470,789
------------ -----------
TOTAL............................................................ $ 14,182,034 $ 6,217,348
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 2,775,858 $ 565,823
Accrued liabilities (Note 9)................................... 2,033,567 370,655
Note payable (Note 6).......................................... 322,883
------------ -----------
Total current liabilities.............................. 5,132,308 936,478
------------ -----------
CAPITAL LEASE OBLIGATION (Note 9)................................ 13,407
------------ -----------
Total liabilities...................................... 5,145,715 936,478
------------ -----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 7 and 9)
STOCKHOLDERS' EQUITY (Note 7):
Common stock, $.001 par value -- authorized, 45,000,000
shares...................................................... 17,812 15,068
Preferred stock, $.001 par value -- authorized, 5,000,000
shares; no issued and outstanding shares....................
Additional paid-in capital..................................... 26,501,567 10,406,996
Accumulated deficit............................................ (17,481,857) (5,139,991)
Common stock in treasury at cost............................... (1,203) (1,203)
------------ -----------
Total stockholders' equity............................. 9,036,319 5,280,870
------------ -----------
TOTAL............................................................ $ 14,182,034 $ 6,217,348
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 29
BIONUTRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997 AND 1996 AND THE TEN MONTH PERIOD ENDED OCTOBER 31,
1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
GROSS SALES (Note 1)................................ $ 2,862,843 $ 20,000 $ 50,000
DISCOUNTS AND ALLOWANCES............................ 435,724
------------ ----------- ----------
Net sales................................. 2,427,119 20,000 50,000
COST OF SALES....................................... 5,013,751
------------ ----------- ----------
Gross profit.............................. (2,586,632) 20,000 50,000
------------ ----------- ----------
EXPENSES:
Consulting services (Notes 7 and 10).............. 815,693 385,916 153,650
Research and development (Note 10)................ 258,939 626,735 25,300
Other operating expenses (Note 10)................ 8,947,531 1,984,229 162,950
------------ ----------- ----------
Total expenses............................ 10,022,163 2,996,880 341,900
------------ ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense (Note 10)........................ (45,019) (52,391)
Interest income................................... 267,166 14,352 12,806
Loss on disposal of assets........................ (237)
------------ ----------- ----------
Total other income (expense).............. 266,929 (30,667) (39,585)
------------ ----------- ----------
NET LOSS............................................ $(12,341,866) $(3,007,547) $ (331,485)
============ =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING..................... 16,042,785 11,564,327 9,853,970
============ =========== ==========
NET LOSS PER COMMON SHARE AND SHARE EQUIVALENT...... $ (0.77) $ (0.26) $ (0.03)
============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 30
BIONUTRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997 AND 1996 AND THE TEN MONTH PERIOD ENDED OCTOBER 31,
1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
-------------------- PAID-IN DEFICIT -------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL ACCUMULATED SHARES AMOUNT EQUITY
---------- ------- ----------- ------------ ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............. 9,531,807 $ 9,532 $ 970,752 $(1,800,959) (1,202,886) $(1,203) $ (821,878)
Issuance of common shares for cash at
$1 per share, January 1995 -
October 1995....................... 663,000 663 662,337 663,000
Issuance of common shares for
services at $1 per share, January
1995 - October 1995................ 60,561 60 60,501 60,561
Issuance of common shares for
services at $1.40 per share,
October 1995....................... 380,494 381 534,160 534,541
Notes payable and other liabilities
converted to stock at $1.40 per
share, October 1995................ 320,407 320 449,808 450,128
Net loss -- ten month period ended
October 31, 1996................... (331,485) (331,485)
---------- ------- ----------- ------------ ---------- ------- ------------
BALANCE, OCTOBER 31, 1995.............. 10,956,269 10,956 2,677,558 (2,132,444) (1,202,886) (1,203) 554,867
Warrants granted for services, May
1996 (Note 7)...................... 87,500 87,500
Issuance of common shares for
services at $1 per share, May 1996
- August 1996...................... 65,425 65 65,360 65,425
Issuance of common shares for cash at
$1.50 per share, June 25, 1996..... 66,667 67 99,933 100,000
Issuance of common shares for cash at
$1.75 per share, June 25, 1996..... 60,000 60 104,940 105,000
Issuance of common shares for cash at
$2 per share, June 1996 - October
1996............................... 255,000 255 509,745 510,000
Notes payable converted to stock at
$1.50 per share, October 31, 1996
(Note 6)........................... 400,000 400 599,600 600,000
Issuance of common shares for cash at
$3 per share, October 31, 1996..... 371,875 372 1,115,253 1,115,625
Issuance of common shares for cash at
$5 per share, October 31, 1996..... 1,000,000 1,000 4,999,000 5,000,000
Issuance of common shares for cash at
$1.36 per share (converted rate)
under option agreement, October 31,
1996 (Note 1)...................... 11,111 11 149,989 150,000
Issuance of common shares in merger
with LipoGenics (Note 1)........... 1,881,632 1,882 (1,882)
Net loss -- year ended October 31,
1996............................... (3,007,547) (3,007,547)
---------- ------- ----------- ------------ ---------- ------- ------------
BALANCE, OCTOBER 31, 1996.............. 15,067,979 15,068 10,406,996 (5,139,991) (1,202,886) (1,203) 5,280,870
Issuance of common shares for
services at $1 per share, December
1996............................... 25,000 25 24,975 25,000
Issuance of common shares for cash at
$5 per share, January 1997......... 63,818 64 319,026 319,090
Issuance of common shares for cash at
$7 per share, November 1996 - June
1997............................... 1,073,480 1,073 7,085,980 7,087,053
Issuance of common shares for
services at $7 per share, June
1997............................... 21,428 20 149,975 149,995
Issuance of common shares for cash at
$8 per share, September 1997 -
October 1997....................... 162,500 162 1,299,838 1,300,000
Stock-based compensation expense,
November 1996 - October 1997 (Note
7)................................. 253,808 253,808
Cash paid for stock-related
expenses........................... (37,631) (37,631)
Issuance of common shares for
purchase of InCon Technologies,
Inc., October 1997 (Note 1)........ 1,400,000 1,400 6,998,600 7,000,000
Net loss -- year ended October 31,
1997............................... (12,341,866) (12,341,866)
---------- ------- ----------- ------------ ---------- ------- ------------
BALANCE, OCTOBER 31, 1997.............. 17,814,205 $17,812 $26,501,567 $(17,481,857) (1,202,886) $(1,203) $ 9,036,319
========== ======= =========== ============ ========== ======= ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 31
BIONUTRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997 AND 1996 AND THE TEN MONTH PERIOD ENDED OCTOBER 31,
1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(12,341,866) $(3,007,547) $(331,485)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 248,943 27,531 29,898
Loss on disposal of asset.......................... 237
Stock based compensation expense................... 253,808 87,500
Expenses incurred in exchange for common stock..... 174,996 65,425 70,613
Changes in operating assets and liabilities:
Trade receivables..................................... (598,354)
Inventory............................................. (1,223,414)
Prepaids and other current assets..................... (446,035) (25,000)
Accounts payable...................................... 1,807,602 279,137 123,130
Accrued liabilities................................... 1,421,184 362,687 (112,017)
------------ ----------- ---------
Net cash used in operating activities......... (10,702,899) (2,185,267) (244,861)
------------ ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (1,510,550) (91,900)
Net decrease (increase) in notes receivable........... 16,665 195,702 (61,800)
Disposal of fixed assets.............................. 5,706
Investment in joint venture........................... (403,739)
Cash received from acquisition of InCon Technologies,
Inc................................................ 431,067
------------ ----------- ---------
Net cash (used in) provided by investing
activities.................................. (1,460,851) 103,802 (61,800)
------------ ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.......................... 350,000 250,000
Proceeds from issuance of stock....................... 8,668,511 6,980,625 663,000
Repayments of long-term debt.......................... (194,000)
------------ ----------- ---------
Net cash provided by financing activities..... 8,668,511 7,330,625 719,000
------------ ----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (3,495,239) 5,249,160 412,339
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 5,676,360 427,200 14,861
------------ ----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 2,181,121 $ 5,676,360 $ 427,200
============ =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -- Cash paid during the year for
interest.............................................. $ $ 39,813 $ 962
============ =========== =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of 1,400,000 shares of common stock in
connection with the acquisition of InCon
Technologies, Inc.................................. $ 7,000,000
============
Assumption of liabilities in connection with the
acquisition of InCon Technologies, Inc............. $ 1,606,849
============
Fair value of receivables 2,006,288, inventory
184,346, fixed assets 5,361,850 and other assets
59,420 acquired.................................... $ 7,611,904
============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 32
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997 AND 1996 AND THE TEN MONTH PERIOD ENDED OCTOBER 31,
1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Bionutrics, Inc. ("Bionutrics") -- Subsequent to October 31, 1996,
NutraGenics, Inc. ("NutraGenics") changed its name to Bionutrics. Bionutrics
consists of its wholly-owned subsidiaries, LipoGenics, Inc. ("LipoGenics"),
Bionutrics Health Products, Inc. ("BHP") (formed in November 1996 to market the
Company's product), Nutrition Technology Corporation ("Nutrition Technology"),
Bionutrics International Ltd. ("BIN") and InCon Technologies, Inc. ("InCon")
(collectively referred to as the "Company").
The Company was in the development stage at October 31, 1996; during the
year ended October 31, 1997, the Company completed its development activities
and commenced its planned principal operations. The planned principal operations
are the development, manufacturing, marketing and selling of dietary supplements
using proprietary technology (the "Technology"). Revenues as of October 31, 1996
represented amounts derived from a short-term agreement licensing certain
proprietary technology, which expired in 1996.
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. The Company has
incurred operating losses of 17,481,857 throughout October 31, 1997 which have
been funded through the issuance of stock. The losses incurred to date, the
uncertainty regarding the ability to raise additional capital and the Company's
inability to generate gross profits and positive cash flows from operations 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.
Management is continuing its efforts to obtain additional funds through the
issuance of common stock in private nonregistered transactions and management is
also continuing its efforts to increase sales and reduce cost of sales on a
product basis in order to generate gross profits so that the Company can meet
its obligations and sustain operations.
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 developed the technology regarding
processing of propriety compounds having applications as ethical drugs,
functional foods and dietary supplements and was the owner of patent
applications underlying such technology. The business combination was accounted
for in a manner similar to a pooling-of-interests. 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.
On October 31, 1997, Nutrition Technology merged with InCon. InCon provides
molecular distillation and toll processing services for Nutrition Technology and
other food and industrial companies. The merger involved the issuance of 1.4
million shares of the Company's restricted common stock, with a fair value of $7
million on the date of the merger, in exchange for all of the issued and
outstanding stock of InCon, as well as all rights and interests pursuant to a
purchase agreement between Rye Investments, Ltd., a British Virgin Island
limited liability corporation ("Rye") which shared common owners with InCon, and
a customer of Rye. The merger was accounted for using the purchase method of
accounting. Accordingly, the assets
F-6
<PAGE> 33
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired and liabilities assumed have been recorded at their fair value as of
October 31, 1997. Goodwill of $563,878 was recorded as a result of the merger
and will be amortized over 20 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Bionutrics and its wholly-owned subsidiaries,
LipoGenics, Inc., Bionutrics Health Products, Inc. and Nutrition Technologies
Corporation, as well as the assets acquired and liabilities assumed in the
October 31, 1997 merger with InCon. 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.
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
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. The estimated useful lives of depreciable assets are:
<TABLE>
<CAPTION>
ASSET TYPE ESTIMATED USEFUL LIFE
---------------------------------------------------------- ---------------------
<S> <C>
Equipment, furniture and fixtures......................... 3-10 years
Leasehold improvements.................................... 10 years
Capitalized software...................................... 3 years
Leased Equipment.......................................... 3 years
</TABLE>
Leasehold improvements are amortized over the lessor of the lease life or
the useful life of the asset. Expenditures of a repair and maintenance nature
are expensed when incurred.
Revenue -- During 1997, the Company had two customers which accounted for
approximately 24% of total sales.
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. Any deferred tax assets were fully offset by a valuation
allowance in 1997 and 1996.
Research and Development -- The cost of research and development is charged
to expense as incurred.
Fair Value of Financial Instruments -- The fair values of cash, trade and
notes receivable, accounts payable, accrued liabilities and notes payable
approximate the carrying value due to the short-term nature of these
instruments.
F-7
<PAGE> 34
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options and warrants granted to consultants or independent
contractors have been accounted for in accordance with the fair value method of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. In accordance with Accounting Principles Board Opinion
("APB") No. 25, options granted to employees of the Company are recorded as
expense, based on the difference, if any, between the fair market value of the
stock, on the date of grant and the option's exercise price.
Net loss per share is based on the weighted average number of shares
outstanding during each period. In calculating weighted average shares
outstanding, all stock options are excluded as their effect on net loss per
share is antidilutive.
Reclassifications -- Certain amounts previously reported in the 1996
financial statements have been reclassified to conform with the 1997
presentation.
New Accounting Pronouncements -- In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share, which specifies new computation,
presentation and disclosure requirements. SFAS No. 128 will be effective for
both interim and annual periods ending after December 15, 1997. Management
believes that the adoption of SFAS No. 128 will not have a material impact on
the earnings per share presented.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which is effective for financial statements for periods
ending after December 15, 1997 and establishes standards for disclosing
information about an entity's capital structure. The Company does not believe
the adoption of SFAS No. 129 will have a significant effect on its disclosures
about capital structure.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is effective for financial statements for periods ending after December
15, 1997 and establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Company does not believe the
adoption of SFAS No. 130 will have a material impact on its results of
operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997 and establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company does
not believe that the adoption of SFAS No. 131 will have a significant effect on
its reporting of segment information.
3. INVENTORY
As of October 31, 1997 inventory consisted of the following:
<TABLE>
<S> <C>
Raw materials.................................................... $ 855,958
Work in process.................................................. 432,785
Spare parts...................................................... 107,702
Finished goods................................................... 11,315
----------
$1,407,760
==========
</TABLE>
F-8
<PAGE> 35
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
As of October 31, the components of property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Equipment, furniture and fixtures..................... $6,398,662 $91,900
Leasehold improvements................................ 507,882
Capitalized software.................................. 30,181
Leased equipment under capital lease (Note 9)......... 20,443
---------- --------
6,957,168 91,900
Less accumulated depreciation and amortization........ (258,357) (21,701)
---------- --------
Property and equipment -- net......................... $6,698,811 $70,199
========== ========
</TABLE>
5. NOTES RECEIVABLE
At October 31, 1996, a stockholder and employee owed the Company $16,665 on
a note receivable. The note, including principal and accrued interest calculated
at 8% per annum, was repaid during 1997.
6. NOTE PAYABLE
At October 31, 1997, the Company had a demand note payable to Rye for
$322,883. At October 31, 1995, the Company had a note payable of $250,000 to a
stockholder of 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.
7. STOCKHOLDERS' EQUITY
At October 31, 1996, the Company authorized 1,900,000 shares of common
stock for issuance under its Nonqualified 1996 Stock Option Plan (the "1996
Plan") to key personnel, consultants and independent contractors. The incentive
stock 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. Stock options are granted to purchase common stock at a price determined
by the plan administrator and 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. 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, 1997.
In October 1997 the Company issued 500,000 shares of restricted Common
Stock at $8 per share pursuant to two stock purchase agreements with two
overseas investors, both of whom are related to an existing shareholder. Payment
of the $4 million purchase price is evidenced by promissory notes requiring
payment no later than May 1, 1998. The share issuance is void under Nevada law
if payment is not received, and for accounting purposes the shares so issued
against promissory notes are not considered issued and outstanding until the
notes are paid.
Employee Stock-Based Compensation -- At July 21, 1992, the Company granted
to a stockholder and board member 11,111 options to purchase LipoGenics stock
which converted, on October 31, 1996, to 110,144 options 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 were exercised at October 31, 1997. 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
F-9
<PAGE> 36
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
this agreement have been exercised at October 31, 1997. At October 31, 1996,
1,163,000 options with a five year exercise period and an option price of $5
were granted to employees under the 1996 Plan. These options vest equally over a
three year period from the date of grant. During 1997, 573,100 options were
granted to employees under the 1996 Plan.
A summary of transactions for employee stock options for the years ended
October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OPTION ----------------------
OF PRICE REMAINING EXERCISE
SHARES RANGE LIFE PRICE
---------- ------------ --------- --------
<S> <C> <C> <C> <C>
Options outstanding at October 31, 1995........ 290,144 $1.36-$1.50 2.1 $ 1.45
Options granted.............................. 1,163,000 5.00
--------- ---------- --- -----
Options outstanding at October 31, 1996........ 1,453,144 1.36-$5.00 3.6 $ 4.29
Options granted.............................. 573,100 7.00-9.13
--------- ---------- --- -----
Options outstanding at October 31, 1997........ 2,026,244 $1.36-$9.13 3.9 $ 5.59
========= ========== === =====
As of October 31, 1997:
Exercisable options.......................... 677,811 $1.36-$5.00 3.2 $ 3.48
========= ========== === =====
Options available for future grant under the
1996 Plan................................. 105,567
=========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock options granted to employees. Accordingly, compensation cost for stock
options and warrants is recorded as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the exercise price of the
option or warrant. No compensation cost was recognized in the Company's
consolidated statements of operations, for employee based options and warrants
for 1997 or 1996.
In accordance with the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, compensation cost was estimated to be
$1,641,517 for 1997. The fair value of options granted during 1997 was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: 6.18% risk-free interest rate, a 99%
expected volatility rate, expected option lives of three years, and no dividend
yield. Compensation related to employee options for 1996 was $87,500. Such
compensation was computed based upon weighted average assumptions; 6% risk free
interest rates, a 60% expected volatility ratio, expected lives of 5 years and
no dividend yield. Had the Company elected to recognize the above mentioned
compensation cost in 1997 and 1996, loss from continuing operations would be
$13,983,383 and $3,095,407, respectively and the net loss per share would be
$.87 and $.27, respectively.
Nonemployee Stock-Based Compensation -- In May 1996, the Company granted
600,000 warrants to a stockholder 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. None of the warrants granted
under this agreement have been exercised at October 31, 1997. At October 31,
1996, 58,333 options with a five year exercise period and an option price of
$5.00 were granted to nonemployees under the 1996 Plan.
F-10
<PAGE> 37
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of transactions for nonemployee stock options and warrants for
the years ended October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION --------------------
OF PRICE REMAINING EXERCISE
SHARES RANGE LIFE PRICE
------- ------------- --------- --------
<S> <C> <C> <C> <C>
Options and warrants outstanding at
October 31, 1995
Granted............................ 658,333 $2.50 - $5.00 8.0 $ 3.40
======= ============
Options and warrants outstanding at
October 31, 1996 and 1997.......... 658,333 $2.50 - $5.00 8.0 $ 3.40
======= ============
As of October 31, 1997:
Exercisable options................ 24,999 $ 5.00
======= ============
Exercisable warrants............... 450,000 $2.50 - $4.00
======= ============
</TABLE>
In accordance with the methodology prescribed under SFAS No. 123, the
Company recognized $253,808 and $87,500 of compensation expense in the 1997 and
1996 consolidated statements of operations, respectively. The fair value of each
nonemployee option and warrant was calculated 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 64%.
8. INCOME TAXES
At October 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $17,282,493 which expire on various
dates through 2012.
At October 31, 1997 and 1996, deferred tax assets of approximately
$5,994,529 and $1,748,000, respectively, relating to such potential tax benefits
were fully offset by a valuation allowance.
9. LEASES
The Company has operating leases for office space, vehicles and equipment,
which expire on various dates through October 13, 2007. Total rental expense was
approximately $241,603 and $96,000 for fiscal years 1997 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases at October
31, 1997 are as follows:
<TABLE>
<S> <C>
1998..................................................... $ 755,316
1999..................................................... 828,139
2000..................................................... 166,448
2001..................................................... 153,640
2002..................................................... 151,497
Thereafter............................................... 770,104
----------
Total............................................... $2,825,144
==========
</TABLE>
F-11
<PAGE> 38
BIONUTRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases a forklift under a noncancellable capital lease. The
future minimum lease payments under this noncancellable capital lease at October
31, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................................... $ 7,416
1999....................................................... 7,416
2000....................................................... 6,798
-------
Total future minimum lease payments........................ 21,630
Less amount representing interest at 5.9% per annum........ 1,805
-------
Present value of net minimum lease payments................ 19,825
Less: present value of current net minimum lease
payments................................................. 6,418
-------
Present value of Long Term net minimum lease payments...... $13,407
=======
</TABLE>
10. RELATED PARTY
Various stockholders have provided consulting and other administrative
services to the Company. Expense for the years ended October 31, 1997 and 1996
and the ten month period ended October 31, 1995 was approximately $358,000,
$469,000 and $69,000, 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 $35,457 and $34,000 for the year ended October 31, 1996 and the
ten month period ended October 31, 1995, respectively. No interest was paid to
stockholders during 1997.
11. ACQUISITION OF INCON TECHNOLOGIES, INC. (UNAUDITED)
The pro forma information presented below includes InCon's operations for
the ten month period ended October 31, 1997. The unaudited pro forma
consolidated financial information does not purport to represent the results of
operations of the Company that actually would have resulted had the merger with
InCon occurred on any date other than October 31, 1997, nor should it be taken
as indicative of the future results of operations.
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
------------
<S> <C>
Net revenues........................................... $ 6,551,135
============
Net loss............................................... $(11,204,344)
============
Net loss per share..................................... $ (0.70)
============
</TABLE>
* * * * * *
12. REGULATORY MATTERS
In May 1997 FDA took regulatory action against a competitor of the Company
with regard to its cholesterol-lowering product introduced in November 1996. The
pending action involves the regulatory classification of a dietary supplement
containing an ingredient promoted as being the same as or similar to an
ingredient contained in a prescription drug product used to lower cholesterol,
and raises issues that do not affect the Bionutrics evolvE(R) product. However,
the respondent competitor also combines its claim to lower cholesterol with
other claims that suggest that cholesterol reduction will both reduce formation
and facilitate regression of plaque, which, according to FDA, are claims to
mitigate or prevent disease not permitted for a dietary supplement under DSHEA.
While Bionutrics does not make such claims and would not be bound by a
regulatory determination involving its competitor's product, nonetheless a
negative determination on the competition's labeling could have a bearing on
"lowering cholesterol" claims in general, and thereby have an adverse effect on
the marketing and advertising programs currently being used for the evolvE(R)
product.
F-12
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation(1)
3.2 Articles of Amendment to the Articles of Incorporation(1)
3.3 Bylaws(1)
4.1 Form of Certificate evidencing shares of Common Stock(1)
10.1 Option granted to Hunt-Wesson, Inc. by LipoGenics, Inc., dated July 1992(1)
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(1)
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(1)
10.4 Additional Secured Loan Agreement dated March 1996 between the Company and Milton
Okin(1)
10.5 Warrant Agreement for the purchase of 600,000 shares between the Company and William
M. McCormick dated May 1996(1)
10.6 Stock Purchase Agreements dated September 16, 1996 and October 31, 1996 between the
Company and Spanswick Limited(1)
10.7 1996 Stock Option Plan(1)
10.8 Form of Stock Purchase Agreement and Subscription Application entered into between
the Company and certain European investors in January and March 1997 pursuant to
Regulation S
10.9 Form of Stock Purchase Agreement entered into between the Company and an
institutional investor in September 1997
10.10 Form of Stock Purchase Agreement and Note between the Company and two overseas
investors in October 1997
10.11 Employment Agreement between the Registrant and John R. Palmer
10.12 Employment Agreement between Bionutrics Health Products Inc. and Stephen H. Friedman
10.13 Agreement and Plan of Merger by and among InCon Technologies, Inc., InCon Holdings,
L.L.C., Bionutrics, Inc. and BNRX, Inc.(3)
16 Letter for change in certifying accountant(2)
21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Form 10 filed with the Commission
on or about January 21, 1997.
(2) Incorporated by reference to Registrant's Amendment No. 1 to Form 10/A filed
with the Commission on or about March 20, 1997.
(3) Incorporated by reference to Registrants From 8-K filed with the Commission
on or about November 7, 1997.
<PAGE> 1
EX 10.8
THE SHARES BEING SUBSCRIBED FOR HEREIN HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM
REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE 1933 ACT.
THE SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED
STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S) UNLESS THE
SHARES ARE REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL IS OBTAINED WHICH IS REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH OFFERS, SALES AND TRANSFERS MAY BE MADE PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
the _____ day of ___________________, 199___, by and between NutraGenics, Inc.,
a Nevada corporation (the "Company"), and ________________________, a(n)
______________________________ (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Stock. On the basis of the
representations, warranties and agreements contained herein and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
__________________ shares of its Common Stock, $.001 par value, at $________ per
share (the "Shares"), and the Investor hereby subscribes for and agrees to
purchase the Shares upon acceptance of this Agreement by the Company.
1.2 Payment. Investor is delivering with this Agreement the
full amount of the purchase price of the Shares in the amount of
$________________ in U.S. funds by wire transfer as directed by the Company to
the Company's designated escrow account. Such funds deposited into the escrow
account on behalf of the Investor shall be held until the conditions for the
Closing of the offering have been met.
1.3 Closing. The closing of the transaction contemplated by
this Agreement (the "Closing") shall be deemed to have occurred when this
Agreement has been executed by both the Investor and the Company and payment
shall have been made as set forth in 1.2 above in consideration for the
Company's delivery into the escrow account of certificates representing the
Shares subscribed for. If at the Closing any of the conditions specified in
Section 5 hereof shall not have been fulfilled to the reasonable satisfaction of
Investor, then Investor shall, at its election, be relieved of all of its
obligations under this Agreement, without thereby waiving any other rights it
may have by reason of such failure or fulfillment. If at the Closing any of the
conditions specified in Section 4 hereof shall not have been fulfilled to the
reasonable satisfaction of the Company, the Company shall, at its election, be
relieved of
<PAGE> 2
all of its obligations under this Agreement, without thereby waiving any other
rights it may have by reason of such failure or unfulfillment.
2. Representation and Warranties of the Company. The Company hereby
represents and warrants to the Investor as follows:
2.1 Organization, Good Standing and Qualification. The
Company is a corporation validly existing and in good standing under the laws of
the State of Nevada and has all requisite power and authority to own or lease
and operate its properties and assets and to carry on its business as now
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business, operations, prospects, condition
(financial or other), or properties.
2.2 Capitalization. The authorized capital of the Company
consists of:
(i) Common Stock. 45,000,000 shares of common stock
("Common Stock"), par value $.001, of which 11,028,361 shares are issued and
outstanding as of August 15, 1996.
(ii) Preferred Stock. 5,000,000 shares of preferred
stock ("Preferred Stock"), par value $.001, none of which is outstanding. The
Preferred Stock may be issued from time to time in one or more series and the
Board of Directors is authorized to fix the rights and terms relating to
dividends, conversion, voting, redemption, liquidation preferences and any other
rights, preferences, privileges and restrictions applicable to each such series.
(iii) Warrants, Options and Subscriptions. There are
no outstanding options, warrants or rights (including preemptive rights and
rights of first refusal) for the purchase or acquisition from the Company of any
shares of its capital stock except as set forth herein. There are currently
outstanding options to purchase 180,000 shares of Common Stock at $1.50 per
share granted to a director and currently outstanding warrants to purchase
300,000 shares of Common Stock at $2.50 and 300,000 shares of Common Stock at
$4.00 per share issued to another director, 400,000 of which are subject to
vesting at the rate of 50,000 shares per quarter beginning in August 1996. Notes
payable to a director in the aggregate amount of $600,000 are convertible in
accordance with their terms into shares of Common Stock at the election of
holder at $1.50 per share. An additional loan of an indeterminate amount made by
the same director to the Company solely for the purpose of engaging FDA counsel
may also be converted into shares of Common Stock at $1.50 per share at the
election of holder. Subscriptions are outstanding for the issuance of 546,875
shares of Common Stock to the principals of a joint venture partner for which
funds have been received but shares have not yet been issued. The consideration
paid for 175,000 shares was $2.00 per share and for the balance was $3.00 per
share. Subscriptions are outstanding for the issuance of 600,000 shares of
Common Stock to Spanswick Limited for which funds have been received but shares
have not yet been issued. The consideration paid was $5.00 per share.
2.3 Valid Issuance of Shares. All of the outstanding shares
of the Company's stock have been duly and validly authorized and issued, are
fully paid and nonassessable, and no further approval or authority of the
stockholders or the directors of the Company will be required by the Company for
the issuance of the Shares. The Shares when issued and paid for in accordance
with the terms of this Agreement will be duly and validly issued, fully paid and
nonassessable and will be free of
2
<PAGE> 3
restrictions on transfer other than restrictions on transfer under applicable
state and federal securities laws.
2.4 Financial Statements. Except as otherwise stated in the
notes thereto, the financial statements delivered herewith dated October 31,
1995 (audited) and July 31, 1996 (unaudited) have been prepared in conformity
with United States generally accepted accounting principles applied, except as
stated therein, on a consistent basis except that unaudited financial statements
may not contain all footnotes required by generally accepted accounting
principles. The financial statements fairly present the financial position and
result of operations and changes in financial position of the Company as of the
dates and for the periods indicated (subject, in the case of the unaudited
financial statements, to changes resulting from normal year-end audit
adjustment).
Except as reflected in such financial statements and the notes
thereto, the Company has no liabilities, absolute or contingent, material to the
operations, business, prospects, assets, properties or condition (financial or
other) of the Company, other than (i) ordinary course liabilities incurred since
the last date of such financial statements in connection with the conduct of the
business of the Company, (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under United States
generally accepted accounting principles to be reflected in the financial
statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company, and
(iii) obligations and commitments pursuant to that certain joint venture entered
into in August 1996 by and between Incon Technologies L.L.C. and the Company's
wholly owned subsidiary.
2.5 No Conflict with Other Instruments. Neither the sale of
the Shares nor the consummation of the transactions herein contemplated, will:
(i) conflict with or constitute a breach of, permit the termination of,
constitute a default under, or violation of (A) the Articles of Incorporation,
as amended, or bylaws of the Company, (B) any material agreement, indenture,
mortgage, deed of trust or other material instrument or agreement or undertaking
by which the Company is bound or to which any of its properties is subject, or,
(C) to the knowledge of the Company, a violation of any law, administrative
regulation, or court decree to which the properties or assets of the Company is
subject; or (ii) result in the creation or imposition of any material lien,
charge or encumbrance upon the property or assets of the Company.
2.6 Authorization. The Company has the corporate power and
authority to enter into this Agreement and to perform all of its obligations
hereunder. The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all necessary corporate actions, and this
Agreement constitutes a legal, valid, binding and enforceable obligation of the
Company. No consent, approval, authorization or order of any court or
governmental agency or board or any other third party, or registration,
qualification, designation or filing with any Federal, state or local authority
is required to consummate the transactions contemplated by this Agreement.
3. Representations and Warranties of Investor. By executing this
Agreement, Investor hereby represents and warrants to and covenants with the
Company as follows:
3.1 Authorization. Investor has the power and authority to
enter into this Agreement and to perform all of its obligations hereunder and
this Agreement constitutes a valid, binding and enforceable obligation of
Investor.
3
<PAGE> 4
3.2 Legal Investment and Compliance with Laws. The purchase
of the Shares by Investor is legally permitted by all laws and regulations to
which Investor is subject and all consents, approvals, authorizations of or
designations, declarations, or filings in connection with the valid execution
and delivery of this Agreement by Investor or the purchase of the Shares by
Investor has been obtained, or will be obtained. Investor hereby represents that
it has satisfied itself as to the full observance of the laws of its
jurisdiction in connection with any invitation to subscribe for the Shares or
any use of this Agreement, including (i) any foreign exchange restrictions
applicable to such purchase, and (ii) the income tax and other tax consequences,
if any, which may be relevant to the purchase, holding, redemption, sale, or
transfer of the Shares. Such Investor's subscription and payment for, and its
continued beneficial ownership of the Shares, will not violate any applicable
securities or other laws of its jurisdiction.
3.3 Access to Information. Investor acknowledges that it has
received the Company's Business Plan and materials accompanying such document
(the "Offering Documents"), and is familiar with and understands the operations
of the Company.
(a) Investor understands and acknowledges that the
Offering Documents provided in connection with this investment have been
prepared by the Company. Accordingly, Investor understands and acknowledges that
no independent investment banking firm or legal counsel have passed upon or
assumed any responsibility for the accuracy, completeness or fairness of the
information contained in the Offering Documents.
(b) Investor understands and acknowledges that any
financial projections provided in connection with this investment and have not
been prepared by independent accountants and are based on numerous assumptions
regarding sales, revenues and expenses and other factors which may not be
realized in the future.
(c) Investor acknowledges that it has been encouraged
to rely upon the advice of its legal counsel and accountants or other financial
advisers with respect to the financial, tax and other considerations relating to
the purchase of the Shares and has been offered, during the course of
discussions concerning the purchase of the Shares, the opportunity to ask such
questions and inspect such documents concerning the Company and its business and
affairs as Investor has requested so as to understand more fully the nature of
the investment and to verify the accuracy of the information supplied.
(d) Investor represents and warrants that, in
determining to purchase the Shares, it has relied solely upon the documents
provided and the advice of its advisors with respect to the tax, foreign and
U.S., and other consequences involved in purchasing the Shares.
3.4 Acquisition for Investment and Unregistered Nature of the
Shares. Investor represents and warrants that the Shares being acquired are
being acquired for its own account and not on behalf of or for the benefit of
any U.S. Person (as defined below) and the sale and resale of the Shares has not
been prearranged with any U.S. Person or buyer in the United States. Investor
represents and warrants that, as of the date of this Agreement, Investor has no
present plan or intention to sell the Shares in the U.S. at any predetermined
time. Investor represents, warrants and covenants that neither Investor nor its
affiliates nor any person acting on its or their behalf has entered into, has
the intention of entering, or will enter into any option, equity swap or other
similar derivative instrument in the U.S. with respect to the Common Stock of
the Company at any time after ___________________________ until the end
4
<PAGE> 5
of a period of one year from the date of this Agreement. Nothing herein shall
prevent Investor from selling the Shares acquired hereunder in accordance with
U.S. securities laws.
(a) Investor represents and warrants that it (i) is
experienced in evaluating and investing in securities of companies in the
developmental stage and acknowledges that it can fend for itself, (ii) can bear
the economic risk of the purchase of the Shares including the total loss of its
investment, and (iii) has such knowledge and experience in business and
financial matters as to be capable of evaluating the merits and risks of an
investment in the Shares.
(b) Investor understands that the Shares have not
been registered under the 1933 Act, or the securities laws of any state and are
subject to substantial restrictions on resale or transfer.
(c) Investor agrees that it will not sell or
otherwise transfer or dispose of the Shares or any portion thereof unless such
Shares are registered under the 1933 Act and any applicable state securities
laws, or except pursuant to the provisions of Regulation S, or unless Investor
obtains an opinion of counsel which is reasonably satisfactory to the Company
that such Shares may be sold in reliance on an exemption from such registration
requirements.
(d) Investor understands that (i) the Company has no
obligation to register any Shares for resale or transfer under the 1933 Act or
any state securities laws and has made no representation that it will file the
necessary reports or publish the necessary information as required by Rule 144
under the 1933 Act that would make available an exemption from the registration
requirements of any such laws for the resale or transfer of the Shares; (ii) the
Company may place a legend on any certificates representing the Shares
indicating that the Shares may not be transferred except in accordance with
Regulation S or another exemption from the 1933 Act; (iii) the Company will not
register a transfer not made in accordance with Regulation S or another
exemption from the 1933 Act; and (iv) Investor therefore may be precluded from
selling or otherwise transferring or disposing of any of the Shares or any
portion thereof for an indefinite period of time or at any particular time.
(e) Investor represents, warrants and certifies that
it is not a United States Person (as defined below) and that it is not
purchasing the Shares for the account or benefit of a United States Person. A
"United States Person" means any natural person resident in the United States;
any partnership or corporation organized or incorporated under the laws of the
United States, its territories or possessions or any state or the District of
Columbia; any estate of which any executor or administrator is a U.S. person;
any trust of which any trustee is a U.S. person; any agency or branch of a
foreign entity located in the United States; any non-discretionary account or
similar account (other than an estate or trust) held by a dealer or other
fiduciary for the account of a U.S. person; any discretionary account or similar
account (other than an estate or trust) held by a dealer or other fiduciary
organized, incorporated, or (if an individual) resident in the United States;
and a partnership or corporation if (i) organized or incorporated under the laws
of any foreign jurisdiction, and (ii) formed by a U.S. Person principally for
the purpose of investing in securities not registered under the 1933 Act, unless
it is organized or incorporated, and owned, by accredited investors (as defined
in Rule 501(a) under the 1933 Act) who are not natural persons, estates or
trusts.
(f) Investor represents, warrants and certifies that
the Shares were not offered to Investor in the United States, and at the time of
execution of this Agreement and at the time of any offer to Investor to purchase
the Shares hereunder, Investor was physically outside the United States.
5
<PAGE> 6
3.5 Further Representations and Understandings.
(a) Investor understands that no federal or state
agency including the Securi- ties and Exchange Commission, the Arizona
Corporation Commission or the securities commission or authorities of any other
state has approved or disapproved the Shares, passed upon or endorsed the merits
of the offering or the accuracy or adequacy of the documents, or made any
finding or determination as to the fairness of the Shares for public investment
and any representation to the contrary is a criminal offense.
(b) Investor understands that the Shares are being
offered and sold in reli- ance on specific exemptions or exclusions from the
registration requirements of federal and state laws and that the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings set forth herein in order to
determine the suitability of Investor to acquire the Shares.
(c) Investor represents and warrants that the
information set forth herein concerning Investor is true and correct.
3.6 Resales Offshore by Investor. Investor acknowledges,
covenants and agrees that the Shares may and will be resold offshore only in
compliance with Regulation S. In connection with any resale of the Shares
pursuant to Regulation S, Investor will deliver to the Company and will cause
the purchaser to deliver to the Company the attached Exhibit A Certificate of
Compliance. The certificates delivered to the purchaser will bear the legend set
forth in Section 6 hereof.
4. Conditions to Obligations of the Company. The obligations of the
Company under this Agreement are subject to satisfaction of the following
conditions at or prior to the Closing, any of which may be waived by the
Company:
4.1 Representations and Warranties Correct. All of the
representations and warranties of Investor contained in this Agreement shall be
true and correct in all material respects as of the Closing with the same effect
as if made on the date of Closing.
4.2 Performance of Covenants and Agreements. All of the
covenants and agreements of Investor contained in this Agreement and required to
be performed on or before the date of Closing shall have been performed in all
material respects to the reasonable satisfaction of the Company.
4.3 Legal Action.
(a) There shall not have been instituted any material
legal proceeding seeking to prohibit the consummation of the transactions
contemplated by this Agreement.
(b) None of the parties hereto shall be prohibited in
any order, writ, injunction or decree of any governmental body of competent
jurisdiction from consummating the transactions contemplated by this Agreement,
and no material action or proceeding shall then be pending which questions the
validity of this Agreement, any of the transactions contemplated hereby or any
action which has been taken by any of the parties in connection herewith or in
connection with any of the transactions contemplated hereby.
6
<PAGE> 7
5. Conditions to Obligations of Investor. The obligations of Investor
under this Agreement are subject to satisfaction of the following conditions at
or prior to the Closing, any of which may be waived by Investor.
5.1 Representations and Warranties Correct. All of the
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects as of the Closing with the same
effect as if made on the date of Closing.
5.2 Legal Action.
(a) There shall not have been instituted or
threatened any legal proceedings seeking to prohibit the consummation of the
transactions contemplated by this or any like Agreement, or to obtain damages
from Investor or any other Investor with respect thereto.
(b) None of the parties hereto or to other like
agreements in connection with this offering shall be prohibited by any order,
writ, injunction or decree of any governmental body of competent jurisdiction
from consummating the transactions contemplated by this or any like Agreement,
and no action or proceeding shall then be pending which questions the validity
of this or any like Agreement, any of the transactions contemplated hereby or
any action which has been taken by any of the parties in connection herewith or
in connection with any of the transactions contemplated hereby.
6. Legends. The certificates evidencing any of the Shares shall be
endorsed with the legend set forth below, and Investor covenants that Investor
shall not transfer the shares represented by any such certificate without
complying with the restrictions on transfer described in the legend endorsed on
such certificate:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF
ANY STATE UNDER ANY STATE SECURITIES LAW. THEY WERE OFFERED PURSUANT TO
A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S ("REGULATION S")
PROMULGATED UNDER THE 1933 ACT. THE SHARES MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH
TERM IS DEFINED IN REGULATION S) UNLESS THE SHARES ARE REGISTERED UNDER
THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL IS OBTAINED WHICH IS REASONABLY SATISFACTORY TO THE COMPANY
THAT SUCH OFFERS, SALES AND TRANSFERS MAY BE MADE PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
7. Miscellaneous.
7.1 Notices. All notices or other communications given or
made hereunder shall be in writing and shall be deemed delivered personally to
the party being given notice or by facsimile, overnight courier service or by
registered or certified mail, return receipt requested, postage prepaid if to
Investor at its address set forth herein or if to the Company at the address set
forth herein or at such other address as may have been furnished by the Company
to Investor.
7
<PAGE> 8
7.2 Construction. Notwithstanding the place where this
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all terms and provisions hereof shall be construed in accordance with
and governed by the laws of the State of Arizona without giving effect to
principles of conflicts of law.
7.3 Entire Agreement; Amendments and Waiver. This Agreement
and Exhibit A hereto set forth the entire understanding of the parties with
respect to the transactions contemplated hereby, and neither party shall be
bound by nor deemed to have made any representations and/or warranties except
those contained herein or incorporated herein by reference. The provisions of
this Agreement, including Exhibit A hereto, may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of
Investor.
7.4 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective heirs, estate, successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
7.5 Headings. The terms used in this Agreement shall be
deemed to include the masculine and the feminine in the singular and the plural
as the context requires. The headings in this Agreement are for reference
purposes only and shall not be deemed to have any substantive effect.
7.6 Survival of Representations and Warranties. All
representations and warranties contained herein will survive the execution and
delivery of this Agreement and delivery of and payment for the Shares regardless
of any investigation made by or on behalf of the parties.
7.7 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.8 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereby have executed this
Agreement as of the date indicated above.
INVESTOR
- ---------------------------------- -----------------------------------
Exact Name in which Shares PRINT Name of Individual with
are to be registered authority to Purchase the Shares on
behalf of Investor and state
capacity in which signing
-----------------------------------
SIGNATURE of Individual with
Authority to Purchase
OFFSHORE DELIVERY INSTRUCTIONS
NUTRAGENICS, INC. Type or print address where
certificates are to be delivered
By:
------------------------------- -----------------------------------
Street
Its:
------------------------------ -----------------------------------
City, State or Province, Country
-----------------------------------
Telephone Number
-----------------------------------
Facsimile Number
9
<PAGE> 10
EXHIBIT A
CERTIFICATE OF COMPLIANCE
In order to effect the transfer of the Shares of Common Stock
acquired pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement")
entered into between the undersigned seller ("Seller") and NutraGenics, Inc.
(the "Company") without registration under the Securities Act of 1933, as
amended (the "Act"), the undersigned Seller and the undersigned purchaser
("Purchaser") represent, warrant and acknowledge to the Company,
As to Seller that:
A. The undersigned (i) acknowledges that the
sale of Shares to which this Certificate
relates is being made in reliance on Rule
903 and/or 904 of Regulation S under the Act
and (ii) certifies that (A) the offer of
such Shares was not made to a person in the
United States and either (1) at the time the
buy order was originated, the buyer was
outside the United States, or the Seller and
any person acting on its behalf reasonably
believe that the buyer was outside the
United States, or (2) if pursuant to Rule
904, the transaction was executed on or
through the facilities of a designated
offshore securities market, and neither the
Seller nor any persons acting on its behalf
knows or believes that the transaction has
been pre-arranged with a buyer in the United
States, (B) neither the Seller nor any
affiliate of the Seller nor any person
acting on its or their behalf has engaged or
will engage in any directed selling efforts
in the United States in connection with the
offer and sale of such Shares, and (C) the
offer or sale, if made prior to the
expiration of one year from the date of the
Stock Purchase Agreement was not made to a
U.S. Person or for the account or benefit of
a U.S. Person. Terms used herein have the
meanings given to them by Regulation S.
B. The representations and warranties made by
Seller in the Stock Purchase Agreement
remain true and correct as of the date
hereof.
-----------------------------------
Print Name of Seller
Dated: By:
----------------------- --------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 11
As to Purchaser, that:
A. Purchaser acknowledges and agrees that the
Shares have not been registered under the
Act and may be resold only (a) pursuant to
an effective Registration Statement under
the Act and any applicable state securities
laws ("State Acts"), (b) pursuant to an
exemption from registration under the Act
and any applicable State Acts, or (c) in
accordance with Rule 903 and/or 904 of
Regulation S under the Act.
B. If any offer or sale of the Shares hereunder
occurred prior to the expiration of the one
year period referred to in paragraph C
below, Purchaser further represents and
warrants that (i) Purchaser is not a U.S.
Person (as defined in Regulation S) and is
not acquiring the Shares for the account or
benefit of any U.S. Person, (ii) at all
times that the offer to buy or sell the
Shares as contemplated hereby were made and
the buy order was originated the Purchaser
was outside of the United States, and (iii)
Purchaser has no present plan or intention
to sell the Shares in the United States or
to a U.S. Person and will not make any
offers or sales of the Shares to a U.S.
Person or in the United States.
C. Neither Purchaser nor its affiliates nor any
person acting on its or their behalf entered
into, prior to or during the one year period
from the date of the Stock Purchase
Agreement any option, equity swap or other
similar derivative instrument or position
with respect to the Shares.
D. Purchaser acknowledges that the certificate
evidencing the Shares will bear a legend to
the effect that transfer is prohibited
except in compliance with Regulation S,
pursuant to a registration under the Act or
State Acts or pursuant to an exemption
therefrom as set forth in paragraph A above
and acknowledges that the Company will
refuse to register the transfer of Shares
not made in accordance with the provisions
of Regulation S.
-----------------------------------
Print Name of Purchaser
Dated: By:
----------------------- --------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 12
THE SHARES BEING SUBSCRIBED FOR HEREIN HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM
REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE 1933 ACT.
THE SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED
STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S) UNLESS THE
SHARES ARE REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL IS OBTAINED SATISFACTORY TO THE COMPANY THAT SUCH OFFERS,
SALES AND TRANSFERS MAY BE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
SUBSCRIPTION APPLICATION
1. Subscription
1.1 On the basis of the representations, warranties and agreements contained
herein and subject to the terms and conditions herein set forth,
NutraGenics, Inc. (the "Company"), agrees to issue and sell shares of its
Common Stock, $.001 par value, at $________ per share (the "Shares"), and
the undersigned Investor hereby subscribes for and agrees to purchase the
Shares in the amount set forth on the signature page upon acceptance of
this Subscription Application (the "Agreement") by the Company.
1.2 The undersigned is delivering with this Agreement the full amount of the
purchase price of the Shares in U.S. funds by wire transfer as directed by
the Company to the Company's designated escrow account. Such funds
deposited into the escrow account on behalf of the Investor shall be held
until the conditions for the Closing of the offering have been met as set
forth in the Placement Agent Agreement.
2. Representations and Warranties of Investor. By executing this Agreement,
Investor hereby represents and warrants to and covenants with the Company
as follows:
2.1 Investor has the power and authority to enter into this Agreement and to
perform all of its obligations hereunder and this Agreement constitutes a
valid, binding and enforceable obligation of Investor except as the
enforceability of the Agreement may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium other similar laws
relating to or affecting the rights of creditors generally.
2.2 The purchase of the Shares by Investor is legally permitted by all laws and
regulations to which Investor is subject and all consents, approvals,
authorizations of or designations, declarations, or filings in connection
with the valid execution and delivery of this Agreement by Investor or the
purchase of the Shares by Investor has been obtained, or will be obtained.
Investor hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Shares or any use of this Agreement,
including (i) any foreign exchange restrictions applicable to such
purchase, and (ii) the income tax and other tax consequences, if any, which
may be relevant to the purchase, holding, redemption, sale, or transfer of
the Shares. Such Investor's subscription and payment for, and its continued
beneficial ownership of the Shares, will not violate any applicable
securities or other laws of its jurisdiction.
<PAGE> 13
2.3 Investor acknowledges that it has received the Company's Business Plan and
materials accompanying such document (the "Offering Documents"), and is
familiar with and understands the operations of the Company. Investor
understands and acknowledges that the Offering Documents provided in
connection with this investment have been prepared by the Company.
Accordingly, Investor understands and acknowledges that no independent
investment banking firm or legal counsel have passed upon or assumed any
responsibility for the accuracy, completeness or fairness of the
information contained in the Offering Documents.
Investor understands and acknowledges that any financial projections
provided in connection with this investment have not been prepared by
independent accountants and are based on numerous assumptions regarding
sales, revenues and expenses and other factors which may not be realized in
the future. Investor acknowledges that it has been encouraged to rely upon
the advice of its legal counsel and accountants or other financial advisers
with respect to the financial, tax and other considerations relating to the
purchase of the Shares and has been offered, during the course of
discussions concerning the purchase of the Shares, the opportunity to ask
such questions and inspect such documents concerning the Company and its
business and affairs as Investor has requested so as to understand more
fully the nature of the investment and to verify the accuracy of the
information supplied. Investor represents and warrants that, in determining
to purchase the Shares, it has relied solely upon the documents provided
and the advice of its advisors with respect to the tax, foreign and U.S.,
and other consequences involved in purchasing the Shares.
2.4 Investor represents and warrants that the Shares being acquired are being
acquired for its own account and not on behalf of or for the account or
benefit of any U.S. Person (as defined below) and the sale and resale of
the Shares has not been prearranged with any U.S. Person or buyer in the
United States. A "United States Person" means any natural person resident
in the United States; any partnership or corporation organized or
incorporated under the laws of the United States, its territories or
possessions or any state or the District of Columbia; any estate of which
any executor or administrator is a U.S. person; any trust of which any
trustee is a U.S. person; any agency or branch of a foreign entity located
in the United States; any non-discretionary account or similar account
(other than an estate or trust) held by a dealer or other fiduciary for the
account of a U.S. person; any discretionary account or similar account
(other than an estate or trust) held by a dealer or other fiduciary
organized, incorporated, or (if an individual) resident in the United
States; and a partnership or corporation if (i) organized or incorporated
under the laws of any foreign jurisdiction, and (ii) formed by a U.S.
Person principally for the purpose of investing in securities not
registered under the 1933 Act, unless it is organized or incorporated, and
owned, by accredited investors (as defined in Rule 501(a) under the 1933
Act) who are not natural persons, estates or trusts. Investor represents
and warrants that, as of the date of this Agreement, Investor has no
present plan or intention to sell the Shares in the U.S. at any
predetermined time. Investor represents, warrants and covenants that
neither Investor nor its affiliates nor any person acting on its or their
behalf has entered into, has the intention of entering, or will enter into
any option, equity swap or other similar derivative instrument in the U.S.
with respect to the Common Stock of the Company at any time after August
26, 1996 until the end of a period of one year from the date of this
Agreement. Nothing herein shall prevent Investor from selling the Shares
acquired hereunder in accordance with U.S. securities laws.
<PAGE> 14
2.5 Investor represents and warrants that it (i) is experienced in evaluating
and investing in securities of companies in the developmental stage and
acknowledges that it can fend for itself, (ii) can bear the economic risk
of the purchase of the Shares including the total loss of its investment,
and (iii) has such knowledge and experience in business and financial
matters as to be capable of evaluating the merits and risks of an
investment in the Shares.
2.6 Investor understands that the Shares have not been registered under the
1933 Act, or the securities laws of any state. Investor agrees that it will
not sell or otherwise transfer or dispose of the Shares or any portion
thereof unless such Shares are registered under the 1933 Act and any
applicable state securities laws, or except pursuant to the provisions of
Regulation S, or unless Investor obtains an opinion of counsel which is
satisfactory to the Company that such Shares may be sold in reliance on an
exemption from such registration requirements. Investor understands that
the Company may place a legend on any certificates representing the Shares
indicating that the Shares may not be transferred except in accordance with
Regulation S and that the Company will not register a transfer not made in
accordance with Regulation S.
2.7 Investor represents, warrants and certifies that the Shares were not
offered to Investor in the United States, and at the time of execution of
this Agreement and at the time of any offer to Investor to purchase the
Shares hereunder, Investor was physically outside the United States.
2.8 Investor understands that no federal or state agency including the
Securities and Exchange Commission, the Arizona Corporation Commission or
the securities commission or authorities of any other state has approved or
disapproved the Shares, passed upon or endorsed the merits of the offering
or the accuracy or adequacy of the documents, or made any finding or
determination as to the fairness of the Shares for public investment and
any representation to the contrary is a criminal offense.
2.9 Investor understands that the Shares are being offered and sold in reliance
on specific exemptions or exclusions from the registration requirements of
federal and state securities laws and that the Company is relying upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings set forth herein. The representations
and warranties contained herein will survive the delivery of the Shares.
3. Resales Offshore by Investor. Investor acknowledges, covenants and agrees
that the Shares may and will be resold offshore only in compliance with
Regulation S. The certificates delivered to the purchaser will bear the
legend set forth in Section 4 hereof.
4. Legends. The certificates evidencing any of the Shares shall be endorsed
with the legend in substantially the same form as appearing on the first
page of this Agreement, and Investor covenants that Investor shall not
transfer the shares represented by any such certificate without complying
with the restrictions on transfer described in the legend endorsed on such
certificate.
<PAGE> 15
5. Miscellaneous.
5.1 All notices or other communications given or made hereunder shall be in
writing and shall be deemed delivered personally to the party being given
notice or by facsimile, overnight courier service or by registered or
certified mail, return receipt requested, postage prepaid if to Investor at
its address set forth herein or if to the Company at its principal business
office.
5.2 The parties expressly agree that all terms and provisions hereof shall be
construed in accordance with and governed by the laws of the State of
Arizona.
THE UNDERSIGNED IS SUBSCRIBING FOR _____________ SHARES
IN THE AMOUNT OF $___________
IN WITNESS WHEREOF, intending to irrevocably bind the undersigned Investor
and the undersigned's heirs, successors and assigns and to be bound by this
Agreement, the undersigned is executing this Subscription Application as of
the date indicated.
Dated: ____________________, 199____
_______________________________________________
Exact Name in which Shares are to be registered
_______________________________________________
PRINT Name of individual with authority to
purchase the Shares on behalf of Investor
and state capacity in which signing
_______________________________________________
SIGNATURE of Individual with Authority to Purchase
OFFSHORE DELIVERY INSTRUCTIONS
_______________________________________________
Type or print address where certificates are
to be delivered
_______________________________________________
Street
_______________________________________________
City, State or Province, Country
_______________________________________________
Telephone Number
_______________________________________________
Facsimile Number
Accepted:
NUTRAGENICS, INC.
By: ___________________________________________
Its: __________________________________________
<PAGE> 1
EX-10.9
THE SHARES BEING SUBSCRIBED FOR HEREIN HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM
REGISTRATION PURSUANT TO SECTION 4(2) OF THE 1933 ACT. THE SHARES MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SHARES ARE REGISTERED UNDER
THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL IS
OBTAINED WHICH IS REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH OFFERS, SALES
AND TRANSFERS MAY BE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
the ______ day of ________________________, 1997, by and between Bionutrics,
Inc., a Nevada corporation (the "Company"), and __________________________, a
_______________________ corporation (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Stock. On the basis of the
representations, warranties and agreements contained herein and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
_____________ shares of its Common Stock, $.001 par value, at $8.00 per share
(the "Shares"), and the Investor hereby subscribes for and agrees to purchase
the Shares upon acceptance of this Agreement by the Company.
1.2 Payment. Investor is delivering with this Agreement the
full amount of the purchase price of the Shares in the amount of
$_________________ in U.S. funds by wire transfer as directed by the Company to
the Company's designated escrow account. Such funds deposited into the escrow
account on behalf of the Investor shall be held until the conditions for the
Closing of the offering have been met.
1.3 Closing. The closing of the transaction contemplated by
this Agreement (the "Closing") shall be deemed to have occurred when this
Agreement has been executed by both the Investor and the Company and payment
shall have been made as set forth in 1.2 above in consideration for the
Company's delivery into the escrow account of certificates representing the
Shares subscribed for. If at the Closing any of the conditions specified in
Section 5 hereof shall not have been fulfilled to the reasonable satisfaction of
Investor, then Investor shall, at its election, be relieved of all of its
obligations under this Agreement, without thereby waiving any other rights it
may have by reason of such failure or fulfillment. If at the Closing any of the
conditions specified in Section 4 hereof shall not have been fulfilled to the
reasonable satisfaction of the Company, the Company shall, at its election, be
relieved of all of its obligations under this Agreement, without thereby waiving
any other rights it may have by reason of such failure or unfulfillment.
<PAGE> 2
2. Representation and Warranties of the Company. The Company hereby
represents and warrants to the Investor as follows:
2.1 Organization, Good Standing and Qualification. The
Company is a corporation validly existing and in good standing under the laws of
the State of Nevada and has all requisite power and authority to own or lease
and operate its properties and assets and to carry on its business as now
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business, operations, prospects, condition
(financial or other), or properties.
2.2 Capitalization. The authorized capital of the Company
consists of:
(i) Common Stock. 45,000,000 shares of common stock
("Common Stock"), par value $.001, of which 16,097,713 shares are issued and
outstanding as of April 30, 1997.
(ii) Preferred Stock. 5,000,000 shares of preferred
stock ("Preferred Stock"), par value $.001, none of which is outstanding. The
Preferred Stock may be issued from time to time in one or more series and the
Board of Directors is authorized to fix the rights and terms relating to
dividends, conversion, voting, redemption, liquidation preferences and any other
rights, preferences, privileges and restrictions applicable to each such series.
(iii) Warrants and Options . There are no outstanding
options, warrants or rights (including preemptive rights and rights of first
refusal) for the purchase or acquisition from the Company of any shares of its
capital stock except as set forth herein. There are currently outstanding
options to purchase 180,000 shares of Common Stock at $1.50 per share granted to
a director and currently outstanding warrants to purchase 300,000 shares of
Common Stock at $2.50 and 300,000 shares of Common Stock at $4.00 per share
issued to another director, 350,000 of which are subject to vesting at the rate
of 50,000 shares per quarter beginning in November 1996. As of April 30, 1997
options in the amount of 1,265,833 shares were outstanding pursuant to the
Company's Employee Stock Option Plan.
2.3 Valid Issuance of Shares. All of the outstanding shares
of the Company's stock have been duly and validly authorized and issued, are
fully paid and nonassessable, and no further approval or authority of the
stockholders or the directors of the Company will be required by the Company for
the issuance of the Shares. The Shares when issued and paid for in accordance
with the terms of this Agreement will be duly and validly issued, fully paid and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under applicable state and federal securities laws.
2.4 Financial Statements. Except as otherwise stated in the
notes thereto, the financial statements delivered herewith dated October 31,
1996 (audited) and April 30, 1997 (unaudited) have been prepared in conformity
with United States generally accepted accounting principles applied, except as
stated therein, on a consistent basis except that unaudited financial statements
may not contain all footnotes required by generally accepted accounting
principles. The financial statements fairly present the financial position and
result of operations and changes in financial position of the Company as of the
dates and for the periods indicated (subject, in the case of the unaudited
financial statements, to changes resulting from normal year-end audit
adjustment).
2
<PAGE> 3
Except as reflected in such financial statements and the notes
thereto, the Company has no liabilities, absolute or contingent, material to the
operations, business, prospects, assets, properties or condition (financial or
other) of the Company, other than (i) ordinary course liabilities incurred since
the last date of such financial statements in connection with the conduct of the
business of the Company, (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under United States
generally accepted accounting principles to be reflected in the financial
statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company, and
(iii) obligations and commitments pursuant to that certain joint venture entered
into in August 1996 by and between Incon Technologies L.L.C. and the Company's
wholly owned subsidiary.
2.5 No Conflict with Other Instruments. Neither the sale of
the Shares nor the consummation of the transactions herein contemplated, will:
(i) conflict with or constitute a breach of, permit the termination of,
constitute a default under, or violation of (A) the Articles of Incorporation,
as amended, or bylaws of the Company, (B) any material agreement, indenture,
mortgage, deed of trust or other material instrument or agreement or undertaking
by which the Company is bound or to which any of its properties is subject, or,
(C) to the knowledge of the Company, a violation of any law, administrative
regulation, or court decree to which the properties or assets of the Company is
subject; or (ii) result in the creation or imposition of any material lien,
charge or encumbrance upon the property or assets of the Company.
2.6 Authorization. The Company has the corporate power and
authority to enter into this Agreement and to perform all of its obligations
hereunder. The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all necessary corporate actions, and this
Agreement constitutes a legal, valid, binding and enforceable obligation of the
Company. No consent, approval, authorization or order of any court or
governmental agency or board or any other third party, or registration,
qualification, designation or filing with any Federal, state or local authority
is required to consummate the transactions contemplated by this Agreement.
3. Representations and Warranties of Investor. By executing this
Agreement, Investor hereby represents and warrants to and covenants with the
Company as follows:
3.1 Authorization. Investor has the power and authority to
enter into this Agreement and to perform all of its obligations hereunder and
this Agreement constitutes a valid, binding and enforceable obligation of
Investor.
3.2 Legal Investment and Compliance with Laws. The purchase
of the Shares by Investor is legally permitted by all laws and regulations to
which Investor is subject and all consents, approvals, authorizations of or
designations, declarations, or filings in connection with the valid execution
and delivery of this Agreement by Investor or the purchase of the Shares by
Investor has been obtained, or will be obtained. Investor hereby represents that
it has satisfied itself as to the full observance of the laws of its
jurisdiction in connection with any invitation to subscribe for the Shares or
any use of this Agreement, including (i) any foreign exchange restrictions
applicable to such purchase, and (ii) the income tax and other tax consequences,
if any, which may be relevant to the purchase, holding, redemption, sale, or
transfer of the Shares. Such Investor's subscription and payment for, and its
continued beneficial ownership of the Shares, will not violate any applicable
securities or other laws of its jurisdiction.
3
<PAGE> 4
3.3 Access to Information. Investor acknowledges that it has
received the Company's Form 10 and the 10-Q for the period ended April 30, 1997
(the "Offering Documents"), and is familiar with and understands the operations
of the Company.
(a) Investor understands and acknowledges that the
Offering Documents provided in connection with this investment have been
prepared by the Company. Accordingly, Investor understands and acknowledges that
no independent investment banking firm or legal counsel have passed upon or
assumed any responsibility for the accuracy, completeness or fairness of the
information contained in the Offering Documents.
(b) Investor understands and acknowledges that any
financial projections provided in connection with this investment and have not
been prepared by independent accountants and are based on numerous assumptions
regarding sales, revenues and expenses and other factors which may not be
realized in the future.
(c) Investor acknowledges that it has been encouraged
to rely upon the advice of its legal counsel and accountants or other financial
advisers with respect to the financial, tax and other considerations relating to
the purchase of the Shares and has been offered, during the course of
discussions concerning the purchase of the Shares, the opportunity to ask such
questions and inspect such documents concerning the Company and its business and
affairs as Investor has requested so as to understand more fully the nature of
the investment and to verify the accuracy of the information supplied.
(d) Investor represents and warrants that, in
determining to purchase the Shares, it has relied solely upon the documents
provided and the advice of its advisors with respect to the tax, foreign and
U.S., and other consequences involved in purchasing the Shares.
3.4 Acquisition for Investment and Unregistered Nature of
the Shares.
(a) Investor represents and warrants that the Shares
being acquired are being acquired for its own account without a view to public
distribution or resale and that Investor has no contract, understanding,
agreement or arrangement to sell or otherwise transfer or dispose of the Shares
or any portion thereof to any other person.
(b) Investor represents and warrants that it (i) is
experienced in evaluating and investing in securities of companies in the
developmental stage and acknowledges that it can fend for itself, (ii) can bear
the economic risk of the purchase of the Shares including the total loss of its
investment, and (iii) has such knowledge and experience in business and
financial matters as to be capable of evaluating the merits and risks of an
investment in the Shares.
(c) Investor understands that the Shares have not
been registered under the 1933 Act, or the securities laws of any state and are
subject to substantial restrictions on resale or transfer.
(d) Investor agrees that it will not sell or
otherwise transfer or dispose of the Shares or any portion thereof unless such
Shares are registered under the 1933 Act and any applicable state securities
laws, or unless Investor obtains an opinion of counsel which is reasonably
satisfactory to the Company that such Shares may be sold in reliance on an
exemption from such registration requirements.
4
<PAGE> 5
(e) Investor understands that (i) the Company has no
obligation to register any Shares for resale or transfer under the 1933 Act or
any state securities laws and has made no representation that it will file the
necessary reports or publish the necessary information as required by Rule 144
under the 1933 Act that would make available an exemption from the registration
requirements of any such laws for the resale or transfer of the Shares; (ii) the
Company may place a legend on any certificates representing the Shares
indicating that the Shares may not be transferred except in accordance with an
exemption from the 1933 Act; (iii) the Company will not register a transfer not
made in accordance with an exemption from the 1933 Act; and (iv) Investor
therefore may be precluded from selling or otherwise transferring or disposing
of any of the Shares or any portion thereof for an indefinite period of time or
at any particular time.
3.5 Further Representations and Understandings.
(a) Investor understands that no federal or state
agency including the Securities and Exchange Commission, the Arizona
Corporation Commission or the securities commission or authorities of any other
state has approved or disapproved the Shares, passed upon or endorsed the merits
of the offering or the accuracy or adequacy of the documents, or made any
finding or determination as to the fairness of the Shares for public investment
and any representation to the contrary is a criminal offense.
(b) Investor understands that the Shares are being
offered and sold in reliance on specific exemptions or exclusions from the
registration requirements of federal and state laws and that the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings set forth herein in order to
determine the suitability of Investor to acquire the Shares.
(c) Investor represents and warrants that the
information set forth herein concerning Investor is true and correct.
3.6 Resales Offshore by Investor. Investor acknowledges,
covenants and agrees that the Shares may and will be resold offshore only in
compliance with Regulation S. In connection with any resale of the Shares
pursuant to Regulation S, Investor will deliver to the Company and will cause
the purchaser to deliver to the Company the attached Exhibit A Certificate of
Compliance. THE CERTIFICATES DELIVERED TO THE PURCHASER WILL BEAR THE LEGEND SET
FORTH IN SECTION 6 HEREOF.
4. Conditions to Obligations of the Company. The obligations of the
Company under this Agreement are subject to satisfaction of the following
conditions at or prior to the Closing, any of which may be waived by the
Company:
4.1 Representations and Warranties Correct. All of the
representations and warranties of Investor contained in this Agreement shall be
true and correct in all material respects as of the Closing with the same effect
as if made on the date of Closing.
4.2 Performance of Covenants and Agreements. All of the
covenants and agreements of Investor contained in this Agreement and required to
be performed on or before the date of Closing shall have been performed in all
material respects to the reasonable satisfaction of the Company.
5
<PAGE> 6
4.3 Legal Action.
(a) There shall not have been instituted any material
legal proceeding seeking to prohibit the consummation of the transactions
contemplated by this Agreement.
(b) None of the parties hereto shall be prohibited in
any order, writ, injunction or decree of any governmental body of competent
jurisdiction from consummating the transactions contemplated by this Agreement,
and no material action or proceeding shall then be pending which questions the
validity of this Agreement, any of the transactions contemplated hereby or any
action which has been taken by any of the parties in connection herewith or in
connection with any of the transactions contemplated hereby.
5. Conditions to Obligations of Investor. The obligations of Investor
under this Agreement are subject to satisfaction of the following conditions at
or prior to the Closing, any of which may be waived by Investor.
5.1 Representations and Warranties Correct. All of the
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects as of the Closing with the same
effect as if made on the date of Closing.
5.2 Legal Action.
(a) There shall not have been instituted or threatened
any legal proceedings seeking to prohibit the consummation of the transactions
contemplated by this or any like Agreement, or to obtain damages from Investor
or any other Investor with respect thereto.
(b) None of the parties hereto or to other like
agreements in connection with this offering shall be prohibited by any order,
writ, injunction or decree of any governmental body of competent jurisdiction
from consummating the transactions contemplated by this or any like Agreement,
and no action or proceeding shall then be pending which questions the validity
of this or any like Agreement, any of the transactions contemplated hereby or
any action which has been taken by any of the parties in connection herewith or
in connection with any of the transactions contemplated hereby.
6. Legends. The certificates evidencing any of the Shares shall be
endorsed with the legend set forth below, and Investor covenants that Investor
shall not transfer the shares represented by any such certificate without
complying with the restrictions on transfer described in the legend endorsed on
such certificate:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF
ANY STATE UNDER ANY STATE SECURITIES LAW. THEY WERE OFFERED PURSUANT TO
AN EXEMPTION FROM REGISTRATION PURSUANT TO SECTION 4(2) OF THE 1933
ACT. THE SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS THE SHARES ARE REGISTERED UNDER THE 1933 ACT AND APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IS OBTAINED WHICH IS
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH OFFERS,
6
<PAGE> 7
SALES AND TRANSFERS MAY BE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
7. Miscellaneous.
7.1 Notices. All notices or other communications given or
made hereunder shall be in writing and shall be deemed delivered personally to
the party being given notice or by facsimile, overnight courier service or by
registered or certified mail, return receipt requested, postage prepaid if to
Investor at its address set forth herein or if to the Company at the address set
forth herein or at such other address as may have been furnished by the Company
to Investor.
7.2 Construction. Notwithstanding the place where this
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all terms and provisions hereof shall be construed in accordance with
and governed by the laws of the State of Arizona without giving effect to
principles of conflicts of law.
7.3 Entire Agreement; Amendments and Waiver. This Agreement
and Exhibit A hereto set forth the entire understanding of the parties with
respect to the transactions contemplated hereby, and neither party shall be
bound by nor deemed to have made any representations and/or warranties except
those contained herein or incorporated herein by reference. The provisions of
this Agreement, including Exhibit A hereto, may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of
Investor.
7.4 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective heirs, estate, successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
7.5 Headings. The terms used in this Agreement shall be
deemed to include the masculine and the feminine in the singular and the plural
as the context requires. The headings in this Agreement are for reference
purposes only and shall not be deemed to have any substantive effect.
7.6 Survival of Representations and Warranties. All
representations and warranties contained herein will survive the execution and
delivery of this Agreement and delivery of and payment for the Shares regardless
of any investigation made by or on behalf of the parties.
7.7 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.8 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereby have executed this
Agreement as of the date indicated above.
INVESTOR
- -------------------------- -----------------------------------------------
Exact Name in which Shares PRINT Name of Individual with authority to
are to be registered Purchase the Shares on behalf of Investor
and state capacity in which signing
----------------------------------------
SIGNATURE of Individual with Authority to
Purchase
DELIVERY INSTRUCTIONS
----------------------------------------
BIONUTRICS, INC. Type or print address where certificates
are to be delivered
By:
--------------- ----------------------------------------
Its: President Street
----------------------------------------
City, State or Province, Country
----------------------------------------
Telephone Number
----------------------------------------
Facsimile Number
8
<PAGE> 9
EXHIBIT A
CERTIFICATE OF COMPLIANCE
FOR TRANSFER OF SHARES IN AN OFFSHORE TRANSACTION
In order to effect the transfer offshore of the Shares of
Common Stock acquired pursuant to a Stock Purchase Agreement (the "Stock
Purchase Agreement") entered into between the undersigned seller ("Seller") and
Bionutrics, Inc. (the "Company") without registration under the Securities Act
of 1933, as amended (the "Act"), the undersigned Seller and the undersigned
purchaser ("Purchaser") represent, warrant and acknowledge to the Company,
As to Seller that:
A. The undersigned (i) acknowledges that the
sale of Shares to which this Certificate
relates is being made in reliance on Rule
903 and/or 904 of Regulation S under the Act
and (ii) certifies that (A) the offer of
such Shares was not made to a person in the
United States and either (1) at the time the
buy order was originated, the buyer was
outside the United States, or the Seller and
any person acting on its behalf reasonably
believe that the buyer was outside the
United States, or (2) if pursuant to Rule
904, the transaction was executed on or
through the facilities of a designated
offshore securities market, and neither the
Seller nor any persons acting on its behalf
knows or believes that the transaction has
been pre-arranged with a buyer in the United
States, (B) neither the Seller nor any
affiliate of the Seller nor any person
acting on its or their behalf has engaged or
will engage in any directed selling efforts
in the United States in connection with the
offer and sale of such Shares, and (C) the
offer or sale, if made prior to the
expiration of one year from the date of the
Stock Purchase Agreement was not made to a
U.S. Person or for the account or benefit of
a U.S. Person. Terms used herein have the
meanings given to them by Regulation S.
B. The representations and warranties made by
Seller in the Stock Purchase Agreement
remain true and correct as of the date
hereof.
Print Name of Seller
Dated: By:
------------------ --------------------------
Name:
--------------------------
Title:
--------------------------
<PAGE> 10
As to Purchaser, that:
A. Purchaser acknowledges and agrees that the
Shares have not been registered under the
Act and may be resold only (a) pursuant to
an effective Registration Statement under
the Act and any applicable state securities
laws ("State Acts"), (b) pursuant to an
exemption from registration under the Act
and any applicable State Acts, or (c) in
accordance with Rule 903 and/or 904 of
Regulation S under the Act.
B. If any offer or sale of the Shares hereunder
occurred prior to the expiration of the one
year period referred to in paragraph C
below, Purchaser further represents and
warrants that (i) Purchaser is not a U.S.
Person (as defined in Regulation S) and is
not acquiring the Shares for the account or
benefit of any U.S. Person, (ii) at all
times that the offer to buy or sell the
Shares as contemplated hereby were made and
the buy order was originated the Purchaser
was outside of the United States, and (iii)
Purchaser has no present plan or intention
to sell the Shares in the United States or
to a U.S. Person and will not make any
offers or sales of the Shares to a U.S.
Person or in the United States.
C. Neither Purchaser nor its affiliates nor any
person acting on its or their behalf entered
into, prior to or during the one year period
from the date of the Stock Purchase
Agreement any option, equity swap or other
similar derivative instrument or position
with respect to the Shares.
D. Purchaser acknowledges that the certificate
evidencing the Shares will bear a legend to
the effect that transfer is prohibited
except under Regulation S, pursuant to a
registration under the Act or State Acts or
pursuant to an exemption therefrom as set
forth in paragraph A above and acknowledges
that the Company will refuse to register the
transfer of Shares not made in accordance
with such requirements.
-------------------------------------
Print Name of Purchaser
Dated: By:
----------------- -------------------------------
Name:
-------------------------------
Title:
-------------------------------
<PAGE> 1
EXHIBIT 10.10
THE SHARES BEING SUBSCRIBED FOR HEREIN HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM
REGISTRATION PURSUANT TO SECTION 4(2) OF THE 1933 ACT. THE SHARES MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SHARES ARE REGISTERED UNDER
THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL IS
OBTAINED WHICH IS REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH OFFERS, SALES
AND TRANSFERS MAY BE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the
______ day of ________________________, 1997, by and between Bionutrics, Inc., a
Nevada corporation (the "Company"), and __________________________, a
_______________________ corporation (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Stock. On the basis of the
representations, warranties and agreements contained herein and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
187,500 shares of its Common Stock, $.001 par value, at $8.00 per share (the
"Shares"), and the Investor hereby subscribes for and agrees to purchase the
Shares upon acceptance of this Agreement by the Company. This offer shall
terminate on October 25, 1997.
1.2 Payment. Investor is delivering with this Agreement to the
Company's designated escrow account the full amount of the purchase price of the
Shares in the amount of $_________ evidenced by a promissory note (the "Note")
in the amount of ______________________________________________________ in U.S.
funds bearing interest at 5% per annum and due and payable on or before May 1,
1998, all as set forth in the Note delivered herewith.
1.3 Closing. The closing of the transaction contemplated by this
Agreement (the "Closing") shall be deemed to have occurred when this Agreement
has been executed by both the Investor and the Company and the Note shall have
been delivered as set forth in 1.2 above in consideration for the Company's
delivery into the escrow account of certificates representing the Shares
subscribed for. Delivery of the Note shall constitute acknowledgement by
Investor that the conditions specified in Section 5 hereof shall have been
fulfilled to the reasonable satisfaction of Investor, provided that if any of
the conditions specified in Section 4 hereof shall not have been fulfilled to
the reasonable satisfaction of the Company, the Company shall, at its election,
and upon return of the Note to Investor, be relieved of all of its obligations
under this Agreement, without thereby waiving any other rights it may have by
reason of such failure or unfulfillment.
<PAGE> 2
2. Representation and Warranties of the Company. The Company hereby
represents and warrants to the Investor as follows:
2.1 Organization, Good Standing and Qualification. The Company is a
corporation validly existing and in good standing under the laws of the State of
Nevada and has all requisite power and authority to own or lease and operate its
properties and assets and to carry on its business as now conducted. The Company
is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business, operations, prospects, condition (financial or other),
or properties.
2.2 Capitalization. The authorized capital of the Company consists
of:
(i) Common Stock. 45,000,000 shares of common stock ("Common
Stock"), par value $.001, of which 16,097,713 shares are issued and outstanding
as of April 30, 1997.
(ii) Preferred Stock. 5,000,000 shares of preferred stock
("Preferred Stock"), par value $.001, none of which is outstanding. The
Preferred Stock may be issued from time to time in one or more series and the
Board of Directors is authorized to fix the rights and terms relating to
dividends, conversion, voting, redemption, liquidation preferences and any other
rights, preferences, privileges and restrictions applicable to each such series.
(iii) Warrants and Options . There are no outstanding options,
warrants or rights (including preemptive rights and rights of first refusal) for
the purchase or acquisition from the Company of any shares of its capital stock
except as set forth herein. There are currently outstanding options to purchase
180,000 shares of Common Stock at $1.50 per share granted to a director and
currently outstanding warrants to purchase 300,000 shares of Common Stock at
$2.50 and 300,000 shares of Common Stock at $4.00 per share issued to another
director, 350,000 of which are subject to vesting at the rate of 50,000 shares
per quarter beginning in November 1996. As of April 30, 1997 options in the
amount of 1,265,833 shares were outstanding pursuant to the Company's Employee
Stock Option Plan.
2.3 Valid Issuance of Shares. All of the outstanding shares of the
Company's stock have been duly and validly authorized and issued, are fully paid
and nonassessable, and no further approval or authority of the stockholders or
the directors of the Company will be required by the Company for the issuance of
the Shares. The Shares when issued and paid for by the delivery of the Note in
accordance with the terms of this Agreement will be duly and validly issued,
fully paid and nonassessable and will be free of restrictions on transfer other
than restrictions on transfer under applicable state and federal securities laws
and except as set forth herein. The Shares will bear a restriction that if the
Note is not paid when due, the Shares will be deemed automatically cancelled as
provided under Nevada law.
2.4 Financial Statements. Except as otherwise stated in the notes
thereto, the financial statements delivered herewith dated October 31, 1996
(audited) and April 30, 1997 (unaudited) have been prepared in conformity with
United States generally accepted accounting principles applied, except as stated
therein, on a consistent basis except that unaudited financial statements may
not contain all footnotes required by generally accepted accounting principles.
The financial statements fairly present the financial position and result of
operations and changes in financial position of the Company as of the
2
<PAGE> 3
dates and for the periods indicated (subject, in the case of the unaudited
financial statements, to changes resulting from normal year-end audit
adjustment).
Except as reflected in such financial statements and the notes
thereto, the Company has no liabilities, absolute or contingent, material to the
operations, business, prospects, assets, properties or condition (financial or
other) of the Company, other than (i) ordinary course liabilities incurred since
the last date of such financial statements in connection with the conduct of the
business of the Company, (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under United States
generally accepted accounting principles to be reflected in the financial
statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company, and
(iii) obligations and commitments pursuant to that certain joint venture entered
into in August 1996 by and between Incon Technologies L.L.C. and the Company's
wholly owned subsidiary.
2.5 No Conflict with Other Instruments. Neither the sale of the
Shares nor the consummation of the transactions herein contemplated, will: (i)
conflict with or constitute a breach of, permit the termination of, constitute a
default under, or violation of (A) the Articles of Incorporation, as amended, or
bylaws of the Company, (B) any material agreement, indenture, mortgage, deed of
trust or other material instrument or agreement or undertaking by which the
Company is bound or to which any of its properties is subject, or, (C) to the
knowledge of the Company, a violation of any law, administrative regulation, or
court decree to which the properties or assets of the Company is subject; or
(ii) result in the creation or imposition of any material lien, charge or
encumbrance upon the property or assets of the Company.
2.6 Authorization. The Company has the corporate power and
authority to enter into this Agreement and to perform all of its obligations
hereunder. The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all necessary corporate actions, and this
Agreement constitutes a legal, valid, binding and enforceable obligation of the
Company. No consent, approval, authorization or order of any court or
governmental agency or board or any other third party, or registration,
qualification, designation or filing with any Federal, state or local authority
is required to consummate the transactions contemplated by this Agreement.
3. Representations and Warranties of Investor. By executing this
Agreement, Investor hereby represents and warrants to and covenants with the
Company as follows:
3.1 Authorization. Investor has the power and authority to enter
into this Agreement and to perform all of its obligations hereunder and this
Agreement constitutes a valid, binding and enforceable obligation of Investor.
3.2 Legal Investment and Compliance with Laws. The purchase of the
Shares by Investor is legally permitted by all laws and regulations to which
Investor is subject and all consents, approvals, authorizations of or
designations, declarations, or filings in connection with the valid execution
and delivery of this Agreement by Investor or the purchase of the Shares by
Investor has been obtained, or will be obtained. Investor hereby represents that
it has satisfied itself as to the full observance of the laws of its
jurisdiction in connection with any invitation to subscribe for the Shares or
any use of this Agreement, including (i) any foreign exchange restrictions
applicable to such purchase, and (ii) the income tax and other tax consequences,
if any, which may be relevant to the purchase, holding,
3
<PAGE> 4
redemption, sale, or transfer of the Shares. Such Investor's subscription and
payment for, and its continued beneficial ownership of the Shares, will not
violate any applicable securities or other laws of its jurisdiction.
3.3 Access to Information. Investor acknowledges that it has
received the Company's Form 10/A and the 10-Q for the period ended April 30,
1997 (the "Offering Documents"), and is familiar with and understands the
operations of the Company.
(a) Investor understands and acknowledges that the Offering
Documents provided in connection with this investment have been prepared by the
Company. Accordingly, Investor understands and acknowledges that no independent
investment banking firm or legal counsel have passed upon or assumed any
responsibility for the accuracy, completeness or fairness of the information
contained in the Offering Documents.
(b) Investor understands and acknowledges that any financial
projections provided in connection with this investment and have not been
prepared by independent accountants and are based on numerous assumptions
regarding sales, revenues and expenses and other factors which may not be
realized in the future.
(c) Investor acknowledges that it has been encouraged to rely
upon the advice of its legal counsel and accountants or other financial advisers
with respect to the financial, tax and other considerations relating to the
purchase of the Shares and has been offered, during the course of discussions
concerning the purchase of the Shares, the opportunity to ask such questions and
inspect such documents concerning the Company and its business and affairs as
Investor has requested so as to understand more fully the nature of the
investment and to verify the accuracy of the information supplied.
(d) Investor represents and warrants that, in determining to
purchase the Shares, it has relied solely upon the documents provided and the
advice of its advisors with respect to the tax, foreign and U.S., and other
consequences involved in purchasing the Shares.
3.4 Acquisition for Investment and Unregistered Nature of the
Shares.
(a) Investor represents and warrants that the Shares being
acquired are being acquired for its own account without a view to public
distribution or resale and that Investor has no contract, understanding,
agreement or arrangement to sell or otherwise transfer or dispose of the Shares
or any portion thereof to any other person.
(b) Investor represents and warrants that it (i) is
experienced in evaluating and investing in securities of companies in the
developmental stage and acknowledges that it can fend for itself, (ii) can bear
the economic risk of the purchase of the Shares including the total loss of its
investment, and (iii) has such knowledge and experience in business and
financial matters as to be capable of evaluating the merits and risks of an
investment in the Shares.
(c) Investor understands that the Shares have not been
registered under the 1933 Act, or the securities laws of any state and are
subject to substantial restrictions on resale or transfer.
4
<PAGE> 5
(d) Investor agrees that it will not sell or otherwise
transfer or dispose of the Shares or any portion thereof unless such Shares are
registered under the 1933 Act and any applicable state securities laws, or
unless Investor obtains an opinion of counsel which is reasonably satisfactory
to the Company that such Shares may be sold in reliance on an exemption from
such registration requirements.
(e) Investor understands that (i) the Company has no
obligation to register any Shares for resale or transfer under the 1933 Act or
any state securities laws and has made no representation that it will file the
necessary reports or publish the necessary information as required by Rule 144
under the 1933 Act that would make available an exemption from the registration
requirements of any such laws for the resale or transfer of the Shares; (ii) the
Company may place a legend on any certificates representing the Shares
indicating that the Shares may not be transferred except in accordance with an
exemption from the 1933 Act; (iii) the Company will not register a transfer not
made in accordance with an exemption from the 1933 Act; and (iv) Investor
therefore may be precluded from selling or otherwise transferring or disposing
of any of the Shares or any portion thereof for an indefinite period of time or
at any particular time.
3.5 Further Representations and Understandings.
(a) Investor understands that no federal or state agency
including the Securities and Exchange Commission, the Arizona Corporation
Commission or the securities commission or authorities of any other state has
approved or disapproved the Shares, passed upon or endorsed the merits of the
offering or the accuracy or adequacy of the documents, or made any finding or
determination as to the fairness of the Shares for public investment and any
representation to the contrary is a criminal offense.
(b) Investor understands that the Shares are being offered and
sold in reliance on specific exemptions or exclusions from the registration
requirements of federal and state laws and that the Company is relying upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings set forth herein in order to determine the
suitability of Investor to acquire the Shares.
(c) Investor represents and warrants that the information set
forth herein concerning Investor is true and correct.
3.6 Resales Offshore by Investor. Investor acknowledges, covenants
and agrees that the Shares may and will be resold offshore only in compliance
with Regulation S. In connection with any resale of the Shares pursuant to
Regulation S, Investor will deliver to the Company and will cause the purchaser
to deliver to the Company the attached Exhibit A Certificate of Compliance.
THE CERTIFICATES DELIVERED TO THE PURCHASER WILL BEAR THE LEGEND SET FORTH IN
SECTION 6(a) HEREOF.
4. Conditions to Obligations of the Company. The obligations of the
Company under this Agreement are subject to satisfaction of the following
conditions at or prior to the Closing, any of which may be waived by the
Company:
5
<PAGE> 6
4.1 Representations and Warranties Correct. All of the
representations and warranties of Investor contained in this Agreement shall be
true and correct in all material respects as of the Closing with the same effect
as if made on the date of Closing.
4.2 Performance of Covenants and Agreements. All of the covenants
and agreements of Investor contained in this Agreement and required to be
performed on or before the date of Closing shall have been performed in all
material respects to the reasonable satisfaction of the Company.
4.3 Legal Action.
(a) There shall not have been instituted any material legal
proceeding seeking to prohibit the consummation of the transactions contemplated
by this Agreement.
(b) None of the parties hereto shall be prohibited in any
order, writ, injunction or decree of any governmental body of competent
jurisdiction from consummating the transactions contemplated by this Agreement,
and no material action or proceeding shall then be pending which questions the
validity of this Agreement, any of the transactions contemplated hereby or any
action which has been taken by any of the parties in connection herewith or in
connection with any of the transactions contemplated hereby.
5. Conditions to Obligations of Investor. The obligations of Investor
under this Agreement are subject to satisfaction of the following conditions at
or prior to the Closing, any of which may be waived by Investor.
5.1 Representations and Warranties Correct. All of the
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects as of the Closing with the same
effect as if made on the date of Closing.
5.2 Legal Action.
(a) There shall not have been instituted or threatened any
legal proceedings seeking to prohibit the consummation of the transactions
contemplated by this or any like Agreement, or to obtain damages from Investor
or any other Investor with respect thereto.
(b) None of the parties hereto or to other like agreements in
connection with this offering shall be prohibited by any order, writ, injunction
or decree of any governmental body of competent jurisdiction from consummating
the transactions contemplated by this or any like Agreement, and no action or
proceeding shall then be pending which questions the validity of this or any
like Agreement, any of the transactions contemplated hereby or any action which
has been taken by any of the parties in connection herewith or in connection
with any of the transactions contemplated hereby.
6. Legends.
(a) The certificates evidencing any of the Shares shall be endorsed
with the legend set forth below, and Investor covenants that Investor shall not
transfer the shares represented by any such certificate without complying with
the restrictions on transfer described in the legend endorsed on such
certificate:
6
<PAGE> 7
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED, (THE "1933 ACT") OR THE SECURITIES COMMISSION OF ANY
STATE UNDER ANY STATE SECURITIES LAW. THEY WERE OFFERED PURSUANT TO AN
EXEMPTION FROM REGISTRATION PURSUANT TO SECTION 4(2) OF THE 1933 ACT. THE
SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE
SHARES ARE REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL IS OBTAINED WHICH IS REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH OFFERS, SALES AND TRANSFERS MAY BE
MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
(b) The Shares shall also be endorsed with the following
restriction:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN PAID FOR PURSUANT TO
A CERTAIN PROMISSORY NOTE DATED THE DATE HEREOF IN THE FULL AMOUNT OF THE
PURCHASE PRICE. IF SUCH PROMISSORY NOTE IS NOT PAID IN FULL WHEN DUE, THE
SHARES EVIDENCED HEREBY WILL BE DEEMED AUTOMATICALLY CANCELLED AS
PROVIDED UNDER NEVADA LAW.
7. Miscellaneous.
7.1 Notices. All notices or other communications given or made
hereunder shall be in writing and shall be deemed delivered personally to the
party being given notice or by facsimile, overnight courier service or by
registered or certified mail, return receipt requested, postage prepaid if to
Investor at its address set forth herein or if to the Company at the address set
forth herein or at such other address as may have been furnished by the Company
to Investor.
7.2 Construction. Notwithstanding the place where this Agreement
may be executed by any of the parties hereto, the parties expressly agree that
all terms and provisions hereof shall be construed in accordance with and
governed by the laws of the State of Arizona without giving effect to principles
of conflicts of law.
7.3 Entire Agreement; Amendments and Waiver. This Agreement and
Exhibit A hereto set forth the entire understanding of the parties with respect
to the transactions contemplated hereby, and neither party shall be bound by nor
deemed to have made any representations and/or warranties except those contained
herein or incorporated herein by reference. The provisions of this Agreement,
including Exhibit A hereto, may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of Investor.
7.4 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective heirs, estate, successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights,
7
<PAGE> 8
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
7.5 Headings. The terms used in this Agreement shall be deemed to
include the masculine and the feminine in the singular and the plural as the
context requires. The headings in this Agreement are for reference purposes only
and shall not be deemed to have any substantive effect.
7.6 Survival of Representations and Warranties. All representations
and warranties contained herein will survive the execution and delivery of this
Agreement and delivery of and payment for the Shares regardless of any
investigation made by or on behalf of the parties.
7.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereby have executed this Agreement
as of the date indicated above.
INVESTOR
______________________ ____________________________________________
Exact Name in which Shares PRINT Name of Individual with authority to
are to be registered Purchase the Shares on behalf of Investor
and state capacity in which signing
____________________________________________
SIGNATURE of Individual with Authority to
Purchase
DELIVERY INSTRUCTIONS
--------------------------------------------
BIONUTRICS, INC. Type or print address where certificates
are to be delivered
____________________________________________
By:_________________________ ____________________________________________
Its: President Street
____________________________________________
City, State or Province, Country
____________________________________________
Telephone Number
____________________________________________
Facsimile Number
9
<PAGE> 10
EXHIBIT A
CERTIFICATE OF COMPLIANCE
FOR TRANSFER OF SHARES IN AN OFFSHORE TRANSACTION
In order to effect the transfer offshore of the Shares of Common
Stock acquired pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") entered into between the undersigned seller ("Seller") and
Bionutrics, Inc. (the "Company") without registration under the Securities Act
of 1933, as amended (the "Act"), the undersigned Seller and the undersigned
purchaser ("Purchaser") represent, warrant and acknowledge to the Company,
As to Seller that:
A. The undersigned (i) acknowledges that the sale of
Shares to which this Certificate relates is being
made in reliance on Rule 903 and/or 904 of Regulation
S under the Act and (ii) certifies that (A) the offer
of such Shares was not made to a person in the United
States and either (1) at the time the buy order was
originated, the buyer was outside the United States,
or the Seller and any person acting on its behalf
reasonably believe that the buyer was outside the
United States, or (2) if pursuant to Rule 904, the
transaction was executed on or through the facilities
of a designated offshore securities market, and
neither the Seller nor any persons acting on its
behalf knows or believes that the transaction has
been pre-arranged with a buyer in the United States,
(B) neither the Seller nor any affiliate of the
Seller nor any person acting on its or their behalf
has engaged or will engage in any directed selling
efforts in the United States in connection with the
offer and sale of such Shares, and (C) the offer or
sale, if made prior to the expiration of one year
from the date of the Stock Purchase Agreement was not
made to a U.S. Person or for the account or benefit
of a U.S. Person. Terms used herein have the meanings
given to them by Regulation S.
B. The representations and warranties made by Seller in
the Stock Purchase Agreement remain true and correct
as of the date hereof.
______________________________________________
Print Name of Seller
Dated:___________ By:___________________________________________
Name:_________________________________________
Title:________________________________________
<PAGE> 11
As to Purchaser, that:
A. Purchaser acknowledges and agrees that the Shares
have not been registered under the Act and may be
resold only (a) pursuant to an effective Registration
Statement under the Act and any applicable state
securities laws ("State Acts"), (b) pursuant to an
exemption from registration under the Act and any
applicable State Acts, or (c) in accordance with Rule
903 and/or 904 of Regulation S under the Act.
B. If any offer or sale of the Shares hereunder occurred
prior to the expiration of the one year period
referred to in paragraph C below, Purchaser further
represents and warrants that (i) Purchaser is not a
U.S. Person (as defined in Regulation S) and is not
acquiring the Shares for the account or benefit of
any U.S. Person, (ii) at all times that the offer to
buy or sell the Shares as contemplated hereby were
made and the buy order was originated the Purchaser
was outside of the United States, and (iii) Purchaser
has no present plan or intention to sell the Shares
in the United States or to a U.S. Person and will not
make any offers or sales of the Shares to a U.S.
Person or in the United States.
C. Neither Purchaser nor its affiliates nor any person
acting on its or their behalf entered into, prior to
or during the one year period from the date of the
Stock Purchase Agreement any option, equity swap or
other similar derivative instrument or position with
respect to the Shares.
D. Purchaser acknowledges that the certificate
evidencing the Shares will bear a legend to the
effect that transfer is prohibited except under
Regulation S, pursuant to a registration under the
Act or State Acts or pursuant to an exemption
therefrom as set forth in paragraph A above and
acknowledges that the Company will refuse to register
the transfer of Shares not made in accordance with
such requirements.
______________________________________________
Print Name of Seller
Dated:___________ By:___________________________________________
Name:_________________________________________
Title:________________________________________
<PAGE> 12
PROMISSORY NOTE
U.S. $_________ PHOENIX, ARIZONA
________, 199__
FOR VALUE RECEIVED, ________________________________, a(n) _____________
corporation (the "Maker"), hereby promises to pay to BIONUTRICS, INC. (the
"Holder"), the principal amount of ____________________________ ($___________),
together with simple interest thereon from and including the date of this
Promissory Note (the "Note") until, but not including, the date of full and
final payment, at the Interest Rate as hereinafter defined.
1. INTEREST. Interest shall accrue on the principal amount then
outstanding hereunder at the rate of 5% per annum (the "Interest Rate") based on
the number of days elapsed in a 365-day year. Notwithstanding the foregoing, if
at any time implementation of any provision hereof shall cause the interest
contracted for or charged herein and collectible hereunder to exceed the
applicable lawful maximum rate, then the Interest Rate shall be limited to such
lawful maximum.
2. PAYMENTS. The principal sum of this Note, together with all
accrued but unpaid interest due hereunder, shall be due and payable on May 1,
1998 (the "Due Date").
3. ACCELERATION AND OTHER REMEDIES. Maker shall be in "Default"
under this Note if Maker fails to timely make the payment of principal and
interest due and payable hereunder within five (5) days from the Due Date. Upon
the occurrence of any Default, the entire principal balance outstanding
hereunder, together with all accrued but unpaid interest thereon, shall become
immediately due and payable, and such balance shall then bear interest at the
contracted for annual rate of the Interest Rate plus six percent (6%) per annum.
4. WAIVERS. Except as otherwise expressly provided herein, Maker
hereby waives diligence, demand, grace, presentment for payment, notice of
nonpayment, protest and notice of protest, notice of extension and notice of
default. No delay or omission on the part of Holder in exercising any right
hereunder shall constitute a waiver of any such right or of any other right
hereunder. A waiver on any one occasion shall not be construed to bar the
exercise, or to constitute a waiver of any such right on any future occasion.
5. PREPAYMENT. Maker may prepay all or any portion of the interest
and the unpaid principal balance of this Note at any time, or from time to time,
without penalty or premium. Any prepayment shall first be credited to interest
and then to principal.
6. AMENDMENT. This Note may not be changed, modified or terminated,
nor may any provision of this Note be waived except by an agreement in writing
signed by the party to be charged.
7. BINDING NATURE OF AGREEMENT; ASSIGNMENT. The provisions of this
Note shall be binding upon Maker, and shall inure to the benefit of and bind the
respective successors and assigns of Holder and Maker. Neither Holder nor Maker
may assign or transfer this Note or assign or delegate any of his, her, or its
respective rights or obligations hereunder without the prior written consent of
the other party in each instance.
8. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF ARIZONA, NOTWITHSTANDING ANY ARIZONA OR
OTHER CONFLICTS-OF-LAWS PROVISIONS TO THE CONTRARY.
9. COLLECTION COSTS AND EXPENSES. If this Note shall be placed in
the hands of an attorney for collection, by suit or otherwise, then Maker's
obligations hereunder shall include the payment of all reasonable collection
costs and expenses incurred by Holder in connection therewith, including,
without limitation, reasonable attorneys' fees and costs.
<PAGE> 13
10. TIME OF ESSENCE. Time is of the essence of this Note and each
and every provision hereof.
11. CANCELLATION OF SHARES. This Note is entered into in connection
with a certain Stock Purchase Agreement dated as of the date hereof wherein
Maker purchased certain shares of Holder's Common Stock (the "Shares") and Maker
acknowledges that a Default hereunder will cause the Shares purchased thereby to
be deemed automatically cancelled.
12. NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered against receipt
or when deposited in the United States mails by registered or certified mail,
postage prepaid, return receipt requested, addressed as set forth below:
(i) If to Holder:
Bionutrics, Inc.
2425 E. Camelback Road
Suite 650
Phoenix, Arizona 85016
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Jean E. Harris, Esq.
(ii) If to Maker:
____________________________
____________________________
____________________________
____________________________
Any party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section for the giving of notice.
IN WITNESS WHEREOF, Maker has executed this Note as of the date first set
forth above.
________________________________,
a(n) _______________ corporation
By:_________________________________________
Its:________________________________________
2
<PAGE> 1
EX 10.11
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 31 day of October, 1997, by and between INCON
TECHNOLOGIES, INC., a Delaware corporation (the "Company"), JOHN R. PALMER (the
"Executive"), and BIONUTRICS, INC., a Nevada corporation ("Bionutrics").
RECITALS:
A. The Executive is currently serving as chief executive officer and
president of the Company.
B. Pursuant to the terms of an Agreement and Plan of Merger (the
"Merger Agreement") dated as of October 31, 1997, among the Company, its
principals, Bionutrics, its wholly owned subsidiaries Nutrition Technology
Corporation and BNRX Inc., Delaware corporations, the Company will become a
wholly owned subsidiary of Nutrition Technology Corporation, a Delaware
Corporation.
C. The parties hereto desire to enter into this Agreement to establish
the terms and conditions of the continued employment relationship between the
Executive and the Company following, the Closing (as defined in the Merger
Agreement).
AGREEMENT:
In consideration of the recitals, mutual promises and respective
covenants and agreements of the parties contained herein, the parties agree as
follows~
1. EMPLOYMENT.
The Company hereby agrees to continue to employ the Executive as its
President and Chief Executive Officer ("CEO"), and the Executive hereby agrees
to continue to serve the Company in such capacity, upon the terms and conditions
set forth in this Agreement. The period of the Executive's employment with the
Company pursuant to this Agreement shall be referred to as the "Employment
Period". The Executive's employment by the Company shall terminate as of the
last day of the Employment Period.
2. AUTHORITY AND DUTIES.
(a) Authority. The Executive shall have the duties and authority as are
consistent with, and customarily associated with, the office of President and
CEO for business organizations similar to the Company in scope and purpose, and
such other reasonable duties and authority as may be determined from time to
time by the Board of Directors of the Company (the "Board").
(b) Duties. During the Employment Period, the Executive agrees to
devote his full time and all his skill, knowledge and working time (vacation
time and absence for sickness or disability excepted) to the business of the
Company and to the betterment of the Company.
<PAGE> 2
(c) Conflicts. Nothing herein shall be construed to prohibit the
Executive from serving on boards or committees of other companies for a profit
or non-profit and investing his assets in such form or manner as he shall wish;
provided, that no such service or investment(s) shall conflict or interfere with
the duties and responsibilities of his office or with his loyalty to the
Company. The foregoing notwithstanding, the Company acknowledges that the
Executive has a current equity interest in, and performs services for, a
business entity known as InCon Industries, Inc. ("III"). Provided that the
Executive does not thereby violate any provision of this Agreement, the
Executive may (i) continue to provide service to III not to exceed on average
four hours per week for a period that shall end on the date three months from
the date of this Agreement (following which the Executive shall have no
management or operational involvement in III), and (ii) retain a passive
investment interest in III and serve on its board of directors.
3. COMPENSATION AND BENEFITS.
(a) Base Salary. During the Employment Period, the Company shall pay
the Executive a base salary at an annual rate (the "Base Salary") of $200,000
payable with the same frequency and on the same basis that the Company normally
makes salary payments to other executive personnel ("Payment Practices"), and
subject to all applicable deductions or reductions therein made pursuant to the
Executive's elections under the Company's compensation and/or benefit plans or
programs. The payment of the Base Salary shall not be deemed the exclusive
compensation of the Executive, and shall not prevent the Executive from
participating in any other compensation or benefit plan of the Company for which
he qualifies or is designated to qualify by the Board.
(b) Incentive Compensation. In addition to any other compensation to
which the Executive may be entitled hereunder, the Executive shall participate
in an annual incentive plan ("AIP") if pre-tax profits determined in accordance
with GAAP (except that to pre-tax profits so calculated shall be added the
deduction, if any, for amortization of good will acquired as a result of
allocation of the purchase price under the Merger Agreement) for the fiscal year
in question for the Company and Rye Investments, Ltd., a British Virgin Islands
corporation owned by the shareholders of the Company, or the successor to the
business of Rye Investment, Ltd., acquired by Bionutrics exceed the amount
(the"Hurdle") equal to (i) $3 million, plus (ii) interest at 18% per annum from
date of contribution on capital contributed by Bionutrics to the business of the
Company and Rye Investments, Ltd. plus (iii) the prior cumulative annual
shortfall if any in meeting the Hurdle. The AIP shall be equal to 10% percent of
the excess if any of pre-tax profits over the Hurdle, and shall be payable
during the term of employment and in respect of two fiscal years after
termination of employment. If the Employment Period terminates on a date other
than the last day of a fiscal year, the Executive's share of the AIP, if any,
for the corresponding portion of the third fiscal year after termination of the
Employment Period shall be calculated pro rata based upon the elapsed portion of
the fiscal year prior to termination. Payments of AIP shall be made within 90
days after the close of the Company's fiscal year.
2
<PAGE> 3
(c) Vehicle. The Company shall provide the Executive the use of a
vehicle of his choice provided that its cost to the Company shall be no more
than $750 per month for the Employment Period.
(d) Vacation. The Executive shall be entitled to 20 business days of
vacation per calendar year, which shall be earned on a pro-rata basis throughout
each such year. The Executive may take vacation days in advance of their accrual
upon the prior consent of the Company. Upon the termination of the Employment
Period, the Company shall pay the Executive for accrued but unused vacation days
at the rate of the Base Salary then in effect. The Executive shall also be
entitled to all paid holidays given by the Company generally to its employees.
The Executive may carry from one calendar year to the next a maximum of 15
unused vacation days.
(e) Expenses. During the Employment Period, the Executive shall be
entitled to receive reimbursement for all reasonable expenses incurred by the
Executive in performing services hereunder, including expenses of travel and
living expenses while away from home on business or at the request of and in the
service of the Company; provided, that such expenses are properly accounted for
by the Executive to the Company.
(f) Other Benefits. The Executive and his family shall be entitled to
participate in each of the Company's employee benefit plans and arrangements,
including medical insurance and disability and such additional benefit plans and
arrangements as are provided to executives of Bionutrics at the Executive's
level and shall be entitled to continued life insurance coverage during the
Employment Period.
(g) Stock Options. Executive and Bionutrics shall execute a Stock
Option Agreement in the form attached hereto as Exhibit A, whereby Executive
shall be provided the option to acquire up to 100,000 shares of the common stock
of Bionutrics at the market value per share as determined by the Board on the
date of grant. The date of grant shall if practicable under Bionutrics 1997
stock option plan be as of October 22, 1997, the date of board approval of the
merger agreement or, if not practicable in the judgment of Bionutrics within ten
days after the merger. The Executive's interest in the options described in the
Stock Option Agreement shall vest one-third on each of the first, second and
third anniversaries of the commencement of the Employment Period.
4. TERMINATION EVENTS.
(a) The Employment Period may be terminated by the Company as of the
respective dates set forth in Sections 4(a)(i)-(iii), and the Company shall pay
the Executive within thirty 30 days of the date of such termination, in full
satisfaction of all obligations by the Company to the Executive under this
Agreement, an amount equal to the sum of (x) in the case of a termination
pursuant to Section 4(a)(i), (ii) or (iii), all unreimbursed expenses payable as
provided in accordance with Section 3(e) above, (y) in the case of a termination
pursuant to Section 4(a)(i), (ii) or (iii), all Base Salary earned through the
last day of the Employment Period, and (z) in the
3
<PAGE> 4
case of a termination pursuant to Section 4(a)(i) or (ii), the Executive's share
of the AIP Bonus, if any, earned through the last day of the Employment Period:
(i) By the Death of the Executive. The date of death of the
Executive shall be the date of termination of the Employment Period.
(ii) By the Disability of the Executive. The Company may
terminate the Employment Period on the date it is determined that the Executive
suffers from a physical or mental disability that renders him unable to continue
performing his duties under this Agreement. The Executive shall be deemed to be
so disabled if either (i) a physician selected according to the mutual
recommendation of a physician nominated by the Company and the Executive's
personal physician advises the Company that the Executive's physical or mental
condition will render the Executive unable to perform his duties on a
substantially full-time basis for a period exceeding six three consecutive
months, or (ii) due to a physical or mental condition, the Executive has not
substantially performed his duties hereunder on a substantially full-time basis
for a period of four and one-half consecutive months or, in each case, for six
months in any 12-month period.
(iii) By the Company for Cause. The Company may terminate the
Employment Period at any time for "cause", which shall mean (i) a material
default or breach by the Executive of his obligations under Section 5 of this
Agreement, or (ii) an act or acts of dishonesty or moral turpitude that are
materially injurious to the Company, financially or otherwise, (iii) willful and
persistent inattention to the services and duties required of the Executive
under this Agreement after notice and Executive's failure to cure within 30 days
or (iv) conviction of any felonious criminal act. Upon the happening of one of
the above-mentioned events, the Company may give the Executive a notice of
termination specifying the reason(s) for the termination. The date on which such
notice is provided to the Executive shall be the date of termination of the
Employment Period. No act or omission on the part of the Executive shall be
deemed willful if it is done by the Executive in good faith and upon the
reasonable belief that such act or omission was in the best interest of the
Company.
(b) The Company may at any time, or the Executive may at least 36
months after the closing under the Merger Agreement, terminate the Employment
Period upon six months' written notice to the Executive or Company as the case
may be (the "Notice Period") with or without cause, provided that the Executive
may, at least 12 months after such closing, terminate the Employment Period upon
six months' notice if the Board of the Company substantially reduces his
responsibilities as CEO and fails within 30 days of notice to substantially
restore such eliminated responsibilities. The Company shall have the option of
requiring the Executive to continue performing services during the Notice Period
or to prohibit the Executive from performing such services. In either case the
effective date of termination shall be the date that is six months after the
date of the termination notice. In the event of termination of the Employment
Period pursuant to this Section 4(b), the Company shall pay the Executive in
addition to AIP (i) all unreimbursed expenses payable as provided in accordance
with Section 3(e), (ii) all Base Salary earned through the last day of the
Employment Period and (iii) monthly
4
<PAGE> 5
severance pay for 24 months equal to 1/12th of the Executive's Base Salary as of
the commencement of Notice Period.
(c) The Executive may, during the 36-month period after the Closing,
terminate the Employment Period upon 30 days' written notice, in which case the
Executive shall receive the compensation and benefits set forth in Section 3(a),
(c), (d), (e) and (f) hereunder to which the Executive is entitled through the
date of termination.
5. COVENANT NOT TO COMPETE.
(a) Interests to be Protected. The parties acknowledge that during the
term of the Executive's employment with the Company, the Executive will perform
essential services for the Company. The Executive will be exposed to, have
access to, and be required to work with, a considerable amount of the Company's
confidential information. The parties expressly recognize that should the
Executive compete with Company in any manner whatsoever (as defined in Section
5(b) below), it could seriously impair the good will and diminish the value of
the Company's business. The parties acknowledge that this covenant has an
extended duration; however, they agree that this covenant is reasonable and it
is necessary for the protection of the Company, its stockholders and employees.
For these and other reasons, and the fact that there are many other employment
opportunities available to the Executive if the Employment Period should
terminate for any reason, the Executive stipulates that the following
restrictive covenants are fair and reasonable and are freely, voluntarily and
knowingly entered into. Furthermore, each party was given the opportunity to
consult with independent legal counsel before entering into this Agreement.
(b) Non-Competition. During the Employment Period and for the period
ending 24 months after termination of the Employment Period, in the case of
clause (i) and 36 months after such termination in the case of clause (ii), the
Executive shall not (whether directly or indirectly, as owner, principal, agent,
director, officer, manager, employee, partner or in any other capacity) (i)
compete in any manner with the Company in any line of business in which it is
engaged as of the termination of the Employment Period or if pursuant to a plan
adopted during the Employment Period during the 24-month period following such
termination or in any line of business the Executive is so notified by the
Company during the Employment Period that the Company or Rye intends to pursue
during such 24-month period or (ii) solicit or accept business from any person
who during the preceding 36 months was a customer of the Company or Rye,
provided that the foregoing shall not apply if the Company is in default of its
obligations pursuant to Section 3(b) to pay AIP benefits or in default of its
obligations to make payments to the Executive pursuant to Section 4(a), (b) or
(c).
(c) Equitable Relief. In the event a violation of any of the
restrictions contained in this Section 5 is established, the Company shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which the Company may be entitled. In the event of a
violation of any
5
<PAGE> 6
provision of Section 5(b) of this Agreement, the period for which those
provisions would remain in effect shall be extended for a period of time equal
to that period beginning when such violation commenced and ending when the
activities constituting such violation are finally terminated in good faith.
(d) Restrictions Separable. If the scope of any provision of this
Section is found by a court to be too broad to permit enforcement to its full
extent, such provision shall be enforced to the maximum extent permitted by law.
The parties agree that the scope of any provision of this Section 5 may be
modified by a judge in any proceeding to enforce this Agreement, so that such
provision can be enforced to the maximum extent permitted by law. Each and every
restriction set forth in this Section is independent and separable from the
others, and no such restriction shall be rendered unenforceable by virtue of the
fact that, for any reason, any other or others of them may be unenforceable in
whole or in part.
6. ARBITRATION.
Any disputes or controversies arising under this Agreement shall be
resolved through an arbitration proceeding that shall be held in Chicago,
Illinois, in accordance with the rules of the American Arbitration Association
by an arbitrator selected by the Arbitration Committee of such Association. The
decision rendered by such arbitrator shall be final and binding, and judgment on
such decision may be entered by either party in the highest court, state or
federal, having jurisdiction. The parties stipulate that the arbitration
provisions hereof shall be a complete defense to any suit, action or proceeding
instituted in any federal, state or local court before any administrative
tribunal with respect to the subject matter arbitrated. The cost and expense of
arbitration shall be paid by the party to whom the decision is adverse as
determined by the arbitrator.
7. NO CONFLICTS.
The Executive represents, warrants and covenants that he is not a party
to or bound by any consulting, non-competition, non-solicitation or
confidentiality agreement or the like that would in any manner conflict or
interfere with the Executive's ability to fulfill his duties under this
Agreement.
8. SUCCESSORS AND ASSIGNS.
This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees provided that the Executive may not assign his obligations
under this Agreement without the prior written consent of the Company.
6
<PAGE> 7
9. NOTICES.
For the purposes of this Agreement, notices, demands and all other
communications provided for in the Agreement shall be in writing and shall be
deemed sufficient if sent by certified mail, return receipt requested, to the
Executive's residence in the case of the Executive or to the Bionutrics
principal office in the case of the Company or Bionutrics.
10. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
the Executive and another officer specifically designated by the Board. No
waiver by either party hereto of, or compliance with, any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party that are not set forth expressly in this Agreement.
11. GOVERNING LAW,
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Illinois.
12. VALIDITY.
The invalidity or unenforceability of any provision or provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all together shall constitute one
and the same instrument.
14. CONDITION PRECEDENT.
This Agreement shall not be effective until the closing under the
Merger Agreement and the effectiveness of the merger contemplated therein.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
INCON TECHNOLOGIES, INC.
By: /s/James M. Belcher
--------------------------
Name: James M. Belcher
EXECUTIVE
/s/John R. Palmer
-----------------------------------
John R. Palmer
BIONUTRICS, INC.
By: /s/Ronald H. Lane
--------------------------
Name: Ronald H. Lane
Title: President
8
<PAGE> 1
EX 10.12
BIONUTRICS HEALTH PRODUCTS, INC.
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of the 30th day of July,
1997, effective as of January 6, 1997 (the "Effective Date"), by and between
BIONUTRICS HEALTH PRODUCTS, INC., a Delaware corporation ("Employer") and a
wholly-owned subsidiary of BIONUTRICS, INC., a Nevada corporation
("Bionutrics"), and STEPHEN H. FRIEDMAN ("Employee").
R E C I T A L S
A. Employee has served as a consultant to Employer and Bionutrics since
April 15, 1996.
B. Employer desires to employ Employee, and Employee desires to be
employed by Employer, pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth in this Agreement, the parties hereto hereby agree as
follows:
A G R E E M E N T
1. EMPLOYMENT; DUTIES. Employer hereby employs Employee, and Employee
hereby accepts such employment, to serve as Executive Vice President, Marketing
and Sales of Employer and in such other executive capacities and for such other
duties and services as shall from time to time be mutually agreed upon by
Employer and Employee. Employee shall report to the President of Employer.
Employee shall devote his full and undivided business time, attention and
efforts to Employer's business and to the performance of Employee's duties under
this Agreement, and shall fully and faithfully perform all duties assigned to
him under this Agreement, consistent with Employee's position hereunder, to the
best of Employee's abilities.
2. COMPENSATION AND OTHER BENEFITS. During the term of Employee's
employment hereunder, Employee shall be entitled to receive the following
compensation and benefits:
(A) BASE SALARY. Employee shall be entitled to receive a per
annum salary of Two Hundred Thousand Dollars ($200,000.00) (the "Base Salary")
as full compensation for all the services rendered by Employee during the term
of Employee's employment hereunder. Employee shall be entitled to receive the
Base Salary in twenty-six (26) equal payments; payments to be made every two
weeks (less all applicable deductions for all taxes, including federal, state,
and FICA, and the Employee's share of the cost of benefit programs in which
Employee participates, etc.), or in such other periodic installments as Employer
and Employee may mutually agree. Employer shall review Employee's performance
and Base Salary under
<PAGE> 2
this Agreement on April 15, 1997, and no less frequently than every twelve (12)
months thereafter, and Employer may, at the sole discretion of Employer's Board
of Directors, adjust Employee's Base Salary; provided, however, that the Base
Salary may not be reduced below the Base Salary set forth in this Section 2(a).
(B) BONUS. Commencing with the fiscal year of Employer
beginning on November 1, 1996, and for each fiscal year thereafter, in addition
to the Base Salary, Employee shall receive a bonus ("Bonus") of up to
twenty-five percent (25%) of the Base Salary in effect at the end of such fiscal
year so long as Employee meets the criteria set forth on Schedule A attached
hereto. At least thirty (30) days prior to the end of each applicable fiscal
year, Employer and Employee shall meet and mutually agree in writing on
Employee's performance criteria for the upcoming year. To receive any Bonus for
the applicable fiscal year, Employee must be employed by Employer on the last
day of Employer's fiscal year. The Board of Directors of Employer, in its sole
discretion, shall determine whether Employee has met such standards and the
amount of Bonus, if any, to be paid to Employee for each fiscal year.
(C) VACATION. Employee shall be entitled to three (3) weeks of
vacation per year during each year of employment. For the purposes of this
Section 2(c), the term "year" shall mean each 12-month period beginning on the
Effective Date and on each anniversary of the Effective Date thereafter. No
unused annual vacation time shall be carried forward to future years.
(D) RELOCATION. On the earlier of June 1, 1997 or the date
that Employee signs a residence lease or purchases a home in Maricopa County,
Arizona, Employer shall pay Employee, as reimbursement of reasonable relocation
costs and expenses, the amount of Twenty Thousand Dollars ($20,000.00). Until
such date, Employer will continue to pay Employee's reasonable expenses related
to (i) travel to and from Employee's current residence in Connecticut and
Phoenix, Arizona, and (ii) meals and lodging while in Phoenix, Arizona, to
perform Employee's duties under this Agreement.
(E) PENSION AND PROFIT SHARING PLANS. Employee shall be
entitled to participate in such pension, profit sharing and deferred
compensation plans and programs, if any, as may be provided from time to time by
Employer to such other comparable level employees of Employer, including any
employee stock option plans and 401(k) retirement plans of Employer.
(F) MEDICAL AND DENTAL BENEFITS. Employee shall be entitled to
participate in such group medical, accident and dental plans, if any, as may be
provided from time to time by Employer to such other comparable level employees
of Employer. Until Employee relocates to Phoenix and is a participant in
Employer's issuance plans, Employer shall reimburse Employee for Cobra insurance
costs incurred by Employee for medical and dental plans.
2
<PAGE> 3
(G) REIMBURSEMENT. Employer shall reimburse Employee for all
reasonable travel and entertainment expenses and other ordinary and necessary
business expenses necessarily incurred by Employee in connection with the
business of Employer and Employee's duties under this Agreement. The term
"business expenses" shall not include any item that is not deductible, in whole
or in part, by Employer for federal income tax purposes. To obtain
reimbursement, Employee shall submit to Employer receipts, bills, or sales slips
for the expenses incurred. Reimbursements shall be made by Employer monthly
within 30 business days of presentation by Employee of reasonably sufficient
evidence of the expenses incurred.
(H) OTHER BENEFITS. Employee shall be entitled to receive or
participate in such other fringe benefits, such as holidays, life and long-term
disability insurance and bonus programs, as Employer may make generally
available on a nondiscriminatory basis to all other employees of Employer.
(I) STOCK OPTIONS. Employee and Employer shall execute a Stock
Option Agreement and a First Amendment to Stock Option Agreement whereby
Employee shall be provided the option to acquire 150,000 shares of the common
stock of Bionutrics at Five Dollars ($5.00) per share. The options granted shall
vest in one-third increments of 50,000 shares on each of the first three
anniversaries of October 31, 1996; provided, however, that if Employee's
employment is terminated by Employer without Cause, as hereinafter defined,
options shall vest in the same manner as they would have vested if Employee had
remained employed until the end of the Initial Term, as hereinafter defined;
provided further, however, that all unvested options shall be forfeited if
Employee's employment is terminated for Cause.
3. TERM OF EMPLOYMENT.
(A) AT WILL EMPLOYMENT. (i) Employee's employment hereunder is
at will and may be terminated with or without "Cause" (as defined below) and
with or without notice at any time at the option of either Employee or Employer.
No verbal or written communications by any manager or other representative of
Employer shall be considered as implying any agreement contrary to the
foregoing. (ii) Unless terminated sooner by Employee or Employer pursuant to
this Section 3 (a)(i), the term of Employee's employment hereunder shall
continue for two (2) years, through and until January 5, 1999, (the "Initial
Term"). Unless Employer terminates this Agreement by giving written notice to
Employee not less than six months prior to the end of the Initial Term or if
Employee gives written notice to Employer not less than six months prior to the
end of the Initial Term that employee terminates this Agreement, Employee's
employment under this Agreement will automatically renew for an additional two
(2) years, through and until January 5, 2001 (the "Renewal Term").
(B) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
3
<PAGE> 4
(I) DEATH. Employee's employment shall be
automatically terminated, without notice, effective upon the date of Employee's
death;
(II) TERMINATION FOR "CAUSE." Employer may, at its
option, upon notice to Employee, terminate Employee's employment for "Cause"
effective on the date Employer's Board of Directors determines the existence of
"Cause." For purposes of this Agreement, "Cause" shall be limited to a
determination by Employer that Employee: (A) has been convicted of a felony
involving dishonesty, fraud, theft or embezzlement; (B) has repeatedly failed or
refused, after written notice from Employer, in a material respect to follow
reasonable policies or directives established by Employer; (C) has willfully and
persistently failed, after written notice from Employer, to attend to material
duties or obligations imposed upon him under this Agreement, including those
duties and obligations normally associated with an Executive Vice President,
Marketing and Sales; (D) has performed an act or failed to act, which, if he
were prosecuted and convicted, would constitute a felony involving One Thousand
Dollars ($1,000.00) or more of money or property of Employer; or (E) has
misrepresented or concealed a material fact for purposes of securing employment
with Employer or this Employment Agreement. The existence of "Cause" shall be
determined by Employer's Board of Directors after notice to Employee and after
providing Employee with an opportunity to be heard. Employer shall have the
right to suspend Employee with full pay for any period of time the Board of
Directors of Employer deems, in its sole discretion, necessary or appropriate to
investigate Employee's conduct in connection with this paragraph; or
(III) CHANGE IN CONTROL. Employee may, at his option,
upon notice to Employer, terminate Employee's employment effective on the date
of the notice in the event of a Change of Control of Employer (as defined
below).
(C) SEVERANCE. In the event that Employer terminates this
Agreement without "Cause," as provided in paragraph 3(a)(i), Employer's
obligations provided for in paragraph 2 shall continue until the expiration of
the Initial Term, or any Renewal Term, and in addition, Employer shall pay
Employee a severance amount of Fifty Thousand Dollars ($50,000.00) within 30
days after the date on which Employee's employment terminates. In the event that
Employer exercises its right to issue the six month notice provided for in
paragraph 3(a) above such that there is no Renewal Term, Employer's obligations
provided for in paragraph 2 shall continue through the end of the Initial Term
and in addition, Employer shall pay Employee a severance amount of Fifty
Thousand Dollars ($50,000.00) within 30 days after the date on which Employee's
employment terminates. In the event that Employer terminates this Agreement for
"Cause", as provided in paragraph 3(a)(ii), Employee shall not be entitled to
any severance or continued benefits under this Agreement, except as otherwise
provided by law.
(D) CHANGE IN CONTROL. In the event Employee terminates his
employment with Employer as a result of a Change of Control, any unvested
options to acquire Employer's common stock held by Employee shall immediately
vest and become exercisable, notwithstanding the provisions of such options. The
term "Change in Control" of Employer
4
<PAGE> 5
shall mean a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934 as in effect on the date of this Agreement or,
if Item 6(e) is no longer in effect, any regulations issued by the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 which
serve similar purposes; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if and when (i) any person (as such
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934) other than a current director or officer of Employer becomes the
"beneficial owner" (as defined in Rule 13d- 3 under the Securities Exchange Act
of 1934) directly or indirectly of securities of Employer representing 15% or
more of the combined voting power of Employer's then-outstanding securities,
except that this provision shall not apply to any public or private offering of
Employer's common stock nor shall this provision apply to an acquisition which
has been approved by at least two-thirds of the members of the Board of
Directors who are not affiliates or associates of such person and by at least
80% of the issued and outstanding shares of Employer's common stock beneficially
owned by non-affiliates of such person; (ii) during the period of this
Agreement, individuals who, at the beginning of such period, constituted the
Board of Directors of Employer (the "Original Directors") cease for any reason
to constitute at least a majority thereof, unless the election or nomination for
election of each new director was approved (an "Approved Director") by the
unanimous vote of a Board of Directors constituted entirely of Existing
Directors and/or Approved Directors; (iii) a tender offer or exchange offer is
made whereby the effect of such offer is to take over and control Employer and
such offer is consummated for the ownership of securities of Employer
representing 20% or more of the combined voting power of Employer's
then-outstanding voting securities; (iv) Employer is merged, consolidated or
enters into a reorganization transaction with another person and as the result
of such merger, consolidation or reorganization less than 75% of the outstanding
equity securities of the surviving or resulting person shall then be owned in
the aggregate by the former stockholders of Employer; or (v) Employer transfers
substantially all of its assets to another person or entity which is not a
wholly-owned subsidiary of Employer; provided, however, that notwithstanding the
foregoing no Change of Control shall be deemed to have occurred if such a Change
of Control is a "Consented Change of Control." A "Consented Change of Control"
is any transaction described in clauses (i), (iii), (iv) or (v) above if such
transaction has been unanimously approved by Employer's Board of Directors.
Sales of Employer's Common Stock beneficially owned or controlled by Employee
shall not be considered in determining whether a Change in Control has occurred.
4. COVENANT NOT TO COMPETE.
(A) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Employer's confidential
information. The parties expressly recognize that should Employee compete with
Employer in any manner whatsoever (as defined in paragraph 4(b) below), it could
seriously impair the goodwill and diminish the value of
5
<PAGE> 6
Employer's business. The parties acknowledge that this covenant has an extended
duration; however, they agree that this covenant is reasonable and it is
necessary for the protection of Employer, its stockholders, and employees. For
these and other reasons, and the fact that there are many other employment
opportunities available to Employee if he should terminate his employment, the
parties are in full and complete agreement that the following restrictive
covenants are fair and reasonable and are freely, voluntarily, and knowingly
entered into. Furthermore, each party was given the opportunity to consult with
independent legal counsel before entering into this Agreement.
(B) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period ending 12 months after the termination of
Employee's employment with Employer, Employee shall not (whether directly or
indirectly, as owner, principal, agent, director, officer, manager, employee,
partner or in any other capacity) engage or become financially interested in any
competitive business conducted within the Restricted Territory (as defined
below) or solicit, canvas or accept, or authorize any other person, firm or
entity to solicit, canvas or accept, from any customers of Employer, any
competitive business within the Restricted Territory for Employee or for any
other person, firm or entity. As used herein, the term "customers" of Employer
shall mean any persons, firms or entities that purchased goods or services from
Employer during the period of Employee's employment with Employer; the term
"competitive business" shall mean any business which sells or provides or
attempts to sell or provide products or services the same as or substantially
similar to the products or services sold or provided by Employer; and the term
"Restricted Territory" shall mean any area in which Employer conducts business.
(C) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this Section 4 is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of Section 4(b) of this Agreement, the period for
which those provisions would remain in effect shall be extended for a period of
time equal to that period beginning when such violation commenced and ending
when the activities constituting such violation shall have been finally
terminated in good faith.
(D) RESTRICTIONS SEPARABLE. If the scope of any provision of
this Section is found by a court to be too broad to permit enforcement to its
full extent, then such provision shall be enforced to the maximum extent
permitted by law. The parties agree that the scope of any provision of this
Section 4 may be modified by a judge in any proceeding to enforce this
Agreement, so that such provision can be enforced to the maximum extent
permitted by law. Each and every restriction set forth in this Section is
independent and severable from the others, and no such restriction shall be
rendered unenforceable by virtue of the fact that, for any reason, any other or
others of them may be unenforceable in whole or in part.
6
<PAGE> 7
5. MISCELLANEOUS.
(A) THIRD-PARTY BENEFICIARY. Bionutrics shall at all times be
and remain a third-party beneficiary under this Agreement and all documents,
instruments, and agreements made and entered into pursuant hereto.
(B) NOTICES. All notices required or permitted to be given
hereunder shall be in writing and shall be deemed given when delivered in
person, or three (3) business days after being placed in the hands of a courier
service (e.g., DHL or Federal Express) prepaid or faxed provided that a
confirming copy is delivered by first-class U.S. Mail, postage prepaid,
addressed as follows:
If to Employer:
Bionutrics Health Products, Inc.
2425 E. Camelback Road, Suite 650
Phoenix, Arizona 85016
Attention: President
FAX: (602) 508-0115
With a Copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Attention: Jean E. Harris, Esq.
If to Employee:
Stephen H. Friedman
___________________________
___________________________
FAX: (602) _______________
With a Copy to:
Nancy B. Schess, Esq.
Klein, Zelman, Rothermel & Dichte, L.L.P.
485 Madison Avenue
New York, New York 10022
7
<PAGE> 8
and/or to such other respective addresses and/or addressees as may be designated
by notice given in accordance with the provisions of this Section.
(C) ENTIRE AGREEMENT. This Agreement and any Schedules or
Exhibits hereto constitute the entire agreement between the parties and shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal representatives, successors and permitted assigns. Except as set forth
herein, the provisions of this Agreement supersede any and all other agreements
or understandings, whether oral or written, with respect to Employee's
employment by Employer.
(D) NON-WAIVER. The failure in any one or more instances of a
party to insist upon performance of any of the terms, covenants or conditions of
this Agreement, to exercise any right or privilege conferred in this Agreement
or the waiver by said party of any breach of any of the terms, covenants or
conditions of this Agreement, shall not be construed as a subsequent waiver of
any such terms, covenants, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party.
(E) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.
(F) APPLICABLE LAW. This agreement shall be governed and
controlled as to validity, enforcement, interpretation, construction, effect and
in all other respects by the internal laws of the state of Arizona applicable to
contracts made in that state.
(G) CONSTRUCTION. The parties hereto acknowledge and agree
that each party has had the opportunity to participate in the drafting of this
Agreement and have this document reviewed by the respective legal counsel for
the parties hereto and that the normal rule of construction to the effect that
any ambiguities are to be resolved against the drafting party shall not be
applied to the interpretation of this Agreement. No inference in favor of, or
against, any party shall be drawn from the fact that one party has drafted any
portion hereof.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
EMPLOYER:
BIONUTRICS HEALTH PRODUCTS, INC.,
a Delaware corporation
By: /s/ Ronald H. Lane
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
EMPLOYEE:
/s/ Stephen H. Friedman
----------------------------------
----------------------------------
9
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Name of Subsidiary Place of Incorporation
- ------------------ ----------------------
Lipogenics, Inc. Delaware
Bionutrics Health Products, Inc. Delaware
Nutrition Technology Corporation Nevada
InCon Technologies Inc. Delaware
(Subsidiary of Nutrition
Technology Corporation)
Bionutrics International Ltd. British Virgin Islands
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 2,181,121
<SECURITIES> 0
<RECEIVABLES> 2,334,719
<ALLOWANCES> 0
<INVENTORY> 1,407,760
<CURRENT-ASSETS> 6,477,652
<PP&E> 6,957,168
<DEPRECIATION> 258,357
<TOTAL-ASSETS> 14,182,034
<CURRENT-LIABILITIES> 5,132,308
<BONDS> 0
0
0
<COMMON> 17,812
<OTHER-SE> 26,501,567
<TOTAL-LIABILITY-AND-EQUITY> 14,182,034
<SALES> 2,427,119
<TOTAL-REVENUES> 2,427,119
<CGS> 5,013,751
<TOTAL-COSTS> 5,013,751
<OTHER-EXPENSES> 10,022,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266,929
<INCOME-PRETAX> (12,341,866)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,341,866)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,341,866)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> 0
</TABLE>
