<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of Report (Date of earliest event reported) October 31, 1997
COMMISSION FILE NUMBER 0-22011
BIONUTRICS, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 86-0760991
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2425 EAST CAMELBACK ROAD, PHOENIX, ARIZONA 85016-4214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 508-0112
<PAGE> 2
Registrant hereby amends its Current Report on Form 8-K for October 31, 1997,
filed on November 7, 1997, solely to add the financial information and pro forma
financial information required by Item 7 of Form 8-K.
Item 7. Financial Statements and Exhibits
Financial Statements of Business Acquired - the required
financial statements for InCon Technologies Inc. are set forth
below:
CONSOLIDATED FINANCIAL STATEMENTS
TEN-MONTH PERIOD ENDED OCTOBER 31, 1997 AND
YEAR ENDED DECEMBER 31, 1996 AND
INDEPENDENT AUDITORS' REPORT
2
<PAGE> 3
BIONUTRICS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bionutrics, Inc.
(Registrant)
Dated: January 30, 1998 By: /s/ George E. Duck, Jr.
-------------------------
Its: Vice President, Finance
-------------------------
Secretary and Treasurer
-------------------------
3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bionutrics, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of InCon Technologies Inc. (the
"Company") as of October 31, 1997 and December 31, 1996 and the related
statements of operations, stockholders' equity/members' capital (deficiency)
and cash flows for the ten-month period ended October 31, 1997 and the year
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at October 31, 1997 and
December 31, 1996 and the results of its operations and its cash flows for the
ten-month period ended October 31, 1997 and the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Phoenix, Arizona
January 12, 1998
<PAGE> 5
INCON TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 431,067 $ 22,200
Accounts receivable 514,699 160,425
Other receivables 23,668 100,080
Supplies 184,346
Prepaid expenses 12,562 1,000
----------- -----------
Total current assets 1,166,342 283,705
PROPERTY AND EQUIPMENT - Net (Note 3) 1,747,079 997,043
OTHER ASSETS 34,212 15,560
----------- -----------
TOTAL $ 2,947,633 $ 1,296,308
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY/
MEMBERS' CAPITAL (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 478,996 $ 211,088
Accrued liabilities 348,439 37,633
Current portion of notes payable (Note 4) 28,961 2,135,510
Capital lease obligation - current portion (Note 5) 6,418
Other current liabilities 9,775 2,990
----------- -----------
Total current liabilities 872,589 2,387,221
----------- -----------
LONG-TERM LIABILITIES:
Capital lease obligation (Note 5) 13,407
Notes payable (Note 4) 720,853 11,200
----------- -----------
Total long-term liabilities 734,260 11,200
----------- -----------
Total liabilities 1,606,849 2,398,421
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8 and 9)
STOCKHOLDERS' EQUITY/MEMBERS' CAPITAL (DEFICIENCY):
Common stock, no par value - authorized, 3,000 shares;
issued and outstanding, 1,000 shares, 1997 37,069
Additional paid-in capital 1,094,227
Retained earnings 209,488
Members' deficiency (1,102,113)
----------- -----------
Total stockholders' equity/(members' capital deficiency) 1,340,784 (1,102,113)
----------- -----------
TOTAL $ 2,947,633 $ 1,296,308
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
INCON TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TEN-MONTH PERIOD ENDED OCTOBER 31, 1997 AND
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES (Note 7) $ 4,440,361 $ 1,135,746
COST OF SALES 1,052,715 123,895
----------- -----------
GROSS PROFIT 3,387,646 1,011,851
GENERAL AND ADMINISTRATIVE EXPENSES 2,317,958 1,203,675
----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,069,688 (191,824)
OTHER EXPENSE 120,480 80,297
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 949,208 (272,121)
PROVISION FOR INCOME TAXES (Note 6) (160,538)
----------- -----------
NET INCOME (LOSS) $ 788,670 $ (272,121)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
INCON TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/
MEMBERS' CAPITAL (DEFICIENCY)
TEN-MONTH PERIOD ENDED OCTOBER 31, 1997 AND
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEMBERS' ADDITIONAL
COMMON STOCK CAPITAL RETAINED PAID-IN
---------------------------
SHARES AMOUNT (DEFICIENCY) EARNINGS CAPITAL TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1996 $ 13,007 $ 13,007
Capital contribution 550,000 550,000
Forgiveness of interest by affiliate 87,527 87,527
Distributions to Members (1,480,526) (1,480,526)
Net loss (272,121) (272,121)
------------ ------------
BALANCE,
DECEMBER 31, 1996 (1,102,113) (1,102,113)
Capital contribution 560,000 560,000
Net income, January 1, 1997
to April 30, 1997 579,182 579,182
------------ ------------
BALANCE,
APRIL 30, 1997 37,069 37,069
Issuance of common stock
(Note 1) 1,000 $37,069 (37,069)
Forgiveness of interest by affiliate 43,540 43,540
Net income, May 1, 1997 to
October 31, 1997 $209,488 209,488
Capital contribution $1,050,687 1,050,687
----- ------- ----------- -------- ---------- ----------
BALANCE,
OCTOBER 31, 1997 1,000 $37,069 $ $209,488 $1,094,227 $1,340,784
===== ======= =========== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 8
INCON TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEN-MONTH PERIOD ENDED OCTOBER 31, 1997 AND
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 788,670 $ (272,121)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 432,973 24,466
Forgiveness of interest by affiliate 43,540 87,527
Changes in assets and liabilities:
Accounts receivable (354,274) (160,424)
Supplies (184,346)
Other receivables 76,412 4,500
Prepaid expenses (11,562)
Accounts payable 267,908 174,703
Accrued liabilities 310,806 7,711
Other (11,868) (89,402)
----------- -----------
Net cash provided by (used in) operating activities 1,358,259 (223,040)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (513,558) (940,922)
Acquisition of MSL - net of $5,703 cash acquired (1,141,880)
Proceeds from receivables purchased in MSL acquisition 564,133
Payment of payables assumed in acquisition of MSL (71,878)
----------- -----------
Net cash used in investing activities (1,163,183) (940,922)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable - net (1,396,896) 1,258,969
Capital contribution 1,050,687
Capital contributions from (distributions to) members of
InCon Technologies, LLC 560,000 (930,526)
----------- -----------
Net cash provided by financing activities 213,791 328,443
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 408,867 (835,519)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,200 857,719
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 431,067 $ 22,200
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 78,886 $ 83,415
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES:
Assumption of liabilities in connection with the
acquisition of Molecular Separations Laboratories, Inc. $ 398,609
===========
Value of receivables $564,133 and fixed assets
$1,000,624 acquired
$1,564,757
===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 9
INCON TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEN-MONTH PERIOD OCTOBER 31, 1997 AND
YEAR ENDED DECEMBER 31, 1996
1. BUSINESS DESCRIPTION
InCon Technologies Inc. (the "Company") is a Delaware corporation
purchased by Bionutrics, Inc. ("Bionutrics") on October 31, 1997 and is
now a wholly-owned subsidiary of Bionutrics. The Company was a limited
liability company, formerly InCon Technologies, LLC ("Technologies"), for
the year ended December 31, 1996 and for the period January 1, 1997 to
April 30, 1997. Effective May 1, 1997, the Company issued 1,000 shares of
the Company's common stock for all of the membership interest in
Technologies. The Company provides molecular distillation ("toll
processing") of chemical and food products and provides services in
support of the engineering, procurement and construction management of an
edible oil refining and processing facility for a former related entity,
Rye Investments, Ltd., a British Virgin Islands corporation ("Rye") (Note
7).
Prior to acquisition by Bionutrics, the Company was a wholly-owned
subsidiary of InCon Holdings, LLC ("Holdings LLC"). Holdings LLC is owned
20% each by four individuals (one of which is a board member of a
subsidiary of P.T. Bakrie & Brothers (Note 7)) and one foreign
corporation. The Company owns 100% of Molecular Separations Laboratories,
Inc. ("MSL"), an Illinois corporation that has conducted a business
similar to the toll processing business of the Company for the past five
years (Note 10). MSL was acquired by the Company on April 21, 1997 in a
transaction accounted for as a purchase.
The Company also owned a 50% interest in NuRx International, LLC, ("NuRx")
an inactive Delaware limited liability company which was dissolved when
the Company was acquired by Bionutrics. NuRx originally intended to
undertake toll processing, not directly related to the Company's toll
processing business, but jointly with Bionutrics, the other 50% owner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, MSL, from its
date of acquisition. All significant intercompany balances and
transactions have been eliminated.
LONG-TERM CONTRACTS - Revenues are recognized on long-term contracts or
processing projects using the percentage of completion method on a
cost-to-cost basis. Contract costs include all direct material, labor,
subcontract costs, and indirect costs related to contract performance.
General and administrative costs are charged to expense as incurred.
ACCOUNTS RECEIVABLE - The Company and MSL extend or have extended credit
to their customers, a significant portion of which are in the chemical,
health food and food processing business throughout the nation. Management
believes all accounts receivable to be collectible at October 31, 1997 and
December 31, 1996.
- 6 -
<PAGE> 10
SUPPLIES - Prior to June 30, 1997, all shop supplies and parts were
expensed upon acquisition. After June 30, 1997, the Company determined it
prudent to maintain a supply inventory of new and used molecular
distillation replacement parts and shop supplies. All products processed
in the toll processing business are owned by the customers of the Company
and MSL before and after processing.
PROPERTY AND EQUIPMENT are stated at cost, net of accumulated
depreciation. Acquisitions, renewals and betterments exceeding $500 that
add to, or substantially extend the life of the assets are capitalized.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the related assets. Leasehold improvements are amortized
over the lesser of the lease life or the useful life of the asset.
Expenditures of a repair and maintenance nature are expensed when
incurred. The estimated useful lives of depreciable assets are as follows:
ASSET TYPE ESTIMATED USEFUL LIFE
Furniture and fixtures 5 - 10 years
Equipment 7 - 12 years
Automobiles 5 years
Leasehold improvements 10 years
Trade show assets 7 years
INCOME TAXES are provided for the tax effects of transactions reported in
the consolidated financial statements and consist of taxes currently due.
Any deferred tax assets have been fully reserved due to the uncertainty
regarding their future utilization as a result of the Company being
purchased by Bionutrics.
CONTRACT SERVICES REVENUE - In accordance with a support agreement between
Rye and InCon Technologies, Technologies agreed to provide Rye with
certain services in support of the engineering, procurement and
construction management of an edible oil refining and processing facility.
In consideration for said services, Rye agreed to pay Technologies
$2,000,000 under a percentage-of-completion agreement. Accordingly, actual
costs are accumulated as incurred , the percentage-of-completion is then
determined on a cost-to-cost basis, with adjustments made for cost
overruns. The Company has assumed Technologies' responsibility for
completing the contract. Revenues of $1,280,986 were earned by the Company
from this contract during the ten-month period ended October 31, 1997 and
$459,500 for the year ended December 31, 1996.
DEVELOPMENT SERVICES REVENUE - The Company has assumed responsibility for
completing the Development Agreement between P.T. Bakrie & Brothers
("Bakrie") (Note 7) and Technologies. Under the agreement, the Company has
agreed to provide Bakrie with access to their facilities for up to 80
hours per month during the term of the agreement. The Company bills Bakrie
a fixed fee plus expenses monthly and income is recognized when billed.
Expenses related to the agreement are expensed as incurred. In addition,
the Company has provided laboratory development services to various
customers to determine the feasibility of the use of molecular
distillation for processing their products. Revenues from these services
are billed when the services are complete and income is recognized when
billed. There were no material amounts of unbilled work-in-process related
to these projects at October 31, 1997 or December 31, 1996. Revenues of
$500,000 and $459,560 were earned under the Bakrie contract during the
ten-month period ended October 31, 1997 and the year ended December 31,
1996, respectively.
The Company is currently negotiating a $1,000,000 Phase II extension of
the Bakrie Development Agreement which, as of October 31, 1997, Bakrie had
not yet executed.
- 7 -
<PAGE> 11
TOLL PROCESSING REVENUE - Billings are in accordance with customer's
agreements which are based upon the following patterns:
1. Processing hours consumed
2. Quantity of feed materials
3. Quantity of final project and/or
4. Fixed processing fee.
Billings are rendered on a regular basis in accordance with the
agreements. These agreements range from ten-months to three years
duration. There was no significant unbilled work-in-progress as of
December 31, 1996 or October 31, 1997.
MAJOR CUSTOMERS include: Rye, who is currently responsible for all of the
Contract Services Revenue and Bakrie who generates 93% of the Company's
Development Services Revenue. Two customers provide 84% of the Toll
Processing Revenue.
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, the disclosure 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.
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at October 31, 1997
and December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Furniture and fixtures $ 100,238 $ 88,381
Equipment 1,927,198 826,975
Automobiles 2,000 20,190
Leasehold improvements 179,554 92,172
Trade show assets 1,221
---------- ----------
Total 2,210,211 1,027,718
Less accumulated depreciation 463,132 30,675
---------- ----------
Property and equipment - net $1,747,079 $ 997,043
========== ==========
</TABLE>
4. NOTES PAYABLE
NuRx INTERNATIONAL, LLC ("NuRx") - On November 4, 1996, Bionutrics
invested $400,000 in NuRx, which resulted in a 50% ownership interest for
both Holdings LLC and Bionutrics. The money was then loaned by NuRx to
Technologies under a note, dated November 1, 1996, which required
payment on demand. Under terms of the loan from NuRx to Technologies,
interest is due at the prime lending rate of the Bank of Boston. The
liability was assumed by the Company on May 1, 1997 when the Company
acquired the assets, liabilities and membership interest of Technologies.
NuRx waived the assessment of interest prior to January 1, 1997. Interest
paid to NuRx during the ten-month period ended October 31, 1997 was
$27,973. Because the Company paid some administrative expenses on behalf
of NuRx, the amount owed by the Company decreased to $383,981 as of
October 31, 1997 and $384,969 as of December 31, 1996. NuRx was dissolved
when the Company was acquired by Bionutrics on October 31, 1997.
- 8 -
<PAGE> 12
RYE, a British Virgin Islands corporation, a sister entity of Holdings
LLC, entered into a contract with Technologies to provide services in
support of the construction and sale of a processing plant located in
Indonesia. Rye advanced Technologies the funds it needed to provide those
services under a note not to exceed $3,000,000. Under the terms of the
note, the funds are due to Rye on demand. Interest is due at the prime
rate of Citibank NA. During October 31, 1997 and the year ended December
31, 1996, Rye waived the assessment of any interest. Interest expense of
$87,527 and $43,540 was recorded as a capital contribution for the year
ended December 31, 1996 and the ten-month period ended October 31, 1997,
respectively. The liability was assumed by the Company on May 1, 1997
when the Company acquired the assets, liabilities and membership interest
of Technologies. The balance of $1,750,541 and $339,382 remained
outstanding at October 31, 1997 and December 31, 1996, respectively.
FORMER MSL STOCKHOLDERS - On April 21, 1997, Technologies purchased 24,000
shares of MSL (80%) for $640,000. The purchase price consisted of $128,000
in cash at the closing, and the issuance of four installment notes payable
to the stockholders for the remaining $512,000. The interest paid during
the ten-month period ended October 31, 1997 was $83,415. The notes were
collateralized by the stock of MSL. The Company assumed responsibility for
the notes on May 1, 1997 when it assumed all the assets and liabilities of
Technologies. Interest was due the former stockholders at the prime rate
of American National Bank and Trust Company of Chicago. The remaining
6,000 shares of stock were contributed to the Company by one of the
individuals who owned a 20% interest in Holdings LLC (Note 7). Holdings
LLC owned 80% of the stock of the Company at the time. At October 31,
1997, there was no balance owed to the former stockholders of MSL.
In addition, as part of the stock purchase agreement with the former
stockholders of MSL, the Company agreed to pay them a "Closing Dividend"
equal to approximately $517,000. The payment was based on the excess of
MSL's current assets over the sum of its current liabilities known
collectively as the permitted liabilities, as of the effective date
(January 1, 1997). Based on the terms in the agreement, this dividend can
be subject to an adjustment. Accordingly, an adjustment was made to the
closing dividend in the amount of $9,148. At October 31, 1997, all of the
dividend and the related adjustment had been paid. Future adjustments,
as described in Note 9, may be required.
Notes payable at October 31, 1997 and December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NuRx $ 426,931 $ 384,969
Rye 322,883 1,750,541
Note payable - auto 11,200
----------- ----------
Total 749,814 2,146,710
Less current maturities 28,961 2,135,510
---------- ----------
Long-term debt - net $ 720,853 $ 11,200
========== ==========
</TABLE>
5. 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 $64,772 and $47,102 for the and the ten-month
period ended October 31, 1997 and the year ended December 31, 1996,
respectively.
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<PAGE> 13
Future minimum lease payments under noncancellable operating leases at
October 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 119,184
1999 168,656
2000 163,726
2001 153,640
2002 151,497
Thereafter 770,104
----------
Total $1,526,807
==========
</TABLE>
The Company leases a forklift under a noncancellable capital lease. Future
minimum lease payments 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>
6. INCOME TAXES
At October 31, 1997, deferred tax assets of approximately $80,000 relating
to such potential tax benefits were fully offset by a valuation allowance.
The Company's current provision was $160,538 for the ten-month period
ended October 31, 1997.
There was no provision for income taxes for the year ended December 31,
1996 as the Company was taxable as a limited liability company.
7. RELATED PARTIES
RYE, as disclosed in Note 2, and the Company shared common owners prior to
the purchase by Bionutrics. The Company earned, and Rye paid, $1,280,986
under the contract service agreement described in Note 2 in the ten-month
period ended October 31, 1997. Also, as described in Note 4, the Company
and Rye have entered into a note arrangement for revolving loans up to
$3,000,000 from Rye to the Company. The Company and Rye have had various
expense reimbursement transactions from time to time.
BAKRIE, as disclosed in Note 2, is an Indonesian company engaged in many
business lines and activities. The Company and Bakrie have entered into a
development services agreement under which Bakrie paid the Company
$520,000 for development services during the ten-month period ended
October 31, 1997. Rye has also entered into an agreement with Bakrie to
purchase equipment and services necessary to construct an edible oil
refining and processing facility.
- 10 -
<PAGE> 14
BIONUTRICS is engaged in the research, development, manufacturing,
marketing and sale of certain dietary supplements and other nutrition and
health promoting products. The Company and Bionutrics have entered into an
exclusive processing agreement for the distillation of certain Bionutrics
raw material. From time to time the Company has performed processing
services for Bionutrics and has billed accordingly. The principals of
Holdings, LLC and its subsidiaries own stock in Bionutrics. Sales of
$421,990 were made to Bionutrics during the ten-month period ended October
31, 1997.
INCON INDUSTRIES INC. ("Industries") - John R. Palmer, Jr., N. P. Shaikh
and Robert K. Wheeler, who are the principal owners of Industries also own
20% each of Holdings, LLC. Industries is the owner of the formula,
procedures, technologies and other know-how used in the production of
products used in the space shuttle and military propellants and has a
contract with the United States government as the sole supplier of such
products. The Company is negotiating a contract with Industries to provide
specific manufacturing processing services at fixed prices. The Company
and Industries have had various expense reimbursement transactions from
time to time. The Company recorded $92,396 in sales to Industries during
the ten-month period ended October 31, 1997.
970 PSW, LLC ("970 PSW") - John R. Palmer, Jr., N. P. Shaikh and Robert K.
Wheeler, who are the principal owners of 970 PSW also own 20% each of
Holdings, LLC. 970 PSW purchased the facility used by the Company and MSL
at 970 Douglas Road in Batavia. Illinois. On July 31, 1997, the Company
signed a ten year lease with 970 PSW for such facility.
JOHN R. PALMER, JR. ("Palmer") is a principal of the Company, Holdings,
LLC, Industries, 970 PSW, and Rye as well as a former principal of MSL.
Palmer is an employee of the Company and has been an employee of MSL. He
has received guaranteed payments and salary. Palmer has had short-term
borrowings back and forth from time to time with no interest charged.
Palmer also had short-term borrowings with the Company and entered into a
long-term note with the Company to purchase MSL stock. Palmer contributed
6,000 shares of MSL stock (20%) to Holdings, Inc. with a value of
$160,000. The Company and Palmer have had various expense reimbursement
transactions from time to time. Palmer owns stock in Bionutrics.
8. EMPLOYEE BENEFIT PLANS
The Company has a Simplified Employee Pension Plan (the "SEP") covering
substantially all employees which provides for discretionary contributions
based on only the first $160,000 of compensation, limited annually to the
smaller of $30,000 or 15% or compensation. There were no contributions to
the SEP for the ten-month period ended October 31, 1997. However, $30,258
was contributed for the year ended December 31, 1996.
MSL has a 401(k) plan covering substantially all employees, which requires
the Company to contribute equal to 25% of each participant's contribution
of up to 10% of salary. Contributions to the 401(k) plan totaled $7,425
for the ten-month period ended October 31, 1997.
- 11 -
<PAGE> 15
9. COMMITMENTS AND CONTINGENCIES
ADJUSTMENT TO MSL PURCHASE CONTRACT - The amount of the closing dividend
(Note 4) paid to the former stockholders of MSL may be increased by the
amount of any tax refund obtained by the Company on account of the
"Permitted Liabilities" as defined in the stock purchase agreement between
the Company and MSL. As of the date of this report, no claim for an
adjustment has been made.
SALES REPRESENTATIVE, EMPLOYEE AND INDEPENDENT CONTRACT AGREEMENTS - The
Company has agreements with sales representatives, employees, and
independent contractors with various terms which are terminable at will
or for cause by either party of the contract.
10. ACQUISITION OF MOLECULAR SEPARATION LABORATORIES, INC. (UNAUDITED)
The unaudited pro forma information of the Company presented below
includes MSL'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 MSL occurred on any date
other than April 21, 1997, nor should it be taken as indicative of the
future results of operations.
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
<S> <C>
Sales $4,842,092
==========
Net income $1,137,520
==========
</TABLE>
* * * * * *
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