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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
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THE RICEX COMPANY
(Name of Small Business Issuer in Its Charter)
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DELAWARE 680412200
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1241 HAWK'S FLIGHT COURT, EL DORADO HILLS, CA 95762
(Address of Principal Executive Offices) (Zip Code)
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(916) 933-3000
(Issuer's Telephone Number)
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Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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TABLE OF CONTENTS
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PART I .................................................................................................... 1
Item 1. Description of Business......................................................................... 1
Item 2. Management's Discussion and Analysis............................................................ 17
Item 3. Description of Property......................................................................... 22
Item 4. Security Ownership of Certain Beneficial Owners and Management.................................. 23
Item 5. Directors, Executive Officers, Promoters and Control Persons.................................... 24
Item 6. Executive Compensation.......................................................................... 26
Item 7. Certain Relationships and Related Transactions.................................................. 33
Item 8. Description of Securities....................................................................... 34
PART II ................................................................................................... 38
Item 1. Market Price of and Dividends on the Company's Common Equity and Other Shareholder Matters...... 38
Item 2. Legal Proceedings............................................................................... 39
Item 3. Changes in and Disagreements with Accountants................................................... 39
Item 4. Recent Sales of Unregistered Securities......................................................... 39
Item 5. Indemnification of Directors and Officers....................................................... 41
Part F/S
Index to Financial Statements ............................................................................. F-1
PART III. ................................................................................................. (i)
Item 1. Index to Exhibits............................................................................... (i)
SIGNATURES ................................................................................................ S-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The RiceX Company, a Delaware corporation (the "Company" or "RiceX Company")
is, and since its formation, has been engaged in extensive research and
development efforts that resulted in the development of a process (the "RiceX
Process") that stabilizes rice bran, the outer portion of the rice kernel. Rice
bran contains over 60% of the nutritional value of rice, but without
stabilization the rice bran is lost shortly after processing to lipase-induced
rancidity. Consequently, a rich nutrient resource must either be thrown away or
disposed of as low value animal feed. The RiceX Process stabilizes the rice bran
and gives it a shelf life of at least one year. While other competing processes
have been able to stabilize rice bran for a limited time, the RiceX Process
preserves more of the higher value compounds and oil found in rice bran for a
significantly longer time. The RiceX Process has enabled the Company to develop
a variety of nutritional food products, including its primary product RiceX-TM-
Stabilized Rice Bran ("RiceX"). The Company's customers include consumer
nutrition and healthcare companies, domestic and international food companies,
and animal feed producers. The Company has formed alliances, or has entered into
negotiations to form a number of strategic alliances, for the development and/or
distribution of its products, including agreements with Monsanto Company, The
Kellogg Company, DuCoa, L.P., the Nutrilite Division of Amway Corporation and
SunJoy Enterprises.
The Company, through its subsidiary, Food Extrusion Montana, Inc. ("FoodEx
MT") is engaged in custom manufacturing of grain based products for food
ingredient companies at its production facility in Dillon, Montana. FoodEx MT
has specialized processing equipment and techniques for the treatment of grain
products to cook, convert, isolate, dry and package finished food ingredients
used in the formulation of health food and consumer food finished products. The
carbohydrate and lipid rich fraction component (Ricelin) of the Company's rice
bran products (see "RiceX Products") is produced at the FoodEx MT facility. The
Company believes that FoodEx MT's manufacturing capabilities are unique among
grain processors.
The Company generated approximately $3.3 million and $908,000 in revenue for
the years ended December 31, 1997 and 1996, respectively. See "Part
F/S--Financial Statements."
The Company occupies approximately 36,300 square feet of executive offices,
production facilities, and research facilities in El Dorado Hills, California
and Dillon, Montana. The Company is currently planning expansion through the
acquisition of additional facilities in the rice-growing regions of the United
States, although there can be no assurance that such expansion will occur. See
"Description of Property."
RiceX-TM- and RiceX Ricelin-TM- are registered tradenames and Satin
Finish-Registered Trademark- is a registered trademark of the Company.
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RICEX PRODUCTS
The Company produces stabilized, nutrient-rich rice bran that may be used in
a wide variety of new product possibilities. The Company is pursuing the
development of proprietary rice bran products from stabilized rice bran
technology. The Company's initial products include:
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RiceX Stabilized Rice Bran: Stable whole rice bran and germ. This is the basic
stabilized rice bran product that is both a food supplement
and an ingredient for cereals, baked goods, animal feed,
health bars, etc., and also the basis for producing Ricelin,
oils and Fiber Complex.
RiceX Ricelin: Carbohydrate and lipid rich fraction component of RiceX.
Ricelin also embodies a concentrated form of the vitamins
and nutrients found in stabilized bran.
RiceX Fiber Complex: Nutrient rich insoluble fiber source that contains rice bran
oil and associated nutrients. This product, designed for use
by the baking and health food markets, is the remaining
ingredient when stabilized bran is processed to form
Ricelin.
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In addition, Max "E" Oil, RiceX Defatted Fiber and HVF are all produced by
further refining RiceX Stabilized Rice Bran into oil and its by-products. In
April 1998, the Company entered into a non-binding letter of intent with the
Nutrilite Division of Amway Corporation ("Nutrilite") whereby Nutrilite would
enter into a requirements contract with the Company to purchase stabilized rice
bran oil and its by-products and receive from the Company exclusive sales rights
for the multi-level sales channel for a two-year period. The Company currently
has no facilities for the mass production of stabilized rice bran oils but plans
to arrange for toll manufacturing or to acquire or build these facilities upon
the successful completion of the development project. However, there can be no
assurance that such arrangement or facilities will be available. See "Factors
Affecting Operating Results."
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Max "E" Oil: Nutrient-rich oil made from RiceX Stabilized Rice Bran. This
oil has a very high flash point, which provides a very long
fry life, and it is not readily absorbed into food. In
addition, the oil maintains many of the nutritional benefits
of the whole rice bran products.
RiceX Defatted Fiber: Low fat insoluble fiber that does not contain rice bran oil.
This is a product designed for use by the baking industry
for its nutritional benefits.
Higher Value Fractions("HVF"): These are nutraceutical-like compounds naturally occurring
in Rice Bran and Rice Bran Products that provide specific
health benefits. Tocopherols, tocotrienols, and gamma
oryzanol are some of the antioxidant-rich fractions that are
found in rice bran and are enhanced with stabilization, with
the gamma oryzanol being unique to rice.
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INDUSTRY BACKGROUND
THE IMPORTANCE OF RICE
Rice is the staple food for approximately 70% of the world's population and
is the staple food source for several of the world's largest countries. World
rice production is expected to be more than 550 million tons in 1997 (according
to the USA Rice Federation), constituting more than one quarter of all cereal
grains produced worldwide. The United States accounts for less than 2% of the
world's production. Ninety
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percent (90%) of world rice tonnage is produced in 13 countries with aggregate
populations of 3.2 billion people. (USA Rice Federation, Rice Notes)
Approximately 75% of all rice production occurs in five regions: China, India,
South East Asia, Africa and South America, that have a combined population of
2.3 billion (nearly 50% of the world's population) and an average per capita
gross domestic product of $2,000 (less than one tenth of the U.S. average).
Malnutrition is a common problem in this group of nations, particularly for
people located in rural villages where subsistence rice farming is a primary
livelihood. Transportation and storage are poor, consequently locally grown rice
is consumed locally and the amount of food available varies widely over time
with changes in seasons and weather. Children are especially susceptible to
variations in local agricultural output due to their heightened nutritional
needs and dependency on others for food. Per capita rice consumption in many of
the poorer rice belt countries exceeds one pound per day.
Despite the importance of rice as a worldwide food source and the problems
associated with nutritional deficiencies in rice-dependent nations, more than
60% of the nutrients found in rice is lost during processing. These nutrients
are contained in the outer brown layer of the rice kernel known as "rice bran,"
which, because of poor stability, is lost to lipase-induced rancidity or
microbiological spoilage shortly after milling.
RICE PROCESSING AND RICE BRAN STABILIZATION
When harvested from the field, rice is in the form of paddy, or "rough" rice
where the kernel is fully enveloped by the rice hull. The hull is dried, then
removed in the first stage of milling, yielding brown rice. In the second stage
of milling, the outer brown layer, or rice bran, is removed to produce white
rice. Rice bran is composed of the rice germ and several sub-layers, which
account for approximately 8% by weight of paddy rice and contain over 60% of the
nutrients found in each kernel of rice. (Juliano, B.O., 1985, Rice: Chemistry
and Technology, American Association of Cereal Chemists, St. Paul. MN, p.37-50.)
Under normal milling conditions, when brown rice is milled to white rice,
the oil in the bran and a potent lipase enzyme found on the surface of the bran
come into contact with one another. The lipase enzyme causes very rapid
hydrolysis of the oil, converting it into glycerol, monoglycerides, diglycerides
and free fatty acid ("FFA"). As the FFA content increases, the rice bran becomes
unsuitable for human or animal consumption. At normal room temperature, the FFA
level increases to 7-8% within 24 hours and thereafter increases at the rate of
approximately 4-5% per day. Rice bran is unfit for human consumption at 5-7%
FFA, which typically occurs within 12 hours of milling. Once the FFA
concentration exceeds 12%, it becomes unsuitable even for cattle feed, the
lowest economic use available to most crop by-products.
If the lipase enzyme can be deactivated, rice bran can be stabilized, thus
preserving a potentially important nutrient source that is largely wasted today.
Heat will deactivate the lipase enzyme, reduce the microbiological load and
reduce moisture levels, serving as the basis for most attempts at stabilization
of rice bran. Parboiled, or "converted" rice, is subjected to soaking and
steaming prior to being dried and milled. This process softens the rice kernel
and reduces the problem of lipase-induced hydrolysis. The bran produced from
parboiled rice, however, is only semi-stabilized, typically spoiling in 20 days
or less. The parboiling process also destroys much of the nutritional value of
the bran by chemically changing the beneficial nutrients residing in the bran.
There have been a number of attempts to develop alternative rice bran
stabilization processes that deactivate the lipase enzyme using chemicals,
microwave heating, and variants on extrusion technology. The Company believes
each of these efforts result in an inferior product that either does not remain
stable for a commercially reasonable time period and/or the nutrients in the
bran are lost, significantly reducing the nutritional value in the bran.
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THE RICEX SOLUTION
The RiceX Process uses proprietary innovations in food extrusion technology
to create a combination of temperature, pressure and other conditions necessary
to deactivate the lipase enzyme without significantly damaging the structure or
activity of other, higher value compounds, oil and proteins found in the bran.
The RiceX Process does not use chemicals to stabilize raw rice bran, and
produces an "all natural" product.
The Company's processing equipment is designed to be installed on the
premises of any two-stage rice mill and is located downstream from the rice
polishers. After hulling, the rice is transported pneumatically to the rice
polishing room where the brown rice kernels are tumbled and the rice bran is
polished from the surface of each kernel. The bran is separated from the denser
polished rice grains and is transported pneumatically to a loop conveyor system
designed by the Company. The loop conveyor system immediately carries the fresh,
unstabilized rice bran to the RiceX Company stabilizer. Stabilization is
achieved by feeding the fresh rice bran into a specially designed auger food
extruder that forces the material under pressure and heat through an orifice.
The auger is designed to create the proper temperature and pressure necessary to
selectively deactivate the lipase enzyme and reduce the microbiological load.
The system is controlled by electronics that maintain process conditions within
the prescribed pressure/temperature regime. In case of power failure or
interruption of the flow of fresh bran into the system, the electronic control
system is designed to purge the RiceX Company equipment of material in process
and safely shut down.
Bran leaving the Company's stabilization system (the "RiceX bran") is
deposited on a food-grade conveyor that tempers the product and reduces moisture
content. The product is then discharged onto the cooling unit. A high volume,
low-pressure airflow further dehumidifies and cools the RiceX bran as it moves
forward. The cooled RiceX bran is then loaded into one-ton shipping containers
for transportation to other processing facilities or is transported by pneumatic
conveyor to a bagging unit for packaging in 40 and 50-pound sacks. RiceX bran
has a shelf life of at least one year and is rich in tocopherpols, tocotrienols,
oryzanols, and other nutritional and natural compounds that exhibit positive
health properties ("nutraceuticals").
The RiceX Process system is modular. Each stabilization module can process
approximately 2,500 pounds of RiceX bran per hour and has a capacity of over
7,920 tons per year. This is sufficient to process all of the bran generated by
a 78,000 ton-per-year rice mill. Stabilization production capacity can be
doubled or tripled by installing additional RiceX Company units sharing a common
conveyer and stage system, which can handle the output of the world's largest
rice mills. The Company has developed a smaller production unit, which has a
maximum production capacity of 950 tons per year for installation in countries
or locations where rice mills are substantially smaller than those in the United
States.
The processing conditions created by the RiceX Process are unique, however
the ancillary equipment used to achieve these processing conditions is in wide
use throughout the food industry. It is in the stabilizer unit that the unique
RiceX Company technology resides; all of the other processing, material
handling, control, and storage components are off-the-shelf equipment items.
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BENEFITS OF RICEX STABILIZED RICE BRAN
Rice bran is a rich source of protein, oil, dietary fiber and other
nutrients. The proximate composition and caloric content of RiceX Stabilized
Rice Bran is as follows:
RICEX STABILIZED RICE BRAN COMPOSITION
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Fat........................................................... 18%-23%
Protein....................................................... 12%-16%
Total Dietary Fiber........................................... 23%-35%
Soluble Fiber................................................. 2%-6%
Moisture...................................................... 4%-8%
Ash........................................................... 7%-10%
3.2
Calories...................................................... kcal/gram
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Rice bran is unique in the plant kingdom. Its protein is hypoallergenic and
contains all of the essential amino acids, the necessary building blocks of
protein in the body. Rice bran contains approximately 20% oil and closely
resembles peanut oil in fatty acid composition and heat stability. Rice bran oil
contains essential fatty acids and a broad range of nutraceutical compounds that
have been demonstrated to have therapeutic properties. (Cheruvanky and Raghuram,
1991 Journal of the American College of Nutrition, Vol. 10, No. 4, pp 593-691.)
Nutraceuticals are food constituents that have human therapeutic effects.
Some of these compounds, include a newly discovered complex of Vitamin E called
"tocotrienols," and gamma oryzanol, which is only found in rice. These compounds
are potent antioxidants that have been shown to aid in reducing damage from
free-radicals in the body. RiceX bran also contains very high levels of
B-complex vitamins, betacarotene (a vitamin A precursor), other carotenoids and
phytosterols, as well as both soluble and insoluble fiber. (Saunders, 1990, Rice
BranOil, presented at Calorie Control Council Meeting, February 14, 1990,
Washington, D.C.)
BUSINESS STRATEGY
The Company's goal is to become the world's leading producer and distributor
of stabilized rice bran and rice bran products. The Company will produce
stabilized rice bran and related products in manufacturing facilities owned by
it or through joint venture arrangements. See "Supply and Manufacturing". The
Company does not intend to sell its technology or processing methods, but will
protect its process and products through both trade secret protection and
through patent and trademark protection. See "Patents and Trademarks".
The Company intends to continue research and development efforts, including
clinical trials, to establish the efficacy of its stabilized rice bran-based
products in providing nutritional support to individuals with chronic diseases
and in promoting human health and nutrition. The Company believes that clinical
support for stabilized rice bran products will further enhance the value of its
products as nutraceuticals and functional food ingredients. Finally, the Company
intends to aggressively market its products in four distinct product areas:
nutraceuticals, functional food ingredients, rice bran oils and performance feed
supplements. In further pursuit of this goal, the Company has focused and will
continue to focus its marketing and development efforts in two distinctly
different areas: "developed" nations, including the U.S., Europe, South Africa,
Argentina, Japan, Korea and Taiwan; and "developing" nations, including India,
China, Indonesia, and most of the other countries in Asia, Africa and South
America.
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DEVELOPED NATIONS
In developed nations, the Company's focus is on producing and selling RiceX
Company products to large consumer product marketers as health enhancing
ingredients for existing or newly developed products, and as stand-alone
products to consumers. The Company has established a relationship with a German
company to introduce RiceX Company products into the European Community. The
Company is also in negotiations with the Mercosur market, Argentina and the
Province of Entre Rios for the commercialization of stabilized rice bran and
various product forms. Although there can be no assurance that the Company's
products will successfully be introduced in Argentina and in the European
Community, the Company believes that interest of this type validates the
potential opportunity and the relationship reflects the strategy for the
Company's foreign ventures. The Company intends to seek other opportunities in
the developed world by converting stabilized rice bran grown in those countries
into finished goods and higher value fractions with demonstrated health or
nutritional benefits.
DEVELOPING NATIONS
In developing nations, the Company intends to partner with local companies
on a joint venture basis to stabilize locally-grown rice bran for local
consumption and for future export. To accomplish this, the Company plans to
introduce its stabilization process systems in large rice mills located in
China, India and Southeast Asia. In many developing nations, the average person
has a 300-500 calorie daily diet deficit. (The Food and Agriculture Organization
of the United Nations (FAO), Agrostat PC, on diskette (FAO, Rome, 1993); and the
World Resources Institute in collaboration with the United Nations Environment
Programme and the United Nations Development Programme, World Resources 1994-95
(Oxford University Press; New York, 1994), p.108). If the Company is able to
expand into these areas, the installation of 100 RiceX processing systems could
provide 500 nutritionally dense calories per day to over 30 million people each
year. The diet supplement provided by the locally-grown and stabilized rice bran
would help those people approach U.S. levels of nutrition.
The Company also intends to access international markets by selling RiceX
and Ricelin into foreign countries. In June 1997, SunJoy Enterprises
Corporation, a China-based conglomerate ("SunJoy") entered into an international
distributor agreement, pursuant to which the Company has already begun shipments
of RiceX and Ricelin into mainland China. The Company intends to develop this
relationship into a joint venture with SunJoy to allow the Company to stabilize
and process rice bran in the local areas of the country. However, there can be
no assurance that such an arrangement will be consummated. See "Factors
Affecting Operating Results."
The United Nations Industrial Development Organization ("UNIDO") has offered
to sponsor the demonstration of the RiceX Process in Brazil and Thailand to
promote the utilization of the large amounts of rice bran that is discarded
throughout the developing world. The Company has had preliminary discussions
regarding the demonstration of its system and the end products from this
technology with a number of companies and governments including China,
Argentina, Brazil, Malaysia and certain African countries. There can be no
assurance that these discussions will lead to implementation of the RiceX
Process with these companies or governments.
SALES AND MARKETING
The Company has targeted four distinct product areas in which RiceX and
related products may be used as the primary ingredient. Its key marketing
strategy is to form strategic alliances with industry leaders in each of its
target markets. This strategy will allow the Company to leverage the research,
marketing and distribution strengths of its partners in order to more
economically and efficiently introduce and market products. The Company has
formed alliances, or has entered into negotiations to form alliances, in each of
its target markets as follows:
- The Nutrilite Division of Amway Corporation--Nutraceuticals
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- The Kellogg Company--Functional Food Ingredients
- The Nutrilite Division of Amway Corporation and Monsanto Company--Rice
Bran Oils
- DuCoa, L.P.--Performance Feed Supplements
These relationships, and the Company's overall marketing plans in each of
the four target markets are discussed below.
NUTRACEUTICALS
Nutraceuticals are food-derived substances with pharmaceutical-like
properties, including vitamins and dietary supplements. RiceX can be used as a
nutraceutical to provide certain specific nutrients or food components
(including antioxidants, oryzanols, Vitamin B, and bran fiber) or to address
specific health applications such as cardiovascular health, diabetes control,
fighting free-radicals and general nutritional supplementation. The Company has
sold RiceX as an ingredient to consumer nutrition and healthcare companies,
national nutritional retailers, and multi-level personal products marketers. The
Company is continuing to develop HVFs, the nutraceutical-like compounds found in
rice bran that provide specific health benefits, and upon completion of the
development project, Nutrilite plans to commercialize products for distribution
in the United States and other countries through its multi-level sales channel
pursuant to a non-binding letter of intent. The Company has also been informed
that at least one national nutrition retailer and other personal product
marketing companies are working on development of special products utilizing
RiceX and its related products. There can be no assurance that such marketing
efforts will be successful or that any of the proposed products will be
developed in a commercially reasonable time or at all.
FUNCTIONAL FOOD INGREDIENTS
RiceX is a low cost, all natural food product that contains a unique
combination of oil, protein, carbohydrates, vitamins, minerals, fibers, and
antioxidants that can be used to enhance the nutritional value of popular
consumer products. Several foods that are ideally suited to the addition of
RiceX to their ingredients include cereals, snack foods and breads. The Company
is marketing RiceX to consumer food companies for use in already established
products and for development of new products.
The Company has begun shipment of a variety of its stabilized rice bran and
rice bran products into mainland China pursuant to an international distributor
agreement with SunJoy. The Company intends to develop this relationship into a
joint venture with SunJoy to allow the Company to stabilize and process rice
bran in the local areas of the country. The Kellogg Company has agreed to
collaborate in a clinical research project that could lead to commercialization
of several new and reformulated consumer food products that will contain RiceX
as one of their major ingredients. There can be no assurance that any or all of
these projects will be successful.
RICE BRAN OILS
Nutrient-rich oil made from RiceX Stabilized Rice Bran has a very high flash
point, which provides a long fry life and is not readily absorbed into food. The
oil also maintains many of the nutritional benefits of whole rice bran products,
making it ideally suited for healthy salad and cooking oils. The Nutrilite
Division of Amway Corporation has plans to commercialize edible rice bran oils
in the United States and other countries through its multi-level sales
distribution channel. The Company and Monsanto Company have agreed to work
towards the formation of two joint venture companies. The first joint venture
would be in India, the purpose of which would be the commercialization of the
Company's rice bran stabilization technology for the purpose of increasing the
yield and quality of rice bran oil in India. The second joint venture would be
for the worldwide, non-multi-level sales distribution channel commercialization
of edible rice bran oils. However, there can be no assurance that the Nutrilite
and Monsanto collaborations will be successful.
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PERFORMANCE FEED SUPPLEMENTS
The Company also markets RiceX as a food supplement for animals. RiceX may
be used as an equine feed supplement and has proven to provide greater muscle
mass, improved stamina, and hair-coat luster when added to a normal diet.
Anecdotal reports suggest that RiceX fiber increases milk production in dairy
cows by 15-20% and that RiceX bran promotes more rapid weight gain in poultry
and meat livestock. A national animal supplement distributor is now selling feed
products that incorporate RiceX. In February 1998 the Company formed a strategic
alliance with DuCoa, L.P. ("DuCoa") to introduce RiceX products to the petfood
and swine feed industry markets which are estimated to be $11.8 billion
annually. Under the agreement, DuCoa has dedicated technical and sales resources
to the formulation of the Company's products as ingredients for petfood and
swine feed.
MARKETING METHODS
In November 1997, the Company hired a Vice President of Sales and Marketing
to head up its sales and marketing programs. The sales staff consists of two
direct in-house sales representatives. Shipping and distribution of products are
managed and directed by RiceX Company corporate staff, and by the direction of
several of its processing locations and subcontract shippers.
Pursuant to the Stabilized Rice Bran Processing Sales and Marketing
Agreement between Farmer's Rice Cooperative, a cooperative association organized
under the California Food and Agriculture Code ("Farmer's") and the Company
dated June 28, 1994, Farmer's has a non-exclusive license to the Company's rice
bran processing equipment for production of stabilized rice bran solely for sale
to the Company and Farmer's customers. Pursuant to the terms of the agreement,
Farmer's has agreed to pay the Company a royalty payment for each short ton of
stabilized rice bran produced by Farmer's for sale to its customers. The royalty
payment may be adjusted from time to time to account for changes in the market.
CUSTOMERS
Currently, the Company's major customers are (1) Wolcott Farms, (2)
Integris, (3) Anderson Livestock and (4) SunJoy. The Company depends on these
customers for approximately 70% of all sales revenue. Loss of any of these
companies as a customer could have a material adverse effect on the Company's
business, financial condition and results of operations.
SUPPLY AND MANUFACTURING
The Company purchases unstabilized rice bran from two major suppliers,
Farmer's Rice Cooperative and California Pacific Rice Growers. Pursuant to
agreements with these companies, the Company's stabilization machinery is
physically attached to the suppliers' rice processing plants and the rice bran
by-product is directly transferred to the Company's machinery for stabilization
without the need for shipping. The relationship with the suppliers is symbiotic
as the rice manufacturer cannot easily dispose of the rice bran by-product while
the Company has a ready access to unstabilized bran. These suppliers are
currently the only suppliers of unstabilized rice bran to the Company. The
Company intends to enter into additional relationships with rice processors,
both in the U.S. and abroad, as part of its overall business strategy. The
Company's production capacity currently stands at 6.6 tons per month. The
Company believes that it will be readily able to obtain additional suppliers due
to the benefits suppliers can receive from an agreement with the Company. There
can be no assurance that the Company will obtain additional suppliers.
The Company ships stabilized rice bran from its facilities in California to
its plant in Dillon, Montana for further processing into RiceX Ricelin and RiceX
Fiber Complex. Current monthly production capacity is approximately 68 tons of
RiceX Ricelin and 75 tons of RiceX Fiber Complex. Additional equipment could
slightly more than double production capacity. The Company intends to acquire or
construct an additional processing facility as the demand for Ricelin and Fiber
Complex justifies expansion.
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Every food product manufactured by the Company is produced under published
FDA regulations for "Good Manufacturing Practices." Quality control is overseen
by the Vice President of Operations and conducted by a microbiologist and a
Ph.D. chemist. Product samples for each product code are analyzed for
microbiological adherence to a predetermined set of product specifications and
each lot is positively released.
The Company purchases machinery, parts and equipment for its stabilization
system from (1) Kamflex Corporation, a company whose President and Chief
Executive Officer is a shareholder and former director and officer of the
Company, (2) MAC Equipment, and (3) Cal Mill Equipment. The Company believes
that while its current relationships with suppliers are good, there can be no
assurance that such relationships will continue. The Company believes
replacement suppliers are readily available if needed, because the Company does
not use custom machinery, parts or equipment. See "Certain Relationships and
Related Transactions."
PATENTS AND TRADEMARKS
The RiceX Process is an adaptation and refinement of standard food
processing technology applied to the stabilization of rice bran. The Company has
chosen to treat the RiceX Process as trade secrets and not to pursue process or
process equipment patents on the original processes, however, process
improvements will be reviewed for future patent protection. The Company believes
that the unique products, and their biological effects, resulting from RiceX
Company stabilized rice bran are patentable. The Company has filed three
provisional U.S. patent applications relating to RiceX Ricelin, Fiber Complex,
and HVF products and intends to seek patent protection in selected foreign
jurisdictions. The patent applications include "A Method for Treating Diabetes
Mellitus," "A Method for Treating Hypercholesterolimea, Hyperlipidemia, and
Atheroscelerosis," and "A Method for Enhancing the Tocol Content of Rice Bran
Oil." The Company may apply for additional patents in the future as new products
are developed.
The Company owns the RiceX-TM- and RiceX Ricelin-TM- tradenames and the
Satin Finish-Registered Trademark- trademark.
Pursuant to the terms of an agreement between the Company and Wolcott Farms,
Inc., a California corporation ("Wolcott Farms"), dated March 1, 1997, the
Company granted Wolcott Farms an exclusive, worldwide license to use the
trademark Satin Finish, agreed to transfer title to the trademark upon full
payment of the purchase price by Wolcott Farms, and granted Wolcott Farms the
right to sublicense the trademark to Natural Glo Investors, L.P. Wolcott Farms
has agreed to pay the Company minimum monthly royalty payments which are applied
towards the purchase price.
The Company endeavors to protect its intellectual property rights through
patents, trademarks, trade secrets and other measures, however, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not develop similar technology. There can be no assurance
that any patent applications the Company may file will be issued or that foreign
intellectual property laws will protect the Company's intellectual property
rights. Other companies and inventors may receive patents that contain claims
applicable to the Company's system and processes. The use of the Company's
systems covered by such patents could require licenses that may not be available
on acceptable terms, if at all. In addition, there can be no assurance that
patent applications will result in issued patents.
Although there currently are no pending claims or lawsuits against the
Company regarding possible infringement claims, there can be no assurance that
infringement claims by third parties, or claims for indemnification resulting
from infringement claims, will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the
future, litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to defend the Company
against claimed infringement of the rights of others and to determine the scope
and validity of the proprietary rights of others. Any such litigation could
result in substantial cost and diversion of resources by the Company, which
could have a material adverse effect on the Company's financial condition and
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results of operations. Adverse determinations in such litigation could result in
the Company's loss of proprietary rights, subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties or prevent the Company from manufacturing or selling its systems, any of
which could have a material adverse effect on the Company's financial condition
and results of operations. In addition, there can be no assurance that a license
under a third party's intellectual property rights will be available on
reasonable terms, if at all. See "Factors Affecting Operating Results--Patents,
Licenses and Intellectual Property Claims."
COMPETITION
Although the Company believes that it is the only company to stabilize rice
bran so that the bran has a shelf life of over one year, the Company competes
with other companies attempting to stabilize rice bran as well as companies
producing other food ingredients and nutritional supplements. The Company's
major competitors include Producer's Rice Mill and Uncle Ben's Rice, Inc. Many
of the Company's competitors have greater capital resources and experience in
the food industry than the Company. There can be no assurance that the Company
will be able to compete successfully in the rice bran industry. The Company's
major nutritional supplement competitors include producers of wheat bran and oat
bran, particularly in the functional food ingredients market segment. See
"Factors Affecting Operating Results--Competition."
RESEARCH AND DEVELOPMENT
Rice bran contains a wide variety of antioxidants, vitamins, and other
nutrients associated with good health and resistance to disease. The Company has
conducted a preliminary clinical evaluation that indicates RiceX products have
efficacy in the nutritional management of certain conditions and diseases, such
as diabetes mellitus and coronary vascular disease. Data from this study has
been analyzed and the data support the initiation of clinical trials. The
Company intends to vigorously conduct these trials and, if successful, will
develop foods containing the active nutraceutical components of RiceX bran to
manufacture products targeted at specific conditions or suitable for the
maintenance of general health and well-being. There can be no assurance that the
results of additional clinical trials will prove successful or that the Company
will be able to develop additional new products. See "Government Regulations."
As of March 31, 1998, the Company had three full-time employees engaged in
research and development, including a Vice President of Science and Technology,
a Director of Research and Development, and a Director of Science and
Technology, and two part-time employees. The Company also uses the services of
independent labs and testing facilities. Expenditures for research and
development for the three months ended March 31, 1998, and the years ended
December 31, 1997, 1996, and 1995 totaled $306,577, $790,095, $632,975, and
$425,207, respectively. The Company expects to continue research and development
expenditures to establish the scientific basis for health claims of existing
products and to develop new products and applications.
EMPLOYEES
As of the date hereof, the Company has a total of 37 employees, 35 of whom
are full time employees. The Company believes that its relations with its
employees are good.
GOVERNMENT REGULATION
The manufacturing, packaging, labeling, advertising, distribution and sale
of the Company's products are subject to regulation by one or more federal
agencies. The U.S. Food and Drug Administration (the "FDA") has acknowledged in
a letter dated March 18, 1965, that rice polishings (rice bran) is food and may
be sold as such as long as the product is manufactured, packaged and labeled
correctly. With this letter, RiceX Stabilized Rice Bran can be deemed GRAS
(Generally Recognized As Safe). Although no official
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regulatory position has been identified for the derived products (stabilized
rice bran), the process for self affirmation of GRAS status is well defined.
The FDA regulates the Company's products under the United States Food, Drug
and Cosmetic Act (the "FDCA") and regulations promulgated by the FDA to
implement this statute. In 1976, the FDA's ability to regulate the composition
of dietary supplements was restricted in several material respects by the
Proxmire Amendment to the FDCA. Under this Amendment, the FDA is precluded from
establishing maximum limits on the potency of vitamins, minerals and other
dietary supplements, from limiting the combination or number of any vitamins,
minerals or other food ingredients in dietary supplements, and from classifying
a vitamin, mineral, or combination of vitamins and minerals as a drug solely
because of potency. The Proxmire Amendment did not affect the FDA's authority to
determine that a vitamin, mineral or other dietary supplement is a new drug on
the basis of drug claims made in the product's labeling. Such a determination
would require deletion of the drug claims, or the Company's submission and the
FDA's approval of a new drug application, which entails costly and
time-consuming clinical studies.
In 1990, the FDA's authority over dietary supplement labeling was expanded
in several respects by the Nutrition Labeling and Education Act ("NLEA"). This
statute amended the FDCA by establishing a requirement for the nutrition
labeling of most foods, including dietary supplements. In addition, the NLEA
prohibits the use of any health benefit claim ("health claim") in dietary
supplement labeling unless the claim is supported by significant scientific
agreement and is pre-approved by the FDA. Interested companies may petition the
FDA for the approval of health claims. To date, the FDA has approved health
claims for dietary supplements only in connection with the use of calcium for
prevention of osteoporosis, use of folic acid for prevention of neural tube
defects, and the use of oat bran for the reduction of serum cholesterol. The
NLEA also allows nutrient content claims characterizing the level of a
particular nutrient in a dietary supplement (e.g., "high in," "low in," "source
of") if they are in compliance with definitions issued by the FDA. The NLEA
precludes any state from mandating nutritional labeling, nutrient content claim
or health claim requirements that differ from those established under the NLEA.
In October 1994, the FDCA was amended by enactment of the Dietary Supplement
Health Education Act of 1994 ("DSHEA"), which introduced a new statutory
framework governing the composition and labeling of dietary supplements. With
respect to composition, the DSHEA creates a new class of "dietary supplements,"
dietary ingredients consisting of vitamins, minerals, herbs, amino acids and
other dietary substances for human use to supplement the diet, as well as
concentrates, metabolites, extracts or combinations of dietary ingredients.
Under the DSHEA, dietary ingredients on the market before October 15, 1994 may
be sold without obtaining the FDA pre-approval and without notifying the FDA.
New dietary ingredients (not on the market before October 15, 1994) require
proof of use as an article of food without being chemically altered, or evidence
of a history of use or other evidence establishing that it is reasonably
expected to be safe. The FDA must be supplied with such evidence at least 75
days before the initial use of a new dietary ingredient. There can be no
assurance that the FDA will accept the evidence of safety for any new dietary
ingredients the Company may decide to use, and the FDA's refusal to accept such
evidence could result in judicial proceedings by the FDA to prevent the sale of
products containing the new dietary ingredient.
The DSHEA permits "statements of nutritional support" for dietary
supplements without FDA pre-approval. Such statements may describe how
particular dietary ingredients affect the structure, function or general
well-being of the body, or the mechanism of action by which a dietary ingredient
may affect body structure, function or well-being, but may neither state that a
dietary supplement will diagnose, mitigate, treat, cure or prevent a disease,
nor can a claim be made which would be interpreted as a health claim under NLEA.
A company making a statement of nutritional support must possess substantiating
evidence for the statement, disclose on the label that the FDA has not reviewed
the statement and that the product is not intended for use for a disease, and
notify the FDA of the statement within 30 days after its initial use. However,
there can be no assurance that the FDA will not determine that a given statement
of nutritional support the Company decides to make is a drug claim rather than
an acceptable nutritional support
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statement. Such a determination would require deletion of the drug claim or the
submission by the Company and the approval by the FDA of a new drug application,
which would entail costly and time-consuming clinical studies. In addition, if
the FDA takes the position that a claim is a "health claim," rather than a
statement of nutritional support, the Company would need prior agency approval.
There can be no assurance that the FDA will accept as adequate such
substantiation as is provided for nutritional support claims. The DSHEA allows
the dissemination of "third party literature", publications such as reprints of
scientific articles that link particular dietary ingredients with health
benefits. Third party literature may be used in connection with the sale of
dietary supplements to consumers. Such a publication may be so distributed if it
is not false or misleading, if no particular manufacturer or brand of dietary
supplement is mentioned, if the publication is presented in such manner so as to
offer a balanced view of available scientific information on the subject matter,
if it is physically separated from products when used in a retail establishment
and if it does not have any other information appended to it. There can no
assurance, however, that all pieces of third party literature that may be
disseminated in connection with the Company's products will be determined by the
FDA to satisfy each of these requirements, and any such failure to comply could
subject the product involved to regulation as a new drug.
In September 1997, the FDA issued final regulations to implement certain
DSHEA labeling provisions. The regulations take effect on March 23, 1999. In
addition, in April 1998, the FDA proposed regulations addressing allowable and
prohibitive types of labeling claims for dietary supplements. There can be no
assurance that if such regulations are adopted, the implementation will not
adversely affect the Company's ability to market products targeted at specific
conditions. The DSHEA also requires that dietary supplements be prepared, packed
and held under conditions that meet the good manufacturing practice ("GMP")
regulations to be promulgated by the FDA with respect to dietary supplements.
The FDA has not issued GMP regulations specifically for dietary supplements.
Should the FDA issue such regulations, there can be no assurance that the
Company' proposed production facilities will meet all of the GMP regulations and
the Company may be required to expend resources to take appropriate action to
comply with such regulations.
The FTC, which exercises jurisdiction over the advertising of dietary
supplements, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees, agency cease and desist orders, judicial injunctions and the
payment of fines by the companies involved. In addition, the FTC has increased
its scrutiny of infomercials. There can be no assurance that the FTC will not
question the Company's advertising in the future. The FTC has been very active
in enforcing its requirements that companies possess adequate substantiation in
their files for claims in product advertising.
The Company intends to manufacture certain products pursuant to contracts
with customers who will distribute the products under their own or other
trademarks. Such customers are subject to the governmental regulations discussed
in this section in connection with their purchase, marketing, distribution and
sale of such products, and the Company will be subject to such regulations in
connection with the manufacture of such products and its delivery of services to
such customers. However, although the Company's customers are independent
companies, and their labeling, marketing and distribution of such products is
beyond the Company's control, the failure of these customers to comply with
applicable laws or regulations could have a material adverse effect on the
Company. Governmental regulations in foreign countries where the Company plans
to sell products may prevent or delay entry into the market or prevent or delay
the introduction, or require the reformulation, of certain of the Company's
products. Compliance with such foreign governmental regulations generally will
be the responsibility of the Company's customers in those countries. Those
customers are independent companies over which the Company will have no control.
The FDA has broad authority to enforce the provisions of the FDCA applicable
to dietary supplements, including the power to seize adulterated or misbranded
products or unapproved new drugs, to
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request their recall from the market, to enjoin their further manufacture or
sale, to publicize information about a hazardous product, to issue warning
letters, and to institute criminal proceedings. The Company may be subject to
additional laws or regulations administered by the FDA or other regulatory
authorities, the repeal of laws or regulations which the Company might consider
favorable, or more stringent interpretations of current laws or regulations,
from time to time in the future. The Company is unable to predict the nature of
such future laws, regulations, interpretations or applications, nor can it
predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on its business in the future. They
could, however, require the reformulation of certain products to meet new
standards, the recall or discontinuance of certain products not able to be
reformulated, imposition of additional recordkeeping requirements, expanded
documentation of the properties of certain products, expanded or different
labeling, and/or scientific substantiation. Any or all of such requirements
could have a material adverse effect on the Company's results of operations and
financial condition.
FACTORS AFFECTING OPERATING RESULTS
This Registration Statement contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Registration Statement
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. The Company's
actual results may differ materially as a result of certain factors, including
those set forth hereafter and elsewhere in this Registration Statement.
Potential investors should consider carefully the following factors, as well as
the more detailed information contained elsewhere in this Registration
Statement, before making a decision to invest in the common stock of the
Company.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; NEED FOR ADDITIONAL CAPITAL
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
a shareholders' deficit of $4,410,429 through March 31, 1998, has negative
working capital as of that date, and expects to incur a loss in 1998. The
Company's cash and equivalents balance at March 31, 1998 was $523,279 and the
Company's use of cash in operations was $265,962 for the three months then
ended. The Company commenced manufacturing and marketing activities in June
1996, and there can be no assurance that sales of its products will achieve
significant levels of market acceptance. The Company's business could be subject
to any or all of the problems, expenses, delays and risks inherent in the
establishment of a new business enterprise including limited capital resources,
possible delays in product development, possible cost overruns due to price and
cost increases in raw product and manufacturing processes, uncertain market
acceptance and the absence of an operating history. Therefore, there can be no
assurance that the Company's business or products will be successful or that the
Company will be able to achieve or maintain profitable operations. There can be
no assurance that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated.
To become and remain competitive, the Company will likely be required to
make significant investments in research and development. The Company is seeking
additional equity or debt financing to provide for the capital required to
maintain or expand the Company's marketing and production capabilities. The
timing and amount of any capital requirements cannot be predicted at this time.
There can be no assurance that any financing will be available on acceptable
terms, if at all. If such financing is not available on satisfactory terms, the
Company may be unable to continue, develop or expand its business, develop new
products, or develop new markets at the rate desired and its operating results
may be adversely
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affected. Equity financing could result in additional dilution to existing
shareholders. See "Liquidity and Capital Resources."
MARKET RISKS OF A NEW BUSINESS
The Company has formulated its business plans and strategies based on
certain assumptions regarding the size of the rice bran market, the Company's
anticipated share of this market, and the estimated price and acceptance of the
Company's products. These assumptions are based on the best estimates of the
Company's management. There can be no assurance that the Company's assessments
regarding market size, potential market share attainable by the Company, the
price at which the Company will be able to sell its products, market acceptance
of the Company's products or a variety of other factors will prove to be
correct. Any future success of the Company may depend upon factors including
changes in the dietary supplement industry, governmental regulation, increased
levels of competition including the entry of additional competitors and
increased success by existing competitors, changes in general economic
conditions, increases in operating costs including costs of production,
supplies, personnel, equipment, and reduced margins caused by competitive
pressures.
COMPETITION
Competition in the Company's targeted industries, including nutraceuticals,
functional food ingredients, rice bran oils and animal feed supplements is
vigorous with a large number of businesses engaged in the various industries.
Many of the competitors have established reputations for successfully developing
and marketing their products. Many of the competitors have greater financial,
managerial, and technical resources than the Company. If the Company is not
successful in competing in these markets, it may not be able to attain its
business objectives.
GOVERNMENTAL REGULATION
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies.
Although Congress has recently recognized the potential impact of dietary
supplements in promoting the health of U.S. citizens by enacting the DSHEA,
which severely limits the FDA's jurisdiction in regulating dietary supplements,
there is no way to predict the potential effect of DSHEA. It may be difficult
for any company manufacturing or marketing dietary supplements to remain in
strict compliance with the technical requirements of DSHEA. The FDA has recently
proposed regulations with the purpose of implementing DSHEA and proposals have
been made to modify or change the provisions of DSHEA. It is impossible to
predict whether those regulations or proposed changes will become law or the
effect that such regulations or proposed changes, if implemented, will have on
the business and operations of the Company.
RELIANCE ON LIMITED NUMBER OF PRODUCTS
All of the Company's products are based on stabilized rice bran. Although
the Company will market rice bran as a dietary supplement, as an active
ingredient for inclusion in other company's products, and in other ways, a
decline in the market demand for the Company's products as well as the products
of other companies utilizing the Company's product could have a significant
adverse impact on the Company.
RELIANCE ON ADEQUATE SUPPLY OF RAW RICE BRAN
The Company's proprietary technology is used to stabilize rice bran, which
is a by-product from milling paddy rice to white rice. The Company currently has
supply arrangements with two of the largest rice mills in the United States and
is pursuing other supply sources in the United States and in foreign countries.
There can be no assurance that the Company will continue to secure adequate
sources of raw rice bran to meet its requirements to produce stabilized rice
bran products.
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DEPENDENCE ON MARKETING EFFORTS
The Company is dependent on its ability to market products to mass
merchandise and health food retailers, food manufacturers, animal food
producers, and to other companies for use in their products. 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 its marketing and advertising
efforts and there can be no assurance that these efforts will be successful.
DEPENDENCE ON KEY EMPLOYEES
The Company believes that its success will depend to a significant extent
upon the efforts and abilities of a small group of executive, scientific and
marketing personnel, and in particular on Allen J. Simon, the Company's Chief
Executive Officer. The loss of the services of one or more of these key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's future
success will depend upon its ability to continue to attract and retain qualified
scientific and management personnel. There can be no assurance that the Company
will be successful in attracting and retaining such personnel.
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 for its products and technology.
The Company has three provisional U.S. patent applications pending and the
Company may decide to file corresponding international applications. The process
of seeking patent protection may be long and expensive, and there can be no
assurance that patents will be issued, that the Company will be able to protect
its technology adequately, or that competition will not be able to develop
similar technology. The Company believes the basis on which it has filed its
current pending patent applications is reasonable; however, there can be no
assurance that any patent applications filed will result in issued patents or
that the Company will choose to pursue each particular patent application to
issuance. There currently are no pending claims or lawsuits against the Company
regarding possible infringement claims; there can be no assurance that
infringement claims by third parties, or claims for indemnification resulting
from infringement claims, will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the
future, litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to defend the Company
against claimed infringement of the rights of others and to determine the scope
and validity of the proprietary rights of others. Any litigation could result in
substantial cost and diversion of effort by the Company, which could have a
material adverse effect on the Company's financial condition and operating
results. Adverse determinations in any litigation could result in the Company's
loss of proprietary rights, subject the Company to significant liabilities to
third parties, require the Company to seek licenses from third parties or
prevent the Company from manufacturing or selling its systems, any of which
could have a material adverse effect on the Company's financial condition and
results of operations. There can be no assurance that a license under a third
party's intellectual property rights will be available to the Company on
reasonable terms, if at all.
THIN MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's Common Stock has been traded on the OTC Bulletin Board since
December 1995. The Company believes that factors such as announcements of
developments related to the Company's business, fluctuations in the Company's
quarterly or annual operating results, failure to meet securities analysts'
expectations, general conditions in the international marketplace and the
worldwide economy, announcements of technological innovations or new systems or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with clients and suppliers could cause the price of the Company's common stock
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to fluctuate, perhaps substantially. In recent years the stock market has
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of affected companies. Such fluctuations could adversely
affect the market price of the Company's common stock.
SHARES ELIGIBLE FOR SALE
Sales of substantial numbers of shares of common stock in the public market
could adversely affect the market price of the common stock. Of the 20,525,500
shares outstanding as of March 31, 1998, (i) approximately 7,500,000 shares
issued and outstanding as of March 31, 1998 are eligible for resale in the
public markets subject to compliance with Rule 144 ("Rule 144") promulgated
under the Securities Act of 1933, as amended (the "1933 Act") and (ii)
approximately 10,900,000 shares will be eligible for immediate sale in the
public market without restriction pursuant to Rule 144(k) of the 1933 Act. In
addition, approximately 2,600,000 shares subject to options (if exercised) will
be eligible for sale in the public market 90 days after effectiveness of this
registration statement pursuant to Rule 701 of the 1933 Act. 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, or, if the Common Stock is quoted on Nasdaq or a stock exchange,
the average weekly trading volume in Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 also are subject to certain
manner-of-sale provisions and notice requirements and to the availability of
current public information about the Company. A person who is not an affiliate,
who has not been an affiliate within three months prior to sale, and who
beneficially owns restricted securities with respect to which at least 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. Assuming the Monsanto Company converts its
outstanding convertible, non-interest promissory note to common stock (see
"Liquidity and Capital Resources"), holders of an aggregate of up to
approximately 7,200,000 shares of common stock, issued and outstanding as of
March 31, 1998, have rights under certain circumstances to require the Company
to register their shares for future sales. See "Description of Capital
Stock--Registration Rights."
ANTI-TAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION, PROPOSED BYLAWS AND
DELAWARE LAW
Under the Company's Certificate of Incorporation, the Board of Directors of
the Company has the authority, without action by the Company's stockholders, to
fix certain terms of, and to issue, shares of Preferred Stock. The Company has
recently reincorporated under Delaware law. Certain provisions of the
Certificate of Incorporation and certain provisions of Delaware law may have the
effect of delaying, deterring or preventing a change in control of the Company.
Other provisions in the Company's Certificate of Incorporation and Proposed
Bylaws and Delaware law impose procedural and other requirements that could make
it more difficult to effect certain corporate actions, including replacing
incumbent directors. Further, the Board is divided into three classes, each of
which is to serve for a staggered three-year term after the initial
classification and election, which may make it more difficult for a third party
to gain control of the Board. By virtue of these provisions, the Board of
Directors of the Company may be able to take or prevent actions affecting
unaffiliated stockholders without such stockholders' approval or consent. In
addition, these provisions may adversely affect the market price of the
Company's Common Stock and reduce the possibility that an investor may receive a
premium for his or her shares in a tender offer. See "Management--Executive
Officers and Directors," "Description of Capital Stock Preferred Stock" and
"Description of Capital Stock Anti-takeover Effects of Provisions of the
Certificate of Incorporation, and Proposed Bylaws."
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THE COMPANY
The RiceX Company was incorporated under Delaware law in May 1998 and will
succeed to the business of its predecessor corporation, Food Extrusion, Inc.,
pursuant to a reincorporation approved in May 1998 that will be effective upon
completion of the merger of the Nevada corporation with the Delaware corporation
on approximately June 18, 1998. Food Extrusion, Inc., a California corporation
("FoodEx CA"), was incorporated in California in May 1989 and subsequently
merged in a stock-for-stock exchange into Core Iris, Inc., a Nevada corporation
that subsequently changed its name to Food Extrusion, Inc. ("Food Extrusion,
Inc.") Food Extrusion, Inc. changed its name to The RiceX Company in May 1998.
Food Extrusion Montana, Inc., a Montana corporation ("FoodEx MT") is a wholly
owned subsidiary of the Company and was incorporated in December 1996. In
January 1997, FoodEx MT acquired certain assets of Centennial Foods, Inc., an
Idaho corporation ("Centennial") in exchange for 310,000 shares of common stock
of Food Extrusion, Inc., $.001 par value, and the assumption of certain
liabilities totaling approximately $1,320,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Since its formation in 1989, the Company has been engaged in extensive
research and development activities that resulted in the development of the
RiceX Process to stabilize rice bran. The Company's current activities include:
- Research, including clinical trials;
- Product development;
- Equipment development;
- Procurement of manufacturing facilities;
- Development of markets and distribution methods;
- Negotiation of strategic alliances;
- Patent applications;
- Raising capital;
- Development of corporate infrastructure, including executive recruitment;
and
- Initial operations (beginning in late 1996).
For a complete understanding of these activities, this Management's
Discussion and Analysis should be read in conjunction with Part I. Item 1.
Description of Business and Part F/S-Financial Statements to this Form 10-SB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue for the three months ended March 31, 1998 advanced to $831,384, a
16% increase over the year earlier period when sales totaled $719,642. The
increase resulted from greater demand for the Company's stabilized rice bran
products primarily from the animal feed markets and sales to SunJoy pursuant to
an international distributor agreement entered into in 1997.
The gross margin on sale of products was 35% in the three months ended March
31, 1998 and 46% in the year earlier period. Gross margins on the Company's
various products vary widely and the gross margin is impacted from period to
period by sales mix and utilization of production capacity. There were more
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sales of Ricelin, the product with the highest gross margin, last year than this
year. The Company expects that gross margins will improve as sales grow.
Research and development expenditures increased from $87,407 for the three
months ended March 31, 1997 to $306,577 for the current three month period. The
increase resulted from the addition of a Vice President of Science and
Technology to accelerate the Company's research and development efforts and the
associated costs of those efforts.
Selling, general and administrative expenses were $608,490 for the three
months ended March 31, 1998 and $225,526 for the year earlier period. The
increase in these costs relates to the expansion of the Company's
infrastructure, including the addition of executive management and outside
directors to oversee the raising of additional capital, negotiation of strategic
alliances, expansion of production capacity, and the establishment of foreign
markets.
Stock option compensation expense is a non-cash charge relating to the
one-time issuance of favorably priced stock options to employees and directors
to attract these executives to the Company. The charge represents the difference
between the exercise price and the trading value on the date of grant. The
difference is recognized over the vesting period of each grant, which generally
range from two to three years, except for the directors' grants which vest
immediately.
Professional fees declined to $66,746 for the three months ended March 31,
1998 from $192,750 for the three months ended March 31, 1997.
The increase in interest income to $85,507 in the three months ended March
31, 1998 from $14,884 in the year earlier period relates to interest income on
the $4,000,000 note receivable from a shareholder. There was a corresponding
increase in compensation expense to reflect the Company's reimbursements in
accordance with the employee/shareholder's employment agreement. Interest
expense declined to $106,961 in 1998 from $209,239 in the first three months of
1997. The 1997 amount includes the write-off of costs associated with the
restructuring of a note. The 1997 quarter also includes a $1,325,000 non-cash
charge relating to a conversion feature granted to the lender in connection with
restructuring.
The Company's net loss for the three months ended March 31, 1998 totaled
$983,772 or $.05 per share, compared to $1,874,770, or $.10 per share a year
ago. As discussed above, the 1998 period was impacted by the costs associated
with expanding the Company's infrastructure in order to accelerate research and
development efforts and expansion into new markets. In the first quarter of
1997, these efforts had not yet started, however, results for that period were
impacted by the costs associated with restructuring a note.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue for the year ended December 31, 1997 increased to $3,332,617 from
$907,802 for the year ended December 31, 1996. The increase resulted from the
Company's direct sales efforts, the establishment of stabilized rice bran
manufacturing facilities at Farmer's Rice Co-op and California Pacific Rice Mill
in March and August 1996, respectively, and the acquisition of the FoodEx MT
facility. For the year ended December 31, 1997, approximately 88% of the
Company's revenue were sales of stabilized rice bran products. Of this,
approximately 60% was sales of stabilized rice bran, primarily for use in the
equine market, and 40% was sales of RiceX Ricelin for use as a functional food
ingredient. Food processing for a major food manufacturer at the FoodEx MT plant
accounted for another 11% of total sales.
The gross margin on sale of products was 28% and 35% for the year ended
December 31, 1997 and 1996, respectively. As the gross margin on RiceX Ricelin
is greater than on RiceX, the Company's core stabilized rice product, gross
margins will vary depending on product mix and utilization of production
capacity. The Company expects that gross margins will improve as production
capacity and sales grow.
Research and development expenditures totaled $790,095 for the year ended
December 31, 1997, up from $632,975 for the prior year. The Company's research
and development activities included the design
18
<PAGE>
of the RiceX Process for stabilizing rice bran, product development and testing,
and clinical studies to test the efficacy of RiceX in ameliorating the effect of
certain diseases.
Selling, general and administrative expenses increased to $2,423,103 for the
year ended December 31, 1997, from $1,033,009 for the year ended December 31,
1996. Selling, general and administrative activities in 1996 were directed at
raising capital, negotiating supply contracts, establishing manufacturing
facilities, and developing a direct sales effort. In 1997, these activities were
accelerated, additional executive management and corporate infrastructure was
added, and sales and marketing efforts were stepped up to include the
development of strategic alliances and the establishment of international
markets.
The year ended December 31, 1997 also included a non-cash charge totaling
$2,031,570 associated with the one-time issuance and subsequent vesting of
favorably priced stock options to employees and directors.
Professional fees for the year ended December 31, 1997 were $1,907,399
compared to $919,784 for the year earlier. In both years, legal fees were
incurred in connection with the Core Iris, Inc. reverse merger and in capital
transactions. 1997 also included legal fees associated with patent searches and
applications, consulting fees for capital raising activities and executive
searches, and litigation that was successfully concluded by year-end.
Interest expense for the year ended December 31, 1997 was $533,902 compared
to $182,151 for 1996 due to substantial new borrowing in the latter half of 1996
and early 1997 and the write-off in 1997 of certain debt issuance costs on a
note that was restructured.
1997 earnings were also impacted by a $1,325,000 non-cash charge relating to
a conversion feature granted to a lender in connection with the restructuring of
debt. The charge represents the difference between the fair market value of the
Company's stock and the conversion rate on the date of borrowing. In 1996, there
was a $2,687,000 non-cash charge to earnings related to a favorably priced stock
option granted as a finder's fee for locating financing.
The Company's net loss for the year ended December 31, 1997 totaled
$7,768,598, or $.40 per share, compared to $5,024,323, or $.28 per share for the
year ended December 31, 1996. As discussed above, the increase in the Company's
net loss reflects the acceleration of its research and development activities,
along with the costs of attracting new executive management and with building
corporate infrastructure to support initial manufacturing operations and
expected growth. The net loss was also impacted by the costs of raising capital
and interest costs for the debt and equity required to support the Company's
operations until sufficient operating volumes are achieved.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue for the year ended December 31, 1996 totaled $907,802 as the Company
began manufacturing stabilized rice bran for broad distribution during the year
at Farmer's Rice Co-op (March 1996) and California Pacific Rice Mill (August
1996). Revenue in 1995 totaled $99,620 from the sale of products produced as a
result of development efforts.
Research and development expenses increased to $632,975 in 1996 from
$425,207 in 1995. The Company's research and development activities centered
around the development of the RiceX Process and stabilized rice bran product
development. The increase in these expenditures in 1996 over 1995 was due to the
concentrated effort in 1996 to complete development of the RiceX Process
equipment and install it in the Company's first commercial manufacturing
facilities.
Selling, general and administrative expenses were $1,033,009 for the year
ended December 31, 1996 compared to $81,100 for the year ended December 31,
1995. In 1995, the Company's efforts were focused almost entirely on research
and development. Selling, general and administrative expenses included only
general corporate expenses and costs to raise capital. In 1996, the Company
commenced commercial manufacturing and added sales and administrative staff to
support operations. Additionally, the Company
19
<PAGE>
incurred substantial effort and costs in raising capital, including a private
placement and the Core Iris, Inc. reverse merger.
Professional fees for the year ended December 31, 1996 were $919,784, up
from $38,518 for the prior year. In 1995, the Company's efforts were almost
entirely directed towards research and development and professional fees
included only general corporate matters. In 1996, the Company incurred
substantial legal and consulting fees in connection with efforts to raise
capital, including new debt, conversions of existing debt, a private placement
and the Core Iris, Inc. reverse merger.
Interest expense for the year ended December 31, 1996 was $182,151 and
$72,813 for the year ended December 31, 1995. The increase was due to
incremental borrowing in the latter part of 1996. 1996's results also included a
$2,687,000 non-cash charge related to a favorably priced stock option granted as
a finder's fee for locating financing.
The Company's net loss for the year ended December 31, 1996 totaled
$5,024,323, or $.28 per share, compared to $440,493 or $.04 per share for the
year ended December 31, 1995. The 1995 net loss is net of a $110,371, or $.01
per share gain on debt restructuring and the early extinguishment of debt. As
discussed above, the increase in the Company's net loss reflects the
acceleration of its research and development activities, along with building
corporate infrastructure to support initial manufacturing operations and
expected growth. The net loss was also impacted by the costs of raising capital
and interest costs for the debt and equity required to support the Company's
operations until sufficient operating volumes are achieved.
LIQUIDITY AND CAPITAL RESOURCES
As of the date of this Form 10-SB, the Company has yet to generate positive
cash flow from its own operations due to the preliminary nature of such
operations, substantial ongoing investment in research and development efforts,
and expenditures to build the appropriate infrastructure to support its expected
growth. Consequently, the Company has been substantially dependent on private
placements of its equity securities and debt financing to fund its cash
requirements.
The Company's most recent private placement was closed in May 1996,
resulting in the issuance of an aggregate of 1,400,000 shares of common stock
for net proceeds of approximately $1,000,000. In connection with the private
placement, the Company issued warrants to purchase an aggregate of 600,000
shares of common stock (the "Warrants"). The exercise price of the Warrants,
which became exercisable in February 1997 and expire in February 1999, is $4.00
per share. As of the date hereof, no shares of common stock have been issued as
a result of the exercise of the Warrants.
During the first quarter of 1996, the Company received a loan of $1,750,000
from Dominion Resources, Inc. bearing an interest rate of 5% per year with
principal and interest payable in full in November 1999. The loan is secured by
equipment. As additional consideration for the loan, the Company issued the
lender 578,000 shares of its common stock.
During the fourth quarter of 1996, the Company received a loan commitment in
the amount of $5,000,000 from Monsanto Company ("Monsanto") pursuant to a
convertible, non-interest bearing promissory note (the "Monsanto Note"). The
Monsanto Note matures in November 1999. Monsanto has the right to convert the
unpaid principal amount outstanding under the Monsanto Note into shares of
common stock of the Company. As of the date of this Registration Statement,
Monsanto has advised the Company that it intends to exercise its conversion
right in full upon the close of the Company's next equity offering. Terms and
conditions of the conversion are subject to negotiation. Had Monsanto exercised
its conversion right prior to March 31, 1998, long-term liabilities shown on the
Company's March 31, 1998 balance sheet would have been reduced by $5,000,000,
and shareholders' equity (deficit) would have been increased by the same amount.
Upon conversion, the Company has granted Monsanto certain registration rights on
the common stock into which the Monsanto Note is converted. See "Description of
Capital Stock--Registration Rights."
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<PAGE>
In connection with a conversion of debt and payables owed to three
consulting firms, the Company issued the consulting firms warrants to purchase
an aggregate of 305,000 shares of common stock (the "Consultant Warrants") of
FoodEx CA. In the first quarter of 1996 these warrants were exercised.
Subsequently, these shares were exchanged for 2,287,500 shares of the Company's
common stock pursuant to the terms of the Core Iris, Inc. reverse merger.
During 1996, the Company issued 135,000 and 337,500 shares of its common
stock to employees and consultants, respectively, in lieu of cash compensation.
Also during 1996, 305,000 and 200,000 options to purchase shares of the
Company's common stock were issued to employees and directors, respectively.
These options were issued at approximately fair market value on the date of
grant. The employee options vest over three years and have a ten-year term. The
director options vest immediately and expire in ten years.
In August 1996, 1,000,000 options to purchase shares of the Company's common
stock at $1.75 per share were issued to a consultant in connection with
negotiating and locating financing. The options vested in November 1996 and
expire in November 1999. Under SFAS 123 "Accounting for Stock-Based
Compensation" the options were valued at $2,687,000 and charged to earnings as a
finder's fee.
Effective January 1997, the Company acquired the assets of FoodEx MT in
exchange for 310,000 shares of the Company's common stock and the assumption of
certain liabilities totaling $1,320,000. The seller has the option sell the
common shares back to the Company at a price of $5.00 per share in November 1998
or sooner upon the occurrence of certain events. These shares have been
reflected in the Company's balance sheet as redeemable common stock.
During 1997, 88,465 shares of the Company's common stock valued at $389,727
were issued to consultants in lieu of cash compensation and reported as
professional fees expense for the year ended December 31, 1997, In addition
50,000 stock warrants at $2.00 per share were issued to consultants in lieu of
cash compensation. These warrants were valued at $211,950 pursuant to SFAS 123
and recorded as professional fees expense for the year ended December 31, 1997.
Stock option grants totaling 2,810,000 shares of common stock were issued
during the year ended December 31, 1997 to new employees as incentive to join
the Company. The options were issued at a discount from the Company's trading
value on the date of grant. Non-cash charges to earnings for the discount will
be recorded over the vesting period of the options that generally range from two
to three years. In 1997, the charge for employee options was $1,306,570. During
1997, 2,051,000 shares of the Company's common stock were issued upon exercise
of employee options. Cash proceeds from exercise of options totaled $51,000. The
remaining $4,000,000 in proceeds was paid by delivery to the Company of a
promissory note which bears interest at 8% per annum and is secured by a pledge
of 2,000,000 shares of the Company's common stock. See "Executive Compensation."
In July 1997, 200,000 stock options were granted to directors under a plan
that was subsequently terminated. The options were granted at $1.00 per share,
which was less than the fair market value at date of grant. Compensation expense
totaling $725,000 was recorded for these grants in the year ended December 31,
1997. Also in July 1997, 100,000 options were granted to new outside directors
under a newly adopted for director compensation plan. See "Director
Compensation." These options were granted at fair market value on the date of
grant.
Since inception, the Company has used its common stock and stock options and
warrants to attract and compensate employees and consultants, as additional
incentive for debt financing, for acquisitions, and to repay outstanding
indebtedness. It is the Company's intent to limit the use of its common stock as
compensation in the future with the following exceptions. The Board of Directors
has currently authorized management to issue common stock with a fair market
value of up to $250,000 to compensate consultants and vendors in lieu of cash
compensation. As of the date hereof, $85,000, or 30,000 shares have been issued.
Additionally, in November 1997, the Board of Directors approved the 1997 Stock
Option Plan that
21
<PAGE>
authorizes the issuance of up to 5,000,000 shares of the Company's common stock
to employees, directors and consultants. To date, 100,000 options have been
granted under the Plan.
As of March 31, 1998, the Company's cash reserves totaled $523,279 and total
current assets were $1,524,301. The Company has recently begun production and
sales effort after many years of research and development and has yet to reach
break-even in terms of both cash flow and profitability. In addition, the
Company's long-term debt as of March 31, 1998 was $7,815,881. As discussed
above, the Company has been advised that the Monsanto Note will be converted
from debt to equity. This would reduce long-term debt by $5,000,000 to
$2,815,881. Approximately $1,320,000 in long-term debt related to the
acquisition of the FoodEx MT facility is due in October 1998. In connection with
the acquisition, the sellers of the FoodEx MT facility received 310,000 shares
of the Company's common stock with the option to put the shares back to the
Company at $5.00 per share in November 1998. The Company will need new debt
financing, additional capital, or the ability to extend the repayment period in
order to meet the FoodEx MT liabilities.
For the remainder of 1998 and into 1999, the Company expects to incur
additional costs for research and development, including clinical studies, and
professional and legal fees for patent and trademark applications. It also
expects to expand its sales and marketing effort and in November 1997 added a
Vice President of Sales and Marketing. These efforts could significantly
increase demand for the Company's products beyond the Company's current
production capacity. While the Company believes it can increase its production
capacity to meet sales demand, significant additional capital could be required
to meet expansion requirements.
The Company is taking steps to raise equity capital and has been advised by
Monsanto that concurrent with any such financing, Monsanto will convert the
Monsanto Note from debt to equity. However, there can be no assurance that any
new capital would be available to the Company or that adequate funds for the
Company's operations, whether from the Company's revenues, financial markets,
collaborative or other arrangements with corporate partners or from other
sources, will be available when needed or on terms satisfactory to the Company.
The failure of the Company to obtain adequate additional financing may require
the Company to delay, curtail or scale back some or all of its research and
development programs, sales and marketing efforts, manufacturing operations,
clinical studies and regulatory activities and, potentially, to cease its
operations. Any additional equity financing may involve substantial dilution to
the Company's then-existing shareholders.
ITEM 3. DESCRIPTION OF PROPERTY
The Company currently leases (i) a 5,600 square foot facility at 1241 Hawk's
Flight Court, El Dorado Hills, California pursuant to a lease expiring in
September 2006, (ii) an additional 11,400 square foot research and shipping
facility in El Dorado Hills, California pursuant to a lease expiring in
September 2006 with aggregate annual lease payments for both properties
approximately $125,000 and (iii) a 3,000 square foot wharehouse facility in El
Dorado Hills, California, pursuant to a month-to-month lease with monthly
payments of $1,000.
FoodEx MT owns a 15,700 square foot production facility in Dillon, MT. The
facility is pledged as collateral for a loan from the State of Montana,
Department of Commerce ("MT DOC"). The loan from MT DOC is non-interest bearing
and has no prepayment penalty. The balance of the loan is due in November 1998.
Prior to the Company's acquisition of Centennial, the MT DOC agreed to a buy
down on the loan and has waived all debt service and interest payments under the
loan until November 30, 1998. The Company assumed this remaining obligation
pursuant to the acquisition and has agreed to pay the buy down amount of
$368,999, to the lender pursuant to the terms of the Asset Purchase Agreement
between the Company, FoodEx MT and Centennial. The Company believes the property
is adequately covered by insurance.
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<PAGE>
FoodEx MT also leases a 3,600 square foot administrative and research
facility in Dillon, Montana on a month-to-month basis pursuant to a verbal
agreement with a monthly lease payment of $700.
The Company believes that its facilities are adequate for its proposed needs
through 1998.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 1998 (the
"Reference Date") with respect to the beneficial ownership of common stock of
the Company, by each person known by the Company to own beneficially more than
five percent of the Company's common stock, by each executive officer and
director, and by all officers and directors as a group. Unless otherwise
indicated, all persons have sole voting and investment powers over such shares,
subject to community property laws. As of the Reference Date, there were
20,525,500 shares of common stock outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL
OF BENEFICIAL OWNER(1) OWNER(2) PERCENT OF CLASS
- -------------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Daniel L. McPeak, Chairman of the Board of Directors ..................... 3,877,829(3)(4) 18.55%
and Patricia McPeak, President and Director
Kirit S. Kamdar .......................................................... 1,751,250 8.38%
765 Persimmon Drive
St. Charles, IL 60174
Allen J. Simon, .......................................................... 2,050,000(4) 9.81%
Chief Executive Officer and Director
Ike E. Lynch, ............................................................ 60,000(4) --
Vice President of Operations
Dr. Michael J. Goldblatt, ................................................ 50,000(4) --
Director
Dr. Jerry A. Weisbach, ................................................... 50,000(4) --
Director
All directors and executive officers,
as a group (7 persons).................................................. 6,087,829(4) 29.12%
</TABLE>
- ------------------------
(1) Except as otherwise noted, the address for each person is c/o The RiceX
Company, 1241 Hawk's Flight Court, El Dorado Hills, California 97652.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
common stock listed as beneficially owned by them. A person is deemed to be
the beneficial holder of securities that can be acquired by such person
within 60 days from the Reference Date upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
including shares, underlying options or warrants which are exercisable by
such person currently, or within 60 days following the Reference Date, and
excluding shares underlying options and warrants held by any other person.
(3) Ownership shown jointly because Mr. McPeak and Ms. McPeak are married.
Includes 1,808,225 shares in Mr. McPeak's name and 1,869,604 shares in Ms.
Peak's name. Includes vested options for the purchase of common stock for
200,000 shares (100,000 shares each)
(4) Includes vested options for the purchase of common stock as follows: Daniel
L. McPeak, 100,000; Patricia McPeak, 100,000; Allen J. Simon, 50,000; Dr.
Michael J. Goldblatt, 50,000; Dr. Jerry A. Weisbach, 50,000; Ike E. Lynch,
30,000.
23
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors, executive officers and significant employees of the Company,
their respective ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
Daniel L. McPeak................... 63 Class III Director and Chairman of the Board
Allen J. Simon..................... 57 Chief Executive Officer and Class II Director
Patricia McPeak.................... 57 President and Class III Director
Dr. Jerry A. Weisbach.............. 64 Class I Director
Dr. Michael J. Goldblatt........... 45 Class I Director
Karen D. Berriman.................. 41 Vice President and Chief Financial Officer
Ike E. Lynch....................... 53 Vice President of Operations
Dr. Gary A. Miller................. 52 Vice President of Research and Development
Dennis C. Riddle................... 51 Vice President of Marketing
Dr. Rukmini Cheruvanky............. 64 Director of Research and Development
Dr. Reddy Sastry V. Cherukuri...... 61 Director of Science and Technology
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
DANIEL L. MCPEAK. Mr. McPeak co-founded the Company in February 1989 and
has served as Chairman of the Board of the Company since its formation. From May
1989 to April 1997, Mr. McPeak also served as Chief Executive Officer of the
Company. Prior to founding the Company, from 1981 to May 1989, Mr. McPeak served
as Chief Executive Officer of Brady International, a rice bran stabilization
research and development company. Mr. McPeak is the spouse of Ms. McPeak.
ALLEN J. SIMON. Mr. Simon has served as Chief Executive Officer and
Director of the Company since April 1997. From June 1978 to April 1990, Mr.
Simon served as President of Shaklee U.S. Inc., a manufacturer and marketer of
nutritional, personal care, and water purification products. Mr. Simon retired
from his position as President of Shaklee U.S. in April 1990 after facilitating
its sale to a large pharmaceutical company. Mr. Simon has a B.S. degree in
Business Administration Finance from Northwestern University.
PATRICIA MCPEAK. Ms. McPeak co-founded the Company in February 1989 and has
served as President and Director of the Company since its formation. From
February 1989 to January 1996, Ms. McPeak also served as Secretary of the
Company. In 1981, Ms. McPeak founded Brady International and from 1981 to
December 1986 she served as President. From January 1987 to May 1989, she served
as Executive Vice President of Brady International. Ms. McPeak is the spouse of
Mr. McPeak.
DR. JERRY A. WEISBACH. Dr. Weisbach has served as Director of the Company
since July 1997. From 1988 to 1994, Dr. Weisbach served as Director of
Technology Transfer and Adjunct Professor for The Rockefeller University. Dr.
Weisbach consults and serves on the clinical advisory boards and the scientific
advisory board of several other companies. Dr. Weisbach is also a member of the
boards of directors of Neose Technologies, Inc., Synthon Corporation,
Exponential Biotherapies, Inc., Inkine Pharmaceuticals, Strong Pharmaceuticals
and Encore Pharmaceuticals. Dr. Weisbach received his B.S degree in chemistry
from Brooklyn College and his M.A. degree and Ph.D. degree in chemistry from
Harvard University.
DR. MICHAEL J. GOLDBLATT. Dr. Goldblatt has served as Director of the
Company since July 1997. Dr. Goldblatt also serves as Vice President of Science
and Technology for McDonalds Corporation. From January 1992 until January 1997,
Dr. Goldblatt served as Vice President of Product Development Nutrition for
McDonalds Corporation. Dr. Goldblatt is also a member of the boards of directors
of
24
<PAGE>
Bernard Technologies, Biotechnologies Research Development Corporation and Gray
Star. Mr. Goldblatt received his Ph.D. in Nutrition from University of
California Davis.
KAREN D. BERRIMAN. Ms. Berriman has served as Vice President and Chief
Financial Officer of the Company since September 1997. From February 1990 to
April 1997, Ms. Berriman was Vice President/ Treasurer and Chief Financial
Officer of American Recreation Centers, Inc., until its sale to AMF Bowling,
Inc. From 1978 to 1983 and from 1985 to 1990, Ms. Berriman was a senior audit
manager with the national accounting firm of Price Waterhouse. She is a
Certified Public Accountant and has a B.S. degree in Business Administration
from California State University, Chico.
IKE E. LYNCH. Mr. Lynch has served as Vice President of Operations of the
Company since July 1997 and as President and Chief Operations Officer of FoodEX
MT since January 1997. Previously Mr. Lynch was President and Chief Executive
Officer of Centennial Foods, Inc., since its founding in 1989. From 1984 to
1989, Mr. Lynch was President and Chief Executive Officer of Ultrasystems, Inc.,
an engineering and space/defense company. From 1978 until 1984, Mr. Lynch served
as President and Chief Executive Officer of Hubinger Co., a subsidiary of the H.
J. Heinz Co. Mr. Lynch received a B.S. degree from the College of Idaho.
DR. GARY A. MILLER. Dr. Miller has served as Vice President of Research and
Development of the Company since October 1997. Prior to joining the Company, Dr.
Miller served as the Vice President, Research and Development of McNeil
Specialty Products Co., a division of Johnson & Johnson, from 1990 to October
1997 and as Director, Product Development from 1985 to 1990. From 1983 to 1985,
Dr. Miller was the Director of Scientific Affairs for the NutraSweet Group, a
division of G.D. Searle & Co. From 1976 to 1983, he was Manager of
Pharmaceutical Product Development for American McGaw. Dr. Miller was an
Assistant Professor of Food and Nutrition at the University of Nebraska from
1974 to 1976. He holds B.S. and Ph.D. degrees in Food Science from Rutgers
University.
DENNIS C. RIDDLE. Mr. Riddle joined the Company in November 1997 as its
Vice President of Marketing. From 1983 to October 1997, Mr. Riddle was Vice
President of Sales/Marketing & Technical Service for CPC International, Corn
Products, an ingredient supplier for food and beverage processors,
pharmaceutical firms, and animal feed processors. From 1977 to 1983, Mr. Riddle
served as Eastern Division Manager for American Maize Products. From 1970 to
1977, he served as a Sales Supervisor for the Carnation Company and Kraft Foods.
Mr. Riddle holds a B.S. degree in Business Administration from High Point
College and a Masters of Business Administration from the Fuqua School of
Business, Duke University.
SIGNIFICANT EMPLOYEES
DR. RUKMINI CHERUVANKY. Dr. Cheruvanky has served as the Company's Director
of Research and Development since April 1996. From January 1996 until joining
the Company, Dr. Cheruvanky served as the Laboratory Supervisor for Certified
Analytical Laboratories, a company that specializes in the food analysis. From
November 1994 to December 1995, Dr. Cheruvanky served as a Research Chemist in
the Research and Development department of DuPont Merck Pharmaceutical Company,
one of the largest pharmaceutical companies in the world. From May 1967 to
February 1994, Dr. Cheruvanky served as Deputy Director of the National
Institute of Nutrition, the Indian Council of Medical Research. Dr. Cheruvanky
has an M.S. degree in Organic Chemistry and a Ph.D. degree in Organic Chemistry
of Natural Products from Andhra University in India.
DR. REDDY SASTRY V. CHERUKURI. Dr. Cherukuri has served as the Company's
Director of Science and Technology since April 1996. From May 1995 until joining
the Company, Dr. Cherukuri served as Laboratory Supervisor of Customs Coatings,
Inc., a research pharmaceutical company. From December 1994 to January 1995, Dr.
Cherukuri served as a Chemist for DuPont Merck Pharmaceutical Company. From May
1992 to November 1994, Dr. Cherukuri served as Consultant to the Indian Council
of Medical
25
<PAGE>
Research. From January 1967 to May 1992, Dr. Cherukuri served as the Senior
Research Manager, Chief of Medicinal Chemistry and the Group Leader of New Drug
Development for Indian Drugs and Pharmaceutical, Ltd., a synthetic drugs
research and development company. Dr. Cherukuri has an M.S. degree in Organic
Chemistry and a Ph.D. degree in Organic Chemistry of Synthetic and Natural
Products from Andhra University in India.
BOARD OF DIRECTORS
The Board of Directors is classified into three classes, with each class
serving staggered three-year terms. The classification of the Board of Directors
has the effect of generally requiring at least two annual stockholder meetings,
instead of one, to replace a majority of the members of the Board of Directors.
The Company's Board of Directors has not yet established any committees of the
Board.
DIRECTOR COMPENSATION
On July 9, 1997, the Board of Directors adopted a non-employee director
compensation plan pursuant to which non-employee directors will be compensated
as follows: (i) $15,000 annual retainer payable in quarterly installments for
participation at up to six meetings of the Board of Directors; (ii) an
immediately exercisable, nonqualified stock option to purchase 50,000 shares of
common stock to be granted upon appointment to the Board of Directors, and (iii)
an immediately exercisable, nonqualified stock option to purchase 15,000 shares
of common stock to be granted on the day of each annual shareholders' meeting
during the non-employee director's service on the Board of Directors. Such
options are to be granted as free-standing options and not under the 1997 Stock
Option Plan. The exercise price shall be the fair market value of a share of
common stock on the date of grant. Directors are also reimbursed for reasonable
expenses incurred in attending meetings of the Board of Directors and committees
thereof.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the Chief
Executive Officer and each of the Company's most highly compensated executive
officers whose total salary and bonus for fiscal 1997 exceeded $100,000 or would
have exceeded $100,000 on an annualized basis (collectively, the "Named
Executive Officers").
26
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
----------------------
ANNUAL COMPENSATION
------------------------- NUMBER OF
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION UNDERLYING OPTIONS (#)
- --------------------------------------------------- --------- ---------- ------------- ----------------------
<S> <C> <C> <C> <C>
Daniel L. McPeak................................... 1997 $ 141,798 $ 26,409(3) 50,000
Chairman of the Board, and Chief 1996 116,308 7,500(2) 50,000
Executive Officer through April 1997 1995 84,000(1) 7,500(2) --
Allen J. Simon..................................... 1997 177,370 28,760(4) 2,050,000
Chief Executive Officer as of April 1997
Patricia McPeak.................................... 1997 127,135 13,372(5) 50,000
President 1996 113,308 6,300(2) 50,000
1995 60,000(1) 8,700(2) --
Karen D. Berriman.................................. 1997 43,189 2,100(2) 200,000
Chief Financial Officer as of September 1997
Ike E. Lynch....................................... 1997 131,253 47,700(6) 60,000
Vice President of Operations as of
January 1997
Dr. Gary A. Miller................................. 1997 28,704 4,258(7) 200,000
Vice President of Science and Technology
as of October 1997
Dennis C. Riddle................................... 1997 30,147 2,986(8) 350,000
Vice President of Sales and Marketing as
of November 1997
</TABLE>
- ------------------------
(1) Represents compensation accrued but not paid.
(2) Represents automobile allowance or automobile expenses paid on behalf of the
executive.
(3) Represents automobile expenses of $21,787 and other prerequisites paid on
behalf of executive.
(4) Represents automobile allowance of $10,200, temporary housing allowance of
$18,052 and other perquisites paid on behalf of the executive.
(5) Represents automobile expenses of $9,019 and other perquisites paid on
behalf of the executive.
(6) Represents value realized upon the exercise of stock options plus annual
auto allowance of $7,200 and temporary housing allowance of $10,500.
(7) Represents automobile allowance and temporary housing and relocation
expenses of $3,058.
(8) Represent temporary housing expenses of $2,986.
27
<PAGE>
OPTION GRANTS IN 1997 TO EXECUTIVES
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL FAIR MARKET
OPTIONS OPTIONS GRANTED VALUE ON DATE
GRANTED TO EMPLOYEES IN EXERCISE OF GRANT EXPIRATION
NAME (#) 1997 PRICE ($/SH.) ($/SH.) DATE
- ------------------------------------------- ---------- ----------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Daniel L. McPeak........................... 50,000 1.6% $ 1.00 $ 4.63 7/9/07
Allen J. Simon............................. 50,000 1.6% $ 1.00 $ 4.63 7/9/07
Allen J. Simon............................. 2,000,000 64.3% $ 2.00 $ 2.75 4/18/07
Patricia McPeak............................ 50,000 1.6% $ 1.00 $ 4.63 7/9/07
Karen D. Berriman.......................... 200,000 6.4% $ 3.75 $ 5.63 9/15/07
Ike E. Lynch............................... 60,000 1.9% $ 1.00 $ 5.88 1/01/07
Dr. Gary A. Miller......................... 200,000 6.4% $ 4.38 $ 6.56 10/20/07
Dennis C. Riddle........................... 350,000 11.3% $ 3.84 $ 5.75 9/19/07
</TABLE>
STOCK OPTION EXERCISES AND YEAR-END VALUE TABLE
The table below reflects the number of shares covered by both exercisable
and non-exercisable stock options as of December 31, 1997 for the Named
Executive Officers. Values for "in-the-money" options represent the position
spread between the exercise price of existing options and the market value for
the Company's common stock on December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
ACQUIRED ON 1997 DECEMBER 31, 1997
EXERCISE VALUE ------------------------ ----------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- --------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel L. McPeak........... 100,000 $ 275,000
Allen J. Simon............. 2,000,000 $ 0 50,000 $ 137,000
Patricia McPeak............ 100,000 $ 275,000
Karen D. Berriman.......... 200,000 $ 0
Ike E. Lynch............... 30,000 $ 30,000 30,000 $ 82,500
Dr. Gary A. Miller......... 200,000 $ 0
Dennis C. Riddle........... 350,000 $ 0
</TABLE>
EMPLOYMENT AGREEMENTS
SIMON EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. Simon in April 1997 (the "Simon Employment Agreement"),
pursuant to which Mr. Simon agreed to serve as Chief Executive Officer of the
Company. The Simon Employment Agreement provides that Mr. Simon will receive an
annual base salary of $250,000 and an annual cash bonus as determined by the
Board of Directors. The Company also granted Mr. Simon an option to purchase
2,000,000 shares of common stock at an exercise price of $2.00 per share. The
Company will provide Mr. Simon with (i) temporary living relocation expenses
associated with his move to Sacramento and reimburse him for all federal and
state income taxes he incurs as a result of payment of these expenses; (ii) a
life insurance policy in the amount of $1,000,000; (iii) long-term disability
insurance coverage; (iv) a car allowance of $1,200 per month; (v) interest
expense payments due and payable under the three promissory notes payable to the
28
<PAGE>
Company; and (vi) federal and state income tax payments incurred as a result of
the three promissory notes.
On April 18, 1997, Mr. Simon was granted an option to purchase 2,000,000
shares of Company common stock at an exercise price of $2.00 per share, which he
exercised on May 29, 1997. Mr. Simon granted to the Company the option to
repurchase all or part of the 2,000,000 shares that have not vested under the
option agreement ("Repurchase Option"). One third of the shares (666,667) vested
and were released from the Repurchase Option immediately, an additional one
third of the shares vested on April 18, 1998 and the final one-third of the
shares shall vest and be released from the Repurchase Option on April 18, 1999.
The Simon Employment Agreement may be terminated by Mr. Simon at any time
for any reason or no reason upon delivering thirty days notice to the Company.
If Mr. Simon's employment is terminated by the Company without Cause (as defined
in the Simon Employment Agreement), or if Mr. Simon terminates his employment
for Good Reason (as defined in the Simon Employment Agreement), including as a
result of a change in control (as defined in the Simon Employment Agreement), he
is entitled to a lump sum payment dependent on the amount of time the Simon
Employment Agreement has been in effect.
If the Simon Employment Agreement had been terminated in the first year, the
severance amount would have been equal to his base salary for 12 months; if the
Simon Employment Agreement is terminated in the second year, the severance
amount will be equal to his base salary for 18 months; and if the Simon
Employment Agreement has been in effect for longer than two years, the severance
amount will equal 24 months of base pay at the time of termination. In addition,
Mr. Simon shall receive (i) his base salary accrued through the date of
termination; (ii) all accrued vacation pay and accrued bonuses, if any, to the
date of termination; (iii) any bonus which would have been paid but for the
termination, prorated through the date of termination, based upon the Company's
performance and in accordance with the terms, provisions and conditions of any
Company incentive bonus plan in which Mr. Simon may be designated a participant;
(iv) providing, for a period of 12 months after the date of termination, at the
Company's expense, coverage to Mr. Simon under the Company's life insurance and
disability insurance policies and to Mr. Simon and his dependents under the
Company's health plan; if any of the Company's health, life insurance, or
disability insurance plans are not continued or if Mr. Simon is not eligible for
coverage thereunder because of the termination of his employment, the Company
shall pay the amount required for Mr. Simon to obtain equivalent coverage; (v)
providing to Executive reasonable outplacement services; and (vi) providing an
office, secretarial support, and access to equipment and supplies for a period
of 6 months after termination. Also upon termination of Mr. Simon's employment
by the Company without Cause, all equity options, restricted equity grants and
similar rights held by Mr. Simon with respect to securities of the Company shall
automatically become fully vested and shall become immediately exercisable.
MCPEAK EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. McPeak in April 1997 (the "McPeak Employment Agreement"),
pursuant to which Mr. McPeak agreed to serve as Chairman of the Board of
Directors of the Company and previously served as Chief Executive Officer. The
McPeak Employment Agreement provides that Mr. McPeak will receive an annual base
salary of $150,000 which will be increased to $200,000 upon the Company's
realization of positive cash flow on a month-to-month basis. The McPeak
Employment Agreement terminates on December 31, 2001, unless his employment is
terminated earlier. Thereafter, the term will be automatically extended for
additional one-year periods unless either party delivers notice of election not
to extend the employment at least 60 days prior to the end of the then current
term.
Mr. McPeak's employment may be terminated prior to the expiration of this
agreement under the following circumstances: (i) death; (ii) termination by the
Company for Cause (as defined in the McPeak Employment Agreement); (iii)
termination by the Company without Cause (as defined in the McPeak
29
<PAGE>
Employment Agreement). If Mr. McPeak is terminated without Cause, he is entitled
to the base salary in effect at such time for the remainder of the term of the
McPeak Employment Agreement. Within three months of first receiving notice of a
Change in Control (as defined in the McPeak Employment Agreement) Mr. McPeak may
elect to retire from service and render, on a non-exclusive basis, only such
consulting and advisory services to the Company as he may reasonably accept and
he is entitled to continue receiving his benefits and salary until the later of
(i) six months after the date of such election, (ii) subsequent full-time
employment with another enterprise, or (iii) the expiration of the term of the
McPeak Employment Agreement.
MS. MCPEAK EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Ms. McPeak in April 1997 (the "Ms. McPeak Employment Agreement"),
pursuant to which Ms. McPeak agreed to serve as President of the Company. The
Ms. McPeak Employment Agreement provides that Ms. McPeak will receive an annual
base salary of $130,000 which will be increased to $150,000 upon the Company's
realization of positive cash flow on a month-to-month basis.
The Ms. McPeak Employment Agreement terminates on December 31, 2001, unless
her employment is terminated earlier. Thereafter, the term will be automatically
extended for additional one-year periods unless either party delivers notice of
election not to extend the employment at least 60 days prior to the end of the
then current term. Ms. McPeak's employment may be terminated prior to the
expiration of the agreement under the following circumstances: (i) death; (ii)
termination by the Company for Cause (as defined in the Ms. McPeak Employment
Agreement); (iii) termination by the Company without Cause (as defined in the
Ms. McPeak Employment Agreement). If Ms. McPeak is terminated without Cause, she
is entitled to the base salary in effect at such time for the remainder of the
term of the Ms. McPeak Employment Agreement. Within three months of first
receiving notice of a Change in Control (as defined in the Ms. McPeak Employment
Agreement) Ms. McPeak may elect to retire from service and render, on a
non-exclusive basis, only such consulting and advisory services to the Company
as she may reasonably accept and she is entitled to continue receiving her
benefits and salary until the later of (i) six months after the date of such
election, (ii) subsequent full-time employment with another enterprise, or (iii)
the expiration of the term of the Ms. McPeak Employment Agreement.
BERRIMAN EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Ms. Berriman in September 1997 (the "Berriman Employment
Agreement"), pursuant to which Ms. Berriman agreed to serve as Vice President
and Chief Financial Officer. The Berriman Employment Agreement provides that Ms.
Berriman will receive an annual base salary of $150,000 and an annual cash bonus
as determined by the Chief Executive Officer and the Board of Directors. The
Berriman Employment Agreement also granted to Ms. Berriman an option to purchase
200,000 shares of the Company's common stock at an exercise price of $3.752,
which was .667 times the closing price of the shares on the the date of grant.
The option vests over three years and has a ten year term.
The Berriman Employment Agreement may be terminated by Ms. Berriman for any
reason or no reason upon delivering thirty days notice to the Company. If Ms.
Berriman's employment is terminated by the Company without Cause (as defined in
the Berriman Employment Agreement), or if Ms. Berriman terminates her employment
for Good Reason (as defined in the Berriman Employment Agreement), including as
a result of a Change in Control (as defined in the Berriman Employment
Agreement), she is entitled to a lump sum payment dependent on the amount of
time the Berriman Employment Agreement has been in effect.
If the Berriman Employment Agreement is terminated in the first year, the
severance amount will be equal to her base salary for 12 months; if the Berriman
Employment Agreement is terminated in the second year, the severance amount will
be equal to her base salary for 18 months; and if the Berriman Employment
Agreement has been in effect for longer than two years, the severance amount
will equal 24 months of base pay at the time of termination. In addition, Ms.
Berriman shall receive (i) her base salary accrued through the date of
termination; (ii) all accrued vacation pay and accrued bonuses, if any, to the
30
<PAGE>
date of termination; (iii) any bonus which would have been paid but for the
termination, prorated through the date of termination, based upon the Company's
performance and in accordance with the terms, provisions and conditions of any
Company incentive bonus plan in which Ms. Berriman may be designated a
participant; (iv) providing, for a period of 12 months after the date of
termination, at the Company's expense, coverage to Ms. Berriman under the
Company's disability insurance policies and to Ms. Berriman and her dependents
under the Company's health plan; if any of the Company's health or disability
insurance plans are not continued or if Ms. Berriman is not eligible for
coverage thereunder because of the termination of her employment, the Company
shall pay the amount required for Ms. Berriman to obtain equivalent coverage.
LYNCH EMPLOYMENT AGREEMENT. In January 1997, the Company's wholly-owned
subsidiary, Food Extrusion Montana, Inc. entered into an Employment Agreement
with Mr. Lynch (the "Lynch Employment Agreement"), pursuant to which Mr. Lynch
agreed to serve as President and Chief Operations Officer. The Lynch Employment
Agreement provides that Mr. Lynch will receive an annual base salary of $125,000
per year.
The Lynch Employment Agreement terminates on December 31, 2002, unless his
employment is terminated earlier. Thereafter, the term will be automatically
extended for an additional two year term unless either party delivers notice of
election not to extend the employment at least 30 days prior to the expiration
of the initial term. Mr. Lynch's employment may be terminated prior to the
expiration of the agreement under the following circumstances: (i) the mutual
written agreement of FoodEX MT and Mr. Lynch; (ii) Mr. Lynch's disability, which
shall, for the purposes of the Lynch Employment Agreement, mean Mr. Lynch's
inability due to physical or mental impairment, to perform Mr. Lynch's duties
and obligations under the Lynch Employment Agreement, despite reasonable
accommodation by the FoodEX MT, for a period exceeding three months; (iii) Mr.
Lynch's death; (iv) notice of termination by FoodEX MT for cause (as defined in
the Lynch Employment Agreement); or (v) written notice of termination by FoodEX
MT without cause upon fourteen (14) days notice, subject to the compensation for
early termination. If Mr. Lynch is terminated without cause, he is entitled to
the base salary in effect at such time for the remainder of the term of the
Lynch Employment Agreement.
MILLER EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Dr. Miller in October 1997 (the "Miller Employment Agreement"),
pursuant to which Dr. Miller agreed to serve as Vice President of Research and
Development. The agreement provides that Dr. Miller will receive an annual base
salary of $150,000 and an annual base bonus as determined by the Chief Executive
Officer and the Board of Directors. The Miller Employment Agreement also granted
to Dr. Miller an option to purchase 200,000 shares of the Company's common stock
at an exercise price of $4.377, which was .667 times the closing price of the
shares on the date of grant. The option vests over three years and has a ten
year term.
The Miller Employment Agreement may be terminated by Dr. Miller for any
reason or no reason upon delivering thirty days notice to the Company. If Dr.
Miller's employment is terminated by the Company without Cause (as defined in
the Miller Employment Agreement), or if Dr. Miller terminates his employment for
Good Reason (as defined in the Miller Employment Agreement), including as a
result of a Change in Control (as defined in the Miller Employment Agreement),
he is entitled to a lump sum payment dependent on the amount of time the Miller
Employment Agreement has been in effect.
If the Miller Employment Agreement is terminated in the first year, the
severance amount will be equal to his base salary for 12 months; if the Miller
Employment Agreement is terminated in the second year, the severance amount will
be equal to his base salary for 18 months; and if the Miller Employment
Agreement has been in effect for longer than two years, the severance amount
will equal 24 months of base pay at the time of termination. In addition, Mr.
Miller shall receive (i) his base salary accrued through the date of
termination; (ii) all accrued vacation pay and accrued bonuses, if any, to the
date of termination; (iii) any bonus which would have been paid but for the
termination, prorated through the date of
31
<PAGE>
termination, based upon the Company's performance and in accordance with the
terms, provisions and conditions of any Company incentive bonus plan in which
Mr. Miller may be designated a participant; (iv) providing, for a period of 12
months after the date of termination, at the Company's expense, coverage to Mr.
Miller under the Company's life insurance and disability insurance policies and
to Mr. Miller and his dependents under the Company's health plan; if any of the
Company's health, life insurance or disability insurance plans are not continued
or if Mr. Miller is not eligible for coverage thereunder because of the
termination of her employment, the Company shall pay the amount required for Mr.
Miller to obtain equivalent coverage.
RIDDLE EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. Riddle in September 1997 (the "Riddle Employment Agreement"),
pursuant to which Mr. Riddle agreed to serve as Vice President of Marketing. The
agreement provides that Mr. Riddle will receive an annual base salary of
$175,000 and an annual cash bonus as determined by the Chief Executive Officer
and the Board of Directors. The Riddle Employment Agreement also granted to Mr.
Riddle an option to purchase 350,000 shares of the Company's common stock at an
exercise price of $3.835, which was .667 times the closing price of the shares
on the date of grant. The option vests over two years and has a ten year term.
The Riddle Employment Agreement may be terminated by Mr. Riddle for any
reason or no reason upon delivering thirty days notice to the Company. If Mr.
Riddle's employment is terminated by the Company without Cause (as defined in
the Riddle Employment Agreement), or if Mr. Riddle terminates his employment for
Good Reason (as defined in the Riddle Employment Agreement), including as a
result of a Change in Control (as defined in the Riddle Employment Agreement),
he is entitled to a lump sum payment dependent on the amount of time the Riddle
Employment Agreement has been in effect.
If the Riddle Employment Agreement is terminated in the first year, the
severance amount will be equal to his base salary for 12 months; if the Riddle
Employment Agreement is terminated in the second year, the severance amount will
be equal to his base salary for 18 months; and if the Riddle Employment
Agreement has been in effect for longer than two years, the severance amount
will equal 24 months of base pay at the time of termination. In addition, Mr.
Riddle shall receive (i) his base salary accrued through the date of
termination; (ii) all accrued vacation pay and accrued bonuses, if any, to the
date of termination; (iii) any bonus which would have been paid but for the
termination, prorated through the date of termination, based upon the Company's
performance and in accordance with the terms, provisions and conditions of any
Company incentive bonus plan in which Mr. Riddle may be designated a
participant; (iv) providing, for a period of 12 months after the date of
termination, at the Company's expense, coverage to Mr. Riddle under the
Company's disability insurance policies and to Mr. Riddle and his dependents
under the Company's health plan; if any of the Company's health or disability
insurance plans are not continued or if Mr. Riddle is not eligible for coverage
thereunder because of the termination of his employment, the Company shall pay
the amount required for Mr. Riddle to obtain equivalent coverage.
CHERUVANKY EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Dr. Cheruvanky in April 1996 (the "Cheruvanky Employment
Agreement"), pursuant to which Dr. Cheruvanky agreed to serve in the position of
Research Biochemist. In 1996, the title of her position was changed to Director
of Research and Development of the Company. The Cheruvanky Employment Agreement
provides that Dr. Cheruvanky will receive an annual base salary of $50,000.
The agreement will terminate on April 14, 1999. Thereafter, the Cheruvanky
Employment Agreement will be automatically extended for another three year term
unless either party notifies the other party in writing thirty days prior to the
expiration of the initial term of her or its intention not to renew the
Cheruvanky Employment Agreement.
The Cheruvanky Employment Agreement shall be terminated prior to the
expiration of this agreement upon the occurrence of any of the following events:
(i) the mutual written agreement of the Company and Dr. Cheruvanky; (ii) Dr.
Cheruvanky's disability, the inability due to physical or mental impairment to
32
<PAGE>
perform the employees duties and obligations under the Cheruvanky Employment
Agreement; (iii) Dr. Cheruvanky's death; (iv) termination for Cause (as defined
in the Cheruvanky Employment Agreement); (v) termination without Cause. If Dr.
Cheruvanky is terminated without Cause, she is entitled to an amount equal to
her monthly base salary multiplied by the number of months remaining in the term
of the Cheruvanky Employment Agreement.
SASTRY EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Dr. Sastry in April 1996 (the "Sastry Employment Agreement"),
pursuant to which Dr. Sastry agreed to serve in the position of Research
Pharmaceutical Chemist. In 1996, the title of his position was changed to
Director of Science and Technology of the Company. The Employment Agreement
provides that Dr. Sastry will receive an annual base salary of $50,000.
The agreement will terminate on April 14, 1999. Thereafter, the Sastry
Employment Agreement will be automatically extended for another three year term
unless either party notifies the other party in writing thirty days prior to the
expiration of the initial term of his or its intention not to renew the Sastry
Employment Agreement.
The Sastry Employment Agreement shall be terminated prior to the expiration
of this agreement upon the occurrence of any of the following events: (i) the
mutual written agreement of the Company and Dr. Sastry; (ii) Dr. Sastry's
disability, the inability due to physical or mental impairment to perform the
employees duties and obligations under the Sastry Employment Agreement; (iii)
Dr. Sastry's death; (iv) termination for Cause (as defined in the Sastry
Employment Agreement); (v) termination without Cause. If Dr. Sastry is
terminated without Cause, he is entitled to an amount equal to his monthly base
salary multiplied by the number of months remaining in the term of the Sastry
Employment Agreement.
STOCK OPTION PLANS
1997 STOCK OPTION PLAN. The Board of Directors adopted the 1997 Stock
Option Plan (the "1997 Plan") in November 1997. A total of 5,000,000 shares have
been authorized for issuance under the 1997 Plan, of which 4,900,000 shares are
available for future grant as of the date of this Registration Statement. The
1997 Plan provides for the grant of "incentive stock options" as defined in
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees of the Company. The 1997 Plan also provides for the grant of options
that are not intended to qualify as incentive stock options under Section 422A
of the Code to employees, non-employee directors and consultants of the Company.
The exercise price of any incentive stock option granted under the 1997 Plan may
not be less than 100% of the fair market value of the Company's common stock on
the date of grant and of any nonqualified stock option 85% of fair market value
and 110% of fair market value in the case of a participant owning stock
possessing more than 10% of the voting rights of the Company's outstanding
capital stock. Shares subject to an option granted under the 1997 Plan may be
purchased for cash, in exchange for shares of common stock owned by the
optionee, or other consideration as set forth in the 1997 Plan. The 1997 Plan is
administered by the Board of Directors. Under the 1997 Plan, options vest not
less than 20% per year and have ten year terms (except with respect to 10%
stockholders which have five-year terms). If the Company sells substantially all
of its assets, is a party to a merger or consolidation in which it is not the
surviving corporation (a "Change of Control"), then the Company has the right to
accelerate unvested options and shall give the option holder written notice of
the exercisability and specify a time period in which the option may be
exercised. All options shall terminate in their entirety to the extent not
exercised on or prior to the date specified in the written notice unless the
agreement governing the Change of Control shall provide otherwise.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From January 1990 to September 1992, Mr. Kirit Kamdar was a Director of the
Company and from January 1990 to April 1994, Mr. Kamdar served as the Company's
Executive Vice President. Mr. Kamdar
33
<PAGE>
currently owns 1,751,250 shares of the Company's common stock or 8.38%. Since
July 1974, Mr. Kamdar has been President and Chief Executive Officer of Kamflex
Corporation, an Illinois manufacturing corporation ("Kamflex") and a vendor of
extrusion and conveyor equipment. In 1996, Kamflex sold $205,542 worth of such
equipment to the Company pursuant to its standard commercial terms and prices.
In 1997, Kamflex has continued to generate sales revenues from its supplier
arrangement with the Company. Kamflex's sales volume to customers other than the
Company is approximately $3.5 to $4 million per year.
In May 1997, Allen J. Simon, a director and Chief Executive Officer of the
Company exercised a previously-granted stock option to purchase 2,000,000 shares
of common stock of the Company at an exercise price of $2.00 per share. The
exercise price was paid by delivery to the Company of Mr. Simon's promissory
notes in the aggregate principal amount of $4,000,000. Such notes bear an
interest rate of 8% per annum and are secured by the 2,000,000 shares and are
payable upon a sale of a portion or all of the shares of common stock of the
Company pledged as collateral for the notes.
In November 1995, FoodEx CA issued and sold an aggregate of 100,000 shares
of common stock to Daniel L. McPeak, Chairman of the Board of the Company, and
Patricia McPeak, a Director and President of the Company, in consideration for
cancellation of notes and compensation payable, less notes receivable, totaling
$495,511.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company intends that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors, and be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
ITEM 8. DESCRIPTION OF SECURITIES
The following summary is a description of certain provisions of the
Company's Certificate of Incorporation and Bylaws. Such summary does not purport
to be complete and is subject to, and is qualified in its entirety by, all of
the provision of the Certificate of Incorporation and Bylaws, including the
definitions therein of certain terms. Copies of the Certificate of Incorporation
and Bylaws are filed as exhibits to the Registration Statement.
COMMON STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has authority to issue up to 100,000,000 shares of common stock, par
value $0.001 per share. As of March 31, 1998, there were 20,525,500 shares of
common stock outstanding and 189 holders of record of common stock. Each holder
of common stock is entitled to one vote for each share held on all matters.
Cumulative voting in elections of directors and all other matters brought before
stockholders meetings, whether they be annual or special, is not provided for
under the Company's Certificate of Incorporation or Bylaws. However, under
certain circumstances, cumulative voting rights in the election of the Company's
directors may exist under California law. See "Description of Capital
Stock--Application of California General Corporate Law." The holders of common
stock will be entitled to receive such dividends, if any, as may be declared by
the board from time to time out of legally available funds, subject to any
preferential dividend rights of any outstanding shares of Preferred Stock. Upon
the liquidation, dissolution, or winding up of the Company,
34
<PAGE>
the holders of the common stock will be entitled to share ratably in all assets
of the Company that are legally available for distribution, after payment of all
debt and other liabilities and distribution in full of preferential amounts, if
any, to be distributed to holders of Preferred Stock. The holders of common
stock are not entitled to preemptive, subscription, redemption, or conversion
rights. The rights, preferences, and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the designations, powers, preferences, privileges, and relative
participating, optional or special rights and the qualifications, limitations or
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights of the common stock. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting, conversion or other
rights that could adversely affect the voting power and other rights of the
holders of common stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of Preferred
Stock may have the effect of decreasing the market price of the common stock,
and may adversely affect the voting and other rights of the holders of common
stock. As of the date of this Form, there are no issued and outstanding shares
of Preferred Stock.
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and Monsanto dated February
1997, Monsanto is entitled to certain demand and so-called "piggyback"
registration rights with respect to the registration of such shares under the
Securities Act of 1933, as amended (the "Securities Act"). The Company has also
granted certain so-called "piggyback" registration rights to Allen J. Simon, the
Company's Chief Executive Officer, and certain holders of common stock. If the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders,
Monsanto, Mr. Simon and certain holders of common stock are entitled to notice
of such registration and are entitled to include shares of such common stock
therein. Additionally, Monsanto is entitled to certain demand registration
rights pursuant to which Monsanto may require the Company to file a registration
statement under the Securities Act with respect to shares of common stock issued
to Monsanto upon conversion of a promissory note payable by the Company to
Monsanto, and the Company is required to use its best efforts to effect such
registration. All of these registration rights are subject to certain conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in such registration.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company has been appointed as the transfer
agent and registrar for the Company's common stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
PROPOSED BYLAWS
CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and
Proposed Bylaws could be deemed to have an anti-takeover effect. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board and in the policies formulated by the Board, and to
discourage an unsolicited takeover of the Company if the Board determines that
such takeover is not in the best interests of the Company and its stockholders.
However, these provisions could have the effect of
35
<PAGE>
discouraging certain attempts to acquire the Company or remove incumbent
management even if some or a majority of stockholders deemed such an attempt to
be in their best interests.
The Certificate of Incorporation provides for a classified Board consisting
of three classes, as nearly equal in number as the then authorized number of
directors constituting the Board permits. The initial terms of the first class,
the second class and the third class are set to expire at the conclusion of the
1998 annual meeting, the 1999 annual meeting, and the 2000 annual meeting of
stockholders, respectively. At each annual meeting of stockholders beginning in
1998, successors to the directors whose terms expire at that annual meeting
shall be elected for a three-year term, with each director to hold office until
a successor has been duly elected and qualified. As a result, approximately
one-third of the Board will be elected each year.
The Bylaws provide that stockholders may remove a director with cause only
upon the affirmative vote of a majority of shares entitled to vote at an
election of directors. This provision, combined with the provisions in the
Bylaws authorizing the Board to fill vacant directorships, precludes a
stockholder from removing incumbent directors and simultaneously gaining control
of the Board by filling the vacancies created by such removal with its own
nominees. The Certificate of Incorporation also provides that the affirmative
vote of 66 2/3% of the outstanding shares is required to amend certain
provisions in the Company's Certificate of Incorporation.
The Bylaws establish an advance notice procedure for the nomination, other
than by or at the direction of the Board, of candidates for election as
directors as well as for other stockholder proposals to be considered at annual
meetings of stockholders. Notice must be received by the Company not less than
60 days prior to the annual meeting and must contain certain specified
information concerning the persons to be nominated or the matters to be brought
before the meeting and concerning the stockholder submitting the proposal. The
Bylaws also provide that special meetings of stockholders of the Company may be
called by a stockholder holding not less than 20% of the Company's outstanding
voting stock only upon 60 days advance notice.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporations
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) at or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combinations to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation, (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder, (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned
36
<PAGE>
by the interested stockholder, or (v) the receipt by the interested stockholder
of the benefits of any loans, advances, guarantees, pledges, or other financial
benefits provided by or through the corporation. In general, Section 203 defines
an interested stockholder as any entity or person beneficially owning 15% or
more of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
APPLICATION OF CALIFORNIA GENERAL CORPORATE LAW
Although incorporated in Delaware, the Company is headquartered in the State
of California. Section 2115 of the California General Corporation Law ("Section
2115") provides that certain provisions of the California General Corporation
Law shall be applicable to a corporation organized under the laws of another
state to the exclusion of the law of the state in which it is incorporated, if
the corporation meets certain tests regarding the business done in California
and the number of its California stockholders.
An entity such as the Company is subject to Section 2115 if, on a
consolidated basis, the average of the property factor, payroll factor and sales
factor deemed to be in California during its latest full income year is more
than 50% and more than one half of its outstanding voting securities are held of
record by persons having addresses in California. Section 2115 does not apply to
a corporation with outstanding securities listed on the New York or American
Stock Exchange, or with outstanding securities designated as qualified for
trading as a national market security on the National Association of Securities
Dealers Automatic Quotation System, if such corporation has at least 800
beneficial holders of its equity securities. Since the Company currently would
be deemed to meet the factors discussed above, it is and will be subject to
Section 2115.
During the period that the Company is subject to Section 2115, the
provisions of the California General Corporation Law regarding the following
matters are made applicable to the exclusion of the law of the State of
Delaware: annual election of directors; removal of directors without cause;
removal of directors by court proceedings; filling of director vacancies where
less than a majority in office elected by shareholders; directors' standard of
care; liability of directors for unlawful distributions; indemnification of
directors, officers and others; limitations on corporate distributions of cash
or property; liability of a shareholder who receives unlawful distribution;
requirement for annual shareholders' meetings and remedy if same not timely
held; shareholders' right to cumulate votes at any election of directors;
supermajority vote requirements; limitations on sales of assets; limitations on
mergers; reorganizations; dissenters' rights in connection with reorganizations;
records and reports; actions by the California Attorney General; and rights of
inspection.
37
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
The principal United States market for the Company's common stock is the OTC
Bulletin Board. The following is the high and low bid information for such
common stock:
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1998
Fourth Quarter (through March 31, 1998)................................. $ 5.375 $ 3.125
1997
First Quarter (through March 30, 1997).................................. $ 12.50 $ 3.75
Second Quarter (through June 30, 1997).................................. $ 6.00 $ 1.50
Third Quarter (through September 30, 1997).............................. $ 6.625 $ 4.50
Fourth Quarter (through December 31, 1997).............................. $ 8.50 $ 3.125
1996
First Quarter (through March 30, 1996).................................. $ 5.25 $ 4.25
Second Quarter (through June 30, 1996).................................. $ 5.50 $ 3.875
Third Quarter (through September 30, 1996).............................. $ 5.625 $ 2.9375
Fourth Quarter (through December 30, 1996).............................. $ 5.50 $ 2.875
</TABLE>
There are approximately 189 holders of record of the Company's common stock as
of March 31, 1998.
SHARES ELIGIBLE FOR SALE
Sales of substantial numbers of shares of common stock in the public market
could adversely affect the market price of the common stock. Of the 20,525,500
shares outstanding as of March 31, 1998, (i) approximately 7,500,000 shares
issued and outstanding as of March 31, 1998 are eligible for resale in the
public markets subject to compliance with Rule 144 ("Rule 144") promulgated
under the Securities Act of 1933, as amended (the "1933 Act") and (ii)
approximately 10,900,000 shares will be eligible for immediate sale in the
public market without restriction pursuant to Rule 144(k) of the 1933 Act. In
addition, approximately 2,600,000 shares subject to options (if exercised) will
be eligible for sale in the public market 90 days after effectiveness of this
registration statement pursuant to Rule 701 of the 1933 Act. 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, or, if the Common Stock is quoted on Nasdaq or a stock exchange,
the average weekly trading volume in Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 also are subject to certain
manner-of-sale provisions and notice requirements and to the availability of
current public information about the Company. A person who is not an affiliate,
who has not been an affiliate within three months prior to sale, and who
beneficially owns restricted securities with respect to which at least 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. Assuming the Monsanto Company converts its
outstanding convertible, non-interest promissory note to common stock (see
"Liquidity and Capital Resources"), holders of an aggregate of up to
approximately 7,200,000 shares of common stock, issued and outstanding as of
March 31, 1998, have rights under certain circumstances to require the Company
to register their shares for future sales. See "Description of Capital
Stock--Registration Rights."
38
<PAGE>
DIVIDENDS
The Company has not paid, nor declared, any dividends since its inception
and does not intend to declare any such dividends in the foreseeable future. The
Company's ability to pay dividends is subject to limitations imposed by Delaware
law and, as a quasi-California corporation, to the more restrictive provision of
California law. Under Delaware law, dividends may be paid to the extent that the
corporation's assets exceed its liabilities and it is able to pay its debts as
they become due in the usual course of business. California law generally
prohibits a corporation from paying dividends unless the retained earnings of
the corporation immediately prior to the distribution exceed the amount of the
distribution. Alternatively, a corporation may pay dividends if (i) the assets
of the corporation exceed 1 1/4 times its liabilities; and (ii) the current
assets of the corporation equal or exceed its current liabilities, but if the
average pre-tax earnings of the corporation before interest expense for the two
years preceding the distribution was less than the average interest expense of
the corporation for those years, the current assets of the corporation must
exceed 1 1/4 times its current liabilities. See "Description of Capital Stock--
Application of California General Corporate Law."
ITEM 2. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings, other
than routine litigation incidental to the Company's business, to which the
Company is a party or of which any of its property is subject.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Coopers & Lybrand LLP ("C&L") were previously the principal accountants for
the Company. On July 28, 1997, C&L's appointment as independent accountants was
terminated and the Company engaged Price Waterhouse LLP as the Company's
independent accountants. The Company's Board of Directors approved the decision
to change accountants. The opinions of C&L on the balance sheet of the Company
for the years ended December 31, 1996 and 1995, the statement of operations,
shareholders' deficit, and cash flows for the Company for the period from May 9,
1989 to December 31, 1996, did not contain any adverse opinions or disclaimers
or opinions, or modifications as to uncertainty, audit scope or accounting
principles. There were no disagreements between the Company and C&L on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of C&L, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In December 1997, the Company issued 100,000 shares of common stock to Bob
Hesse, a consultant of the Company, on the exercise of previously-granted stock
options upon surrender of 25,000 shares of the Company's common stock for the
exercise price of $1.00 per share. The trading value of the shares was $4.00 per
share on the date of surrender. The shares were issued without registration in
reliance on the exemption from registration provided by 4(2) of the Securities
Act.
In September 1997, the Company issued 322,500 shares of common stock in
settlement of litigation. The shares previously outstanding were cancelled and
new shares issued in replacement thereof. The Shares were issued without
registration in reliance in the exemption from registration provided by 4(2) of
The Securities Act.
In August 1997, the Company issued 1,000 shares of common stock to Terry
Miller, an employee of the Company, on the exercise of previously-granted stock
options at an exercise price of $1.00 per share. The shares were issued without
registration in reliance on the exemption from registration provided by 4(2) of
the Securities Act.
39
<PAGE>
In August 1997, the Company issued warrants to purchase an aggregate of
25,000 shares each of common stock of the Company to Tom Schultz and Theodore
Swartwood in connection with services rendered. The shares were issued without
registration under the Securities Act in reliance on the exemption from
registration provided by 4(2) of the Securities Act.
In July 1997, the Company issued 40,000 shares of common stock to Marilyn
Roosevelt, a consultant to the Company in connection with services rendered. The
shares were issued without registration under the Securities Act in reliance on
the exemption from registration provided by 4(2) of the Securities Act.
In July 1997, the Company issued and sold 18,750 shares to Carl Burhanan, a
creditor of the Company, to correct an error in a prior share issuance related
to the cancellation of indebtedness. The shares were issued without registration
under the Securities Act in reliance on the exemption from registration provided
by 4(2) of the Securities Act.
In June 1997, the Company issued and sold to Stephen Holloman, Director of
Engineering of the Company, 20,000 shares of common stock on the exercise of
previously-granted stock options at an exercise price of $1.00 per share. The
shares were issued without registration under the Securities Act in reliance on
the exemption from registration provided by 4(2) of the Securities Act.
In May 1997, the Company issued and sold to Allen J. Simon, a director and
Chief Executive Officer of the Company, 2,000,000 shares of common stock on the
exercise of previously-granted stock options at an exercise price of $2.00 per
share. The shares were issued without registration under the Securities Act in
reliance on the exemption from registration provided by 4(2) of the Securities
Act.
Effective May 1997, the Company issued 30,000 shares of common stock to Mel
Shulman, a consultant to the Company in connection with services rendered. The
shares were issued without registration under the Securities Act in reliance on
the exemption from registration provided by 4(2) of the Securities Act.
In April 1997, the Company issued and sold to Ike Lynch 30,000 shares of
common stock on the exercise of previously-granted stock options at an exercise
price of $1.00 per share. The shares were issued without registration under the
Securities Act in reliance on the exemption from registration provided by 4(2)
of the Securities Act.
In January 1997, the Company's subsidiary, Food Extrusion Montana, Inc.,
purchased certain assets of Centennial Foods, Inc. in exchange for the Company's
issuance of 310,000 shares of common stock and the assumption of certain
liabilities totaling approximately $1,320,000. The shares were issued without
registration under the Securities Act in reliance on the exemption from
registration provided by 3(a)(10) of the Securities Act.
From January 1996 through April 1996, the Company issued and sold to 28
accredited investors 40 Units, each Unit consisting of 35,000 shares of common
stock and a warrant to purchase 15,000 shares of common stock, at $25,000 per
Unit for an aggregate offering price of $1,000,000. The Units were issued
without registration under the Securities Act in reliance on the exemption from
registration provided by Regulation D promulgated under the Securities Act.
In March 1996, the Company issued and sold 578,000 shares of common stock as
additional consideration for a note payable in the amount of $1,750,000 to a
lender. The shares were issued without registration under the Securities Act in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.
In January 1996, the Company issued and sold 12,822,751 shares of common
stock to 21 shareholders of FoodEx CA in an exchange of 7.5 shares of the
Company's common stock for each outstanding share of FoodEx CA. The shares were
issued without registration under the Securities Act in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. All
prior share issuances reflect shares prior to the 7.5 share exchange.
40
<PAGE>
In January 1996, FoodEx CA, the predecessor to the Company, issued and sold
an aggregate of 45,000 shares of common stock to three capital consulting firms,
one of which was controlled by a then-director of the Company, in exchange for
cancellation of notes and accrued interest amounting to $223,813. FoodEx CA also
issued and sold to the three capital consulting firms, warrants to purchase up
to 305,000 shares of common stock at an exercise price of $.01 per share. The
warrants were subsequently exercised. The shares and warrants were issued
without registration under the Securities Act in reliance on the exemption from
registration provided by Regulation D promulgated under the Securities Act.
In January 1996, FoodEx CA issued and sold 2,500 shares of common stock to a
lender in exchange for cancellation of debt and accrued interest. The shares
were issued without registration under the Securities Act in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
In January 1996, FoodEx CA issued and sold 2,500 shares of common stock to
Steve Saunders, a shareholder of the Company, to correct an error in a prior
share issuance. The shares were issued without registration in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
In January, 1996, FoodEx CA issued and sold 1,000 shares to an employee of
the Company as additional compensation for services rendered. The shares were
issued without registration under the Securities Act in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
In January 1996, FoodEx CA issued and sold 6,000 shares each of common stock
to Daniel McPeak and Patricia McPeak, directors, officers and shareholders of
the Company as additional compensation. The shares were issued without
registration in reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
In November 1995, FoodEx CA issued and sold 100,000 shares of common stock
to Daniel L. McPeak and Patricia McPeak, two of the Company's directors,
officers and shareholders, in exchange for cancellation of notes and
compensation payable, less notes receivable. The shares were issued without
registration under the Securities Act in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
In November 1995, FoodEx CA issued and sold 10,800 shares of common stock to
Steve Saunders, a shareholder of the Company, for cancellation of debt and
accrued interest. The shares were issued without registration under the
Securities Act in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act.
In November 1995, FoodEx CA issued and sold 199,900 shares of common stock
to five lenders in exchange for cancellation of debt and accrued interest. The
shares were issued without registration under the Securities Act in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act.
In October 1995, FoodEx CA issued and sold 31,000 shares of common stock to
Gene Boyer et al, a shareholder, for services rendered and capital contributions
to FoodEx CA. The shares were issued without registration in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Proposed Bylaws provide for
expanded indemnification of directors and officers of the Company and limits the
liability of directors of the Company. The Proposed Bylaws provide that the
Company shall indemnify each person who is or was an officer or director of the
Company, or is or was serving as an officer, director, employee or agent of any
other corporation, partnership, joint venture, trust or other enterprise at the
request of the Company, against
41
<PAGE>
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
him or her in connection with such action, suit or proceeding if he or she acted
in good faith and in a manner he or she believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Such right to indemnification includes the right to advancement of expenses
incurred by such person prior to final disposition of the proceeding, provided
that such director or officer shall provide the Company with an undertaking to
repay all amounts so advanced if it shall ultimately be determined by final
judicial decision that such person is not entitled to be indemnified for such
expenses. The Proposed Bylaws also provide that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he or she
is or was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection with the defense or settlement of such action or suit,
if he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Company unless
and only to the extent that the Delaware Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper. No
person shall be indemnified by the Company for any expenses or amounts paid in
settlement with respect to any action to recover short-swing profits under
Section 16(b) of the Securities Exchange Act of 1934, as amended. The
Certificate of Incorporation provides that if the Delaware General Corporation
Law is amended to further eliminate or limit the personal liability of
directors, then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by the Delaware General Corporation
Law, as so amended. The Company has also entered into agreements to indemnify
its officers and directors in addition to the indemnification provided for in
the Company's Proposed Bylaws.
The Company has also entered into indemnification agreements with its
directors and officers which similarly provide for the indemnification and
advancement of expenses. In addition, the Company has agreed to indemnify Mr.
Simon to the fullest extent of the law pursuant to the terms of Mr. Simon's
employment agreement with the Company. See "Description of Capital
Stock--Application of California General Corporate Law."
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers and directors of the Company pursuant to
the provisions of the Company's Certificate of Incorporation, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
42
<PAGE>
PART F/S
THE RICEX COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997 and March 31, 1998 (unaudited)..................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and for the three months ended March 31, 1997 and
1998 (unaudited)........................................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and for the three months ended
March 31, 1998 (unaudited).............................................. F-5
Consolidated Statements of Cash Flow for the years ended December 31,
1995, 1996 and 1997 and for the three months ended March 31, 1997 and
1998 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
February 18, 1998 (except for Note 2, which is as of May 15, 1998)
To the Board of Directors of
The RiceX Company (formerly Food Extrusion, Inc.)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of The
RiceX Company (formerly Food Extrusion, Inc.) at December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
Sacramento, California
F-2
<PAGE>
THE RICEX COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,988,300 $ 863,127 $ 523,279
Trade accounts receivable.......................... 204,527 578,613 421,411
Inventories........................................ 149,468 526,977 540,277
Deposits and other current assets.................. 93,008 11,652 39,334
---------- ----------- -----------
Total current assets............................. 2,435,303 1,980,369 1,524,301
Property and equipment, net.......................... 1,841,529 4,449,813 4,315,885
Note receivable...................................... -- 245,908 226,408
Deferred debt issuance costs......................... 348,710 135,909 110,075
Patents and trademarks............................... -- 45,665 45,665
---------- ----------- -----------
$4,625,542 $ 6,857,664 $6,222,334
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.................. $ 154,571 $ 1,252,570 $1,239,949
Accounts payable and accrued liabilities........... 475,508 1,206,165 1,266,882
---------- ----------- -----------
Total current liabilities........................ 630,079 2,458,735 2,506,831
Long-term debt, net of current portion............... 3,943,051 6,552,818 6,575,932
---------- ----------- -----------
Total liabilities................................ 4,573,130 9,011,553 9,082,763
---------- ----------- -----------
Redeemable common stock par value $.001 per share,
310,000 shares outstanding redeemable at $5.00 per
share in November 1998............................. -- 1,550,000 1,550,000
---------- ----------- -----------
Shareholders' equity (deficit):
Common stock, par value $.001 per share, 50,000,000
shares authorized, 18,000,750, 20,215,215 and
20,215,500 shares issued and outstanding at
December 31, 1996 and 1997 and March 31, 1998.... 18,001 20,215 20,215
Additional paid-in capital......................... 7,738,236 17,713,049 17,713,049
Accumulated deficit................................ (7,700,775) (15,469,373) (16,453,145)
Unearned stock option compensation................. -- (1,967,780) (1,690,548)
Notes receivable from shareholders................. (3,050) (4,000,000) (4,000,000)
---------- ----------- -----------
Total shareholders' equity (deficit)............. 52,412 (3,703,889) (4,410,429)
Commitments
---------- ----------- -----------
$4,625,542 $ 6,857,664 $6,222,334
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE RICEX COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales....................... $ 25,400 $ 784,306 $3,291,315 $ 710,199 $ 820,650
Royalties................... 74,220 123,496 41,302 9,443 10,734
---------- ---------- ---------- ---------- ----------
99,620 907,802 3,332,617 719,642 831,384
Cost of sales................. 32,046 512,059 2,364,383 386,360 534,457
---------- ---------- ---------- ---------- ----------
67,574 395,743 968,234 333,282 296,927
Research and development
expenses.................... 425,207 632,975 790,095 87,407 306,577
Selling, general and
administrative expenses..... 81,100 1,033,009 2,423,103 225,526 608,490
Stock option compensation to
employees (Note 9).......... -- -- 2,031,570 182,814 277,232
Professional fees............. 38,518 919,784 1,907,399 192,750 66,746
---------- ---------- ---------- ---------- ----------
Loss from operations........ (477,251) (2,190,025) (6,183,933) (355,215) (962,118)
Other income (expense):
Interest and other income... -- 35,653 275,037 14,884 85,507
Interest expense............ (72,813) (182,151) (533,902) (209,239) (106,961)
Beneficial conversion
feature and option issued
in connection with debt... -- (2,687,000) (1,325,000) (1,325,000) --
---------- ---------- ---------- ---------- ----------
Loss before provision for
income taxes and
extraordinary item........ (550,064) (5,023,523) (7,767,798) (1,874,570) (983,572)
Provision for income taxes.... (800) (800) (800) (200) (200)
Extraordinary gain on
restructuring and
extinguishment of debt...... 110,371 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss.................... $ (440,493) $(5,024,323) $(7,768,598) $(1,874,770) $ (983,772)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings per share:
Net loss per share before
extraordinary item........ $ (.05) $ (.28) $ (.40) $ (.10) $ (.05)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net loss per share.......... $ (.04) $ (.28) $ (.40) $ (.10) $ (.05)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted-average shares
outstanding............... 11,146,500 17,762,917 19,499,049 18,045,528 20,525,500
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE RICEX COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
UNEARNED NOTES TOTAL
COMMON STOCK ADDITIONAL STOCK RECEIVABLE SHAREHOLDERS'
---------------------- PAID-IN ACCUMULATED OPTION FROM EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION SHAREHOLDERS (DEFICIT)
--------- ----------- ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994, as
restated (unaudited) (Note 3)... 10,700,000 $ 10,700 $ 598,320 $(2,235,959) -- -- $(1,626,939)
Conversion of debt to common
stock......................... 2,562,750 2,563 1,700,961 -- -- -- 1,703,524
Net loss........................ -- -- -- (440,493) -- -- (440,493)
--------- ----------- ---------- ------------ ------------- ------------ -------------
Balance at December 31, 1995...... 13,262,750 13,263 2,299,281 (2,676,452) -- -- (363,908)
Issuance of common stock to
employees..................... 135,000 135 77,365 -- -- -- 77,500
Conversion of debt to common
stock......................... 337,500 337 223,476 -- -- -- 223,813
Issuance of common stock for
services, net of
reorganization and stock
offering costs of $480,000.... 2,287,500 2,288 1,042,712 -- -- $ (3,050) 1,041,950
Issuance of common stock in
private placement............. 1,400,000 1,400 998,600 -- -- -- 1,000,000
Issuance of common stock with
debt financing................ 578,000 578 409,802 -- -- -- 410,380
Issuance of stock options for
services...................... -- -- 2,687,000 -- -- -- 2,687,000
Net loss........................ -- -- -- (5,024,323) -- (5,024,323)
--------- ----------- ---------- ------------ ------------- ------------ -------------
Balance at December 31, 1996...... 18,000,750 18,001 7,738,236 (7,700,775) -- (3,050) 52,412
Issuance of common stock
pursuant to exercise of stock
options....................... 2,126,000 2,126 4,048,874 -- -- (3,996,950) 54,050
Issuance of common stock for
services...................... 88,465 88 389,639 -- -- -- 389,727
Issuance of stock warrants for
services...................... -- -- 211,950 -- -- -- 211,950
Issuance of stock options to
employees..................... -- -- 3,999,350 -- $(3,999,350) -- --
Vesting of stock options to
employees..................... -- -- -- -- 2,031,570 -- 2,031,570
Beneficial conversion feature on
long-term debt................ -- 1,325,000 -- -- -- 1,325,000
Net loss........................ -- -- -- (7,768,598) -- -- (7,768,598)
--------- ----------- ---------- ------------ ------------- ------------ -------------
Balance at December 31, 1997...... 20,215,215 20,215 17,713,049 (15,469,373) (1,967,780) (4,000,000) (3,703,889)
Issuance of common stock for
services...................... 285 -- -- -- -- -- --
Vesting of stock options to
employees..................... -- -- -- 277,232 -- 277,232
Net loss........................ -- -- -- (983,772) -- -- (983,772)
--------- ----------- ---------- ------------ ------------- ------------ -------------
Balance at March 31, 1998
(unaudited)..................... 20,215,500 $ 20,215 $17,713,049 ($16,453,145) $(1,690,548) $(4,000,000) $(4,410,429)
--------- ----------- ---------- ------------ ------------- ------------ -------------
--------- ----------- ---------- ------------ ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE RICEX COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(440,493) $(5,024,323) $(7,768,598) $(1,874,770) $(983,772)
Extraordinary gain on restructuring and
extinguishment of debt............................ (110,371) -- -- -- --
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 21,785 216,457 735,216 289,745 204,550
Shares, warrants and options issued for
compensation and services....................... -- 3,401,909 2,633,247 182,814 277,232
Accredtion of debt discsounts..................... -- 96,149 241,526 41,041 59,091
Debt issued for services............................ 34,354 -- -- -- --
Beneficial conversion feature....................... -- -- 1,325,000 1,325,000 --
Net change in operating assets and liabilities:
Trade accounts receivable....................... (317) (199,216) (374,086) (173,216) 157,202
Inventories..................................... -- (149,468) (377,509) 2,547 (13,300)
Deposits and other current assets............... 18,907 (84,893) 81,356 26,772 (27,682)
Deferred debt issuance costs.................... -- -- 141,892 -- --
Accounts payable and accrued liabilities........ 367,868 52,225 730,657 (258,039) 60,717
--------- ---------- ---------- ---------- ---------
Net cash used in operating activities......... (108,267) (1,691,160) (2,631,299) (438,106) (265,962)
--------- ---------- ---------- ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net............ (200,174) (1,278,687) (611,432) (134,115) (44,788)
Payments for trademarks and patents................. -- -- (345,665) (300,000) --
Collection on note receivable....................... -- -- 54,092 6,500 19,500
--------- ---------- ---------- ---------- ---------
Net cash used for investing activities........ (200,174) (1,278,687) (903,005) (427,615) (25,288)
--------- ---------- ---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. -- 1,190,380 54,050 -- --
Private placement proceeds received in advance of
offering.......................................... 220,000 -- -- -- --
Proceeds from issuance of long-term debt............ 198,227 2,500,000 2,500,000 -- --
Principal payments on long-term debt................ -- (16,917) (56,919) (5,428) (19,598)
Proceeds from issuance of long-term debt to
shareholders...................................... -- 1,364,397 -- -- --
Payments of long-term debt to shareholders.......... -- (224,000) (88,000) (23,000) (29,000)
--------- ---------- ---------- ---------- ---------
Net cash (used in) provided by financing
activities.................................. 418,227 4,813,860 2,409,131 (28,428) (48,598)
--------- ---------- ---------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 109,786 1,844,013 (1,125,173) (894,149) (339,848)
Cash and cash equivalents, beginning of period........ 34,501 144,287 1,988,300 1,988,300 863,127
--------- ---------- ---------- ---------- ---------
Cash and cash equivalents, end of period.............. $ 144,287 $1,988,300 $ 863,127 $1,094,151 $ 523,279
--------- ---------- ---------- ---------- ---------
--------- ---------- ---------- ---------- ---------
</TABLE>
The accompaning notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The RiceX Company (the Company or RiceX) was incorporated in California as
Food Extrusion, Inc. in 1989 and reorganized as a Nevada corporation in January
1996 (Note 3). On May 15, 1998, the Company changed its name to The RiceX
Company (Note 2). The Company has a wholly-owned subsidiary, Food Extrusion
Montana, Inc. (FoodEx Montana). The financial statements include the accounts of
the Company and FoodEx Montana. All intercompany balances and transactions have
been eliminated in the consolidated financial statements.
The Company is an agribusiness food technology company, which has developed
a proprietary process to stabilize rice bran. The Company is headquartered in El
Dorado Hills, California and has stabilization equipment located at two rice
mills in Northern California. The Company purchases raw rice bran from these
mills and mill employees, under Company supervision, operate the Company's
equipment to stabilize rice bran. The Company pays a processing fee to the mills
for this service. Under an agreement with one of the mills, that mill may use
the Company's equipment to stabilize rice bran for its customers and the mill
pays a royalty fee to the Company.
FoodEx Montana is engaged in the business of custom manufacturing grain
based products for food ingredient companies at its production facility in
Dillon, Montana. The facility has specialized processing equipment and
techniques for the treatment of grain products to cook, enzyme treat, convert,
isolate, dry and package finished food ingredients. The soluble form of the
Company's rice bran products is produced at the Montana facility.
A summary of the accounting principles and practices used in the preparation
of the consolidated financial statements follows:
FINANCIAL STATEMENT PRESENTATION
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
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.
INTERIM FINANCIAL DATA (UNAUDITED)
The unaudited financial information as of March 31, 1998 and for the three
months ended March 31, 1998 and 1997 has been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of the Company's
management, reflects all adjustments necessary for a fair presentation of the
financial position and the results of operations for such interim periods in
accordance with generally accepted accounting principles.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable
from sales to major customers. The Company performs credit evaluations on its
customers' financial condition and generally does not require collateral on
accounts receivable. The Company maintains an allowance for doubtful accounts on
its receivables based upon expected collectibility of all accounts receivable.
Uncollectible accounts have not been significant.
F-7
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Three customers accounted for 57% (30%, 17%, 10%) of sales for the year
ended December 31, 1997, two customers accounted for 77% (51%, 26%) of sales for
the year ended December 31, 1996 and three customers accounted for 84% (40%,
27%, 17%) of sales for the year ended December 31, 1995. No other customers
accounted for more than 10% of sales.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original or
remaining maturity at the time of purchase of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market determined on a
first-in, first-out (FIFO) basis. At March 31, 1998, inventories consisted of
$370,377 in finished goods and $169,900 in packaging supplies. At December 31,
1997, inventories consist of $341,607 of finished goods and $185,370 of
packaging supplies. At December 31, 1996, inventories consist primarily of
packaging supplies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on the
straight-line basis over the shorter of the estimated life of the asset or the
lease term, generally ranging from three to ten years. Upon sale or retirement,
the related cost and accumulated depreciation are removed from the accounts and
the resulting gain or loss is included in results of operations. The cost of
additions, improvements, and interest on construction are capitalized, while
maintenance and repairs are charged to expense when incurred.
CAPITALIZED INTEREST
Interest is capitalized on self-constructed assets beginning when payments
are made for the construction and ending when the assets are completed and
placed into service. Interest costs associated with the manufacture of its rice
stabilization equipment of $63,694 and $27,125 were capitalized during the years
ended December 31, 1996 and 1995. No interest costs were capitalized in 1997.
DEBT ISSUANCE COSTS
Costs incurred in connection with financing agreements are deferred and
amortized over the terms of the related obligations using the straight-line
method.
REVENUE RECOGNITION
Revenue from royalty contracts and product sales are recognized as products
are shipped.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
F-8
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company accounts for employee stock options in accordance with APB 25,
under which compensation expense is recognized in the financial statements when
option grants are issued at less than fair market value on the grant date. The
Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", which require the Company to disclose pro forma
net income assuming compensation expense related to options granted was
determined using the fair value method. As required by SFAS No. 123, the fair
value method is used for valuing options and warrants granted to non-employee
consultants for services rendered.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 128, Earnings per Share ("SFAS 128"),
which changed the basis upon which earnings (or loss) per share is calculated.
As required by this statement, the Company adopted the provisions of SFAS 128
for the year ended December 31, 1997, and retroactively for each of the
preceding years presented in the financial statements. Adoption of SFAS 128 did
not have a material impact on the Company's loss per share amounts for the three
years ended December 31, 1997.
Basic net loss per share is computed on the weighted average number of
shares of common stock outstanding during each period. Dilutive net loss per
share is not presented as the Company has reported a loss on operations for each
of the three years ended December 31, 1997. The weighted average shares
outstanding do not include potentially dilutive instruments including stock
options, warrants and convertible long-term debt.
INCOME TAXES
Prior to 1996, the Company, was taxed as an S corporation for both federal
and state purposes. As such, the Company was not subject to federal income tax
and was subject to a state tax at a reduced rate of 1.5%. Effective January 1,
1996, the Company terminated its S corporation election.
The Company accounts for income taxes under the liability method. Deferred
income tax assets and liabilities result from the future tax consequences
associated with temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized.
ACCOUNTING FOR LONG-LIVED ASSETS
Long-lived assets are recorded at the lower of amortized cost or fair value.
As part of an ongoing review of the valuation of long-lived assets, management
assesses the carrying value of such assets if facts and circumstances suggest
they may be impaired. If this review indicates that the carrying value of these
assets may not be recoverable, as determined by a nondiscounted cash flow
analysis over the remaining useful life, the carrying value would be reduced to
its estimated fair value. There have been no material impairments recognized in
these consolidated financial statements.
F-9
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION AND SUBSEQUENT EVENTS
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred operating losses and
negative cash flows from operations since inception and has a shareholders'
deficit of $3,703,889 at December 31, 1997.
The Company is taking steps to raise equity capital and has been advised by
Monsanto that concurrent with any such financing, Monsanto will convert the
Monsanto Note from debt to equity. The Company intends to utilize these funds to
expand its manufacturing capacity and marketing efforts to increase sales to a
level that will make the Company self-sustaining.
On May 8, 1998, the Company's board of directors approved the
reincorporation of the Company as a Delaware corporation. Subject to shareholder
consent, the reincorporation should become effective approximately June 18,
1998. On May 15, 1998, the Company's name was changed to The RiceX Company.
3. REORGANIZATION
In January 1996, the Company and Core Iris, Inc., a shell company, executed
a plan of reorganization whereby Core Iris, Inc. acquired 100% of the issued and
outstanding shares of the Company. The surviving company was renamed Food
Extrusion, Inc.
For accounting purposes, the transaction has been treated as a
recapitalization of the Company. All share and per share information has been
restated for all periods to include the equivalent number of shares received in
the transaction.
4. BUSINESS COMBINATION
Effective January 1997, FoodEx Montana entered into an asset purchase
agreement, shareholders' agreement and security agreement (collectively, the
"Asset Purchase Agreements") with an unrelated company (Seller) to acquire a
manufacturing facility located in Montana in exchange for 310,000 shares of the
Company's common stock, the assumption of certain obligations totaling
approximately $1,320,000, and all obligations under the Seller's 401(k) plan.
The Company has recorded the acquisition using the purchase method of accounting
as follows:
<TABLE>
<S> <C>
Redeemable common stock issued..................................... $1,550,000
Liabilities assumed, net of $232,071 discount...................... 1,087,964
----------
Acquisition price of facility.................................. $2,637,964
----------
----------
</TABLE>
The following unaudited pro forma data summarizes the results of operations
of the Company for the year ended December 31, 1996 as if the acquisition had
been completed on January 1, 1996. The pro forma data gives effect to the actual
operating results prior to acquisition. The pro forma results do not purport to
be indicative of the results that would have actually been achieved if the
acquisition had occurred on January 1, 1996 or that may be achieved in the
future.
<TABLE>
<S> <C>
Sales............................................................ $ 1,443,375
Net loss......................................................... $(5,255,765)
Basic net loss per share......................................... $ (.30)
</TABLE>
F-10
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATION (CONTINUED)
The Asset Purchase Agreements also granted the Seller the option to sell the
common shares back to the Company at a price of $5.00 per share for a 30 day
period beginning November 1, 1998 (Put Option). The exercise period for the Put
Option is accelerated upon the occurrence of a sale of assets, merger or
reorganization of the Company. The Asset Purchase Agreements also granted the
Company the right of first refusal on any transfer of the Company's common stock
by the Seller during a one-year period ending November 1, 1998. The assets
acquired under the Asset Purchase Agreements are pledged as collateral for the
Put Option.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and building........................................... $ -- $ 367,961 $ 367,961
Equipment................................................... 1,291,820 4,204,118 4,245,283
Leasehold improvements...................................... 382,664 381,642 381,642
Furniture and fixtures...................................... 189,341 221,145 224,768
---------- ---------- -----------
1,863,825 5,174,866 5,219,654
Less accumulated depreciation and amortization.............. (265,796) (926,953) (1,105,669)
---------- ---------- -----------
1,598,029 4,247,913 4,113,985
Equipment not placed in service............................. 201,900 201,900 201,900
Construction in progress.................................... 41,600 -- --
---------- ---------- -----------
$1,841,529 $4,449,813 $ 4,315,885
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts payable and other accruals................... $394,189 $ 668,610 $ 664,151
Accrued interest............................................ 81,319 155,822 177,398
Amounts due shareholders.................................... -- 381,733 425,333
-------- ---------- -----------
$475,508 $1,206,165 $ 1,266,882
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
F-11
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to related parties:
Note payable to shareholder, face amount of $1,750,000
secured by certain equipment, stated interest rate of
5%, imputed interest rate of 13%, due Novermber 1999.... $1,421,591 $1,534,187 $ 1,562,336
Notes payable to shareholders, unsecured, non-interest
bearing, to be repaid at discretion of the Company...... 118,086 30,086 1,086
Notes payable--other:
Note payable secured by six rice extruders, non-interest
bearing, due October 1999............................. 2,500,000 5,000,000 5,000,000
Notes payable, secured by equipment at FoodEx, Montana,
non-interest bearing, imputed interest rate of 13%,
due November 1998..................................... -- 1,186,008 1,216,950
Other notes payable..................................... 57,945 55,107 35,509
---------- ---------- -----------
4,097,622 7,805,388 7,815,881
Less current portion........................................ 154,571 1,252,570 1,239,949
---------- ---------- -----------
$3,943,051 $6,552,818 $ 6,575,932
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The total value of assets pledged as collateral on notes payable at December
31, 1997 is $2,906,440.
The scheduled maturities of long-term debt at their discounted values at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998........................................................................ $ 1,252,570
1999........................................................................ 6,552,818
------------
$ 7,805,388
------------
------------
</TABLE>
In March 1996, the Company borrowed $1,750,000 from a financing company (the
Lender) and issued 578,000 shares of the Company's common stock to the Lender.
Of the total proceeds, $1,339,620 was allocated to debt and $410,380 was
allocated to the common stock. The stated interest rate on the note is 5%. The
effective annualized interest rate on the note after taking into account the
issuance of common stock is 13%. As of December 31, 1997 and 1996, $194,567 and
$81,971, respectively of imputed interest has been accreted and added to
principal.
In October 1996, the Company entered into a loan agreement (Loan Agreement)
with an investor (Investor). The Loan Agreement provided for the Investor to
loan up to $5,000,000 with interest accruing at the prime rate less .25% on the
outstanding principal balance. At December 31, 1996, the outstanding principal
balance under the Loan Agreement was $2,500,000.
F-12
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
In February 1997, the Loan Agreement was substantially renegotiated to make
the loan non-interest bearing retroactive to its inception and to set the
conversion rate at the lesser of $5.00 per share or the price per share the
Company receives in the most recent offering of at least $1,000,000 prior to a
notice of intent to convert. Additionally, at any time during the three year
term of the loan, the outstanding principal is convertible at the Investor's
election, into the Company's common stock. The Company recorded a charge of
$1,325,000 for the beneficial conversion feature. This beneficial conversion
feature is a result of the fair market value of the stock, based on the trading
value of the stock, being greater than the conversion rate on the scheduled
dates the Company received proceeds pursuant to the Loan Agreement. As a result
of the charge to income for the conversion feature, the effective interest rate
of the loan is greater than the interest rate currently available to the Company
for similar debt; therefore no imputed interest has been calculated on this
loan. The Company is subject to various terms and covenants stipulated in the
Loan Agreement including certain limitations on additional indebtedness, liens,
pledges and encumbrances on the Company's assets, and investments in and
advances to other companies. The outstanding principal at December 31, 1997 was
$5,000,000.
In connection with the acquisition of certain assets of the Montana
manufacturing facility (Note 4), FoodEx Montana assumed certain existing
non-interest bearing obligations with a face value of $1,320,035. The
obligations are all due November 1, 1998. For the year ending December 31, 1997,
$128,930 of imputed interest was accreted and added to principal and $30,886 of
principal payments were made.
8. COMMITMENTS
OPERATING LEASES
The Company leases office and laboratory/warehouse space under operating
leases which expire through 2006. Beginning in October 2001, the Company has the
unilateral right to terminate the operating leases with six months written
notice. Future minimum rental payments required under these noncancelable
operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 124,825
1999.......................................................................... 127,684
2000.......................................................................... 128,482
2001.......................................................................... 98,158
----------
$ 479,149
----------
----------
</TABLE>
Rent expense under operating leases was $136,915, $79,899 and $55,751 for
the years ended December 31, 1997, 1996 and 1995.
MANAGEMENT COMPENSATION
The Company has entered into various employment agreements with certain key
employees for periods of up to five years which require payments totaling
approximately $1,500,000 annually.
F-13
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY
CONVERSION OF DEBT FOR STOCK
During November 1995, the Company issued 2,562,750 shares of common stock
valued at $0.71 per share in exchange for cancellation of certain liabilities to
related and non-related parties resulting in an extaordinary gain. On January 1,
1996, the Company also issued 337,500 shares of common stock at $0.71 for
cancelation of certain liabilities resulting in no gain or loss.
STOCK ISSUED FOR SERVICES
In 1997, the Company issued 88,465 shares of common stock to non-employee
consultants for consulting services rendered. The value of the common stock,
based on the trading value of the stock, at issuance was $389,727, which has
been included in professional fees. Also in 1997, 50,000 warrants with an
exercise price of $2.00 per share were issued to consultants for services
rendered. The warrants were immediately exercisable and expire in October 2002.
The fair value of the warrants at date of grant, based on the trading value of
the stock, was calculated at $211,950, which is included in professional fees in
the accompanying statement of operations.
In January 1996, the Company issued warrants to purchase 2,287,500 shares of
common stock to three capital consulting firms (the Consultants), one of which
was controlled by a then-employee of the Company, at an exercise price of $.01
per share, as consideration for underwriting services provided in connection
with various debt and equity financing transactions, the Reorganization, and
other ongoing capital consulting services. The warrants were immediately
exercised by the Consultants. The costs of these financing and consulting
services were allocated as follows:
<TABLE>
<S> <C>
Equity financing costs recorded as an offset to additional
paid-in capital............................................. $ 480,000
Debt financing costs recorded as deferred issuance costs...... 410,000
Professional expenses......................................... 631,950
----------
$1,521,950
----------
----------
</TABLE>
In 1996, the Company granted an option to a non-employee to purchase up to
1,000,000 shares of the Company's common stock at $1.75 per share as a finder's
fee in connection with locating financing. The option expires November 1, 1999.
The Company valued the option in accordance with SFAS No. 123 using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 6.77%, expected option life of 1.5 years, expected volatility
of 88%, and no expected dividends. The value of the option using this method was
$2,687,000, which the Company recorded as other expense.
PRIVATE PLACEMENT AND WARRANTS OUTSTANDING
In December 1995, the Company initiated a private offering in anticipation
of the Reorganization (Note 3) for $1,000,000 of common stock and warrants to
accredited investors (Offering). Proceeds of $220,000 from the Offering received
prior to the Reorganization were advanced to the Company to fund operations. The
Offering consisted of 40 units at $25,000 per unit, each unit consisting of
35,000 shares of common stock of the surviving corporation and a warrant to
purchase 15,000 shares of common stock of the surviving corporation. The
warrants are exercisable for a two year period commencing on February 9, 1997,
at a price of $4.00 per share. At December 31, 1997 and 1996, warrants to
purchase 600,000 common shares were outstanding.
F-14
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK OPTIONS
In 1996, the Board of Directors of the Company granted nonstatutory stock
options to certain key employees and directors. In 1997, additional nonstatutory
stock options were granted to directors for services rendered and to attract new
executive management and outside directors. Stock option information is as
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE GRANT- DATE
SHARES PRICE FAIR VALUE
----------- ----------- -----------
<S> <C> <C> <C>
Shares under option at December 31, 1995........................... -- $ -- $ --
Granted ($1.00).................................................. 505,000 1.00 .71
----------- ----- -----
Shares under option at December 31, 1996........................... 505,000 1.00 .71
Granted ($2.75 - $6.56).......................................... 3,110,000 2.48 3.77
Exercised........................................................ (2,151,000) 1.93 2.77
----------- ----- -----
Shares under option at December 31, 1997........................... 1,464,000 2.78 4.27
Granted ($3.75).................................................. 100,000 3.75 3.75
----------- ----- -----
Shares under option at March 31, 1998 (unaudited).................. 1,564,000 $ 2.84 $ 4.33
----------- ----- -----
----------- ----- -----
Options exercisable at December 31, 1997........................... 480,667 $ 1.81 $ 2.80
----------- ----- -----
----------- ----- -----
Options exercisable at March 31, 1998 (unaudited).................. 510,667 $ 1.76 $ 2.80
----------- ----- -----
----------- ----- -----
</TABLE>
Compensation expense, equal to the excess of the fair market value on the
date of grant and over the exercise price, is recognized over the vesting period
of each option. Compensation expense related to employee stock options was
$2,031,570 in 1997 and $0 in 1996.
As required by SFAS No. 123, the Company has determined the pro-forma
information as if the Company had accounted for stock options granted under the
fair value method. The Black-Scholes option pricing model was used with the
following weighted-average assumptions for 1997 and 1996: risk-free interest
rate of return of 6.77% for both years; expected option lives of one to five
years; expected market price volatility of 72% and 88%; and no expected
dividends. For purposes of pro forma disclosures, the estimated fair value of
the options is recognized as an expense over the options' vesting period. The
Company's pro forma net loss and net loss per share would be as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Net loss--as reported........................................... $ (5,024,323) $ (7,768,598)
Net loss--pro forma............................................. (5,095,818) (8,144,849)
Basic net loss per share--as reported........................... (.28) (.40)
Basic net loss per share--pro forma............................. (.29) (.42)
Weighted average fair value of options granted during the
year.......................................................... $ .24 $ 1.72
</TABLE>
In May 1997, options for 2,000,000 shares of the Company's common stock were
exercised by an executive officer with a note receivable due to the Company that
bears interest at 8% per year. The note is secured by the officer's shares of
stock and has been classified as a reduction of shareholders' equity
F-15
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
(deficit). The Company has agreed to reimburse the executive officer for the
interest on the note plus the income tax effect on the interest.
In November 1997, the Board of Directors approved the Food Extrusion, Inc.
1997 Stock Option Plan (the Plan) which provides for the granting of either
incentive stock options or nonqualified stock options to purchase shares of the
Company's common stock to officers, directors and key employees responsible for
the direction and management of the Company and to non-employee consultants and
independent contractors. At December 31, 1997 there were no grants under the
Plan and 5,000,000 shares of the Company's common stock was reserved for future
grants. The Plan is subject to shareholder approval.
10. INCOME TAXES
The provision for income taxes consists of $800 for the years ended December
31, 1995, 1996 and 1997 which represents the state minimum tax.
The difference between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
<TABLE>
<CAPTION>
TAX BENEFIT (EXPENSE)
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory tax rate...................................................... 34.0% 34.0% 34.0%
State and local income tax, net of federal benefit.............................. 1.0 6.1 3.6
S corporation status............................................................ (34.0) -- --
Valuation allowance............................................................. (1.0) (40.1) (37.6)
--------- --------- ---------
Effective tax rate.......................................................... 0% 0% 0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Stock options and warrants...................................... $ 1,163,471 $ 2,508,391
Net operating loss carryforwards................................ 666,541 2,590,462
Professional fees............................................... 273,634 --
Deferred compensation to stockholder............................ -- 69,789
Research costs.................................................. 50,396 44,711
Property and equipment.......................................... 8,507 7,984
State taxes..................................................... (157,861) (301,833)
------------- -------------
2,004,688 4,919,504
Less valuation allowance........................................ (2,004,688) (4,919,504)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
Deferred taxes arise from temporary differences in the recognition of
certain expenses for tax and financial statement purposes. At December 31, 1997
and 1996, management determined that realization of
these benefits is not assured and has provided a valuation allowance for the
entire amount of such benefits.
F-16
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
At December 31, 1997, net operating loss (NOL) carryforwards were approximately
$6,274,289 for federal tax purposes which expire through 2012 and $4,916,171 for
state tax purposes which expire through 2002.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximated carrying
value at December 31, 1997 and 1996. The Company's financial instruments include
cash and short-term financial instruments for which the carrying amount
approximates fair value due to the short maturity of the instruments. The
carrying amount of long-term debt approximate fair value as the majority of the
debt was recently borrowed at rates, or imputed at rates, currently available to
the Company for similar debt.
12. RELATED-PARTY TRANSACTIONS
Related party transactions, other than those disclosed elsewhere in the
consolidated financial statements, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Equipment purchased from a company controlled by a
shareholder.......................................... $ 16,416 $ 205,542 $ 83,990 $ 35,846 $ --
Accrued compensation and taxes payable to a
shareholder, net of interest income due.............. -- -- 171,733 -- 245,333
Accrued consulting fee to shareholder.................. -- -- 210,000 -- 180,000
Professional consulting services provided by a
shareholder.......................................... -- 35,444 -- -- --
Accrued interest payable to a shareholder.............. 16,844 -- -- -- --
</TABLE>
In the opinion of management, all transactions with related parties have
been conducted on terms which are fair and equitable; however the transactions
are not necessarily on the same terms as those which would have been made
between wholly unrelated parties.
F-17
<PAGE>
THE RICEX COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING
ACTIVITIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes................. -- $ 800 $ 800 -- $ 900
Cash paid for interest expense............. -- 80,650 -- $ 333 460
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for note
receivable............................... -- -- 4,000,000 -- --
Issuance of common stock for asset and
assumptions of certain liabilities,
net...................................... -- -- 2,637,964 2,637,964 --
Sale of trademark for note receivable...... -- -- 300,000 300,000 --
Assets acquired under capital leases and
notes payable............................ 50,000 41,203 23,195 23,195 --
Conversion of notes and compensation
payable to common stock and cancellation
of notes receivable from shareholders,
net...................................... 1,773,809 223,813 -- -- --
Issuance of debt to repay shareholder and
related party notes in conjunction with
debt
restructuring............................ 100,000 -- -- -- --
Issuance of common stock for financing cost
in connection with private placement of
stock and reverse acquisition............ -- 480,000 -- -- --
Conversion of advances payable to Core
Iris., Inc. common stock................. -- 220,000 -- -- --
Issuance of common stock to shareholder
employees for compensation............... -- 77,500 -- -- --
Issuance of common stock to shareholders
for services rendered, net of
reorganization and stock offering costs
of $480,000.............................. -- 1,041,950 -- -- --
</TABLE>
F-18
<PAGE>
PART III.
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Certificate of Incorporation of the Registrant.
2.2 Proposed Form of Bylaws of the Registrant.
3.1 Proposed Form of Common Stock Certificate.
3.2 Option Agreement between the Registrant and David B. Lockton dated August 1, 1996.
3.3 Restricted Stock Purchase Agreement between the Registrant and Allen J. Simon dated April 18, 1997 and
amended on May 29, 1997.
3.4 Amendment No. 1 to Restricted Stock Purchase Agreement between the Registrant and Allen J. Simon dated
May 29, 1997.
3.5 Security Agreement between Allen J. Simon and the Registrant dated May 29, 1997.
3.6 Promissory Note Secured by Pledge of Stock for Allen J. Simon in favor of the Registrant in the amount of
$1,333,333.34 dated May 29, 1997.
3.7 Security Agreement between Allen J. Simon and the Registrant dated May 29, 1997.
3.8 Promissory Note Secured by Pledge of Stock for Allen J. Simon in favor of the Registrant in the amount of
$1,333,333.33 dated May 29, 1997.
3.9 Security Agreement between Allen J. Simon and the Registrant dated May 29, 1997.
3.10 Promissory Note Secured by Pledge of Stock for Allen J. Simon in favor of the Registrant in the amount of
$1,333,333.33 dated May 29, 1997.
3.11 Security Agreement between Food Extrusion, Inc. and Monsanto Company dated November 1, 1996.
3.12 Promissory Note of the Registrant in favor of Monsanto Company in the amount of $5,000,000 dated November
1, 1996.
3.13 Subscription Agreement between the Registrant and the Dorchester Group dated January 1, 1996.
3.14 Subscription Agreement between the Registrant and Matison EuroInvest dated January 1, 1996.
3.15 Subscription Agreement between the Registrant and Cambro Investment Group dated January 1, 1996.
3.16 Stock Option Agreement between the Registrant and Allen J. Simon dated April 18, 1997.
3.17 Amendment No. 1 to Stock Option Agreement by and among the Registrant and Allen J. Simon dated May 29,
1997.
3.18 Registration Rights Agreement by and between the Registrant and Allen J. Simon dated April 18, 1997.
3.19 Registration Rights Agreement by and among the Registrant and Monsanto Company dated February 5, 1997.
3.20 Form of Registration Rights Agreement between the Registrant and certain officers and directors.
3.21 Form of Warrant Agreement between the Registrant and certain investors dated February 9, 1996.
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
3.22 Stock Purchase Agreement between the Registrant and Marilyn Roosevelt dated July 16, 1997.
3.23 Shareholders Agreement between CF Corporation (formerly Centennial Foods, Inc.) and the Registrant dated
March 19, 1997.
3.24 1997 Stock Option Plan with (i) Form of Incentive Stock Option Agreement and (ii) Form of Nonstatutory
Stock Option Agreement.
3.25 Form of Directors Stock Option Agreement.
3.26 Directors Stock Option Agreement between the Registrant and Allen J. Simon dated July 9, 1997.
3.27 Form of Nonstatutory Stock Option Agreement not issued under the 1997 Stock Option Plan, governing
options granted to employees by the Registrant.
3.28 Note Agreement between Monsanto Company and the Registrant dated October 31, 1996.
3.29 Addendum No. 1 to Note Agreement dated October 31, 1996 between Monsanto Company and the Registrant dated
February 6 ,1997.
3.30 Creditor Agreement between Centennial Foods, Inc., the Registrant and Ike Lynch dated October 14, 1996.
3.31 Creditor Agreement between Centennial Foods, Inc., the Registrant and Montana Department of Environmental
Quality dated October 18, 1996.
3.32 Agreement between Harrington Company, Centennial Foods, Inc. and Montana Department of Natural Resources
and Conservation dated 1990.
3.33 Amendment to Agreement between Harrington Company, Centennial Foods, Inc. and Montana Department of
Natural Resources and Conservation dated 1990.
3.34 Promissory Note in favor of Seafirst Bank in the amount of $1,184,000 dated November 9, 1990.
3.35 Letter Agreement between Centennial Foods, Inc. and Seafirst Bank dated March 22, 1993.
3.36 Business Loan and Credit Agreement between Centennial Foods, Inc. and Seattle-First National Bank dated
November 7, 1990.
3.37 Commercial Security Agreement between Centennial Foods, Inc. and Seattle-First National Bank dated
November 11, 1990.
3.38 Loan Modification Agreement between Centennial Foods, Inc. and Seattle-First national Bank dated June 8,
1995.
3.39 Assignment of Commercial Security Agreement and Business Loan and Credit Agreement dated March 4, 1996
between Seattle-First National Bank and Company 19 General Partnership.
3.40 Assignment of Subordination Agreements and Negotiable Collateral between Seattle-First National Bank and
Company 19 General Partnership dated March 4, 1996.
3.41 Creditor Agreement between Centennial Foods, Inc. and Company 19 General partnership dated October 14,
1996.
3.42 Form of Subordination Agreement between certain creditors of Centennial Foods, Inc. in favor of Seafirst.
3.43 Creditor's Agreement between Centennial Foods and Montana Department of Commerce dated October 11, 1996.
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
3.44 Security Agreement between the Centennial Foods, Inc. and State of Montana Department of Commerce dated
December 20, 1990.
3.45 Loan Agreement dated October 9, 1990 between Centennial Foods, Inc. and Beaverhead County.
3.46 Amendment to Loan Agreement dated November 15, 1990 between Centennial Foods, Inc. and Beaverhead County.
3.47 Second Amendment to Loan Agreement dated December 20, 1990 between Centennial Foods, Inc. and Beaverhead
County.
3.48 Promissory Note in favor of Beaverhead County in the amount of $780,000 dated December 20, 1990.
3.49 Indenture between Centennial Foods, Inc. and Beaverhead County dated February 1992.
3.50 Form of Non-interest Bearing Convertible Promissory Note dated December 31, 1994 in favor of certain
noteholders.
3.51 Form of Creditor's Agreement between Centennial Foods, Inc. and certain convertible noteholders.
6.1 Employment Agreement between Allen J. Simon and the Registrant dated April 18, 1997.
6.2 Amendment to Employment Agreement between Allen J. Simon and the Registrant dated May 29, 1997.
6.3 Employment Agreement between the Registrant and Karen D. Berriman dated September 15, 1997.
6.4 Employment Agreement between the Registrant and Gary A. Miller dated October 6, 1997.
6.5 Employment Agreement between the Registrant and Cherukuri Venkata Reddy Sastry dated April 14, 1996.
6.6 Employment Agreement between the Registrant and Rukmini Cheruvanky dated April 14, 1996.
6.7 Employment Agreement between the Registrant and Dennis Riddle dated September 19, 1997.
6.8 Employment Agreement between the Registrant and Daniel McPeak dated April 1, 1997.
6.9 Employment Agreement between the Registrant and Patricia Mayhew dated April 1, 1997.
6.10 Employment Agreement between the Food Extrusion Montana, Inc. and Ike E. Lynch dated March 19, 1997.
6.11 Employment Agreement between Centennial Foods, Inc. and Ike Lynch dated January 1, 1994.
6.12 Consulting Agreement between the Registrant and Robert H. Hesse dated September 30, 1997.
6.13 Form of Indemnification Agreement by and among the Registrant and certain officers and directors.
6.14 Agreement between the Registrant and Wolcott Farms, Inc. dated March 1, 1997.*
6.15 Stabilized Rice Bran Processing, Sales and Marketing Agreement between Farmer's Rice and the Registrant
dated June 28, 1994.*
6.16 Amendment dated April 16, 1996 to Stabilized Rice Bran Processing, Sales and Marketing Agreement between
Farmers' Rice Cooperative and the Registrant dated June 28, 1994.
6.17 Stabilized Rice Bran Processing, Sales and Marketing Agreement between California Pacific Rice Milling,
Ltd. and the Registrant dated August, 1995.*
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
6.18 Agreement between the Registrant and Dry Creek Trading, Inc. dated February 1, 1997.
6.19 International Distribution Agreement between the Registrant and SunJoy Cereal-Tech Development Ltd. dated
June 16, 1997.*
6.20 Agreement between the Registrant and SunJoy Enterprises Corporation dated June 16, 1997.
6.21 Non-binding Letter of Intent between Nutrilite Division of Amway Corporation and the Registrant dated
April 8, 1998.
6.22 Letter Agreement between DuCoa, L.P. and the Registrant dated February 25, 1998.*
6.23 Letter of Intent between Monsanto Company and Registrant dated March 16, 1998.*
6.24 Security Agreement between CF Corporation, Food Extrusion Montana, Inc. and the Registrant dated March
19, 1997.
6.25 Joint Development Agreement between Kellogg Company and the Registrant dated May 15, 1998.*
6.26 Promissory Note in favor of Dominion Resources, Inc. in the amount of $1,750,000 dated July 30, 1996.
6.27 Commercial Lease and Deposit Receipt between Roebbelen Land Company and the Registrant dated December 23,
1991.
6.28 First Amendment of Lease between Roebbelen Land Company and the Registrant dated January 19, 1994.
6.29 Second Amendment of Lease between Roebbelen Land Company and the Registrant dated July 11, 1996.
6.30 Third Amendment of Lease Agreement between Roebbelen Land Company and the Registrant dated February 1,
1998.
6.31 Lease Agreement between Roebbelen Land Company and the Registrant dated July 11, 1996.
6.32 First Amendment of Lease between Roebbelen Land Company and the Registrant dated September 1996.
6.33 Second Amendment of Lease Agreement between Roebbelen Land company and the Registrant dated February 1,
1998.
6.34 Rental Agreement, Month to Month, between James W. Cameron, Jr. and the Registrant dated December 22,
1997.
6.35 Plan and Agreement of Reorganization between Core Iris, Inc. and the Registrant dated December 5, 1996.
6.36 Asset Purchase Agreement between Centennial Foods, Inc., Food Extrusion Montana, Inc. and the Registrant
dated January 2, 1997.
27 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential treatment requested as to certain portions
(iv)
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOOD EXTRUSION, INC.
Date: July 17, 1998
By: /s/ ALLEN J. SIMON
-----------------------------------------
Allen J. Simon
CHIEF EXECUTIVE OFFICER
By: /s/ KAREN D. BERRIMAN
-----------------------------------------
Karen D. Berriman
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
S-1
